form10q_093012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
Commission file number 000-13580
SUFFOLK BANCORP
(Exact Name of Registrant as Specified in Its Charter)
New York State |
11-2708279 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
|
4 West Second Street, Riverhead, New York |
11901 |
(Address of Principal Executive Offices) |
(Zip Code) |
(631) 208-2400
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] |
Accelerated filer [X] |
|
|
Non-accelerated filer [ ] (Do not check if a smaller reporting company) |
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 stock, as of the latest practicable date.
11,566,347 SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 26, 2012
SUFFOLK BANCORP
Form 10-Q
For the Quarterly Period Ended September 30, 2012
Table of Contents
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Page
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PART I
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Item 1
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Financial Statements
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Condensed Consolidated Statements of Condition as of September 30, 2012 (unaudited) and December 31, 2011
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2
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Condensed Consolidated Statements of (Loss) Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)
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3
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Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)
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4
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Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (unaudited)
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5
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)
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6
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Notes to the Unaudited Condensed Consolidated Financial Statements
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7
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Item 2
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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33
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Item 3
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Quantitative and Qualitative Disclosures About Market Risk
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43
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Item 4
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Controls and Procedures
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44
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PART II
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Item 1
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Legal Proceedings
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46
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Item 1A
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Risk Factors
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47
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Item 2
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Unregistered Sales of Equity Securities and Use of Proceeds
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48
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Item 3
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Defaults upon Senior Securities
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48
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Item 4
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Mine Safety Disclosures
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48
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Item 5
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Other Information
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48
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Item 6
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Exhibits
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48
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Signatures
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50
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Item 1 – Financial Statements
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
AS OF SEPTEMBER 30, 2012 (unaudited) AND DECEMBER 31, 2011
(dollars in thousands except per share data)
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September 30, 2012
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December 31, 2011
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ASSETS
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Cash and Cash Equivalents
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|
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Cash and Non-interest Bearing Deposits Due From Banks
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$ |
57,937 |
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$ |
73,651 |
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Interest Bearing Deposits Due From Banks
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344,767 |
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98,908 |
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Federal Funds Sold
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1,642 |
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- |
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Total Cash and Cash Equivalents
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404,346 |
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172,559 |
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Federal Reserve Bank, Federal Home Loan Bank and Other Stock
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2,368 |
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2,536 |
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Investment Securities:
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Available for Sale, at Fair Value
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328,668 |
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299,204 |
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Held to Maturity (Fair Value of $9,049 and $10,161, respectively)
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8,164 |
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9,315 |
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Total Investment Securities
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336,832 |
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308,519 |
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Loans
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766,569 |
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969,654 |
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Allowance for Loan Losses
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21,021 |
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39,958 |
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Net Loans
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745,548 |
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929,696 |
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Loans Held-for-Sale
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7,000 |
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- |
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Premises and Equipment, Net
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27,539 |
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27,984 |
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Deferred Taxes
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16,300 |
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18,465 |
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Income Tax Receivable
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9,300 |
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5,421 |
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Other Real Estate Owned ("OREO")
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1,572 |
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1,800 |
|
Accrued Interest and Loan Fees Receivable
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|
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5,572 |
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6,885 |
|
Prepaid FDIC Assessment
|
|
|
574 |
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1,843 |
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Goodwill and Other Intangibles
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2,537 |
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2,437 |
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Receivable - Securities Sales Not Settled
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3,890 |
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|
- |
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Other Assets
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5,727 |
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6,082 |
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TOTAL ASSETS
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$ |
1,569,105 |
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$ |
1,484,227 |
|
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
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Demand Deposits
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$ |
573,962 |
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$ |
525,379 |
|
Saving, N.O.W. & Money Market Deposits
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|
551,155 |
|
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531,544 |
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Time Certificates of $100,000 or More
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167,677 |
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168,140 |
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Other Time Deposits
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80,320 |
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86,809 |
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Total Deposits
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1,373,114 |
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1,311,872 |
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Unfunded Pension Liability
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21,324 |
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18,212 |
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Capital Leases
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4,707 |
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4,737 |
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Accrued Interest Payable
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|
287 |
|
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|
348 |
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Other Liabilities
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14,393 |
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12,498 |
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TOTAL LIABILITIES
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1,413,825 |
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1,347,667 |
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COMMITMENTS AND CONTINGENT LIABILITIES
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STOCKHOLDERS' EQUITY
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Common Stock (par value $2.50; 15,000,000 shares authorized;
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13,732,085 shares issued; 11,566,347 and 9,276,814 shares outstanding
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at September 30, 2012 and December 31, 2011, respectively)
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34,330 |
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34,330 |
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Surplus
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42,476 |
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24,010 |
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Retained Earnings
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87,510 |
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91,303 |
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Treasury Stock at Par (2,165,738 and 4,005,270 shares
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at September 30, 2012 and December 31, 2011, respectively)
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(5,414 |
) |
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(10,013 |
) |
Accumulated Other Comprehensive Loss, Net of Tax
|
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|
(3,622 |
) |
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|
(3,070 |
) |
TOTAL STOCKHOLDERS' EQUITY
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|
|
155,280 |
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|
136,560 |
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
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$ |
1,569,105 |
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$ |
1,484,227 |
|
See accompanying notes to condensed consolidated financial statements.
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|
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(unaudited, dollars in thousands except per share data)
|
|
Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2012
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2011
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2012
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2011
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INTEREST INCOME
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Loans and Loan Fees
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|
$ |
11,825 |
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|
$ |
15,100 |
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$ |
37,146 |
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$ |
47,488 |
|
United States Treasury Securities
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|
|
- |
|
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|
1 |
|
|
|
- |
|
|
|
96 |
|
U.S. Government Agency Obligations
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|
|
30 |
|
|
|
44 |
|
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|
34 |
|
|
|
337 |
|
Obligations of States & Political Subdivisions
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|
1,517 |
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1,544 |
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4,569 |
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|
5,332 |
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Collateralized Mortgage Obligations
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1,256 |
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1,404 |
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3,649 |
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4,534 |
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Mortgage-Backed Securities
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|
|
145 |
|
|
|
8 |
|
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|
171 |
|
|
|
24 |
|
Corporate Bonds
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|
|
72 |
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|
|
- |
|
|
|
88 |
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|
|
- |
|
Federal Funds Sold & Due from Banks
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|
|
168 |
|
|
|
79 |
|
|
|
382 |
|
|
|
140 |
|
Dividends
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|
28 |
|
|
|
17 |
|
|
|
91 |
|
|
|
161 |
|
Total Interest Income
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|
15,041 |
|
|
|
18,197 |
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|
46,130 |
|
|
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58,112 |
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INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Saving, N.O.W. & Money Market Deposits
|
|
|
286 |
|
|
|
435 |
|
|
|
906 |
|
|
|
1,618 |
|
Time Certificates of $100,000 or More
|
|
|
372 |
|
|
|
471 |
|
|
|
1,217 |
|
|
|
1,576 |
|
Other Time Deposits
|
|
|
229 |
|
|
|
307 |
|
|
|
767 |
|
|
|
985 |
|
Interest on Borrowings
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
655 |
|
Total Interest Expense
|
|
|
887 |
|
|
|
1,214 |
|
|
|
2,890 |
|
|
|
4,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
14,154 |
|
|
|
16,983 |
|
|
|
43,240 |
|
|
|
53,278 |
|
Provision for Loan Losses
|
|
|
12,000 |
|
|
|
900 |
|
|
|
9,600 |
|
|
|
24,088 |
|
Net Interest Income After Provision for Loan Losses
|
|
|
2,154 |
|
|
|
16,083 |
|
|
|
33,640 |
|
|
|
29,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Charges on Deposit Accounts
|
|
|
1,022 |
|
|
|
953 |
|
|
|
2,972 |
|
|
|
2,964 |
|
Other Service Charges, Commissions & Fees
|
|
|
927 |
|
|
|
988 |
|
|
|
2,523 |
|
|
|
2,631 |
|
Fiduciary Fees
|
|
|
266 |
|
|
|
213 |
|
|
|
675 |
|
|
|
644 |
|
Net (Loss) Gain on Sale of Securities Available for Sale
|
|
|
(162 |
) |
|
|
- |
|
|
|
(162 |
) |
|
|
1,645 |
|
Other Operating Income
|
|
|
541 |
|
|
|
278 |
|
|
|
1,242 |
|
|
|
872 |
|
Total Non-Interest Income
|
|
|
2,594 |
|
|
|
2,432 |
|
|
|
7,250 |
|
|
|
8,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits
|
|
|
9,486 |
|
|
|
8,141 |
|
|
|
26,945 |
|
|
|
23,458 |
|
Net Occupancy Expense
|
|
|
1,480 |
|
|
|
1,435 |
|
|
|
4,210 |
|
|
|
4,391 |
|
Equipment Expense
|
|
|
509 |
|
|
|
506 |
|
|
|
1,512 |
|
|
|
1,451 |
|
Outside Services
|
|
|
1,145 |
|
|
|
1,425 |
|
|
|
3,338 |
|
|
|
3,713 |
|
FDIC Assessments
|
|
|
508 |
|
|
|
555 |
|
|
|
1,056 |
|
|
|
2,541 |
|
OREO Expense
|
|
|
781 |
|
|
|
182 |
|
|
|
840 |
|
|
|
293 |
|
Prepayment Fee on Borrowing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,028 |
|
Other Operating Expenses
|
|
|
3,975 |
|
|
|
2,683 |
|
|
|
8,727 |
|
|
|
6,855 |
|
Total Operating Expenses
|
|
|
17,884 |
|
|
|
14,927 |
|
|
|
46,628 |
|
|
|
43,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Tax (Benefit) Expense
|
|
|
(13,136 |
) |
|
|
3,588 |
|
|
|
(5,738 |
) |
|
|
(5,784 |
) |
Income Tax (Benefit) Expense
|
|
|
(3,975 |
) |
|
|
516 |
|
|
|
(1,945 |
) |
|
|
(4,552 |
) |
NET (LOSS) INCOME
|
|
$ |
(9,161 |
) |
|
$ |
3,072 |
|
|
$ |
(3,793 |
) |
|
$ |
(1,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS PER COMMON SHARE - BASIC
|
|
$ |
(0.94 |
) |
|
$ |
0.32 |
|
|
$ |
(0.39 |
) |
|
$ |
(0.13 |
) |
(LOSS) EARNINGS PER COMMON SHARE - DILUTED
|
|
$ |
(0.94 |
) |
|
$ |
0.32 |
|
|
$ |
(0.39 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC
|
|
|
9,837,959 |
|
|
|
9,726,948 |
|
|
|
9,764,133 |
|
|
|
9,718,809 |
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED
|
|
|
9,837,959 |
|
|
|
9,726,948 |
|
|
|
9,764,133 |
|
|
|
9,718,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
|
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(unaudited, dollars in thousands)
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net (Loss) Income
|
|
$ |
(9,161 |
) |
|
$ |
3,072 |
|
|
$ |
(3,793 |
) |
|
$ |
(1,232 |
) |
Other Comprehensive Income (Loss), Net of Taxes and Reclassification Adjustments:
|
|
|
|
|
|
|
|
|
|
Increase in Unrealized Gain on Securities Available for Sale Arising During the Period
|
|
|
3,479 |
|
|
|
2,021 |
|
|
|
819 |
|
|
|
4,047 |
|
Pension and Post-Retirement Plan Benefit Obligation
|
|
|
(1,116 |
) |
|
|
- |
|
|
|
(1,371 |
) |
|
|
(89 |
) |
Total Other Comprehensive Income (Loss), Net of Taxes
|
|
|
2,363 |
|
|
|
2,021 |
|
|
|
(552 |
) |
|
|
3,958 |
|
Total Comprehensive (Loss) Income
|
|
$ |
(6,798 |
) |
|
$ |
5,093 |
|
|
$ |
(4,345 |
) |
|
$ |
2,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
|
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(unaudited, in thousands except for share data)
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Common Stock
|
|
|
|
|
|
|
Balance, January 1
|
|
$ |
34,330 |
|
|
$ |
34,236 |
|
Stock appreciation rights and stock options exercised
|
|
|
- |
|
|
|
12 |
|
Stock dividend reinvestment
|
|
|
- |
|
|
|
82 |
|
Ending Balance
|
|
|
34,330 |
|
|
|
34,330 |
|
Surplus
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
|
24,010 |
|
|
|
23,368 |
|
Private equity offering, net of $2,239 of stock issuance costs
|
|
|
18,162 |
|
|
|
- |
|
Stock-based compensation
|
|
|
304 |
|
|
|
- |
|
Stock appreciation rights and stock options exercised
|
|
|
- |
|
|
|
65 |
|
Stock dividend reinvestment
|
|
|
- |
|
|
|
577 |
|
Ending Balance
|
|
|
42,476 |
|
|
|
24,010 |
|
Retained Earnings
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
|
91,303 |
|
|
|
91,450 |
|
Net loss
|
|
|
(3,793 |
) |
|
|
(1,232 |
) |
Stock appreciation rights and stock options exercised
|
|
|
- |
|
|
|
(70 |
) |
Ending Balance
|
|
|
87,510 |
|
|
|
90,148 |
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
|
(10,013 |
) |
|
|
(10,005 |
) |
Reissuance of 1,839,533 common shares from treasury in connection with private equity offering
|
|
|
4,599 |
|
|
|
- |
|
Stock appreciation rights and stock options exercised
|
|
|
- |
|
|
|
(8 |
) |
Ending Balance
|
|
|
(5,414 |
) |
|
|
(10,013 |
) |
Accumulated Other Comprehensive (Loss) Income, Net of Tax
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
|
(3,070 |
) |
|
|
(2,229 |
) |
Other comprehensive (loss) income
|
|
|
(552 |
) |
|
|
3,958 |
|
Ending Balance
|
|
|
(3,622 |
) |
|
|
1,729 |
|
Total Stockholders' Equity
|
|
$ |
155,280 |
|
|
$ |
140,204 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
|
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(unaudited, dollars in thousands)
|
|
For the Nine Months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
NET LOSS
|
|
$ |
(3,793 |
) |
|
$ |
(1,232 |
) |
ADJUSTMENTS TO RECONCILE NET LOSS
|
|
|
|
|
|
|
|
|
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
|
|
|
9,600 |
|
|
|
24,088 |
|
Depreciation and Amortization
|
|
|
1,928 |
|
|
|
2,019 |
|
Stock Based Compensation
|
|
|
304 |
|
|
|
- |
|
Net Amortization of Premiums
|
|
|
1,114 |
|
|
|
1,801 |
|
Increase in Other Intangibles
|
|
|
(100 |
) |
|
|
- |
|
Deferred Tax Expense
|
|
|
1,929 |
|
|
|
- |
|
(Increase) Decrease in Income Tax Receivable
|
|
|
(3,879 |
) |
|
|
2,345 |
|
Decrease (Increase) in Accrued Interest and Loan Fees Receivable
|
|
|
1,313 |
|
|
|
(293 |
) |
Decrease (Increase) in Other Assets
|
|
|
355 |
|
|
|
(6,450 |
) |
Decrease in Prepaid FDIC Assessment
|
|
|
1,269 |
|
|
|
2,718 |
|
Increase in Unfunded Pension Liability
|
|
|
3,112 |
|
|
|
2,374 |
|
Decrease in Accrued Interest Payable
|
|
|
(61 |
) |
|
|
(172 |
) |
Increase (Decrease) in Other Liabilities
|
|
|
1,641 |
|
|
|
(802 |
) |
Writedown of OREO
|
|
|
600 |
|
|
|
- |
|
Loss (Gain) on Sale of Securities Available for Sale - Net
|
|
|
162 |
|
|
|
(1,645 |
) |
Net Cash Provided by Operating Activities
|
|
|
15,494 |
|
|
|
24,751 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Principal Payments on Investment Securities
|
|
|
22,244 |
|
|
|
25,479 |
|
Proceeds from Sale of Investment Securities - Available for Sale
|
|
|
3,584 |
|
|
|
42,447 |
|
Maturities of Investment Securities - Available for Sale
|
|
|
32,294 |
|
|
|
29,605 |
|
Purchases of Investment Securities - Available for Sale
|
|
|
(92,808 |
) |
|
|
(3,287 |
) |
Maturities of Investment Securities - Held to Maturity
|
|
|
2,135 |
|
|
|
3,951 |
|
Purchases of Investment Securities - Held to Maturity
|
|
|
(990 |
) |
|
|
(1,715 |
) |
Decrease in Federal Reserve Bank, Federal Home Loan Bank and Other Stock
|
|
|
168 |
|
|
|
1,727 |
|
Loan Repayments - Net
|
|
|
167,176 |
|
|
|
90,708 |
|
Purchases of Premises and Equipment - Net
|
|
|
(1,483 |
) |
|
|
(1,398 |
) |
Proceeds from Sale of OREO
|
|
|
- |
|
|
|
3,919 |
|
Net Cash Provided by Investing Activities
|
|
|
132,320 |
|
|
|
191,436 |
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Deposit Accounts
|
|
|
61,242 |
|
|
|
(49,574 |
) |
Decrease in Short-Term Borrowings - Net
|
|
|
- |
|
|
|
(40,000 |
) |
Decrease in Capital Lease Payable
|
|
|
(30 |
) |
|
|
- |
|
Proceeds from private equity offering, net
|
|
|
22,761 |
|
|
|
- |
|
Dividends Paid to Stockholders
|
|
|
- |
|
|
|
(1,454 |
) |
Proceeds from Stock Dividend Reinvestment
|
|
|
- |
|
|
|
658 |
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
83,973 |
|
|
|
(90,370 |
) |
Net Increase in Cash and Cash Equivalents
|
|
|
231,787 |
|
|
|
125,817 |
|
Cash and Cash Equivalents Beginning of Year
|
|
|
172,559 |
|
|
|
41,149 |
|
Cash and Cash Equivalents End of Year
|
|
$ |
404,346 |
|
|
$ |
166,966 |
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,951 |
|
|
$ |
5,006 |
|
Income Taxes
|
|
$ |
- |
|
|
$ |
197 |
|
Loans Transferred to Held For Sale
|
|
$ |
53,843 |
|
|
$ |
- |
|
Loans Transferred to Other Real Estate Owned
|
|
$ |
372 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
|
SUFFOLK BANCORP AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Summary of Significant Accounting Policies
|
The unaudited interim condensed consolidated financial statements include the accounts of Suffolk Bancorp (“Suffolk”) and its wholly owned subsidiary, Suffolk County National Bank and its subsidiaries (the “Bank”). Suffolk and the Bank are collectively referred to hereafter as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 2011 Annual Report on Form 10-K. The following footnotes describe the Company’s most significant accounting policies. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
Loans and Loan Interest Income Recognition - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs and an allowance for loan losses. Unearned discounts on installment loans are credited to income using methods that result in a level yield. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.
Interest income is accrued on the unpaid principal balance. Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. For all classes of loans, loans generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status. Loans start accruing interest again when they become current as to principal and interest, and when, in the opinion of management, the loans can be collected in full. For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties and the Company has granted a concession are considered troubled debt restructurings and are classified as impaired. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt. Interest received on non-accrual, impaired loans is applied against principal or interest according to management’s judgment as to the collectibility of the principal.
Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance. This happens when it is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by continuous analysis of the loan portfolio. That analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. All loans over $250,000 in the commercial and industrial, commercial real estate and construction loan classes rated substandard or worse and all troubled debt restructurings are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools. In assessing the adequacy of the allowance, the Company reviews its loan portfolio by separate classes which have similar risk and collateral characteristics; e.g., commercial, commercial real estate, construction, residential mortgages, home equity, and consumer loans.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loan, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value
of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every non-performing loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-classified loans and is based on historical loss experience for each loan class from a trailing seven-quarter period, (which period will continue to be expanded for future calculations) and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the collectibility of the loan class not captured by historical loss data. These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. There are no formulas for translating them into a specific basis point adjustment of the Company’s historical loss rate for a pool of loans having similar risk characteristics. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.
Loans Held-For-Sale – Loans held-for-sale are carried at the lower of aggregate cost or fair value. Changes in fair value of loans held-for-sale are recognized in earnings.
Dividend Restriction - Banking regulations and the Bank's agreement with the Office of the Comptroller of the Currency (“OCC”) require maintaining certain capital levels and impose limitations on dividends paid by the Bank to the Company and by the Company to stockholders. This is discussed further in "Regulatory Matters" in the Notes to the Condensed Consolidated Financial Statements.
Reclassifications - Items in the prior period financial statements were reclassified to conform to the current presentation.
(2)
|
Recent Accounting Pronouncements
|
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860), “Reconsideration of Effective Control for Repurchase Agreements,” which amends the authoritative accounting guidance under ASC Topic 860 “Transfers and Servicing.” The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Adoption of this update in the first quarter of 2012 did not have a material effect on the Company’s condensed consolidated results of operations or financial condition.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends the authoritative accounting guidance under ASC Topic 820 “Fair Value Measurement” to more closely align U.S. GAAP with International Financial Reporting Standards (“IFRS”). This standard requires the disclosure of: (1) the reason for the measurement for nonrecurring fair value measurements; (2) all transfers between levels of the fair value hierarchy, which must be separately reported and described; (3) for all Level 2 and Level 3 fair value measurements, a description of the valuation technique(s) and the inputs used in those measurements; (4) for Level 3 measurements, quantitative information about the significant unobservable inputs used in those measurements; (5) a description of the valuation processes used in Level 3 fair value measurements, as well as narrative descriptions about those measurement’s sensitivity to changes in unobservable inputs if such changes would significantly alter the fair value measurement; and (6) expanded disclosure of the categorization by level of the fair value hierarchy for the items that are not measured at fair value in the balance sheet, but for where the estimated fair value is required to be disclosed (e.g., portfolio loans and deposits). This new guidance was effective prospectively beginning January 1, 2012 and it did not have a material effect on the Company’s condensed consolidated financial statements upon implementation in the first quarter of 2012. The new disclosures of the fair value levels of the Company’s assets and liabilities are set forth in Note 3.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220, “Presentation of Comprehensive Income,” in order to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update requires all non-owner changes in stockholders’ equity
be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of which presentation method an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s), where the components of net income and the components of other comprehensive income are presented. This new guidance was effective retrospectively for all annual and interim periods presented beginning January 1, 2012 and the Company now presents a separate condensed consolidated statement of comprehensive income. In October 2011, the FASB decided to defer the presentation of reclassification adjustments pending further consideration.
The Company records investments available for sale, loans held-for-sale, other real estate owned (“OREO”), mortgage servicing rights and impaired loans at fair value. Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability in an exchange. The definition of fair value includes the exchange price which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal market for the asset or liability. Market participant assumptions include assumptions about risk, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique, as well as the effect of credit risk on the fair value of liabilities. The Company uses three levels of the fair value inputs to measure assets, as described below.
Basis of Fair Value Measurement:
Level 1 – Valuations based on quoted prices in active markets for identical investments.
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 inputs include: (i) quoted prices for similar investments in active markets; (ii) quoted prices for identical investments traded in non-active markets (i.e., dealer or broker markets); and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data for substantially the full term of the investment.
Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.
The following table presents the carrying amounts and fair values of the Company’s financial instruments. FASB ASC 825, “Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation: (in thousands)
|
|
Level in
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Fair Value
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Heirarchy
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Cash and due from banks
|
|
Level 1
|
|
|
$ |
402,704 |
|
|
$ |
402,704 |
|
|
$ |
172,559 |
|
|
$ |
172,559 |
|
Cash equivalents
|
|
Level 2
|
|
|
|
1,642 |
|
|
|
1,642 |
|
|
|
- |
|
|
|
- |
|
Federal Reserve Bank, Federal Home Loan Bank and Other Stock
|
|
N/A |
|
|
|
|
2,368 |
|
|
|
N/A |
|
|
|
2,536 |
|
|
|
N/A |
|
Investment securities held to maturity
|
|
Level 2
|
|
|
|
8,164 |
|
|
|
9,049 |
|
|
|
9,315 |
|
|
|
10,161 |
|
Investment securities available for sale
|
|
Level 2/3 (1)
|
|
|
|
328,668 |
|
|
|
328,668 |
|
|
|
299,204 |
|
|
|
299,204 |
|
Loans Held-for-Sale
|
|
Level 2
|
|
|
|
7,000 |
|
|
|
7,000 |
|
|
|
- |
|
|
|
- |
|
Loans, net of allowance
|
|
Level 2
|
|
|
|
745,548 |
|
|
|
772,759 |
|
|
|
929,696 |
|
|
|
960,070 |
|
Accrued interest and loan fees receivable
|
|
Level 2
|
|
|
|
5,572 |
|
|
|
5,572 |
|
|
|
6,885 |
|
|
|
6,885 |
|
Non-maturity Deposits
|
|
Level 2
|
|
|
|
1,125,117 |
|
|
|
1,125,117 |
|
|
|
1,056,923 |
|
|
|
1,056,923 |
|
Time Deposits
|
|
Level 2
|
|
|
|
247,997 |
|
|
|
250,130 |
|
|
|
254,949 |
|
|
|
257,267 |
|
Accrued interest payable
|
|
Level 2
|
|
|
|
287 |
|
|
|
287 |
|
|
|
348 |
|
|
|
348 |
|
(1) See table that follows for Level 2 and 3 components.
Fair value estimates are made at a specific point in time and may be based on judgments regarding losses expected in the future, risk, and other factors that are subjective in nature. The methods and assumptions used to produce the fair value estimates follow.
Short-term financial instruments are valued at the carrying amounts included in the condensed consolidated statements of condition, which are reasonable estimates of fair value due to the relatively short term nature of the instruments. This approach applies to cash and cash equivalents; accrued interest and loan fees receivable; non-interest-bearing demand deposits; N.O.W., money market, and saving accounts; and accrued interest payable. Certificates of deposit are valued using a replacement cost of funds approach.
Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by class. The fair value of performing loans was calculated by discounting scheduled cash flows through their estimated maturity using estimated market discount rates that reflect the credit and interest rate risk of the loan. Estimated maturity is based on the Bank’s history of repayments for each type of loan and an estimate of the effect of the current economy. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using available market information and specific borrower information.
The fair value of loans held-for-sale is based upon binding contracts from third party investors.
Assets measured at fair value on a non-recurring basis were as follows: (in thousands)
Fair Value Measurements Using
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
|
|
|
|
Inputs
|
|
Description
|
|
September 30, 2012
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$ |
28,928 |
|
|
$ |
28,928 |
|
Loans held-for-sale
|
|
|
7,000 |
|
|
|
7,000 |
|
Other real estate owned
|
|
|
1,572 |
|
|
|
1,572 |
|
Mortgage servicing rights
|
|
|
1,723 |
|
|
|
1,723 |
|
Total
|
|
$ |
39,223 |
|
|
$ |
39,223 |
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
|
|
|
|
Inputs
|
|
Description
|
|
December 31, 2011
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$ |
118,613 |
|
|
$ |
118,613 |
|
Other real estate owned
|
|
|
1,800 |
|
|
|
1,800 |
|
Mortgage servicing rights
|
|
|
1,623 |
|
|
|
1,623 |
|
Total
|
|
$ |
122,036 |
|
|
$ |
122,036 |
|
|
|
|
|
|
|
|
|
|
Impaired loans are evaluated and valued at the time the loan is identified as impaired. The loans are measured based on the value of the collateral securing these loans, or techniques that are not based on market activity for loans that are not collateral dependent and require management’s judgment. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by the Company if significant, or may be valued based on the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral may be valued based on independent field examiner review or aging reports, if significant. Reviews by field examiners may be conducted based on the loan exposure
and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
The following tables summarize the valuation of financial instruments measured at fair value on a recurring basis in the condensed consolidated statements of condition at September 30, 2012 and December 31, 2011, including the additional requirement to segregate classifications to correspond to the major security type classifications utilized for disclosure purposes: (in thousands)
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
|
|
|
|
|
Observable Inputs
|
|
Description
|
|
September 30, 2012
|
|
|
(Level 2)
|
|
U.S. Government Agency securities
|
|
$ |
12,136 |
|
|
$ |
12,136 |
|
Obligations of states and political subdivisions
|
|
|
170,411 |
|
|
|
170,411 |
|
Collateralized mortgage obligations
|
|
|
95,964 |
|
|
|
95,964 |
|
Mortgage-backed securities
|
|
|
37,056 |
|
|
|
37,056 |
|
Corporate Bonds
|
|
|
13,101 |
|
|
|
13,101 |
|
Total
|
|
$ |
328,668 |
|
|
$ |
328,668 |
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
December 31, 2011
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Obligations of states and political subdivisions
|
|
$ |
171,992 |
|
|
$ |
171,992 |
|
|
$ |
- |
|
Collateralized mortgage obligations
|
|
|
126,770 |
|
|
|
118,776 |
|
|
|
7,994 |
|
Mortgage-backed securities
|
|
|
442 |
|
|
|
442 |
|
|
|
- |
|
Total
|
|
$ |
299,204 |
|
|
$ |
291,210 |
|
|
$ |
7,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between, into and/or out of Levels 1 or 2 during the quarter ended September 30, 2012. For the quarter ended September 30, 2012, there were no longer any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) due to the sale of two private label collateralized mortgage obligation (“CMO”) securities during the third quarter of 2012 as part of management’s efforts to reduce overall balance sheet risk. These securities had previously been written down $1.1 million in the fourth quarter of 2011 due to other than temporary impairment evident at that time. The Company owns no other private label CMOs.
The table below presents a reconciliation for the CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2012:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
(in thousands)
|
|
Balance at June 30, 2012
|
|
$ |
7,425 |
|
Other-than-temporary impairment
|
|
|
- |
|
Included in other comprehensive income
|
|
|
- |
|
Sales
|
|
|
(7,425 |
) |
Balance at September 30, 2012
|
|
$ |
- |
|
The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities. Such instruments are generally classified within level 1 and level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include U.S. Government agency securities, state and municipal obligations, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. Such instruments are generally classified within level 2 of the fair value hierarchy.
The types of instruments valued based on significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability are generally classified within level 3 of the fair value hierarchy. The significant unobservable inputs used in the fair value measurements of the Company’s level 3 CMOs at December 31, 2011 were voluntary prepayment rates, conditional default rates and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the conditional default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for voluntary prepayment rates.
FASB ASC 820, “Fair Value Measurements and Disclosures,” provides additional guidance in determining fair values when the volume and level of activity for the asset or liability have significantly decreased, particularly when there is no active market or where the price inputs being used represent distressed sales. It also provides guidelines for making fair value measurements more consistent with principles, reaffirming the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets become inactive.
The fair value of commitments to extend credit was estimated by either discounting cash flows or using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties. The fees charged for commitments to extend credit were not material in amount.
The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements. The contractual amounts of these commitments were $18,705,000 and $19,841,000 at September 30, 2012 and December 31, 2011, respectively. The fees charged for the commitments were not material in amount.
(4)
|
Investment Securities
|
The amortized cost, fair values and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at September 30, 2012 and December 31, 2011 were: (in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$ |
12,090 |
|
|
$ |
52 |
|
|
$ |
(6 |
) |
|
$ |
12,136 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Obligations of states and political subdivisions
|
|
|
155,883 |
|
|
|
14,528 |
|
|
|
- |
|
|
|
170,411 |
|
|
|
156,663 |
|
|
|
15,329 |
|
|
|
- |
|
|
|
171,992 |
|
Collateralized mortgage obligations
|
|
|
91,675 |
|
|
|
4,289 |
|
|
|
- |
|
|
|
95,964 |
|
|
|
122,155 |
|
|
|
5,768 |
|
|
|
(1,153 |
) |
|
|
126,770 |
|
Mortgage-backed securities
|
|
|
36,352 |
|
|
|
735 |
|
|
|
(31 |
) |
|
|
37,056 |
|
|
|
391 |
|
|
|
51 |
|
|
|
- |
|
|
|
442 |
|
Corporate Bonds
|
|
|
12,737 |
|
|
|
364 |
|
|
|
- |
|
|
|
13,101 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance at end of period
|
|
|
308,737 |
|
|
|
19,968 |
|
|
|
(37 |
) |
|
|
328,668 |
|
|
|
279,209 |
|
|
|
21,148 |
|
|
|
(1,153 |
) |
|
|
299,204 |
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
8,164 |
|
|
|
885 |
|
|
|
- |
|
|
|
9,049 |
|
|
|
9,315 |
|
|
|
846 |
|
|
|
- |
|
|
|
10,161 |
|
Total investment securities
|
|
$ |
316,901 |
|
|
$ |
20,853 |
|
|
$ |
(37 |
) |
|
$ |
337,717 |
|
|
$ |
288,524 |
|
|
$ |
21,994 |
|
|
$ |
(1,153 |
) |
|
$ |
309,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of securities available for sale were $3.6 million for the three and nine months ended September 30, 2012, resulting in a net loss of $162 thousand. For the three months ended September 30, 2011, there were no such sales. For the nine months ended September 30, 2011, such proceeds were $42.4 million, resulting in a net gain of $1.6 million.
The amortized cost and approximate fair value of the Company’s investment securities at September 30, 2012 are shown below by expected maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
September 30, 2012
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Securities Available for sale:
|
|
|
|
|
|
|
Due in one year or less
|
|
$ |
3,232 |
|
|
$ |
3,277 |
|
Due from one to five years
|
|
|
82,842 |
|
|
|
89,291 |
|
Due from five to ten years
|
|
|
87,431 |
|
|
|
95,843 |
|
Due after ten years
|
|
|
7,205 |
|
|
|
7,237 |
|
Subtotal
|
|
|
180,710 |
|
|
|
195,648 |
|
Collateralized mortgage obligations
|
|
|
91,675 |
|
|
|
95,964 |
|
Mortgage-backed securities
|
|
|
36,352 |
|
|
|
37,056 |
|
Total securities available for sale
|
|
|
308,737 |
|
|
|
328,668 |
|
Securities Held to maturity:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
1,559 |
|
|
|
1,574 |
|
Due from one to five years
|
|
|
6,127 |
|
|
|
6,939 |
|
Due from five to ten years
|
|
|
478 |
|
|
|
536 |
|
Subtotal
|
|
|
8,164 |
|
|
|
9,049 |
|
Total investment securities
|
|
$ |
316,901 |
|
|
$ |
337,717 |
|
|
|
|
|
|
|
|
|
|
As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank stock with a book value of $712,000. The stock has no maturity and there is no public market for the investment.
As a member of the Federal Home Loan Bank of New York (“FHLB”), the Bank owns 15,851 shares of FHLB stock with a book value of $1,585,000. The stock has no maturity and there is no public market for the investment. The stock continues to pay dividends and has not placed restrictions on redemptions and as such, was not deemed impaired as of September 30, 2012.
At September 30, 2012 and December 31, 2011, investment securities carried at $224,736,000 and $201,207,000, respectively, were pledged to secure trust deposits and public funds on deposit.
The table below indicates the length of time individual securities have been held in a continuous unrealized loss position at the date indicated: (in thousands)
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
As of September 30, 2012
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Type of securities
|
|
Securities
|
|
|
Fair value
|
|
|
Losses
|
|
|
Fair value
|
|
|
Losses
|
|
|
Fair value
|
|
|
Losses
|
|
U.S. government agency securities
|
|
|
1 |
|
|
$ |
4,036 |
|
|
$ |
6 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,036 |
|
|
$ |
6 |
|
Mortgage-backed securities
|
|
|
1 |
|
|
|
4,827 |
|
|
|
31 |
|
|
|
- |
|
|
|
- |
|
|
|
4,827 |
|
|
|
31 |
|
Total
|
|
|
2 |
|
|
$ |
8,863 |
|
|
$ |
37 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,863 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
As of December 31, 2011
|
|
Number of
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
Type of securities
|
|
Securities
|
|
|
Fair value
|
|
|
Losses
|
|
|
Fair value
|
|
|
Losses
|
|
|
Fair value
|
|
|
Losses
|
|
Collateralized mortgage obligations
|
|
|
2 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,994 |
|
|
$ |
1,153 |
|
|
$ |
7,994 |
|
|
$ |
1,153 |
|
Total
|
|
|
2 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,994 |
|
|
$ |
1,153 |
|
|
$ |
7,994 |
|
|
$ |
1,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.” Upon review of the considerations mentioned here during the third quarter of 2012, no OTTI was deemed to be warranted.
In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized 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 other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When an OTTI occurs under the model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not 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 or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’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 basis less any current-period loss, the OTTI is 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 flows 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 tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
During the third quarter of 2012, the Company sold two private label CMOs that had been in a continuous loss position for twelve months or longer as part of management’s efforts to reduce overall balance sheet risk. These securities had previously been written down by $1.1 million in the fourth quarter of 2011 due to other than temporary impairment evident at that time. The Company owns no other private label CMOs.
The following table summarizes the two non-agency, private label CMOs owned by the Company at December 31, 2011, by year of vintage with OTTI, credit ratings and related credit losses recognized in earnings. Management determined the estimated fair values for each security based on discounted cash flow analyses using the Intex Desktop Valuation model. Management explicitly calculates the credit component utilizing conditional default and loss severity vectors with the Intex model. Management relies on FASB ASC paragraph 820-10-55-5 to provide guidance on the discount rates to be used when a market is not active. According to the standard, the discount rate should take into account all of the following factors:
•
|
The time value of money (risk-free rate)
|
•
|
Price for bearing the uncertainty in the cash flows (risk premium)
|
•
|
Other case-specific factors that would be considered by market participants, including a liquidity adjustment.
|
Weighted average key assumptions utilized in the valuations for December 31, 2011 were as follows:
•
|
Voluntary Prepayments – 16.2%
|
•
|
Conditional Default Rates – 16.2% for the first 24 months, then trending downward in a linear fashion to 9.3% for the following 12 months, then to zero through approximately 17 years.
|
•
|
Loss Severity – 55.5% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI
|
|
|
|
Year of
|
|
|
Total
|
|
|
Total
|
|
|
Related to
|
|
|
|
Vintage
|
|
|
Fair
|
|
|
Amortized
|
|
|
Credit Loss at
|
|
(in thousands)
|
|
2006
|
|
|
Value
|
|
|
Cost
|
|
|
December 31, 2011
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC and Below
|
|
$ |
7,994 |
|
|
$ |
7,994 |
|
|
$ |
9,147 |
|
|
$ |
1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO's
|
|
$ |
7,994 |
|
|
$ |
7,994 |
|
|
$ |
9,147 |
|
|
$ |
1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table categorizes total loans (net of unearned discount) by loan class at September 30, 2012 and December 31, 2011: (dollars in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Commercial and industrial
|
|
$ |
177,077 |
|
|
$ |
206,652 |
|
Commercial real estate
|
|
|
340,581 |
|
|
|
428,646 |
|
Real estate construction loans
|
|
|
23,781 |
|
|
|
49,704 |
|
Residential mortgages (1st and 2nd liens)
|
|
|
138,934 |
|
|
|
160,619 |
|
Home equity loans
|
|
|
70,276 |
|
|
|
79,684 |
|
Consumer loans
|
|
|
15,563 |
|
|
|
43,831 |
|
Other loans
|
|
|
381 |
|
|
|
543 |
|
Gross Loans
|
|
|
766,593 |
|
|
|
969,679 |
|
Unearned discount
|
|
|
(24 |
) |
|
|
(25 |
) |
Allowance for loan losses
|
|
|
(21,021 |
) |
|
|
(39,958 |
) |
Net loans at end of period
|
|
$ |
745,548 |
|
|
$ |
929,696 |
|
|
|
|
|
|
|
|
|
|
(6)
|
Allowance for Loan Losses
|
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Generally, troubled debt restructurings are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a troubled debt restructuring to accrual status upon six months of performance under the new terms.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans over $250,000 in the commercial and industrial, commercial real estate and construction loan classes rated substandard or worse and all troubled debt restructurings are evaluated individually for impairment. All other loans are evaluated as homogeneous pools. If a loan is impaired, a specific reserve is recorded so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be “collateral-dependent,” the loan is reported at the fair value of the collateral net of costs to sell. For troubled debt restructurings that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses.
The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over a seven-quarter historical loan loss period (which period will continue to be expanded for future calculations). This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified:
·
|
Commercial and industrial loans
|
·
|
Commercial real estate mortgages
|
·
|
Real estate -- construction loans
|
·
|
Residential mortgages (1st and 2nd liens)
|
For performing loans, an estimate of adequacy is made by applying qualitative factors specific to the portfolio to the period-end balances. Consideration is also given to the type and collateral of the loans with particular attention paid to commercial real estate construction loans, due to the inherent risk of this type of loan. Specific and general reserves are available for any identified loss.
At September 30, 2012, non-performing loans, including non-accrual loans and loans contractually past due 90 days or more with regard to payment of principal and/or interest, totaled $14,356,000 as compared to $80,760,000 at December 31, 2011. When compared to total loans, non-performing loans declined to 1.9% at September 30, 2012, down from 8.3% at December 31, 2011. This decline resulted largely from the Company’s previously announced bulk sales of $30 million of non-performing and classified loans in June 2012 and $51 million in September 2012.
Information pertaining to the allowance for loan losses at September 30, 2012 is as follows: (in thousands)
|
|
Commercial and industrial loans
|
|
|
Commercial real estate mortgages
|
|
|
Real estate construction loans
|
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer and other loans
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (total allowance)
|
|
$ |
9,936 |
|
|
$ |
7,911 |
|
|
$ |
70 |
|
|
$ |
1,345 |
|
|
$ |
1,561 |
|
|
$ |
198 |
|
|
$ |
21,021 |
|
Ending balance: individually evaluated for impairment
|
|
|
242 |
|
|
|
- |
|
|
|
- |
|
|
|
550 |
|
|
|
- |
|
|
|
1 |
|
|
|
793 |
|
Ending balance: collectively evaluated for impairment
|
|
|
9,694 |
|
|
|
7,911 |
|
|
|
70 |
|
|
|
795 |
|
|
|
1,561 |
|
|
|
197 |
|
|
|
20,228 |
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (loan portfolio)
|
|
$ |
177,077 |
|
|
$ |
340,581 |
|
|
$ |
23,781 |
|
|
$ |
138,934 |
|
|
$ |
70,276 |
|
|
$ |
15,920 |
|
|
$ |
766,569 |
|
Ending balance: individually evaluated for impairment
|
|
|
11,597 |
|
|
|
9,718 |
|
|
|
5,584 |
|
|
|
2,687 |
|
|
|
- |
|
|
|
135 |
|
|
|
29,721 |
|
Ending balance: collectively evaluated for impairment
|
|
|
165,480 |
|
|
|
330,863 |
|
|
|
18,197 |
|
|
|
136,247 |
|
|
|
70,276 |
|
|
|
15,785 |
|
|
|
736,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further information pertaining to the allowance for loan losses at December 31, 2011 is as follows: (in thousands)
|
|
Commercial and industrial loans
|
|
|
Commercial real estate mortgages
|
|
|
Real estate construction loans
|
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer loans
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (total allowance)
|
|
$ |
25,080 |
|
|
$ |
11,029 |
|
|
$ |
623 |
|
|
$ |
2,401 |
|
|
$ |
512 |
|
|
$ |
313 |
|
|
$ |
39,958 |
|
Ending balance: individually evaluated for impairment
|
|
|
7,477 |
|
|
|
3,092 |
|
|
|
57 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,626 |
|
Ending balance: collectively evaluated for impairment
|
|
|
17,603 |
|
|
|
7,937 |
|
|
|
566 |
|
|
|
2,401 |
|
|
|
512 |
|
|
|
313 |
|
|
|
29,332 |
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (loan portfolio) (1)
|
|
$ |
206,652 |
|
|
$ |
428,646 |
|
|
$ |
49,704 |
|
|
$ |
160,619 |
|
|
$ |
79,684 |
|
|
$ |
43,806 |
|
|
$ |
969,111 |
|
Ending balance: individually evaluated for impairment
|
|
|
36,559 |
|
|
|
66,402 |
|
|
|
19,251 |
|
|
|
8,345 |
|
|
|
3,897 |
|
|
|
646 |
|
|
|
135,100 |
|
Ending balance: collectively evaluated for impairment
|
|
|
170,093 |
|
|
|
362,244 |
|
|
|
30,453 |
|
|
|
152,274 |
|
|
|
75,787 |
|
|
|
43,160 |
|
|
|
834,011 |
|
(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of current and past due loans at September 30, 2012: (in thousands)
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
30 - 59 days
|
|
|
60 - 89 days
|
|
|
90 days and over
|
|
|
Total
|
|
|
Current
|
|
|
Total
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$ |
1,631 |
|
|
$ |
1,716 |
|
|
$ |
5,963 |
|
|
$ |
9,310 |
|
|
$ |
167,767 |
|
|
$ |
177,077 |
|
Commercial real estate
|
|
|
1,950 |
|
|
|
588 |
|
|
|
5,893 |
|
|
|
8,431 |
|
|
|
332,150 |
|
|
|
340,581 |
|
Real estate construction loans
|
|
|
1,866 |
|
|
|
4,250 |
|
|
|
1,334 |
|
|
|
7,450 |
|
|
|
16,331 |
|
|
|
23,781 |
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1st and 2nd liens)
|
|
|
1,061 |
|
|
|
1,481 |
|
|
|
1,031 |
|
|
|
3,573 |
|
|
|
135,361 |
|
|
|
138,934 |
|
Home equity loans
|
|
|
964 |
|
|
|
175 |
|
|
|
- |
|
|
|
1,139 |
|
|
|
69,137 |
|
|
|
70,276 |
|
Consumer and other loans
|
|
|
118 |
|
|
|
16 |
|
|
|
135 |
|
|
|
269 |
|
|
|
15,651 |
|
|
|
15,920 |
|
Total
|
|
$ |
7,590 |
|
|
$ |
8,226 |
|
|
$ |
14,356 |
|
|
$ |
30,172 |
|
|
$ |
736,397 |
|
|
$ |
766,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of current and past due loans at December 31, 2011: (in thousands)
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
30 - 59 days
|
|
|
60 - 89 days
|
|
|
90 days and over
|
|
|
Total
|
|
|
Current
|
|
|
Total
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$ |
9,774 |
|
|
$ |
8,574 |
|
|
$ |
16,867 |
|
|
$ |
35,215 |
|
|
$ |
171,437 |
|
|
$ |
206,652 |
|
Commercial real estate
|
|
|
4,981 |
|
|
|
4,843 |
|
|
|
45,344 |
|
|
|
55,168 |
|
|
|
373,478 |
|
|
|
428,646 |
|
Real estate construction loans
|
|
|
1,282 |
|
|
|
- |
|
|
|
6,978 |
|
|
|
8,260 |
|
|
|
41,444 |
|
|
|
49,704 |
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1st and 2nd liens)
|
|
|
3,479 |
|
|
|
1,144 |
|
|
|
7,028 |
|
|
|
11,651 |
|
|
|
148,968 |
|
|
|
160,619 |
|
Home equity loans
|
|
|
- |
|
|
|
198 |
|
|
|
3,897 |
|
|
|
4,095 |
|
|
|
75,589 |
|
|
|
79,684 |
|
Consumer loans
|
|
|
215 |
|
|
|
78 |
|
|
|
646 |
|
|
|
939 |
|
|
|
42,867 |
|
|
|
43,806 |
|
Total (1)
|
|
$ |
19,731 |
|
|
$ |
14,837 |
|
|
$ |
80,760 |
|
|
$ |
115,328 |
|
|
$ |
853,783 |
|
|
$ |
969,111 |
|
(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.
|
|
|
|
|
|
|
|
|
|
The following is a summary of impaired loans, by class of loan, at September 30, 2012 and December 31, 2011: (in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Impaired Loans
|
|
|
Impaired Loans
|
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Balance
|
|
|
Allowance Allocated
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Balance
|
|
|
Allowance Allocated
|
|
With no allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
$ |
11,675 |
|
|
$ |
11,347 |
|
|
$ |
- |
|
|
$ |
21,162 |
|
|
$ |
20,885 |
|
|
$ |
- |
|
Commercial real estate mortgages
|
|
|
11,384 |
|
|
|
9,718 |
|
|
|
- |
|
|
|
52,679 |
|
|
|
46,687 |
|
|
|
- |
|
Real estate construction loans
|
|
|
5,584 |
|
|
|
5,584 |
|
|
|
- |
|
|
|
19,939 |
|
|
|
17,044 |
|
|
|
- |
|
Residential mortgages (1st & 2nd liens)
|
|
|
360 |
|
|
|
360 |
|
|
|
- |
|
|
|
8,914 |
|
|
|
8,345 |
|
|
|
- |
|
Home equity loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,995 |
|
|
|
3,897 |
|
|
|
- |
|
Consumer and other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
646 |
|
|
|
646 |
|
|
|
- |
|
Subtotal
|
|
$ |
29,003 |
|
|
$ |
27,009 |
|
|
$ |
- |
|
|
$ |
107,335 |
|
|
$ |
97,504 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
$ |
251 |
|
|
$ |
250 |
|
|
$ |
242 |
|
|
$ |
15,877 |
|
|
$ |
15,674 |
|
|
$ |
7,477 |
|
Commercial real estate mortgages
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,609 |
|
|
|
19,715 |
|
|
|
3,092 |
|
Real estate construction loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,207 |
|
|
|
2,207 |
|
|
|
57 |
|
Residential mortgages (1st & 2nd liens)
|
|
|
2,343 |
|
|
|
2,327 |
|
|
|
550 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer and other loans
|
|
|
135 |
|
|
|
135 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Subtotal
|
|
$ |
2,729 |
|
|
$ |
2,712 |
|
|
$ |
793 |
|
|
$ |
38,693 |
|
|
$ |
37,596 |
|
|
$ |
10,626 |
|
Total
|
|
$ |
31,732 |
|
|
$ |
29,721 |
|
|
$ |
793 |
|
|
$ |
146,028 |
|
|
$ |
135,100 |
|
|
$ |
10,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present information regarding average balances of impaired loans and interest income recognized on impaired loans for the quarters and nine months ended September 30, 2012 and 2011: (in thousands)
|
|
Quarter Ended September 30, 2012
|
|
|
Quarter Ended September 30, 2011
|
|
|
|
Impaired Loans
|
|
|
Impaired Loans
|
|
|
|
Average recorded investment in impaired loans
|
|
|
Interest income recognized on impaired loans
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
|
Average recorded investment in impaired loans
|
|
|
Interest income recognized on impaired loans
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
Commercial and industrial loans
|
|
$ |
19,946 |
|
|
$ |
58 |
|
|
$ |
- |
|
|
$ |
19,597 |
|
|
$ |
451 |
|
|
$ |
- |
|
Commercial real estate mortgages
|
|
|
24,146 |
|
|
|
209 |
|
|
|
- |
|
|
|
22,485 |
|
|
|
952 |
|
|
|
- |
|
Real estate construction loans
|
|
|
13,166 |
|
|
|
72 |
|
|
|
- |
|
|
|
35,839 |
|
|
|
- |
|
|
|
- |
|
Residential mortgages (1st & 2nd liens)
|
|
|
4,973 |
|
|
|
42 |
|
|
|
- |
|
|
|
6,484 |
|
|
|
- |
|
|
|
- |
|
Home equity loans
|
|
|
2,360 |
|
|
|
4 |
|
|
|
- |
|
|
|
2,707 |
|
|
|
- |
|
|
|
- |
|
Consumer loans
|
|
|
352 |
|
|
|
- |
|
|
|
- |
|
|
|
166 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
64,943 |
|
|
$ |
385 |
|
|
$ |
- |
|
|
$ |
87,278 |
|
|
$ |
1,403 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Impaired Loans
|
|
|
Impaired Loans
|
|
|
|
Average recorded investment in impaired loans
|
|
|
Interest income recognized on impaired loans
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
|
Average recorded investment in impaired loans
|
|
|
Interest income recognized on impaired loans
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
Commercial and industrial loans
|
|
$ |
27,660 |
|
|
$ |
373 |
|
|
$ |
- |
|
|
$ |
20,376 |
|
|
$ |
1,060 |
|
|
$ |
- |
|
Commercial real estate mortgages
|
|
|
48,318 |
|
|
|
468 |
|
|
|
- |
|
|
|
27,027 |
|
|
|
2,621 |
|
|
|
- |
|
Real estate construction loans
|
|
|
16,809 |
|
|
|
410 |
|
|
|
- |
|
|
|
49,816 |
|
|
|
- |
|
|
|
- |
|
Residential mortgages (1st & 2nd liens)
|
|
|
7,202 |
|
|
|
127 |
|
|
|
- |
|
|
|
5,992 |
|
|
|
- |
|
|
|
- |
|
Home equity loans
|
|
|
3,396 |
|
|
|
4 |
|
|
|
- |
|
|
|
2,747 |
|
|
|
- |
|
|
|
- |
|
Consumer loans
|
|
|
546 |
|
|
|
- |
|
|
|
- |
|
|
|
152 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
103,931 |
|
|
$ |
1,382 |
|
|
$ |
- |
|
|
$ |
106,110 |
|
|
$ |
3,681 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of information pertaining to non-performing assets: (in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Non-accrual Loans
|
|
$ |
14,356 |
|
|
$ |
80,760 |
|
Non-accrual Loans Held-for-Sale
|
|
|
7,000 |
|
|
|
- |
|
Loans 90 Days Past Due and Still Accruing
|
|
|
- |
|
|
|
- |
|
Other Real Estate Owned
|
|
|
1,572 |
|
|
|
1,800 |
|
Total Non-performing Assets
|
|
$ |
22,928 |
|
|
$ |
82,560 |
|
Troubled debt restructurings accruing interest
|
|
$ |
9,992 |
|
|
$ |
1,496 |
|
Troubled debt restructurings - nonaccruing
|
|
$ |
5,306 |
|
|
$ |
24,979 |
|
The following table summarizes non-accrual loans by loan class as of September 30, 2012 and December 31, 2011 (dollars in thousands):
|
|
Non-accrual Loans
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
% of
|
|
|
|
|
|
|
|
|
Total
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Loans (1)
|
|
|
Total
|
|
|
|
|
|
% of
|
|
|
Loans (1)
|
|
|
Total
|
|
|
|
9/30/2012
|
|
|
Total
|
|
|
9/30/2012
|
|
|
Loans
|
|
|
12/31/2011
|
|
|
Total
|
|
|
12/31/2011
|
|
|
Loans
|
|
Commercial and industrial loans
|
|
$ |
5,963 |
|
|
|
41.6 |
% |
|
$ |
177,077 |
|
|
|
0.8 |
% |
|
$ |
16,867 |
|
|
|
20.9 |
% |
|
$ |
206,652 |
|
|
|
1.7 |
% |
Commercial real estate mortgages
|
|
|
5,893 |
|
|
|
41.0 |
|
|
|
340,581 |
|
|
|
0.8 |
|
|
|
45,344 |
|
|
|
56.2 |
|
|
|
428,646 |
|
|
|
4.7 |
|
Real estate construction loans
|
|
|
1,334 |
|
|
|
9.3 |
|
|
|
23,781 |
|
|
|
0.2 |
|
|
|
6,978 |
|
|
|
8.6 |
|
|
|
49,704 |
|
|
|
0.7 |
|
Residential mortgages (1st & 2nd liens)
|
|
|
1,031 |
|
|
|
7.2 |
|
|
|
138,934 |
|
|
|
0.1 |
|
|
|
7,028 |
|
|
|
8.7 |
|
|
|
160,619 |
|
|
|
0.7 |
|
Home equity loans
|
|
|
- |
|
|
|
- |
|
|
|
70,276 |
|
|
|
- |
|
|
|
3,897 |
|
|
|
4.8 |
|
|
|
79,684 |
|
|
|
0.4 |
|
Consumer loans
|
|
|
135 |
|
|
|
0.9 |
|
|
|
15,539 |
|
|
|
- |
|
|
|
646 |
|
|
|
0.8 |
|
|
|
43,806 |
|
|
|
0.1 |
|
Other loans
|
|
|
- |
|
|
|
- |
|
|
|
381 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
543 |
|
|
|
- |
|
Total non-accrual loans
|
|
$ |
14,356 |
|
|
|
100.0 |
% |
|
$ |
766,569 |
|
|
|
1.9 |
% |
|
$ |
80,760 |
|
|
|
100.0 |
% |
|
$ |
969,654 |
|
|
|
8.3 |
% |
(1) Net of unearned discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no loans past due 90 days or more and still accruing at September 30, 2012 or December 31, 2011.
The following table details the collateral value securing non-accrual loans: (in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Non-accrual Loans
|
|
|
Non-accrual Loans
|
|
|
|
Principal Balance
|
|
|
Collateral Value
|
|
|
Principal Balance
|
|
|
Collateral Value
|
|
Commercial and industrial loans (1)
|
|
$ |
5,963 |
|
|
$ |
4,400 |
|
|
$ |
16,867 |
|
|
$ |
- |
|
Commercial real estate mortgages
|
|
|
5,893 |
|
|
|
13,650 |
|
|
|
45,344 |
|
|
|
68,067 |
|
Real estate construction loans
|
|
|
1,334 |
|
|
|
2,300 |
|
|
|
6,978 |
|
|
|
6,715 |
|
Residential mortgages (1st and 2nd liens)
|
|
|
1,031 |
|
|
|
1,326 |
|
|
|
7,028 |
|
|
|
14,133 |
|
Home equity loans
|
|
|
- |
|
|
|
- |
|
|
|
3,897 |
|
|
|
7,438 |
|
Consumer loans
|
|
|
135 |
|
|
|
135 |
|
|
|
646 |
|
|
|
- |
|
Total
|
|
$ |
14,356 |
|
|
$ |
21,811 |
|
|
$ |
80,760 |
|
|
$ |
96,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Repayment of commercial and industrial loans is expected from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non- real estate collateral for this class of loans.
For the non-accrual loans outstanding at the end of the reported periods, additional interest income of approximately $237,000 and $1,571,000 would have been recorded during the three months ended September 30, 2012 and 2011, respectively, if the loans had performed in accordance with their original terms. For the nine months ended September 30, 2012 and 2011, additional interest income of approximately $1,260,000 and $3,335,000, respectively, would have been recorded if the loans had performed in accordance with their original terms.
A total of $37,000 is committed to be advanced in connection with impaired loans as of September 30, 2012. This represents the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing. It is the Company’s policy to evaluate advances on impaired loans on a case by case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments but may do so in certain circumstances.
The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of September 30, 2012: (in thousands)
|
|
Commercial and industrial loans
|
|
|
Commercial real estate mortgages
|
|
|
Real estate construction loans
|
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer and other loans (2)
|
|
|
Total
|
|
Unimpaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pass loans
|
|
$ |
147,163 |
|
|
$ |
280,384 |
|
|
$ |
3,257 |
|
|
$ |
136,247 |
|
|
$ |
70,276 |
|
|
$ |
15,785 |
|
|
$ |
653,112 |
|
Loss factor (1)
|
|
|
5.81 |
% |
|
|
2.35 |
% |
|
|
0.61 |
% |
|
|
0.58 |
% |
|
|
2.22 |
% |
|
|
1.25 |
% |
|
|
2.71 |
% |
Reserve
|
|
|
8,556 |
|
|
|
6,596 |
|
|
|
20 |
|
|
|
795 |
|
|
|
1,561 |
|
|
|
197 |
|
|
|
17,725 |
|
Total special mention loans
|
|
|
7,143 |
|
|
|
39,732 |
|
|
|
4,300 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
51,175 |
|
Loss factor
|
|
|
5.59 |
% |
|
|
2.50 |
% |
|
|
0.30 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
2.75 |
% |
Reserve
|
|
|
399 |
|
|
|
993 |
|
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,405 |
|
Total substandard loans
|
|
|
11,174 |
|
|
|
10,747 |
|
|
|
10,640 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
32,561 |
|
Loss factor
|
|
|
6.61 |
% |
|
|
3.00 |
% |
|
|
0.35 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
3.37 |
% |
Reserve
|
|
|
739 |
|
|
|
322 |
|
|
|
37 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,098 |
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total substandard loans
|
|
|
11,564 |
|
|
|
9,718 |
|
|
|
5,584 |
|
|
|
2,687 |
|
|
|
- |
|
|
|
135 |
|
|
|
29,688 |
|
Loss factor (3)
|
|
|
1.81 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
20.47 |
% |
|
|
0.00 |
% |
|
|
0.74 |
% |
|
|
2.56 |
% |
Reserve
|
|
|
209 |
|
|
|
- |
|
|
|
- |
|
|
|
550 |
|
|
|
- |
|
|
|
1 |
|
|
|
760 |
|
Total doubtful loans
|
|
|
33 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
Loss factor
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Reserve
|
|
|
33 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
Total unimpaired loans
|
|
$ |
165,480 |
|
|
$ |
330,863 |
|
|
$ |
18,197 |
|
|
$ |
136,247 |
|
|
$ |
70,276 |
|
|
$ |
15,785 |
|
|
$ |
736,848 |
|
Total reserve on unimpaired loans
|
|
$ |
9,694 |
|
|
$ |
7,911 |
|
|
$ |
70 |
|
|
$ |
795 |
|
|
$ |
1,561 |
|
|
$ |
197 |
|
|
$ |
20,228 |
|
(1) Loss factor calculation is reserve as a percentage of balance for a loan class and includes a pro-rata apportionment of unallocated reserves.
|
|
(2) Net of unearned discount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Loss factors are driven by higher collateral positions and charge-offs taken within the commercial and industrial, commercial real estate and real estate construction loan classes.
|
|
The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of December 31, 2011: (in thousands)
|
Commercial and industrial loans
|
Commercial real estate mortgages
|
Real estate construction loans
|
Residential mortgages (1st and 2nd liens)
|
Home equity loans
|
Consumer loans (4)
|
Total
|
Unimpaired loans:
|
|
|
|
|
|
|
|
|
|
Total pass loans (1)
|
$ 151,553
|
|
$ 289,856
|
$ 4,932
|
|
$ 152,274
|
$ 75,787
|
$ 31,385
|
$ 705,787
|
Loss factor (2)
|
9.98%
|
|
2.19%
|
1.74%
|
|
1.58%
|
0.68%
|
1.00%
|
3.51%
|
Reserve
|
15,121
|
|
6,359
|
86
|
|
2,401
|
512
|
313
|
24,792
|
Total special mention loans
|
16,448
|
|
41,283
|
7,772
|
|
-
|
-
|
-
|
65,503
|
Loss factor
|
8.68%
|
|
2.18%
|
1.88%
|
|
0.00%
|
0.00%
|
0.00%
|
3.78%
|
Reserve
|
1,428
|
|
900
|
146
|
|
-
|
-
|
-
|
2,474
|
Total substandard loans
|
13,892
|
|
31,105
|
17,749
|
|
-
|
-
|
-
|
62,746
|
Loss factor
|
7.59%
|
|
2.18%
|
1.88%
|
|
0.00%
|
0.00%
|
0.00%
|
3.29%
|
Reserve
|
1,054
|
|
678
|
334
|
|
-
|
-
|
-
|
2,066
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
Total substandard loans
|
36,316
|
|
66,402
|
17,639
|
|
8,345
|
3,897
|
646
|
133,245
|
Loss factor
|
20.52%
|
|
4.66%
|
0.32%
|
(3)
|
0.00%
|
0.00%
|
0.00%
|
7.96%
|
Reserve
|
7,452
|
|
3,092
|
57
|
|
-
|
-
|
-
|
10,601
|
Total doubtful loans
|
243
|
|
-
|
1,612
|
|
-
|
-
|
-
|
1,855
|
Loss factor
|
10.29%
|
|
0.00%
|
0.00%
|
|
0.00%
|
0.00%
|
0.00%
|
1.35%
|
Reserve
|
25
|
|
-
|
-
|
|
-
|
-
|
-
|
25
|
Total unimpaired loans
|
$ 181,893
|
|
$ 362,244
|
$ 30,453
|
|
$ 152,274
|
$ 75,787
|
$ 31,385
|
$ 834,036
|
Total reserve on unimpaired loans
|
$ 17,603
|
|
$ 7,937
|
$ 566
|
|
$ 2,401
|
$ 512
|
$ 313
|
$ 29,332
|
(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.
|
|
|
|
(2) Loss factor calculation is reserve as a percentage of balance for a loan class.
|
|
|
|
|
|
(3) Loss factor is driven by higher collateral positions and charge-offs taken within this loan class.
|
|
|
|
(4) Net of unearned discount.
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity in the allowance for loan losses by loan class for the periods indicated: (in thousands)
|
|
Commercial and Industrial Loans
|
|
|
Commercial Real Estate Mortgages
|
|
|
Real Estate Construction Loans
|
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
16,319 |
|
|
$ |
8,851 |
|
|
$ |
176 |
|
|
$ |
2,286 |
|
|
$ |
1,406 |
|
|
$ |
189 |
|
|
$ |
29,227 |
|
Charge-offs
|
|
|
(6,689 |
) |
|
|
(8,102 |
) |
|
|
(2,123 |
) |
|
|
(2,885 |
) |
|
|
(1,360 |
) |
|
|
(179 |
) |
|
|
(21,338 |
) |
Recoveries
|
|
|
462 |
|
|
|
- |
|
|
|
260 |
|
|
|
112 |
|
|
|
246 |
|
|
|
52 |
|
|
|
1,132 |
|
(Credit) provision for loan losses
|
|
|
(156 |
) |
|
|
7,162 |
|
|
|
1,757 |
|
|
|
1,832 |
|
|
|
1,269 |
|
|
|
136 |
|
|
|
12,000 |
|
Balance at end of period
|
|
$ |
9,936 |
|
|
$ |
7,911 |
|
|
$ |
70 |
|
|
$ |
1,345 |
|
|
$ |
1,561 |
|
|
$ |
198 |
|
|
$ |
21,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
30,486 |
|
|
$ |
11,210 |
|
|
$ |
4,163 |
|
|
$ |
1,691 |
|
|
$ |
1,908 |
|
|
$ |
453 |
|
|
$ |
49,911 |
|
Charge-offs
|
|
|
(5,248 |
) |
|
|
(1,832 |
) |
|
|
(232 |
) |
|
|
- |
|
|
|
(121 |
) |
|
|
(34 |
) |
|
|
(7,467 |
) |
Recoveries
|
|
|
373 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26 |
|
|
|
399 |
|
Reclass to allowance for contingent liabilities
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(50 |
) |
Provision for loan losses
|
|
|
(1,865 |
) |
|
|
4,382 |
|
|
|
(1,911 |
) |
|
|
406 |
|
|
|
(69 |
) |
|
|
(43 |
) |
|
|
900 |
|
Balance at end of period
|
|
$ |
23,746 |
|
|
$ |
13,710 |
|
|
$ |
2,020 |
|
|
$ |
2,097 |
|
|
$ |
1,718 |
|
|
$ |
402 |
|
|
$ |
43,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
25,080 |
|
|
$ |
11,029 |
|
|
$ |
623 |
|
|
$ |
2,401 |
|
|
$ |
512 |
|
|
$ |
313 |
|
|
$ |
39,958 |
|
Charge-offs
|
|
|
(7,816 |
) |
|
|
(15,794 |
) |
|
|
(2,123 |
) |
|
|
(3,473 |
) |
|
|
(1,953 |
) |
|
|
(261 |
) |
|
|
(31,420 |
) |
Recoveries
|
|
|
2,086 |
|
|
|
- |
|
|
|
340 |
|
|
|
114 |
|
|
|
246 |
|
|
|
97 |
|
|
|
2,883 |
|
(Credit) provision for loan losses
|
|
|
(9,414 |
) |
|
|
12,676 |
|
|
|
1,230 |
|
|
|
2,303 |
|
|
|
2,756 |
|
|
|
49 |
|
|
|
9,600 |
|
Balance at end of period
|
|
$ |
9,936 |
|
|
$ |
7,911 |
|
|
$ |
70 |
|
|
$ |
1,345 |
|
|
$ |
1,561 |
|
|
$ |
198 |
|
|
$ |
21,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
13,826 |
|
|
$ |
9,226 |
|
|
$ |
3,177 |
|
|
$ |
519 |
|
|
$ |
1,392 |
|
|
$ |
279 |
|
|
$ |
28,419 |
|
Charge-offs
|
|
|
(6,537 |
) |
|
|
(1,832 |
) |
|
|
(232 |
) |
|
|
(411 |
) |
|
|
(191 |
) |
|
|
(178 |
) |
|
|
(9,381 |
) |
Recoveries
|
|
|
551 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
64 |
|
|
|
617 |
|
Reclass to allowance for contingent liabilities
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(50 |
) |
Provision for loan losses
|
|
|
15,906 |
|
|
|
6,366 |
|
|
|
(925 |
) |
|
|
1,987 |
|
|
|
517 |
|
|
|
237 |
|
|
|
24,088 |
|
Balance at end of period
|
|
$ |
23,746 |
|
|
$ |
13,710 |
|
|
$ |
2,020 |
|
|
$ |
2,097 |
|
|
$ |
1,718 |
|
|
$ |
402 |
|
|
$ |
43,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a $12.0 million consolidated provision for loan losses during the third quarter of 2012, principally a result of the $51 million bulk sale of non-performing and classified loans which occurred during this period. Despite $6.7 million in charge-offs recorded for commercial and industrial loans in the third quarter, the Company recorded a $156 thousand credit to its provision for loan losses for this class of loans resulting in a $6.4 million net reduction in the commercial and industrial loans allowance balance at September 30, 2012. The third quarter credit provision in this loan class resulted from several factors, most notably a reduction in the ASC 450-20 loss factors on unimpaired pass rated loans from 9.98% at December 31, 2011 to 5.81% at September 30, 2012; a reduction in the loss factors on unimpaired special mention loans from 8.68% at December 31, 2011 to 5.59% at September 30, 2012; and a decline in the Company’s specific reserves for impaired substandard commercial and industrial loans as computed under ASC 310-10 at September 30, 2012. The impact on the computed allowance for loan losses at September 30, 2012 stemming from these changes was reductions of $6.6 million, $1.0 million and $7.2 million, respectively. The reduction in the ASC 450-20 loss factors was primarily due to an expansion of the look back period used in calculating historical losses from a trailing four quarter average to a trailing seven-quarter average time frame (which period will continue to be expanded for future calculations). This change more accurately represents the Company’s incurred and expected losses in the September 30, 2012 commercial and industrial loan portfolio.
Credit Quality Information
The Bank utilizes an eight-grade risk-rating system for commercial and industrial loans, commercial real estate and construction loans. Loans in risk grades 1- 4 are considered “pass” loans. The Bank’s risk grades are as follows:
Risk Grade 1 Excellent:
Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2 Good:
Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.
Risk Grade 3 Satisfactory:
Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:
·
|
At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;
|
·
|
At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.
|
·
|
The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.
|
·
|
During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or
|
·
|
The borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.
|
Risk Grade 4 Satisfactory/Monitored:
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.
Risk Grade 5 Special Mention:
Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment.
Risk Grade 6 Substandard:
One or more of the following characteristics may be exhibited in loans classified Substandard:
·
|
Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.
|
·
|
Loans are inadequately protected by the current net worth and paying capacity of the obligor.
|
·
|
The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.
|
·
|
Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
|
·
|
Unusual courses of action are needed to maintain a high probability of repayment.
|
·
|
The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.
|
·
|
The lender is forced into a subordinated or unsecured position due to flaws in documentation.
|
·
|
Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.
|
·
|
The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
|
·
|
There is a significant deterioration in market conditions to which the borrower is highly vulnerable.
|
Risk Grade 7 Doubtful:
One or more of the following characteristics may be present in loans classified Doubtful:
·
|
Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.
|
·
|
The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
|
·
|
The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.
|
Risk Grade 8 Loss:
Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
The Bank considers real estate, home equity and consumer loans secured by real estate that are contractually past due 90 days or more or where legal action has commenced against the borrower to be substandard. The Bank follows the Federal Financial Institutions Examination Council (“FFIEC”) Uniform Retail Credit Classification guidelines.
The Bank annually reviews the ratings on all commercial and industrial, commercial real estate and construction loans greater than $1 million. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these loan classes. Management uses the results of these reviews as part of its ongoing review process.
The following table identifies the credit risk profile by internally assigned grade as of September 30, 2012: (in thousands)
Credit Risk Profile By Internally Assigned Grade
|
|
|
|
----------Commercial Credit Exposure----------
|
|
|
----------Consumer Credit Exposure----------
|
|
|
|
Commercial and industrial loans
|
|
|
Commercial real estate mortgages
|
|
|
Real estate construction loans
|
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer and other loans
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$ |
147,163 |
|
|
$ |
280,384 |
|
|
$ |
3,257 |
|
|
$ |
136,247 |
|
|
$ |
70,276 |
|
|
$ |
15,785 |
|
|
$ |
653,112 |
|
Special mention
|
|
|
7,143 |
|
|
|
39,732 |
|
|
|
4,300 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
51,175 |
|
Substandard
|
|
|
22,738 |
|
|
|
20,465 |
|
|
|
16,224 |
|
|
|
2,687 |
|
|
|
- |
|
|
|
135 |
|
|
|
62,249 |
|
Doubtful
|
|
|
33 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
Total
|
|
$ |
177,077 |
|
|
$ |
340,581 |
|
|
$ |
23,781 |
|
|
$ |
138,934 |
|
|
$ |
70,276 |
|
|
$ |
15,920 |
|
|
$ |
766,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the credit risk profile by internally assigned grade as of December 31, 2011: (in thousands)
Credit Risk Profile By Internally Assigned Grade
|
|
|
|
----------Commercial Credit Exposure----------
|
|
----------Consumer Credit Exposure----------
|
|
|
|
Commercial and industrial loans
|
|
|
Commercial real estate mortgages
|
|
|
Real estate construction loans
|
|
Residential mortgages (1st and 2nd liens)
|
|
|
Home equity loans
|
|
|
Consumer loans
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (1)
|
|
$ |
144,952 |
|
|
$ |
289,856 |
|
|
$ |
4,932 |
|
|
$ |
152,274 |
|
|
$ |
75,787 |
|
|
$ |
43,160 |
|
|
$ |
710,961 |
|
Special mention
|
|
|
16,448 |
|
|
|
41,283 |
|
|
|
7,772 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
65,503 |
|
Substandard
|
|
|
45,009 |
|
|
|
97,507 |
|
|
|
35,388 |
|
|
|
8,345 |
|
|
|
3,897 |
|
|
|
646 |
|
|
|
190,792 |
|
Doubtful
|
|
|
243 |
|
|
|
- |
|
|
|
1,612 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,855 |
|
Total
|
|
$ |
206,652 |
|
|
$ |
428,646 |
|
|
$ |
49,704 |
|
|
$ |
160,619 |
|
|
$ |
79,684 |
|
|
$ |
43,806 |
|
|
$ |
969,111 |
|
(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding troubled debt restructurings as of September 30, 2012 and December 31, 2011 (dollars in thousands):
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Total Troubled Debt Restructurings
|
|
Number of Loans
|
|
|
Outstanding Recorded Balance
|
|
|
Number of Loans
|
|
|
Outstanding Recorded Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
41 |
|
|
$ |
7,517 |
|
|
|
52 |
|
|
$ |
6,011 |
|
Commercial real estate mortgages
|
|
|
7 |
|
|
|
5,375 |
|
|
|
9 |
|
|
|
12,083 |
|
Real estate construction loans
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
5,183 |
|
Residential mortgages
|
|
|
10 |
|
|
|
2,186 |
|
|
|
11 |
|
|
|
2,986 |
|
Consumer
|
|
|
4 |
|
|
|
220 |
|
|
|
5 |
|
|
|
212 |
|
|
|
|
62 |
|
|
$ |
15,298 |
|
|
|
79 |
|
|
$ |
26,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents, by class, information regarding troubled debt restructurings executed during the three and nine months ended September 30, 2012 (dollars in thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2012
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
New Troubled Debt Restructurings
|
|
Loans
|
|
|
Balance
|
|
|
Balance
|
|
|
Loans
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
3 |
|
|
$ |
815 |
|
|
$ |
815 |
|
|
|
13 |
|
|
$ |
5,920 |
|
|
$ |
5,920 |
|
Residential mortgages
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
81 |
|
|
|
81 |
|
Consumer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
49 |
|
|
|
49 |
|
|
|
|
3 |
|
|
$ |
815 |
|
|
$ |
815 |
|
|
|
15 |
|
|
$ |
6,050 |
|
|
$ |
6,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents by class, information regarding loans modified as troubled debt restructurings in the last 12 months that had payment defaults of 90 days or more during the three and nine months ended September 30, 2012 (dollars in thousands)
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2012
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
Defaulted Troubled Debt Restructurings
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
1,200 |
|
|
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company allocated $2,600,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011. There were no specific reserves allocated for such customers as of September 30, 2012. These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.
The Company accounts for its retirement plan in accordance with FASB ASC 715, “Compensation – Retirement Benefits” and FASB ASC 960, “Plan Accounting – Defined Benefit Pension Plans,” which requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan in its statement of financial position; recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligations as of the date of fiscal year-end statements of financial position (with limited exceptions); and disclose in the notes to financial statements additional information about certain effects of net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset and obligation. Plan assets and benefit obligations are measured as of the date of the statement of financial position and in determining the amount of net periodic benefit cost. The Company has adopted the provisions of the codification, which have been recorded in the accompanying consolidated statement of condition and disclosures.
The following table presents information concerning net periodic defined benefit pension expense for the three and nine months ended September 30, 2012 and 2011: (in thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
Service cost
|
|
$ |
666 |
|
|
$ |
545 |
|
|
$ |
1,999 |
|
|
$ |
1,635 |
|
Interest cost
|
|
|
555 |
|
|
|
563 |
|
|
|
1,664 |
|
|
|
1,688 |
|
Expected return on plan assets
|
|
|
(590 |
) |
|
|
(560 |
) |
|
|
(1,771 |
) |
|
|
(1,680 |
) |
Amortization of prior service cost
|
|
|
406 |
|
|
|
244 |
|
|
|
1,220 |
|
|
|
732 |
|
Net periodic benefit expense
|
|
$ |
1,037 |
|
|
$ |
792 |
|
|
$ |
3,112 |
|
|
$ |
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2011, the Company made an annual minimum contribution of $3,700,000 for the plan year ending September 30, 2012. There is no additional minimum required contribution for the plan year ending September 30, 2012.
(8)
|
Stock-based Compensation
|
Under the terms of the Company’s stock option plans adopted in 1999 and 2009, options have been granted to key employees and directors to purchase shares of the Company’s stock. Under the Suffolk Bancorp 2009 Stock Incentive Plan (“the Plan”), there are 500,000 shares of the Company’s common stock reserved for issuance, of which 150,000 had been granted as of September 30, 2012. There are no remaining shares reserved for issuance under the 1999 Stock Option Plan. Options are awarded by the Compensation Committee of the Board of Directors. Both plans provide that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less. Both plans provide for but do not require the grant of stock appreciation rights that the holder may exercise instead of
the underlying option. When the stock appreciation right is exercised, the underlying option is canceled. The optionee receives shares of common stock or cash with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise of stock appreciation rights is treated as the exercise of the underlying option. Options granted prior to 2010 vest after one year. Options granted in 2011 are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year. Options granted in 2012 are exercisable over a three-year period commencing one year from the date of grant at a rate of one third per year.
On December 30, 2011, the Company granted an award of 30,000 non-qualified stock options at an exercise price of $10.79 per share. The stock option award was granted to the President and Chief Executive Officer as a material inducement to employment with the Company. The non-qualified options were not issued as part of any of the Company’s registered stock-based compensation plans. The options are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year. For the nine months ended September 30, 2012, $35,000 was recognized as compensation expense based on the original fair value of the options. The total remaining unrecognized compensation cost of $144,000 will be expensed over the remaining vesting period of 4.3 years.
Stock-based compensation for all other share-based payments to employees, including grants of employee stock options, is recorded in the financial statements based on their fair values. During the nine months ended September 30, 2012, $269,000 was recognized as compensation expense. The remaining unrecognized compensation cost of $727,000 will be expensed over the remaining weighted vesting period of 2.9 years.
A summary of stock option activity for the Company’s 1999 and 2009 plans follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
|
of Shares
|
|
|
Per Share
|
|
Outstanding - January 1, 2012
|
|
|
81,500 |
|
|
$ |
26.91 |
|
Granted
|
|
|
130,000 |
|
|
$ |
13.15 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited or expired
|
|
|
(30,000 |
) |
|
$ |
32.23 |
|
Outstanding - September 30, 2012
|
|
|
181,500 |
|
|
$ |
16.18 |
|
|
|
|
|
|
|
|
|
|
The following table presents weighted-average information regarding options granted in 2012:
Black-Scholes Assumptions for Options Granted During the Nine Months Ended September 30, 2012:
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.78 |
% |
Expected dividend yield
|
|
|
- |
|
Expected life in years
|
|
|
10 |
|
Expected volatility
|
|
|
43.03 |
% |
The following summarizes all shares subject to purchase from stock options outstanding and exercisable as of September 30, 2012, including options which were not issued as part of any of the Company’s registered stock-based compensation plans:
|
Outstanding
|
Exercisable
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
|
Remaining
|
Weighted-Average
|
|
Remaining
|
Weighted-Average
|
Range of Exercise Prices
|
Shares
|
Contractual Life
|
Exercise Price
|
Shares
|
Contractual Life
|
Exercise Price
|
$10.79 - $12.44
|
100,000
|
9.4 years
|
$11.49
|
-
|
-
|
-
|
$13.13 - $14.97
|
80,000
|
9.6 years
|
$13.75
|
-
|
-
|
-
|
$28.30 - $31.83
|
17,000
|
4.1 years
|
$30.43
|
17,000
|
4.1 years
|
$30.43
|
$32.90 - $34.95
|
14,500
|
3.4 years
|
$34.01
|
14,500
|
3.4 years
|
$34.01
|
|
211,500
|
8.7 years
|
$15.41
|
31,500
|
3.8 years
|
$32.08
|
|
|
|
|
|
|
|
The Company uses an asset and liability approach to accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes,” which prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return. The Company had unrecognized tax benefits including interest of approximately $32,000 as of September 30, 2012. The Company recognizes interest and penalties accrued relating to unrecognized tax benefits in income tax expense.
Realization of deferred tax assets associated with the net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. During 2012, the Bank set up a state valuation allowance of $835 thousand to reflect management’s estimates of projected income and inability to utilize the state net operating loss carryforward.
At September 30, 2012, the Bank had a federal net operating loss of $28 million, of which approximately $16 million will be carried back to tax years 2010 and 2011, and $12 million will be available to reduce future taxable income and expire in various dates through 2032.
On October 25, 2010, the Bank, following discussion with the Office of the Comptroller of the Currency (the “OCC”) entered into an agreement with the OCC (the “Agreement”). The Agreement requires the Bank to take certain actions, and set forth below are the requirements of the OCC Agreement along with a description of the actions taken by the Bank to date to satisfy the requirements. References to “Article” are to those sections of the Agreement setting forth the specific requirements for the issue being addressed.
1. Create a Compliance Committee which is to meet at least monthly to monitor and coordinate the Bank’s adherence to the provisions of the Agreement and make monthly reports to the Board of Directors.
The Bank has created a Compliance Committee consisting of members of the Board of Directors and of management which meets at least monthly to monitor and coordinate the Bank’s adherence to the provisions of the Agreement. The Compliance Committee makes monthly reports to the Board.
2. Ensure the Bank has competent management in certain officer positions to carry out the Board’s policies, ensure compliance with the Agreement, applicable laws, rules and regulations and manage the daily operations of the Bank.
Upon receipt of the Agreement, the Board of Directors engaged qualified independent consultants to assist with compliance with the Agreement, including an assessment of key management roles. The Board has evaluated management and subsequently several strategic hires were made to ensure competent management. (See staffing plan discussed in number 3 below.)
3. Develop a staffing plan that is consistent with the goals and objectives established in the Bank’s strategic plan that addresses the workload requirements and maintenance of an effective control environment.
A comprehensive staffing plan was established following receipt of the Agreement. Since that time, the Bank has hired qualified management to fill certain key positions and has made other staffing and organization changes to effectively manage the operations of the Bank consistent with the Bank’s strategic plan. Steps taken by the Bank include:
-
|
Hired a new, qualified, and highly-experienced President and Chief Executive Officer effective December 31, 2011.
|
-
|
Hired a new, qualified, and highly-experienced Chief Lending Officer during the second quarter of 2011. During the first quarter of 2012, the Chief Lending Officer was promoted into the newly created position of Chief Credit Officer.
|
-
|
Hired a new, qualified, highly-experienced Chief Lending Officer during the first quarter of 2012.
|
-
|
During the first quarter of 2012, hired a qualified and highly-experienced Chief Financial Officer with sufficient knowledge of U.S. GAAP, regulatory accounting and the banking industry and the skills to implement this knowledge.
|
-
|
Improved credit function by hiring a new loan administrator, additional underwriting staff and a loan workout specialist.
|
-
|
During the first quarter of 2012, hired a qualified and highly-experienced Comptroller with sufficient knowledge of U.S. GAAP, regulatory accounting and the banking industry and the skills to implement this knowledge.
|
-
|
During the third quarter of 2012, created and filled the position of Financial Reporting Manager with experience in regulatory and SEC reporting.
|
-
|
Created and filled the position of Treasurer to further relieve the Chief Financial Officer of day-to-day duties in asset liability management, investment portfolio management, and additional treasury functions.
|
-
|
During the second quarter of 2012, hired a qualified and highly experienced General Counsel and Corporate Secretary with prior experience as general counsel of publicly held financial institutions.
|
-
|
Appointed a Vice Chairman of the Board of Directors, who was subsequently named Chairman in May 2012, to provide daily oversight of management on behalf of the full Board and to communicate back to the Board.
|
-
|
Outsourced the internal audit function to a qualified risk management firm to provide greater independence and depth to the function.
|
All key executive and senior management positions necessary to carry out the Board’s policies and to ensure compliance with the Agreement, applicable laws, rules and regulations and manage the daily operations of the Bank have been filled.
4. Adopt, implement, and thereafter ensure adherence to a three year written strategic plan.
A three year strategic plan incorporating all required elements of this Article, including monitoring of adherence to the strategic plan, has been approved and adopted by the Board of Directors.
5. Develop, implement, and thereafter ensure adherence to a three year capital program.
A three year capital program incorporating all required elements of this Article, including monitoring of adherence to the capital program, has been approved and adopted by the Board of Directors.
6. Adopt, implement, and thereafter ensure adherence to an independent internal audit program.
Management has outsourced the internal audit function to a qualified risk management firm to provide greater independence and depth to the function. The Bank’s internal auditors meet regularly with the Audit Committee of the Board of Directors. The Audit Committee monitors internal audit activities, the results of audits and the tracking of action plans for corrective actions of findings.
7. Implement and adhere to a written program for the maintenance of an adequate Allowance for Loan Losses.
Management has made substantial progress in developing and implementing a written program for the maintenance of an adequate Allowance for Loan Losses (”ALLL”). The Bank has devoted substantial management resources to this area. An ALLL Committee has been established that meets quarterly to discuss and review the Bank’s computed ALLL, which is then presented to the Board of Directors. Technology solutions are being explored to provide more robust measuring and reporting tools. The program being developed is consistent with OCC guidelines and current US GAAP standards and incorporates all elements required by the Agreement.
8. Develop, implement and thereafter ensure adherence to a written program to ensure compliance with the appraisal and evaluation requirements for loans and other real estate owned.
The Bank has developed and implemented a written program to ensure compliance with the appraisal and evaluation requirements for loans and other real estate owned.
9. Develop, implement and thereafter ensure adherence to a written program to improve credit risk management processes and practices to reduce the high level of credit risk in the Bank.
The Bank has made substantial progress in developing and implementing a written program to improve its credit risk management process and practices to reduce the high level of credit risk in the Bank. The program being developed is consistent with OCC guidelines and incorporates all elements required by the Agreement. Steps taken by the Bank include:
-
|
Reorganized the credit department to ensure appropriate separation of duties and developed expanded training for lenders.
|
-
|
Hired a senior credit officer to run a newly created separate loan review and workout department.
|
-
|
Changed the Bank’s credit policy to require identification of concentrations of risk, analysis of our customer’s global cash flows, reappraisal and re-evaluation of collateral, more accurate and timely credit-risk rating procedures and improved underwriting processes and standards.
|
-
|
Incorporated the results of a systematic re-appraisal of commercial real estate which secures loans in excess of $1 million.
|
-
|
Engaged qualified outside consultants to assist in re-evaluating risk ratings.
|
-
|
Improved the processes for identifying loans and the determination of the amount of impairment.
|
-
|
Augmented the Bank’s credit policy to govern loan workout.
|
-
|
Implemented a new procedure to ensure that OREO was accounted for in accordance with U.S. GAAP.
|
10. Adopt, implement and thereafter ensure adherence to a written asset diversification program.
The Bank has adopted and implemented a written asset diversification program which is reviewed quarterly by management and the Board of Directors.
11. Develop, implement and thereafter ensure adherence to a written program of policies and procedures, staffing and training to provide for compliance with the Bank Secrecy Act.
The Bank has developed and implemented a written program of policies and procedures, staffing and training to provide for compliance with the Bank Secrecy Act.
12. Review and revise the contingency funding plan.
The Bank has reviewed and revised its contingency funding plan.
13. Adopt, implement and thereafter ensure adequate management reports that enable the Board and management to monitor the Bank’s liquidity position on a monthly basis.
The Bank has adopted and implemented adequate management reports that enable the Board of Directors and management to monitor the Bank’s liquidity position on a monthly basis.
14. Develop, implement and thereafter ensure adherence to a comprehensive, written information security program to ensure the safety and soundness of its operations to support the Bank’s efforts to safeguard customer information.
The Bank has developed and implemented a comprehensive, written information security program to ensure the safety and soundness of its operations to support the Bank’s efforts to safeguard customer information.
Management and the Board of Directors are committed to taking all necessary actions to promptly address the requirements of the Agreement, and believe that the Bank has already made measurable progress in addressing these requirements.
The Bank is subject to individual minimum capital ratios (“IMCR’s”) established by the OCC requiring Tier 1 leverage capital equal to at least 8.00% of adjusted total assets; Tier 1 risk-based capital equal to at least 10.50% of risk-weighted assets; and total risk-based capital equal to at least 12.00% of risk-weighted assets. Management believes the Bank met all three IMCR’s at September 30, 2012: Tier 1 capital was 9.65% of adjusted total assets, Tier 1 risk-based capital was 16.85% of risk-weighted assets, and total risk-based capital was 18.11% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.
The Company’s Tier 1 leverage ratio was 9.74% at September 30, 2012. The Company’s Tier 1 risk-based and total risk-based capital ratios were 16.90% and 18.17%, respectively, at September 30, 2012.
The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock of which the Bank has none as of September 30, 2012. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the Bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. In addition, under the Agreement the Bank is required to establish a dividend policy that will permit the declaration of a dividend only when the Bank is in compliance with its capital program and with the prior written determination of no supervisory objection by the OCC.
While subject to the Agreement, the Company expects that its and the Bank’s management and Board of directors will be required to focus a substantial amount of time on complying with its terms. There is no guarantee that the Bank will be able to fully comply with the Agreement. If the Bank fails to comply with the terms of the Agreement, it could be subject to further regulatory enforcement actions.
See also Note 13 of the Company’s December 31, 2011 Form 10-K for a complete description of the Agreement with the OCC.
On July 11, 2011 a shareholder derivative action, Robert J. Levy v. J. Gordon Huszagh, et al., No. 11 Civ. 3321 (JS), was filed in the U.S. District Court for the Eastern District of New York against certain current and former directors of the Company and a former officer of the Company. The Company was named as a nominal defendant. The complaint seeks damages against the individual defendants in an unspecified amount, and alleges that the individual defendants breached their fiduciary duties by making improper statements regarding the sufficiency of the Company’s allowance for loan losses and loan portfolio credit quality, and by failing to establish sufficient allowances for loan losses and to establish effective credit risk management policies. On September 30, 2011, the Company and the current and former director defendants filed a motion to dismiss the complaint. On September 28, 2012, the court granted the motion to dismiss and granted the plaintiff leave to file an amended complaint.
On October 28, 2011, a separate shareholder derivative action, Susan Forbush v. Edgar F. Goodale, et al., No. 33538/11, was filed in the Supreme Court of the State of New York for the County of Suffolk, against certain current and former directors of the Company and a former officer of the Company. The Company was named as a nominal defendant. The complaint asserts claims that are substantially similar to those asserted in the Levy action. On February 17, 2012, the defendants filed a motion to dismiss the complaint. The motion to dismiss remains pending.
On October 20, 2011, a putative shareholder class action, James E. Fisher v. Suffolk Bancorp, et al., No. 11 Civ. 5114 (SJ), was filed in the U.S. District Court for the Eastern District of New York against the Company, its former chief executive officer, and a former chief financial officer of the Company. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by knowingly or recklessly making false statements about, or failing to disclose accurate information about, the Company’s financial results and condition, loan loss reserves, impaired assets, internal and disclosure controls, and banking practices. The complaint seeks damages in an unspecified amount on behalf of purchasers of the Company’s common stock between March 12, 2010 and August 10, 2011. On July 2, 2012, the defendants filed a motion to dismiss the complaint. The motion to dismiss remains pending.
The foregoing matters are in their preliminary phases and it is not possible to ascertain whether there is a reasonable possibility of a loss from these matters. Therefore we have concluded that an amount for a loss contingency is not to be accrued or disclosed at this time. The Company believes that it has substantial defenses to the claims filed against it in these lawsuits and, to the extent that these actions proceed, the Company intends to defend itself vigorously.
The Company has been informed that the SEC's New York regional office is conducting an inquiry to determine whether there have been violations of the federal securities laws in connection with the Company's financial reporting. The SEC has not asserted that any federal securities law violation has occurred. The Company believes it is in compliance with all federal securities laws and believes it has cooperated fully with the SEC’s inquiry. Although the ultimate outcome of the inquiry
cannot be ascertained at this time, based upon information that presently is available to it, the Company does not believe that the inquiry, when resolved, will have a material adverse effect on the Company’s results of operations or financial condition.
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Statement Pursuant to the Private Securities Litigation Reform Act of 1995
Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.These can include remarks about the Company, the banking industry, the economy in general, expectations of the business environment in which the Company operates, projections of future performance, and potential future credit experience. These remarks are based upon current management expectations, and may, therefore, involve risks and uncertainties that cannot be predicted or quantified and are beyond the Company’s control and are subject to a variety of uncertainties that could cause future results to vary materially from the Company’s historical performance, or from current expectations. These remarks may be identified by such forward-looking statements as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Factors that could affect the Company include particularly, but are not limited to: a failure by the Company to meet the deadlines under SEC rules for filing its periodic reports (or any permitted extension thereof); increased capital requirements mandated by the Company’s regulators; the Company’s ability to raise capital; changes in interest rates; increases or decreases in retail and commercial economic activity in the Company’s market area; variations in the ability and propensity of consumers and businesses to borrow, repay, or deposit money, or to use other banking and financial services; results of regulatory examinations; any failure by the Company to comply with our written agreement with the OCC (the “Agreement”) or the individual minimum capital ratios for the Bank established by the OCC; the cost of compliance with the Agreement; any failure by the Company to maintain effective internal controls over financial reporting; larger-than-expected losses from the sale of assets; potential litigation or regulatory action relating to the matters resulting in the Company’s failure to file on time its Quarterly Report on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011, and September 30, 2011 or resulting from the revisions to earnings previously announced on April 12, 2011 or the restatement of its financial statements for the quarterly period ended September 30, 2010 and year ended December 31, 2010; and the potential that net charge-offs are higher than expected or for further increases in our provision for loan losses. Further, it could take the Company longer than anticipated to implement its strategic plans to increase revenue and manage non-interest expense, or it may not be possible to implement those plans at all. Finally, new and unanticipated legislation, regulation, or accounting standards may require the Company to change its practices in ways that materially change the results of operations. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. For more information, see the risk factors described in the Company’s Annual Report on Form 10-K and other filings with the SEC.
Non-GAAP Disclosure
This discussion includes a non-GAAP financial measure of the Company’s tangible common equity ratio. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (GAAP). The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with GAAP.
Executive Summary
Suffolk Bancorp (the “Company”) is a one-bank holding company engaged in the commercial banking business through the Suffolk County National Bank (the “Bank”), a full service commercial bank headquartered in Riverhead, New York and the Company’s wholly owned subsidiary. Organized in 1890, the Bank has 30 offices in Suffolk County, New York.
As of September 30, 2012, the Company, on a consolidated basis, had total assets of $1.6 billion, total deposits of $1.4 billion and stockholders’ equity of $155 million. The Company recorded a net loss of $9.2 million, or ($0.94) per diluted common share, for the third quarter of 2012, compared to net income of $3.1 million, or $0.32 per diluted common share, for the third quarter of 2011. The decline in third quarter 2012 earnings was principally due to the impact of an $11.1 million increase in the provision for loan losses resulting from the Company’s successful execution of a previously announced bulk sale of non-performing loans in September 2012. The Company sold $51 million of loans at an aggregate price of 61% of book value resulting in a $19.6 million charge to the allowance for loan losses. Also contributing to the third quarter loss was an increase in total operating expenses of $3.0 million, largely the result of $2.5 million in non-recurring costs, and a reduction in net interest income of $2.9 million (16.7%). Partially offsetting these factors was a 6.7% improvement in non-interest income in 2012.
The Company’s return on average assets and return on average common stockholders’ equity were (2.34%) and (25.40%), respectively, for the third quarter of 2012 and 0.77% and 8.96%, respectively, for the third quarter of 2011. The Company’s net interest margin decreased by 58 basis points to 4.09% for the third quarter of 2012 from 4.67% for the third quarter of 2011. The decrease in the net interest margin was due to the continued low level of interest rates, a shift in the Company’s balance sheet mix from loans into lower-yielding overnight interest-bearing deposits, due principally to ongoing loan workout activity, and the elevated level of non-accrual loans present throughout 2012. Generally, the Company’s net interest margin is impacted not only by the average balance and mix of the Company’s interest-earning assets and interest-bearing liabilities, but also by the level of market interest rates. These rates are significantly influenced by the actions of the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) policy makers.
Financial Performance Summary
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(dollars in thousands, except per share data)
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As of or for the quarters and nine months ended September 30, 2012 and 2011
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Quarters ended September 30,
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Nine Months ended September 30,
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Over/
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Over/
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(under)
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(under)
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2012
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2011
|
2011
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|
2012
|
2011
|
2011
|
|
Revenue (1)
|
$ 16,748
|
$ 19,415
|
(13.7%)
|
|
$ 50,490
|
$ 62,034
|
(18.6%)
|
|
Operating expenses
|
$ 17,884
|
$ 14,927
|
19.8%
|
|
$ 46,628
|
$ 43,730
|
6.6%
|
|
Provision for loan losses
|
$ 12,000
|
$ 900
|
1233.3%
|
|
$ 9,600
|
$ 24,088
|
(60.1%)
|
|
Net (loss) income
|
$ (9,161)
|
$ 3,072
|
N/M
|
(2)
|
$ (3,793)
|
$ (1,232)
|
207.9%
|
|
Net (loss) income per common share - diluted
|
$ (0.94)
|
$ 0.32
|
N/M
|
(2)
|
$ (0.39)
|
$ (0.13)
|
198.8%
|
|
Return on average assets
|
(2.34%)
|
0.77%
|
(311)
|
bp
|
(0.33%)
|
(0.10%)
|
(23)
|
bp
|
Return on average stockholders' equity
|
(25.40%)
|
8.96%
|
(3,436)
|
bp
|
(3.65%)
|
(1.22%)
|
(243)
|
bp
|
Tier 1 leverage ratio
|
9.74%
|
8.57%
|
117
|
bp
|
9.74%
|
8.57%
|
117
|
bp
|
Tier 1 risk-based capital ratio
|
16.90%
|
12.60%
|
430
|
bp
|
16.90%
|
12.60%
|
430
|
bp
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Total risk-based capital ratio
|
18.17%
|
13.88%
|
429
|
bp
|
18.17%
|
13.88%
|
429
|
bp
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Tangible common equity ratio (non-GAAP)
|
9.75%
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9.06%
|
69
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bp
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9.75%
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9.06%
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69
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bp
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bp - denotes basis points; 100 bp equals 1%.
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(1) Represents net interest income plus total non-interest income.
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(2) N/M - denotes % variance not meaningful for statistical purposes.
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The Company’s Tier 1 leverage ratio was 9.74% at September 30, 2012 versus 8.85% at December 31, 2011 and 8.57% at September 30, 2011. The Company’s total risk-based capital ratio was 18.17% at September 30, 2012 versus 14.26% at December 31, 2011 and 13.88% at September 30, 2011. The Company’s tangible common equity ratio (non-GAAP financial measure) was 9.75% at September 30, 2012 versus 9.05% at December 31, 2011 and 9.06% at September 30, 2011. The Company completed a successful $25 million private placement of its common stock with several institutional investors and certain of the Company’s directors and officers in September 2012. The institutional investors purchased 1,783,000 shares of common stock at a price of $13.50 per share. Certain of the Company’s directors and officers purchased approximately $930,000 of stock at $16.44 per share.
Total non-accrual loans, excluding loans categorized as held-for-sale, decreased to $14 million or 1.87% of loans outstanding at September 30, 2012 versus $81 million or 8.33% of loans outstanding at December 31, 2011 and $92 million or 9.09% of loans outstanding at September 30, 2011. The Company was able to make significant progress this quarter in reducing levels of non-accrual loans with the completion of the $51 million bulk loan sale.
Total accruing loans delinquent 30 days or more amounted to 2.06% of loans outstanding at September 30, 2012 versus 3.56% of loans outstanding at December 31, 2011 and 2.32% of loans outstanding at September 30, 2011. Net loan charge-offs of $20.2 million, including $19.6 million related to loans transferred to held-for-sale and then sold during the quarter, were recorded in the third quarter of 2012 versus $8.4 million in the second quarter of 2012 (including $7.0 million related to loans transferred to held-for-sale and then sold during the quarter) and $7.1 million in the third quarter of 2011. The allowance for loan losses totaled $21.0 million at September 30, 2012, $40.0 million at December 31, 2011 and $43.7 million at September 30, 2011, representing 2.74%, 4.12% and 4.31% of total loans, respectively, at such dates. The allowance for loan losses as a percentage of non-accrual loans, excluding non-accrual loans categorized as held-for-sale, was 146%, 49% and 47% at September 30, 2012, December 31, 2011 and September 30, 2011, respectively. The Company held OREO of $1.6 million at September 30, 2012 and $1.8 million at December 31, 2011 and September 30, 2011.
The Company’s core deposit franchise continues to be among the best in the region and performed very well in the third quarter of 2012. Core deposits, consisting of demand, N.O.W., savings and money market accounts, totaled $1.1 billion at September 30, 2012, December 31, 2011 and September 30, 2011. Core deposits represented 82%, 81% and 80% of total deposits at September 30, 2012, December 31, 2011 and September 30, 2011, respectively. Demand deposits increased by 9.2% to $574 million at September 30, 2012 versus $525 million at December 31, 2011 and by 10.5% from $520 million at September 30, 2011. Demand deposits represented 42% of total deposits at September 30, 2012, 40% at December 31, 2011 and 38% at September 30, 2011. The deposit product mix continues to be a primary strength of the Company, and resulted in a total cost of funds of approximately 26 basis points during the third quarter of 2012 versus 34 basis points in the comparable 2011 quarter.
With completion of the $51 million bulk loan sale and $25 million capital raise, the Company has strengthened its overall financial position. The management team has been working hard to put the people, systems and processes in place to position the Company for future growth. As we diversify our lending focus into a more balanced mix of products and begin moving west from the eastern end of Long Island, we believe there are many opportunities for us in attractive markets. By gradually redeploying our current cash position into higher-yielding, high quality loans and other interest-earning assets, and focusing our efforts on expense reductions going forward, management of the Company believes we can achieve improved financial results in future periods.
Critical Accounting Policies, Judgments and Estimates
The Company’s accounting and reporting policies conform to U.S. GAAP and general practices within the financial services industry. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Allowance for Loan Losses - In management’s opinion, one of the most critical accounting policies impacting the Company’s financial statements is the evaluation of the allowance for loan losses (“ALLL”). The Company considers the determination of the ALLL to involve a higher degree of judgment and complexity than its other significant accounting policies. The ALLL is determined by continuous analysis of the loan portfolio. That analysis includes changes in the size and composition of the portfolio, historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. The Company maintains an ALLL at a level management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on an evaluation of their collectibility. However, the determination of the ALLL is inherently subjective, as it requires estimates, all of which may be subject to significant change. When a loan, in full or in part, is deemed uncollectible, it is charged against the ALLL. This happens when it is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have enough assets to pay the debt, or the value of the collateral is less than the balance of the loan and not likely to improve soon. To the extent actual performance differs from management’s estimates, additional provisions for loan losses may be required that would reduce or may substantially reduce earnings in future periods, and no assurances can be given that the Company will not sustain loan losses, in any particular period, that are sizable in relation to the ALLL. Residential real estate and consumer loans are analyzed as a group and not individually because of the large number of loans, small balances, and historically low losses. In the future, the provision for loan losses may change as a percentage of total loans.
The Company’s underwriting standards generally require a loan-to-value ratio of 75 percent or less, and when applicable, a debt coverage ratio of at least 120 percent, at the time a loan is originated. The Company has not been directly affected by the increase in defaults of sub-prime mortgages as the Company does not originate, or hold in portfolio, sub-prime mortgages. The ALLL analysis also considers the loan loss history of the Company’s peers with similar characteristics. In assessing the adequacy of the ALLL, the Company reviews its loan portfolio by separate classes which have similar risk and collateral
characteristics; e.g. commercial loans, commercial real estate, construction loans, residential mortgages, home equity loans, and consumer loans. Management conducts a monthly analysis of the loan portfolio which evaluates any loan designated as having a high risk profile including but not limited to, loans classified as “Substandard” or “Doubtful” as defined by regulation, loans criticized internally or designated as “Special Mention,” delinquencies, expirations, overdrafts, loans to customers having experienced recent operating losses and loans identified by management as impaired. The analysis is performed to determine the amount of the ALLL which would be adequate to absorb probable losses contained in the loan portfolio. The analytical process is regularly reviewed and adjustments may be made based on the assessments of internal and external influences on credit quality.
The Company’s market area experienced unprecedented damage due to Hurricane Sandy. Although the extent of the damage and its impact on the Company cannot be determined at this time, the storm is expected to impair the ability of some borrowers to repay their loans and also adversely impact collateral values. As a result, the Company may experience increased levels of non-performing loans and loan losses which may negatively impact earnings.
Deferred Tax Assets and Liabilities – The Company recognizes deferred tax assets and liabilities. Deferred income taxes occur when income taxes are allocated over time and result from differences in the timing of a transaction under generally accepted accounting principles, and the computation for income tax return purposes. Examples include the future tax effects of temporary differences for such items as deferred compensation and the provision for loan losses. Estimates of net deferred tax assets are based upon evidence available to management that future realization is more likely than not. If management determines that the Company may be unable to realize all or part of its net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the amount that management expects to realize. During 2012, the Bank set up a state valuation allowance of $835 thousand to reflect management’s estimates of projected income and inability to utilize the state net operating loss carryforward.
Other-Than-Temporary Impairment (“OTTI”) of Investment Securities – Current guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the statement of income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The Company has not recorded any OTTI-related charges during the first nine months of 2012.
Material Changes in Financial Condition
Total assets of the Company were $1.6 billion at September 30, 2012. When compared to December 31, 2011, total assets increased by $85 million. This change primarily reflects increases in cash and cash equivalents and investment securities of $232 million and $28 million, respectively, partially offset by a decrease in net loans of $184 million. These movements largely reflect the shift in the Company’s balance sheet mix from loans into lower-yielding overnight interest-bearing deposits, primarily the result of loan workout activity. Net loans were $746 million at September 30, 2012 as compared to $930 million at December 31, 2011.
Total investment securities were $337 million at September 30, 2012 as compared to $309 million at December 31, 2011. The increase in the investment portfolio largely reflects purchases of U.S. Government agency, corporate and mortgage-backed securities of $12 million, $13 million and $36 million, respectively. These were partially offset by sales and prepayments of CMOs totaling $30 million.
At September 30, 2012, total deposits were $1.4 billion, an increase of $61 million when compared to December 31, 2011, primarily due to growth in core deposit balances which consist of demand, N.O.W., savings and money market accounts. Core deposit balances increased by $68 million including an increase of $49 million in demand deposits. Core deposit balances represented approximately 82% and 81% of total deposits at September 30, 2012 and December 31, 2011, respectively. The Company had no short-term borrowed funds outstanding at either September 30, 2012 or at year end 2011.
Liquidity and Capital Resources
Liquidity is measured by the ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, maintain reserve requirements and operate the Company. Liquidity is primarily achieved through deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-bearing balances.
Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates.
Stockholders’ equity is a noninterest-bearing source of funds that can provide support for asset growth. Stockholders’ equity was $155 million at September 30, 2012 compared to $137 million at December 31, 2011. The $18 million increase for the first nine months of 2012 is primarily due to the $23 million in net proceeds from the Company’s third quarter private placement offering partially offset by the net loss of $4 million recorded in the third quarter 2012.
The Company’s tangible common equity ratio was 9.75% at September 30, 2012 compared to 9.05% at December 31, 2011 and 9.06% at September 30, 2011. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP or as required by bank regulatory agencies. Set forth below are the reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets at September 30, 2012 (in thousands):
Total stockholders' equity
|
$155,280
|
|
Total assets
|
$1,569,105
|
Less: intangible assets
|
(2,537)
|
|
Less: intangible assets
|
(2,537)
|
Tangible common equity
|
$152,743
|
|
Tangible assets
|
$1,566,568
|
|
|
|
|
|
The following table details the Bank’s regulatory capital amounts and ratios (dollars in thousands):
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Minimum
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Minimum to be "Well
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|
|
|
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|
for capital
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|
|
Capitalized" under prompt
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Actual capital ratios
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|
adequacy
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|
|
corrective action provisions
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Amount
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Ratio
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|
|
Amount
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|
|
Ratio
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|
|
Amount
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|
|
Ratio
|
|
As of September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
$ |
159,963 |
|
|
|
18.11 |
% |
|
$ |
70,664 |
|
|
|
8.00 |
% |
|
$ |
88,330 |
|
|
|
10.00 |
% |
Tier 1 Capital (to risk-weighted assets)
|
|
|
148,795 |
|
|
|
16.85 |
% |
|
|
35,332 |
|
|
|
4.00 |
% |
|
|
52,998 |
|
|
|
6.00 |
% |
Tier 1 Capital (to average assets)
|
|
|
148,795 |
|
|
|
9.65 |
% |
|
|
61,656 |
|
|
|
4.00 |
% |
|
|
77,070 |
|
|
|
5.00 |
% |
As of December 31, 2011
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Total Capital (to risk-weighted assets)
|
|
$ |
146,990 |
|
|
|
14.21 |
% |
|
$ |
82,756 |
|
|
|
8.00 |
% |
|
$ |
103,445 |
|
|
|
10.00 |
% |
Tier 1 Capital (to risk-weighted assets)
|
|
|
133,716 |
|
|
|
12.93 |
% |
|
|
41,378 |
|
|
|
4.00 |
% |
|
|
62,067 |
|
|
|
6.00 |
% |
Tier 1 Capital (to average assets)
|
|
|
133,716 |
|
|
|
8.81 |
% |
|
|
60,726 |
|
|
|
4.00 |
% |
|
|
75,907 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
The Bank is subject to individual minimum capital ratios (“IMCR’s”) established by the OCC requiring Tier 1 leverage capital equal to at least 8.00% of adjusted total assets; Tier 1 risk-based capital equal to at least 10.50% of risk-weighted assets; and total risk-based capital equal to at least 12.00% of risk-weighted assets. At September 30, 2012, management believes the Bank met all of the IMCR’s.
At September 30, 2012 the Company’s Tier 1 leverage ratio was 9.74%. The Company’s Tier 1 risk-based capital and total risk-based capital ratios were 16.90% and 18.17%, respectively, at the same reported period. At September 30, 2012, management believes the Company’s capital ratios exceed current regulatory minimum guidelines.
Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and documentary letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At September 30, 2012 and December 31, 2011, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $144 million and $118 million, respectively.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most letters of credit expire within one year. At September 30, 2012 and December 31, 2011, letters of credit outstanding were approximately $19 million and $20 million, respectively.
The Company has a liability of $255,000 for unfunded commitments at September 30, 2012.
Results of Operations
Net (Loss) Income – The Company recorded a net loss of $9.2 million, or ($0.94) per diluted common share for the third quarter of 2012 compared to net income of $3.1 million, or $0.32 per diluted common share for the third quarter of 2011. For the nine month periods, the Company recorded a net loss of $3.8 million, or ($0.39) per diluted common share in 2012 compared to a net loss of $1.2 million, or ($0.13) per diluted common share in 2011.
Net Interest Income - As shown in the net interest income analysis table below for the three months ended September 30, 2012 and 2011, net interest income decreased 16.7% to $14.2 million as the Company’s net interest margin declined to 4.09% during the third quarter of 2012 from 4.67% a year ago. The lower net interest margin primarily resulted from a 66 basis point reduction in the Company’s yield on average total interest-earning assets to 4.33% in 2012, partially offset by an 11 basis point reduction in the cost of average total interest-bearing liabilities to 0.44% in 2012.
The second table below presents the net interest income analysis for the nine months ended September 30, 2012 and 2011. Net interest income decreased 18.8% to $43.2 million as the Company’s net interest margin contracted by 62 basis points to 4.24% during the first nine months of 2012 from 4.86% a year ago. The decreased net interest margin primarily resulted from a 78 basis point reduction in the Company’s yield on average total interest-earning assets to 4.50% in 2012, partially offset by a 22 basis point reduction in the cost of average total interest-bearing liabilities to 0.48% in 2012.
The reduction in the net interest margin reflects the continued low level of interest rates, a shift in the Company’s balance sheet mix from loans into lower-yielding overnight interest-bearing deposits, due principally to ongoing loan workout activity, and the elevated level of non-accrual loans present throughout 2012.
NET INTEREST INCOME ANALYSIS
|
|
For the Three Months Ended September 30, 2012 and 2011
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (1)
|
|
$ |
323,630 |
|
|
$ |
3,807 |
|
|
|
4.68 |
% |
|
$ |
327,175 |
|
|
$ |
3,803 |
|
|
|
4.61 |
% |
Federal Home Loan Bank and other stock
|
|
|
2,368 |
|
|
|
28 |
|
|
|
4.70 |
|
|
|
2,538 |
|
|
|
17 |
|
|
|
2.66 |
|
Federal funds sold and interest-bearing deposits
|
|
|
304,412 |
|
|
|
168 |
|
|
|
0.22 |
|
|
|
146,254 |
|
|
|
79 |
|
|
|
0.21 |
|
Loans
|
|
|
824,148 |
|
|
|
11,825 |
|
|
|
5.71 |
|
|
|
1,035,628 |
|
|
|
15,100 |
|
|
|
5.78 |
|
Total interest-earning assets
|
|
|
1,454,558 |
|
|
$ |
15,828 |
|
|
|
4.33 |
% |
|
|
1,511,595 |
|
|
$ |
18,999 |
|
|
|
4.99 |
% |
Non-interest-earning assets
|
|
|
105,311 |
|
|
|
|
|
|
|
|
|
|
|
61,163 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,559,869 |
|
|
|
|
|
|
|
|
|
|
$ |
1,572,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$ |
551,566 |
|
|
$ |
286 |
|
|
|
0.21 |
% |
|
$ |
587,759 |
|
|
$ |
435 |
|
|
|
0.29 |
% |
Time deposits
|
|
|
253,770 |
|
|
|
601 |
|
|
|
0.94 |
|
|
|
284,378 |
|
|
|
778 |
|
|
|
1.09 |
|
Total savings and time deposits
|
|
|
805,336 |
|
|
|
887 |
|
|
|
0.44 |
|
|
|
872,137 |
|
|
|
1,213 |
|
|
|
0.55 |
|
Borrowings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
289 |
|
|
|
1 |
|
|
|
1.37 |
|
Total interest-bearing liabilities
|
|
|
805,336 |
|
|
|
887 |
|
|
|
0.44 |
|
|
|
872,426 |
|
|
|
1,214 |
|
|
|
0.55 |
|
Demand deposits
|
|
|
576,825 |
|
|
|
|
|
|
|
|
|
|
|
530,217 |
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
34,228 |
|
|
|
|
|
|
|
|
|
|
|
34,091 |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,416,389 |
|
|
|
|
|
|
|
|
|
|
|
1,436,734 |
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
143,480 |
|
|
|
|
|
|
|
|
|
|
|
136,024 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$ |
1,559,869 |
|
|
|
|
|
|
|
|
|
|
$ |
1,572,758 |
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
4.43 |
% |
Net interest income/margin
|
|
|
|
|
|
|
14,941 |
|
|
|
4.09 |
% |
|
|
|
|
|
|
17,785 |
|
|
|
4.67 |
% |
Less tax-equivalent basis adjustment
|
|
|
|
|
|
|
(787 |
) |
|
|
|
|
|
|
|
|
|
|
(802 |
) |
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
14,154 |
|
|
|
|
|
|
|
|
|
|
$ |
16,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest on securities includes the effects of tax-equivalent basis adjustments of $787 and $802 in 2012 and 2011, respectively.
|
|
NET INTEREST INCOME ANALYSIS
|
|
For the Nine Months Ended September 30, 2012 and 2011
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (1)
|
|
$ |
314,031 |
|
|
$ |
10,885 |
|
|
|
4.63 |
% |
|
$ |
375,415 |
|
|
$ |
13,097 |
|
|
|
4.66 |
% |
Federal Home Loan Bank and other stock
|
|
|
2,436 |
|
|
|
91 |
|
|
|
4.99 |
|
|
|
3,707 |
|
|
|
161 |
|
|
|
5.81 |
|
Federal funds sold and interest-bearing deposits
|
|
|
225,123 |
|
|
|
382 |
|
|
|
0.23 |
|
|
|
86,723 |
|
|
|
140 |
|
|
|
0.22 |
|
Loans
|
|
|
896,655 |
|
|
|
37,146 |
|
|
|
5.53 |
|
|
|
1,076,457 |
|
|
|
47,488 |
|
|
|
5.90 |
|
Total interest-earning assets
|
|
|
1,438,245 |
|
|
$ |
48,504 |
|
|
|
4.50 |
% |
|
|
1,542,302 |
|
|
$ |
60,886 |
|
|
|
5.28 |
% |
Non-interest-earning assets
|
|
|
93,528 |
|
|
|
|
|
|
|
|
|
|
|
67,205 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,531,773 |
|
|
|
|
|
|
|
|
|
|
$ |
1,609,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$ |
547,238 |
|
|
$ |
906 |
|
|
|
0.22 |
% |
|
$ |
608,396 |
|
|
$ |
1,618 |
|
|
|
0.36 |
% |
Time deposits
|
|
|
258,145 |
|
|
|
1,984 |
|
|
|
1.03 |
|
|
|
292,843 |
|
|
|
2,561 |
|
|
|
1.17 |
|
Total savings and time deposits
|
|
|
805,383 |
|
|
|
2,890 |
|
|
|
0.48 |
|
|
|
901,239 |
|
|
|
4,179 |
|
|
|
0.62 |
|
Borrowings
|
|
|
77 |
|
|
|
- |
|
|
|
- |
|
|
|
27,101 |
|
|
|
655 |
|
|
|
3.23 |
|
Total interest-bearing liabilities
|
|
|
805,460 |
|
|
|
2,890 |
|
|
|
0.48 |
|
|
|
928,340 |
|
|
|
4,834 |
|
|
|
0.70 |
|
Demand deposits
|
|
|
544,871 |
|
|
|
|
|
|
|
|
|
|
|
513,418 |
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
42,665 |
|
|
|
|
|
|
|
|
|
|
|
32,790 |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,392,996 |
|
|
|
|
|
|
|
|
|
|
|
1,474,548 |
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
138,777 |
|
|
|
|
|
|
|
|
|
|
|
134,959 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$ |
1,531,773 |
|
|
|
|
|
|
|
|
|
|
$ |
1,609,507 |
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
4.03 |
% |
|
|
|
|
|
|
|
|
|
|
4.58 |
% |
Net interest income/margin
|
|
|
|
|
|
|
45,614 |
|
|
|
4.24 |
% |
|
|
|
|
|
|
56,052 |
|
|
|
4.86 |
% |
Less tax-equivalent basis adjustment
|
|
|
|
|
|
|
(2,374 |
) |
|
|
|
|
|
|
|
|
|
|
(2,774 |
) |
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
43,240 |
|
|
|
|
|
|
|
|
|
|
$ |
53,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest on securities includes the effects of tax-equivalent basis adjustments of $2,374 and $2,774 in 2012 and 2011, respectively.
|
|
Provision for Loan Losses – Provisions for loan losses of $12.0 million and $9.6 million were recorded in the third quarter of 2012 and for the nine months ended September 30, 2012, respectively. The third quarter 2012 amount represents an increase of $11.1 million from the third quarter of 2011, largely reflecting the Company’s successful execution of a previously announced bulk sale of $51 million in non-performing loans in September 2012 at an aggregate price of 61% of book value resulting in a $19.6 million charge to the allowance for loan losses. The year to date 2012 amount represents a decrease of $14.5 million from the same period last year and largely resulted from a significant reduction in the level of criticized and classified assets in 2012 coupled with continued positive results from ongoing workout and non-performing asset disposition activities.
The adequacy of the provision and the resulting allowance for loan losses, which decreased by $19 million from December 31, 2011 to $21 million at September 30, 2012, is determined by management’s ongoing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of criticized and classified loans, collateral values and changes in the size and mix of the loan portfolio. (See also Critical Accounting Policies, Judgments and Estimates contained herein.)
Non-Interest Income – Non-interest income for the three and nine month periods ended September 30, 2012 was $2.6 million and $7.3 million, respectively, as compared to $2.4 million and $8.8 million, respectively for the same periods in 2011.
The $162 thousand or 6.7% improvement in non-interest income in the third quarter of 2012 versus 2011 was due to increases in deposit service charges, fiduciary fees and gains on the sale of residential mortgage loans, partially offset by losses of $162 thousand incurred on the sale of two private label CMOs in 2012.
For the nine months ended September 30, 2012, the $1.5 million or 17.2% reduction in non-interest income as compared to the same period in the prior year resulted largely from $1.6 million in net gains on the sale of securities available for sale recorded in 2011. Somewhat offsetting this reduction was a 42.4% increase in other operating income largely due to gains on the sale of residential mortgage loans in 2012. The components of non-interest income are shown in the table below:
Non-Interest Income
|
|
(dollars in thousands)
|
|
For the quarters and nine months ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
Over/
|
|
|
|
Over/
|
|
|
|
|
(under)
|
|
|
|
(under)
|
|
|
2012
|
2011
|
2011
|
|
2012
|
2011
|
2011
|
|
Service charges on deposit accounts
|
$ 1,022
|
$ 953
|
7.2
|
%
|
$ 2,972
|
$ 2,964
|
0.3
|
%
|
Other service charges, commissions & fees
|
927
|
988
|
(6.2)
|
|
2,523
|
2,631
|
(4.1)
|
|
Fiduciary fees
|
266
|
213
|
24.9
|
|
675
|
644
|
4.8
|
|
Net (loss) gain on sale of securities available for sale
|
(162)
|
-
|
N/M
|
(1)
|
(162)
|
1,645
|
N/M
|
(1)
|
Other operating income
|
541
|
278
|
94.6
|
|
1,242
|
872
|
42.4
|
|
Total non-interest income
|
$ 2,594
|
$ 2,432
|
6.7
|
%
|
$ 7,250
|
$ 8,756
|
(17.2)
|
%
|
|
|
|
|
|
|
|
|
|
(1) N/M - denotes % variance not meaningful for statistical purposes.
|
|
|
|
|
|
|
Operating Expenses – Total operating expenses increased to $17.9 million and $46.6 million for the three and nine month periods, respectively, ended September 30, 2012 from $14.9 million and $43.7 million, respectively, for the same periods in 2011. The increase in total operating expenses for the third quarter of 2012 versus the comparable 2011 period resulted primarily from higher levels of employee compensation and benefits expense (up $1.3 million or 16.5%), OREO expense (up $599 thousand) and other operating expenses (up $1.3 million or 48.2%). The increase in employee compensation costs resulted from growth in staff in critical areas of the Company to position it for future growth. Higher pension and medical expenses also contributed to this increase. OREO expense increased primarily as the result of a $600 thousand write-down of a commercial property in 2012. The Company is in contract to sell this property at its current carrying value. Other operating expenses increased principally due to $1.9 million in one-time fees, principally past due real estate taxes and other expenses associated with non-performing loans sold in the third quarter of 2012. Partially offsetting these increases were reductions in outside services expense and FDIC assessment costs in 2012.
The 6.6% increase in total operating expenses for the nine months ended September 30, 2012 versus the comparable 2011 period resulted primarily from higher levels of employee compensation and benefits and other operating expenses, partially offset by decreases in outside services expense, FDIC assessment costs and prepayment fees on borrowings. The reduction in 2012 FDIC assessment expenses was due to a new assessment base/calculation that has reduced costs for community banks and deposit growth assumptions included in the FDIC’s original prepaid assessment estimate that have not been realized by the Company. In addition, 2011 total operating expenses included a non-recurring $1.0 million pre-payment fee incurred on the termination of an FHLB borrowing. The components of operating expenses are shown in the table below:
Operating Expenses
|
|
(dollars in thousands)
|
|
For the quarters and nine months ended September 30, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
Over/
|
|
|
|
Over/
|
|
|
|
|
|
|
|
|
(under)
|
|
|
|
(under)
|
|
|
|
|
|
|
2012
|
2011
|
2011
|
|
2012
|
2011
|
2011
|
|
Employee compensation and benefits
|
|
$ 9,486
|
$ 8,141
|
16.5
|
%
|
$ 26,945
|
$ 23,458
|
14.9
|
%
|
Net occupancy expense
|
|
|
|
1,480
|
1,435
|
3.1
|
|
4,210
|
4,391
|
(4.1)
|
|
Equipment expense
|
|
|
|
509
|
506
|
0.6
|
|
1,512
|
1,451
|
4.2
|
|
Outside services
|
|
|
|
1,145
|
1,425
|
(19.6)
|
|
3,338
|
3,713
|
(10.1)
|
|
FDIC assessments
|
|
|
|
508
|
555
|
(8.5)
|
|
1,056
|
2,541
|
(58.4)
|
|
OREO expense
|
|
|
|
781
|
182
|
329.1
|
|
840
|
293
|
186.7
|
|
Prepayment fee on borrowing
|
|
|
-
|
-
|
-
|
|
-
|
1,028
|
(100.0)
|
|
Other operating expenses
|
|
|
3,975
|
2,683
|
48.2
|
|
8,727
|
6,855
|
27.3
|
|
Total operating expenses
|
|
|
$ 17,884
|
$ 14,927
|
19.8
|
%
|
$ 46,628
|
$ 43,730
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality
Total non-accrual loans, excluding loans categorized as held-for-sale, decreased to $14 million or 1.87% of loans outstanding at September 30, 2012 versus $81 million or 8.33% of loans outstanding at December 31, 2011 and $92 million or 9.09% of loans outstanding at September 30, 2011. The Company was able to make significant progress this quarter in reducing levels of non-accrual loans with the completion of the $51 million bulk loan sale previously noted.
Total accruing loans delinquent 30 days or more amounted to 2.06% of loans outstanding at September 30, 2012 versus 3.56% of loans outstanding at December 31, 2011 and 2.32% of loans outstanding at September 30, 2011. Net loan charge-offs of $20.2 million, including $19.6 million related to loans transferred to held-for-sale and then sold during the quarter, were recorded in the third quarter of 2012 versus $8.4 million in the second quarter of 2012 (including $7.0 million related to loans transferred to held-for-sale and then sold during the quarter) and $7.1 million in the third quarter of 2011. The allowance for loan losses totaled $21.0 million at September 30, 2012, $40.0 million at December 31, 2011 and $43.7 million at September 30, 2011, representing 2.74%, 4.12% and 4.31% of total loans, respectively, at such dates. The allowance for loan losses as a percentage of non-accrual loans, excluding non-accrual loans categorized as held-for-sale, was 146%, 49% and 47% at September 30, 2012, December 31, 2011 and September 30, 2011, respectively. The Company held OREO of $1.6 million at September 30, 2012 and $1.8 million at December 31, 2011 and September 30, 2011.
Management has determined that the current level of the allowance for loan losses is adequate in relation to the probable inherent losses present in the portfolio. Management considers many factors in this analysis, among them credit risk grades, delinquency trends, concentrations within segments of the loan portfolio, recent charge-off experience, local and national economic conditions, current real estate market conditions in geographic areas where the Company’s loans are located, changes in the trend of non-performing loans, changes in interest rates and loan portfolio growth. Changes in one or a combination of these factors may adversely affect the Company’s loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. Due to these uncertainties, management expects to record loan charge-offs in future periods. (See also Critical Accounting Policies, Judgments and Estimates contained herein.)
The following table presents information regarding non-performing assets and the allowance for loan losses:
ANALYSIS OF NON-PERFORMING ASSETS
|
|
AND THE ALLOWANCE FOR LOAN LOSSES
|
|
September 30, 2012 versus December 31, 2011 and September 30, 2011
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-PERFORMING ASSETS BY TYPE:
|
|
|
|
At
|
|
|
|
9/30/2012
|
|
|
12/31/2011
|
|
|
9/30/2011
|
|
Non-accrual Loans
|
|
$ |
14,356 |
|
|
$ |
80,760 |
|
|
$ |
92,070 |
|
Non-accrual Loans Held-for-Sale
|
|
|
7,000 |
|
|
|
- |
|
|
|
- |
|
Loans 90 Days or More Past Due and Still Accruing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
OREO
|
|
|
1,572 |
|
|
|
1,800 |
|
|
|
1,800 |
|
Total Non-performing Assets
|
|
$ |
22,928 |
|
|
$ |
82,560 |
|
|
$ |
93,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans Outstanding
|
|
$ |
766,569 |
|
|
$ |
969,654 |
|
|
$ |
1,012,888 |
|
Total Loans Held-for-Sale
|
|
$ |
7,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES:
|
|
|
|
Quarter Ended
|
|
|
|
9/30/2012
|
|
|
12/31/2011
|
|
|
9/30/2011
|
|
Beginning Balance
|
|
$ |
29,227 |
|
|
$ |
43,693 |
|
|
$ |
49,911 |
|
Provision
|
|
|
12,000 |
|
|
|
800 |
|
|
|
900 |
|
Reclass to allowance for contingent liabilities
|
|
|
- |
|
|
|
- |
|
|
|
(50 |
) |
Charge-offs
|
|
|
(21,338 |
) |
|
|
(5,217 |
) |
|
|
(7,467 |
) |
Recoveries
|
|
|
1,132 |
|
|
|
682 |
|
|
|
399 |
|
Ending Balance
|
|
$ |
21,021 |
|
|
$ |
39,958 |
|
|
$ |
43,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY RATIOS:
|
|
|
|
At
|
|
|
|
9/30/2012
|
|
|
12/31/2011
|
|
|
9/30/2011
|
|
Allowance as a % of Total Loans (1)
|
|
|
2.7 |
% |
|
|
4.1 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual Loans as a % of Total Loans (1)
|
|
|
1.9 |
% |
|
|
8.3 |
% |
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing Assets as a % of Total Loans, Loans Held-for-Sale and OREO
|
|
|
3.0 |
% |
|
|
8.5 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses as a % of Non-accrual Loans (1)
|
|
|
146 |
% |
|
|
49 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses as a % of Non-accrual Loans and Loans 90 days or More Past Due and Still Accruing (1)
|
|
|
146 |
% |
|
|
49 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes loans held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. The Company’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, mature, or re-priced in any given period of time. The Company’s earnings or the net value of its portfolio (the present value of expected cash flows from liabilities) will change when interest rates change. The principal objective of the Company’s asset/liability
management program is to maximize net interest income while keeping risks acceptable. These risks include both the effect of changes in interest rates and risks to liquidity. The program also provides guidance to management in funding the Company’s investment in loans and securities. The Company’s exposure to interest-rate risk has not changed substantially since December 31, 2011.
Item 4 - Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of September 30, 2012 in connection with the filing of the Form 10-Q for that period.
The Certifying Officers evaluated the effectiveness of disclosure controls and procedures as of September 30, 2012. Based on that evaluation, and in light of material weaknesses in internal control over financial reporting that existed throughout this quarter as described below, management concluded that the Company’s disclosure and procedures were not effective as of September 30, 2012.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.
Because of their inherent limitations, systems of internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.
A "material weakness" in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected in a timely basis by the Company's internal controls.
Material Weaknesses in Internal Control
Allowance for Loan Losses
Estimating the allowance for loan losses requires credit administration staff to identify and evaluate borrowers' ability to repay their obligations through periodic evaluation and reevaluation of cash flow and/or collateral, and, when necessary, making provision for the amount deemed being likely not to be repaid. The Company identified deficiencies within the credit administration function which compromised the operational effectiveness of the internal controls, particularly in making timely reevaluations of credit and/or collateral. This led to management’s determination that there was a material weakness in internal control over financial reporting in estimating the allowance for loan losses.
Financial Reporting Staffing Resources
Management concluded that a material weakness exists due to insufficient staffing resources that are in dedicated permanent positions within the accounting function with sufficient skills and industry knowledge of U.S. GAAP and regulatory accounting, which resulted in insufficient documentation and monitoring over the financial reporting cycle, including preparing financial statements and disclosures. Among other factors identified, the prior CFO resigned as of June 24, 2011. The Company immediately engaged an interim accounting consultant to assist with financial reporting in the meantime; however, the individual was not an officer of the Company. The Company’s President and Chief Executive Officer was appointed as Acting Chief Financial Officer on June 27, 2011. The Company filled the Chief Financial Officer position on February 2, 2012.
Interdepartmental Communications
A material weakness exists due to insufficient communications at the interdepartmental levels. There was inconsistent exchange of important financial information between the Company’s accounting and operating functions that led to errors in classifying loans as performing loans when the loans were non-performing. This was one factor resulting in the allowance for loan losses to be understated as of September 30, 2010 and December 31, 2010.
Governance and Management Accountability
The Board of Directors is responsible for competent and effective oversight and leadership of the Company's management and to ensure accountability of management. The material weaknesses related to the allowance for loan losses, financial reporting staffing resources and interdepartmental communications, as well as delays in processes surrounding the completion of restated and current financial statements, and the untimely correction of deficiencies previously identified by regulators, are reflective of a material weakness in the Board of Directors as it relates to the foregoing matters.
The Company has implemented certain changes in its internal controls as of the date of this report to address the material weaknesses. Specifically, management took the following steps to remediate the material weaknesses set forth above:
Allowance for Loan Losses
1.
|
Hired a new Chief Lending Officer during the second quarter of 2011. During the first quarter of 2012, the Chief Lending Officer was promoted into the newly created position of Chief Credit Officer. As Chief Credit Officer, the position’s responsibilities include credit administration, credit review, and loan workout.
|
2.
|
Hired a new, highly-experienced Chief Lending Officer during the first quarter of 2012.
|
3.
|
Improved staff by hiring a new loan administrator, additional underwriting staff and a loan workout specialist.
|
4.
|
Reorganized the credit department to ensure appropriate separation of duties and developed expanded training for the Company’s lenders.
|
5.
|
Hired a senior credit officer to run a newly created separate loan review and workout department.
|
6.
|
Changed the Company’s credit policy to require identification of concentrations of risk, analysis of our customer’s global cash flows, re-appraisal and re-evaluation of collateral, more accurate and timely credit-risk rating procedures and improved underwriting processes and standards.
|
7.
|
Incorporated the results of a systematic re-appraisal of commercial real estate which secures loans in excess of $1 million.
|
8.
|
Engaged qualified outside consultants to assist in re-evaluating risk ratings.
|
9.
|
Improved the processes for identifying loans and the determination of the amount of impairment.
|
10.
|
Augmented the Company’s credit policy to govern loan workout.
|
11.
|
Implemented a new policy and procedure to ensure that OREO was accounted for in accordance with U.S. GAAP.
|
Financial Reporting Staffing Resources
12.
|
During the first quarter of 2012, hired a qualified and highly-experienced Chief Financial Officer with sufficient knowledge of U.S. GAAP, regulatory accounting and the banking industry and the skills to effectively implement that knowledge.
|
13.
|
During the first quarter of 2012, hired a qualified and highly-experienced Comptroller with sufficient knowledge of U.S. GAAP, regulatory accounting, and the banking industry and the skills to effectively implement that knowledge.
|
14.
|
Increased oversight of the financial reporting process through the Audit Committee and the Compliance Committee, the latter of which meets at least monthly or more often.
|
15.
|
During the third quarter of 2012, created and filled the position of Financial Reporting Manager with experience in regulatory and SEC reporting.
|
16.
|
Created and filled the new position of Treasurer to further relieve the Chief Financial Officer of day-to-day duties in asset liability management, investment portfolio management and additional treasury functions.
|
17.
|
Enhanced procedures to ensure that all reconciliations of all departments are completed and reviewed to ensure accuracy.
|
18.
|
Compiled individual policies into comprehensive written policies and procedures for the accounting function which will include specific policies, procedures and controls for financial reporting.
|
19.
|
Increased automation of the accounting and financial reporting process to free staff resources to focus on financial reporting.
|
Interdepartmental Communications
20.
|
Established a process for both credit and finance staff to review the computation of specific impairment allowances under ASC 310-10 – Receivables – Impairment of a Loan and established enhanced reporting from core systems available directly to personnel in accounting and finance.
|
Governance and Management Accountability
21.
|
Hired a new, qualified, and highly-experienced President and Chief Executive Officer effective December 31, 2011.
|
22.
|
During the second quarter of 2012, hired a qualified and highly experienced General Counsel and Corporate Secretary with prior experience as general counsel of publicly held financial institutions.
|
23.
|
Formed a Compliance Committee of the Board to oversee compliance and, later, to respond to the Agreement with the OCC.
|
24.
|
Implemented procedures to track all regulatory compliance through structured matrices.
|
25.
|
Engaged qualified independent consultants to assist with compliance with the Agreement with the OCC, including an assessment of key management roles.
|
26.
|
Outsourced the internal audit function to a qualified risk management firm to provide greater independence and depth to the function.
|
27.
|
Appointed a Vice Chairman of the Board, who was subsequently named Chairman in May 2012, to provide daily oversight of management on behalf of the full Board and to communicate back to the Board.
|
The Company has not determined the impact of the remediation steps at the time of filing of this report.
PART II
Item 1 - Legal Proceedings
On July 11, 2011 a shareholder derivative action, Robert J. Levy v. J. Gordon Huszagh, et al., No. 11 Civ. 3321 (JS), was filed in the U.S. District Court for the Eastern District of New York against certain current and former directors of the Company and a former officer of the Company. The Company was named as a nominal defendant. The complaint seeks damages against the individual defendants in an unspecified amount, and alleges that the individual defendants breached their fiduciary duties by making improper statements regarding the sufficiency of the Company’s allowance for loan losses and loan portfolio credit quality, and by failing to establish sufficient allowances for loan losses and to establish effective credit risk management policies. On September 30, 2011, the Company and the current and former director defendants filed a motion to dismiss the complaint. On September 28, 2012, the court granted the motion to dismiss and granted the plaintiff leave to file an amended complaint.
On October 28, 2011, a separate shareholder derivative action, Susan Forbush v. Edgar F. Goodale, et al., No. 33538/11, was filed in the Supreme Court of the State of New York for the County of Suffolk, against certain current and former directors of the Company and a former officer of the Company. The Company was named as a nominal defendant. The complaint asserts claims that are substantially similar to those asserted in the Levy action. On February 17, 2012, the defendants filed a motion to dismiss the complaint. The motion to dismiss remains pending.
On October 20, 2011, a putative shareholder class action, James E. Fisher v. Suffolk Bancorp, et al., No. 11 Civ. 5114 (SJ), was filed in the U.S. District Court for the Eastern District of New York against the Company, its former chief executive
officer, and a former chief financial officer of the Company. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by knowingly or recklessly making false statements about, or failing to disclose accurate information about, the Company’s financial results and condition, loan loss reserves, impaired assets, internal and disclosure controls, and banking practices. The complaint seeks damages in an unspecified amount on behalf of purchasers of the Company’s common stock between March 12, 2010 and August 10, 2011. On July 2, 2012, the defendants filed a motion to dismiss the complaint. The motion to dismiss remains pending.
The foregoing matters are in their preliminary phases and it is not possible to ascertain whether there is a reasonable possibility of a loss from these matters. Therefore we have concluded that an amount for a loss contingency is not to be accrued or disclosed at this time. The Company believes that it has substantial defenses to the claims filed against it in these lawsuits and, to the extent that these actions proceed, the Company intends to defend itself vigorously.
The Company has been informed that the SEC's New York regional office is conducting an inquiry to determine whether there have been violations of the federal securities laws in connection with the Company's financial reporting. The SEC has not asserted that any federal securities law violation has occurred. The Company believes it is in compliance with all federal securities laws and believes it has cooperated fully with the SEC’s inquiry. Although the ultimate outcome of the inquiry cannot be ascertained at this time, based upon information that presently is available to it, the Company does not believe that the inquiry, when resolved, will have a material adverse effect on the Company’s results of operations or financial condition.
Item 1A - Risk Factors
There are no material changes from any of the risk factors previously disclosed in the Company’s 2011 Form 10-K in response to Part I, Item 1A, except as follows:
An increase in the Company’s allowance for loan losses would negatively impact capital levels and could make it difficult to maintain the capital levels directed by the OCC.
The Bank is subject to individual minimum capital ratios (“IMCR’s”) established by the OCC requiring Tier 1 leverage capital equal to at least 8.00% of adjusted total assets; Tier 1 risk-based capital equal to at least 10.50% of risk-weighted assets; and total risk-based capital equal to at least 12.00% of risk-weighted assets. The Bank met all three IMCR’s at September 30, 2012: Tier 1 capital was 9.65% of adjusted total assets, Tier 1 risk-based capital was 16.85% of risk-weighted assets, and total risk-based capital was 18.11% of risk-weighted assets. Further increases to the Company’s allowance for loan losses, however, would negatively impact the Bank’s capital levels and could make it difficult to maintain the capital levels directed by the OCC. If the Bank fails to maintain the required capital levels, it could be subject to further regulatory enforcement actions.
The revisions to the Company’s earnings previously announced on April 12, 2011, and the restatement of the Company’s financial statements for the quarter ended September 30, 2010 and the year ended December 31, 2010, has resulted in additional costs to the Company and may cause the Company to incur further costs or result in regulatory action or litigation against the Company which could adversely affect its results of operation or financial condition.
On April 12, 2011, the Company released preliminary earnings for the first quarter of 2011. Following that release, but prior to the regulatory deadline to file its Form 10-Q, management identified possible deficiencies and/or weaknesses in the Company’s internal controls with respect to credit administration and credit risk management, primarily with respect to the timing of the recognition of credit risk, as well as with regard to risk rating which affected the computation of the allowance for loan losses. On May 11, 2011, the Company announced that it would be delayed in filing its Form 10-Q. The Company retained independent consultants specializing in the evaluation and computation of the allowance for loan losses that conducted an independent review of the Company’s loan files with respect to the correct risk-rating of credits, and to the extent possible, to evaluate when that rating might correctly have been determined, and finally, where applicable, what the correct specific impairment allowance should be. The result of the reevaluation and re-computation of the allowance for loan losses was an increase in the specific impairment allowances, offset by a decrease in the qualitative reserve percentages, resulting in an overall increase in the total allowance over that announced on April 12, 2011. On August 12, 2011, the Company announced that the Audit Committee of the Board of Directors had concluded that the Company’s previously issued financial statements as of and for the year ended December 31, 2010 and the quarter ended September 30, 2010, as reported in the Company’s Annual Report on Form 10-K and Quarterly Report on Form 10-Q, respectively, should be restated due to an understatement of its allowance for loan losses in such periods. The reevaluation and restatement process has resulted in additional costs to the Company and may cause the Company to incur further costs that could adversely affect its results of operation or financial condition. The revisions to our earnings previously announced on April 12, 2011 and the
restatement of our financial statements could also result in regulatory action or litigation against the Company, which could adversely affect our results of operation or financial condition.
A failure to restore and maintain effective internal controls over financial reporting and disclosure controls and procedures could have a material adverse effect on our results of operation or financial condition.
During April 2011, management identified possible deficiencies and/or weaknesses in the Company’s internal controls related to the design and implementation of policies to promptly identify problem loans and to quantify the elements of risk in problem loans. After conducting an internal review, management determined that there were material weaknesses related to the allowance for loan losses, financial reporting staffing resources, interdepartmental communications and governance and management accountability. See Part I, Item 4—Controls and Procedures. The Company has incurred costs and implemented certain changes in its internal controls over financial reporting and disclosure controls and procedures to address these material weaknesses. The Company has not yet determined that it has restored effective internal controls over financial reporting and disclosure controls and procedures and it is possible that additional deficiencies or weaknesses could be identified A failure to restore and maintain effective internal controls over financial reporting and disclosure controls and procedures could affect our results of operations or financial condition.
Potential impairment in the carrying value of our goodwill could negatively impact our earnings and capital.
At September 30, 2012, we had goodwill totaling $814,000. Goodwill is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Given the current economic environment, we could be required to evaluate the recoverability of goodwill prior to our normal annual assessment if we experience disruption in our business and/or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. These non-cash impairment charges could adversely affect our results of operations or financial condition in future periods.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
As previously disclosed on a Current Report on Form 8-K filed with the SEC on September 20, 2012, on September 19, 2012, the Company sold an aggregate of 1,783,000 shares of common stock to institutional investors at a price of $13.50 per share for aggregate gross proceeds of approximately $24 million. On September 24, 2012, the Company also sold an aggregate of 56,533 shares of common stock to certain of its directors and officers at a price of $16.44 per share for aggregate gross proceeds of approximately $900,000. Both sales were effected in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Item 3 – Defaults upon Senior Securities
None
Item 4 – Mine Safety Disclosures
None
Item 5 – Other Information
None
Item 6 - Exhibits
10.1
|
Form of Securities Purchase Agreement, dated as of September 18, 2012, by and between Suffolk Bancorp and the investor signatory thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2012 and incorporated herein by reference)
|
|
|
10.2
|
Form of Loan Purchase Agreement, dated as of September 19, 2012, by and between The Suffolk County National Bank of Riverhead and the purchaser signatory thereto (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2012 and incorporated herein by reference)
|
31.1
|
Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section)
|
|
|
32.2
|
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section)
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
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.
SUFFOLK BANCORP
|
|
|
|
|
|
|
Date: November 8, 2012
|
|
/s/ Howard C. Bluver |
|
|
|
Howard C. Bluver |
|
|
|
President & Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Brian K. Finneran |
|
|
|
Brian K. Finneran |
|
|
|
Chief Financial Officer |
|
|
|
|
|
EXHIBIT INDEX
Exhibit Number
|
Description
|
10.1
|
Form of Securities Purchase Agreement, dated as of September 18, 2012, by and between Suffolk Bancorp and the investor signatory thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2012 and incorporated herein by reference)
|
|
|
10.2
|
Form of Loan Purchase Agreement, dated as of September 19, 2012, by and between The Suffolk County National Bank of Riverhead and the purchaser signatory thereto (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2012 and incorporated herein by reference)
|
31.1
|
Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section)
|
|
|
32.2
|
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section)
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|