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EX-21 - SOMERSET HILLS BANCORPc64713_ex21.htm
EX-23 - SOMERSET HILLS BANCORPc64713_ex23.htm
EX-32 - SOMERSET HILLS BANCORPc64713_ex32.htm
EX-31 - SOMERSET HILLS BANCORPc64713_ex31.htm
EX-10.4(1) - SOMERSET HILLS BANCORPc64713_ex10-41.htm
EX-10.4(2) - SOMERSET HILLS BANCORPc64713_ex10-42.htm



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549


FORM 10-K

S  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

or

£  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File Number 000-50055

SOMERSET HILLS BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey
(State of other jurisdiction of
incorporation or organization)

 

22-3768777
(I. R. S. Employer
Identification No.)

155 Morristown Road, Bernardsville, NJ
(Address of principal executive offices)

 

07924
(Zip Code)

(908) 221-0100
(Registrants’ telephone number including area code)

Securities registered under Section 12(b) of the Exchange Act:

 

 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, no par value

 

Nasdaq

Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
£  No S

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
£  No S

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 S  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S  No £

Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-K or any amendment to this Form 10-K. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (check one) : Large accelerated filer £  Accelerated filer £  Non-accelerated filer £  Smaller reporting company S

(Do not check if a 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 S

As of June 30, 2010, the aggregate market value of voting and non-voting equity held by non-affiliates was $39.0 million.

As of March 10th, 2011 there were 5,448,338 shares of common stock, no par value per share outstanding.




DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

 

 

 

 

10-K Item

 

Document Incorporated

Item 10.

 

Directors and Executive Officers
of the Registrant

 

Proxy Statement for 2011 Annual Meeting
of Shareholders to be filed no later than April 30, 2011.

Item 11.

 

Executive Compensation

 

Proxy Statement for 2011 Annual Meeting
of Shareholders to be filed no later than April 30, 2011.

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Proxy Statement for 2011 Annual Meeting of Shareholders to be filed no later than April 30, 2011.

Item 13.

 

Certain Relationships and Related Transactions

 

Proxy Statement for 2011 Annual Meeting
of Shareholders to be filed no later than April 30, 2011.

Item 14.

 

Principal Accountant Fees and Services

 

Proxy Statement for 2011 Annual Meeting
of Shareholders to be filed no later than April 30, 2011.


PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Somerset Hills Bancorp (the “Company”) is a one-bank holding company incorporated under the laws of New Jersey in January 2000 to serve as the holding company for Somerset Hills Bank (the “Bank”). We were organized at the direction of the Board of Directors of the Bank. Effective January 1, 2001, Somerset Hills Bancorp acquired all of the capital stock of the Bank and became a bank holding company under the Bank Holding Company Act of 1956, as amended. Our only significant operation is our investment in the Bank. Our main office is located at 155 Morristown Road, Bernardsville, New Jersey and our telephone number is (908) 630-5029.

The Bank is a commercial bank formed under the laws of the State of New Jersey in 1997. The Bank operates from its main office at 155 Morristown Road, Bernardsville, New Jersey, and its five branch offices located in Long Valley, Madison, Mendham, Morristown and Summit, New Jersey. The Bank operates a licensed mortgage company subsidiary, Sullivan Financial Services, Inc. (“Sullivan”). Sullivan’s operations are located in Madison, New Jersey. The Company considers Sullivan to be a separate business segment.

The Bank’s deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation up to applicable limits. The operations of the Bank are subject to the supervision and regulation of the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance. Our mortgage company’s operations are subject to regulation by the New Jersey Department of Banking and Insurance, the Departments of Banking in Florida, New York and Pennsylvania as well as the Department of Housing and Urban Development and the Veterans Administration.

We separate our business into two reporting segments: retail banking and mortgage banking. For financial information on our business segments, see Note 12 to the accompanying Financial Statements.

Business of the Bank

The Bank conducts a traditional commercial banking business and offers services including personal and business checking accounts, time deposits, money market accounts and regular savings accounts. The Bank’s lending activities are oriented to the small-to-medium sized business, high net worth individuals, professional practices and consumer and retail customers living and working primarily in the Bank’s market area of Somerset, Morris and Union Counties, New Jersey. The Bank offers the commercial, consumer, and mortgage-lending products typically offered by community banks and, through its mortgage company subsidiary, a variety of residential mortgage products.

The deposit services offered by the Bank include small business and personal checking and savings accounts and certificates of deposit. The Bank’s signature deposit account is the Paramount Checking Account, an interest paying checking account offering features such as free checks, telephone banking, text banking, internet banking and bill payment, free safe deposit box and a refund of foreign ATM fees. Another deposit service the bank offers is the Escrow Ease product. Escrow Ease is specifically designed to meet the trust account needs of attorneys, realtors and title companies. The Escrow Ease Account offers the convenience of segregation of client funds, by sub account, within a single master trust account with detailed sub account reporting including the preparation of year-end tax documents. Sub accounts may be either interest or non-interest bearing and, for attorneys, can also be designated as IOLTA accounts. The Bank concentrates on customer relationships in building our customer deposit base and competes aggressively in the area of transaction accounts.

In addition, the Bank has established a wealth management subsidiary pursuant to which it offers insurance services, securities brokerage and investment advisory services on a non-proprietary basis under the terms of an agreement with Mass Mutual, its affiliated securities brokerage and its locally affiliated agents. The Bank has also established a title insurance agency joint venture which offers traditional title agency services in connection with commercial real estate transactions. The Bank is a 50 percent owner of the joint venture.

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Service Area

The service area of the Bank primarily consists of Somerset, Morris and Union Counties, New Jersey, although we make loans throughout New Jersey. The Bank operates through its main office in Bernardsville, New Jersey, and its branch offices located in Long Valley, Madison, Mendham, Morristown and Summit, New Jersey.

Our mortgage company subsidiary originates loans primarily throughout New Jersey, and to a lesser degree, New York, Pennsylvania and Florida. The mortgage company’s operations are located in Madison, New Jersey.

Competition

The Bank operates in a highly competitive environment competing for deposits and loans with commercial banks, thrifts and other financial institutions, many of which have greater financial resources than the Bank. Many large financial institutions compete for business in the service area of the Bank. In addition, in November 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 was passed into law. The Act permits insurance companies and securities firms, among others, to acquire financial institutions and has increased competition within the financial services industry. Certain of our competitors have significantly higher lending limits than we do and provide services to their customers that we do not offer.

Management believes that the Bank is able to compete favorably with our competitors because we provide responsive personalized service through management’s knowledge and awareness of our market area, customers and businesses.

Employees

At December 31, 2010 and 2009, we employed 60 and 71 full-time employees and 14 and 15 part-time employees, respectively. None of these employees are covered by a collective bargaining agreement and we believe that our employee relations are good.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under both federal and state law. These laws and regulations are intended to protect depositors, not shareholders. In addition, the operations of Sullivan are subject to various state and federal regulations designed to protect consumers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank.

BANK HOLDING COMPANY REGULATION

General

As a bank holding company registered under the Bank Holding Company Act, the Company is subject to the regulation and supervision applicable to bank holding companies by the Board of Governors of the Federal Reserve System. The Company is required to file with the Federal Reserve annual reports and other information regarding its business operations and those of its subsidiaries.

The Bank Holding Company Act requires, among other things, the prior approval of the Federal Reserve in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such company’s voting shares) or (iii) merge or consolidate with any other bank holding company. The Federal Reserve will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers.

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The Bank Holding Company Act generally prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be properly incident thereto.

The Bank Holding Company Act was substantially amended through the Gramm-Leach Bliley Financial Modernization Act of 1999 (“Financial Modernization Act”). The Financial Modernization Act permits bank holding companies and banks, which meet certain capital, management and Community Reinvestment Act standards to engage in a broader range of non-banking activities. In addition, bank holding companies that elect to become financial holding companies may engage in certain banking and non-banking activities without prior Federal Reserve approval. Finally, the Financial Modernization Act imposes certain new privacy requirements on all financial institutions and their treatment of consumer information. At this time, the Company has elected not to become a financial holding company, as it does not engage in any activities that are not permissible for banks.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the Federal Reserve with respect to bank holding company operations, which has now been codified as part of the Bank Holding Company Act through the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted in July of 2010 (the “Dodd-Frank Act”), a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Capital Adequacy Guidelines for Bank Holding Companies

The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. These requirements apply on a consolidated basis to bank holding companies with consolidated assets of $500 million or more and to certain bank holding companies with less than $500 million in consolidated assets if they are engaged in substantial non-banking activities or meet certain other criteria. We do not meet these criteria, and so are not subject to a minimum consolidated capital requirement.

In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. This minimum leverage requirement only applies to bank holding companies on a consolidated basis if the risk based capital requirements discussed above apply. We do not have a minimum consolidated capital requirement at the holding company level at this time.

BANK REGULATION

As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the New Jersey Department of Banking and Insurance. As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the New Jersey Department of Banking and Insurance impact virtually all of the Bank’s activities, including the minimum level of capital we must maintain, our ability to pay dividends, our ability to expand through new branches or acquisitions and various other matters.

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Insurance of Deposits

The Dodd-Frank Act has caused significant changes in the FDIC’s insurance of deposit accounts. Among other things, the Dodd-Frank Act permanently increased the FDIC deposit insurance limit to $250 thousand per depositor. In addition, the Dodd-Frank Act includes provisions replacing, by statute, the FDIC’s program to provide unlimited deposit insurance coverage for noninterest bearing transactional accounts. Institutions are not required to opt into this coverage, and can not opt out of the program. In addition, institutions are not required to pay an additional assessment for this additional coverage. Under the Dodd-Frank Act, this unlimited coverage for non- interest bearing transaction accounts will expire on January 1, 2013.

The FDIC has significantly increased deposit insurance assessment rates, beginning in the second quarter of 2009. As increased, the adjusted base assessment rates range from 12.0 to 77.5 basis points of deposits, a significant increase over premium rates for the past several years The FDIC also levied a special assessment of 5 basis points on assets less Tier 1 Capital as of June 30, 2009, paid September 30, 2009. The 5 basis point special assessment resulted in a charge to the Bank of approximately $141 thousand. The FDIC also required insured depository institutions to pre-pay deposit insurance premiums for the next two and one-half years in 2009. Premium assessments are to increase by three basis points in 2011. These additional costs have and will adversely affect the Company’s results of operations.

On February 7, 2011 the FDIC announced the approval of a revised assessment system mandated by the Dodd-Frank Act. The Dodd-Frank Act requires that the base on which deposit insurance assessments are charged be revised from one based on domestic deposits to one based on assets. The FDIC’s rule to base the assessment base on average total consolidated assets minus average tangible equity, instead of domestic deposits, may lower assessments for community banks with less than $10 billion in assets. The new rate schedule is effective during the second quarter of 2011 and may reduce the Company’s costs for Federal deposit insurance.

Capital Adequacy Guidelines

The FDIC has promulgated risk-based capital guidelines, which are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier I Capital,” consisting of common shareholders’ equity, qualifying preferred stock and certain permissible hybrid instruments, less certain goodwill items and other intangible assets. The remainder (“Tier II Capital”) may consist of (a) the allowance for loan losses of up to 1.25% of risk- weighted assets, (b) non-qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier I capital. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the Federal Reserve (determined on a case by case basis or as a matter of policy after formal rule-making).

Bank assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property, which carry a 50% risk-weighting, and loans secured by deposits in the Bank which carry a 20% risk weighting. Most investment securities (including, primarily general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations are given a 100% risk weighting. Transaction related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk weighting. Short-term commercial letters of credit have a 20% risk weighting and certain short-term unconditionally cancelable commitments have a 0% risk weighting.

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In addition to the risk-based capital guidelines, the FDIC has adopted a minimum Tier 1 capital (leverage) ratio. Under these guidelines, a bank must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.

Dividends

As long as the operations of the Bank remain our primary source of income, our ability to pay dividends will be affected by any legal or regulatory limitations on the Bank’s ability to pay dividends. The Bank may pay dividends as declared from time to time by the Board of Directors out of funds legally available, subject to certain restrictions. Under the New Jersey Banking Act of 1948, the Bank may not pay a cash dividend unless, following the payment, the Bank’s capital stock will be unimpaired and the Bank will have a surplus of no less than 50% of the Bank’s capital stock or, if not, the payment of the dividend will not reduce the surplus. In addition, the Bank would be prohibited from paying dividends in such amounts as would reduce the Bank’s capital below regulatory imposed minimums.

REGULATION OF SULLIVAN

As a subsidiary of the Bank, Sullivan is subject to regulation and examination by the New Jersey Department of Banking and Insurance and the FDIC. In addition, as a licensed lender, Sullivan is subject to the jurisdiction of the New Jersey Department of Banking and Insurance and, as an approved Department of Housing and Urban Development and Veterans Administration lender, Sullivan is subject to examination by the Department of Housing and Urban Development and the Veterans Administration. Sullivan is also subject to regulation by the Florida Department of Financial Services as well as the Department of Banking in New York and Pennsylvania.

LEGISLATIVE AND REGULATORY CHANGES

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law on July 21, 2010. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Some uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry by increasing compliance costs and reducing some sources of revenue. The Dodd-Frank Act, among other things:

 

 

 

 

Directs the Federal Reserve to issue rules which are expected to limit debit-card interchange fees;

 

 

 

 

Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the deposit insurance fund from 1.15% to 1.35% and changes the basis for determining FDIC premiums from deposits to assets;

 

 

 

 

Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on checking accounts;

 

 

 

 

Creates a new consumer financial protection bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and would have broad powers to supervise and enforce consumer protection laws directly for large institutions;

 

 

 

 

Provides for new disclosure and other requirements relating to executive compensation and corporate governance;

 

 

 

 

Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries;

 

 

 

 

Provides mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and

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Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

On October 8, 2008, the Emergency Economic Stabilization Act (the “EESA”) was signed into law. On October 14, 2008, the United States Treasury (the “UST”) announced its Troubled Assets Relief Program (“TARP”) Capital Purchase Program (“CPP”). Under the CPP, the UST will purchase shares of senior preferred stock in insured depository institutions or their holding companies, bearing a dividend rate of 5%. In addition, participating institutions must issue to the UST common stock purchase warrants, permitting the UST to purchase common stock with a value equal to 15% of the UST’s preferred stock investment. The Company elected to participate in the CPP, and on January 16, 2009, it issued $7.4 million in preferred stock to the U.S. Treasury. In addition, the Company issued to the Treasury common stock purchase warrants permitting the Treasury to purchase up to 163,065 shares of the Company’s common stock, no par value, at an exercise price of $6.82 per share, for an aggregate purchase price of approximately $1,112,103.30. The Company redeemed, on May 20, 2009, all 7,414 shares of preferred stock for $7.4 million and, on June 24, 2009, repurchased all 163,085 warrants for $275 thousand.

On February 16, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was adopted. Among other things, the ARRA amended various provisions of the EESA to, among other things, substantially restrict executive compensation for those entities that participate in the CPP, including those institutions that participated prior to the adoption of the ARRA, impose more stringent reporting requirements on such institutions and require such institutions to permit their shareholders to have a non-binding, advisory vote on executive compensation.

On July 30, 2002, the Sarbanes-Oxley Act, or “SOX” was enacted. SOX is not a banking law, but applies to all public companies, including Somerset Hills Bancorp. The stated goals of SOX are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. SOX is the most far reaching U.S. securities legislation enacted in some time. SOX generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended.

SOX includes very specific additional disclosure requirements and new corporate government rules and requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specific issues by the SEC. SOX represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. SOX addresses, among other matters:

 

 

 

 

audit committees;

 

 

 

 

certification of financial statements by the chief executive officer and the chief financial officer;

 

 

 

 

management’s assessment of a company’s internal controls over financial reporting, and a company’s auditor’s certification of such assessment;

 

 

 

 

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

 

 

 

 

a prohibition on insider trading during pension plan black out periods;

 

 

 

 

disclosure of off-balance sheet transactions;

 

 

 

 

a prohibition on personal loans to officers and directors, unless subject to Federal Reserve Regulation O;

 

 

 

 

expedited filing requirements for Form 4 statements of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

 

 

 

 

disclosure of whether or not a company has adopted a code of ethics;

 

 

 

 

“real time” filing of periodic reports;

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auditor independence; and

 

 

 

 

various increased criminal penalties for violations of securities laws.

Complying with the requirements of SOX as implemented by the SEC has and will continue to increase our compliance costs and could make it more difficult to attract and retain board members.

On October 26, 2001, a new anti-terrorism bill, the International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001, was signed into law. This law restricts money laundering by terrorists in the United States and abroad. This act specifies new “know your customer” requirements that will obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution. Banking regulators will consider compliance with the act’s money laundering provisions in making decisions regarding approval of acquisitions and mergers. In addition, sanctions for violations of the act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million.

ITEM 1A. RISK FACTORS

Risks affecting our business:

The recent nationwide recession has reduced real estate values in our trade area and may adversely affect our business by stressing the ability of our customers to repay their loans.

Our trade area, like the rest of the United States, is currently experiencing weak economic conditions. As a result, many companies have experienced reduced revenues and have laid off employees. These factors have stressed the ability of both commercial and consumer customers to repay their loans and may result in higher levels of non-accrual loans. In addition, real estate values have declined in our trade area. Since the majority of our loans are secured by real estate, declines in the market value of real estate impact the value of the collateral securing our loans, and could lead to greater losses in the event of defaults on loans secured by real estate.

Changes in interest rates can have an adverse effect on profitability.

Our earnings and cash flows are largely dependent upon net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition, and policies of various governmental and regulatory agencies and, in particular, the policies of the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, including our securities portfolio, and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk). Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

Our earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and exploit opportunities to generate fee-based income.

Historically, the growth of our loans and deposits has been the principal factor in our increase in net interest income. In the event that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. Our ability to continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to generate fee-based income. Our ability to manage growth successfully will also depend on whether we

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can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest rate trends.

Our business strategy could be adversely affected if we are not able to attract and retain skilled employees and manage our expenses.

Our ability to successfully implement business strategies, especially given the persistently poor economy and an increasingly onerous regulatory environment, will depend upon our ability to continue to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our staff employees.

Our mortgage banking operations expose us to risks that are different from retail banking.

The bank’s mortgage banking operations expose us to risks that are different from our retail banking operations. Our mortgage banking operations are dependent upon the level of demand for residential mortgages. During higher and rising interest rate environments, the level of refinancing activity tends to decline, which can lead to reduced volumes of business and lower revenues than currently recognized and that may not exceed our fixed costs to run the business. In addition, mortgages sold to third-party investors are typically subject to certain repurchase provisions related to borrower refinancing, defaults, fraud or other reasons stipulated in the applicable third- party investor agreements. If the fair value of a loan when repurchased is less than the fair value when sold, the bank may be required to charge such shortfall to earnings.

Risks Related to the Banking Industry:

Changes in local economic conditions could adversely affect our loan portfolio.

Our success depends to a great extent upon the general economic conditions of the local markets that we serve. Unlike larger banks that are more geographically diversified, we provide banking and financial services primarily to customers in our central and northern New Jersey trade area, so any decline in the economy of this specific region could have an adverse impact on us.

Our loans, the ability of borrowers to repay these loans and the value of collateral securing these loans, are impacted by economic conditions. Our financial results, the credit quality of our existing loan portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest rates, adverse employment conditions and the monetary and fiscal policies of the federal government. We cannot assure you that continued negative trends or developments will not have a significant adverse effect on us.

There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.

The risk of non-payment (or deferred or delayed payment) of loans is inherent in banking. Such non-payment, or delayed or deferred payment of loans to the Company, if they occur, may have a material adverse effect on our earnings and overall financial condition. Additionally, in compliance with applicable banking laws and regulations, the Company maintains an allowance for loan losses created through charges against earnings. As of December 31, 2010, the Company’s allowance for loan losses was $2.9 million. The Company’s marketing focus on small to medium-size businesses may result in the assumption by the Company of certain lending risks that are different from or greater than those which would apply to loans made to larger companies. We seek to minimize our credit risk exposure through credit controls, which include evaluation of potential borrowers’ available collateral, liquidity and cash flow. However, there can be no assurance that such procedures will actually reduce loan losses.

Our allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and nonperformance. Our allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses could materially and adversely affect the results of our operations. Risks within the loan portfolio are

8


analyzed on a continuous basis by management; and, periodically, by an independent loan review function and by the Audit Committee. A risk system, consisting of multiple-grading categories, is utilized as an analytical tool to assess risk and the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrowers, past and expected loan loss experience and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly and as adjustments become necessary, they are realized in the periods in which they become known. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. State and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses and have in the past required an increase in our allowance for loan losses. Although we believe that our allowance for loan losses is adequate to cover probable and reasonably estimated losses, we cannot assure you that we will not further increase the allowance for loan losses or that our regulators will not require us to increase this allowance. Either of these occurrences could adversely affect our earnings.

We are in competition with many other banks, including larger commercial banks which have greater resources than us.

The banking industry within our trade area is highly competitive. The Company’s principal market area is also served by branch offices of large commercial banks and thrift institutions. In addition, in 1999 the Gramm-Leach-Bliley Financial Modernization Act of 1999 was passed into law. The Modernization Act permits other financial entities, such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing competition. A number of our competitors have substantially greater resources than we do to expend upon advertising and marketing, and their substantially greater capitalization enables them to make much larger loans. Our success depends a great deal upon our judgment that large and mid-size financial institutions do not adequately serve small businesses in our principal market area and upon our ability to compete favorably for such customers. In addition to competition from larger institutions, we also face competition for individuals and small businesses from recently-formed banks seeking to compete as “hometown” institutions. Most of these new institutions have focused their marketing efforts on the smaller end of the small business market we serve.

The banking business is subject to significant government regulations, which are designed for the protection of depositors and the public, but not our stockholders.

We are subject to extensive governmental supervision, regulation and control. These laws and regulations are subject to change, and may require substantial modifications to our operations or may cause us to incur substantial additional compliance costs. In addition, future legislation and government policy could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the subject of future modification. These laws and regulations are generally designed to protect depositors and the deposit insurance funds and to foster economic growth and not for the purpose of protecting stockholders. Our management cannot predict what effect any such future modifications will have on our operations.

For example, the recently adopted Dodd-Frank Act will result in substantial new compliance costs, and may restrict certain sources of revenue. The Dodd-Frank Act was signed into law on July 21, 2010. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole, or on our business, results of operations and financial condition. The Dodd-Frank Act, among other things:

 

 

 

 

Directs the Federal Reserve to issue rules which are expected to limit debit-card interchange fees;

 

 

 

 

Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the deposit insurance fund from 1.15% to 1.35% and changes the basis for determining FDIC premiums from deposits to assets;

 

 

 

 

Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on checking accounts;

9


 

 

 

 

Creates a new consumer financial protection bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and would have broad powers to supervise and enforce consumer protection laws;

 

 

 

 

Provides for new disclosure and other requirements relating to executive compensation and corporate governance;

 

 

 

 

Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries;

 

 

 

 

Provides mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and

 

 

 

 

Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

We can give no assurance that future changes in laws and regulations or changes in their interpretation will not adversely affect our business.

We cannot predict how changes in technology will impact our business.

The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

 

 

 

 

telecommunications;

 

 

 

 

data processing;

 

 

 

 

automation;

 

 

 

 

internet-based banking;

 

 

 

 

consumer check capture;

 

 

 

 

telephone and text banking; and

 

 

 

 

debit cards and so-called “smart cards.”

Our ability to compete successfully in the future will depend on whether we can anticipate and respond to technological changes. To develop these and other new technologies, we will likely have to make additional capital investments. Although we continually invest in new technology, we cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future.

The Company’s information systems may experience an interruption or breach in security.

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer-relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur; or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny or expose the Company to civil litigation and possible financial liability; any of which could have a material adverse affect on the Company’s financial condition and results of operations.

10


ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

ITEM 2. DESCRIPTION OF PROPERTY

The Bank owns its main office in Bernardsville and branch office in Long Valley, New Jersey, and leases its Madison, Mendham, Morristown and Summit, New Jersey branch offices.

The following table sets forth certain information regarding the properties of the Bank:

 

 

 

Owned Properties

Location

 

Square Feet

Bernardsville

 

14,000

Long Valley

 

1,200

 

 

 

 

 

 

 

Leased Properties

 Location  

 

 Square Feet  

 

 Monthly Rental  

 

 Expiration of Term  

Madison

 

 

 

4,000

   

 

$

 

10,000

   

 

 

2016

 

Mendham

 

 

 

2,500

   

 

 

7,500

   

 

 

2015

 

Morristown

 

 

 

2,379

   

 

 

4,758

   

 

 

2013

 

Summit

 

 

 

4,016

   

 

 

9,625

   

 

 

2014

 

ITEM 3. LEGAL PROCEEDINGS

We are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the business of the Company and the Bank. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank, which if determined adversely, would have a material effect on the business or financial position of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Removed and reserved

PART II

ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is currently traded on Nasdaq Global Market under the symbol “SOMH.”

The following table shows the high and low sale prices for the common stock as reported on the Nasdaq from January 1, 2009 through December 31, 2010.

11


 

 

 

 

 

 

 

   

Sales Price(1)

 

Dividends
Declared

 

High

 

Low

2010

 

 

 

 

 

 

First Quarter

 

 

$

 

8.10

 

 

 

$

 

7.13

 

 

 

$

 

0.05

 

Second Quarter

 

 

 

9.42

 

 

 

 

7.62

 

 

 

 

0.05

 

Third Quarter

 

 

 

8.80

 

 

 

 

7.75

 

 

 

 

0.06

 

Fourth Quarter

 

 

 

9.20

 

 

 

 

8.00

 

 

 

 

0.06

 

2009

 

 

 

 

 

 

First Quarter

 

 

$

 

6.86

 

 

 

$

 

4.52

 

 

 

$

 

0.05

 

Second Quarter

 

 

 

8.09

 

 

 

 

5.81

 

 

 

 

0.05

 

Third Quarter

 

 

 

8.40

 

 

 

 

6.95

 

 

 

 

0.05

 

Fourth Quarter

 

 

 

8.05

 

 

 

 

6.95

 

 

 

 

0.05

 


 

 

(1)

 

 

  The prices quoted above have been adjusted, where applicable, to reflect the 5% stock dividend declared in April 2010 and paid in May 2010.

As of December 31, 2010, there were 186 record holders of our common stock.

In February 2007, our Board of Directors adopted a stock repurchase program under which we may repurchase up to 250,000 shares of our common stock in open market or privately negotiated transactions. In October 2007 the Board increased this program by another 250,000 shares. The Company did not repurchase any shares during the fourth quarter of 2010.

12


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER DATA

SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER DATA
(in thousands, except per share data)

Set forth below is selected historical financial data of the Company. This information is derived in part from and should be read in conjunction with the consolidated financial statements and notes thereto presented in the Annual Report to Stockholders.

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2010

 

2009

 

2008

 

2007

 

2006

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

Total interest income

 

 

$

 

13,473

 

 

 

$

 

13,854

 

 

 

$

 

14,988

 

 

 

$

 

17,867

 

 

 

$

 

15,782

 

Total interest expense

 

 

 

2,193

 

 

 

 

3,391

 

 

 

 

4,275

 

 

 

 

7,142

 

 

 

 

6,054

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

11,280

 

 

 

 

10,463

 

 

 

 

10,713

 

 

 

 

10,725

 

 

 

 

9,728

 

Provision for loan losses

 

 

 

125

 

 

 

 

950

 

 

 

 

515

 

 

 

 

1,031

 

 

 

 

201

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

11,155

 

 

 

 

9,513

 

 

 

 

10,198

 

 

 

 

9,694

 

 

 

 

9,527

 

Other income

 

 

 

2,214

 

 

 

 

2,931

 

 

 

 

1,747

 

 

 

 

2,386

 

 

 

 

2,869

 

Other expenses

 

 

 

9,640

 

 

 

 

10,109

 

 

 

 

9,780

 

 

 

 

11,159

 

 

 

 

9,022

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

3,729

 

 

 

 

2,335

 

 

 

 

2,165

 

 

 

 

921

 

 

 

 

3,374

 

Income tax expense

 

 

 

1,219

 

 

 

 

441

 

 

 

 

599

 

 

 

 

539

 

 

 

 

1,176

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

2,510

 

 

 

 

1,894

 

 

 

 

1,566

 

 

 

 

382

 

 

 

 

2,198

 

Dividends on preferred stock and accretion

 

 

 

-

 

 

 

 

350

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

 

$

 

2,510

 

 

 

$

 

1,544

 

 

 

$

 

1,566

 

 

 

$

 

382

 

 

 

$

 

2,198

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

$0.46

 

 

 

 

$0.28

 

 

 

 

$0.29

 

 

 

 

$0.07

 

 

 

 

$0.50

 

Diluted earnings per share

 

 

 

$0.46

 

 

 

 

$0.28

 

 

 

 

$0.28

 

 

 

 

$0.07

 

 

 

 

$0.44

 

Note: All per share data has been restated to reflect the 5% stock dividends declared in 2006, 2007, 2008 and 2010.

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Data:

 

At December 31,

 

2010

 

2009

 

2008

 

2007

 

2006

Total Assets

 

 

$

 

328,896

 

 

 

$

 

330,110

 

 

 

$

 

299,663

 

 

 

$

 

285,470

 

 

 

$

 

289,428

 

Net Loans

 

 

 

204,271

 

 

 

 

203,657

 

 

 

 

208,427

 

 

 

 

205,257

 

 

 

 

190,398

 

Total Deposits

 

 

 

276,541

 

 

 

 

279,125

 

 

 

 

249,760

 

 

 

 

244,673

 

 

 

 

250,221

 

Stockholders’ Equity

 

 

 

39,391

 

 

 

 

38,200

 

 

 

 

37,529

 

 

 

 

36,621

 

 

 

 

37,896

 

Selected Financial Ratios:

 

 

 

 

 

 

 

 

 

 

Return on Average Assets (ROA)

 

 

 

0.80

%

 

 

 

 

0.61

%

 

 

 

 

0.56

%

 

 

 

 

0.13

%

 

 

 

 

0.86

%

 

Return on Average Equity (ROE)

 

 

 

6.37

%

 

 

 

 

4.65

%

 

 

 

 

4.24

%

 

 

 

 

1.01

%

 

 

 

 

7.62

%

 

Equity to Total Assets at Year-End

 

 

 

11.98

%

 

 

 

 

11.57

%

 

 

 

 

12.52

%

 

 

 

 

12.83

%

 

 

 

 

13.09

%

 

13


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other “forward-looking” information. Those statements are subject to known and unknown risk; uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and using numerous assumptions. Important factors that may cause actual results to differ from those contemplated by forward-looking statements include those disclosed under Item 1A   Risk Factors as well as the following factors:

 

 

 

 

the success or failure of our efforts to implement our business strategy;

 

 

 

 

the effect of changing economic conditions and in particular changes in interest rates;

 

 

 

 

changes in government regulations, tax rates and similar matters;

 

 

 

 

our ability to attract and retain quality employees; and

 

 

 

 

other risks which may be described in our future filings with the SEC.

We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2010 contains a summary of the Company’s significant accounting policies. Management believes the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors of the Company.

The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. 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 make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected by declines in real estate values, or if the Central or Northern areas of New Jersey experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

OVERVIEW AND STRATEGY

The Company serves as a holding company for the Bank, which is its primary asset and only operating subsidiary. The Bank conducts a traditional banking business, making commercial loans, consumer loans, and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non- proprietary

14


relationships with third party vendors. The Bank relies primarily upon deposits as the funding source for its assets. The Bank offers traditional deposit products. In addition, as an alternative to traditional certificate of deposit accounts, the Bank offers its Paramount Checking Account, an interest paying checking account which also provides a suite of additional services, such as free checks, free telephone banking and free bill payment, free safe deposit box and refunds for foreign ATM fees. Although the rate the Bank pays on the Paramount Checking Account can often be higher than the rate offered on interest paying checking accounts by the Bank’s competitors, management believes the account has helped to reduce the Bank’s overall cost of funds and has been an integral part of the Bank’s core account acquisition strategy. Core accounts consist of noninterest-bearing deposits-demand, NOW, money market and savings accounts. Paramount Checking Account balances are generally higher than other account balances, and the account helps the Bank develop an overall relationship with its customers, which frequently leads to cross-selling opportunities, which the Bank actively pursues through direct mailings and other special promotions. Another component to the Bank’s core account acquisition strategy is the generation of deposit accounts which result from new commercial loan customers who move their deposit relationship to the bank and the continued expansion of the Bank’s Escrow Ease product. Escrow Ease is specially designed to meet the trust account needs of attorneys, realtors and title companies. At December 31, 2010, the core account balances represented 84.9% of total deposit balances.

Through its Sullivan Financial Services subsidiary (“Sullivan”), the Bank also engages in mortgage banking operations, originating loans primarily for resale into the secondary market and, to a lesser extent, for the Bank’s loan portfolio. We treat the operations of Sullivan as a separate reporting segment apart from our commercial banking business. See Note 12 to the accompanying Audited Financial Statements for financial information on our business segments.

The Company’s results of operations depend primarily on its net interest income, which is the difference between the interest earned on its interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, and is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of non-interest income and non-interest expenses.

RESULTS OF OPERATIONS - 2010 versus 2009

Net Income and Net Income Available to Common Shareholders

Net income for 2010 was $2.510 million, an increase of $616 thousand from $1.894 million earned in 2009. Net income available to common stockholders was $2.510 million for 2010, up $966,000 from $1.544 million earned in 2009. Diluted earnings per share were $0.46 for 2010 and $0.28 for 2009. Net income available to common stockholders and diluted earnings per share for 2009 reflect $350 thousand of accretion, dividends, and repurchase premium related to $7.4 million of preferred stock and warrants issued on January 16, 2009 to the U.S. Treasury under the Capital Purchase Program. During the second quarter of 2009 the Company repurchased all of the preferred stock and warrants issued to Treasury.

The significant improvement in net income for 2010 versus 2009 was due to several factors including higher net interest income resulting primarily from lower funding costs, reduced provision for loan losses largely attributable to stabilizing credit quality, and lower operating expenses reflecting management’s focus on cost containment. These improvements were partially offset by lower non-interest income due to lower bank owned life insurance income and reduced gains on sale of residential mortgage loans.

Net Interest Income

Net interest income on a fully taxable equivalent basis for 2010 totaled $11.497 million, an increase of $804 thousand, or 7.5%, from $10.693 million earned in 2009. The increase in net interest income was substantially attributable to a widening of the net interest margin, which increased by 24 basis points to 3.98% in 2010 from 3.74% in 2009. The increase in the net interest margin was primarily due to a reduction in rates paid for deposits. The average rate paid on interest-bearing deposits declined to 0.90% in 2010 from 1.48% in 2009, while the average rate paid on all deposits (which includes both interest-bearing deposits and noninterest-bearing demand deposits) declined to 0.69% in 2010 from 1.17% in 2009. The decline in deposit costs was consistent with the overall decline in the general level of

15


interest rates, as well as a continued shift in deposits held by the Bank to core transaction accounts, which typically pay interest at lower rates than time deposits. Average noninterest-bearing demand balances increased to $60.3 million, a 12% increase over 2009, and average core deposits (defined as all deposits other than time deposits) increased to $219.5 million, a 9.7% increase over 2009. Average core deposits in 2010 comprised 83.6% of average total deposits versus 77.6% in 2009. Despite the improvement in the Bank’s cost of funds, the net interest margin continued to be hampered by significant balances held in liquid overnight investments. As strong growth in core deposits has outpaced loan growth, management has made a strategic decision to refrain from investing significantly in medium- to longer-term investment securities but rather to stand ready to lend as the economy improves. Cash and Due from Banks, which has been predominantly invested at an overnight rate of 0.25%, averaged $38.8 million in 2010 and $33.1 million in 2009.

Average Balance Sheets

The following table sets forth certain information relating to the Company’s average assets and liabilities for the years ended December 31, 2010, 2009, and 2008, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Securities available for sale are reflected in the following table at amortized cost. Non-accrual loans are included in the average loan balance.

16


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,
(dollars in thousands)

 

2010

 

2009

 

2008

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

 

$

 

38,789

 

 

 

$

 

119

 

 

 

 

0.31

%

 

 

 

$

 

33,106

 

 

 

$

 

89

 

 

 

 

0.27

%

 

 

 

$

 

2,634

 

 

 

$

 

25

 

 

 

 

0.93

%

 

Loans receivable

 

 

 

206,639

 

 

 

 

11,357

 

 

 

 

5.50

 

 

 

 

208,840

 

 

 

 

11,501

 

 

 

 

5.51

 

 

 

 

208,116

 

 

 

 

12,740

 

 

 

 

6.12

 

Investment securities

 

 

 

44,550

 

 

 

 

1,980

 

 

 

 

4.44

 

 

 

 

44,441

 

 

 

 

2,228

 

 

 

 

5.01

 

 

 

 

38,793

 

 

 

 

2,060

 

 

 

 

5.31

 

Loans held for sale

 

 

 

3,429

 

 

 

 

187

 

 

 

 

5.46

 

 

 

 

4,056

 

 

 

 

219

 

 

 

 

5.40

 

 

 

 

3,905

 

 

 

 

238

 

 

 

 

6.11

 

Restricted stock

 

 

 

938

 

 

 

 

47

 

 

 

 

5.05

 

 

 

 

900

 

 

 

 

45

 

 

 

 

5.05

 

 

 

 

865

 

 

 

 

45

 

 

 

 

5.16

 

Federal funds sold

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

442

 

 

 

 

2

 

 

 

 

0.35

 

 

 

 

5,462

 

 

 

 

106

 

 

 

 

1.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest earning assets

 

 

 

294,345

 

 

 

 

13,690

 

 

 

 

4.65

%

 

 

 

 

291,785

 

 

 

 

14,084

 

 

 

 

4.83

%

 

 

 

 

259,775

 

 

 

 

15,214

 

 

 

 

5.77

%

 

Non-interest earning assets

 

 

 

23,126

 

 

 

 

 

 

 

 

21,784

 

 

 

 

 

 

 

 

24,672

 

 

 

 

 

Allowance for loan losses

 

 

 

(3,160

)

 

 

 

 

 

 

 

 

(2,779

)

 

 

 

 

 

 

 

 

(3,073

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

314,311

 

 

 

 

 

 

 

$

 

310,790

 

 

 

 

 

 

 

$

 

281,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND
STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

 

$

 

131,368

 

 

 

$

 

786

 

 

 

 

0.60

%

 

 

 

$

 

118,130

 

 

 

$

 

1,074

 

 

 

 

0.91

%

 

 

 

$

 

121,153

 

 

 

$

 

2,140

 

 

 

 

1.77

%

 

Savings accounts

 

 

 

6,940

 

 

 

 

19

 

 

 

 

0.27

 

 

 

 

6,082

 

 

 

 

20

 

 

 

 

0.33

 

 

 

 

5,426

 

 

 

 

45

 

 

 

 

0.83

 

Money market accounts

 

 

 

20,900

 

 

 

 

91

 

 

 

 

0.44

 

 

 

 

22,113

 

 

 

 

118

 

 

 

 

0.53

 

 

 

 

17,375

 

 

 

 

261

 

 

 

 

1.50

 

Certificates of deposit

 

 

 

43,069

 

 

 

 

926

 

 

 

 

2.15

 

 

 

 

57,681

 

 

 

 

1,808

 

 

 

 

3.13

 

 

 

 

39,785

 

 

 

 

1,444

 

 

 

 

3.63

 

FHLB advances

 

 

 

11,003

 

 

 

 

371

 

 

 

 

3.37

 

 

 

 

11,000

 

 

 

 

371

 

 

 

 

3.37

 

 

 

 

11,109

 

 

 

 

373

 

 

 

 

3.36

 

Other borrowings

 

 

 

3

 

 

 

 

-

 

 

 

 

0.73

 

 

 

 

3

 

 

 

 

-

 

 

 

 

0.51

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Federal funds purchased

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

11

 

 

 

 

-

 

 

 

 

1.00

 

 

 

 

506

 

 

 

 

12

 

 

 

 

2.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

 

213,283

 

 

 

 

2,193

 

 

 

 

1.03

%

 

 

 

 

215,020

 

 

 

 

3,391

 

 

 

 

1.58

%

 

 

 

 

195,354

 

 

 

 

4,275

 

 

 

 

2.19

%

 

Non-interest bearing deposits

 

 

 

60,330

 

 

 

 

 

 

 

 

53,811

 

 

 

 

 

 

 

 

48,055

 

 

 

 

 

Other liabilities

 

 

 

1,325

 

 

 

 

 

 

 

 

1,277

 

 

 

 

 

 

 

 

993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

274,938

 

 

 

 

 

 

 

 

270,108

 

 

 

 

 

 

 

 

244,402

 

 

 

 

 

Stockholders’ Equity

 

 

 

39,373

 

 

 

 

 

 

 

 

40,682

 

 

 

 

 

 

 

 

36,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY

 

 

$

 

314,311

 

 

 

 

 

 

 

$

 

310,790

 

 

 

 

 

 

 

$

 

281,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

 

 

$

 

11,497

 

 

 

 

 

 

 

$

 

10,693

 

 

 

 

 

 

 

$

 

10,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Rate Spread(1)

 

 

 

 

 

 

 

3.62

%

 

 

 

 

 

 

 

 

3.25

%

 

 

 

 

 

 

 

 

3.67

%

 

Net Interest Margin(2)

 

 

 

 

 

 

 

3.98

%

 

 

 

 

 

 

 

 

3.74

%

 

 

 

 

 

 

 

 

4.21

%

 

Ratio of Average Interest-Earning Assets to Average Interest-Bearing Liabilities

 

 

 

138.01

%

 

 

 

 

 

 

 

 

135.70

%

 

 

 

 

 

 

 

 

132.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Net Interest Rate Spread equals Total interest earning assets yield less Total interest bearing liabilities cost.

 

(2)

 

 

 

Net Interest Margin equals Net Interest Income divided by Total average interest earning assets.

The data contained in the table has been adjusted to a tax equivalent basis, based on the Company’s federal statutory rate of 34 percent. Management believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules.

17


Rate/Volume Analysis

The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,
2010 versus 2009

 

Year Ended December 31,
2009 versus 2008

 

 

(in thousands)

 

 

Increase (Decrease)
due to change in Average

 

Increase (Decrease)
due to change in Average

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

$

 

15

 

 

 

$

 

15

 

 

 

$

 

30

 

 

 

$

 

83

 

 

 

$

 

(18

)

 

 

 

$

 

65

 

Loans

 

 

 

(121

)

 

 

 

 

(23

)

 

 

 

 

(144

)

 

 

 

 

40

 

 

 

 

(1,279

)

 

 

 

 

(1,239

)

 

Securities

 

 

 

5

 

 

 

 

(254

)

 

 

 

 

(249

)

 

 

 

 

254

 

 

 

 

(91

)

 

 

 

 

163

 

Loans held for sale

 

 

 

(34

)

 

 

 

 

2

 

 

 

 

(32

)

 

 

 

 

8

 

 

 

 

(27

)

 

 

 

 

(19

)

 

Restricted stock

 

 

 

2

 

 

 

 

-

 

 

 

 

2

 

 

 

 

2

 

 

 

 

(1

)

 

 

 

 

1

 

Federal funds sold

 

 

 

(2

)

 

 

 

 

-

 

 

 

 

(2

)

 

 

 

 

(18

)

 

 

 

 

(87

)

 

 

 

 

(105

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

 

$

 

(135

)

 

 

 

$

 

(260

)

 

 

 

$

 

(395

)

 

 

 

$

 

369

 

 

 

$

 

(1,503

)

 

 

 

$

 

(1,134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

$

 

120

 

 

 

$

 

(409

)

 

 

 

$

 

(289

)

 

 

 

$

 

(27

)

 

 

 

$

 

(1,038

)

 

 

 

$

 

(1,065

)

 

Savings accounts

 

 

 

3

 

 

 

 

(4

)

 

 

 

 

(1

)

 

 

 

 

2

 

 

 

 

(27

)

 

 

 

 

(25

)

 

Money market accounts

 

 

 

(6

)

 

 

 

 

(20

)

 

 

 

 

(26

)

 

 

 

 

25

 

 

 

 

(168

)

 

 

 

 

(143

)

 

Certificates of deposit

 

 

 

(457

)

 

 

 

 

(425

)

 

 

 

 

(882

)

 

 

 

 

560

 

 

 

 

(196

)

 

 

 

 

364

 

FHLB advances

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(4

)

 

 

 

 

1

 

 

 

 

(3

)

 

Federal funds purchased

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(5

)

 

 

 

 

(7

)

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

 

(340

)

 

 

 

 

(858

)

 

 

 

 

(1,198

)

 

 

 

 

551

 

 

 

 

(1,435

)

 

 

 

 

(884

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$

 

205

 

 

 

$

 

598

 

 

 

$

 

803

 

 

 

$

 

(182

)

 

 

 

$

 

(68

)

 

 

 

$

 

(250

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18


Provision for Loan Losses

For the year ended December 31, 2010, the Company’s provision for loan losses was $125 thousand, a decrease of $825 thousand from $950 thousand for the year ended December 31, 2009. The relatively low level of loan loss provisioning during 2010 was consistent with a stabilizing, yet still weak, overall economic environment. For the Company, this translated into very few new problem credits and virtually no aggregate loan growth. This was in contrast to 2009 when, consistent with the then weakening overall credit environment, a relatively larger number of specific credits in the Bank’s loan portfolio became impaired. In addition, during 2009, due to declining economic trends, management increased the general loss factors utilized in estimating credit losses inherent in the loan portfolio. Although the Company’s asset quality metrics, such as nonaccrual loan, charge-off, and delinquency ratios remain among the soundest relative to its competitive peer groups, management believes there continue to be heightened risks in certain segments of the loan portfolio. Management regularly reviews the adequacy of its allowance and may provide for additional provisions in future periods due to increased general weakness in the economy or in our geographic trade area, deterioration or impairment of specific credits, or as management may deem necessary.

Non-Interest Income

The largest component of our non-interest income is gains on sales of mortgage loans originated by Sullivan, our mortgage company subsidiary (see “Segment Reporting”). The Company also earns non-interest revenue from additional sources such as bank-owned life insurance (“BOLI”), wealth management, and fees on deposit accounts, ATM usage, wire transfer, lock box services, and safe deposit boxes.

Non-interest income was $2.214 million in 2010, down $717 thousand from $2.931 million in 2009. The largest component of the decrease was bank-owned life insurance, which was down $581 thousand due to a large death benefit payment received in 2009. Also contributing to the decline in total non-interest income were lower gains on sales of residential mortgages, which declined by $210 thousand to $1.281 million in 2010 from $1.491 million in 2009. Although residential mortgage loan originations remained strong by historical standards, Sullivan’s loans originated for sale fell to $129.4 million in 2010 from $186.4 million in 2009. Partially offsetting the lower origination volume were higher spreads, or prices, received from the institutions that purchased Sullivan’s loans. The declines in BOLI and mortgage banking revenue were partially offset by higher banking fees (including service fees on deposits, ATM and debit card income, lock box services, and wire fees) and higher wealth management revenue. In the aggregate, these other sources of non-interest income, which are typically less volatile than mortgage banking and BOLI, increased by 13.1% to $635 thousand in 2010 from $561 thousand in 2009.

Non-Interest Expense

Total non-interest expense declined by $469 thousand, or 4.6%, to $9.640 million in 2010 from $10.109 million in 2009. The decrease in non-interest expense was primarily attributable to lower occupancy expenses and two non-recurring charges in 2009: (i) a $183 thousand charge for retirement plan liability due to the death of the Company’s former Chief Financial Officer and (ii) a $140 thousand special FDIC assessment. Occupancy expense declined by $217 thousand to $1.665 million in 2010 from $1.882 million in 2009, as certain leasehold improvements and furniture and fixtures reached the end of their depreciable lives and the Company consolidated the back-office space of Sullivan into an existing location of the Bank. During 2010, Management continued its focus on reducing costs by relying less on outside service providers and negotiating better terms with vendors. Reflecting this focus, the Company reduced its costs in 2010 versus 2009 for the following line items: printing, stationery and supplies declined by $53 thousand; legal fees declined by $48 thousand; correspondent banking fees declined by $35 thousand; audits & exams declined by $25 thousand; and telecommunications declined by $24 thousand. Partially offsetting the aforementioned declines in expenses were (i) a $191 thousand, or 3.6%, increase in salary and employee benefits (excluding the aforementioned retirement plan liability charge) due largely to increased incentive pay, (ii) a $36 thousand increase in data processing costs, and (iii) a $24 thousand increase in the Bank’s regular FDIC insurance assessment.

19


Income Taxes

The Company recorded provisions for income taxes of $1.219 million and $441 thousand for 2010 and 2009, respectively. The effective tax rate for 2010 was 32.7%, as compared to 18.9% for 2009. The low effective tax rate in 2009 was due primarily to a $568 thousand nontaxable death benefit received on BOLI. In addition, the effective tax rate in 2010 was higher than 2009 due to an increase in income from taxable sources, whereas recurring non-taxable income declined slightly.

FINANCIAL CONDITION

Total assets as of December 31, 2010 were $328.9 million, down $1.2 million from $330.1 million at December 31, 2009. Loans held for sale fell by $3.2 million, while total cash and cash equivalents increased by $1.3 million. Total investment securities remained constant, with investment securities held to maturity declining by $1.6 million due to issuer calls, and investment securities available for sale increasing by $1.8 million, due to purchases, net of calls and mortgage-backed securities run-off. Loans Receivable remained relatively constant ($207.1 million at year-end 2010 versus $206.8 million at year-end 2009) as loan originations were virtually matched by loan maturities and early pay-downs. As of year-end 2010, total cash and cash equivalents remained high by historical standards at $57.6 million, as credit demand remained weak and Management has shied away from significant purchases of investment securities as the yields available in the securities markets have remained very low. At year-end, the Bank’s loan pipeline was growing and Management expects to begin to redeploy cash balances in the first quarter.

Loan Portfolio

The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail customers living and working in the Bank’s market area of Somerset, Morris and Union Counties, New Jersey. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of customer service, competitive rate structures and selective marketing have enabled it to gain market entry. Bank mergers and lending restrictions at larger banks competing with the Bank have also contributed to the Bank’s success in attracting borrowers.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Real estate loans consist of (i) construction, land and land development loans, which include loans secured by first liens on commercial or residential properties to finance the construction or renovation of such properties (ii) commercial mortgages, which include loans secured by first liens on completed commercial properties to purchase or refinance such properties and (iii) residential mortgages, which include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences.

Total loans (excluding loans held for sale) at year-end 2010 increased slightly to $207.1 million from $206.8 million at year-end 2009. The Bank’s origination of $47.8 million in new loans and loan commitments during 2010 was almost entirely offset by loan payoffs and paydowns. The changes in the loan portfolio, by category, as of December 31, 2010 compared to December 31, 2009 are as follows: Commercial loans decreased $8.5 million to $31.6 million; construction, land and land development loans decreased $51 thousand to $7.5 million; commercial mortgage loans decreased $1.9 million to $98.2 million; home equity loans decreased $4.1 million to $42.3 million; residential mortgage loans increased $15.3 million to $26.9 million; and other consumer loans decreased $224 thousand to $532 thousand. During 2010, the Bank’s loan portfolio saw a continued shift that began during 2009, in balances from the “commercial” and “consumer” categories to the “real estate” category. This resulted primarily from deleveraging and/or refinancing strategies employed by many of the Bank’s borrowers which in turn led to paydowns or repayments of the Bank’s loans in essentially all categories. With regard to new loan origination, the demand for credit that met the Bank’s underwriting standards was below historical levels and was predominantly for credit secured by residential and commercial real estate.

20


The following table sets forth the classification of our loans by major category as of December 31, 2010, 2009, 2008, 2007 and 2006, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

Amount

 

Percent of
Total Loans

 

Amount

 

Percent of
Total Loans

 

Amount

 

Percent of
Total Loans

 

Amount

 

Percent of
Total Loans

 

Amount

 

Percent of
Total Loans

Commercial

 

 

$

 

31,556

 

 

 

 

15.2

%

 

 

 

$

 

40,102

 

 

 

 

19.4

%

 

 

 

$

 

57,600

 

 

 

 

27.3

%

 

 

 

$

 

60,264

 

 

 

 

28.9

%

 

 

 

$

 

63,319

 

 

 

 

32.9

%

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

 

7,489

 

 

 

 

3.6

 

 

 

 

7,540

 

 

 

 

3.7

 

 

 

 

6,945

 

 

 

 

3.3

 

 

 

 

7,502

 

 

 

 

3.6

 

 

 

 

15,047

 

 

 

 

7.8

 

Commercial mortgages

 

 

 

98,183

 

 

 

 

47.4

 

 

 

 

100,118

 

 

 

 

48.4

 

 

 

 

84,578

 

 

 

 

40.1

 

 

 

 

81,849

 

 

 

 

39.3

 

 

 

 

67,244

 

 

 

 

34.9

 

Residential mortgages

 

 

 

26,907

 

 

 

 

13.0

 

 

 

 

11,656

 

 

 

 

5.6

 

 

 

 

12,718

 

 

 

 

6.0

 

 

 

 

9,652

 

 

 

 

4.6

 

 

 

 

7,145

 

 

 

 

3.7

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

42,332

 

 

 

 

20.5

 

 

 

 

46,481

 

 

 

 

22.5

 

 

 

 

48,239

 

 

 

 

22.8

 

 

 

 

47,862

 

 

 

 

23.0

 

 

 

 

38,832

 

 

 

 

20.2

 

Other consumer

 

 

 

532

 

 

 

 

0.3

 

 

 

 

756

 

 

 

 

0.4

 

 

 

 

1,035

 

 

 

 

0.5

 

 

 

 

1,247

 

 

 

 

0.6

 

 

 

 

984

 

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Loans

 

 

 

206,999

 

 

 

 

100.0

%

 

 

 

 

206,653

 

 

 

 

100.0

%

 

 

 

 

211,115

 

 

 

 

100.0

%

 

 

 

 

208,376

 

 

 

 

100.0

%

 

 

 

 

192,571

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred costs (fees)

 

 

 

147

 

 

 

 

 

 

115

 

 

 

 

 

 

131

 

 

 

 

 

 

82

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

 

207,146

 

 

 

 

 

 

206,768

 

 

 

 

 

 

211,246

 

 

 

 

 

 

208,458

 

 

 

 

 

 

192,568

 

 

 

Less: Allowance for loan losses

 

 

 

2,875

 

 

 

 

 

 

3,111

 

 

 

 

 

 

2,819

 

 

 

 

 

 

3,201

 

 

 

 

 

 

2,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

 

$

 

204,271

 

 

 

 

 

$

 

203,657

 

 

 

 

 

$

 

208,427

 

 

 

 

 

$

 

205,257

 

 

 

 

 

$

 

190,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


The following table sets forth fixed and adjustable rate loans in the loan portfolio as of December 31, 2010 in terms of contractual maturity (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Within One
Year

 

1 to 5
Years

 

After 5
Years

 

Total

Loans with Fixed Rate

 

 

$

 

25,610

 

 

 

$

 

7,542

 

 

 

$

 

58,254

 

 

 

$

 

91,406

 

Loans with Adjustable Rate

 

 

 

34,598

 

 

 

 

53,900

 

 

 

 

27,095

 

 

 

 

115,593

 

Asset Quality

The Company’s principal assets are its loans. Inherent in the lending function is the risk of the borrower’s inability to repay a loan under its existing terms. The Company attempts to minimize overall credit risk through loan diversification and its loan approval procedures. Due diligence begins at the time a borrower and the Company begin to discuss the origination of a loan. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source and timing of the repayment of the loan, and other factors are analyzed before a loan is submitted for approval. Loans made are also subject to periodic audit and review.

Non-performing assets include non-accrual loans, loans delinquent 90 days or more and still accruing and other real estate owned (“OREO”). Generally, a loan is placed on non-accrual status when principal or interest is past due for a period of 90 days or more, unless the asset is both well secured and in the process of collection. When a loan is classified as non-accrual, interest accruals discontinue and all past due interest, including interest applicable to prior periods, is reversed and charged against current income. OREO refers to real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure. The OREO property is recorded at the lower of cost or estimated fair value at the time of acquisition. Estimated fair value generally represents the estimated sale price based on current market conditions, less estimated costs to sell the property. Holding costs and declines in estimated fair value result in charges to expense after acquisition.

Consistent with sound lending practices, in very limited situations the Company will work with borrowers experiencing financial difficulties and will modify a borrower’s existing loan terms and conditions. If applicable, the Company records an impairment loss charged to the Allowance for Loan Losses based on the present value of expected revised future cash flows discounted at the loan’s original interest rate. Such loans with modified loan terms are referred to as troubled debt restructurings (“TDRs”). As of December 31, 2010, the Company had two TDRs totaling $738 thousand, which are both currently performing under applicable restructured terms.

22


The following table sets forth information concerning the Company’s non-performing assets and TDRs as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

(in thousands)

Non-accrual loans

 

 

$

 

254

 

 

 

$

 

256

 

 

 

$

 

1,365

 

 

 

$

 

3,036

 

 

 

$

 

282

 

Loans past due 90 days and still accruing

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

 

$

 

254

 

 

 

$

 

256

 

 

 

$

 

1,365

 

 

 

$

 

3,036

 

 

 

$

 

282

 

OREO

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing assets

 

 

$

 

254

 

 

 

$

 

256

 

 

 

$

 

1,365

 

 

 

$

 

3,036

 

 

 

$

 

282

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructured loans

 

 

$

 

738

 

 

 

$

 

394

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

 

 

0.12%

 

 

 

 

0.12%

 

 

 

 

0.65%

 

 

 

 

1.46%

 

 

 

 

0.15%

 

Non-performing assets to total assets

 

 

 

0.08%

 

 

 

 

0.08%

 

 

 

 

0.46%

 

 

 

 

1.06%

 

 

 

 

0.10%

 

Allowance for loan losses as a
percentage of non-performing loans

 

 

 

1,132%

 

 

 

 

1,215%

 

 

 

 

207%

 

 

 

 

105%

 

 

 

 

770%

 

Other than as disclosed in the table above and impaired loans (as disclosed in Note 3 to the Company’s Consolidated Financial Statements), there were no loans where information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans in the table above.

As of December 31, 2010 and 2009, there were no concentrations of loans exceeding 10% of the Company’s total loans. The Company’s loans are primarily to businesses and individuals located in northern and central New Jersey.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level considered adequate to provide for probable incurred loan losses. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. The Company’s officers analyze risks within the loan portfolio on a continuous basis, through an external independent loan review function, and by the Company’s Audit Committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the Company’s allowance for loan losses.

23


The following is a summary of the reconciliation of the allowance for loan losses for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

(in thousands)

Balance, beginning of year

 

 

$

 

3,111

 

 

 

$

 

2,819

 

 

 

$

 

3,201

 

 

 

$

 

2,170

 

 

 

$

 

2,029

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

(389

)

 

 

 

 

(656

)

 

 

 

 

(898

)

 

 

 

 

-

 

 

 

 

-

 

Real Estate

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

(6

)

 

 

 

 

(7

)

 

 

 

 

(3

)

 

 

 

 

(1

)

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Charge-offs

 

 

 

(395

)

 

 

 

 

(663

)

 

 

 

 

(901

)

 

 

 

 

(1

)

 

 

 

 

(2

)

 

Recoveries

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

34

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Real Estate

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

5

 

 

 

 

4

 

 

 

 

1

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Total Recoveries

 

 

 

34

 

 

 

 

5

 

 

 

 

4

 

 

 

 

1

 

 

 

 

-

 

Reclassification related to unused commitments

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(58

)

 

Provision charged to expense

 

 

 

125

 

 

 

 

950

 

 

 

 

515

 

 

 

 

1,031

 

 

 

 

201

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

 

 

$

 

2,875

 

 

 

$

 

3,111

 

 

 

$

 

2,819

 

 

 

$

 

3,201

 

 

 

$

 

2,170

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs to average loans outstanding

 

 

 

0.17%

 

 

 

 

0.32%

 

 

 

 

0.43%

 

 

 

 

-%

 

 

 

 

-%

 

Balance of allowance as a
percentage of total loans at end of year

 

 

 

1.39%

 

 

 

 

1.50%

 

 

 

 

1.33%

 

 

 

 

1.54%

 

 

 

 

1.13%

 

24


The following table sets forth, for each of the Company’s major lending areas, the amount and percentage of the Company’s allowance for loan losses attributable to such category, and the percentage of total loans represented by such category, as of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of the Allowance for Loan Losses by Category
For the years ended December 31,
(dollars in thousands)

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

Amount

 

% of
ALL

 

% of
total
loans

 

Amount

 

% of
ALL

 

% of
total
loans

 

Amount

 

% of
ALL

 

% of
total
loans

 

Amount

 

% of
ALL

 

% of
total
loans

 

Amount

 

% of
ALL

 

% of
total
loans

Balance applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and commercial real estate

 

 

$

 

2,109

 

 

 

 

73.4

%

 

 

 

 

66.3

%

 

 

 

$

 

2,503

 

 

 

 

80.4

%

 

 

 

 

71.5

%

 

 

 

$

 

2,240

 

 

 

 

79.5

%

 

 

 

 

70.7

%

 

 

 

$

 

2,658

 

 

 

 

83.0

%

 

 

 

 

71.8

%

 

 

 

$

 

1,698

 

 

 

 

78.2

%

 

 

 

 

75.6

%

 

Residential real estate

 

 

 

205

 

 

 

 

7.1

 

 

 

 

13.0

 

 

 

 

65

 

 

 

 

2.1

 

 

 

 

5.6

 

 

 

 

64

 

 

 

 

2.3

 

 

 

 

6.0

 

 

 

 

48

 

 

 

 

1.5

 

 

 

 

4.6

 

 

 

 

36

 

 

 

 

1.7

 

 

 

 

3.7

 

Consumer, installment and home equity loans

 

 

 

506

 

 

 

 

17.6

 

 

 

 

20.7

 

 

 

 

537

 

 

 

 

17.3

 

 

 

 

22.9

 

 

 

 

489

 

 

 

 

17.3

 

 

 

 

23.3

 

 

 

 

485

 

 

 

 

15.2

 

 

 

 

23.6

 

 

 

 

398

 

 

 

 

18.3

 

 

 

 

20.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub-total

 

 

$

 

2,820

 

 

 

 

98.1

 

 

 

 

100.0

 

 

 

$

 

3,105

 

 

 

 

99.8

 

 

 

 

100.0

 

 

 

$

 

2,793

 

 

 

 

99.1

 

 

 

 

100.0

 

 

 

$

 

3,191

 

 

 

 

99.7

 

 

 

 

100.0

 

 

 

$

 

2,132

 

 

 

 

98.2

 

 

 

 

100.0

 

Unallocated reserves

 

 

 

55

 

 

 

 

1.9

 

 

 

 

-

 

 

 

 

6

 

 

 

 

0.2

 

 

 

 

-

 

 

 

 

26

 

 

 

 

0.9

 

 

 

 

-

 

 

 

 

10

 

 

 

 

0.3

 

 

 

 

-

 

 

 

 

38

 

 

 

 

1.8

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 

$

 

2,875

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

$

 

3,111

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

$

 

2,819

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

$

 

3,201

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

$

 

2,170

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


Investment Securities

The Company maintains an investment portfolio to fund increased loan demand or deposit withdrawals and other liquidity needs and to provide an additional source of interest income. The portfolio is composed of obligations of U.S. Government Agencies, obligations of U.S. States and Political Subdivisions and corporate debt securities, stock in the Federal Home Loan Bank, and equity securities of another financial institution. Corporate debt securities consist of trust preferred securities and corporate debt securities issued by various large-capitalization financial institutions.

Securities are classified as “held-to-maturity” (HTM), “available for sale” (AFS), or “trading” at time of purchase. Securities are classified as HTM based upon management’s intent and the Company’s ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts. Securities which are bought and held principally for resale in the near term are classified as trading securities, which are carried at market value. Realized gains and losses as well as gains and losses from marking the portfolio to market value are included in trading revenue. The Company has no trading securities. Securities not classified as HTM or trading securities are classified as AFS and are stated at fair value. Unrealized gains and losses on AFS securities are excluded from results of operations, and are reported as a component of accumulated other comprehensive (loss) income, net of taxes, which is included in stockholders’ equity. Securities classified as AFS include securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase regulatory capital, or other similar requirements.

Management determines the appropriate classification of securities, whether AFS or HTM, at the time of purchase. Our total investment securities portfolio remained about constant, increasing by $0.3 million from year-end 2009 to year-end 2010, but there was a shift in portfolio composition from HTM to AFS. At December 31, 2010, our AFS portfolio totaled $36.0 million and our HTM portfolio totaled $10.7 million, while at December 31, 2009 our AFS portfolio was $34.2 million and our HTM portfolio was $12.3 million. The HTM portfolio declined by $1.6 million due to issuer calls, and investment securities available for sale increased by $1.8 million due to purchases, net of calls and mortgage-backed securities run-off.

The following table sets forth the carrying value of the Company’s investment securities portfolio as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

(in thousands)

 

2010

 

2009

 

2008

 

Amortized
Cost

 

Estimated
Fair Value

 

Amortized
Cost

 

Estimated
Fair Value

 

Amortized
Cost

 

Estimated
Fair Value

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored
agency securities

 

 

$

 

9,051

 

 

 

$

 

9,023

 

 

 

$

 

5,500

 

 

 

$

 

5,502

 

 

 

$

 

4,000

 

 

 

$

 

4,013

 

Mortgage backed securities

 

 

 

18,909

 

 

 

 

19,847

 

 

 

 

22,394

 

 

 

 

23,292

 

 

 

 

26,173

 

 

 

 

26,916

 

Collateralized mortgage
obligations

 

 

 

5,583

 

 

 

 

5,677

 

 

 

 

5,284

 

 

 

 

5,421

 

 

 

 

5,895

 

 

 

 

5,887

 

Corporate debt securities

 

 

 

1,470

 

 

 

 

1,446

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale

 

 

 

35,013

 

 

 

 

35,993

 

 

 

 

33,178

 

 

 

 

34,215

 

 

 

 

36,068

 

 

 

 

36,816

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of US States and
Political Subdivisions

 

 

 

9,227

 

 

 

 

9,209

 

 

 

 

10,748

 

 

 

 

10,787

 

 

 

 

10,748

 

 

 

 

10,445

 

Corporate debt securities

 

 

 

1,513

 

 

 

 

1,339

 

 

 

 

1,514

 

 

 

 

1,196

 

 

 

 

1,545

 

 

 

 

1,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity

 

 

 

10,740

 

 

 

 

10,548

 

 

 

 

12,262

 

 

 

 

11,983

 

 

 

 

12,293

 

 

 

 

11,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

 

$

 

45,753

 

 

 

$

 

46,541

 

 

 

$

 

45,440

 

 

 

$

 

46,198

 

 

 

$

 

48,361

 

 

 

$

 

48,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


The following table sets forth as of December 31, 2010 and December 31, 2009, the maturity distribution of the Company’s debt investment portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity of Debt Investment Securities
Securities Available for Sale
($ in thousands)

 

December 31, 2010

 

December 31, 2009

 

Amortized
Cost

 

Estimated
Fair Value

 

Weighted
Average
Yield

 

Amortized
Cost

 

Estimated
Fair Value

 

Weighted
Average
Yield

Within 1 year

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

-

%

 

1 to 5 years

 

 

 

4,744

 

 

 

 

4,781

 

 

 

 

1.52

%

 

 

 

 

6,923

 

 

 

 

6,960

 

 

 

 

3.08

%

 

Over 5 years

 

 

 

30,269

 

 

 

 

31,212

 

 

 

 

3.97

%

 

 

 

 

26,255

 

 

 

 

27,255

 

 

 

 

4.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

35,013

 

 

 

$

 

35,993

 

 

 

 

 

$

 

33,178

 

 

 

$

 

34,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity of Debt Investment Securities
Securities Held to Maturity
($ in thousands)

 

December 31, 2010

 

December 31, 2009

 

Amortized
Cost

 

Estimated
Fair Value

 

Weighted
Average
Yield

 

Amortized
Cost

 

Estimated
Fair Value

 

Weighted
Average
Yield

Within 1 year

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

-

%

 

1 to 5 years

 

 

 

581

 

 

 

 

608

 

 

 

 

4.98

%

 

 

 

 

375

 

 

 

 

396

 

 

 

 

4.74

%

 

Over 5 years

 

 

 

10,159

 

 

 

 

9,940

 

 

 

 

5.67

%

 

 

 

 

11,887

 

 

 

 

11,587

 

 

 

 

5.74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

10,740

 

 

 

$

 

10,548

 

 

 

 

 

$

 

12,262

 

 

 

$

 

11,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

Deposits are the Company’s primary source of funds. Average total deposits increased $4.8 million, or 1.9%, to $262.6 million in 2010 from $257.8 million in 2009. The increase in deposits in 2010 was largely due to growth in demand (both interest- and noninterest-bearing), which increased by $19.8 million, or 11.5%, to $191.7 million in 2010 from $171.9 million in 2009. Partially offsetting the increase in demand deposits was a decline in time deposits, which declined by $14.6 million, or 25.3%, to $43.1 million in 2010 from $57.7 million in 2009. This shift in deposit composition helped the bank by reducing its overall cost of deposits.

The following table sets forth the average amount of various types of deposits for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended
December 31,
($ in Thousands)

 

2010

 

2009

 

2008

 

Average
Amount

 

Average
Yield/Rate

 

Average
Amount

 

Average
Yield/Rate

 

Average
Amount

 

Average
Yield/Rate

Non-interest bearing demand

 

 

$

 

60,330

 

 

 

 

-

 

 

 

$

 

53,811

 

 

 

 

-

 

 

 

$

 

48,055

 

 

 

 

-

 

Interest bearing demand

 

 

 

131,368

 

 

 

 

0.60

%

 

 

 

 

118,130

 

 

 

 

0.91

%

 

 

 

 

121,153

 

 

 

 

1.77

%

 

Savings and money market

 

 

 

27,840

 

 

 

 

0.39

%

 

 

 

 

28,195

 

 

 

 

0.49

%

 

 

 

 

22,801

 

 

 

 

1.34

%

 

Time deposits

 

 

 

43,069

 

 

 

 

2.15

%

 

 

 

 

57,681

 

 

 

 

3.13

%

 

 

 

 

39,785

 

 

 

 

3.63

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

262,607

 

 

 

 

0.69

%

 

 

 

$

 

257,817

 

 

 

 

1.17

%

 

 

 

$

 

231,794

 

 

 

 

1.68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


The Company does not typically solicit short-term deposits of $100,000 or more because of the liquidity risks posed by such deposits. The following table summarizes the maturity distribution of time deposit in denominations of $100,000 or more as of December 31, 2010 (in thousands).

 

 

 

Three months or less

 

 

$

 

2,851

 

Over three months through six months

 

 

 

4,130

 

Over six months through twelve months

 

 

 

3,146

 

Over twelve months

 

 

 

10,488

 

 

 

 

Total

 

 

$

 

20,615

 

 

 

 

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. The Company’s principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

At December 31, 2010, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short- and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied. As of December 31, 2010, liquid assets (cash and due from banks, interest bearing deposits at other banks and investment securities available for sale) were approximately $93.6 million, which represented 28.4% of total assets and 32.5% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and has the ability to borrow a total of $82.2 million (subject to available qualified collateral, with current borrowings of $11.0 million outstanding at December 31, 2010). In addition, during April 2009, the Bank established a credit facility (with an approximate borrowing capacity based on pledged collateral as of December 31, 2010 of $9.7 million) with the Federal Reserve Bank of New York for direct discount window borrowings. In addition, the Bank has in place additional borrowing capacity of $13.0 million through correspondent banks. At December 31, 2010, the Bank had aggregate available and unused credit of $93.9 million, which represents the aforementioned facilities totaling $104.9 million, net of $11 million in outstanding borrowings. At December 31, 2010 outstanding commitments for the Bank to extend credit were $85.7 million.

Off-Balance Sheet Arrangements

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 consolidated statements of financial condition. 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 following table shows the amounts and expected maturities of significant commitments, as of December 31, 2010. Further discussion of these commitments is included in Note 11 to the Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

One Year
or Less

 

One to Three
Years

 

Three to
Five Years

 

Over Five
Years

 

Total

 

 

(in thousands)

Standby letters of credit

 

 

$

 

1,592

 

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

1,592

 

Commitments under standby letters of credit, both financial and performance, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

28


CONTRACTUAL OBLIGATIONS

The following table shows the contractual obligations of the Company by expected payment period, as of December 31, 2010. Further discussion of these commitments is included in Notes 10 and 11 to the Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligation

 

Total

 

Less than one
year

 

1-3 years

 

3-5 years

 

More than
5 years

 

 

(in thousands)

Operating Lease Obligations

 

 

$

 

1,709

 

 

 

$

 

383

 

 

 

$

 

732

 

 

 

$

 

514

 

 

 

$

 

80

 

Federal Home loan Bank Borrowings

 

 

$

 

11,000

 

 

 

$

 

-

 

 

 

$

 

 

 

$

 

-

 

 

 

$

 

11,000

 

Operating leases represent obligations entered into by the Company for the use of land, premises and equipment. The leases generally have escalation terms based upon certain defined indexes.

Interest Rate Sensitivity Analysis

The principal objective of the Company’s asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given the Company’s business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. The Company seeks to reduce the vulnerability of its operations to changes in interest rates, and actions in this regard are taken under the guidance of the Asset/Liability Committee (the “ALCO”). The ALCO generally reviews the Company’s liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

The Company currently utilizes net interest income simulation and economic value of portfolio equity (“EVPE”) models to measure the potential impact to the Company of future changes in interest rates. As of December 31, 2010 and 2009 the results of the models were within guidelines prescribed by the Company’s Board of Directors. If model results were to fall outside prescribed ranges, action would be required by the ALCO.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period assuming certain changes in the general level of interest rates. In our model, which was run as of December 31, 2010, we estimated that a gradual (often referred to as “ramped”) 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.9%, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.6%. As of December 31, 2009, our model predicted that a 200 basis point ramped increase in general interest rates would increase net interest income by 3.6%, while a 200 basis point decrease would decrease net interest income by 1.7%.

An EVPE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of up and down 200 basis points. The economic value of equity is likely to be different as interest rates change. The Company’s variance in EVPE as a percentage of assets as of December 31, 2010, was -1.09% with a rate shock of up 200 basis points, and +0.03% with a rate shock of down 200 basis points. At December 31, 2009, the variances were -0.36% assuming an up 200 basis points rate shock and -1.11% assuming a down 200 basis points rate shock.

Capital

A significant measure of the strength of a financial institution is its capital base. The Bank’s Federal regulators have classified and defined capital into the following components: (1) Tier I Capital, which includes tangible stockholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) Tier II Capital, which includes a portion of the allowance for probable loan losses, certain qualifying long-term debt, and preferred stock which does not qualify for Tier I Capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines which require certain capital as a percent of the Bank’s assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets).

A bank is required to maintain, at a minimum, Tier I Capital as a percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II Capital as a percentage of risk-adjusted assets of 8.0%.

29


In addition to the risk-based guidelines, the Bank’s regulators require that an institution which meets the regulator’s highest performance and operation standards maintain a minimum leverage ratio (Tier I Capital as a percentage of tangible assets) of 4.0%. For those institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be evaluated through the ongoing regulatory examination process.

The following table summarizes the risk-based and leverage capital ratios for the Bank as well as the required minimum regulatory capital ratios:

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

Actual
Ratio

 

Minimum
Requirement

 

Well
Capitalized
Requirement

Somerset Hills Bank:

 

 

 

 

 

 

Total risk-based capital ratio

 

 

 

15.48

%

 

 

 

 

8.00

%

 

 

 

 

10.00

%

 

Tier 1 risk-based capital ratio

 

 

 

14.28

%

 

 

 

 

4.00

%

 

 

 

 

6.00

%

 

Leverage ratio

 

 

 

10.44

%

 

 

 

 

4.00

%

 

 

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

At December 31, 2009

 

Actual
Ratio

 

Minimum
Requirement

 

Well
Capitalized
Requirement

Somerset Hills Bank:

 

 

 

 

 

 

Total risk-based capital ratio

 

 

 

14.19

%

 

 

 

 

8.00

%

 

 

 

 

10.00

%

 

Tier 1 risk-based capital ratio

 

 

 

12.94

%

 

 

 

 

4.00

%

 

 

 

 

6.00

%

 

Leverage ratio

 

 

 

9.92

%

 

 

 

 

4.00

%

 

 

 

 

5.00

%

 

The Company’s tangible common equity ratio was 12.0% as of December 31, 2010 and 12.1% as of December 31, 2009.

Borrowings

As an additional source of liquidity, we use advances from the Federal Home Loan Bank of New York. The Company had outstanding advances at December 31, 2010 as follows:

 

 

 

 

 

Maturity

 

Rate

 

Amount

November 29, 2017

 

3.21%

 

 

$

 

1,500,000

 

November 29, 2017

 

3.41%

 

 

$

 

1,500,000

 

January 8, 2018

 

2.87%

 

 

$

 

2,000,000

 

January 8, 2018

 

3.12%

 

 

$

 

2,000,000

 

January 8, 2018

 

3.61%

 

 

$

 

2,000,000

 

February 22, 2018

 

3.71%

 

 

$

 

2,000,000

 

 

 

 

 

 

 

 

 

 

$

 

11,000,000

 

 

 

 

 

 

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all of the assets and liabilities of the Company are monetary. Therefore, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

30


RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of the impact of recently issued accounting standards, please see Note 1 to the company’s consolidated financial statements.

ITEM 8. FINANCIAL STATEMENTS

The information required by this item follows.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

(b) Management’s report on internal control over financial reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting was designed by or under the supervision of the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of the preparation of the Company’s financial statements for external and regulatory reporting purposes, in accordance with U.S. generally accepted accounting principles. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the COSO. Based on the assessment, management determined that, as of December 31, 2010, the Company’s internal control over financial reporting is effective.

The forgoing shall not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. In addition, this information shall not be deemed to be incorporated by reference into any of the Registrant’s filings with the Securities and Exchange Commission, except as shall be expressly set forth by specific reference in any such filing.

 

 

 

/s/ Stewart E. McClure, Jr.  

 

/s/ William S. Burns  

Stewart E. McClure, Jr.

 

William S. Burns

President & CEO

 

Chief Financial Officer

(c) Changes in internal controls:

There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 9B. OTHER INFORMATION

Not applicable

31


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A)

Information required by this part is included in the definitive Proxy Statement for the Company’s 2011 Annual Meeting under the captions “ELECTION OF DIRECTORS” and “COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934,” each of which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2011.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is included in the definitive Proxy Statement for the Company’s 2011 Annual Meeting under the captions “EXECUTIVE COMPENSATION AND ALL OTHER COMPENSATION” and “COMPENSATION OF DIRECTORS”, which is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2011.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy statement for the Company’s 2011 Annual Meeting under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”, which is incorporated herein by reference. It is expected that such Proxy statement will be filed with the Securities and Exchange Commission no later than April 30, 2011.

The following table sets forth information with respect to the Company’s equity compensation plans as of the end of the most recently completed fiscal year.

Equity Compensation Plan Information

 

 

 

 

 

 

 

Plan category

 

Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)

Equity compensation plans approved by security holders

 

 

 

302,591

 

 

 

$

 

7.15

 

 

 

 

93,714

 

Equity compensation plans not approved by security holders

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

Total

 

 

 

302,591

 

 

 

$

 

7.15

 

 

 

 

93,714

 

 

 

 

 

 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions is included in the definitive Proxy Statement for the Company’s 2011 Annual Meeting under the caption “INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS”, which is incorporated herein by reference. It is expected that such Proxy statement will be filed with the Securities and Exchange Commission no later than April 30, 2011.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information concerning principal accountant fees and services as well as related pre-approval policies under the caption “Appointment of Auditors for Fiscal 2011” in the Proxy Statement for the Company’s 2011 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2011.

32


ITEM 15. EXHIBITS

(a) Exhibits

 

 

 

Exhibit number

 

Description of Exhibits

 

3.1

   

Certificate of Incorporation of Somerset Hills Bancorp(1)

 

 

3.2

   

Bylaws of Somerset Hills Bancorp(3)

 

3.3

   

Certificate of Incorporation for Somerset Hills Bank(1)

 

 

3.4

   

Bylaws of Somerset Hills Bank(1)

 

4.1

   

Specimen Common Stock Certificate(1)

 

 

10.1

   

1998 Combined Stock Option Plan(1)

 

10.2

   

1998 Non-Qualified Stock Option Plan(1)

 

 

10.3

   

2001 Combined Stock Option Plan(1)

 

10.4

   

Employment Agreement of Stewart E. McClure, Jr. as amended(1) on May 15, 2003(6), September 26, 2007(4) and January 16, 2009(6)

 

 

10.5

   

Supplemental Retirement Plan dated July 19, 2007 with Stewart E. McClure, Jr.(5)

 

14

   

Code of Ethics(2)

 

 

21

   

Subsidiaries of Somerset Hills Bancorp

 

23

   

Consent of Crowe Horwath LLP

 

 

31

   

Rule 13a-14(a)/15d-14(a) Certifications

 

32

   

Section 1350 Certification


 

 

(1)

 

 

 

Incorporated by reference from the Registrant’s Registration Statement on Form SB-2, as amended, File No. 333-99647, declared effective on November 12, 2002.

 

(2)

 

 

 

Incorporated by reference from Exhibit 14 from the Registrant’s Annual Report on Form10-KSB for the year ended December 31, 2003.

 

(3)

 

 

 

Incorporated by reference from Current Report on Form 8-k filed December 20, 2007.

 

(4)

 

 

 

Incorporated by reference from Exhibits 10.3 and 10.4 of Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

 

(5)

 

 

 

Incorporated by reference from Exhibits 10.1 and 10.2 of Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and as amended as set forth in the Current Report on Form 8-K filed July 28, 2008.

 

(6)

 

 

 

Filed herewith as Exhibits 10.4(1) and 10.4(2) herewith.

33


SOMERSET HILLS BANCORP AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Page

Report of Independent Registered Public Accounting Firm

 

 

 

35

 

Consolidated Statements of Financial Condition as of December 31, 2010 and 2009

 

 

 

36

 

Consolidated Statements of Income for the Years ended December 31, 2010 and 2009

 

 

 

37

 

Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2010 and 2009

 

 

 

38

 

Consolidated Statements of Cash Flows for the Years ended December 31, 2010 and 2009

 

 

 

39

 

Notes to Consolidated Financial Statements

 

 

 

40

 

34


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Somerset Hills Bancorp
Bernardsville, New Jersey

We have audited the accompanying consolidated statements of financial condition of Somerset Hills Bancorp and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Somerset Hills Bancorp and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

/s/  Crowe Horwath LLP

Livingston, New Jersey
March 24, 2011

35


SOMERSET HILLS BANCORP AND SUBSIDIARY

Consolidated Statements of Financial Condition
December 31, 2010 and 2009
(Dollars in Thousands)

 

 

 

 

 

 

 

2010

 

2009

ASSETS

 

 

 

 

Cash and due from banks

 

 

$

 

5,480

 

 

 

$

 

4,911

 

Interest bearing deposits at other banks

 

 

 

52,086

 

 

 

 

51,381

 

 

 

 

 

 

Total cash and cash equivalents

 

 

 

57,566

 

 

 

 

56,292

 

Loans held for sale

 

 

 

2,230

 

 

 

 

5,360

 

Investment securities held to maturity (Approximate
fair value of $10,548 in 2010 and $11,983 in 2009)

 

 

 

10,740

 

 

 

 

12,262

 

Investment securities available for sale

 

 

 

35,993

 

 

 

 

34,215

 

Loans receivable

 

 

 

207,146

 

 

 

 

206,768

 

Less: allowance for loan losses

 

 

 

(2,875

)

 

 

 

 

(3,111

)

 

 

 

 

 

 

Net loans receivable

 

 

 

204,271

 

 

 

 

203,657

 

Premises and equipment, net

 

 

 

5,285

 

 

 

 

5,592

 

Bank owned life insurance

 

 

 

8,053

 

 

 

 

7,756

 

Accrued interest receivable

 

 

 

1,111

 

 

 

 

1,127

 

Prepaid expenses

 

 

 

1,251

 

 

 

 

1,440

 

Other assets

 

 

 

2,396

 

 

 

 

2,409

 

 

 

 

 

 

Total assets

 

 

$

 

328,896

 

 

 

$

 

330,110

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Noninterest-bearing deposits-demand

 

 

$

 

68,521

 

 

 

$

 

59,288

 

Interest bearing deposits

 

 

 

 

NOW, money market and savings

 

 

 

166,304

 

 

 

 

169,510

 

Certificates of deposit, under $100,000

 

 

 

21,101

 

 

 

 

26,041

 

Certificates of deposit, $100,000 and over

 

 

 

20,615

 

 

 

 

24,286

 

 

 

 

 

 

Total deposits

 

 

 

276,541

 

 

 

 

279,125

 

Federal Home Loan Bank advances

 

 

 

11,000

 

 

 

 

11,000

 

Other liabilities

 

 

 

1,964

 

 

 

 

1,785

 

 

 

 

 

 

Total liabilities

 

 

 

289,505

 

 

 

 

291,910

 

 

 

 

 

 

Commitments and contingencies (notes 10 and 11)

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

Preferred stock-1,000,000 shares authorized; none issued

 

 

 

-

 

 

 

 

-

 

Common stock-authorized, 9,000,000 shares
of no par value; issued and outstanding,
5,421,924 in 2010 and 5,438,762 in 2009

 

 

 

37,600

 

 

 

 

37,334

 

Retained earnings

 

 

 

1,145

 

 

 

 

182

 

Accumulated other comprehensive income

 

 

 

646

 

 

 

 

684

 

 

 

 

 

 

Total stockholders’ equity

 

 

 

39,391

 

 

 

 

38,200

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

$

 

328,896

 

 

 

$

 

330,110

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

36


SOMERSET HILLS BANCORP AND SUBSIDIARY

Consolidated Statements of Income
Years ended December 31, 2010 and 2009
(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

2010

 

2009

INTEREST INCOME

 

 

 

 

Loans, including fees

 

 

$

 

11,544

 

 

 

$

 

11,720

 

Federal funds sold

 

 

 

-

 

 

 

 

2

 

Investment securities

 

 

 

1,810

 

 

 

 

2,043

 

Interest bearing deposits with other banks

 

 

 

119

 

 

 

 

89

 

 

 

 

 

 

Total interest income

 

 

 

13,473

 

 

 

 

13,854

 

INTEREST EXPENSE

 

 

 

 

Deposits

 

 

 

1,822

 

 

 

 

3,020

 

Federal Home Loan Bank advances

 

 

 

371

 

 

 

 

371

 

 

 

 

 

 

Total interest expense

 

 

 

2,193

 

 

 

 

3,391

 

 

 

 

 

 

Net interest income

 

 

 

11,280

 

 

 

 

10,463

 

PROVISION FOR LOAN LOSSES

 

 

 

125

 

 

 

 

950

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

11,155

 

 

 

 

9,513

 

 

 

 

 

 

NON-INTEREST INCOME

 

 

 

 

Service fees on deposit accounts

 

 

 

299

 

 

 

 

293

 

Gains on sales of mortgage loans and fees, net

 

 

 

1,281

 

 

 

 

1,491

 

Bank owned life insurance

 

 

 

298

 

 

 

 

879

 

Other income

 

 

 

336

 

 

 

 

268

 

 

 

 

 

 

Total non-interest income

 

 

 

2,214

 

 

 

 

2,931

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

Salaries and employee benefits

 

 

 

5,460

 

 

 

 

5,452

 

Occupancy expense

 

 

 

1,665

 

 

 

 

1,882

 

Advertising and business promotion

 

 

 

189

 

 

 

 

198

 

Stationery and supplies

 

 

 

133

 

 

 

 

186

 

Data processing

 

 

 

535

 

 

 

 

499

 

FDIC insurance

 

 

 

387

 

 

 

 

503

 

Other operating expenses

 

 

 

1,271

 

 

 

 

1,389

 

 

 

 

 

 

Total non-interest expense

 

 

 

9,640

 

 

 

 

10,109

 

 

 

 

 

 

Income before income taxes

 

 

 

3,729

 

 

 

 

2,335

 

PROVISION FOR INCOME TAXES

 

 

 

1,219

 

 

 

 

441

 

 

 

 

 

 

NET INCOME

 

 

 

2,510

 

 

 

 

1,894

 

Dividends on preferred stock and accretion

 

 

 

-

 

 

 

 

350

 

 

 

 

 

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

 

$

 

2,510

 

 

 

$

 

1,544

 

 

 

 

 

 

Earnings per share:

 

 

 

 

Basic

 

 

$

 

0.46

 

 

 

$

 

0.28

 

Diluted

 

 

$

 

0.46

 

 

 

$

 

0.28

 

Weighted average shares outstanding-basic

 

 

 

5,445,049

 

 

 

 

5,438,545

 

Weighted average shares outstanding-diluted

 

 

 

5,496,910

 

 

 

 

5,469,142

 

See accompanying notes to consolidated financial statements.

37


SOMERSET HILLS BANCORP AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2010 and 2009
(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Stock
Number of
Shares

 

Preferred
Stock

 

Common
Stock

 

Retained
Earnings
(Accumulated
Deficit)

 

Accumulated
Other
Comprehensive
Income (loss),
Net of tax

 

Comprehensive
Income

 

Total

Balance January 1, 2009

 

 

 

5,180,012

 

 

 

$

 

-

 

 

 

$

 

37,361

 

 

 

$

 

(326

)

 

 

 

$

 

494

 

 

 

$

 

-

 

 

 

$

 

37,529

 

Issuance of preferred stock, net of costs

 

 

 

 

 

7,191

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

7,191

 

Exercise of common stock options, net of tax benefit

 

 

 

353

 

 

 

 

-

 

 

 

 

2

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

2

 

Stock based compensation

 

 

 

(592

)

 

 

 

 

-

 

 

 

 

41

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

41

 

Issuance of common stock warrants

 

 

 

 

 

-

 

 

 

 

205

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

205

 

Net income for the period

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

1,894

 

 

 

 

-

 

 

 

 

1,894

 

 

 

 

1,894

 

Cash dividend paid ($0.19 per share)

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(1,036

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(1,036

)

 

Accretion of discount on preferred stock

 

 

 

 

 

223

 

 

 

 

-

 

 

 

 

(223

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Cash dividends on preferred stock

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(127

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(127

)

 

Redemption of preferred stock

 

 

 

 

 

(7,414

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(7,414

)

 

Redemption of common stock warrants

 

 

 

 

 

-

 

 

 

 

(275

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(275

)

 

Other comprehensive income, net of taxes

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

190

 

 

 

 

190

 

 

 

 

190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2009

 

 

 

5,179,773

 

 

 

 

-

 

 

 

 

37,334

 

 

 

 

182

 

 

 

 

684

 

 

 

 

 

 

38,200

 

Exercise of common stock options, net of tax benefit

 

 

 

19,878

 

 

 

 

-

 

 

 

 

117

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

117

 

Stock based compensation

 

 

 

 

 

-

 

 

 

 

35

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

35

 

Net income for the period

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

2,510

 

 

 

 

-

 

 

 

 

2,510

 

 

 

 

2,510

 

Stock dividend paid (5.00%)

 

 

 

259,918

 

 

 

 

-

 

 

 

 

429

 

 

 

 

(429

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Cash dividend paid common ($0.21 per share)

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(1,118

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(1,118

)

 

Common stock repurchased

 

 

 

(37,645

)

 

 

 

 

-

 

 

 

 

(315

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(315

)

 

Other comprehensive income, net of taxes

 

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(38

)

 

 

 

 

(38

)

 

 

 

 

(38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

$

 

2,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2010

 

 

 

5,421,924

 

 

 

$

 

-

 

 

 

$

 

37,600

 

 

 

$

 

1,145

 

 

 

$

 

646

 

 

 

 

 

$

 

39,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

38


SOMERSET HILLS BANCORP AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years ended December 31, 2010 and 2009
(Dollars in Thousands)

 

 

 

 

 

 

 

2010

 

2009

OPERATING ACTIVITIES

 

 

 

 

Net income

 

 

$

 

2,510

 

 

 

$

 

1,894

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

Depreciation and amortization

 

 

 

582

 

 

 

 

635

 

Provision for loan losses

 

 

 

125

 

 

 

 

950

 

Stock-based compensation

 

 

 

35

 

 

 

 

41

 

Mortgage loans originated for sale

 

 

 

(129,445

)

 

 

 

 

(186,402

)

 

Proceeds from mortgage loan sales

 

 

 

133,856

 

 

 

 

184,899

 

Gain on sale of mortgage loans and fees, net

 

 

 

(1,281

)

 

 

 

 

(1,491

)

 

Decrease in accrued interest receivable

 

 

 

16

 

 

 

 

100

 

(Increase) decrease in bank owned life insurance

 

 

 

(297

)

 

 

 

 

703

 

Decrease (increase) in other assets

 

 

 

202

 

 

 

 

(1,244

)

 

Increase in other liabilities

 

 

 

198

 

 

 

 

313

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

6,501

 

 

 

 

398

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Maturity and payments of investment securities held to maturity

 

 

 

1,518

 

 

 

 

27

 

Purchases of investment securities available-for-sale

 

 

 

(17,078

)

 

 

 

 

(10,613

)

 

Maturity and payments of investment securities available-for-sale

 

 

 

15,133

 

 

 

 

13,450

 

Net (Increase) decrease in loans receivable

 

 

 

(739

)

 

 

 

 

3,820

 

Purchases of premises and equipment

 

 

 

(161

)

 

 

 

 

(198

)

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

 

 

(1,327

)

 

 

 

 

6,486

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Net proceeds from exercise of common stock and options, including tax benefit

 

 

 

117

 

 

 

 

2

 

Cash dividends paid common stock

 

 

 

(1,118

)

 

 

 

 

(1,036

)

 

Cash dividends paid preferred stock

 

 

 

-

 

 

 

 

(127

)

 

Net increase in demand deposits and savings accounts

 

 

 

6,027

 

 

 

 

36,896

 

Net (decrease) in certificates of deposit

 

 

 

(8,611

)

 

 

 

 

(7,531

)

 

Purchase of common stock

 

 

 

(315

)

 

 

 

 

-

 

Net proceeds from sale of preferred stock

 

 

 

-

 

 

 

 

7,191

 

Net proceeds from sale of common stock warrants

 

 

 

-

 

 

 

 

205

 

Redemption of common stock warrants

 

 

 

-

 

 

 

 

(275

)

 

Redemption of preferred stock

 

 

 

-

 

 

 

 

(7,414

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

 

(3,900

)

 

 

 

 

27,911

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

 

1,274

 

 

 

 

34,795

 

Cash and cash equivalents at beginning of period

 

 

 

56,292

 

 

 

 

21,497

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

$

 

57,566

 

 

 

$

 

56,292

 

 

 

 

 

 

Supplemental information:

 

 

 

 

Cash paid during the year for:

 

 

 

 

Interest

 

 

$

 

2,282

 

 

 

$

 

3,424

 

Income taxes

 

 

 

1,250

 

 

 

 

316

 

See accompanying notes to consolidated financial statements.

39


SOMERSET HILLS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010 and 2009

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. The Bank is also a 50% owner of Somerset Hills Title Group, 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.

The principal estimate that is particularly susceptible to significant change in the near term relates to the allowance for loan losses. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, and current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses.

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 deciding how to allocate resources and assess performance. The Company has two reportable segments: community banking and mortgage banking.

b) 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.

40


The following tables set forth the computations of basic and diluted earnings per share (dollars and share data in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Months Ended December 31, 2010

 

12 Months Ended December 31, 2009

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

2,510

 

 

 

 

-

 

 

 

 

-

 

 

 

$

 

1,894

 

 

 

 

-

 

 

 

 

-

 

Less: dividends and accretion of preferred stock

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(350

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

 

$

 

2,510

 

 

 

 

5,445

 

 

 

$

 

0.46

 

 

 

$

 

1,544

 

 

 

 

5,439

 

 

 

$

 

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

-

 

 

 

 

52

 

 

 

 

 

 

-

 

 

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stock holders and assumed conversions

 

 

$

 

2,510

 

 

 

 

5,497

 

 

 

$

 

0.46

 

 

 

$

 

1,544

 

 

 

 

5,469

 

 

 

$

 

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Included in Cash and due from banks at December 31, 2010 and 2009 is $883,000 and $740,000 respectively, representing reserves required by banking regulations.

d) 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 or debt securities not classified as held to maturity or trading are classified as available for sale. 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 tax.

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.

e) Stock-Based Compensation

At December 31, 2010, the Company had four stock-based plans, which are described more fully in Note 9. The Company recognizes compensation expense based on the fair value of such awards at the date of the grant over the period the awards are earned.

The Company recognizes compensation expense related to stock options granted after December 31, 2005 based on the fair value of such awards at the date of the grant over the period the awards are earned.

41


f) 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 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 losses incurred 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 or if, during a longer period of delay, the Company expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of 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, 2010. 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

42


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 lessee/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.

g) Loans Held for Sale

Residential mortgage loans funded by the Bank and held for sale in the secondary market are carried at the lower of aggregate cost or 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.

h) 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.

i) 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.

j) Comprehensive Income

Comprehensive income includes net income and unrealized gains and losses on investment securities available for sale.

k) 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 2010 and 2009.

43


l) Recent Accounting Pronouncements

Adoption of New Accounting Guidance

In June 2009, the Financial Accounting Standards Board (“FASB”) amended existing guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This amended guidance addresses (1) practices that are not consistent with the intent and key requirements of the original guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. The impact of adoption on January 1, 2010 was not material.

In July 2010, the FASB issued ASU No. 2010-20 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires significantly more information about credit quality in a financial institution’s portfolio and the allowance for credit losses. The disclosure requirements are effective for interim and annual reporting periods ending on or after December 15, 2010. Adoption of ASU 2010-20 did not have a material impact on the Company’s financial position 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 (in thousands):

 

 

 

 

 

 

 

 

 

Held to Maturity

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

2010

 

 

 

 

 

 

 

 

Obligations of US States and Political Subdivisions

 

 

$

 

9,227

 

 

 

$

 

120

 

 

 

$

 

(138

)

 

 

 

$

 

9,209

 

Corporate debt securities

 

 

 

1,513

 

 

 

 

-

 

 

 

 

(174

)

 

 

 

 

1,339

 

 

 

 

 

 

 

 

 

 

Total held to maturity

 

 

$

 

10,740

 

 

 

$

 

120

 

 

 

$

 

(312

)

 

 

 

$

 

10,548

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

Obligations of US States and Political Subdivisions

 

 

$

 

10,748

 

 

 

$

 

155

 

 

 

$

 

(116

)

 

 

 

$

 

10,787

 

Corporate debt securities

 

 

 

1,514

 

 

 

 

-

 

 

 

 

(318

)

 

 

 

 

1,196

 

 

 

 

 

 

 

 

 

 

Total held to maturity

 

 

$

 

12,262

 

 

 

$

 

155

 

 

 

$

 

(434

)

 

 

 

$

 

11,983

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

$

 

1,470

 

 

 

$

 

5

 

 

 

$

 

(29

)

 

 

 

$

 

1,446

 

U.S. Government sponsored agency securities

 

 

 

9,051

 

 

 

 

15

 

 

 

 

(43

)

 

 

 

 

9,023

 

Mortgage backed securities

 

 

 

18,909

 

 

 

 

940

 

 

 

 

(2

)

 

 

 

 

19,847

 

Collaterized mortgage obligations

 

 

 

5,583

 

 

 

 

94

 

 

 

 

-

 

 

 

 

5,677

 

 

 

 

 

 

 

 

 

 

Total available for sale

 

 

$

 

35,013

 

 

 

 

1,054

 

 

 

$

 

(74

)

 

 

 

$

 

35,993

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

 

$

 

5,500

 

 

 

$

 

11

 

 

 

$

 

(9

)

 

 

 

$

 

5,502

 

Mortgage backed securities

 

 

 

22,394

 

 

 

 

932

 

 

 

 

(34

)

 

 

 

 

23,292

 

Collaterized mortgage obligations

 

 

 

5,284

 

 

 

 

140

 

 

 

 

(3

)

 

 

 

 

5,421

 

 

 

 

 

 

 

 

 

 

Total available for sale

 

 

$

 

33,178

 

 

 

$

1,083

 

 

 

$

 

(46

)

 

 

 

$

 

34,215

 

 

 

 

 

 

 

 

 

 

44


The amortized cost and fair value of the Company’s investment securities held to maturity and available for sale at December 31, 2010, 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 (in thousands).

 

 

 

 

 

Held to Maturity

 

Amortized
Cost

 

Estimated
Fair
Value

Due in one year or less

 

 

$

 

-

 

 

 

$

 

-

 

Due in one to five years

 

 

 

581

 

 

 

 

608

 

Due in five years to ten years

 

 

 

1,917

 

 

 

 

1,894

 

Due after ten years

 

 

 

8,242

 

 

 

 

8,046

 

 

 

 

 

 

 

 

$

 

10,740

 

 

 

$

 

10,548

 

 

 

 

 

 

Available for Sale

 

 

 

 

Due in one year or less

 

 

$

 

-

 

 

 

$

 

-

 

Due in one year to five years

 

 

 

4,744

 

 

 

 

4,781

 

Due in five years to ten years

 

 

 

10,824

 

 

 

 

11,143

 

Due after ten years

 

 

 

19,445

 

 

 

 

20,069

 

 

 

 

 

 

 

 

$

 

35,013

 

 

 

$

 

35,993

 

 

 

 

 

 

45


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, 2010 and 2009 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

Less than 12 months

 

12 Months or longer

 

Total

Held to Maturity

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

Municipal securities

 

 

$

 

3,708

 

 

 

$

 

98

 

 

 

$

 

279

 

 

 

$

 

40

 

 

 

$

 

3,987

 

 

 

$

 

138

 

Corporate debt securities

 

 

 

503

 

 

 

 

11

 

 

 

 

836

 

 

 

 

163

 

 

 

 

1,339

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

4,211

 

 

 

$

 

109

 

 

 

$

 

1,115

 

 

 

$

 

203

 

 

 

$

 

5,326

 

 

 

$

 

312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

Less than 12 months

 

12 Months or longer

 

Total

Held to Maturity

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

Municipal securities

 

 

$

 

902

 

 

 

$

 

10

 

 

 

$

 

1,504

 

 

 

$

 

106

 

 

 

$

 

2,406

 

 

 

$

 

116

 

Corporate debt securities

 

 

 

-

 

 

 

 

-

 

 

 

 

1,196

 

 

 

 

318

 

 

 

 

1,196

 

 

 

 

318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

902

 

 

 

$

 

10

 

 

 

$

 

2,700

 

 

 

$

 

424

 

 

 

$

 

3,602

 

 

 

$

 

434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

Less than 12 months

 

12 Months or longer

 

Total

Available for Sale

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

U.S. Government sponsored agency securities

 

 

$

 

5,576

 

 

 

$

 

43

 

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

5,576

 

 

 

$

 

43

 

Mortgage backed securities

 

 

 

1,004

 

 

 

 

2

 

 

 

 

-

 

 

 

 

-

 

 

 

 

1,004

 

 

 

 

2

 

Corporate debt securities

 

 

 

971

 

 

 

 

29

 

 

 

 

-

 

 

 

 

-

 

 

 

 

971

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

7,551

 

 

 

$

 

74

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

7,551

 

 

 

$

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

Less than 12 months

 

12 Months or longer

 

Total

Available for Sale

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

 

Estimated
Fair
Value

 

Unrealized
Losses

U.S. Government sponsored agency securities

 

 

$

 

991

 

 

 

$

 

9

 

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

991

 

 

 

$

 

9

 

Mortgage backed securities

 

 

 

2,972

 

 

 

 

34

 

 

 

 

-

 

 

 

 

-

 

 

 

 

2,972

 

 

 

 

34

 

Collateralized mortgage obligations

 

 

 

214

 

 

 

 

3

 

 

 

 

-

 

 

 

 

-

 

 

 

 

214

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

4,177

 

 

 

$

 

46

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

4,177

 

 

 

$

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46


At December 31, 2010, there were $1.1 million in securities with gross unrealized losses that have been in a continuous unrealized loss position for twelve or more months. Management does not consider any impairment in the value of its securities to be other than temporary in nature. Impairment that exists within the Company’s investment portfolios is due primarily to interest rate fluctuations. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery.

There were no sales of securities for the years ended December 31, 2010 and 2009.

Securities with an amortized cost of $983 thousand and $858 thousand were pledged to secure public funds on deposit at December 31, 2010 and 2009, 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 (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Commercial

 

 

$

 

31,556

 

 

 

$

 

40,102

 

Commercial mortgage

 

 

 

98,183

 

 

 

 

100,118

 

Construction, land and land development

 

 

 

7,489

 

 

 

 

7,540

 

Consumer

 

 

 

42,864

 

 

 

 

47,237

 

Residential

 

 

 

26,907

 

 

 

 

11,656

 

 

 

 

 

 

 

 

 

 

206,999

 

 

 

 

206,653

 

Net deferred costs

 

 

 

147

 

 

 

 

115

 

Less: Allowance for loan losses

 

 

 

(2,875

)

 

 

 

 

(3,111

)

 

 

 

 

 

 

Total

 

 

$

 

204,271

 

 

 

$

 

203,657

 

 

 

 

 

 

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 thus repayment is subject to 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.

47


Individually impaired loans as of December 31, 2010 and 2009 were as follows (in thousands):

 

 

 

 

 

 

 

2010

 

2009

Loans with no allocated allowance for loan losses

 

 

$

 

782

 

 

 

$

 

2,349

 

Loans with allocated allowance for loan losses

 

 

 

1,209

 

 

 

 

1,876

 

 

 

 

 

 

Total

 

 

$

 

1,991

 

 

 

$

 

4,225

 

 

 

 

 

 

The following table presents information about impaired loans by loan portfolio class as of December 31, 2010 (in thousands):

Impaired Loans

 

 

 

 

 

 

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Related
Allowance

With no related allowance recorded:

 

 

 

 

 

 

Commercial

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

Commercial mortgage

 

 

 

782

 

 

 

 

787

 

 

 

 

-

 

Construction, land and land development

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

With an allowance recorded:

 

 

 

 

 

 

Commercial

 

 

 

217

 

 

 

 

217

 

 

 

 

5

 

Commercial mortgage

 

 

 

992

 

 

 

 

862

 

 

 

 

134

 

Construction, land and land development

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Total:

 

 

 

 

 

 

Commercial

 

 

 

217

 

 

 

 

217

 

 

 

 

5

 

Commercial mortgage

 

 

 

1,774

 

 

 

 

1,649

 

 

 

 

134

 

Construction, land and land development

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

The amount of allowance allocated to impaired loans at December 31, 2010 and 2009 was $139 thousand and $285 thousand, respectively.

 

 

 

 

 

 

 

2010

 

2009

Average of individually impaired loans during year

 

 

$

 

3,138

 

 

 

$

 

1,722

 

Interest income recognized during impairment

 

 

 

169

 

 

 

 

64

 

Cash-basis interest income recognized

 

 

 

-

 

 

 

 

-

 

The outstanding balances of non-accrual 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 (in thousands):

 

 

 

 

 

 

 

2010

 

2009

Nonaccrual loans

 

 

$

 

254

 

 

 

$

 

256

 

Loans past due 90 days and still accruing

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

Total non-performing loans

 

 

 

254

 

 

 

 

256

 

OREO

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

Total non-performing assets

 

 

$

 

254

 

 

 

$

 

256

 

 

 

 

 

 

Troubled debt restructured loans

 

 

$

 

738

 

 

 

$

 

394

 

 

 

 

 

 

48


The following table presents loans receivable on nonaccrual status by loan portfolio class as of December 31, 2010 (in thousands):

 

 

 

Nonaccrual loans

 

Total

Commercial

 

 

$

 

-

 

Commercial mortgage

 

 

 

254

 

Construction, land and land development

 

 

 

-

 

Consumer

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

Total

 

 

$

254

 

 

 

 

The balance of troubled debt restructured loans at year-end 2010 is represented by two credits that are currently performing under their restructured terms and for which the Company has no commitment to lend additional funds. The following table presents information about restructured loans by loan portfolio class as of December 31, 2010 (in thousands):

 

 

 

 

 

 

 

Troubled Debt Restructurings

 

Number of
loans

 

Pre-modification
outstanding
recorded investment

 

Post-modification
outstanding
recorded investment

Commercial

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

Commercial mortgage

 

 

 

2

 

 

 

 

744

 

 

 

 

719

 

Construction, land and land development

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

The following table presents past due and current loans by the loan portfolio class as of December 31, 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Commercial

 

 

$

 

2

 

 

 

$

 

 -

 

 

 

$

 

-

 

 

 

$

 

2

 

 

 

$

 

31,554

 

 

 

$

 

31,556

 

 

 

$

 

 -

 

Commercial mortgage

 

 

 

510

 

 

 

 

-

 

 

 

 

254

 

 

 

 

764

 

 

 

 

97,419

 

 

 

 

98,183

 

 

 

 

-

 

Construction, land and land development

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

7,489

 

 

 

 

7,489

 

 

 

 

-

 

Consumer

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

42,864

 

 

 

 

42,864

 

 

 

 

-

 

Residential

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

26,907

 

 

 

 

26,907

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

512

 

 

 

$

 

-

 

 

 

$

 

254

 

 

 

$

 

766

 

 

 

$

 

206,233

 

 

 

$

 

206,999

 

 

 

$

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 obligator, 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

49


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, 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Credit risk profile by
internally assigned grades

 

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

Commercial

 

 

$

 

28,367

 

 

 

$

 

2,973

 

 

 

$

 

217

 

 

 

$

 

 -

 

 

 

$

 

31,557

 

Commercial mortgage

 

 

 

95,191

 

 

 

 

1,217

 

 

 

 

1,774

 

 

 

 

-

 

 

 

 

98,182

 

Construction, land and land development

 

 

 

7,489

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

7,489

 

Consumer

 

 

 

42,592

 

 

 

 

272

 

 

 

 

-

 

 

 

 

-

 

 

 

 

42,864

 

Residential

 

 

 

26,102

 

 

 

 

805

 

 

 

 

-

 

 

 

 

-

 

 

 

 

26,907

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

199,741

 

 

 

$

 

5,267

 

 

 

$

 

1,991

 

 

 

$

 

-

 

 

 

$

 

206,999

 

 

 

 

 

 

 

 

 

 

 

 

Changes in the allowance for loan losses, were as follows (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Balance at beginning of year

 

 

$

 

3,111

 

 

 

$

 

2,819

 

Charge-offs

 

 

 

(395

)

 

 

 

 

(663

)

 

Recoveries

 

 

 

34

 

 

 

 

5

 

Reclassification related to unused commitments

 

 

 

-

 

 

 

 

-

 

Provision charged to operations

 

 

 

125

 

 

 

 

950

 

 

 

 

 

 

Balance at end of year

 

 

$

 

2,875

 

 

 

$

 

3,111

 

 

 

 

 

 

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, 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial

 

Commercial
Mortgage

 

Construction,
Land and Land
Development

 

Consumer

 

Residential

 

Unallocated

 

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

 

$

 

5

 

 

 

$

 

134

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

139

 

Collectively evaluated for impairment

 

 

 

181

 

 

 

 

1,687

 

 

 

 

102

 

 

 

 

506

 

 

 

 

205

 

 

 

 

55

 

 

 

 

2,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total

 

 

$

 

186

 

 

 

$

 

1,821

 

 

 

$

 

102

 

 

 

$

 

506

 

 

 

$

 

205

 

 

 

$

 

55

 

 

 

$

 

2,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

 

$

 

217

 

 

 

$

 

1,774

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

 

$

 

1,991

 

Collectively evaluated for impairment

 

 

 

31,340

 

 

 

 

96,408

 

 

 

 

7,489

 

 

 

 

42,864

 

 

 

 

26,907

 

 

 

 

 

 

205,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total

 

 

$

 

31,557

 

 

 

$

 

98,182

 

 

 

$

 

7,489

 

 

 

$

 

42,864

 

 

 

$

 

26,907

 

 

 

 

 

$

 

206,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50


The Company grants loans to stockholders, officers, directors, and their affiliates. The aggregate amount of these loans outstanding at December 31, 2010 and 2009 was approximately $1.1 million and $1.8 million respectively. During 2010, new loans to such related parties amounted to approximately $445 thousand and repayments amounted to approximately $1.2 million.

NOTE 4   PREMISES AND EQUIPMENT

Premises and equipment are as follows (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Land

 

 

$

 

693

 

 

 

$

 

693

 

Buildings and improvement

 

 

 

5,282

 

 

 

 

5,266

 

Furniture, fixtures and equipment

 

 

 

2,227

 

 

 

 

2,317

 

Leasehold improvements

 

 

 

955

 

 

 

 

990

 

Computer equipment and software

 

 

 

938

 

 

 

 

1,071

 

 

 

 

 

 

 

 

 

 

10,095

 

 

 

 

10,337

 

Less accumulated depreciation and amortization

 

 

 

(4,810

)

 

 

 

 

(4,745

)

 

 

 

 

 

 

Total premises and equipment, net

 

 

$

 

5,285

 

 

 

$

 

5,592

 

 

 

 

 

 

Depreciation charged to operations amounted to approximately $468 thousand and $578 thousand for the years ended December 31, 2010 and 2009, respectively.

NOTE 5   CERTIFICATES OF DEPOSIT

At December 31, 2010, a summary of the maturity of certificates of deposit is as follows (in thousands):

 

 

 

2011

 

 

$

 

19,135

 

2012

 

 

 

7,630

 

2013

 

 

 

6,939

 

2014

 

 

 

1,667

 

2015

 

 

 

6,345

 

 

 

 

 

 

 

$

 

41,716

 

 

 

 

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 $16.1 million and $12.4 million at December 31, 2010 and 2009, respectively.

NOTE 6   BORROWINGS

a) Federal Home Loan Bank Borrowing

As of December 31, 2010 and 2009, the Company had an approved borrowing capacity of approximately $82.2 million and $82.5 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 interest rates that range from 2.87% to 3.71% at December 31, 2010 with maturity dates of November 29, 2017 through February 22, 2018 and are callable at the option of the FHLB with call dates ranging from January 8, 2009 to February 22, 2013. At December 31, 2010 and 2009, $11.0 million in

51


borrowings were outstanding with the FHLB. There were no FHLB borrowings prepaid in 2010 and 2009. The company had outstanding advances at December 31, 2010 and 2009 as follows:

 

 

 

 

 

 

 

Maturity

 

First Date Callable

 

Rate

 

Amount

November 29, 2017

 

November 29, 2009

 

 

 

3.21

%

 

 

 

$

 

1,500,000

 

November 29, 2017

 

November 29, 2010

 

 

 

3.41

%

 

 

 

$

 

1,500,000

 

January 8, 2018

 

January 8, 2009

 

 

 

2.87

%

 

 

 

$

 

2,000,000

 

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

 

 

 

 

 

 

$

 

11,000,000

 

 

 

 

 

 

 

 

b) Credit Lines and Borrowings

The Company has three lines of credit with financial institutions aggregating $13.0 million at December 31, 2010. Borrowings under these agreements have interest rates that fluctuate based on market conditions. The Company also purchases Federal Funds on an overnight basis. The Company had no borrowings outstanding under these lines as of December 31, 2010 and 2009, 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 (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Current Tax Expense:

 

 

 

 

Federal

 

 

$

 

970

 

 

 

$

 

511

 

State

 

 

 

197

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

1,167

 

 

 

 

606

 

Deferred Tax (Benefit):

 

 

 

 

Federal

 

 

 

7

 

 

 

 

(112

)

 

State

 

 

 

45

 

 

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

(165

)

 

 

 

 

 

 

 

 

$

 

1,219

 

 

 

$

 

441

 

 

 

 

 

 

The following table presents a reconciliation between the reported income taxes and the income taxes, which would be computed by applying the normal tax rate (34%) to income before taxes (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Federal income tax

 

 

$

 

1,268

 

 

 

$

 

794

 

Add (deduct) effect of:

 

 

 

 

State income taxes net of federal income tax effect

 

 

 

159

 

 

 

 

28

 

Stock options

 

 

 

4

 

 

 

 

5

 

Meals and entertainment

 

 

 

25

 

 

 

 

21

 

Increase in cash surrender value life insurance

 

 

 

(101

)

 

 

 

 

(299

)

 

Tax-exempt income

 

 

 

(138

)

 

 

 

 

(152

)

 

Other

 

 

 

2

 

 

 

 

44

 

 

 

 

 

 

 

 

$

 

1,219

 

 

 

$

 

441

 

 

 

 

 

 

52


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 (in thousands):

 

 

 

 

 

 

 

2010

 

2009

Deferred tax assets and (liabilities):

 

 

 

 

Allowance for loan losses

 

 

$

 

1,150

 

 

 

$

 

1,139

 

Mark to market   loans

 

 

 

21

 

 

 

 

37

 

Non accrual loan income

 

 

 

10

 

 

 

 

8

 

Depreciation

 

 

 

(254

)

 

 

 

 

(225

)

 

Deferred compensation

 

 

 

162

 

 

 

 

147

 

Unrealized Loss (Gain)   AFS

 

 

 

(391

)

 

 

 

 

(353

)

 

NOL carryover and other

 

 

 

-

 

 

 

 

38

 

 

 

 

 

 

Net deferred tax assets

 

 

$

 

698

 

 

 

$

 

791

 

 

 

 

 

 

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.

There was no valuation allowance for deferred taxes as of December 31, 2010 and 2009. 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.

At December 31, 2010, the Bank had utilized all of its state income tax loss carryforwards and has realized the benefit of these losses. Sullivan has utilized all of its state income tax loss carryforwards and therefore has no remaining carryforwards. 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 2007.

The Company adopted FASB accounting standards codification 740-10-05-6 as of January 1, 2007. 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 adoption had no affect on the Company’s financial statements. The Company recognizes interest and /or penalties related to income tax matters in income tax expense.

NOTE 8   RELATED PARTY TRANSACTIONS

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 $21,000 and $5,000 during the years ended December 31, 2010 and 2009, respectively. This law firm had outstanding loan balances of $197,000 and $284,000 at December 31, 2010 and 2009, respectively in connection with one term loan made by the Bank in 2009. This law firm had approximately $15,291,000 and $11,383,000 of deposits held with the Company as of December 31, 2010 and 2009, 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, 2010 and 2009. The restaurant had outstanding loan balances of $304,000 and $274,000 at December 31, 2010 and 2009, respectively in connection with one line of credit loan made by the Bank in 2003 and one direct auto loan made in 2008. This restaurant had approximately $12,000 and $30,000 of deposits held with the Company as of December 31, 2010 and 2009, respectively.

53


NOTE 9   BENEFIT PLANS

Stock Options

The Board of Directors of the Company adopted four stock option plans, for the members of the board of directors, executive officers, and certain employees of the Bank.

The Company’s 1998 Combined Stock Option Plan (the Combined Plan) and Non-Qualified Stock Option Plan provides for the granting of options to acquire up to 443,236 shares of the Company’s common stock. These plans have expired pursuant to their terms, and no further options can be granted under either of these plans, although those options previously granted remain outstanding and may be exercised pursuant to their terms. 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. Both incentive stock options (ISOs) and non-qualified options (NQOs) may be granted under the plans. The 2007 Plan also permits grants of shares of restricted stock. The shares of common stock that may be purchased pursuant to ISOs granted under the Combined Plan is limited to 221,618. Only key employees of the Company may receive ISOs under the 2001 Combined Plan. Only NQOs may be granted under the NQO Plan.

Options granted pursuant to the NQO Plan and 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 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, 2010, 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, 2009

 

 

 

314,429

 

 

 

$

 

7.16

 

 

 

 

4.0 years

 

 

 

$

 

69

 

Granted

 

 

 

21,000

 

 

 

 

7.52

 

 

 

 

 

Exercised

 

 

 

(19,878

)

 

 

 

 

5.87

 

 

 

 

 

Forfeited

 

 

 

(12,960

)

 

 

 

 

10.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2010

 

 

 

302,591

 

 

 

$

 

7.15

 

 

 

 

3.7 years

 

 

 

$

 

634

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest

 

 

 

302,591

 

 

 

$

 

7.15

 

 

 

 

3.7 years

 

 

 

$

 

634

 

 

 

 

 

 

 

 

 

 

Exercisable at end of the year

 

 

 

258,037

 

 

 

$

 

7.09

 

 

 

 

2.9 years

 

 

 

$

 

558

 

 

 

 

 

 

 

 

 

 

The fair value of stock options granted during 2010 were $1.65 on the date of grant using the Black Scholes option-pricing model with the following assumptions for 2010: expected dividend yields of 2.53%, stock price volatility of 22.48%, risk-free interest rates of 3.12% and expected lives of 7 years. In 2009 stock options were granted on three separate dates. The fair values of stock options granted during 2009 were $0.87, $0.94 and $1.61 on the date of grant using the Black Scholes option-pricing model with the following assumptions for 2009: expected dividend yields of 3.43%, 3.28% and 2.56%, stock price volatility of 20.60%, 20.60% and 22.48%, risk- free interest rates of 2.49%, 2.51 and 3.01% and expected lives of 7 years.

At December 31, 2010 and 2009, the number of options exercisable was 258,037 and 278,194, respectively, and the weighted-average price of those options was $7.09 and $7.07, respectively.

54


At December 31, 2010 and 2009, there were 93,714 and 101,754 additional shares available for grant under the Plans.

Information related to the stock option plan during each year follows (in thousands):

 

 

 

 

 

 

 

2010

 

2009

Intrinsic value of options exercised

 

 

$

 

63

 

 

 

$

 

1

 

Cash received from options exercised

 

 

 

117

 

 

 

 

2

 

Tax benefit realized from option exercises

 

 

 

1

 

 

 

 

-

 

Weighted average fair value of options granted

 

 

$

 

1.57

 

 

 

$

 

1.32

 

As of December 31, 2010 there was $52 thousand 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 2.8 years.

Share Awards

The 2007 Plan also provides for the issuance of shares to directors and officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date, based on the price on the Nasdaq Global Market exchange. Shares granted to date have a vesting period of 4 years. There were 3,780 shares issued in 2007.

A summary of changes in the Company’s nonvested shares for the year follows:

 

 

 

 

 

 

 

Shares

 

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2010

 

 

 

1,572

 

 

 

$

 

11.56

 

Granted

 

 

 

-

 

 

 

 

-

 

Vested

 

 

 

(731

)

 

 

 

 

11.56

 

Forfeited

 

 

 

(110

)

 

 

 

 

11.56

 

 

 

 

 

 

Nonvested at December 31, 2010

 

 

 

731

 

 

 

$

 

11.56

 

 

 

 

 

 

As of December 31, 2010 there was $4 thousand of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 0.4 years. The total fair value of shares vested during the year ended December 31, 2010 was $7 thousand.

During 2007 the Company entered into a non-qualified Supplemental Executive Retirement Plan (“SERP”) with its Chief Executive Officer and it’s Chief Financial Officer. The benefit provided to them by the SERP is calculated at $48 thousand and $24 thousand, respectively, per year for fifteen years after retirement. The Company’s expense for the SERP was $68 thousand and $252 thousand for the period ending December 31, 2010 and 2009, respectively resulting in a deferred compensation liability of $405 thousand and $361 as of year-end 2010 and 2009. Due to the passing of the Chief Financial Officer in January 2009, the Company recognized $183 thousand of expense in the first quarter of 2009. Payment of the benefit accrued for the former Chief Financial Officer is expected to be paid to his beneficiary evenly over 13 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 $102 thousand and $95 thousand for the years ended December 31, 2010 and 2009, respectively.

55


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. Rental expense was approximately $539 thousand and $620 thousand for the years ended December 31, 2010 and 2009, respectively.

The following is a schedule of minimum rental commitments under operating leases at December 31, 2010 (in thousands):

 

 

 

2011

 

 

$

 

383

 

2012

 

 

 

383

 

2013

 

 

 

349

 

2014

 

 

 

299

 

2015

 

 

 

215

 

Thereafter

 

 

 

80

 

 

 

 

Total

 

 

$

 

1,709

 

 

 

 

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 these agreements.

c) Commitment to Extend Credit

Sullivan Financial Services, Inc. (Sullivan) is a mortgage banking entity engaged in extending mortgage commitments to customers on behalf of investor companies. Sullivan also directly issues mortgage commitments to extend financing for FHA and VA mortgages. In certain instances the mortgage commitments Sullivan directly issues are closed in Sullivan’s name as lender and simultaneously assigned at closing to a mortgage banker who finances the mortgage. In other instances, Sullivan closes the qualifying mortgage on its warehouse line and later sells and/or assigns the mortgage loan to an investor company. Sullivan also brokers loans, which are funded by a mortgage banker.

d) 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. In January 2009, the Company issued 7,414 shares of Series A Preferred Stock to the U.S. treasury under the Capital Purchase Program. The Company redeemed, on May 20, 2009, all 7,414 shares of preferred stock for $7.4 million and, on June 24, 2009, repurchased all 163,085 warrants for $275 thousand.

e) Litigation

The Company is involved in legal proceedings incurred in the normal course of business. In the opinion of management, none of these proceedings are expected to have a material affect on the financial position or results of operations of the Company.

56


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. (in thousands):

 

 

 

 

 

 

 

December 31,

 

2010

 

2009

Commitments to extend credit and unused lines of credit

 

 

$

 

85,685

 

 

 

$

 

80,708

 

Letters of credit—standby and performance

 

 

 

1,592

 

 

 

 

1,174

 

 

 

 

 

 

Total

 

 

$

 

87,277

 

 

 

$

 

81,882

 

 

 

 

 

 

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 extensions of credit to related parties for approximately $1.4 million and $2.2 million at December 31, 2010 and 2009, 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: retail 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 Financial Services, Inc. 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.

57


The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments as of and for the year ended December 31, 2010 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

The Bank
and Bancorp

 

Sullivan Financial
Services, Inc.

 

Eliminating
Entries

 

Consolidated

Interest income

 

 

$

 

13,346

 

 

 

$

 

195

 

 

 

$

 

(68

)

 

 

 

$

 

13,473

 

Interest expense

 

 

 

2,193

 

 

 

 

68

 

 

 

 

(68

)

 

 

 

 

2,193

 

Provision for loan losses

 

 

 

125

 

 

 

 

-

 

 

 

 

-

 

 

 

 

125

 

Non-interest income

 

 

 

1,035

 

 

 

 

1,281

 

 

 

 

(102

)

 

 

 

 

2,214

 

Non-interest expense(1)

 

 

 

9,823

 

 

 

 

1,138

 

 

 

 

(102

)

 

 

 

 

10,859

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

2,240

 

 

 

$

 

270

 

 

 

$

 

-

 

 

 

$

 

2,510

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

327,927

 

 

 

$

 

4,287

 

 

 

$

 

(3,318

)

 

 

 

$

 

328,896

 

 

 

 

 

 

 

 

 

 

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, 2009 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

The Bank
and Bancorp

 

Sullivan Financial
Services, Inc.

 

Eliminating
Entries

 

Consolidated

Interest income

 

 

$

 

13,713

 

 

 

$

 

221

 

 

 

$

 

(80

)

 

 

 

$

 

13,854

 

Interest expense

 

 

 

3,391

 

 

 

 

80

 

 

 

 

(80

)

 

 

 

 

3,391

 

Provision for loan losses

 

 

 

950

 

 

 

 

-

 

 

 

 

-

 

 

 

 

950

 

Non-interest income

 

 

 

1,524

 

 

 

 

1,491

 

 

 

 

(84

)

 

 

 

 

2,931

 

Non-interest expense(1)

 

 

 

9,348

 

 

 

 

1,286

 

 

 

 

(84

)

 

 

 

 

10,550

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

$

 

1,548

 

 

 

$

 

346

 

 

 

$

 

-

 

 

 

$

 

1,894

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

329,274

 

 

 

$

 

9,478

 

 

 

$

 

(8,642

)

 

 

 

$

 

330,110

 

 

 

 

 

 

 

 

 

 


 

 

(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.

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, 2010, management believes the Bank met all capital adequacy requirements to which it is subject.

58


The Bank’s actual capital amounts and ratios are presented in the tables (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

For Capital
Adequacy Purpose

 

For Classification
As Well Capitalized

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

December 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

$

 

37,004

 

 

 

 

15.48

%

 

 

 

$

 

19,122

   

 

8.00

%

 

 

 

$

 

23,904

   

 

10.00

%

 

Tier I capital (to risk-weighted assets)

 

 

 

34,129

 

 

 

 

14.28

%

 

 

 

 

9,561

   

 

4.00

%

 

 

 

 

14,342

   

 

6.00

%

 

Tier I capital (to average assets)

 

 

 

34,129

 

 

 

 

10.44

%

 

 

 

 

13,076

   

 

4.00

%

 

 

 

 

16,345

   

 

5.00

%

 

                         

December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

$

 

34,607

 

 

 

 

14.19

%

 

 

 

$

 

19,504

   

 

8.00

%

 

 

 

$

 

24,380

   

 

10.00

%

 

Tier I capital (to risk-weighted assets)

 

 

 

31,559

 

 

 

 

12.94

%

 

 

 

 

9,752

   

 

4.00

%

 

 

 

 

14,628

   

 

6.00

%

 

Tier I capital (to average assets)

 

 

 

31,559

 

 

 

 

9.92

%

 

 

 

 

12,720

   

 

4.00

%

 

 

 

 

15,900

   

 

5.00

%

 

As of December 31, 2010 and 2009, the Bank’s ratio of equity capital to total assets was 10.40% and 9.58%, respectively.

NOTE 14   FAIR VALUE

Statement 157, which is now included in 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 to 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 3rd 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.

59


Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2010

 

Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

U.S Government sponsored

 

 

 

 

 

 

Agency Securities

 

 

$

 

 -

 

 

 

$

 

9,023

 

 

 

$

 

 -

 

Mortgage Backed Securities

 

 

 

-

 

 

 

 

19,847

 

 

 

 

-

 

Collaterized Mortgage Obligations

 

 

 

-

 

 

 

 

5,677

 

 

 

 

-

 

Corporate Debt Securities

 

 

 

-

 

 

 

 

1,446

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2009

 

Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

U.S Government sponsored

 

 

 

 

 

 

Agency Securities

 

 

$

 

 -

 

 

 

$

 

5,502

 

 

 

$

 

 -

 

Mortgage Backed Securities

 

 

 

-

 

 

 

 

23,292

 

 

 

 

-

 

Collaterized Mortgage Obligations

 

 

 

-

 

 

 

 

5,421

 

 

 

 

-

 

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2010

 

Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

Impaired loans

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

356

 

60


 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2009

 

Quoted Prices in
Active Markets
for Identical
Unobservable
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

Impaired loans

 

 

$

 

 -

 

 

 

$

 

 -

 

 

 

$

 

1,220

 

The following represent impairment charges recognized during the period:

A loan is impaired when full payment under the loan terms is not expected. 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. Collateral dependent impaired loans for which there is a specific reserve, which are measured for impairment using the fair value of the collateral, had a carrying amount of $471 thousand and $1.5 million, including a valuation allowance of $114 thousand and $261 thousand, for the years ended December 31, 2010 and 2009, respectively. Fair value is classified as Level 3 in the fair value hierarchy and 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. Specific reserves for collateral dependent impaired loans decreased by $147 thousand from $261 thousand at December 31, 2009 to $114 thousand at December 31, 2010.

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, 2010 and 2009 are outlined below. For cash and due from banks, and federal funds sold, the recorded book value of approximately $57.6 million and $56.3 million approximates fair value at December 31, 2010 and 2009, respectively.

The carrying amount of loans held for sale is approximately $2.2 million and $5.4 million at December 31, 2010 and 2009, respectively, and approximates their fair value. No impairment charges were recognized on loans held for sale for the period ending 2010 and 2009.

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.

 

 

 

 

 

 

 

 

 

   

2010

 

2009

 

Carrying
amount

 

Estimated
Fair value

 

Carrying
amount

 

Estimated
Fair value

 

 

(in thousands)

Investment securities - held to maturity

 

 

$

 

10,740

 

 

 

$

 

10,548

 

 

 

$

 

12,262

 

 

 

$

 

11,983

 

Investment securities - available for sale

 

 

 

35,993

 

 

 

 

35,993

 

 

 

 

34,215

 

 

 

 

34,215

 

Loans, including deferred costs

 

 

 

207,146

 

 

 

 

208,199

 

 

 

 

206,768

 

 

 

 

207,839

 

61


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.

 

 

 

 

 

 

 

 

 

   

2010

 

2009

 

Carrying
amount

 

Estimated
Fair value

 

Carrying
amount

 

Estimated
Fair value

 

 

(in thousands)

Time deposits

 

 

$

 

41,716

 

 

 

$

 

42,456

 

 

 

$

 

50,327

 

 

 

$

 

51,050

 

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.

 

 

 

 

 

 

 

 

 

   

2010

 

2009

 

Carrying
amount

 

Estimated
Fair value

 

Carrying
amount

 

Estimated
Fair value

 

 

(in thousands)

Federal Home Loan Bank Borrowings

 

 

$

 

11,000

 

 

 

$

 

12,707

 

 

 

$

 

11,000

 

 

 

$

 

12,299

 

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.

62


NOTE 15   PARENT COMPANY ONLY

The following information on the parent only financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009 should be read in conjunction with the notes to the consolidated financial statements (in thousands).

Statements of Financial Condition

 

 

 

 

 

 

 

2010

 

2009

Assets:

 

 

 

 

Cash and due from subsidiaries

 

 

$

 

4,314

 

 

 

$

 

5,682

 

Investment in subsidiaries

 

 

 

34,775

 

 

 

 

32,243

 

Other assets

 

 

 

302

 

 

 

 

275

 

 

 

 

 

 

Total assets

 

 

$

 

39,391

 

 

 

$

 

38,200

 

 

 

 

 

 

Liabilities:

 

 

 

 

Other liabilities

 

 

$

 

-

 

 

 

$

 

-

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

Common stock

 

 

 

37,600

 

 

 

 

37,334

 

Other comprehensive income, net of taxes

 

 

 

646

 

 

 

 

684

 

Retained earnings

 

 

 

1,145

 

 

 

 

182

 

 

 

 

 

 

Total stockholders’ equity

 

 

 

39,391

 

 

 

 

38,200

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

$

 

39,391

 

 

 

$

 

38,200

 

 

 

 

 

 

The following information on the parent only operating statements and cash flows as of December 31, 2010 and 2009 and for the years then ended should be read in conjunction with the notes to the consolidated financial statements (in thousands).

Statements of Operations

 

 

 

 

 

 

 

2010

 

2009

Dividend income

 

 

$

 

-

 

 

 

$

 

258

 

Equity in undistributed income of subsidiaries

 

 

 

2,570

 

 

 

 

1,733

 

Other expenses

 

 

 

60

 

 

 

 

97

 

 

 

 

 

 

Net income

 

 

$

 

2,510

 

 

 

$

 

1,894

 

 

 

 

 

 

63


Statements of Cash Flows

 

 

 

 

 

 

 

2010

 

2009

Cash flows from operating activities:

 

 

 

 

Net income

 

 

$

 

2,510

 

 

 

$

 

1,894

 

Equity in undistributed income of the subsidiaries

 

 

 

(2,570

)

 

 

 

 

(1,733

)

 

Increase in other assets

 

 

 

27

 

 

 

 

-

 

Stock-based compensation

 

 

 

35

 

 

 

 

41

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

(52

)

 

 

 

 

202

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Proceeds from exercise of options

 

 

 

117

 

 

 

 

2

 

Common stock repurchase

 

 

 

(315

)

 

 

 

 

-

 

Net proceeds from sale of preferred stock

 

 

 

-

 

 

 

 

7,191

 

Net proceeds from sale of common stock warrants

 

 

 

-

 

 

 

 

205

 

Redemption of common stock warrants

 

 

 

-

 

 

 

 

(275

)

 

Redemption of preferred stock

 

 

 

-

 

 

 

 

(7,414

)

 

Cash dividend paid common stock

 

 

 

(1,118

)

 

 

 

 

(1,036

)

 

Cash dividend paid preferred stock

 

 

 

-

 

 

 

 

(127

)

 

 

 

 

 

 

Net cash used in financing activities

 

 

 

(1,316

)

 

 

 

 

(1,454

)

 

 

 

 

 

 

Net change in cash for the period

 

 

 

(1,368

)

 

 

 

 

(1,252

)

 

Net cash at beginning of year

 

 

 

5,682

 

 

 

 

6,934

 

 

 

 

 

 

Net cash at end of year

 

 

$

 

4,314

 

 

 

$

 

5,682

 

 

 

 

 

 

64


NOTE 16   QUARTERLY FINANCIAL DATA (unaudited)

Selected Consolidated Quarterly Financial Data

 

 

 

 

 

 

 

 

 

2010 Quarter Ended,
(In thousands, except per share data)

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Total interest income

 

 

$

 

3,309

 

 

 

$

 

3,380

 

 

 

$

 

3,410

 

 

 

$

 

3,374

 

Total interest expense

 

 

 

641

 

 

 

 

548

 

 

 

 

526

 

 

 

 

478

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

2,668

 

 

 

 

2,832

 

 

 

 

2,884

 

 

 

 

2,896

 

Provision for loan losses

 

 

 

75

 

 

 

 

-

 

 

 

 

25

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

2,593

 

 

 

 

2,832

 

 

 

 

2,859

 

 

 

 

2,871

 

Other income

 

 

 

422

 

 

 

 

485

 

 

 

 

579

 

 

 

 

728

 

Other expenses

 

 

 

2,450

 

 

 

 

2,425

 

 

 

 

2,399

 

 

 

 

2,366

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

565

 

 

 

 

892

 

 

 

 

1,039

 

 

 

 

1,233

 

Income tax expense

 

 

 

155

 

 

 

 

291

 

 

 

 

350

 

 

 

 

423

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

410

 

 

 

$

 

601

 

 

 

$

 

689

 

 

 

$

 

810

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.08

 

 

 

$

 

0.11

 

 

 

$

 

0.13

 

 

 

$

 

0.15

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

$

 

0.08

 

 

 

$

 

0.11

 

 

 

$

 

0.13

 

 

 

$

 

0.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 Quarter Ended,
(In thousands, except per share data)

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Total interest income

 

 

$

 

3,464

 

 

 

$

 

3,438

 

 

 

$

 

3,492

 

 

 

$

 

3,460

 

Total interest expense

 

 

 

881

 

 

 

 

914

 

 

 

 

830

 

 

 

 

766

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

2,583

 

 

 

 

2,524

 

 

 

 

2,662

 

 

 

 

2,694

 

Provision for loan losses

 

 

 

450

 

 

 

 

150

 

 

 

 

150

 

 

 

 

200

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

2,133

 

 

 

 

2,374

 

 

 

 

2,512

 

 

 

 

2,494

 

Other income

 

 

 

1,071

 

 

 

 

716

 

 

 

 

594

 

 

 

 

550

 

Other expenses

 

 

 

2,666

 

 

 

 

2,645

 

 

 

 

2,450

 

 

 

 

2,348

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

538

 

 

 

 

445

 

 

 

 

656

 

 

 

 

696

 

Income tax expense (benefit)

 

 

 

(81

)

 

 

 

 

114

 

 

 

 

194

 

 

 

 

214

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

619

 

 

 

 

331

 

 

 

 

462

 

 

 

 

482

 

Dividends on preferred stock and accretion

 

 

 

93

 

 

 

 

257

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

 

$

 

526

 

 

 

$

 

74

 

 

 

$

 

462

 

 

 

$

 

482

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.10

 

 

 

$

 

0.01

 

 

 

$

 

0.09

 

 

 

$

 

0.09

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

$

 

0.10

 

 

 

$

 

0.01

 

 

 

$

 

0.08

 

 

 

$

 

0.09

 

 

 

 

 

 

 

 

 

 

 

Note:

 

 

  The sum of the four quarters of EPS may not equal EPS for the year due to rounding. Earnings per share have been adjusted to reflect the 5% stock dividend declared in April 2010 and paid in May 2010.

65


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 in the Borough of Bernardsville, State of New Jersey, on March 24, 2011.

SOMERSET HILLS BANCORP
By:/s/ Stewart E. McClure, Jr.
Stewart E. McClure, Jr.
President, Chief Executive Officer
and Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below on March 24, 2011.

/s/ Stewart E. McClure, Jr.


Stewart E. McClure, Jr.

 

President, Chief Executive Officer, and
Chief Operating Officer

/s/ William S. Burns


William S. Burns

 

Chief Financial Officer

/s/ Edward B. Deutsch


Edward B. Deutsch

 

Chairman

/s/ William F. Keefe


William F. Keefe

 

Director

/s/ Jefferson W. Kirby


Jefferson W. Kirby

 

Director

/s/ Desmond V. Lloyd


Desmond V. Lloyd

 

Director

/s/ Thomas J. Marino


Thomas J. Marino

 

Director

/s/ Gerald B. O’Connor


Gerald B. O’Connor

 

Director

/s/ M. Gerald Sedam, II


M. Gerald Sedam, II

 

Director

66