Attached files

file filename
EX-31.2 - EX-31.2 - HUDSON VALLEY HOLDING CORPy90754exv31w2.htm
EX-32.1 - EX-32.1 - HUDSON VALLEY HOLDING CORPy90754exv32w1.htm
EX-32.2 - EX-32.2 - HUDSON VALLEY HOLDING CORPy90754exv32w2.htm
EX-31.1 - EX-31.1 - HUDSON VALLEY HOLDING CORPy90754exv31w1.htm
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2011
 
Commission File No. 001-34453
 
 
HUDSON VALLEY HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
     
NEW YORK   13-3148745
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
21 Scarsdale Road, Yonkers, NY 10707
(Address of principal executive office with zip code)
 
914-961-6100
(Registrant’s telephone number including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes o  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act.)  Yes o  No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
     
    Outstanding at
    May 2,
Class
 
2011
Common stock, par value $0.20 per share
  17,689,049
 


 


Table of Contents

 
 
PART 1 — FINANCIAL INFORMATION
 
Item 1.  Condensed Financial Statements
 
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Interest Income:
               
Loans, including fees
  $ 26,332     $ 27,564  
Securities:
               
Taxable
    2,950       3,687  
Exempt from Federal income taxes
    1,161       1,710  
Federal funds sold
    26       42  
Deposits in banks
    164       93  
                 
Total interest income
    30,633       33,096  
                 
Interest Expense:
               
Deposits
    2,274       3,335  
Securities sold under repurchase agreements and other short-term borrowings
    47       77  
Other borrowings
    844       1,498  
                 
Total interest expense
    3,165       4,910  
                 
Net Interest Income
    27,468       28,186  
Provision for loan losses
    5,451       5,582  
                 
Net interest income after provision for loan losses
    22,017       22,604  
                 
Non Interest Income:
               
Service charges
    2,040       1,803  
Investment advisory fees
    2,606       2,225  
Recognized impairment charge on securities available for sale (includes $773 and $1,757 of total losses in 2011 and 2010, respectively, less $612 of losses and $15 of gains on securities available for sale, recognized in other comprehensive income in 2011 and 2010, respectively,)
    (161 )     (1,772 )
Realized gain on securities available for sale, net
          68  
Gains (losses) on sale of other real estate owned
    127       (65 )
Other income
    607       534  
                 
Total non interest income
    5,219       2,793  
                 
Non Interest Expense:
               
Salaries and employee benefits
    10,818       9,872  
Occupancy
    2,345       2,185  
Professional services
    1,453       1,315  
Equipment
    1,010       966  
Business development
    506       562  
FDIC assessment
    1,111       1,088  
Other operating expenses
    3,207       2,466  
                 
Total non interest expense
    20,450       18,454  
                 
Income Before Income Taxes
    6,786       6,943  
Income Taxes
    1,962       2,088  
                 
Net Income
  $ 4,824     $ 4,855  
                 
Basic Earnings Per Common Share
  $ 0.27     $ 0.28  
Diluted Earnings Per Common Share
  $ 0.27     $ 0.27  
 
See notes to condensed consolidated financial statements


2


Table of Contents

 
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Dollars in thousands
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Net Income
  $ 4,824     $ 4,855  
                 
Other comprehensive gain (loss), net of tax:
               
Net change in unrealized (losses) gains:
               
Other-than-temporarily impaired securities available for sale:
               
Total (losses) gains
    (773 )     (1,757 )
Losses recognized in earnings
    161       1,772  
                 
(Losses) gains recognized in comprehensive income
    (612 )     15  
Income tax effect
    251       (6 )
                 
Unrealized holding (losses) gains on other-than-temporarily impaired securities available for sale, net of tax
    (361 )     9  
                 
Securities available for sale not other-than-temporarily impaired:
               
(Losses) gains arising during the year
    (2,533 )     3,214  
Income tax effect
    989       (1,266 )
                 
      (1,544 )     1,948  
                 
Gains recognized in earnings
          (68 )
Income tax effect
          27  
                 
            (41 )
                 
Unrealized holding (losses) gains on securities available for sale not other-than-temporarily- impaired , net of tax
    (1,544 )     1,907  
                 
Unrealized holding (loss) gain on securities, net
    (1,905 )     1,916  
                 
Minimum pension liability adjustment
    81       102  
Income tax effect
    (32 )     (41 )
                 
      49       61  
                 
Other comprehensive (loss) income
    (1,856 )     1,977  
                 
Comprehensive Income
  $ 2,968     $ 6,832  
                 
 
See notes to condensed consolidated financial statements


3


Table of Contents

 
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dollars in thousands, except share amounts
 
                 
    March 31,
    December 31,
 
    2011     2010  
 
ASSETS
               
Cash and due from banks
  $ 41,934     $ 25,876  
Interest earning deposits in banks
    198,173       258,280  
Federal funds sold
    39,511       72,071  
Securities available for sale at estimated fair value (amortized cost of $433,991 in 2011 and $440,792 in 2010)
    433,721       443,667  
Securities held to maturity at amortized cost (estimated fair value of $16,258 in 2011 and $17,272 in 2010)
    15,252       16,267  
Federal Home Loan Bank of New York (FHLB) Stock
    5,378       7,010  
Nonperforming loans held for sale
    5,506       7,811  
Loans (net of allowance for loan losses of $40,287 in 2011 and $38,949 in 2010)
    1,774,679       1,689,187  
Accrued interest and other receivables
    15,158       16,396  
Premises and equipment, net
    27,233       28,611  
Other real estate owned
    4,810       11,028  
Deferred income taxes, net
    26,898       25,043  
Bank owned life insurance
    26,502       25,976  
Goodwill
    23,842       23,842  
Other intangible assets
    2,248       2,454  
Other assets
    14,428       15,514  
                 
TOTAL ASSETS
  $ 2,655,273     $ 2,669,033  
                 
LIABILITIES
               
Deposits:
               
Non interest-bearing
  $ 814,755     $ 756,917  
Interest-bearing
    1,428,858       1,477,495  
                 
Total deposits
    2,243,613       2,234,412  
Securities sold under repurchase agreements and other short-term borrowings
    46,480       36,594  
Other borrowings
    51,492       87,751  
Accrued interest and other liabilities
    23,034       20,359  
                 
TOTAL LIABILITIES
    2,364,619       2,379,116  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $0.01 par value; authorized 15,000,000; no shares outstanding in 2011 and 2010, respectively
           
Common stock, $0.20 par value; authorized 25,000,000 shares; outstanding 17,686,063 and 17,665,908 shares in 2011 and 2010, respectively
    3,797       3,793  
Additional paid-in capital
    347,166       346,750  
Retained earnings (deficit)
    (1,816 )     (3,989 )
Accumulated other comprehensive income (loss), net
    (929 )     927  
Treasury stock, at cost; 1,299,414 shares in both 2011 and 2010
    (57,564 )     (57,564 )
                 
Total stockholders’ equity
    290,654       289,917  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 2,655,273     $ 2,669,033  
                 
 
See notes to condensed consolidated financial statements


4


Table of Contents

 
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2011 and 2010
Dollars in thousands, except share amounts
 
                                                         
                                  Accumulated
       
                                  Other
       
    Number of
                Additional
    Retained
    Comprehensive
       
    Shares
    Common
    Treasury
    Paid-in
    Earnings
    Income
       
    Outstanding     Stock     Stock     Capital     (Deficit)     (Loss)     Total  
 
Balance at January 1, 2011
    17,665,908     $ 3,793     $ (57,564 )   $ 346,750     $ (3,989 )   $ 927     $ 289,917  
Net income
                                    4,824               4,824  
Stock option expense and exercises of stock options, net of tax
    20,155       4               416                       420  
Cash dividends ($0.15 per share)
                                    (2,651 )             (2,651 )
Accrued benefit liability adjustment
                                            49       49  
Net unrealized gain on securities available for sale:
                                                       
Not other-than-temporarily impaired
                                            (1,544 )     (1,544 )
Other-than-temporarily impaired (includes $773 of total losses less $161 of losses recognized in earnings, net of $251 tax)
                                            (361 )     (361 )
                                                         
Balance at March 31, 2011
    17,686,063     $ 3,797     $ (57,564 )   $ 347,166     $ (1,816 )   $ (929 )   $ 290,654  
                                                         
 
                                                         
                                  Accumulated
       
                                  Other
       
    Number of
                Additional
          Comprehensive
       
    Shares
    Common
    Treasury
    Paid-in
    Retained
    Income
       
    Outstanding     Stock     Stock     Capital     Earnings     (Loss)     Total  
 
Balance at January 1, 2010
    16,016,738     $ 3,463     $ (57,564 )   $ 346,297     $ 2,294     $ (812 )   $ 293,678  
Net income
                                    4,855               4,855  
Stock option expense and exercises of stock options, net of tax
    9,054       2               176                       178  
Cash dividends ($0.19 per share)
                                    (3,686 )             (3,686 )
Accrued benefit liability adjustment
                                            61       61  
Net unrealized gain on securities available for sale:
                                                       
Not other-than-temporarily impaired
                                            1,907       1,907  
Other-than-temporarily impaired (includes $1,757 of total losses less $1,772 of losses recognized in earnings, net of $(6) tax)
                                            9       9  
                                                         
Balance at March 31, 2010
    16,025,792     $ 3,465     $ (57,564 )   $ 346,473     $ 3,463     $ 1,165     $ 297,002  
                                                         
 
See notes to condensed consolidated financial statements


5


Table of Contents

 
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollars in thousands
                 
    For the Three Months
 
    Ended March 31,  
    2011     2010  
 
Operating Activities:
               
Net income
  $ 4,824     $ 4,855  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    5,451       5,582  
Depreciation and amortization
    1,001       988  
Recognized impairment charge on securities available for sale
    161       1,772  
Realized gain on security transactions, net
          (68 )
(Gain) loss on other real estate owned
    (127 )     65  
Amortization of premiums on securities, net
    666       383  
Increase in cash value of bank owned life insurance
    (267 )     (348 )
Amortization of intangible assets
    206       206  
Stock option expense and related tax benefits
    47       50  
Deferred tax benefit
    (647 )     (1,688 )
Decrease (increase) in deferred loan fees, net
    72       (560 )
Decrease (increase) in accrued interest and other receivables
    1,238       (696 )
Decrease (increase) in other assets
    1,086       (1,363 )
Excess tax benefits from share-based payment arrangements
    (7 )      
Decrease in accrued interest and other liabilities
    2,675       4,301  
Decrease in accrued benefit liability adjustment
    49       63  
                 
Net cash provided by operating activities
    16,428       13,542  
                 
Investing Activities:
               
Net decrease (increase) in Federal funds sold
    32,560       (19,755 )
Decrease in FHLB stock
    1,632        
Proceeds from maturities and paydowns of securities available for sale
    52,516       40,636  
Proceeds from maturities and paydowns of securities held to maturity
    1,015       1,658  
Proceeds from sales of securities available for sale
          4,942  
Purchases of securities available for sale
    (46,510 )     (58,657 )
Net (increase) decrease in loans
    (88,710 )     11,642  
Proceeds from sale of other real estate owned
    6,345       2,209  
Net dispositions (purchases) of premises and equipment
    377       (245 )
Premiums paid on bank owned life insurance
    (259 )     (51 )
                 
Net cash used in investing activities
    (41,034 )     (17,621 )
                 
Financing Activities:
               
Net increase in deposits
    9,201       112,323  
Net decrease in securities sold under repurchase agreements and short-term borrowings
    9,886       18,701  
Repayment of other borrowings
    (36,259 )     (6 )
Proceeds from exercise of stock options
    373       128  
Excess tax benefits from share-based payment arrangements
    7        
Cash dividends paid
    (2,651 )     (3,686 )
                 
Net cash (used in) provided by financing activities
    (19,443 )     127,460  
                 
(Decrease) increase in Cash and Due from Banks and interest earning deposits
    (44,049 )     123,381  
Cash and due from banks and interest earning deposits, beginning of period
    284,156       166,980  
                 
Cash and due from banks and interest earning deposits, end of period
  $ 240,107     $ 290,361  
                 
Supplemental Disclosures:
               
Interest paid
  $ 3,537     $ 5,087  
Income tax payments
    60       1,378  
Transfer from loans held for sale back to loan portfolio
    2,305        
 
See notes to condensed consolidated financial statements


6


Table of Contents

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in thousands, except per share and share amounts
 
1.  Description of Operations
 
Hudson Valley Holding Corp. (the “Company”) is a New York corporation founded in 1982. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956.
 
The Company provides financial services through its wholly-owned subsidiary, Hudson Valley Bank, N.A. (“HVB” or “the Bank”), a national banking association established in 1972, with operational headquarters in Westchester County, New York. The Bank has 18 branch offices in Westchester County, New York, 10 in New York City, New York, 1 in Rockland County, New York, 5 in Fairfield County, Connecticut and 1 in New Haven County, Connecticut.
 
The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a Manhattan, New York based money management firm.
 
We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area, primarily Westchester County and Rockland County, New York, portions of New York City, Fairfield County and New Haven County, Connecticut.
 
Our principal executive offices are located at 21 Scarsdale Road, Yonkers, New York 10707.
 
Our principal customers are businesses, professionals, municipalities, not-for-profit organizations and individuals. We are dedicated to providing personalized service to customers and focusing on products and services for selected segments of the market. We believe that our ability to attract and retain customers is due primarily to our focused approach to our markets, our personalized and professional services, our product offerings, our experienced staff, our knowledge of our local markets and our ability to provide responsive solutions to customer needs. We provide these products and services to a diverse range of customers and do not rely on a single large depositor for a significant percentage of deposits. We anticipate that we will continue to expand in our current market and surrounding area through various means which include acquiring other banks and related businesses, adding staff, opening loan production offices and continuing to open new branch offices.
 
2.  Basis of Presentation
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2011 and December 31, 2010 and the results of its operations, comprehensive income, cash flows and changes in stockholders’ equity for the three month periods ended March 31, 2011 and 2010. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
 
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices used within the banking industry. Certain information and note disclosures normally included in annual financial statements have been omitted.
 
In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and statements of income for the periods reported. Actual results could differ significantly from those estimates.
 
Estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of the fair value of securities available for sale, the determination of other-than-temporary impairment of investments and the carrying amounts of goodwill and deferred tax assets. In


7


Table of Contents

 
connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties.
 
Intercompany items and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
 
These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2010 and notes thereto.
 
Securities — Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities 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 Company’s methodology for assessing the appropriateness of the allowance consists of a specific component for identified problem loans, and a formula component which addresses historical loan loss experience together with other relevant risk factors affecting the portfolio. This methodology applies to all loan classes.
 
Risk characteristics of the Company’s portfolio classes include the following:
 
Commercial Real Estate Loans — In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan, or a decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied. These types of loans may involve greater risks than other types of lending, because payments on such loans are often dependent upon the successful operation of the business involved, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.
 
Construction Loans  — Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the company or another bank providing the permanent financing.


8


Table of Contents

 
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 — Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential mortgages, multi-family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be a decline in general economic conditions.
 
Commercial and Industrial Loans  — The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory, new or used equipment or other short or long-term working capital purposes. These loans are generally secured by corporate assets, often with real estate as secondary collateral, but are also offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.
 
Lease Financing and Other Loans  — The Company originates lease financing transactions which are primarily conducted with businesses, professionals and not-for-profit organizations and provide financing principally for office equipment, telephone systems, computer systems, energy saving improvements and other special use equipment. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business. The Company also offers installment loans and reserve lines of credit to individuals. Repayment of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.
 
The 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 loan’s contractual terms. In addition, a loan which has been renegotiated with a borrower experiencing financial difficulties for which the terms of the loan have been modified with a concession that the Company would not otherwise have granted are considered troubled debt restructurings and are also recognized as impaired. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Company expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of 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 Company’s portfolios of home equity loans, real estate mortgages, installment and other loans.
 
The formula component is calculated by first applying historical loss experience factors to outstanding loans by type. The Company uses a three year average loss experience as the starting base for the formula component.


9


Table of Contents

 
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. Management’s evaluation of the loss related to each of these conditions is quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.
 
Actual losses can vary significantly from the estimated amounts. The Company’s methodology permits adjustments to the allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed.
 
Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of March 31, 2011. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examinations.
 
Income Recognition on Loans — Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectibility of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.
 
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.
 
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


10


Table of Contents

 
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 Company’s 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 1,210,000 shares of the Company’s 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 Company’s 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 7 “Stock-Based Compensation” herein for additional discussion.
 
Earnings per Common Share — The “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 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 of stock options, had been issued.


11


Table of Contents

 
3.   Securities
 
The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale and held to maturity at March 31, 2011 and December 31, 2010 (in thousands):
 
March 31, 2011
 
                                 
          Gross Unrealized     Estimated Fair
 
    Amortized Cost     Gains     Losses     Value  
 
Classified as Available for Sale
                               
U.S. Treasury and government agencies
  $ 3,001     $ 10           $ 3,011  
Mortgage-backed securities — residential
    300,568       5,310     $ 1,902       303,976  
Obligations of states and political subdivisions
    108,207       4,443       9       112,641  
Other debt securities
    12,144       2       8,562       3,584  
                                 
Total debt securities
    423,920       9,765       10,473       423,212  
Mutual funds and other equity securities
    10,071       556       118       10,509  
                                 
Total
  $ 433,991     $ 10,321     $ 10,591     $ 433,721  
                                 
                                 
          Gross Unrecognized     Estimated Fair
 
    Amortized Cost     Gains     Losses     Value  
 
Classified as Held to Maturity
                               
Mortgage-backed securities — residential
  $ 10,116     $ 682     $ 1     $ 10,797  
Obligations of states and political subdivisions
    5,136       325             5,461  
                                 
Total
  $ 15,252     $ 1,007     $ 1     $ 16,258  
                                 
 
December 31, 2010
 
                                 
          Gross Unrealized     Estimated Fair
 
    Amortized Cost     Gains     Losses     Value  
 
Classified as Available for Sale
                               
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  
                                 
                                 
          Gross Unrecognized     Estimated Fair
 
    Amortized Cost     Gains     Losses     Value  
 
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  
                                 
 
Included in other debt securities are investments in six pooled trust preferred securities with amortized costs and estimated fair values of $11,578 and $3,016, respectively, at March 31, 2011. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively affected by the recent downturn in the economy and increased investor concerns about recent and potential future


12


Table of Contents

 
losses in the financial services industry. These investments are rated below investment grade by Moody’s Investor Services at March 31, 2011 with ratings ranging from Caa1 to C. In light of these conditions, these investments were reviewed for other-than-temporary impairment.
 
In estimating OTTI losses, the Company considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuers, (3) whether the Company intends to sell or whether it is more likely than not that the Company would be required to sell the investments prior to recovery of cost and (4) evaluation of cash flows to determine if they have been adversely affected.
 
The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over-collateralization tests, interest coverage tests and other factors. 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 March 31, 2011 included the following:
 
     
 
Annual prepayment
  1.0%
Projected specific defaults/deferrals
  27.1% - 73.6%
Projected severity of loss on specific defaults/deferrals
  50.0% - 87.1%
Projected additional defaults:
   
Year 1
  2.0%
Year 2
  1.0%
Thereafter
  0.25%
Projected severity of loss on additional defaults
  85.0%
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 three months ended March 31, 2011 and 2010 (in thousands):
 
                 
    2011     2010  
Balance at beginning of period:
               
Total OTTI credit related impairment charges beginning of period
  $ 9,110     $ 6,557  
Increase to the amount related to the credit loss for which other-than-temporary impairment was previously recognized
    161       1,615  
Credit related impairment not previously recognized
          158  
                 
Balance at end of period
  $ 9,271     $ 8,330  
                 
 
During the three month period ended March 31, 2011, pretax OTTI losses of $82, $38, $24, $16 and $1, respectively, were recognized on five pooled trust preferred securities which prior to the 2011 charges had book values of $2,208, $949, $5,583, $2,180 and $656, respectively. These OTTI losses resulted from adverse changes in the expected cash flows of these securities which indicated that the Company may not recover the entire cost basis of these investments. Continuation or worsening of current adverse economic conditions may result in further impairment charges in the future.


13


Table of Contents

 
The following tables reflect the Company’s investment’s fair value and gross unrealized loss, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of March 31, 2011 and December 31, 2010 (in thousands):
 
March 31, 2011
 
                                                 
    Duration of Unrealized Loss              
    Less than 12 Months     Greater than 12 Months     Total  
          Gross
          Gross
          Gross
 
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Loss     Value     Loss     Value     Loss  
 
Classified as Available for Sale
                                               
U.S. Treasuries and government agencies
                                   
Mortgage-backed securities — residential
  $ 104,979     $ 1,898     $ 2,354     $ 4     $ 107,333     $ 1,902  
Obligations of states and political subdivisions
    1,630       9                   1,630       9  
Other debt securities
                3,016       8,562       3,016       8,562  
                                                 
Total debt securities
    106,609       1,907       5,370       8,566       111,979       10,473  
Mutual funds and other equity securities
    25       6       82       112       107       118  
                                                 
Total temporarily impaired securities
  $ 106,634     $ 1,913     $ 5,452     $ 8,678     $ 112,086     $ 10,591  
                                                 
Classified as Held to Maturity
                                               
Mortgage-backed securities — residential
  $ 354     $ 1                 $ 354     $ 1  
                                                 
Total temporarily impaired securities
  $ 354     $ 1                 $ 354     $ 1  
                                                 
 
December 31, 2010
 
                                                 
    Duration of Unrealized Loss              
    Less than 12 Months     Greater than 12 Months     Total  
          Gross
          Gross
          Gross
 
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Loss     Value     Loss     Value     Loss  
 
Classified as Available for Sale
                                               
U.S. Treasuries and government agencies
                                   
Mortgage-backed securities — 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  
                                                 
 
The total number of securities in the Company’s portfolio that were in an unrealized loss position was 115 and 90, respectively, at March 31, 2011 and December 31, 2010. The Company has determined that it does not intend to sell, or it is more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. With the exception of the investment in pooled trust preferred securities discussed above, the Company believes that its securities continue to have satisfactory ratings, are readily marketable and that current unrealized losses are primarily a result of changes in interest rates. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011. With


14


Table of Contents

 
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 March 31, 2011.
 
At March 31, 2011 and December 31, 2010, securities having a stated value of approximately $307,000 and $310,000, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
 
The contractual maturity of all debt securities held at March 31, 2011 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  
    (000’s)  
 
Contractual Maturity
                               
Within 1 year
  $ 10,280     $ 10,027              
After 1 but within 5 years
    33,505       35,123     $ 5,136     $ 5,461  
After 5 years but within 10 years
    64,265       67,258              
After 10 years
    15,302       6,828              
Mortgage-backed Securities — residential
    300,568       303,976       10,116       10,797  
                                 
Total
  $ 423,920     $ 423,212     $ 15,252     $ 16,258  
                                 
 
4.  Loans
 
The loan portfolio is comprised of the following:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (000’s)  
 
Real Estate:
               
Commercial
  $ 821,959     $ 796,253  
Construction
    168,567       174,369  
Residential
    548,346       467,326  
Commercial & Industrial
    234,742       245,263  
Lease Financing and other
    45,539       49,040  
                 
Total
    1,819,153       1,732,251  
Deferred loan fees, net
    (4,187 )     (4,115 )
Allowance for loan losses
    (40,287 )     (38,949 )
                 
Loans, net
  $ 1,774,679     $ 1,689,187  
                 


15


Table of Contents

 
The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment for the three month periods ended March 31, 2011 and 2010 (in thousands):
 
                                                 
    March 31, 2011  
                                  Lease
 
          Commercial
          Residential
    Commercial &
    Financing
 
    Total     Real Estate     Construction     Real Estate     Industrial     & Other  
 
Balance at beginning of year
  $ 38,949     $ 16,736     $ 7,140     $ 9,851     $ 4,290     $ 932  
                                                 
Charge-offs
    (5,255 )     (156 )     (736 )     (2,195 )     (2,168 )      
Recoveries
    1,142       238       139       554       205       6  
                                                 
Net Charge-offs
    (4,113 )     82       (597 )     (1,641 )     (1,963 )     6  
Provision for loan losses
    5,451       (145 )     587       2,749       2,288       (28 )
                                                 
Net change during the period
    1,338       (63 )     (10 )     1,108       325       (22 )
                                                 
Balance at end of period
  $ 40,287     $ 16,673     $ 7,130     $ 10,959     $ 4,615     $ 910  
                                                 
 
                                                 
    March 31, 2010  
                                  Lease
 
          Commercial
          Residential
    Commercial &
    Financing
 
    Total     Real Estate     Construction     Real Estate     Industrial     & Other  
 
Balance at beginning of year
  $ 38,645     $ 15,273     $ 5,802     $ 9,706     $ 7,326     $ 538  
                                                 
Charge-offs
    (4,894 )     (114 )     (112 )     (4,396 )     (249 )     (23 )
Recoveries
    30                   6       18       6  
                                                 
Net Charge-offs
    (4,864 )     (114 )     (112 )     (4,390 )     (231 )     (17 )
Provision for loan losses
    5,582       1,671       1,258       3,456       (799 )     (4 )
                                                 
Net change during the period
    718       1,557       1,146       (934 )     (1,030 )     (21 )
                                                 
Balance at end of year
  $ 39,363     $ 16,830     $ 6,948     $ 8,772     $ 6,296     $ 517  
                                                 
 


16


Table of Contents

 
Impaired loans as of March 31, 2011 and December 31, 2010 were as follows (in thousands):
 
                                                 
    March 31, 2011     December 31, 2010  
    Unpaid
          Allowance for
    Unpaid
          Allowance for
 
    Principal
    Recorded
    Loan Losses
    Principal
    Recorded
    Loan Losses
 
    Balance     Investment     Allocated     Balance     Investment     Allocated  
 
With no related allowance recorded:
                                               
Commercial
  $ 26,439     $ 25,055           $ 22,714     $ 21,166        
Construction
    14,416       11,482             16,985       11,868        
Residential
    17,376       13,224             11,476       7,223        
Commercial & industrial
    7,703       5,523             5,543       4,538        
Lease financing & other
    645       388             651       393        
With an allowance recorded:
                                               
Commercial
                                   
Construction
    3,821       3,822     $ 850       3,821       3,821     $ 850  
Residential
    521       521       19       521       521       17  
Commercial & industrial
    289       289       68       25       25       25  
Lease financing & other
                                   
                                                 
Total loans
  $ 71,210     $ 60,304     $ 937     $ 61,736     $ 49,555     $ 892  
                                                 
 
The Company classifies all loans considered to be troubled debt restructurings (“TDRs”) as impaired. Impaired loans as of March 31, 2011 and December 31, 2010 included $20,311 and $17,236, respectively, of loans considered to be TDRs. At March 31, 2011 and 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 March 31, 2011 and December 31, 2010 were on nonaccrual status. The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan or by an analysis of the expected cash flows related to the loan.
 
The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2011 and December 31, 2010 (in thousands):
 
                                                 
    March 31, 2011  
                                  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
  $ 39,350     $ 16,673     $ 6,280     $ 10,940     $ 4,547     $ 910  
Individually evaluated for impairment
    937             850       19       68        
                                                 
Total ending balance of allowance
  $ 40,287     $ 16,673     $ 7,130     $ 10,959     $ 4,615     $ 910  
                                                 
Total loans:
                                               
Ending balance of loans:
                                               
Collectively evaluated for impairment
  $ 1,758,849     $ 796,904     $ 153,263     $ 534,601     $ 228,930     $ 45,151  
Individually evaluated for impairment
    60,304       25,055       15,304       13,745       5,812       388  
                                                 
Total ending balance of loans
  $ 1,819,153     $ 821,959     $ 168,567     $ 548,346     $ 234,742     $ 45,539  
                                                 

17


Table of Contents

 
                                                 
    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  
                                                 
 
The following table presents the recorded investment in non-accrual loans and loans past due 90 days and still accruing by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):
 
                                 
    March 31, 2011     December 31, 2010  
          Past Due
          Past Due
 
          90 Days
          90 Days
 
          and Still
          and Still
 
    Non-Accrual     Accruing     Non-Accrual     Accruing  
 
Loans:
                               
Commercial Real Estate:
                               
Owner occupied
  $ 4,660           $ 1,942     $ 292  
Non owner occupied
    14,524             13,353        
Construction:
                               
Commercial
    5,372             4,477       1,323  
Residential
    9,933             11,212        
Residential:
                               
Multifamily
    5,429             1,437        
1-4 family
    5,092             4,649        
Home equity
    3,224             1,658       10  
Commercial & Industrial
    5,546             4,563        
Other:
                               
Lease financing and other
    653             393        
Overdrafts
                           
                                 
Total
  $ 54,433           $ 43,684     $ 1,625  
                                 


18


Table of Contents

 
The following table presents the aging of the recorded investment in loans (including past due and non-accrual loans) as of March 31, 2011 and December 31, 2010 by class of loans (in thousands):
 
                                                 
    March 31, 2011  
                      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
  $ 316,746     $ 2,496     $ 2,013     $ 3,328     $ 7,837     $ 308,909  
Non owner occupied
    505,213       3,610             14,524       18,134       487,079  
Construction:
                                               
Commercial
    102,048             1,792       3,580       5,372       96,676  
Residential
    66,519                   9,933       9,933       56,586  
Residential:
                                               
Multifamily
    248,566                   5,429       5,429       243,137  
1- 4 family
    181,900       445       985       5,007       6,437       175,463  
Home equity
    117,880       559       893       3,224       4,676       113,204  
Commercial & Industrial
    234,742       3,014       1,434       4,165       8,613       226,129  
Other:
                                               
Lease financing and other
    43,251       109       55       584       748       42,503  
Overdrafts
    2,288                               2,288  
                                                 
Total
  $ 1,819,153     $ 10,233     $ 7,172     $ 49,774     $ 67,179     $ 1,751,974  
                                                 
 
                                                 
    December 31, 2010  
                      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  
                                                 


19


Table of Contents

 
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as; value of underlying collateral, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans individually and classifies them as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings.
 
Special Mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the institution’s credit position at some future date.
 
Substandard — Loans classified as substandard asset are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
 
Doubtful — Loans classified as doubtful have all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
 
Loans not meeting the above criteria that are analyzed individually as part of the above described process are considered to be pass rated loans.
 
The following table presents the risk category by class of loans as of March 31, 2011 and December 31, 2010 of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed (in thousands):
 
                                         
    March 31, 2011  
                Special
             
    Total     Pass     Mention     Substandard     Doubtful  
 
Commercial Real Estate:
                                       
Owner occupied
  $ 316,746     $ 240,205     $ 32,715     $ 43,826        
Non owner occupied
    505,214       424,707       32,371       48,136        
Construction:
                                       
Commercial
    102,048       71,701       11,699       18,648        
Residential
    66,519       45,621             20,898        
Residential:
                                       
Multifamily
    248,566       230,130       8,498       9,938        
1-4 family
    89,521       67,451       9,750       12,320        
Home equity
    7,117       316             6,801        
Commercial & Industrial
    235,568       215,698       5,875       13,995        
Other:
                                       
Lease Financing & Other
    40,794       39,243       515       1,036        
                                         
Total loans
  $ 1,612,093     $ 1,335,072     $ 101,423     $ 175,598        
                                         
 


20


Table of Contents

 
                                         
    December 31, 2010  
                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 delinquency.
 
The following table presents the delinquency categories by class of loans as of March 31, 2011 and December 31, 2010 for loans evaluated for risk in groups of homogeneous loans (in thousands):
 
                                                 
    March 31, 2011  
                      90 Days
             
          31-59 Days
    60-89 Days
    Or More
    Total
       
    Total     Past Due     Past Due     Past Due     Past Due     Current  
 
Residential:
                                               
1-4 family
  $ 92,379     $ 163     $ 894           $ 1,057     $ 91,322  
Home equity
    110,763       114       893             1,007       109,756  
Other:
                                               
Other loans
    1,630                               1,630  
Overdrafts
    2,288                               2,288  
                                                 
Total loans
  $ 207,060     $ 277     $ 1,787           $ 2,064     $ 204,996  
                                                 
 
                                                 
    December 31, 2010  
                      90 Days
             
          31-59 Days
    60-89 Days
    Or More
    Total
       
    Total     Past Due     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  
                                                 

21


Table of Contents

 
The following table presents the average recorded investment in impaired loans by portfolio segment and interest recognized on impaired loans for the three month periods ended March 31, 2011 and 2010 (in thousands):
 
                                                 
                                  Lease
 
          Commercial
          Residential
    Commercial &
    Financing
 
    Total     Real Estate     Construction     Real Estate     Industrial     & Other  
 
Three months ended March 31, 2011:
                                               
Average recorded investment in impaired loans
  $ 54,929     $ 23,111     $ 15,497     $ 10,742     $ 5,188     $ 391  
                                                 
Interest income recognized during impairment
  $ 59     $ 59     $     $     $     $  
                                                 
Three months ended March 31, 2010:
                                               
Average recorded investment in impaired loans
  $ 60,138     $ 25,625     $ 13,762     $ 16,687     $ 2,407     $ 1,657  
                                                 
Interest income recognized during impairment
  $     $     $     $     $     $  
                                                 
 
Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $836 and $2,468, respectively, for the three month periods ended March 31, 2011 and 2010.
 
5.  Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per common share for each of the periods indicated:
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (000’s except share data)
 
Numerator:
               
Net income (loss) available to common shareholders for basic and diluted earnings per share
  $ 4,824     $ 4,855  
Denominator:
               
Denominator for basic earnings per common share — weighted average shares
    17,678,554       17,624,056  
Effect of dilutive securities:
               
Stock options
    64,958       84,765  
                 
Denominator for diluted earnings per common share — adjusted weighted average shares
    17,743,512       17,708,821  
                 
Basic earnings per common share
  $ 0.27     $ 0.28  
Diluted earnings per common share
  $ 0.27     $ 0.27  
Dividends declared per share
  $ 0.15     $ 0.19  
 
In November 2010, the Company declared a 10% stock dividend. Share and per share amounts for 2010 have been retroactively restated to reflect the issuance of the additional shares.


22


Table of Contents

 
6.  Benefit Plans
 
In addition to defined contribution pension and savings plans which cover substantially all employees, the Company provides additional retirement benefits to certain officers and directors pursuant to unfunded supplemental defined benefit plans. The following table summarizes the components of the net periodic pension cost of the defined benefit plans (in thousands).
 
                 
    Three Months
 
    Ended
 
    March 31,  
    2011     2010  
 
Service cost
  $ 95     $ 64  
Interest cost
    147       139  
Amortization of prior service cost
    (58 )     (48 )
Amortization of net loss
    139       150  
                 
Net periodic pension cost
  $ 323     $ 305  
                 
 
The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2010 Annual Report on Form 10-K that it expected to contribute $612 to the unfunded defined benefit plans during 2011. For the three month period ended March 31, 2011, the Company contributed $196 to these plans.
 
7.  Stock-Based Compensation
 
In accordance with the provisions of the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan, approved by the Company’s shareholders on May 27, 2010, the Company may grant eligible employees, including directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other types of awards. The 2010 Plan provides for the issuance of up to 1,210,000 shares of the Company’s common stock. Prior to the 2010 Plan, the Company had stock option plans that provided for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Under the prior plans, options were granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant, vested over various periods ranging from immediate to five years from date of grant, and had expiration dates up to ten years from the date of grant.
 
Compensation costs relating to stock-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Stock options 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 three month period ended March 31, 2011.


23


Table of Contents

 
The following table summarizes stock option activity for the three month period ended March 31, 2011:
 
                                 
                Weighted Average
        Weighted Average
  Aggregate Intrinsic
  Remaining Contractual
    Shares   Exercise Price   Value(1) ($000’s)   Term(Yrs)
 
Outstanding at December 31, 2010
    700,070     $ 23.93                  
Granted
                           
Exercised
    (20,155 )     18.51                  
Cancelled or Expired
    (10,235 )     17.23                  
                                 
Outstanding at March 31, 2011
    669,680       24.19     $ 1,318       3.0  
                                 
Exercisable at March 31, 2011
    638,475       23.47     $ 1,318       3.1  
                                 
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 fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2011. This amount changes based on changes in the fair value of the Company’s stock.
 
The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in the three month period ended March 31, 2011 or the year ended December 31, 2010.
 
Net compensation expense of $40 and $150 related to the Company’s stock option plans was included in net income for the three month periods ended March 31, 2011 and 2010, respectively. The total tax effect related thereto was $(1) and $1, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $193 at March 31, 2011. This expense is expected to be recognized over a remaining weighted average period of 1.1 years.
 
8.   Fair Value
 
The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB Accounting Standards Codification which requires additional disclosures about the Company’s 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 entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, which is a Level 1 input, or matrix pricing, which is a mathematical technique widely used in the


24


Table of Contents

 
industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, which is a Level 2 input.
 
The Company’s available for sale securities at March 31, 2011 and December 31, 2010 include several pooled trust preferred instruments. The recent severe downturn in the overall economy and, in particular, in the financial services industry has created a situation where significant observable inputs (Level 2) are not readily available. As an alternative, the Company combined Level 2 input of market yield requirements of similar instruments together with certain Level 3 assumptions addressing the impact of current market illiquidity to estimate the fair value of these instruments — See Note 3 “Securities” for further discussion of pooled trust preferred securities.
 
Assets and liabilities measured at fair value are summarized below:
 
                                 
    Fair Value Measurements at March 31, 2011 Using:  
    Quoted Prices in
    Significant
    Significant
       
    Active Markets
    Other
    Unobservable
       
    for Identical
    Observable Inputs
    Inputs
       
    Assets (Level 1)     (Level 2)     (Level 3)     Total  
    (000’s)  
 
Measured on a recurring basis:
                               
Available for sale securities:
                               
U.S. Treasury and government agencies
        $ 3,011           $ 3,011  
Mortgage-backed securities — residential
          303,976             303,976  
Obligations of states and political subdivisions
          112,641             112,641  
Other debt securities
          568     $ 3,016       3,584  
Mutual funds and other equity securities
          10,509             10,509  
                                 
Total assets at fair value
        $ 430,705     $ 3,016     $ 433,721  
                                 
Measured on a non-recurring basis:
                               
Impaired loans(1)
              $ 19,833     $ 19,833  
Loans held for sale(2)
                5,506       5,506  
Other real estate owned(3)
                4,810       4,810  
                                 
Total assets at fair value
              $ 30,149     $ 30,149  
                                 
 
 
(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 March 31, 2011 was $20,770 for which a specific allowance of $937 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 March 31, 2011 was derived by management from appraisals which used various assumptions and were discounted as necessary, resulting in a Level 3 classification.
 


25


Table of Contents

 
                                 
    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  
    (000’s)  
 
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 loan sales.
 
(3)  Other real estate owned is reported at lower of cost or 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.

26


Table of Contents

 
 
The table below presents a reconciliation and income statement classification of gains and losses for securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2011 and 2010:
 
                 
    Level 3 Assets Measured on a Recurring Basis  
    For the three months
 
    ended March 31,  
    2011     2010  
    (000’s)  
 
Balance at beginning of period
  $ 3,687     $ 3,938  
Transfers into (out of) Level 3
    102        
Net unrealized gain (loss) included in other comprehensive income
    (612 )     1,634  
Principal payments
           
Recognized impairment charge included in the statement of income
    (161 )     (1,772 )
                 
Balance at end of period
  $ 3,016     $ 3,800  
                 
 
9.  Fair Value of Financial Instruments
 
The Company follows the “Financial Instruments” topic of the FASB Accounting Standards Codification which requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of March 31, 2011 and December 31, 2010 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 March 31, 2011 and December 31, 2010 were as follows:
 
                                 
    March 31, 2011     December 31, 2010  
    Carrying
    Estimated
    Carrying
    Estimated
 
    Amount     Fair Value     Amount     Fair Value  
    (In millions)  
 
Assets:
                               
Financial assets for which carrying value
approximates fair value
  $ 279.6     $ 279.6     $ 356.2     $ 356.2  
Held to maturity securities, and accrued interest
    15.3       16.3       16.3       17.3  
FHLB Stock
    5.4       N/A       7.0       N/A  
Loans and accrued interest
    1,803.4       1,830.0       1,717.8       1,759.8  
Liabilities:
                               
Deposits with no stated maturity and
accrued interest
    2,070.8       2,070.8       2,047.4       2,047.4  
Time deposits and accrued interest
    174.1       174.4       188.5       188.9  
Securities sold under repurchase
agreements and other short-term
borrowing and accrued interest
    46.5       46.5       36.6       36.6  
Other borrowings and accrued interest
    51.8       50.0       88.2       85.6  


27


Table of Contents

 
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.
 
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.
 
10.  Recent Accounting Pronouncements
 
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 has significantly expanded 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 Company’s 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 Company’s 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 Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update by the Company required enhanced disclosures and did not have a material effect on the Company’s financial condition or results of operations.
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02,A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 amend and clarify GAAP related to the accounting for debt restructurings. Specifically, ASU No. 2011-02 requires that, when evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has granted a concession, (ii) a temporary or permanent increase in the contractual interest rate as a result of a restructuring may be considered a concession because the new contractual interest rate on the restructured debt is still below the market interest rate for new debt with similar risk characteristics, and (iii) a


28


Table of Contents

 
restructuring that results in a delay in payment is either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions of ASU No. 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption.
 
Other — Certain 2010 amounts have been reclassified to conform to the 2011 presentation.


29


Table of Contents

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This section presents discussion and analysis of the Company’s consolidated financial condition at March 31, 2011 and December 31, 2010, and the consolidated results of operations for the three month periods ended March 31, 2011 and March 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 in the Company’s 2010 Annual Report on Form 10-K.
 
Overview of Management’s Discussion and Analysis
 
This overview is intended to highlight selected information included in this Quarterly Report on Form 10-Q. It does not contain sufficient information for a complete understanding of the Company’s financial condition and operating results and, therefore, should be read in conjunction with this entire Quarterly Report on Form 10-Q and the Company’s 2010 Annual Report on Form 10-K.
 
The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County and New Haven County, Connecticut. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to grow net interest income and non interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. Considering current economic conditions, the Company’s primary market risk exposures are interest rate risk, the risk of deterioration of market values of collateral supporting the Company’s loan portfolio, particularly commercial and residential real estate and potential risks associated with the impact of regulatory changes that may take place in reaction to the current crisis in the financial system. Interest rate risk is the exposure of net interest income to changes in interest rates. Commercial and residential real estate are the primary collateral for the majority of the Company’s loans.
 
The Company recorded net income for the three month period ended March 31, 2011 of $4.8 million or $0.27 per diluted share, a slight decrease of $0.1 million compared to net income of $4.9 million or $0.27 per diluted share for the same period in the prior year. The per share amount for the 2010 period has been adjusted to reflect the effects of the 10 percent stock dividend issued in December 2010. Earnings remained essentially unchanged in the first three months of 2011, compared to the same period in 2010; with little change in the provision for loan losses which totaled $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year. The provisions in both 2011 and 2010 are reflective of continued weakness in the overall economy necessitating the Company’s decision to follow a more aggressive strategy for problem asset resolution. As part of the revised resolution strategy, the Company continues to reevaluate each problem loan and make a determination of net realizable value based on management’s estimation of the most likely 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.
 
Total loans increased $86.9 million during the three months ended March 31, 2011 compared to the prior year end. This increase resulted primarily from strong demand for local market multi-family loans and an increase in commercial real estate loans partially offset by decreased loan demand in other sectors of the market; charge-offs and pay downs of existing loans. The Company recognized $4.1 million of net charge-offs during the three month period ended March 31, 2011. 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 additional 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. The Company, however, continues to provide lending availability to both new and existing customers.
 
Nonperforming assets increased to $64.7 million at March 31, 2011, compared to $64.1 million at December 31, 2010. Overall asset quality continued to be adversely affected by the current state of the economy and the


30


Table of Contents

real estate market. Although there is growing evidence that the current economic downturn may have begun to slowly turn around, higher than normal levels of delinquent and nonperforming loans, slowdowns in repayments and declines in the loan-to-value ratios on existing loans continued during the first quarter of 2011.
 
Total deposits increased $9.2 million during the three month period ended March 31, 2011, compared to the prior year end. The Company continues to experience significant growth in new customers both in existing branches and new branches added during the last two years. Growth in the first quarter was partially offset by seasonal decreases in certain municipal deposit balances. Proceeds from deposit growth were used to fund loan growth, reduce maturing term borrowings or were retained in liquid investments, principally interest earning bank deposits.
 
The Company has continued to repay maturing long-term borrowings with liquidity provided primarily by core deposit growth. Additional liquidity from deposit growth was retained in the Company’s short-term liquidity portfolios, available to fund future loan growth. With interest rates remaining at historical low levels, this increase in liquidity contributed to margin compression. This compression has been virtually offset by reinvestment of available liquidity in new loans, primarily local market multi-family loans and a $72.2 million reduction of term borrowings since March 31, 2010, of which $36.3 million occurred in the first quarter of 2011.
 
As a result of the aforementioned activity in the Company’s core businesses of loans and deposits and other asset/liability management activities, net interest income declined slightly by $0.7 million or 2.5 percent to $27.5 million for the three month period ended March 31, 2011, compared to $28.2 million for the same period in the prior year. The net interest margin of 4.39 percent for the three month period ended March 31, 2011 was essentially unchanged from the 4.40 percent for the same period in the prior year. Tax equivalent basis net interest income declined slightly by $ 1.0 million or 3.4 percent to $28.1 million for the three month period ended March 31, 2011, compared to $29.1 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $0.6 million for the three month period ended March 31, 2011, compared to $0.9 million for the same period in the prior year.
 
The Company’s non interest income was $5.2 million for the three month period ended March 31, 2011. This represented an increase of $2.4 million or 85.7 percent compared to $2.8 million for the same period in the prior year. This increase partially resulted from 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 $1.6 billion at March 31, 2011 compared to $1.3 billion at March 31, 2010. 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 $0.2 million for the three month period ended March 31, 2011 and $1.8 million for the same period in the prior year. The impairment charges were related to the Company’s investments in pooled trust preferred securities. Non interest income for the three month periods ended March 31, 2011 and 2010 also included $0.1 million of net gains and $0.1 million of net losses, respectively, related to sales and revaluations of other real estate owned.
 
Non interest expense was $20.5 million for the three month period ended March 31, 2011. This represented an increase of $2.0 million or 10.8 percent, compared to $18.5 million for the same period in the prior year. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increases in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.
 
The Office of the Comptroller of the Currency (“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. The Company and HVB have continuously exceeded all required regulatory capital ratios.


31


Table of Contents

Critical Accounting Policies
 
Application of Critical Accounting Policies — The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgments, and therefore, are critical to understanding the Company’s results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company’s Board of Directors.
 
Results of Operations for the Three Month Periods Ended March 31, 2011 and March 31, 2010
 
Summary of Results
 
The Company reported net income of $4.8 million for the three month period ended March 31, 2011, a slight decrease of $0.1 million or 2.0 percent compared to $4.9 million for the same period in the prior year. The slight decrease in net income for the three month period ended March 31, 2011, compared to the same period in the prior year, reflected slightly lower net interest income and higher noninterest expense, partially offset by higher non interest income, a lower provision for loan losses and lower income taxes. Net interest income was slightly lower primarily due to margin compression from the effects of the retention of excess liquidity from deposit growth in short term liquidity portfolios, essentially offset by partial reinvestment of available liquidity in new loans. The provision for loan losses totaled $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year, reflective of continued weakness in the overall economy. Non interest income increased primarily as a result of a $1.6 million decrease in recognized impairment charges related to the Company’s investments in pooled trust preferred securities and increases in fee income from investment advisory and deposit services. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increase in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.
 
Diluted earnings per share were $0.27 for both the three month period ended March 31, 2011 and March 31, 2010. The prior period per share amount has been adjusted to reflect the 10 percent stock dividend distributed in December 2010. Annualized returns on average stockholders’ equity and average assets were 6.6 percent and 0.7 percent for the three month period ended March 31, 2011, compared to 6.5 percent and 0.7 percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were virtually the same at 6.6 percent and 6.5 percent, respectively for the three month periods ended March 31, 2011 and 2010. Adjusted average stockholders’ equity excludes the effects of net unrealized gains, net of tax of $0.4 million and $1.8 million, on securities available for sale for the three month periods ended March 31, 2011 and 2010, 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 Company’s stated asset/liability management strategies, which do not contemplate significant realization of market gains or losses on securities available for sale which were primarily related to changes in interest rates or illiquidity in the marketplace.


32


Table of Contents

  Average Balances and Interest Rates
 
The following tables set forth the average balances of interest earning assets and interest bearing liabilities for the three month period ended March 31, 2011 and March 31, 2010, as well as total interest and corresponding yields and rates (dollars in thousands):
 
                                                 
    Three Months Ended March 31,  
    2011     2010  
    Average
          Yield/
    Average
          Yield/
 
    Balance     Interest(3)     Rate     Balance     Interest(3)     Rate  
    (Unaudited)  
 
ASSETS
                                               
Interest earning assets:
                                               
Deposits in Banks
  $ 276,957     $ 164       0.24 %   $ 181,154     $ 93       0.21 %
Federal funds sold
    44,662       26       0.23       88,102       42       0.19  
Securities:(1)
                                               
Taxable
    339,975       2,950       3.47       362,575       3,687       4.07  
Exempt from federal income taxes
    115,360       1,786       6.19       169,939       2,631       6.19  
Loans, net(2)
    1,727,420       26,332       6.10       1,758,302       27,564       6.27  
                                                 
Total interest earning assets
    2,504,374       31,258       4.99       2,560,072       34,017       5.32  
                                                 
Non interest earning assets:
                                               
Cash & due from banks
    41,022                       42,009                  
Other assets
    153,212                       141,787                  
                                                 
Total non interest earning assets
    194,234                       183,796                  
                                                 
Total assets
  $ 2,698,608                     $ 2,743,868                  
                                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Interest bearing liabilities:
                                               
Deposits:
                                               
Money market
  $ 870,155     $ 1,539       0.71 %   $ 889,697     $ 2,180       0.98 %
Savings
    114,769       127       0.44       112,779       128       0.45  
Time
    184,473       435       0.94       207,127       674       1.30  
Checking with interest
    280,805       173       0.25       328,819       353       0.43  
Securities sold under repo & other s/t borrowings
    39,708       47       0.47       66,071       77       0.47  
Other borrowings
    75,063       844       4.50       123,777       1,498       4.84  
                                                 
Total interest bearing liabilities
    1,564,973       3,165       0.81       1,728,270       4,910       1.14  
                                                 
Non interest bearing liabilities:
                                               
Demand deposits
    819,945                       693,881                  
Other liabilities
    22,713                       25,573                  
                                                 
Total non interest bearing liabilities
    842,658                       719,454                  
                                                 
Stockholders’ equity(1)
    290,977                       296,144                  
                                                 
Total liabilities and stockholders’ equity
  $ 2,698,608                     $ 2,743,868                  
                                                 
Net interest earnings
          $ 28,093                     $ 29,107          
                                                 
Net yield on interest earning assets
                    4.49 %                     4.55 %
 
 
(1)  Excludes unrealized gains (losses) on securities available for sale. Management believes that this presentation more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which have not resulted in significant realization of temporary market gains or losses on securities available for sale which were primarily related to changes in interest rates. Effects of these adjustments are presented in the table below.
 
(2)  Includes loans classified as non-accrual.


33


Table of Contents

(3)  The data contained in the tables has been adjusted to a tax equivalent basis, based on the Company’s federal statutory rate of 35 percent. Management believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules. Effects of these adjustments are presented in the table below.
 
Average Balances and Interest Rates Non-GAAP Reconciliation to GAAP
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (000’s)  
 
Total interest earning assets:
               
As reported
  $ 2,504,935     $ 2,562,904  
Unrealized gain on securities available for sale(1)
    561       2,832  
                 
Adjusted total interest earning assets
  $ 2,504,374     $ 2,560,072  
                 
                 
Net interest earnings:
               
As reported
  $ 27,468     $ 28,186  
Adjustment to tax equivalency basis(2)
    625       921  
                 
Adjusted net interest earnings
  $ 28,093     $ 29,107  
                 
                 
Net yield on interest earning assets:
               
As reported
    4.39 %     4.40 %
Effects of(1) and(2) above
    0.10 %     0.15 %
                 
Adjusted net yield on interest earning assets
    4.49 %     4.55 %
                 
Average stockholders’ equity:
               
As reported
  $ 291,426     $ 297,941  
Effects of (1) and (2) above
    449       1,797  
                 
Adjusted average stockholders’ equity
  $ 290,927     $ 296,144  
                 


34


Table of Contents

  Interest Differential
 
The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three month periods ended March 31, 2011 and March 31, 2010:
 
                         
    (000’s)  
    Three Month Period Increase
 
    (Decrease) Due to Change in  
    Volume     Rate     Total(1)  
 
Interest income:
                       
Deposits in Banks
  $ 49     $ 22     $ 71  
Federal funds sold
    (21 )     5       (16 )
Securities:
                       
Taxable
    (230 )     (507 )     (737 )
Exempt from federal income taxes
    (845 )           (845 )
Loans, net
    (484 )     (748 )     (1,232 )
                         
Total interest income
    (1,531 )     (1,228 )     (2,759 )
                         
Interest expense:
                       
Deposits:
                       
Money market
    (48 )     (593 )     (641 )
Savings
    2       (3 )     (1 )
Time
    (74 )     (165 )     (239 )
Checking with interest
    (52 )     (128 )     (180 )
Securities sold under repo & other s/t borrowings
    (31 )     1       (30 )
Other borrowings
    (590 )     (64 )     (654 )
                         
Total interest expense
    (793 )     (952 )     (1,745 )
                         
Decrease in interest differential
  $ (738 )   $ (276 )   $ (1,014 )
                         
 
 
(1)  Changes attributable to both rate and volume are allocated between the rate and volume variances based upon their absolute relative weights to the total change.
 
(2)  Equivalent yields on securities exempt from federal income taxes are based on a federal statutory rate of 35 percent in 2011 and 2010.
 
Net Interest Income
 
Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. Net interest income, on a tax equivalent basis, declined slightly by $1.0 million or 3.4 percent to $28.1 million for the three month period ended March 31, 2011, compared to $29.1 million for the same period in the prior year. Net interest income was slightly lower due to a decrease in the tax equivalent basis net interest margin to 4.49 percent for the three month period ended March 31, 2011, compared to 4.55 percent for the same period in the prior year, partially offset by a $107.6 million or 12.9 percent increase in the excess of adjusted average interest earning assets over interest bearing liabilities to $939.4 million for the three month period ended March 31, 2011 from $831.8 million for the same period in the prior year.
 
The Company’s overall asset quality has been adversely affected by the current state of the economy and has continued to experience higher than normal 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. Changes in the levels of nonperforming loans have a direct impact on net interest income.
 
The Company has continued to repay maturing long-term borrowings with liquidity provided primarily by core deposit growth. Additional liquidity from deposit growth was retained in the Company’s short-term liquidity


35


Table of Contents

portfolios, available to fund future loan growth. With interest rates remaining at historical low levels, this increase in liquidity contributed to margin compression. This compression has been virtually offset by reinvestment of available liquidity in new loans, primarily local market multi-family loans and a $72.2 million reduction of term borrowings since March 31, 2010, of which $36.3 million occurred in the first quarter of 2011.
 
For purposes of the financial information included in this section, the Company adjusts average interest earning assets to exclude the effects of unrealized gains and losses on securities available for sale and adjusts net interest income to a tax equivalent basis. Management believes that this alternate presentation more closely reflects actual performance, as it is consistent with the Company’s stated asset/liability management strategies. The effects of these non-GAAP adjustments to tax equivalent basis net interest income and adjusted average assets are included in the table presented in “Average Balances and Interest Rates” section herein.
 
The Company has made efforts throughout the extended period of severe economic uncertainty and fluctuating interest rates to minimize the impact on its net interest income by appropriately repositioning its securities portfolio and funding sources while maintaining prudence and awareness of the potential consequences that the current economic crisis could have on its asset quality and interest rate risk profiles. The Company continues to increase the number of loans originated with interest rate floors as well as with fixed rates of interest and exercise caution in reinvestment of excess liquidity provided from continued strong deposit growth. These actions are being conducted partially to maintain flexibility in reaction to the continuation of historically low interest rates. The Company’s ability to make changes in its asset mix allows management to capitalize on more desirable yields, as available, on various interest earning assets. The result of these efforts has enabled the Company, given the difficulties being encountered in the current economic crisis, to maximize the effective repositioning of its portfolios from both asset and interest rate risk perspectives.
 
Interest income is determined by the volume of and related rates earned on interest earning assets. Volume decreases in loans, investments and federal funds sold and a lower average yield on interest earning assets, partially offset by a volume increase in interest earning deposits resulted in lower interest income for the three months ended March 31, 2011, compared to the same period in the prior year. Adjusted average interest earning assets for the three month period ended March 31, 2011 decreased $55.7 million or 2.2 percent to $2,504.4 million from $2,560.1 million for the same period in the prior year.
 
Loans are the largest component of interest earning assets. Average net loans decreased $30.9 million or 1.8 percent to $1,727.4 million for the three month period ended March 31, 2011 from $1,758.3 million for the same period in the prior year. The decrease in average net loans reflects the general softness in the availability of loans experienced over the past three years and the Company’s increased emphasis on problem loan resolution. The Company, however, continues to emphasize making new loans, expansion of loan production capabilities and more effective market penetration as evidenced by recent growth in the loan portfolio resulting primarily from strong demand for local market multi-family loans. The average yield on loans was 6.10 percent for the three month period ended March 31, 2011, compared to 6.27 percent for the same period in the prior year. The decline in the average yield resulted primarily from new loans being originated in a lower interest rate environment. As a result, interest income on loans was lower for the three month period ended March 31, 2011, compared to the same period in the prior year, due to lower volume and lower average interest rates.
 
Average total securities, including FHLB stock and excluding net unrealized gains and losses, decreased $77.2 million or 14.5 percent to $455.3 million for the three month period ended March 31, 2011 from $532.5 million for the same period in the prior year. The decrease in average total securities resulted primarily from a planned reduction in the portfolio conducted by the Company as part of its ongoing asset/liability management efforts. The decrease in average total securities for the three month period ended March 31, 2011, compared to the same period in the prior year 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 4.16 percent for the three month period ended March 31, 2011, compared to 4.75 percent for the same period in the prior year. As a result, tax equivalent basis interest income on securities decreased for the three month period ended March 31, 2011, compared to the same period in the prior year, due to


36


Table of Contents

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 $1.7 million or 34.7 percent to $3.2 million for the three month period ended March 31, 2011 from $4.9 million for the same period in the prior year. Average interest bearing liabilities decreased $163.3 million or 9.4 percent to $1,565.0 million for the three month period ended March 31, 2011 from $1,728.3 million for the same period in the prior year. The decrease in average interest bearing liabilities for the three month period ended March 31, 2011, compared to the same period in the prior year, was due to volume decreases in interest bearing demand deposits, time deposits, securities sold under repurchase agreements and other short-term borrowings and other borrowings. The decreases in interest bearing deposits were more than offset by increases in noninterest bearing demand deposits. The decreases in average short-term and other borrowings for the three month period ended March 31, 2011, compared to the same period in the prior year, resulted from management’s decision to utilize available cash flow from deposit growth and maturing investment securities to reduce borrowings as part of the Company’s ongoing asset/liability management efforts. The average interest rate paid on interest bearing liabilities was 0.81 percent for the three month period ended March 31, 2011, compared to 1.14 percent for the same period in the prior year. As a result of these factors, interest expense on average interest bearing liabilities was lower for the three month period ended March 31, 2011, compared to the same period in the prior year due to lower interest rates and lower volume.
 
Average non interest bearing demand deposits increased $126.0 million or 18.2 percent to $819.9 million for the three month period ended March 31, 2011 from $693.9 million for the same period in the prior year. Non interest bearing demand deposits are an important component of the Company’s ongoing asset liability management, and also have a direct impact on the determination of net interest income.
 
The interest rate spread on a tax equivalent basis for the three month periods ended March 31, 2011 and 2010 is as follows:
 
                 
    Three Month
 
    Period Ended
 
    March 31,  
    2011     2010  
 
Average interest rate on:
               
Total average interest earning assets
    4.99 %     5.32 %
Total average interest bearing liabilities
    0.81 %     1.14 %
Total interest rate spread
    4.18 %     4.18 %
 
Interest rate spreads increase or decrease as a result of the relative change in average interest rates on interest earning assets compared to the change in average interest rates on interest bearing liabilities. The interest rate spread was unchanged for the three month period ended March 31, 2011, compared to the prior year period. Management cannot predict what impact market conditions will have on its interest rate spread and future compression of net interest spread may occur.
 
Provision for Loan Losses
 
The Company recorded a provision for loan losses of $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year. The provision for loan losses is charged to income to bring the Company’s allowance for loan losses to a level deemed appropriate by management. See “Allowance for loan losses” for further discussion.
 
Non Interest Income
 
The Company’s non interest income was $5.2 million for the three month period ended March 31, 2011. This represented an increase of $2.4 million or 85.7 percent compared to $2.8 million for the same period in the prior year. This increase partially resulted from 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 $1.6 billion at March 31, 2011 compared to $1.3 billion at


37


Table of Contents

March 31, 2010. 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 $0.2 million for the three month period ended March 31, 2011, compared to $1.8 million for the same period in the prior year. The impairment charges were related to the Company’s investments in pooled trust preferred securities. The Company has continued to hold its investments in pooled trust preferred securities as it does not believe that the current market value estimates for these investments are indicative of their underlying value. The pooled trust preferred securities are primarily backed by various 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. Non interest income for the three month periods ended March 31, 2011 and 2010 also included $0.1 million of net gains and $0.1 million of net losses, respectively, related to sales and revaluations of other real estate owned.
 
Non Interest Expense
 
Non interest expense was $20.5 million for the three month period ended March 31, 2011 which was an increase of $2.0 million or 10.8 percent from $18.5 million for the three month period ended March 31, 2010. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increase in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.
 
Salaries and employee benefits, the largest component of non interest expense, increased $0.9 million or 9.1 percent to $10.8 million as compared to $9.9 million for the same period in the prior year. The increase primarily resulted from merit increases, the reinstatement of an incentive compensation plan and additional personnel added to accommodate growth.
 
Occupancy expense totaled $2.3 million for the three month period ended March 31, 2011 which was a slight increase of $0.1 million or 4.5 percent as compared to $2.2 million for the same period in the prior year. The slight increase reflected the Company’s continued expansion, including the opening of new branch facilities, as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.
 
Professional services expense totaled $1.5 million for the three month period ended March 31, 2011 which was an increase of $0.2 million or 15.4 percent as compared to $1.3 million for the same period in the prior year. The increase was primarily due to costs related to the engagement of consultants to assist with new systems implementations.
 
Equipment expense totaled $1.0 million for the three month period ended March 31, 2011 which was unchanged from the same period in the prior year.
 
Business development expense was $0.5 million for the three month period ended March 31, 2011 which was a decrease of $0.1 million or 16.7 percent as compared to $0.6 million for the same period in the prior year. The decrease resulted for reduced participation in business development events and an anticipated reduction in the cost of the Company’s annual and quarterly reports.
 
The FDIC assessment for the three period ended March 31, 2011 totaled $1.1 million which was unchanged as compared to the same period in the prior year.
 
Significant changes, more than 5 percent, in other components of non interest expense for the three month period ended March 31, 2011 compared to March 31, 2010, were due to the following:
 
  •  Decrease of $143,000 (145.9%), in other insurance expense, resulting from reductions in the estimates of the net cost of certain life insurance policies due partially offset by increases in banker’s professional and automobile insurance costs,
 
  •  Decrease of $36,000 (14.9%) respectively, in stationery and printing costs, due to continued cost saving measures and decreased consumption,


38


Table of Contents

 
  •  Decrease of $40,000 (22.1%) in communications expense due to continued cost saving measures,
 
  •  Decrease of $199,000 (33.0%) in other loan expenses primarily due to fluctuations in costs associated with the disposition and management of properties held as other real estate owned and asset recovery costs,
 
  •  Increase of $316,000 (37.9%) in outside services, due to outsourcing of several data processing and electronic services functions,
 
  •  Increase of $76,000 (135.7%) in dues and meetings due to increased participation in such events.
 
Income Taxes
 
Income taxes of $2.0 million and $2.1 million, respectively, were recorded in the three month periods ended March 31, 2011 and March 31, 2010, respectively. The Company’s overall effective tax rate was of 28.9 percent for the three month period ended March 31, 2011 compared to 30.1 percent for the same period in the prior year. The 2011 effective rate primarily due to the fact that tax-exempt income represented a higher percentage of pretax income in 2011 compared to 2010. The Company is subject to a Federal statutory rate of 35 percent, a New York State tax rate of 7.1 percent plus a 17 percent surcharge, a Connecticut State tax rate of 7.5 percent and a New York City tax rate of 9 percent.
 
Assets
 
The Company had total assets of $2,655.3 million at March 31, 2011, a slight decrease of $13.7 million or 0.5 percent from $2,669.0 million at December 31, 2010. The decrease resulted primarily from the repayment of $36.3 million of maturing term borrowings which was partially offset by deposit growth.
 
Cash and Due from Banks
 
Cash and due from banks was $240.1 million at March 31, 2011, a decrease of $44.1 million or 15.5 percent from $284.2 million at December 31, 2010. Included in cash and due from banks is interest earning deposits of $198.2 million at March 31, 2011 and $258.3 million at December 31, 2010.
 
Federal Funds Sold
 
Federal funds sold totaled $39.5 million at March 31, 2011, a decrease of $32.6 million or 45.2 percent from $72.1 million at December 31, 2010. The decrease was a result of deposit growth and investment paydowns being deployed into loans or utilized for the repayment of term borrowings.
 
Securities and FHLB Stock
 
Securities are selected to provide safety of principal, liquidity, pledging capabilities (to collateralize certain deposits and borrowings), income and to leverage capital. The Company’s investment strategy focuses on maximizing income while providing for safety of principal, maintaining appropriate utilization of capital, providing adequate liquidity to meet loan demand or deposit outflows and to manage overall interest rate risk. The Company selects individual securities whose credit, cash flow, maturity and interest rate characteristics, in the aggregate, affect the stated strategies.
 
The securities portfolio, which consists of various debt and equity securities, totaled $449.0 million at March 31, 2011, a decrease of $11.0 million or 2.4 percent from $460.0 million at December 31, 2010. FHLB stock totaled $5.4 million at March 31, 2011 and $7.0 million at December 31, 2010.
 
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 $433.7 million at March 31, 2011 which was a decrease of $10.0 million or 2.3 percent from $443.7 million at December 31, 2010. The held to maturity portfolio


39


Table of Contents

totaled $15.3 million at March 31, 2011, which was a decrease of $1.0 million or 6.1 percent from $16.3 million at December 31, 2010.
 
U.S. Treasury and government agency obligations classified as available for sale totaled $3.0 million at March 31, 2011, which was unchanged from $3.0 million at December 31, 2010. There were no U.S. Treasury or government agency obligations classified as held to maturity at March 31, 2011 or at December 31, 2010.
 
Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $304.0 million at March 31, 2011, a decrease of $5.5 million or 1.8 percent from $309.5 million at December 31, 2010. The decrease was due to maturities and principal paydowns of $47.9 million and other changes of $3.2 million which were partially offset by purchases of $45.6 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $10.1 million at March 31, 2011, a decrease of $1.0 million or 9.0 percent from $11.1 million at December 31, 2010. The decrease was due to maturities and principal paydowns of $1.0 million.
 
Obligations of state and political subdivisions classified as available for sale totaled $112.6 million at March 31, 2011, a decrease of $3.5 million or 3.0 percent from $116.1 million at December 31, 2010. The decrease was a result of maturities and calls of $4.5 million which was partially offset by purchases of $0.8 million and other increases of $0.2 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both March 31, 2011 and December 31, 2010. The combined available for sale and held to maturity obligations of state and political subdivisions at March 31, 2011 were comprised of approximately 83 percent of New York State political subdivisions and 17 percent of a variety of other states and their subdivisions all with diversified maturity dates. The Company considers such securities to have favorable tax equivalent yields.
 
Other debt securities classified as available for sale decreased $0.8 million or 18.2 percent, to $3.6 million at March 31, 2010 from $4.4 million at December 31, 2010. The decrease was due to other changes of $0.7 million and maturities and calls of $0.1 million. Included in other changes were $0.2 million of OTTI losses related to the Company’s investments in pooled trust preferred securities. These pooled trust preferred securities, which had an aggregate cost basis of $11.6 million as of both March 31, 2011 and December 31, 2010, have suffered severe declines in estimated fair value primarily as a result of both illiquidity in the marketplace and declines in the credit ratings of a number of issuing banks underlying these securities. Management cannot predict what effect that continuation of such conditions could have on potential future value or whether there will be additional impairment charges related to these securities. There were no other debt securities classified as held to maturity at March 31, 2011 or at December 31, 2010.
 
Mutual funds and other equity securities classified as available for sale totaled $10.5 million at March 31, 2011, a decrease of $0.2 million or 1.9 percent from $10.7 million at December 31, 2010. The decrease was due to other changes of $0.2 million. There were no mutual funds of other equity securities classified as held to maturity at March 31, 2011 or at December 31, 2010.
 
The Bank, as a member of the FHLB, invests in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Bank must purchase additional shares of FHLB stock to obtain increases in such borrowings. Shares in excess of required amounts for outstanding borrowings are generally redeemed by the FHLB. The investment in FHLB stock totaled $5.4 million at March 31, 2011 and $7.0 million at December 31, 2010.
 
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 March 31, 2011 or December 31, 2010.
 
Loans
 
Net loans totaled $1,774.7 million at March 31, 2011, an increase of $85.5 million or 5.1 percent from $1,689.2 million at December 31, 2010. The increase resulted principally from a $81.0 million increase in residential loans and a $25.7 million increase in commercial real estate loans which was partially offset by a $10.6 million decrease in commercial and industrial loans, a $5.8 million decrease in construction loans and $3.5 million decrease in lease financing and other loans. The significant increase in residential loans was primarily the result of strong demand for local market multi-family loans which increased by $96.3 million during the three


40


Table of Contents

month period ended March 31, 2011. The Company expects to increase its focus on multi-family loans originated in the New York City area.
 
The loan portfolio is comprised of the following:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (000’s)
 
 
Real Estate:
               
Commercial
  $ 821,959     $ 796,253  
Construction
    168,567       174,369  
Residential
    548,346       467,326  
Commercial and industrial
    234,742       245,263  
Lease financing and other
    45,539       49,040  
                 
Total
    1,819,153       1,732,251  
Deferred loan fees, net
    (4,187 )     (4,115 )
Allowance for loan losses
    (40,287 )     (38,949 )
                 
Loans, net
  $ 1,774,679     $ 1,689,187  
                 


41


Table of Contents

The following table illustrates the trend in nonperforming assets, delinquency and net charge-offs from March 2010 to March 2011 (in thousands):
 
                                         
    March 31,
    December 31,
    September 30,
    June 30,
    March 31,
 
    2011     2010     2010     2010     2010  
 
Loans Past Due 90 Days or More and Still Accruing:
                                       
Real Estate:
                                       
Commercial
        $ 292                 $ 7,061  
Construction
          1,323                    
Residential
              $ 197     $ 342       1,048  
                                         
Total Real Estate
          1,615       197       342       8,109  
Commercial & Industrial
          10             65       394  
Lease Financing and Individuals
                      41       1  
                                         
Total Loans Past Due 90 Days or More and Still Accruing
          1,625       197       448       8,504  
                                         
Non-Accrual Loans:
                                       
Real Estate:
                                       
Commercial
  $ 19,184       15,295       14,672       27,312       30,292  
Construction
    15,305       15,689       14,405       19,566       17,466  
Residential
    13,745       7,744       10,038       19,967       17,756  
                                         
Total Real Estate
    48,234       38,728       39,115       66,845       65,514  
Commercial & Industrial
    5,546       4,563       2,410       2,583       3,988  
Lease Financing and Individuals
    653       393       393       134       184  
                                         
Total Non-Accrual Loans
    54,433       43,684       41,918       69,562       69,686  
                                         
Other Real Estate Owned
    4,810       11,028       9,393       5,578       6,937  
                                         
Nonperforming Assets excluding loans held for sale
    59,243       56,337       51,508       75,588       85,127  
Nonperforming loans held for sale
    5,506       7,811       21,864              
                                         
Total Nonperforming Assets including loans held for sale
  $ 64,749     $ 64,148     $ 73,372     $ 75,588     $ 85,127  
                                         
Net charge-offs during quarter
  $ 4,113     $ 46,223     $ 16,813     $ 20,784     $ 4,864  
                                         
Nonperforming assets to total assets:
                                       
Excluding loans held for sale
    2.23 %     2.11 %     1.82 %     2.62 %     3.04 %
Including loans held for sale
    2.44 %     2.40 %     2.59 %     2.62 %     3.04 %
 
Non-accrual loans increased $10.7 million to $54.4 million at March 31, 2011 from $43.7 million at December 31, 2010. This increase included the transfer of $2.3 million of nonaccrual commercial real estate loans from the loans held for sale category. There was no interest income on non-accrual loans included in net income for the three month period ended March 31, 2011 and the year ended December 31, 2010. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $0.8 million and $4.3 million for the three month period ended March 31, 2011 and the year ended December 31, 2010, respectively.
 
Net income is adversely impacted by the level of nonperforming assets caused by the deterioration of the borrowers’ ability to meet scheduled interest and principal payments. In addition to forgone revenue, the Company must increase the level of provision for loan losses, incur higher collection costs and other costs associated with the management and disposition of foreclosed properties.


42


Table of Contents

The overall increase in nonperforming assets has primarily resulted from the current severe economic slowdown, which has had negative effects on real estate values, sales and available financing, particularly in the commercial and residential real estate sectors. Continuation of this condition could result in additional increases in nonperforming assets and charge-offs in the future.
 
During the three month period ended March 31, 2011:
 
  •  Non-accrual commercial real estate loans increased $3.9 million resulting from the transfer of eleven loans totaling $6.5 million, which was partially offset by full charge-off of one loan totaling $0.1 million, payoffs of two loans totaling $2.3 million and principal payments of $0.2 million.
 
  •  Non-accrual construction loans decreased $0.4 million, resulting from the payoff of two loans totaling $1.6 million, full or partial charge-offs taken on seven loans totaling $0.7 million which was partially offset by the transfer of one loan totaling $1.9 million.
 
  •  Non-accrual residential loans increased $6.0 million resulting from the transfer of twelve loans totaling $8.1 million which was partially offset by full or partial charge-offs taken on five loans totaling $2.1 million.
 
  •  Non-accrual commercial and industrial loans increased $0.9 million resulting from the transfer of ten loans totaling $3.3 million which was partially offset by full or partial charge offs of ten loans totaling $2.2 million, the payoff of one loan totaling $0.1 million and principal payments of $0.1 million.
 
  •  Non-accrual loans to individuals increased $0.2 million resulting from the transfer of one loan totaling $0.2 million.
 
  •  Other real estate owned decreased $6.2 million resulting from the sale of three properties totaling $6.0 million and valuation adjustments of $0.2 million taken on two properties.
 
At March 31, 2011, there were no loans past due 90 days or more and still accruing and three loans totaling $1.6 million at December 31, 2010. In addition, the Company had $12.7 million and $21.0 million of loans that were 31-89 days delinquent and still accruing at March 31, 2011 and December 31, 2010, respectively.
 
Loans considered by the Company to be impaired totaled $60.3 million and $49.6 million at March 31, 2011 and December 31, 2010, respectively, for which specific reserves of $0.9 million and $0.8 million had been established.
 
There were fourteen loans totaling $21.3 million at March 31, 2011 and eight loans totaling $17.2 million at December 31, 2010 that were considered troubled debt restructurings. One loan totaling $5.9 million at both March 31, 2011 and December 31, 2010 was performing in accordance with its restructured terms. The remaining loans which totaled $15.4 million and $11.3 million at March 31, 2011 and December 31, 2010, respectively, are on non-accrual status. At March 31, 2011, the Company had no commitments to lend additional funds to non-accrual or restructured loans.
 
The Company performs extensive ongoing asset quality monitoring by both internal and independent loan review functions. In addition, the Company conducts timely remediation and collection activities through a network of internal and external resources which include an internal asset recovery department, real estate and other loan workout attorneys and external collection agencies. In addition, during the second quarter of 2010, the Company decided to implement a more aggressive workout strategy for the resolution of problem assets in light of a sluggish economic recovery, continued weakness in local real estate activity and market values and growing difficulty in resolving problem loans in a timely fashion through traditional foreclosure proceedings due to increased bankruptcy filings and overcrowded court systems. See “Allowance for Loan Losses” below for further discussion of this strategy. Management believes that these efforts are appropriate for accomplishing either successful remediation or maximizing collections related to nonperforming assets.
 
Allowance for Loan Losses
 
The Company maintains an allowance for loan losses to absorb probable losses incurred in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing the


43


Table of Contents

appropriateness of the allowance consists of a specific component for identified problem loans and a formula component to consider historical loan loss experience and additional risk factors affecting the portfolio.
 
See Note 2 to the Company’s condensed consolidated financial statements presented in this Form 10-Q for a detailed description of the methodology employed by the Company in determining the specific and formula components of the allowance for loan losses.
 
A summary of the components of the allowance for loan losses, changes in the components and the impact of charge-offs/recoveries on the resulting provision for loan losses for the dates indicated is as follows:
 
                         
    (000’s)  
          Change
       
    March 31,
    During
    December 31,
 
    2011     2011     2010  
 
Components
                       
Specific:
                       
Real Estate:
                       
Commercial
                 
Construction
  $ 850           $ 850  
Residential
    19     $ 2       17  
Commercial and Industrial
    68       43       25  
Lease Financing and other
                 
                         
Total Specific component
    937       45       892  
                         
Formula:
                       
Real Estate:
                       
Commercial
  $ 16,673     $ (63 )   $ 16,736  
Construction
    6,280       (10 )     6,290  
Residential
    10,940       1,106       9,834  
Commercial and Industrial
    4,547       282       4,265  
Lease Financing and other
    910       (22 )     932  
                         
Total Formula component
    39,350       1,293       38,057  
                         
Total Allowance
  $ 40,287             $ 38,949  
                         
Net Change
            1,338          
Net Charge-offs
            4,113          
                         
Provision for loan losses
          $ 5,451          
                         
 


44


Table of Contents

                         
          Change
       
    March 31,
    During
    December 31,
 
   
2010
    2010     2009  
 
Components
                       
Specific:
                       
Real Estate:
                       
Commercial
  $ 855     $ 855        
Construction
    1,703       1,578     $ 125  
Residential
    276       (2,202 )     2,478  
Commercial and Industrial
    131       (365 )     496  
Lease Financing and other
    478       3       475  
                         
Total Specific component
    3,443       (131 )     3,574  
                         
Formula:
                       
Real Estate:
                       
Commercial
    15,975       702       15,273  
Construction
    5,245       (432 )     5,677  
Residential
    8,496       1,268       7,228  
Commercial and Industrial
    6,165       (665 )     6,830  
Lease Financing and other
    39       (24 )     63  
                         
Total Formula component
    35,920       849       35,071  
                         
Total Allowance
  $ 39,363             $ 38,645  
                         
Net Change
            718          
Net Charge-offs
            4,864