NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a)
Basis of Financial Statement Presentation
The accounting and reporting
policies of the Company conform to U.S. generally accepted accounting principles (US GAAP). The financial statements include the
accounts of the Company and its wholly-owned subsidiary, Somerset Hills Bank (the “Bank”) and its wholly-owned subsidiaries,
Sullivan Financial Services, Inc. (“Sullivan”), Somerset Hills Wealth Management Services, LLC, Somerset Hills Investment
Holdings, Inc. and SOMH Holdings, LLC. All material intercompany balances and transactions have been eliminated in the financial
statements.
In preparing the financial statements,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during
the reporting periods. Therefore, actual results could differ from those estimates.
To prepare financial statements
in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions
based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are
particularly subject to change. Operating segments are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in determining the allocation of resources and in assessing
operating performance. The Company has two reportable segments: community banking and mortgage banking.
b) Pending Merger
On January 29, 2013, the Company and Lakeland Bancorp,
Inc. (NASDAQ: LBAI) (“Lakeland”), the parent company of Lakeland Bank, announced that the companies have entered into
a definitive Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company will be merged with
and into Lakeland, with Lakeland as the surviving bank holding company. The Merger Agreement provides that the shareholders of
Somerset Hills Bancorp will receive, at their election, for each outstanding share of Somerset Hills Bancorp common stock that
they own at the effective time of the merger, either 1.1962 shares of Lakeland common stock or $12.00 in cash, subject to proration
as described in the Merger Agreement, so that 90% of the aggregate merger consideration will be shares of Lakeland common stock
and 10% will be cash. The Merger Agreement also provides that immediately after the merger of the Company into Lakeland, the Bank
will merge with and into Lakeland Bank, with Lakeland Bank as the surviving bank.
c) Earnings per Share
Basic earnings per share of
common stock is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income applicable to common
stockholders by the weighted average number of shares of common stock outstanding during the period plus the dilutive effect of
potential common shares.
The following tables set forth
the computations of basic and diluted earnings per share:
|
|
Year Ended December 31, 2012
|
|
|
Year Ended December 31, 2011
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
|
(dollars and share data in thousands)
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stockholders
|
|
$
|
3,378
|
|
|
|
5,334
|
|
|
$
|
0.63
|
|
|
$
|
2,813
|
|
|
|
5,410
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
Options
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock holders and assumed conversions
|
|
$
|
3,378
|
|
|
|
5,371
|
|
|
$
|
0.63
|
|
|
$
|
2,813
|
|
|
|
5,460
|
|
|
$
|
0.52
|
|
The tables above exclude
options with exercise prices that exceed the average market price of the Company’s
common stock during the periods presented because such options would have an
anti-dilutive effect on the diluted earnings per common share calculation.
The number of anti-dilutive common stock options totaled 97,585 and 111,400
at December 31, 2012 and 2011, respectively.
d) Cash and Cash Equivalents
Cash and cash equivalents include
cash on hand, overnight amounts due from banks and federal funds sold. Included in cash and due from banks at December 31, 2012
and 2011 is $946,000 and $1,110,000, respectively, representing reserves required by banking regulations.
e) Investment Securities
Debt securities are classified
as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable
fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income, net of taxes.
Interest income includes amortization
of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating
prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on
the trade date and determined using the specific identification method.
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.
f) Stock-Based Compensation
At December 31, 2012, the Company
had three stock-based plans, which are described more fully in Note 9. The Company recognizes compensation expense based on the
fair value of awards under the plan at the date of the grant over the period the awards are earned.
The Company recognizes compensation
expense related to stock options granted based on the fair value of such awards at the date of the grant over the period the awards
are earned.
g) Restricted Stock
The Bank is a member of the
Federal Home Loan Bank (“FHLB”) system and Atlantic Central Bankers Bank (“ACBB”). Members are required
to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. Stock
in the FHLB and ACBB is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on
ultimate recovery of par value. Both cash and stock dividends are reported as income.
h) Loans and Allowance for Loan Losses
Loans
— Loans Receivable,
for all loan portfolio classes, that management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at their outstanding principal, adjusted for any charge-offs, the allowance for
loan losses, and any deferred
fees or costs on originated loans. Interest on loans, for all loan portfolio classes, is accrued and credited to operations based
upon the principal amounts outstanding.
Allowance for Loan Losses
— The Company maintains an allowance for loan losses to absorb probable incurred losses in the loan portfolio based, for
all loan portfolio classes, on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing
the appropriateness of the allowance consists of a specific component for identified problem loans, and a formula component which
addresses historical loan loss experience together with other relevant risk factors affecting the portfolio.
The specific component incorporates
the results of measuring impaired loans as required by the “Receivables” topic of the FASB Accounting Standards Codification.
These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan
is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s
contractual terms. In addition, a loan which has been renegotiated with a borrower experiencing financial difficulties for which
the terms of the loan have been modified with a concession that the Company would not otherwise have granted are considered troubled
debt restructurings and are also recognized as impaired. A loan is not deemed to be impaired if there is a short delay in receipt
of payment. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral
dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.
If the impairment measurement of an impaired loan is less than the related recorded amount, a specific valuation component is established
within the allowance for loan losses or, if the impairment is considered to be permanent, a partial charge-off is recorded against
the allowance for loan losses.
The formula component is calculated
using many factors including: (i) the Company’s historical charge-off and delinquency experience, (ii) the evaluation of
then-existing economic and business conditions affecting the key lending areas of the Company and (iii) other conditions, such
as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the
balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio. Senior
management reviews these conditions quarterly. Management’s evaluation of the loss related to each of these conditions is
quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions
is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified
with specific problem credits.
Actual losses can vary significantly
from the estimated amounts. The Company’s methodology permits adjustments to the allowance in the event that, in management’s
judgment, significant factors which affect the collectability of the loan portfolio as of the evaluation date have changed. Management
believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of December 31, 2012.
There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing
economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized
by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review
the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based
on their judgments at the time of their examinations.
Our primary market area is Morris,
Somerset and Union Counties, New Jersey. Negative economic conditions in our market area could affect both depositors and borrowers,
and thereby adversely affect our performance.
Nonaccrual Policy
—
The Company’s nonaccrual loan policy covers all loan portfolio classes. Interest on loans is accrued and credited to operations
based upon the principal amounts outstanding. Loans are considered delinquent when they become 30 or more days past due. Loans
are placed on non-accrual when principal or interest is delinquent for 90 days or more unless the loan is both well-secured and
in the process of collection, or when management no longer expects payment in full of principal or interest. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. Loans
can be returned to accruing status when they become current as to principal and interest, and when, in management’s opinion,
they are estimated to be fully collectible.
Charge-off Policy
—
The Company’s charge-off policy covers all loan portfolio classes. Loans are generally charged-off at the earlier of when
it is determined that collection efforts are no longer productive or when they have been identified as losses by management, internal
loan review and/or bank examiners. Factors considered in determining whether collection efforts are no longer productive include
any amounts currently being collected, the status of discussions or negotiations with the borrower, the principal and/or guarantors,
the cost of continuing efforts to collect, the status of any foreclosure or other legal actions, the value of the collateral, and
any other pertinent factors.
i) Loans Held for Sale
Residential mortgage loans funded
by the Bank and held for sale in the secondary market are carried at fair value. Fair value is generally determined by the value
of purchase commitments. Aggregate net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Aggregate net unrealized gains, if any, are recorded in other assets and credited to income. Estimated net revenue related to commitments
to fund residential mortgage loans that are expected to be sold are recorded as a receivable and credited to income. Residential
mortgage loans held for sale are typically sold with servicing rights released.
j) Premises and Equipment
Land is stated at cost. Buildings
and improvements and furniture, fixtures and equipment are stated at cost, less accumulated depreciation computed on the straight-line
method over the estimated lives of each type of asset. Estimated useful lives are five to thirty- nine and one half years for buildings
and improvements and three to five years for furniture, fixtures and equipment. Leasehold improvements are stated at cost less
accumulated amortization computed on the straight-line method over the shorter of the term of the lease or useful life. Significant
renewals and improvements are capitalized. Maintenance and repairs are charged to operations as incurred.
k) Bank Owned Life Insurance
The Company has purchased life insurance policies
on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract
at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable
at settlement.
l) Income Taxes
The Company uses the asset and
liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to temporary differences
between the financial statement carrying amounts and tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
m) Comprehensive Income
Comprehensive income includes
net income and unrealized gains and losses on investment securities available for sale.
n) Foreclosed Assets
Assets acquired through or instead
of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair
value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition
are expensed. There were no foreclosed assets in 2012 and 2011.
o) Loss Contingencies
Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or
range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect
on the financial statements.
p) Recent Accounting Pronouncements
Adoption of New Accounting Guidance
In April 2011, the FASB
issued ASU No. 2011-02, “
A Creditor’s Determination of Whether a Restructuring is a Troubled Debt
Restructuring.”
The provisions of ASU No. 2011-02 amend and clarify GAAP related to the accounting for debt
restructurings. Specifically, ASU No. 2011-02 requires that, when evaluating whether a restructuring constitutes a troubled
debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the
debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate
whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt
in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has
granted a concession, (ii) a temporary or permanent increase in the contractual interest rate as a result of a restructuring
may be considered a concession because the new contractual interest rate on the restructured debt is still below the market
interest rate for new debt with similar risk characteristics, and (iii) a restructuring that results in a delay in payment is
either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is
experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even
though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor
would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions
of ASU No. 2011-02 are
effective for the first interim
or annual period beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period
of adoption. The impact of adoption was not material.
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 IFRSs
”, which represents the convergence of the FASB’s and the IASB’s guidance
on fair value measurement. ASU 2011-04 reflects the common requirements under U.S. GAAP and IFRS for measuring fair value and for
disclosing information about fair value measurements, including a consistent meaning for the term “fair value.” The
new guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where
it is already required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing
guidance or wording changes to align with IFRS 13. A public company is required to apply the ASU prospectively for interim and
annual periods beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s
financial condition or results of operations.
In June 2011, the FASB issued
ASU No. 2011-05, “
Comprehensive Income (Topic 220) – Presentation of Comprehensive Income
” the provisions
of which allow an entity the option to present the total of comprehensive income, the components of net income, and the components
of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. Under both options, an entity is required to present each component of net income along with total net income, each
component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive
income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes
in stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when
an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively and is
effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
adoption of this ASU did not have a material impact on the Company’s financial condition or results of operations.
NOTE 2 – INVESTMENT SECURITIES
The amortized cost, gross unrealized
gains and losses, and fair value of the Company’s investment securities held to maturity and available for sale are as follows:
Held
to Maturity
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
$
|
7,902
|
|
|
$
|
392
|
|
|
$
|
—
|
|
|
$
|
8,294
|
|
Corporate debt securities
|
|
|
998
|
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
892
|
|
Total held to maturity
|
|
$
|
8,900
|
|
|
$
|
392
|
|
|
$
|
(106
|
)
|
|
$
|
9,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
$
|
9,228
|
|
|
$
|
412
|
|
|
$
|
—
|
|
|
$
|
9,640
|
|
Corporate debt securities
|
|
|
1,510
|
|
|
|
—
|
|
|
|
(301
|
)
|
|
|
1,209
|
|
Total held to maturity
|
|
$
|
10,738
|
|
|
$
|
412
|
|
|
$
|
(301
|
)
|
|
$
|
10,849
|
|
Available
for Sale
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored agency securities
|
|
$
|
2,894
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
2,921
|
|
Mortgage backed securities, residential
|
|
|
7,160
|
|
|
|
507
|
|
|
|
—
|
|
|
|
7,667
|
|
Collateralized mortgage obligations
|
|
|
1,290
|
|
|
|
34
|
|
|
|
—
|
|
|
|
1,324
|
|
Corporate debt securities
|
|
|
1,463
|
|
|
|
22
|
|
|
|
(27
|
)
|
|
|
1,458
|
|
Total available for sale
|
|
$
|
12,807
|
|
|
$
|
590
|
|
|
$
|
(27
|
)
|
|
$
|
13,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored agency securities
|
|
$
|
14,560
|
|
|
$
|
198
|
|
|
|
(5
|
)
|
|
$
|
14,753
|
|
Mortgage backed securities, residential
|
|
|
22,775
|
|
|
|
1,039
|
|
|
|
—
|
|
|
|
23,814
|
|
Collateralized mortgage obligations
|
|
|
2,677
|
|
|
|
57
|
|
|
|
—
|
|
|
|
2,734
|
|
Corporate debt securities
|
|
|
2,372
|
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
2,278
|
|
Total available for sale
|
|
$
|
42,384
|
|
|
$
|
1,294
|
|
|
$
|
(99
|
)
|
|
$
|
43,579
|
|
The amortized cost and fair
value of the Company’s investment securities held to maturity and available for sale at December 31, 2012, by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
|
(in thousands)
|
|
Held to Maturity
|
|
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due in one to five years
|
|
|
704
|
|
|
|
687
|
|
Due in five years to ten years
|
|
|
2,694
|
|
|
|
2,822
|
|
Due after ten years
|
|
|
5,502
|
|
|
|
5,677
|
|
|
|
$
|
8,900
|
|
|
$
|
9,186
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due in one year to five years
|
|
|
1,463
|
|
|
|
1,495
|
|
Due in five years to ten years
|
|
|
1,000
|
|
|
|
972
|
|
Due after ten years
|
|
|
1,894
|
|
|
|
1,912
|
|
Mortgage backed securities and collateralized mortgage obligations
|
|
|
8,450
|
|
|
|
8,991
|
|
|
|
$
|
12,807
|
|
|
$
|
13,370
|
|
Gross unrealized losses on securities
and the estimated fair value of the related securities aggregated by securities category and length of time that individual securities
have been in a continuous unrealized loss position at December 31, 2012 and 2011 are as follows:
|
|
December 31, 2012
|
|
|
|
Less than 12 months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
Held to Maturity
|
|
(in thousands)
|
|
Corporate debt securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
892
|
|
|
$
|
106
|
|
|
$
|
892
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
892
|
|
|
$
|
106
|
|
|
$
|
892
|
|
|
$
|
106
|
|
|
|
December 31, 2011
|
|
|
|
Less than 12 months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
|
Fair
Value
|
|
|
Unrecognized
Losses
|
|
Held to Maturity
|
|
(in thousands)
|
|
Corporate debt securities
|
|
$
|
450
|
|
|
$
|
62
|
|
|
$
|
759
|
|
|
$
|
239
|
|
|
$
|
1,209
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
450
|
|
|
$
|
62
|
|
|
$
|
759
|
|
|
$
|
239
|
|
|
$
|
1,209
|
|
|
$
|
301
|
|
|
|
December 31, 2012
|
|
|
|
Less than 12 months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Available for Sale
|
|
(in thousands)
|
|
Corporate debt securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
973
|
|
|
$
|
27
|
|
|
$
|
973
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
973
|
|
|
$
|
27
|
|
|
$
|
973
|
|
|
$
|
27
|
|
|
|
December 31, 2011
|
|
|
|
Less than 12 months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Available for Sale
|
|
(in thousands)
|
|
U.S. Government sponsored agency securities
|
|
$
|
3,010
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,010
|
|
|
$
|
5
|
|
Corporate debt securities
|
|
|
1,352
|
|
|
|
20
|
|
|
|
926
|
|
|
|
74
|
|
|
|
2,278
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,362
|
|
|
$
|
25
|
|
|
$
|
926
|
|
|
$
|
74
|
|
|
$
|
5,288
|
|
|
$
|
99
|
|
At December 31, 2012, there
were $1.9 million in securities with gross unrecognized losses that have been in a continuous unrealized loss position for twelve
or more months. Unrealized losses on these securities have not been recognized into income because the issuer(s) bonds are investment
grade, management does not intend to sell and it is not likely that management will be required to sell the securities prior to
their anticipated recovery. The decline in fair value is largely a result of the securities of these issuers falling out of favor
in the broader bond market. The fair value is expected to recover as the bonds approach maturity.
For
the year ended December 31, 2012, the gross proceeds on sales of securities
were approximately $13.3 million. For the year ended December 31, 2012, the
gross gain on sales of securities was approximately $500,000. The tax provision
related to the net realized gain was $200,000 in 2012. For the year ended December
31, 2011, the gross gain on sales of securities was approximately $20,000.
There was $11,000 in gross losses on sales of securities for the year ended
December 31, 2011. The tax provision related to the net realized gain was $3,000.
Securities with an amortized
cost of $1.9 million and $974,000 were pledged to secure public funds on deposit at December 31, 2012 and 2011, respectively.
The Company is a member of the
Federal Home Loan Bank of New York (FHLBNY) and Atlantic Central Bankers Bank. As a result, the Company is required to hold shares
of capital stock of FHLBNY, as well as Atlantic Central Bankers Bank, which are carried at cost, based upon a specified formula.
NOTE 3 – LOANS
Loans are summarized as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
32,192
|
|
|
$
|
32,206
|
|
Commercial mortgage
|
|
|
130,733
|
|
|
|
113,148
|
|
Construction, land and land development
|
|
|
1,902
|
|
|
|
7,505
|
|
Consumer
|
|
|
37,088
|
|
|
|
42,074
|
|
Residential
|
|
|
39,766
|
|
|
|
37,360
|
|
Gross loans
|
|
|
241,681
|
|
|
|
232,293
|
|
Net deferred costs
|
|
|
230
|
|
|
|
192
|
|
Less: Allowance for loan losses
|
|
|
(3,158
|
)
|
|
|
(2,982
|
)
|
Total
|
|
$
|
238,753
|
|
|
$
|
229,503
|
|
The portfolio classes in the
above table have unique risk characteristics with respect to credit quality:
|
•
|
The repayment of commercial loans is generally dependent on the creditworthiness and cash flow
of borrowers and, if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority
of these loans are secured, collateral type, marketability, coverage, valuation and monitoring is not as uniform as in other portfolio
classes and recovery from liquidation of such collateral may be subject to greater variability.
|
|
|
|
|
•
|
Payment on commercial mortgages is driven principally by operating results of the managed properties
or underlying businesses and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment,
and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market
or the economy in general.
|
|
|
|
|
•
|
Properties underlying construction, land and land development loans often do not generate sufficient
cash flow to service debt and thus repayment is subject to the ability of the borrower and, if applicable, guarantors, to complete
development or construction of the property and carry the project, often for extended periods of time. As a result, the performance
of these loans is contingent upon future events whose probability at the time of origination is uncertain.
|
|
|
|
|
•
|
The ability of borrowers to service debt in the residential and consumer loan portfolios is generally
subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans
are predominantly collateralized by first and second liens on single family properties. If a borrower cannot maintain the loan,
the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly
influenced by market, legal and regulatory conditions.
|
The following table presents
information about impaired loans by loan portfolio class as of December 31, 2012 and 2011:
|
|
Impaired Loans at December 31, 2012
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
|
(in thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
234
|
|
|
|
234
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial mortgage
|
|
|
2,314
|
|
|
|
2,327
|
|
|
|
96
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
512
|
|
|
|
512
|
|
|
|
69
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial mortgage
|
|
|
2,314
|
|
|
|
2,327
|
|
|
|
96
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
746
|
|
|
|
746
|
|
|
|
69
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Impaired Loans at December 31, 2011
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
|
(in thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial mortgage
|
|
|
765
|
|
|
|
768
|
|
|
|
—
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
146
|
|
|
|
146
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial mortgage
|
|
|
344
|
|
|
|
344
|
|
|
|
11
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial mortgage
|
|
|
1,109
|
|
|
|
1,112
|
|
|
|
11
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
146
|
|
|
|
146
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Average of individually impaired loans during period:
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
71
|
|
Commercial mortgage
|
|
|
1,028
|
|
|
|
1,643
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
288
|
|
|
|
49
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,316
|
|
|
$
|
1,763
|
|
Interest income recognized during impairment:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
4
|
|
Commercial mortgage
|
|
|
55
|
|
|
|
89
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
1
|
|
|
|
1
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
56
|
|
|
$
|
94
|
|
There was no cash-basis interest
income recognized on any loans for the twelve months ended December 31, 2012 and 2011, respectively.
The outstanding balances of
nonaccrual loans, loans past due 90 days and still accruing, other real estate owned, and troubled debt restructured loans as of
year-end were as follows:
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Nonaccrual loans
|
|
$
|
746
|
|
|
$
|
146
|
|
OREO
|
|
|
—
|
|
|
|
—
|
|
Total non-performing assets
|
|
$
|
746
|
|
|
$
|
146
|
|
Loans past due 90 days and still accruing
|
|
$
|
420
|
|
|
$
|
—
|
|
Troubled debt restructured loans
|
|
$
|
340
|
|
|
$
|
344
|
|
The following table presents
loans receivable on nonaccrual status by loan portfolio class as of December 31, 2012 and 2011, respectively:
|
|
Nonaccrual Loans
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial mortgage
|
|
|
—
|
|
|
|
—
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
746
|
|
|
|
146
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
746
|
|
|
$
|
146
|
|
The balance of troubled debt
restructured loans at year-end 2012 and 2011 is represented by one credit that is currently performing under its restructured terms
and for which the Company has no commitment to lend additional funds. There were no TDR’s during 2012 that did not perform
in accordance with their modified terms. During the twelve months ended December 31, 2012 there were no new loans modified as troubled
debt restructurings.
The following table presents
past due and current loans by the loan portfolio class as of December 31, 2012 and 2011, respectively:
|
|
December 31, 2012
|
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
Receivable
|
|
|
Loans Past
Due 90
Days and
Still Accruing
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
31,976
|
|
|
$
|
32,192
|
|
|
$
|
—
|
|
Commercial mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
420
|
|
|
|
420
|
|
|
|
130,313
|
|
|
|
130,733
|
|
|
|
420
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,902
|
|
|
|
1,902
|
|
|
|
—
|
|
Consumer
|
|
|
234
|
|
|
|
—
|
|
|
|
—
|
|
|
|
234
|
|
|
|
36,854
|
|
|
|
37,088
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,766
|
|
|
|
39,766
|
|
|
|
—
|
|
Total
|
|
$
|
234
|
|
|
$
|
216
|
|
|
$
|
420
|
|
|
$
|
870
|
|
|
$
|
240,811
|
|
|
$
|
241,681
|
|
|
$
|
420
|
|
|
|
December 31, 2011
|
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
Receivable
|
|
|
Loans Past
Due 90
Days and
Still Accruing
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
31,947
|
|
|
$
|
32,206
|
|
|
$
|
—
|
|
Commercial mortgage
|
|
|
—
|
|
|
|
468
|
|
|
|
—
|
|
|
|
468
|
|
|
|
112,680
|
|
|
|
113,148
|
|
|
|
—
|
|
Construction, land and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,505
|
|
|
|
7,505
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
148
|
|
|
|
146
|
|
|
|
294
|
|
|
|
41,780
|
|
|
|
42,074
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,360
|
|
|
|
37,360
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
875
|
|
|
$
|
146
|
|
|
$
|
1,021
|
|
|
$
|
231,272
|
|
|
$
|
232,293
|
|
|
$
|
—
|
|
The Company categorizes loans
into risk categories based on relevant information about the quality and realizable value of collateral, if any, and the ability
of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation,
public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the
loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event
occurs indicating a potential decline in credit quality, and no less than annually for large balance loans. The Company uses the
following definitions for risk ratings:
Special Mention
– Loans classified
as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some
future date.
Substandard
– Loans
classified as substandard are inadequately protected by the current sound worth
and paying capacity of the obligor or of the collateral pledged, if any. Loans
so classified have a well-defined weakness or weaknesses that jeopardize the
repayment and liquidation of the debt. They are characterized by the distinct
possibility that the Company will sustain some loss if the deficiencies are
not corrected. Normal payment from the borrower is in jeopardy, although loss
of principal, while still possible, is not imminent.
Doubtful
– Loans classified
as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and
improbable.
The following table presents
the risk category of loans by class of loans based on the most recent analysis performed as of December 31, 2012 and 2011, respectively:
|
|
December 31, 2012
|
|
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Credit Risk Profile by Internally Assigned Grades
|
|
(in thousands)
|
|
Commercial
|
|
$
|
30,158
|
|
|
$
|
2,034
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,192
|
|
Commercial mortgage
|
|
|
127,999
|
|
|
|
420
|
|
|
|
2,314
|
|
|
|
—
|
|
|
|
130,733
|
|
Construction, land and land development
|
|
|
1,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,902
|
|
Consumer
|
|
|
36,067
|
|
|
|
275
|
|
|
|
746
|
|
|
|
—
|
|
|
|
37,088
|
|
Residential
|
|
|
38,961
|
|
|
|
805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,766
|
|
Total
|
|
$
|
235,087
|
|
|
$
|
3,534
|
|
|
$
|
3,060
|
|
|
$
|
—
|
|
|
$
|
241,681
|
|
|
|
December 31, 2011
|
|
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Credit Risk Profile by Internally Assigned Grades
|
|
(in thousands)
|
|
Commercial
|
|
$
|
29,215
|
|
|
$
|
2,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,206
|
|
Commercial mortgage
|
|
|
110,500
|
|
|
|
1,539
|
|
|
|
1,109
|
|
|
|
—
|
|
|
|
113,148
|
|
Construction, land and land development
|
|
|
7,505
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,505
|
|
Consumer
|
|
|
41,780
|
|
|
|
148
|
|
|
|
146
|
|
|
|
—
|
|
|
|
42,074
|
|
Residential
|
|
|
36,555
|
|
|
|
805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,360
|
|
Total
|
|
$
|
225,555
|
|
|
$
|
5,483
|
|
|
$
|
1,255
|
|
|
$
|
—
|
|
|
$
|
232,293
|
|
Changes in the allowance for
loan losses were as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance at beginning of year
|
|
$
|
2,982
|
|
|
$
|
2,875
|
|
Charge-offs
|
|
|
(144
|
)
|
|
|
(127
|
)
|
Recoveries
|
|
|
30
|
|
|
|
14
|
|
Provision charged to operations
|
|
|
290
|
|
|
|
220
|
|
Balance at end of year
|
|
$
|
3,158
|
|
|
$
|
2,982
|
|
The following table represents
the allocation of allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment
methodology at December 31, 2012 and 2011, respectively:
|
|
December 31, 2012
|
|
|
|
Commercial
|
|
|
Commercial
Mortgage
|
|
|
Construction,
Land and Land
Development
|
|
|
Consumer
|
|
|
Residential
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
96
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165
|
|
Collectively evaluated for impairment
|
|
|
551
|
|
|
|
1,659
|
|
|
|
30
|
|
|
|
482
|
|
|
|
227
|
|
|
|
44
|
|
|
|
2,993
|
|
Total
|
|
$
|
551
|
|
|
$
|
1,755
|
|
|
$
|
30
|
|
|
$
|
551
|
|
|
$
|
227
|
|
|
$
|
44
|
|
|
$
|
3,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
2,314
|
|
|
$
|
—
|
|
|
$
|
746
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
3,060
|
|
Collectively evaluated for impairment
|
|
|
32,192
|
|
|
|
128,419
|
|
|
|
1,902
|
|
|
|
36,342
|
|
|
|
39,766
|
|
|
|
|
|
|
|
238,621
|
|
Total
|
|
$
|
32,192
|
|
|
$
|
130,733
|
|
|
$
|
1,902
|
|
|
$
|
37,088
|
|
|
$
|
39,766
|
|
|
|
|
|
|
$
|
241,681
|
|
|
|
December 31, 2011
|
|
|
|
Commercial
|
|
|
Commercial
Mortgage
|
|
|
Construction,
Land and Land
Development
|
|
|
Consumer
|
|
|
Residential
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Collectively evaluated for impairment
|
|
|
522
|
|
|
|
1,531
|
|
|
|
122
|
|
|
|
531
|
|
|
|
215
|
|
|
|
50
|
|
|
|
2,971
|
|
Total
|
|
$
|
522
|
|
|
$
|
1,542
|
|
|
$
|
122
|
|
|
$
|
531
|
|
|
$
|
215
|
|
|
$
|
50
|
|
|
$
|
2,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
1,109
|
|
|
$
|
—
|
|
|
$
|
146
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
1,255
|
|
Collectively evaluated for impairment
|
|
|
32,206
|
|
|
|
112,039
|
|
|
|
7,505
|
|
|
|
41,928
|
|
|
|
37,360
|
|
|
|
|
|
|
|
231,038
|
|
Total
|
|
$
|
32,206
|
|
|
$
|
113,148
|
|
|
$
|
7,505
|
|
|
$
|
42,074
|
|
|
$
|
37,360
|
|
|
|
|
|
|
$
|
232,293
|
|
The following table presents the activity in the
Company’s allowance for loan losses by class of loans based on the most recent analysis performed for the twelve months ended
December 31, 2012:
|
|
Allowance for Loan Losses
|
|
|
|
Commercial
|
|
|
Commercial
Mortgage
|
|
|
Construction,
Land and Land
Development
|
|
|
Consumer
|
|
|
Residential
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance December 31, 2011
|
|
$
|
522
|
|
|
$
|
1,542
|
|
|
$
|
122
|
|
|
$
|
531
|
|
|
$
|
215
|
|
|
$
|
50
|
|
|
$
|
2,982
|
|
Charge-offs
|
|
|
—
|
|
|
|
(67
|
)
|
|
|
—
|
|
|
|
(77
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(144
|
)
|
Recoveries
|
|
|
18
|
|
|
|
8
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
Provision for loan losses
|
|
|
11
|
|
|
|
272
|
|
|
|
(92
|
)
|
|
|
93
|
|
|
|
12
|
|
|
|
(6
|
)
|
|
|
290
|
|
Balance, December 31, 2012
|
|
$
|
551
|
|
|
$
|
1,755
|
|
|
$
|
30
|
|
|
$
|
551
|
|
|
$
|
227
|
|
|
$
|
44
|
|
|
$
|
3,158
|
|
|
|
Commercial
|
|
|
Commercial
Mortgage
|
|
|
Construction,
Land and Land
Development
|
|
|
Consumer
|
|
|
Residential
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Balance
December 31, 2010
|
|
$
|
186
|
|
|
$
|
1,821
|
|
|
$
|
102
|
|
|
$
|
506
|
|
|
$
|
205
|
|
|
$
|
55
|
|
|
$
|
2,875
|
|
Charge-offs
|
|
|
—
|
|
|
|
(125
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(127
|
)
|
Recoveries
|
|
|
14
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
Provision
for loan losses
|
|
|
322
|
|
|
|
(154
|
)
|
|
|
20
|
|
|
|
27
|
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
220
|
|
Balance,
December 31, 2011
|
|
$
|
522
|
|
|
$
|
1,542
|
|
|
$
|
122
|
|
|
$
|
531
|
|
|
$
|
215
|
|
|
$
|
50
|
|
|
$
|
2,982
|
|
NOTE 4 – PREMISES AND EQUIPMENT
Premises and equipment are as
follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
693
|
|
|
$
|
693
|
|
Buildings and improvements
|
|
|
5,293
|
|
|
|
5,294
|
|
Furniture, fixtures and equipment
|
|
|
2,283
|
|
|
|
2,244
|
|
Leasehold improvements
|
|
|
955
|
|
|
|
955
|
|
Computer equipment and software
|
|
|
939
|
|
|
|
939
|
|
|
|
|
10,163
|
|
|
|
10,125
|
|
Less accumulated depreciation and amortization
|
|
|
(5,295
|
)
|
|
|
(5,129
|
)
|
Total premises and equipment, net
|
|
$
|
4,868
|
|
|
$
|
4,996
|
|
Depreciation charged to operations
amounted to approximately $284,000 and $401,000 for the years ended December 31, 2012 and 2011, respectively.
NOTE 5 – CERTIFICATES OF DEPOSIT
At December 31, 2012, a summary
of the maturity of certificates of deposit is as follows:
|
|
Amount
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
18,845
|
|
2014
|
|
|
5,083
|
|
2015
|
|
|
7,528
|
|
2016
|
|
|
2,366
|
|
2017
|
|
|
491
|
|
|
|
$
|
34,313
|
|
Deposits held at the Company
by related parties, which include executive officers, directors, and companies in which Board members have a significant ownership
interest, approximated $17.8 million and $23.4 million at December 31, 2012 and 2011, respectively.
NOTE 6 – BORROWINGS
a) Federal Home Loan Bank Borrowing
As
of December 31, 2012 and 2011, the Company had an approved borrowing capacity
of approximately $83.5 million and $76.7 million, respectively, with the Federal
Home Loan Bank of New York (FHLB), based on total assets and eligible collateral.
Eligible collateral may include certain investment securities and qualifying
mortgage loans. Borrowings under this arrangement have fixed interest rates
that range from 3.12% to 3.61% at December 31, 2012 with maturity dates of
November 29, 2017 through January 8, 2018 and are callable at the option of
the FHLB. At December 31, 2012 and 2011, $5.5 million and $7.5 million, respectively,
in borrowings were outstanding with the FHLB. FHLB borrowings of $2.0 million
and $3.5 million were prepaid during 2012 and 2011, respectively. The Company
incurred losses on debt extinguishment of $334,000 in 2012 and $426,000 in
2011, which were recorded as losses on debt extinguishment. The Company had
outstanding advances at December 31, 2012 and 2011 as follows:
Maturity
|
|
First Date Callable
|
|
Rate
|
|
|
December 31,
2012
|
|
November 29, 2017
|
|
November 29, 2010
|
|
|
3.41
|
%
|
|
$
|
1,500,000
|
|
January 8, 2018
|
|
January 8, 2011
|
|
|
3.12
|
%
|
|
|
2,000,000
|
|
January 8, 2018
|
|
January 8, 2013
|
|
|
3.61
|
%
|
|
|
2,000,000
|
|
Total
|
|
|
|
|
|
|
|
$
|
5,500,000
|
|
Maturity
|
|
First Date Callable
|
|
Rate
|
|
|
December 31,
2011
|
|
November 29, 2017
|
|
November 29, 2010
|
|
|
3.41
|
%
|
|
$
|
1,500,000
|
|
January 8, 2018
|
|
January 8, 2011
|
|
|
3.12
|
%
|
|
|
2,000,000
|
|
January 8, 2018
|
|
January 8, 2013
|
|
|
3.61
|
%
|
|
|
2,000,000
|
|
February 22, 2018
|
|
February 22, 2013
|
|
|
3.71
|
%
|
|
|
2,000,000
|
|
Total
|
|
|
|
|
|
|
|
$
|
7,500,000
|
|
b) Credit Lines and Borrowings
The Company has three lines
of credit with financial institutions aggregating $18.5 million at December 31, 2012. Borrowings under these agreements have interest
rates that fluctuate based on market conditions. The Company may also purchase Federal Funds on an overnight basis. The Company
had no borrowings outstanding under these lines as of December 31, 2012 and 2011, respectively.
NOTE 7 – INCOME TAXES
Deferred income taxes are provided
for the temporary difference between the financial reporting basis and the tax basis of the Company’s assets and liabilities.
The components of income taxes
(benefit) are summarized as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Current Tax Expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,532
|
|
|
$
|
1,118
|
|
State
|
|
|
275
|
|
|
|
247
|
|
|
|
|
1,807
|
|
|
|
1,365
|
|
Deferred Tax (Benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
93
|
|
|
|
(153
|
)
|
State
|
|
|
(70
|
)
|
|
|
(23
|
)
|
|
|
|
23
|
|
|
|
(176
|
)
|
|
|
$
|
1,830
|
|
|
$
|
1,189
|
|
The following table presents
reconciliation between the reported income taxes and the income taxes, which would be computed by applying the Federal statutory
tax rate of 34% to income before taxes:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Federal income tax
|
|
$
|
1,771
|
|
|
$
|
1,361
|
|
Add (deduct) effect of:
|
|
|
|
|
|
|
|
|
State income taxes net of federal income tax effect
|
|
|
252
|
|
|
|
136
|
|
Stock options
|
|
|
—
|
|
|
|
1
|
|
Meals and entertainment
|
|
|
14
|
|
|
|
15
|
|
Increase in cash surrender value life insurance
|
|
|
(92
|
)
|
|
|
(189
|
)
|
Tax-exempt income
|
|
|
(115
|
)
|
|
|
(128
|
)
|
Other
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
$
|
1,830
|
|
|
$
|
1,189
|
|
The tax effects of existing
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Deferred tax assets and (liabilities):
|
|
|
|
Allowance for loan losses
|
|
$
|
1,129
|
|
|
$
|
1,064
|
|
Deferred costs – loans
|
|
|
21
|
|
|
|
37
|
|
Nonaccrual loan income
|
|
|
9
|
|
|
|
3
|
|
Depreciation
|
|
|
(203
|
)
|
|
|
(107
|
)
|
Deferred compensation
|
|
|
242
|
|
|
|
180
|
|
Unrealized loss (gain) – AFS
|
|
|
(192
|
)
|
|
|
(406
|
)
|
NOL carryover and other
|
|
|
43
|
|
|
|
38
|
|
Net deferred tax assets
|
|
$
|
1,049
|
|
|
$
|
809
|
|
There was no valuation allowance
for deferred taxes as of December 31, 2012 and 2011. Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences.
The Company is subject to U.S.
Federal income tax as well as income tax of the State of New Jersey. The Company is no longer subject to examination by taxing
authorities for years before 2009. The Company does not have a material amount of unrecognized tax benefits and does not expect
the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
A tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. The Company recognizes interest and /or penalties related to income tax matters in income tax expense.
NOTE 8 – RELATED PARTY TRANSACTIONS
Loans to executive officers,
directors, and their affiliates during 2012 were as follows:
|
|
Amount
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
1, 262
|
|
New loans
|
|
|
36
|
|
Repayments
|
|
|
(167
|
)
|
Ending balance
|
|
$
|
1,131
|
|
A director of the Company
is a member of a law firm which represents the Company in various matters from time-to-time. The Company paid fees to this law
firm, relating to general corporate matters, of approximately $5,000 and $11,000 during the years ended December 31, 2012 and 2011,
respectively. This law firm had no loan balance outstanding at December 31, 2012 and an outstanding loan balance of $96,000 at
December 31, 2011, in connection with single term loan made by the Bank in 2009. This law firm had approximately $15,959,000 and
$20,978,000 of deposits held with the Company as of December 31, 2012 and 2011, respectively.
A director of the Company
is an owner of a restaurant which the Company uses for entertainment purposes. The Company paid this restaurant approximately $2,000
in each of the years ended December 31, 2012 and 2011. The restaurant had outstanding loan balances of $210,000 and $231,000 at
December 31, 2012 and 2011, respectively, in connection with one line of credit loan made by the Bank in 2003 and converted to
a term loan in 2011. This restaurant had approximately $21,000 and $13,000 of deposits held with the Company as of December 31,
2012 and 2011, respectively.
NOTE 9 – BENEFIT PLANS
Stock Options
The Company has three
equity compensation plans outstanding for the members of the board of directors, executive officers, and certain employees of the
Bank.
The Company’s
2001 Combined Stock Option Plan (“2001 Combined Plan”) provides for the granting of 295,490 shares of the Company’s
common stock. The Company’s 2007 Equity Incentive Plan (“2007 Plan”) provides for the granting of 137,813 shares
of the Company’s common stock. The Company’s 2012 Equity Incentive Plan (“2012 Plan”) provides for the
granting of 150,000 shares of the Company’s common stock. Both incentive stock options (ISOs) and non-qualified options (NQOs)
may be granted under the plans. The 2007 Plan and the 2012 Plan also permit grants of shares of restricted stock. Only employees
of the Company may receive ISOs.
Options granted pursuant
to the 2001 Combined Stock Option Plan must be exercisable at a price greater than or equal to the par value of the Common Stock,
but in no event may the option price be lower than (i) in the case of an ISO, the fair market value of the shares subject to the
ISO on the date of grant, (ii) in the case of an NQO issued to a Director as compensation for serving as a Director or as a member
of the advisory boards of the Bank, the fair market value of the shares subject to the NQO on the date of grant, and (iii) in the
case of an NQO issued to a grantee as employment compensation, eighty-five percent (85%) of the fair market value of the shares
subject to the NQO on the date of grant. In addition, no ISO may be granted to an employee who owns common stock possessing more
than ten percent (10%) of the total combined voting power of the Company’s common stock unless the price is at least 110%
of the fair market value (on the date of grant) of the common stock. Options granted under the 2007 Plan and the 2012 Plan must
have an exercise price equal to at least 100% of the fair market value of the shares on the grant date.
A summary of the status
of the Company’s stock option plans as of December 31, 2012, and the change during the year ended is represented below:
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2011
|
|
|
346,018
|
|
|
$
|
7.64
|
|
|
|
4.9 years
|
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63,000
|
|
|
|
8.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,850
|
)
|
|
|
6.12
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(23,632
|
)
|
|
|
9.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
334,536
|
|
|
$
|
7.95
|
|
|
|
5.1 years
|
|
|
$
|
436
|
|
Vested and expected to vest
|
|
|
334,536
|
|
|
$
|
7.95
|
|
|
|
5.1 years
|
|
|
$
|
436
|
|
Exercisable at end of the year
|
|
|
206,835
|
|
|
$
|
7.53
|
|
|
|
2.6 years
|
|
|
$
|
364
|
|
The
fair value of stock options granted during 2012 was $1.05 on the date of grant
using the Black Scholes option-pricing model with the following assumptions
for 2012: expected dividend yield of 3.73%, stock price volatility of 21.26%,
risk-free interest rates of 1.21% and expected life of 7 years. In 2011, stock
options were granted on two separate dates. The fair values of stock options
granted during 2011 were $1.96 and $1.21 on the dates of grant using the Black
Scholes option-pricing model with the following assumptions for 2011: expected
dividend yields of 2.44% and 3.06%, stock price volatility of 21.69% for both
grants, risk-free interest rates of 2.84% and 1.70% and expected life of 7
years for both grants.
At December 31, 2012
and 2011, the number of options exercisable was 206,835 and 233,605, respectively, and the weighted-average exercise price of those
options was $7.53 and $7.22, respectively.
At December 31, 2012
and 2011, there were 105,479 and 1,056 additional shares available for grant under the Plans.
Information related
to the stock option plan during each year follows:
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Intrinsic value of options exercised
|
|
$
|
128
|
|
|
$
|
99
|
|
Cash received from options exercised
|
|
|
311
|
|
|
|
210
|
|
Tax benefit realized from option exercises
|
|
|
33
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted in dollars
|
|
$
|
1.05
|
|
|
$
|
1.60
|
|
As of December 31, 2012,
there was $142,000 of total unrecognized compensation cost related to nonvested stock options granted under the Company’s
Plans. The cost is expected to be recognized over a weighted-average period of 3.8 years.
Stock Awards
For accounting purposes,
the Company recognizes compensation expense for grants of restricted stock awarded under the Company’s Plans over the vesting
period at the fair market value of the shares on the date they are awarded. For share awards granted to date, the vesting period
is four years with 25% of the award for each year vesting annually on May 23th of each year. As of December 31, 2012, 3,067 shares
were vested. For the year ended December 31, 2012, the Company did not recognize any compensation expense related to the shares
awarded. As of December 31, 2012, all share awards were vested and no additional costs related to previously granted shares are
expected to be recognized.
Other Benefit Plans
During 2007, the Company
entered into a non-qualified Supplemental Executive Retirement Plan (“SERP”) with its Chief Executive Officer and its
then current Chief Financial Officer. The benefit provided to them by the SERP is calculated at $48,000 and $24,000, respectively,
per year for 15 years after retirement. The Company’s expense for the SERP was $101,000 and $70,000 for the period ending
December 31, 2012 and 2011, respectively, resulting in a deferred compensation liability of $528,000 and $451,000 as of year-end
2012 and 2011. Due to the passing of the Chief Financial Officer in January 2009, the Company incurred an expense of $183,000 in
the first quarter of 2009. Payment of the benefit accrued for the former Chief Financial Officer is being paid to his beneficiary
evenly over 12 years.
The Company has a 401(k)
profit sharing plan for eligible employees. The Company matches employee contributions equal to 50% of the amount of the salary
reduction the employee elects to defer, up to a maximum of 5% of eligible compensation. The Company may also contribute a discretionary
amount each year as determined by the Company. The Company’s contribution to the Plan was approximately $86,000 and $95,000
for the years ended December 31, 2012 and 2011, respectively.
NOTE 10 – COMMITMENTS
a) Lease Commitments
The Company leases certain
office space and equipment under non-cancelable lease agreements, which have expiration dates through 2016. Lease and rental expense
was approximately $443,000 and $447,000 for the years ended December 31, 2012 and 2012, respectively.
The following is a schedule
of minimum commitments under operating leases at December 31, 2012:
|
|
Amount
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
364
|
|
2014
|
|
|
315
|
|
2015
|
|
|
230
|
|
2016
|
|
|
101
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
1,010
|
|
b) Employment Agreements
The Company is a party
to an employment agreement with its President and CEO. The agreement provides for one-year terms which automatically renew unless
either party provides notice at least six (6) months prior to the termination date of their intention not to renew. Pursuant to
this agreement, our President and CEO will receive a base salary and certain increases as defined in the agreement.
c) Preferred Stock
The Company’s
certificate of incorporation authorizes it to issue up to 1,000,000 shares of preferred stock, in one or more series, with such
designations and such relative voting, dividend and liquidation, conversion and other rights, preferences and limitations as shall
be resolved by the Board of Directors. There are currently no shares issued or outstanding.
d) Litigation
The Company is involved
in legal proceedings incurred in the normal course of business. On February 8, 2013, the Company received a class action complaint
in connection with its pending merger with Lakeland Bancorp, Inc. In the opinion of management, none of these proceedings are expected
to have a material effect on the financial position or results of operations of the Company.
NOTE 11 – FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company 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 letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Company’s
exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The Company had the
following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk. These instruments are
almost entirely made up of variable rate loans:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Commitments to extend credit and unused lines of credit
|
|
$
|
85,461
|
|
|
$
|
92,807
|
|
Letters of credit—standby and performance
|
|
|
1,421
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,882
|
|
|
$
|
94,531
|
|
Commitments to extend
credit are agreements to lend to a customer so 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral
held varies but may include guarantees, marketable securities, residential or commercial real estate, accounts receivable, inventory
or equipment. The Company had commitments to extend credit to related parties for approximately $456,000 and $1.4 million at December
31, 2012 and 2011, respectively.
Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support contracts entered into by customers. Most guarantees extend for one year. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
NOTE 12 – REPORTABLE SEGMENTS
We separate our business
into two reporting segments: community banking and mortgage banking.
The primary activities
of the Company include acceptance of deposits from the general public, origination of mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, and investment in debt securities, mortgage-backed securities and other
financial instruments (community banking). Sullivan provides mortgage-banking services to customers on behalf of investor companies
(mortgage banking).
The Company follows
U.S. generally accepted accounting principles as described in the summary of significant accounting policies. Consolidation adjustments
reflect elimination of intersegment revenue and expenses and statement of financial condition.
The following table
sets forth certain information about the reconciliation of reported net income for each of the reportable segments as of and for
the year ended December 31, 2012.
|
|
The Bank
and Bancorp
|
|
|
Sullivan
|
|
|
Eliminating
Entries
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
13,133
|
|
|
$
|
128
|
|
|
$
|
(57
|
)
|
|
$
|
13,204
|
|
Interest expense
|
|
|
1,289
|
|
|
|
57
|
|
|
|
(57
|
)
|
|
|
1,289
|
|
Provision for loan losses
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
Non-interest income
|
|
|
1,606
|
|
|
|
1,362
|
|
|
|
(120
|
)
|
|
|
2,848
|
|
Non-interest expense
(1)
|
|
|
10,102
|
|
|
|
1,113
|
|
|
|
(120
|
)
|
|
|
11,095
|
|
Net income
|
|
$
|
3,058
|
|
|
$
|
320
|
|
|
$
|
—
|
|
|
$
|
3,378
|
|
Total assets
|
|
$
|
368,302
|
|
|
$
|
9,299
|
|
|
$
|
(8,671
|
)
|
|
$
|
368,930
|
|
The following table
sets forth certain information about the reconciliation of reported net income for each of the reportable segments as of and for
the year ended December 31, 2011.
|
|
The Bank
and Bancorp
|
|
|
Sullivan
|
|
|
Eliminating
Entries
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
13,571
|
|
|
$
|
111
|
|
|
$
|
(42
|
)
|
|
$
|
13,640
|
|
Interest expense
|
|
|
1,793
|
|
|
|
42
|
|
|
|
(42
|
)
|
|
|
1,793
|
|
Provision for loan losses
|
|
|
220
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
Non-interest income
|
|
|
1,336
|
|
|
|
786
|
|
|
|
(102
|
)
|
|
|
2,002
|
|
Non-interest expense
(1)
|
|
|
10,069
|
|
|
|
867
|
|
|
|
(102
|
)
|
|
|
10,816
|
|
Net income
|
|
$
|
2,825
|
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
$
|
2,813
|
|
Total assets
|
|
$
|
363,482
|
|
|
$
|
4,928
|
|
|
$
|
(4,385
|
)
|
|
$
|
364,025
|
|
(1)
Includes income taxes.
NOTE 13 – REGULATORY MATTERS
The Bank is subject
to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material
effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. At year-end 2012 and 2011, the most recent regulatory
notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have changed the institution’s category.
Quantitative measures
established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). As of December 31, 2012, management believes the Bank met all capital adequacy requirements
to which it is subject.
The Bank’s actual
capital amounts and ratios are presented in the following tables:
|
|
Actual
|
|
|
For Capital
Adequacy Purpose
|
|
|
For Classification
As Well Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2012:
|
|
(dollars in thousands)
|
|
Total capital (to risk-weighted assets)
|
|
$
|
43,595
|
|
|
|
16.30
|
%
|
|
$
|
21,392
|
|
|
|
³8.00
|
%
|
|
$
|
26,581
|
|
|
|
³10.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
40,437
|
|
|
|
15.12
|
%
|
|
|
10,696
|
|
|
|
³4.00
|
%
|
|
|
15,949
|
|
|
|
³6.00
|
%
|
Tier I capital (to average assets)
|
|
|
40,437
|
|
|
|
11.04
|
%
|
|
|
14,656
|
|
|
|
³4.00
|
%
|
|
|
18,206
|
|
|
|
³5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
39,962
|
|
|
|
15.03
|
%
|
|
$
|
21,266
|
|
|
|
³8.00
|
%
|
|
$
|
26,581
|
|
|
|
³10.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
36,980
|
|
|
|
13.91
|
%
|
|
|
10,633
|
|
|
|
³4.00
|
%
|
|
|
15,949
|
|
|
|
³6.00
|
%
|
Tier I capital (to average assets)
|
|
|
36,980
|
|
|
|
10.16
|
%
|
|
|
14,565
|
|
|
|
³4.00
|
%
|
|
|
18,206
|
|
|
|
³5.00
|
%
|
As of December 31, 2012
and 2011, the Bank’s ratio of equity capital to total assets was 10.97% and 10.17%, respectively.
NOTE 14 – FAIR VALUE
FASB ASC 820 establishes
a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted)
for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date
Level 2: Significant other observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data
Level 3: Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability
The fair values of securities
available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or
matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively
on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).
The fair value of loans
held for sale is based upon binding quotes from third party investors (Level 2 inputs).
The fair value of impaired
loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining
fair value.
Assets and Liabilities Measured on a
Recurring Basis
Assets and liabilities
measured at fair value on a recurring basis are summarized below:
|
|
Fair Value Measurements at December 31, 2012
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
(in thousands)
|
|
Available for Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sponsored Agency Securities
|
|
$
|
—
|
|
|
$
|
2,921
|
|
|
$
|
—
|
|
Mortgage Backed Securities – Residential
|
|
|
—
|
|
|
|
7,667
|
|
|
|
—
|
|
Collaterized Mortgage Obligations
|
|
|
—
|
|
|
|
1,324
|
|
|
|
—
|
|
Corporate Debt Securities
|
|
|
—
|
|
|
|
1,458
|
|
|
|
—
|
|
Loans Held for Sale
|
|
|
—
|
|
|
|
6,977
|
|
|
|
—
|
|
|
|
Fair Value Measurements at December 31, 2011
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
(in thousands)
|
|
Available for Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sponsored Agency Securities
|
|
$
|
—
|
|
|
$
|
14,753
|
|
|
$
|
—
|
|
Mortgage Backed Securities – Residential
|
|
|
—
|
|
|
|
23,814
|
|
|
|
—
|
|
Collaterized Mortgage Obligations
|
|
|
—
|
|
|
|
2,734
|
|
|
|
—
|
|
Corporate Debt Securities
|
|
|
—
|
|
|
|
2,278
|
|
|
|
—
|
|
Loans Held for Sale
|
|
|
—
|
|
|
|
2,969
|
|
|
|
—
|
|
Assets and Liabilities Measured on a
Non-Recurring Basis
Assets and liabilities
measured at fair value on a non-recurring basis are summarized below:
|
|
Fair Value Measurements at December 31, 2012
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
(in thousands)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,887
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
677
|
|
A loan is impaired when
full payment under the loan terms is not expected. The fair value measurement for collateral dependent loans is based on the lesser
of appraised value, broker opinion or projected list price of the property less estimated expenses for the disposal of the property,
which include taxes, commissions, first liens and legal fees. At December 31, 2012, impaired loans that are measured for impairment
using the fair value of collateral had an unpaid principal balance of $2.7 million with a valuation allowance of $157,000. If a
loan is impaired, a portion of the allowance for loan losses is allocated so that the loan is reported net of the allocated allowance.
The Level 3 fair value
measurements on collateral dependent impaired loans were based on a current forecast of anticipated sale proceeds, net of expected
closing costs and related fees, to arrive at fair value.
There were no impaired
loans measured at fair value on a non-recurring basis at December 31, 2011.
The
Company has elected the fair value option for loans held for sale. These loans
are intended for sale and the Company believes that the fair value is the best
indicator of the resolution of these loans. Interest income is recorded based
on the contractual terms of the loan and in accordance with the Company’s
policy on loans held for investment. None of these loans are 90 days or more
past due or on nonaccrual at either December 31, 2012 or December 31, 2011.
No impairment charges were recognized on loans held for sale for the year ended
December 31, 2012 or December 31, 2011.
The carrying amounts
and estimated fair values of financial instruments not previously presented are summarized below at December 31, 2012 and December
31, 2011:
|
|
|
Fair Value Measurements at December 31, 2012 Using
|
|
|
|
|
Carrying Value
|
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
(in thousands)
|
|
|
Cash and due from banks
|
$
|
7,544
|
|
$
|
7,544
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
Federal funds sold
|
|
75,127
|
|
|
75,127
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in other financial institutions
|
|
775
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
8,900
|
|
|
|
|
|
|
|
9,186
|
|
|
|
|
|
|
|
Restricted stock
|
|
743
|
|
|
N/A
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, including deferred fees and costs
|
|
241,911
|
|
|
|
|
|
|
|
|
|
|
|
|
243,747
|
|
|
Demand, NOW, money market and savings
|
|
285,874
|
|
|
285,874
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
34,313
|
|
|
|
|
|
|
|
34,962
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
5,500
|
|
|
|
|
|
|
|
6,211
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2011 Using
|
|
|
|
Carrying Value
|
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(in thousands)
|
|
Cash and due from banks
|
$
|
4,588
|
|
$
|
4,588
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
Federal funds sold
|
|
54,636
|
|
|
54,636
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Interest bearing deposits in other financial institutions
|
|
775
|
|
|
775
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Investment securities held to maturity
|
|
10,738
|
|
|
-
|
|
|
|
|
10,849
|
|
|
|
|
-
|
|
|
Restricted stock
|
|
784
|
|
|
N/A
|
*
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Loans receivable, including deferred fees and costs
|
|
232,485
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
235,344
|
|
|
Demand, NOW, money market and savings
|
|
273,808
|
|
|
273,808
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Certificates of deposit
|
|
40,906
|
|
|
-
|
|
|
|
|
41,883
|
|
|
|
|
-
|
|
|
Federal Home Loan Bank advances
|
|
7,500
|
|
|
-
|
|
|
|
|
8,682
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.
|
For the Company, as
for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many
such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction.
Therefore, the Company uses significant estimations and present value calculations to prepare this disclosure.
Changes in the assumptions
or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there
may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the
absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument
fair values.
Estimated
fair values have been determined by the Company using the best available data
and an estimation methodology suitable for each category of financial instrument.
The estimation methodologies used, the estimated fair values, and recorded
book balances at December 31, 2012 and 2011 are outlined below.
The fair values of loans
are estimated based on a discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers
of similar credit quality.
The estimated fair values
of demand deposits (i.e., interest and non-interest bearing checking accounts, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting
date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities.
The fair values of fixed-rate
Federal Home Loan Bank borrowings are estimated using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated expected monthly Federal Home Loan borrowings maturities.
The fair value of commitments
to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit
is based on the amount of unearned fees plus the estimated costs to terminate the letters of credit. Fair values of unrecognized
financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.
NOTE 15 – PARENT COMPANY ONLY
The following information
on the parent only financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 should
be read in conjunction with the notes to the consolidated financial statements.
Statements of Financial Condition
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from subsidiaries
|
|
$
|
591
|
|
|
$
|
2,226
|
|
Investment in subsidiaries
|
|
|
40,809
|
|
|
|
37,769
|
|
Other assets
|
|
|
448
|
|
|
|
374
|
|
Total assets
|
|
$
|
41,848
|
|
|
$
|
40,369
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
37,143
|
|
|
|
36,972
|
|
Retained earnings
|
|
|
4,333
|
|
|
|
2,608
|
|
Accumulated other comprehensive income
|
|
|
372
|
|
|
|
789
|
|
Total stockholders’ equity
|
|
|
41,848
|
|
|
|
40,369
|
|
Total liabilities and stockholders’ equity
|
|
$
|
41,848
|
|
|
$
|
40,369
|
|
The following information
on the parent only operating statements and cash flows as of December 31, 2012 and 2011 and for the years then ended should be
read in conjunction with the notes to the consolidated financial statements.
Statements of Operations
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Equity in undistributed income of subsidiaries
|
|
$
|
3,457
|
|
|
$
|
2,851
|
|
Other expenses
|
|
|
79
|
|
|
|
38
|
|
Net income
|
|
$
|
3,378
|
|
|
$
|
2,813
|
|
Statements of Cash Flows
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,378
|
|
|
$
|
2,813
|
|
Equity in undistributed income of the subsidiaries
|
|
|
(3,457
|
)
|
|
|
(2,851
|
)
|
Increase in other assets
|
|
|
(74
|
)
|
|
|
(72
|
)
|
Stock-based compensation
|
|
|
41
|
|
|
|
44
|
|
Net cash used in operating activities
|
|
|
(112
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
344
|
|
|
|
210
|
|
Common stock repurchase
|
|
|
(214
|
)
|
|
|
(882
|
)
|
Cash dividend paid common stock
|
|
|
(1,653
|
)
|
|
|
(1,350
|
)
|
Net cash used in financing activities
|
|
|
(1,523
|
)
|
|
|
(2,022
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash for the period
|
|
|
(1,635
|
)
|
|
|
(2,088
|
)
|
Net cash at beginning of year
|
|
|
2,226
|
|
|
|
4,314
|
|
Net cash at end of year
|
|
$
|
591
|
|
|
$
|
2,226
|
|
NOTE 16 – QUARTERLY FINANCIAL DATA (unaudited)
Selected Consolidated Quarterly Financial Data
|
|
2012 Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(in thousands, except per share data)
|
|
Total interest income
|
|
$
|
3,455
|
|
|
$
|
3,308
|
|
|
$
|
3,299
|
|
|
$
|
3,142
|
|
Total interest expense
|
|
|
356
|
|
|
|
339
|
|
|
|
327
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,099
|
|
|
|
2,969
|
|
|
|
2,972
|
|
|
|
2,875
|
|
Provision for loan losses
|
|
|
75
|
|
|
|
90
|
|
|
|
75
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
3,024
|
|
|
|
2,879
|
|
|
|
2,897
|
|
|
|
2,825
|
|
Other income
|
|
|
551
|
|
|
|
712
|
|
|
|
580
|
|
|
|
1,005
|
|
Other expenses
|
|
|
2,317
|
|
|
|
2,190
|
|
|
|
2,221
|
|
|
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,258
|
|
|
|
1,401
|
|
|
|
1,256
|
|
|
|
1,293
|
|
Income tax expense
|
|
|
438
|
|
|
|
500
|
|
|
|
443
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
820
|
|
|
$
|
901
|
|
|
$
|
813
|
|
|
$
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
|
2011 Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(in thousands, except per share data)
|
|
Total interest income
|
|
$
|
3,325
|
|
|
$
|
3,376
|
|
|
$
|
3,484
|
|
|
$
|
3,454
|
|
Total interest expense
|
|
|
450
|
|
|
|
463
|
|
|
|
445
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
2,875
|
|
|
|
2,913
|
|
|
|
3,039
|
|
|
|
3,020
|
|
Provision for loan losses
|
|
|
75
|
|
|
|
30
|
|
|
|
95
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
2,800
|
|
|
|
2,883
|
|
|
|
2,944
|
|
|
|
3,000
|
|
Other income
|
|
|
396
|
|
|
|
368
|
|
|
|
734
|
|
|
|
503
|
|
Other expenses
|
|
|
2,353
|
|
|
|
2,278
|
|
|
|
2,744
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
843
|
|
|
|
973
|
|
|
|
934
|
|
|
|
1,252
|
|
Income tax expense
|
|
|
240
|
|
|
|
322
|
|
|
|
197
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
603
|
|
|
$
|
651
|
|
|
$
|
737
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|