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.
The provision for loan losses was $95,000 and $200,000 for the third quarter and first nine months of 2011, respectively compared with $25,000 and $100,000 for the third quarter and first nine months of 2010, respectively. The increase in loan loss provisioning during 2011 as compared with 2010 was largely due to stronger loan growth in 2011. 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 increased by $155,000 to $734,000 in the third quarter of 2011 from $579,000 in the prior year period largely due to $267,000 of additional tax-free revenue related to a BOLI death benefit payment. The increase in BOLI income was partially offset by a $102,000 decline in gains on sales of residential loans 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 and, on a limited basis, for retention in the Bank’s portfolio, and moderately lower banking fees. Sullivan’s origination volume is down due to declining residential mortgage refinancing activity and continued low home purchase activity.
For the first nine months of 2011, non-interest income remained flat from the prior year period: $1.499 million in 2011 versus $1.486 million in 2010. The aforementioned BOLI death benefit was offset by a $265,000 decline in gains on sales of residential mortgages. The first nine months 2011 also benefitted from $9,000 in net gains from the sale of investment securities realized during the first quarter of 2011.
Non-Interest Expense
Non-interest expense in the third quarter and first nine months of 2011 increased by $345,000, or 14.4%, and $102,000, or 1.4%, respectively, over the prior year comparable periods. 2011 non-interest expense included a $426,000 loss on the early extinguishment of $3.5 million of borrowings from the FHLBNY. Excluding this item, non-interest expense declined by $81,000, or 3.4%, to $2.318 million in the third quarter of 2011 from $2.399 million in the prior year third quarter, and by $324,000, or 4.5%, to $6.950 million for the first nine months of 2011 from $7.274 million in the prior year first nine months. The declines in operating expenses were due primarily to a decrease in occupancy costs, as well as lower FDIC expense largely resulting from a change in the formula used by the FDIC to calculate assessments. Management continues its expense containment efforts which have yielded cost savings in many areas of the Company’s operations. The Company’s efficiency ratio improved to 65.2% in the current quarter from 68.2% one year ago. The efficiency ratio has been calculated by dividing total noninterest expense before nonrecurring items by the total of FTE net interest income and noninterest revenues, excluding gains or losses from securities transactions and nonrecurring items.
Income Taxes
The Company recorded provisions for income taxes of $197,000 and $759,000 for the third quarter and first nine months of 2011, respectively, versus $350,000 and $796,000 for the third quarter and first nine months of 2010, respectively. The effective tax rates were 21.1% and 27.6% for the third quarter and first nine months of 2011, respectively, versus 33.7% and 31.9% for the third quarter and first nine months of 2010, respectively. The effective tax rates for the 2011 periods were significantly lower than the 2010 rates due to a $267,000 tax-free gain related to BOLI recorded in the third quarter of 2011.
FINANCIAL CONDITION
September 30, 2011 as compared to December 31, 2010
Total assets increased by $16.1 million to $345.0 million at September 30, 2011 from $328.9 million at December 31, 2010. The increase in assets was due to growth in loans receivable, which increased by $25.7 million to $232.8 million at September 30, 2011 from $207.1 million at year-end 2010, partially offset by a $12.4 million decline in cash and cash equivalents. Growth in loans receivable reflected stabilizing economic conditions in the Bank’s operating region, as well as Management’s successful efforts to generate loan originations to credit-worthy borrowers. The increase in assets was funded largely by an $18.9 million increase in core deposits (i.e., all deposits other than time deposits), partially offset by a $3.5 million decline in Federal Home Loan Bank advances.
Our portfolio of investment securities available for sale increased slightly, from $36.0 million at year-end 2010 to $36.4 million at September 30, 2011, despite $12.4 million in securities purchases during the first nine months of 2011, as the prolonged period of lower interest rates has resulted in continued pay-downs of mortgage-backed securities and calls of certain agency obligations. During the first nine months of 2011, $12.3 million in securities matured or were sold, called or prepaid. There were $919 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $134 thousand in net amortization expenses during the first nine months of 2011. Securities sold in 2011 included sales of $2.0 million of U.S. Treasury securities as part of the Bank’s interest-rate risk management processes. The sales resulted in a pretax capital gain of $9,000 which was recorded in the first quarter of 2011.
Over the course of 2009 and 2010 and into 2011, 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, which is currently earning 0.25% per annum. As a result, cash and cash equivalents have remained high by historical standards. Cash and cash equivalents totaled $45.1 million at September 30, 2011 and $57.6 million at December 31, 2010.
Total loans receivable at September 30, 2011 increased $25.7 million to $232.8 million from $207.1 million at year-end 2010. The changes in and composition of the loan portfolio, by category, as of September 30, 2011 compared to December 31, 2010 are as follows: Commercial loans increased $745 thousand to $32.3 million, construction, land and land development loans increased by $1.1 million to $8.6 million, commercial mortgage loans increased $16.1 million to $114.3 million; consumer loans decreased by $590 thousand to $42.3 million; and residential mortgage loans increased by $8.3 million to $35.2 million. During the first nine months of 2011, the loan portfolio was positively impacted by an increase in commercial real estate loan demand, as well as refinancing strategies employed by many of the Bank’s borrowers. With regard to new loan originations, the Bank has made a strategic decision to hold in its loan portfolio a portion of residential mortgages that meet our credit quality standards that were closed by Sullivan Financial, the Bank’s mortgage banking subsidiary.
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The following schedule presents the components of loans, net of unearned income, for each period presented:
| | | | | | | | | | | | | |
| | September 30, 2011 | | December 31, 2010 | |
| |
| |
| |
| | Amount | | Percent | | Amount | | Percent | |
| |
| |
| |
| |
| |
| | (Dollars In Thousands) | |
| |
| |
Commercial | | $ | 32,301 | | | 13.9 | % | $ | 31,556 | | | 15.2 | % |
Construction, land and land development | | | 8,551 | | | 3.7 | | | 7,489 | | | 3.6 | |
Commercial mortgages | | | 114,326 | | | 49.1 | | | 98,183 | | | 47.4 | |
Residential mortgages | | | 35,177 | | | 15.1 | | | 26,907 | | | 13.0 | |
Consumer | | | 42,274 | | | 18.2 | | | 42,864 | | | 20.8 | |
| |
|
| |
|
| |
|
| |
|
| |
Gross loans | | | 232,629 | | | 100.0 | % | | 206,999 | | | 100.0 | % |
| | | | |
|
| | | | |
|
| |
Net deferred costs | | | 208 | | | | | | 147 | | | | |
| |
|
| | | | |
|
| | | | |
Total loans | | | 232,837 | | | | | | 207,146 | | | | |
Less: Allowance for loan losses | | | 2,967 | | | | | | 2,875 | | | | |
| |
|
| | | | |
|
| | | | |
Net loans | | $ | 229,870 | | | | | $ | 204,271 | | | | |
| |
|
| | | | |
|
| | | | |
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. Construction, land and land development loans include loans secured by first liens on commercial or residential properties to finance the construction or renovation of such properties. Commercial mortgages include loans secured by first liens on completed commercial properties to purchase or refinance such properties. Residential mortgages 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. Consumer loans consist primarily of home equity loans secured by 1st or 2nd liens.
ASSET QUALITY
The following table sets forth information concerning the Company’s non-performing assets and troubled debt restructurings (“TDRs”) as of the dates indicated (in thousands):
| | | | | | | |
| | September 30,
2011 | | December 31, 2010 | |
| |
| |
| |
|
Non-accrual loans | | $ | 285 | | $ | 254 | |
Loans past due 90 days and still accruing | | | — | | | — | |
| |
|
| |
|
| |
Total non-performing loans | | $ | 285 | | $ | 254 | |
OREO | | | — | | | — | |
| |
|
| |
|
| |
Total non-performing assets | | $ | 285 | | $ | 254 | |
| |
|
| |
|
| |
Troubled debt restructured loans | | $ | 731 | | $ | 738 | |
| |
|
| |
|
| |
| | | | | | | |
Non-accrual loans to total loans | | | 0.12 | % | | 0.12 | % |
Non-performing assets to total assets | | | 0.08 | | | 0.08 | |
Allowance for loan losses to non-performing loans | | | 1,041 | | | 1,132 | |
Allowance for loan losses to total loans | | | 1.28 | | | 1.39 | |
Loans delinquent 30-89 days were $618 thousand at September 30, 2011, an increase from $512 thousand at December 31, 2010.
As of September 30, 2011 and December 31, 2010, there were $1.8 million and $2.0 million in impaired loans, respectively. The amount of the allowance for loan losses allocated for impaired loans as of September 30, 2011 and December 31, 2010 was $14 thousand and $139 thousand, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to provide for potential 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, 2011, the allowance for loan losses was $3.0 million, an increase of $92 thousand from year-end 2010. Net charge-offs totaled $114,000 during the third quarter of 2011, $108,000 during the first nine months 2011, $97,000 for the third quarter of 2010 and $94,000 for the first nine months of 2010. The allowance for loan losses as a percentage of loans receivable was 1.28% at September 30, 2011 and 1.39% at December 31, 2010.
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The following table describes the activity in the allowance for loan losses account for the periods ended (in thousands):
| | | | | | | |
| | For the nine months ended
September 30, 2011 | | For the nine months ended
September 30, 2010 | |
| |
| |
| |
Allowance for loan losses at beginning of period | | $ | 2,875 | | | 3,111 | |
Charge-offs | | | (119 | ) | | (97 | ) |
Recoveries | | | 11 | | | 3 | |
| |
|
|
|
|
| |
Net charge-offs | | | (108 | ) | | (94 | ) |
Provision for loan losses | | | 200 | | | 100 | |
| |
|
|
|
|
| |
Allowance for loan losses at end of period | | $ | 2,967 | | | 3,117 | |
| |
|
|
|
|
| |
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, 2011 and 2010 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, which is based on multiple assumptions, 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, 2011, we estimated that a gradual (often referred to as “ramped”) 200 basis-point increase in the general level of interest rates will decrease on our net interest income by 0.5%, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.9%. As of September 30, 2010, our model predicted that a 200 basis point gradual increase in general interest rates would increase net interest income by 1.0%, while a 200 basis point decrease would decrease net interest income by 1.9%.
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 estimated variance in EVPE as a percentage of assets as of September 30, 2011, was -1.37% with a rate shock of up 200 basis points, and -0.33% with a rate shock of down 200 basis points. At September 30, 2010, the variances were -0.85% assuming an up 200 basis points rate shock and -0.88% assuming a down 200 basis points rate shock.
LIQUIDITY MANAGEMENT AND CAPITAL RATIOS
At September 30, 2011, 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, 2011, liquid assets (cash and due from banks, interest bearing deposits at other banks, and unencumbered investment securities available for sale) were approximately $70.8 million, which represents 20.5% of total assets and 24.0% 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 $86.2 million (subject to available qualified collateral) with current borrowings of $7.5 million outstanding at September 30, 2011. In addition, during 2009, the Bank established a credit facility (with an approximate borrowing capacity based on pledged collateral as of September 30, 2011 of $10.2 million) with the Federal Reserve Bank of New York for direct discount window borrowings. In addition, the Bank has, as of September 30, 2011, $25.1 million (market value) in unencumbered securities and an additional borrowing capacity of $18.5 million through correspondent banks. At September 30, 2011 outstanding commitments for the Bank to extend credit were $90.2 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 $40.2 million at September 30, 2011 from $39.4 million at year-end 2010. Activity in stockholders’ equity consisted of an increase in retained earnings of $1.016 million which represents net income of $1.991 million earned during the first nine months of 2011 offset by cash dividend payments of $975 thousand. During the first nine months of 2011, common stock decreased by $512 thousand due to common stock repurchases of $754 thousand, partially offset by the exercise of previously issued stock options of $210 thousand and $32 thousand in stock based compensation. Accumulated comprehensive income increased by $273 thousand resulting from a net change in unrealized gain on securities available for sale.
- 26 -
At September 30, 2011 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at September 30, 2011 and 2010, for the Bank, as well as the minimum regulatory requirements.
| | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum
Regulatory Requirement | | For Classification
as Well Capitalized | |
| |
| |
| |
| |
September 30, 2011 | | Amount | | Ratio | | Amount | | Minimum Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| |
| |
|
The Bank: | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 36,141 | | | 10.51 | % | $ | 13,759 | | | 4.00 | % | $ | 17,199 | | | >5.00 | % |
Tier 1-Risk Based | | | 36,141 | | | 13.59 | | | 10,639 | | | 4.00 | | | 15,959 | | | >6.00 | |
Total Risk-Based | | | 39,108 | | | 14.70 | | | 21,279 | | | 8.00 | | | 26,598 | | | >10.00 | |
| | | | | | | | | | | | | | | | | | | |
September 30, 2010 | | Amount | | Ratio | | Amount | | Minimum Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| |
| |
|
The Bank: | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 33,304 | | | 10.53 | % | $ | 12,651 | | | 4.00 | % | $ | 15,814 | | | >5.00 | % |
Tier 1-Risk Based | | | 33,304 | | | 13.77 | | | 9,674 | | | 4.00 | | | 14,511 | | | >6.00 | |
Total Risk-Based | | | 36,328 | | | 15.02 | | | 19,348 | | | 8.00 | | | 25,185 | | | >10.00 | |
The Company’s tangible common equity ratio was 11.64% as of September 30, 2011 and 12.07% as of September 30, 2010. As the Company has less than $500 million in consolidated assets, it is not subject to regulatory capital requirements at the consolidated holding company level.
ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4 – 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
Item 1.Legal Proceedings
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. In October, 2011 the Board increased this program by another 250,000 shares. The following table shows the Company’s repurchases during the third quarter of 2011: |
| | | | | | | | | | | | | |
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 | | | — | | $ | — | | | — | | | 419,952 | |
August 1 – August 31 | | | 94,130 | | | 8.01 | | | 94,130 | | | 325,822 | |
September 1 – September 30 | | | — | | | — | | | — | | | 325,822 | |
| |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | |
Total | | | 94,130 | | | 8.01 | | | 94,130 | | | 325,822 | |
Item 3.Defaults Upon Senior Securities
Not applicable
Item 4.Reserved
Item 5.Other Information
Not applicable
Item 6.Exhibits
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 |
| |
101 | The following materials from Somerset Hills Bancorp’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
| |
101.INS** | XBRL Instance Document |
| |
101.SCH** | XBRL Taxonomy Extension Schema |
| |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
| |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase |
| |
101.LAB** | XBRL Taxonomy Extension Label Linkbase |
| |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
- 28 -
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 10, 2011 | | | By: /s/ William S. Burns |
| | | |
| | William S. Burns |
| | Executive Vice President and |
| | Chief Financial Officer |
- 29 -
