Add
HUVL.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HUVL.OB > SEC Filings for HUVL.OB > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
This section presents discussion and analysis of the Company's consolidated financial condition at December 31, 2008 and 2007, and consolidated results of operations for each of the three years in the period ended December 31, 2008. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank, N.A. and its subsidiaries, Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp., HVB Leasing Corp., HVB Employment Corp., HVB Realty Corp. and A.R. Schmeidler & Co., Inc. (collectively "HVB") and New York National Bank and it's subsidiaries, 369 East 149th Street Corp. and 369 East Realty Corp. (collectively "NYNB"). As further discussed in Note 18 to the Consolidated Financial Statements included elsewhere herein, a previously issued Consolidated Statement of Cash Flows for the year ended December 31, 2006 contained errors resulting primarily from the misclassification of changes in bank owned life insurance, goodwill and intangible assets as operating cash flows rather than investing activities. This discussion and analysis has been revised for the effects of the restatement. This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained elsewhere in this Annual Report on Form 10-K.
Overview of Management's Discussion and Analysis
This overview is intended to highlight selected information included in this Annual Report on Form 10-K. It does not contain sufficient information for a complete understanding of the Company's financial condition and operating results and, therefore, should be read in conjunction with this entire Annual Report on Form 10-K.
The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County, Connecticut. The Company's assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company's basic strategy is to grow net interest income and non interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. Considering current economic conditions, the Company's primary market risk exposures are interest rate risk, the risk of deterioration of market values of collateral supporting the Company's loan portfolio, particularly commercial and residential real estate and potential risks associated with the impact of regulatory changes that may take place in reaction to the current crisis in the financial system. Interest rate risk is the exposure of net interest income to changes in interest rates. Commercial and residential real estate are the primary collateral for the majority of company's loans.
The year 2008 marked the beginning of an extremely difficult period for the overall economy in general and for the financial services industry in particular. This wide ranging economic downturn has had extremely negative effects on all financial sectors both domestic and foreign. During 2008 we have witnessed the financial collapse of several financial institutions including the country's largest savings bank and two large Wall Street investment banking firms. In addition, the U.S. Congress has enacted unprecedented financial assistance legislation in an attempt to shore up the financial markets and provide needed credit to a faltering economy. Perhaps the most severe impact of this downturn has been felt by the real estate industry, which is a major source of both the deposit and loan businesses of the Company. The Company experienced a general decline in average deposit balances of customers in all sectors of the real estate industry as activity has been severely curtailed as a result of the current economic downturn. In addition, the Company has experienced sharp declines in the value of real estate collateral supporting the majority of it's loans, and the lack of a liquid market for a small part of it's investment portfolio. Despite these conditions, the Company was able to effectively offset the general decline in average deposit balances of existing customers with new deposit activity while continuing to provide significant lending availability to it's customers throughout the year. Management expects that the Company will experience continued pressure from these adverse conditions in 2009.
Net income for 2008 was $30.9 million or $2.74 per diluted share, a decrease of $3.6 million or 10.4 percent compared to $34.5 million or $3.08 per diluted share in 2007. The decline in net income resulted primarily from a
significantly higher provision for loan losses in 2008, higher noninterest expense and a higher adjustment for other-than-temporary impairment of investments, partially offset by higher net interest income, higher noninterest income and lower income taxes.
Total deposits, excluding the effects of a $97 million temporary deposit in a money market account from late December 2007 through early February 2008 and $75 million of brokered certificates of deposit added in September 2008, were essentially unchanged at December 31, 2008 as compared to the prior year end date. The Company did experience growth in new customers both in existing branches and new branches added during 2008, however this growth was offset by some declines in balances of existing customers, primarily those customers directly involved in or supported by the real estate industry.
Total loans grew significantly in 2008 as the company continued to provide lending availability to new and existing customers. This growth, however, was accompanied by a slowdown in payments of certain loans, such as construction loans, whose repayment is often dependent on sales of completed real estate projects which have been adversely impacted by the severe economic conditions currently affecting the real estate markets.
The Company increased its noninterest income in 2008, primarily as a result of increases in investment advisory fees of its subsidiary A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York. Fee income from this source, however, began to decline in the fourth quarter of 2008 and is expected to continue to decline, at least in the near term, as a result of the effects of significant declines in both domestic and international markets. At December 31, 2008, A.R. Schmeidler & Co., Inc. had approximately $1.0 billion of assets under management compared to approximately $1.3 billion at December 31, 2007.
Nonperforming assets and charge-offs increased dramatically during 2008 and overall asset quality has been adversely affected by the current state of the economy. During the year the Company has experienced slowdowns in repayments and declines in the loan-to-value ratios on existing loans. However, as a result of the Company's conservative underwriting and investment standards both before and during the current economic crisis, the Company's overall asset quality continues to be satisfactory. The Company does not originate loans similar to payment option loans or loans that allow for negative interest amortization. The Company does not engage in sub-prime lending nor does it offer loans with low "teaser" rates or high loan-to-value ratios to sub-prime borrowers. At December 31, 2008, the Company had no sub-prime loans in its portfolio. In addition, the Company has not invested in mortgage-backed securities secured by sub-prime loans. These conservative practices somewhat protected the Company from the immediate effects of the early stages of the current financial crisis. However, the severity of the economic downturn has since extended well beyond the sub-prime lending issue, and has resulted in declines in the demand for and values of virtually all commercial and residential real estate properties. These declines, together with the fact that available residential mortgage financing had all but disappeared by the end of 2008, have put downward pressure on the overall asset quality of virtually all financial institutions, including the Company. Continuation or worsening of such conditions could have additional significant adverse effects on asset quality in the future.
The flat yield curve put downward pressure on the Company's net interest income as liabilities repriced at higher rates and maturing longer term assets repriced at similar or only slightly higher rates. The 500 basis point reduction of short-term interest rates from September 2007 through December 2008 has resulted in some improvement in yield curve, however with interest rates at such historically low levels, availability of long-term financing at reasonable rates has been limited. This has resulted in financial institutions replacing maturing long-term borrowings with short-term debt. While replacing long-term borrowings with lower cost short-term debt may have a positive impact on net interest income in the near term, this condition presents additional challenges in the ongoing management of interest rate risk to the extent that these borrowings are utilized to fund longer term assets at fixed rates.
As a result of the effects of interest rates, growth in the Company's loans portfolio and other asset/liability management activities, tax equivalent basis net interest income increased by $5.7 million or 5.2 percent to $114.7 million in 2008, compared to $109.0 million in 2007. The effect of the adjustment to a tax equivalent basis was $4.6 million in 2008 and $4.9 million in 2007.
Non interest income, excluding securities net gains and losses, was $20.0 million for 2008, an increase of $4.6 million or 29.9 percent compared to $15.4 million in 2007. The increase was primarily due to growth in the investment advisory fees of A.R. Schmeidler & Co., Inc., increased income from bank owned life insurance and higher deposit activity and other service fees. Investment advisory fee income is expected to decline at least in the near term, due to the current difficulties in the global financial markets. The net realized loss on securities for the year ended December 31, 2008, included a $1.1 million pretax loss for other than temporary impairment taken in September 2008 related to the Company's investment in a pooled trust preferred security and a $0.5 million pretax adjustment for other than temporary impairment taken in March 2008 related to the Company's investment in a mutual fund. The mutual fund investment, which had a previous pretax other than temporary impairment adjustment of $0.6 million in December 2007, was sold in April 2008 due to its inability to meet the Company's performance expectations. The Company has decided to hold it's investments in trust preferred securities as these investments continue to perform and the Company does not believe that the current market quotes for these investments are indicative of their value.
Non interest expense for 2008 was $71.1 million, an increase of $6.4 million or 9.9 percent compared to $64.7 million in 2007. The increase reflects the Company's continued investment in its branch offices, technology and personnel to accommodate growth in loans and deposits, the expansion of services and products available to new and existing customers and the upgrading of certain internal processes.
The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at December 31, 2008 reflects moderate near term interest rate risk with the Company's net interest income decreasing slightly if rates fall and decreasing moderately if rates rise.
The Company has established specific policies and operating procedures governing its liquidity levels to address future liquidity needs, including contingent sources of liquidity. While the current adverse economic situation has put pressure on the availability of liquidity in the marketplace, the Company believes that its present liquidity and borrowing capacity are sufficient for its current business needs. In addition, the Company, HVB and NYNB are subject to various regulatory capital guidelines. To be considered "well capitalized," an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a total capital ratio of 10 percent. The Company, HVB and NYNB each exceeded all current regulatory capital requirements to be considered in the "well-capitalized" category at December 31, 2008. Management plans to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.
In response to the current financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 ("EESA") was signed into law on October 3, 2008. This law established the Troubled Asset Relief Program ("TARP"). As part of TARP, the Treasury established the Capital Purchase Program ("CPP") to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital Stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. After carefully reviewing and analyzing the terms and conditions of the CPP, the Board of Directors and management of the Company believed that, given it's present financial condition, participation in the CPP was unnecessary and not in the best interests of the Company, it's customers or shareholders.
On November 21, 2008 the FDIC adopted the final rule relating to the Temporary Liquidity Guarantee Program ("TLG Program") which is also a part of EESA. Under the TLG program the FDIC will (1) guarantee certain newly issued senior unsecured debt and (2) provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts, NOW accounts paying less than 0.5 percent interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured institutions through December 31, 2009. The Company has elected to participate in both guarantee programs. For additional discussion of recently enacted government assistance legislation, see "Supervision and Regulation" in Item 1 herein.
Critical Accounting Policies
Application of Critical Accounting Policies - The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The Company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Certain accounting
policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgements, and therefore, are critical to understanding the Company's results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company's Board of Directors.
Allowance for Loan Losses - The Company maintains an allowance for loan losses to absorb probable losses incurred in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company's methodology for assessing the appropriateness of the allowance consists of a specific component for identified problem loans, and a formula component which addresses historical loan loss experience together with other relevant risk factors affecting the portfolio.
The specific component incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan's contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Company expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of the impaired loan is less than the related recorded amount, a specific valuation component is established within the allowance for loan losses or a writedown is charged against the allowance for loan losses if the impairment is considered to be permanent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans that are collectively evaluated for impairment such as the Company's portfolios of home equity loans, real estate mortgages, installment and other loans.
The formula component is calculated by first applying historical loss experience factors to outstanding loans by type. This component is then adjusted to reflect additional risk factors not addressed by historical loss experience. These factors include the evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of the loan portfolio. Senior management reviews these conditions quarterly. Management's evaluation of the loss related to each of these conditions is quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.
Actual losses can vary significantly from the estimated amounts. The Company's methodology permits adjustments to the allowance in the event that, in management's judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of December 31, 2008. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company's service area, since the majority of the Company's loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examinations. See "Loan Portfolio" elsewhere in this Item 7 for further discussion of the allowance for loan losses.
Income Recognition on Loans - Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management's judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management's opinion, they are estimated to be fully collectible.
Securities - Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method. The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines are other-than-temporary in nature. In estimating other-than-temporary losses, management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If the Company determines that a decline in the fair value of a security below cost is other-than-temporary, the carrying amount of the security is reduced to its fair value and the related impairment is charged to earnings.
Other Real Estate Owned ("OREO") - Real estate properties acquired through loan foreclosure are recorded at estimated fair value, net of estimated selling costs, at time of foreclosure establishing a new cost basis. Credit losses arising at the time of foreclosure are charged against the allowance for loan losses. Subsequent valuations are periodically performed by management and the carrying value is adjusted by a charge to expense to reflect any subsequent declines in the estimated fair value. Routine holding costs are charged to expense as incurred.
Goodwill and Other Intangible Assets - In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company's impairment evaluations as of December 31, 2008 did not indicate impairment of its goodwill or identified intangible assets.
Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. In accordance with Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance) ("EITF No. 06-5"), bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF No. 06-5, the Company recorded bank owned life insurance at its cash surrender value.
Retirement Plans - Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Supplemental retirement plan expense allocates the benefits over years of service.
Results of Operations for Each of the Three Years in the Period Ended December 31, 2008
Summary of Results
The Company reported net income of $30.9 million in 2008, a decrease of $3.6 million or 10.4 percent compared to $34.5 million in 2007, which increased $0.4 million or 1.2 percent compared to $34.1 million in 2006. The decrease in 2008 net income, compared to 2007, reflected a significantly higher provision for loan losses, higher noninterest expense and higher net losses on securities available for sale, partially offset by higher net interest income, higher non interest income and a lower effective tax rate. The slight increase in 2007 net income, compared to 2006, reflects higher net interest income, higher non interest income and a lower provision for loan losses, partially offset by higher non interest expense, higher realized net losses on securities available for sale and a slightly higher effective tax rate. Realized losses on securities transactions for 2008 and 2007 include $1.5 million and $0.6 million, respectively, of pretax adjustment for other than temporary impairment related to certain securities in the Company's investment portfolio.
Diluted earnings per share were $2.74 in 2008, a decrease of $0.34 or 11.0 percent compared to $3.08 in 2007, which increased $0.03 or 1.0 percent compared to $3.05 in 2006. These changes are a direct result of the changes in net income in the respective years compared to the prior year period. Prior period per share amounts have been adjusted to reflect the 10 percent stock dividend distributed in December 2008. Returns on average stockholders' equity and average assets were 14.8 percent and 1.3 percent for 2008, compared to 18.0 percent and 1.5 percent in 2007 and 19.4 percent and 1.5 percent in 2006. Returns on adjusted average stockholders' equity were 14.6 percent, 17.6 percent, 18.6 percent in 2008, 2007 and 2006, respectively. Adjusted average stockholders' equity excludes the effects of net unrealized losses, net of tax, on securities available for sale of $2,955, $4,521, and $7,846 in 2008, 2007 and 2006, respectively. The annualized return on adjusted average stockholders' equity is, under SEC regulations, a non-GAAP financial measure. Management believes that this non-GAAP financial measures more closely reflects actual performance, as it is more consistent with the Company's stated asset/liability management strategies, which have not resulted in significant . . .
|
|