Certain of the Company’s asset quality metrics, such as the level of nonperforming loans and the level of net charge-offs, have improved in 2009 as compared to 2008. Notwithstanding these positive indications, management believes there are ongoing heightened risks in certain segments of the loan portfolio due to a significantly weakened national economy, the negative effects of which have begun to extend into the communities we serve. For each of the three months ended September 30, 2009 and 2008 the provision for loan losses was $150 thousand. For the nine months ended September 30, 2009, the provision for loan losses increased to $750 thousand from $365 thousand for the same period last year. The increase in the provision for loan losses for the nine-month period was due primarily to an increase in the general loss factors utilized in management’s estimate of credit losses inherent in the loan portfolio, consistent with the overall weakened credit environment. Management reviews the adequacy of its allowance on an ongoing basis 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 increased in the third quarter of 2009 by $114 thousand, or 23.8%, to $594 thousand from $480 thousand in the third quarter of 2008. The increase was largely due to a $122 thousand increase in gains on sale of residential loans ($371 thousand of gains on $38.6 million principal amount of loans in 2009 versus $249 thousand of gains on $43.4 million of loans in 2008) at Sullivan Financial Services, Inc., a wholly-owned mortgage banking subsidiary of the Bank, which originates loans for sale strictly on a pre-sold flow-basis. More than offsetting the decline in loan volume was a widening of sales margins. Partially offsetting the increase in gains on sale of residential loans was an $8 thousand decrease in bank owned life insurance investment income.
For the nine months ended September 30, 2009, non-interest income increased $914 thousand to $2.4 million from $1.5 million for the same period in 2008. The 2009 period included a $583 thousand bank owned life insurance death benefit payment. Excluding the benefit payment, the Company’s non-interest income increased by $334 thousand, or 22.6%, for the nine-month year over year comparison. Contributing to this increase were gains on sales of residential mortgage loans, which increased to $1.2 million (on $154.1 million principal amount of loans) for the first nine months of 2009 from $794 thousand (on $141.4 million of principal amount of loans) for the prior year period, due to an increased volume of loans coupled with a widening in sales margins. Partially offsetting these positive factors was a $43 thousand decrease in investment income earned on bank owned life insurance.
Non-interest expenses were $2.5 million for the third quarters of both 2009 and 2008. Salary and employee benefits, including employee health insurance costs, increased by $79 thousand and our FDIC regular insurance assessment increased by $51 thousand. These increases were offset by management’s focus on reducing costs, reflected in decreases in all other expense categories including occupancy (lower by $25 thousand); advertising and business promotions (lower by $28 thousand); printing, stationery and supplies (lower by $4 thousand); data processing (lower by $12 thousand); and other, including fees paid for professional services, such as consultants and legal counsel (lower by $80 thousand, excluding the aforementioned increase in FDIC assessment expense).
Non-interest expenses for the first nine months of 2009 were $7.8 million, an increase of $315 thousand from $7.5 million for the comparable 2008 period. The increase in non-interest expenses for the first nine months of 2009 was primarily attributable to two items: a $183 thousand charge for retirement plan liability due to Mr. Riker’s death and a $140 thousand special FDIC assessment. Excluding these two items, non-interest expenses were essentially flat from the prior year. Salary and employee benefits increased by $49 thousand (including employee health insurance costs but excluding the aforementioned retirement charge), and our FDIC regular insurance assessment increased by $145 thousand. These increases were offset by management’s focus on reducing costs, reflected in decreases in the following expense categories: occupancy (lower by $5 thousand); advertising and business promotions (lower by $71 thousand); data processing (lower by $42 thousand); and other, including fees paid for professional services, such as consultants and legal counsel (lower by $98 thousand, excluding the aforementioned FDIC assessment expenses).
The Company recorded provisions for income taxes of $194 thousand and $176 thousand for the third quarters of 2009 and 2008, respectively. The effective tax rate for the quarter ended September 30, 2009 was 29.6%, as compared to 29.3% for the quarter ended September 30, 2008.
The Company recorded provisions for income taxes of $227 thousand and $499 thousand for the nine months ended September 2009 and 2008, respectively. The effective tax rate for the 2009 nine-month period was 13.8%, as compared to 28.8% for the prior year period. The low effective tax rate in 2009 was due to a $583 thousand nontaxable death benefit received on BOLI during the first quarter.
FINANCIAL CONDITION
September 30, 2009 as compared to December 31, 2008
Total assets as of September 30, 2009 increased to $309.2 million from $299.7 million at December 31, 2008. The largest component of the increase was cash and due from banks, which grew by $15.8 million, and was partially offset by decreases of $2.1 million in loans receivable, $2.7 million in investment securities available for sale and $1.5 million in federal funds sold. The decline in loans reflects the continued soft economy in our trade area, as credit demand from our customers remains relatively weak by historical standards, as well as a lower interest rate environment which has led to pay-offs and pay-downs on our loans. The lower rate environment has also resulted in pay-downs and calls on certain investment securities. The increase in assets was primarily funded by a growth in core deposits (defined as total deposits less time deposits), which increased to $200.5 million at September 30, 2009 from $191.9 million at December 31, 2008. Over the course of 2009, Management has taken a cautious approach with regard to liquidity and interest rate risk by largely depositing net inflows into the Bank’s Federal Reserve Bank account.
Total loans at September 30, 2009 decreased $2.1 million to $209.1 million from $211.2 million at year-end 2008. The changes in and composition of the loan portfolio, by category, as of September 30, 2009 compared to December 31, 2008 is as follows: Commercial loans decreased $16.0 million to $41.6 million, construction, land and land development loans increased by $3.5 million to $10.4 million, commercial mortgage loans increased $13.7 million to $98.3; home equity loans decreased by $2.3 million to $46.0 million; residential mortgage loans decreased by $831 thousand to $11.9 million; and other consumer loans decreased by $161 thousand to $874 thousand. During the first nine months of 2009, the Bank’s loan portfolio saw a shift 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 standards and was predominantly for credit secured by commercial real estate.
The following schedule presents the components of our loan portfolio, net of unearned income, for each period presented:
| | | | | | | | | | | | | |
| | September 30, 2009 | | December 31, 2008 | |
| | Amount | | Percent | | Amount | | Percent | |
| | (Dollars In Thousands) | |
Commercial | | $ | 41,596 | | | 19.9 | % | $ | 57,600 | | | 27.3 | % |
Real Estate: | | | | | | | | | | | | | |
Construction, land and land development | | | 10,449 | | | 5.0 | % | | 6,945 | | | 3.3 | % |
Commercial mortgages | | | 98,286 | | | 47.0 | % | | 84,578 | | | 40.1 | % |
Residential mortgages | | | 11,887 | | | 5.7 | % | | 12,718 | | | 6.0 | % |
Consumer: | | | | | | | | | | | | | |
Home equity | | | 45,982 | | | 22.0 | % | | 48,239 | | | 22.8 | % |
Other consumer | | | 874 | | | 0.4 | % | | 1,035 | | | 0.5 | % |
| |
|
| |
|
| |
|
| |
|
| |
Gross loans | | | 209,074 | | | 100.0 | % | | 211,115 | | | 100.0 | % |
| | | | |
|
| | | | |
|
| |
| | | | | | | | | | | | | |
Net deferred costs | | | 109 | | | | | | 131 | | | | |
| |
|
| | | | |
|
| | | | |
Total loans | | | 209,183 | | | | | | 211,246 | | | | |
Less: Allowance for loan losses | | | 2,914 | | | | | | 2,819 | | | | |
| |
|
| | | | |
|
| | | | |
Net Loans | | $ | 206,269 | | | | | $ | 208,427 | | | | |
| |
|
| | | | |
|
| | | | |
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.
Securities available for sale decreased $2.6 million, or 7.1%, from $36.8 million at year-end 2008 to $34.2 million at September 30, 2009. Securities held to maturity remained constant at $12.3 million at December 31, 2008 and at September 30, 2009. The Company purchased $8.2 million in new securities in the first nine months of 2009 and $11.2 million in securities matured, were called or were prepaid. There was $766 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $40 thousand in net amortization expenses during the first nine months of 2009.
Total deposits increased $8.2 million, or 3.3%, to $258.0 million as of September 30, 2009 from $249.8 million as of December 31, 2008. NOW deposits decreased by $923 thousand, savings deposits decreased by $2.7 million, money market deposits increased $7.4 million and demand deposits increased by $5.8 million. Time deposits decreased $1.3 million. Management continues to monitor the Bank’s deposit portfolio through its Investment and Asset/Liability Committee.
ASSET QUALITY
At September 30, 2009, total non-performing assets, which were composed solely of non accrual loans, declined $1.2 million to $115 thousand compared to $1.4 million at December 31, 2008. Management continues to monitor the Company’s asset quality and believes that the allowance for loan losses is adequate to provide for losses inherent in the portfolio.
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The following table provides information regarding risk elements in the loan portfolio:
| | | | | | | |
| | September 30, 2009 | | December 31, 2008 | |
| | (dollars in thousands) | |
|
Non-accrual loans | | $ | 115 | | $ | 1,365 | |
Non-accrual loans to total loans | | | 0.05 | % | | 0.65 | % |
Non-performing assets to total assets | | | 0.04 | % | | 0.46 | % |
Allowance for loan losses as a % of non-performing loans | | | 2,534 | % | | 207 | % |
Allowance for loan losses to total loans | | | 1.39 | % | | 1.33 | % |
Non-Performing Assets
Non-Performing Assets include non-performing loans and other real estate owned (“OREO”), properties acquired through foreclosure or a deed in lieu. At September 30, 2009 we had no OREO and our only non-performing assets were $115 thousand in non-accrual loans discussed above.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to provide for probable 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. Provisions are charged to expense and the allowance is reduced by charge-offs, net of recoveries, and is increased by the provision. 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.
At September 30, 2009, the allowance for loan losses was $2.9 million, up $95 thousand from year-end 2008. There were $660 thousand in charge- offs and $5 thousand in recoveries reported in the first nine months of 2009. The allowance for loan losses as a percentage of loans receivable was 1.39% at September 30, 2009 and 1.33% at December 31, 2008.
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 September 30, 2009 and 2008 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 September 30, 2009, 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 0.7%, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.2%. As of September 30, 2008, our model predicted that a 200 basis point gradual increase in general interest rates would decrease net interest income by 0.7%, while a 200 basis point decrease would increase net interest income by 0.8%.
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 September 30, 2009, was −1.41% with a rate shock of up 200 basis points, and +0.56% with a rate shock of down 200 basis points. At September 30, 2008, the variances were −2.01% assuming an up 200 basis points rate shock and +0.58% assuming a down 200 basis points rate shock.
LIQUIDITY MANAGEMENT AND CAPITAL RATIOS
At September 30, 2009, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.
At September 30, 2009, liquid assets (cash and due from banks, interest bearing deposits at other banks, federal funds sold, and investment securities available for sale) were approximately $67.1 million, which represents 23.1% of total assets and 26.6% 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 $77.3 million (subject to available qualified collateral, with current borrowings of $11.0 million outstanding at September 30, 2009). In addition, during April 2009, the Bank established a credit facility (with an approximate borrowing capacity based on pledged collateral as of September 30, 2009 of $11.5 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 $21.5 million through correspondent banks. At September 30, 2009 outstanding commitments for the Bank to extend credit were $82.0 million. Management believes that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals over the next twelve months.
Total stockholders’ equity increased to $38.0 million at September 30, 2009 from $37.5 million at December 31, 2008. Activity in stockholders’ equity for the first nine months of 2009 consisted of net income of $1.4 million and other comprehensive income, consisting of unrealized after-tax gains on securities available for sale, of $272 thousand, partially offset by cash dividends of $905 thousand.
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At September 30, 2009 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at September 30, 2009, for the Bank, as well as the minimum regulatory requirements. The Company, although not subject to explicit capital ratio requirements by its regulators, had a tangible common equity to tangible assets ratio of 12.0% at September 30, 2009.
| | | | | | | | | | | | | |
| | Amount | | Ratio | | Minimum Amount | | Minimum Ratio | |
| |
| |
| |
| |
| |
|
The Bank: | | | | | | | | | | | | | |
Leverage Capital | | $ | 31,041 | | | 10.15 | % | $ | 12,231 | | | 4.00% | |
Tier 1 – Risk Based | | $ | 31,041 | | | 12.71 | % | $ | 9,765 | | | 4.00% | |
Total Risk - Based | | $ | 33,955 | | | 13.91 | % | $ | 19,530 | | | 8.00% | |
ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4 (T) – 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 reported on in 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) | Changes in internal controls. |
| | |
| | There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting. |
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Part II Other Information
The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) and (b) - none
| (c) | In February of 2007, the Registrant’s Board of Directors approved a repurchase program pursuant to which the registrant may repurchase up to 250,000 shares of its outstanding common stock. In October 2007 the Board increased this program by another 250,000 shares. This program was suspended during the Company’s participation in the Treasury’s CPP program, but has been reinstated since the Company redeemed the preferred stock and repurchased the warrants issued to the Treasury. No shares were repurchased during the third quarter of 2009: |
| | | | | | | | | | | | | |
Period | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs | | Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs | |
| |
| |
| |
| |
| |
| | | | | | | | | |
July 1 – July 31 | | | — | | | — | | | — | | | 207,597 | |
August 1 – August 31 | | | — | | | — | | | — | | | 207,597 | |
September 1 – September 30 | | | — | | | — | | | — | | | 207,597 | |
| |
|
| |
|
| |
|
| | | | |
| | | | | | | | | | | | | |
Total | | | — | | $ | — | | | — | | | 207,597 | |
| |
Item 3. | Defaults Upon Senior Securities |
Not applicable
| |
Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable
Not applicable
Exhibits
Exhibit 31.1 – Certification of Stewart E. McClure, Jr. pursuant to SEC Rule 13a-14(a)
Exhibit 31.2 – Certification of William S. Burns pursuant to SEC Rule 13a-14(a)
Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | SOMERSET HILLS BANCORP |
| | |
Date: | November 12, 2009 | By:/s/ William S. Burns |
| | |
| | William S. Burns |
| | Chief Financial Officer |
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