UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
fiscal year ended December 31, 2010
Commission File number 001-34453
HUDSON VALLEY HOLDING
CORP.
(Exact name of registrant as
specified in its charter)
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New York
(State or other jurisdiction of
incorporation or organization)
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13-3148745
(I.R.S. Employer
Identification No.)
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21 Scarsdale Road, Yonkers, New York
(Address of principal executive
offices)
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10707
(Zip Code)
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Registrants telephone number, including area code:
(914) 961-6100
Securities Registered Pursuant to Section 12(b) of the
Act:
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Name of
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each exchange
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on which
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Title of each Class
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registered
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Common Stock, ($0.20 par value per share)
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The NASDAQ Stock Market LLC
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for shorter period that the registrant is
required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of large
accelerated filer, accelerated filer, and
smaller reporting company in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o Accelerated
filer 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
Act) Yes o No x
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Outstanding at
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March 1,
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Class
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2011
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Common Stock
($0.20 par value)
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17,680,895
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The aggregate market value on June 30, 2010 of voting stock
held by non-affiliates of the Registrant was approximately
$268,028,000.
Documents incorporated by reference:
Portions of the registrants definitive Proxy Statement for
the 2011 Annual Meeting of Stockholders is incorporated by
reference in Part III of this report and will be filed no
later than 120 days from December 31, 2010.
FORM
10-K
TABLE OF CONTENTS
PART
I
ITEM
1 BUSINESS
General
Hudson Valley Holding Corp. (the Company) is a New
York corporation founded in 1982. The Company is registered as a
bank holding company under the Bank Holding Company Act of 1956.
The Company provides financial services through its wholly-owned
subsidiary, Hudson Valley Bank, N.A. (HVB or
the Bank), a national banking association
established in 1972, with operational headquarters in
Westchester County, New York. New York National Bank,
(NYNB), a national banking association which the
Company acquired effective January 1, 2006, was merged into
HVB effective March 1, 2010. NYNB currently operates as a
division of HVB. HVB has 18 branch offices in Westchester
County, New York, 5 in Manhattan, New York, 4 in Bronx County,
New York, 1 in Rockland County, New York, 1 in Queens County,
New York, 1 in Kings County, New York, 5 in Fairfield County,
Connecticut and 1 in New Haven County Connecticut.
The Company provides investment management services through a
wholly-owned subsidiary of HVB, A.R. Schmeidler & Co.,
Inc. (ARS), a money management firm, thereby
generating fee income. ARS has offices at 500 Fifth Avenue
in Manhattan, New York.
We derive substantially all of our revenue and income from
providing banking and related services to businesses,
professionals, municipalities, not-for-profit organizations and
individuals within our market area. See Our Market
Area.
Our principal executive offices are located at 21 Scarsdale
Road, Yonkers, New York 10707.
Our principal customers are businesses, professionals,
municipalities, not-for-profit organizations and individuals.
Our strategy is to operate community-oriented banking
institutions dedicated to providing personalized service to
customers and focusing on products and services for selected
segments of the market. We believe that our ability to attract
and retain customers is due primarily to our focused approach to
our markets, our personalized and professional services, our
product offerings, our experienced staff, our knowledge of our
local markets and our ability to provide responsive solutions to
customer needs. We provide these products and services to a
diverse range of customers and do not rely on a single large
depositor for a significant percentage of deposits. We
anticipate that we will continue to expand in our current market
and surrounding area by acquiring other banks and related
businesses, adding staff and continuing to open new branch
offices and loan production offices.
Forward-Looking
Statements
The Company has made in this Annual Report on
Form 10-K
various forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to
earnings, credit quality and other financial and business
matters for periods subsequent to December 31, 2010. These
statements may be identified by such forward-looking terminology
as expect, may, will,
anticipate, continue,
believe or similar statements or variations of such
terms. The Company cautions that these forward-looking
statements are subject to numerous assumptions, risks and
uncertainties, and that statements relating to subsequent
periods increasingly are subject to greater uncertainty because
of the increased likelihood of changes in underlying factors and
assumptions. Actual results could differ materially from
forward-looking statements.
Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements, in
addition to those risk factors disclosed in this Annual Report
on
Form 10-K
include, but are not limited to, statements regarding:
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further increases in our non-performing loans and allowance for
loan losses;
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our ability to manage our commercial real estate portfolio;
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the future performance of our investment portfolio;
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our opportunities for growth, our plans for expansion (including
opening new branches) and the competition we face in attracting
and retaining customers;
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economic conditions generally and in our market area in
particular, which may affect the ability of borrowers to repay
their loans and the value of real property or other property
held as collateral for such loans;
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1
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demand for our products and services;
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possible impairment of our goodwill and other intangible assets;
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our ability to manage interest rate risk;
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the regulatory environment in which we operate, our regulatory
compliance and future regulatory requirements;
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our intention and ability to maintain regulatory capital above
the levels required by the Office of the Comptroller of the
Currency (the OCC) for the Bank and the levels
required for us to be
well-capitalized,
or such higher capital levels as may be required;
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proposed legislative and regulatory action affecting us and the
financial services industry;
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legislative and regulatory actions (including the impact of the
Dodd-Frank Wall Street Reform and Consumer Protection Act and
related regulations) subject us to additional regulatory
oversight which may result in increased compliance costs
and/or
require us to change our business model;
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future Federal Deposit Insurance Corporation (FDIC)
special assessments or changes to regular assessments;
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our ability to raise additional capital in the future;
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potential liabilities under federal and state environmental
laws; and
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limitations on dividends payable by the Company or the Bank.
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We assume no obligation for updating any such forward-looking
statements at any given time.
Subsidiaries
of the Bank and the Company
In 1993, HVB formed a wholly-owned subsidiary, Sprain Brook
Realty Corp., primarily for the purpose of holding property
obtained by HVB through foreclosure in its normal course of
business.
In 1997, HVB formed a subsidiary (of which it owns more than 99
percent of the voting stock), Grassy Sprain Real Estate
Holdings, Inc., a real estate investment trust, primarily for
the purpose of acquiring and managing a portfolio of
mortgage-backed securities, loans collateralized by real estate
and other investment securities previously owned by HVB.
In 2001, HVB began originating lease financing transactions
through a wholly owned subsidiary, HVB Leasing Corp.
In 2002, HVB formed two wholly-owned subsidiaries. HVB Realty
Corp. owns and manages five branch locations in Yonkers, New
York and HVB Employment Corp. leases certain branch staff to HVB.
In 2004, HVB acquired for cash A.R. Schmeidler & Co.,
Inc. as a wholly-owned subsidiary in a transaction accounted for
as a purchase. This money management firm provides investment
management services to its customers thereby generating fee
income.
In 1997, NYNB formed a wholly-owned subsidiary, 369 East 149th
Street Corp., primarily for the purpose of owning and operating
certain commercial real estate property of which NYNB is a
tenant.
In 2008, NYNB formed a wholly-owned subsidiary, 369
East Realty Corp., primarily for the purpose of holding
property obtained by NYNB through foreclosure in its normal
course of business.
In January 2010, the Company formed a wholly owned subsidiary,
HVHC Risk Management Corp, which is a captive insurance company
which underwrites certain insurance coverage for HVB and its
subsidiary companies.
In February 2010, HVB formed three wholly owned subsidiaries.
HVB Properties Corp. owns and manages two of HVBs
branches. HVB Fleet Services Corp. owns and manages company
owned automobiles. 21 Scarsdale Road Corp. owns and manages the
HVB headquarters buildings.
In February 2010, NYNB formed a wholly owned subsidiary, 2256
Second Avenue Corp., which owns and manages the Second Avenue
branch in Manhattan, New York.
As a result of the merger of HVB and NYNB, effective
March 1, 2010, all subsidiaries of NYNB became subsidiaries
of HVB.
2
The Company has no separate operations or revenues apart from
HVHC Risk Management Corp. and HVB and its subsidiaries.
Employees
At December 31, 2010, we employed 438 full-time employees
and 40 part-time employees. We provide a variety of benefit
plans, including group life, health, dental, disability,
retirement and stock option plans. We consider our employee
relations to be satisfactory.
Our
Market Area
The banking and financial services business in our market area
is highly competitive. Due to their proximity to and location
within New York City, our branches compete with regional banks,
as well as many other non-bank financial institutions. A number
of these banks are larger than we are and are increasing their
efforts to serve smaller commercial borrowers. Many of these
competitors, by virtue of their size and resources, may enjoy
efficiencies and competitive advantages over us in pricing,
delivery and marketing of their products and services. We
believe that, despite the continued growth of large institutions
and the potential for large
out-of-area
banking and financial institutions to enter our market area,
there will continue to be opportunities for
efficiently-operated, service-oriented, well-capitalized,
community-based banking organizations to grow by serving
customers that are not well served by larger institutions or do
not wish to bank with such large institutions.
Westchester County is a suburban county located in the northern
sector of the New York metropolitan area. It has a large and
varied economic base containing many corporate headquarters,
research facilities, manufacturing firms as well as
well-developed trade and service sectors. The median household
income, based on 2009 census data, was $79,585. The
Countys 2009 per capita income of $47,204 placed
Westchester County among the highest of the nations
counties. In December 2010, the Countys unemployment rate
was 6.9 percent, as compared to New York State at
8.1 percent and the United States at 9.1 percent. The
County has over 100,000 businesses, which form a large portion
of our current and potential customer base. We continue to
evaluate expansion opportunities in Westchester County.
New York City, which borders Westchester County, is the
nations financial capital and the home of more than
8 million individuals representing virtually every race and
nationality. According to the 2008 census data, the median
household income in the city was $50,173, while the per capita
income was $30,337. This places New York City in the top ranks
of cities across the United States. In December 2010, New York
Citys unemployment rate was 8.6%. The city also has a
vibrant and diverse business community with more than 106,000
businesses and professional service firms. New York City is
comprised of five counties or boroughs: Bronx, Kings (Brooklyn),
New York (Manhattan), Queens and Richmond (Staten Island).
New York City has many attractive attributes and we believe that
there is an opportunity for community banks to service our niche
markets of businesses and professionals very effectively. We
expanded into the New York City market with the opening of our
first branch in the Bronx in 1999. Subsequent expansion in this
borough was accomplished with the opening of a second branch in
2002, the addition of two additional branches as a result of the
acquisition of NYNB in 2006, and a third branch in 2010. The two
branches acquired with NYNB were consolidated into one branch in
2010. We entered the Manhattan market with the opening of a
full-service branch in the Lincoln Building in 2002 and followed
by the openings of three additional branches in 2004, 2005 and
2008. The NYNB acquisition also provided an additional Manhattan
branch location. In 2008, we opened our first branch in the
borough of Brooklyn. We continue to evaluate additional
expansion opportunities in New York City.
We expanded into Rockland County, New York, by opening a full
service branch in New City, New York in February 2007. Rockland
County, New York, a suburban county, borders Westchester County,
New York to the west. Rockland Countys 2009 per capita
income was $34,071. In December 2010, the Countys
unemployment rate was 6.9%. We believe Rockland County offers
attractive opportunities for us to develop new customers within
our niche markets of businesses, professionals and
not-for-profit organizations.
We expanded our branch network into Fairfield County,
Connecticut with the opening of a full-service branch in,
Stamford, Connecticut in December 2007. We subsequently expanded
our presence in Fairfield County to five full service locations
with the additions of branch offices in Westport, Greenwich and
Fairfield in 2008 and Stratford in 2009. Fairfield County,
Connecticut, a suburban county, borders Westchester County, New
York to the east. The Countys 2009 per capita income was
$48,394. In December 2010, the Countys unemployment rate
was 7.9% as
3
compared to the state of Connecticuts unemployment rate of
8.6%. Fairfield County has very similar attributes to
Westchester County, New York, where we have had success in
attracting and retaining customers.
We expanded into New Haven County, Connecticut in 2009 with the
opening of a full service branch in Milford. New Haven County,
Connecticut borders Fairfield County to the east and is a mixed
urban and suburban county. In December 2010, the Countys
unemployment rate was 9.6%. We continue to explore additional
opportunities for expansion in the Connecticut market.
Competition
The banking and financial services business in our market area
is highly competitive. There are approximately 150 banking
institutions with 2,510 branch banking offices in our
Westchester County, Rockland County, Fairfield County,
Connecticut and New York City market area. These banking
institutions had deposits of approximately $542 billion as
of June 30, 2008 according to Federal Deposit Insurance
Corporation (FDIC) data. Our branches compete with
local offices of large New York City commercial banks due to
their proximity to and location within New York City. Other
financial institutions, such as mutual funds, finance companies,
factoring companies, mortgage bankers and insurance companies,
also compete with us for both loans and deposits. We are smaller
in size than most of our competitors. In addition, many non-bank
competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally
insured banks.
Competition for depositors funds and for credit-worthy
loan customers is intense. A number of larger banks are
increasing their efforts to serve smaller commercial borrowers.
Competition among financial institutions is based upon interest
rates and other credit and service charges, the quality of
service provided, the convenience of banking facilities, the
products offered and, in the case of larger commercial
borrowers, relative lending limits.
Federal legislation permits adequately capitalized bank holding
companies to expand across state lines to offer banking
services. In view of this, it is possible for large
organizations to enter many new markets, including our market
area. Many of these competitors, by virtue of their size and
resources, may enjoy efficiencies and competitive advantages
over us in pricing, delivery and marketing of their products and
services.
In response to competition, we have focused our attention on
customer service and on addressing the needs of businesses,
professionals and not-for-profit organizations located in the
communities in which we operate. We emphasize community
relations and relationship banking. We believe that, despite the
continued growth of large institutions and the potential for
large out-of-area banking and financial institutions to enter
our market area, there will continue to be opportunities for
efficiently-operated, service-oriented, well-capitalized,
community-based banking organizations to grow by serving
customers that are not served well by larger institutions or do
not wish to bank with such large institutions.
Our strategy is to increase earnings through growth within our
existing market. Our primary market area, which includes
Westchester County, Rockland County and New York City in the
State of New York, and Fairfield County and New Haven County in
the State of Connecticut, has a high concentration of the types
of customers that we desire to serve. We expect to continue to
expand by opening new full-service banking facilities and loan
production offices, by expanding deposit gathering and loan
originations in our market area, by enhancing and expanding
computerized and telephonic products, by diversifying our
products and services, by acquiring other banks and related
businesses and through strategic alliances and contractual
relationships.
During the past five years, we have focused on maintaining
existing customer relationships and adding new relationships by
providing products and services that meet these customers
needs. The focus of our products and services continues to be
businesses, professionals,
not-for-profit
organizations and municipalities. We have expanded our market to
additional sections of Westchester County and New York City and
further expanded to include sections of Rockland County, New
York, Fairfield County, Connecticut and New Haven County,
Connecticut. We have opened or acquired seventeen new facilities
during the past five years, three in Westchester County, New
York, seven in New York City, one in Rockland County, New York,
five in Fairfield County, Connecticut and one in New Haven
County, Connecticut. We anticipate opening at least one
additional facility during 2011. We expect to continue to open
additional facilities in the future. We have invested in
technology based products and services to meet customer needs.
In addition, we have expanded products and services in our
deposit gathering and lending programs, and our offering of
investment management and trust services. As a result, our total
assets have grown nearly 50 percent during this five year
period.
4
Lending
We engage in a variety of lending activities which are primarily
categorized as real estate, commercial and industrial,
individual and lease financing. At December 31, 2010, gross
loans totaled $1,732.3 million. Gross loans were comprised
of the following loan types:
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Real estate
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83.0
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Commercial and industrial
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14.2
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Individuals
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1.9
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Lease financing
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0.9
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Total
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100.0
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%
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At December 31, 2010, HVBs lending limit to one
borrower under applicable regulations was approximately
$39.7 million.
In managing our loan portfolios, we focus on:
(i) the application of established
underwriting criteria,
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(ii)
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the establishment of individual internal comfort levels of
lending authority below HVBs legal lending authority,
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(iii)
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the involvement by senior management and the Board of Directors
in the loan approval process for designated categories, types or
amounts of loans,
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(iv) an awareness of concentration by industry or
collateral, and
(v) the monitoring of loans for timely payment and to
seek to identify potential problem loans.
We utilize our Credit Department to assess acceptable and
unacceptable credit risks based upon established underwriting
criteria. We utilize our loan officers, branch managers and
Credit Department to identify changes in a borrowers
financial condition that may affect the borrowers ability
to perform in accordance with loan terms. Lending policies and
procedures place an emphasis on assessing a borrowers
income and cash flow as well as collateral values. Further, we
utilize systems and analysis which assist in monitoring loan
delinquencies. We utilize our loan officers, Asset Recovery
Department and legal counsel in collection efforts on past due
loans. Additional collateral or guarantees may be requested
where delinquencies remain unresolved.
An independent qualified loan review firm reviews loans in our
portfolios and confirms a risk grading to each reviewed loan.
Loans are reviewed based upon the type of loan, the collateral
for the loan, the amount of the loan and any other pertinent
information. The loan review firm reports directly to the Audit
Committee of the Board of Directors.
In addition, we have participated in loans originated by various
other financial institutions within the normal course of
business and within standard industry practices.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Loan
Portfolio for further information related to our portfolio
and lending activities.
Deposits
We offer deposit products ranging in maturity from demand-type
accounts to certificates of deposit with maturities of up to
5 years. Deposits are generally derived from customers
within our primary marketplace. We solicit only certain types of
deposits from outside our market area, primarily from certain
professionals and government agencies. We also utilize brokered
certificates of deposits as a source of funding and to manage
interest rate risk.
We set deposit rates to remain generally competitive with other
financial institutions in our market, although we do not
generally seek to match the highest rates paid by competing
institutions. We have established a process to review interest
rates on all deposit products and, based upon this process,
update our deposit rates weekly. This process also established a
procedure to set deposit interest rates on a relationship basis
and to periodically review these deposit rates. Our
Asset/Liability Management Policy and our Liquidity Policy set
guidelines to manage overall interest rate risk and liquidity.
These guidelines can affect the rates paid on deposits. Deposit
rates are reviewed under these policies periodically since
deposits are our primary source of liquidity.
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We offer deposit pick up services for certain business
customers. We have 27 automated teller machines, or ATMs,
at various locations, which generate activity fees based on use
by other banks customers.
For more information regarding our deposits, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Deposits.
Portfolio
Management Services
We provide investment management services to our customers and
others through a subsidiary, A. R. Schmeidler
& Co., Inc. The acquisition of this firm has allowed
us to expand our investment management services to customers and
to expand revenue by offering such services. We anticipate that
we will continue to expand this line of business.
Other
Services
We also provide a software application to a limited number of
customers designed to meet the specific administrative needs of
bankruptcy trustees through a marketing and licensing agreement
with the application vendor. We have no current plans to expand
this line of business.
Segments
We maintain only one business segment which is discussed in more
detail in Notes 1 and 15 to the financial statements
included elsewhere herein.
Supervision
and Regulation
Banks and bank holding companies are extensively regulated under
both federal and state law. We have set forth below brief
summaries of various aspects of the supervision and regulation
of the Banks. These summaries do not purport to be complete and
are qualified in their entirety by reference to applicable laws,
rules and regulations.
As a bank holding company, we are regulated by and subject to
the supervision of the Board of Governors of the Federal Reserve
System (the FRB) and are required to file with the
FRB an annual report and such other information as may be
required. The FRB has the authority to conduct examinations of
the Company as well.
The Bank Holding Company Act of 1956 (the BHC Act)
limits the types of companies which we may acquire or organize
and the activities in which they may engage. In general, a bank
holding company and its subsidiaries are prohibited from
engaging in or acquiring control of any company engaged in
non-banking activities unless such activities are so closely
related to banking or managing and controlling banks as to be a
proper incident thereto. Activities determined by the FRB to be
so closely related to banking within the meaning of the BHC Act
include operating a mortgage company, finance company, credit
card company, factoring company, trust company or savings
association; performing certain data processing operations;
providing limited securities brokerage services; acting as an
investment or financial advisor; acting as an insurance agent
for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax
planning and preparation service; operating a collection agency;
and providing certain courier services. The FRB also has
determined that certain other activities, including real estate
brokerage and syndication, land development, property management
and underwriting of life insurance unrelated to credit
transactions, are not closely related to banking and therefore
are not proper activities for a bank holding company.
The BHC Act requires every bank holding company to obtain the
prior approval of the FRB before acquiring substantially all the
assets of, or direct or indirect ownership or control of more
than five percent of the voting shares of, any bank. Subject to
certain limitations and restrictions, a bank holding company,
with the prior approval of the FRB, may acquire an
out-of-state
bank.
In November 1999, Congress amended certain provisions of the BHC
Act through passage of the Gramm-Leach-Bliley Act. Under this
legislation, a bank holding company may elect to become a
financial holding company and thereby engage in a
broader range of activities than would be permissible for
traditional bank holding companies. In order to qualify for the
election, all of the depository institution subsidiaries of the
bank holding company must be well capitalized and well managed,
as defined under FRB regulations, and all such subsidiaries must
have achieved a rating of satisfactory or better
with respect to meeting community credit needs. Pursuant to the
Gramm-Leach-Bliley Act, financial holding companies are
permitted to engage in activities that are financial
6
in nature or incidental or complementary thereto, as
determined by the FRB. The Gramm-Leach-Bliley Act identifies
several activities as financial in nature,
including, among others, insurance underwriting and agency
activities, investment advisory services, merchant banking and
underwriting, and dealing in or making a market in securities.
The Company owns a financial subsidiary, A.R.
Schmeidler & Co., Inc.
We believe we meet the regulatory criteria that would enable us
to elect to become a financial holding company. At this time, we
have determined not to make such an election, although we may do
so in the future.
The Gramm-Leach-Bliley Act also makes it possible for entities
engaged in providing various other financial services to form
financial holding companies and form or acquire banks.
Accordingly, the Gramm-Leach-Bliley Act makes it possible for a
variety of financial services firms to offer products and
services comparable to the products and services we offer.
There are various statutory and regulatory limitations regarding
the extent to which present and future banking subsidiaries of
the Company can finance or otherwise transfer funds to the
Company or its non-banking subsidiaries, whether in the form of
loans, extensions of credit, investments or asset purchases,
including regulatory limitation on the payment of dividends
directly or indirectly to the Company from the Bank. Federal
bank regulatory agencies also have the authority to limit
further the Banks payment of dividends based on such
factors as the maintenance of adequate capital for such
subsidiary bank, which could reduce the amount of dividends
otherwise payable. Under applicable banking statutes, at
December 31, 2010, the Bank could have declared additional
dividends of approximately $3.9 million to the Company
without prior regulatory approval.
Under the policy of the FRB, the Company is expected to act as a
source of financial strength to its banking subsidiaries and to
commit resources to support its banking subsidiaries in
circumstances where we might not do so absent such policy. In
addition, any subordinated loans by the Company to its banking
subsidiaries would also be subordinate in right of payment to
depositors and obligations to general creditors of such
subsidiary banks. The Company currently has no loans to the Bank.
The FRB has established capital adequacy guidelines for bank
holding companies that are similar to the FDIC capital
requirements for the Bank described below. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Resources and Note 10 to the Consolidated Financial
Statements. The Company and HVB are subject to various
regulatory capital guidelines. To be considered well
capitalized, an institution must generally have a leverage
ratio of at least 5 percent, a Tier 1 ratio of
6 percent and a total capital ratio of 10 percent. As
a result of the increase in our non-performing loans, the high
percentage of commercial real estate loans in our loan
portfolio, and the increased potential for further possible
deterioration in our loans, as of October 13, 2009 we were
required by the OCC to maintain at the Bank, by no later than
December 31, 2009, a total risk-based capital ratio of at
least 12.0% (compared to 10.0% for a well capitalized bank), a
Tier 1 risk-based capital ratio of at least 10.0% (compared
to 6.0% for a well capitalized bank), and a Tier 1 leverage
ratio of at least 8.0% (compared to 5.0% for a well capitalized
bank). In October 2009 we raised approximately
$93.3 million through an offering of our common stock and
accordingly, at December 31, 2009, the Banks total
risk-based capital ratio, Tier 1 risk-based capital ratio
and Tier 1 leverage ratio were 12.7%, 11.4% and 8.4%,
respectively. At December 31, 2010, the Banks total
risk-based capital ratio, Tier 1 risk-based capital ratio
and Tier 1 leverage ratio were 14.0%, 12.8% and 8.8%,
respectively. Management intends to conduct the affairs of the
Company and its subsidiary Bank so as to maintain a strong
capital position in the future.
Basel
III
In December 2010, the Basel Committee released its final
framework for strengthening international capital and liquidity
regulation, now officially identified by the Basel Committee as
Basel III. Basel III, when implemented by the
U.S. banking agencies and fully phased-in, will require
bank holding companies and their bank subsidiaries to maintain
substantially more capital, with a greater emphasis on common
equity.
The Basel III final capital framework, among other things,
(i) introduces as a new capital measure Common Equity
Tier 1 (CET1), (ii) specifies that
Tier 1 capital consists of CET1 and Additional
Tier 1 capital instruments meeting specified
requirements, (iii) defines CET1 narrowly by requiring that
most adjustments to regulatory capital measures be made to CET1
and not to the other components of capital and (iv) expands
the scope of the adjustments as compared to existing regulations.
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When fully phased in on January 1, 2019, Basel III
requires banks to maintain (i) as a newly adopted
international standard, a minimum ratio of CET1 to risk-weighted
assets of at least 4.5%, plus a 2.5% capital conservation
buffer (which is added to the 4.5% CET1 ratio as that
buffer is phased in, effectively resulting in a minimum ratio of
CET1 to risk-weighted assets of at least 7%), (ii) a
minimum ratio of Tier 1 capital to risk-weighted assets of
at least 6.0%, plus the capital conservation buffer (which is
added to the 6.0% Tier 1 capital ratio as that buffer is
phased in, effectively resulting in a minimum Tier 1
capital ratio of 8.5% upon full implementation), (iii) a
minimum ratio of Total (that is, Tier 1 plus
Tier 2) capital to risk-weighted assets of at least
8.0%, plus the capital conservation buffer (which is added to
the 8.0% total capital ratio as that buffer is phased in,
effectively resulting in a minimum total capital ratio of 10.5%
upon full implementation) and (iv) as a newly adopted
international standard, a minimum leverage ratio of 3%,
calculated as the ratio of Tier 1 capital to balance sheet
exposures plus certain off-balance sheet exposures (computed as
the average for each quarter of the month-end ratios for the
quarter).
Basel III also provides for a countercyclical capital
buffer, generally to be imposed when national regulators
determine that excess aggregate credit growth becomes associated
with a buildup of systemic risk, that would be a CET1 add-on to
the capital conservation buffer in the range of 0% to 2.5% when
fully implemented (potentially resulting in total buffers of
between 2.5% and 5%). The aforementioned capital conservation
buffer is designed to absorb losses during periods of economic
stress. Banking institutions with a ratio of CET1 to
risk-weighted assets above the minimum but below the
conservation buffer (or below the combined capital conservation
buffer and countercyclical capital buffer, when the latter is
applied) will face constraints on dividends, equity repurchases
and compensation based on the amount of the shortfall.
The implementation of the Basel III final framework will
commence January 1, 2013. On that date, banking
institutions will be required to meet the following minimum
capital ratios:
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3.5% CET1 to risk-weighted assets.
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4.5% Tier 1 capital to risk-weighted assets.
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8.0% Total capital to risk-weighted assets.
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The Basel III final framework provides for a number of new
deductions from and adjustments to CET1. These include, for
example, the requirement that mortgage servicing rights,
deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities
be deducted from CET1 to the extent that any one such category
exceeds 10% of CET1 or all such categories in the aggregate
exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1
will begin on January 1, 2014 and will be phased-in over a
five-year period (20% per year). The implementation of the
capital conservation buffer will begin on January 1, 2016
at 0.625% and be phased in over a four-year period (increasing
by that amount on each subsequent January 1, until it
reaches 2.5% on January 1, 2019).
The U.S. banking agencies have indicated informally that
they expect to propose regulations implementing Basel III
in mid-2011 with final adoption of implementing regulations in
mid-2012. Notwithstanding its release of the Basel III
framework as a final framework, the Basel Committee is
considering further amendments to Basel III, including the
imposition of additional capital surcharges on globally
systemically important financial institutions. In addition to
Basel III, Dodd-Frank requires or permits the Federal banking
agencies to adopt regulations affecting banking
institutions capital requirements in a number of respects,
including potentially more stringent capital requirements for
systemically important financial institutions. Accordingly, the
regulations ultimately applicable to the Company may be
substantially different from the Basel III final framework
as published in December 2010. Requirements to maintain higher
levels of capital or to maintain higher levels of liquid assets
could adversely impact the Corporations net income and
return on equity.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the Dodd-Frank Act) was signed into law on
July 21, 2010. Generally, the Act is effective the day
after it was signed into law, but different effective dates
apply to specific sections of the law. The Act, among other
things:
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Directs the Federal Reserve to issue rules which are expected to
limit debit-card interchange fees;
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After a three-year phase-in period which begins January 1,
2013, removes trust preferred securities as a permitted
component of Tier 1 capital for bank holding companies with
assets of $15 billion or more, however, bank holding
companies with assets of less than $15 billion will be
permitted to include trust preferred securities that were issued
before May 19, 2010 as Tier 1 capital;
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Provides for increases in the minimum reserve ratio for the
deposit insurance fund from 1.15 percent to
1.35 percent and changes the basis for determining FDIC
premiums from deposits to assets;
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Creates a new Consumer Financial Protection Bureau that will
have rulemaking authority for a wide range of consumer
protection laws that would apply to all banks and would have
broad powers to supervise and enforce consumer protection laws;
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Requires public companies to give shareholders a non-binding
vote on executive compensation at their first annual meeting
following enactment and at least every three years thereafter
and on golden parachute payments in connection with
approvals of mergers and acquisitions unless previously voted on
by shareholders;
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Authorizes the SEC to promulgate rules that would allow
shareholders to nominate their own candidates using a
companys proxy materials;
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Directs federal banking regulators to promulgate rules
prohibiting excessive compensation paid to executives of
depository institutions and their holding companies with assets
in excess of $1 billion, regardless of whether the company
is publicly traded or not;
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Prohibits a depository institution from converting from a state
to a federal charter or vice versa while it is the subject of a
cease and desist order or other formal enforcement action or a
memorandum of understanding with respect to a significant
supervisory matter unless the appropriate federal banking agency
gives notice of conversion to the federal or state authority
that issued the enforcement action and that agency does not
object within 30 days;
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Changes standards for Federal preemption of state laws related
to federally chartered institutions and their subsidiaries;
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Provides mortgage reform provisions regarding a customers
ability to repay, requiring the ability to repay for
variable-rate loans to be determined by using the maximum rate
that will apply during the first five years of the loan term,
and making more loans subject to provisions for higher cost
loans, new disclosures, and certain other revisions;
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Creates a Financial Stability Oversight Council that will
recommend to the Federal Reserve increasingly strict rules for
capital, leverage, liquidity, risk management and other
requirements as companies grow in size and complexity;
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Makes permanent the $250 thousand limit for federal deposit
insurance and provides unlimited federal deposit insurance
through December 31, 2012 for non-interest bearing demand
transaction accounts at all insured depository
institutions; and
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Repeals the federal prohibitions on the payment of interest on
demand deposits, thereby permitting depository institutions to
pay interest on business transactions and other accounts.
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Authorizes de novo interstate branching, subject to
non-discriminatory state rules, such as home office protection.
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The Dodd-Frank Act contains numerous other provisions affecting
financial institutions of all types, many of which may have an
impact on our operating environment in substantial and
unpredictable ways. Consequently, the Dodd-Frank Act is likely
to increase our cost of doing business, it may limit or expand
our permissible activities, and it may affect the competitive
balance within our industry and market areas. The nature and
extent of future legislative and regulatory changes affecting
financial institutions, including as a result of the Dodd-Frank
Act, is very unpredictable at this time. Our management is
actively reviewing the provisions of the Dodd-Frank Act, many of
which are phased-in over time, and assessing its probable impact
on our business, financial condition, and results of operations.
However, the ultimate effect of the Dodd-Frank Act on the
financial services industry in general, and us in particular, is
uncertain at this time.
9
Emergency
Economic Stabilization Act of 2008
In response to the financial crisis affecting the banking system
and financial markets, on October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (EESA) was signed
into law and established the Troubled Asset Relief Program
(TARP). As part of TARP, the Treasury established
the Capital Purchase Program (CPP) to provide up to
$700 billion of funding to eligible financial institutions
through the purchase of capital stock and other financial
instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. In connection with
EESA, there have been numerous actions by the Federal Reserve
Board, Congress, the Treasury, the FDIC, the SEC and others to
further the economic and banking industry stabilization efforts
under EESA. The Company elected not to participate in the CPP.
Temporary
Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC
adopted a final rule relating to the Temporary Liquidity
Guarantee Program (TLG Program), Under the TLG
Program (as amended on March 17, 2009 the FDIC has
(i) guaranteed through the earlier of maturity or
December 31, 2012, certain newly issued senior unsecured
debt issued by participating institutions on or after
October 14, 2008, and before October 31, 2009 (the
Debt Guarantee Program) and (ii) provide full
FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal
(NOW) accounts paying less than or equal to
0.5 percent interest per annum and Interest on Lawyers
Trust Accounts (IOLTAs) held at participating
FDIC- insured institutions through June 30, 2010 (the
TAG Program). On April 13, 2010, the FDIC
announced a second extension of the TAG Program until
December 31, 2010. Coverage under the TLG Program was
available for the first 30 days without charge. The fee
assessment for coverage of senior unsecured debt ranges from
50 basis points to 100 basis points per annum,
depending on the initial maturity of the debt. The fee
assessment for deposit insurance coverage ranges from 15 to
25 basis points based upon the Banks CAMELS rating by
the OCC on amounts in covered accounts exceeding $250,000.
We elected to participate in both the Debt Guarantee Program and
the TAG Program. We have not issued debt under the Debt
Guarantee Program.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
included a two-year extension of the TAG Program, though the
extension does not apply to all accounts covered under the
original program. The extension through December 31, 2012
applies only to non-interest bearing transaction accounts and
IOLTAs. Beginning January 1, 2011, NOW accounts will no
longer be eligible for the unlimited guarantee. Unlike the
original TAG Program, which allowed banks to opt in, the
extended program will apply at all FDIC-insured institutions and
will no longer be funded by separate premiums. The FDIC will
account for the additional TAG insurance coverage in determining
the amount of the general assessment it charges under the
risk-based assessment system.
Regulation
of HVB
The Bank is subject to the supervision of, and to regular
examination by, the OCC. Various laws and the regulations
thereunder applicable to the Company and the Bank impose
restrictions and requirements in many areas, including capital
requirements, the maintenance of reserves, establishment of new
offices, the making of loans and investments, consumer
protection, employment practices, bank acquisitions and entry
into new types of business. There are various legal limitations,
including Sections 23A and 23B of the Federal Reserve Act,
which govern the extent to which a bank subsidiary may finance
or otherwise supply funds to its holding company or its holding
companys non-bank subsidiaries. Under federal law, no bank
subsidiary may, subject to certain limited exceptions, make
loans or extensions of credit to, or investments in the
securities of, its parent or the non-bank subsidiaries of its
parent (other than direct subsidiaries of such bank which are
not financial subsidiaries) or take their securities as
collateral for loans to any borrower. The Bank is also subject
to collateral security requirements for any loans or extensions
of credit permitted by such exceptions.
Dividend
Limitations
The Company is a legal entity separate and distinct from its
subsidiaries. The Companys revenues (on a parent company
only basis) result in substantial part from dividends paid by
the Bank. The Banks dividend payments, without prior
regulatory approval, are subject to regulatory limitations.
Under the National Bank Act, dividends may be declared only if,
after payment thereof, capital would be unimpaired and remaining
surplus would equal
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100 percent of capital. Moreover, a national bank may
declare, in any one year, dividends only in an amount
aggregating not more than the sum of its net profits for such
year and its retained net profits for the preceding two years.
In addition, the bank regulatory agencies have the authority to
prohibit the Bank from paying dividends or otherwise supplying
funds to the Company if the supervising agency determines that
such payment would constitute an unsafe or unsound banking
practice. Under applicable banking statutes, at
December 31, 2010, the Bank could have declared additional
dividends of approximately $3.9 million to the Company
without prior regulatory approval.
Capital
Standards
The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), defines specific capital categories
based upon an institutions capital ratios. The capital
categories, in declining order, are: (i) well capitalized;
(ii) adequately capitalized; (iii) undercapitalized;
(iv) significantly undercapitalized; and
(v) critically undercapitalized. Under FDICIA and the
FDICs prompt corrective action rules, the FDIC may take
any one or more of the following actions against an
undercapitalized bank: restrict dividends and management fees,
restrict asset growth and prohibit new acquisitions, new
branches or new lines of business without prior FDIC approval.
If a bank is significantly undercapitalized, the FDIC may also
require the bank to raise capital, restrict interest rates a
bank may pay on deposits, require a reduction in assets,
restrict any activities that might cause risk to the bank,
require improved management, prohibit the acceptance of deposits
from correspondent banks and restrict compensation to any senior
executive officer. When a bank becomes critically
undercapitalized, (i.e., the ratio of tangible equity to total
assets is equal to or less than 2 percent), the FDIC must,
within 90 days thereafter, appoint a receiver for the bank
or take such action as the FDIC determines would better achieve
the purposes of the law. Even where such other action is taken,
the FDIC generally must appoint a receiver for a bank if the
bank remains critically undercapitalized during the calendar
quarter beginning 270 days after the date on which the bank
became critically undercapitalized.
The OCCs standard regulations implementing these
provisions of FDICIA provide that an institution will be
classified as well capitalized if it (i) has a
total risk-based capital ratio of at least 10.0 percent,
(ii) has a Tier 1 risk-based capital ratio of at least
6.0 percent, (iii) has a Tier 1 leverage ratio of
at least 5.0 percent, and (iv) meets certain other
requirements. An institution will be classified as
adequately capitalized if it (i) has a total
risk-based capital ratio of at least 8.0 percent,
(ii) has a Tier 1 risk-based capital ratio of at least
4.0 percent, (iii) has a Tier 1 leverage ratio of
(a) at least 4.0 percent or (b) at least
3.0 percent if the institution was rated 1 in its most
recent examination, and (iv) does not meet the definition
of well capitalized. An institution will be
classified as undercapitalized if it (i) has a
total risk-based capital ratio of less than 8.0 percent,
(ii) has a Tier 1 risk-based capital ratio of less
than 4.0 percent, or (iii) has a Tier 1 leverage
ratio of (a) less than 4.0 percent or (b) less
than 3.0 percent if the institution was rated 1 in its most
recent examination. An institution will be classified as
significantly undercapitalized if it (i) has a
total risk-based capital ratio of less than 6.0 percent,
(ii) has a Tier 1 risk-based capital ratio of less
than 3.0 percent, or (iii) has a Tier 1 leverage
ratio of less than 3.0 percent. An institution will be
classified as critically undercapitalized if it has
a tangible equity to total assets ratio that is equal to or less
than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives
an unsatisfactory examination rating. Similar categories apply
to bank holding companies.
As a result of the increase in our non-performing loans, the
high percentage of commercial real estate loans in our loan
portfolio, and the increased potential for further possible
deterioration in our loans, as of October 13, 2009 we were
required by the OCC to maintain at the Bank, by no later than
December 31, 2009, a total risk-based capital ratio of at
least 12.0% (compared to 10.0% for a well capitalized bank), a
Tier 1 risk-based capital ratio of at least 10.0% (compared
to 6.0% for a well capitalized bank), and a Tier 1 leverage
ratio of at least 8.0% (compared to 5.0% for a well capitalized
bank). In October 2009 we raised approximately
$93.3 million through an offering of our common stock and
accordingly, at December 31, 2009, the Banks total
risk-based capital ratio, Tier 1 risk-based capital ratio
and Tier 1 leverage ratio were 12.7%, 11.4% and 8.4%,
respectively. At December 31, 2010, the Banks total
risk-based capital ratio, Tier 1 risk-based capital ratio
and Tier 1 leverage ratio were 14.0%, 12.8% and 8.8%,
respectively.
In addition, significant provisions of FDICIA required federal
banking regulators to impose standards in a number of other
important areas to assure bank safety and soundness, including
internal controls, information
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systems and internal audit systems, credit underwriting, asset
growth, compensation, loan documentation and interest rate
exposure.
See Note 10 to the Consolidated Financial Statements.
Insurance
of Deposit Account
The Banks deposits are insured up to applicable limits by
the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation (FDIC). The Deposit Insurance Fund is
the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged in 2006. Under the
FDICs risk-based system, insured institutions are assigned
to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors with less
risky institutions paying lower assessments on their deposits.
On November 12, 2009, the FDIC issued a final rule that
required insured depository institutions to prepay, on
December 30, 2009, their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010,
2011 and 2012, together with their quarterly risk-based
assessment for the third quarter 2009. The Bank paid
approximately $13.4 million, in assessments as of
December 31, 2009 of which approximately $12.5 million
was recorded as a prepaid asset. Prepaid assessments are to be
applied against the actual quarterly assessments until
exhausted, and may not be applied to any special assessments
that may occur in the future. Any unused prepayments will be
returned to the Bank on June 30, 2013. The balance of the
prepaid FDIC assessment fees at December 31, 2010 was
$8.8 million.
In November 2010, as required by the Dodd-Frank Act, the FDIC
proposed to revise the assessment base to consist of average
consolidated total assets during the assessment period minus the
average tangible equity during the assessment period. In
addition, the proposed revisions would eliminate the adjustment
for secured borrowings and make certain other changes to the
impact of unsecured borrowings and brokered deposits on an
institutions deposit insurance assessment. The proposed
rule also revises the assessment rate schedule to provide
assessments ranging from 5 to 45 basis points. No assurance
can be given as to the final form of the proposed regulations or
its impact on the Bank.
As previously noted above, the Dodd-Frank Act makes permanent
the $250 thousand limit for federal deposit insurance and
provides unlimited federal deposit insurance through
December 31, 2012 for non-interest bearing demand
transaction accounts and IOLTAs at all insured depository
institutions.
The FDIC has authority to further increase insurance
assessments. A significant increase in insurance premiums may
have an adverse effect on the operating expenses and results of
operations of the Bank. Management cannot predict what insurance
assessment rates will be in the future.
Loans to
Related Parties
The Banks authority to extend credit to its directors,
executive officers and 10 percent stockholders, as well as
to entities controlled by such persons, is currently governed by
the requirements of the National Bank Act, Sarbanes-Oxley Act
and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders
(i) be made on terms that are substantially the same as,
and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions
with other persons not related to the lender and that do not
involve more than the normal risk of repayment or present other
unfavorable features and (ii) not exceed certain
limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in
part, on the amount of the Banks capital. In addition,
extensions of credit in excess of certain limits must be
approved by the Banks Board of Directors. Under the
Sarbanes-Oxley Act, the Company and its subsidiaries, other than
the Bank, may not extend or arrange for any personal loans to
its directors and executive officers.
FIRREA
Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), a depository
institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC
in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. These provisions
have commonly been referred to as FIRREAs cross
guarantee provisions. Further, under
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FIRREA, the failure to meet capital guidelines could subject a
bank to a variety of enforcement remedies available to federal
regulatory authorities.
FIRREA also imposes certain independent appraisal requirements
upon a banks real estate lending activities and further
imposes certain
loan-to-value
restrictions on a banks real estate lending activities.
The bank regulators have promulgated regulations in these areas.
Community
Reinvestment Act and Fair Lending Developments
Under the Community Reinvestment Act (CRA), as
implemented by Interagency Appraisal and Evaluation guidelines,
the Bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs
of our entire community, including low and moderate income
neighborhoods. The CRA does not prescribe specific lending
requirements or programs for financial institutions nor does it
limit an institutions discretion to develop the types of
products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires
the regulatory agencies, in connection with its examination of a
bank, to assess the institutions record of meeting the
credit needs of its community and to take such record into
account in its evaluation of certain applications by such
institution. FIRREA amended the CRA to require public disclosure
of an institutions CRA rating and require the regulatory
agencies to provide a written evaluation of an
institutions CRA performance utilizing a four-tiered
descriptive rating system. Institutions are evaluated and rated
by the regulatory agencies as Outstanding,
Satisfactory, Needs to Improve or
Substantial Non Compliance. Failure to receive at
least a Satisfactory rating may inhibit an
institution from undertaking certain activities, including
acquisitions of other financial institutions, which require
regulatory approval based, in part, on CRA Compliance
considerations. As of its last CRA examination in
March 2010, the Bank received a rating of
Satisfactory.
USA
Patriot Act
The USA Patriot Act of 2001, signed into law on October 26,
2001, enhances the powers of domestic law enforcement
organizations and makes numerous other changes aimed at
countering the international terrorist threat to the security of
the United States. Title III of the legislation most
directly affects the financial services industry. It is intended
to enhance the federal governments ability to fight money
laundering by monitoring currency transactions and suspicious
financial activities. The USA Patriot Act has significant
implications for depository institutions and other businesses
involved in the transfer of money. Under the USA Patriot Act, a
financial institution must establish due diligence policies,
procedures and controls reasonably designed to detect and report
money laundering through correspondent accounts and private
banking accounts. Financial institutions must follow regulations
adopted by the Treasury Department to encourage financial
institutions, their regulatory authorities, and law enforcement
authorities to share information about individuals, entities,
and organizations engaged in or suspected of engaging in
terrorist acts or money laundering activities. Financial
institutions must follow regulations adopted by the Treasury
Department setting forth minimum standards regarding customer
identification. These regulations require financial institutions
to implement reasonable procedures for verifying the identity of
any person seeking to open an account, maintain records of the
information used to verify the persons identity, and
consult lists of known or suspected terrorists and terrorist
organizations provided to the financial institution by
government agencies. Every financial institution must establish
anti-money laundering programs, including the development of
internal policies and procedures, designation of a compliance
officer, employee training, and an independent audit function.
The passage of the USA Patriot Act has increased our compliance
activities, but has not otherwise affected our operations.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)
added new legal requirements for public companies affecting
corporate governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
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a prohibition on personal loans made or arranged by the issuer
to its directors and executive officers (except for loans made
by a bank subject to Regulation O);
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independence requirements for audit committee members;
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independence requirements for company auditors;
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certification of financial statements within the Annual Report
on
Form 10-K
and Quarterly Reports on
Form 10-Q
by the chief executive officer and the chief financial officer;
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the forfeiture by the chief executive officer and the chief
financial officer of bonuses or other incentive-based
compensation and profits from the sale of an issuers
securities by such officers in the twelve month period following
initial publication of any financial statements that later
require restatement due to corporate misconduct;
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disclosure of off-balance sheet transactions;
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two-business day filing requirements for insiders filing on
Form 4;
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disclosure of a code of ethics for financial officers and filing
a Current Report on
Form 8-K
for a change in or waiver of such code;
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the reporting of securities violations up the ladder
by both in-house and outside attorneys;
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restrictions on the use of non-GAAP financial measures in press
releases and SEC filings;
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the formation of a public accounting oversight board;
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various increased criminal penalties for violations of
securities laws; and
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an assertion by management with respect to the effectiveness of
internal control over financial reporting.
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Governmental
Monetary Policy
Our business and earnings depend in large part on differences in
interest rates. One of the most significant factors affecting
our earnings is the difference between (1) the interest
rates paid by us on our deposits and other borrowings
(liabilities) and (2) the interest rates received by us on
loans made to our customers and securities held in our
investment portfolios (assets). The value of and yield on our
assets and the rates paid on our liabilities are sensitive to
changes in prevailing market rates of interest. Therefore, our
earnings and growth will be influenced by general economic
conditions, the monetary and fiscal policies of the federal
government, including the Federal Reserve System, whose function
is to regulate the national supply of bank credit in order to
influence inflation and overall economic growth. Its policies
are used in varying combinations to influence overall growth of
bank loans, investments and deposits and may also affect
interest rates charged on loans, earned on investments or paid
for deposits.
In view of changing conditions in the national and local
economies, we cannot predict possible future changes in interest
rates, deposit levels, loan demand, or availability of
investment securities and the resulting effect our business or
earnings.
Investment
Advisers Act of 1940
A.R. Schmeidler & Co., Inc., is a money manager
registered as an investment adviser under the federal Investment
Advisers Act of 1940. ARS and its representatives are also
registered under the laws of various states regulating
investment advisers and their representatives. Regulation under
the Investment Advisers Act requires the filing and updating of
a Form ADV, filed with the Securities and Exchange
Commission. The Investment Advisers Act regulates, among other
things, the fees that may be charged to advisory clients, the
custody of client funds, relationships with brokers and the
maintenance of books and records.
Available
Information
We make available free of charge on our website
(http://www.hudsonvalleybank.com)
our Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports, as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. We provide
electronic or paper copies of filings free of charge upon
request.
14
ITEM 1A
RISK FACTORS
Risks
Related to Our Business
Further
increases in our nonperforming loans may occur and adversely
affect our results of operations and financial
condition.
As a result of the effects of the recent economic downturn, we
are facing higher levels of delinquencies in our loans. At
December 31, 2010 and 2009, our non-accrual loans totaled
$43.7 million and $50.6 million, or 2.5% and 2.8% of
the loan portfolio, respectively. At December 31, 2010 and
2009, our nonperforming assets (which include non-accrual loans,
accruing loans 90 days or more past due and foreclosed real
estate, also called other real estate owned) totaled
$56.3 million and $66.7 million, or 2.1% and 2.5% of
total assets, respectively. In addition, we had
$21.0 million and $32.0 million of accruing loans that
were
31-89 days
delinquent at December 31, 2010 and 2009, respectively and
$7.8 million on non-performing loans held for sale at
December 31, 2010.
Until economic and market conditions improve, we expect to
continue to incur additional losses relating to an increase in
non-performing loans. Our non-performing assets adversely affect
our net income in various ways. First, we do not record interest
income on non-accrual loans or other real estate owned, thereby
adversely affecting our income and increasing our loan
administration costs. Second, when we take collateral in
foreclosures and similar proceedings, we are required to mark
the related loan to the then fair market value of the
collateral, which may result in a loss. Third, these loans and
other real estate owned also increase our risk profile and the
capital our regulators believe is appropriate in light of such
risks. Adverse changes in the value of our problem assets, or
the underlying collateral, or in these borrowers
performance or financial conditions, whether or not due to
economic and market conditions beyond our control, could
adversely affect our business, results of operations and
financial condition. In addition, the resolution of
nonperforming assets requires significant commitments of time
from management and our directors, which can be detrimental to
the performance of their other responsibilities. There can be no
assurance that we will not experience further increases in
nonperforming loans in the future, or that our nonperforming
assets will not result in further losses in the future.
A further downturn in the market areas we serve could increase
our credit risk associated with our loan portfolio, as it could
have a material adverse effect on both the ability of borrowers
to repay loans as well as the value of the real property or
other property held as collateral for such loans. Further
deterioration of our loan portfolio will likely cause a
significant increase in nonperforming loans, which would have an
adverse impact on our results of operations and financial
condition. There can be no assurance that we will not experience
further increases in nonperforming loans in the future.
As
regulated entities, the Company and the Bank are subject to
extensive supervision and prudential regulation, including
maintaining certain capital requirements, which may limit their
operations and potential growth. Failure to meet any such
requirements would subject us to regulatory action.
The Company is supervised by the Federal Reserve and the Bank is
supervised by the OCC. As such, each is subject to extensive
supervision and prudential regulation, including risk-based and
leverage capital requirements. The Company and the Bank must
maintain certain risk-based and leverage capital ratios as
required by the Federal Reserve or the OCC, respectively, that
may change depending upon general economic conditions and the
particular condition, risk profile and growth plans of the
Company and the Bank.
In todays economic and regulatory environment, banking
regulators, including the OCC, continue to direct greater
scrutiny to banks with higher levels of commercial real estate
loans like us. As a general matter, such banks, including the
Bank, are expected to maintain higher capital levels as well as
other measures due to commercial real estate lending growth and
exposures. As a result of the higher levels of our
non-performing loans, the high percentage of commercial real
estate loans in our loan portfolio, and the increased potential
for further possible deterioration in our loans, since
December 31, 2009 we have been required by the OCC to
maintain at the Bank, by no later than December 31, 2009, a
total risk-based capital ratio of at least 12.0% (compared to
10.0% for a well capitalized bank), a Tier 1 risk-based
capital ratio of at least 10.0% (compared to 6.0% for a well
capitalized bank), and a Tier 1 leverage ratio of at least
8.0% (compared to 5.0% for a well capitalized bank). At
December 31, 2010, the Banks total risk-based capital
ratio, Tier 1 risk-based capital ratio and Tier 1
leverage ratio were 14.0%, 12.8% and 8.8%, respectively, and the
Companys total risk-based capital ratio, Tier 1
risk-based capital ratio and Tier 1 leverage ratio were
15.2%, 13.9% and 9.6%, respectively.
15
If we do not maintain these higher capital levels we may be
subject to enforcement actions. More generally, compliance with
capital requirements may limit loan growth or other operations
that require the use of capital and could adversely affect our
ability to expand or maintain present business levels.
If we fail to meet any regulatory capital requirement or are
otherwise deemed to be operating in an unsafe and unsound manner
or in violation of law, we may be subject to a variety of
informal or formal remedial measures and enforcement actions.
Such informal remedial measures and enforcement actions may
include a memorandum of understanding which is initiated by the
regulator and outlines an institutions agreement to take
specified actions within specified time periods to correct
violations of law or unsafe and unsound practices. In addition,
as part of our regular examination process, regulators may
advise us to operate under various restrictions as a prudential
matter. Any of these restrictions, in whatever manner imposed,
could have a material adverse effect on our business and results
of operations.
In addition to informal remedial actions, we may also be subject
to formal enforcement actions. Failure to comply with an
informal enforcement action could cause us to be subject to
formal enforcement actions. Formal enforcement actions include
written agreements, cease and desist orders, the imposition of
substantial fines and other civil penalties and, in the most
severe cases, the termination of deposit insurance or the
appointment of a conservator or receiver for our bank
subsidiary. Furthermore, if the Bank fails to meet any
regulatory capital requirement, it will be subject to the prompt
corrective action framework of the Federal Deposit Insurance
Corporation Improvements Act of 1991, which imposes
progressively more restrictive constraints on operations,
management and capital distributions as the capital category of
an institution declines, up to and including, ultimately, the
appointment of a conservator or receiver. A failure to meet
regulatory capital requirements could also subject us to capital
raising requirements. Additional capital raisings would be
dilutive to holders of our common stock. See Risk
Factors Risks Relating to Our Common Stock for
more information.
Any remedial measure or enforcement action, whether formal or
informal, could impose restrictions on our ability to operate
our business and adversely affect our prospects, financial
condition or results of operations. In addition, any formal
enforcement action could harm our reputation and our ability to
retain and attract customers and impact the trading price of our
common stock.
Further
increases to the allowance for loan losses may cause our
earnings to decrease.
In determining our loan loss reserves for each quarter, we make
various assumptions and judgments about the future performance
of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets
serving as collateral for the repayment of loans. In determining
the amount of the allowance for loan losses, we rely on loan
quality reviews, past experience, and an evaluation of economic
conditions, among other factors. If our assumptions prove to be
incorrect, our allowance for credit losses may not be sufficient
to cover losses inherent in our loan portfolio, resulting in
additions to the allowance and a corresponding decrease in
income. In addition, bank regulators periodically review our
allowance for loan losses and may require us to increase our
provision for loan losses or loan charge-offs. Any increase in
our allowance for loan losses or loan charge-offs as required by
these regulatory authorities or otherwise could have a material
adverse effect on our results of operations or financial
condition.
Our
concentration of commercial real estate loans has resulted in
increased loan losses and could result in further increases in
future periods.
Commercial real estate is cyclical and poses risks of loss to us
due to concentration levels and similar risks of the asset. Of
our loan portfolio, 46.0% was concentrated in commercial real
estate loans as of December 31, 2010 and 43.1% as of
December 31, 2009. As discussed above, banking regulators
direct greater scrutiny to banks with higher levels of
commercial real estate loans. Due to the high percentage of
commercial real estate loans in our loan portfolio, we are among
the banks subject to greater regulatory scrutiny of their
activities.
We have significant exposure to commercial real estate in our
loan portfolio and have substantially increased our provision
for loan losses primarily because of an increase in expected
losses relating to adverse economic conditions, particularly in
the real estate market in our primary lending areas. During
2010, we added $46.5 million in provision for loan losses
compared to $24.3 million in 2009 and $11.0 million in
2008, in part reflecting collateral evaluations in response to
recent changes in the market values of real estate development
loans. We may be required to add additional provision for loan
loss in 2011.
16
Given our high concentration in commercial real estate and the
greater scrutiny directed to this asset class by banking
regulators, our regulators may impose specific concentration
limits on our lending activity in this area in the future. Such
limitations may restrict our business opportunities and
adversely affect our operating results. In addition, further
deterioration in our loan portfolio, including further declines
in the market values of real estate supporting certain
commercial real estate loans, would result in further provisions
for loan losses in future periods, which would have a material
adverse affect on our business and results of operations.
Declines
in value may adversely impact the carrying amount of our
investment portfolio and result in
other-than-temporary
impairment charges.
As of December 31, 2010, we owned pooled trust preferred
debt securities with an aggregate book value of
$11.6 million and an unrealized loss of approximately
$8.0 million. As a result of recent adverse economic
banking conditions, we incurred pretax impairment charges to
earnings on these securities of approximately $2.6 million
in 2010, $5.5 million in 2009 and $1.1 million during
2008. We may be required to record additional impairment charges
on these pooled trust preferred debt securities or other of our
investment securities if they suffer a decline in value that is
considered
other-than-temporary.
Numerous factors, including lack of liquidity for resales of
certain investment securities, absence of reliable pricing
information for investment securities, adverse changes in
business climate or adverse actions by regulators could have a
negative impact on the valuation of our investment portfolio in
future periods. If an impairment charge is significant enough,
it could affect the ability of the Bank to upstream dividends to
us, which could have a material adverse effect on our liquidity
and our ability to pay dividends to stockholders, and could also
negatively impact our regulatory capital ratios and result in us
not being classified as well capitalized for
regulatory purposes.
A
prolonged or worsened downturn in the economy in general and the
real estate market in our key market areas in particular would
adversely affect our loan portfolio and our growth
potential.
Our primary lending market area is Westchester County, New York
and New York City and to an increasing extent, Rockland County,
New York and Fairfield County and New Haven County, Connecticut,
with a primary focus on businesses, professionals and
not-for-profit
organizations located in this area. Accordingly, the asset
quality of our loan portfolio largely depends upon the
areas economy and real estate markets. The Banks
primary lending market area and asset quality have been
adversely affected by the current economic downturn. A prolonged
or worsened downturn in the economy in our primary lending area
would adversely affect our asset quality, operations and limit
our future growth potential.
In particular, a downturn in our local real estate market could
negatively affect our business because a significant portion
(approximately 88% as of December 31, 2010) of our
loans are secured, either on a primary or secondary basis, by
real estate. Our ability to recover on defaulted loans by
selling the real estate collateral would then be diminished and
we would be more likely to suffer losses on defaulted loans. The
Banks loans have already been adversely affected by the
current decline in the real estate market. Continuation or
worsening of such conditions could have additional negative
effects on our business in the future.
A downturn in the real estate market could also result in lower
customer demand for real estate loans. This could in turn result
in decreased profits as our alternative investments, such as
securities, generally yield less than real estate loans.
Difficult
market conditions have adversely affected our
industry.
Substantial declines in the real estate markets over the past
two years, with falling prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the
credit performance of real estate related loans and resulted in
significant write-downs of asset values by financial
institutions. These write-downs have caused many financial
institutions to seek additional capital, to reduce or eliminate
dividends, to merge with larger and stronger institutions and,
in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have
reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally. A worsening of these conditions
17
would likely exacerbate the adverse effects of these difficult
market conditions on us and others in the financial institutions
industry.
As a result of the foregoing, there is a potential for new laws
and regulations regarding lending and funding practices and
liquidity and capital standards, and financial institution
regulatory agencies are now expected to be very aggressive in
responding to concerns and trends identified in examinations,
including the more frequent issuance of informal remedial
measures and formal enforcement orders. These negative
developments in the financial services industry and the impact
of new legislation in response to those developments could
negatively impact our operations by restricting our business
operations, including our ability to originate loans and work
with borrowers to collect loans, and adversely impact our
financial performance.
Higher
FDIC deposit insurance premiums and assessments could adversely
affect our financial condition.
FDIC insurance premiums increased substantially in 2009 and we
may have to pay significantly higher FDIC premiums in the
future. Market developments have significantly depleted the
insurance fund of the FDIC and reduced the ratio of reserves to
insured deposits. The FDIC adopted a revised risk-based deposit
insurance assessment schedule on February 27, 2009, which
raised regular deposit insurance premiums. On May 22, 2009,
the FDIC also implemented a five basis point special assessment
of each insured depository institutions total assets minus
Tier 1 capital as of June 30, 2009, but no more than
10 basis points times the institutions assessment
base for the second quarter of 2009, collected by the FDIC on
September 30, 2009. The amount of this special assessment
for HVB and NYNB was $1.2 million. Additional special
assessments may be imposed by the FDIC for future quarters at
the same or higher levels.
In addition, the FDIC adopted a rule that required insured
depository institutions, including our Bank subsidiaries, to
prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. The
prepaid assessments were collected on December 30,
2009. The total prepaid assessments for HVB and NYNB
was $12.5 million, which was recorded as a prepaid expense
(asset) as of December 30, 2009. As of December 31,
2009 and each quarter thereafter, HVB (for itself and as
successor to NYNB) would record an expense for its regular
quarterly assessment for the quarter and an offsetting credit to
the prepaid assessment until the asset is exhausted.
The Dodd-Frank Act made the FDICs TAG Program mandatory
for all FDIC-insured banks. This additional insurance coverage
will be accounted for by likely increases in general assessment
charges under its risk-based assessment system. These changes,
along with the use of all of our remaining FDIC insurance
assessment credits in early 2009, may cause the premiums charged
by the FDIC to increase. These actions could significantly
increase our noninterest expense in 2011 and in future periods.
A
substantial decline in the value of our Federal Home Loan Bank
of New York common stock may adversely affect our financial
condition.
We own common stock of the Federal Home Loan Bank of New York
(FHLB), in order to qualify for membership in the
Federal Home Loan Bank system, which enables us to borrow funds
under the Federal Home Loan Bank advance program. The amount of
FHLB common stock we own fluctuates in relation to the amount of
our borrowing from the FHLB. As of December 31, 2010 the
carrying value of our FHLB common stock was $7.0 million.
In an extreme situation, it is possible that the capitalization
of a Federal Home Loan Bank, including the FHLB, could be
substantially diminished or reduced to zero. If this occurs, it
may adversely affect our results of operations and financial
condition.
Certain
of our goodwill and intangible assets may become impaired in the
future.
We test our goodwill and intangible assets for impairment on a
periodic basis. It is possible that future impairment testing
could result in a value of our goodwill and intangibles which
may be less than the carrying value and, as a result, may
adversely affect our financial condition and results of
operations. If we determine that impairment exists at a given
time, our earnings and the book value of the related goodwill
and intangibles will be reduced by the amount of the impairment.
18
The
opening of new branches could reduce our
profitability.
We have expanded our branch network by opening new branches. We
intend to continue our branch expansion strategy by opening new
branches, which requires us to incur a number of up-front
expenses associated with the leasing and build-out of the space
to be occupied by the branch, the staffing of the branch and
similar matters. These expenses are typically greater than the
income generated by the branch until it builds up its customer
base, which, depending on the branch, could take 18 months
or more. In opening branches in a new locality, we may also
encounter problems in adjusting to local market conditions, such
as the inability to gain meaningful market share and the
stronger than expected competition. Numerous factors contribute
to the performance of a new branch, such as a suitable location,
qualified personnel, and an effective marketing strategy.
Our
income is sensitive to changes in interest rates.
Our profitability, like that of most banking institutions,
depends to a large extent upon our net interest income. Net
interest income is the difference between interest income
received on interest-earning assets, including loans and
securities, and the interest paid on interest-bearing
liabilities, including deposits and borrowings. Accordingly, our
results of operations and financial condition depend largely on
movements in market interest rates and our ability to manage our
assets and liabilities in response to such movements. Management
estimates that, as of December 31, 2010, a 200 basis
point increase in interest rates would result in a 1.3% increase
in net interest income and a 100 basis point decrease would
result in a 1.6% decrease in net interest income.
In addition, changes in interest rates may result in an increase
in higher cost deposit products within our existing portfolios,
as well as a flow of funds away from bank accounts into direct
investments (such as U.S. Government and corporate
securities and other investment instruments such as mutual
funds) to the extent that we may not pay rates of interest
competitive with these alternative investments.
We may
need to raise additional capital in the future and such capital
may not be available when needed or at all.
We may need to raise additional capital in the future to provide
us with sufficient capital resources and liquidity to meet our
commitments and business needs. Our ability to raise additional
capital, if needed, will depend on, among other things,
conditions in the capital markets at that time, which are
outside of our control, and our financial performance. We cannot
assure you that such capital will be available to us on
acceptable terms or at all. Our inability to raise sufficient
additional capital on acceptable terms when needed could
adversely affect our businesses, financial condition and results
of operations.
Our
markets are intensely competitive, and our principal competitors
are larger than us.
We face significant competition both in making loans and in
attracting deposits. This competition is based on, among other
things, interest rates and other credit and service charges, the
quality of services rendered, the convenience of the banking
facilities, the range and type of products offered and the
relative lending limits in the case of loans to larger
commercial borrowers. Our market area has a very high density of
financial institutions, many of which are branches of
institutions that are significantly larger than we are and have
greater financial resources and higher lending limits than we
do. Many of these institutions offer services that we do not or
cannot provide. Nearly all such institutions compete with us to
varying degrees.
Our competition for loans comes principally from commercial
banks, savings banks, savings and loan associations, credit
unions, mortgage banking companies, insurance companies and
other financial service companies. Our most direct competition
for deposits has historically come from commercial banks,
savings banks, savings and loan associations, and money market
funds and other securities funds offered by brokerage firms and
other similar financial institutions. We face additional
competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms, and
insurance companies. Competition may increase in the future as a
result of recently proposed regulatory changes in the financial
services industry.
Impact of
inflation and changing prices
The consolidated financial statements and notes thereto
incorporated by reference herein have been prepared in
accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical
dollar amounts or estimated fair value without considering the
changes in the relative purchasing power of
19
money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike
industrial companies, nearly all of our assets and liabilities
are monetary in nature. As a result, interest rates have a
greater impact on our performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the price of goods
and services.
Extensive
Regulation and Supervision.
The Company, primarily through its principal subsidiary and
certain non-bank subsidiaries, is subject to extensive federal
and state regulation and supervision. Banking regulations are
primarily intended to protect depositors funds, federal
deposit insurance funds and the banking system as a whole. Such
laws are not designed to protect the Companys
stockholders. These regulations affect the Companys
lending practices, capital structure, investment practices,
dividend policy and growth, among other things. The Company is
also subject to a number of Federal laws, which, among other
things, require it to lend to various sectors of the economy and
population, and establish and maintain comprehensive programs
relating to anti-money laundering and customer identification.
Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes.
Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money
penalties
and/or
reputation damage, which could have a material adverse effect on
the Companys business, financial condition and results of
operations. The Companys compliance with certain of these
laws will be considered by banking regulators when reviewing
bank merger and bank holding company acquisitions.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act May
Affect Our Business Activities, Financial Position and
Profitability By Increasing Our Regulatory Compliance Burden and
Associated Costs, Placing Restrictions on Certain Products and
Services, and Limiting Our Future Capital Raising
Strategies.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act was signed into law by the President of
the United States. The Dodd-Frank Act implements significant
changes in financial regulation and will impact all financial
institutions, including the Company and the Bank. Among the
Dodd-Frank Acts significant regulatory changes, it creates
a new financial consumer protection agency, known as the Bureau
of Consumer Financial Protection (the Bureau), that
is empowered to promulgate new consumer protection regulations
and revise existing regulations in many areas of consumer
protection. The Bureau has exclusive authority to issue
regulations, orders and guidance to administer and implement the
objectives of federal consumer protection laws. The Bureau will
also have the ability to participate, with the OCC, in our
consumer compliance examinations. Moreover, the Dodd-Frank Act
permits states to adopt stricter consumer protection laws and
authorizes state attorney generals to enforce consumer
protection rules issued by the Bureau. The Dodd-Frank Act also
restricts the authority of the Comptroller of the Currency to
preempt state consumer protection laws applicable to national
banks, such as the Bank, and may affect the preemption of state
laws as they affect subsidiaries and agents of national banks,
changes the scope of federal deposit insurance coverage, and
potentially increases the FDIC assessment payable by the Bank.
We expect that the Bureau and certain other provisions in the
Dodd-Frank Act will significantly increase our regulatory
compliance burden and costs and may restrict the financial
products and services we offer to our customers.
Because many of the Dodd-Frank Acts provisions require
regulatory rulemaking, we are uncertain as to the impact that
some of the provisions of the Dodd-Frank Act will have on the
Company and the Bank and cannot provide assurance that the
Dodd-Frank Act will not adversely affect our financial condition
and results of operations for other reasons.
Technological
change may affect our ability to compete.
The banking industry continues to undergo rapid technological
changes, with frequent introductions of new technology-driven
products and services. In addition to improving customer
services, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future
success will depend, in part, on our ability to address the
needs of customers by using technology to provide products and
services that will satisfy customer demands, as well as to
create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in
technological improvements. There can be no assurance that we
will be able to effectively implement new technology-driven
products and services or be successful in marketing such
products and services to the public.
20
In addition, because of the demand for technology-driven
products, banks are increasingly contracting with outside
vendors to provide data processing and core banking functions.
The use of technology-related products, services, delivery
channels and processes exposes a bank to various risks,
particularly transaction, strategic, reputation and compliance
risks. There can be no assurance that we will be able to
successfully manage the risks associated with our increased
dependency on technology.
Changes
in Accounting Policies or Accounting Standards.
The Companys accounting policies are fundamental to
understanding its financial results and condition. Some of these
policies require use of estimates and assumptions that may
affect the value of the Companys assets or liabilities and
financial results. The Company identified its accounting
policies regarding the allowance for loan losses, security
valuations, goodwill and other intangible assets, and income
taxes to be critical because they require management to make
difficult, subjective and complex judgments about matters that
are inherently uncertain. Under each of these policies, it is
possible that materially different amounts would be reported
under different conditions, using different assumptions, or as
new information becomes available.
From time to time the Financial Accounting Standards Board
(FASB) and the Securities and Exchange Commission
(SEC) change their guidance governing the form and
content of the Companys external financial statements. In
addition, accounting standard setters and those who interpret
U.S. generally accepted accounting principles
(GAAP), such as the FASB, SEC, banking regulators
and the Companys outside auditors, may change or even
reverse their previous interpretations or positions on how these
standards should be applied. Such changes are expected to
continue, and may accelerate as the FASB and International
Accounting Standards Board have reaffirmed their commitment to
achieving convergence between U.S. GAAP and International
Financial Reporting Standards. Changes in U.S. GAAP and
changes in current interpretations are beyond the Companys
control, can be hard to predict and could materially impact how
the Company reports its financial results and condition. In
certain cases, the Company could be required to apply a new or
revised guidance retroactively or apply existing guidance
differently (also retroactively) which may result in the Company
restating prior period financial statements for material
amounts. Additionally, significant changes to U.S. GAAP may
require costly technology changes, additional training and
personnel, and other expenses that will negatively impact our
results of operations.
We may
incur liabilities under federal and state environmental laws
with respect to foreclosed properties.
Approximately 88% of the loans held by the Company as of
December 31, 2010 were secured, either on a primary or
secondary basis, by real estate. Approximately half of these
loans were commercial real estate loans, with most of the
remainder being for single or multi-family residences. We
currently own seven properties acquired in foreclosure, totaling
$11.0 million. Under federal and state environmental laws,
we could face liability for some or all of the costs of removing
hazardous substances, contaminants or pollutants from properties
we acquire on foreclosure. While other persons might be
primarily liable, such persons might not be financially solvent
or able to bear the full cost of the
clean-up. It
is also possible that a lender that has not foreclosed on
property but has exercised unusual influence over the
borrowers activities may be required to bear a portion of
the clean-up
costs under federal or state environmental laws.
We Are
Subject to Environmental Liability Risk Associated With Lending
Activities.
A significant portion of our loan portfolio is secured by real
property. During the ordinary course of business, we may
foreclose on and take title to properties securing certain
loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or
toxic substances are found, we may be liable for remediation
costs, as well as for personal injury and property damage.
Environmental laws may require us to incur substantial expenses
and may materially reduce the affected propertys value or
limit our ability to use or sell the affected property. In
addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase
our exposure to environmental liability. Although we have
policies and procedures to perform an environmental review prior
to originating certain commercial real estate loans, as well as
before initiating any foreclosure action on real property, these
reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other
financial liabilities associated with an environmental hazard
could have a material adverse effect on our financial condition
and results of operations.
21
Risks
Relating to Our Common Stock
Market
conditions and other factors may affect the value of our common
stock.
The trading price of the shares of our common stock will depend
on many factors, which may change from time to time, including:
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|
|
|
|
conditions in the credit, mortgage and housing markets, the
markets for securities relating to mortgages or housing, and
developments with respect to financial institutions generally;
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|
|
|
interest rates;
|
|
|
|
the market for similar securities;
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|
|
government action or regulation;
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|
|
|
general economic conditions or conditions in the financial
markets;
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|
|
|
our past and future dividend practice; and
|
|
|
|
our financial condition, performance, creditworthiness and
prospects.
|
Accordingly, the shares of common stock that an investor
purchases may trade at a price lower than that at which they
were purchased.
There may
be future dilution of our common stock.
The Company is currently authorized to issue up to
25 million shares of common stock, of which
17,665,908 shares were outstanding as of December 31,
2010, and up to 15 million shares of preferred stock, of
which no shares are outstanding. The Companys certificate
of incorporation authorizes the Board of Directors to, among
other things, issue additional shares of common or preferred
stock, or securities convertible or exchangeable into common or
preferred stock, without stockholder approval. We may issue such
additional equity or convertible securities to raise additional
capital in connection with acquisitions, as part of our employee
and director compensation or otherwise. The issuance of any
additional shares of common or preferred stock or convertible
securities could substantially dilute holders of our common
stock. Moreover, to the extent that we issue restricted stock,
stock options, or warrants to purchase our common stock in the
future and those stock options or warrants are exercised or the
restricted stock vests, our stockholders may experience further
dilution. Holders of our shares of common stock have no
preemptive rights that entitle them to purchase their pro rata
share of any offering of shares of any class or series and,
therefore, such sales or offerings could result in increased
dilution to our stockholders.
We may
further reduce or eliminate the cash dividend on our common
stock.
We reduced our total per share dividend in 2010 to $0.65 per
share. Holders of our common stock are only entitled to receive
such cash dividends as our Board of Directors may declare out of
funds legally available for such payments. Although we have
historically declared cash dividends on our common stock, we are
not required to do so and may further reduce or eliminate our
common stock cash dividend in the future. This could adversely
affect the market price of our common stock. Also, as a bank
holding company, the Companys ability to declare and pay
dividends depends on certain federal regulatory considerations,
including the guidelines of the Federal Reserve regarding
capital adequacy and dividends.
Government
regulation restricts our ability to pay cash
dividends.
Dividends from the Bank are the only current significant source
of cash for the Company. There are various statutory and
regulatory limitations regarding the extent to which the Bank
can pay dividends or otherwise transfer funds to the Company.
Federal bank regulatory agencies also have the authority to
limit further the Banks payment of dividends based on such
factors as the maintenance of adequate capital for the Bank,
which could reduce the amount of dividends otherwise payable. We
paid a cash dividend to our stockholders of $0.65 per share in
2010 and $1.15 per share in 2009 (adjusted for subsequent stock
dividends). We currently expect to pay substantially reduced per
share dividends in 2011. Under applicable banking statutes, at
December 31, 2010, the Bank could have declared dividends
of approximately $3.9 million to the Company without prior
regulatory approval. No assurance can be given that the Bank
will have the profitability necessary to permit the payment of
dividends in the future; therefore, no assurance can be given
that the Company would have any funds available to pay dividends
to stockholders.
22
Federal bank regulators require us to maintain certain levels of
regulatory capital. The failure to maintain these capital levels
or to comply with applicable laws, regulations and supervisory
agreements could subject us to a variety of informal and formal
enforcement actions. Moreover, dividends can be restricted by
any of our regulatory authorities if the agency believes that
our financial condition warrants such a restriction.
The Companys ability to declare and pay dividends is
restricted under the New York Business Corporation Law, which
provides that dividends may only be paid by a corporation out of
its surplus.
The Federal Reserve issued a supervisory letter dated
February 24, 2009 to bank holding companies that contains
guidance on when the board of directors of a bank holding
company should eliminate, defer or severely limit dividends
including, for example, when net income available for
stockholders for the past four quarters, net of dividends
previously paid during that period, is not sufficient to fully
fund the dividends. The letter also contains guidance on the
redemption of stock by bank holding companies which urges bank
holding companies to advise the Federal Reserve of any such
redemption or repurchase of common stock for cash or other value
which results in the net reduction of a bank holding
companys capital during the quarter.
In the event of a liquidation or reorganization of the Bank, the
ability of holders of debt and equity securities of the Company
to benefit from the distribution of assets from the Bank upon
any such liquidation or reorganization would be subordinate to
prior claims of creditors of the Bank (including depositors),
except to the extent that the Companys claim as a creditor
may be recognized. The Company is not currently a creditor of
the Bank.
Our
common stock price may fluctuate due to the potential sale of
stock by our existing stockholders.
We are aware that several of our large stockholders may in the
future liquidate some or all of their shares of Company common
stock for estate planning and other reasons. In addition, other
stockholders may sell their shares of common stock from time to
time on the NASDAQ Global Select Market or otherwise. As a
result, substantial amounts of our common stock are eligible for
future sale. While we cannot predict either the magnitude or the
timing of such sales, if a large number of common shares are
sold during a short time frame, it may have the effect of
reducing the market price of our common stock.
Our
earnings may be subject to increased volatility.
Our earnings may experience volatility as a result of several
factors. These factors include, among others:
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|
|
a continuation of the current economic downturn, or further
adverse economic developments;
|
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|
|
instability in the financial markets;
|
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|
|
our inability to generate or maintain creditworthy customer
relationships in our primary markets;
|
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|
|
unexpected increases in operating costs, including special
assessments for FDIC insurance;
|
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|
further credit deterioration in our loan portfolio or
unanticipated credit deterioration, or defaults by our loan
customers;
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|
|
credit deterioration or defaults by issuers of securities within
our investment portfolio; or
|
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|
|
a decrease in our common stock price below its book value
potentially impacting the valuation of our goodwill.
|
If any one or more of these events occur, we may experience
significant declines in our net interest margin and non-interest
income, or we may be required to record substantial charges to
our earnings, including increases in the provision for loan
losses, credit-related impairment on securities (both permanent
and
other-than-temporary),
and impairment on goodwill and other intangible assets, in
future periods.
Our
certificate of incorporation, the New York Business Corporation
Law and federal banking laws and regulations may prevent a
takeover of our company.
Provisions of the Companys certificate of incorporation,
the New York Business Corporation Law and federal banking laws
and regulations, including regulatory approval requirements,
could make it more difficult for a third party to acquire us,
even if doing so would be perceived to be beneficial to our
stockholders. The combination of these provisions may inhibit a
non-negotiated merger or other business combination, which, in
turn, could adversely affect the market price of our common
stock.
23
ITEM
1B UNRESOLVED STAFF COMMENTS
None.
ITEM
2 PROPERTIES
Our principal executive offices, including administrative and
operating departments, are located at 21 Scarsdale Road,
Yonkers, New York, in premises we own. HVBs main branch is
located at 1055 Summer Street, Stamford, Connecticut, in
premises we lease.
HVB operates 36 branches. HVB owns the following branch
locations :
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Address
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City
|
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County
|
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State
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|
37 East Main Street
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Elmsford
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Westchester
|
|
New York
|
61 South Broadway
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Yonkers
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Westchester
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New York
|
150 Lake Avenue
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|
Yonkers
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Westchester
|
|
New York
|
865 McLean Avenue
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|
Yonkers
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Westchester
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|
New York
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512 South Broadway
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|
Yonkers
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Westchester
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|
New York
|
21 Scarsdale Road
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Yonkers
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Westchester
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New York
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664 Main Street
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Mount Kisco
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Westchester
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New York
|
369 East 149th Street
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Bronx
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Bronx
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New York
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2256 Second Avenue
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Manhattan
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|
New York
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|
New York
|
HVB leases the following branch locations:
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Address
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City
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County
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State
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|
35 East Grassy Sprain Road
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Yonkers
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|
Westchester
|
|
New York
|
403 East Sandford Boulevard
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Mount Vernon
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|
Westchester
|
|
New York
|
1835 East Main Street
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|
Peekskill
|
|
Westchester
|
|
New York
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500 Westchester Avenue
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|
Port Chester
|
|
Westchester
|
|
New York
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501 Marble Avenue
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Pleasantville
|
|
Westchester
|
|
New York
|
328 Central Avenue
|
|
White Plains
|
|
Westchester
|
|
New York
|
5 Huguenot Street
|
|
New Rochelle
|
|
Westchester
|
|
New York
|
40 Church Street
|
|
White Plains
|
|
Westchester
|
|
New York
|
875 Mamaroneck Avenue
|
|
Mamaroneck
|
|
Westchester
|
|
New York
|
399 Knollwood Road
|
|
White Plains
|
|
Westchester
|
|
New York
|
111 Brook Street
|
|
Eastchester
|
|
Westchester
|
|
New York
|
3130 East Tremont Avenue
|
|
Bronx
|
|
Bronx
|
|
New York
|
975 Allerton Avenue
|
|
Bronx
|
|
Bronx
|
|
New York
|
1250 Waters Place
|
|
Bronx
|
|
Bronx
|
|
New York
|
16 Court Street
|
|
Brooklyn
|
|
Kings
|
|
New York
|
60 East 42nd Street
|
|
Manhattan
|
|
New York
|
|
New York
|
233 Broadway
|
|
Manhattan
|
|
New York
|
|
New York
|
350 Park Avenue
|
|
Manhattan
|
|
New York
|
|
New York
|
112 West 34th Street
|
|
Manhattan
|
|
New York
|
|
New York
|
162-05 Crocheron Avenue
|
|
Flushing
|
|
Queens
|
|
New York
|
254 South Main Street
|
|
New City
|
|
Rockland
|
|
New York
|
1055 Summer Street
|
|
Stamford
|
|
Fairfield
|
|
Connecticut
|
420 Post Road West
|
|
Westport
|
|
Fairfield
|
|
Connecticut
|
500 West Putnam Avenue
|
|
Greenwich
|
|
Fairfield
|
|
Connecticut
|
200 Post Road
|
|
Fairfield
|
|
Fairfield
|
|
Connecticut
|
24
|
|
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|
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|
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Address
|
|
City
|
|
County
|
|
State
|
|
2505 Main Street
|
|
Stratford
|
|
Fairfield
|
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Connecticut
|
54 Broad Street
|
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Milford
|
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New Haven
|
|
Connecticut
|
Of the above leased properties, 4 properties located in
Bronx, White Plains, New Rochelle and New York, New York, have
lease terms that expire within the next 2 years. We
currently expect to renew the leases of each of these properties.
A. R. Schmeidler & Co., Inc is located at
500 Fifth Avenue, New York, New York in leased premises.
We currently operate 27 ATM machines, 24 of which are
located in the Banks facilities. Three ATMs are located at
off-site locations: St. Josephs Hospital, Yonkers, College
of Mount Saint Vincent, Riverdale, New York, and Concordia
College, Bronxville, New York.
In our opinion, the premises, fixtures and equipment are
adequate and suitable for the conduct of our business. All
facilities are well maintained and provide adequate parking.
ITEM
3 LEGAL PROCEEDINGS
Various claims and lawsuits are pending against the Company and
its subsidiaries in the ordinary course of business. In the
opinion of management, resolution of each matter is not expected
to have a material effect on the financial condition or results
of operations of the Company and its subsidiaries.
ITEM
4 (REMOVED AND RESERVED)
25
PART
II
ITEM 5
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock was held of record as of March 1, 2011 by
approximately 894 registered shareholders. Our common stock
trades on the NASDAQ Global Select Market under the symbol
HUVL. Trading in this market is limited. Prior to
our listing on the NASDAQ Global Select Market on
September 21, 2009, our common stock traded sporadically on
the OTC Bulletin Board. We historically created a secondary
market for our stock by issuing offers to repurchase shares from
any stockholder based on the appraised value of the Company.
However we have discontinued this program.
The table below sets forth the price range of our common stock
since being listed on the NASDAQ Global Select Market on
September 21, 2009. Prices have been adjusted to reflect
the 10% stock dividend to shareholders in December 2010.
|
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|
|
|
|
|
|
2010
|
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
24.67
|
|
|
$
|
23.01
|
|
Second Quarter
|
|
|
26.73
|
|
|
|
22.66
|
|
Third Quarter
|
|
|
23.53
|
|
|
|
15.79
|
|
Fourth Quarter
|
|
|
24.68
|
|
|
|
18.74
|
|
|
|
|
|
|
|
|
|
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|
2009
|
|
|
High
|
|
Low
|
|
Third Quarter (from September 21, 2009)
|
|
$
|
26.87
|
|
|
$
|
24.77
|
|
Fourth Quarter
|
|
|
27.75
|
|
|
|
21.68
|
(1)
|
(1) Prior to the fourth quarter of 2009, there was no
established public trading market for the Companys common
stock.
In 1998, the Board of Directors of the Company adopted a policy
of paying quarterly cash dividends to holders of its common
stock. Quarterly cash dividends were paid as follows: In 2010,
$0.21 per share to shareholders of record on February 11
and May 10, $0.09 per share to shareholders of record on
August 9 and $0.14 per share to shareholders of record on
November 8. In 2009, $0.38 per share to shareholders of
record on February 13, $0.33 per share to shareholders of
record on May 22, $0.25 per share to shareholders of record
on August 21 and $0.19 per share to shareholders of record on
November 13. Dividends per share have been adjusted to
reflect the 10 percent stock dividends to shareholders in
December 2010 and 2009.
Stock dividends of 10 percent each (one share for every 10
outstanding shares) were declared by the Company for
shareholders of record on November 29, 2010 and
December 7, 2009.
Any funds which the Company may require in the future to pay
cash dividends, as well as various Company expenses, are
expected to be obtained by the Company chiefly in the form of
cash dividends from HVB and secondarily from sales of common
stock pursuant to the Companys stock option plan. The
ability of the Company to declare and pay dividends in the
future will depend not only upon its future earnings and
financial condition, but also upon the future earnings and
financial condition of the Bank and its ability to transfer
funds to the Company in the form of cash dividends and
otherwise. See further discussion in Supervision and
Regulation under Item 1 of this Annual Report on
Form 10-K.
The Company is a separate and distinct legal entity from HVB.
The Companys right to participate in any distribution of
the assets or earnings of HVB is subordinate to prior claims of
creditors of HVB.
The Company sold 3,993,395 shares of common stock at an
issue price of $25.00 per share in an underwritten common stock
offering during the fourth quarter of 2009. Net proceeds from
the offering were $93.3 million. In conjunction with this
common stock offering, the Company listed its common stock on
the NASDAQ Global Select Market under the symbol
HUVL. Concurrent with listing its common stock on
the NASDAQ, the Company lifted all restrictions on
transferability of its common stock that previously applied to
certain shareholders and a majority of the shares outstanding. A
total of $59.0 million of the net proceeds from this offering
was contributed to HVB and NYNB during 2010 and 2009 increasing
the Banks capital ratios, as required of the Banks
by the OCC, to levels in excess of well capitalized
levels generally applicable to banks under current regulations.
See further discussion in
26
Supervision and Regulation under Item 1 of this
Annual Report on
Form 10-K.
The remaining net proceeds of this offering are available for
general corporate purposes. There were no sales of common stock
by the Company during the fourth quarter of 2010.
There were no purchases made by the Company of its common stock
during the year ended December 31, 2010.
Stockholder
Return Performance Graph
The following graph compares the Companys total
stockholder return for the years 2006, 2007, 2008, 2009 and 2010
based on prices as reported on the over-the-counter bulletin
board and as reported on the NASDAQ Global Select Market
effective with the Companys listing in
September 2009, with (1) the Russell 2000 and
(2) the SNL $1 billion to $5 billion Bank Index.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
|
Hudson Valley Holding Corp.
|
|
|
100.00
|
|
|
|
107.79
|
|
|
|
136.51
|
|
|
|
133.85
|
|
|
|
75.23
|
|
|
|
85.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
118.37
|
|
|
|
116.51
|
|
|
|
77.15
|
|
|
|
98.11
|
|
|
|
124.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Bank $1B-$5B
|
|
|
100.00
|
|
|
|
115.72
|
|
|
|
84.29
|
|
|
|
69.91
|
|
|
|
50.11
|
|
|
|
56.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The graph assumes $100 was invested on December 31, 2005
and dividends were reinvested. Returns are market capitalization
weighted.
27
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data for the years ended and as of the dates
indicated. The selected historical consolidated financial data
as of December 31, 2010 and 2009, and for the years ended
December 31, 2010, 2009 and 2008, are derived from our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The selected historical consolidated financial data as of
December 31, 2008, 2007 and 2006 and for the years ended
December 31, 2007 and 2006 are derived from our
consolidated financial statements that are not included in this
Annual Report on
Form 10-K.
Share and per share data have been restated to reflect the
effects of 10 percent stock dividends issued in 2010, 2009,
2008 and 2007. The information set forth below should be read in
conjunction with the consolidated financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(000s except share data)
|
|
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
128,339
|
|
|
$
|
136,579
|
|
|
$
|
140,112
|
|
|
$
|
150,367
|
|
|
$
|
141,157
|
|
Total interest expense
|
|
|
17,683
|
|
|
|
22,304
|
|
|
|
30,083
|
|
|
|
46,299
|
|
|
|
41,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
110,656
|
|
|
|
114,275
|
|
|
|
110,029
|
|
|
|
104,068
|
|
|
|
99,557
|
|
Provision for loan losses
|
|
|
46,527
|
|
|
|
24,306
|
|
|
|
11,025
|
|
|
|
1,470
|
|
|
|
2,130
|
|
Income before income taxes
|
|
|
3,708
|
|
|
|
26,322
|
|
|
|
46,523
|
|
|
|
52,742
|
|
|
|
52,094
|
|
Net income
|
|
|
5,113
|
|
|
|
19,012
|
|
|
|
30,877
|
|
|
|
34,483
|
|
|
|
34,059
|
|
Basic earnings per common share
|
|
|
0.29
|
|
|
|
1.39
|
|
|
|
2.35
|
|
|
|
2.65
|
|
|
|
2.60
|
|
Diluted earning per common share
|
|
|
0.29
|
|
|
|
1.37
|
|
|
|
2.27
|
|
|
|
2.54
|
|
|
|
2.52
|
|
Weighted average shares outstanding
|
|
|
17,630,814
|
|
|
|
13,644,736
|
|
|
|
13,166,931
|
|
|
|
13,029,183
|
|
|
|
13,107,578
|
|
Diluted weighted average share outstanding
|
|
|
17,687,246
|
|
|
|
13,916,067
|
|
|
|
13,612,605
|
|
|
|
13,551,592
|
|
|
|
13,528,691
|
|
Cash dividends per common share
|
|
$
|
0.65
|
|
|
$
|
1.15
|
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
459,934
|
|
|
$
|
522,285
|
|
|
$
|
671,355
|
|
|
$
|
780,251
|
|
|
$
|
917,660
|
|
Loans, net
|
|
|
1,689,187
|
|
|
|
1,772,645
|
|
|
|
1,677,611
|
|
|
|
1,289,641
|
|
|
|
1,205,243
|
|
Total assets
|
|
|
2,669,033
|
|
|
|
2,665,556
|
|
|
|
2,540,890
|
|
|
|
2,330,748
|
|
|
|
2,291,734
|
|
Deposits
|
|
|
2,234,412
|
|
|
|
2,172,615
|
|
|
|
1,839,326
|
|
|
|
1,812,542
|
|
|
|
1,626,441
|
|
Borrowings
|
|
|
124,345
|
|
|
|
176,903
|
|
|
|
466,398
|
|
|
|
286,941
|
|
|
|
456,559
|
|
Stockholders equity
|
|
|
289,917
|
|
|
|
293,678
|
|
|
|
207,501
|
|
|
|
203,687
|
|
|
|
185,566
|
|
28
Financial
Ratios
Significant ratios of the Company for the periods indicated are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Earnings Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
|
0.20
|
%
|
|
|
0.79
|
%
|
|
|
1.39
|
%
|
|
|
1.59
|
%
|
|
|
1.64
|
%
|
Average total assets
|
|
|
0.18
|
|
|
|
0.74
|
|
|
|
1.30
|
|
|
|
1.49
|
|
|
|
1.54
|
|
Average total stockholders equity
|
|
|
1.75
|
|
|
|
8.74
|
|
|
|
14.76
|
|
|
|
18.03
|
|
|
|
19.40
|
|
Adjusted average total stockholders equity(1)
|
|
|
1.77
|
|
|
|
8.78
|
|
|
|
14.55
|
|
|
|
17.61
|
|
|
|
18.57
|
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total stockholders equity to average total assets
|
|
|
10.43
|
%
|
|
|
8.43
|
%
|
|
|
8.79
|
%
|
|
|
8.27
|
%
|
|
|
7.95
|
%
|
Average net loans as a multiple of average total
stockholders equity
|
|
|
5.86
|
|
|
|
8.00
|
|
|
|
7.09
|
|
|
|
6.45
|
|
|
|
6.44
|
|
Leverage capital
|
|
|
9.60
|
%
|
|
|
10.17
|
%
|
|
|
7.53
|
%
|
|
|
8.31
|
%
|
|
|
7.74
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
13.92
|
|
|
|
13.94
|
|
|
|
10.11
|
|
|
|
12.61
|
|
|
|
12.32
|
|
Total risk-based capital (to risk weighted assets)
|
|
|
15.18
|
|
|
|
15.16
|
|
|
|
11.33
|
|
|
|
13.77
|
|
|
|
13.49
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of year-end loans
|
|
|
2.25
|
%
|
|
|
2.13
|
%
|
|
|
1.33
|
%
|
|
|
1.33
|
%
|
|
|
1.37
|
%
|
Loans (net) as a percentage of year-end total assets
|
|
|
63.29
|
|
|
|
66.50
|
|
|
|
66.02
|
|
|
|
55.33
|
|
|
|
52.59
|
|
Loans (net) as a percentage of year-end total deposits
|
|
|
75.60
|
|
|
|
81.59
|
|
|
|
91.21
|
|
|
|
71.15
|
|
|
|
74.10
|
|
Securities as a percentage of year-end total assets
|
|
|
17.23
|
|
|
|
19.59
|
|
|
|
26.42
|
|
|
|
33.48
|
|
|
|
40.04
|
|
Average interest earning assets as a percentage of average
interest bearing liabilities
|
|
|
150.04
|
|
|
|
145.87
|
|
|
|
146.90
|
|
|
|
146.83
|
|
|
|
148.34
|
|
Dividends per share as a percentage of diluted earnings per share
|
|
|
224.14
|
|
|
|
83.94
|
|
|
|
67.40
|
|
|
|
53.54
|
|
|
|
47.62
|
|
|
|
(1) |
Adjusted average stockholders equity excludes unrealized
gains, net of tax, of $3,078 and $981 in 2010 and 2009,
respectively and unrealized losses, net of tax, of $2,955,
$4,521 and $7,846 in 2008, 2007 and 2006, respectively.
Management believes this alternate presentation more closely
reflects actual performance, as it is more consistent with the
Companys stated asset/liability management strategies,
which have not resulted in significant realization of temporary
market gains or losses on securities available for sale which
were primarily related to changes in interest rates. As noted in
the Companys 2011 Proxy Statement, which is incorporated
herein by reference, net income as a percentage of adjusted
average stockholders equity is one of several factors
utilized by management to determine total compensation.
|
29
ITEM 7
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section presents discussion and analysis of the
Companys consolidated financial condition at
December 31, 2010 and 2009, and consolidated results of
operations for each of the three years in the period ended
December 31, 2010. The Company is consolidated with its
wholly-owned subsidiaries Hudson Valley Bank, N.A. and its
subsidiaries (collectively HVB or the
Bank) and HVHC Risk Management Corp. This discussion and
analysis should be read in conjunction with the financial
statements and supplementary financial information contained
elsewhere in this Annual Report on
Form 10-K.
Overview
of Managements Discussion and Analysis
This overview is intended to highlight selected information
included in this Annual Report on
Form 10-K.
It does not contain sufficient information for a complete
understanding of the Companys financial condition and
operating results and, therefore, should be read in conjunction
with this entire Annual Report on
Form 10-K.
The Company derives substantially all of its revenue from
providing banking and related services to businesses,
professionals, municipalities, not-for profit organizations and
individuals within its market area, primarily Westchester County
and Rockland County, New York, portions of New York City and
Fairfield County and New Haven County, Connecticut. The
Companys assets consist primarily of loans and investment
securities, which are funded by deposits, borrowings and
capital. The primary source of revenue is net interest income,
the difference between interest income on loans and investments,
and interest expense on deposits and borrowed funds. The
Companys basic strategy is to grow net interest income and
non interest income by the retention of its existing customer
base and the expansion of its core businesses and branch offices
within its current market and surrounding areas. Considering
current economic conditions, the Companys primary market
risk exposures are interest rate risk, the risk of deterioration
of market values of collateral supporting the Companys
loan portfolio, particularly commercial and residential real
estate and potential risks associated with the impact of
regulatory changes that may take place in reaction to current
conditions in the financial system. Interest rate risk is the
exposure of net interest income to changes in interest rates.
Commercial and residential real estate are the primary
collateral for the majority of Companys loans.
The wide ranging economic downturn, which began in 2008 and
continued throughout 2009 and 2010, has had extremely negative
effects on all financial sectors both domestic and foreign.
Perhaps the most severe impact of this downturn has been felt by
the real estate industry, which is a major source of both the
deposit and loan businesses of the Company. Although recent
indications suggest that the economic decline has begun to turn
around, the Company expects this recovery to be slow and expects
to continue to experience some negative pressure from these
adverse conditions into the first quarter of 2011 and beyond.
Net income for 2010 was $5.1 million or $0.29 per diluted
share, a decrease of $13.9 million or 73.2 percent
compared to $19.0 million or $1.37 per diluted share in
2009. The overall decline in earnings in 2010, compared to 2009,
resulted primarily from significant increases in the provision
for loan losses which totaled $46.5 million for the year
ended December 31, 2010, compared to $24.3 million for
the prior year period. Earnings were also adversely affected by
real estate owned valuation provisions of $1.4 million and
$0.6 million, respectively, in the second and third
quarters of 2010. These provisions are reflective of continued
weakness in the overall economy which has resulted in the
Companys decision to follow a more aggressive strategy for
problem asset resolution further discussed below.
Total loans decreased $84.2 million during the year ended
December 31, 2010. This decline resulted from a number of
factors including decreased loan demand, charge-offs, pay downs
of existing loans and the transfer of $21.9 million of
nonperforming loans to the loans
held-for-sale
category. The Company recognized $46.2 million of net
charge-offs during 2010. Despite the weakness in loan demand,
and the continuation of pressure on overall asset quality caused
by the ongoing effects of the economic downturn, the Company
continues to provide lending availability to both new and
existing customers.
Overall asset quality continued to be adversely affected by the
current state of the economy and the real estate market.
Nonperforming assets, which include nonaccrual loans, accruing
loans delinquent over 90 days and other
30
real estate owned, decreased to $56.3 million at
December 31, 2010, compared to $66.7 million at
December 31, 2009. The decrease included the transfer of
$21.9 million of nonperforming loans to the loans
held-for-sale
category. The Company has continued to experience a slowdown in
payments of certain loans, such as construction loans, whose
repayment is often dependent on sales of completed properties,
as well as increases in delinquent and nonperforming loans in
other sectors of the loan portfolio, all of which have been
adversely impacted by the economic downturn and decline in the
real estate market. These conditions have resulted in severe
declines in the demand for and values of virtually all
commercial and residential real estate properties. These
declines, together with the limited availability of residential
mortgage financing, resulted in continued downward pressure on
the overall asset quality of the Companys loan portfolio
during 2010. In addition, recent significant increases in
filings of bankruptcy and foreclosure proceedings have
overloaded the court systems and have resulted in what the
Company believes to be unacceptable delays in attempts to obtain
title to real estate and other collateral through conventional
foreclosure.
As a result of above factors, since the second quarter of 2010,
the Company has followed a more aggressive strategy for
resolving problem assets. As part of the revised resolution
strategy, the Company has reevaluated each problem loan and has
made a determination of net realizable value based on
managements estimation of the best possible outcome
considering the individual characteristics of each asset against
the likelihood of resolution with the current borrower,
expectations for resolution through the court system, or other
available market opportunities. The severity of the decline in
real estate values has provided new market opportunities for the
disposition of distressed assets as investors search for yield
in the current low interest rate environment and our more
aggressive policy has begun to take advantage of those
opportunities. As part of this revised strategy, during the
third quarter of 2010, the Company transferred twenty five loans
totaling $21.9 million to the loans
held-for-sale
category. Partial charge-offs of these loans to adjust their
carrying amount to estimated fair value accounted for
$14.1 million of the $46.2 million of net charge-offs
recorded during the full year of 2010. Approximately
$14.1 million of these loans were sold in December of 2010
without further loss. The remaining $7.8 million are
expected to be disposed of in the first or second quarters of
2011. As noted above, despite recent indications suggesting that
the economic decline may have begun to turn around, the Company
expects any recovery to be slow and expects to continue to
experience some negative pressure from these adverse conditions
into the first quarter of 2011 and beyond.
Total deposits increased $61.8 million during the year
ended December 31, 2010, as the Company continued to
experience significant growth in new customers both in existing
branches and new branches added during the last two years.
Overall deposit growth was partially offset by planned
reductions in certain non-core deposit balances. Proceeds from
deposit growth were used to reduce maturing term borrowings or
were retained in liquid investments, principally interest
earning bank deposits.
As a result of the aforementioned activity in the Companys
core businesses of loans and deposits and other asset/liability
management activities, tax equivalent basis net interest income
declined by $4.6 million or 3.9 percent to
$113.8 million for the year ended December 31, 2010,
compared to $118.4 million for the year ended
December 31, 2009. The effect of the adjustment to a tax
equivalent basis was $3.1 million in 2010 and
$4.1 million in 2009.
Non interest income was $13.7 million in 2010, an increase
of $3.2 million or 30.5 percent, compared to
$10.5 million in 2009. The increase was partially due to an
increase in investment advisory fees. Fee income from this
source increased primarily as a result of the effects of recent
improvement in both domestic and international equity markets.
Assets under management were approximately $1.5 billion at
December 31, 2010 and $1.3 billion at
December 31, 2009. The overall increases in non interest
income also included growth in deposit service charges. Non
interest income also included recognized pre-tax impairment
charges on securities available for sale of $2.6 million in
2010 and $5.5 million in 2009. The impairment charges were
related to the Companys investments in pooled trust
preferred securities. Non interest income for 2010 and 2009 also
included $2.0 million and $0.3 million of valuation
losses on other real estate owned.
Non interest expense was $74.1 million for both 2010 and
2009. Increases in non interest expense resulting from the
Companys continued investment in its branch offices,
technology and personnel to accommodate growth, the expansion of
services and products available to new and existing customers
and the upgrading of certain internal processes were more than
offset by cost saving measures implemented by the Company during
2009 and 2010. In
31
addition, 2010 reflected significantly lower FDIC deposit
insurance premiums. Additional premiums imposed by the FDIC in
2009 to replenish shortfalls in the FDIC Insurance Fund were not
imposed to the same degree in 2010. However, additional premium
increases and special assessments may continue to be imposed by
the FDIC in the future. Decreases resulting from the lower FDIC
premiums and other cost saving measures were offset by
significant increases in costs related to problem loan
resolutions and other real estate owned.
The Company uses a simulation analysis to estimate the effect
that specific movements in interest rates would have on net
interest income. Excluding the effects of planned growth and
anticipated new business, the simulation analysis at
December 31, 2010 shows the Companys net interest
income decreasing slightly if rates fall and increasing slightly
if rates rise.
The Company has established specific policies and operating
procedures governing its liquidity levels to address future
liquidity needs, including contingent sources of liquidity.
While the current adverse economic situation has put pressure on
the availability of liquidity in the marketplace, the Company
believes that its present liquidity and borrowing capacity are
sufficient for its current business needs. In addition, the
Company and the Bank are subject to various regulatory capital
guidelines. In todays economic and regulatory environment
the OCC, which is the primary federal regulator of the Bank, has
directed greater scrutiny to banks with higher levels of
commercial real estate loans. During the fourth quarter of 2009,
the OCC required HVB to maintain, by December 31, 2009, a
total risk-based capital ratio of at least 12.0%, a Tier 1
risk-based capital ratio of at least 10.0%, and a Tier 1
leverage ratio of at least 8.0%. These capital levels are in
excess of well capitalized levels generally
applicable to banks under current regulations. To meet these
increased capital ratios and to support future growth, the
Company successfully raised a net $93.3 million in an
underwritten common stock offering in the fourth quarter of
2009. As of December 31, 2010, and 2009, the Company and
HVB exceeded all required regulatory capital levels.
Critical
Accounting Policies
Application of Critical Accounting Policies
The Companys consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States. The Companys significant
accounting policies are more fully described in Note 1 to
the Consolidated Financial Statements. Certain accounting
policies require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. On an on-going
basis, management evaluates its estimates and assumptions, and
the effects of revisions are reflected in the financial
statements in the period in which they are determined to be
necessary. The accounting policies described below are those
that most frequently require management to make estimates and
judgements, and therefore, are critical to understanding the
Companys results of operations. Senior management has
discussed the development and selection of these accounting
estimates and the related disclosures with the Audit Committee
of the Companys Board of Directors.
Securities Securities are classified as
either available for sale, representing securities the Company
may sell in the ordinary course of business, or as held to
maturity, representing securities that the Company has
determined that it is more likely than not that it would not be
required to sell prior to maturity or recovery of cost.
Securities available for sale are reported at fair value with
unrealized gains and losses (net of tax) excluded from
operations and reported in other comprehensive income.
Securities held to maturity are stated at amortized cost.
Interest income includes amortization of purchase premium and
accretion of purchase discount. The amortization of premiums and
accretion of discounts is determined by using the level yield
method. Securities are not acquired for purposes of engaging in
trading activities. Realized gains and losses from sales of
securities are determined using the specific identification
method. The Company regularly reviews declines in the fair value
of securities below their costs for purposes of determining
whether such declines are
other-than-temporary
in nature. In estimating
other-than-temporary
impairment (OTTI), management considers adverse
changes in expected cash flows, the length of time and extent
that fair value has been less than cost and the financial
condition and near term prospects of the issuer. The Company
also assesses whether it intends to sell, or it is more likely
than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost
basis. If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized as
impairment through earnings. For securities that do not meet the
aforementioned criteria, the amount of impairment is split into
two components as
32
follows: 1) OTTI related to credit loss, which must be
recognized in the income statement and 2) OTTI related to
other factors, which is recognized in other comprehensive
income. The credit loss is defined as the difference between the
present value of the cash flows expected to be collected and the
amortized cost basis.
Allowance for Loan Losses The Company
maintains an allowance for loan losses to absorb probable losses
incurred in the loan portfolio based on ongoing quarterly
assessments of the estimated losses. The Companys
methodology for assessing the appropriateness of the allowance
consists of a specific component for identified problem loans,
and a formula component which addresses historical loan loss
experience together with other relevant risk factors affecting
the portfolio.
The specific component incorporates the results of measuring
impaired loans as required by the Receivables topic
of the FASB Accounting Standards Codification. These accounting
standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is recognized
as impaired when it is probable that principal
and/or
interest are not collectible in accordance with the loans
contractual terms. In addition, a loan which has been
renegotiated with a borrower experiencing financial difficulties
for which the terms of the loan have been modified with a
concession that the Company would not otherwise have granted are
considered troubled debt restructurings and are also recognized
as impaired. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period
of delay, the Company expects to collect all amounts due
including interest accrued at the contractual rate during the
period of delay. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the
loans effective interest rate, the loans observable
market price or the fair value of the collateral, if the loan is
collateral dependent. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to
significant change. If the fair value of an impaired loan is
less than the related recorded amount, a specific valuation
component is established within the allowance for loan losses
or, if the impairment is considered to be permanent, a partial
charge-off is recorded against the allowance for loan losses.
Individual measurement of impairment does not apply to large
groups of smaller balance homogenous loans that are collectively
evaluated for impairment such as portions of the Companys
portfolios of home equity loans, real estate mortgages,
installment and other loans.
The formula component is calculated by first applying historical
loss experience factors to outstanding loans by type. This
component is then adjusted to reflect additional risk factors
not addressed by historical loss experience. These factors
include the evaluation of then-existing economic and business
conditions affecting the key lending areas of the Company and
other conditions, such as new loan products, credit quality
trends (including trends in nonperforming loans expected to
result from existing conditions), collateral values, loan
volumes and concentrations, specific industry conditions within
portfolio segments that existed as of the balance sheet date and
the impact that such conditions were believed to have had on the
collectibility of the loan portfolio. Senior management reviews
these conditions quarterly. Managements evaluation of the
loss related to each of these conditions is quantified by loan
type and reflected in the formula component. The evaluations of
the inherent loss with respect to these conditions is subject to
a higher degree of uncertainty due to the subjective nature of
such evaluations and because they are not identified with
specific problem credits.
Actual losses can vary significantly from the estimated amounts.
The Companys methodology permits adjustments to the
allowance in the event that, in managements judgment,
significant factors which affect the collectibility of the loan
portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best
estimate of probable losses which have been incurred as of
December 31, 2010. There is no assurance that the Company
will not be required to make future adjustments to the allowance
in response to changing economic conditions, particularly in the
Companys service area, since the majority of the
Companys loans are collateralized by real estate. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the
Companys allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance
based on their judgments at the time of their examinations.
Other Real Estate Owned (OREO)
Real estate properties acquired through loan foreclosure are
recorded at estimated fair value, net of estimated selling
costs, at time of foreclosure establishing a new cost basis.
Credit losses arising at the time of foreclosure are charged
against the allowance for loan losses. Subsequent valuations are
33
periodically performed by management and the carrying value is
adjusted by a charge to expense to reflect any subsequent
declines in the estimated fair value. Routine holding costs are
charged to expense as incurred.
Goodwill and Other Intangible Assets Goodwill
and identified intangible assets with indefinite useful lives
are not subject to amortization. Identified intangible assets
that have finite useful lives are amortized over those lives by
a method which reflects the pattern in which the economic
benefits of the intangible asset are used up. All goodwill and
identified intangible assets are subject to impairment testing
on an annual basis, or more often if events or circumstances
indicate that impairment may exist. If such testing indicates
impairment in the values
and/or
remaining amortization periods of the intangible assets,
adjustments are made to reflect such impairment. The
Companys impairment evaluations as of December 31,
2010 and December 31, 2009 did not indicate impairment of
its goodwill or identified intangible assets.
Income Taxes Income tax expense is the total
of the current year income tax due or refundable and the change
in deferred tax assets and liabilities. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period the change is enacted.
Results
of Operations for Each of the Three Years in the Period Ended
December 31, 2010
Summary
of Results
The Company reported net income of $5.1 million in 2010, a
decrease of $13.9 million or 73.2 percent compared to
$19.0 million in 2009, which decreased $11.9 million
or 38.5 percent compared to $30.9 million in 2008. The
decrease in 2010 net income, compared to 2009, reflected a
significantly higher provision for loan losses, lower net
interest income and slightly higher noninterest expense,
partially offset by higher non interest income and a lower
effective tax rate. The decrease in 2009 net income,
compared to 2008, reflected a significantly higher provision for
loan losses, higher noninterest expense including significantly
higher FDIC deposit insurance premiums and lower non interest
income, partially offset by higher net interest income and a
lower effective tax rate. Provisions for loan losses totaled
$46.5 million, $24.3 million and $11.0 million in
2010, 2009 and 2008 respectively. Non interest income includes
$2.6 million, $5.5 million and $1.5 million of
pretax recognized impairment charges related to certain
securities in the Companys investment portfolio in 2010,
2009 and 2008, respectively. Non interest income also includes
$2.0 million and $0.3 million of valuation losses on
other real estate owned in 2010 and 2009, respectively. Non
interest expense includes $4.7 million, $5.5 million
and $0.9 million of FDIC deposit insurance premiums in
2010, 2009 and 2008, respectively. The significantly higher
levels of the provisions for loan losses, recognized impairment
charges, valuation losses on other real estate owned and FDIC
deposit insurance premiums in 2010 and 2009, compared to 2008,
are a direct result of the significantly negative effects that
the ongoing economic downturn has had on the performance and
collateral values of the Companys loan portfolios, the
underlying credit and marketability of certain securities in its
investment portfolio, and the overall performance of the
financial services industry in general.
Diluted earnings per share were $0.29 in 2010, a decrease of
$1.08 or 78.8 percent compared to $1.37 in 2009, which
decreased $0.90 or 39.6 percent compared to $2.27 in 2008.
These changes are a direct result of the changes in net income
in the respective years compared to the prior year period. Prior
period per share amounts have been adjusted to reflect the
10 percent stock dividend distributed in December 2010.
Returns on average stockholders equity and average assets
were 1.7 percent and 0.2 percent for 2010, compared to
8.7 percent and 0.7 percent in 2009 and
14.8 percent and 1.3 percent in 2008. Returns on
adjusted average stockholders equity were
1.8 percent, 8.8 percent and 14.6 percent in
2010, 2009 and 2008, respectively. Adjusted average
stockholders equity excludes the effects of net unrealized
gains, net of tax of $3,078 and $981 and unrealized losses, net
of tax, of $2,955 on securities available for sale in 2010, 2009
and 2008, respectively. The annualized return on adjusted
average stockholders equity is, under SEC regulations, a
non-GAAP financial measure. Management believes that this
non-GAAP financial measures more closely reflects actual
performance, as it is more consistent with the Companys
stated asset/liability management strategies, which do not
contemplate significant realization of market gains or
34
losses on securities available for sale which were primarily
related to changes in interest rates or illiquidity in the
marketplace.
Net interest income for 2010 was $110.7 million, a decrease
of $3.6 million or 3.1 percent compared to
$114.3 million in 2009, which increased $4.3 million
or 3.9 percent compared to $110.0 million in 2008. The
2010 decrease compared to 2009 was primarily due to a decrease
in the tax equivalent basis net interest margin to 4.36% from
4.90%, partially offset by $193.2 million growth in the
average balance of interest earning assets which was in excess
of the $85.0 million growth in the average balance of
interest bearing liabilities. The 2010 decrease in the tax
equivalent basis net interest margin, compared to the prior
year, resulted primarily from the effects significant increases
in the average balance of low yielding interest bearing deposits
in banks as a percentage of interest earning assets resulting
primarily from weak loan demand, the completion of a planned
reduction of the Companys investment portfolio and the
effects of maturing, higher yielding loans and investments being
renewed or replaced in a significantly lower interest rate
environment. The 2009 increase over 2008 was primarily due to
$187.3 million growth in the average balance of interest
earning assets which was in excess of the $143.4 million
growth in the average balance of interest bearing liabilities,
partially offset by a reduction in the tax equivalent basis net
interest margin to 4.90% in 2009 from 5.14% in 2008. The 2009
decrease in the tax equivalent basis net interest margin,
compared to the prior year, was primarily as a result of a
slight reduction in the incremental spread between interest
earning assets and interest bearing liabilities, partially
offset by a $43.9 million increase in the excess of
interest earning assets over interest bearing liabilities. The
2009 increase in the average balance of interest earning assets
reflected growth in loans and short-term funds, partially offset
by a planned reduction in investments. The 2009 increase in
interest bearing liabilities reflected growth in deposits,
partially offset by a planned reduction in short-term and other
borrowed funds.
The provision for loan losses for 2010 was $46.5 million
compared to $24.3 million in 2009 and $11.0 million in
2008. The significant increases in 2010 and 2009, compared to
their respective prior year periods is primarily directly
related to negative effects on the loan portfolio of conditions
resulting from the ongoing crisis in the financial markets. As a
result of the severe economic downturn, the Company has
experienced significant levels of delinquent and nonperforming
loans and a continuation of the slowdowns in repayments and
declines in the
loan-to-value
ratios on existing loans which began in the second half of 2008
and has continued throughout 2009 and 2010. These conditions,
together with the shortage of available residential mortgage
financing, have put downward pressure on the overall asset
quality of virtually all financial institutions, including the
Company. In addition since the second quarter of 2010, the
Company has followed the more aggressive strategy for resolving
problem assets including the transfer of $21.9 million of
nonperforming loans, to the
held-for-sale
category. The Company believes that the overall revised strategy
will continue to address new and existing problem loans in the
most appropriate and timely manner given current conditions in
the economy.
Non interest income increased $3.2 million or
30.5 percent to $13.7 million in 2010 compared to
$10.5 million in 2009, which decreased $8.1 million or
43.5 percent compared to $18.6 million in 2008. The
increase of noninterest income in 2010, compared to the prior
year period, was primarily due to increases in investment
advisory fees of A.R. Schmeidler & Co., Inc., growth
in deposit activity and other service fees and a decrease in
recognized impairment charges on securities
available-for-sale,
partially offset by an increase in valuation losses on other
real estate owned. The Companys non interest income
decreased in 2009, compared to the prior year period, primarily
as a result of a significant increase in recognized impairment
charges on securities
available-for-sale
and a significant decrease in investment advisory fees,
partially offset by a decline in deposit activity and other
service income. Investment advisory fee income experienced
significant declines beginning in the fourth quarter of 2008 and
continued to decline during the first half of 2009 as a result
of significant declines in both domestic and international
equity markets. Although there was significant improvement in
the financial markets in late 2009 and 2010, continued
improvement and the continued acquisition of new customers will
be necessary for this source of non interest income to return to
past levels. The Company recorded pre-tax recognized impairment
charges on securities
available-for-sale
of $2.6 million, $5.5 million and $1.5 million in
2010, 2009 and 2008, respectively. Other dispositions of
securities available for sale resulted in net realized gains of
$0.2 million, $0.1 million and $0.1 million in
2010, 2009 and 2008, respectively. The sales were conducted as
part of the Companys ongoing asset/liability management
process. Non interest income also includes $2.0 million and
$0.3 million of valuation losses on other real estate owned
in 2010 and 2009, respectively.
35
Non interest expense was $74.1 million for both 2010 and
2009. The 2009 amount reflected an increase of $3.0 million
or 4.2 percent compared to $71.1 million in 2008.
Increases in 2010 non interest expense resulting from the
Companys continued investment in its branch offices,
technology and personnel to accommodate growth, the expansion of
services and products available to new and existing customers
and the upgrading of certain internal processes were more than
offset by cost saving measures implemented by the Company during
2009 and 2010. In addition, 2010 reflected significantly lower
FDIC deposit insurance premiums compared to 2009. Additional
premiums imposed by the FDIC in 2009 to replenish shortfalls in
the FDIC Insurance Fund were not imposed to the same degree in
2010. However, additional premium increases and special
assessments may continue to be imposed by the FDIC in the
future. Decreases resulting from the lower FDIC premiums and
other cost saving measures were offset by significant increases
in costs related to problem loan resolutions and other real
estate owned. Increases in 2009 resulting from the
Companys continued investment in its branch offices,
technology and personnel to accommodate growth in loans and
deposits, the expansion of services and products available to
new and existing customers and the upgrading of certain internal
processes were effectively offset by significant other cost
saving measures implemented by the Company during the year,
including the elimination of all 2009 incentive compensation and
bonuses for employees of the Bank. However, overall 2009 non
interest expense increased, compared to the prior year period,
primarily due to aforementioned significant increase in FDIC
deposit premiums.
The effective tax rate in 2010 decreased to (37.9) percent,
compared to 27.8 percent in 2009 and 33.6 percent in
2008. The tax benefit recorded in 2010 resulted from the effects
of tax-exempt income exceeding taxable income for the year
primarily due to the significant 2010 loan loss provision. The
2009 decrease, compared to the prior year period, was primarily
as a result of tax-exempt income constituting a greater
percentage of pretax income due to the significant increase in
the loan loss provision and recognized impairment charges on
securities available for sale.
36
Average
Balances and Interest Rates
The following table sets forth the daily average balances of
interest earning assets and interest bearing liabilities for
each of the last three years as well as total interest and
corresponding yields and rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest(3)
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest(3)
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest(3)
|
|
|
Rate
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks
|
|
$
|
300,703
|
|
|
$
|
737
|
|
|
|
0.25
|
%
|
|
$
|
35,508
|
|
|
$
|
81
|
|
|
|
0.23
|
%
|
|
$
|
5,362
|
|
|
$
|
152
|
|
|
|
2.83
|
%
|
Federal funds sold
|
|
|
78,748
|
|
|
|
168
|
|
|
|
0.21
|
|
|
|
43,910
|
|
|
|
100
|
|
|
|
0.23
|
|
|
|
24,899
|
|
|
|
827
|
|
|
|
3.32
|
|
Securities:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
367,421
|
|
|
|
13,905
|
|
|
|
3.78
|
|
|
|
413,781
|
|
|
|
18,077
|
|
|
|
4.37
|
|
|
|
507,943
|
|
|
|
24,873
|
|
|
|
4.90
|
|
Exempt from federal income taxes
|
|
|
149,355
|
|
|
|
9,032
|
|
|
|
6.05
|
|
|
|
184,772
|
|
|
|
11,783
|
|
|
|
6.38
|
|
|
|
208,730
|
|
|
|
13,274
|
|
|
|
6.36
|
|
Loans, net(2)
|
|
|
1,714,325
|
|
|
|
107,658
|
|
|
|
6.28
|
|
|
|
1,739,421
|
|
|
|
110,662
|
|
|
|
6.36
|
|
|
|
1,483,196
|
|
|
|
105,632
|
|
|
|
7.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
2,610,552
|
|
|
|
131,500
|
|
|
|
5.04
|
|
|
|
2,417,392
|
|
|
|
140,703
|
|
|
|
5.82
|
|
|
|
2,230,130
|
|
|
|
144,758
|
|
|
|
6.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
41,490
|
|
|
|
|
|
|
|
|
|
|
|
43,197
|
|
|
|
|
|
|
|
|
|
|
|
49,786
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
145,905
|
|
|
|
|
|
|
|
|
|
|
|
118,118
|
|
|
|
|
|
|
|
|
|
|
|
105,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest earning assets
|
|
|
187,395
|
|
|
|
|
|
|
|
|
|
|
|
161,315
|
|
|
|
|
|
|
|
|
|
|
|
155,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,797,947
|
|
|
|
|
|
|
|
|
|
|
$
|
2,578,707
|
|
|
|
|
|
|
|
|
|
|
$
|
2,385,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
926,755
|
|
|
$
|
8,099
|
|
|
|
0.87
|
%
|
|
$
|
787,347
|
|
|
$
|
9,145
|
|
|
|
1.16
|
%
|
|
$
|
642,784
|
|
|
$
|
10,498
|
|
|
|
1.63
|
%
|
Savings
|
|
|
115,624
|
|
|
|
562
|
|
|
|
0.49
|
|
|
|
101,846
|
|
|
|
503
|
|
|
|
0.49
|
|
|
|
95,296
|
|
|
|
708
|
|
|
|
0.74
|
|
Time
|
|
|
202,244
|
|
|
|
2,455
|
|
|
|
1.21
|
|
|
|
263,065
|
|
|
|
3,899
|
|
|
|
1.48
|
|
|
|
263,506
|
|
|
|
6,757
|
|
|
|
2.56
|
|
Checking with interest
|
|
|
332,315
|
|
|
|
1,091
|
|
|
|
0.33
|
|
|
|
250,314
|
|
|
|
1,048
|
|
|
|
0.42
|
|
|
|
149,793
|
|
|
|
1,072
|
|
|
|
0.72
|
|
Securities sold under repurchase agreements and other short-term
borrowings
|
|
|
56,899
|
|
|
|
271
|
|
|
|
0.48
|
|
|
|
101,818
|
|
|
|
536
|
|
|
|
0.53
|
|
|
|
161,749
|
|
|
|
2,187
|
|
|
|
1.35
|
|
Other borrowings
|
|
|
109,349
|
|
|
|
5,205
|
|
|
|
4.76
|
|
|
|
153,799
|
|
|
|
7,173
|
|
|
|
4.66
|
|
|
|
201,687
|
|
|
|
8,861
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
1,743,186
|
|
|
|
17,683
|
|
|
|
1.01
|
|
|
|
1,658,189
|
|
|
|
22,304
|
|
|
|
1.35
|
|
|
|
1,514,815
|
|
|
|
30,083
|
|
|
|
1.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
745,290
|
|
|
|
|
|
|
|
|
|
|
|
675,953
|
|
|
|
|
|
|
|
|
|
|
|
625,630
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
20,199
|
|
|
|
|
|
|
|
|
|
|
|
28,049
|
|
|
|
|
|
|
|
|
|
|
|
32,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest bearing liabilities
|
|
|
765,489
|
|
|
|
|
|
|
|
|
|
|
|
704,002
|
|
|
|
|
|
|
|
|
|
|
|
658,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity(1)
|
|
|
289,272
|
|
|
|
|
|
|
|
|
|
|
|
216,516
|
|
|
|
|
|
|
|
|
|
|
|
212,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity(1)
|
|
$
|
2,797,947
|
|
|
|
|
|
|
|
|
|
|
$
|
2,578,707
|
|
|
|
|
|
|
|
|
|
|
$
|
2,385,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings
|
|
|
|
|
|
$
|
113,817
|
|
|
|
|
|
|
|
|
|
|
$
|
118,399
|
|
|
|
|
|
|
|
|
|
|
$
|
114,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest earning assets
|
|
|
|
|
|
|
|
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
5.14
|
%
|
|
|
(1)
|
Excludes unrealized gains (losses) on securities available for
sale. Management believes that this presentation more closely
reflects actual performance, as it is more consistent with the
Companys stated asset/liability management strategies,
which have not resulted in significant realization of temporary
market gains or losses on securities available for sale which
were primarily related to changes in interest rates. Effects of
these adjustments are presented in the table below.
|
|
(2)
|
Includes loans classified as non-accrual.
|
|
(3)
|
The data contained in the table has been adjusted to a tax
equivalent basis, based on the Companys federal statutory
rate of 35 percent. Management believes that this
presentation provides comparability of net interest income and
net interest margin arising from both taxable and tax-exempt
sources and is consistent with industry practice and SEC rules.
Effects of these adjustments are presented in the table below.
|
37
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
Average Balances and Interest Rates
Non-GAAP disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Total interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2,615,461
|
|
|
$
|
2,418,855
|
|
|
$
|
2,225,320
|
|
Unrealized gain (loss) on securities available-for-sale(1)
|
|
|
4,909
|
|
|
|
1,463
|
|
|
|
(4,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted total interest earning assets
|
|
$
|
2,610,552
|
|
|
$
|
2,417,392
|
|
|
$
|
2,230,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
110,656
|
|
|
$
|
114,275
|
|
|
$
|
110,029
|
|
Adjustment to tax equivalency basis(2)
|
|
|
3,161
|
|
|
|
4,124
|
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest earnings
|
|
$
|
113,817
|
|
|
$
|
118,399
|
|
|
$
|
114,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
4.23
|
%
|
|
|
4.72
|
%
|
|
|
4.94
|
%
|
Effects of (1) and (2) above
|
|
|
0.13
|
%
|
|
|
0.18
|
%
|
|
|
0.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest earnings
|
|
|
4.36
|
%
|
|
|
4.90
|
%
|
|
|
5.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Interest
Differential
The following table sets forth the dollar amount of changes in
interest income, interest expense and net interest income
between the years ended December 31, 2010 and 2009, and the
years ended December 31, 2009 and 2008, on a tax equivalent
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010 Compared to 2009
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
Due to Change in
|
|
|
Due to Change in
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total(1)
|
|
|
Volume
|
|
|
Rate
|
|
|
Total(1)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks
|
|
$
|
605
|
|
|
$
|
51
|
|
|
$
|
656
|
|
|
$
|
855
|
|
|
$
|
(926
|
)
|
|
$
|
(71
|
)
|
Federal funds sold
|
|
|
79
|
|
|
|
(11
|
)
|
|
|
68
|
|
|
|
631
|
|
|
|
(1,358
|
)
|
|
|
(727
|
)
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(2,025
|
)
|
|
|
(2,147
|
)
|
|
|
(4,172
|
)
|
|
|
(4,611
|
)
|
|
|
(2,185
|
)
|
|
|
(6,796
|
)
|
Exempt from federal income taxes
|
|
|
(2,259
|
)
|
|
|
(492
|
)
|
|
|
(2,751
|
)
|
|
|
(1,524
|
)
|
|
|
33
|
|
|
|
(1,491
|
)
|
Loans, net
|
|
|
(1,597
|
)
|
|
|
(1,407
|
)
|
|
|
(3,004
|
)
|
|
|
18,248
|
|
|
|
(13,218
|
)
|
|
|
5,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(5,197
|
)
|
|
|
(4,006
|
)
|
|
|
(9,203
|
)
|
|
|
13,599
|
|
|
|
(17,654
|
)
|
|
|
(4,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
|
1,619
|
|
|
|
(2,665
|
)
|
|
|
(1,046
|
)
|
|
|
2,361
|
|
|
|
(3,714
|
)
|
|
|
(1,353
|
)
|
Savings
|
|
|
68
|
|
|
|
(9
|
)
|
|
|
59
|
|
|
|
49
|
|
|
|
(254
|
)
|
|
|
(205
|
)
|
Time
|
|
|
(901
|
)
|
|
|
(543
|
)
|
|
|
(1,444
|
)
|
|
|
(11
|
)
|
|
|
(2,847
|
)
|
|
|
(2,858
|
)
|
Checking with interest
|
|
|
343
|
|
|
|
(300
|
)
|
|
|
43
|
|
|
|
719
|
|
|
|
(743
|
)
|
|
|
(24
|
)
|
Securities sold under repurchase agreements and other short-term
borrowings
|
|
|
(236
|
)
|
|
|
(29
|
)
|
|
|
(265
|
)
|
|
|
(810
|
)
|
|
|
(841
|
)
|
|
|
(1,651
|
)
|
Other borrowings
|
|
|
(2,073
|
)
|
|
|
105
|
|
|
|
(1,968
|
)
|
|
|
(2,104
|
)
|
|
|
416
|
|
|
|
(1,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(1,180
|
)
|
|
|
(3,441
|
)
|
|
|
(4,621
|
)
|
|
|
204
|
|
|
|
(7,983
|
)
|
|
|
(7,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest differential
|
|
$
|
(4,017
|
)
|
|
$
|
(565
|
)
|
|
$
|
(4,582
|
)
|
|
$
|
13,395
|
|
|
$
|
(9,671
|
)
|
|
$
|
3,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Changes attributable to both rate and volume are allocated
between the rate and volume variances based upon their absolute
relative weights to the total change.
|
Net
Interest Income
Net interest income, the difference between interest income and
interest expense, is the most significant component of the
Companys consolidated earnings. During the three year
period ended December 31, 2010, the overall economic
picture, both globally and in the Companys market area,
has been one of historic low interest rates, severe economic
downturn in virtually every sector of the economy, sharp
declines in asset values particularly in the commercial and
residential real estate sectors, weak loan demand and shrinking
margins. The Companys overall asset quality has continued
to be adversely affected by the current state of the economy.
During 2010 and 2009, the Company has experienced significant
levels of delinquent and nonperforming loans and a continuation
of the slowdowns in repayments and declines in the
loan-to-value
ratios on existing loans which began in the second half of 2008.
Changes in the levels of nonperforming loans have a direct
impact on net interest income. While there are recent signs that
the economic downturn has begun to reverse, the Company expects
some continued downward pressure on net interest income for the
near future as a result of ongoing lag effect of these
conditions.
The Company has made efforts throughout this period of severe
economic uncertainty and low interest rates to minimize the
impact on its net interest income by appropriately repositioning
its securities portfolio and funding
39
sources while maintaining prudence and awareness of the
potential consequences that the current economic crisis could
have on its asset quality and interest rate risk profiles.
During 2010 and 2009, the Company was able to repay maturing
long-term borrowings, all of its brokered certificates of
deposit and non-customer related short-term borrowings with
liquidity provided primarily by core deposit growth and planned
utilization of run-off from our investment securities.
Additional liquidity from deposit growth was retained in the
Companys short-term liquidity portfolios, available to
fund future loan growth. With interest rates remaining at
historically low levels, this increase in liquidity contributed
to margin compression. Also during 2010 and 2009, the Company
increased the number of loans originated with interest rate
floors and, as part of the continuation of a planned reduction
of the Companys investment portfolio, targeting cash flow
from maturing investment securities to fund current and future
loan growth. These actions were conducted partially in reaction
to severely declining interest rates. The Companys ability
to make changes in its asset mix allows management to capitalize
on more desirable yields, as available, on various interest
earning assets. Management believes that the result of these
efforts has enabled the Company, given the difficulties being
encountered in the current economic crisis, to maximize the
effective repositioning of its portfolios from both asset and
interest rate risk perspectives.
Net interest income, on a tax equivalent basis, decreased
$4.6 million or 3.9 percent to $113.8 million in
2010, compared to $118.4 million in 2009, which increased
$3.7 million or 3.2 percent from $114.7 million
in 2008. The decrease in 2010, compared to 2009, primarily
resulted from a decrease in the tax equivalent basis net
interest margin to 4.36 percent in 2010 from
4.90 percent in 2009, partially offset by an increase of
$108.2 million or 14.3 percent in the excess of
adjusted average interest earning assets over average interest
bearing liabilities to $867.4 million in 2010 from
$759.2 million in 2009. The increase in 2009, compared to
2008, primarily resulted from an increase of $43.9 million
or 6.1 percent in the excess of adjusted average interest
earning assets over interest bearing liabilities to
$759.2 million in 2009 from $715.3 million in 2008,
partially offset by a decrease in the tax equivalent basis net
interest margin to 4.90 percent in 2009 from
5.14 percent in 2008. For purposes of the financial
information included in this section, the Company adjusts
average interest earning assets to exclude the effects of
unrealized gains and losses on securities available for sale and
adjusts net interest income to a tax equivalent basis.
Management believes that this alternate presentation more
closely reflects actual performance, as it is consistent with
the Companys stated asset/liability management strategies.
The effects of these non-GAAP adjustments to tax equivalent
basis net interest income and adjusted average assets are
included in the table presented in Average Balances and
Interest Rates section herein.
Interest income is determined by the volume of and related rates
earned on interest earning assets. Volume decreases in loans and
investments and a lower average yield on interest earning
assets, partially offset by volume increases in interest earning
deposits and Federal funds sold resulted in lower interest
income in 2010, compared to 2009. A volume decrease in
investments and a lower average yield on interest earning
assets, partially offset by volume increases in loans, Federal
funds sold and interest earning deposits resulted in slightly
lower interest income in 2009, compared to 2008. Adjusted
average interest earning assets in 2010 increased
$193.2 million or 8.0 percent to $2,610.6 million
from $2,417.4 million in 2009, which increased
$187.3 million or 8.4 percent from
$2,230.1 million in 2008.
Loans are the largest component of interest earning assets. Net
loans decreased $83.4 million or 4.7 percent to
$1,689.2 million at December 31, 2010 from
$1,772.6 million at December 31, 2009, which increased
$95.0 million or 5.7 percent from
$1,677.6 million at December 31, 2008. Average net
loans decreased $25.1 million or 1.4 percent to
$1,714.3 million in 2010 from $1,739.4 million in
2009, which increased $256.2 million or 17.3 percent
from $1,483.2 million in 2008. The decrease in average net
loans in 2010, compared to 2009 resulted from insufficient loan
demand to offset payoffs and pay downs, significant charge-offs
taken during the year and sales of other nonperforming loans,
partially offset by significant growth in the multi-family
sector of the portfolio. The increase in average net loans
during 2009, compared to 2008, reflected the Companys
continuing emphasis on making new loans, expansion of loan
production capabilities and more effective market penetration.
The average yield on loans was 6.28 percent in 2010,
compared to 6.36 percent in 2009 and 7.12 percent in
2008. As a result, interest income on loans decreased in 2010,
compared to 2009, due to lower volume and lower interest rates,
and interest income on loans increased in 2009, compared to
2008, due to higher volume, partially offset by lower interest
rates.
40
Total securities, including Federal Home Loan Bank
(FHLB) stock and excluding net unrealized gains and
losses, decreased $66.4 million or 12.5 percent to
$464.1 million at December 31, 2010 from
$530.5 million at December 31, 2009, which decreased
$166.3 million or 23.9 percent from
$696.8 million at December 31, 2008. Average total
securities, including FHLB stock and excluding net unrealized
gains and losses, decreased $81.8 million or
13.7 percent to $516.8 million in 2010 from
$598.6 million in 2009, which decreased $118.1 million
or 16.5 percent from $716.7 million in 2008. The
decreases in average total securities in 2010 and 2009, compared
to their respective prior year periods, resulted primarily from
a planned reduction in the portfolio conducted by the Company as
part of its ongoing asset/liability management efforts. During
2010, cash flow from maturing investments was either redeployed
into new mortgage backed securities, or retained in interest
bearing bank balances to fund future loan growth. The decrease
in average total securities in 2010 compared to 2009 reflects
volume decreases in U.S. Treasury and Agency securities,
mortgage-backed securities including collateralized mortgage
obligations, obligations of state and political subdivisions and
FHLB stock, partially offset by a volume increase in other
securities. The average tax equivalent basis yield on securities
was 4.44 percent for 2010 compared to 4.99 percent in
2009. As a result, tax equivalent basis interest income on
securities decreased in 2010, compared to 2009, due to lower
volume and lower interest rates. During 2009, management
utilized cash flow from maturing investments to fund loan growth
and to reduce short-term and other borrowings. The decrease in
average total securities in 2009 compared to 2008 reflects
volume decreases in U.S. Treasury and Agency securities,
mortgage-backed securities including collateralized mortgage
obligations, obligations of state and political subdivisions,
FHLB stock and other securities. The average tax equivalent
basis yield on securities was 4.99 percent for 2009
compared to 5.32 percent in 2008. As a result, tax
equivalent basis interest income on securities decreased in
2009, compared to 2008, due to lower volume and lower interest
rates. Increases and decreases in average FHLB stock results
from purchases or redemptions of stock in order to maintain
required levels to support FHLB borrowings.
Interest expense is a function of the volume of, and rates paid
for, interest bearing liabilities, comprised of deposits and
borrowings. Interest expense decreased $4.6 million or
20.6 percent to $17.7 million in 2010 from
$22.3 million in 2009, which decreased $7.8 million or
25.9 percent from $30.1 million in 2008. Average
interest bearing liabilities increased $85.0 million or
5.1 percent to $1,743.2 million in 2010 from
$1,658.2 million in 2009, which increased
$143.4 million or 9.5 percent from
$1,514.8 million in 2008.
The increase in average interest bearing liabilities in 2010,
compared to 2009, was due to volume increases in money market
deposits, savings deposits and checking with interest, partially
offset by volume decreases in time deposits, short-term
borrowings and other borrowed funds. The Company continued to
experience significant growth in new customers both in existing
branches and new branches added during the last two years.
Proceeds from deposit growth were used to reduce maturing term
borrowings or were retained in liquid investments, principally
interest earning bank deposits. The average interest rate paid
on interest bearing liabilities was 1.01 percent in 2010,
compared to 1.35 percent in 2009. As a result of these
factors, interest expense was lower in 2010, compared to 2009,
due to lower interest rates, partially offset by higher volume.
The increase in average interest bearing liabilities in 2009,
compared to 2008, was due to volume increases in interest
bearing demand deposits, partially offset by volume decreases in
securities sold under repurchase agreements and other short-term
borrowings and other borrowings, and a slight volume decrease in
time deposits. The increases in average interest bearing demand
deposits include approximately $101 million of growth which
resulted from the transfer of certain money market mutual fund
investments of existing customers to interest bearing demand
deposits. This transfer was primarily due to the increase in
FDIC insurance coverage of certain deposit products which was
part of the legislation enacted in response to the current
economic crisis. In addition to above mentioned deposit growth,
the Company experienced significant growth in new customers both
in existing branches and new branches added during 2008 and
2009. Overall deposit growth in 2009 was partially offset by
some declines in balances of existing customers, primarily those
customers directly involved in or supported by the real estate
industry. Proceeds from deposit growth were used primarily to
reduce long term and short term debt and to fund loan growth.
The decreases in average short-term and other borrowings in
2009, compared to 2008, resulted from managements decision
to utilize cash flow from deposit growth and maturing investment
securities to reduce borrowings as part of the Companys
ongoing asset/liability management efforts. The average interest
rate paid on interest bearing liabilities was 1.35 percent
in 2009, compared to 1.99 percent in 2008. As a result of
these factors,
41
interest expense on average interest bearing liabilities was
lower in 2009, compared to the prior year period due to lower
interest rates, partially offset by higher volume.
Average non interest bearing demand deposits increased
$69.3 million or 10.3 percent to $745.3 million
in 2010 from $676.0 million in 2009, which increased
$50.4 million or 8.1 percent from $625.6 million
in 2008. Non interest bearing demand deposits are an important
component of the Companys ongoing asset liability
management, and also have a direct impact on the determination
of net interest income.
The interest rate spread on a tax equivalent basis for each of
the three years in the period ended December 31, 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Average interest rate on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest earning assets
|
|
|
5.04
|
%
|
|
|
5.82
|
%
|
|
|
6.49
|
%
|
Total average interest bearing liabilities
|
|
|
1.01
|
|
|
|
1.35
|
|
|
|
1.99
|
|
Total interest rate spread
|
|
|
4.03
|
|
|
|
4.47
|
|
|
|
4.50
|
|
In 2010 and 2009, the interest rate spreads decreased reflecting
greater increases in interest rates on interest bearing
liabilities compared to interest rates on interest earning
assets. Management cannot predict what impact market conditions
will have on its interest rate spread and future compression in
net interest rate spread may occur.
Provision
for Loan Losses
The provision for loan losses in 2010 was $46.5 million
compared to $24.3 million in 2008 and $11.0 million in
2008. The significant increases in 2010 and 2009, compared to
their respective prior years, are directly related to negative
effects on the Companys loan portfolio of conditions
resulting from the ongoing crisis in the financial markets. In
addition, the 2010 increase, compared to 2009, partially
resulted from a decision by the Company to implement a more
aggressive workout strategy for the resolution of problem assets
in light of a sluggish economic recovery, continued weakness in
local real estate activity and market values and growing
difficulty in resolving problem loans in a timely fashion
through traditional foreclosure proceedings due to increased
bankruptcy filings and overcrowded court systems. Continuation
or worsening of such conditions could result in additional
significant provisions for loan losses in the future.
Non
Interest Income
Non interest income increased $3.2 million or
30.5 percent to $13.7 million in 2010 compared to
$10.5 million in 2009, which decreased $8.1 million or
43.5 percent compared to $18.6 million in 2008. The
increase in 2010, compared to the prior year period, was
primarily due to an increase in investment advisory fees of A.R.
Schmeidler & Co., Inc. and also reflects growth in
deposit activity and other service fees and a decrease in
recognized impairment charges on securities available for sale,
partially offset by an increase in valuation losses on other
real estate owned and a slight decrease in other income. The
decrease in 2009, compared to the prior year period, was
primarily the result of a significant increase in impairment
charges related to the Companys investment in certain
pooled trust preferred securities and a sharp decrease in
investment advisory fees. The above mentioned changes in
investment advisory fees, impairment charges on securities and
valuation losses on other real estate owned are directly related
to the current economic crisis, which has had significant
negative effects on the financial services industry, the real
estate industry and the domestic and international equity
markets.
Service charges increased by $0.7 million or
11.9 percent to $6.6 million in 2010 compared to
$5.9 million in 2009, which decreased slightly by
$0.1 million or 1.7 percent from $6.0 million in
2008. The 2010 increase, compared to 2009, was primarily due to
growth service charges related to new products introduced in
2009 and 2010. The 2009 decrease, compared to 2008, resulted
primarily from increases in fees related to growth in deposits
being offset by declines in activity fees on existing deposits.
Investment advisory fees increased $1.4 million or
18.2 percent to $9.1 million in 2010 from
$7.7 million in 2009, which decreased $3.5 million or
31.3 percent from $11.2 million in 2008. The 2010
increase, compared to 2009, was due to a net increase in assets
under management from existing customers, addition of new
customers and net increases in asset value. Fee income from this
source, however, experienced sharp declines beginning in the
42
fourth quarter of 2008 and continued to decline during the first
half of 2009 as a result of the effects of significant declines
in both domestic and international equity markets which resulted
in the sharp decline in fees in 2009, compared to 2008. Although
there has been recent improvement in the financial markets,
continued improvement and the acquisition of new customers will
be necessary for this source of non interest income to return to
past levels.
The Company recognized impairment charges on securities
available for sale of $2.6 million, $5.5 million and
$0.6 million for the years ended December 31, 2010,
2009 and 2008 respectively. The entire 2010 and 2009 charges and
$1.1 million of the 2008 charge related to the
Companys investments in certain pooled trust preferred
securities. These securities are primarily backed by
U.S. financial institutions many of which are experiencing
severe financial difficulties as a result of the current
economic downturn. Continuation of these conditions may result
in additional impairment charges on these securities in the
future. The Company has decided to hold its investments in trust
preferred securities as it does not believe that the current
market quotes for these investments are indicative of their
underlying value. The $0.4 million remainder of the 2008
impairment charge was related to the Companys investment
in a mutual fund. This investment was sold in April 2008 without
additional loss. Other dispositions of securities available for
sale resulted in net realized gains of $0.2 million,
$0.1 million and $0.1 million in 2010, 2009 and 2008,
respectively. The sales were conducted as part of the
Companys ongoing asset/liability management process. Non
interest income also includes $2.0 million and
$0.3 million of valuation losses on other real estate owned
in 2010 and 2009, respectively. These valuation losses are a
direct result of the significantly negative effects that the
ongoing economic downturn has had on the values of the
Companys real estate related assets.
Other income decreased $0.2 million or 7.7 percent to
$2.4 million in 2010 from $2.6 million in 2009, which
decreased $0.3 million or 10.3 percent from
$2.9 million in 2008. The decrease in 2010, compared to
2009, resulted from decreases in income on bank owned life
insurance, rental income and miscellaneous customer fees,
partially offset by increases in debit card income. The decrease
in 2009, compared to 2008, resulted primarily from a decrease in
miscellaneous service fees and rental income, partially offset
by increases in income from bank owned life insurance and debit
card income.
Non
Interest Expense
Non interest expense was $74.1 million, $74.1 million
and $71.1 million for the years ended December 31,
2010, 2009 and 2008, respective. Increases in non interest
expense resulting from the Companys continued investment
in its branch offices, technology and personnel to accommodate
growth, the expansion of services and products available to new
and existing customers and the upgrading of certain internal
processes were more than offset by cost saving measures
implemented by the company during 2009 and 2010. The
Companys efficiency ratio (a lower ratio indicates greater
efficiency) which compares non interest expense to total
adjusted revenue (taxable equivalent net interest income, plus
non interest income, excluding gain or loss on securities
transactions) was 56.2 percent in 2010, compared to
55.2 percent in 2009 and 52.8 percent in 2008.
Salaries and employee benefits, the largest component of non
interest expense, decreased $0.2 million or
0.5 percent to $38.5 million in 2010 from
$38.7 million in 2009, which was a decrease of
$3.2 million or 7.6 percent from $41.9 million in
2008. The decrease in 2010 resulted from the planned reduction
in certain staffing levels and a reduction in employee
retirements plans partially offset by increased incentive
compensation. The decrease in 2009 resulted from decreased
incentive compensation and the reduction of certain benefits
which were partially offset by additional staff requirements
which resulted from the opening of new branches.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Employees at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Full Time Employees
|
|
|
438
|
|
|
|
463
|
|
|
|
478
|
|
Part Time Employees
|
|
|
40
|
|
|
|
35
|
|
|
|
55
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Salaries and Employee Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
29,821
|
|
|
$
|
30,294
|
|
|
$
|
29,122
|
|
Payroll Taxes
|
|
|
2,455
|
|
|
|
2,468
|
|
|
|
2,357
|
|
Medical Plans
|
|
|
2,354
|
|
|
|
2,168
|
|
|
|
2,356
|
|
Incentive Compensation Plans
|
|
|
1,816
|
|
|
|
780
|
|
|
|
4,839
|
|
Employee Retirement Plans
|
|
|
1,336
|
|
|
|
2,536
|
|
|
|
2,661
|
|
Other
|
|
|
725
|
|
|
|
442
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,507
|
|
|
$
|
38,688
|
|
|
$
|
41,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total non interest expense
|
|
|
51.9
|
%
|
|
|
52.2
|
%
|
|
|
58.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy expense increased $0.1 million or
1.2 percent to $8.4 million in 2010 from
$8.3 million in 2009 which increased $0.8 million or
10.7 percent from $7.5 million in 2008. The increases
in both 2010 and 2009 reflect increased costs related to the
opening of new branch offices and also included rising costs on
leased facilities, real estate taxes, utility costs, maintenance
costs and other costs to operate the Companys facilities.
Professional services increased $0.8 million or
18.2 percent to $5.2 million in 2010 from
$4.4 million in 2009, which was a $0.1 million or
2.3 percent increase from $4.3 million for 2008. The
increase in 2010 was primarily due to costs related to the
formation of a new subsidiary, expenses related to the
operational merger of New York National Bank into HVB and the
engagement of consultants to assist with new systems
implementations and certain personnel related projects. The
slight increase in 2009 was related to a core processing study.
Equipment expense decreased $0.4 million or
9.1 percent to $4.0 million in 2010 from
$4.4 million in 2009, which was an increase of
$0.2 million or 4.8 percent from $4.2 million in
2008. The 2010 decrease reflects reduced equipment rental costs
and cost saving measures implemented in late 2009. The 2009
increase reflects increased maintenance expense for the
Companys equipment and offices due to higher costs and the
addition of new branch offices.
Business development expense was $2.0 million at
December 31, 2010 which was unchanged as compared to
$2.0 million in 2009, which was a $0.1 million or
4.8 percent decrease from $2.1 million in 2008. The
2009 decrease was due to a decreased participation in public
relations events and a reduction in annual report expenses.
The assessment of the Federal Deposit Insurance Corporation
(FDIC) was $4.7 million for 2010,
$5.5 million in 2009 and $0.9 million for 2008. The
2010 decrease was due to additional premiums that were imposed
by the FDIC, during 2009, to replenish shortfalls in the FDIC
Insurance Fund which resulted from the current economic crisis.
44
Other operating expenses, as reflected in the following table
increased 4.2 percent in 2010 and increased
5.6 percent in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(000s except percentages)
|
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Stationery and printing
|
|
$
|
711
|
|
|
$
|
1,160
|
|
|
$
|
1,619
|
|
Communications expense
|
|
|
764
|
|
|
|
779
|
|
|
|
890
|
|
Courier expense
|
|
|
861
|
|
|
|
774
|
|
|
|
941
|
|
Other loan expense
|
|
|
2,468
|
|
|
|
1,961
|
|
|
|
685
|
|
Outside services
|
|
|
4,044
|
|
|
|
3,810
|
|
|
|
3,123
|
|
Dues, meetings and seminars
|
|
|
325
|
|
|
|
289
|
|
|
|
463
|
|
Other
|
|
|
2,145
|
|
|
|
2,084
|
|
|
|
2,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,318
|
|
|
$
|
10,857
|
|
|
$
|
10,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of total non interest expense
|
|
|
15.3
|
%
|
|
|
14.6
|
%
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2010 increases reflect higher loan expenses, including
increased expenses related to properties held as other real
estate owned and increased loan collection costs, increased
costs related to couriers and higher outside service fees. The
2010 decreases reflect lower stationary and printing costs,
lower communications expense and lower insurance costs.
The 2009 increases reflect higher loan expenses, including
increased expenses related to properties held as other real
estate owned and increased loan collection costs and higher
outside service fees. The 2009 decreases reflect lower
stationary and printing costs, lower communications expense,
lower courier costs due to greater efficiencies gained due to a
change in service providers and decreased participation in
meetings and seminars.
Income
Taxes
Income taxes (benefits) of $(1.4) million,
$7.3 million and $15.6 million were recorded in 2010,
2009, and 2008, respectively. The Company is currently subject
to a statutory Federal tax rate of 35 percent, a New York
State tax rate of 7.1 percent plus a 17 percent
surcharge, a Connecticut State tax rate of 7.5 percent, and
a New York City tax rate of approximately 9 percent. The
Companys overall effective tax rate was (37.9) percent in
2010, 27.8 percent in 2009 and 33.6 percent in 2008.
The tax benefit in 2010 and the decrease in the overall
effective tax rate in 2009, compared to 2008, resulted primary
from tax-exempt income exceeding book pre-tax income in 2010 and
representing a larger percentage of book pre-tax income in 2009,
compared to 2008.
In the normal course of business, the Companys Federal,
New York State and New York City corporation tax returns are
subject to audit. The Company is currently open to audit by the
Internal Revenue Service under the statute of limitations for
years after 2006. The Company is currently undergoing an audit
by New York State for years 2005 through 2007. This audit has
not yet been completed, however, no significant issues have as
yet been raised. Other pertinent tax information is set forth in
the Notes to Consolidated Financial Statements included
elsewhere herein.
Financial
Condition at December 31, 2010 and 2009
Cash
and Due from Banks
Cash and due from banks was $284.2 million at
December 31, 2010, an increase of $117.2 million or
70.2 percent from $167.0 million at December 31,
2009. Included in cash and due from banks is interest earning
deposits of $258.3 million at December 31, 2010 and
$127.7 million at December 31, 2009. The increase was
a result of deposit growth and loan paydowns which have not yet
been deployed into investments or loans.
45
Federal
Funds Sold
Federal funds sold totaled $72.1 million at
December 31, 2010, an increase of $20.2 million or
38.9 percent from $51.9 million at December 31,
2009. The increase resulted from timing differences in the
redeployment of available funds into loans and longer term
investments and volatility in certain deposit types and
relationships.
Securities
Portfolio
Securities are selected to provide safety of principal,
liquidity, pledging capabilities (to collateralize certain
deposits and borrowings), income and to leverage capital. The
Companys investment strategy focuses on maximizing income
while providing for safety of principal, maintaining appropriate
utilization of capital, providing adequate liquidity to meet
loan demand or deposit outflows and to manage overall interest
rate risk. The Company selects individual securities whose
credit, cash flow, maturity and interest rate characteristics,
in the aggregate, affect the stated strategies.
The securities portfolio consists of various debt and equity
securities totaling $459.9 million, $522.3 million and
$671.4 million and FHLB stock totaling $7.0 million,
$8.5 million and $20.5 million at December 31,
2010, 2009, and 2008, respectively.
Securities are classified as either available for sale,
representing securities the Company may sell in the ordinary
course of business, or as held to maturity, representing
securities the Company has the ability and positive intent to
hold until maturity. Securities available for sale are reported
at fair value with unrealized gains and losses (net of tax)
excluded from operations and reported in other comprehensive
income. Securities held to maturity are stated at amortized
cost. The available for sale portfolio totaled
$443.7 million, $500.6 million and $642.4 million
at December 31, 2010, 2009 and 2008 respectively. The held
to maturity portfolio totaled $16.3 million,
$21.7 million and $29.0 million at December 31,
2010, 2009 and 2008, respectively.
Average aggregate securities and FHLB stock represented
19.8 percent, 24.8 percent and 32.1 percent of
average interest earning assets in 2010, 2009 and 2008,
respectively. Emphasis on the securities portfolio will continue
to be an important part of the Companys investment
strategy. The size of the securities portfolio will depend on
loan and deposit growth, the level of capital and the
Companys ability to take advantage of leveraging
opportunities.
The following table sets forth the amortized cost, gross
unrealized gains and losses and the estimated fair value of
securities classified as available for sale and held to maturity
at December 31:
2010
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
Classified as Available for Sale
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Treasury and government agencies
|
|
$
|
3,001
|
|
|
$
|
11
|
|
|
|
|
|
|
$
|
3,012
|
|
Mortgage-backed securities residential
|
|
|
303,479
|
|
|
|
6,648
|
|
|
$
|
587
|
|
|
|
309,540
|
|
Obligations of states and political subdivisions
|
|
|
111,912
|
|
|
|
4,170
|
|
|
|
1
|
|
|
|
116,081
|
|
Other debt securities
|
|
|
12,329
|
|
|
|
|
|
|
|
7,956
|
|
|
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
430,721
|
|
|
|
10,829
|
|
|
|
8,544
|
|
|
|
433,006
|
|
Mutual funds and other equity securities
|
|
|
10,071
|
|
|
|
706
|
|
|
|
116
|
|
|
|
10,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
440,792
|
|
|
$
|
11,535
|
|
|
$
|
8,660
|
|
|
$
|
443,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as Held to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
11,131
|
|
|
$
|
700
|
|
|
$
|
1
|
|
|
$
|
11,830
|
|
Obligations of states and political subdivisions
|
|
|
5,136
|
|
|
|
306
|
|
|
|
|
|
|
|
5,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,267
|
|
|
$
|
1,006
|
|
|
$
|
1
|
|
|
$
|
17,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
2009
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
Classified as Available for Sale
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Treasury and government agencies
|
|
$
|
4,995
|
|
|
$
|
33
|
|
|
$
|
20
|
|
|
$
|
5,008
|
|
Mortgage-backed securities residential
|
|
|
312,996
|
|
|
|
5,600
|
|
|
|
2,208
|
|
|
|
316,388
|
|
Obligations of states and political subdivisions
|
|
|
158,465
|
|
|
|
5,897
|
|
|
|
91
|
|
|
|
164,271
|
|
Other debt securities
|
|
|
14,712
|
|
|
|
14
|
|
|
|
9,904
|
|
|
|
4,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
491,168
|
|
|
|
11,544
|
|
|
|
12,223
|
|
|
|
490,489
|
|
Mutual funds and other equity securities
|
|
|
9,172
|
|
|
|
1,109
|
|
|
|
135
|
|
|
|
10,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
500,340
|
|
|
$
|
12,653
|
|
|
$
|
12,358
|
|
|
$
|
500,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as Held to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
16,515
|
|
|
$
|
733
|
|
|
$
|
1
|
|
|
$
|
17,247
|
|
Obligations of states and political subdivisions
|
|
|
5,135
|
|
|
|
346
|
|
|
|
|
|
|
|
5,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,650
|
|
|
$
|
1,079
|
|
|
$
|
1
|
|
|
$
|
22,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
Classified as Available for Sale
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Treasury and government agencies
|
|
$
|
45,206
|
|
|
$
|
288
|
|
|
$
|
79
|
|
|
$
|
45,415
|
|
Mortgage-backed securities residential
|
|
|
371,963
|
|
|
|
3,487
|
|
|
|
1,313
|
|
|
|
374,137
|
|
Obligations of states and political subdivisions
|
|
|
200,858
|
|
|
|
2,341
|
|
|
|
1,710
|
|
|
|
201,489
|
|
Other debt securities
|
|
|
20,082
|
|
|
|
227
|
|
|
|
8,665
|
|
|
|
11,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
638,109
|
|
|
|
6,343
|
|
|
|
11,767
|
|
|
|
632,685
|
|
Mutual funds and other equity securities
|
|
|
9,170
|
|
|
|
613
|
|
|
|
105
|
|
|
|
9,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
647,279
|
|
|
$
|
6,956
|
|
|
$
|
11,872
|
|
|
$
|
642,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as Held to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
23,859
|
|
|
$
|
525
|
|
|
$
|
78
|
|
|
$
|
24,306
|
|
Obligations of states and political subdivisions
|
|
|
5,133
|
|
|
|
108
|
|
|
|
1
|
|
|
|
5,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,992
|
|
|
$
|
633
|
|
|
$
|
79
|
|
|
$
|
29,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amortized cost of securities at
December 31, 2010, distributed based on contractual
maturity or earlier call date for securities expected to be
called, and weighted average yields computed on a tax equivalent
basis. Mortgage-backed securities which may have principal
prepayments are distributed to a maturity category based on
estimated average lives. Actual maturities will differ from
contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
After 1 Year but Within 5 Years
|
|
|
After 5 Years Within 10 Years
|
|
|
After 10 Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
U.S. Treasuries and government agencies
|
|
$
|
3,001
|
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,001
|
|
|
|
0.73
|
%
|
Mortgage-backed securities residential
|
|
|
138,173
|
|
|
|
4.03
|
%
|
|
$
|
138,822
|
|
|
|
2.89
|
%
|
|
$
|
37,615
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
314,610
|
|
|
|
3.42
|
%
|
Obligations of states and political subdivisions
|
|
|
30,911
|
|
|
|
7.18
|
%
|
|
|
42,313
|
|
|
|
6.33
|
%
|
|
|
43,771
|
|
|
|
5.89
|
%
|
|
|
53
|
|
|
|
6.97
|
%
|
|
|
117,048
|
|
|
|
6.39
|
%
|
Other debt securities
|
|
|
4,335
|
|
|
|
1.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,994
|
|
|
|
2.08
|
%
|
|
|
12,329
|
|
|
|
0.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,420
|
|
|
|
4.54
|
%
|
|
$
|
181,135
|
|
|
|
3.69
|
%
|
|
$
|
81,386
|
|
|
|
4.62
|
%
|
|
$
|
8,047
|
|
|
|
2.13
|
%
|
|
$
|
446,988
|
|
|
|
4.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
177,718
|
|
|
|
|
|
|
$
|
182,469
|
|
|
|
|
|
|
$
|
81,985
|
|
|
|
|
|
|
$
|
8,106
|
|
|
|
|
|
|
$
|
450,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Obligations of U.S. Treasury and government agencies
principally include U.S. Treasury securities and debentures
and notes issued by the FHLB, Fannie Mae, and Freddie Mac. The
total balances held of such securities classified as available
for sale decreased $2.0 million to $3.0 million as of
December 31, 2010, from $5.0 million as of
December 31, 2009, which decreased $40.4 million from
$45.4 million at December 31, 2008. The 2010 decrease
resulted from maturities of $42.0 million which were
partially offset by purchases of $40.0 million. The 2009
decrease resulted from maturities and calls of
$246.1 million and other decreases of $0.2 million,
partially offset by purchases of $205.9 million.
The Company invests in mortgage-backed securities, including
CMOs that are primarily issued by the Government National
Mortgage Association (GNMA), Fannie Mae, Freddie Mac
and, to a lesser extent from time to time, such securities
issued by others. GNMA securities are backed by the full faith
and credit of the U.S. Treasury, assuring investors of
receiving all of the principal and interest due from the
mortgages backing the securities. Fannie Mae and Freddie Mac
guarantee the payment of interest at the applicable certificate
rate and the full collection of the mortgages backing the
securities; however, such securities are not backed by the full
faith and credit of the U.S. Treasury.
Mortgage-backed securities, including CMOs, classified as
available for sale decreased $6.9 million to
$309.5 million as of December 31, 2010 from
$316.4 million as of December 31, 2009 which decreased
$57.7 million from $374.1 million at December 31,
2008. The 2010 decrease was due to principal paydowns of
$138.8 million and sales of $4.9 million which were
partially offset by purchases of $136.3 million and other
changes of $0.5 million. The 2009 decrease was due to
principal paydowns of $157.9 million, sales of
$6.8 million, partially offset by purchases of
$106.2 million and other increases of $0.8 million.
The sales were conducted as a result of managements
efforts to reposition the portfolio during the periods of
changing economic conditions and interest rates.
Mortgage-backed securities, including CMOs, classified as
held to maturity totaled $11.1 million at December 31,
2010 which was a decrease of $5.4 million from
$16.5 million as of December 31, 2009, which was a
decrease of $7.4 million from $23.9 million as of
December 31, 2008. The 2010 decrease was due to principal
paydowns of $5.4. The decrease in 2009 was due to principal
paydowns of $7.3 million and other changes of
$0.1 million. There were no adjustable rate mortgage-backed
securities classified as held to maturity at December 31,
2010, 2009 and 2008.
At December 31, 2010 and 2009, fixed rated mortgage-backed
securities, including CMOs, classified as available for
sale totaled $303.6 million and $304.4 million,
respectively. During 2010, principal paydowns of
$137.8 million were partially offset by purchases of
$136.3 million and other increases of $0.9 million.
During 2009, principal paydowns of $155.7 million and sales
of $1.3 million were partially offset by purchases of
$101.2 million and other increases of $0.4 million. At
December 31, 2010 and 2009, variable rate mortgaged backed
securities classified as available for sale totaled
$5.9 million and $12.0 million, respectively. In 2010,
the decrease was due to sales of $4.8 million, principal
paydowns of $1.0 million and other decreases of
$0.2 million. In 2009, sales of $5.5 million and
principal paydowns of $2.2 million were partially offset by
purchases of $5.0 million and other changes of
$0.4 million.
Obligations of states and political subdivisions classified as
available for sale decreased $48.2 million to
$116.1 million at December 31, 2010, from
$164.3 million at December 31, 2009, which decreased
$37.2 million from $201.5 million at December 31,
2008. The 2010 decrease resulted from maturities and calls of
$69.2, sales of $16.9 million and other decreases of
$1.6 million which was partially offset by purchases of
$39.5 million. The 2009 decrease resulted from maturities
and calls of $53.5 million and sales of $2.0 million
which was partially offset by purchases of $13.1 million
and other increases of $5.2 million. Obligations of states
and political subdivisions classified as held to maturity
totaled $5.1 million at December 31, 2010, 2009 and
2008. The obligations at year end 2009 were comprised of
approximately 82 percent for New York State political
subdivisions and 18 percent for a variety of other states
and their subdivisions all with diversified final maturities.
The Company considers such securities to have favorable tax
equivalent yields and further utilizes such securities for their
favorable income tax treatment.
Other debt securities classified as available for sale decreased
$0.4 million to $4.4 million at December 31, 2010
from $4.8 million at December 31, 2009, which
decreased $6.8 million from $11.6 million at
December 31, 2008. The 2010 decrease was due to other
decreases of $0.4 million and maturities and calls of
$0.2 million partially
48
offset by payments in kind of $0.2 million. The 2009
decrease was due to other changes of $7.0 million partially
offset by payments in kind of $0.2 million. Included in
other changes was a $5.5 million pretax impairment charge
related to the Companys investment in pooled trust
preferred securities and an additional $1.5 million of
unrealized losses on pooled trust preferred securities. These
pooled trust preferred securities, which had a cost basis of
$11.6 million and $13.8 million as of
December 31, 2010 and 2009, respectively, have suffered
severe declines in estimated fair value as a result of both
illiquidity in the marketplace and severe declines in the credit
ratings of a number of issuing banks underlying these
securities. The Company has recognized $2.6 million
impairment charges over the past twelve months, related to its
investments in pooled trust preferred securities. Management
cannot predict what effect that continuation of such conditions
could have on potential future value or whether there will be
additional impairment charges related to these securities.
Mutual funds and other equities classified as available for sale
totaled $10.7 million at December 31, 2010, which
increased $0.6 million from $10.1 million at
December 31, 2009, which was an increase of
$0.4 million from $9.7 million at December 31,
2008. The 2010 increase was due to purchases of
$1.0 million was partially offset by other decreases of
$0.4 million and maturities and calls of $0.1 million.
There were no mutual funds or other equities classified as held
to maturity during 2010, 2009 or 2008.
The Company invests in FHLB stock and other securities which are
rated with an investment grade by nationally recognized credit
rating organizations. As a matter of policy, the Company invests
in non-rated securities, on a limited basis, when the Company is
able to satisfy itself as to the underlying credit. These
non-rated securities outstanding at December 31, 2010
totaled approximately $5.8 million comprised primarily of
obligations of municipalities located within the Companys
market area. The Bank, as a member of the FHLB, invests in stock
of the FHLB as a prerequisite to obtaining funding under various
advance programs offered by the FHLB. The Bank must purchase
additional shares of FHLB stock to obtain increases in such
borrowings.
The Company continues to exercise a conservative approach to
investing by purchasing high credit quality investments with
various maturities and cash flows to provide for liquidity needs
and prudent asset liability management. The Companys
securities portfolio provides for a significant source of
income, liquidity and is utilized in managing Company-wide
interest rate risk. These securities are used to collateralize
borrowings and deposits to the extent required or permitted by
law. Therefore, the securities portfolio is an integral part of
the Companys funding strategy.
Except for securities of the U.S. Treasury and government
agencies, there were no obligations of any single issuer which
exceeded ten percent of stockholders equity at
December 31, 2010.
Loan
Portfolio
Real Estate Loans: Real estate loans are
comprised primarily of loans collateralized by interim and
permanent commercial mortgages, construction mortgages and
residential mortgages including home equity loans. The Company
originates these loans primarily for its portfolio, although a
portion of its residential real estate loans, in addition to
meeting the Companys underwriting criteria, comply with
nationally recognized underwriting criteria (conforming
loans) and can be sold in the secondary market.
Commercial real estate loans are offered by the Company on a
fixed or variable rate basis generally with up to 10 year
terms. Amortizations generally range up to 25 years. The
Company also originates 15 year fixed rate self-amortizing
commercial mortgages.
In underwriting commercial real estate loans, the Company
evaluates both the prospective borrowers ability to make
timely payments on the loan and the value of the property
securing the loan. The Company generally utilizes licensed or
certified appraisers, previously approved by the Company, to
determine the estimated value of the property. Commercial
mortgages are generally underwritten for up to 75% of the value
of the property depending on the type of the property. The
Company generally requires lease assignments where applicable.
Repayment of such loans may be negatively impacted should the
borrower default or should there be a substantial decline in the
value of the property securing the loan, or a decline in general
economic conditions.
Where the owner occupies the property, the Company also
evaluates the businesss ability to repay the loan on a
timely basis. In addition, the Company may require personal
guarantees, lease assignments and/or the guarantee of the
operating company when the property is owner occupied. These
types of loans may involve greater risks than other types of
lending, because payments on such loans are often dependent upon
the successful operation of the
49
business involved, therefore, repayment of such loans may be
negatively impacted by adverse changes in economic conditions
affecting the borrowers business.
Construction loans are short-term loans (generally up to
18 months) secured by land for both residential and
commercial development. The loans are generally made for
acquisition and improvements. Funds are disbursed as phases of
construction are completed. The majority of these loans are made
with variable rates of interest, although some fixed rate
financing is provided. The loan amount is generally limited to
55% to 70% of completed value, depending on the type of
property. Most non-residential construction loans require
pre-approved permanent financing or pre-leasing by the company
or another bank providing the permanent financing. The Company
funds construction of single family homes and commercial real
estate, when no contract of sale exists, based upon the
experience of the builder, the financial strength of the owner,
the type and location of the property and other factors.
Construction loans are generally personally guaranteed by the
principal(s). Repayment of such loans may be negatively impacted
by the builders inability to complete construction, by a
downturn in the new construction market, by a significant
increase in interest rates or by a decline in general economic
conditions.
Residential real estate loans are offered by the Company with
terms of up to 30 years and loan to value ratios of up to
70%. Repayment of such loans may be negatively impacted should
the borrower default, should there be a significant decline in
the value of the property securing the loan or should there be a
decline in general economic conditions.
The Company offers a variety of home equity line of credit
products. These products include credit lines on primary
residences, vacation homes and
1-4 unit
residential investment properties. A low cost option is
available to qualified borrowers who intend to actively utilize
the lines. Depending on the product, loan amounts of $50,000 to
$2,000,000 are available for terms ranging from 5 years to
25 years with various repayment terms. Required combined
maximum loan to value ratios range from 60% to 70%, and the
lines generally have interest rates ranging from the prime rate
minus 1% (Prime Rate as published in the Wall Street Journal) to
prime rate plus 1.5%, subject to certain interest rate floors.
The Company does not originate loans similar to payment option
loans or loans that allow for negative interest amortization.
The Company does not engage in
sub-prime
lending nor does it offer loans with low teaser
rates or high
loan-to-value
ratios to sub-prime borrowers.
Commercial and Industrial Loans: The
Companys commercial and industrial loan portfolio consists
primarily of commercial business loans and lines of credit to
businesses and professionals. These loans are usually made to
finance the purchase of inventory, new or used equipment or
other short or long-term working capital purposes. These loans
are generally secured by corporate assets, often with real
estate as secondary collateral, but are also offered on an
unsecured basis. These loans generally have variable rates of
interest. Commercial loans, for the purpose of purchasing
equipment and/or inventory, are usually written for terms of 1
to 5 years with, exceptionally, longer terms. In granting
this type of loan, the Company primarily looks to the
borrowers cash flow as the source of repayment with
collateral and personal guarantees, where obtained, as a
secondary source. The Company generally requires a debt service
coverage ratio of at least 125%. Commercial loans are often
larger and may involve greater risks than other types of loans
offered by the Company. Payments on such loans are often
dependent upon the successful operation of the underlying
business involved and, therefore, repayment of such loans may be
negatively impacted by adverse changes in economic conditions,
managements inability to effectively manage the business,
claims of others against the borrowers assets which may
take priority over the Companys claims against assets,
death or disability of the borrower or loss of market for the
borrowers products or services.
Loans to Individuals and Leasing: The Company
offers installment loans and reserve lines of credit to
individuals. Installment loans are limited to $50,000 and lines
of credit are generally limited to $5,000. These loans have
terms up to 5 years with fixed or variable rates of interest.
The rate of interest is dependent on the term of the loan and
the type of collateral. The Company does not place an emphasis
on originating these types of loans.
The Company also originates lease financing transactions. These
transactions are primarily conducted with businesses,
professionals and not-for-profit organizations and provide
financing principally for office equipment, telephone systems,
computer systems, energy saving improvements and other special
use equipment. The terms vary depending on the equipment being
leased, but are generally 3 to 5 years. The interest rate
is dependent on the term of the lease, the type of collateral,
and the overall credit of the customer.
50
Average net loans decreased $25.1 million or
1.4 percent to $1,714.3 million in 2010 from
$1,739.4 million in 2009, which increased
$256.2 million or 17.3 percent from
$1,483.2 million in 2008. Gross loans decreased
$84.1 million or 4.6 percent to $1,732.3 million
at December 31, 2010 from $1,816.4 million at
December 31, 2009, which increased $111.1 million or
6.5 percent from $1,705.3 million at December 31,
2008. The changes in gross loans resulted primarily from:
|
|
|
|
|
Increases of $12.7 million and $140.7 million in 2010
and 2009, respectively, in commercial real estate mortgages. The
increases were due to increased activity in commercial mortgages,
|
|
|
|
Decrease of $81.3 million and an increase of
$0.9 million in 2010 and 2009, respectively, in
construction loans. The decrease in 2010 was due to increased
payoffs, charge-offs and a lower volume of originations. The
increase in 2009 resulted from a slightly higher volume of
originations.
|
|
|
|
Increases in residential real estate mortgages of
$12.8 million and $45.1 million in 2010 and 2009,
respectively, primarily as a result of increased activity
principally in multi-family loans,
|
|
|
|
Decreases of $29.6 million and $83.2 million in 2010
and 2009, respectively, in commercial and industrial loans. The
decreases were primarily the result of lower loan volume due to
the ongoing economic crisis.
|
|
|
|
Increases of $6.3 million and $5.5 million in 2010 and
2009, respectively in other loans, and
|
|
|
|
Decrease of $5.0 million and an increase of
$2.3 million in 2010 and 2009, respectively, in lease
financings.
|
Major classifications of loans, at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
796,253
|
|
|
$
|
783,597
|
|
|
$
|
642,923
|
|
|
$
|
355,044
|
|
|
$
|
290,185
|
|
Construction
|
|
|
174,369
|
|
|
|
255,660
|
|
|
|
254,837
|
|
|
|
211,837
|
|
|
|
252,941
|
|
Residential
|
|
|
467,326
|
|
|
|
454,532
|
|
|
|
409,431
|
|
|
|
324,488
|
|
|
|
289,553
|
|
Commercial and industrial
|
|
|
245,263
|
|
|
|
274,860
|
|
|
|
358,076
|
|
|
|
377,042
|
|
|
|
355,214
|
|
Other
|
|
|
33,257
|
|
|
|
26,970
|
|
|
|
21,536
|
|
|
|
29,686
|
|
|
|
28,777
|
|
Lease financing
|
|
|
15,783
|
|
|
|
20,810
|
|
|
|
18,461
|
|
|
|
12,463
|
|
|
|
8,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,732,251
|
|
|
|
1,816,429
|
|
|
|
1,705,264
|
|
|
|
1,310,560
|
|
|
|
1,225,436
|
|
Deferred loan fees
|
|
|
(4,115
|
)
|
|
|
(5,139
|
)
|
|
|
(5,116
|
)
|
|
|
(3,552
|
)
|
|
|
(3,409
|
)
|
Allowance for loan losses
|
|
|
(38,949
|
)
|
|
|
(38,645
|
)
|
|
|
(22,537
|
)
|
|
|
(17,367
|
)
|
|
|
(16,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,689,187
|
|
|
$
|
1,772,645
|
|
|
$
|
1,677,611
|
|
|
$
|
1,289,641
|
|
|
$
|
1,205,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
The Companys primary lending emphasis is for loans to
businesses and developers, primarily in the form of commercial
and multi-family residential real estate mortgages, construction
loans, and commercial and industrial loans, including lines of
credit. The Company will continue to emphasize these types of
loans, which will enable the Company to meet the borrowing needs
of businesses in the communities it serves. These loans are made
at both fixed rates of interest and variable or floating rates
of interest, generally based upon the Prime Rate as published in
the Wall Street Journal. At December 31, 2010, the Company
had total gross loans with fixed rates of interest of
$1,173.8 million, or 67.8 percent of total loans, and
total gross loans with variable or floating rates of interest of
$558.5 million, or 32.2 percent of total loans, as
compared to $1,134.1 million or 62.4 percent of total
loans in fixed rate loans and $682.3 million or
37.6 percent of total loans in variable or floating rate
loans at December 31, 2009.
At December 31, 2010 and 2009, the Company had
approximately $195.1 million and $274.8 million,
respectively, of committed but unissued lines of credit,
commercial mortgages, construction loans and commercial and
industrial loans.
The following table presents the maturities of loans outstanding
at December 31, 2010 excluding loans to individuals, real
estate mortgages (other than construction loans) and lease
financings, and the amount of such loans by maturity date that
have pre-determined interest rates and the amounts that have
floating or adjustable rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
|
|
|
After 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year but
|
|
|
After
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Within
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
5 Years
|
|
|
Years
|
|
|
Total
|
|
|
Percent
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate commercial
|
|
$
|
157,441
|
|
|
$
|
392,856
|
|
|
$
|
245,956
|
|
|
$
|
796,253
|
|
|
|
65.5
|
%
|
Real Estate construction
|
|
|
152,923
|
|
|
|
21,446
|
|
|
|
|
|
|
|
174,369
|
|
|
|
14.3
|
%
|
Commercial & industrial
|
|
|
104,438
|
|
|
|
51,194
|
|
|
|
89,631
|
|
|
|
245,263
|
|
|
|
20.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,802
|
|
|
$
|
465,496
|
|
|
$
|
335,587
|
|
|
$
|
1,215,885
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed or predetermined interest rates
|
|
$
|
281,516
|
|
|
$
|
443,646
|
|
|
$
|
288,477
|
|
|
$
|
1,013,639
|
|
|
|
83.4
|
%
|
Floating or adjustable interest rates
|
|
|
133,286
|
|
|
|
21,850
|
|
|
|
47,110
|
|
|
|
202,246
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,802
|
|
|
$
|
465,496
|
|
|
$
|
335,587
|
|
|
$
|
1,215,885
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
34.1
|
%
|
|
|
38.3
|
%
|
|
|
27.6
|
%
|
|
|
100.0
|
%
|
|
|
|
|
It is the Companys policy to discontinue the accrual of
interest on loans when, in the opinion of management, a
reasonable doubt exists as to the timely collectibility of the
amounts due. Regulatory requirements generally prohibit the
accrual of interest on certain loans when principal or interest
is due and remains unpaid for 90 days or more, unless the
loan is both well secured and in the process of collection.
The following table summarizes the Companys non-accrual
loans, loans past due 90 days or more, Other Real Estate
Owned (OREO) and related interest income not
recorded on non-accrual loans as of and for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Loans past due 90 days or more and still accruing
|
|
$
|
1,625
|
|
|
$
|
6,941
|
|
|
$
|
7,019
|
|
|
$
|
3,953
|
|
|
$
|
3,879
|
|
Non-accrual loans at period end
|
|
|
43,684
|
|
|
|
50,590
|
|
|
|
11,284
|
|
|
|
10,719
|
|
|
|
5,572
|
|
Other real estate owned
|
|
|
11,028
|
|
|
|
9,211
|
|
|
|
5,467
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale
|
|
|
7,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional interest income that would have been recorded if
these borrowers had complied with contractual terms
|
|
|
4,346
|
|
|
|
3,032
|
|
|
|
875
|
|
|
|
933
|
|
|
|
474
|
|
There was no interest income on non-accrual loans included in
net income for the years ended December 31, 2010, 2009 and
2008, respectively.
52
The following table is a summary of nonperforming assets as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loans Past Due 90 Days or More and Still Accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
292
|
|
|
$
|
6,210
|
|
|
$
|
897
|
|
|
$
|
1,865
|
|
|
|
|
|
Construction
|
|
|
1,323
|
|
|
|
|
|
|
|
5,797
|
|
|
|
|
|
|
$
|
894
|
|
Residential
|
|
|
|
|
|
|
401
|
|
|
|
325
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate
|
|
|
1,615
|
|
|
|
6,611
|
|
|
|
7,019
|
|
|
|
2,632
|
|
|
|
894
|
|
Commercial & Industrial
|
|
|
10
|
|
|
|
273
|
|
|
|
|
|
|
|
1,237
|
|
|
|
2,934
|
|
Lease Financing and Other
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
84
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Past Due 90 Days or More and Still Accruing
|
|
|
1,625
|
|
|
|
6,941
|
|
|
|
7,019
|
|
|
|
3,953
|
|
|
|
3,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
15,295
|
|
|
|
20,957
|
|
|
|
2,241
|
|
|
|
143
|
|
|
|
658
|
|
Construction
|
|
|
15,689
|
|
|
|
10,057
|
|
|
|
2,824
|
|
|
|
4,646
|
|
|
|
1,799
|
|
Residential
|
|
|
7,744
|
|
|
|
15,621
|
|
|
|
4,618
|
|
|
|
340
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate
|
|
|
38,728
|
|
|
|
46,635
|
|
|
|
9,683
|
|
|
|
5,129
|
|
|
|
3,218
|
|
Commercial & Industrial
|
|
|
4,563
|
|
|
|
3,821
|
|
|
|
1,601
|
|
|
|
5,590
|
|
|
|
2,346
|
|
Lease Financing and Other
|
|
|
393
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Accrual Loans
|
|
|
43,684
|
|
|
|
50,590
|
|
|
|
11,284
|
|
|
|
10,719
|
|
|
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
|
11,028
|
|
|
|
9,211
|
|
|
|
5,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Assets (excluding loans held for sale)
|
|
|
56,337
|
|
|
|
66,742
|
|
|
|
23,770
|
|
|
|
14,672
|
|
|
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale
|
|
|
7,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonperforming Assets
|
|
$
|
64,148
|
|
|
$
|
66,742
|
|
|
$
|
23,770
|
|
|
$
|
14,672
|
|
|
$
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs during period
|
|
$
|
46,223
|
|
|
$
|
8,198
|
|
|
$
|
5,855
|
|
|
$
|
887
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets (excluding loans held for sale to total
assets at period end
|
|
|
2.11
|
%
|
|
|
2.50
|
%
|
|
|
0.94
|
%
|
|
|
0.63
|
%
|
|
|
0.41
|
%
|
Nonperforming assets to total assets at period end
|
|
|
2.40
|
%
|
|
|
2.50
|
%
|
|
|
0.94
|
%
|
|
|
0.63
|
%
|
|
|
0.41
|
%
|
Non-accrual commercial real estate loans decreased
$5.7 million to $15.3 million at December 31,
2010 from $21.0 million at December 31, 2009 which was
an increase of $18.8 million from $2.2 million at
December 31, 2008. The 2010 decrease resulted from the
charge-off of twenty three loans totaling $12.8 million,
the transfer of twelve loans totaling $9.5 million to loans
held for sale, principal payments of $2.7 million, and the
transfer of two loans totaling $2.5 million to other real
estate owned. These decreases were partially offset by the
transfer to non-accrual of 27 loans totaling $21.8 million.
The 2009 increase resulted from the addition of seventeen loans
totaling $30.3 million which was partially offset by the
transfer of one loan totaling $6.0 million to other real
estate owned, the charge-off of two loans totaling
$2.8 million and principal payments of $2.7 million.
Non-accrual construction loans increased $5.6 million to
$15.7 million at December 31, 2010 from
$10.1 million at December 31, 2009, which was an
increase of $7.3 million from $2.8 million at
December 1, 2008. The 2010 increase resulted from the
transfer of twenty one loans totaling $38.4 to non-accrual
status. The increase was partially offset by the charge-off of
twenty one loans totaling $17.0 million, the transfer of
nine loans totaling $9.6 million to loans held for sale,
principal payments of $2.5 million and the transfer of four
loans totaling $3.7 million to other real estate owned. The
2009 increase resulted from the transfer of sixteen loans
totaling
53
$14.7 million to non-accrual which was partially offset by
the return of three loans totaling $3.9 million to accruing
status, the transfer of two loans totaling $2.4 million to
other real estate owned and the charge-off of four loans
totaling $1.1 million.
Non-accrual residential real estate loans decreased
$7.9 million to $7.7 million at December 31, 2010
from $15.6 million at December 31, 2009 which was an
increase of $11.0 million from $4.6 million at
December 31, 2008. The 2010 decrease was due to the
charge-off of twenty five loans totaling $14.7 million,
principal payments of $5.5 million, the transfer of four
loans totaling $2.7 million to loans held for sale and the
transfer of three loans totaling $4.0 million to other real
estate owned. These decreases were partially offset by the
transfer of twenty eight loans totaling $19.0 million to
non-accrual. The 2009 increase resulted from the transfer of
seventeen loans totaling $16.1 million to non-accrual,
which was partially offset by principal payments of
$2.4 million, the return of three loans totaling
$1.5 million to accruing status and the charge-off of five
loans totaling $1.2 million.
Non-accrual commercial and industrial loans increased
$0.8 million to $4.6 million at December 31, 2010
from $3.8 million at December 31, 2009 which was an
increase of $2.2 million from $1.6 million at
December 31, 2008. The 2010 increase resulted from the
transfer of twenty nine loans totaling $4.2 million which
was partially offset by the charge-off of thirty loans totaling
$2.8 million, the return of one loan totaling
$0.4 million to accrual status, the transfer of one loan
totaling $0.1 million to other real estate owned and
principal payments of $0.1 million. The 2009 increase
resulted from the transfer of thirty eight loans totaling
$6.8 million to non-accrual which was partially offset by
the charge off of thirty four loans totaling $4.4 million
and principal payments of $0.1 million.
Non-accrual loans to individuals increased $0.3 million to
$0.4 million at December 31, 2010 from
$0.1 million at December 31, 2009 which was an
increase of $0.1 million from December 31, 2008. The
2010 increase resulted from the transfer of seventeen loans
totaling $1.3 million which was partially offset by the
charge-off of fifteen loans totaling $1.0 million. The 2009
increase resulted from the transfer of eighteen loans totaling
$0.2 million to non-accrual which were partially offset by
the charge-off of sixteen loans totaling $0.1 million.
Loans past due 90 days or more and still accruing were
$1.6 million, $6.9 million and $7.0 million at
December 31, 2010, 2009 and 2008, respectively. In
addition, we had $21.0 million, $32.0 million and
$17.1 million of accruing loans that were
31-89 days
delinquent at December 31, 2010, 2009 and 2008,
respectively.
Other real estate owned increased $1.8 million to
$11.0 million at December 31, 2010, which was an
increase of $3.7 million to $9.2 million at
December 31, 2009 from $5.5 million in 2008. The 2010
increase was due to the addition of six properties totaling
$10.3 million which were partially offset by the sale of
three properties totaling $6.6 million and a
$1.9 million loss on the sale of one property. The 2009
increase was due to the addition of three properties totaling
$8.4 million which was partially offset by the sale of two
properties totaling $3.4 million and writedowns of
$1.3 million.
The increase in nonperforming assets for 2010, compared to their
respective prior year periods, has primarily resulted from the
effects of the current severe economic downturn. During 2010 and
2009, the Company experienced severe increases in delinquent and
nonperforming loans and a continuation of the slowdowns in
repayment and declines in
loan-to-value
ratios on existing loans which began in the second half of 2008.
The severity of the economic downturn during 2009 extended well
beyond the
sub-prime
lending issue, and has resulted in severe declines in the demand
for and values of virtually all commercial and residential real
estate properties. These declines, together with the present
shortage of available mortgage financing, have put downward
pressure on overall asset quality of virtually all financial
institutions, including the Companys. Continuation or
worsening of such conditions would have additional significant
adverse effects on asset quality in the future.
At December 31, 2010, the Company had no commitments to
lend additional funds to customers with non-accrual or
restructured loan balances. Non-accrual loans decreased
$6.9 million to $43.7 million at December 31,
2010, compared to $50.6 million at December 31, 2009,
which increased $39.3 million compared to $11.3 million at
December 31, 2008. Net income is adversely impacted by the
level of non-accrual loans and other nonperforming assets caused
by the deterioration of the borrowers ability to meet
scheduled interest and principal payments. In addition to
forgone revenue, the Company must increase the level of
provision for loan losses, incur higher collection costs and
other costs associated with the management and disposition of
foreclosed properties.
54
In accordance with the Receivables Topic of the FASB
Accounting Standards Codification, which establishes the
accounting treatment of impaired loans, loans totaling
$49.6 million, $50.6 million and $11.3 million at
December 31, 2010, 2009 and 2008, respectively, have been
measured based on the estimated fair value of the collateral
since these loans are all collateral dependent. At
December 31, 2010 and 2009, the total allowance for loan
loss allocated to impaired loans and other identified loan
problems was $0.9 million and $3.6 million,
respectively. At December 31, 2008 there was no allowance
for loan losses specifically allocated to impaired and other
identified problem loans. The average recorded investment in
impaired loans for the years ended December 31, 2010, 2009
and 2008 was approximately $64.4 million,
$35.0 million and $12.3 million, respectively. Loans
which have been renegotiated with a borrower experiencing
financial difficulties for which the terms of the loan have been
modified with a concession that the Company would not otherwise
have granted are considered to be troubled debt restructurings
(TDRs) and are included in impaired loans. Impaired
loans as of December 31, 2010 and 2009 included
$17.2 million and $0.6 million, respectively, of loans
considered to be TDRs. At December 31, 2010, one TDR with a
carrying amount of $5.9 million was on accrual status and
performing in accordance with its modified terms. All other TDRs
as of December 31, 2010 and 2009 were on nonaccrual status.
There were no TDRs at December 31, 2008. Other pertinent
data related to the Companys loan portfolio are contained
in Note 4 to the Companys consolidated financial
statements presented in this
Form 10-K.
The Company performs extensive ongoing asset quality monitoring
by both internal and independent loan review functions. In
addition, the Company conducts timely remediation and collection
activities through a network of internal and external resources
which include an internal asset recovery department, real estate
and other loan workout attorneys and external collection
agencies. In addition, during the second quarter of 2010, the
Company decided to implement a more aggressive workout strategy
for the resolution of problem assets in light of a sluggish
economic recovery, continued weakness in local real estate
activity and market values and growing difficulty in resolving
problem loans in a timely fashion through traditional
foreclosure proceedings due to increased bankruptcy filings and
overcrowded court systems. See Allowance for Loan
Losses below for further discussion of this strategy.
Management believes that these efforts are appropriate for
accomplishing either successful remediation or maximizing
collections related to nonperforming assets.
Allowance
for Loan Losses
The Company maintains an allowance for loan losses to absorb
probable losses incurred in the loan portfolio based on ongoing
quarterly assessments of the estimated losses. The
Companys methodology for assessing the appropriateness of
the allowance consists of a specific component for identified
problem loans and a formula component to consider historical
loan loss experience and additional risk factors affecting the
portfolio.
55
A summary of the components of the allowance for loan losses,
changes in the components and the impact of
charge-offs/recoveries on the resulting provision for loan
losses for the dates indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
December 31,
|
|
|
During
|
|
|
December 31,
|
|
|
During
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
850
|
|
|
$
|
725
|
|
|
$
|
125
|
|
|
$
|
125
|
|
|
|
|
|
Residential
|
|
|
17
|
|
|
|
(2,461
|
)
|
|
|
2,478
|
|
|
|
2,478
|
|
|
|
|
|
Commercial and Industrial
|
|
|
25
|
|
|
|
(471
|
)
|
|
|
496
|
|
|
|
496
|
|
|
|
|
|
Lease Financing and other
|
|
|
|
|
|
|
(475
|
)
|
|
|
475
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specific component
|
|
|
892
|
|
|
|
(2,682
|
)
|
|
|
3,574
|
|
|
|
3,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formula:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
16,736
|
|
|
|
1,463
|
|
|
|
15,273
|
|
|
|
7,053
|
|
|
|
8,220
|
|
Construction
|
|
|
6,290
|
|
|
|
613
|
|
|
|
5,677
|
|
|
|
2,007
|
|
|
|
3,670
|
|
Residential
|
|
|
9,834
|
|
|
|
2,606
|
|
|
|
7,228
|
|
|
|
3,034
|
|
|
|
4,194
|
|
Commercial and Industrial
|
|
|
4,265
|
|
|
|
(2,565
|
)
|
|
|
6,830
|
|
|
|
558
|
|
|
|
6,272
|
|
Lease Financing and other
|
|
|
932
|
|
|
|
869
|
|
|
|
63
|
|
|
|
(118
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Formula component
|
|
|
38,057
|
|
|
|
2,986
|
|
|
|
35,071
|
|
|
|
12,534
|
|
|
|
22,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance
|
|
$
|
38,949
|
|
|
|
|
|
|
$
|
38,645
|
|
|
|
|
|
|
$
|
22,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
16,108
|
|
|
|
|
|
Net Charge-offs
|
|
|
|
|
|
|
(46,223
|
)
|
|
|
|
|
|
|
(8,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
$
|
46,527
|
|
|
|
|
|
|
$
|
24,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
During
|
|
|
December 31,
|
|
|
During
|
|
|
December 31,
|
|
|
During
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
(500
|
)
|
|
$
|
500
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(950
|
)
|
|
|
950
|
|
|
|
150
|
|
|
$
|
800
|
|
|
|
|
|
|
$
|
800
|
|
Commercial and Industrial
|
|
|
(207
|
)
|
|
|
207
|
|
|
|
(471
|
)
|
|
|
678
|
|
|
$
|
525
|
|
|
|
153
|
|
Lease Financing and other
|
|
|
(120
|
)
|
|
|
120
|
|
|
|
(197
|
)
|
|
|
317
|
|
|
|
(30
|
)
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specific component
|
|
|
(1,777
|
)
|
|
|
1,777
|
|
|
|
(18
|
)
|
|
|
1,795
|
|
|
|
495
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formula:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,993
|
|
|
|
4,227
|
|
|
|
550
|
|
|
|
3,677
|
|
|
|
678
|
|
|
|
2,999
|
|
Construction
|
|
|
509
|
|
|
|
3,161
|
|
|
|
(811
|
)
|
|
|
3,972
|
|
|
|
732
|
|
|
|
3,240
|
|
Residential
|
|
|
1,226
|
|
|
|
2,968
|
|
|
|
316
|
|
|
|
2,652
|
|
|
|
489
|
|
|
|
2,163
|
|
Commercial and Industrial
|
|
|
1,227
|
|
|
|
5,045
|
|
|
|
394
|
|
|
|
4,651
|
|
|
|
858
|
|
|
|
3,793
|
|
Lease Financing and other
|
|
|
(8
|
)
|
|
|
189
|
|
|
|
152
|
|
|
|
37
|
|
|
|
7
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Formula component
|
|
|
6,947
|
|
|
|
15,590
|
|
|
|
601
|
|
|
|
14,989
|
|
|
|
2,764
|
|
|
|
12,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance
|
|
|
|
|
|
$
|
17,367
|
|
|
|
|
|
|
$
|
16,784
|
|
|
|
|
|
|
$
|
13,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
|
5,170
|
|
|
|
|
|
|
|
583
|
|
|
|
|
|
|
|
3,259
|
|
|
|
|
|
Amount Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,529
|
|
|
|
|
|
Net Charge-offs
|
|
|
(5,855
|
)
|
|
|
|
|
|
|
(887
|
)
|
|
|
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
$
|
11,025
|
|
|
|
|
|
|
$
|
1,470
|
|
|
|
|
|
|
$
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The formula component is calculated by first applying historical
loss experience factors to outstanding loans by type, excluding
loans for which a specific allowance has been determined. This
component is then adjusted to reflect additional risk factors
not addressed by historical loss experience. These factors
include the evaluation of then-existing economic and business
conditions affecting the key lending areas of the Company and
other conditions, such as new loan products, credit quality
trends (including trends in nonperforming loans expected to
result from existing conditions), collateral values, loan
volumes and concentrations, specific industry conditions within
portfolio segments that existed as of the balance sheet date and
the impact that such conditions were believed to have had on the
collectibility of the loan portfolio. Senior management reviews
these conditions quarterly. Managements evaluation of the
loss related to these conditions is quantified by loan type and
reflected in the formula component. The evaluations of the
incurred loss with respect to these conditions is subject to a
higher degree of uncertainty due to the subjective nature of
such evaluations and because they are not identified with
specific problem credits.
57
The specific component of the allowance for loan losses is the
result of our analysis of impaired loans and our determination
of the amount required to reduce the carrying amount of such
loans to estimated fair value. Accordingly, such allowance is
dependent on the particular loans and their characteristics at
each measurement date, not necessarily the total amount of such
loans. The Company usually records partial charge-offs as
opposed to specific reserves for impaired loans that are real
estate collateral dependent and for which independent appraisals
have determined the fair value of the collateral to be less than
the carrying amount of the loan. In 2010, the Company decided to
implement a more aggressive workout strategy for the resolution
of problem assets in light of a sluggish economic recovery,
continued weakness in local real estate activity and market
values and growing difficulty in resolving problem loans in a
timely fashion through traditional foreclosure proceedings due
to increased bankruptcy filings and overcrowded court systems.
The severity of the decline in real estate values has provided
new market opportunities for the disposition of distressed
assets as investors search for yield in the current low interest
rate environment and our more aggressive policy may be able to
take advantage of those opportunities. As part of the revised
resolution strategy, the Company has reevaluated each problem
loan and has made a determination of net realizable value based
on managements estimation of the best probable outcome
considering the individual characteristics of each asset against
the likelihood of resolution with the current borrower,
expectations for resolution through the court system, or other
available market opportunities including potential loan sales.
The effects of this new strategy are reflected in significant
2010 charge-offs, as well as in a $3.0 million increase in
the formula component of the allowance at December 31, 2010
compared to December 31, 2009. The reduction in the
specific component at December 31, 2010 resulted from
partial charge-offs taken during 2010 on loans with specific
reserves at December 31, 2009. On September 30, 2010,
the Company transferred $21.9 million of nonperforming
loans to the loans held for sale category. During the fourth
quarter of 2010, a significant portion of the sale had been
completed, leaving a balance of $7.1 million in
Nonperforming loans held for sale in the
December 31, 2010 Consolidated Balance Sheet. Loans held
for sale are carried at the lower of cost or fair value. At
December 31, 2010, the Company had $0.9 million of
specific reserves allocated to three impaired loans. There were
$3.6 million of specific reserves allocated to seven
impaired loans as of December 31, 2009. The Companys
analyses as of December 31, 2010 and December 31, 2009
indicated that impaired loans were principally real estate
collateral dependent and that, with the exception of those loans
for which specific reserves were assigned, there was sufficient
underlying collateral value or guarantees to indicate expected
recovery of the carrying amount of the loans.
The changes in the formula component of the allowance for loan
losses are the result of the application of historical loss
experience to outstanding loans by type. Loss experience for
each year is based upon average charge-off experience for the
prior three year period by loan type. The formula component is
then adjusted to reflect changes in other relevant factors
affecting loan collectibility. Management periodically adjusted
the formula component to an amount that, when considered with
the specific component, represented its best estimate of
probable losses in the loan portfolio as of each balance sheet
date. The following are the major add-on factors which affected
the changes in the formula component of the allowance for loan
losses each year:
2010
|
|
|
|
|
Economic and business conditions The volatility in
energy costs and the cost of raw materials used in construction,
the demand for and value of real estate, the primary collateral
for the Companys loans, and the level of real estate taxes
within the Companys market area, together with the general
state of the economy, trigger economic uncertainty. While there
continue to be some recent signs of increased activity in the
real estate sectors of the market, persistent negative effects
from the unprecedented economic downturn experienced in 2009 and
2008 have continued to negatively affect the cash flow of many
of the Companys customers in 2010. In addition,
significant increases in filings of bankruptcy and foreclosure
proceedings have overloaded the court systems and have resulted
in what the Company believes to be unacceptable delays in
attempts to obtain title to real estate and other collateral
through conventional foreclosure which has resulted in the
Company considering alternate strategies for problem loan
resolution including loan sales. Although current indicators
show that the economic downturn may have begun to turn around,
recovery is expected to be a slow process. Also, despite
evidence of recent improvement, there has been continued
volatility in housing prices and the availability of mortgage
financing continues to be limited. After considering the
significant increase in the historical loss factor resulting
from the impact of 2010 net charge-offs, the Company has
continued to include an additional factor for adverse economic
and business conditions in the determination of the formula
component of the allowance. The aforementioned factors
|
58
|
|
|
|
|
were reduced slightly during 2010 from December 2009 levels due
to managements judgment of limited improvement in major
economic indicators, and have remained unchanged since then, due
to the continuing lag effect of the economic downturn offsetting
the improvements in the economic indicators.
|
|
|
|
|
|
Concentration The primary collateral for the
Companys loans is real estate, particularly commercial
real estate. The economic downturn has had a severe negative
effect on activity and values throughout the real estate
industry, which has heightened risk associated with this
concentration. Therefore, consideration of the changes in levels
of risk associated with concentrations resulting from adverse
conditions in the marketplace is part of the determination of
the formula component of the allowance. As result of
charge-offs, paydowns and reduced production of new loans,
concentrations in construction loans have been significantly
reduced, and concentrations in commercial real estate loans have
grown slightly. After considering the significant increase in
the historical loss factor resulting from 2010 net
charge-offs and the overall reduction in total construction
loans, in the third quarter the Company slightly reduced the
additional factor for concentrations in construction compared to
December 2009. The additional factor for concentration in
commercial real estate was maintained at the December 2009 level
as there was no significant change in the concentration.
|
|
|
|
Collateral Values Real estate loans in general have
taken on a heightened degree of risk during the recent economic
downturn. Underlying values of real estate have generally
declined throughout 2010 both nationally and within our local
market area. Construction loans, in particular, have a higher
degree of risk than other types of loans which the Company
makes, since repayment of the loans is generally dependent on
the borrowers ability to successfully construct and sell
or lease completed properties. After considering the significant
increase in the historical loss factor resulting from
2010 net charge-offs, the Company increased the additional
factor for real estate values on construction loans and
commercial real estate loans in the first two quarters of 2010.
This increase was designed at that time to reflect significant
valuation adjustments expected to result from the loan sale
being contemplated as part of the Companys more aggressive
strategy on loan resolution which began in the second quarter of
2010. Upon completion of partial charge-offs related to the
valuation adjustments related to the sale, the additional
factors were reduced in the third quarter, and maintained for
the remainder of the 2010 at a level slightly above the amounts
of December 2009. The additional factor for residential real
estate values had been higher than that for commercial real
estate in December 2009 as the impact of the financial downturn
on the Companys residential portfolio had been felt
earlier in the cycle. The additional factor however was
increased in the second quarter of 2010 as certain nonperforming
residential loans were also being considered for sale. Upon
completion of partial charge-offs related to the sale, the
additional factor was reduced in the third quarter, and
maintained for the remainder of 2010 at the December 2009 level.
|
|
|
|
Asset quality Changes in the amount of nonperforming
loans, classified loans, delinquencies, and the results of the
Companys periodic loan review process are also considered
in the process of determining the formula component. During the
year ended December 31, 2010, the lagging effects of the
economic downturn within the economy and our local market area
have had negative effects on the Companys loans.
Significant charge-offs have continued to increase the
historical loss factor used for determination of the formula
component of the allowance, and continued additions to
nonperforming assets and fluctuating delinquency, have added
additional economic uncertainty, although the Company has
experienced some recent improvement in overall delinquencies.
After considering the significant increase in the historical
loss factor resulting from 2010 net charge-offs, in the
third quarter of 2010 the Company reduced the additional factors
for charge-offs compared to December 31, 2009 as management
believes the impact of the level of charge-offs recorded in 2010
have had more than a sufficient impact on the historical loss
factor. This level was maintained for the remainder of 2010. The
additional factors for delinquency and extension risk were
generally reduced slightly below December 2009 levels by the
third quarter of 2010, reflective of general improvement in
delinquency levels after the aggressive resolution strategy
implemented in the second quarter. This level was maintained in
the fourth quarter as there was no evidence to warrant further
adjustment to the factor after considering the combination of
the increase in the historical loss factor and the changes in
the delinquency pipeline.
|
|
|
|
Nature of Portfolio Volume We purchase loan
participations from a number of banks, including some outside
our primary market area. While we review each loan and make our
own determination regarding whether to participate in the loan,
we rely on the other banks knowledge of their customer and
marketplace.
|
59
|
|
|
|
|
Due to the severely negative impact that the recent economic
downturn has had on the financial services industry, risk
associated with participation with other financial institutions
has increased. The Company also recognizes potential risk
differentials between different types of collateral within
portfolios. Owner occupied versus non owner occupied real estate
and primary versus secondary liens are examples. The potential
impact of these factors on any probable losses with respect to
nature of portfolio volume is considered in the determination of
the formula component of the allowance for loan losses. Despite
the significant increase in the historical loss factor resulting
from 2010 net charge-offs, the Company has maintained or,
in the case of the additional factor for Commercial Real Estate,
slightly reduced the additional factors for nature of portfolio
volume compared to December 31, 2009 in the determination
of the formula component of the allowance, as it does not
believe that there has been significant changes in these risk
factors during 2010.
|
2009
|
|
|
|
|
Economic and business conditions The volatility in
energy costs and the cost of raw materials used in construction,
the demand for and value of real estate, the primary collateral
for the Companys loans, and the level of real estate taxes
within the Companys market area, together with the general
state of the economy, trigger economic uncertainty. During 2009,
these factors generally continued to worsen, particularly in the
second quarter. Although there may be indications that the
economic downturn has bottomed out, we believe any economic
recovery will be a slow process. In addition, during the fourth
quarter of 2008 and continuing through 2009, housing prices have
significantly declined and the availability of mortgage
financing continues to be limited. We have considered these
trends in determining the formula component of the allowance for
loan losses.
|
|
|
|
Concentration The primary collateral for the
Companys loans is real estate, particularly commercial
real estate. The current economic downturn has had a severely
negative effect on activity and values throughout the real
estate industry, which has heightened risk associated with this
concentration. Therefore, consideration of the changes in levels
of risk associated with concentrations resulting from adverse
conditions in the marketplace is part of the determination of
the formula component of the allowance.
|
|
|
|
Credit risk Construction loans currently have a
higher degree of risk than other types of loans which the
Company makes, since repayment of the loans is generally
dependent on the borrowers ability to successfully
construct and sell or lease completed properties. Changes in
concentration and the associated changes in various risk factors
are considered in the determination of the formula component of
the allowance. During the year ended December 31, 2009, the
market for new construction has continued to slow significantly
in the Companys primary market area. Houses are taking
longer to sell and prices have declined. We have considered
these trends in determining the formula component of the
allowance for loan losses.
|
|
|
|
Asset quality Changes in the amount of nonperforming
loans, classified loans, delinquencies, and the results of the
Companys periodic loan review process are also considered
in the process of determining the formula component. During the
year ended December 31, 2009, nonperforming assets and
delinquencies increased substantially. We believe the overall
increase in nonperforming assets in 2009 is due to lagging
effects of the economic downturn within the economy and our
local market area.
|
|
|
|
Loan Participations We purchase loan participations
from a number of banks, including some outside our primary
market area. While we review each loan and make our own
determination regarding whether to participate in the loan, we
rely on the other banks knowledge of their customer and
marketplace. Since many of these relationships are new, we do
not yet have an established record of performance and,
therefore, any probable losses with respect to these new loan
participation relationships is considered in the determination
of the formula component of the allowance for loan losses
|
2008
|
|
|
|
|
Economic and business conditions The volatility in
energy costs and the cost of raw materials used in construction,
the demand for and value of real estate, the primary collateral
for the Companys loans, and the level of real estate taxes
within the Companys market area, together with the general
state of the economy, trigger economic uncertainty. During the
year ended December 31, 2008, these factors have generally
|
60
|
|
|
|
|
worsened. Further deterioration in the economy in general and
business conditions in the Companys primary market area
continue. During the fourth quarter, housing prices have
significantly declined and the availability of mortgage
financing is limited. We have considered these trends in
determining the formula component of the allowance for loan
losses.
|
|
|
|
|
|
Credit risk Construction loans currently have a
higher degree of risk than other types of loans which the
Company makes, since repayment of the loans is generally
dependent on the borrowers ability to successfully
construct and sell or lease completed properties. Changes in
concentration and the associated changes in various risk factors
are considered in the determination of the formula component of
the allowance. During the year ended December 31, 2008, the
market for new construction has slowed significantly in the
Companys primary market area. Houses are taking longer to
sell and prices have declined. We have considered these trends
in determining the formula component of the allowance for loan
losses.
|
|
|
|
Asset quality Changes in the amount of nonperforming
loans, classified loans, delinquencies, and the results of the
Companys periodic loan review process are also considered
in the process of determining the formula component. During the
year ended December 31, 2008, nonperforming assets
increased. We believe this increase is due to current trends
within the economy and our local market area.
|
|
|
|
Loan Participations We will purchase loan
participations from a number of banks, including some outside
our primary market area. While we review each loan and make our
own determination regarding whether to participate in the loan,
we rely on the other banks knowledge of their customer and
marketplace. Since many of these relationships are new, we do
not yet have an established record of performance and,
therefore, any probable losses with respect to these new loan
participation relationships is considered in the determination
of the formula component of the allowance for loan losses.
|
61
A summary of the allowance for loan losses for each of the prior
five years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net loans outstanding at end of year
|
|
$
|
1,689,187
|
|
|
$
|
1,772,645
|
|
|
$
|
1,677,611
|
|
|
$
|
1,289,641
|
|
|
$
|
1,205,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average net loans outstanding during the year
|
|
$
|
1,714,325
|
|
|
$
|
1,739,421
|
|
|
$
|
1,483,196
|
|
|
$
|
1,233,360
|
|
|
$
|
1,131,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
38,645
|
|
|
$
|
22,537
|
|
|
$
|
17,367
|
|
|
$
|
16,784
|
|
|
$
|
13,525
|
|
Amount acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,529
|
|
Provision charged to expense
|
|
|
46,527
|
|
|
|
24,306
|
|
|
|
11,025
|
|
|
|
1,470
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,172
|
|
|
|
46,843
|
|
|
|
28,392
|
|
|
|
18,254
|
|
|
|
17,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs and recoveries during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(13,452
|
)
|
|
|
(2,790
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
Construction
|
|
|
(16,582
|
)
|
|
|
(1,090
|
)
|
|
|
(775
|
)
|
|
|
(237
|
)
|
|
|
|
|
Residential
|
|
|
(14,911
|
)
|
|
|
(1,173
|
)
|
|
|
(1,270
|
)
|
|
|
(16
|
)
|
|
|
(153
|
)
|
Commercial and industrial
|
|
|
(3,150
|
)
|
|
|
(4,404
|
)
|
|
|
(3,422
|
)
|
|
|
(649
|
)
|
|
|
(216
|
)
|
Lease financing and other
|
|
|
(544
|
)
|
|
|
(42
|
)
|
|
|
(632
|
)
|
|
|
(139
|
)
|
|
|
(76
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
151
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
856
|
|
|
|
14
|
|
|
|
180
|
|
|
|
20
|
|
|
|
|
|
Commercial and industrial
|
|
|
535
|
|
|
|
1,259
|
|
|
|
65
|
|
|
|
97
|
|
|
|
22
|
|
Lease financing and other
|
|
|
41
|
|
|
|
27
|
|
|
|
77
|
|
|
|
37
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs during the year
|
|
|
(46,223
|
)
|
|
|
(8,198
|
)
|
|
|
(5,855
|
)
|
|
|
(887
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
38,949
|
|
|
$
|
38,645
|
|
|
$
|
22,537
|
|
|
$
|
17,367
|
|
|
$
|
16,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average net loans outstanding during
the year
|
|
|
2.70
|
%
|
|
|
0.47
|
%
|
|
|
0.39
|
%
|
|
|
0.07
|
%
|
|
|
0.04
|
%
|
Ratio of allowance for loan losses to gross loans outstanding at
end of the year
|
|
|
2.25
|
%
|
|
|
2.13
|
%
|
|
|
1.33
|
%
|
|
|
1.33
|
%
|
|
|
1.39
|
%
|
In determining the allowance for loan losses, in addition to
historical loss experience and the other relevant factors
disclosed above, management considers changes in net charge-offs
during the year.
62
The distribution of our allowance for loan losses at the years
ended December 31, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
|
|
|
of Loans
|
|
|
|
Amount
|
|
|
|
|
|
in each
|
|
|
Amount
|
|
|
|
|
|
in each
|
|
|
|
of Loan
|
|
|
Loan
|
|
|
Category
|
|
|
of Loan
|
|
|
Loan
|
|
|
Category
|
|
|
|
Loss
|
|
|
Amount
|
|
|
by Total
|
|
|
Loss
|
|
|
Amount
|
|
|
by Total
|
|
|
|
Allowance
|
|
|
By Category
|
|
|
Loans
|
|
|
Allowance
|
|
|
By Category
|
|
|
Loans
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
16,736
|
|
|
$
|
796,253
|
|
|
|
45.97
|
%
|
|
$
|
15,273
|
|
|
$
|
783,597
|
|
|
|
43.14
|
%
|
Construction
|
|
|
7,140
|
|
|
|
174,369
|
|
|
|
10.07
|
%
|
|
|
5,802
|
|
|
|
255,660
|
|
|
|
14.07
|
%
|
Residential
|
|
|
9,851
|
|
|
|
467,326
|
|
|
|
26.98
|
%
|
|
|
9,706
|
|
|
|
454,532
|
|
|
|
25.02
|
%
|
Commercial & Industrial
|
|
|
4,290
|
|
|
|
245,263
|
|
|
|
14.16
|
%
|
|
|
7,326
|
|
|
|
274,860
|
|
|
|
15.13
|
%
|
Lease Financing & Other
|
|
|
932
|
|
|
|
49,040
|
|
|
|
2.82
|
%
|
|
|
538
|
|
|
|
47,780
|
|
|
|
2.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,949
|
|
|
$
|
1,732,251
|
|
|
|
100.00
|
%
|
|
$
|
38,645
|
|
|
$
|
1,816,429
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
of Loans
|
|
|
|
|
|
|
|
|
of Loans
|
|
|
|
Amount
|
|
|
|
|
|
in each
|
|
|
Amount
|
|
|
|
|
|
in each
|
|
|
|
of Loan
|
|
|
Loan
|
|
|
Category
|
|
|
of Loan
|
|
|
Loan
|
|
|
Category
|
|
|
|
Loss
|
|
|
Amount
|
|
|
by Total
|
|
|
Loss
|
|
|
Amount
|
|
|
by Total
|
|
|
|
Allowance
|
|
|
By Category
|
|
|
Loans
|
|
|
Allowance
|
|
|
By Category
|
|
|
Loans
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,220
|
|
|
$
|
642,923
|
|
|
|
37.70
|
%
|
|
$
|
4,227
|
|
|
$
|
355,044
|
|
|
|
27.09
|
%
|
Construction
|
|
|
3,670
|
|
|
|
254,837
|
|
|
|
14.94
|
%
|
|
|
3,661
|
|
|
|
211,837
|
|
|
|
16.16
|
%
|
Residential
|
|
|
4,194
|
|
|
|
409,431
|
|
|
|
24.01
|
%
|
|
|
3,918
|
|
|
|
324,488
|
|
|
|
24.76
|
%
|
Commercial & Industrial
|
|
|
6,272
|
|
|
|
358,076
|
|
|
|
21.00
|
%
|
|
|
5,252
|
|
|
|
377,042
|
|
|
|
28.77
|
%
|
Lease Financing & Other
|
|
|
181
|
|
|
|
39,997
|
|
|
|
2.35
|
%
|
|
|
309
|
|
|
|
42,149
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,537
|
|
|
$
|
1,705,264
|
|
|
|
100.00
|
%
|
|
$
|
17,367
|
|
|
$
|
1,310,560
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
of Loans
|
|
|
|
Amount
|
|
|
|
|
|
in each
|
|
|
|
of Loan
|
|
|
Loan
|
|
|
Category
|
|
|
|
Loss
|
|
|
Amount
|
|
|
by Total
|
|
|
|
Allowance
|
|
|
By Category
|
|
|
Loans
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,677
|
|
|
$
|
290,185
|
|
|
|
23.68
|
%
|
Construction
|
|
|
3,972
|
|
|
|
252,941
|
|
|
|
20.64
|
%
|
Residential
|
|
|
3,452
|
|
|
|
289,553
|
|
|
|
23.63
|
%
|
Commercial & Industrial
|
|
|
5,329
|
|
|
|
355,214
|
|
|
|
28.99
|
%
|
Lease Financing & Other
|
|
|
354
|
|
|
|
37,543
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,784
|
|
|
$
|
1,225,436
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual losses can vary significantly from the estimated amounts.
The Companys methodology permits adjustments to the
allowance in the event that, in managements judgment,
significant factors which affect the collectibility of the loan
portfolio as of the evaluation date have changed. By assessing
the estimated losses probable in the loan portfolio on a
quarterly basis, the Bank is able to adjust specific and
probable loss estimates based upon any more recent information
that has become available. Other pertinent information related
to the Companys
63
allowance for loan losses is contained in Note 4 to the
Companys consolidated financial statements presented in
this
Form 10-K.
Management believes the allowance for loan losses is the best
estimate of probable losses which have been incurred as of
December 31, 2010. There is no assurance that the Company
will not be required to make future adjustments to the allowance
in response to changing economic conditions or regulatory
examinations.
The Company recorded a provision for loan losses of
$46.5 million during 2010, $24.3 million for 2009 and
$11.0 million in 2008. The provision for loan losses is
charged to income to bring the Companys allowance for loan
losses to a level deemed appropriate by management based on the
factors previously discussed under Allowance for Loan
Losses.
Deposits
The Companys fundamental source of funds supporting
interest earning assets is deposits, consisting of non interest
bearing demand deposits, checking with interest, money market,
savings and various forms of time deposits. The maintenance of a
strong deposit base is key to the development of lending
opportunities and creates long term customer relationships,
which enhance the ability to cross sell services. Depositors
include businesses, professionals, municipalities,
not-for-profit organizations and individuals. To meet the
requirements of a diverse customer base, a full range of deposit
instruments are offered, which has allowed the Company to
maintain and expand its deposit base despite intense competition
from other banking institutions and non-bank financial service
providers.
Total deposits at December 31, 2010 increased
$61.8 million or 2.8 percent to $2,234.4 million,
from $2,172.6 million at December 31, 2009, which
increased $333.3 million or 18.1 percent from
$1,839.3 million at December 31, 2008. In 2009,
approximately $101 million of this growth resulted from the
transfer of certain money market mutual fund investments of
existing customers to interest bearing demand deposits. This
transfer was primarily due to the recent increase in FDIC
insurance coverage of certain deposit products which was part of
the legislation enacted in response to the current economic
crisis. In addition to the above mentioned deposit growth, the
Company also experienced significant growth in new customers
both in existing branches and new branches added during 2009 and
2010. This growth was partially offset by some declines in
balances of existing customers, primarily those customers
directly involved in or supported by the real estate industry.
Proceeds from deposit growth were used primarily to reduce long
term and short term borrowings and to fund loan growth. The
Company had no brokered certificates of deposit at
December 31, 2010 and December 31, 2009.
The following table presents a summary of deposits at
December 31:
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010
|
|
|
2009
|
|
|
Demand deposits
|
|
$
|
756,917
|
|
|
$
|
686,856
|
|
Money market accounts
|
|
|
862,450
|
|
|
|
859,693
|
|
Savings accounts
|
|
|
120,238
|
|
|
|
111,393
|
|
Time deposits of $100,000 or more
|
|
|
144,497
|
|
|
|
144,817
|
|
Time deposits of less than $100,000
|
|
|
43,851
|
|
|
|
61,231
|
|
Checking with interest
|
|
|
306,459
|
|
|
|
308,625
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,234,412
|
|
|
$
|
2,172,615
|
|
|
|
|
|
|
|
|
|
|
64
At December 31, 2010 and 2009, certificates of deposit
including other time deposits of $100,000 or more totaled
$188.3 million and $206.0 million, respectively. At
December 31, 2010 and 2009 such deposits classified by time
remaining to maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Time
|
|
|
Time
|
|
|
|
|
|
Time
|
|
|
Time
|
|
|
|
|
|
|
Deposits
|
|
|
Deposits
|
|
|
Total
|
|
|
Deposits
|
|
|
Deposits
|
|
|
Total
|
|
|
|
of $100,000
|
|
|
of $100,000
|
|
|
Time
|
|
|
of $100,000
|
|
|
of $100,000
|
|
|
Time
|
|
|
|
or More
|
|
|
or Less
|
|
|
Deposits
|
|
|
or More
|
|
|
or Less
|
|
|
Deposits
|
|
|
|
(000s)
|
|
|
3 months of less
|
|
$
|
83,069
|
|
|
$
|
14,544
|
|
|
$
|
97,613
|
|
|
$
|
94,450
|
|
|
$
|
20,140
|
|
|
$
|
114,590
|
|
Over three months through 6 months
|
|
|
22,136
|
|
|
|
9,177
|
|
|
|
31,313
|
|
|
|
26,420
|
|
|
|
13,362
|
|
|
|
39,782
|
|
Over 6 months through 12 months
|
|
|
31,778
|
|
|
|
7,571
|
|
|
|
39,349
|
|
|
|
23,705
|
|
|
|
9,691
|
|
|
|
33,396
|
|
Over 12 months
|
|
|
7,514
|
|
|
|
12,559
|
|
|
|
20,073
|
|
|
|
242
|
|
|
|
18,038
|
|
|
|
18,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,497
|
|
|
$
|
43,851
|
|
|
$
|
188,348
|
|
|
$
|
144,817
|
|
|
$
|
61,231
|
|
|
$
|
206,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits of over $100,000, including municipal CDs,
decreased $0.3 million at December 31, 2010 and
decreased $11.7 million at December 31, 2009,
respectively, compared to the prior year end balances. These
CDs are primarily short term and are acquired on a bid
basis. Time deposits of over $100,000 generally have maturities
of 7 to 180 days.
The Company also utilizes wholesale borrowings, brokered
deposits and other sources of funds interchangeably with time
deposits in excess of $100,000 depending upon availability and
rates paid for such funds at any point in time. Due to the
generally short maturity of these funding sources, the Company
can experience higher volatility of interest margins during
periods of both rising and declining interest rates. At
December 31, 2010 and 2009, the Company had no brokered
deposits.
The following table summarizes the average amounts and rates of
various classifications of deposits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Demand deposits Non interest bearing
|
|
$
|
745,290
|
|
|
|
|
|
|
$
|
675,953
|
|
|
|
|
|
|
$
|
625,630
|
|
|
|
|
|
Money market accounts
|
|
|
926,755
|
|
|
|
0.87
|
%
|
|
|
787,347
|
|
|
|
1.16
|
%
|
|
|
642,784
|
|
|
|
1.63
|
%
|
Savings accounts
|
|
|
115,624
|
|
|
|
0.49
|
|
|
|
101,846
|
|
|
|
0.49
|
|
|
|
95,296
|
|
|
|
0.74
|
|
Time deposits
|
|
|
202,244
|
|
|
|
1.21
|
|
|
|
263,065
|
|
|
|
1.48
|
|
|
|
263,506
|
|
|
|
2.56
|
|
Checking with interest
|
|
|
332,315
|
|
|
|
0.33
|
|
|
|
250,314
|
|
|
|
0.42
|
|
|
|
149,793
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,322,228
|
|
|
|
0.53
|
%
|
|
$
|
2,078,525
|
|
|
|
0.70
|
%
|
|
$
|
1,777,009
|
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average deposits outstanding increased $243.7 million or
11.7 percent to $2,322.2 million in 2010 from
$2,078.5 million in 2009, which increased
$301.5 million or 17.0 percent from
$1,777.0 million in 2008.
Average non interest bearing deposits increased
$69.3 million or 10.3 percent to $745.3 million
in 2010 from $676.0 in 2009 which increased $50.4 million
or 8.1 percent from $625.6 million in 2008. These
increases reflect the Companys continuing emphasis on
developing this funding source. Average interest bearing
deposits in 2010 increased $174.4 million or
12.4 percent reflecting increases in money market accounts,
checking with interest accounts and savings accounts partially
offset by decreases in time deposits. Average interest bearing
deposits in 2009 increased $251.1 million or
21.8 percent reflecting increases in checking with interest
accounts, money market accounts, and time deposits partially
offset by decreases in savings accounts.
65
Average money market deposits increased $139.4 million or
17.7 percent in 2010 and $144.5 million or
22.5 percent in 2009, due in part to new customer accounts,
increased activity in existing accounts, and the addition of new
branches.
Average checking with interest deposits increased
$82.0 million or 32.8 percent in 2010 and increased
$100.5 million or 67.1 percent in 2009. These
increases were due to new account activity and increased
activity in existing accounts. The increased activity in
existing accounts, particularly in 2009, resulted partially from
the increase in FDIC insurance coverage of certain deposit
products which was part of legislation enacted in response to
the ongoing economic crisis.
Average time deposits decreased $60.8 million or
23.1 percent in 2010 and $0.4 million or
0.2 percent in 2009. The decreases in both 2010 and 2009
were due to decreased activity in existing accounts due to the
current low interest rate environment.
Average savings deposit balances increased $13.8 million or
13.6 percent in 2010 and increased $6.5 million or
6.8 percent in 2009. The increases in both 2010 and 2009
were a result of new customer accounts, increased activity in
existing accounts and the addition of new branches.
Borrowings
The Companys borrowings with original maturities of one
year or less totaled $36.6 million and $53.1 million
at December 31, 2010 and 2009, respectively. Such
short-term borrowings consisted of $36.1 million of
customer repurchase agreements and note options on Treasury, tax
and loan of $0.5 million at December 31, 2010 and
$52.6 million of customer repurchase agreements, and note
options on Treasury, tax and loan of $0.5 million at
December 31, 2009. The decrease was due to reductions in
overnight borrowings as a result of deposit growth and runoff of
the securities portfolio in excess of loan growth. Other
borrowings totaled $87.8 million and $123.8 million at
December 31, 2010 and 2009, respectively, which consisted
of fixed rate borrowings of $66.5 million and
$102.5 million from the FHLB with initial stated maturities
of five or ten years and one to four year call options and non
callable FHLB borrowings of $21.3 million and
$21.3 million at December 31, 2010 and 2009,
respectively. The callable borrowings from FHLB mature beginning
in 2010 through 2016. The FHLB has the right to call all of such
borrowings at various dates in 2010 and quarterly thereafter. A
non callable borrowing of $1.3 million matures in 2027 and
a non callable borrowing of $20.0 million matures in 2011.
Our FHLB term borrowings are subject to prepayment penalties
under certain circumstances in the event of prepayment.
Interest expense on all borrowings totaled $5.5 million,
$7.7 million and $11.0 million in 2010, 2009 and 2008,
respectively. As of December 31, 2010 and 2009, these
borrowings were collateralized by loans and securities with an
estimated fair value of $267.0 million and
$206.0 million, respectively.
The following table summarizes the average balances, weighted
average interest rates and the maximum month-end outstanding
amounts of the Companys borrowings for each of the years
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s except percentages)
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Average balance:
|
|
|
Short-term
|
|
|
$
|
56,899
|
|
|
$
|
101,818
|
|
|
$
|
161,749
|
|
|
|
|
Other borrowings
|
|
|
|
109,349
|
|
|
|
153,799
|
|
|
|
201,687
|
|
Weighted average interest rate (for the year):
|
|
|
Short-term
|
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
1.4
|
%
|
|
|
|
Other borrowings
|
|
|
|
4.8
|
|
|
|
4.7
|
|
|
|
4.4
|
|
Weighted average interest rate (at year end):
|
|
|
Short-term
|
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
1.0
|
%
|
|
|
|
Other borrowings
|
|
|
|
4.5
|
|
|
|
4.9
|
|
|
|
4.3
|
|
Maximum month-end outstanding amount:
|
|
|
Short-term
|
|
|
$
|
71,822
|
|
|
$
|
256,084
|
|
|
$
|
269,585
|
|
|
|
|
Other borrowings
|
|
|
|
123,784
|
|
|
|
196,815
|
|
|
|
210,844
|
|
HVB is a member of the FHLB. As a member, HVB is able to
participate in various FHLB borrowing programs which require
certain investments in FHLB common stock as a prerequisite to
obtaining funds. As of December 31,
66
2010, HVB had short-term borrowing lines with the FHLB of
$200 million with no amounts outstanding. These and various
other FHLB borrowing programs available to members are subject
to availability of qualifying loan
and/or
investment securities collateral and other terms and conditions.
HVB also has unsecured overnight borrowing lines totaling
$70 million with three major financial institutions which
were all unused and available at December 31, 2010. In
addition, HVB has approved lines under Retail Certificate of
Deposit Agreements with three major financial institutions
totaling $944 million of which no balances were outstanding
as at December 31, 2010. Utilization of these lines are
subject to product availability and other restrictions.
Additional liquidity is also provided by the Companys
ability to borrow from the Federal Reserve Banks discount
window. In response to the current economic crisis, the Federal
Reserve Bank has increased the ability of banks to borrow from
this source through its
Borrower-in-Custody
(BIC) program, which expanded the types of
collateral which qualify as security for such borrowings. HVB
has been approved to participate in the BIC program. There were
no balances outstanding with the Federal Reserve at
December 31, 2010.
As of December 31, 2010, the Company had qualifying loan
and investment securities totaling approximately
$311.8 million which could be utilized under available
borrowing programs thereby increasing liquidity.
Capital
Resources
Stockholders equity decreased $3.8 million or
1.3 percent to $289.9 million at December 31,
2010 from $293.7 million at December 31, 2009, which
increased $86.2 million or 41.5 percent from
$207.5 million at December 31, 2008. The 2010 decrease
resulted from cash dividends of $11.4 which was partially offset
by net income of $5.1 million, net proceeds from exercises
of stock options of $0.8 million and an increase of
accumulated other comprehensive income of $1.7 million. The
2009 increase resulted from proceeds from a public offering of
common stock of $93.3 million, net income of
$19.0 million, an increase in accumulated other
comprehensive income of $4.4 million and net proceeds from
stock options exercised of $0.8 million partially offset by
cash dividends paid of $15.7 million and purchases of
treasury stock of $15.6 million.
The Company sold 3,993,395 shares of common stock at an
issue price of $25.00 per share in an underwritten common stock
offering during the fourth quarter of 2009. Net proceeds from
the offering were $93.3 million. In conjunction with this
common stock offering, the Company listed its common stock on
the NASDAQ Global Select Market under the symbol
HUVL. Concurrent with listing its common stock on
the NASDAQ, the Company lifted all restrictions on
transferability of its common stock that previously applied to
certain shareholders and a majority of the shares outstanding. A
total of $59.0 million of the net proceeds from this
offering was contributed to HVB increasing the Banks
capital ratios, as required of the Bank by the OCC, to levels in
excess of well capitalized levels generally
applicable to banks under current regulations. See further
discussion in Supervision and Regulation under
Item 1 of this Annual Report on
Form 10-K.
The remaining net proceeds of this offering are available for
general corporate purposes.
The Company paid its first cash dividend in 1996, and the Board
of Directors authorized a quarterly cash dividend policy in the
first quarter of 1998. HVBs payment of dividends to the
Company, the Companys primary source of funds, is subject
to limitation by federal and state regulators based on such
factors as the maintenance of adequate capital, which could
reduce the amount of dividends otherwise payable. See
Business Supervision and Regulation.
The various components and changes in stockholders equity
are reflected in the Consolidated Statements of Changes in
Stockholders Equity for the years ended December 31,
2010, 2009 and 2008 included elsewhere herein.
Management believes that future retained earnings will provide
the necessary capital for current operations and the planned
growth in total assets.
The Board of Governors of the Federal Reserve System issued a
supervisory letter dated February 24, 2009 to bank holding
companies that contains guidance on when the board of directors
of a bank holding company should eliminate, defer or severely
limit dividends including, for example, when net income
available for shareholders for the past four quarters, net of
dividends previously paid during that period, is not sufficient
to fully fund the
67
dividends. The letter also contains guidance on the redemption
of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption
or repurchase of common stock for cash or other value which
results in the net reduction of a bank holding companys
capital during the quarter.
All banks and bank holding companies are subject to risk-based
capital guidelines. These guidelines define capital as
Tier 1 and Total capital. Tier 1 capital consists of
common stockholders equity and qualifying preferred stock,
less intangibles; and Total capital consists of Tier 1
capital plus the allowance for loan losses up to certain limits,
preferred stock and certain subordinated and term-debt
securities. The guidelines require a minimum total risk-based
capital ratio of 8.0 percent, and a minimum Tier 1
risk-based capital ratio of 4.0 percent. Banks and bank
holding companies must also maintain a minimum leverage ratio of
4 percent, which consists of Tier 1 capital based on
risk-based capital guidelines, divided by average tangible
assets (excluding intangible assets that were deducted to arrive
at Tier 1 capital). In todays economic and regulatory
environment, banking regulators, including the OCC, which is the
primary federal regulator of the Bank, are directing greater
scrutiny to banks with higher levels of commercial real estate
loans. Due to the high percentage of commercial real estate
loans in our portfolio, we are among the banks subject to such
greater regulatory scrutiny. As a result of this concentration,
the increase in the level of our non-performing loans, and the
potential for further possible deterioration in our loan
portfolio, the OCC required HVB to maintain, since
December 31, 2009, a total risk-based capital ratio of at
least 12.0 percent (compared to 10.0 percent for a
well capitalized bank), a Tier 1 risk-based capital ratio
of at least 10.0 percent (compared to 6.0 percent for
a well capitalized bank), and a Tier 1 leverage ratio of at
least 8.0 percent (compared to 5.0 percent for a well
capitalized bank). These capital levels are in excess of
well capitalized levels generally applicable to
banks under current regulations.
The capital ratios at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
13.9
|
%
|
|
|
13.9
|
%
|
|
|
10.1
|
%
|
HVB
|
|
|
12.8
|
|
|
|
11.4
|
|
|
|
9.9
|
|
NYNB
|
|
|
N/A
|
|
|
|
13.4
|
|
|
|
10.1
|
|
Total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
15.2
|
%
|
|
|
15.2
|
%
|
|
|
11.3
|
%
|
HVB
|
|
|
14.0
|
|
|
|
12.7
|
|
|
|
11.1
|
|
NYNB
|
|
|
N/A
|
|
|
|
14.7
|
|
|
|
11.4
|
|
Leverage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
9.6
|
%
|
|
|
10.2
|
%
|
|
|
7.5
|
%
|
HVB
|
|
|
8.8
|
|
|
|
8.4
|
|
|
|
7.4
|
|
NYNB
|
|
|
N/A
|
|
|
|
8.3
|
|
|
|
6.7
|
|
Management intends to conduct the affairs of the Bank so as to
maintain a strong capital position in the future.
Liquidity
The Asset/Liability Strategic Committee (ALSC) of
the Board of Directors of HVB establishes specific policies and
operating procedures governing the Companys liquidity
levels and develops plans to address future liquidity needs,
including contingent sources of liquidity. The primary functions
of asset liability management are to provide safety of depositor
and investor funds, assure adequate liquidity and maintain an
appropriate balance between interest earning assets and interest
bearing liabilities. Liquidity management involves the ability
to meet the cash flow requirement of depositors wanting to
withdraw funds or borrowers needing assurance that sufficient
funds will be available to meet their credit needs. Interest
rate sensitivity management seeks to manage fluctuating net
interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates.
The Companys liquid assets, at December 31, 2010,
include cash and due from banks of $284.2 million and
Federal funds sold of $72.1 million. Federal funds sold
represents the Companys excess liquid funds that are
invested with other financial institutions in need of funds and
which mature daily.
68
Other sources of liquidity include maturities and principal and
interest payments on loans and securities. The loan and
securities portfolios provide a constant stream of maturing
assets and reinvestable cash flows, which can be converted into
cash should the need arise. The ability to redeploy these funds
is an important source of medium to long term liquidity. The
amortized cost of securities having contractual maturities,
expected call dates or average lives of one year or less
amounted to $110.1 million at December 31, 2010. This
represented 24.1 percent of the amortized cost of the
securities portfolio. Excluding installment loans to
individuals, real estate loans other than construction loans and
lease financing, $257.4 million, or 14.9 percent of
loans at December 31, 2010, mature in one year or less. The
Company may increase liquidity by selling certain residential
mortgages, or exchanging them for mortgage-backed securities
that may be sold in the secondary market.
Non interest bearing demand deposits and interest bearing
deposits from businesses, professionals, not-for-profit
organizations and individuals are a relatively stable, low-cost
source of funds. The deposits of the Bank generally have shown a
steady growth trend as well as a generally consistent deposit
mix. However, there can be no assurance that deposit growth will
continue or that the deposit mix will not shift to higher rate
products.
The Bank is a member of the FHLB. As such, we are able to
participate in various FHLB borrowing programs which require
certain investments in FHLB common stock as a prerequisite to
obtaining funds. As of December 31, 2010, HVB had
short-term borrowing lines with the FHLB of $200 million
with no balances outstanding. These and various other FHLB
borrowing programs available to members are subject to
availability of qualifying loan
and/or
investment securities collateral and other terms and conditions.
The Bank also has unsecured overnight borrowing lines totaling
$70.0 million with three major financial institutions which
were all unused and available at December 31, 2010. In
addition, HVB has approved lines under Retail Certificate of
Deposit Agreements with three major financial institutions
totaling approximately $944 million which were also unused
and available at December 31, 2010. The retail certificates
of deposit lines are subject to product availability and other
restrictions.
Additional liquidity is also provided by the Banks ability
to borrow from the Federal Reserve Banks discount window.
In response to the current economic crisis, the Federal Reserve
Bank has increased the ability of banks to borrow from this
source through its
Borrower-in-Custody
(BIC) program, which expanded the types of
collateral which qualify as security for such borrowings. The
Bank has been approved to participate in the BIC program. There
were no amounts outstanding with the Federal Reserve at
December 31, 2010.
The various borrowing programs discussed above are subject to
certain restrictions and terms and conditions which may include
continued availability of such borrowing programs, the
Companys ability to pledge qualifying collateral in
sufficient amounts, the Companys maintenance of capital
ratios acceptable to these lenders and other conditions which
may be imposed on the Company.
As of December 31, 2010, the Company had qualifying loan
and investment securities totaling approximately
$311.8 million which could be utilized under available
borrowing programs thereby increasing liquidity.
The Company also has outstanding, at any time, a significant
number of commitments to extend credit and provide financial
guarantees to third parties. These arrangements are subject to
strict credit control assessments. Guarantees specify limits to
the Companys obligations. Because many commitments and
almost all guarantees expire without being funded in whole or in
part, the contract amounts are not estimates of future cash
flows. The Company is also obligated under leases or license
agreements for certain of its branches and equipment.
69
A summary of significant long-term contractual obligations and
credit commitments at December 31, 2010 follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
|
|
|
|
After
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
but
|
|
|
but
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
1
|
|
|
3
|
|
|
5
|
|
|
5
|
|
|
|
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Contractual Obligations:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
$
|
168,275
|
|
|
$
|
13,182
|
|
|
$
|
6,774
|
|
|
$
|
117
|
|
|
$
|
188,348
|
|
FHLB Borrowings
|
|
|
71,286
|
|
|
|
77
|
|
|
|
88
|
|
|
|
16,300
|
|
|
|
87,751
|
|
Operating lease and license obligations
|
|
|
4,159
|
|
|
|
6,160
|
|
|
|
5,568
|
|
|
|
8,521
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
243,720
|
|
|
$
|
19,419
|
|
|
$
|
12,430
|
|
|
$
|
24,938
|
|
|
$
|
300,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available lines of credit
|
|
$
|
101,457
|
|
|
$
|
35,222
|
|
|
$
|
1,936
|
|
|
$
|
56,439
|
|
|
$
|
195,054
|
|
Letters of credit
|
|
|
19,022
|
|
|
|
7,680
|
|
|
|
|
|
|
|
|
|
|
|
26,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120,479
|
|
|
$
|
42,902
|
|
|
$
|
1,936
|
|
|
$
|
56,439
|
|
|
$
|
221,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest not included.
FHLB borrowings are presented in the above table by contractual
maturity date. The FHLB has rights, under certain conditions, to
call $30.0 million of those borrowings as of various dates
during 2011 and quarterly thereafter.
The Company pledges certain of its assets as collateral for
deposits of municipalities and other deposits allowed or
required by law, FHLB and FRB borrowings and repurchase
agreements. By utilizing collateralized funding sources, the
Company is able to access a variety of cost effective sources of
funds. The assets pledged consist of certain loans secured by
real estate, U.S. Treasury and government agency securities,
mortgage-backed securities, certain obligations of state and
political subdivisions and other securities. Management monitors
its liquidity requirements by assessing assets pledged, the
level of assets available for sale, additional borrowing
capacity and other factors. Management does not anticipate any
negative impact to its liquidity from its pledging activities.
Another source of funding for the Company is capital market
funds, which includes common stock, preferred stock, convertible
debentures, retained earnings and long-term debt qualifying as
regulatory capital.
Each of the Companys sources of liquidity is vulnerable to
various uncertainties beyond the control of the Company.
Scheduled loan and security payments are a relatively stable
source of funds, while loan and security prepayments and calls,
and deposit flows vary widely in reaction to market conditions,
primarily prevailing interest rates. Asset sales are influenced
by general market interest rates and other unforeseen market
conditions. The Companys ability to borrow at attractive
rates is affected by its financial condition and other market
conditions.
Management expects that the Company has and will have sources of
liquidity to meet any expected funding needs and also to be
responsive to changing interest rate markets.
Quarterly
Results of Operations
Set forth below are certain quarterly results of operations for
2010 and 2009 (in thousands except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarters
|
|
2009 Quarters
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Interest income
|
|
$
|
31,196
|
|
|
$
|
31,537
|
|
|
$
|
32,510
|
|
|
$
|
33,096
|
|
|
$
|
34,194
|
|
|
$
|
33,839
|
|
|
$
|
33,910
|
|
|
$
|
34,636
|
|
Net interest income
|
|
|
27,537
|
|
|
|
27,253
|
|
|
|
27,680
|
|
|
|
28,186
|
|
|
|
29,065
|
|
|
|
28,646
|
|
|
|
28,179
|
|
|
|
28,385
|
|
Provision for loan losses
|
|
|
5,825
|
|
|
|
6,572
|
|
|
|
28,548
|
|
|
|
5,582
|
|
|
|
7,082
|
|
|
|
2,732
|
|
|
|
11,527
|
|
|
|
2,965
|
|
Income (loss) before income taxes
|
|
|
6,985
|
|
|
|
6,102
|
|
|
|
(16,322
|
)
|
|
|
6,943
|
|
|
|
7,527
|
|
|
|
10,324
|
|
|
|
(1,150
|
)
|
|
|
9,621
|
|
Net income
|
|
|
7,142
|
|
|
|
4,071
|
|
|
|
(10,955
|
)
|
|
|
4,855
|
|
|
|
5,212
|
|
|
|
6,898
|
|
|
|
310
|
|
|
|
6,592
|
|
Basic earnings per common share
|
|
$
|
0.41
|
|
|
$
|
0.23
|
|
|
$
|
(0.63
|
)
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
$
|
0.52
|
|
Diluted earnings per common share
|
|
$
|
0.41
|
|
|
$
|
0.23
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
$
|
0.50
|
|
70
Forward-Looking
Statements
The Company has made, and may continue to make, various
forward-looking statements with respect to earnings, credit
quality and other financial and business matters for periods
subsequent to December 31, 2010. The Company cautions that
these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements
relating to subsequent periods increasingly are subject to
greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements, in
addition to those risk factors disclosed in this Annual Report
on
Form 10-K
include, but are not limited to, statements regarding:
|
|
|
|
|
further increases in our non-performing loans and allowance for
loan losses;
|
|
|
|
our ability to manage our commercial real estate portfolio;
|
|
|
|
the future performance of our investment portfolio;
|
|
|
|
our opportunities for growth, our plans for expansion (including
opening new branches) and the competition we face in attracting
and retaining customers;
|
|
|
|
economic conditions generally and in our market area in
particular, which may affect the ability of borrowers to repay
their loans and the value of real property or other property
held as collateral for such loans;
|
|
|
|
demand for our products and services;
|
|
|
|
possible impairment of our goodwill and other intangible assets;
|
|
|
|
our ability to manage interest rate risk;
|
|
|
|
the regulatory environment in which we operate, our regulatory
compliance and future regulatory requirements;
|
|
|
|
our intention and ability to maintain regulatory capital above
the levels required by the OCC for the Bank and the levels
required for us to be well-capitalized, or such
higher capital levels as may be required;
|
|
|
|
proposed legislative and regulatory action affecting us and the
financial services industry;
|
|
|
|
legislative and regulatory actions (including the impact of the
Dodd-Frank Wall Street Reform and Consumer Protection Act and
related regulations) subject us to additional regulatory
oversight which may result in increased compliance costs
and/or
require us to change our business model;
|
|
|
|
future FDIC special assessments or changes to regular
assessments;
|
|
|
|
our ability to raise additional capital in the future;
|
|
|
|
potential liabilities under federal and state environmental
laws; and
|
|
|
|
limitations on dividends payable by the Company or the Bank.
|
We assume no obligation for updating any such forward-looking
statements at any given time.
71
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk is the potential for economic losses to be incurred
on market risk sensitive instruments arising from adverse
changes in market indices such as interest rates, foreign
currency exchange rates and commodity prices. Since all Company
transactions are denominated in U.S. dollars with no direct
foreign exchange or changes in commodity price exposures, the
Companys primary market risk exposure is interest rate
risk.
Interest rate risk is the exposure of net interest income to
changes in interest rates. Interest rate sensitivity is the
relationship between market interest rates and net interest
income due to the repricing characteristics of assets and
liabilities. If more liabilities than assets reprice in a given
period (a liability-sensitive position or negative
gap), market interest rate changes will be reflected more
quickly in liability rates. If interest rates decline, such
positions will generally benefit net interest income.
Alternatively, where assets reprice more quickly than
liabilities in a given period (an asset-sensitive position or
positive gap), a decline in market rates could have
an adverse effect on net interest income. Excessive levels of
interest rate risk can result in a material adverse effect on
the Companys future financial condition and results of
operations. Accordingly, effective risk management techniques
that maintain interest rate risk at prudent levels is essential
to the Companys safety and soundness.
The Company has no financial instruments entered into for
trading purposes. Federal funds, both purchases and sales, on
which rates change daily, and loans and deposits tied to certain
indices, such as the prime rate and federal discount rate, are
the most market sensitive and have the most stable fair values.
The least sensitive instruments include long-term fixed rate
loans and securities and fixed rate savings deposits, which have
the least stable fair value. On those types falling between
these extremes, the management of maturity distributions is as
important as the balances maintained. Management of maturity
distributions involve the matching of interest rate maturities,
as well as principal maturities, and is a key determinant of net
interest income. In periods of rapidly changing interest rates,
an imbalance (gap) between the rate sensitive assets
and liabilities can cause major fluctuations in net interest
income and in earnings. Establishing patterns of sensitivity
which will enhance future growth regardless of frequent shifts
in the market conditions is one of the objectives of the
Companys asset/liability management strategy.
Evaluating the Companys exposure to changes in interest
rates is the responsibility of ALSC and includes assessing both
the adequacy of the management process used to control interest
rate risk and the quantitative level of exposure. When assessing
the interest rate risk management process, the Company seeks to
ensure that appropriate policies, procedures, management
information systems and internal controls are in place to
maintain interest rate risk at appropriate levels. Evaluating
the quantitative level of interest rate risk exposure requires
the Company to assess the existing and potential future effects
of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity and
asset quality.
The Company uses the simulation analysis to estimate the effect
that specific movements in interest rates would have on net
interest income. This analysis incorporates management
assumptions about the levels of future balance sheet trends,
different patterns of interest rate movements, and changing
relationships between interest rates (i.e. basis risk). These
assumptions have been developed through a combination of
historical analysis and future expected pricing behavior. For a
given level of market interest rate changes, the simulation can
consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed
securities, call activities on investment securities, balance
changes on non contractual maturity deposit products (demand
deposits, checking with interest, money market and savings
accounts), and embedded option risk by taking into account the
effects of interest rate caps and floors. The impact of planned
growth and anticipated new business activities is not integrated
into the simulation analysis. The Company can assess the results
of the simulation and, if necessary, implement suitable
strategies to adjust the structure of its assets and liabilities
to reduce potential unacceptable risks to net interest income.
The simulation analysis at December 31, 2010 shows the
Companys net interest income increasing slightly if rates
rise and decreasing slightly if rates fall.
The Companys policy limit on interest rate risk is that if
interest rates were to gradually increase or decrease
200 basis points from current rates, the percentage change
in estimated net interest income for the subsequent
12 month measurement period should not decline by more than
5.0 percent. Net interest income is forecasted using
various interest rate scenarios that management believes are
reasonably likely to impact the Companys financial
condition. A base case scenario, in which current interest rates
remain stable, is used for comparison to other
72
scenario simulations. The table below illustrates the estimated
exposures under a rising rate scenario and a declining rate
scenario calculated as a percentage change in estimated net
interest income from the base case scenario, assuming a gradual
shift in interest rates for the next 12 month measurement
period, beginning December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
Percentage Change
|
|
|
in Estimated
|
|
in Estimated
|
|
|
Net Interest
|
|
Net Interest
|
|
|
Income from
|
|
Income from
|
Gradual Change in Interest Rates
|
|
December 31, 2010
|
|
December 31, 2009
|
|
+200 basis points
|
|
|
1.3
|
%
|
|
|
2.1
|
%
|
100 basis points
|
|
|
(1.6
|
)%
|
|
|
(1.1
|
)%
|
Beginning on March 31, 2008, a 100 basis point
downward change was substituted for the 200 basis point
downward scenario previously used, as management believes that a
200 basis point downward change is not a meaningful
analysis in light of current interest rate levels. The
percentage change in estimated net income in the +200
and −100 basis points scenario is within the
Companys policy limits.
As with any method of measuring interest rate risk, there are
certain limitations inherent in the method of analysis
presented. Actual results may differ significantly from
simulated results should market conditions and management
strategies, among other factors, vary from the assumptions used
in the analysis. The model assumes that certain assets and
liabilities of similar maturity or period to repricing will
react the same to changes in interest rates, but, in reality,
they may react in different degrees to changes in market
interest rates. Specific types of financial instruments may
fluctuate in advance of changes in market interest rates, while
other types of financial instruments may lag behind changes in
market interest rates. Additionally, other assets, such as
adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the
asset. Furthermore, in the event of a change in interest rates,
expected rates of prepayments on loans and securities and early
withdrawals from time deposits could deviate significantly from
those assumed in the simulation.
One way to minimize interest rate risk is to maintain a balanced
or matched interest rate sensitivity position. However, profits
are not always maximized by matched funding. To increase net
interest earnings, the Company selectively mismatches asset and
liability repricing to take advantage of short-term interest
rate movements and the shape of the U.S. Treasury yield curve.
The magnitude of the mismatch depends on a careful assessment of
the risks presented by forecasted interest rate movements. The
risk inherent in such a mismatch, or gap, is that interest rates
may not move as anticipated.
Interest rate risk exposure is reviewed in quarterly meetings in
which guidelines are established for the following quarter and
the longer term exposure. The structural interest rate mismatch
is reviewed periodically by ALSC and management.
The Company also prepares a static gap analysis. Balance sheet
items are appropriately categorized by contractual maturity,
expected average lives for mortgage-backed securities, or
repricing dates, with prime rate indexed loans and certificates
of deposit. Checking with interest accounts, savings accounts,
money market accounts and other borrowings constitute the bulk
of the floating rate category. The determination of the interest
rate sensitivity of non contractual items is arrived at in a
subjective fashion. Savings accounts are viewed as a relatively
stable source of funds and are therefore classified as
intermediate funds.
At December 31, 2010, the Static Gap showed a
positive cumulative gap of $271.8 million in the one day to
one year repricing period, as compared to a positive cumulative
gap of $191.6 million at December 31, 2009. The change
in the cumulative static gap between December 31, 2010 and
December 31, 2009 reflects the results of the
Companys efforts to reposition its portfolios as a result
of changes in interest rates and changes to the shape of the
yield curve. Management believes that this strategy has enabled
the Company to be well positioned for the next cycle of interest
rate changes and to address conditions which may arise as a
result of the current financial crisis.
73
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors and Stockholders of
Hudson Valley Holding Corp.
Yonkers, New York
We have audited the accompanying consolidated balance sheets of
Hudson Valley Holding Corp. and Subsidiaries as of
December 31, 2010 and 2009 and the related consolidated
statements of income, comprehensive income, changes in
stockholders equity and cash flows for each of the years
in the three-year period ended December 31, 2010. We also
have audited Hudson Valley Holding Corp. and Subsidiaries
internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Hudson Valley Holding Corp. and Subsidiaries
management is responsible for these financial statements, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report
on Internal Control Over Financial Reporting located in
Item 9A of this accompanying Form 10-K. Our
responsibility is to express an opinion on these financial
statements and an opinion on the companys internal control
over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hudson Valley Holding Corp. and Subsidiaries as of
December 31, 2010 and 2009 and the results of its
operations and its cash flows for each of the years in the
three-year period ended December 31, 2010 in conformity
with accounting principles generally accepted in the
United States of America. Also in our opinion, Hudson
Valley Holding Corp. and Subsidiaries maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
/s/ Crowe Horwath LLP
New York, New York
March 16, 2011
75
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
For the years ended December 31,
2010, 2009 and 2008
Dollars in thousands, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
107,658
|
|
|
$
|
110,662
|
|
|
$
|
105,632
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
13,905
|
|
|
|
18,077
|
|
|
|
24,873
|
|
Exempt from Federal income taxes
|
|
|
5,871
|
|
|
|
7,659
|
|
|
|
8,628
|
|
Federal funds sold
|
|
|
168
|
|
|
|
100
|
|
|
|
827
|
|
Deposits in banks
|
|
|
737
|
|
|
|
81
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
128,339
|
|
|
|
136,579
|
|
|
|
140,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,207
|
|
|
|
14,595
|
|
|
|
19,035
|
|
Securities sold under repurchase agreements and other short-term
borrowings
|
|
|
271
|
|
|
|
536
|
|
|
|
2,187
|
|
Other borrowings
|
|
|
5,205
|
|
|
|
7,173
|
|
|
|
8,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
17,683
|
|
|
|
22,304
|
|
|
|
30,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
110,656
|
|
|
|
114,275
|
|
|
|
110,029
|
|
Provision for loan losses
|
|
|
46,527
|
|
|
|
24,306
|
|
|
|
11,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
64,129
|
|
|
|
89,969
|
|
|
|
99,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
6,627
|
|
|
|
5,914
|
|
|
|
5,951
|
|
Investment advisory fees
|
|
|
9,070
|
|
|
|
7,716
|
|
|
|
11,181
|
|
Recognized impairment charge on securities available for sale
(includes $2,169 and $13,829 of total losses in 2010 and 2009,
respectively, less $383 of gains and $8,333 of losses recognized
in other comprehensive income in 2010 and 2009, respectively.)
|
|
|
(2,552
|
)
|
|
|
(5,496
|
)
|
|
|
(1,547
|
)
|
Realized gains on securities available for sale, net
|
|
|
168
|
|
|
|
52
|
|
|
|
148
|
|
Loss on sales of other real estate owned, net
|
|
|
(1,974
|
)
|
|
|
(251
|
)
|
|
|
|
|
Other income
|
|
|
2,386
|
|
|
|
2,559
|
|
|
|
2,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest income
|
|
|
13,725
|
|
|
|
10,494
|
|
|
|
18,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
38,507
|
|
|
|
38,688
|
|
|
|
41,857
|
|
Occupancy
|
|
|
8,413
|
|
|
|
8,272
|
|
|
|
7,490
|
|
Professional services
|
|
|
5,175
|
|
|
|
4,447
|
|
|
|
4,295
|
|
Equipment
|
|
|
3,986
|
|
|
|
4,354
|
|
|
|
4,219
|
|
Business development
|
|
|
2,035
|
|
|
|
2,032
|
|
|
|
2,053
|
|
FDIC assessment
|
|
|
4,712
|
|
|
|
5,491
|
|
|
|
893
|
|
Other operating expenses
|
|
|
11,318
|
|
|
|
10,857
|
|
|
|
10,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest expense
|
|
|
74,146
|
|
|
|
74,141
|
|
|
|
71,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
3,708
|
|
|
|
26,322
|
|
|
|
46,523
|
|
Income Taxes (Benefit)
|
|
|
(1,405
|
)
|
|
|
7,310
|
|
|
|
15,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,113
|
|
|
$
|
19,012
|
|
|
$
|
30,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share
|
|
$
|
0.29
|
|
|
$
|
1.39
|
|
|
$
|
2.35
|
|
Diluted Earnings per Common Share
|
|
|
0.29
|
|
|
|
1.37
|
|
|
|
2.27
|
|
See notes to consolidated financial statements.
76
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
For the years ended December 31,
2010, 2009 and 2008
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Income
|
|
$
|
5,113
|
|
|
$
|
19,012
|
|
|
$
|
30,877
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporarily
impaired securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses
|
|
|
(2,169
|
)
|
|
|
(13,829
|
)
|
|
|
(1,547
|
)
|
Losses recognized in earnings
|
|
|
2,552
|
|
|
|
5,496
|
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in comprehensive income
|
|
|
383
|
|
|
|
(8,333
|
)
|
|
|
|
|
Income tax effect
|
|
|
(157
|
)
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (gains) losses on
other-than-temporarily
impaired securities available for sale, net of tax
|
|
|
226
|
|
|
|
(4,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale not
other-than-temporarily
impaired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the year
|
|
|
2,365
|
|
|
|
13,596
|
|
|
|
(1,909
|
)
|
Income tax effect
|
|
|
(897
|
)
|
|
|
(5,546
|
)
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,468
|
|
|
|
8,050
|
|
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains recognized in earnings
|
|
|
(168
|
)
|
|
|
(52
|
)
|
|
|
(148
|
)
|
Income tax effect
|
|
|
67
|
|
|
|
21
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
(31
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on securities available for
sale not
other-than-temporarily-impaired,
net of tax
|
|
|
1,367
|
|
|
|
8,019
|
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on securities, net
|
|
|
1,593
|
|
|
|
3,103
|
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
243
|
|
|
|
2,049
|
|
|
|
309
|
|
Income tax effect
|
|
|
(97
|
)
|
|
|
(820
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
1,229
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
1,739
|
|
|
|
4,332
|
|
|
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
6,852
|
|
|
$
|
23,344
|
|
|
$
|
30,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
77
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
December 31, 2010 and 2009
Dollars in thousands, except per share and share amounts
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash and non interest earning due from banks
|
|
$
|
25,876
|
|
|
$
|
39,321
|
|
Interest earning deposits in banks
|
|
|
258,280
|
|
|
|
127,659
|
|
Federal funds sold
|
|
|
72,071
|
|
|
|
51,891
|
|
Securities available for sale, at estimated fair value
(amortized cost of $440,792 in 2010 and $500,340 in 2009)
|
|
|
443,667
|
|
|
|
500,635
|
|
Securities held to maturity, at amortized cost (estimated fair
value of $17,272 in 2010 and $22,728 in 2009)
|
|
|
16,267
|
|
|
|
21,650
|
|
Federal Home Loan Bank of New York (FHLB) stock
|
|
|
7,010
|
|
|
|
8,470
|
|
Loans (net of allowance for loan losses of $38,949 in 2010 and
$38,645 in 2009)
|
|
|
1,689,187
|
|
|
|
1,772,645
|
|
Nonperforming loans held for sale
|
|
|
7,811
|
|
|
|
|
|
Accrued interest and other receivables
|
|
|
16,396
|
|
|
|
15,200
|
|
Premises and equipment, net
|
|
|
28,611
|
|
|
|
30,383
|
|
Other real estate owned
|
|
|
11,028
|
|
|
|
9,211
|
|
Deferred income tax, net
|
|
|
25,043
|
|
|
|
20,957
|
|
Bank owned life insurance
|
|
|
25,976
|
|
|
|
24,458
|
|
Goodwill
|
|
|
23,842
|
|
|
|
23,842
|
|
Other intangible assets
|
|
|
2,454
|
|
|
|
3,276
|
|
Other assets
|
|
|
15,514
|
|
|
|
15,958
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,669,033
|
|
|
$
|
2,665,556
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Deposits:
|
|
|
|
|
|
|
|
|
Non interest bearing
|
|
$
|
756,917
|
|
|
$
|
686,856
|
|
Interest bearing
|
|
|
1,477,495
|
|
|
|
1,485,759
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
2,234,412
|
|
|
|
2,172,615
|
|
Securities sold under repurchase agreements and other short-term
borrowings
|
|
|
36,594
|
|
|
|
53,121
|
|
Other borrowings
|
|
|
87,751
|
|
|
|
123,782
|
|
Accrued interest and other liabilities
|
|
|
20,359
|
|
|
|
22,360
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,379,116
|
|
|
|
2,371,878
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value; authorized
15,000,000 shares; no shares outstanding in 2010 and 2009,
respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.20 par value; authorized
25,000,000 shares: outstanding 17,665,908 and
16,016,738 shares in 2010 and 2009, respectively
|
|
|
3,793
|
|
|
|
3,463
|
|
Additional paid-in capital
|
|
|
346,750
|
|
|
|
346,297
|
|
Retained earnings (deficit)
|
|
|
(3,989
|
)
|
|
|
2,294
|
|
Accumulated other comprehensive income (loss)
|
|
|
927
|
|
|
|
(812
|
)
|
Treasury stock, at cost; 1,299,414 shares in 2010 and 2009
|
|
|
(57,564
|
)
|
|
|
(57,564
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
289,917
|
|
|
|
293,678
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
2,669,033
|
|
|
$
|
2,665,556
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
78
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
For the years ended December 31,
2010, 2009 and 2008
Dollars in thousands, except share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
of
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Income
|
|
|
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
|
9,841,890
|
|
|
$
|
2,091
|
|
|
$
|
(23,580
|
)
|
|
$
|
227,173
|
|
|
$
|
2,369
|
|
|
$
|
(4,366
|
)
|
|
$
|
203,687
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,877
|
|
|
|
|
|
|
|
30,877
|
|
Grants and exercises of stock options, net of tax
|
|
|
395,447
|
|
|
|
78
|
|
|
|
|
|
|
|
12,032
|
|
|
|
|
|
|
|
|
|
|
|
12,110
|
|
Purchase of treasury stock
|
|
|
(366,365
|
)
|
|
|
|
|
|
|
(18,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,883
|
)
|
Sale of treasury stock
|
|
|
12,738
|
|
|
|
|
|
|
|
528
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
670
|
|
Stock dividend
|
|
|
987,899
|
|
|
|
198
|
|
|
|
|
|
|
|
10,782
|
|
|
|
(10,980
|
)
|
|
|
|
|
|
|
|
|
Cash dividends ($1.53 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,182
|
)
|
|
|
|
|
|
|
(20,182
|
)
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
186
|
|
Net unrealized loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(964
|
)
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
10,871,609
|
|
|
|
2,367
|
|
|
|
(41,935
|
)
|
|
|
250,129
|
|
|
|
2,084
|
|
|
|
(5,144
|
)
|
|
|
207,501
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,012
|
|
|
|
|
|
|
|
19,012
|
|
Sale of common stock ($25.00 per share, gross)
|
|
|
3,993,395
|
|
|
|
799
|
|
|
|
|
|
|
|
92,522
|
|
|
|
|
|
|
|
|
|
|
|
93,321
|
|
Grants and exercises of stock options, net of tax
|
|
|
30,843
|
|
|
|
6
|
|
|
|
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
821
|
|
Purchase of treasury stock
|
|
|
(334,703
|
)
|
|
|
|
|
|
|
(15,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,631
|
)
|
Sale of treasury stock
|
|
|
52
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Stock dividend
|
|
|
1,455,542
|
|
|
|
291
|
|
|
|
|
|
|
|
2,831
|
|
|
|
(3,122
|
)
|
|
|
|
|
|
|
|
|
Cash dividends ($1.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,680
|
)
|
|
|
|
|
|
|
(15,680
|
)
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,229
|
|
|
|
1,229
|
|
Net unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,103
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
16,016,738
|
|
|
|
3,463
|
|
|
|
(57,564
|
)
|
|
|
346,297
|
|
|
|
2,294
|
|
|
|
(812
|
)
|
|
|
293,678
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,113
|
|
|
|
|
|
|
|
5,113
|
|
Grants and exercises of stock options, net of tax
|
|
|
46,584
|
|
|
|
9
|
|
|
|
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
783
|
|
Stock dividend
|
|
|
1,602,586
|
|
|
|
321
|
|
|
|
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.65 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,396
|
)
|
|
|
|
|
|
|
(11,396
|
)
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
146
|
|
Net unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,593
|
|
|
|
1,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
17,665,908
|
|
|
$
|
3,793
|
|
|
$
|
(57,564
|
)
|
|
$
|
346,750
|
|
|
$
|
(3,989
|
)
|
|
$
|
927
|
|
|
$
|
289,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
79
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
For the years ended December 31,
2010, 2009 and 2008
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,113
|
|
|
$
|
19,012
|
|
|
$
|
30,877
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
46,527
|
|
|
|
24,306
|
|
|
|
11,025
|
|
Depreciation and amortization
|
|
|
3,993
|
|
|
|
3,864
|
|
|
|
3,554
|
|
Recognized impairment charge on securities available for sale
|
|
|
2,552
|
|
|
|
5,496
|
|
|
|
1,547
|
|
Realized gain on security transactions, net
|
|
|
(168
|
)
|
|
|
(52
|
)
|
|
|
(148
|
)
|
Loss on other real estate owned
|
|
|
1,974
|
|
|
|
251
|
|
|
|
|
|
Amortization of premiums on securities, net
|
|
|
2,120
|
|
|
|
624
|
|
|
|
32
|
|
Increase in cash value of bank owned life insurance
|
|
|
(1,191
|
)
|
|
|
(1,261
|
)
|
|
|
(943
|
)
|
Amortization of other intangible assets
|
|
|
822
|
|
|
|
821
|
|
|
|
821
|
|
Stock option expense and related tax benefits
|
|
|
160
|
|
|
|
276
|
|
|
|
2,671
|
|
Deferred taxes (benefit)
|
|
|
(5,237
|
)
|
|
|
(9,855
|
)
|
|
|
(2,777
|
)
|
(Increase) decrease in deferred loan fees
|
|
|
(1,025
|
)
|
|
|
24
|
|
|
|
1,563
|
|
(Increase) decrease in accrued interest and other receivables
|
|
|
(1,196
|
)
|
|
|
1,157
|
|
|
|
(1,105
|
)
|
Decrease (increase) in other assets
|
|
|
444
|
|
|
|
(11,367
|
)
|
|
|
(217
|
)
|
Excess tax benefits from share based payment arrangements
|
|
|
(13
|
)
|
|
|
(22
|
)
|
|
|
(2,075
|
)
|
(Decrease) increase in accrued interest and other liabilities
|
|
|
(2,001
|
)
|
|
|
(5,305
|
)
|
|
|
87
|
|
Decrease in minimum pension liability adjustment
|
|
|
147
|
|
|
|
2,055
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
53,021
|
|
|
|
30,024
|
|
|
|
45,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in short term investments
|
|
|
(20,180
|
)
|
|
|
(45,212
|
)
|
|
|
92,375
|
|
Decrease (increase) in FHLB stock
|
|
|
1,460
|
|
|
|
12,023
|
|
|
|
(8,816
|
)
|
Proceeds from maturities of securities available for sale
|
|
|
250,294
|
|
|
|
457,550
|
|
|
|
274,216
|
|
Proceeds from maturities of securities held to maturity
|
|
|
5,391
|
|
|
|
7,337
|
|
|
|
4,800
|
|
Proceeds from sales of securities available for sale
|
|
|
21,915
|
|
|
|
8,750
|
|
|
|
65,506
|
|
Purchases of securities available for sale
|
|
|
(217,009
|
)
|
|
|
(325,430
|
)
|
|
|
(239,115
|
)
|
Net decrease (increase) in loans
|
|
|
5,754
|
|
|
|
(126,752
|
)
|
|
|
(406,025
|
)
|
Proceeds from sales of loans held for sale
|
|
|
14,053
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of other real estate owned
|
|
|
6,546
|
|
|
|
3,393
|
|
|
|
|
|
Net purchases of premises and equipment
|
|
|
(2,221
|
)
|
|
|
(3,260
|
)
|
|
|
(7,185
|
)
|
Premiums paid on bank owned life insurance
|
|
|
(327
|
)
|
|
|
(344
|
)
|
|
|
(413
|
)
|
Increase in goodwill
|
|
|
|
|
|
|
(2,900
|
)
|
|
|
(5,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
65,676
|
|
|
|
(14,845
|
)
|
|
|
(230,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
61,797
|
|
|
|
333,289
|
|
|
|
26,784
|
|
Repayment of other borrowings
|
|
|
(36,031
|
)
|
|
|
(73,031
|
)
|
|
|
(14,031
|
)
|
Net (decrease) increase in securities sold under repurchase
agreements and short term borrowings
|
|
|
(16,527
|
)
|
|
|
(216,464
|
)
|
|
|
193,488
|
|
Proceeds from issuance of common stock
|
|
|
623
|
|
|
|
93,866
|
|
|
|
9,439
|
|
Proceeds from sale of treasury stock
|
|
|
|
|
|
|
2
|
|
|
|
670
|
|
Cash dividends paid
|
|
|
(11,396
|
)
|
|
|
(15,680
|
)
|
|
|
(20,182
|
)
|
Acquisition of treasury stock
|
|
|
|
|
|
|
(15,631
|
)
|
|
|
(18,883
|
)
|
Excess tax benefits from share based payment arrangements
|
|
|
13
|
|
|
|
22
|
|
|
|
2,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,521
|
)
|
|
|
106,373
|
|
|
|
179,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Due from Banks
|
|
|
117,176
|
|
|
|
121,552
|
|
|
|
(5,639
|
)
|
Cash and due from banks, beginning of year
|
|
|
166,980
|
|
|
|
45,428
|
|
|
|
51,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks, end of year
|
|
$
|
284,156
|
|
|
$
|
166,980
|
|
|
$
|
45,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
18,300
|
|
|
$
|
24,364
|
|
|
$
|
31,396
|
|
Income tax payments
|
|
|
6,898
|
|
|
|
15,851
|
|
|
|
17,751
|
|
Transfer to loans held for sale
|
|
|
21,864
|
|
|
|
|
|
|
|
|
|
Transfer to other real estate owned
|
|
|
10,337
|
|
|
|
8,400
|
|
|
|
5,467
|
|
See notes to consolidated financial statements.
80
HUDSON
VALLEY HOLDING CORP. AND SUBSIDIARIES
Dollars in thousands, except per share and share
amounts
1 Summary
of Significant Accounting Policies
Description of Operations and Basis of
Presentation The consolidated financial
statements include the accounts of Hudson Valley Holding Corp.
and its wholly owned subsidiaries, Hudson Valley Bank N.A. (the
Bank or HVB) and HVHC Risk Management
Corp (HVHC RMC), (collectively the
Company). The Company offers a broad range of
banking and related services to businesses, professionals,
municipalities, not-for-profit organizations and individuals.
HVB is a national banking association headquartered in
Westchester County, New York. As of the date of merger, HVB has
36 branch offices, 18 in Westchester County, New York, 1 in
Rockland County, New York, 11 in New York City, 5 in Fairfield
County, Connecticut and 1 in New Haven County, Connecticut. The
Company also provides investment management services to its
customers through its wholly-owned subsidiary, A.R.
Schmeidler & Co., Inc. (ARS), a Manhattan,
New York based money management firm. All inter-company accounts
are eliminated. The consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and income and expenses
for the period. Actual results could differ significantly from
those estimates. Estimates that are particularly susceptible to
significant change in the near term relates to the determination
of the allowance for loan losses, fair value of other real
estate owned and fair value of financial instruments. In
connection with the determination of the allowance for loan
losses, management utilizes the work of professional appraisers
for significant properties.
Securities Securities are classified as
either available for sale, representing securities the Company
may sell in the ordinary course of business, or as held to
maturity, representing securities that the Company has
determined that it is more likely than not that it would not be
required to sell prior to maturity or recovery of cost.
Securities available for sale are reported at fair value with
unrealized gains and losses (net of tax) excluded from
operations and reported in other comprehensive income.
Securities held to maturity are stated at amortized cost.
Interest income includes amortization of purchase premium and
accretion of purchase discount. The amortization of premiums and
accretion of discounts is determined by using the level yield
method. Securities are not acquired for purposes of engaging in
trading activities. Realized gains and losses from sales of
securities are determined using the specific identification
method. The Company regularly reviews declines in the fair value
of securities below their costs for purposes of determining
whether such declines are
other-than-temporary
in nature. In estimating
other-than-temporary
impairment (OTTI), management considers adverse
changes in expected cash flows, the length of time and extent
that fair value has been less than cost and the financial
condition and near term prospects of the issuer. The Company
also assesses whether it intends to sell, or it is more likely
than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost
basis. If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized as
impairment through earnings. For securities that do not meet the
aforementioned criteria, the amount of impairment is split into
two components as follows: 1) OTTI related to credit loss,
which must be recognized in the income statement and
2) OTTI related to other factors, which is recognized in
other comprehensive income. The credit loss is defined as the
difference between the present value of the cash flows expected
to be collected and the amortized cost basis.
Loans Loans are reported at their outstanding
principal balance, net of the allowance for loan losses, and
deferred loan origination fees and costs. Loan origination fees
and certain direct loan origination costs are deferred and
recognized over the life of the related loan or commitment as an
adjustment to yield, or taken directly into income when the
related loan is sold or commitment expires.
Allowance for Loan Losses The Company
maintains an allowance for loan losses to absorb probable losses
incurred in the loan portfolio based on ongoing quarterly
assessments of the estimated losses. The Companys
methodology for assessing the appropriateness of the allowance
consists of a specific component for identified problem loans,
and a formula component which addresses historical loan loss
experience together with other relevant risk factors affecting
the portfolio.
81
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The specific component incorporates the results of measuring
impaired loans as required by the Receivables topic
of the FASB Accounting Standards Codification. These accounting
standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is recognized
as impaired when it is probable that principal
and/or
interest are not collectible in accordance with the loans
contractual terms. In addition, a loan which has been
renegotiated with a borrower experiencing financial difficulties
for which the terms of the loan have been modified with a
concession that the Company would not otherwise have granted are
considered troubled debt restructurings and are also recognized
as impaired. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period
of delay, the Company expects to collect all amounts due
including interest accrued at the contractual rate during the
period of delay. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the
loans effective interest rate, the loans observable
market price or the fair value of the collateral, if the loan is
collateral dependent. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to
significant change. If the fair value of an impaired loan is
less than the related recorded amount, a specific valuation
component is established within the allowance for loan losses
or, if the impairment is considered to be permanent, a partial
charge-off is recorded against the allowance for loan losses.
Individual measurement of impairment does not apply to large
groups of smaller balance homogenous loans that are collectively
evaluated for impairment such as portions of the Companys
portfolios of home equity loans, real estate mortgages,
installment and other loans.
The formula component is calculated by first applying historical
loss experience factors to outstanding loans by type. The
Company uses a three year average loss experience as the
starting base for the formula component. This component is then
adjusted to reflect additional risk factors not addressed by
historical loss experience. These factors include the evaluation
of then-existing economic and business conditions affecting the
key lending areas of the Company and other conditions, such as
new loan products, credit quality trends (including trends in
nonperforming loans expected to result from existing
conditions), collateral values, loan volumes and concentrations,
recent charge-off and delinquency experience, specific industry
conditions within portfolio segments that existed as of the
balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan
portfolio. Senior management reviews these conditions quarterly.
Managements evaluation of the loss related to each of
these conditions is quantified by loan type and reflected in the
formula component. The evaluations of the inherent loss with
respect to these conditions is subject to a higher degree of
uncertainty due to the subjective nature of such evaluations and
because they are not identified with specific problem credits.
Actual losses can vary significantly from the estimated amounts.
The Companys methodology permits adjustments to the
allowance in the event that, in managements judgment,
significant factors which affect the collectibility of the loan
portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best
estimate of probable losses which have been incurred as of
December 31, 2010. There is no assurance that the Company
will not be required to make future adjustments to the allowance
in response to changing economic conditions, particularly in the
Companys service area, since the majority of the
Companys loans are collateralized by real estate. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the
Companys allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance
based on their judgments at the time of their examinations.
Income Recognition on Loans Interest on loans
is accrued monthly. Net loan origination and commitment fees are
deferred and recognized as an adjustment of yield over the lives
of the related loans. Loans, including impaired loans, are
placed on a non-accrual status when management believes that
interest or principal on such loans may not be collected in the
normal course of business. When a loan is placed on non-accrual
status, all interest previously accrued, but not collected, is
reversed against interest income. Interest received on
non-accrual loans generally is either applied against principal
or reported as interest income, in accordance with
managements judgment as to the collectibility of
principal. Loans can be returned to accruing status when they
become current as to principal and interest, demonstrate a
period of performance under the contractual terms, and when, in
managements opinion, they are estimated to be fully
collectible.
82
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Premises and Equipment Premises and equipment
are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets,
generally 3 to 5 years for furniture, fixtures and
equipment and 31.5 years for buildings. Leasehold
improvements are amortized over the lesser of the term of the
lease or the estimated useful life of the asset.
Other Real Estate Owned (OREO)
Real estate properties acquired through loan foreclosure are
recorded at estimated fair value, net of estimated selling
costs, at time of foreclosure establishing a new cost basis.
Credit losses arising at the time of foreclosure are charged
against the allowance for loan losses. Subsequent valuations are
periodically performed by management and the carrying value is
adjusted by a charge to expense to reflect any subsequent
declines in the estimated fair value. Routine holding costs are
charged to expense as incurred.
Goodwill and Other Intangible Assets Goodwill
and identified intangible assets with indefinite useful lives
are not subject to amortization. Identified intangible assets
that have finite useful lives are amortized over those lives by
a method which reflects the pattern in which the economic
benefits of the intangible asset are used up. All goodwill and
identified intangible assets are subject to impairment testing
on an annual basis, or more often if events or circumstances
indicate that impairment may exist. If such testing indicates
impairment in the values
and/or
remaining amortization periods of the intangible assets,
adjustments are made to reflect such impairment. The
Companys impairment evaluations as of December 31,
2010 and December 31, 2009 did not indicate impairment of
its goodwill or identified intangible assets.
Income Taxes Income tax expense is the total
of the current year income tax due or refundable and the change
in deferred tax assets and liabilities. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period the change is enacted.
Stock-Based Compensation On May 27,
2010, at the Companys Annual Meeting of Shareholders, the
Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan was
approved. The purpose of the 2010 Plan is to provide additional
incentive to directors, officers, key employees, consultants and
advisors of the Company and its subsidiaries. Included in the
provisions of the 2010 Plan, the Company may grant eligible
employees, including directors, consultants and advisors,
incentive stock options, non-qualified stock options, restricted
stock awards, restricted stock units, stock appreciation rights,
performance awards and other types of awards. The 2010 Plan
provides for the issuance of up to 1,100,000 shares of the
Companys common stock. Prior to the adoption of the 2010
Plan, the Company had stock option plans that provided for the
granting of options to directors, officers, eligible employees,
and certain advisors, based upon eligibility as determined by
the Compensation Committee. Under the prior plans options were
granted for the purchase of shares of the Companys common
stock at an exercise price not less than the market value of the
stock on the date of grant, vested over various periods ranging
from immediate to five years from date of grant, and had
expiration dates of up to ten years from the date of grant.
Compensation costs relating to share-based payment transactions
are recognized in the financial statements with measurement
based upon the fair value of the equity or liability instruments
issued. Compensation costs related to share based payment
transactions are expensed over their respective vesting periods.
The fair value (present value of the estimated future benefit to
the option holder) of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. See Note
11 Stock-Based Compensation herein for additional
discussion.
Earnings per Common Share Earnings per
Share, topic of the FASB Accounting Standards Codification
establishes standards for computing and presenting earnings per
share. The statement requires disclosure of basic earnings per
common share (i.e. common stock equivalents are not considered)
and diluted earnings per common share (i.e. common stock
equivalents are considered using the treasury stock method) on
the face of the statement of income, along with a reconciliation
of the numerator and denominator of basic and diluted earnings
per share. Basic earnings per common share are computed by
dividing net income by the weighted average number of common
83
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
shares outstanding during the period. The computation of diluted
earnings per common share is similar to the computation of basic
earnings per share except that the denominator is increased to
include the number of additional common shares that would have
been outstanding if the dilutive potential common shares,
consisting solely of stock options, had been issued.
Weighted average common shares outstanding used to calculate
basic and diluted earnings per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,630,814
|
|
|
|
13,644,736
|
|
|
|
13,166,931
|
|
Effect of stock options
|
|
|
56,432
|
|
|
|
271,332
|
|
|
|
445,674
|
|
Diluted
|
|
|
17,687,246
|
|
|
|
13,916,068
|
|
|
|
13,612,605
|
|
In November 2010, December 2009 and December 2008, the
Board of Directors of the Company declared 10 percent stock
dividends. Share amounts have been retroactively restated to
reflect the issuance of the additional shares.
Disclosures About Segments of an Enterprise and Related
Information Segment Reporting topic
of the FASB Accounting Standards Codification establishes
standards for the way business enterprises report information
about operating segments and establishes standards for related
disclosure about products and services, geographic areas, and
major customers. The statement requires that a business
enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and assess performance. The Company has one operating
segment, Community Banking.
Bank Owned Life Insurance The Company has
purchased life insurance policies on certain key executives.
Bank owned life insurance is recorded at the amount that can be
realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
Retirement Plans Pension expense is the net
of service and interest cost, return on plan assets and
amortization of gains and losses not immediately recognized.
Employee 401(k) and profit sharing plan expense is the amount of
matching contributions. Supplemental retirement plan expense
allocates the benefits over years of service.
Recent
Accounting Pronouncements
In June 2009, the FASB amended previous guidance relating to
transfers of financial assets and eliminates the concept of a
qualifying special purpose entity. This guidance must be applied
as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and
for interim and annual reporting periods thereafter. This
guidance must be applied to transfers occurring on or after the
effective date. Additionally, on and after the effective date,
the concept of a qualifying special-purpose entity is no longer
relevant for accounting purposes. Therefore, formerly qualifying
special-purpose entities should be evaluated for consolidation
by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. The
disclosure provisions were also amended and apply to transfers
that occurred both before and after the effective date of this
guidance. The adoption of this guidance on January 1, 2010
did not have a material effect on the Companys financial
condition and results of operations.
In June 2009, the FASB amended guidance for consolidation of
variable interest entity guidance 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 with an approach focused on
identifying which enterprise has the power to direct the
activities of a variable interest entity that most significantly
impact the entitys 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 enterprises involvement in variable interest
entities are also required. This guidance is
84
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
effective as of the beginning of each reporting entitys
first annual reporting period that begins after
November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting
periods thereafter. The adoption of this guidance on
January 1, 2010 did not have a material effect on the
Companys financial condition and results of operations.
In July 2010, the FASB issued Accounting Standards Update
2010-20
Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. This
guidance will significantly expand the disclosures that the
Company must make about the credit quality of financing
receivables and the allowance for credit losses. The objectives
of the enhanced disclosures are to provide financial statement
users with additional information about the nature of credit
risks inherent in the Companys financing receivables, how
credit risk is analyzed and assessed when determining the
allowance for credit losses, and the reasons for the change in
the allowance for credit losses. The disclosures as of the end
of the reporting period are effective for the Companys
interim and annual periods ending on or after December 15,
2010. The disclosures about activity that occurs during a
reporting period are effective for the Companys interim
and annual periods beginning on or after December 15, 2010.
The adoption of this Update requires enhanced disclosures and
did not have a material effect on the Companys financial
condition or results of operations.
Other Certain 2009 amounts have been
reclassified to conform to the 2010 presentation.
2 Securities
The following table sets forth the amortized cost, gross
unrealized gains and losses and the estimated fair value of
securities classified as available for sale and held to maturity
at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Classified as Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
3,001
|
|
|
$
|
11
|
|
|
|
|
|
|
$
|
3,012
|
|
|
$
|
4,995
|
|
|
$
|
33
|
|
|
$
|
20
|
|
|
$
|
5,008
|
|
Mortgage-backed securities residential
|
|
|
303,479
|
|
|
|
6,648
|
|
|
$
|
587
|
|
|
|
309,540
|
|
|
|
312,996
|
|
|
|
5,600
|
|
|
|
2,208
|
|
|
|
316,388
|
|
Obligations of states and political subdivisions
|
|
|
111,912
|
|
|
|
4,170
|
|
|
|
1
|
|
|
|
116,081
|
|
|
|
158,465
|
|
|
|
5,897
|
|
|
|
91
|
|
|
|
164,271
|
|
Other debt securities
|
|
|
12,329
|
|
|
|
|
|
|
|
7,956
|
|
|
|
4,373
|
|
|
|
14,712
|
|
|
|
14
|
|
|
|
9,904
|
|
|
|
4,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
430,721
|
|
|
|
10,829
|
|
|
|
8,544
|
|
|
|
433,006
|
|
|
|
491,168
|
|
|
|
11,544
|
|
|
|
12,223
|
|
|
|
490,489
|
|
Mutual funds and other equity securities
|
|
|
10,071
|
|
|
|
706
|
|
|
|
116
|
|
|
|
10,661
|
|
|
|
9,172
|
|
|
|
1,109
|
|
|
|
135
|
|
|
|
10,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
440,792
|
|
|
$
|
11,535
|
|
|
$
|
8,660
|
|
|
$
|
443,667
|
|
|
$
|
500,340
|
|
|
$
|
12,653
|
|
|
$
|
12,358
|
|
|
$
|
500,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Classified as Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
11,131
|
|
|
$
|
700
|
|
|
$
|
1
|
|
|
$
|
11,830
|
|
|
$
|
16,515
|
|
|
$
|
733
|
|
|
$
|
1
|
|
|
$
|
17,247
|
|
Obligations of states and political subdivisions
|
|
|
5,136
|
|
|
|
306
|
|
|
|
|
|
|
|
5,442
|
|
|
|
5,135
|
|
|
|
346
|
|
|
|
|
|
|
|
5,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,267
|
|
|
$
|
1,006
|
|
|
$
|
1
|
|
|
$
|
17,272
|
|
|
$
|
21,650
|
|
|
$
|
1,079
|
|
|
$
|
1
|
|
|
$
|
22,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Included in other debt securities are investments in six pooled
trust preferred securities with amortized costs and estimated
fair values of $11,637 and $3,687, respectively, at
December 31, 2010 and $13,823 and $3,938, respectively, at
December 31, 2009. These investments represent pooled trust
preferred obligations of financial institutions. The value of
these investments has been severely negatively affected by the
recent downturn in the economy and increased investor concerns
about recent and potential future losses in the financial
services industry. These investments are rated below investment
grade by Moodys Investor Services at December 31,
2010 with ratings ranging from Caa1 to C. In light of these
conditions, these investments were reviewed for
other-than-temporary
impairment.
In estimating
other-than-temporary
impairment (OTTI) losses, the Company considers:
(1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term
prospects of the issuers, (3) whether it is more likely
than not that the Company would be required to sell the
investments prior to maturity or recovery of cost and
(4) evaluation of cash flows to determine if they have been
adversely affected.
The Company uses a discounted cash flow (DCF)
analysis to provide an estimate of an OTTI loss. Inputs to the
discount model included known defaults and interest deferrals,
projected additional default rates, projected additional
deferrals of interest, over-collateralization tests, interest
coverage tests and other factors. Expected default and deferral
rates were weighted toward the near future to reflect the
current adverse economic environment affecting the banking
industry. The discount rate was based upon the yield expected
from the related securities. Significant inputs to the cash flow
models used in determining credit related
other-than-temporary
impairment losses on pooled trust preferred securities as of
December 31, 2010 included the following:
|
|
|
|
Annual prepayment
|
|
1.00%
|
Projected specific defaults/deferrals
|
|
27.1% - 81.0%
|
Projected severity of loss on specific defaults/deferrals
|
|
28.8% - 95.0%
|
Projected additional defaults:
|
|
|
Year 1
|
|
2.00%
|
Year 2
|
|
1.00%
|
Thereafter
|
|
0.25%
|
Projected severity of loss on additional defaults
|
|
85.00%
|
Range of present value discount rates
|
|
3m LIBOR+1.60%-2.25%
|
The following table summarizes the change in pretax OTTI credit
related losses on securities available for sale for the years
end December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
6,558
|
|
|
$
|
1,062
|
|
Credit related impairment not previously recognized
|
|
|
304
|
|
|
|
5,492
|
|
Increases to the amount related to the credit loss for which
other-than-temporary impairment was previously recognized
|
|
|
2,248
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,110
|
|
|
$
|
6,558
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2010, pretax OTTI losses
of $2,082, $304, $151, $12 and $3, respectively, were recognized
on five pooled trust preferred securities which, prior to the
2010 losses, had book values of $7,455, $2,500, $2,215, $943 and
$649, respectively. During the year ended December 31,
2009, pretax OTTI losses of $2,857, $2,633, $4 and $2,
respectively, were recognized on four pooled trust preferred
securities which, prior to the 2009 losses, had book values of
$5,000, $10,000, $939 and $646, respectively. The OTTI losses in
2010 and 2009 resulted from adverse changes in the expected cash
flows of the pooled trust preferred securities which indicated
that the Company may not recover the entire cost basis of these
investments. Continuation or worsening of the current adverse
economic conditions may result in further impairment charges in
the future.
86
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2010, securities having a stated value of
approximately $310,000 were pledged to secure public
deposits, securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
Gross proceeds from sales of securities available for sale were
$21,915, $8,750 and $65,506 in 2010, 2009 and 2008,
respectively. These sales resulted in gross pretax gains of $280
and gross pretax losses of $112 in 2010, gross pretax gains of
$110 and gross pretax losses of $58 in 2009, and gross pretax
gains of $148 in 2008. There were no gross losses on sales of
securities available for sale in 2008. Applicable income taxes
relating to such transactions were $67, $21 and $59 in 2010,
2009, and 2008, respectively.
The Company recorded $2,552, $5,496 and $1,547, respectively, of
pretax impairment charges on securities
available-for-sale.
All of the 2010 and 2009 charges and $1,062 of the 2008 charges
were related to the Companys investments in pooled trust
preferred securities. These charges represented approximately
18.5 percent, 33.1 percent and 53.1 percent of
the book value of the related investments in 2010, 2009 and
2008, respectively. In 2008, the Company also recorded a pretax
impairment charge of $485 related to an investment in a mutual
fund. This adjustment represented approximately 2.2 percent
of the book value of the related investment. The investment was
sold in April 2008 without further loss, due to its inability to
meet the Companys performance expectations. Income tax
benefits applicable to impairment charges were $1,051, $2,264
and $714 in 2010, 2009 and 2008, respectively.
The following tables reflect the Companys
investments fair value and gross unrealized loss,
aggregated by investment category and length of time the
individual securities have been in a continuous unrealized loss
position, as of December 31, 2010 and 2009 (in thousands):
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Classified as Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
72,105
|
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
|
$
|
72,105
|
|
|
$
|
587
|
|
Obligations of states and political subdivisions
|
|
|
461
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
461
|
|
|
|
1
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
$
|
4,193
|
|
|
$
|
7,956
|
|
|
|
4,193
|
|
|
|
7,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
72,566
|
|
|
|
588
|
|
|
|
4,193
|
|
|
|
7,956
|
|
|
|
76,759
|
|
|
|
8,544
|
|
Mutual funds and other equity securities
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
116
|
|
|
|
118
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
72,566
|
|
|
$
|
588
|
|
|
$
|
4,311
|
|
|
$
|
8,072
|
|
|
$
|
76,877
|
|
|
$
|
8,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
400
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
$
|
400
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
400
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
$
|
400
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Classified as Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and government agencies
|
|
|
|
|
|
|
|
|
|
$
|
2,980
|
|
|
$
|
20
|
|
|
$
|
2,980
|
|
|
$
|
20
|
|
Mortgage-backed securities residential
|
|
$
|
94,211
|
|
|
$
|
2,208
|
|
|
|
|
|
|
|
|
|
|
|
94,211
|
|
|
|
2,208
|
|
Obligations of states and political subdivisions
|
|
|
2,055
|
|
|
|
12
|
|
|
|
2,889
|
|
|
|
79
|
|
|
|
4,944
|
|
|
|
91
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
4,433
|
|
|
|
9,904
|
|
|
|
4,433
|
|
|
|
9,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
96,266
|
|
|
|
2,220
|
|
|
|
10,302
|
|
|
|
10,003
|
|
|
|
106,568
|
|
|
|
12,223
|
|
Mutual funds and other equity securities
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
135
|
|
|
|
128
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
96,266
|
|
|
$
|
2,220
|
|
|
$
|
10,430
|
|
|
$
|
10,138
|
|
|
$
|
106,696
|
|
|
$
|
12,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities residential
|
|
$
|
489
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
489
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
489
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
489
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total number of securities in the Companys portfolio
that were in an unrealized loss position was 90 and 162 at
December 31, 2010 and December 31, 2009, respectively.
The Company has determined that it is more likely than not that
it would not be required to sell its securities prior to
maturity or to recovery of cost. With the exception of the
investment in pooled trust preferred securities discussed above,
the Company believes that its securities continue to have
satisfactory ratings, are readily marketable and that current
unrealized losses are primarily a result of changes in interest
rates. Therefore, management does not consider these investments
to be other-than-temporarily impaired at December 31, 2010.
With regard to the investments in pooled trust preferred
securities, the Company has decided to hold these securities as
it believes that current market quotes for these securities are
not necessarily indicative of their value. The Company has
recognized impairment charges on five of the pooled trust
preferred securities. Management believes that the remaining
impairment in the value of these securities to be primarily
related to illiquidity in the market and therefore not credit
related at December 31, 2010.
The contractual maturity of all debt securities held at
December 31, 2010 is shown below. Actual maturities may
differ from contractual maturities because some issuers have the
right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Contractual Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
9,065
|
|
|
$
|
9,132
|
|
|
|
|
|
|
|
|
|
After 1 but within 5 years
|
|
|
32,484
|
|
|
|
34,007
|
|
|
|
|
|
|
|
|
|
After 5 years but within 10 years
|
|
|
69,642
|
|
|
|
72,161
|
|
|
$
|
5,136
|
|
|
$
|
5,442
|
|
After 10 years
|
|
|
16,051
|
|
|
|
8,166
|
|
|
|
|
|
|
|
|
|
Mortgaged-back Securities
|
|
|
303,479
|
|
|
|
309,540
|
|
|
|
11,131
|
|
|
|
11,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
430,721
|
|
|
$
|
433,006
|
|
|
$
|
16,267
|
|
|
$
|
17,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 Credit
Commitments and Concentrations of Credit Risk
The Company has outstanding, at any time, a significant number
of commitments to extend credit and also provide financial
guarantees to third parties. Those arrangements are subject to
strict credit control assessments. Guarantees specify limits to
the Companys obligations. The amounts of those loan
commitments and guarantees are set out in the following table.
Because many commitments and almost all guarantees expire
without being funded in whole or in part, the contract amounts
are not estimates of future cash flows.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Contract
|
|
Contract
|
|
|
Amount
|
|
Amount
|
|
Credit commitments-variable
|
|
$
|
158,788
|
|
|
$
|
237,733
|
|
Credit commitments-fixed
|
|
|
36,266
|
|
|
|
37,094
|
|
Guarantees written
|
|
|
26,702
|
|
|
|
27,847
|
|
The majority of loan commitments have terms up to one year, with
either a floating interest rate or contracted fixed interest
rates, generally ranging from 3.25% to 12.00%. Guarantees
written generally have terms up to one year.
Loan commitments and guarantees written have off-balance-sheet
credit risk because only origination fees and accruals for
probable losses are recognized in the balance sheet until the
commitments are fulfilled or the guarantees expire. Credit risk
represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. The credit risk amounts are equal to the contractual
amounts, assuming that the amounts are fully advanced and that
collateral or other security would have no value.
The Companys policy is to require customers to provide
collateral prior to the disbursement of approved loans. For
loans and financial guarantees, the Company usually retains a
security interest in the property or products financed or other
collateral which provides repossession rights in the event of
default by the customer.
Concentrations of credit risk (whether on or off-balance-sheet)
arising from financial instruments exist in relation to certain
groups of customers. A group concentration arises when a number
of counterparties have similar economic characteristics that
would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
The Company does not have a significant exposure to any
individual customer or counterparty. A geographic concentration
arises because the Company operates principally in Westchester
County and Bronx County, New York. Loans and credit commitments
collateralized by real estate including all loans where real
estate is either primary or secondary collateral are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
Property
|
|
|
Property
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
555,816
|
|
|
$
|
970,301
|
|
|
$
|
1,526,117
|
|
Credit commitments
|
|
|
62,865
|
|
|
|
54,153
|
|
|
|
117,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
618,681
|
|
|
$
|
1,024,454
|
|
|
$
|
1,643,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
665,249
|
|
|
$
|
1,037,286
|
|
|
$
|
1,702,535
|
|
Credit commitments
|
|
|
102,224
|
|
|
|
79,950
|
|
|
|
182,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
767,473
|
|
|
$
|
1,117,236
|
|
|
$
|
1,884,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The credit risk amounts represent the maximum accounting loss
that would be recognized at the reporting date if counterparties
failed completely to perform as contracted and any collateral or
security proved to have no value. The Company has in the past
experienced little difficulty in accessing collateral when
required.
89
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 Loans
The loan portfolio is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
796,253
|
|
|
$
|
783,597
|
|
Construction
|
|
|
174,369
|
|
|
|
255,660
|
|
Residential
|
|
|
467,326
|
|
|
|
454,532
|
|
Commercial and industrial
|
|
|
245,263
|
|
|
|
274,860
|
|
Lease financing and other
|
|
|
49,040
|
|
|
|
47,780
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,732,251
|
|
|
|
1,816,429
|
|
Deferred loan fees
|
|
|
(4,115
|
)
|
|
|
(5,139
|
)
|
Allowance for loan losses
|
|
|
(38,949
|
)
|
|
|
(38,645
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,689,187
|
|
|
$
|
1,772,645
|
|
|
|
|
|
|
|
|
|
|
The Company has established credit policies applicable to each
type of lending activity in which it engages. The Banks evaluate
the credit worthiness of each customer and extends credit based
on credit history, ability to repay and market value of
collateral. The customers credit worthiness is monitored
on an ongoing basis. Additional collateral is obtained when
warranted. Real estate is the primary form of collateral. Other
important forms of collateral are bank deposits and marketable
securities. While collateral provides assurance as a secondary
source of repayment, the Company ordinarily requires the primary
source of payment to be based on the borrowers ability to
generate continuing cash flows.
A summary of the activity in the allowance for loan losses
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning of year
|
|
$
|
38,645
|
|
|
$
|
22,537
|
|
|
$
|
17,367
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
46,527
|
|
|
|
24,306
|
|
|
|
11,025
|
|
Recoveries on loans previously charged-off
|
|
|
2,416
|
|
|
|
1,301
|
|
|
|
322
|
|
Charge-offs
|
|
|
(48,639
|
)
|
|
|
(9,499
|
)
|
|
|
(6,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
38,949
|
|
|
$
|
38,645
|
|
|
$
|
22,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the allowance for loan losses and
the recorded investment in loans by portfolio segment for the
year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
Commercial &
|
|
|
Financing
|
|
|
|
Total
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Industrial
|
|
|
& Other
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
38,645
|
|
|
$
|
15,273
|
|
|
$
|
5,802
|
|
|
$
|
9,706
|
|
|
$
|
7,326
|
|
|
$
|
538
|
|
Charge-offs
|
|
|
(48,639
|
)
|
|
|
(13,452
|
)
|
|
|
(16,582
|
)
|
|
|
(14,911
|
)
|
|
|
(3,150
|
)
|
|
|
(544
|
)
|
Recoveries
|
|
|
2,416
|
|
|
|
833
|
|
|
|
151
|
|
|
|
856
|
|
|
|
535
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs
|
|
|
(46,223
|
)
|
|
|
(12,619
|
)
|
|
|
(16,431
|
)
|
|
|
(14,055
|
)
|
|
|
(2,615
|
)
|
|
|
(503
|
)
|
Provision for loan losses
|
|
|
46,527
|
|
|
|
14,082
|
|
|
|
17,769
|
|
|
|
14,200
|
|
|
|
(421
|
)
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change during the year
|
|
|
304
|
|
|
|
1,463
|
|
|
|
1,338
|
|
|
|
145
|
|
|
|
(3,036
|
)
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
38,949
|
|
|
$
|
16,736
|
|
|
$
|
7,140
|
|
|
$
|
9,851
|
|
|
$
|
4,290
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The recorded investment in impaired loans was $49,555 and
$50,589 at December 31, 2010 and 2009, respectively, for
which specific reserves of $892 and $3,574, respectively, had
been established. The Company classifies all loans considered to
be troubled debt restructurings (TDRs) as impaired.
Impaired loans as of December 31, 2010 and 2009 included
$17,236 and $640, respectively, of loans considered to be TDRs.
At December 31, 2010, one TDR with a carrying amount of
$5,871 was on accrual status and performing in accordance with
its modified terms. All other TDRs as of December 31, 2010
and 2009 were on nonaccrual status. The fair value of impaired
loans was determined using either the fair value of the
underlying collateral of the loan or by an analysis of the
expected cash flows related to the loan.
The average investment in impaired loans during 2010 and 2009
was $64,390 and $34,970, respectively.
Impaired loans at December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Allowance for
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
22,714
|
|
|
$
|
21,166
|
|
|
|
|
|
Construction
|
|
|
16,985
|
|
|
|
11,868
|
|
|
|
|
|
Residential
|
|
|
11,476
|
|
|
|
7,223
|
|
|
|
|
|
Commercial & industrial
|
|
|
5,543
|
|
|
|
4,538
|
|
|
|
|
|
Lease financing & other
|
|
|
651
|
|
|
|
393
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
3,821
|
|
|
|
3,821
|
|
|
$
|
850
|
|
Residential
|
|
|
521
|
|
|
|
521
|
|
|
|
17
|
|
Commercial & industrial
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
Lease financing & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
61,736
|
|
|
$
|
49,555
|
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the allowance for loan losses and
the recorded investment in loans by portfolio segment based on
impairment method for the year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
Commercial &
|
|
|
Financing
|
|
|
|
Total
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Industrial
|
|
|
& Other
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance attributed to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
38,057
|
|
|
$
|
16,736
|
|
|
$
|
6,290
|
|
|
$
|
9,834
|
|
|
$
|
4,265
|
|
|
$
|
932
|
|
Individually evaluated for impairment
|
|
|
892
|
|
|
|
|
|
|
|
850
|
|
|
|
17
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending balance of allowance
|
|
$
|
38,949
|
|
|
$
|
16,736
|
|
|
$
|
7,140
|
|
|
$
|
9,851
|
|
|
$
|
4,290
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
1,682,696
|
|
|
$
|
775,087
|
|
|
$
|
158,680
|
|
|
$
|
459,582
|
|
|
$
|
240,700
|
|
|
$
|
48,647
|
|
Individually evaluated for impairment
|
|
|
49,555
|
|
|
|
21,166
|
|
|
|
15,689
|
|
|
|
7,744
|
|
|
|
4,563
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending balance of loans
|
|
$
|
1,732,251
|
|
|
$
|
796,253
|
|
|
$
|
174,369
|
|
|
$
|
467,326
|
|
|
$
|
245,263
|
|
|
$
|
49,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans at December 31, 2010, 2009 and 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Total non-accrual loans
|
|
$
|
43,684
|
|
|
$
|
50,590
|
|
|
$
|
11,284
|
|
Interest income that would have been recorded under the original
contract terms
|
|
|
4,346
|
|
|
|
3,032
|
|
|
|
875
|
|
There was no income recorded on non-accrual loans during the
years ended December 31, 2010, 2009 and 2008.
92
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the recorded investments in
non-accrual loans and loans past due 90 days and still
accruing by class of loans as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
and Still
|
|
|
|
|
|
and Still
|
|
|
|
Non-Accrual
|
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Accruing
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
1,942
|
|
|
$
|
292
|
|
|
$
|
7,682
|
|
|
$
|
5,244
|
|
Non owner occupied
|
|
|
13,353
|
|
|
|
|
|
|
|
13,275
|
|
|
|
966
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,477
|
|
|
|
1,323
|
|
|
|
4,889
|
|
|
|
|
|
Residential
|
|
|
11,212
|
|
|
|
|
|
|
|
5,168
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
1,437
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
|
1-4 family
|
|
|
4,649
|
|
|
|
|
|
|
|
13,084
|
|
|
|
401
|
|
Home equity
|
|
|
1,658
|
|
|
|
|
|
|
|
1,402
|
|
|
|
|
|
Commercial & Industrial
|
|
|
4,563
|
|
|
|
10
|
|
|
|
3,821
|
|
|
|
273
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing and other
|
|
|
393
|
|
|
|
|
|
|
|
134
|
|
|
|
57
|
|
Overdrafts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,684
|
|
|
$
|
1,625
|
|
|
$
|
50,590
|
|
|
$
|
6,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the recorded investments in past
due loans as of December 31, 2010 by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
|
|
31-59 Days
|
|
|
60-89 Days
|
|
|
or More
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Current
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
317,926
|
|
|
$
|
100
|
|
|
$
|
3,204
|
|
|
$
|
2,234
|
|
|
$
|
5,538
|
|
|
$
|
312,388
|
|
Non owner occupied
|
|
|
478,327
|
|
|
|
4,199
|
|
|
|
7,014
|
|
|
|
8,899
|
|
|
|
20,112
|
|
|
|
458,215
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
104,466
|
|
|
|
|
|
|
|
2,913
|
|
|
|
5,799
|
|
|
|
8,712
|
|
|
|
95,754
|
|
Residential
|
|
|
69,903
|
|
|
|
|
|
|
|
3,821
|
|
|
|
7,390
|
|
|
|
11,211
|
|
|
|
58,692
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
152,295
|
|
|
|
1,160
|
|
|
|
1,132
|
|
|
|
1,437
|
|
|
|
3,729
|
|
|
|
148,566
|
|
1-4 family
|
|
|
187,728
|
|
|
|
1,096
|
|
|
|
2,064
|
|
|
|
4,211
|
|
|
|
7,371
|
|
|
|
180,357
|
|
Home equity
|
|
|
127,303
|
|
|
|
721
|
|
|
|
1,240
|
|
|
|
1,657
|
|
|
|
3,618
|
|
|
|
123,685
|
|
Commercial & Industrial
|
|
|
245,263
|
|
|
|
2,258
|
|
|
|
738
|
|
|
|
2,414
|
|
|
|
5,410
|
|
|
|
239,853
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing and other
|
|
|
45,096
|
|
|
|
219
|
|
|
|
70
|
|
|
|
323
|
|
|
|
612
|
|
|
|
44,484
|
|
Overdrafts
|
|
|
3,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,732,251
|
|
|
$
|
9,753
|
|
|
$
|
22,196
|
|
|
$
|
34,364
|
|
|
$
|
66,313
|
|
|
$
|
1,665,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Loans made directly or indirectly to employees, directors or
principal shareholders were approximately $37,681 and $36,336 at
December 31, 2010 and 2009, respectively. During 2010, new
loans granted to these individuals totaled $7,418 and payments
and decreases due to changes in board composition totaled $6,073.
The Company categorizes loans into risk categories based on
relevant information about the ability of the borrowers to
service their debt such as; value of underlying collateral,
current financial information, historical payment experience,
credit documentation, public information, and current economic
trends, among other factors. The Company analyzes
non-homogeneous loans individually and classifies them as to
credit risk. This analysis is performed on a quarterly basis.
The Company uses the following definitions for risk ratings.
Special Mention Loans classified as special
mention have potential weaknesses that deserve managements
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of repayment prospects for the asset
or in the institutions credit position at some future date.
Substandard Loans classified as substandard
asset are inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if
any. Loans so classified must have a well-defined weakness, or
weaknesses, that jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that the bank will
sustain some loss if the deficiencies are not corrected.
Doubtful Loans classified as doubtful have
all the weaknesses inherent in one classified as substandard
with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable and
improbable.
Loans not meeting the above criteria that are analyzed
individually as part of the above described process are
considered to be pass rated loans.
The following table presents the risk category by class of loans
as of December 31, 2010 of non-homogeneous loans
individually classified as to credit risk as of the most recent
analysis performed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
317,926
|
|
|
$
|
247,210
|
|
|
$
|
25,164
|
|
|
$
|
45,552
|
|
|
|
|
|
Non owner occupied
|
|
|
478,327
|
|
|
|
406,949
|
|
|
|
42,552
|
|
|
|
25,826
|
|
|
$
|
3,000
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
104,466
|
|
|
|
79,861
|
|
|
|
5,426
|
|
|
|
19,179
|
|
|
|
|
|
Residential
|
|
|
69,903
|
|
|
|
48,777
|
|
|
|
|
|
|
|
21,126
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
|
152,295
|
|
|
|
139,725
|
|
|
|
2,620
|
|
|
|
9,950
|
|
|
|
|
|
1-4 family
|
|
|
91,761
|
|
|
|
67,401
|
|
|
|
12,342
|
|
|
|
12,018
|
|
|
|
|
|
Home equity
|
|
|
12,135
|
|
|
|
6,715
|
|
|
|
249
|
|
|
|
5,171
|
|
|
|
|
|
Commercial & Industrial
|
|
|
245,262
|
|
|
|
218,088
|
|
|
|
11,559
|
|
|
|
15,615
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Financing & Other
|
|
|
43,570
|
|
|
|
41,502
|
|
|
|
332
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,515,645
|
|
|
$
|
1,256,228
|
|
|
$
|
100,244
|
|
|
$
|
156,173
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not individually rated, primarily consisting of certain
1-4 family residential mortgages and home equity lines of
credit, are evaluated for risk in groups of homogeneous loans.
The primary risk characteristic evaluated on these pools is
payment history.
94
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the delinquency categories by class
of loans for loans evaluated for risk in groups of homogeneous
loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-59 Days
|
|
|
60-89 Days
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Current
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
95,968
|
|
|
$
|
1,090
|
|
|
$
|
413
|
|
|
$
|
1,503
|
|
|
$
|
94,465
|
|
Home equity
|
|
|
115,167
|
|
|
|
342
|
|
|
|
|
|
|
|
342
|
|
|
|
114,825
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,527
|
|
Overdrafts
|
|
|
3,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
216,606
|
|
|
$
|
1,432
|
|
|
$
|
413
|
|
|
$
|
1,845
|
|
|
$
|
214,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
Held for Sale
During 2010, the Company transferred $21,864 of nonperforming
loans to the
held-for-sale
category. This transfer was part of the Companys
implementation of a more aggressive workout strategy in reaction
to the severity of the current economic crisis. The Company sold
$14,053 of these loans in the fourth quarter of 2010. The
remaining $7,811 are recorded at their fair value and are
reflected as Nonperforming loans held for sale on
the Consolidated Balance Sheet as of December 31, 2010.
5 Premises
and Equipment
A summary of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
2,589
|
|
|
$
|
2,589
|
|
Buildings
|
|
|
22,869
|
|
|
|
22,392
|
|
Leasehold improvements
|
|
|
12,590
|
|
|
|
12,034
|
|
Furniture, fixtures and equipment
|
|
|
18,189
|
|
|
|
17,315
|
|
Automobiles
|
|
|
838
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
57,075
|
|
|
|
55,064
|
|
Less accumulated depreciation and amortization
|
|
|
(28,464
|
)
|
|
|
(24,681
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
28,611
|
|
|
$
|
30,383
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $3,993, $3,864 and
$3,554 in 2010, 2009 and 2008, respectively.
6 Goodwill
and Other Intangible Assets
In the fourth quarter 2004, the Company acquired A.R.
Schmeidler & Co., Inc. in a transaction accounted for
as an asset purchase for tax purposes. In connection with this
acquisition, the Company recorded customer relationship
intangible assets of $2,470 and non-compete provision intangible
assets of $516, which have amortization periods of 13 years
and 7 years, respectively. Deferred tax benefits have been
provided for the tax effect of temporary differences in the
amortization periods of these identified intangible assets for
book and tax purposes.
Also, at the time of this acquisition, the Company recorded
$4,492 of goodwill. In accordance with the terms of the
acquisition agreement, the Company made additional
performance-based payments over the five years subsequent to the
acquisition. These additional payments, which totaled $17,995,
were accounted for as additional purchase price and, as a
result, goodwill related to the acquisition was increased. The
deferred income tax effects related to timing differences
between the book and tax bases of identified intangible assets
and goodwill deductible for tax purposes are included in net
deferred tax assets in the Companys Consolidated Balance
Sheets.
95
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On January 1, 2006, the Company acquired NYNB in a tax-free
stock purchase transaction. In connection with this acquisition
the Company recorded a core deposit premium intangible asset of
$3,907 and a related deferred tax liability of $1,805. The core
deposit premium has an estimated amortization period of 7 years.
Also in connection with this acquisition, the Company recorded
$1,528 of goodwill.
The following table sets forth the gross carrying amount and
accumulated amortization for each of the Companys
intangible assets subject to amortization as of
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Deposit Premium
|
|
$
|
3,907
|
|
|
$
|
2,791
|
|
|
$
|
3,907
|
|
|
$
|
2,232
|
|
Customer Relationships
|
|
|
2,470
|
|
|
|
1,188
|
|
|
|
2,470
|
|
|
|
998
|
|
Employment Related
|
|
|
516
|
|
|
|
460
|
|
|
|
516
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,893
|
|
|
$
|
4,439
|
|
|
$
|
6,893
|
|
|
$
|
3,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $822 for 2010, 2009
and 2008. The estimated annual intangible assets amortization
expense in each of the five years subsequent to
December 31, 2010 is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2011
|
|
$
|
803
|
|
2012
|
|
|
748
|
|
2013
|
|
|
190
|
|
2014
|
|
|
190
|
|
2015
|
|
|
190
|
|
Changes in the carrying amount of goodwill for the years ended
December 31 are as follows:
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
20,942
|
|
Performance-based payment
|
|
|
2,900
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
23,842
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
23,842
|
|
|
|
|
|
|
Cumulative deferred tax on goodwill deductible for tax purposes
was $2,446 and $1,690 at December 31, 2010 and 2009,
respectively.
7 Deposits
The following table presents a summary of deposits at
December 31:
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
|
|
2010
|
|
|
2009
|
|
|
Demand deposits
|
|
$
|
756,917
|
|
|
$
|
686,856
|
|
Money Market accounts
|
|
|
862,450
|
|
|
|
859,693
|
|
Savings accounts
|
|
|
120,238
|
|
|
|
111,393
|
|
Time deposits of $100,000 or more
|
|
|
144,497
|
|
|
|
144,817
|
|
Time deposits of less than $100,000
|
|
|
43,851
|
|
|
|
61,231
|
|
Checking with interest
|
|
|
306,459
|
|
|
|
308,625
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
2,234,412
|
|
|
$
|
2,172,615
|
|
|
|
|
|
|
|
|
|
|
The Company had no brokered deposits at December 31, 2010
or 2009.
At December 31, 2010 and 2009, certificates of deposits,
including other time deposits of $100,000 or more, totalled
$188,348 and $206,048, respectively.
96
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Scheduled maturities of time deposit for the next five years
were as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
2011
|
|
$
|
168,275
|
|
|
|
|
|
2012
|
|
|
9,940
|
|
|
|
|
|
2013
|
|
|
3,243
|
|
|
|
|
|
2014
|
|
|
2,935
|
|
|
|
|
|
2015
|
|
|
3,839
|
|
|
|
|
|
8 Borrowings
The Companys borrowings with original maturities of one
year or less totaled $35,594 and $53,121 at December 31,
2010 and 2009, respectively. Such short-term borrowings
consisted of $35,129 of customer repurchase agreements and note
options on Treasury, tax and loan of $465 at December 31,
2010 and $52,604 of customer repurchase agreements, and note
options on Treasury, tax and loan of $517 at December 31,
2009. The decrease was due to reductions in overnight borrowings
as a result of deposit growth and runoff off the securities
portfolio in excess of loan growth. Other borrowings totaled
$87,751 million and $123,782 at December 31, 2010 and
2009, respectively, which consisted of fixed rate borrowings of
$66,451 and $102,482 from the FHLB with initial stated
maturities of five or ten years and one to four year call
options and non callable FHLB borrowings of $21,300 and $21,300
at December 31, 2010 and 2009, respectively. The callable
borrowings from FHLB mature beginning in 2010 through 2016. The
FHLB has the right to call all of such borrowings at various
dates in 2010 and quarterly thereafter. A non callable borrowing
of $1,300 matures in 2027 and a non callable borrowing of
$20,000 matures in 2011. Our FHLB term borrowings are subject to
prepayment penalties under certain circumstances in the event of
prepayment.
Interest expense on all borrowings totaled $5,476, $7,709 and
$11,048 in 2010, 2009 and 2008, respectively. As of
December 31, 2010 and 2009, these borrowings were
collateralized by loans and securities with an estimated fair
value of $267,000 and $206,000, respectively.
The following table summarizes the average balances, weighted
average interest rates and the maximum month-end outstanding
amounts of the Companys borrowings for each of the years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Average balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
56,899
|
|
|
$
|
101,818
|
|
|
$
|
161,749
|
|
Other Borrowings
|
|
|
109,349
|
|
|
|
153,799
|
|
|
|
201,687
|
|
Weighted average interest rate (for the year):
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
1.4
|
%
|
Other Borrowings
|
|
|
4.8
|
|
|
|
4.7
|
|
|
|
4.4
|
|
Weighted average interest rate (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
1.4
|
%
|
Other borrowings
|
|
|
4.5
|
|
|
|
4,9
|
|
|
|
4.4
|
%
|
Maximum month-end outstanding amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
71,822
|
|
|
$
|
256,084
|
|
|
$
|
269,585
|
|
Other Borrowings
|
|
|
123,784
|
|
|
|
196,815
|
|
|
|
210,844
|
|
HVB is a member of the FHLB. As a member, HVB is able to
participate in various FHLB borrowing programs which require
certain investments in FHLB common stock as a prerequisite to
obtaining funds. As of December 31, 2010, HVB had
short-term borrowing lines with the FHLB of $200 million
with no amounts outstanding. These and various other FHLB
borrowing programs available to members are subject to
availability of qualifying loan
and/or
investment securities collateral and other terms and conditions.
HVB also has unsecured overnight borrowing lines totaling
$70 million with three major financial institutions which
were all unused and available at December 31, 2010. In
addition, HVB has approved lines under Retail
97
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Certificate of Deposit Agreements with three major financial
institutions totaling $944 million of which no balances
were outstanding as at December 31, 2010. Utilization of
these lines are subject to product availability and other
restrictions.
Additional liquidity is also provided by the Companys
ability to borrow from the Federal Reserve Banks discount
window. In response to the current economic crisis, the Federal
Reserve Bank has increased the ability of banks to borrow from
this source through its
Borrower-in-Custody
(BIC) program, which expanded the types of
collateral which qualify as security for such borrowings. HVB
has been approved to participate in the BIC program. There were
no balances outstanding with the Federal Reserve at
December 31, 2010.
As of December 30, 2010, the Company had qualifying loan
and investment securities totaling approximately
$312 million which could be utilized under available
borrowing programs thereby increasing liquidity.
The various borrowing programs discussed above are subject to
certain restrictions and terms and conditions which may include
continued availability of such borrowing programs, the
Companys ability to pledge qualifying collateral in
sufficient amounts, the Companys maintenance of capital
ratios acceptable to these lenders and other conditions which
may be imposed on the Company.
9 Income
Taxes
A reconciliation of the income tax provision and the amount
computed using the federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at statutory rate
|
|
$
|
1,298
|
|
|
|
35.0
|
%
|
|
$
|
9,213
|
|
|
|
35.0
|
%
|
|
$
|
16,283
|
|
|
|
35.0
|
%
|
State income tax, net of Federal benefit
|
|
|
(85
|
)
|
|
|
(0.9
|
)
|
|
|
977
|
|
|
|
3.7
|
|
|
|
2,330
|
|
|
|
5.0
|
|
Tax-exempt interest income
|
|
|
(2,307
|
)
|
|
|
(51.4
|
)
|
|
|
(2,566
|
)
|
|
|
(9.7
|
)
|
|
|
(2,832
|
)
|
|
|
(6.1
|
)
|
Non-deductible expenses and other
|
|
|
(311
|
)
|
|
|
(6.9
|
)
|
|
|
(314
|
)
|
|
|
(1.2
|
)
|
|
|
(135
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(1,405
|
)
|
|
|
(24.3
|
)%
|
|
$
|
7,310
|
|
|
|
27.8
|
%
|
|
$
|
15,646
|
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes
(benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,771
|
|
|
$
|
13,543
|
|
|
$
|
14,278
|
|
Deferred
|
|
|
(4,046
|
)
|
|
|
(7,736
|
)
|
|
|
(2,217
|
)
|
State and Local:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
994
|
|
|
|
3,622
|
|
|
|
4,144
|
|
Deferred
|
|
|
(1,124
|
)
|
|
|
(2,119
|
)
|
|
|
(559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,405
|
)
|
|
$
|
7,310
|
|
|
$
|
15,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effect of temporary differences giving rise to the
Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Asset
|
|
|
Liability
|
|
|
Asset
|
|
|
Liability
|
|
|
Allowance for loan losses
|
|
$
|
20,348
|
|
|
|
|
|
|
$
|
15,470
|
|
|
|
|
|
Supplemental pension benefit
|
|
|
4,073
|
|
|
|
|
|
|
|
3,871
|
|
|
|
|
|
Other
|
|
|
4,065
|
|
|
|
|
|
|
|
2,966
|
|
|
|
|
|
Interest on non-accrual loans
|
|
|
1,232
|
|
|
|
|
|
|
|
1,576
|
|
|
|
|
|
Accrued benefit liability
|
|
|
601
|
|
|
|
|
|
|
|
698
|
|
|
|
|
|
Deferred compensation
|
|
|
264
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
Share based compensation costs
|
|
|
134
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
Intangible Assets
|
|
|
|
|
|
$
|
2,902
|
|
|
|
|
|
|
$
|
2,413
|
|
Property and equipment
|
|
|
|
|
|
|
1,725
|
|
|
|
|
|
|
|
1,555
|
|
Securities available for sale
|
|
|
|
|
|
|
1,047
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,717
|
|
|
$
|
5,674
|
|
|
$
|
24,985
|
|
|
$
|
4,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
25,043
|
|
|
|
|
|
|
$
|
20,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, the Companys Federal,
New York State and New York City Corporation tax returns are
subject to audit. The Company is currently open to audit by the
Internal Revenue Service under the statute of limitations for
years after 2005. The Company is currently undergoing an audit
by New York State 2005 through 2007. This audit has not yet been
completed, however, no significant issues have as yet been
raised.
The Company follows the Income Taxes topic of the
FASB Accounting Standard Codification which prescribes a
recognition threshold and measurement attribute criteria for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return as well
as guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
The Company has performed an evaluation of its tax positions and
has concluded that as of December 31, 2010, there were no
significant uncertain tax positions requiring additional
recognition in its financial statements and does not believe
that there will be any material changes in its unrecognized tax
positions over the next 12 months.
The Companys policy is to recognize interest and penalties
related to unrecognized tax benefits as a component of income
tax expense. There were no accruals for interest or penalties
during the years ended December 31, 2010 and 2009.
10 Stockholders
Equity
The Company and the Bank are subject to various regulatory
capital requirements administered by the Federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional
discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements of the Company and the Bank. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. Quantitative measures
established by regulation to ensure capital adequacy require the
Company and HVB to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets
(as defined).
99
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors. In todays economic and
regulatory environment, banking regulators, including the OCC,
which is the primary federal regulator of the Bank, are
directing greater scrutiny to banks with higher levels of
commercial real estate loans. Due to the high percentage of
commercial real estate loans in our portfolio, we are among the
banks subject to such greater regulatory scrutiny. As a result
of this concentration, the increase in the level of our
non-performing loans, and the potential for further
deterioration in our loan portfolio, the OCC required HVB to
maintain, by December 31, 2009, a total risk-based capital
ratio of at least 12.0 percent (compared to
10.0 percent for a well capitalized bank), a Tier 1
risk-based capital ratio of at least 10.0 percent (compared
to 6.0 percent for a well capitalized bank), and a
Tier 1 leverage ratio of at least 8.0 percent
(compared to 5.0 percent for a well capitalized bank.)
These capital requirements are in excess of well
capitalized levels generally applicable to banks under
current regulations. To meet these new higher capital
requirements, in October, 2009 the Company raised approximately
$93.3 million through an offering of its common stock.
The following summarizes the capital requirements and capital
position at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum to be
|
|
|
|
|
|
|
Minimum for
|
|
Well Capitalized
|
|
Enhanced
|
|
|
|
|
Capital Adequacy
|
|
Under Prompt
|
|
Capital
|
|
|
Actual
|
|
Purposes
|
|
Corrective Action
|
|
Requirement
|
Capital Ratios:
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
HVB Only:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (To Risk Weighted Assets)
|
|
$
|
264,574
|
|
|
|
14.0
|
%
|
|
$
|
150,768
|
|
|
|
8.0
|
%
|
|
$
|
188,460
|
|
|
|
10.0
|
%
|
|
$
|
226,152
|
|
|
|
12.0
|
%
|
Tier 1 Capital (To Risk Weighted Assets)
|
|
|
240,834
|
|
|
|
12.8
|
%
|
|
|
75,384
|
|
|
|
4.0
|
%
|
|
|
113,076
|
|
|
|
6.0
|
%
|
|
|
188,460
|
|
|
|
10.0
|
%
|
Tier 1 Capital (To Average Assets)
|
|
|
240,834
|
|
|
|
8.8
|
%
|
|
|
109,191
|
|
|
|
4.0
|
%
|
|
|
136,489
|
|
|
|
5.0
|
%
|
|
|
218,383
|
|
|
|
8.0
|
%
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (To Risk Weighted Assets)
|
|
$
|
233,080
|
|
|
|
12.7
|
%
|
|
$
|
146,999
|
|
|
|
8.0
|
%
|
|
$
|
183,749
|
|
|
|
10.0
|
%
|
|
$
|
220,499
|
|
|
|
12.0
|
%
|
Tier 1 Capital (To Risk Weighted Assets)
|
|
|
210,102
|
|
|
|
11.4
|
%
|
|
|
73,500
|
|
|
|
4.0
|
%
|
|
|
110,249
|
|
|
|
6.0
|
%
|
|
|
183,749
|
|
|
|
10.0
|
%
|
Tier 1 Capital (To Average Assets)
|
|
|
210,102
|
|
|
|
8.4
|
%
|
|
|
99,682
|
|
|
|
4.0
|
%
|
|
|
124,602
|
|
|
|
5.0
|
%
|
|
|
199,363
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYNB Only:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (To Risk Weighted Assets)
|
|
$
|
11,775
|
|
|
|
14.7
|
%
|
|
$
|
6,404
|
|
|
|
8.0
|
%
|
|
$
|
8,005
|
|
|
|
10.0
|
%
|
|
$
|
9,606
|
|
|
|
12.0
|
%
|
Tier 1 Capital (To Risk Weighted Assets)
|
|
|
10,675
|
|
|
|
13.4
|
%
|
|
|
3,202
|
|
|
|
4.0
|
%
|
|
|
4,803
|
|
|
|
6.0
|
%
|
|
|
8,005
|
|
|
|
10.0
|
%
|
Tier 1 Capital (To Average Assets)
|
|
|
10,675
|
|
|
|
8.3
|
%
|
|
|
5,185
|
|
|
|
4.0
|
%
|
|
|
6,482
|
|
|
|
5.0
|
%
|
|
|
10,371
|
|
|
|
8.0
|
%
|
100
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum for
|
|
|
|
|
Capital Adequacy
|
|
|
Actual
|
|
Purposes
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (To Risk Weighted Assets)
|
|
$
|
286,144
|
|
|
|
15.2
|
%
|
|
$
|
150,810
|
|
|
|
8.0
|
%
|
Tier 1 Capital (To Risk Weighted Assets)
|
|
|
262,389
|
|
|
|
13.9
|
%
|
|
|
75,405
|
|
|
|
4.0
|
%
|
Tier 1 Capital (To Average Assets)
|
|
|
262,389
|
|
|
|
9.6
|
%
|
|
|
109,277
|
|
|
|
4.0
|
%
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (To Risk Weighted Assets)
|
|
$
|
290,633
|
|
|
|
15.2
|
%
|
|
$
|
153,335
|
|
|
|
8.0
|
%
|
Tier 1 Capital (To Risk Weighted Assets)
|
|
|
267,120
|
|
|
|
13.9
|
%
|
|
|
76,667
|
|
|
|
4.0
|
%
|
Tier 1 Capital (To Average Assets)
|
|
|
267,120
|
|
|
|
10.2
|
%
|
|
|
105,016
|
|
|
|
4.0
|
%
|
Management believes, as of December 31, 2010 and 2009, that
the Company and the Bank met all capital adequacy requirements
to which they are subject.
In addition, pursuant to
Rule 15c3-1
of the Securities and Exchange Commission, ARS is required to
maintain minimum net capital as defined under such
rule. As of December 31, 2010 ARS exceeded its minimum
capital requirement.
Stock
Dividend
In November 2010 and December 2009 the Board of
Directors of the Company declared 10 percent stock
dividends. Share and per share amounts have been retroactively
restated to reflect the issuance of the additional shares.
11 Stock-Based
Compensation
In accordance with the provisions of the Hudson Valley Holding
Corp. 2010 Omnibus Incentive Plan, approved by the
Companys shareholders on May 27, 2010, the Company
may grant eligible employees, including directors, consultants
and advisors, incentive stock options, non-qualified stock
options, restricted stock awards, restricted stock units, stock
appreciation rights, performance awards and other types of
awards. The 2010 Plan provides for the issuance of up to
1,100,000 shares of the Companys common stock. Prior
to the 2010 Plan, the Company had stock option plans that
provided for the granting of options to directors, officers,
eligible employees, and certain advisors, based upon eligibility
as determined by the Compensation Committee. Under the prior
plans, options were granted for the purchase of shares of the
Companys common stock at an exercise price not less than
the market value of the stock on the date of grant, vested over
various periods ranging from immediate to five years from date
of grant, and had expiration dates up to ten years from the date
of grant. The Company estimates that more than 75% of options
granted under the prior plans will vest. Compensation costs
relating to stock-based payment transactions are recognized in
the financial statements with measurement based upon the fair
value of the equity or liability instruments issued.
Compensation costs related to share based payment transactions
are expensed over their respective vesting periods. There were
no stock-based compensation awards granted under either the 2010
Plan or the prior plans during the year ended December 31,
2010.
101
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes stock option activity for 2010.
Shares and per share amounts have been adjusted to reflect the
effect of the 10% stock dividend in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Aggregate
|
|
Average
|
|
|
Shares
|
|
Weighted Average
|
|
Intrinsic
|
|
Remaining
|
|
|
Underlying
|
|
Exercise Price
|
|
Value(1)
|
|
Contractual
|
Outstanding Options
|
|
Options
|
|
Per Share
|
|
($000s)
|
|
Term (Yrs.)
|
|
As of December 31, 2009
|
|
|
793,925
|
|
|
$
|
23.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(45,925
|
)
|
|
|
21.60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(47,930
|
)
|
|
|
12.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
700,070
|
|
|
$
|
23.93
|
|
|
|
2,645
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2010
|
|
|
658,646
|
|
|
$
|
23.16
|
|
|
|
2,645
|
|
|
|
3.2
|
|
Available for future grant
|
|
|
1,210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The aggregate intrinsic value of a stock option in the table
above represents the total pre-tax intrinsic value (the amount
by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been
received by the option holders had all option holders exercised
their options on December 31, 2010. This amount changes
based on changes in the market value of the Companys stock.
|
The following table summarizes the range of exercise prices of
the Companys stock options outstanding and exercisable at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Number
|
|
Remaining
|
|
|
|
|
|
|
of
|
|
Life
|
|
Exercise
|
|
|
Exercise Price
|
|
Options
|
|
(yrs)
|
|
Price
|
|
|
|
$
|
13.03
|
|
|
$
|
18.94
|
|
|
|
211,678
|
|
|
|
1.9
|
|
|
$
|
16.78
|
|
|
|
|
18.95
|
|
|
|
26.09
|
|
|
|
260,740
|
|
|
|
3.9
|
|
|
|
21.32
|
|
|
|
|
26.10
|
|
|
|
45.40
|
|
|
|
227,652
|
|
|
|
3.6
|
|
|
|
33.57
|
|
Total Options Outstanding
|
|
|
13.03
|
|
|
|
45.40
|
|
|
|
700,070
|
|
|
|
3.2
|
|
|
|
23.93
|
|
Exercisable
|
|
|
13.03
|
|
|
|
45.40
|
|
|
|
658,646
|
|
|
|
3.2
|
|
|
|
23.16
|
|
Not Exercisable
|
|
|
26.12
|
|
|
|
45.40
|
|
|
|
41,424
|
|
|
|
2.8
|
|
|
|
36.09
|
|
The fair value (present value of the estimated future benefit to
the option holder) of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. There
were no stock options granted in the years ended
December 31, 2010 and 2009. The following table illustrates
the assumptions used in the valuation model for activity during
the year ended December 31, 2008.
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31
|
|
|
2008
|
|
Weighted average assumptions:
|
|
|
|
|
Dividend yield
|
|
|
3.3
|
%
|
Expected volatility
|
|
|
67.6
|
%
|
Risk-free interest rate
|
|
|
0.3
|
%
|
Expected lives (in years)
|
|
|
0.4
|
|
The expected volatility is based on historical volatility. The
risk-free interest rates for periods within the contractual life
of the awards are based on the U.S. Treasury yield curve in
effect at the time of the grant. The expected life is based on
historical exercise experience.
The per share weighted average fair value of options granted
during the year ended December 31, 2008 was $3.96.
Compensation expense of $148, $254 and $596 related to the
Companys stock option plans was included in
102
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
net income for the years ended December 30, 2010, 2009 and
2008, respectively. The total tax benefit related thereto was
$6, $8 and $144, respectively. Unrecognized compensation expense
related to non-vested share-based compensation granted under the
Companys stock option plans totaled $245 at
December 31, 2010. This expense is expected to be
recognized over a weighted-average period of 1.3 years.
12 Fair
Value
The Company follows the Fair Value Measurement and
Disclosures topic of the FASB Accounting Standards
Codification which requires additional disclosures about the
Companys assets and liabilities that are measured at fair
value and establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) for
identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other observable
inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs
that reflect a reporting entitys own assumptions about the
assumptions that market participants would use in pricing an
asset or liability.
A description of the valuation methodologies used for assets and
liabilities measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy, is set forth below. While management believes the
Companys valuation methodologies are appropriate and
consistent with other financial institutions, the use of
different methodologies or assumptions to determine the fair
value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
The fair values of securities available for sale are determined
by obtaining quoted prices on nationally recognized securities
exchanges, which is a Level 1 input, or matrix pricing,
which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the
securities relationship to other benchmark quoted
securities, which is a Level 2 input.
The Companys available for sale securities at
December 31, 2010 and 2009 include several pooled trust
preferred instruments. The recent severe downturn in the overall
economy and, in particular, in the financial services industry
has created a situation where significant observable inputs
(Level 2) are not readily available for these
securities. As an alternative, the Company combined Level 2
input of market yield requirements of similar instruments
together with certain Level 3 assumptions addressing the
impact of current market illiquidity to estimate the fair value
of these instruments See Note 2
Securities for further discussion of pooled trust
preferred securities.
103
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets and liabilities measured at fair value are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 Using:
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Unobservable
|
|
|
|
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
|
|
|
|
$
|
3,012
|
|
|
|
|
|
|
$
|
3,012
|
|
Mortgage-backed securities residential
|
|
|
|
|
|
|
309,540
|
|
|
|
|
|
|
|
309,540
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
116,081
|
|
|
|
|
|
|
|
116,081
|
|
Other debt securities
|
|
|
|
|
|
|
686
|
|
|
$
|
3,687
|
|
|
|
4,373
|
|
Mutual funds and other equity securities
|
|
|
|
|
|
|
10,661
|
|
|
|
|
|
|
|
10,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
|
|
$
|
439,980
|
|
|
$
|
3,687
|
|
|
$
|
443,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans(1)
|
|
|
|
|
|
|
|
|
|
$
|
18,594
|
|
|
$
|
18,594
|
|
Loans held for sale(2)
|
|
|
|
|
|
|
|
|
|
|
7,811
|
|
|
|
7,811
|
|
Other real estate owned(3)
|
|
|
|
|
|
|
|
|
|
|
11,028
|
|
|
|
11,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
|
|
|
$
|
37,433
|
|
|
$
|
37,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral.
Collateral values are estimated using Level 2 and
Level 3 inputs which include independent appraisals and
internally customized discounting criteria. The recorded
investment in impaired loans subject to fair value reporting on
December 31, 2010 was $19,486 for which a specific
allowance of $892 has been established within the allowance for
loan losses. The fair values were based on internally customized
discounting criteria of the collateral and thus classified as
Level 3 fair values. |
|
(2) |
|
Loans held for sale are reported at lower of cost or fair value.
Fair value is based on average bid indicators received from
third parties expected to participate in the loans sales. |
|
(3) |
|
Other real estate owned is reported at fair value less
anticipated costs to sell. Fair value is based on third party or
internally developed appraisals which, considering the
assumptions in the valuation, are considered Level 2 or
Level 3 inputs. The fair value of other real estate owned
at December 31, 2010 was derived by management from
appraisals which used various assumptions and were discounted as
necessary, resulting in a Level 3 classification. |
104
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using:
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Unobservable
|
|
|
|
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
|
|
|
|
$
|
5,008
|
|
|
|
|
|
|
$
|
5,008
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
316,388
|
|
|
|
|
|
|
|
316,388
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
164,271
|
|
|
|
|
|
|
|
164,271
|
|
Other debt securities
|
|
|
|
|
|
|
884
|
|
|
$
|
3,938
|
|
|
|
4,822
|
|
Mutual funds and other equity securities
|
|
|
|
|
|
|
10,146
|
|
|
|
|
|
|
|
10,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
|
|
$
|
496,697
|
|
|
$
|
3,938
|
|
|
$
|
500,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans(1)
|
|
|
|
|
|
|
|
|
|
$
|
16,921
|
|
|
$
|
16,921
|
|
Other real estate owned(2)
|
|
|
|
|
|
|
|
|
|
|
9,211
|
|
|
|
9,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
|
|
|
|
|
|
$
|
26,132
|
|
|
$
|
26,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral.
Collateral values are estimated using Level 2 and Level 3 inputs
which include independent appraisals and internally customized
discounting criteria. The recorded investment in impaired loans
subject to fair value measurement on December 31, 2009 was
$20,494 for which a specific allowance of $3,573 has been
established within the allowance for loan losses. |
|
(2) |
|
Other real estate owned is reported at fair value less
anticipated costs to sell. Fair value is based on third party or
internally developed appraisals which, considering the
assumptions in the valuation, are considered Level 2 or Level 3
inputs. The fair value of other real estate owned at
December 31, 2009 was derived by management from appraisals
which used various assumptions and were discounted as necessary,
resulting in a Level 3 classification. |
The table below presents a reconciliation and income statement
classification of gains and losses for securities available for
sale measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the
years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets
|
|
|
|
Measured on a Recurring
|
|
|
|
Basis For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(000s)
|
|
|
Balance at beginning of period
|
|
$
|
3,938
|
|
|
$
|
10,786
|
|
Transfers into (out of) Level 3
|
|
|
367
|
|
|
|
174
|
|
Net unrealized gain (loss) included in other comprehensive
income(1)
|
|
|
1,934
|
|
|
|
(1,526
|
)
|
Principal payments
|
|
|
|
|
|
|
|
|
Recognized impairment charge included in the statement of
income(2)
|
|
|
(2,552
|
)
|
|
|
(5,496
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,687
|
|
|
$
|
3,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reported under Unrealized (loss) gain on securities
available for sale arising during the period. |
|
(2) |
|
Reported under Recognized impairment charge on securities
available for sale, net. |
105
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 Benefit
Plans
The Hudson Valley Bank Employees Defined Contribution
Pension Plan covers substantially all employees. In 2010, there
were no pension costs accrued and charged to current operations.
Pension costs accrued and charged to current operations included
2.5 percent of each participants earnings in 2009 and
5 percent of each participants earnings in 2008.
Pension costs charged to other operating expenses totaled
approximately $387 and $1,066 in 2009 and 2008, respectively.
The Hudson Valley Bank Employees Savings Plan covers
substantially all employees. The Company matches 25 percent
of employee contributions annually, up to 4 percent of base
salary. Savings Plan costs charged to expense totaled
approximately $170, $170 and $166 in 2010, 2009 and 2008,
respectively.
The Companys matching contribution under the
Employees Savings Plan as well as its contribution to the
Defined Contribution Pension Plan is in the form of cash.
Neither plan holds any shares of the Companys stock.
Additional retirement benefits are provided to certain officers
and directors of HVB pursuant to unfunded supplemental plans.
Costs for the supplemental pension plans totaled $1,299, $2,123
and $1,103 in 2010, 2009 and 2008, respectively. The Company
uses a December 31 measurement date for the supplemental plans
and makes contributions to the plans only as benefit payments
become due. In the fourth quarter of 2010, one employee was
added to the officers supplemental plan resulting in an
additional $24 of expense for the year. Also during 2010, two
directors included in the directors supplemental
retirement plan elected to retire. In accordance with the terms
of the plan, one retiring director began receiving monthly
benefits beginning in June 2010 and the other elected a lump sum
payment which was paid in December 2010. Activity in the
officers supplemental plan during 2009 included the
addition of one employee to the plan in the second quarter and,
in the fourth quarter, the election of one participant to retire
early at a reduced benefit as permitted by the plan. In
addition, during the fourth quarter of 2009, the Company amended
the officers supplemental plan to establish a maximum
salary on which benefits under the plan can be determined. The
net effect of the 2009 activity and amendment was a $923
decrease in the projected benefit obligation of the plan as of
December 31, 2009, and a $414 increase in 2009 expense
related to the plan. The expense increase was primarily related
to the accrual of prior service cost of the employee added to
the plan in the second quarter. In late 2008, HVB amended the
directors supplemental retirement plan by freezing
benefits to a level equal to vested benefits, as defined, as of
December 31, 2008. This amendment resulted in a pretax
reduction of the accrued benefit liability of $861 of which $669
is included as a reduction of directors pension expense
included in Professional Services in the Consolidated Statement
of Income, and $192 is included as part of the accrued benefit
liability adjustment in the Consolidated Statement of
Comprehensive Income.
The following tables set forth the status of the Companys
supplemental plans as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
11,161
|
|
|
$
|
11,754
|
|
|
$
|
11,570
|
|
Service cost
|
|
|
296
|
|
|
|
1,006
|
|
|
|
448
|
|
Interest cost
|
|
|
596
|
|
|
|
560
|
|
|
|
621
|
|
Amendments
|
|
|
|
|
|
|
(1,156
|
)
|
|
|
(861
|
)
|
Actuarial (gain) loss
|
|
|
164
|
|
|
|
(336
|
)
|
|
|
587
|
|
Benefits paid
|
|
|
(803
|
)
|
|
|
(668
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
11,414
|
|
|
|
11,160
|
|
|
|
11,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
803
|
|
|
|
668
|
|
|
|
611
|
|
Benefits paid
|
|
|
(803
|
)
|
|
|
(668
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at year end
|
|
$
|
(11,414
|
)
|
|
$
|
(11,160
|
)
|
|
$
|
(11,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated comprehensive income at
December 31 consist of:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net actuarial loss
|
|
$
|
2,184
|
|
|
$
|
2,618
|
|
Prior service cost
|
|
|
(681
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,503
|
|
|
$
|
1,746
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation was $10,658 and $10,321 at
December 31, 2010 and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.25
|
%
|
|
|
5.25
|
%
|
Expected return on plan assets
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost and other amounts
recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
296
|
|
|
$
|
1,006
|
|
Interest cost
|
|
|
596
|
|
|
|
560
|
|
Expected return on plan assets
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(191
|
)
|
|
|
(191
|
)
|
Amortization of net loss
|
|
|
598
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,299
|
|
|
$
|
2,123
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
|
(434
|
)
|
|
|
(2,240
|
)
|
Amortization of prior service cost
|
|
|
191
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
(243
|
)
|
|
|
(2,049
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive income
|
|
$
|
1,056
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
The estimated net loss and prior service costs that will be
amortized from accumulated other comprehensive income into net
periodic benefit cost in 2010 are $558 and $(233).
107
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
Year
|
|
Pension Benefits
|
|
2011
|
|
$
|
612
|
|
2012
|
|
|
833
|
|
2013
|
|
|
1,110
|
|
2014
|
|
|
1,088
|
|
2015
|
|
|
1,088
|
|
Years 2016-2020
|
|
|
4,884
|
|
14 Commitments,
Contingent Liabilities and Other Disclosures
The Company is obligated under leases for certain of its
branches and equipment. Minimum rental commitments for bank
premises and equipment under noncancelable operating leases are
as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2011
|
|
$
|
4,159
|
|
2012
|
|
|
3,205
|
|
2013
|
|
|
2,955
|
|
2014
|
|
|
2,802
|
|
2015
|
|
|
2,766
|
|
Thereafter
|
|
|
8,521
|
|
|
|
|
|
|
Total minimum future rentals
|
|
$
|
24,408
|
|
|
|
|
|
|
Rent expense for premises and equipment was $3,533, $3,462 and
$3,097 in 2010, 2009 and 2008, respectively.
In the normal course of business, there are various outstanding
commitments and contingent liabilities which are not reflected
in the consolidated balance sheets. No losses are anticipated as
a result of these transactions.
In the ordinary course of business, the Company is party to
various legal proceedings, none of which, in the opinion of
management, will have a material effect on the Companys
consolidated financial position or results of operations.
Cash
Reserve Requirements
HVB is required to maintain average reserve balances under the
Federal Reserve Act and Regulation D issued thereunder.
Such reserves totaled $13,082 at December 31, 2010.
Restrictions
on Funds Transfers
There are various restrictions which limit the ability of a bank
subsidiary to transfer funds in the form of cash dividends,
loans or advances to the parent company. Under federal law, the
approval of the primary regulator is required if dividends
declared by a bank in any year exceed the net profits of that
year, as defined, combined with the retained net profits for the
two preceding years. Under applicable banking statutes, at
December 31, 2010, HVB could have declared additional
dividends of $3,901 to the Company without prior regulatory
approval.
15 Segment
Information
The Company has one reportable segment, Community
Banking. All of the Companys activities are
interrelated, and each activity is dependent and assessed based
on how each of the activities of the Company
108
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
supports the others. For example, commercial lending is
dependent upon the ability of the Company to fund itself with
retail deposits and other borrowings and to manage interest rate
and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Company as
one operating segment or unit.
The Company operates only in the U.S. domestic market, primarily
in the New York metropolitan area. For the years ended
December 31, 2010, 2009 and 2008, there is no customer that
accounted for more than 10% of the Companys revenue.
16 Fair
Value of Financial Instruments
The Financial Instruments topic of the FASB
Accounting Standards Codification requires the disclosure of the
estimated fair value of certain financial instruments. These
estimated fair values as of December 31, 2010 and 2009 have
been determined using available market information and
appropriate valuation methodologies. Considerable judgment is
required to interpret market data to develop estimates of fair
value. The estimates presented are not necessarily indicative of
amounts the Company could realize in a current market exchange.
The use of alternative market assumptions and estimation
methodologies could have had a material effect on these
estimates of fair value.
Carrying amount and estimated fair value of financial
instruments, not previously presented, at December 31, 2010
and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets for which carrying value approximates fair value
|
|
$
|
356.2
|
|
|
$
|
356.2
|
|
|
$
|
218.9
|
|
|
$
|
218.9
|
|
Held to maturity securities and accrued interest
|
|
|
16.3
|
|
|
|
17.3
|
|
|
|
21.7
|
|
|
|
22.8
|
|
FHLB Stock
|
|
|
7.0
|
|
|
|
N/A
|
|
|
|
8.5
|
|
|
|
N/A
|
|
Loans and accrued interest
|
|
|
1,717.8
|
|
|
|
1,759.8
|
|
|
|
1,770.4
|
|
|
|
1,769.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity and accrued interest
|
|
|
2,047.4
|
|
|
|
2,047.4
|
|
|
|
1,968.3
|
|
|
|
1,968.3
|
|
Time deposits and accrued interest
|
|
|
188.5
|
|
|
|
188.9
|
|
|
|
206.3
|
|
|
|
205.9
|
|
Securities sold under repurchase agreements and other short-term
borrowings and accrued interest
|
|
|
36.6
|
|
|
|
36.6
|
|
|
|
53.1
|
|
|
|
53.1
|
|
Other borrowings and accrued interest
|
|
|
88.2
|
|
|
|
85.6
|
|
|
|
124.4
|
|
|
|
119.2
|
|
The estimated fair value of the indicated items was determined
as follows:
Financial assets for which carrying value approximates fair
value The estimated fair value approximates
carrying amount because of the immediate availability of these
funds or based on the short maturities and current rates for
similar deposits. Cash and due from banks as well as Federal
funds sold are reported in this line item.
Held to maturity securities and accrued
interest The fair value of securities held
to maturity was estimated based on quoted market prices or
dealer quotations. Accrued interest is stated at its carrying
amounts which approximates fair value.
FHLB Stock It is not practicable to
determine its fair value due to restrictions placed on its
transferability.
109
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Loans and accrued interest The fair
value of loans was estimated by discounting projected cash flows
at the reporting date using current rates for similar loans.
Accrued interest is stated at its carrying amount which
approximates fair value.
Deposits with no stated maturity and accrued
interest The estimated fair value of
deposits with no stated maturity and accrued interest, as
applicable, are considered to be equal to their carrying amounts.
Time deposits and accrued interest The
fair value of time deposits has been estimated by discounting
projected cash flows at the reporting date using current rates
for similar deposits. Accrued interest is stated at its carrying
amount which approximates fair value.
Securities sold under repurchase agreements and other
short-term borrowings and accrued
interest The estimated fair value of these
instruments approximate carrying amount because of their short
maturities and variable rates. Accrued interest is stated at its
carrying amount which approximates fair value.
Other borrowings and accrued
interest The fair value of callable FHLB
advances was estimated by discounting projected cash flows at
the reporting date using the rate applicable to the projected
call date option. Accrued interest is stated at its carrying
amount which approximates fair value.
17 Condensed
Financial Information of Hudson Valley Holding Corp.
(Parent Company Only)
Condensed Balance Sheets
December 31, 2010 and 2009
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,895
|
|
|
$
|
46,707
|
|
Investment in subsidiaries
|
|
|
269,469
|
|
|
|
246,214
|
|
Other assets
|
|
|
29
|
|
|
|
72
|
|
Equity securities
|
|
|
1,133
|
|
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
290,526
|
|
|
$
|
294,514
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
609
|
|
|
$
|
836
|
|
Stockholders equity
|
|
|
289,917
|
|
|
|
293,678
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
290,526
|
|
|
$
|
294,514
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Income
For the years ended December 31, 2010, 2009 and 2008
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Dividends from subsidiaries
|
|
$
|
7
|
|
|
$
|
24,354
|
|
|
$
|
28,208
|
|
Dividends from equity securities
|
|
|
77
|
|
|
|
78
|
|
|
|
85
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
720
|
|
|
|
243
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed earnings in the
subsidiaries
|
|
|
(636
|
)
|
|
|
24,189
|
|
|
|
27,949
|
|
Equity in (overdistributed) undistributed earnings of the
subsidiaries
|
|
|
5,749
|
|
|
|
(5,177
|
)
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,113
|
|
|
$
|
19,012
|
|
|
$
|
30,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Statements of Cash Flows
For the years ended December 31, 2010, 2009 and 2008
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,113
|
|
|
$
|
19,012
|
|
|
$
|
30,877
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in overdistributed (undistributed) earnings of the
subsidiaries
|
|
|
(5,749
|
)
|
|
|
5,177
|
|
|
|
(2,928
|
)
|
Increase in other assets
|
|
|
(119
|
)
|
|
|
118
|
|
|
|
(95
|
)
|
Increase (decrease) in other liabilities
|
|
|
43
|
|
|
|
48
|
|
|
|
18
|
|
Other changes, net
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(711
|
)
|
|
|
24,366
|
|
|
|
27,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiaries
|
|
|
(15,350
|
)
|
|
|
(44,000
|
)
|
|
|
|
|
Proceeds from sales of equity securities
|
|
|
22
|
|
|
|
|
|
|
|
2
|
|
Purchase of equity securities
|
|
|
|
|
|
|
(3
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(15,328
|
)
|
|
|
(44,003
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and sale of treasury stock
|
|
|
623
|
|
|
|
93,868
|
|
|
|
10,109
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(15,631
|
)
|
|
|
(18,883
|
)
|
Cash dividends paid
|
|
|
(11,396
|
)
|
|
|
(15,680
|
)
|
|
|
(20,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,773
|
)
|
|
|
62,557
|
|
|
|
(28,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) Cash and Due from Banks
|
|
|
(26,812
|
)
|
|
|
42,920
|
|
|
|
(1,167
|
)
|
Cash and due from banks, beginning of year
|
|
|
46,707
|
|
|
|
3,787
|
|
|
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks, end of year
|
|
$
|
19,895
|
|
|
$
|
46,707
|
|
|
$
|
3,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
ITEM 9 CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Our disclosure controls and procedures are designed to ensure
that information the Company must disclose in its reports filed
or submitted under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed,
summarized, and reported on a timely basis. Any controls and
procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control
objectives. We carried out an evaluation, under the supervision
and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of December 31, 2010. Based on
this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2010, the
Companys disclosure controls and procedures were effective
in bringing to their attention on a timely basis information
required to be disclosed by the Company in reports that the
Company files or submits under the Exchange Act. Also, during
the year ended December 31, 2010, there has not been any
change that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over
financial reporting.
Managements
Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities and Exchange Act of 1934. The
Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
The Companys internal control over financial reporting
includes those policies and procedures that: (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment
and those criteria, management concluded that the Company
maintained effective internal control over financial reporting
as of December 31, 2010.
The Companys independent registered public accounting firm
has issued their report on the effectiveness of the
Companys internal control over financial reporting. That
report is included under the heading, Report of Independent
Registered Public Accounting Firm.
ITEM 9B. OTHER
INFORMATION
Not applicable.
112
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions Nominees for
the Board of Directors, Executive Officers,
Corporate Governance and Section 16(a)
Beneficial Ownership Reporting Compliance in the 2011
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE
COMPENSATION
The information set forth under the caption Executive
Compensation in the 2011 Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND
RELATED STOCKHOLDER MATTERS
The information set forth under the captions Outstanding
Equity Awards at Fiscal Year End and Security
Ownership of Certain Beneficial Owners and Management in
the 2011 Proxy Statement is incorporated herein by reference.
The following table sets forth information regarding the
Companys Stock Option Plans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
Shares to
|
|
|
|
Shares Remaining
|
|
|
be Issued
|
|
|
|
Available for
|
|
|
Upon Exercise
|
|
Weighted-Average Exercise
|
|
Future Issuance Under
|
|
|
of
|
|
Price of
|
|
Equity Compensation
|
Plan Category
|
|
Outstanding Options
|
|
Outstanding Options
|
|
Plans
|
|
Equity compensation plans approved by stockholders
|
|
|
658,646
|
|
|
$
|
23.16
|
|
|
|
1,210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
All equity compensation plans have been approved by the
Companys stockholders. Additional details related to the
Companys equity compensation plans are provided in
Notes 10 and 11 to the Companys consolidated
financial statements presented in this
Form 10-K.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The information set forth under the captions Compensation
Committee Interlocks and Insider Participation,
Certain Relationships and Related Transactions and
Corporate Governance in the 2011 Proxy Statement is
incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption Independent
Registered Public Accounting Firm Fees in the 2011 Proxy
Statement and is incorporated herein by reference.
113
PART
IV
ITEM 15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
1. Financial
Statements
The following financial statements of the Company are included
in this document in Item 8 Financial Statements
and Supplementary Data:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Statements of Income for the Years Ended
December 31, 2010, 2009 and 2008
|
|
|
|
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
Consolidated Balance Sheets at December 31, 2010 and 2009
|
|
|
|
Consolidated Statements of Changes in Stockholders Equity
for the Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2010, 2009 and 2008
|
|
|
|
Notes to Consolidated Financial Statements
|
2. Financial
Statement Schedules
Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown elsewhere in
the document in the Financial Statements or Notes thereto, or in
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
114
3. Exhibits
Required by Securities and Exchange Commission Regulation
S-K
|
|
|
|
|
|
Number
|
|
|
Exhibit Title
|
|
|
3
|
.1
|
|
|
Restated Certificate of Incorporation of Hudson Valley Holding
Corp.(4)
|
|
3
|
.2
|
|
|
Amended and Restated By-Laws of Hudson Valley Holding
Corp.(5)
|
|
4
|
.1
|
|
|
Specimen of Common Stock
Certificate(3)
|
|
10
|
.1
|
|
|
Hudson Valley Bank Amended and Restated Directors Retirement
Plan Effective December 31,
2008*(6)
|
|
10
|
.2
|
|
|
Hudson Valley Bank Restated and Amended Supplemental Retirement
Plan of
1995*(3)
|
|
10
|
.3
|
|
|
Form of Amendment No. 1 to Hudson Valley Bank Restated and
Amended Supplemental Retirement Plan of
1995*(7)
|
|
10
|
.4
|
|
|
Hudson Valley Bank Supplemental Retirement Plan of
1997*(3)
|
|
10
|
.5
|
|
|
Form of Amendment No. 1 to Hudson Valley Bank Supplemental
Retirement Plan of
1997*(7)
|
|
10
|
.6
|
|
|
Form of Amendment No. 2 to Hudson Valley Bank Supplemental
Retirement Plan of 1995 and
1997*(7)
|
|
10
|
.7
|
|
|
Form of Amendment No. 3 to Hudson Valley Bank Supplemental
Retirement Plan of 1995 and
1997*(7)
|
|
10
|
.8
|
|
|
Amended and Restated 2002 Stock Option
Plan*(6)
|
|
10
|
.9
|
|
|
Specimen Non-Statutory Stock Option
Agreement*(3)
|
|
10
|
.10
|
|
|
Specimen Incentive Stock Option
Agreement*(1)
|
|
10
|
.11
|
|
|
Consulting Agreement Between the Company and Director
John A.
Pratt, Jr.*(3)
|
|
10
|
.12
|
|
|
Hudson Valley Holding Corp. 2010 Omnibus Incentive
Plan*(8)
|
|
11
|
|
|
|
Statements re: Computation of Per Share
Earnings(9)
|
|
12
|
|
|
|
Computation of Ratios of Earnings to Fixed
Charges(9)
|
|
21
|
|
|
|
Subsidiaries of the
Company(9)
|
|
23
|
.1
|
|
|
Consent of Crowe Horwath
LLP(9)
|
|
31
|
.1
|
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002(9)
|
|
31
|
.2
|
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002(9)
|
|
32
|
.1
|
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002(9)
|
|
32
|
.2
|
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of
2002(9)
|
* Management contract and compensatory plan or
arrangement
|
|
(1)
|
Incorporated herein by reference in this document to the
Form 10-K
filed on March 11, 2005
|
|
(2)
|
Incorporated herein by reference in this document to the
Form 10-Q
filed on August 9, 2006
|
|
(3)
|
Incorporated herein by reference in this document to the
Form 10-K
filed on March 15, 2007
|
|
(4)
|
Incorporated herein by reference in this document to the
Form 10-Q
filed October 20, 2009
|
|
(5)
|
Incorporated herein by reference in this document to the
Form 8-K
filed on April 28, 2010
|
|
(6)
|
Incorporated herein by reference in this document to the
Form 10-K
filed on March 16, 2009
|
|
(7)
|
Incorporated herein by reference in this document to the
Form 10-K
filed on March 16, 2010
|
|
(8)
|
Incorporated herein by reference in this document to the Form
8-K filed on
June 1, 2010
|
|
(9)
|
Filed herewith
|
115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HUDSON VALLEY HOLDING CORP.
March 16, 2011
James J. Landy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on March 16, 2011
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
James J. Landy
President, Chief Executive Officer and Director
Stephen R. Brown
Senior Executive Vice President, Chief Financial Officer,
Treasurer and Director
(Principal Financial Officer)
John P. Cahill
Director
William E. Griffin
Chairman of the Board and Director
Mary Jane Foster
Director
Gregory F. Holcombe
Director
Adam Ifshin
Director
Michael J. Maloney
Executive Vice President, Chief Banking
Officer of the Bank and Director
Angelo R. Martinelli
Director
John A. Pratt Jr.
Director
Cecile D. Singer
Director
Craig S. Thompson
Director
Andrew J. Reinhart
First Senior Vice President and Controller
(Principal Accounting Officer)
116