UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended:
SEPTEMBER 30,
2009
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____ to____.
Commission
File No. 001-14783
STATE
BANCORP, INC.
(Exact
name of registrant as specified in its charter)
NEW
YORK
11-2846511
(State or
other jurisdiction
of (I.R.S.
Employer
incorporation
or
organization) Identification
No.)
TWO JERICHO PLAZA, JERICHO,
NEW YORK 11753
(Address
of principal executive offices) (Zip Code)
(516)
465-2200
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ] Smaller reporting
company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
As of
October 21, 2009, there were 14,640,490 shares of registrant’s Common Stock
outstanding.
STATE BANCORP,
INC
.
Form
10-Q
For
the Quarterly Period Ended September 30, 2009
Table
of Contents
|
|
Page
|
|
PART
I
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets (Unaudited) – September 30, 2009 and December
31, 2008
|
1
|
|
Condensed
Consolidated Statements of Income (Unaudited) for the Three and Nine
Months Ended September 30, 2009 and 2008
|
2
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2009 and 2008
|
3
|
|
Condensed
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(Loss) (Unaudited) for the Nine Months Ended September 30, 2009 and
2008
|
4
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
Item
4.
|
Controls
and Procedures
|
37
|
|
|
|
|
PART
II
|
|
Item
1.
|
Legal
Proceedings
|
37
|
Item
1A.
|
Risk
Factors
|
37
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
Item
3.
|
Defaults
upon Senior Securities
|
39
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
40
|
Item
5.
|
Other
Information
|
40
|
Item
6.
|
Exhibits
|
40
|
|
|
|
Signatures
|
|
41
|
PART
I
ITEM
1. - FINANCIAL STATEMENTS
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
September
30, 2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
ASSETS:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
35,992,398
|
|
|
$
|
101,988,240
|
|
Securities
purchased under agreements to resell
|
|
|
-
|
|
|
|
1,000,000
|
|
Total
cash and cash equivalents
|
|
|
35,992,398
|
|
|
|
102,988,240
|
|
Securities
available for sale - at estimated fair value
|
|
|
395,022,468
|
|
|
|
412,379,205
|
|
Federal
Home Loan Bank and other restricted stock
|
|
|
8,035,943
|
|
|
|
4,823,143
|
|
Loans
and leases (net of allowance for loan and lease losses of $29,401,119 in
2009 and $18,668,451 in 2008)
|
|
|
1,078,793,787
|
|
|
|
1,098,548,188
|
|
Loans
held for sale
|
|
|
9,302,360
|
|
|
|
5,321,577
|
|
Bank
premises and equipment - net
|
|
|
6,561,981
|
|
|
|
6,688,432
|
|
Bank
owned life insurance
|
|
|
30,451,721
|
|
|
|
29,897,956
|
|
Net
deferred income taxes
|
|
|
18,452,729
|
|
|
|
18,142,368
|
|
Receivable
- current income taxes
|
|
|
-
|
|
|
|
343,614
|
|
Other
assets
|
|
|
13,851,019
|
|
|
|
14,361,779
|
|
TOTAL
ASSETS
|
|
$
|
1,596,464,406
|
|
|
$
|
1,693,494,502
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
363,046,659
|
|
|
$
|
351,629,362
|
|
Savings
|
|
|
536,010,827
|
|
|
|
612,251,609
|
|
Time
|
|
|
408,904,114
|
|
|
|
517,167,256
|
|
Total
deposits
|
|
|
1,307,961,600
|
|
|
|
1,481,048,227
|
|
Other
temporary borrowings
|
|
|
63,000,000
|
|
|
|
3,000,000
|
|
Senior
unsecured debt
|
|
|
29,000,000
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Junior
subordinated debentures
|
|
|
20,620,000
|
|
|
|
20,620,000
|
|
Overnight
sweep and settlement accounts payable, net
|
|
|
-
|
|
|
|
13,174,175
|
|
Other
accrued expenses and liabilities
|
|
|
14,323,811
|
|
|
|
11,732,765
|
|
Total
liabilities
|
|
|
1,444,905,411
|
|
|
|
1,539,575,167
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, authorized 250,000 shares; 36,842 shares issued
and outstanding in 2009 and 2008; liquidation preference of
$36,842,000 in 2009 and 2008
|
|
|
35,962,325
|
|
|
|
35,800,172
|
|
Common
stock, $0.01 par value in 2009 and $5.00 in 2008, authorized 20,000,000
shares; issued 15,615,889 shares in 2009 and 15,490,895 shares in 2008;
outstanding 14,632,874 shares in 2009 and 14,461,634 shares in
2008
|
|
|
156,159
|
|
|
|
77,454,475
|
|
Warrant
|
|
|
1,056,842
|
|
|
|
1,056,842
|
|
Surplus
|
|
|
167,690,196
|
|
|
|
89,984,480
|
|
Retained
deficit
|
|
|
(43,444,983
|
)
|
|
|
(37,634,783
|
)
|
Treasury
stock (983,015 shares in 2009 and 1,029,261 shares in
2008)
|
|
|
(16,568,293
|
)
|
|
|
(17,262,240
|
)
|
Accumulated
other comprehensive income (net of taxes of $4,414,817 in 2009 and
$2,976,111 in 2008)
|
|
|
6,706,749
|
|
|
|
4,520,389
|
|
Total
stockholders' equity
|
|
|
151,558,995
|
|
|
|
153,919,335
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,596,464,406
|
|
|
$
|
1,693,494,502
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
For
the Three and Nine Months Ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
15,398,175
|
|
|
$
|
16,778,178
|
|
|
$
|
45,034,174
|
|
|
$
|
53,370,368
|
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
-
|
|
|
|
-
|
|
|
|
6,272
|
|
|
|
963,237
|
|
Securities
available for sale - taxable
|
|
|
4,124,801
|
|
|
|
4,868,898
|
|
|
|
13,324,213
|
|
|
|
14,579,365
|
|
Securities
available for sale - tax-exempt
|
|
|
15,486
|
|
|
|
16,401
|
|
|
|
66,190
|
|
|
|
154,646
|
|
Securities
available for sale - dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,667
|
|
Dividends
on Federal Home Loan Bank and other restricted stock
|
|
|
35,392
|
|
|
|
91,985
|
|
|
|
74,373
|
|
|
|
412,834
|
|
Total
interest income
|
|
|
19,573,854
|
|
|
|
21,755,462
|
|
|
|
58,505,222
|
|
|
|
69,520,117
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,218,070
|
|
|
|
4,979,067
|
|
|
|
10,587,846
|
|
|
|
17,875,224
|
|
Temporary
borrowings
|
|
|
24,637
|
|
|
|
823,943
|
|
|
|
88,859
|
|
|
|
2,933,161
|
|
Senior
unsecured debt
|
|
|
280,477
|
|
|
|
-
|
|
|
|
563,168
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
231,185
|
|
|
|
231,186
|
|
|
|
693,556
|
|
|
|
693,556
|
|
Junior
subordinated debentures
|
|
|
212,729
|
|
|
|
315,734
|
|
|
|
666,028
|
|
|
|
994,589
|
|
Total
interest expense
|
|
|
3,967,098
|
|
|
|
6,349,930
|
|
|
|
12,599,457
|
|
|
|
22,496,530
|
|
Net
interest income
|
|
|
15,606,756
|
|
|
|
15,405,532
|
|
|
|
45,905,765
|
|
|
|
47,023,587
|
|
Provision
for loan and lease losses
|
|
|
3,000,000
|
|
|
|
3,700,000
|
|
|
|
16,500,000
|
|
|
|
10,225,744
|
|
Net
interest income after provision for loan and lease losses
|
|
|
12,606,756
|
|
|
|
11,705,532
|
|
|
|
29,405,765
|
|
|
|
36,797,843
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
504,264
|
|
|
|
468,370
|
|
|
|
1,690,301
|
|
|
|
1,623,340
|
|
Net
security gains (losses)
|
|
|
485,759
|
|
|
|
(9,700
|
)
|
|
|
(2,832,286
|
)
|
|
|
50,459
|
|
Income
from bank owned life insurance
|
|
|
181,784
|
|
|
|
275,554
|
|
|
|
553,764
|
|
|
|
792,517
|
|
Other
operating income
|
|
|
622,789
|
|
|
|
564,323
|
|
|
|
1,225,432
|
|
|
|
1,788,887
|
|
Total
non-interest income
|
|
|
1,794,596
|
|
|
|
1,298,547
|
|
|
|
637,211
|
|
|
|
4,255,203
|
|
Income
before operating expenses
|
|
|
14,401,352
|
|
|
|
13,004,079
|
|
|
|
30,042,976
|
|
|
|
41,053,046
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and other employee benefits
|
|
|
5,925,785
|
|
|
|
5,631,860
|
|
|
|
17,223,014
|
|
|
|
17,370,579
|
|
Occupancy
|
|
|
1,391,194
|
|
|
|
1,425,746
|
|
|
|
4,340,642
|
|
|
|
4,200,076
|
|
Equipment
|
|
|
306,373
|
|
|
|
301,563
|
|
|
|
908,539
|
|
|
|
918,746
|
|
Legal
|
|
|
187,834
|
|
|
|
(196,510
|
)
|
|
|
533,290
|
|
|
|
2,535,616
|
|
Marketing
and advertising
|
|
|
-
|
|
|
|
150,000
|
|
|
|
750,000
|
|
|
|
436,808
|
|
FDIC
and NYS assessment
|
|
|
657,000
|
|
|
|
311,870
|
|
|
|
2,970,661
|
|
|
|
565,373
|
|
Credit
and collection
|
|
|
1,151,370
|
|
|
|
186,275
|
|
|
|
1,513,453
|
|
|
|
545,305
|
|
Other
operating expenses
|
|
|
1,721,189
|
|
|
|
2,355,027
|
|
|
|
4,796,766
|
|
|
|
5,942,381
|
|
Total
operating expenses
|
|
|
11,340,745
|
|
|
|
10,165,831
|
|
|
|
33,036,365
|
|
|
|
32,514,884
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
3,060,607
|
|
|
|
2,838,248
|
|
|
|
(2,993,389
|
)
|
|
|
8,538,162
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
1,119,213
|
|
|
|
849,121
|
|
|
|
(913,799
|
)
|
|
|
2,587,904
|
|
NET
INCOME (LOSS)
|
|
$
|
1,941,394
|
|
|
$
|
1,989,127
|
|
|
$
|
(2,079,590
|
)
|
|
$
|
5,950,258
|
|
NET
INCOME (LOSS) PER COMMON SHARE - BASIC
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.42
|
|
NET
INCOME (LOSS) PER COMMON SHARE - DILUTED
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATE
BANCORP, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
For
the Nine Months Ended September 30, 2009 and 2008
|
|
|
2009
|
|
|
2008
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(2,079,590
|
)
|
|
$
|
5,950,258
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
16,500,000
|
|
|
|
10,225,744
|
|
Write
down of loans held for sale to estimated fair value
|
|
|
1,000,000
|
|
|
|
-
|
|
Depreciation
and amortization of bank premises and equipment
|
|
|
1,150,473
|
|
|
|
996,061
|
|
Amortization
of net premium on securities
|
|
|
2,044,876
|
|
|
|
1,448,679
|
|
Deferred
income tax (benefit) expense
|
|
|
(1,749,067
|
)
|
|
|
1,418,407
|
|
Net
security losses (gains)
|
|
|
2,832,286
|
|
|
|
(50,459
|
)
|
Net
gains on sales of loans held for sale
|
|
|
(83,332
|
)
|
|
|
-
|
|
Income
from bank owned life insurance
|
|
|
(553,764
|
)
|
|
|
(792,517
|
)
|
Change
in fair value of derivative contracts
|
|
|
542,801
|
|
|
|
(620,657
|
)
|
Stock-based
compensation expense
|
|
|
635,621
|
|
|
|
819,197
|
|
Directors'
stock plan expense
|
|
|
102,060
|
|
|
|
248,433
|
|
Decrease
in receivable - current income taxes
|
|
|
343,614
|
|
|
|
11,356,169
|
|
(Increase)
decrease in other assets
|
|
|
(445,965
|
)
|
|
|
567,194
|
|
Increase
(decrease) in other accrued expenses and other liabilities
|
|
|
2,935,400
|
|
|
|
(6,648,890
|
)
|
Net
cash provided by operating activities
|
|
|
23,175,413
|
|
|
|
24,917,619
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of securities available for sale
|
|
|
101,515,818
|
|
|
|
84,991,228
|
|
Proceeds
from maturities of securities available for sale
|
|
|
94,902,608
|
|
|
|
155,810,357
|
|
Purchases
of securities available for sale
|
|
|
(180,313,785
|
)
|
|
|
(226,798,607
|
)
|
(Increase)
decrease in Federal Home Loan Bank and other restricted
stock
|
|
|
(3,212,800
|
)
|
|
|
1,820,500
|
|
Proceeds
from sales of loans held for sale
|
|
|
1,439,286
|
|
|
|
-
|
|
Decrease
(increase) in loans and leases - net
|
|
|
3,254,401
|
|
|
|
(65,648,210
|
)
|
Increase
in loans held for sale - net
|
|
|
(6,336,737
|
)
|
|
|
(4,500,000
|
)
|
Purchases
of bank premises and equipment - net
|
|
|
(1,024,021
|
)
|
|
|
(1,670,818
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
10,224,770
|
|
|
|
(55,995,550
|
)
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in demand and savings deposits
|
|
|
(64,823,485
|
)
|
|
|
(92,428,380
|
)
|
(Decrease)
increase in time deposits
|
|
|
(108,263,142
|
)
|
|
|
97,547,921
|
|
Increase
in federal funds purchased
|
|
|
-
|
|
|
|
4,500,000
|
|
Increase
(decrease) in other temporary borrowings
|
|
|
60,000,000
|
|
|
|
(38,031,328
|
)
|
Proceeds
from issuance of senior unsecured debt
|
|
|
29,000,000
|
|
|
|
-
|
|
Decrease
in overnight sweep and settlement accounts payable, net
|
|
|
(13,174,175
|
)
|
|
|
-
|
|
Cash
dividends paid on common stock
|
|
|
(2,186,882
|
)
|
|
|
(5,702,488
|
)
|
Cash
dividends paid on preferred stock
|
|
|
(1,279,236
|
)
|
|
|
-
|
|
Proceeds
from reissuance of treasury stock
|
|
|
39,548
|
|
|
|
-
|
|
Proceeds
from shares issued under dividend reinvestment plan
|
|
|
291,347
|
|
|
|
2,737,469
|
|
Proceeds
from shares issued pursuant to compensation awards
|
|
|
-
|
|
|
|
552,064
|
|
Net
cash used in financing activities
|
|
|
(100,396,025
|
)
|
|
|
(30,824,742
|
)
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(66,995,842
|
)
|
|
|
(61,902,673
|
)
|
CASH
AND CASH EQUIVALENTS - JANUARY 1
|
|
|
102,988,240
|
|
|
|
96,380,214
|
|
CASH
AND CASH EQUIVALENTS - SEPTEMBER 30
|
|
$
|
35,992,398
|
|
|
$
|
34,477,541
|
|
SUPPLEMENTAL
DATA:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
12,860,798
|
|
|
$
|
23,093,879
|
|
Income
taxes paid
|
|
$
|
478,513
|
|
|
$
|
154,551
|
|
Loans
transferred to held for sale
|
|
$
|
7,361,998
|
|
|
$
|
4,500,000
|
|
Preferred
dividends accrued but not paid
|
|
$
|
230,263
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
For
the Nine Months Ended September 30, 2009 and 2008
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Warrant
|
|
|
Surplus
|
|
|
Retained
Deficit
|
|
|
Treasury
Stock
|
|
|
Other
Comprehensive Income (Loss)
|
|
|
Total
Stockholders' Equity
|
|
Balance,
January 1, 2009
|
|
$
|
35,800,172
|
|
|
$
|
77,454,475
|
|
|
$
|
1,056,842
|
|
|
$
|
89,984,480
|
|
|
$
|
(37,634,783
|
)
|
|
$
|
(17,262,240
|
)
|
|
$
|
4,520,389
|
|
|
$
|
153,919,335
|
|
Adjustment
for change in par value of common stock to $0.01 per share from $5.00 per
share
|
|
|
-
|
|
|
|
(77,299,566
|
)
|
|
|
-
|
|
|
|
77,299,566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,079,590
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,079,590
|
)
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,957,051
|
|
Reclassification
adjustment (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(770,691
|
)
|
Total
other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,186,360
|
|
|
|
2,186,360
|
|
Total
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,770
|
|
Accretion
of discount on preferred shares
|
|
|
162,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(162,153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
dividend on common stock ($.15 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,186,882
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,186,882
|
)
|
Cash
dividend on preferred stock (5%)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,381,575
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,381,575
|
)
|
Shares
issued under the dividend reinvestment plan (43,292 shares at 95% of
market value)
|
|
|
-
|
|
|
|
433
|
|
|
|
-
|
|
|
|
290,914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
291,347
|
|
Stock
issued under directors' stock plan (10,625 shares)
|
|
|
-
|
|
|
|
106
|
|
|
|
-
|
|
|
|
(481,089
|
)
|
|
|
-
|
|
|
|
615,814
|
|
|
|
-
|
|
|
|
134,831
|
|
Stock-based
compensation (71,077 shares)
|
|
|
-
|
|
|
|
711
|
|
|
|
-
|
|
|
|
634,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
635,621
|
|
Treasury
stock reissued (4,637 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,585
|
)
|
|
|
-
|
|
|
|
78,133
|
|
|
|
-
|
|
|
|
39,548
|
|
Balance,
September 30, 2009
|
|
$
|
35,962,325
|
|
|
$
|
156,159
|
|
|
$
|
1,056,842
|
|
|
$
|
167,690,196
|
|
|
$
|
(43,444,983
|
)
|
|
$
|
(16,568,293
|
)
|
|
$
|
6,706,749
|
|
|
$
|
151,558,995
|
|
Balance,
January 1, 2008
|
|
$
|
-
|
|
|
$
|
74,981,740
|
|
|
$
|
-
|
|
|
$
|
86,654,142
|
|
|
$
|
(32,164,263
|
)
|
|
$
|
(16,646,426
|
)
|
|
$
|
812,475
|
|
|
$
|
113,637,668
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,950,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,950,258
|
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,739,771
|
)
|
Reclassification
adjustment (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,429
|
)
|
Total
other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,770,200
|
)
|
|
|
(6,770,200
|
)
|
Total
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(819,942
|
)
|
Cash
dividend on common stock ($.40 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,702,488
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,702,488
|
)
|
Shares
issued under the dividend reinvestment plan (226,040 shares at 95% of
market value)
|
|
|
-
|
|
|
|
1,130,200
|
|
|
|
-
|
|
|
|
1,607,269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,737,469
|
|
Stock
options exercised (60,009 shares)
|
|
|
-
|
|
|
|
300,045
|
|
|
|
-
|
|
|
|
252,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
552,064
|
|
Stock-based
compensation (159,372 shares)
|
|
|
-
|
|
|
|
796,860
|
|
|
|
-
|
|
|
|
15,326
|
|
|
|
7,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
819,197
|
|
Stock
issued under directors' stock plan (48,122 shares)
|
|
|
-
|
|
|
|
240,610
|
|
|
|
-
|
|
|
|
460,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
701,578
|
|
Balance,
September 30, 2008
|
|
$
|
-
|
|
|
$
|
77,449,455
|
|
|
$
|
-
|
|
|
$
|
88,989,724
|
|
|
$
|
(31,909,482
|
)
|
|
$
|
(16,646,426
|
)
|
|
$
|
(5,957,725
|
)
|
|
$
|
111,925,546
|
|
(1)
Unrealized gains (losses) on securities available for sale, net of taxes
of $1,835,728 and $(4,437,299) in 2009 and 2008,
respectively.
|
|
(2)
Adjustment for losses (gains) included in net income, net of taxes of
$397,023 and $20,030 in 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
|
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL
STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
condensed consolidated financial statements include the accounts of State
Bancorp, Inc. and its wholly owned subsidiary, State Bank of Long Island (the
“Bank”). The Bank’s consolidated financial statements include the
accounts of its wholly owned subsidiaries, SB Portfolio Management Corp. (“SB
Portfolio”), SB ORE Corp., and New Hyde Park Leasing Corporation and its
subsidiaries, P.W.B. Realty, L.L.C. and State Title Agency, LLC. SB
Portfolio is a fixed income portfolio management subsidiary that currently has
no investment securities under management. State Bancorp, Inc. and
subsidiaries are collectively referred to hereafter as the
“Company.” All intercompany accounts and transactions have been
eliminated.
In
addition to the foregoing, the Company has two other subsidiaries, State Bancorp
Capital Trust I and State Bancorp Capital Trust II, neither of which are
consolidated with the Company for reporting purposes. State Bancorp Capital
Trust I and State Bancorp Capital Trust II were formed in 2002 and 2003,
respectively, for the purpose of issuing trust preferred securities, the
proceeds of which were used to acquire junior subordinated debentures issued by
the Company. The Company has fully and unconditionally guaranteed all
obligations of State Bancorp Capital Trust I and State Bancorp Capital Trust II
under the trust agreements relating to the respective trust preferred
securities. (See Note 8 of the Notes to Consolidated Financial
Statements included in Item 8, “Financial Statements and Supplementary Data” of
the Company’s 2008 Annual Report on Form 10-K.)
In the
opinion of the Company’s management, the preceding unaudited condensed
consolidated financial statements contain all adjustments, consisting of normal
accruals, necessary for a fair presentation of its condensed consolidated
balance sheets as of September 30, 2009 and December 31, 2008, its condensed
consolidated statements of income for the three and nine months ended September
30, 2009 and 2008, its condensed consolidated statements of cash flows for the
nine months ended September 30, 2009 and 2008 and its condensed consolidated
statements of stockholders’ equity and comprehensive income (loss) for the nine
months ended September 30, 2009 and 2008, in conformity with accounting
principles generally accepted in the United States of America (“U.S.
GAAP”). The results of operations for the three and nine months ended
September 30, 2009 are not necessarily indicative of the results of operations
to be expected for the remainder of the year. For further
information, please refer to the audited consolidated financial statements and
footnotes thereto included in the Company’s 2008 Annual Report on Form
10-K. Subsequent events have been evaluated through October 28, 2009,
which is the date the financial statements were issued.
Accounting for Stock-Based
Compensation
The
Company accounts for stock-based compensation on a modified prospective basis
with the fair value of any subsequent grants of stock-based compensation to be
reflected in the income statement.
Accounting for Derivative
Financial Instruments
The
Company does not currently hold any derivative financial instruments for trading
purposes. From time to time, the Bank may execute customer interest rate swap
transactions together with offsetting interest rate swap transactions with
institutional dealers. The customer swap program provides a customer
financing option that can result in longer maturity terms without incurring the
associated interest rate risk. Each swap is mutually exclusive, and
the swaps are marked to market with changes in fair value recognized in other
income, with the fair value for each individual swap offsetting the
corresponding other.
On
September 15, 2008 and October 3, 2008, respectively, Lehman Brothers Holdings,
Inc. (“Lehman”) and Lehman Brothers Special Financing Inc. (“Lehman Special
Financing”) filed Voluntary Petitions under Chapter 11 of the U.S. Bankruptcy
Code, each of which constituted an event of default under the swap agreements
the Bank had with Lehman Special Financing. The Bank filed proofs of
claim with the United States Bankruptcy Court, Southern District, on January 13,
2009. As a result of the events of default, the Bank terminated the
interest rate swap agreements with Lehman Special Financing. The terminations
resulted in several customer interest rate swap transactions no longer being
offset by that institutional dealer and a loss to the Company on those swap
agreements of approximately $584,000 was recorded in the third quarter
of 2008. During the third quarter of 2009, the Company recorded a
gain of $221,000 on the sale of its claims against Lehman and Lehman Special
Financing.
In
addition, during the second and third quarters of 2009, the unhedged customer
interest rate swap transactions were once again offset by an institutional
dealer. As all customer interest rate swap transactions are now hedged, we
expect that their future impact on the Company’s financial statements will be
immaterial. For the three months ended September 30, 2009, a net gain of
$160,000 was recorded, while for the nine months ended September 30, 2009, a net
loss of $68,000 was recognized. The 2009 amounts include the gain of $221,000 on
the sale of the Bank’s claims against Lehman and Lehman Special Financing. For
the three and nine months ended September 30, 2008, a net loss of $584,000 was
recognized. At September 30, 2009 and December 31, 2008, the total gross
notional amount of swap transactions outstanding was $37,755,235 and
$27,828,473, respectively.
|
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
Fair
Value
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Other
assets
|
|
$
|
2,175,586
|
|
|
$
|
3,132,311
|
|
Interest
rate contracts
|
Other
liabilities
|
|
$
|
2,242,184
|
|
|
$
|
1,500,858
|
|
Accounting for Bank Owned
Life Insurance
The Bank
is the beneficiary of a policy that insures the lives of certain current and
former senior officers of the Bank and its subsidiaries. The Company
has recognized the cash surrender value, or the amount that can be realized
under the insurance policy, as an asset in the consolidated balance sheets.
Changes in the cash surrender value are recorded in other income.
Allowance for Loan and Lease
Losses
The
allowance for loan and lease losses is established through a provision for loan
and lease losses charged to expense. Loans and leases are charged
against the allowance when management believes that the collectibility of the
principal is unlikely, while recoveries of previously charged-off loans and
leases are credited to the allowance. The balance in the allowance
for loan and lease losses is maintained at a level that, in the opinion of
management, is sufficient to absorb probable incurred losses. To determine that
level, management evaluates problem loans and leases based on the financial
condition of the borrower, the value of collateral and/or guarantor
support. Based upon the resultant risk categories assigned to
each loan and lease and the procedures regarding impairment described below, an
appropriate allowance level is determined. Management also evaluates the quality
of, and changes in, the portfolio, while taking into consideration the Bank’s
historical loss experience, the existing economic climate of the service area in
which the Bank operates, examinations by regulatory authorities, internal
reviews and other evaluations in determining the appropriate allowance balance.
While management utilizes all available information to estimate the adequacy of
the allowance for loan and lease losses, the ultimate collectibility of a
substantial portion of the loan and lease portfolio and the need for future
additions to the allowance will be based upon changes in economic conditions and
other relevant factors.
Commercial
loans and commercial real estate loans are considered impaired when, based on
current information and events, it is probable that the Company will not be able
to collect all of the principal and interest due under the contractual terms of
the loan. Management considers all non-accrual loans in excess of $250 thousand
for impairment. Those with balances less than $250 thousand as well
as other groups of smaller-balance homogeneous loans and leases, such as
consumer and residential mortgages, are collectively evaluated for
impairment.
The
allowance for loan and lease losses related to loans and leases that are
impaired includes reserves which are based upon the expected future cash flows,
discounted at the effective interest rate, or the fair value of the underlying
collateral for collateral-dependent loans or leases, or the observable market
price. This evaluation is inherently subjective as it requires
material estimates, including the amount and timing of future cash flows
expected to be received on impaired loans and leases, which may be susceptible
to significant change.
Other-Than-Temporary
Impairment (“OTTI”) of Investment Securities
One
recent significant change in practice relates to management’s assertion
regarding recovery of declines in fair value, moving from an assertion about
“intent and ability to hold to recovery” to a “do not intend to sell” or “it is
more likely than not that it will not be required to sell” prior to recovery
assertion. In instances where the Company will not be required to sell the bond
or doesn’t intend to sell the bond, the components of the impairment charge
would be bifurcated. The credit loss component would be recognized in earnings,
and the other components would be recognized in other comprehensive income. In
instances where the Company intends to sell or is more likely than not to be
required to sell prior to recovery the full OTTI charge is to be recognized in
earnings. (See also Note 4 – Investment Securities.)
Adoption of New Accounting
Guidance
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168,
“The FASB Accounting Standards Codification
TM
and
the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162.” Effective for financial statements issued for
interim and annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification
TM
(“ASC”) is now the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
ASC superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the ASC
became non-authoritative. Following this Statement, the Board will not issue new
standards in the form of Statements, FASB Staff Positions (“FSP”) or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates. The Board will not consider Accounting Standards Updates as
authoritative in their own right. Accounting Standards Updates will serve only
to update the ASC, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the ASC. The impact of
adoption on September 30, 2009 was not material.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was codified into
ASC 855. SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In
particular, SFAS No. 165 sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The impact of adoption
on June 30, 2009 was not material.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which were codified into ASC 825. This FSP
amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. This FSP also amends Accounting Principles Board (“APB”) Opinion No.
28, “Interim Financial Reporting,” to require those disclosures in summarized
financial information at interim reporting periods. The impact of
adoption on June 30, 2009 was not material as it required only disclosures which
are included in Note 10 – Fair Value.
In April
2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments,” which were codified into ASC
320. This FSP amends the OTTI guidance in U.S. GAAP for debt securities to make
the guidance more operational and to improve the presentation and disclosure of
OTTI on debt and equity securities in the financial statements. This FSP does
not amend existing recognition and measurement guidance related to OTTI of
equity securities. The impact of adoption on June 30, 2009 was not
material.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly,” which was codified into ASC 820.
This FSP provides additional guidance for estimating fair value in accordance
with SFAS No. 157, “Fair Value Measurements,” when the volume and level of
activity for the asset or liability have significantly decreased. This FSP also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. The impact of adoption on June 30, 2009 was not
material.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities,” which was
codified into ASC 260. This FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing EPS
under the two-class method described in SFAS No. 128, “Earnings per
Share.” The FSP concluded that unvested share-based payment awards
that contain nonforfeitable rights to dividend equivalents are participating
securities and shall be included in the computation of EPS pursuant to the
two-class method. Our restricted stock awards are considered
participating securities. The impact of adoption on January 1, 2009 was not
material.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133,” which was
codified into ASC 815. SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” to provide users of financial statements with an enhanced
understanding of: (1) how and why an entity uses derivative
instruments; (2) how derivative instruments and related hedged items are
accounted for; and (3) how such items affect an entity’s financial position,
performance and cash flows. SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivative instruments,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative agreements. The impact of adoption on January 1, 2009 was
not material.
In
December 2007, the FASB issued revised SFAS No. 141, “Business Combination,” or
SFAS No. 141(R), which was codified into ASC 805. SFAS No. 141(R)
retains the fundamental requirements of SFAS No. 141 that the acquisition method
of accounting (formerly the purchase method) be used for all business
combinations; that an acquirer be identified for each business combination; and
that intangible assets be identified and recognized separately from
goodwill. SFAS No. 141(R) requires the acquiring entity in a business
combination to recognize the assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited
exceptions. Additionally, SFAS No. 141(R) changes the requirements
for recognizing assets acquired and liabilities assumed arising from
contingencies and recognizing and measuring contingent
consideration. SFAS No. 141(R) also enhances the disclosure
requirements for business combinations. The impact of adoption on
January 1, 2009 was not material. In April 2009, the FASB issued FSP
FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies.” This FSP amends and
clarifies SFAS No. 141(R), “Business Combinations,” to address application
issues raised by preparers, auditors, and members of the legal profession on
initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The impact of adoption on January 1, 2009 was not
material.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51,” which was
codified into ASC 810. SFAS No. 160 amends Accounting Research Bulletin No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Among other things, SFAS No. 160
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. SFAS No. 160 also amends SFAS No. 128,
“Earnings per Share,” so that earnings per share calculations in consolidated
financial statements will continue to be based on amounts attributable to the
parent. The impact of adoption on January 1, 2009 was not
material.
Newly
Issued But Not Yet Effective Accounting Standards
The
following two standards shall remain authoritative until such time that each is
integrated into the ASC:
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 seeks to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. SFAS No. 166
addresses (1) practices that have developed since the issuance of SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,” that are not consistent with the original intent and key
requirements of that Statement and (2) concerns of financial statement users
that many of the financial assets (and related obligations) that have been
derecognized should continue to be reported in the financial statements of
transferors. This Statement must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. This Statement must be applied to transfers occurring on or
after the effective date. The impact of adoption is not expected to
be material.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R).” SFAS No. 167 seeks to improve financial reporting by
enterprises involved with variable interest entities by addressing (1) the
effects on certain provisions of FASB Interpretation No. 46 (revised December
2003), “Consolidation of Variable Interest Entities,” as a result of the
elimination of the qualifying special-purpose entity concept in SFAS No. 166,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provide timely and useful information
about an enterprise’s involvement in a variable interest entity. This Statement
shall be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The impact of
adoption is not expected to be material.
2. STOCKHOLDERS’
EQUITY
The
Company has 250,000 shares of preferred stock authorized. In December 2008, the
U.S. Department of the Treasury (the “Treasury”) purchased 36,842 shares of the
Company’s cumulative Series A Preferred Stock par value $1,000 per share, with a
redemption and liquidation value of $36,842,000 and an initial annual dividend
of 5% for five years and 9% thereafter. When originally issued, the
preferred stock could not be redeemed for a period of three years from the date
of the investment, except with the proceeds from a qualified equity offering
(the sale by the Company of common or preferred stock for
cash). After the third anniversary of the date of this investment,
the preferred stock could be redeemed, in whole or in part, at any time, at the
option of the Company. However, pursuant to the American Recovery and
Reinvestment Act of 2009 (“ARRA”), subject to approval by the Treasury and the
Company’s primary federal regulator, the Company may redeem the preferred stock
without regard to whether the Company has replaced such funds from any other
source or to any waiting period. On June 15, 2009, the Treasury
issued an Interim Final Rule under the ARRA, which did not impose any other
conditions in connection with any such approval. However, the Interim
Final Rule is subject to comments, and, therefore, may change.
Stock
held in treasury by the Company is reported as a reduction to total
stockholders’ equity. During the first nine months of 2009, the
Company did not repurchase any of its common shares.
The par
value of the Company’s common stock was changed to $0.01 per share from $5.00
per share in the second quarter of 2009, resulting in both a decrease in common
stock and an increase in surplus of $77,299,566.
3. EARNINGS PER
SHARE
Basic
earnings per common share is computed based on the weighted-average number of
shares outstanding. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable under stock
options, restricted stock grants and common stock warrants. For
periods in which a loss is reported, the impact of stock options, restricted
stock grants and common stock warrants is not considered as the result would be
antidilutive.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$
|
1,941,394
|
|
|
$
|
1,989,127
|
|
|
$
|
(2,079,590
|
)
|
|
$
|
5,950,258
|
|
Less: dividends
and accretion of discount on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
(514,576
|
)
|
|
|
-
|
|
|
|
(1,543,728
|
)
|
|
|
-
|
|
Income
(loss) attributable to common stockholders
|
|
$
|
1,426,818
|
|
|
$
|
1,989,127
|
|
|
$
|
(3,623,318
|
)
|
|
$
|
5,950,258
|
|
Weighted
average common shares outstanding
|
|
|
14,375,032
|
|
|
|
14,207,743
|
|
|
|
14,355,838
|
|
|
|
14,097,522
|
|
Dilutive
effect of stock options, restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
common stock warrants
|
|
|
11,538
|
|
|
|
59,767
|
|
|
|
N/A
|
*
|
|
|
39,173
|
|
Adjusted
common shares outstanding - diluted
|
|
|
14,386,570
|
|
|
|
14,267,510
|
|
|
|
14,355,838
|
|
|
|
14,136,695
|
|
Net
income (loss) per common share - basic
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.42
|
|
Net
income (loss) per common share - diluted
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.42
|
|
Antidilutive
common stock warrant issued to the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
under the Capital Purchase Program (“CPP”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
not included in the calculation
|
|
|
465,569
|
|
|
|
-
|
|
|
|
465,569
|
|
|
|
-
|
|
Other
antidilutive potential shares not included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
the calculation
|
|
|
559,959
|
|
|
|
366,514
|
|
|
|
629,757
|
|
|
|
430,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
N/A - for periods in which a loss is reported, the impact of stock
options, restricted stock grants and common
|
|
|
|
|
|
stock
warrants is not considered as the result would be
antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. INVESTMENT
SECURITIES
At the
time of purchase of a security, the Company designates the security as either
available for sale or held to maturity, depending upon investment objectives,
liquidity needs and intent. Securities held to maturity are stated at
cost, adjusted for premium amortized or discount accreted, if
any. The Company has the positive intent and ability to hold such
securities to maturity. Securities available for sale are stated at
estimated fair value. Unrealized gains and losses are excluded from
income and reported net of tax as accumulated other comprehensive income (loss)
as a separate component of stockholders’ equity until
realized. Interest earned on investment securities is included in
interest income. Realized gains and losses on the sale of securities
are reported in the consolidated statements of income and determined using the
adjusted cost of the specific security sold.
In the
first quarter of 2009, a $4.0 million OTTI charge was recorded on one $10
million par value trust preferred CDO that had previously incurred a non-cash
OTTI write down of $5.2 million in the fourth quarter of 2008. Management
determined that it intended to sell this bond and continued to review
developments and other considerations with respect to this trust preferred CDO,
including the limited prospects for its ultimate price recovery, the expected
time involved and the downside risks involved in continuing to hold this
investment. As a result of this review and with some limited liquidity appearing
in the trust preferred CDO market, management determined that an immediate
liquidation was appropriate. As a result, the bond was liquidated in July 2009
at a price of 13.45% of par representing a gain of 5.2% of par or $520,000 which
was recognized in the Company’s third quarter 2009 financial
statements.
At
September 30, 2009 and December 31, 2008, the Company had no securities
designated as held to maturity. The amortized cost, gross unrealized
gains and losses and estimated fair value of securities available for sale at
September 30, 2009 and December 31, 2008 are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
$
|
11,198,064
|
|
|
$
|
85,498
|
|
|
$
|
(6,183
|
)
|
|
$
|
11,277,379
|
|
Government
Agency securities
|
|
|
12,044,358
|
|
|
|
420,017
|
|
|
|
-
|
|
|
|
12,464,375
|
|
Mortgage-backed
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
174,092,198
|
|
|
|
6,713,595
|
|
|
|
(100,482
|
)
|
|
|
180,705,311
|
|
FNMA
|
|
|
140,227,438
|
|
|
|
4,029,271
|
|
|
|
(15,464
|
)
|
|
|
144,241,245
|
|
GNMA
|
|
|
46,338,845
|
|
|
|
106,265
|
|
|
|
(110,952
|
)
|
|
|
46,334,158
|
|
Total
securities available for sale
|
|
$
|
383,900,903
|
|
|
$
|
11,354,646
|
|
|
$
|
(233,081
|
)
|
|
$
|
395,022,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
$
|
5,327,088
|
|
|
$
|
33,926
|
|
|
$
|
(704
|
)
|
|
$
|
5,360,310
|
|
Government
Agency securities
|
|
|
22,538,511
|
|
|
|
835,036
|
|
|
|
-
|
|
|
|
23,373,547
|
|
Collateralized
debt obligations
|
|
|
5,864,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,864,999
|
|
Mortgage-backed
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
229,014,250
|
|
|
|
4,391,402
|
|
|
|
(47,275
|
)
|
|
|
233,358,377
|
|
FNMA
|
|
|
126,282,702
|
|
|
|
2,198,936
|
|
|
|
(23,012
|
)
|
|
|
128,458,626
|
|
GNMA
|
|
|
15,855,155
|
|
|
|
128,321
|
|
|
|
(20,130
|
)
|
|
|
15,963,346
|
|
Total
securities available for sale
|
|
$
|
404,882,705
|
|
|
$
|
7,587,621
|
|
|
$
|
(91,121
|
)
|
|
$
|
412,379,205
|
|
The
amortized cost and estimated fair value of securities available for sale at
September 30, 2009 are shown below by expected maturity. Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair
Value
|
|
Securities
available for sale:
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
12,044,358
|
|
|
$
|
12,464,375
|
|
Due
after one year through five years
|
|
|
6,151,796
|
|
|
|
6,203,268
|
|
Due
after five years through ten years
|
|
|
5,046,268
|
|
|
|
5,074,111
|
|
Subtotal
|
|
|
23,242,422
|
|
|
|
23,741,754
|
|
Mortgage-backed
securities and
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations
|
|
|
360,658,481
|
|
|
|
371,280,714
|
|
Total
securities available for sale
|
|
$
|
383,900,903
|
|
|
$
|
395,022,468
|
|
For the
three months ended September 30, 2009 and 2008, gross gains of $520,000 and
$1,415 and gross losses of $34,241 and $11,115, respectively, were recognized on
the sale of securities available for sale. For the nine months ended
September 30, 2009 and 2008, gross gains of $1,359,632 and $302,134 and gross
losses of $4,191,918 (inclusive of a $4.0 million OTTI charge previously
mentioned) and $251,675, respectively, were recognized on the sale of securities
available for sale.
Information
pertaining to securities with gross unrealized losses at September 30, 2009 and
December 31, 2008, aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:
|
|
Less
than 12 Months
|
|
|
12
Months or Longer
|
|
|
Total
|
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
$
|
(5,547
|
)
|
|
$
|
1,207,575
|
|
|
$
|
(636
|
)
|
|
$
|
124,515
|
|
|
$
|
(6,183
|
)
|
|
$
|
1,332,090
|
|
Mortgage-backed
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
(100,482
|
)
|
|
|
15,318,763
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,482
|
)
|
|
|
15,318,763
|
|
FNMA
|
|
|
(15,464
|
)
|
|
|
8,630,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,464
|
)
|
|
|
8,630,384
|
|
GNMA
|
|
|
(110,952
|
)
|
|
|
20,072,848
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(110,952
|
)
|
|
|
20,072,848
|
|
Total
securities available for sale
|
|
$
|
(232,445
|
)
|
|
$
|
45,229,570
|
|
|
$
|
(636
|
)
|
|
$
|
124,515
|
|
|
$
|
(233,081
|
)
|
|
$
|
45,354,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
$
|
(704
|
)
|
|
$
|
125,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(704
|
)
|
|
$
|
125,000
|
|
Mortgage-backed
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
(33,540
|
)
|
|
|
10,705,583
|
|
|
|
(13,735
|
)
|
|
|
3,265,727
|
|
|
|
(47,275
|
)
|
|
|
13,971,310
|
|
FNMA
|
|
|
(1,999
|
)
|
|
|
504,953
|
|
|
|
(21,013
|
)
|
|
|
3,106,042
|
|
|
|
(23,012
|
)
|
|
|
3,610,995
|
|
GNMA
|
|
|
(20,130
|
)
|
|
|
2,976,562
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,130
|
)
|
|
|
2,976,562
|
|
Total
securities available for sale
|
|
$
|
(56,373
|
)
|
|
$
|
14,312,098
|
|
|
$
|
(34,748
|
)
|
|
$
|
6,371,769
|
|
|
$
|
(91,121
|
)
|
|
$
|
20,683,867
|
|
There was
one fixed rate municipal obligation in a continuous loss position for 12 months
or longer at September 30, 2009. The market value, and therefore the
loss position, for each type of security respond differently to market
conditions. In management’s opinion, those market conditions are
temporary in nature and provide the basis for the Company’s belief that the
declines are temporary.
The
market value for fixed rate securities changes inversely with changes in
interest rates. When interest rates are falling, the market value of
fixed rate securities will appreciate, whereas in a rising interest rate
environment, the market value of fixed rate securities will depreciate. As a
fixed rate security approaches its maturity date, the market value of the
security typically approaches its par value. In the case of
adjustable rate securities, the coupon rate resets periodically and is typically
comprised of a base market index rate plus a spread. The market value of these
securities is primarily influenced by the length of time remaining before the
coupon rate resets to market levels. As an adjustable rate security approaches
that reset date, it is likely that an unrealized loss position would
dissipate.
5. LOANS AND
LEASES
The
Company’s loan and lease portfolio is concentrated primarily in commercial and
industrial loans and commercial mortgage loans. At September 30, 2009
and December 31, 2008, loans held for sale were $9.3 million and $5.3 million,
respectively. Charge-offs of $2.5 million were incurred on the
transfer of $7.4 million in loans to loans held for sale in the first
nine months of 2009. During the third quarter of 2009 and subsequent to their
transfer to loans held for sale, an additional $1.0 million charge was recorded
to write down the carrying value of these loans held for sale to their estimated
fair value.
In
addition to the loans held for sale, impaired loans before related specifically
allocated allowance for loan losses were $24.4 million and $11.9 million at
September 30, 2009 and December 31, 2008, respectively. The increase
in such impaired loans was primarily due to additional non-accrual residential
construction loans, commercial real estate loans and commercial and industrial
loans of $10.1 million, $2.2 million and $1.3 million, respectively. These were
partially offset by a $0.6 million non-accrual loan that was transferred to
loans held for sale and subsequently sold in the second quarter of 2009 and $0.5
million in charge-offs and principal repayments. Impaired loans net
of related specifically allocated allowance for loan loss were $16.8 million and
$10.0 million at September 30, 2009 and December 31, 2008,
respectively.
The
recorded investment in loans that are considered to be impaired, as of September
30, 2009 and December 31, 2008, is summarized below:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Impaired
loans with related allowance for loan loss
|
|
$
|
22,991,856
|
|
|
$
|
11,908,500
|
|
Allowance
for loan loss specifically allocated to impaired loans
|
|
|
(7,600,640
|
)
|
|
|
(1,954,590
|
)
|
|
|
|
15,391,216
|
|
|
|
9,953,910
|
|
Impaired
loans with no related allowance for loan loss
|
|
|
1,379,789
|
|
|
|
-
|
|
Net
impaired loans
|
|
$
|
16,771,005
|
|
|
$
|
9,953,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2009
|
|
|
Third
Quarter 2008
|
|
Average
impaired loan and lease balance
|
|
$
|
24,455,841
|
|
|
$
|
12,666,538
|
|
Interest
income of $20,366 and $23,312, respectively, was recognized on impaired loans
for the three and nine months ended September 30, 2009. Interest income of
$11,733 and $57,514, respectively, was recognized on impaired loans for the
three and nine months ended September 30, 2008.
Activity
in the allowance for loan and lease losses for the nine months ended September
30, 2009 and 2008 is as follows:
|
|
2009
|
|
|
2008
|
|
Balance,
January 1
|
|
$
|
18,668,451
|
|
|
$
|
14,704,864
|
|
Adjustment
due to sale of SB Equipment assets
|
|
|
-
|
|
|
|
(2,002,155
|
)
|
Provision
charged to income
|
|
|
16,500,000
|
|
|
|
10,225,744
|
|
Charge-offs
|
|
|
(6,268,520
|
)
|
|
|
(8,627,296
|
)
|
Recoveries
|
|
|
501,188
|
|
|
|
271,359
|
|
Balance,
September 30
|
|
$
|
29,401,119
|
|
|
$
|
14,572,516
|
|
The
aggregate amount of loans classified as special mention ($97.9 million),
substandard ($46.8 million), doubtful ($-0-) or loss ($0.3 million) by the
Company's loan grading process has increased to $145.0 million at September 30,
2009 from $63.5 million at December 31, 2008. This increase reflects six
relationships, each over $5.0 million, totaling $54.0 million. These
relationships consisted of commercial and industrial loans totaling $29.0
million and commercial real estate credits totaling $25.0 million.
At
September 30, 2009 and December 31, 2008, loans and leases with unpaid principal
balances on which the Bank is no longer accruing interest income were $34.7
million and $16.1 million, respectively. The increase in such non-accrual loans
at September 30, 2009 compared to December 31, 2008 was primarily due to the
addition of
$26
million from seven relationships to non-accrual status. These relationships
consisted of residential construction and commercial real estate credits
totaling $20 million, and commercial and industrial loans totaling $6 million.
These additions were reduced by charge-offs of non-accrual loans of $2 million
and cash payments received of $5 million.
Loans and leases 90 days or
more past due and still accruing interest totaled $7 thousand and $3 thousand at
September 30, 2009 and December 31, 2008, respectively.
6. LEGAL
PROCEEDINGS
The
Company and the Bank are subject to legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the amount
of ultimate liability, if any, with respect to such matters will not materially
affect future operations and will not have a material impact on the Company’s
financial statements.
7. REGULATORY
MATTERS
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial
statements. Under the capital adequacy guidelines, the Company and
the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company’s and
the Bank’s capital amounts and the Bank’s classification are also subject to
qualitative judgments by the federal banking regulators about components of
capital, risk weightings of assets and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total capital and
Tier I capital, as defined in the federal banking regulations, to risk-weighted
assets and of Tier I capital to average assets as shown in the following
table. Each of the Company’s and the Bank’s capital ratios exceeds
applicable regulatory capital requirements and the Bank meets the requisite
capital ratios to be well-capitalized as of September 30, 2009 and December 31,
2008. There are no subsequent conditions or events that management believes have
changed the Company’s or the Bank’s capital adequacy. The Company’s
and the Bank’s capital amounts (in thousands) and ratios are as
follows:
|
|
|
|
|
|
|
|
For
Capital
|
|
|
To
Be Considered
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital to Total Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Assets (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
147,750
|
|
|
|
9.25
|
%
|
|
$
|
63,859
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
153,550
|
|
|
|
9.62
|
%
|
|
$
|
63,827
|
|
|
|
4.00
|
%
|
|
$
|
79,784
|
|
|
|
5.00
|
%
|
Tier
I Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
147,750
|
|
|
|
11.95
|
%
|
|
$
|
49,452
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
153,550
|
|
|
|
12.42
|
%
|
|
$
|
49,437
|
|
|
|
4.00
|
%
|
|
$
|
74,155
|
|
|
|
6.00
|
%
|
Total
Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
169,376
|
|
|
|
13.70
|
%
|
|
$
|
98,904
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
169,171
|
|
|
|
13.69
|
%
|
|
$
|
98,873
|
|
|
|
8.00
|
%
|
|
$
|
123,592
|
|
|
|
10.00
|
%
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital to Total Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Assets (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
154,081
|
|
|
|
9.38
|
%
|
|
$
|
65,721
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
156,322
|
|
|
|
9.52
|
%
|
|
$
|
65,685
|
|
|
|
4.00
|
%
|
|
$
|
82,106
|
|
|
|
5.00
|
%
|
Tier
I Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
154,081
|
|
|
|
12.03
|
%
|
|
$
|
51,212
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
156,322
|
|
|
|
12.22
|
%
|
|
$
|
51,185
|
|
|
|
4.00
|
%
|
|
$
|
76,777
|
|
|
|
6.00
|
%
|
Total
Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company
|
|
$
|
180,118
|
|
|
|
14.07
|
%
|
|
$
|
102,424
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Bank
|
|
$
|
172,350
|
|
|
|
13.47
|
%
|
|
$
|
102,369
|
|
|
|
8.00
|
%
|
|
$
|
127,961
|
|
|
|
10.00
|
%
|
The
preferred stock, purchased by the Treasury in December 2008, qualifies as Tier I
capital for regulatory reporting purposes. The Treasury also received a warrant
to purchase 465,569 shares of the Company’s common stock with an exercise price
of $11.87 per share representing an aggregate market price of $5,526,300 or 15%
of the preferred stock investment. The warrant is immediately
exercisable and expires in ten years. The Company allocated
$1,056,842 of the proceeds from the issuance of the preferred stock to the value
of the warrant representing an unamortized discount on preferred stock. The
discount is being amortized to preferred stock using an effective yield method
over a five-year period. Through September 30, 2009, $177,167 of the discount
has been accreted to preferred stock.
The
proceeds from the issuance to the U.S. Treasury were allocated based on the
relative fair value of the warrant as compared to the fair value of the
preferred stock. The fair value of the warrant was determined using a
Black-Scholes valuation model. The assumptions used in the warrant valuation
were a dividend yield of 3.8%, stock price volatility of 34% and a risk-free
interest rate of 2.7%. The fair value of the preferred stock was determined
using a discounted cash flow analysis based on assumptions regarding the market
rate for preferred stock, which was estimated to be approximately 9% at the date
of issuance.
The
Treasury’s consent is required for any increase in common dividends per share
that is greater than the amount of the last quarterly cash dividend declared
prior to October 14, 2008, and any repurchases of common stock until the earlier
of a redemption or December 5, 2011. Furthermore, the ARRA prohibits
the payment or accrual of any bonus, retention award or incentive compensation
to, in the Company’s case, the five (5) most highly-compensated
employees. This prohibition does not apply to the granting of
restricted stock, provided that the stock does not fully vest during the time
the Treasury owns any debt or equity acquired under the Capital Purchase Program
(“CPP”) (unless the only securities outstanding are warrants acquired under the
CPP) and the amount of restricted stock granted does not have a value greater
than one-third of the total annual compensation of the recipient. The
ARRA also prohibits the payment of any severance or payment to any named
executive officer (“NEO”) or any of the next five (5) most highly-compensated
employees for departure from the Company for any reason except for payments
relating to services already performed or benefits previously
accrued. In addition, under ARRA, any bonus payment made to the
twenty (20) most highly compensated employees of the Company is subject to
recovery by the Company if the bonus payment was based on materially inaccurate
financial statements or any other materially inaccurate performance metric
criteria. On June 15, 2009, the Treasury issued an Interim Final Rule
to provide guidance on the executive compensation provisions under
ARRA. The Interim Final Rule clarified that any payments made in
connection with a change in control of the Company will be prohibited golden
parachute payments. Under the Interim Final Rule, a golden parachute payment is
treated as paid at the time of departure or change in control and may include a
right to amounts actually payable after the TARP period. In addition,
the Interim Final Rule clarifies that in addition to payments for services
performed or benefits accrued, (i) payments under tax-qualified retirement
plans, (ii) payments made due to the employee’s death or disability and (iii)
severance or similar payments required to be made pursuant to a state statute or
foreign law are excluded from prohibited payments. The Treasury has
the ability to make unilateral, retroactive changes to the Securities Purchase
Agreement – Standard Terms (“Securities Purchase Agreement”) which governs the
sale of the Series A Preferred Stock to the Treasury.
8. STOCK-BASED
COMPENSATION
Incentive Stock
Options
Under the
terms of the Company’s incentive stock option plans adopted in April 1994,
February 1999 and February 2002, options have been granted to certain key
personnel that entitle each holder to purchase shares of the Company’s common
stock. The option price is the higher of the fair market value or the book value
of the shares at the date of grant. Such options were exercisable
commencing one year from the date of grant, at the rate of 25% per year, and
expire within ten years from the date of grant. Any optionee-owned
stock may be used as full or partial payment of the exercise price and shall be
valued at the fair market value of the stock on the date of exercise of the
option.
At
September 30, 2009, incentive stock options for the purchase of 254,319 shares
were outstanding and exercisable. No options have been exercised in
2009. The total intrinsic value of options exercised for the nine months ended
September 30, 2008 was $292,899. The options outstanding and exercisable at
September 30, 2009 have an intrinsic value of $3,001. A summary of
stock option activity follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
Number
|
|
|
Exercise
Price
|
|
|
|
of
Shares
|
|
|
Per
Share
|
|
Outstanding
- January 1, 2009
|
|
|
330,914
|
|
|
$
|
15.26
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or forfeited
|
|
|
(76,595
|
)
|
|
$
|
13.69
|
|
Outstanding
- September 30, 2009
|
|
|
254,319
|
|
|
$
|
15.73
|
|
The
following summarizes shares subject to purchase from incentive stock options
outstanding and exercisable as of September 30, 2009:
|
|
Weighted-Average
|
|
|
|
|
Shares
|
Remaining
|
Weighted-Average
|
Shares
|
Weighted-Average
|
Range
of Exercise Prices
|
Outstanding
|
Contractual
Life
|
Exercise
Price
|
Exercisable
|
Exercise
Price
|
$8.25
- $10.28
|
58,867
|
1.2
years
|
$9.76
|
58,867
|
$9.76
|
$12.45
- $13.61
|
84,839
|
3.0
years
|
$13.08
|
84,839
|
$13.08
|
$19.16
|
53,973
|
4.4
years
|
$19.16
|
53,973
|
$19.16
|
$22.63
|
56,640
|
5.4
years
|
$22.63
|
56,640
|
$22.63
|
|
254,319
|
3.4
years
|
$15.73
|
254,319
|
$15.73
|
Restricted
Stock Awards
Under the
Company’s 2006 Equity Compensation Plan (the “2006 Plan”), the Company can award
options, stock appreciation rights (“SARs”), restricted stock, performance units
and unrestricted stock. The 2006 Plan also allows the Company to make awards
conditional upon attainment of vesting conditions and performance
targets.
During
the first nine months of 2009, the Company awarded 75,715 shares of restricted
stock to certain key employees. The restricted stock awarded in 2009
and 2008 primarily vests one-third on each of the third through fifth
anniversaries of the award date. The restricted stock awarded in 2006
vested in full in September 2009 at a fair value of $66,590. Based on an
estimated forfeiture rate, of those shares awarded in 2009 and 2008, 169,000
shares are expected to vest over the five year period. The Company
recognizes compensation expense over the vesting period at the fair market value
of the shares on the award date. If a participant’s service
terminates for any reason other than death or disability, then the participant
shall forfeit to the Company any shares acquired by the participant pursuant to
the restricted stock award which remain subject to vesting
conditions. The total remaining unrecognized compensation cost
related to nonvested shares of restricted stock is $1,761,298 to be expensed
over the remaining period of 3.8 years. For the nine months ended September 30,
2009 and 2008, $298,735 and $200,108, respectively, were recognized as
compensation expense, net of estimated forfeitures. The Company recognized tax
benefits resulting from the compensation expense for the nine months ended
September 30, 2009 and 2008 of $91,204 and $59,831, respectively.
A summary
of restricted stock activity follows:
|
|
Number
|
|
|
Weighted-Average
|
|
|
|
of
Shares
|
|
|
Grant-Date
Fair Value
|
|
Nonvested
- January 1, 2009
|
|
|
136,935
|
|
|
$
|
13.50
|
|
Granted
|
|
|
75,715
|
|
|
$
|
7.58
|
|
Vested
|
|
|
(7,482
|
)
|
|
$
|
19.95
|
|
Cancelled
or forfeited
|
|
|
(2,142
|
)
|
|
$
|
13.00
|
|
Nonvested
- September 30, 2009
|
|
|
203,026
|
|
|
$
|
11.06
|
|
At
September 30, 2009, 362,506 shares were reserved for possible issuance of awards
of options, SARs, restricted stock, performance units and unrestricted
stock.
Non-Plan Stock-Based
Compensation
In
November 2006, non-qualified stock options and restricted stock awards were
granted to Thomas M. O’Brien, the Company’s and the Bank’s President and Chief
Executive Officer, pursuant to the terms of his employment
agreement. The non-qualified stock options to purchase 164,745 shares
have an exercise price of $17.84 and will vest 20% per year over five
years. The estimated fair value of the options was $5.42 per share
and was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used: (1) dividend yield
3.32%; (2) expected volatility 35%; (3) risk-free interest
rate 4.57%; and (4) expected life of options 7.3 years. At
September 30, 2009, 65,898 of these options were exercisable, but none have been
exercised. The options outstanding and those exercisable at September
30, 2009 have no intrinsic value.
The
restricted stock awarded to Mr. O’Brien totals 83,612 shares and was awarded at
an average price of $17.94 to vest in 20 equal quarterly installments over five
years. The fair value of restricted stock awards vested during the
nine months ended September 30, 2009 and 2008 was $100,219 and $161,136,
respectively. A summary of restricted stock activity
follows:
|
|
Number
|
|
|
Weighted-Average
|
|
|
|
of
Shares
|
|
|
Grant-Date
Fair Value
|
|
Nonvested
- January 1, 2009
|
|
|
45,983
|
|
|
$
|
17.94
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(12,543
|
)
|
|
$
|
17.94
|
|
Nonvested
- September 30, 2009
|
|
|
33,440
|
|
|
$
|
17.94
|
|
The total
remaining unrecognized compensation cost related to nonvested options and shares
of restricted stock awarded to Mr. O’Brien is $997,500 and will be expensed over
the weighted-average remaining period of 2.1 years. For the nine
months ended September 30, 2009 and 2008, $359,100 was recognized as
compensation expense in each period. The non-qualified stock options
and the restricted stock awards were not issued as part of any of the Company’s
registered stock-based compensation plans.
9. BORROWINGS
The Bank
may use a secured line of credit with the Federal Home Loan Bank of New York
(“FHLB”) for overnight funding or on a term basis to fund assets. The
amount of this line of credit will fluctuate based upon the amount of pledged
collateral in the form of real estate mortgage loans and investment securities.
At September 30, 2009, the Bank had approximately $230,000,000 of real estate
mortgage loan collateral pledged at the FHLB. Based on this collateral, the Bank
had approximately $149,000,000 available to borrow overnight or on a term basis.
There were no investment securities pledged. The FHLB line is renewed
annually.
|
|
Nine
months ended
|
|
|
Twelve
months ended
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Amount
outstanding under lines of credit with the FHLB - end of
period
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
Amount
outstanding under lines of credit with the FHLB - period
average
|
|
$
|
12,681,000
|
|
|
$
|
110,915,000
|
|
Weighted-average
interest rate on average amount outstanding
|
|
|
0.43
|
%
|
|
|
2.52
|
%
|
At
September 30, 2009 and December 31, 2008, the Bank had $3,000,000 outstanding in
securities sold under agreements to repurchase.
On March
31, 2009, the Bank issued $29,000,000 in senior unsecured debt due March 30,
2012 guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) under the
FDIC’s Temporary Liquidity Guarantee Program (“TLGP”). Interest at
2.625% per annum is payable semi-annually in arrears on the 30
th
day
of each March and September, beginning September 30, 2009.
10. FAIR
VALUE
A fair
value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. Three levels
of inputs 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.
For the
Company’s securities available for sale, the estimated fair value equals quoted
market price, if available (Level 1 inputs). If a quoted market price is not
available, fair value is estimated using a quoted market price for similar
securities (Level 2 inputs). Our derivative instruments consist of interest rate
swap transactions with customers on loans. As such, significant fair
value inputs can generally be verified and do not typically involve significant
management judgments (Level 2 inputs). The market value adjustment of
the derivatives considers the credit risk of the counterparties to the
transaction and the effect of any credit enhancements related to the
transaction. The fair value of loans held for sale and impaired loans
with specific allocations of the allowance for loan losses is generally based on
recent real estate appraisals. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and
the income approach. Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales
and income data available. Unobservable inputs are typically significant and
result in a Level 3 classification for determining fair value of loans held for
sale and impaired loans.
Assets and Liabilities
Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
September
30, 2009
|
|
|
Fair
Value Measurements at September 30, 2009 Using Significant Other
Observable Inputs (Level 2)
|
|
Assets:
|
|
|
|
|
|
|
Available
for sale securities
|
|
$
|
395,022,468
|
|
|
$
|
395,022,468
|
|
Derivatives
|
|
$
|
2,175,586
|
|
|
$
|
2,175,586
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
2,242,184
|
|
|
$
|
2,242,184
|
|
|
|
December
31, 2008
|
|
|
Fair
Value Measurements at December 31, 2008 Using Significant Other Observable
Inputs (Level 2)
|
|
|
Fair
Value Measurements at December 31, 2008 Using Significant Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$
|
412,379,205
|
|
|
$
|
406,514,206
|
|
|
$
|
5,864,999
|
|
Derivatives
|
|
$
|
3,132,311
|
|
|
$
|
3,132,311
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1,500,858
|
|
|
$
|
1,500,858
|
|
|
$
|
-
|
|
The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3):
|
|
Available
for Sale Securities
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Beginning
balance
|
|
$
|
5,864,999
|
|
|
$
|
-
|
|
Other-than-temporary
impairment
|
|
|
(4,000,000
|
)
|
|
|
(6,203,195
|
)
|
Included
in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Transfers
(out of) into Level 3
|
|
|
(1,864,999
|
)
|
|
|
12,068,194
|
|
Ending
balance
|
|
$
|
-
|
|
|
$
|
5,864,999
|
|
Due to
credit deterioration noted in the financial institution industry in general, the
Company incurred a first quarter 2009 charge to write down to the fair value a
CDO classified as a Level 3 asset as of December 31, 2008. This
valuation was based upon comparable prices of similar instruments obtained from
an outside broker and resulted in the asset being classified as a Level 2 asset
from March 31, 2009 until its liquidation in July 2009.
Assets and Liabilities
Measured on a Non-Recurring Basis
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
|
|
September
30, 2009
|
|
|
Fair
Value Measurements at September 30, 2009 Using Significant Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
15,391,216
|
|
|
$
|
15,391,216
|
|
Loans
held for sale
|
|
$
|
9,302,360
|
|
|
$
|
9,302,360
|
|
|
|
December
31, 2008
|
|
|
Fair
Value Measurements at December 31, 2008 Using Significant Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
9,953,910
|
|
|
$
|
9,953,910
|
|
Loans
held for sale
|
|
$
|
5,321,577
|
|
|
$
|
5,321,577
|
|
Impaired
loans with specific allocations had a principal amount of $22,991,856 and
$11,908,500, with a valuation allowance of $7,600,640 and $1,954,590 at
September 30, 2009 and December 31, 2008, respectively. The provision
for losses on impaired loans was $6,216,844 and $1,826,908 for the nine months
ended September 30, 2009 and 2008, respectively. Charge-offs
of $2,585,807 and $3,345,544 were incurred on the transfer of loans
to loans held for sale in the first nine months of 2009 and 2008, respectively.
(See also Note 5 – Loans and Leases.)
The
carrying amounts and estimated fair values of the Company’s financial
instruments, not previously disclosed, are as follows (in
thousands):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Amount
|
|
|
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
$
|
35,992
|
|
|
$
|
35,992
|
|
|
$
|
102,988
|
|
|
$
|
102,988
|
|
Accrued
interest receivable
|
|
|
5,961
|
|
|
|
5,961
|
|
|
|
6,879
|
|
|
|
6,879
|
|
Federal
Home Loan Bank and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
restricted stock
|
|
|
8,036
|
|
|
|
8,036
|
|
|
|
4,823
|
|
|
|
4,823
|
|
Loans
and leases - net of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
allowance
for loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
lease losses
|
|
|
1,088,096
|
|
|
|
1,066,528
|
|
|
|
1,103,870
|
|
|
|
1,132,185
|
|
Total
|
|
$
|
1,138,085
|
|
|
$
|
1,116,517
|
|
|
$
|
1,218,560
|
|
|
$
|
1,246,875
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,307,962
|
|
|
$
|
1,127,670
|
|
|
$
|
1,481,048
|
|
|
$
|
1,367,381
|
|
Senior
unsecured debt
|
|
|
29,000
|
|
|
|
27,927
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
10,000
|
|
|
|
11,109
|
|
|
|
10,000
|
|
|
|
12,113
|
|
Junior
subordinated debentures
|
|
|
20,620
|
|
|
|
20,626
|
|
|
|
20,620
|
|
|
|
20,640
|
|
Accrued
interest payable
|
|
|
1,172
|
|
|
|
1,172
|
|
|
|
1,433
|
|
|
|
1,433
|
|
Temporary
borrowings
|
|
|
63,000
|
|
|
|
63,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
Total
|
|
$
|
1,431,754
|
|
|
$
|
1,251,504
|
|
|
$
|
1,516,101
|
|
|
$
|
1,404,567
|
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents
-
For cash and cash equivalents (due from banks, federal funds sold and securities
purchased under agreements to resell), the carrying amount is a reasonable
estimate of fair value.
Accrued Interest Receivable
-
For accrued interest receivable, the carrying amount is a reasonable estimate of
fair value.
Federal Home Loan Bank and Other
Restricted Stock
– Determining the fair value of Federal Home
Loan Bank stock is not practicable due to restrictions placed on its
transferability. For other restricted stock, the carrying amount is a
reasonable estimate of fair value.
Loans and Leases
- For
certain homogeneous categories of loans, such as some residential mortgages and
other consumer loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits
- The fair value of
demand deposits, savings accounts and time deposits is the amount payable on
demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the interest rate swap rates of
similar term points.
Senior Unsecured Debt, Subordinated
Notes and Junior Subordinated Debentures
- The fair value of senior
unsecured debt, subordinated notes and junior subordinated debentures is
estimated using the interest rate swap rates of similar term and repricing
points and spreads of equivalent new issues.
Temporary Borrowings and Accrued
Interest Payable
– Temporary borrowings (FHLB overnight and term
advances, federal funds purchased and securities sold under agreements to
repurchase) and accrued interest payable are considered to have fair values
equal to their carrying amounts due to their short-term nature.
Commitments to Extend Credit,
Standby Letters of Credit and Commercial Letters of Credit
- The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of standby letters of
credit and commercial letters of credit is based on fees currently charged for
similar agreements, which are not material to the financial
statements.
11. INCOME
TAXES
An income
tax benefit of $0.9 million and an income tax expense of $2.6 million were
recorded in the nine month periods ended September 30, 2009 and 2008,
respectively. The Company is currently subject to a statutory Federal tax rate
of 34%, a New York State tax rate of 7.1% plus a 17% MTA surcharge and a New
York City tax rate of 9%. The Company’s overall effective tax rate was a benefit
of 30.5% for the nine month period ended September 30, 2009, compared to an
expense of 30.3% for the same period in the prior year. In addition,
the Company is no longer subject to examination by NYS and NYC taxing
authorities for years before January 1, 2007, and by Federal taxing authorities
for years before January 1, 2005.
On a
quarterly basis, the Company performs an evaluation of its tax positions and has
concluded that as of September 30, 2009 there were no significant uncertain
tax positions requiring additional recognition in its consolidated financial
statements and does not believe that there will be any material changes in its
unrecognized tax positions over the next 12 months.
The
Company’s policy is to recognize interest and penalties related to unrecognized
tax benefits as a component of income tax expense. There were no accruals for
interest or penalties during the nine month period ended September 30,
2009.
At
September 30, 2009 the Company has available a net operating loss carryforward
of approximately $19 million that may be applied against future taxable income
and is expected to expire in the year 2027. Based on projected future
earnings, management believes it is more likely than not that the tax benefit of
the carryforward will be realized within the carryforward period and therefore
no valuation allowance has been recorded against the deferred tax
assets.
12. SUBSEQUENT
EVENTS
The
Company’s Board declared a cash dividend of $0.05 per share at its
October 27, 2009 meeting. The cash dividend will be paid on December
16, 2009 to stockholders of record on November 20, 2009.
On
October 9, 2009, the Company filed a definitive proxy statement on Schedule 14A
with the SEC in connection with a Special Meeting of Stockholders of the Company
to be held on November 17, 2009. Stockholders will be asked to consider and vote
upon the following matters: (1) the amendment to the Company’s Certificate of
Incorporation to increase the number of authorized shares of common stock from
20,000,000 to 50,000,000, (2) the amendment to the Company’s Certificate of
Incorporation to eliminate the classified board and provide for the annual
election of the Board of Directors, and (3) the amendment to the Company’s
Certificate of Incorporation to reduce the director and stockholder vote
required to approve certain business combinations.
ITEM 2. - MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Forward Looking
Statements
- Certain statements contained in this discussion are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as “may,” “could,”
“should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,”
“plan,” “project,” “is confident that,” and similar expressions are intended to
identify these forward looking-statements. These forward-looking statements
involve risk and uncertainty and a variety of factors that could cause the
Company’s actual results and experience to differ materially from the
anticipated results or other expectations expressed in these forward-looking
statements. The Company’s ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that
could have a material adverse effect on the operations of the Company and its
subsidiaries include, but are not limited to, changes in: market interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, the quality and composition of the loan and
lease or investment portfolios, demand for loan and lease products, demand for
financial services in the Company’s primary trade area, litigation, tax and
other regulatory matters, accounting principles and guidelines, other economic,
competitive, governmental, regulatory and technological factors affecting the
Company’s operations, pricing and services and those risks detailed in the
Company’s periodic reports filed with the SEC.
Executive
Summary
–
State
Bancorp, Inc. (the “Company”) is a one-bank holding company formed in
1985. The Company operates as the parent for its wholly owned
subsidiary, State Bank of Long Island and its subsidiaries (the “Bank”), a New
York State chartered commercial bank founded in 1966. The Company
also has two unconsolidated subsidiaries, State Bancorp Capital Trust I and
State Bancorp Capital Trust II (collectively the “Trusts”), entities formed in
2002 and 2003, respectively, to issue trust preferred securities. The
income of the Company is principally derived through the operation of the Bank.
Unless the context otherwise requires, references herein to the Company include
the Company and its subsidiaries on a consolidated basis.
The Bank
maintains its corporate headquarters in Jericho, New York and serves its
customer base through seventeen branches in Nassau, Suffolk, Queens and
Manhattan. The Bank offers a full range of banking services to our
diverse customer base which includes commercial real estate owners and
developers, small to middle market businesses, professional service firms,
municipalities and consumers. Retail and commercial products include
checking accounts, NOW accounts, money market accounts, savings accounts,
certificates of deposit, individual retirement accounts, commercial loans,
commercial mortgage loans, small business lines of credit, cash management
services and telephone and online banking. In addition, the Bank also
provides access to annuity products and mutual funds. The Company’s loan
portfolio is concentrated in commercial and industrial loans and commercial
mortgage loans. The Bank does not engage in subprime lending and does not offer
payment option ARMs or negative amortization loan products.
|
(dollars
in thousands, except per share data)
|
As
of or for the three and nine months ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months
|
|
Nine
months
|
|
|
|
|
|
|
|
|
Over/
|
|
|
|
Over/
|
|
|
|
|
|
|
|
|
(under)
|
|
|
|
(under)
|
|
|
|
|
|
|
2009
|
2008
|
2008
|
|
2009
|
2008
|
2008
|
|
Revenue
(1)
|
|
|
|
$17,402
|
$16,704
|
4.2
|
%
|
$46,543
|
$51,279
|
(9.2)
|
%
|
Operating
expenses
|
|
|
|
$11,341
|
$10,166
|
11.6
|
%
|
$33,036
|
$32,515
|
1.6
|
%
|
Provision
for loan and lease losses
|
|
$3,000
|
$3,700
|
(18.9)
|
%
|
$16,500
|
$10,226
|
61.4
|
%
|
Net
income (loss)
|
|
|
|
$1,941
|
$1,989
|
(2.4)
|
%
|
$(2,080)
|
$5,950
|
N/M
|
(2)
|
Net
income (loss) per common share - diluted
|
$0.10
|
$0.14
|
(28.6)
|
%
|
$(0.25)
|
$0.42
|
N/M
|
(2)
|
Return
on average total assets
|
|
|
0.47%
|
0.50%
|
(3)
|
bp
|
(0.17)%
|
0.49%
|
(66)
|
bp
|
Return
on average total stockholders' equity
|
5.13%
|
6.95%
|
(182)
|
bp
|
(1.84)%
|
6.91%
|
(875)
|
bp
|
Tier
I leverage ratio
|
|
|
|
9.25%
|
8.05%
|
120
|
bp
|
9.25%
|
8.05%
|
120
|
bp
|
Tier
I risk-based capital ratio
|
|
|
11.95%
|
10.32%
|
163
|
bp
|
11.95%
|
10.32%
|
163
|
bp
|
Total
risk-based capital ratio
|
|
|
13.70%
|
12.32%
|
138
|
bp
|
13.70%
|
12.32%
|
138
|
bp
|
Tangible
common equity ratio
|
|
|
7.17%
|
7.02%
|
15
|
bp
|
7.17%
|
7.02%
|
15
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bp
- denotes basis points; 100 bp equals 1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents net interest income plus total non-interest
income.
|
|
|
|
|
|
|
(2)
N/M - denotes % variance not meaningful for statistical
purposes.
|
|
|
|
|
|
|
As of
September 30, 2009, the Company, on a consolidated basis, had total assets of
approximately $1.6 billion, total deposits of approximately $1.3 billion and
stockholders’ equity of approximately $152 million.
The
Company recorded net income of $1.9 million, or $0.10 per diluted common share,
for the third quarter of 2009 compared to $2.0 million, or $0.14 per diluted
common share, for the third quarter of 2008. The decrease in net income in 2009
primarily reflects an increase in total operating expenses of $1.2 million
largely as a result of a $1.0 million charge to write down the carrying value of
loans held for sale to their estimated fair value and a $345 thousand increase
in FDIC deposit insurance assessment expenses. The increase in total operating
expenses was partially offset by an increase in net interest income of $201
thousand, a decrease of $700 thousand in the provision for loan and lease losses
and a $496 thousand increase in total non-interest income. Earnings per diluted
common share in 2009 was negatively impacted by quarterly dividends paid on
preferred stock issued under the Capital Purchase Program (“CPP”).
|
(dollars
in thousands)
|
For
the three and nine months ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months
|
|
Nine
months
|
|
|
|
|
|
|
|
|
Over/
|
|
|
|
Over/
|
|
|
|
|
|
|
|
|
(under)
|
|
|
|
(under)
|
|
|
|
|
|
|
2009
|
2008
|
2008
|
|
2009
|
2008
|
2008
|
|
Net
interest income
|
|
|
|
$15,607
|
$15,406
|
1.3
|
%
|
$45,906
|
$47,024
|
(2.4)
|
%
|
Service
charges on deposit accounts
|
|
504
|
468
|
7.7
|
%
|
1,690
|
1,623
|
4.1
|
%
|
Net
security gains (losses)
|
|
|
486
|
(10)
|
N/M
|
(1)
|
(2,832)
|
50
|
N/M
|
(1)
|
Income
from bank owned life insurance
|
|
182
|
276
|
(34.1)
|
%
|
554
|
793
|
(30.1)
|
%
|
Other
operating income
|
|
|
623
|
564
|
10.5
|
%
|
1,225
|
1,789
|
(31.5)
|
%
|
Total
revenue
|
|
|
|
$17,402
|
$16,704
|
4.2
|
%
|
$46,543
|
$51,279
|
(9.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
N/M - denotes % variance not meaningful for statistical
purposes.
|
|
|
|
|
|
The
Company’s return on average total assets decreased to 0.47% in the third quarter
of 2009 from 0.50% in the third quarter of 2008, while return on average total
stockholders’ equity decreased to 5.13% in the third quarter of 2009 from 6.95%
in the third quarter of 2008. Primarily due to a decrease in the
Company’s average earning asset yield offset somewhat by a decrease in the
average cost of interest-bearing liabilities, the Company’s net interest margin
declined by six basis points to 4.06% in the third quarter of 2009 from 4.12% in
the third quarter of 2008.
The
Company’s primary market area of Nassau, Suffolk, Queens and Manhattan provides
opportunity for deposit growth and commercial and industrial
lending. The economy in the New York metropolitan region remains
fragile and unemployment levels continue to be high. Based on our
assessment of the current market conditions and continuing economic pressures,
together with our determination of credit risk within our portfolio from our
ongoing review process, our provision for loan losses was $3.0 million in the
third quarter of 2009 compared to $3.7 million in the third quarter of 2008.
Nevertheless, our allowance for loan and lease losses increased to $29 million
at September 30, 2009 from $19 million at December 31, 2008. We
believe that we are aggressive in the ongoing review of our credit portfolio and
in our action plans for loans that begin to demonstrate weaknesses. When
appropriate, we continue to pursue opportunities to proactively liquidate and
dispose of certain problem loans by selling such loans in the market either
individually or, if conditions allow, in a bulk sale transaction. Liquidity for
the disposition of problem credits, although thin, has improved in recent
months. Management remains clearly focused on reaching an expedited resolution
to the problem loans in our portfolio in the near term. In the first nine months
of 2009, we wrote-down certain problem loans totaling $9.9 million to estimated
fair market value of $7.4 million and transferred the net balance to loans held
for sale after determining that such action represented the most cost-effective
long-term solution. During the third quarter of 2009 and subsequent to their
transfer to loans held for sale, an additional $1.0 million charge was recorded
to write down the carrying value of these loans held for sale to their estimated
fair value. Total loans held for sale amounted to $9.3 million at September 30,
2009 compared to $5.3 million at December 31, 2008.
Net
charge-offs in the third quarter of 2009 were $1.6 million. Problem and
non-performing loans remain a cause for continued close management
attention. Our primary concern is the impact of the present difficult
economic conditions on certain residential construction loans when the loan
amounts are in excess of projected sales or where the Bank would have to advance
significant additional funds to complete the project (see discussion on
non-performing assets in the Asset Quality section). It continues to
be our belief that the Bank is best served by exiting these facilities through
the sale of its position to investors who are better suited to realize the value
that may come over time. We generally attempt to sell such loans prior to their
becoming non-performing or shortly thereafter.
The
primary focus of the Company’s loan and lease portfolio is commercial real
estate and commercial and industrial loans. Residential lending
constitutes less than 10% of our total portfolio at September 30,
2009. The Company’s securities portfolio contains no subprime,
structured debt or exotic structures. At September 30, 2009, the fair
value of the securities portfolio represented 103% of book value. The
past practice of taking corporate credit risk in the Bank’s investment portfolio
has been discontinued.
We
continue to expect to achieve modest loan growth this year in our core
competencies of commercial and industrial credits and commercial mortgage loans.
We remain cautious on credit conditions and the inherent risk in lending
portfolios which is being exacerbated in this weak economy. The risk of economic
recovery being marked by modest growth and elevated unemployment levels is
substantial. Within the confines of current market conditions, the Company
continues to build for the future while forthrightly addressing its existing
problems. We are attracting new client relationships and have selectively
hired experienced commercial relationship managers to join our team of
professional bankers.
It is
management’s intent for the Company’s branch network to provide funding to
support anticipated asset growth, supplemented with short-term borrowings as
needed. The Company will continue to pursue product delivery and back
office expense reductions and operating efficiencies along with
revenue-generating sales initiatives to improve net income. Some of
these initiatives may result in the recording of initial costs in order to
achieve longer term financial benefits.
Concern
for the stability of the banking and financial systems reached a magnitude which
has resulted in unprecedented government intervention including, but not limited
to, the passage of the Emergency Economic Stabilization Act (“EESA”), the
implementation of the CPP, the Temporary Liquidity Guarantee Program (“TLGP”)
and the Troubled Asset Relief Program (“TARP”), all of which are described in
greater detail in Item 1. “Business” and Item 1A. of the Company’s 2008 Annual
Report on Form 10-K. During 2009, some of these programs have been expanded and
new programs have been announced to stimulate the economy and stabilize the
housing market.
The
Company has participated in the CPP through its December 2008 issuance of Series
A Preferred Stock and a warrant to purchase common stock to the
Treasury. The Company is participating in the Transaction Account
Guarantee Program of the FDIC’s TLGP which provides non-interest bearing
transaction accounts and interest bearing transaction accounts with interest
rates no higher than 0.50% at the Bank with unlimited FDIC insurance coverage
beyond the current limit of $250,000. The unlimited coverage was to
be in effect through December 31, 2009. Effective October 1, 2009, a
final rule adopted by the FDIC extends the TLGP for six months to June 30, 2010.
Management anticipates that the cost of continuing to participate in the TLGP
will be immaterial to the Company’s financial statements. The Company
participated in the Debt Guarantee Program of the TLGP in March 2009 allowing
the Bank to issue $29 million in FDIC-guaranteed senior unsecured debt at a
fixed interest rate of 2.625% per annum and a maturity of March 30,
2012. The FDIC guarantee will be in effect through the maturity date,
March 30, 2012.
The U.S.
Government is currently reviewing a plan for regulatory reform that would
consolidate bank regulators, create new government agencies and give new powers
to the Federal Reserve. Specific proposals include, among other
things, the creation of a new national bank supervisor to regulate all federally
chartered depository institutions, giving the Federal Reserve the power to
regulate systemic risk to the nation’s financial stability and the creation of a
Consumer Financial Protection Agency to regulate consumer financial
products. The Company will continue to monitor the progress of these
proposals and their possible effect on the Company. As currently
written, the proposals will not have a material adverse effect on the Company’s
operations.
Critical Accounting
Policies, Judgments and Estimates
- The discussion and analysis of the
financial condition and results of operations of the Company are based on the
Unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report on Form 10-Q, which are prepared in conformity with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenues
and expenses. Management evaluates those estimates and assumptions on an ongoing
basis, including those related to the allowance for loan and lease losses,
income taxes, other-than-temporary impairment of investment securities and
recognition of contingent liabilities. Management bases its estimates
on historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances. These form the
basis for making judgments on the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from those estimates under different assumptions or
conditions.
Allowance for Loan and Lease
Losses
- In management’s opinion, one of the most critical accounting
policies impacting the Company’s financial statements is the evaluation of the
allowance for loan and lease losses. Management carefully monitors
the credit quality of the portfolio and charges off the amounts of those loans
and leases deemed uncollectible. Management evaluates the fair value
of collateral supporting any impaired loans and leases using independent
appraisals and other measures of fair value. This process involves
subjective judgments and assumptions that are always subject to substantial
change based on factors outside the control of the Company.
Management
of the Company recognizes that, despite its best efforts to minimize risk
through its credit review process, losses will inevitably occur. As
we have witnessed, in times of economic slowdown, regional or national, the
credit risk inherent in the Company’s loan and lease portfolio will
increase. The timing and amount of loan and lease losses that occur
are dependent upon several factors, most notably qualitative and quantitative
factors about both the micro and macro economic conditions as reflected in the
loan and lease portfolio and the economy as a whole. Factors considered in the
evaluation of the allowance for loan and lease losses include, but are not
limited to, estimated probable incurred losses from loan and lease and other
credit arrangements, general economic conditions, credit risk grades assigned to
commercial and industrial and commercial real estate loans, changes in credit
concentrations or pledged collateral, historical loan and lease loss experience
and trends in portfolio volume, maturity, composition, delinquencies and
non-accruals. The allowance for loan and lease losses is established to absorb
probable incurred loan and lease charge-offs. Additions to the
allowance are made through the provision for loan and lease losses, which is a
charge to current operating earnings. The adequacy of the provision and the
resulting allowance for loan and lease losses is determined by management’s
continuing review of the loan and lease portfolio, including identification and
review of individual problem situations that may affect a borrower’s ability to
repay, delinquency and non-performing loan data, collateral values, regulatory
examination results and changes in the size and character of the loan and lease
portfolio. Despite such a review, the level of the allowance for loan
and lease losses remains an estimate, cannot be precisely determined and may be
subject to significant changes from quarter to quarter. Based on
current economic conditions, management believes that the current level of the
allowance for loan and lease losses is adequate in relation to the probable
incurred losses present in the portfolio.
Commercial
loans are assigned credit risk grades using a scale of one to ten with
allocations for probable losses made for pools of similar risk-graded loans.
Loans with signs of credit deterioration, generally in grades eight through ten,
are termed “classified” loans in accordance with guidelines established by the
Company’s regulators. When management analyzes the allowance for loan
and lease losses, classified loans are assigned allocation factors ranging from
24% to 100% of the outstanding loan balance and are based on the Company’s
historic loss experience. Loans that have potential weaknesses, generally in
grade seven, that require close monitoring by senior management, are termed
“criticized” loans in accordance with regulatory guidelines. Criticized loans
are assigned an allocation factor of 4% based on historic loss experience.
Non-accrual loans and leases in excess of $250 thousand are individually
evaluated for impairment and are not included in these risk grade pools. A loan
is considered “impaired” when, based on current information and events, it is
probable that both the principal and interest due under the original contractual
terms will not be collected in full. The Company measures impairment of
collateralized loans based on the fair value of the collateral, less estimated
costs to sell. For loans that are not collateral-dependent,
impairment is measured by using the present value of expected cash flows,
discounted at the loan’s effective interest rate. Allocations for loans which
are performing satisfactorily, generally in grades one through six, are based on
historic experience for other performing loans and leases and are assigned an
allocation factor of 0.55% of the loan balance. An allowance allocation factor
for portfolio macro factors ranging from 1-70 basis points is calculated to
cover potential losses from a number of variables, not the least of which is the
current economic uncertainty.
It is the
present intent of management to continue to monitor the level of the allowance
for loan losses in order to properly reflect its estimate of the exposure, if
any, represented by fluctuations in the local real estate market and the
underlying value that market provides as collateral to certain segments of the
loan and lease portfolio. The provision is continually evaluated relative to
portfolio risk and regulatory guidelines and will continue to be closely
reviewed. In addition, various bank regulatory agencies, as an
integral part of their examination process, closely review the allowance for
loan and lease losses. Such agencies may require the Company to
recognize additions to the allowance based on their independent judgment of
information available to them at the time of their
examinations. Frequently, such additional information generally
becomes available only after management has conducted its quarterly calculation
of the provision.
Accounting for Income Taxes
-
Deferred tax assets and liabilities are recognized to reflect the temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses carryforward. Deferred tax assets and
liabilities are measured using the currently enacted tax rates that apply to
taxable income in effect for the years in which those tax assets are expected to
be realized or settled. Management exercises significant judgment in
the evaluation of the amount and timing of the recognition of the resulting tax
assets and liabilities. The judgments and estimates required for this evaluation
are periodically updated based upon changes in business factors and the tax laws
and regulations.
Other-Than-Temporary Impairment
(“OTTI”) of Investment Securities
– One recent significant change in
practice relates to management’s assertion regarding recovery of declines in
fair value, moving from an assertion about “intent and ability to hold to
recovery” to a “do not intend to sell” or “it is more likely than not that it
will not be required to sell” prior to recovery assertion. In instances where
the Company will not be required to sell the bond or doesn’t intend to sell the
bond, the components of the impairment charge would be bifurcated. The credit
loss component would be recognized in earnings, and the other components would
be recognized in other comprehensive income. In instances where the Company
intends to sell or is more likely than not to be required to sell prior to
recovery the full OTTI charge is to be recognized in earnings. (See
also Note 4 – Investment Securities.)
Recognition of Contingent
Liabilities
– The Company and the Bank are subject to proceedings and
claims that arise in the normal course of business. Management
assesses the likelihood of any adverse outcomes to these matters as well as
potential ranges of probable losses. There can be no assurance that
actual outcomes will not differ from those assessments. A liability
is recognized in the Company’s consolidated balance sheets if such liability is
both probable and estimable.
Material Changes in
Financial Condition
- Total assets of the Company were $1.6 billion at
September 30, 2009. When compared to December 31, 2008, total assets decreased
by $97 million or 6%. This was primarily attributable to declines in cash and
due from banks and securities available for sale of $66 million and $17 million,
respectively. The decrease in the investment portfolio largely reflects declines
in mortgage-backed and U.S. Government agency securities. The decrease in
mortgage-backed securities is attributable to sales and principal repayments of
$76 million and $87 million, respectively, offset to a large extent by purchases
of $155 million. The decrease in U.S. Government agency securities is largely
due to sales and maturities totaling $10 million.
At
September 30, 2009, total deposits were $1.3 billion, a decrease of $173 million
when compared to December 31, 2008. This was largely attributable to decreases
in certificates of deposit, including those of the Certificate of Deposit
Account Registry Service (“CDARS”) and other brokered deposits, of $108 million
and savings deposits of $76 million, respectively. CDARS is a network of
financial institutions that exchanges deposits with one another to maximize FDIC
coverage of their depositors. These decreases were partially offset by an
increase in demand deposits of $11 million. Core deposit balances represented
approximately 69% of total deposits at September 30, 2009 compared to 65% at
year-end 2008. Short-term borrowed funds, consisting primarily of FHLB advances,
totaled $63 million at September 30, 2009 and $3 million at December 31, 2008.
The Company participated in the Debt Guarantee Program of the TLGP in March 2009
whereby the Bank issued $29 million in FDIC-guaranteed senior non-secured debt
at a fixed interest rate of 2.625% per annum and a maturity of March 30,
2012.
Capital Resources
-
Total stockholders’ equity amounted to $152 million at September 30, 2009,
representing a decrease of $2 million from December 31, 2008. The decrease from
year-end 2008 largely reflects the net loss recorded in the first nine months of
2009. Management continually evaluates the Company’s capital position in light
of current and future growth objectives and regulatory guidelines.
In
December 2008, the Company issued to the U.S. Treasury $37 million of 5% fixed
rate cumulative perpetual preferred stock and a warrant to purchase 465,569
shares of common stock. This increase in capital has allowed the
Company to reinforce its commitment to serve the credit needs of our clients and
the communities in which we operate. The Company contributed $34
million of this capital to its Bank subsidiary in December 2008.
The
Company’s tangible common equity to tangible assets ratio was 7.17% at September
30, 2009 compared to 6.91% at December 31, 2008 and 7.02% at September 30,
2008. The ratio of tangible common equity to tangible assets, or TCE
ratio, is calculated by dividing total common stockholders’ equity by total
assets, after reducing both amounts by intangible assets. The TCE ratio is not
required by GAAP or by applicable bank regulatory requirements, but is a metric
used by management to evaluate the adequacy of our capital levels. Since there
is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not
necessarily comparable to similar capital measures disclosed or used by other
companies in the financial services industry. Tangible common equity and
tangible assets are non-GAAP financial measures and should be considered in
addition to, not as a substitute for or superior to, financial measures
determined in accordance with GAAP. With respect to the calculation of the
actual unaudited TCE ratio as of September 30, 2009, reconciliations of tangible
common equity to GAAP total common stockholders’ equity and tangible assets to
GAAP total assets are set forth below (in thousands):
Total
stockholders' equity
|
|
$
|
151,559
|
|
Less:
preferred stock
|
|
|
(35,962
|
)
|
Less:
warrant
|
|
|
(1,057
|
)
|
Total
common stockholders' equity
|
|
|
114,540
|
|
Less:
intangible assets
|
|
|
-
|
|
Tangible
common equity
|
|
$
|
114,540
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,596,464
|
|
Less:
intangible assets
|
|
|
-
|
|
Tangible
assets
|
|
$
|
1,596,464
|
|
At
September 30, 2009, the Bank’s Tier I leverage ratio was 9.62% while its
risk-based capital ratios were 12.42% for Tier I capital and 13.69% for total
capital. These ratios exceed the minimum regulatory guidelines for a
well-capitalized institution. Table 2-1 summarizes the Company’s capital ratios
as of September 30, 2009 and compares them to current minimum regulatory
guidelines and December 31 and September 30, 2008 actual results.
TABLE
2-1
|
Tier
I Leverage
|
Tier
I Capital/Risk-Weighted Assets
|
Total
Capital/Risk-Weighted Assets
|
|
|
|
|
Regulatory
Minimum
|
3.00%
- 4.00%
|
4.00%
|
8.00%
|
|
|
|
|
Ratios as of:
|
|
|
|
September
30, 2009
|
9.25%
|
11.95%
|
13.70%
|
December
31, 2008
|
9.38%
|
12.03%
|
14.07%
|
September
30, 2008
|
8.05%
|
10.32%
|
12.32%
|
Additionally,
under the CPP the Company must receive consent from the Treasury in order to
increase its dividend on common stock to an amount that is greater than the
amount of the last quarterly cash dividend declared prior to October 14,
2008. The Company’s Board declared a cash dividend
of $0.05 per share at its October 27, 2009 meeting. The
cash dividend will be paid on December 16, 2009 to stockholders of record on
November 20, 2009.
The
Company did not repurchase any shares of its common stock during the first nine
months of 2009 under the existing stock repurchase plan. Under the Company’s
current stock repurchase authorization, management may repurchase up to 512,348
additional shares if market conditions warrant. This action will
occur only if management believes that the purchase will be at prices that are
accretive to earnings per share and is the most efficient use of Company
capital. The Treasury’s consent is also required for any repurchases
of common stock until the earlier of a redemption of the Series A Preferred
Stock or December 5, 2011.
The
Company’s two unconsolidated trust subsidiaries currently have outstanding a
total of $20 million in trust preferred securities which presently qualify as
Tier I capital of the Company for regulatory capital purposes. The securities
each bear an interest rate tied to three-month LIBOR and are each redeemable by
the Company in whole or in part. The Company has the right to optionally redeem
the debentures related to Trust I, which bear a coupon rate of three-month LIBOR
plus 345 basis points, prior to the maturity date of November 7, 2032 at
par. The Company has the right to optionally redeem the debentures
related to Trust II, which bear a coupon rate of three-month LIBOR plus 285
basis points, prior to the maturity date of January 23, 2034 at par. As of
September 30, 2009, the Company has chosen not to redeem these debentures, and
in the future will continue to evaluate the cost effectiveness of these
borrowings. The weighted average rate on all trust preferred securities
outstanding was 4.26% and 6.29% for the first nine months of 2009 and 2008,
respectively.
In 2006,
the Company issued $10 million of 8.25% subordinated notes due June 15,
2013. The notes were sold in a private placement and qualify as Tier
II capital for the Company.
The
Company’s (parent only) primary funding sources are dividends from the Bank and
proceeds from the Dividend Reinvestment and Stock Purchase Plan (the
“DRP”). Dividend payments from the Bank are subject to regulatory
limitations, generally based on capital levels and current and retained
earnings, imposed by regulatory agencies with authority over the Bank. As of
September 30, 2009, $2.1 million in dividends were available to the Company from
the Bank according to these limitations without seeking regulatory
approval.
Liquidity
- Liquidity
management is defined as both the Company’s and the Bank’s ability to meet their
financial obligations on a continuous basis without material loss or disruption
of normal operations. These obligations include the withdrawal of deposits on
demand or at their contractual maturity, the repayment of borrowings as they
mature, funding new and existing loan commitments and the ability to take
advantage of business opportunities as they arise. Asset liquidity is
provided by short-term investments and the marketability of securities available
for sale. As the Federal Reserve Bank (“FRB”) pays interest on excess reserve
balances, the Company may leave balances at the FRB if the rate being paid is
higher than would be available from other short-term investments. Liquid assets
declined to $404 million at September 30, 2009 from $457 million at December 31,
2008, resulting largely from reductions in interest earning balances at the FRB
and securities available for sale. Liquidity is provided by the maintenance
of a strong base of core deposits, maturing short-term assets including cash and
due from banks, the ability to sell or pledge marketable assets and access to
lines of credit and the capital markets.
Liquidity
is measured and monitored daily, thereby allowing management to better
understand and react to emerging balance sheet trends, including temporary
mismatches with regard to sources and uses of funds. After assessing actual and
projected cash flow needs, management seeks to obtain funding at the most
economical cost. These funds can be obtained by converting liquid
assets to cash or by attracting new deposits or other sources of
funding. Many factors affect the Company’s ability to meet liquidity
needs, including variations in the markets served, loan demand, its
asset/liability mix, its reputation and credit standing in its markets and
general economic conditions. Borrowings and the scheduled amortization of
investment securities and loans are more predictable funding sources, while
deposit flows and securities prepayments are somewhat less predictable in
nature, as they are often subject to external factors beyond the control of
management. Among these are changes in the local and national economies,
competition from other financial institutions and changes in market interest
rates.
The
Company’s primary sources of funds are cash provided by deposits, proceeds from
maturities and sales of securities available for sale, and cash provided by
operating activities. At September 30, 2009, total deposits were $1.3
billion, a decrease of $173 million when compared to December 31, 2008. Of the
total time deposits at September 30, 2009, $332 million are scheduled to mature
within the next 12 months. During the first nine months of 2009 and 2008,
proceeds from sales and maturities of securities available for sale totaled $196
million and $241 million, respectively. Additionally, the Company
issued $29 million in FDIC-guaranteed senior non-secured debt under the TLGP in
March of 2009.
The
Company’s primary uses of funds are for the origination of loans and the
purchase of investment securities. During the first nine months of
2009 and 2008, the Company had an increase in loans and loans held for sale (net
of unearned income, principal paydowns and other dispositions, and before
allowance for loan and lease losses) totaling $3 million and $70 million,
respectively. The Company did not purchase any loans during the first
nine months of 2009 or 2008. The Company purchased securities
available for sale totaling $180 million and $227 million during the first nine
months of 2009 and 2008, respectively.
The
Asset/Liability Committee of the Board of Directors (the “ALCO”) is responsible
for oversight of the liquidity position and the asset/liability structure. The
Board has delegated authority to management to establish specific policies and
operating procedures governing liquidity levels and develop plans to address
future and current liquidity needs. Management monitors the rates and
cash flows from the loan and investment portfolios while also examining the
maturity structure and volatility characteristics of liabilities to develop an
optimum asset/liability mix. Available funding sources include
retail, commercial and municipal deposits, purchased liabilities and
stockholders’ equity. At September 30, 2009, access to approximately
$149 million in FHLB lines of credit for overnight or term borrowings with
maturities of up to thirty years was available. The amount of the
FHLB lines of credit will fluctuate based upon the amount of pledged collateral
in the form of real estate mortgage loans and investment
securities. At September 30, 2009, approximately $86 million in
informal lines of credit extended by correspondent banks were also available to
be utilized, if
needed, for short-term
funding purposes. At September 30, 2009, $60 million in advances were
outstanding under lines of credit with the FHLB. At September 30, 2009, no funds
were drawn on correspondent bank lines of credit. To supplement its
short-term borrowed funds, the Company also utilized CDARS for $88 million in
short-term certificates of deposit outstanding at September 30, 2009. CDARS
deposits are considered, for regulatory purposes, to be brokered deposits. These
deposits were generally available at rates lower than the competitive market
rates on local certificates of deposit, offered us greater flexibility and were
more efficient to obtain. Notwithstanding the CDARS deposits, and
pursuant to authorization limits, management may also access the traditional
brokered deposit market for funding. As of September 30, 2009, $30
million in such brokered deposits were outstanding, none of which is maturing in
the fourth quarter of 2009. The Bank, currently a well-capitalized depository
institution, is allowed to solicit and accept, renew or roll over any brokered
deposit without restriction. Should the Bank become adequately capitalized, it
may accept, renew or roll over any brokered deposit only after it has applied
for and been granted a waiver by the FDIC. Should the Bank become
undercapitalized, it may not accept, renew, or roll over any brokered
deposit. As the Company’s liquidity remains satisfactory due to its
deposit base, borrowing capacity secured by liquid assets and other funding
sources, management believes that existing funding sources will be adequate to
meet future liquidity requirements.
Off-Balance Sheet
Arrangements
- The Bank is a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit and standby and documentary letters of
credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated financial
statements. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates
each customer’s creditworthiness on a case-by-case basis and determines the
amount of collateral, if deemed necessary, to be obtained by the Bank upon
extension of credit. Collateral required varies, but may include
accounts receivable, inventory, equipment and real estate. At
September 30, 2009 and 2008, commitments to originate loans and leases and
commitments under unused lines of credit for which the Bank is obligated
amounted to approximately $207 million and $241 million,
respectively.
Letters
of credit are conditional commitments guaranteeing payments of drafts in
accordance with the terms of the letter of credit
agreements. Commercial letters of credit are used primarily to
facilitate trade or commerce and are also issued to support public and private
borrowing arrangements, bond financing and similar
transactions. Collateral may be required to support letters of credit
based upon management’s evaluation of the creditworthiness of each
customer. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan and lease facilities to
customers. Most letters of credit expire within one
year. At September 30, 2009 and 2008, letters of credit outstanding
were approximately $16 million in each period. At September 30, 2009
and 2008, the uncollateralized portion was approximately $3 million in each
period.
The use
of derivative financial instruments, i.e. interest rate swaps, is an exposure to
credit risk. This credit exposure relates to possible losses that
would be recognized if the counterparties fail to perform their obligations
under the contracts. From time to time, customer interest rate swap
transactions together with offsetting interest rate swap transactions with
institutional dealers may be executed. At September 30, 2009 and 2008, the
total gross notional amount of swap transactions outstanding was $38 million and
$28 million, respectively.
On
September 15, 2008 and October 3, 2008, respectively, Lehman and Lehman Special
Financing filed Voluntary Petitions under Chapter 11 of the U.S. Bankruptcy
Code, each of which constituted an event of default under the swap agreements
the Bank had with Lehman Special Financing. The Bank filed proofs of
claim with the United States Bankruptcy Court, Southern District, on January 13,
2009. As a result of the events of default, the Bank terminated the
interest rate swap agreements with Lehman Special Financing. The terminations
resulted in several customer interest rate swap transactions no longer being
offset by that institutional dealer and a loss to the Company on those swap
agreements of approximately $584 thousand was recorded in the third quarter
of 2008. During the third quarter of 2009, the Company recorded a
gain of $221 thousand on the sale of its claims against Lehman and Lehman
Special Financing.
In
addition, during the second and third quarters of 2009, the unhedged customer
interest rate swap transactions were once again offset by an institutional
dealer. As all customer interest rate swap transactions are now hedged, we
expect that their future impact on the Company’s financial statements will be
immaterial. For the three months ended September 30, 2009, a net gain of $160
thousand was recorded, while for the nine months ended September 30, 2009, a net
loss of $68 thousand was recognized. The 2009 amounts include the gain of $221
thousand on the sale of the Bank’s claims against Lehman and Lehman Special
Financing. For the three and nine months ended September 30, 2008, a net loss of
$584 thousand was recognized.
Contractual Obligations
–
Shown below are the amounts
of payments due under specified contractual obligations, aggregated by category
of contractual obligation, for specified time periods. All
information is as of September 30, 2009.
|
|
Payments
due by period (in thousands)
|
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
More
than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
5
years
|
|
Leases
covering various equipment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
branches,
office space and land
|
|
$
|
15,935
|
|
|
$
|
3,159
|
|
|
$
|
4,931
|
|
|
$
|
2,504
|
|
|
$
|
5,341
|
|
Time
deposits
|
|
|
408,904
|
|
|
|
331,905
|
|
|
|
69,612
|
|
|
|
7,387
|
|
|
|
-
|
|
FHLB
borrowings
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Securities
sold under agreements to repurchase
|
|
|
3,000
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
Senior
unsecured debt
|
|
|
29,000
|
|
|
|
-
|
|
|
|
29,000
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Junior
subordinated debentures
|
|
|
20,620
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,620
|
|
Total
|
|
$
|
547,459
|
|
|
$
|
397,064
|
|
|
$
|
104,543
|
|
|
$
|
19,891
|
|
|
$
|
25,961
|
|
Material Changes in Results
of Operations for the Three Months Ended September 30, 2009 versus the Three
Months Ended September 30, 2008
- The Company recorded net income of $1.9
million for the third quarter of 2009 compared to $2.0 million for the third
quarter of 2008. The decrease in net income in 2009 primarily reflects an
increase in total operating expenses of $1.2 million largely as a result of a
$1.0 million charge to write down the carrying value of loans held for sale to
their estimated fair value and a $345 thousand increase in FDIC insurance
assessment expenses. The increase in total operating expenses was
partially offset by an increase in net interest income of $201 thousand, a
decrease of $700 thousand in the provision for loan and lease losses and a $496
thousand increase in total non-interest income.
As shown
in Table 2-2 (A) following this discussion, net interest income increased by
1.3% to $15.6 million resulting from a $36 million increase in average
interest-earning assets, despite a six basis point decline in the Company’s net
interest margin to 4.06% in 2009. The decrease in the Company’s net interest
margin to 4.06% during the third quarter of 2009 from 4.12% a year ago primarily
resulted from a 73 basis point decrease in the Company’s average earning asset
yield to 5.09%, offset by a 79 basis point decrease in the cost of total average
interest-bearing liabilities to 1.43%. The decline in the Company’s
average earning asset yield was a result of several factors, most notably
reduced asset yields due to lower interest rates, increased non-performing
assets and accelerated cash flows on investment securities. The lower asset
yield resulted primarily from the impact of a 70 basis point reduction in
average yield on loans and leases, offset in part by the $34 million increase in
the average balance of loans and leases, which carry a significantly higher
yield than the securities portfolio. Yields on all average
interest-earning assets were lower during the third quarter of 2009 as compared
to the third quarter of 2008 due to the prevailing lower interest rate
environment.
The
increase in average interest-earning assets largely reflects growth in
commercial and industrial loans, and commercial mortgage loans that resulted in
a 3% increase in average loans and leases outstanding to $1.1 billion during the
third quarter of 2009 versus the comparable period in 2008. Average
interest-earning balances, primarily at the FRB, increased $7 million during the
third quarter of 2009 as compared to the same period in 2008, while average
investment securities declined $3 million. The decrease in investment securities
reflects the Company’s improved balance sheet mix from securities into
higher-yielding loans.
The
reduction in the cost of average interest-bearing liabilities in 2009 resulted
from an increase in average core deposits coupled with a lower prevailing rate
environment in the third quarter of 2009 versus the comparable 2008 period. The
average cost of time and savings deposits and junior subordinated debentures
declined by 82 basis points and 200 basis points, respectively, in the third
quarter of 2009 versus 2008. The Company experienced a $102 million
increase in average total deposits during the third quarter of 2009 versus
2008. This increase, together with the Company’s March 2009 issuance
of $29 million in senior unsecured debt guaranteed by the FDIC under the TLGP,
resulted in a reduction in average other temporary borrowings in 2009. Average
federal funds purchased, securities sold under agreements to repurchase and
other temporary borrowings declined $135 million during the third quarter of
2009 versus the comparable 2008 period.
The
provision for loan and lease losses was $3.0 million in the third quarter of
2009, representing a decrease of $700 thousand versus the comparable 2008
period. The adequacy of the provision and the resulting allowance for loan
losses is determined by management’s continuing review of the loan portfolio,
including identification and review of individual problem situations that may
affect a borrower’s ability to repay, delinquency and non-performing loan data,
collateral values, regulatory examination results and changes in the size and
character of the loan portfolio. (See also Critical Accounting Policies,
Judgments and Estimates, and Asset Quality contained herein.)
Total
non-interest income increased $496 thousand to $1.8 million during the third
quarter of 2009 when compared to the third quarter of 2008 resulting primarily
from a $520 thousand gain on the liquidation in the third quarter of 2009 of one
$10 million par value trust preferred CDO that had previously been classified as
OTTI. (See also Note 4 – Investment Securities.) In addition, during the third
quarter of 2009, the Company recorded a gain of $221 thousand on the sale of its
claims against Lehman and Lehman Special Financing in connection with a loss
recorded during the third quarter of 2008 related to three interest rate swap
positions. (See also Off-Balance Arrangements contained herein.)
|
(dollars
in thousands)
|
For
the three and nine months ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months
|
|
Nine
months
|
|
|
|
|
|
|
|
|
Over/
|
|
|
|
Over/
|
|
|
|
|
|
|
|
|
(under)
|
|
|
|
(under)
|
|
|
|
|
|
|
2009
|
2008
|
2008
|
|
2009
|
2008
|
2008
|
|
Salaries
and other employee benefits
|
|
$5,926
|
$5,632
|
5.2
|
%
|
$17,223
|
$17,370
|
(0.8)
|
%
|
Occupancy
|
|
|
|
1,391
|
1,426
|
(2.5)
|
%
|
4,341
|
4,200
|
3.4
|
%
|
Equipment
|
|
|
|
307
|
302
|
1.7
|
%
|
908
|
919
|
(1.2)
|
%
|
Legal
|
|
|
|
|
188
|
(197)
|
N/M
|
(1)
|
533
|
2,536
|
(79.0)
|
%
|
Marketing
and advertising
|
|
|
-
|
150
|
(100.0)
|
%
|
750
|
437
|
71.6
|
%
|
FDIC
and NYS assessment
|
|
|
657
|
312
|
110.6
|
%
|
2,971
|
565
|
425.8
|
%
|
Credit
and collection
|
|
|
1,151
|
186
|
518.8
|
%
|
1,513
|
545
|
177.6
|
%
|
Other
operating expenses
|
|
|
1,721
|
2,355
|
(26.9)
|
%
|
4,797
|
5,943
|
(19.3)
|
%
|
Total
operating expenses
|
|
|
$11,341
|
$10,166
|
11.6
|
%
|
$33,036
|
$32,515
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
N/M - denotes % variance not meaningful for statistical
purposes.
|
|
|
|
|
|
Total
operating expenses increased $1.2 million or 11.6% to $11.3 million during the
third quarter of 2009 when compared to the third quarter of 2008. The increase
in total operating expenses primarily reflects higher credit and collection
expenses due to the $1.0 million charge to write down the carrying value of
loans held for sale to their estimated fair value, higher legal expenses due to
the expense credit recorded in 2008 resulting from the settlement of the
shareholder derivative suit, higher FDIC and NYS assessment expenses and higher
salaries and other employee benefits expenses due to staff additions. These were
partially offset by lower marketing and advertising and other operating
expenses. The reduction in other operating expenses in 2009 was primarily due to
the $584 thousand loss recorded during the third quarter of 2008 related to
three interest rate swap positions. (See also Off-Balance Arrangements contained
herein.)
FDIC and
NYS assessment expenses increased in the third quarter of 2009 when compared to
the third quarter of 2008 primarily due to higher FDIC deposit insurance
assessment fees in 2009. On February 27, 2009, the FDIC adopted a final rule
that initially raised the assessment rate schedule, uniformly across all four
risk categories into which the FDIC assigns insured institutions, by seven basis
points (annualized) of insured deposits beginning on January 1,
2009. Under the final rule, the Bank’s assessment rate was 15 basis
points (annualized) for the third quarter of 2009. On September 29, 2009, the
FDIC published a Notice of Proposed Rulemaking that would require insured
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also voted
to adopt a uniform three-basis point increase in assessment rates effective on
January 1, 2011. We expect that we may be required to prepay an estimated $7.6
million on December 30, 2009 for our fourth quarter of 2009 and all of 2010,
2011 and 2012 FDIC assessments.
Due in
part to the increase in total operating expenses, the Company’s operating
efficiency ratio (total operating expenses divided by the sum of fully taxable
equivalent net interest income and non-interest income, excluding net securities
gains and losses) increased to 66.6% in the third quarter of 2009 versus 60.2%
in the third quarter of 2008. The Company’s other measure of expense
control, the ratio of total operating expenses to average total assets, was
2.77% for the third quarter of 2009 versus 2.55% for the third quarter of
2008.
The
Company’s income tax expense was $1.1 million in the third quarter of 2009 as
compared to $849 thousand in 2008. The Company has performed an evaluation of
its tax positions and concluded that there were no significant uncertain tax
positions that required recognition in its financial statements.
Material Changes in Results
of Operations for the Nine Months Ended September 30, 2009 versus the Nine
Months Ended September 30, 2008
- For the nine months ended September 30,
2009 the Company recorded a net loss of $2.1 million compared to net income of
$6.0 million in the same 2008 period. The factors contributing to the decrease
in earnings were lower net interest income, a significant increase in the
provision for loan and lease losses, lower non-interest income and increased
total operating expenses.
As shown
in Table 2-2 (B) following this discussion, the decrease of $1.1 million in net
interest income for the first nine months of 2009 versus the comparable period
in 2008 resulted from a 15 basis point contraction in the Company’s net interest
margin to 3.99% in 2009 from 4.14% a year ago. The lower margin was primarily
due to a 103 basis point reduction in the Company’s average interest-earning
asset yield to 5.08% in 2009 resulting from a 127 basis point decline in the
yield on loans and leases versus 2008. The reduced loan and lease yield was
negatively impacted by lower market interest rates and an increase in
non-accrual loans in 2009. The yield on the Company’s securities portfolio
declined by 37 basis points to 4.58% in 2009 from 4.95% a year ago as the result
of accelerated cash flows on mortgage-backed assets. Partially offsetting the
reduced earning asset yield was a 105 basis point decline in the Company’s
average cost of interest-bearing liabilities to 1.50% in 2009. The lower cost of
funds in 2009 resulted from lower rates on maturing time deposits, growth in
lower-yield savings deposits (up $53 million) and a n increase in demand
deposits (up $21 million) in 2009. Partially offsetting the decline in the
Company’s net interest margin was an $18 million increase in average
interest-earning assets in 2009, primarily loans and leases which grew by $46
million (4%) and replaced declines in lower-yielding assets such as securities
purchased under agreements to resell (down $33 million) and securities (down $8
million).
The
provision for loan and lease losses increased by $6.3 million for the first nine
months of 2009 as compared to 2008 due to several factors, including an increase
in non-accrual loans of $20 million and internal risk rating downgrades of
several commercial loan relationships. The Company recorded net loan
and lease charge-offs of $5.8 million and $8.4 million for the first nine months
of 2009 and 2008, respectively. (See also Asset Quality contained
herein.)
The
decline in total non-interest income resulted largely from net security losses
of $2.8 million due to the first quarter 2009 $4.0 million non-cash OTTI write
down of a trust preferred CDO. During the third quarter of 2009, the Company
liquidated this security at a gain of $520 thousand. Income from bank owned life
insurance (“BOLI”) declined by $239 thousand for the first nine months of 2009
versus the comparable 2008 period due to a lower rate of return on BOLI assets.
Other operating income decreased by $563 thousand in 2009, due to reductions in
sweep program fees coupled with losses recorded on certain customer interest
rate swaps in 2009.
Total
operating expenses increased by $521 thousand or 1.6% to $33.0 million for the
first nine months of 2009, primarily due to a $2.4 million increase in FDIC and
NYS assessment, an increase in credit and collection expenses due to the $1.0
million charge to write down the carrying value of loans held for sale to their
estimated fair value, and a $313 thousand increase in marketing and advertising
expenses in 2009. The increase in FDIC and NYS assessment expenses recorded in
2009 was due to several factors, most notably the FDIC insurance fund special
assessment recorded in the second quarter of 2009, a higher FDIC deposit
insurance assessment rate in 2009 and fees associated with participation in the
Treasury TAGP which was not in existence in the 2008 period. The increase in
marketing and advertising expenses in 2009 versus 2008 resulted from corporate
branding efforts undertaken in the first half of 2009 coupled with significant
reductions in print, broadcast and other media advertising during the comparable
2008 period. Largely offsetting these increases were a reduction in legal
expenses of $2.0 million related to the shareholder derivative lawsuit settled
in 2008 and a $1.1 million decline in other operating expenses, largely the
result of the $584 thousand loss recorded during the third quarter of 2008
related to three interest rate swap positions.
On May
22, 2009, the FDIC adopted a final rule imposing a special assessment on insured
institutions as part of the agency's efforts to rebuild the Deposit Insurance
Fund (“DIF”) and help maintain public confidence in the banking system. The
final rule established a special assessment of five basis points on each
FDIC-insured depository institution's assets, minus its Tier 1 capital, as of
June 30, 2009. The special assessment was collected September 30, 2009. Under
generally accepted accounting principles, the full amount of the Company’s
special assessment was accrued as an expense in the second quarter of
2009.
The
Company’s operating efficiency ratio was 66.4% for the first nine months of 2009
and 62.8% for the first nine months of 2008. The Company’s ratio of
total operating expenses to average total assets was 2.70% for the first nine
months of 2009 and 2.67% for the first nine months of 2008.
Asset Quality
– There
is no subprime exposure in the Company’s securities portfolio. All of
the mortgage-backed securities and collateralized mortgage obligations held in
the Company’s portfolio are issued by U.S. Government-sponsored
enterprises. (See also Note 4 – Investment Securities.)
The
Company’s loan and lease portfolio is concentrated in commercial and industrial
loans and commercial mortgage loans. The Bank does not engage in
subprime lending and the Bank’s adjustable-rate residential mortgage (ARM)
exposure is less than 1% of the total loan and lease portfolio. The
Bank has not offered payment option ARM or negative amortization loan
products.
Non-performing
assets, defined by the Company as non-accrual loans and leases and other real
estate owned (“OREO”), totaled $35 million (which includes $9 million in loans
held for sale which have been previously written down to their estimated fair
value) at September 30, 2009, $16 million (which includes $2 million in loans
held for sale) at December 31, 2008 and $14 million (which includes $500
thousand in loans held for sale) at September 30, 2008. The increase
in non-accrual loans at September 30, 2009 compared to December 31, 2008 was
primarily due to the addition of
$26 million from seven
relationships to non-accrual status. These relationships consisted of
residential construction and commercial real estate credits totaling $20
million, and commercial and industrial loans totaling $6 million. These
additions were reduced by charge-offs of non-accrual loans of $2 million and
cash payments received of $5 million.
At September 30, 2009, December 31,
2008 and September 30, 2008, the Company held no OREO. Loans and leases 90 days
or more past due and still accruing interest totaled $7 thousand and $3 thousand
at September 30, 2009 and December 31, 2008, respectively. At September 30,
2008, there were no loans 90 days or more past due and still accruing
interest.
The
allowance for loan and lease losses amounted to $29 million or 2.7% of loans and
leases, excluding loans held for sale, at September 30, 2009, $19 million or
1.7% of loans and leases, excluding loans held for sale, at December 31, 2008,
and $15 million or 1.3% of loans and leases, excluding loans held for sale, at
September 30, 2008. The allowance for loan and lease losses as a percentage of
total non-performing assets, excluding loans held for sale, was 116% at
September 30, 2009, 134% at December 31, 2008 and 104% one year ago. Loans held
for sale have been previously written down to their estimated fair value and any
future losses on such loans would not impact the allowance for loan and lease
losses. While the allowance for loan and lease losses as a percentage of
non-performing assets is lower at September 30, 2009 than at December 31, 2008,
management believes that the current level of the allowance for loan and lease
losses is adequate in relation to the probable incurred losses present in the
portfolio. This is based, in part, on additional collateral in the form of cash
and real estate obtained during 2009. Management considers many factors in this
analysis, among them credit risk grades assigned to commercial and industrial
and commercial real estate loans, delinquency trends, concentrations within
segments of the loan and lease portfolio, recent charge-off experience, local
and national economic conditions, current real estate market conditions in
geographic areas where the Company’s loans and leases are located, changes in
the trend of non-performing loans and leases, changes in interest rates, and
loan and lease portfolio growth. Changes in one or a combination of
these factors may adversely affect the Company’s loan and lease portfolio
resulting in increased delinquencies, loan and lease losses and future levels of
loan and lease loss provisions. (See also Critical Accounting
Policies, Judgments and Estimates contained herein.)
Loans to
borrowers which the Bank has identified as requiring special attention (such as
a result of changes affecting the borrower’s industry, management, financial
condition or other concerns) will be added to the Company’s watch list as well
as loans which are criticized or classified by bank regulators or loan review
auditors. The majority of such watch list loans were originated as
residential construction, commercial real estate or commercial and industrial
loans. In some cases, additional collateral in the form of commercial
real estate was taken based on current valuations. Thus, there exists
a broad base of collateral with a mix of various types of corporate assets
including inventory, receivables and equipment, and commercial real estate, with
no particular concentration in any one type of collateral.
|
|
|
|
Increase/
|
|
September
30, 2009
|
December
31, 2008
|
(decrease)
|
|
|
|
|
Commercial
and industrial loans:
|
|
|
|
Number
|
127
|
78
|
49
|
Aggregate
value
|
$59
million
|
$25
million
|
$34
million
|
|
|
|
|
Commercial
real estate loans:
|
|
|
|
Number
|
55
|
38
|
17
|
Aggregate
value
|
$106
million
|
$63
million
|
$43
million
|
|
|
|
|
Residential
real estate loans:
|
|
|
|
Number
|
10
|
5
|
5
|
Aggregate
value
|
$1
million
|
less
than $1 million
|
less
than $1 million
|
|
|
|
|
All
other loans:
|
|
|
|
Number
|
6
|
10
|
(4)
|
Aggregate
value
|
less
than $1 million
|
less
than $1 million
|
less
than $1 million
|
|
|
|
|
|
|
|
|
(1) Excluding
loans held for sale.
|
|
|
|
As a
result of management’s ongoing review and assessment of the Bank’s policies and
procedures, the Company has adopted a more aggressive workout and disposition
posture for watch list relationships. The Company has workout
specialists who are directly responsible for managing this process and exiting
such relationships in an expedited and cost effective manner. Line officers may
not maintain control over such relationships. It is anticipated that management
will use a variety of strategies, depending on individual case circumstances, to
exit relationships where the fundamental credit quality shows indications of
more than temporary or seasonal deterioration. We cannot give any
assurance that such strategies will enable us to exit such relationships
especially in light of recent credit market conditions.
The
provision for loan and lease losses is continually evaluated relative to
portfolio risk and regulatory guidelines considering all economic factors that
affect the loan and lease loss allowance, such as fluctuations in the Long
Island and New York City real estate markets and interest rates, economic
slowdowns in industries and other uncertainties. All of the factors
mentioned above will continue to be closely monitored. Due to the
uncertainties cited above, management expects to record loan charge-offs in
future periods, which management believes have been adequately reserved for in
the allowance for loan and lease losses. A further review of the
Company’s non-performing assets may be found in Table 2-3 following this
analysis.
TABLE
2 - 2 (A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME ANALYSIS
|
For
the Three Months Ended September 30, 2009 and 2008
(unaudited)
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
(1)
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
(1)
|
|
|
Interest
|
|
|
Yield/Cost
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
|
$
|
388,060
|
|
|
$
|
4,146
|
|
|
|
4.24
|
%
|
|
$
|
391,064
|
|
|
$
|
4,880
|
|
|
|
4.96
|
%
|
Federal
Home Loan Bank and other restricted stock
|
|
|
5,769
|
|
|
|
35
|
|
|
|
2.41
|
|
|
|
8,051
|
|
|
|
92
|
|
|
|
4.55
|
|
Interest-bearing
deposits
|
|
|
10,677
|
|
|
|
3
|
|
|
|
0.11
|
|
|
|
3,271
|
|
|
|
13
|
|
|
|
1.58
|
|
Loans
and leases (3)
|
|
|
1,121,278
|
|
|
|
15,409
|
|
|
|
5.45
|
|
|
|
1,086,993
|
|
|
|
16,805
|
|
|
|
6.15
|
|
Total
interest-earning assets
|
|
|
1,525,784
|
|
|
$
|
19,593
|
|
|
|
5.09
|
%
|
|
|
1,489,379
|
|
|
$
|
21,790
|
|
|
|
5.82
|
%
|
Non-interest-earning
assets
|
|
|
97,040
|
|
|
|
|
|
|
|
|
|
|
|
95,958
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,622,824
|
|
|
|
|
|
|
|
|
|
|
$
|
1,585,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
589,269
|
|
|
$
|
1,145
|
|
|
|
0.77
|
%
|
|
$
|
503,892
|
|
|
$
|
1,491
|
|
|
|
1.18
|
%
|
Time
deposits
|
|
|
439,151
|
|
|
|
2,073
|
|
|
|
1.87
|
|
|
|
456,092
|
|
|
|
3,488
|
|
|
|
3.04
|
|
Total
savings and time deposits
|
|
|
1,028,420
|
|
|
|
3,218
|
|
|
|
1.24
|
|
|
|
959,984
|
|
|
|
4,979
|
|
|
|
2.06
|
|
Federal
funds purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,485
|
|
|
|
39
|
|
|
|
2.39
|
|
Other
temporary borrowings
|
|
|
12,630
|
|
|
|
25
|
|
|
|
0.79
|
|
|
|
141,402
|
|
|
|
785
|
|
|
|
2.21
|
|
Senior
unsecured debt
|
|
|
29,000
|
|
|
|
280
|
|
|
|
3.83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
10,000
|
|
|
|
231
|
|
|
|
9.16
|
|
|
|
10,000
|
|
|
|
231
|
|
|
|
9.19
|
|
Junior
subordinated debentures
|
|
|
20,620
|
|
|
|
213
|
|
|
|
4.10
|
|
|
|
20,620
|
|
|
|
316
|
|
|
|
6.10
|
|
Total
interest-bearing liabilities
|
|
|
1,100,670
|
|
|
|
3,967
|
|
|
|
1.43
|
|
|
|
1,138,491
|
|
|
|
6,350
|
|
|
|
2.22
|
|
Demand
deposits
|
|
|
354,341
|
|
|
|
|
|
|
|
|
|
|
|
320,464
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
17,737
|
|
|
|
|
|
|
|
|
|
|
|
12,525
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,472,748
|
|
|
|
|
|
|
|
|
|
|
|
1,471,480
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
150,076
|
|
|
|
|
|
|
|
|
|
|
|
113,857
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,622,824
|
|
|
|
|
|
|
|
|
|
|
$
|
1,585,337
|
|
|
|
|
|
|
|
|
|
Net
interest income/margin
|
|
|
|
|
|
|
15,626
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
15,440
|
|
|
|
4.12
|
%
|
Less
tax-equivalent basis adjustment
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
15,607
|
|
|
|
|
|
|
|
|
|
|
$
|
15,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Weighted daily average balance for period noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Interest on securities includes the effects of tax-equivalent basis
adjustments, using a 34% tax rate. Tax-equivalent
|
|
|
|
|
|
basis
adjustments were $9 and $8 in 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Interest on loans and leases includes the effects of tax-equivalent basis
adjustments, using a 34% tax rate. Tax-equivalent
|
|
|
|
|
|
basis
adjustments were $10 and $26 in 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME ANALYSIS
|
|
For
the Nine Months Ended September 30, 2009 and 2008
(unaudited)
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
(1)
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
(1)
|
|
|
Interest
|
|
|
Yield/Cost
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
|
$
|
391,486
|
|
|
$
|
13,398
|
|
|
|
4.58
|
%
|
|
$
|
399,142
|
|
|
$
|
14,789
|
|
|
|
4.95
|
%
|
Federal
Home Loan Bank and other restricted stock
|
|
|
5,734
|
|
|
|
74
|
|
|
|
1.73
|
|
|
|
8,111
|
|
|
|
413
|
|
|
|
6.80
|
|
Securities
purchased under agreements to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
resell
|
|
|
6,538
|
|
|
|
6
|
|
|
|
0.12
|
|
|
|
39,624
|
|
|
|
963
|
|
|
|
3.25
|
|
Interest-bearing
deposits
|
|
|
18,122
|
|
|
|
24
|
|
|
|
0.18
|
|
|
|
3,249
|
|
|
|
57
|
|
|
|
2.34
|
|
Loans
and leases (3)
|
|
|
1,118,428
|
|
|
|
45,080
|
|
|
|
5.39
|
|
|
|
1,072,644
|
|
|
|
53,450
|
|
|
|
6.66
|
|
Total
interest-earning assets
|
|
|
1,540,308
|
|
|
$
|
58,582
|
|
|
|
5.08
|
%
|
|
|
1,522,770
|
|
|
$
|
69,672
|
|
|
|
6.11
|
%
|
Non-interest-earning
assets
|
|
|
92,955
|
|
|
|
|
|
|
|
|
|
|
|
103,434
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,633,263
|
|
|
|
|
|
|
|
|
|
|
$
|
1,626,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$
|
596,774
|
|
|
$
|
3,578
|
|
|
|
0.80
|
%
|
|
$
|
544,235
|
|
|
$
|
6,179
|
|
|
|
1.52
|
%
|
Time
deposits
|
|
|
461,524
|
|
|
|
7,010
|
|
|
|
2.03
|
|
|
|
452,847
|
|
|
|
11,696
|
|
|
|
3.45
|
|
Total
savings and time deposits
|
|
|
1,058,298
|
|
|
|
10,588
|
|
|
|
1.34
|
|
|
|
997,082
|
|
|
|
17,875
|
|
|
|
2.39
|
|
Federal
funds purchased
|
|
|
300
|
|
|
|
1
|
|
|
|
0.45
|
|
|
|
7,741
|
|
|
|
161
|
|
|
|
2.78
|
|
Securities
sold under agreements to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchase
|
|
|
1,154
|
|
|
|
4
|
|
|
|
0.46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
temporary borrowings
|
|
|
15,681
|
|
|
|
84
|
|
|
|
0.72
|
|
|
|
141,607
|
|
|
|
2,772
|
|
|
|
2.61
|
|
Senior
unsecured debt
|
|
|
19,546
|
|
|
|
563
|
|
|
|
3.85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
notes
|
|
|
10,000
|
|
|
|
693
|
|
|
|
9.27
|
|
|
|
10,000
|
|
|
|
694
|
|
|
|
9.27
|
|
Junior
subordinated debentures
|
|
|
20,620
|
|
|
|
666
|
|
|
|
4.32
|
|
|
|
20,620
|
|
|
|
995
|
|
|
|
6.45
|
|
Total
interest-bearing liabilities
|
|
|
1,125,599
|
|
|
|
12,599
|
|
|
|
1.50
|
|
|
|
1,177,050
|
|
|
|
22,497
|
|
|
|
2.55
|
|
Demand
deposits
|
|
|
340,260
|
|
|
|
|
|
|
|
|
|
|
|
319,235
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
16,622
|
|
|
|
|
|
|
|
|
|
|
|
14,975
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,482,481
|
|
|
|
|
|
|
|
|
|
|
|
1,511,260
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
150,782
|
|
|
|
|
|
|
|
|
|
|
|
114,944
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,633,263
|
|
|
|
|
|
|
|
|
|
|
$
|
1,626,204
|
|
|
|
|
|
|
|
|
|
Net
interest income/margin
|
|
|
|
|
|
|
45,983
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
47,175
|
|
|
|
4.14
|
%
|
Less
tax-equivalent basis adjustment
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
45,906
|
|
|
|
|
|
|
|
|
|
|
$
|
47,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Weighted daily average balance for period noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Interest on securities includes the effects of tax-equivalent basis
adjustments, using a 34% tax rate. Tax-equivalent
|
|
|
|
|
|
basis
adjustments were $31 and $71 in 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Interest on loans and leases includes the effects of tax-equivalent basis
adjustments, using a 34% tax rate. Tax-equivalent
|
|
|
|
|
|
basis
adjustments were $46 and $80 in 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANALYSIS
OF NON-PERFORMING ASSETS
|
|
AND
THE ALLOWANCE FOR LOAN AND LEASE LOSSES
|
|
September
30, 2009 versus December 31, 2008 and September 30, 2008
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-PERFORMING
ASSETS BY TYPE:
|
|
|
|
Period
Ended
|
|
|
|
9/30/2009
|
|
|
12/31/2008
|
|
|
9/30/2008
|
|
Non-accrual
Loans and Leases (1)
|
|
$
|
25,354
|
|
|
$
|
13,970
|
|
|
$
|
13,985
|
|
Non-accrual
Loans Held for Sale
|
|
|
9,302
|
|
|
|
2,102
|
|
|
|
500
|
|
Other
Real Estate Owned ("OREO")
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Non-performing Assets
|
|
$
|
34,656
|
|
|
$
|
16,072
|
|
|
$
|
14,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and Leases 90 Days or More Past Due and Still Accruing (1)
|
|
$
|
7
|
|
|
$
|
3
|
|
|
$
|
-
|
|
Gross
Loans and Leases Outstanding (1)
|
|
$
|
1,108,195
|
|
|
$
|
1,117,216
|
|
|
$
|
1,096,300
|
|
Loans
Held for Sale
|
|
$
|
9,302
|
|
|
$
|
5,322
|
|
|
$
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANALYSIS
OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES:
|
|
|
|
Quarter
Ended
|
|
|
|
9/30/2009
|
|
|
12/31/2008
|
|
|
9/30/2008
|
|
Beginning
Balance
|
|
$
|
27,954
|
|
|
$
|
14,573
|
|
|
$
|
17,248
|
|
Provision
|
|
|
3,000
|
|
|
|
7,000
|
|
|
|
3,700
|
|
Net
Charge-Offs
|
|
|
(1,553
|
)
|
|
|
(2,905
|
)
|
|
|
(6,375
|
)
|
Ending
Balance
|
|
$
|
29,401
|
|
|
$
|
18,668
|
|
|
$
|
14,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY RATIOS:
|
|
|
|
Period
Ended
|
|
|
|
9/30/2009
|
|
|
12/31/2008
|
|
|
9/30/2008
|
|
Allowance
as a % of Total Loans and Leases (1)
|
|
|
2.7
|
%
|
|
|
1.7
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
Loans and Leases as a % of Total Loans and
Leases
|
|
|
3.1
|
%
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
Assets as a % of Total Loans and Leases and OREO
(2)
|
|
|
3.1
|
%
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses as a % of Non-accrual Loans and Leases
(1)
|
|
|
116
|
%
|
|
|
134
|
%
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses as a % of Non-accrual Loans and
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases,
and Loans and Leases 90 days or More Past Due and Still Accruing
(1)
|
|
|
116
|
%
|
|
|
134
|
%
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excluding
loans held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) For
purposes of calculating this ratio, non-performing assets excludes loans
and leases 90 days or more past due and still accruing
interest.
|
|
ITEM
3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management
and Market Risk
- The process by which financial institutions manage
interest-earning assets and funding sources under different assumed interest
rate environments is called asset/liability management. The primary
goal of asset/liability management is to increase net interest income within an
acceptable range of overall risk tolerance. Management must ensure
that liquidity, capital, interest rate and market risk are prudently
managed. Asset/liability and interest rate risk management are
governed by policies reviewed and approved annually by the Company’s Board of
Directors. The Board has delegated responsibility for asset/liability
and interest rate risk management to the ALCO. The ALCO meets
quarterly and sets strategic directives that guide the day to day
asset/liability management activities of the Company as well as reviewing and
approving all major funding, capital and market risk management programs. The
ALCO also focuses on current market conditions, balance sheet management
strategies, deposit and loan pricing issues and interest rate risk measurement
and mitigation.
Interest Rate Risk
–
Interest rate risk is the potential adverse change to earnings or capital
arising from movements in interest rates. This risk can be quantified by
measuring the change in net interest margin relative to changes in market
rates. Reviewing re-pricing and cash flow characteristics of
interest-earning assets and interest-bearing liabilities helps identify
risk. The Company’s ALCO sets forth policy guidelines that limit the
level of interest rate risk within specified tolerance ranges. Management must
determine the appropriate level of risk, under policy guidelines, which will
enable the Company to achieve its performance objectives within the confines
imposed by its business objectives and the external environment within which it
operates.
Interest
rate risk arises from re-pricing risk, basis risk, yield curve risk and options
risk, and is measured using financial modeling techniques including interest
rate ramp and shock simulations to measure the impact of changes in interest
rates on earnings for periods of up to two years. These simulations
are used to determine whether corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of the
Company. Asset and liability management strategies may also involve
the use of instruments such as interest rate swaps to hedge interest rate
risk. Management performs simulation analysis to assess the Company’s
asset/liability position on a dynamic re-pricing basis using software developed
by a well known industry vendor. Simulation modeling applies alternative
interest rate scenarios to the Company’s balance sheet to estimate the related
impact on net interest income. The use of simulation modeling assists management
in its continuing efforts to achieve earnings stability in a variety of interest
rate environments.
The
Company’s asset/liability and interest rate risk management policy limits
interest rate risk exposure to -12% and -15% of the base case net interest
income for net earnings at risk at the 12-month and 24-month time horizons,
respectively. Net earnings at risk is the potential adverse change in
net interest income arising from up to +200/-100 basis point change in interest
rates ramped over a 12 month period, and measured over a 24 month time
horizon. The Company’s balance sheet is held flat over the 24 month
time horizon with all principal cash flows assumed to be reinvested in similar
products and term points at the simulated market interest rates.
The
Company may be considered “asset sensitive” when net interest income increases
in a rising interest rate environment or decreases in a falling interest rate
environment. Similarly, the Company may be considered “liability
sensitive” when net interest income increases in a falling interest rate
environment or decreases in a rising interest rate environment. When
there is minimal variability in net interest income in either a rising or
falling interest rate environment, the Company may be considered “interest rate
neutral.”
As of
September 30, 2009, the Company’s balance sheet is considered slightly asset
sensitive. This is evidenced by the increase in net interest income
in a hypothetical rising rate scenario. This is due to the relative rate
insensitivity of non-maturity deposits.
%
Change in Net Interest Income
|
|
12
Month Interest Rate Changes
|
|
Basis
Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
Time
Horizon
|
|
Down
100
|
|
|
Base
Flat
|
|
|
Up
100
|
|
|
Up
200
|
|
Year
One
|
|
|
-4.1
|
%
|
|
|
0.0
|
%
|
|
|
2.0
|
%
|
|
|
2.4
|
%
|
Year
Two
|
|
|
-5.6
|
%
|
|
|
0.1
|
%
|
|
|
2.7
|
%
|
|
|
3.1
|
%
|
Management
also monitors equity value at risk as a percentage of market value of portfolio
equity (“MVPE”). The Company’s MVPE is the difference between the
market value of its interest-sensitive assets and the market value of its
interest-sensitive liabilities. MVPE at risk is the potential adverse
change in the present value (market value) of total equity arising from an
immediate hypothetical shock in interest rates. Management uses
scenario analysis on a static basis to assess its equity value at risk by
modeling MVPE under various interest rate shock scenarios. When
modeling MVPE at risk, management recognizes the high degree of subjectivity
when projecting long-term cash flows and reinvestment rates, and therefore uses
MVPE at risk as a relative indicator of interest rate
risk. Accordingly, the Company does not set policy limits over MVPE
at risk.
As of
September 30, 2009, the variability in the Company’s MVPE after an immediate
hypothetical shock in interest rates of +200/-100 basis points is
low. The small changes in the percentage change in MVPE and the MVPE
Ratio continue to be a result of the closely matched duration of assets and
liabilities on the Bank’s balance sheet. The low volatility of MVPE is also
attributable to the low interest rate environment at September 30, 2009 and its
hypothetical impact on the market value of the Company’s investment assets and
lower cost core deposits.
MVPE
Variability
|
|
Immediate
Interest Rate Shocks
|
|
Basis
Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
|
Down
100
|
|
|
Base
Flat
|
|
|
Up
100
|
|
|
Up
200
|
|
%
Change in MVPE (1)
|
|
|
0.7
|
%
|
|
|
0.0
|
%
|
|
|
-2.8
|
%
|
|
|
-6.4
|
%
|
MVPE
Ratio
|
|
|
19.6
|
%
|
|
|
19.7
|
%
|
|
|
19.1
|
%
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Assumes 40% marginal tax rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simulation
and scenario techniques in asset/liability modeling are influenced by a number
of estimates and assumptions with regard to embedded options, prepayment
behaviors, pricing strategies and cash flows. Such assumptions and
estimates are inherently uncertain and, as a consequence, simulation and
scenario output will neither precisely estimate the level of, or the changes in,
net interest income and MVPE, respectively.
ITEM
4. – CONTROLS AND PROCEDURES
The
Company carried out an evaluation, under the supervision and with the
participation of its principal executive officer and principal financial
officer, of the effectiveness of the design and operation of its disclosure
controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on
this evaluation, the Company’s principal executive officer and principal
financial officer concluded that, as of the end of the period covered by this
report, the Company’s disclosure controls and procedures are effective in timely
alerting them to material information required to be included in the Company’s
periodic reports filed with the SEC. There have been no significant changes in
the Company’s internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
There
were no changes to the Company’s internal control over financial reporting as
defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that
occurred in the third quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II
ITEM
1. - LEGAL PROCEEDINGS
The
Company and the Bank are subject to legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the amount
of ultimate liability, if any, with respect to such matters will not materially
affect future operations and will not have a material impact on the Company’s
financial statements.
ITEM
1A. – RISK FACTORS
There are
no other material changes from the risks disclosed in the “Risk Factors” section
of our annual report on Form 10-K for the year ended December 31, 2008,
except as described below.
Banking laws and
regulations could limit our access to funds from the Bank, one of our primary
sources of liquidity.
As a bank
holding company, one of our principal sources of funds is dividends from our
subsidiaries. These funds are used to service our debt as well as to
pay expenses and dividends on our common stock. Our non-consolidated
interest expense on our debt obligations was $1.4 million and $1.7 million for
the nine months ended September 30, 2009 and 2008, respectively. Our
non-consolidated operating expenses were $112 thousand and $19 thousand for the
nine months ended September 30, 2009 and 2008, respectively. State
banking regulations limit, absent regulatory approval, the Bank’s dividends to
us to the lesser of the Bank’s undivided profits and the Bank’s retained net
income for the current year plus its retained net income for the preceding two
years (less any required transfers to capital surplus) up to the date of any
dividend declaration in the current calendar year. As of September
30, 2009, $2.1 million in dividends were available to the Company from the Bank
according to these limitations without seeking regulatory approval.
Federal
bank regulatory agencies have the authority to prohibit the Bank from engaging
in unsafe or unsound practices in conducting its business. The
payment of dividends or other transfers of funds to us, depending on the
financial condition of the Bank, could be deemed an unsafe or unsound
practice.
Dividend
payments from the Bank would also be prohibited under the “prompt corrective
action” regulations of the federal bank regulators if the Bank is, or after
payment of such dividends would be, undercapitalized under such
regulations. In addition, the Bank is subject to restrictions under
federal law that limit its ability to transfer funds or other items of value to
us and our nonbanking subsidiaries, including affiliates, whether in the form of
loans and other extensions of credit, investments and asset purchases, or other
transactions involving the transfer of value. Unless an exemption
applies, these transactions by the Bank with us are limited to 10% of the Bank’s
capital and surplus and, with respect to all such transactions with affiliates
in the aggregate, to 20% of the Bank’s capital and surplus. As of
September 30, 2009, a maximum of approximately $35 million was available to us
from the Bank according to these limitations. Moreover, loans and
extensions of credit to affiliates generally are required to be secured in
specified amounts. A bank’s transactions with its non-bank affiliates
also are required generally to be on arm’s-length terms. We do not
have any borrowings from the Bank and do not anticipate borrowing from the Bank
in the future.
Accordingly,
we can provide no assurance that we will receive dividends or other
distributions from the Bank and our other subsidiaries.
Our other
primary source of funding is our DRP, which allows existing stockholders to
reinvest cash dividends in our common stock and/or to purchase additional shares
through optional cash investments on a quarterly basis. Shares are
purchased at up to a 15% discount from the current market price under both the
dividend reinvestment option and with additional cash payments. No
assurance can be given that we will continue the DRP or that stockholders will
make purchases in the future.
Our
results of operations are affected by economic conditions in the New York
metropolitan area and nationally.
As a
result of our geographic concentration in the New York metropolitan area, our
results of operations largely depend upon economic conditions in this
region.
We are in
the midst of a recession and thus are operating in a challenging and uncertain
economic environment, globally, nationally and locally. Financial
institutions continue to be affected by sharp declines in the real estate and
financial markets. Decreases in real estate values could negatively
affect the value of property used as collateral for our loans. Adverse changes
in the economy may also affect the ability of our borrowers to make timely
repayments of their loans, which would have an impact on our earnings. If poor
economic conditions result in decreased demand for real estate loans, our
profits may continue to decline because our investment alternatives may earn
less income for us than real estate loans.
We
continue to see loan delinquencies and charge-offs. The Company’s
non-performing loans totaled $35 million (which includes $9 million in loans
held for sale which have been previously written down to their estimated fair
value) at September 30, 2009 compared to $16 million (which includes $2 million
in loans held for sale) at December 31, 2008. Net loan charge-offs
recorded for the first nine months of 2009 were $5.8 million and our provision
for loan and lease losses for the first nine months of 2009 was $16.5
million. The impact of the national and local economic recession
along with any further deterioration could drive losses beyond that which is
provided for in our allowance for loan losses and result in additional
consequences, such as loan delinquencies, increased problem assets and
foreclosures, declining demand for our products and services, decreased deposits
and declining collateral value for our loans.
If
our investment in the Federal Home Loan Bank of New York is classified as
other-than-temporarily impaired or as permanently impaired, our earnings
and stockholders’ equity could decrease.
We own
common stock of the Federal Home Loan Bank of New York (“FHLB-NY”). We hold the
FHLB-NY common stock to qualify for membership in the Federal Home Loan Bank
System and to be eligible to borrow funds under the FHLB-NY’s advance program.
The aggregate cost and fair value of our FHLB-NY common stock as of September
30, 2009 was $4.6 million based on its par value. This amount fluctuates as a
function of our FHLB-NY borrowings. There is no public market for our FHLB-NY
common stock.
Recent
published reports indicate that certain member banks of the Federal Home Loan
Bank System, not including the FHLB-NY, may be subject to accounting rules and
asset quality risks that could result in materially lower regulatory capital
levels. In an extreme situation, it is possible that the capitalization of
a Federal Home Loan Bank, including the FHLB-NY, could be substantially
diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in FHLB-NY common stock could be deemed
other-than-temporarily impaired at some time in the future, and if this occurs,
it would cause our earnings and stockholders’ equity to decrease by the
after-tax amount of an impairment charge.
The
loss of key personnel could impair the Bank’s future success.
The
Bank’s future success depends in part on the continued service of its executive
officers, other key members of management and its staff, as well as its ability
to continue to attract, motivate and retain additional highly qualified
employees. The loss of services of key personnel could have an
adverse effect on the Bank’s business because of their skills, knowledge of the
Company’s market, years of industry experience and the difficulty of promptly
finding qualified replacement personnel. The Company currently has an
employment agreement in place with its Chief Executive
Officer. Change in control agreements are in place for selected key
officers. The American Recovery and Reinvestment Act
of 2009 (“ARRA”) was signed by the President on February 17, 2009 and
imposed strict new limits on executive compensation for all CPP participants,
including a prohibition on the payment or accrual of any bonus, retention award
or incentive compensation to the Company’s five most highly compensated
employees. These prohibitions may negatively impact the Company’s
ability to retain existing key staff members and/or to attract additional
qualified personnel to join the Company in key positions.
Higher FDIC
deposit insurance premiums and assessments could adversely affect our financial
condition.
FDIC
insurance premiums have increased substantially in 2009 and we may have to pay
significantly higher FDIC premiums in the future and prepay insurance premiums.
Market developments have significantly depleted the insurance fund of the FDIC
and reduced the ratio of reserves to insured deposits. The FDIC adopted a
revised risk-based deposit insurance assessment schedule on February 27, 2009,
which raised regular deposit insurance premiums. On May 22, 2009, the FDIC also
implemented a five basis point special assessment of each insured depository
institution’s total assets minus Tier 1 capital as of June 30, 2009, but no more
than 10 basis points times the institution’s assessment base for the second
quarter of 2009, collected by the FDIC on September 30, 2009. The amount of this
special assessment was $730 thousand. Additional special assessments may be
imposed by the FDIC for future quarters at the same or higher
levels.
In
addition, the FDIC recently announced a proposed rule that would require insured
depository institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
If the proposed rule is adopted, the prepaid assessments would be collected on
December 30, 2009. We have estimated that the total prepaid assessments would be
approximately $7.6 million, which would be recorded as a prepaid expense (asset)
as of December 30, 2009. As of December 31, 2009 and each quarter thereafter, we
would record an expense for our regular deposit assessment for the quarter and
an offsetting credit to the prepaid assessment until the asset is
exhausted.
We
participate in the TLGP for noninterest-bearing transaction deposit accounts.
Banks that participate in the TLGP noninterest-bearing transaction account
guarantee will pay the FDIC an annual assessment of 10 basis points on the
amounts in such accounts above the amounts covered by FDIC deposit insurance. To
the extent that these TLGP assessments are insufficient to cover any loss or
expenses arising from the TLGP program, the FDIC is authorized to impose an
emergency special assessment on all FDIC-insured depository institutions. The
FDIC has authority to impose charges for the TLG program upon the holding
companies of such depository institutions as well. The TLGP was scheduled to end
December 31, 2009, but the FDIC extended the program to June 30, 2010. In
announcing the extension, the FDIC indicated that it will charge a higher
guarantee fee to banks that elect to participate in the extension to reflect
each bank’s risk. We have elected to participate in the extension.
These
changes may cause the premiums and TLGP assessments charged by the FDIC to
increase. These actions could significantly increase our non-interest expense in
2009 and in future periods. The prepayment of our FDIC assessments also may
temporarily reduce our liquidity.
ITEM
2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not
applicable.
ITEM
3. – DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM
5. – OTHER INFORMATION
Not
applicable.
ITEM
6. - EXHIBITS
31.1
|
Certification
of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section)
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
STATE
BANCORP, INC.
10/28/09
|
|
/s/
Thomas M. O'Brien
|
|
Date
|
|
Thomas
M. O'Brien,
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
/s/
Brian K. Finneran
|
|
Date
|
|
Brian
K. Finneran,
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
EXHIBIT
INDEX
Exhibit Number
|
Description
|
31.1
|
Certification
of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liability of that
section)
|
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