Securities and Excha
nge Commission
Washington, D.C.
20549
Form 10-Q
QUA
RTERLY
REPO
RT PURSUANT TO SE
CTION
13 or 15(d)
OF
THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
June 30,
2010
Commission File Number 0
-
13314
SMIT
HTOWN BANCORP, INC.
(Exact name of Registrant as specified
in its charter)
New York
|
11-2695037
|
(State or other jurisdiction of
incorporation or organization)
|
(IRS Employer Identification
No.)
|
|
|
100 Motor Parkway, Suite 160,
Hauppauge, NY
|
11788-5138
|
(A
ddress of Principal Executive
Offices)
|
(Zip
Code)
|
(631) 360-9300
(Registrant's telephone number,
including area code)
Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities E
xchange 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 (Section 232.405 of this chapter) during the preceding 12
mont
h
s (or for such shorter
period that the Registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerate
d filer, a
non accelerated filer, or a smaller reporting company. See the
definitions of “
accelerated
filer”
and
“
smaller
reporting company”
in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer
¨
Accelerated
filer
x
Non-accelera
ted 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
Indicate the number of shares
outstanding of each of the issuer
’
s classes of common sto
ck, as of the latest practicable
date:
Shares of Common Stock ($.01 Par Value)
Outstanding as of
August 2,
2010
14,967,508
SMI
THTOWN BANCORP, INC.
INDEX
Part I - FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item 1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolida
ted Balance Sheets
(Unaudited)
June 30, 2010 and December 31,
2009
|
|
3
|
|
|
|
|
|
Consolidated Statements of Income
(Unaudited)
Three and Six Months Ended June
30, 2010 and 2009
|
|
4
|
|
|
|
|
|
Consolidated Statements of Changes
in Stockholders
’
Equity (Unaudite
d)
Six Months Ended June 30,
2010
|
|
5
|
|
|
|
|
|
Consolidated Statements of Cash
Flows (Unaudited)
Six Months Ended June 30, 2010 and
2009
|
|
6
|
|
|
|
|
|
Notes to Unaudited Consolidated
Financial Statements
|
|
7
|
|
|
|
|
Item 2.
|
Management
’
s Discussion and An
alysis of Financial Condition and
Results of Operations
|
|
20
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
|
33
|
|
|
|
|
Item 4.
|
Controls and
Procedures
|
|
34
|
|
|
|
|
Part II - OTHER
INFORMATION
|
|
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
|
34
|
|
|
|
|
I
tem 1A.
|
Risk
Factors
|
|
34
|
|
|
|
|
Item 2.
|
Unregistered Sales of Equity
Securities and Use of Proceeds
|
|
35
|
|
|
|
|
Item 3.
|
Defaults Upon Senior
Securities
|
|
35
|
|
|
|
|
Item
4.
|
Reserved
|
|
35
|
|
|
|
|
Item 5. Other
Information
|
|
35
|
|
|
|
Item 6.
Exhibits
|
|
35
|
|
|
|
|
Signat
ures
|
|
|
Exhibit
2.01
|
Agreement and Plan of Merger,
dated July 15, 2010, between People
’
s United Financial, Inc.
and
Smithtown Bancorp, Inc.
(Incorporated by reference to Exhibit 2.1 of Form 8-K Current Report
filed
July 16, 2010, File No.
000-13314
.)
|
|
|
Exhibit
10.1
|
Written Agreement by and between
Smithtown Bancorp, Inc. and Federal Reserve Bank of New York
dated
June 22,
2010. (Incorporated by reference to Exhibit 9.01 of Form 8-K
Current Report filed June 28, 2010,
File No.
000-13314.)
|
|
|
Exhi
bit 31.1
|
Certification of Principal
Executive Officer pursuant to Rule 13a-14(a)
|
|
|
Exhibit
31.2
|
Certification of Principal
Financial Officer pursuant to Rule 13a-14(a)
|
|
|
Exhibit 32
|
Certification of Chief Executive
Officer and Chief Financial Officer pursu
ant to Rule 13a-14(b) and 18
U.S.C. Section
1350
|
Item 1. Financial
Statements
Consolidated Balance Sheets
(unaudited)
(Dollar amounts in thousands except
share data)
|
|
June
30,
20
10
|
|
|
December
31,
200
9
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
17
,
28
3
|
|
|
$
|
18,745
|
|
Interest
earning deposits with
banks
|
|
|
19,844
|
|
|
|
3,409
|
|
Total cash and cash
equivalents
|
|
|
37,127
|
|
|
|
22,154
|
|
Term
placements
|
|
|
507
|
|
|
|
507
|
|
Securities available for
sale
|
|
|
209,221
|
|
|
|
397,274
|
|
Securities h
eld to matu
rity (fair value of $34 and
$67
,
respectively)
|
|
|
33
|
|
|
|
66
|
|
Loans held for
sale
|
|
|
-
|
|
|
|
16,450
|
|
Loans
|
|
|
1,978,087
|
|
|
|
2,090,896
|
|
Less: allowance for loan
losses
|
|
|
57,999
|
|
|
|
38,483
|
|
Loans, net
|
|
|
1,920,088
|
|
|
|
2,052,413
|
|
Restricted stock, at
cost
|
|
|
18,092
|
|
|
|
18,353
|
|
Real estate owned,
net
|
|
|
1,130
|
|
|
|
2,013
|
|
Premises and equipment,
net
|
|
|
51,421
|
|
|
|
47,708
|
|
Goodwill
|
|
|
3,923
|
|
|
|
3,923
|
|
Intangible
assets
|
|
|
494
|
|
|
|
616
|
|
Cash value of company owned life
insurance
|
|
|
25,152
|
|
|
|
24,874
|
|
Accrued interest receivable and
other assets
|
|
|
39,984
|
|
|
|
48,579
|
|
Total
assets
|
|
$
|
2,307,172
|
|
|
$
|
2,634,930
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$
|
154,946
|
|
|
$
|
152,306
|
|
Saving, NOW and money market
deposits
|
|
|
868,445
|
|
|
|
999,066
|
|
Time deposits of $100,000 or
more
|
|
|
439,383
|
|
|
|
508,632
|
|
Other time
deposits
|
|
|
361,024
|
|
|
|
415,024
|
|
Total
deposits
|
|
|
1,823,798
|
|
|
|
2,075,028
|
|
Other
borrowings
|
|
|
3
13,480
|
|
|
|
352,820
|
|
Subordinated
debentures
|
|
|
56,514
|
|
|
|
56,351
|
|
Accrued interest payable and other
liabilities
|
|
|
17,735
|
|
|
|
14,976
|
|
Total
liabilities
|
|
|
2,211,527
|
|
|
|
2,499,175
|
|
|
|
|
|
|
|
|
|
|
Commitments an
d contingent liabilities (Note
10
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.01
per share:
|
|
|
|
|
|
|
|
|
Authorized: 1,000,000 shares at
June 30, 2010 and
December 31, 2009,
respectively; no shares issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $.01 per
share:
|
|
|
|
|
|
|
|
|
Authorized:
35,000,000 shares at
June 30, 2010 and
December 31, 2009
, respectively;
17,019,372
and
1
6
,
907
,
346
shares issued at
June 30, 2010 and
December 31, 2009,
respectively; 14,967,508 and
14,855,482
shares
outstanding at
June
30, 2010 and
December
31, 2009, respe
ctively
|
|
|
170
|
|
|
|
169
|
|
Additional paid-in
capital
|
|
|
82,557
|
|
|
|
82,318
|
|
Retained
earnings
|
|
|
21,837
|
|
|
|
64,820
|
|
Treasury stock, at cost, 2,051,864
shares
|
|
|
(10,062
|
)
|
|
|
(10,062
|
)
|
|
|
|
94,502
|
|
|
|
137,245
|
|
Accumulated other comprehensive
income (
loss
)
|
|
|
1,143
|
|
|
|
(1,490
|
)
|
Total stockholders'
equit
y
|
|
|
95,645
|
|
|
|
135,755
|
|
Total liabilities and
stockholders' equity
|
|
$
|
2,307,172
|
|
|
$
|
2,634,930
|
|
See notes to consolidated financial
statements.
Consolidated
Statements of Income
(unaudited)
(Dollar
amounts in thousands except share data)
|
|
For
the
three
mon
ths
ended
June
30,
|
|
|
For
the
six
months
ended
June
30,
|
|
|
|
2010
|
|
|
200
9
|
|
|
2010
|
|
|
200
9
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
26,213
|
|
|
$
|
28,043
|
|
|
$
|
54,030
|
|
|
$
|
53,542
|
|
Taxable
securities
|
|
|
1,409
|
|
|
|
843
|
|
|
|
3,426
|
|
|
|
1,706
|
|
Tax exempt
securities
|
|
|
499
|
|
|
|
147
|
|
|
|
1,001
|
|
|
|
195
|
|
Interest
earning deposits with
banks
|
|
|
22
|
|
|
|
40
|
|
|
|
40
|
|
|
|
126
|
|
Other
|
|
|
190
|
|
|
|
225
|
|
|
|
434
|
|
|
|
307
|
|
Total interest
income
|
|
|
28,333
|
|
|
|
29,298
|
|
|
|
58,931
|
|
|
|
55,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and money market
deposits
|
|
|
2
,
148
|
|
|
|
3
,
520
|
|
|
|
4
,
663
|
|
|
|
6
,
649
|
|
Time deposits of $100,000 or
more
|
|
|
2,652
|
|
|
|
3,282
|
|
|
|
5,538
|
|
|
|
6,711
|
|
Other time
deposits
|
|
|
2,468
|
|
|
|
3,451
|
|
|
|
5,181
|
|
|
|
7,268
|
|
Other
borrowings
|
|
|
2,118
|
|
|
|
2,262
|
|
|
|
4,250
|
|
|
|
4,486
|
|
Subordinated
debentures
|
|
|
1,018
|
|
|
|
477
|
|
|
|
2,026
|
|
|
|
993
|
|
Total interest
expense
|
|
|
10,404
|
|
|
|
12,992
|
|
|
|
21,658
|
|
|
|
26,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
17,929
|
|
|
|
16,306
|
|
|
|
37,273
|
|
|
|
29,769
|
|
Provision for loan
losses
|
|
|
27,500
|
|
|
|
1,800
|
|
|
|
52,500
|
|
|
|
3,000
|
|
Net interest income
(loss)
after provision for loan
losses
|
|
|
(9,571
|
)
|
|
|
14,506
|
|
|
|
(15,227
|
)
|
|
|
26,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from insurance
agency
|
|
|
877
|
|
|
|
953
|
|
|
|
1,717
|
|
|
|
1,875
|
|
Service charges on dep
osit
accounts
|
|
|
638
|
|
|
|
551
|
|
|
|
1,260
|
|
|
|
1,118
|
|
Net gain on the sale of investment
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
518
|
|
|
|
522
|
|
Trust and investment
services
|
|
|
152
|
|
|
|
194
|
|
|
|
349
|
|
|
|
327
|
|
Increase in cash value of company
owned life insurance
|
|
|
153
|
|
|
|
117
|
|
|
|
278
|
|
|
|
233
|
|
OTTI
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI
losses
|
|
|
(102
|
)
|
|
|
(2
55
|
)
|
|
|
(597
|
)
|
|
|
(255
|
)
|
Portion of loss recognized in
other comprehensive income
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
Net
impairment
loss
es
recognized in
earnings
|
|
|
(85
|
)
|
|
|
(255
|
)
|
|
|
(580
|
)
|
|
|
(255
|
)
|
Other
|
|
|
629
|
|
|
|
386
|
|
|
|
1,256
|
|
|
|
902
|
|
Total noninterest
income
|
|
|
2,364
|
|
|
|
1,946
|
|
|
|
4,798
|
|
|
|
4,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
5,319
|
|
|
|
5,241
|
|
|
|
10,5
60
|
|
|
|
10,047
|
|
Occupancy and
equipment
|
|
|
3,704
|
|
|
|
2,780
|
|
|
|
7,
705
|
|
|
|
5,358
|
|
Federal depo
sit
insurance
|
|
|
1,603
|
|
|
|
1,797
|
|
|
|
3,261
|
|
|
|
2,347
|
|
Amortization of intangible
assets
|
|
|
60
|
|
|
|
90
|
|
|
|
12
2
|
|
|
|
181
|
|
Other
|
|
|
5,156
|
|
|
|
1,307
|
|
|
|
7,697
|
|
|
|
2,670
|
|
Total noninterest
expense
|
|
|
15,842
|
|
|
|
11,215
|
|
|
|
29,345
|
|
|
|
20,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(23,049
|
)
|
|
|
5,237
|
|
|
|
(39,774
|
)
|
|
|
10,888
|
|
Provision
for income
taxes
|
|
|
6,165
|
|
|
|
1,824
|
|
|
|
3,209
|
|
|
|
3,859
|
|
Net income
(loss)
|
|
$
|
(29,214
|
)
|
|
$
|
3,413
|
|
|
$
|
(42,983
|
)
|
|
$
|
7,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss)
|
|
$
|
(27,172
|
)
|
|
$
|
2,308
|
|
|
$
|
(40,350
|
)
|
|
$
|
5,368
|
|
Basic earnings (loss) per
share
|
|
$
|
(1.97
|
)
|
|
$
|
0.26
|
|
|
$
|
(2.90
|
)
|
|
$
|
0.56
|
|
Diluted earnings (loss)
per
share
|
|
$
|
(1.97
|
)
|
|
$
|
0.26
|
|
|
$
|
(2.90
|
)
|
|
$
|
0.56
|
|
See notes to consolidated financial
statements.
Consolidated Statements of Changes in
Stockholders
’
Equity (unaudited)
(Dollar amounts in thousands except
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Total
|
|
|
|
Shares
Outstanding
|
|
|
Amount
|
|
|
Paid
In Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Comprehensive
Loss
|
|
|
Stockholders’
Equity
|
|
|
Comprehensive
(Loss)
|
|
Balance
at January 1, 2010
|
|
|
14,855,482
|
|
|
$
|
169
|
|
|
$
|
82,318
|
|
|
$
|
64,820
|
|
|
$
|
(10,062
|
)
|
|
$
|
(1,490
|
)
|
|
$
|
135,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,983
|
)
|
|
|
|
|
|
|
|
|
|
|
(42,983
|
)
|
|
$
|
(42,983
|
)
|
Change
in unrealized gain (loss) on securities available for sale, net of
reclassification and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,778
|
|
|
|
2,778
|
|
|
|
2,778
|
|
Change
in unrealized gain (loss) on securities available for sale for which a
portion of an
OTTI
has
been recognized in earnings, net of reclassification and
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Changes
in funded status of retirement plans, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
(120
|
)
|
|
|
(120
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,350
|
)
|
Issuance
of shares for employee stock ownership plan
|
|
|
50,526
|
|
|
|
1
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240
|
|
|
|
|
|
Stock
awards granted
|
|
|
61,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
|
14,967,508
|
|
|
$
|
170
|
|
|
$
|
82,557
|
|
|
$
|
21,837
|
|
|
$
|
(10,062
|
)
|
|
$
|
1,143
|
|
|
$
|
95,645
|
|
|
|
|
|
See notes to consolidated financial
statements.
Consolidated Statements of Cash
Flows
(unaudited)
(Dollar amounts in thousands except
share data)
|
|
For
the
six
months
ended
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(42
,
983
|
)
|
|
$
|
7,029
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
on premises and equipment
|
|
|
2,671
|
|
|
|
1,981
|
|
Provision
for loan losses
|
|
|
52
,
5
00
|
|
|
|
3,0
00
|
|
Deferred
tax asset valua
tion
allowance
|
|
|
19,800
|
|
|
|
-
|
|
Net
gain on investment securities
|
|
|
(518
|
)
|
|
|
(522
|
)
|
Loss
on sale of real estate owned
|
|
|
22
|
|
|
|
-
|
|
Loss
on sale of loans held for sale
|
|
|
250
|
|
|
|
-
|
|
Other
than temporary net impairment loss on
securities
|
|
|
580
|
|
|
|
255
|
|
Net
increase
in
other liabilities
|
|
|
5,3
64
|
|
|
|
2,353
|
|
Net
increase other assets
|
|
|
(9,666
|
)
|
|
|
(2,348
|
)
|
Net
increase in deferred taxes
|
|
|
(6,055
|
)
|
|
|
(3,127
|
)
|
Amortization
of unearned restricted stock awards
|
|
|
191
|
|
|
|
180
|
|
Amortization
of
ESOP
awards
|
|
|
120
|
|
|
|
150
|
|
Increase
in cash surrender value of company owned life insur
ance
|
|
|
(278
|
)
|
|
|
(233
|
)
|
Investment
securities amortization of premium/(accretion) of
discount, net
|
|
|
543
|
|
|
|
849
|
|
Amortization
of intangible assets
|
|
|
122
|
|
|
|
181
|
|
Cash
p
rovided
by operating activities
|
|
|
22,663
|
|
|
|
9,748
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from calls, repayments, maturities and sales
of
available for
sale
securities
|
|
|
192,084
|
|
|
|
66,439
|
|
Proceeds
from calls, repayments, maturities and sales
of
held
to maturity
securities
|
|
|
33
|
|
|
|
46
|
|
Purchases
of available for
sale
securitie
s
|
|
|
-
|
|
|
|
(237,036
|
)
|
Net
redemptions (p
urchases
)
of
restricted securities
|
|
|
261
|
|
|
|
(1,252
|
)
|
Net
decrease (increase) in l
oans
|
|
|
96,025
|
|
|
|
(281,827
|
)
|
Proceeds
from the sale of real estate owned
|
|
|
861
|
|
|
|
-
|
|
Purchases
of premises and equipment
|
|
|
(6,384
|
)
|
|
|
(5,788
|
)
|
Cash
provided
by (
us
ed
in
)
investing
activities
|
|
|
282,880
|
|
|
|
(459,418
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
(decrease)
increase
in demand, money market, NOW and savings
deposits
|
|
|
(127
,
981
|
)
|
|
|
318,469
|
|
Net
(decrease)
increase
in
time deposits
|
|
|
(123,249
|
)
|
|
|
97,933
|
|
Cash
dividend
s
paid
|
|
|
-
|
|
|
|
(946
|
)
|
Net
decrease in other
borrowings
|
|
|
(39,340
|
)
|
|
|
-
|
|
Proceeds
from subordinated debt and warrant issuance
|
|
|
-
|
|
|
|
5,000
|
|
Net
proceeds from common stock issuance
|
|
|
-
|
|
|
|
28
464
|
|
Cash
(used
in)
provided
by financing activities
|
|
|
(290,570
|
)
|
|
|
448,920
|
|
|
|
|
|
|
|
|
|
|
Net
increase
(decrease)
in
cash and cash equivalents
|
|
|
14,973
|
|
|
|
(750
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
22,154
|
|
|
|
25,969
|
|
Cash
and cash equivalents, end of period
|
|
$
|
37,127
|
|
|
$
|
25,219
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information - Cash Flows:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
21,627
|
|
|
$
|
26,010
|
|
Income
taxes
|
|
|
-
|
|
|
|
4,541
|
|
See notes to consolidated financial
statements.
Notes to Consolidated Financial
Statements (unaudited
)
(Dollar amounts in thousands except
share data)
Note 1
–
Financial Statement
Presentation
The consolidated financial statements
include the accounts of Smithtown Bancorp, Inc., (“
Company”
), a New York State-chartered bank
holding company with its New
York State-chartered commercial bank
subsidiary, Bank of Smithtown (“
Bank”
), and three other
subsidiaries, Smithtown Bancorp Capital Trust I, Smithtown Bancorp Capital Trust
II and Smithtown Bancorp Capital Trust III, all of which were formed for the
pur
p
ose of issuing trust preferred
securities. Bank of Smithtown has
six
wholly owned subsidiaries, Bank of
Smithtown Financial Services, Inc., Bank of Smithtown Insurance Agents and
Brokers, Inc., BOS Preferred Funding Corporation, SBRE Realty Corp
.,
SBRE Re
alty II, LLC
, formed to hold other real estate owned
property, and
Carlyle &
Co, a nominee partnership used by the Bank
’
s trust department to hold permissible
securities.
Intercompany transactions and balances
are eliminated in consolidation.
The accompa
nying unaudited interim consolidated
financial statements have been prepared pursuant to the rules and regulations
for reporting on Form 10-Q. Accordingly, certain disclosures required
by U.S. generally accepted accounting principles are not included
her
e
in. These interim statements
should be read in conjunction with the consolidated financial statements and
notes included in the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission (“
SEC”
). The December 31, 2009
co
n
solidated financial statements were
derived from the Company
’
s December 31, 2009 audited financial
statements included in the Annual Report on Form 10-K.
Interim statements are subject to
possible adjustments in connection with the annual audit of the Com
pany for the year ending December 31,
2010. In the opinion of management, the accompanying unaudited
interim consolidated financial statements contain all adjustments necessary to
present fairly the Company
’
s financial position and its results of
operati
o
ns for the periods
presented. Operating results for the six months ended June 30, 2010
are not necessarily indicative of those that may be expected for the year ending
December 31, 2010.
In preparing the consolidated financial
statements, management is r
equired to make estimates and
assumptions, such as the allowance for loan losses, deferred tax asset valuation
allowance and fair value measurements that affect the reported asset and
liability balances and revenue and expense amounts and the disclosure
o
f
contingent assets and
liabilities. Actual results could differ significantly from those
estimates.
Written Agreement
On June 22, 2010, the Company entered
into a Written Agreement with the Federal Reserve Bank of New York
(“
FRB”
). The Written
Agreemen
t is in addition to
the
Consent Agreement with
the
Federal Deposit
Insurance Corporations (“
FDIC
”
)
and a parallel Consent Order with the
New York State Banking
Department (“
Banking
Department
”
)
, hereinafter collectively
referr
ed to as the
“
Consent
Agreemen
t,
”
that the Bank entered into on January
29, 2010. The Written Agreement similarly requires that the Company
obtain the approval of the FRB prior to paying a dividend. Certain
provisions of the Consent Agreement are described in more detail in Note
11.
Proposed Plan of Merger with
People
’
s United Financial,
Inc.
On July 15, 2010, the Company and
People
’
s United Financial, Inc. (“
People
’
s United”
) of Bridgeport, Connecticut announced a
definitive agreement under which People
’
s United will acquire the C
ompany in a cash and stock transaction
valued at approximately $60 million, or $4.00 per share.
Under the agreement, People
’
s United will acquire the Company for
approximately $30 million in cash and 2.14 million shares of People
’
s United common stock, va
lued in the aggregate at approximately
$30 million based on the 5-day average closing price of People
’
s United common stock for the period
ended July 14, 2010.
The definitive agreement has been
unanimously approved by the respective boards of directors
of People
’
s United and the Company. The
Company will merge into People
’
s United, and the Bank, will
simultaneously merge into People
’
s United Bank, People
’
s United
’
s banking subsidiary. The
value of the consideration a shareholder of the Company will re
c
eive for each share of Company common
stock is equivalent in the aggregate to 0.1430 shares of People
’
s United common stock and $2.00 in
cash. Shareholders of the Company as of the record date for the
special shareholders meeting to vote on the transacti
o
n will be entitled to elect for each
share held whether to receive shares of People
’
s United common stock or cash, subject
to reallocation if either cash or stock is
oversubscribed.
The actual value of the merger
consideration to be paid upon closing to
each shareholder of the Company will
depend on the average People
’
s United stock price shortly prior to
completion of the merger, and the exact amount of cash payable per common share
of the Company and the exact number of shares to be issued per common
s
h
are of the Company will be determined at
that time based on the average People
’
s United stock price, so that each share
of the Company receives consideration with approximately the same
value. Receipt of People
’
s United common stock is expected to be
tax
-
free to shareholders of the
Company.
The transaction is subject to approval
by bank regulatory authorities and by the shareholders of the
Company. People
’
s United shareholder approval is not
required. The transaction is expected to close in the fourth
q
uarter
2010.
The merger is the result of an
assessment by the Company and its board of directors of the Company
’
s strategic alternatives in light of the
financial challenges facing the Company. The Merger Agreement
satisfies the requirement of the Cons
ent Agreement to sell or merge the
Company and the Bank in the event that the required capital ratios are not
satisfied by June 30, 2010. If the merger is not consummated, the
Company would be required to find an alternative approach to overcoming its
ch
a
llenges and satisfying the relevant
regulatory requirements, including meeting the capital ratios required by the
Consent Agreement and the Written Agreement. At this time, the
Company has no other alternative to raise capital or to enter into another
me
r
ger agreement if the merger with
People
’
s United is not
consummated. In addition, the terms of the Merger Agreement prohibit
the Company and the Bank from taking certain actions to facilitate the
foregoing.
The unaudited consolidated financial
statements
have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business for the
foreseeable future.
If the People
’
s United merger is not consummated, the
Company may no
t be able to
raise any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company
’
s existing shareholders. In
addition, the Company may not be able to find another merger partner or
ac
q
uirer. In such circumstances,
a failure to raise such capital or to find another merger partner or acquirer
could result in further and more severe regulatory actions against the Company
and the Bank thereby giving rise to substantial doubt as to the Com
p
any
’
s ability to continue as a going
concern. These financial statements do not include any adjustments
that may result should the Company be unable to continue as a going
concern.
Note 2
–
Earnings Per Common
Share
The Company has stock compensation
aw
ards with non-forfeitable
dividend rights, which are considered participating securities. As
such, earnings per share is computed using the two-class method
.
Basic earnings per common share is
computed by dividing net income allocated to common stock by
the weighted average number of common
shar
es outstanding during
the period
which excludes
the participating securities. Diluted earnings per common share
includes the dilutive effect of additional potential issuance of common shares
from stock-based compe
nsation plans and warrants to purchase
common shares, but excludes awards considered participating
securities. Earnings and dividends per share are restated for all
stock splits and stock dividends through the date of issuance of the financial
statements
.
|
|
For
the
three
months
ended
June
30
,
|
|
|
For
the
six
months
ended
June
30
,
|
|
|
|
20
10
|
|
|
200
9
|
|
|
20
10
|
|
|
200
9
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(29,214
|
)
|
|
$
|
-
|
|
|
$
|
(42,983
|
)
|
|
$
|
-
|
|
Distributed earnings allocated to
common stock
|
|
|
-
|
|
|
$
|
471
|
|
|
|
-
|
|
|
$
|
941
|
|
Undistributed earnings allocated
to common stock
|
|
|
-
|
|
|
|
2,923
|
|
|
|
-
|
|
|
|
6,051
|
|
Net earnings allocated to common
stock
|
|
$
|
-
|
|
|
$
|
3,394
|
|
|
$
|
-
|
|
|
$
|
6,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding,
including shares considered participating
securities
|
|
|
14,967,508
|
|
|
|
13,216,764
|
|
|
|
14,943,988
|
|
|
|
12,530,304
|
|
Less: weighted average
participating securities
|
|
|
(113,170
|
)
|
|
|
(73,974
|
)
|
|
|
(100,258
|
)
|
|
|
(66,812
|
)
|
Weighted average
shares
|
|
|
14,854,338
|
|
|
|
13,142,790
|
|
|
|
14,843,730
|
|
|
|
12,463,492
|
|
Basic earnings (loss) per common
share
|
|
$
|
(1.97
|
)
|
|
$
|
0.26 0.31
|
|
|
$
|
(2.90
|
)
|
|
$
|
0.56 0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(29,214
|
)
|
|
$
|
-
|
|
|
$
|
(42,983
|
)
|
|
$
|
-
|
|
Net earnings allocated to common
stock
|
|
$
|
-
|
|
|
$
|
3,394
|
|
|
$
|
-
|
|
|
$
|
6,992
|
|
Weighted average common shares
outstanding for basic earnings per common share
|
|
|
14,854,338
|
|
|
|
13,142,790
|
|
|
|
14,843,730
|
|
|
|
12,463,492
|
|
Add: Dilutiv
e effect of warrants issued to
purchase common stock
|
|
|
-
|
|
|
|
268
|
|
|
|
-
|
|
|
|
134
|
|
Weighted average shares and
dilutive potential common shares
|
|
|
14,854,338
|
|
|
|
13,143,058
|
|
|
|
14,843,730
|
|
|
|
12,463,626
|
|
Diluted earnings
(loss)
per common
share
|
|
$
|
(1.97
|
)
|
|
$
|
0.26
|
|
|
$
|
(2.90
|
)
|
|
$
|
0.56
|
|
No dividends were paid during the six
months ended June 30, 2010. Dividends of $5 w
ere paid on unvested shares with
non-forfeitable d
ividend
rights during the six months ended June 30,
2009,
none of w
hich were
included in net income as compensation
expense as all awards
were
expected to vest.
Participating
securities totaling 113,170, representing shares of restricted common stock, and
475,000 warrants to purchase common stock were not included in the calculation
of diluted earnings per share for the three and six months ended June 30, 2010,
because they were not dilutive.
Note 3
–
Stock-Based
Compensation
The Board of Directors determines
restricted stock awarded under the 2007 Stock Compensation
Plan (“
Stock Compensation Plan”
).
C
ompensation expense is recognized over
the vesting period of the awards based on the fair value of the stock at issue
date. The fair value of the stock was determined using the closing
price at the date of issuance. Re
stricted
shares vest ratably
over five years.
The board of d
irector
s elected to issue 61,500 and
38,125
shares of non-vested
restricted stock under the Stock Compensation Plan for the
six months ended June 30,
20
10
and 200
9
, respectively.
A summary of ch
anges in the Company
’
s nonvested shares
for the six months ended June 30, 2010
follows:
|
|
Shares
|
|
|
Weighted
Average Grant
Date Share
Value
|
|
Nonvested at January 1,
20
10
|
|
|
51,670
|
|
|
$
|
17.51
|
|
Granted
|
|
|
61,500
|
|
|
|
4.75
|
|
Non
-
vested at
June 30
, 20
10
|
|
|
113,170
|
|
|
|
10.58
|
|
As of
June 30, 2010
, there was $
988
of total unrecognized compensation cost
related to nonvested shares granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 4
.5
years.
Note 4
–
Investment
Securities
The following table summarizes the
amortized cost
and fair
value of the available for sale securities and held
to
maturity investment secur
ities portfolio
s
at
June 30, 2010 and
December 31, 2009 and the corresponding
amounts of gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
5,000
|
|
|
$
|
320
|
|
|
$
|
-
|
|
|
$
|
5,320
|
|
Obligations
of state and political subdivisions
|
|
|
58,316
|
|
|
|
1,622
|
|
|
|
(5
|
)
|
|
|
59,933
|
|
Mortgage-backed
securities: residential
|
|
|
128,459
|
|
|
|
4,571
|
|
|
|
-
|
|
|
|
133,030
|
|
Collateralized
mortgage obligations
|
|
|
4,542
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
4,515
|
|
Other
|
|
|
9,758
|
|
|
|
-
|
|
|
|
(3,335
|
)
|
|
|
6,423
|
|
Total
available for sale
|
|
$
|
206,075
|
|
|
$
|
6,513
|
|
|
$
|
(3,367
|
)
|
|
$
|
209,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$
|
33
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
5,000
|
|
|
$
|
-
|
|
|
$
|
(34
|
)
|
|
$
|
4,966
|
|
Obligations
of state and political subdivisions
|
|
|
59,339
|
|
|
|
761
|
|
|
|
(114
|
)
|
|
|
59,986
|
|
Mortgage-backed
securities: residential
|
|
|
319,543
|
|
|
|
1,447
|
|
|
|
(212
|
)
|
|
|
320,778
|
|
Collateralized
mortgage obligations
|
|
|
4,545
|
|
|
|
8
|
|
|
|
-
|
|
|
|
4,553
|
|
Other
|
|
|
10,338
|
|
|
|
-
|
|
|
|
(3,347
|
)
|
|
|
6,991
|
|
Total
available for sale
|
|
$
|
398,765
|
|
|
$
|
2,216
|
|
|
$
|
(3,707
|
)
|
|
$
|
397,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$
|
66
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
67
|
|
The proceeds from sales and calls of
securities and the associated gains
and losses
for the three and six months ended June
30,
are listed
below:
|
|
For
the
three
months
ended
June
30
,
|
|
|
For
the
six
months
ended
June
30
,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Proceeds
|
|
$
|
965
|
|
|
$
|
11,176
|
|
|
$
|
162,788
|
|
|
$
|
46,904
|
|
Gross
gains
|
|
|
-
|
|
|
|
-
|
|
|
|
653
|
|
|
|
522
|
|
Gross
losses
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
|
|
-
|
|
The tax provision
related to these
re
alized gains and los
ses was $181 and $183 for the six months
ended June 30, 2010 and 2009
, respectively.
The amortized cost and fair value of the
investment securities portfolio are shown by expected maturity
in the following table
. Expected maturities may
differ from contr
actual
maturities if borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
|
|
June 30, 2010
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Available
for sale
|
|
|
|
|
|
|
Within
one year
|
|
$
|
453
|
|
|
$
|
453
|
|
One
to five years
|
|
|
10,782
|
|
|
|
11,102
|
|
Five
to ten years
|
|
|
28,334
|
|
|
|
29,338
|
|
Beyond
ten years
|
|
|
166,506
|
|
|
|
168,328
|
|
Total
|
|
$
|
206,075
|
|
|
$
|
209,221
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
33
|
|
|
$
|
34
|
|
Total
|
|
$
|
33
|
|
|
$
|
34
|
|
Securities pledged at
June 30, 2010,
had a carrying amount of $
132,165
and
were pledged to secure public
deposits
,
treasury tax and loan
deposits
and FHLB
borrowings
.
At June 30, 2010,
there were no holdings of securities of
any one issuer, other than the U.S. Government and its
entities and
agencies, in an amount greater than 10%
of shareholders
’
equity.
The following table summarizes the
investment securities wit
h
unrealized losses at
June
30, 2010 and
December 31
, 2009
aggregated by major security type and
length of time in a continuous unrealized loss position:
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$
|
1,439
|
|
|
$
|
(5
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,439
|
|
|
$
|
(5
|
)
|
Collateralized
mortgage obligations
|
|
|
4,515
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,515
|
|
|
|
(27
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
3,943
|
|
|
|
(3,335
|
)
|
|
|
3,943
|
|
|
|
(3,335
|
)
|
Total
|
|
$
|
5,954
|
|
|
$
|
(32
|
)
|
|
$
|
3,943
|
|
|
$
|
(3,335
|
)
|
|
$
|
9,897
|
|
|
$
|
(3,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities and agencies
|
|
$
|
4,966
|
|
|
$
|
(34
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,966
|
|
|
$
|
(34
|
)
|
Obligations
of state and political subdivisions
|
|
|
13,312
|
|
|
|
(114
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
13,312
|
|
|
|
(114
|
)
|
Mortgage-backed
securities
|
|
|
82,283
|
|
|
|
(
212
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
82,283
|
|
|
|
(212
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
4,511
|
|
|
|
(3,347
|
)
|
|
|
4,511
|
|
|
|
(3,347
|
)
|
Total
|
|
$
|
100,561
|
|
|
$
|
(360
|
)
|
|
$
|
4,511
|
|
|
$
|
(3,347
|
)
|
|
$
|
105,072
|
|
|
$
|
(3,707
|
)
|
Other-Than-Temporary-Impairment
In determining OTTI for debt securities,
management considers many factors, including: (1) the length of time and
the extent to which the fair value has been less than cost, (2
) the financial condition and
near-term prospects of the issuer, (3) whether the market decline was
affected by macroeconomic conditions, and (4) whether the Company has the
intent to sell the debt security or more likely than not will be required to
sell
the debt security before its anticipated
recovery. The assessment of whether an
OTTI
exists involves a high degree of
subjectivity and judgment and is based on the information available to
management at a point in time.
In order to determine OTTI for
pur
chased beneficial
interests that, on the purchase date, were rated below AA, the Company compares
the present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows. OTTI is
deemed to
h
ave occurred if there has been an
adverse change in the remaining expected future cash flows.
When OTTI occurs, for either debt
securities or purchased beneficial interests that, on the purchase date, were
rated bellow AA, the amount of the OTTI recognize
d in earnings depends on whether an
entity intends to sell the security or it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss. If an entity intends to sell
o
r it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss, the OTTI shall be recognized in earnings
in an amount
equal to the entire difference between
the investm
ent
’
s amortized cost basis and its fair
value at the balance sheet date. If an entity does not intend to sell
the security and it is not more likely than not that the entity will be required
to sell the security before recovery of its amortized cost basi
s
less any current-period loss, the OTTI
shall be separated into the amount representing the credit loss and the amount
related to all other factors. The amount of the total OTTI related to
the credit loss is determined based on the present value of cash
f
lows expected to be collected and is
recognized in earnings. The amount of the total OTTI related to other
factors is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the OTTI recognized in
earnin
g
s becomes the new amortized cost basis
of the investment.
At June 30
, 20
10
, the Compan
y
’
s securities portfolio totaled $209,254,
of which
$
9,897
was in an unrealized loss
position. The majority of unrealized losses are related to the
Company
’
s other secu
rities, as discussed
below:
Other
Securities
The Company
’
s unrealized losses on other securities
relate primarily to its investment in two pooled trust preferred securities and
one single issuer trust preferred security.
The decline in fair value is
pr
imarily attributable to
temporary illiquidity and the financial crisis affecting these markets and not
necessarily the expected cash flows of the individual securities.
Due to the illiquidity in the market,
it is unlikely that the Company would be able to
recover its investment in these
securities if the Company sold the securities at this time.
The following table presents detailed
information for each trust preferred security held by the Company at
June 30
, 20
10
.
Issuer
|
|
Single
Issuer
or
Pooled
|
|
Class
|
|
|
Book
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
Credit
Rating
|
|
Number
of Paying
Banks in
Issuance
|
|
|
Deferrals
and
Defaults as
% of
Collateral
|
|
|
Excess
Subordination
as a Percent of
Paying
Collateral
|
|
Fairfield
County Bank Trust Preferred
|
|
Single
|
|
-
|
|
|
$
|
5,000
|
|
|
$
|
(1,801
|
)
|
|
$
|
3,199
|
|
NA
|
|
1
|
|
|
None
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Funding III LTD Series 144A
|
|
Pooled
|
|
B-2
|
|
|
|
1,128
|
|
|
|
(837
|
)
|
|
|
291
|
|
Ca/C
|
|
23
|
|
|
|
34.64
|
%
|
|
|
(35.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Funding I
|
|
Pooled
|
|
B
|
|
|
|
1,150
|
|
|
|
(697
|
)
|
|
|
453
|
|
Caa3/C
|
|
12
|
|
|
|
37.36
|
%
|
|
|
(29.8
|
)%
|
Total
|
|
|
|
|
|
|
$
|
7,278
|
|
|
$
|
(3,335
|
)
|
|
$
|
3,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess subordination is the amount of
paying collateral above the amount of outstanding collateral underlying each
class of the security. The Excess Subordination as a Percent of
Paying Collateral, in the table detailing each trust preferr
ed security above, reflects the
difference between the paying collateral and the collateral underlying each
security in the pool divided by the paying collateral. A negative
number results when the paying collateral is less than the collateral
underlying
each class of the security. A
low or negative number decreases the likelihood of full repayment of principal
and interest according to original contractual
terms.
Our analysis of two of t
hese investments
includes $2,27
8
book value of pooled trust
prefer
red securities
(CDOs). The issuers in these securities are primarily
banks. The Company uses the OTTI evaluation model to compare the
present value of expected cash flows to the previous estimate to ensure there
are no adverse changes in cash flows duri
n
g the quarter. The OTTI model
considers the structure and term of the CDO and the financial condition of the
underlying issuers. Specifically, the model details interest rates,
principal balances of note classes and underlying issuers, the timing and
am
o
unt of interest and principal payments
of the underlying issuers, and the allocation of the payments to the note
classes. The current estimate of expected cash flows is based on the
recent trustee reports and any other relevant market information
includi
n
g announcements of interest payment
deferrals or defaults of underlying trust preferred
securities. Assumptions used in the model include expected future
default rates and prepayments. We assume no recoveries on defaults
and treat all interest payment d
e
ferrals as defaults
. Upon completion of the
June 30
, 2010 analysis, our model indicated
OTTI on Trust Preferred Funding III LTD Series 144A,
which experienced additional defaults or
deferrals during the period. This
security had OTTI losses recognized
in
earnings of
$
85 and $580 for the three
and six months ended June 30, 2010, respectively
. The two CDOs remained
classified as available for sale at
June 30
, 2010, and together, the two CDOs and
one single issuer trust preferred security accounted for all
of the unrealized losses in the
other
securities category
at June 30
,
2010.
The discount rates used to support the
realizable value in trust preferred securities is the actual index and margin on
each security. The discount rates used for the estimated
fair value of the two
CDOs and the one single issuer trust preferred security were
14% and 13%, respectively, at
June 30
, 20
10
. Management determined these
rates based on discussions with our investment bankers regarding newly issued
bank debt. Manage
ment also reviewed the current internal
risk ratings of the collateral underlying the
securities
.
Future deferrals and defaults
on the two CDOs
are estimated based on an
analysis of the collateral underlying the security. Particular
attention
is paid to
each bank
’
s nonperforming assets to total loans,
total risk based capital ratio and Texas ratio
(nonperforming assets plus restructured
loans/tangible capital plus the allowance for loan losses)
. These three ratios are
weighted to calculate a credit risk
rating (“
CRR”
) for each bank. The CRR,
based on a scale of 1 being the best and 5 being the worst, is used as the basis
for future default assumptions. Banks known to have deferred or
defaulted prior, or subsequent, to the reporting date and banks with
a
CRR of 4 or higher as of the reporting
date are considered to default immediately in our discou
nted cash flow pricing model
(“
m
odel”
). As of
June 30
, 20
10
other future default rates were
estimated at 50.00% if the CRR was 3.50 to 3.99, 25.00% if the CRR
was 3.00 to 3.49, 12.50% if the CRR was
2.50 to 2.99, 6.25% if the CRR was 2.00 to 2.49 and 3.00% if the CRR was 1.99 or
less. These weightings generate an overall estimate of future
defaults that are spread over the remaining maturity of the security
in
our Model.
Trust Preferred Funding I has
experienced $30,000 in defaults and $21,000 in deferrals, but did not have any
new defaults or deferrals in the first six months of 2010. Trust
Preferred Funding III LTD Series 144A has experienced $51,750 in de
faults and $48,000 in deferrals with
$20,000 of the deferrals announced in the first six months of 2010 and $27,500
of deferrals moving to defaults in the first six months of 2010. Our
Model as of June 30, 2010, estimated $
25
,
558
and $15,794
in future def
aults in Trust Preferred Funding III LTD
Series 144A and Trust Preferred Funding I, respectively.
Principal and interest payments on each
t
rust
preferred security
have been
made on a timely
basis.
The last
two interest payments on Trust Preferred Funding
I have produced a
shortfall.
Fairfield County Bank Trust Preferred is
performing. The Company monitors the regulatory filings of Fairfield
County Bank to assess their financial condition. Based on the
analysis for the first six months of 2010, there is
no assumption of a future
default. Our model, using the contractual coupon of the security with
no defaults, shows no credit related loss.
Information received after the balance
sheet date, but before the issuance of the financial statements is
inclu
ded in the cash flow
analysis during the reporting period.
The table below presents a roll forward
of the credit losses recognized in earnings from
December 3
1
, 2009
through
June 30
, 20
10
:
Beginning balance,
December 31
, 20
09
|
|
$
|
414
|
|
Additions/Subtractions:
|
|
|
|
|
Increases to the amount related to
the credit loss for which
OTTI
was previously
recognized
|
|
|
580
|
|
Ending balance, June
30
, 20
10
|
|
$
|
994
|
|
Note 5
–
Loans
Loans as of June 30, 2010
and December 31, 2009 consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Commercial
and industrial loans
|
|
$
|
43,667
|
|
|
$
|
48,625
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
Land
and construction
|
|
|
317,895
|
|
|
|
353,772
|
|
Commercial
|
|
|
937,012
|
|
|
|
997,097
|
|
Multifamily
|
|
|
471,084
|
|
|
|
478,840
|
|
Residential
|
|
|
210,041
|
|
|
|
214,548
|
|
Consumer
|
|
|
1,670
|
|
|
|
2,082
|
|
Less:
Net deferred loan fees
|
|
|
3,282
|
|
|
|
4,068
|
|
Total
loans
|
|
|
1,978,087
|
|
|
|
2,090,896
|
|
Allowance
for loan losses
|
|
|
57,999
|
|
|
|
38,483
|
|
Net
loans
|
|
$
|
1,920,088
|
|
|
$
|
2,052,413
|
|
Individually
impaired loans were as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Loans
with no allocated allowance for loan losses
|
|
$
|
102,153
|
|
|
$
|
133,155
|
|
Loans
with allocated allowance for loan losses
|
|
|
196,081
|
|
|
|
79,385
|
|
Total
|
|
$
|
298,234
|
|
|
$
|
212,540
|
|
|
|
|
|
|
|
|
|
|
Amount
of the allowance for loan losses allocated
|
|
$
|
30,555
|
|
|
$
|
21,630
|
|
Average
of individually impaired loans during the year
|
|
|
233,436
|
|
|
|
44,685
|
|
Interest
income recognized during impairment
|
|
|
788
|
|
|
|
495
|
|
Included
in impaired loans above are troubled debt restructurings of $53,124 and $42,633
at June 30, 2010 and December 31, 2009, respectively. The amount of
the allowance for loan losses allocated to trouble debt restructurings was
$6,079 and $2,571 at June 30, 2010 and December 31, 2009,
respectively.
At June
30, 2010 and December 31, 2009, $318 and $51, respectively, was committed to
customers whose loans are classified as a troubled debt
restructuring.
Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectability of principal or
interest. Any payments received on impaired loans are applied to the
recorded investment in the loan. No interest was earned for the six
months ended June 30, 2010 and for 2009 on the cash basis for impaired
loans.
Nonaccrual loans
, l
oans past due 90 days
and still accruing
and
troubled debt restructurings not
included in n
onaccrual
loans
and l
oans past due 90 days
and still accruing
were as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Nonaccrual
loans
|
|
$
|
227,502
|
|
|
$
|
130,172
|
|
L
oans past due 90 days
and still
accruing
|
|
|
-
|
|
|
|
-
|
|
Troubled debt restructurings not
included in
n
onaccrual loans
and l
oans past due 90 days
and still
accruing
|
|
|
24,292
|
|
|
|
26,937
|
|
Nonaccrual
loans and loans past due 90 days or more and still accruing include both smaller
balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.
Note
6 - Fair Value
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be
used to measure fair values:
Level 1
–
Quoted prices (unadjusted) for
identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2
–
Significant other observable inputs
other than Level
1 prices
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3
–
Significant unobservable inputs that
reflect
a
company
’
s own assumptions about the assumptions
that market participants would use in pricing an asset or
liability.
The Company used the following methods
and significant assumptions to estimate the fair value of the following assets
and liabilities:
Investment
Securities
: The
fair values for investment securities are determined by quoted market prices, if
available (Level 1). For securities where quoted prices are not
available, fair values are calculated based on market prices of similar
securities
(Level 2).
For securities where quoted prices or
market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level
3).
Discounted cash flows are calculated
using spread to swa
p and
LIBOR curves that are updated to incorporate loss severities, volatility, credit
spread and optionality. During times when trading is more liquid,
broker quotes are used (if available) to validate the model. Rating
agency and industry research rep
o
rts as well as defaults and deferrals on
individual securities are reviewed and incorporated into the
calculations.
Impaired
Loans
: The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent r
eal 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 di
f
ferences between the comparable sales
and income data available. Such adjustments are usually significant
and typically result in a Level 3 classification of the inputs for determining
fair value.
Other Real Estate
Owned
: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
are measured at the lower of carrying amount or fair value, less costs to
sell. Fair values are generally based on third party appraisals of
the property, resulting in a Level 3 classification. In cases where
the carrying amount exceeds the fair value, less costs to sell, an impairment
loss is recognized.
Loans Held For
Sale:
Loans held for sale are carried at the lower of cost or
fair value, as determined by outstanding commitments, from third party
investors.
Assets and liabilities measured at fair
value on a recurring basis, including financial assets and liabilities for which
the Company has elected the fair value option, are summarized
below:
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
June 30, 2010 Using
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant Other
Unobservable
Inputs
|
|
|
|
Carrying Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
5,320
|
|
|
$
|
-
|
|
|
$
|
5,320
|
|
|
$
|
-
|
|
Obligations
of state and political subdivisions
|
|
|
59,933
|
|
|
|
-
|
|
|
|
59,933
|
|
|
|
-
|
|
Mortgage-backed
securities: residential
|
|
|
133,030
|
|
|
|
-
|
|
|
|
133,030
|
|
|
|
-
|
|
Collateralized
mortgage obligations
|
|
|
4,515
|
|
|
|
-
|
|
|
|
4,515
|
|
|
|
-
|
|
Other
|
|
|
6,423
|
|
|
|
-
|
|
|
|
2,480
|
|
|
|
3,943
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31, 2009 Using
|
|
|
|
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Other
Unobservable
Inputs
|
|
|
|
Carrying Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
4,966
|
|
|
$
|
-
|
|
|
$
|
4,966
|
|
|
$
|
-
|
|
Obligations
of state and political subdivisions
|
|
|
59,986
|
|
|
|
-
|
|
|
|
59,986
|
|
|
|
-
|
|
Mortgage-backed
securities: residential
|
|
|
320,778
|
|
|
|
-
|
|
|
|
320,778
|
|
|
|
-
|
|
Collateralized
mortgage obligations
|
|
|
4,553
|
|
|
|
-
|
|
|
|
4,553
|
|
|
|
-
|
|
Other
|
|
|
6,991
|
|
|
|
-
|
|
|
|
2,480
|
|
|
|
4,511
|
|
The table below presents a
reconciliation of all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the period ended
June 30
, 20
10 and the year ended December
31
, 2009
:
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
Available for Sale Securities
|
|
Balance of recurring Level 3
assets at January 1, 20
10
|
|
$
|
4,511
|
|
Total gains or losses
(realized/unrealized):
|
|
|
|
|
Included in earnings
–
realized
|
|
|
|
|
Included in earnings
–
unrealized
|
|
|
(580
|
)
|
Included
in other comprehensive income
|
|
|
12
|
|
Purchases, sales, issuances and
settlements, net
|
|
|
|
|
Transfers in and/or out of Level
3
|
|
|
-
|
|
Balance of recu
rring Level 3 assets at June
30
, 20
10
|
|
$
|
3,943
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
Available for Sale Securities
|
|
Balance of recurring Level 3
assets at January 1, 200
9
|
|
$
|
8,743
|
|
Total gains or losses
(realized/unrealized):
|
|
|
|
|
Included in earnings
–
realized
|
|
|
(77
|
)
|
Included in earnings
–
unrealized
|
|
|
(414
|
)
|
Included
in other comprehensive income
|
|
|
(1,882
|
)
|
Purchases, sales, issuances and
settlements, net
|
|
|
(1,859
|
)
|
Transfers in and/or out of Level
3
|
|
|
-
|
|
Balance of recurring Level 3
assets at December 31, 200
9
|
|
$
|
4,511
|
|
Assets measured at fair value on a
non-recurring basis are summarized below:
|
|
|
|
|
Fair Value Measurements at
June 30, 2010 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Carrying Value
|
|
|
(Level 1)
|
|
|
( Level 2)
|
|
|
( Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
196,081
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
165,526
|
|
Other
real estate owned, net
|
|
|
1,130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,130
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2009 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Carrying Value
|
|
|
(Level 1)
|
|
|
( Level 2)
|
|
|
( Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
79,385
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
57,755
|
|
Other
real estate owned, net
|
|
|
2,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,013
|
|
Loans
held for sale
|
|
|
16,450
|
|
|
|
-
|
|
|
|
16,450
|
|
|
|
-
|
|
Impaired loans
, which are measured for impairment
using the fair value of the collateral for
collateral dependent loans,
had
a carrying amount of $
196,081
,
with a valuation allowance of
$
30,555
at
June 30
, 20
10
, resulting in a
n additional provision
for loan losses of $
8,925
for the
six month ended June 30
, 20
10.
At December 31,
200
9
,
impaired loans had a carrying
amount of $79,385
, with a
valuation allowance of $
21,630
, resulting in an additional provision
for loan losses of $
21,305
for t
he year ending December 31,
2009
.
Other
real estate owned, which is measured at the lower of carrying or fair value less
costs to sell, had a net carrying amount of $1,130, which is made up of the
outstanding balance of $8,102, net of a valuation allowance of $6,972 at June
30, 2010.
Proceeds from
sales
of
other real estate owned
were $861
for
the
six
months e
nded
June 30
, 20
10. Gross
losses
of
$22 were
realized on sales during the first
six
months of
20
10
.
At December
31, 2009, other real estate owned
had a net carrying amount of $2,013,
which was made up of the outstanding balance of $8,985, net of a valuation
allowance of $6,972. A write-down of $6,872 was recorded for the year
ending December 31, 2009. There were no sales of other real estate
owned during 2009.
There
were no loans held for sale, which are carried at the lower of cost or fair
value, at June 30, 2010. Charge offs of $1,864 were recognized during
the first six months of 2010 on the loans held for sale before they were
classified as held for sale.
Proceeds from sales
of loans
held for sale were $19,400
for the
six
months ended
June
30
,
20
1
0. Losses on
sales totaled $250 during the first six months of 2010.
Loans
held for sale at December 31, 2009 totaled $16,450. Charge offs of
$9,883 were recognized in 2009 on the loans held for sale at December 31, 2009
before they were classified as held for sale. There were no sales of
loans held for sale in 2009.
The carrying amounts and estimated fair
values of financial
instruments
at
June 30, 2010 and
December 31, 2009
were
as follows:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
17,283
|
|
|
$
|
17,283
|
|
|
$
|
18,745
|
|
|
$
|
18,745
|
|
Interest
earning deposits with banks
|
|
|
19,844
|
|
|
|
19,844
|
|
|
|
3,409
|
|
|
|
3,409
|
|
Term
placements
|
|
|
507
|
|
|
|
507
|
|
|
|
507
|
|
|
|
507
|
|
Securities
available for sale
|
|
|
209,221
|
|
|
|
209,221
|
|
|
|
397,274
|
|
|
|
397,274
|
|
Securities
held to maturity
|
|
|
33
|
|
|
|
33
|
|
|
|
66
|
|
|
|
67
|
|
Restricted
stock
|
|
|
18,092
|
|
|
NA
|
|
|
|
18,353
|
|
|
NA
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
16,450
|
|
|
|
16,450
|
|
Loans,
net
|
|
|
1,920,088
|
|
|
|
1,712,051
|
|
|
|
2,090,896
|
|
|
|
1,975,640
|
|
Other
real estate owned
|
|
|
1,130
|
|
|
|
1,130
|
|
|
|
2,013
|
|
|
|
2,013
|
|
Accrued
interest receivable
|
|
|
8,440
|
|
|
|
8,440
|
|
|
|
10,152
|
|
|
|
10,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,823,798
|
|
|
|
1,833,218
|
|
|
|
2,075,028
|
|
|
|
2,086,245
|
|
FHLB
advances and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
313,480
|
|
|
|
331,745
|
|
|
|
352,820
|
|
|
|
303,354
|
|
Subordinated
debt
|
|
|
56,433
|
|
|
|
20,965
|
|
|
|
56,351
|
|
|
|
28,480
|
|
Accrued
interest payable
|
|
|
4,628
|
|
|
|
4,628
|
|
|
|
4,597
|
|
|
|
4,597
|
|
The methods and assumptions, not
previously presented, used to estimat
e fair value are described as
follows:
Carrying amount is the estimated fair
value for cash and cash equivalents, interest bearing deposits, accrued interest
receivable and payable, demand deposits, short term debt, and variable rate
loans or deposits th
at
re-price frequently and fully. The methods for determining the fair
values for securities were described previously. For fixed rate loans
or deposits and for variable rate loans or deposits with infrequent re-pricing
or re-pricing limits, fair value
i
s based on discounted cash flows using
current market rates applied to the estimated life and credit
risk. Fair value of debt is based on current rates for similar
financing. It was not practicable to determine the fair value of FHLB
stock due to restri
c
tions placed on its
transferability. The fair value of off balance sheet items is not
consider
ed
material.
Note
7 – Other Borrowings and Subordinated Debentures
A
d
vances from the FH
L
B were as follows:
June
30, 2010:
|
|
|
|
Overnight
line of credit at 0.
34
%
|
|
$
|
2,000
|
|
Maturities
from January 2011
through September 2018,
fixed
rate at rates
from
2.18% to 3.15%,
averaging
2
.
68
%
|
|
|
310,000
|
|
|
|
|
|
|
December
31, 2009:
|
|
|
|
|
Overnight
line of credit at
0.34%
|
|
$
|
36,340
|
|
Maturities
from
January 2010 through September
2
018, fixed rate at
rates from 2.18% to 3.61%, averaging 2.70%
|
|
|
315,000
|
|
Each term advance is payable at its
maturity date with a prepayment penalty if paid before the maturity
date.
All advances are periodically callable.
The advances were coll
ateralized by $
701,626
and $884,328 of first mortgage loans at
June 30, 2010 and December 31, 2009, respectively. The collateral at
June 30, 2010 has been delivered to the FHLB and at December 31, 2009 was under
a blanket lien arrangement. Based on this
collateral and the Company
’
s holdings of FHLB stock, the Company is
eligible to borrow up to an
additional $120,625 at
June 30, 2010.
In 2003,
a trust formed by the Company issued $11,000 of floating rate trust preferred
securities as part of a pooled offering of such securities due October 8,
2033. The securities bear interest at 3 month London Interbank
Offered Rate (“LIBOR”) plus 2.99% with a rate of 3.29% as of June 30,
2010. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The debentures and related
debt issuance costs represent the sole assets of the trust. The
Company may redeem the subordinated debentures, in whole or in part, on any
interest payment date.
In 2006,
an additional trust formed by the Company issued $7,000 of floating rate trust
preferred securities as part of a pooled offering of such securities due
September 30, 2036. These securities bear interest at 6.53% for the
initial five-year term and thereafter at 3 month LIBOR plus
1.43%. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The debentures and related
debt issuance costs represent the sole assets of the trust. The
Company may not redeem any part of the subordinated debentures prior to the
initial call date of September 30, 2011.
In 2008,
a third trust formed by the Company issued $20,000 of floating rate trust
preferred securities due September 1, 2038. The securities bear interest at 3
month LIBOR plus 3.75% with a rate of 4.29% as of June 30, 2010. The
Company issued subordinated debentures to the trust in exchange for the proceeds
of the offering. The debentures and related debt issuance costs
represent the sole assets of the trust. The Company may redeem the
subordinated debentures, in whole or in part, at a premium declining ratably to
par on September 1, 2013.
The
Company is not considered the primary beneficiary of these trusts, which are
variable interest entities; therefore the trusts are not consolidated in the
Company’s financial statements, but rather the subordinated debentures are shown
as a liability. The Company has the option to defer interest payments
on the subordinated debentures from time to time for a period not to exceed five
consecutive years.
The
subordinated debentures may be included in Tier 1 capital (with certain
limitations applicable) under current regulatory guidelines and
interpretations.
On May 3, 2010, the Company
announced that it has decided to defer interest on these subordinate
d debentures. During the
interest deferral period, the Company continues to accrue interest
expense.
On July
27, 2009 and June 29, 2009, the Bank issued $14,000 and $5,000, respectively, of
fixed rate subordinated notes due July 1, 2019; the notes bear interest at
11%. The Bank, subject to obtaining prior approval of the
FDIC and the Banking Department
,
may redeem the subordinated notes, in whole or in part, on any interest payment
date beginning on July 1, 2014.
The subordinated debentures may be
inclu
ded in Tier 2 capital
(with certain limitations applicable) under current regulatory guidelines and
interpretations.
Note
8 – Post Retirement Benefits
The Company sponsors a postretirement
medical and life insurance plan for a closed group of prior emplo
yees. Pre-Medicare eligible
retirees pay an amount similar to active employees. Post-Medicare
eligible retirees pay the entire amount over the Bank
’
s obligation, which is frozen at $864
per year per covered person.
Since the plans hold no assets,
the Bank did not contribute to the plans in 2009 and does not expect to
contribute to the plans during 2010, other than to fund the payments for the
benefits.
A
nontax-qualified executive and director incentive retirement plan covers certain
directors and executive officers. Under the plan, the Company can
award up to 10% of the executive officer’s salary for the prior fiscal year and
up to 25% of a director’s fees for the prior fiscal year. The Company
pays each participant the amount awarded plus interest either over 15 years or
in a lump sum at normal retirement age. The Bank’s expense for these
plans was $58 and $115 for the three and six months ended June 30, 2010,
respectively. The Bank’s expense for these plans was $94 and $190 for
the three and six months ended June 30, 2009, respectively.
A
nontax-qualified deferred compensation plan covers all directors and executive
officers. Under the plan, directors may elect to defer a portion of
their fees and executive officers may elect to defer a portion of their
compensation. Upon retirement or termination of service, the Company
pays each participant the amount of their deferrals plus interest over 5 years,
10 years or in a lump sum payment. A liability is accrued for the
obligation under this plan. The Bank’s expense for these plans was $8
and $16 for the three and six months ended June 30, 2010,
respectively. The Bank’s expense for these plans was $7 and $15 for
the three and six months ended June 30, 2009, respectively.
Certain
members of management are covered by group term replacement life
insurance. The benefit provides postretirement life insurance up to a
maximum of two and one half times final annual base salary. The
Bank’s expense for these plans was $35 and $46 for the three and six months
ended June 30, 2010, respectively. The Bank’s expense for these plans
was $10 and $21 for the three and six months ended June 30, 2009,
respectively.
The Chief
Executive Officer (“CEO”) has a Supplemental Executive Retirement Agreement
(“SERA”). Under the plan, the CEO receives a lifetime benefit at
retirement, with a guaranteed 15 years, based on seventy percent of his final
three-year average base salary reduced by various offsets including employer
contributions under the 401(k) Plan, the Executive Incentive Retirement Plan, as
well as 50% of his Social Security benefit. The Bank’s expense for
this plan was $351 and $703 for the three and six months ended June 30, 2010,
respectively. The Bank’s expense for this plan was $193 and $355 for
the three and six months ended June 30, 2009, respectively.
The
following table sets forth the components of net periodic benefit cost and other
amounts recognized in Other Comprehensive Income:
Three months ended June 30,
|
|
SERA Benefits
|
|
|
Postretirement Medical and Life
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$
|
179
|
|
|
$
|
133
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
cost
|
|
|
61
|
|
|
|
37
|
|
|
|
4
|
|
|
|
3
|
|
Amortization
of net (gain)/loss
|
|
|
111
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
Net
periodic benefit cost
|
|
$
|
351
|
|
|
$
|
185
|
|
|
$
|
11
|
|
|
$
|
8
|
|
Six months ended June 30,
|
|
SERA Benefits
|
|
|
Postretirement Medical and Life
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$
|
358
|
|
|
$
|
265
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
cost
|
|
|
122
|
|
|
|
75
|
|
|
|
8
|
|
|
|
6
|
|
Amortization
of net (gain)/loss
|
|
|
223
|
|
|
|
31
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
16
|
|
Net
periodic benefit cost
|
|
$
|
703
|
|
|
$
|
371
|
|
|
$
|
22
|
|
|
$
|
16
|
|
Note
9 – Income Taxes
The
Company had income tax expense for the three months ended June 30, 2010 of
$6,165. Due to an operating loss before taxes for the quarter of
$23,049, there was a gross income tax benefit of $9,535 offset by a valuation
allowance on the Company’s deferred tax asset of $15,700. For the six
months ended June 30, 2010, the Company had income tax expense of
$3,209. Due to an operating loss before taxes of $39,774, there was a
gross income tax benefit was $16,591 offset by a valuation allowance on the
Company’s deferred tax asset of $19,800. An assessment of the
Company’s deferred tax asset before valuation allowance at June 30, 2010 of
$27,970, led to the decision to record the additional valuation
allowance. Based on the Company’s operating losses over the past
three quarters, the ability to realize the full benefits of the deferred tax
asset has become further impaired. In determining the need for and
the amount of a valuation allowance Management considered the Company’s ability
to realize carry back benefits of the current losses as well as the ability to
realize future tax benefits based on tax planning strategies that are feasible
and could be implemented. The Company evaluates the need for a
valuation allowance for its deferred tax asset on a quarterly
basis.
Note
10 - Loan Commitments and Other Related Activities
Some financial instruments, such
as
loan commitments, credit
lines, letters of credit and overdraft protection, are issued to meet customer
financing needs. These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are
met
,
and usually have expiration
dates. Commitments may expire without being used. Off
balance sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same
credit policies are used to m
a
ke such commitments as are used for
loans, including obtaining collateral at exercise of the
commitment.
The contractual amounts of financial
instruments with off balance sheet risk
w
ere as follows:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
Commitments to make
loans
|
|
$
|
100
|
|
|
$
|
4,550
|
|
|
$
|
2,742
|
|
|
$
|
16,971
|
|
Unused lines of
credit
|
|
|
1,108
|
|
|
|
74,901
|
|
|
|
1,108
|
|
|
|
107,456
|
|
Standby letters of
credit
|
|
|
-
|
|
|
|
19,295
|
|
|
|
-
|
|
|
|
18,281
|
|
Note
11 – Regulatory Capital Matters
We are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimal capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that,
if undertaken, could
have a direct material effect on our financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, we must meet specific capital
guidelines that involve
quanti
tative measures of
our
assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. Our capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weighting and
other f
a
ctors.
Quantitative measures established by
regulations to ensure capital adequacy require us to maintain minimum amounts
and ratios (set forth below in the table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as def
ined in the regulations), and of Tier 1
capital (as defined in the regulations) to average assets (as defined in the
regulations). Pursuant to
the
Consent Agreement
,
the Bank must maintain Tier 1 Capital
at least equal to 7% of total assets, Tier 1 Risk-B
ased Capital at least equal to 9% of
Total Risk-Weighted Assets and Total Risk-Based Capital at least equal to 11% of
Total Risk-Weighted Assets no later than June 30, 2010.
The Company
’
s and the Bank
’
s actual capital amounts and ratios as
of
June 30, 201
0 and
December 31, 2009 are in the following
table.
T
he Bank is categorized as
adequately capitalized
for regulatory capital
purposes.
|
|
Actual
|
|
|
Required For Capital
Adequacy Purposes
|
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
June
30
,
20
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
169,584
|
|
|
|
9.40
|
%
|
|
$
|
144,308
|
|
|
|
8.00
|
%
|
|
$
|
NA
|
|
|
|
NA
|
%
|
Bank
|
|
|
167,803
|
|
|
|
9.31
|
|
|
|
144,165
|
|
|
|
8.00
|
|
|
|
180,206
|
|
|
|
10.00
|
|
Tier
1 capital to risk weighted a
ssets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
120,112
|
|
|
|
6.66
|
|
|
|
72,154
|
|
|
|
4.00
|
|
|
NA
|
|
|
NA
|
|
Bank
|
|
|
117,768
|
|
|
|
6.54
|
|
|
|
72,083
|
|
|
|
4.00
|
|
|
|
108,124
|
|
|
|
6.00
|
|
Tier
1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
120,112
|
|
|
|
5.06
|
|
|
|
94,861
|
|
|
|
4.00
|
|
|
NA
|
|
|
NA
|
|
Bank
|
|
|
117,768
|
|
|
|
4.97
|
|
|
|
94,794
|
|
|
|
4.00
|
|
|
|
118,493
|
|
|
|
5.00
|
|
|
|
Actual
|
|
|
Required For Capital
Adequacy Purposes
|
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
214,555
|
|
|
|
10.52
|
%
|
|
$
|
163,188
|
|
|
|
8.00
|
%
|
|
$
|
NA
|
|
|
NA
|
%
|
Bank
|
|
|
211,718
|
|
|
|
10.37
|
|
|
|
162,977
|
|
|
|
8.00
|
|
|
|
203,721
|
|
|
|
10.00
|
|
Tier 1 capital to risk weighted
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
171,540
|
|
|
|
8.41
|
|
|
|
81,594
|
|
|
|
4.00
|
|
|
NA
|
|
|
NA
|
|
Bank
|
|
|
168,196
|
|
|
|
8.26
|
|
|
|
81,488
|
|
|
|
4.00
|
|
|
|
122,233
|
|
|
|
6.00
|
|
Tier 1 capital to average
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
171,540
|
|
|
|
6.39
|
|
|
|
107,347
|
|
|
|
4.00
|
|
|
NA
|
|
|
NA
|
|
Bank
|
|
|
168,196
|
|
|
|
6.28
|
|
|
|
107,086
|
|
|
|
4.00
|
|
|
|
133,857
|
|
|
|
5.00
|
|
Based on the Bank’s June 30,
2010 total risk weighted assets of $1,802,063 and total month end assets used
for leverage of $2,300,993, the Bank would have needed total capital of $198,227
and Tier 1 capital $162,186 to meet the capital requirements of the Consent
Agreement.
Attempts to meet the capital
requireme
nts of the Consent
Agreement
so far this year
include:
|
·
|
Shrinking the balance
sheet
|
|
·
|
Shifting assets from higher to
lower risk weighting
categories
|
|
·
|
Selling one or more packages of
nonperforming loans
|
|
·
|
Selling one or more packages of
performing loan
s
|
|
·
|
A combination of the foregoing
strategies
|
|
·
|
A sale or merger of the
Bank
|
Since the Bank was unable to meet the
required capital ratios at June 30, 2010, the Consent Agreement requires
immediate notification to the FDIC and Banking De
partment and provides a 60 day period to
either meet the ratios or to
submit a written plan describing the
primary means and timing by which the Bank shall meet or exceed the minimum
requirements, as well as a contingency plan for the sale or merger of
the
Bank in the event the
primary sources of capital are not available. The Bank has notified
the FDIC and Banking Department of the Merger Agreement.
Banking regulators solely determine the
Bank
’
s progress toward compliance with
provisions of the Consent A
greement. Accordingly, it is
possible banking regulators in the future could impose further and more
stringent conditions or take other actions whose impact could be
material.
Item
2. - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
(Dollar
amounts in thousands except share data)
About
Forward-Looking Statements
This
report may contain statements relating to the future results of the Company
(including certain projections and business trends) that are considered
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995 (the “PSLRA”). In addition, certain statements may
be contained in the Company’s future filings with the SEC, in press releases,
and in oral and written statements made by or with the approval of the Company
that are not statements of historical fact and constitute forward-looking
statements within the meaning of the PSLRA. Such forward-looking
statements, in addition to historical information, which involve risk and
uncertainties, are based on the beliefs, assumptions and expectations of
management of the Company. Words such as “expects,” “believes,”
“should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,”
“outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and
variations of such similar expressions are intended to identify such
forward-looking statements. Examples of forward-looking statements
include, but are not limited to, possible or assumed estimates with respect to
the financial condition, expected or anticipated revenue, and results of
operations and business of the Company, including earnings growth; revenue
growth in retail banking, lending and other areas; origination volume in the
Company’s consumer, commercial and other lending businesses; current and future
capital management programs; future loan loss provision; noninterest income
levels, including fees from banking services as well as product sales; tangible
capital generation; market share; expense levels; and other business operations
and strategies. For this presentation, the Company claims the protection of the
safe harbor for forward-looking statements contained in the PSLRA.
Factors
that could cause future results to vary from current management expectations
include, but are not limited to: changes in economic conditions including an
economic recession that could affect the value of real estate collateral and the
ability for borrowers to repay their loans; the ability of the Company to
successfully execute its plans and strategies; legislative and regulatory
changes, including increases in Federal Deposit Insurance Corporation (“FDIC”)
insurance rates; monetary and fiscal policies of the federal government; changes
in tax policies, rates and regulations of federal, state and local tax
authorities; changes in interest rates; deposit flows; the cost of funds; demand
for loan products and other financial services; competition; changes in the
quality and composition of the Bank’s loan and investment portfolios; changes in
estimates of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements; changes in management’s
business strategies; acquisitions and integration of acquired businesses;
changes in accounting principles, policies or guidelines; changes in real estate
values; changes in the level of nonperforming assets and charge offs and other
factors discussed elsewhere in this report, factors set forth in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009 under “Item 1A.,
Risk Factors,” factors set forth in this report under “Item 1A., Risk Factors”
and in other reports filed by the Company with the SEC. The forward-looking
statements are made as of the date of this report, and the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
This discussion and analysis should be
read in co
njunction with
the Company
’
s consolidated financial statements,
notes thereto and other financial information appearing elsewhere in this
report.
Dollar
amounts in thousands
except share
data
.
Proposed
Plan of Merger with People’s United Financial, Inc.
On July
15, 2010, the Company and People’s United Financial, Inc. (“People’s United”) of
Bridgeport, Connecticut announced a definitive agreement under which People’s
United will acquire the Company in a cash and stock transaction valued at
approximately $60 million, or $4.00 per share.
Under the
agreement, People’s United will acquire the Company for approximately $30
million in cash and 2.14 million shares of People’s United common stock, valued
in the aggregate at approximately $30 million based on the 5-day average closing
price of People’s United common stock for the period ended July 14,
2010.
The
definitive agreement has been unanimously approved by the respective boards of
directors of People’s United and the Company. The Company will merge into
People’s United, and the Bank, will simultaneously merge into People’s United
Bank, People’s United’s banking subsidiary. The value of the consideration
a shareholder of the Company will receive for each share of Company common stock
is equivalent in the aggregate to 0.1430 shares of People’s United common stock
and $2.00 in cash. Shareholders of the Company as of the record date for
the special shareholders meeting to vote on the transaction will be
entitled to elect for each share held whether to receive shares of People’s
United common stock or cash, subject to reallocation if either cash or stock is
oversubscribed.
The
actual value of the merger consideration to be paid upon closing to each
shareholder of the Company will depend on the average People’s United stock
price shortly prior to completion of the merger, and the exact amount of cash
payable per common share of the Company and the exact number of shares to be
issued per common share of the Company will be determined at that time based on
the average People’s United stock price, so that each share of the Company
receives consideration with approximately the same value. Receipt of
People’s United common stock is expected to be tax-free to shareholders of the
Company.
The
transaction is subject to approval by bank regulatory authorities and by the
shareholders of the Company. People’s United shareholder approval is not
required. The transaction is expected to close in the fourth quarter
2010.
The
merger is the result of an assessment by the Company and its board of directors
of the Company’s strategic alternatives in light of the financial challenges
facing the Company. The Merger Agreement satisfies the requirement of the
Consent Agreement to sell or merge the Company and the Bank in the event that
the required capital ratios are not satisfied by June 30, 2010. If the
merger is not consummated, the Company would be required to find an alternative
approach to overcoming its challenges and satisfying the relevant regulatory
requirements, including meeting the capital ratios required by the Consent
Agreement and the Written Agreement. At this time, the Company has no
other alternative to raise capital or to enter into another merger agreement if
the merger with People’s is not consummated. In addition, the terms of the
Merger Agreement prohibit the Company and the Bank from taking certain actions
to facilitate the foregoing.
If the
People’s merger is not consummated, the Company may not be able to raise any
additional capital and, if it could raise any additional capital, such capital
is likely to be extremely dilutive to the Company’s existing shareholders.
In addition, the Company may not be able to find another merger partner or
acquirer. In such circumstances, a failure to raise such capital or to
find another merger partner or acquirer could result in further and more severe
regulatory actions against the Company and the Bank thereby giving rise to
substantial doubt as to the Company
’
s ability to
continue as a going concern.
Overview
The
Company recorded a net loss for the second quarter of 2010 of $29,214, or $1.97
per fully diluted share. The net loss for the first six months of 2010 was
$42,983, or $2.90 per fully diluted share. Net charge offs and additional
specific allocations added to the allowance for loan losses on impaired loans,
especially in the Bank’s land and construction portfolio, led to a provisions
for loan losses of $27,500 and $52,500 for the three and six month periods ended
June 30, 2010. After net charge offs of $20,722 and $32,975 during the
quarter and six months ended June 30, 2010, the allowance for loan losses at
June 30, 2010 totaled $57,999, or 2.93%, of total loans. Nonperforming
loans at June 30, 2010 were $227,502, or 11.50% of total loans. At
December 31, 2009, nonperforming loans were $130,172, or 6.23%, of total
loans.
One new
branch was opened during the second quarter and three new branch projects remain
under development with expected completion dates between the end of 2010 and the
first quarter of 2011. These locations have FDIC and Banking Department
approval to establish a branch and the Bank is obligated under lease
agreements. The board of directors and management believe the expanding
branch network continues to add to the franchise value of the
Company.
On June
22, 2010, the Company entered into a Written Agreement with the FRB. The
Written Agreement is in addition to the Consent Agreement and similarly requires
that the Company obtain the approval of the FRB prior to paying a
dividend.
During
the first six months of 2010, the Bank made the following progress in complying
with the Consent Agreement provisions:
|
i.
|
The
Bank submitted to the FDIC and Banking Department a revised lending
policy to provide additional guidance and control over the lending
functions.
|
|
ii.
|
The
Bank submitted to the FDIC and Banking Department a revised independent
loan review policy and program to ensure that it is consistent with the
Bank’s loan review policy and that is sufficiently comprehensive to assess
risks in the Bank’s lending and minimize credit
losses.
|
|
iii.
|
The
Bank has eliminated from its books all assets or portions of assets
classified as “Loss.”
|
|
iv.
|
The
Bank completed and submitted to the FDIC and Banking Department a plan for
systematically reducing and monitoring its CRE loan concentration of
credit to an amount, which is commensurate with the Bank’s business
strategy, management expertise, size and
location.
|
|
v.
|
The
Bank completed and submitted to the FDIC and Banking Department a plan to
reduce assets classified “Doubtful” and
“Substandard.”
|
|
vi.
|
The
Bank completed and submitted to the FDIC and Banking Department a profit
plan and comprehensive budget for all categories of income and expense for
the calendar year 2010.
|
|
vii.
|
The
Bank provided updated plans and forecasts based on the known information
at the time to the FDIC and Banking Department regarding our capital
requirements.
|
The Bank
was not successful meeting the capital ratios in the Consent Agreement of Tier 1
Capital at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least
equal to 9% of Total Risk-Weighted Assets and Total Risk-Based Capital at least
equal to 11% of Total Risk-Weighted Assets by June 30, 2010. Since the
Bank was unable to meet the required capital ratios, the Consent Agreement
requires immediate notification to the FDIC and Banking Department and provides
a 60 day period to either meet the ratios or to submit a written plan describing
the primary means and timing by which the Bank shall meet or exceed the minimum
requirements, as well as a contingency plan for the sale or merger of the Bank
in the event the primary sources of capital are not available. The Bank
has notified the FDIC and Banking Department of the Merger
Agreement.
Cash
dividends will remain suspended and the Company will continue to defer interest
payments on its trust preferred securities. Dividends cannot be paid to
common shareholders until all deferred interest payments on the trust preferred
securities are brought current.
The
Merger Agreement with People’s, described above, imposes significant
restrictions on the Company’s operations until the consummation of the
merger.
On April
13, 2010, the FDIC approved an interim rule (finalized in June 2010) extending
the Transaction Account Guarantee Program (“TAG Program”), which offers deposit
insurance on the entire amount of all noninterest bearing checking accounts
through December 31, 2010. The Bank has decided to continue its
participation in the TAG Program through this latest extension
period.
Net
Income (Loss)
The net
loss for the quarter ended June 30, 2010 totaled $29,214, or $1.97 per diluted
share, while net income for the quarter ending June 30, 2009 totaled $3,413, or
$0.26 per diluted share. Significant trends for the second quarter of 2010
include: (i) a $25,700, or 1,427.77%, increase in the provision for loan losses;
(ii) a $1,623, or 9.95%, increase in net interest income; (iii) a $418, or
21.48%, increase in total noninterest income; (iv) a $4,627, or 41.26%, increase
in total noninterest expense and (v) a $4,341, or 237.99%, increase in the
provision for income taxes.
The net
loss for the six months ended June 30, 2010 totaled $42,983, or $2.90 per
diluted share, while net income for the same period in 2009 totaled $7,029, or
$0.56 per diluted share. Significant trends for the first six months of
2010 include: (i) a $49,500, or 1,650.00%, increase in the provision for loan
losses; (ii) a $7,504, or 25.21%, increase in net interest income; (iii) a $76,
or 1.61%, increase in total noninterest income; (iv) a $8,742, or 42.43%,
increase in total noninterest expense and (v) a $650, or 16.84%, decrease in the
provision for income taxes.
Net
Interest Income
Net
interest income, the primary contributor to earnings, represents the difference
between income on interest earning assets and expense on interest bearing
liabilities. Net interest income depends upon the volume of interest earning
assets and interest bearing liabilities and the interest rates earned or paid on
them.
The
following table sets forth certain information relating to the Company's average
consolidated statements of financial condition and its consolidated statements
of income for the periods indicated and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Interest income on
investment securities is shown on a tax equivalent (“TE”) basis. Interest
income on nontaxable investment securities depicted below have been grossed up
by .54 to estimate the TE yield. Yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities, respectively,
for the periods shown. Average balances are derived from daily average
balances and include nonaccrual loans, if any. The yields and costs
include fees, which are considered adjustments to yields.
|
|
For the three months ended
June 30, 2010
|
|
|
For the three months ended
June 30, 2009
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
149,781
|
|
|
$
|
1,409
|
|
|
|
3.76
|
%
|
|
$
|
123,207
|
|
|
$
|
843
|
|
|
|
2.74
|
%
|
Nontaxable
|
|
|
60,051
|
|
|
|
769
|
|
|
|
5.12
|
|
|
|
16,598
|
|
|
|
226
|
|
|
|
5.45
|
|
Total
investment securities
|
|
|
209,832
|
|
|
|
2,178
|
|
|
|
4.15
|
|
|
|
139,805
|
|
|
|
1,069
|
|
|
|
3.06
|
|
Loans
|
|
|
2,020,825
|
|
|
|
26,213
|
|
|
|
5.19
|
|
|
|
1,902,130
|
|
|
|
28,043
|
|
|
|
5.90
|
|
Interest
earning deposits with banks
|
|
|
28,498
|
|
|
|
22
|
|
|
|
0.31
|
|
|
|
64,002
|
|
|
|
40
|
|
|
|
0.25
|
|
Other
interest earning assets
|
|
|
18,386
|
|
|
|
190
|
|
|
|
4.13
|
|
|
|
32,468
|
|
|
|
226
|
|
|
|
2.78
|
|
Total
interest earning assets
|
|
|
2,277,541
|
|
|
|
28,603
|
|
|
|
5.02
|
|
|
|
2,138,405
|
|
|
|
29,378
|
|
|
|
5.50
|
|
Noninterest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
20,479
|
|
|
|
|
|
|
|
|
|
|
|
21,509
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
77,371
|
|
|
|
|
|
|
|
|
|
|
|
78,341
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,375,391
|
|
|
|
|
|
|
|
|
|
|
$
|
2,238,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW and money market deposits
|
|
$
|
893,302
|
|
|
$
|
2,148
|
|
|
|
0.96
|
%
|
|
$
|
794,931
|
|
|
$
|
3,520
|
|
|
|
1.78
|
%
|
Time
deposits of $100,000 or more
|
|
|
428,043
|
|
|
|
2,652
|
|
|
|
2.49
|
|
|
|
405,834
|
|
|
|
3,612
|
|
|
|
3.57
|
|
Other
time deposits
|
|
|
386,238
|
|
|
|
2,468
|
|
|
|
2.56
|
|
|
|
397,073
|
|
|
|
3,121
|
|
|
|
3.15
|
|
Other
borrowings
|
|
|
320,375
|
|
|
|
2,118
|
|
|
|
2.64
|
|
|
|
327,222
|
|
|
|
2,262
|
|
|
|
2.77
|
|
Subordinated
debt
|
|
|
56,476
|
|
|
|
1,018
|
|
|
|
7.21
|
|
|
|
38,939
|
|
|
|
477
|
|
|
|
4.90
|
|
Total
interest bearing liabilities
|
|
|
2,084,434
|
|
|
|
10,404
|
|
|
|
2.00
|
|
|
|
1,963,999
|
|
|
|
12,992
|
|
|
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
148,820
|
|
|
|
|
|
|
|
|
|
|
|
121,449
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
13,325
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,249,884
|
|
|
|
|
|
|
|
|
|
|
|
2,098,773
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
125,507
|
|
|
|
|
|
|
|
|
|
|
|
139,482
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders'
equity
|
|
$
|
2,375,391
|
|
|
|
|
|
|
|
|
|
|
$
|
2,238,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (TE)/interest rate spread
|
|
|
|
|
|
$
|
18,199
|
|
|
|
3.02
|
%
|
|
|
|
|
|
$
|
16,386
|
|
|
|
2.85
|
%
|
Net
interest earning assets/net interest margin
|
|
$
|
193,107
|
|
|
|
|
|
|
|
3.19
|
%
|
|
$
|
174,406
|
|
|
|
|
|
|
|
3.06
|
%
|
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
17,929
|
|
|
|
|
|
|
|
|
|
|
$
|
16,306
|
|
|
|
|
|
|
|
For the six months ended
June 30, 2010
|
|
|
For the six months ended
June 30, 2009
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
175,377
|
|
|
$
|
3,426
|
|
|
|
3.91
|
%
|
|
$
|
96,895
|
|
|
$
|
1,706
|
|
|
|
3.52
|
%
|
Nontaxable
|
|
|
60,231
|
|
|
|
1,542
|
|
|
|
5.12
|
|
|
|
10,662
|
|
|
|
300
|
|
|
|
5.63
|
|
Total
investment securities
|
|
|
235,608
|
|
|
|
4,968
|
|
|
|
4.22
|
|
|
|
107,557
|
|
|
|
2,006
|
|
|
|
3.73
|
|
Loans
|
|
|
2,058,095
|
|
|
|
54,030
|
|
|
|
5.25
|
|
|
|
1,820,570
|
|
|
|
53,542
|
|
|
|
5.89
|
|
Interest
earning deposits with banks
|
|
|
31,269
|
|
|
|
40
|
|
|
|
0.26
|
|
|
|
89,036
|
|
|
|
127
|
|
|
|
0.29
|
|
Other
interest earning assets
|
|
|
18,247
|
|
|
|
434
|
|
|
|
4.76
|
|
|
|
24,278
|
|
|
|
307
|
|
|
|
2.53
|
|
Total
interest earning assets
|
|
|
2,343,219
|
|
|
|
59,472
|
|
|
|
5.08
|
|
|
|
2,041,441
|
|
|
|
55,982
|
|
|
|
5.49
|
|
Noninterest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
20,962
|
|
|
|
|
|
|
|
|
|
|
|
20,582
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
76,572
|
|
|
|
|
|
|
|
|
|
|
|
76,581
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,440,753
|
|
|
|
|
|
|
|
|
|
|
$
|
2,138,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW and money market deposits
|
|
$
|
928,810
|
|
|
$
|
4,663
|
|
|
|
1.01
|
%
|
|
$
|
708,502
|
|
|
$
|
6,649
|
|
|
|
1.89
|
%
|
Time
deposits of $100,000 or more
|
|
|
452,029
|
|
|
|
5,538
|
|
|
|
2.47
|
|
|
|
399,069
|
|
|
|
6,711
|
|
|
|
3.39
|
|
Other
time deposits
|
|
|
375,202
|
|
|
|
5,181
|
|
|
|
2.78
|
|
|
|
406,008
|
|
|
|
7,268
|
|
|
|
3.61
|
|
Other
borrowings
|
|
|
333,775
|
|
|
|
4,250
|
|
|
|
2.55
|
|
|
|
326,853
|
|
|
|
4,486
|
|
|
|
2.77
|
|
Subordinated
debt
|
|
|
56,435
|
|
|
|
2,026
|
|
|
|
7.18
|
|
|
|
38,888
|
|
|
|
993
|
|
|
|
5.11
|
|
Total
interest bearing liabilities
|
|
|
2,146,251
|
|
|
|
21,658
|
|
|
|
2.03
|
|
|
|
1,879,320
|
|
|
|
26,107
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
149,368
|
|
|
|
|
|
|
|
|
|
|
|
115,567
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
11,553
|
|
|
|
|
|
|
|
|
|
|
|
13,304
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,307,172
|
|
|
|
|
|
|
|
|
|
|
|
2,008,191
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
133,581
|
|
|
|
|
|
|
|
|
|
|
|
130,413
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders'
equity
|
|
$
|
2,440,753
|
|
|
|
|
|
|
|
|
|
|
$
|
2,138,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (TE)/interest rate spread
|
|
|
|
|
|
$
|
37,814
|
|
|
|
3.05
|
%
|
|
|
|
|
|
$
|
29,875
|
|
|
|
2.69
|
%
|
Net
interest earning assets/net interest margin
|
|
$
|
196,968
|
|
|
|
|
|
|
|
3.22
|
%
|
|
$
|
162,121
|
|
|
|
|
|
|
|
2.92
|
%
|
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
37,273
|
|
|
|
|
|
|
|
|
|
|
$
|
29,769
|
|
|
|
|
|
The
Bank’s net interest margin increased 13 basis points during the quarter ended
June 30, 2010 compared to the same period last year. Loan yields decreased
71 basis points, primarily the result of nonperforming loans, causing a decrease
in the average yield on total interest earning assets of 48 basis points, or
8.73%. The lower yields on interest earning assets were more than offset
by lower interest expense on interest bearing liabilities. The average
rate on interest bearing liabilities decreased 65 basis points in the first
quarter of 2010 from the first quarter of 2009, a 24.53% drop. Net
interest income increased $1,813, or 11.06%, to 17,929 in the second quarter of
2010 compared to $16,306 in second quarter of 2009.
The
Bank’s net interest margin increased 30 basis points during the six months ended
June 30, 2010 compared to the same period last year. Asset yields were
lower by 41 basis points resulting largely from loans yields being down 64 basis
due to the continued high level of nonperforming loans. All deposit
categories benefited from a lower cost of funds due to the continued low rate
environment. The average rate on interest bearing liabilities decreased 77
basis points in the first six months of 2010 from the first six months of 2009,
a 27.50% drop. Net interest income increased $7,504, or 25.21%, in the
six-month period of 2010 compared to the same period of 2009.
Asset
Quality
The table
below sets forth the amounts and categories of our nonperforming assets,
including troubled debt restructurings (See Note 5), at the dates
indicated.
|
|
At June 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
Land
and construction
|
|
$
|
101,755
|
|
|
$
|
52,590
|
|
Commercial
|
|
|
80,717
|
|
|
|
57,026
|
|
Multifamily
|
|
|
29,192
|
|
|
|
7,870
|
|
Residential
|
|
|
13,370
|
|
|
|
9,575
|
|
Commercial
and industrial loans
|
|
|
2,460
|
|
|
|
3,097
|
|
All
other loans (including overdrafts)
|
|
|
8
|
|
|
|
14
|
|
Total
nonaccrual loans
|
|
$
|
227,502
|
|
|
$
|
130,172
|
|
|
|
|
|
|
|
|
|
|
Loans
past due 90 days and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans
|
|
$
|
227,502
|
|
|
$
|
130,172
|
|
|
|
|
|
|
|
|
|
|
Other
nonperforming assets:
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
$
|
1,130
|
|
|
$
|
2,013
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
228,632
|
|
|
$
|
132,185
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans to total loans
|
|
|
11.50
|
%
|
|
|
6.23
|
%
|
Total
nonperforming assets to total assets
|
|
|
9.91
|
%
|
|
|
5.02
|
%
|
Allowance
for loan losses to total nonperforming loans
|
|
|
25.49
|
%
|
|
|
29.56
|
%
|
The
following table sets forth certain types of loans which management believes to
be considered higher risk loans because of the lack of principal amortization, a
collateral position subordinate to another creditor, or increased defaults due
to slowdowns in the construction and real estate sales sector during the
economic recession. The table quantifies their respective percentage of
the Company’s total loans, the total allowance for loan losses balance
specifically allocated to these loans and the level of nonperforming loans
within these categories.
June 30, 2010
|
|
Amount
|
|
|
Percentage of
Loan
Portfolio
|
|
|
Total Specific
Allocation
|
|
|
Nonperforming
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
only land and construction loans
|
|
$
|
331,565
|
|
|
|
16.76
|
%
|
|
$
|
11,345
|
|
|
$
|
97,786
|
|
Interest
only commercial mortgages
|
|
|
38,065
|
|
|
|
1.93
|
|
|
|
1,463
|
|
|
|
4,230
|
|
Interest
only residential mortgages and home equity lines
|
|
|
28,672
|
|
|
|
1.45
|
|
|
|
-
|
|
|
|
1,145
|
|
Interest
only commercial loans
|
|
|
27,773
|
|
|
|
1.40
|
|
|
|
-
|
|
|
|
2,046
|
|
Interest
only consumer loans
|
|
|
551
|
|
|
|
0.03
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
426,626
|
|
|
|
21.57
|
%
|
|
$
|
12,808
|
|
|
$
|
105,207
|
|
The
following table describes the activity in the allowance for loan losses account
followed by a key loan ratio for the periods ended:
|
|
For the six months
ended
June 30, 2010
|
|
|
For the six months
ended
June 30, 2009
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at beginning of period
|
|
$
|
38,483
|
|
|
$
|
11,303
|
|
Charge
offs:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,086
|
|
|
|
240
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
Land
and construction
|
|
|
20,361
|
|
|
|
-
|
|
Commercial
|
|
|
8,118
|
|
|
|
-
|
|
Multifamily
|
|
|
2,484
|
|
|
|
-
|
|
Consumer
|
|
|
56
|
|
|
|
92
|
|
Total
|
|
|
33,105
|
|
|
|
332
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
121
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
Land
and construction
|
|
|
5
|
|
|
|
-
|
|
Commercial
|
|
|
36
|
|
|
|
-
|
|
Multifamily
|
|
|
52
|
|
|
|
-
|
|
Consumer
|
|
|
26
|
|
|
|
17
|
|
Total
|
|
|
121
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Net
charge offs
|
|
|
(32,984
|
)
|
|
|
(194
|
)
|
Provision
for loan losses
|
|
|
52,500
|
|
|
|
3,000
|
|
Allowance
for loan losses at end of period
|
|
$
|
57,999
|
|
|
$
|
14,109
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge offs during period to average loans outstanding
(annualized)
|
|
|
3.20
|
%
|
|
|
0.02
|
%
|
Allocation
of Allowance for Loan Losses
The
following table sets forth the allocation of the Company’s allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the date indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses, which may occur within the loan category since the total loan
loss allowance is a valuation allocation applicable to the entire loan
portfolio.
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Amount
|
|
|
Percentage of
Loans to
Total
Loans
|
|
|
Amount
|
|
|
Percentage of
Loans to
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,429
|
|
|
|
2.2
|
%
|
|
$
|
1,883
|
|
|
|
3.1
|
%
|
Real
estate
|
|
|
52,006
|
|
|
|
97.7
|
|
|
|
35,802
|
|
|
|
96.8
|
|
Consumer
and other
|
|
|
142
|
|
|
|
0.1
|
|
|
|
138
|
|
|
|
0.1
|
|
Unallocated
|
|
|
4,422
|
|
|
|
0.0
|
|
|
|
660
|
|
|
|
-
|
|
Total
|
|
$
|
57,999
|
|
|
|
100.0
|
%
|
|
$
|
38,483
|
|
|
|
100.0
|
%
|
The
Company made a $52,500 provision for loan losses for the six-month period ended
June 30, 2010. The Company received a number of updated appraisals on
impaired loans during the first six month of 2010 that demonstrated a continued
trend of declining values from the original appraisals. These new
appraisals were largely responsible for the increase in specific allocations on
impaired loans of $8,924. Net loan charge offs totaled $32,984 during the
first six months of 2010, a significant increase from $194 during the same
period last year. The general allocation portion of the allowance for loan
losses has been adjusted to account for the higher historical charge offs.
For example, the general allocation for commercial mortgages has increased to
102 basis points at June 30, 2010 from 52 basis points at December 31, 2009 and
the general allocation on multifamily mortgages has increased to 105 basis
points from 40 basis points over the same period. The general allocation
on the loan and construction portfolio increased to 432 basis points at June 30,
2010 from 350 basis points at December 31, 2009.
Nonperforming
loans totaled $227,502, or 11.50%, of total loans as of June 30, 2010, as
compared to $130,172, or 6.23%, as of December 31, 2009. Nonperforming
loans include $28,832 of restructured loans that are in nonaccrual status.
In addition, delinquent loans increased as loans 30-89 days past due totaled
$48,042, or 2.43%, of total loans at June 30, 2010 compared to $20,756, or .99%,
of total loans at December 31, 2009.
The ratio
of the allowance for loan losses to total nonperforming loans as of June 30,
2010 and December 31, 2009 was 25.49% and 29.56%, respectively. The ratio
of the allowance for loan losses to total loans increased to 2.93% at June 30,
2010 from 1.84% at December 31, 2009. Annualized net charge offs for the
first six months of 2010 totaled 3.20% of average total loans. Net charge
offs for 2009 were 1.22% of average total loans.
Noninterest
Income
Noninterest
income increased $418, or 21.48%, and $76, or 1.61%, for the three and six
months ended June 30, 2010, respectively, over the comparable periods in
2009. Total noninterest income was reduced $85 due to the net loss on OTTI
recognized in earnings during the quarter and $580 for the first six months of
2010. Gross revenues from the Company’s insurance subsidiary decreased
$76, or 7.97%, and $158, or 8.43%, for first three and six months of 2010,
respectively, as premiums and corresponding commissions are down as a result of
the soft insurance market. Service charge income increased 15.79% for the
quarter and 12.70% for the first six months of 2010, due to an increased volume
of transaction accounts resulting from branch expansion efforts during
2009. Income from trust and investment management services decreased $42,
or 21.65%, for the quarter to date and increased $22, or 6.73% for the year to
date, due to efforts to move deposit relationships off the balance sheet and
into alternative investment products to meet the requirements of the Consent
Agreement, offset by efforts to reduce assets under management as the Bank moves
toward offering limited trust services. Other noninterest income increased
$243, or 62.95%, and $354, or 39.25%, for the three and six month periods ended
June 30, 2010, respectively, mainly the result of ATM and debit card transaction
fees and loan fees generated from renewals.
Noninterest
Expense
Noninterest
expense increased $4,627, or 41.26%, and $8,742, or 42.43%, for the three and
six months ended June 30, 2010, respectively, as compared to the same periods in
2009. The Company’s Federal deposit insurance decreased $194, or 10.80%,
during the second quarter of 2010, as the higher risk based insurance premiums
the Bank paid in the second quarter of 2010 were less than the regular premiums
and special assessment expensed in the second quarter of 2009. Year to
date, FDIC insurance premiums have increased $914, or 38.94%. Occupancy
and equipment expense increased $924, or 33.24%, and $2,347, or 43.80%, for the
quarter and year to date, consistent with the 50% increase in branch locations
during 2009. Salary and employee benefits increased $78, or 1.49%, and
$513, or 5.11%, for the three and six months ended June 30, 2010, respectively,
mainly the result of the new branch locations offset by no accruals for
incentive compensation due to net losses. Other noninterest expenses
increased $3,848, or 294.41%, and $5,027, or 188.28%, due to costs attributed to
the impaired loan portfolio such as legal fees, collection expenses, real estate
taxes and insurance for properties in foreclosure. Other added costs in
other noninterest expenses include expenses attributed to meeting the terms of
the Consent Agreement and legal fees associated with defending various
lawsuits.
Income
Tax Expense/Benefit
The
Company had income tax expense for the three months ended June 30, 2010 of
$6,165. Due to an operating loss before taxes for the quarter of $23,049,
there was a gross income tax benefit of $9,535 offset by a valuation allowance
on the Company’s deferred tax asset of $15,700. For the six months ended
June 30, 2010, the Company had income tax expense of $3,209. Due to an
operating loss before taxes of $39,774, there was a gross income tax benefit was
$16,591 offset by a valuation allowance on the Company’s deferred tax asset of
$19,800. An assessment of the Company’s deferred tax asset before
valuation allowance at June 30, 2010 of $27,970, led to the decision to record
the additional valuation allowance. Based on the Company’s operating
losses over the past three quarters, the ability to realize the full benefits of
the deferred tax asset has become further impaired. In determining the
need for and the amount of a valuation allowance Management considered the
Company’s ability to realize carry back benefits of the current losses as well
as the ability to realize future tax benefits based on tax planning strategies
that are feasible and could be implemented. The Company evaluates the need
for a valuation allowance for its deferred tax asset on a quarterly
basis.
Financial
Condition
Total
assets were $2,307,172 at June 30, 2010, a decrease of $327,758, or 12.44%, from
the previous year-end. This decrease in assets was driven predominantly by
a decrease in loans, including loans held for sale, of $129,259, or 6.13%, and
investments of $188,086, or 47.34%. The shrinking of the balance sheet was
in reaction to the no growth provision and capital requirements of the Consent
Agreement. Deposits have decreased by $251,230, or 12.11%, mainly through
pricing to retain multiple service customers and let go single service CD
customers.
The
decrease in loans during the first six months of 2010 included the sale, or pay
off, of $81,803 of problem real estate loans. In the course of these
resolutions, the Bank recovered $63,999 of principal and charged off $17,804,
representing a loss rate of approximately 21.76%. These resolutions,
however, were offset by the movement of some loans previously identified at
December 31, 2009 as impaired loans into the nonperforming loan category,
as well as some new impaired loans in 2010.
Loans
The
Company’s loan portfolio consists mainly of real estate loans secured by
commercial and residential properties located primarily within the Bank’s market
area of Long Island, the five boroughs of New York City and the greater
metropolitan area. Most classifications of loans had decreases from the
prior year-end. Land and construction loans decreased by $35,877, or
11.29%, as the Bank continued to look to reduce its exposure in this loan
category. Commercial real estate loans declined by $60,085, or 6.03%, and
combined with the decrease on land and construction loans represents the bulk of
the Company’s progress in reducing its CRE loan exposure as per the terms of the
Consent Agreement.
With
97.71% of the Bank’s loan portfolio secured by real estate, the portfolio is
subject to additional risk of significant additional losses due to the downturn
in the real estate market. The effects of the economic recession,
especially commercial real estate difficulties, took, and will continue to take,
a significant toll on our portfolio. The land and construction portfolio,
in particular speculative construction, was impacted to the greatest degree
resulting in charge offs well above historical rates.
The
following table sets forth the major classifications of loans:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Real
estate:
|
|
|
|
|
|
|
Land
and construction
|
|
$
|
317,895
|
|
|
$
|
353,772
|
|
Commercial
|
|
|
937,012
|
|
|
|
997,097
|
|
Multifamily
|
|
|
471,084
|
|
|
|
478,840
|
|
Residential
|
|
|
210,041
|
|
|
|
214,548
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
Commercial
and industrial loans
|
|
|
43,667
|
|
|
|
48,625
|
|
Loans
to individuals for household, family and other personal
expenditures
|
|
|
1,252
|
|
|
|
1,740
|
|
All
other loans (including overdrafts)
|
|
|
418
|
|
|
|
342
|
|
Less:
Net deferred loan fees
|
|
|
3,282
|
|
|
|
4,068
|
|
Total
loans
|
|
$
|
1,978,087
|
|
|
$
|
2,090,896
|
|
Nonaccrual,
Past Due and Restructured Loans
The
following table sets forth the Bank's nonaccrual, contractually past due and
restructured loans:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
227,502
|
|
|
$
|
130,172
|
|
Trouble
Debt Restructured loans
|
|
|
53,124
|
|
|
|
47,633
|
|
The
amount of gross interest income that would have been recorded in 2010 on
nonaccrual and restructured loans if the loans had been current in accordance
with their original terms was $8,730. The amount of interest income that
was recorded in 2010 on nonaccrual and restructured loans was
$2,595.
A loan is
moved to nonaccrual status at 90 days past due unless the loan is both well
secured and in the process of collection. All interest accrued but not
received for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on a cash basis,
until qualifying for return to accrual status. Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Impaired
loans of $298,234 less nonaccrual loans of 227,502, represents $70,732 of
impaired loans that are still performing, which management believes it is
probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In addition to loans identified
as impaired that are still performing, there is a total of $103,864 of loans
that are not considered impaired, where management has serious doubts as to the
ability of the borrowers to comply with the present loan repayment terms.
Potential problem loans are the sum of the $70,732 and $103,864 above, or
$174,596.
Securities
Securities
totaled $209,254 at June 30, 2010, down 47.34% from $397,340 at December 31,
2009. Sales and principal payments of government sponsored entity and
agency mortgage-backed securities used to offset the decrease in deposits caused
the reduction.
The
following schedule presents the estimated fair value for securities available
for sale and the amortized cost for securities held to maturity as detailed in
the Company's balance sheets as of June 30, 2010 and December 31,
2009.
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Available
for sale
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
5,320
|
|
|
$
|
4,966
|
|
Obligations
of state and political subdivisions
|
|
|
59,933
|
|
|
|
59,986
|
|
Mortgage-backed
securities: residential
|
|
|
133,030
|
|
|
|
320,778
|
|
Collateralized
mortgage obligations
|
|
|
4,515
|
|
|
|
4,553
|
|
Other
securities
|
|
|
6,423
|
|
|
|
6,991
|
|
Total
available for sale
|
|
$
|
209,221
|
|
|
$
|
397,274
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$
|
33
|
|
|
$
|
66
|
|
The
following table presents the amortized costs and estimated fair values of
securities by contractual maturity at June 30, 2010:
|
|
Within One Year
|
|
|
After One But
Within Five Years
|
|
|
After Five But
Within Ten Years
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Yield
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Yield
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Yield
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Yield
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities and agencies
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
5,000
|
|
|
$
|
5,320
|
|
|
|
4.00
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
5,000
|
|
|
$
|
5,320
|
|
Obligations
of state and political subdivisions
|
|
|
453
|
|
|
|
452
|
|
|
|
3.60
|
|
|
|
10,782
|
|
|
|
11,102
|
|
|
|
3.45
|
|
|
|
21,855
|
|
|
|
22,538
|
|
|
|
3.46
|
|
|
|
25,226
|
|
|
|
25,841
|
|
|
|
4.00
|
|
|
|
58,316
|
|
|
|
59,933
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128,459
|
|
|
|
133,030
|
|
|
|
5.23
|
|
|
|
128,459
|
|
|
|
133,030
|
|
Collateralized
mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,542
|
|
|
|
4,515
|
|
|
|
4.80
|
|
|
|
4,542
|
|
|
|
4,515
|
|
Other
securities
|
|
|
7,278
|
|
|
|
3,943
|
|
|
|
4.44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,480
|
|
|
|
1,480
|
|
|
|
3.24
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
3.73
|
|
|
|
9,758
|
|
|
|
6,423
|
|
Total
available for sale
|
|
$
|
7,731
|
|
|
$
|
4,395
|
|
|
|
3.73
|
%
|
|
$
|
10782
|
|
|
$
|
11,102
|
|
|
|
3.45
|
%
|
|
$
|
28,335
|
|
|
$
|
29,338
|
|
|
|
3.55
|
%
|
|
$
|
159,227
|
|
|
$
|
164,386
|
|
|
|
5.17
|
%
|
|
$
|
206,075
|
|
|
$
|
209,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state
and political subdivisions
|
|
$
|
33
|
|
|
$
|
34
|
|
|
|
4.34
|
%
|
|
$
|
00
|
|
|
$
|
00
|
|
|
|
0.00
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
33
|
|
|
$
|
34
|
|
Deposits
& Other Borrowings
Total
deposits decreased $251,230, or 12.11%, for the period ended June 30, 2010 from
December 31, 2009. The largest segment of the portfolio was savings, NOW
and money market deposits, which decreased $130,621, or 13.07%, in the first six
months of 2010. Time deposits decreased $123,249, or 13.34%.
Strategies implemented to attempt to meet the terms of the Consent Agreement led
to the shrinkage in total deposits.
At June
30, 2010, the remaining maturities of the Bank's time deposits in amounts of
$100,000 or more were as follows:
3
months or less
|
|
$
|
162,379
|
|
Over
3 through 6 months
|
|
|
177,154
|
|
Over
6 through 12 months
|
|
|
80,642
|
|
Over
12 months
|
|
|
19,208
|
|
Total
|
|
$
|
439,383
|
|
Other
borrowings decreased to $313,480 at June 30, 2010 from $352,820 at December 31,
2009. Included in other borrowings are $1,480 of secured borrowings that
are a financial arrangement with the Senior Housing Crime Prevention
program that are secured by U.S. government agency bonds. At
maturity, the Company has the option to repay the secured borrowings
simultaneous with the release of the collateral or to renew the
borrowings.
The
following table sets forth the Bank's borrowed funds:,
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
FHLBNY
OLOC:
|
|
|
|
|
|
|
Maximum
month end balance during the period
|
|
$
|
14,800
|
|
|
$
|
36,340
|
|
Average
balance during the period
|
|
|
5,048
|
|
|
|
1,801
|
|
Weighted
average interest rate during the period
|
|
|
0.46
|
%
|
|
|
0.38
|
%
|
Weighted
average interest rate at period end
|
|
|
0.34
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Term
advances from FHLBNY:
|
|
|
|
|
|
|
|
|
Maximum
month end balance during the period
|
|
$
|
310,000
|
|
|
$
|
325,000
|
|
Average
balance during the period
|
|
|
313,846
|
|
|
|
324,247
|
|
Weighted
average interest rate during the period
|
|
|
2.68
|
%
|
|
|
2.77
|
%
|
Weighted
average interest rate at period end
|
|
|
2.68
|
|
|
|
2.70
|
|
|
|
|
|
|
|
|
|
|
Senior
Housing Crime Prevention:
|
|
|
|
|
|
|
|
|
Maximum
month end balance during the period
|
|
$
|
1,480
|
|
|
$
|
1,480
|
|
Average
balance during the period
|
|
|
1,480
|
|
|
|
1,480
|
|
Weighted
average interest rate during the period
|
|
|
1.79
|
%
|
|
|
1.79
|
%
|
Weighted
average interest rate at period end
|
|
|
1.79
|
|
|
|
1.79
|
|
Liquidity
Liquidity
provides the source of funds for anticipated deposit outflow and loan
growth. The Bank’s primary sources of liquidity include deposits,
repayments of loan principal, maturities and sales of investment securities,
principal reductions on mortgage-backed securities, “unpledged” securities,
deposits with banks, and borrowing potential from correspondent banks. The
primary factors affecting these sources of liquidity are their immediate
availability if necessary and current market rates of interest, which can cause
fluctuations in levels of deposits and prepayments on loans and
securities. Management believes that the Bank’s liquidity level is
sufficient to meet funding needs while under the terms of the Consent
Agreement.
The Bank
has the ability, as a member of the FHLB system, to borrow against residential
and commercial mortgages owned by the Bank and pledged to FHLB. As a
result of entering into the Consent Agreement, the FHLB has required the Bank to
physically deliver the pledged loan collateral during 2010. At December
31, 2009, the collateral pledged to the FHLB was under a blanket lien
arrangement and delivered electronically. At June 30, 2010, the unused
available credit totaled $120,625, which represents a decrease of $364,604 from
the December 31, 2009 amount of $485,229.
The Bank has the
ability to deliver additional collateral should the need arise. As of June
30, 2010, the Bank had $2,000 of collateralized overnight borrowings, which was
down from $36,340 at December 31, 2009. The Bank had $310,000 and $315,000
in collateralized term advances outstanding with the FHLB as of June 30, 2010
and December 31, 2009, respectively. At June 30, 2010, the Company has
$37,127 in cash and cash equivalents, a 67.59% increase from the December level
of $22,154, as additional interest earning deposits are being maintained by the
Bank at the Federal Reserve Bank of New York for increased liquidity while under
the Consent Agreement.
The
Company’s principal source of liquidity is dividends from the Bank. Cash
available to service Company trust preferred debt obligations, to pay expenses
and for distribution of dividends to shareholders is primarily derived from
dividends paid by the Bank to the Company. Under the Consent Agreement,
the Bank’s payment of dividends requires prior approval of the FDIC and Banking
Department. Under the Written Agreement, the Bank’s payment of dividends
requires prior approval of the FRB. Such prior approval of the FDIC
and Banking Department and FRB is unlikely to be received. As of June 30, 2010,
the Company had $634 in cash and cash equivalents. The Company presently
plans to use the cash and cash equivalents to pay its expenses. Interest
payments on trust preferred securities were made during the first quarter of
2010, but the Company deferred interest payments on its trust preferred
securities during the second quarter of 2010 to preserve cash for operating
expenses due to the dividend restrictions. In the event the Company
subsequently needs additional funds and the FRB, FDIC and Banking Department are
unwilling to approve a dividend from the Bank, the Company will need to raise
additional capital or borrow funds to meet liquidity needs.
Capital
Resources
Total
stockholders’ equity was $95,645 at June 30, 2010, a decrease of $40,110, or
29.55%, from December 31, 2009, primarily due the net loss of
$42,983.
Initial
efforts to meet the capital requirements of the Consent Agreement focused upon
shrinking the balance sheet, selling one or more packages of nonperforming
loans, selling one or more packages of performing loans, raising capital, or
some ‘hybrid’ combination of the foregoing strategies. The success in
shrinking the balance sheet and selling loans to meet the capital requirements
has been more than offset by the loss for the first six months resulting largely
from the $52,500 provision for loan losses and a valuation allowance of $19,800
against the Company’s deferred tax asset. As a result, efforts were
focused on assessing the Company’s strategic initiatives, which resulted in the
Company entering into the Merger Agreement with People’s United Financial, Inc.
on July 15, 2010.
The
Company had returns on average equity of (64.36%) and 10.78%, and returns on
average assets of (3.52%) and 0.66% for the six months ended June 30, 2010 and
2009, respectively. The equity to assets ratio was 4.15% and 5.15% at June
30, 2010 and December 31, 2009, respectively. No dividends were paid for
the six months ended June 30, 2010. The Company paid dividends of $946 for
the six months ended June 30, 2009.
Recent
Regulatory and Accounting Developments
Adoption
of New Accounting Guidance
In
January 2010, the Financial Accounting Standards Board (“FASB”) amended existing
guidance to improve disclosure requirements related to fair value measurements.
New disclosures are required for significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the transfers. In addition,
the FASB clarified guidance related to disclosures for each class of assets and
liabilities as well as disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. The impact of adoption on
January 1, 2010 was not material as it required only disclosures, which are
included in the Fair Value footnote.
In June
2009, the FASB amended existing guidance to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This amended guidance addresses (1) practices
that are not consistent with the intent and key requirements of the original
guidance and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. The impact
of adoption on January 1, 2010 was not material.
In June
2009, the FASB amended guidance for consolidation of variable interest entities
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity. The new approach focuses on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. Additional disclosures about an enterprise’s involvement in
variable interest entities are also required. The impact of adoption on January
1, 2010 was not material.
In
December 2007, the FASB enhanced existing guidance for the use of the
acquisition method of accounting (formerly the purchase method) for all business
combinations, for an acquirer to be identified for each business combination and
for intangible assets to be identified and recognized separately from
goodwill. An entity in a business combination is required to recognize the
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. Additionally, there were changes in requirements
for recognizing assets acquired and liabilities assumed arising from
contingencies and recognizing and measuring contingent consideration.
Disclosure requirements for business combinations were also enhanced. The
impact of adoption on January 1, 2009 was not material.
In April
2009, the FASB issued amended clarifying guidance to address application issues
raised by preparers, auditors and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The impact of adoption on January 1, 2009 was not
material.
In
January 2010, the FASB issued amended clarifying guidance addressing
implementation issues related to the changes in ownership provisions. The impact
of adoption on January 1, 2010 was not material.
Newly
Issued But Not Yet Effective Accounting Guidance
In
January 2010, the FASB amended existing guidance related to fair value
measurements requiring new disclosures for activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should
present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number).
These disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The impact of
adoption is expected to be immaterial.
Recent
Legislative Developments
On July
21, 2010, President Obama signed into law the sweeping financial regulatory
reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection
Act” that implements far-reaching changes to the regulation of the financial
services industry, including provisions that, among other things
will:
|
·
|
Centralize
responsibility for consumer financial protection by creating a new agency
responsible for implementing, examining and enforcing compliance with
federal consumer financial laws.
|
|
·
|
Apply
the same leverage and risk-based capital requirements that apply to
insured depository institutions to bank holding
companies.
|
|
·
|
Require
the FDIC to seek to make its capital requirements for banks such as the
Bank of Smithtown countercyclical so that the amount of capital required
to be maintained increases in times of economic expansion and decreases in
times of economic contraction.
|
|
·
|
Change
the assessment base for federal deposit insurance from the amount of
insured deposits to consolidated assets less tangible
capital.
|
|
·
|
Implement
corporate governance revisions, including with regard to executive
compensation and proxy access by shareholders, that apply to all public
companies, not just financial
institutions.
|
|
·
|
Make
permanent the $250 thousand limit for federal deposit insurance and
increase the cash limit of Securities Investor Protection Corporation
protection from $100 thousand to $250 thousand, and provide unlimited
federal deposit insurance until January 1, 2013, for non-interest bearing
demand transaction accounts at all insured depository
institutions.
|
|
·
|
Repeal
the federal prohibitions on the payment of interest on demand deposits,
thereby permitting depository institutions to pay interest on business
transaction and other accounts.
|
|
·
|
Increase
the authority of the Federal Reserve to examine the Company and its
non-bank subsidiaries.
|
Many
aspects of the act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on the
Company, its customers or the financial industry more generally.
Provisions in the legislation that affect deposit insurance assessments and
payment of interest on demand deposits could increase the costs associated with
deposits as well as place limitations on certain revenues those deposits may
generate.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Management
considers interest rate risk to be the most significant market risk for the
Company. Market risk is the risk of loss from adverse changes in market
prices and rates. Interest rate risk is the exposure to adverse changes in
the net income of the Company as a result of changes in interest rates.
The Company’s primary earnings source is net interest income, which is affected
by changes in the level of interest rates, the relationship between rates, the
impact of interest rate fluctuations on asset prepayments, the level and
composition of deposits and liabilities, and the credit quality of earning
assets. The Company’s objectives in its asset and liability management are
to maintain a strong, stable net interest margin, to utilize its capital
effectively without taking undue risks, to maintain adequate liquidity, and to
reduce vulnerability of its operations to changes in interest
rates.
The
Company’s Asset and Liability Committee evaluates at least quarterly the impact
of changes in market interest rates on assets and liabilities, net interest
margin, capital and liquidity. Risk assessments are governed by policies
and limits established by senior management, which are reviewed and approved by
the board of directors at least annually. The economic environment
continually presents uncertainties as to future interest rate trends. The
Asset and Liability Committee regularly utilizes a model that projects net
interest income based on increasing or decreasing interest rates in order to be
better able to respond to changes in interest rates.
Changes
in interest rates affect the value of the Company’s interest earning assets and
in particular its securities portfolio. Generally, the value of securities
fluctuates inversely with changes in interest rates. Increases in interest
rates could result in decreases in the market value of interest earning assets,
which could adversely affect the Company’s stockholders’ equity and its results
of operations if sold. The Company is also subject to reinvestment risk
associated with changes in interest rates. Changes in market interest
rates also could affect the type (fixed rate or adjustable rate) and amount of
loans originated by the Company and the average life of loans and securities,
which can impact the yields earned on the Company’s loans and securities.
Changes in interest rates may affect the average life of loans and mortgage
related securities. In periods of decreasing interest rates, the average
life of loans and securities held by the Company may be shortened to the extent
increased prepayment activity occurs during such periods which, in turn, may
result in the reinvestment of funds from such prepayments into lower yielding
assets. Under these circumstances, the Company is subject to reinvestment
risk to the extent that it is unable to reinvest the cash received from such
prepayments at rates that are comparable to the rates on existing loans and
securities. Additionally, increases in interest rates may result in
decreasing loan prepayments with respect to fixed rate loans (and therefore an
increase in the average life of such loans), may result in a decrease in loan
demand, and make it more difficult for borrowers to repay adjustable rate
loans.
The
Company utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure to net interest income to sustained interest
rate changes. Management routinely monitors simulated net interest income
sensitivity over a rolling two-year horizon. The simulation model captures
the seasonality of the Company’s deposit flows and the impact of changing
interest rates on the interest income received and the interest expense paid on
all assets and liabilities reflected on the Company’s balance sheet. This
sensitivity analysis is compared to the asset and liability policy limits that
specify a maximum tolerance level for net interest income exposure over a
one-year horizon. A 100, 200 and 300 basis point upward and downward shift
in interest rates over a one-year time horizon was considered at June 30, 2010
and December 31, 2009. A parallel and pro rata shift in rates over a
twelve-month period is assumed.
The
following table reflects the Bank’s income sensitivity analysis as of June 30,
2010 and December 31, 2009:
Change In Interest
Rates In Basis Points
|
|
As of June 30,
2010
Potential Change In
|
|
|
As of December 31,
2009
Potential Change In
|
|
(Rate Shock)
|
|
Net Interest Income
|
|
|
Net Interest Income
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up
300 basis points
|
|
|
2,632
|
|
|
|
3.81
|
|
|
|
1,048
|
|
|
|
1.18
|
|
Up
200 basis points
|
|
|
1,702
|
|
|
|
2.46
|
|
|
|
880
|
|
|
|
0.99
|
|
Up
100 basis points
|
|
|
869
|
|
|
|
1.26
|
|
|
|
542
|
|
|
|
0.61
|
|
Static
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Down
100 basis points
|
|
|
(851
|
)
|
|
|
(1.23
|
)
|
|
|
(667
|
)
|
|
|
(0.75
|
)
|
Down
200 basis points
|
|
|
(564
|
)
|
|
|
(0.82
|
)
|
|
|
(1,541
|
)
|
|
|
(1.74
|
)
|
Down
300 basis points
|
|
|
391
|
|
|
|
0.57
|
|
|
|
(2,603
|
)
|
|
|
(2.94
|
)
|
The
preceding sensitivity analysis does not represent a Company forecast and should
not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including, but
not limited to, the nature and timing of interest rate levels and yield curve
shapes, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, and reinvestment and replacement of asset and
liability cash flows. While assumptions are developed based upon perceived
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences may change.
Also, as
market conditions vary from those assumed in the sensitivity analysis, actual
results will also differ due to prepayment and refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals,
prepayment penalties and product preference changes and other internal and
external variables. Furthermore, the sensitivity analysis does not reflect
actions that management might take in responding to, or anticipating changes in,
interest rates and market conditions.
Item
4. Controls and Procedures
An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 131-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2010. Based on that evaluation, the Company’s management,
including the Principal Executive Officer and Principal Financial Officer,
concluded that the Company’s disclosure controls and procedures were effective.
There has been no change in the Company’s internal controls over financial
reporting during the quarter that has materially affected, or is reasonably
likely to affect, the Company’s internal control over financial
reporting.
Part
II - Other Information
Item
1. Legal Proceedings
On
February 25, 2010 and March 29, 2010, the Company and several of its officers
and its directors were named in two lawsuits commenced in United States District
Court, Eastern District of New York on behalf of a putative class of all persons
and entities who purchased the Company’s common stock between March 13, 2008 and
February 1, 2010, alleging claims under Section 10(b) and Section 20(a) of the
securities Exchange Act of 1934. The plaintiffs allege, among other
things, the Company’s loan loss reserve, fair value of its assets, recognition
of impaired assets and its internal and disclosure controls were materially
false, misleading or incomplete.
On April
26, 2010, the Plaintiffs in the February 25, 2010 action moved to consolidate
their action with the action filed on March 29, 2010, to have itself appointed
lead plaintiff in the consolidated action and to obtain approval of its
selection of lead counsel. The motion is currently pending.
On April
22, 2010, an action was commenced in New York State Supreme Court, Kings County
by Robert I. Toussie against the Company and several of its officers. The
complaint alleges claims for fraud and aiding and abetting fraud based upon,
among other things, the plaintiff’s allegation that during 2008 and 2009, one or
more defendants made material misrepresentations and incomplete statements to
the plaintiff concerning the Company’s loan losses, delinquent loans,
capitalization, quarterly earnings and financial soundness. The complaint
seeks compensatory and punitive damages against the defendants.
On May
12, 2010, the defendants removed the April 22, 2010 action to the United States
District Court for the Eastern District of New York. The defendants
notified the court that the action was related to the February 25, 2010 and
March 29, 2010 actions. On June 1, 2010, the plaintiff moved to remand the
action back to State court. The defendants filed an opposition to the
plaintiff’s remand motion on June 15, 2010, and the plaintiff filed his reply on
June 22, 2010. The plaintiff’s remand motion has been assigned to a
magistrate judge and is currently pending.
On July
20, 2010, the first of two putative class action lawsuits was filed in New York
State Supreme Court, Suffolk County, against, among others, the Company and the
members of its Board of Directors, concerning the recently announced proposed
acquisition of the Company. The complaints allege that the members of the
Board of Directors breached their fiduciary duty by causing the Company to agree
to the proposed acquisition, and that the Company aided and abetted those
alleged breaches of duty. The complaints seek, among other relief, an
order enjoining the consummation of the proposed acquisition and rescinding the
acquisition agreement.
The
Company and the individual defendants intend to vigorously defend all aspects of
these actions.
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Items 1A: Risk Factors,” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and
the additional risk factor below, as such factors could materially affect the
Company’s business, financial condition, or future results. . The risks
described below and in the Annual Report on Form 10-K are not the only risks
that the Company faces. Additional risks and uncertainties not currently known
to the Company, or that the Company currently deems to be immaterial, also may
have a material impact on the Company’s business, financial condition, or
results.
The
proposed merger of the Company with People’s United described above under “Item
2. - Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Proposed Plan of Merger with People’s United Financial,
Inc.” might not be consummated. The merger is subject to approval by bank
regulatory authorities and by the shareholders of the Company and to the
satisfaction of various closing conditions. The merger is the result of an
assessment by the Company and its board of directors of the Company’s strategic
alternatives in light of the financial challenges facing the Company. The
Merger Agreement satisfies the requirement of the Consent Agreement to sell or
merge the Company and the Bank in the event that the required capital ratios are
not satisfied by June 30, 2010. If the merger is not consummated, the
Company would be required to find an alternative approach to overcoming its
challenges and satisfying the relevant regulatory requirements, including
meeting the capital ratios required by the Consent Agreement and the Written
Agreement. At this time, the Company has no other alternative to raise
capital or to enter into another merger agreement if the merger with People’s
United is not consummated. In addition, the terms of the Merger Agreement
prohibit the Company and the Bank from taking certain actions to facilitate the
foregoing.
If the
People’s United merger is not consummated, the Company may not be able to raise
any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company’s existing
shareholders. In addition, the Company may not be able to find another
merger partner or acquirer. In such circumstances, a failure to raise such
capital or to find another merger partner or acquirer could result in further
and more severe regulatory actions against the Company and the
Bank.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item
3. Defaults upon Senior Securities
None
Item
4. Reserved
Item
5. Other Information
None
Item
6. Exhibits and Reports on Form 8-K
Exhibit
|
|
Description
|
|
|
|
Exhibit
2.1
|
|
Agreement
and Plan of Merger, dated July 15, 2010, between People’s United
Financial, Inc. and Smithtown Bancorp, Inc. (Incorporated by reference to
Exhibit 2.1 of Form 8-K Current Report filed July 16, 2010, File No.
000-13314.)
|
|
|
|
Exhibit
10.1
|
|
Written
Agreement by and between Smithtown Bancorp, Inc. and Federal Reserve Bank
of New York dated June 22, 2010. (Incorporated by reference to
Exhibit 9.01 of Form 8-K Current Report filed June 28, 2010, File No.
000-13314.)
|
|
|
|
Exhibit
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)
|
|
|
|
Exhibit
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule
13a-14(a)
|
|
|
|
Exhibit
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) and 18 U.S.C. Section
1350
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SMITHTOWN
BANCORP, INC.
|
|
|
|
August
2, 2010
|
|
|
|
/s/ BRADLEY E. ROCK
|
|
Bradley
E. Rock, Chairman
|
|
and
Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
/s/ CHRISTOPHER BECKER
|
|
Christopher
Becker, Executive
|
|
Vice
President and Chief
Financial
Officer
|
|
(Principal
Financial Officer)
|
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