The data contained in the above tables have 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 $90,000 and $165,000 for the second quarter and first half of 2012, respectively compared with $30,000 and $105,000 for the second quarter and first half of 2011, respectively. The loan loss provisioning during 2012 and 2011 was largely due to loan portfolio growth. The provision for the first half of 2012 was also due to the charge-off of one specific credit in the first quarter of 2012. The Company’s asset quality metrics, such as nonaccrual loan, charge-off, and delinquency ratios remain sound relative to its competitive peer groups, and the relatively low level of loan loss provisioning during both 2012 and 2011 reflects very few new problem credits. Nevertheless, management continues to believe that there remains a heightened risk 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
Non-interest income increased to $712,000 and $1.3 million in the second quarter and first half of 2012, respectively, from $368,000 and $765,000 in the second quarter and first half of 2011, respectively. During the second quarter of 2012, the Bank sold $5.5 million of available-for-sale investment securities as part of its asset liability management strategy to maintain asset durations in light of loan portfolio growth. The sales resulted in net securities gains of $161,000. During the first quarter of 2011 the Bank realized $9,000 in net securities gains. The increases in non-interest income were also due to increased origination volume and sales of residential loans at Sullivan Financial Services, Inc., a wholly-owned mortgage banking subsidiary of the Bank. Mortgage originations increased due to higher residential mortgage refinancing activity, which is typically elevated during periods of low interest rates. Gains on the sale of loans totaled $314,000 and $621,000 in the second quarter and first half of 2012, respectively, versus $139,000 and $286,000 in the comparable 2011 periods. The increases in non-interest income in 2012 versus 2011 also reflect modest growth in service fees on deposit accounts and debit card income.
Non-Interest Expense
Non-interest expenses decreased by $88,000, or 3.9%, to $2.2 million in the second quarter of 2012 from $2.3 million in the prior year second quarter, and by $125,000, or 2.7%, to $4.5 million in the first half of 2012 from $4.6 million in the prior year first half. The declines in operating expenses were due primarily to decreases in (i) occupancy, due largely to lower depreciation costs, (ii) data processing, due to lower fees paid to the bank’s technology service providers and (iii) FDIC assessment costs, due to changes in the method of calculating premiums which generally benefitted community banks. Management continues its expense containment efforts which have yielded cost savings in many areas of the Company’s operations.
Income Taxes
The Company recorded provisions for income taxes of $500,000 and $938,000 for the second quarter and first half of 2012, respectively, versus $322,000 and $562,000 for the second quarter and first half of 2011, respectively. The effective tax rates were 35.7% and 35.3% for the second quarter and first half of 2012, respectively, versus 33.1% and 30.9% for the second quarter and first half of 2011, respectively. The increase in the effective tax rates for 2012 was due to an increase in revenue from taxable sources.
FINANCIAL CONDITION
June 30, 2012 as compared to December 31, 2011
At June 30, 2012, total assets were $353.5 million, a decrease of $10.5 million from $364.0 million at year-end 2011. The decrease was primarily due to a $12.8 million decline in investment securities and a $3.5 million decline in cash and cash equivalents, partially offset by a $6.3 million increase in loans receivable. Total deposits as of June 30, 2012 totaled $303.5 million, representing an $11.2 million decrease from year-end 2011. The decreases in deposit balances as of June 30, 2012 from year-end 2011 largely represent seasonal variances and do not reflect the Bank’s recent trends of growth in loans, securities and deposits (see “Comparative Average Balance Sheets” below).
Our portfolio of investment securities available for sale decreased, from $43.6 million at year-end 2011 to $32.0 million at June 30, 2012, due in part to the sale of $5.5 million in securities in conjunction with the Bank’s asset/liability management strategies. In addition, during the first six months of 2012, $7.7 million in securities matured, were called or prepaid, as the prolonged period of lower interest rates has resulted in increased amortization of mortgage-related securities and calls of certain agency obligations. There were $659 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $138 thousand in net amortization expenses during the first six months of 2012.
Since 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, 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 $56.5 million at June 30, 2012 and $60.0 million at December 31, 2011.
Total loans receivable at June 30, 2012 increased $6.3 million to $238.8 million from $232.5 million at year-end 2011. The changes in and composition of the loan portfolio, by category, as of June 30, 2012 compared to December 31, 2011 are as follows: Commercial loans decreased $2.2 million to $30.0 million, construction, land and land development loans decreased by $1.6 million to $5.9 million, commercial mortgage loans increased $12.0 million to $125.1 million; consumer loans decreased by $2.5 million to $39.6 million; and residential mortgage loans increased by $0.5 million to $37.9 million. At the end of the second quarter of 2012, the Bank’s commercial loan pipeline of approved loans approximated $10.3 million.
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The following schedule presents the components of loans, net of unearned income, for each period presented:
| | | | | | | | | | | | | |
| | June 30, 2012 | | December 31, 2011 | |
| |
| |
| |
| | Amount | | Percent | | Amount | | Percent | |
| |
| |
| |
| |
| |
| | (Dollars In Thousands) | |
| |
| |
Commercial | | $ | 30,015 | | | 11.8 | % | $ | 32,206 | | | 13.9 | % |
Construction, land and land development | | | 5,868 | | | 2.8 | | | 7,505 | | | 3.2 | |
Commercial mortgages | | | 125,137 | | | 51.9 | | | 113,148 | | | 48.7 | |
Residential mortgages | | | 37,906 | | | 16.5 | | | 37,360 | | | 16.1 | |
Consumer | | | 39,618 | | | 17.0 | | | 42,074 | | | 18.1 | |
| |
|
| |
|
| |
|
| |
|
| |
Gross loans | | | 238,544 | | | 100.0 | % | | 232,293 | | | 100.0 | % |
| | | | |
|
| | | | |
|
| |
Net deferred costs | | | 227 | | | | | | 192 | | | | |
| |
|
| | | | |
|
| | | | |
Total loans | | | 238,771 | | | | | | 232,485 | | | | |
Less: Allowance for loan losses | | | 3,089 | | | | | | 2,982 | | | | |
| |
|
| | | | |
|
| | | | |
Net loans | | $ | 235,682 | | | | | $ | 229,503 | | | | |
| |
|
| | | | |
|
| | | | |
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):
| | | | | | | |
| | June 30, 2012 | | December 31, 2011 | |
| |
| |
| |
| | | | | | | |
Non-accrual loans | | $ | 141 | | $ | 146 | |
Loans past due 90 days and still accruing | | | — | | | — | |
| |
|
| |
|
| |
Total non-performing loans | | $ | 141 | | $ | 146 | |
OREO | | | — | | | — | |
| |
|
| |
|
| |
Total non-performing assets | | $ | 141 | | $ | 146 | |
| |
|
| |
|
| |
Troubled debt restructured loans | | $ | 342 | | $ | 344 | |
| |
|
| |
|
| |
| | | | | | | |
Non-accrual loans as a percentage of total loans | | | 0.06 | % | | 0.06 | % |
Non-performing assets as a percentage of total assets | | | 0.04 | | | 0.04 | |
Allowance for loan losses as a percentage of non-performing loans | | | 2,191 | | | 2,042 | |
Allowance for loan losses as a percentage of total loans | | | 1.30 | | | 1.28 | |
Loans delinquent 30-89 days were $1.2 million at June 30, 2012, and $875 thousand at December 31, 2011.
As of June 30, 2012 and December 31, 2011, there were $483 thousand in impaired loans. The amount of the allowance for loan losses allocated for impaired loans as of June 30, 2012 and December 31, 2011 was $9 thousand and $11 thousand, respectively.
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 June 30, 2012, the allowance for loan losses was $3.1 million, an increase of $107,000 from year-end 2011. Net charge-offs totaled $2,000 during the second quarter of 2012 and $58,000 during the first half of 2012. Net recoveries totaled $3,000 during the first quarter of 2011 and $6,000 during the first half of 2011. The allowance for loan losses as a percentage of loans receivable was 1.30% at June 30, 2012 and 1.28% at December 31, 2011.
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The following table describes the activity in the allowance for loan losses account (in thousands):
| | | | | | | |
| | For the six months ended
June 30, 2012 | | For the six months ended
June 30, 2011 | |
| |
| |
| |
|
Allowance for loan losses at beginning of period | | $ | 2,982 | | $ | 2,875 | |
Charge-offs | | | (72 | ) | | (2 | ) |
Recoveries | | | 14 | | | 8 | |
| |
|
| |
|
| |
Net charge-offs | | | (58 | ) | | 6 | |
Provision for loan losses | | | 165 | | | 105 | |
| |
|
| |
|
| |
Allowance for loan losses at end of period | | $ | 3,089 | | $ | 2,986 | |
| |
|
| |
|
| |
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 June 30, 2012 and 2011, 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 June 30, 2012, 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 2.7%, while a ramped 200 basis-point decrease in interest rates (which, due to the current interest rate environment results in a flattening of the yield curve) will decrease net interest income by 3.3%. As of June 30, 2011, our model predicted that a 200 basis point gradual increase in general interest rates will have no effect on our net interest income, while a 200 basis point decrease would decrease net interest income by 1.8%.
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 estimated variance in EVPE as a percentage of assets as of June 30, 2012, was -1.35% with a rate shock of up 200 basis points, and -0.21% with a rate shock of down 200 basis points. At June 30, 2011, the variances were -1.55% assuming an up 200 basis points rate shock and -0.02% assuming a down 200 basis points rate shock.
LIQUIDITY MANAGEMENT AND CAPITAL RATIOS
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 June 30, 2012, 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 June 30, 2012, liquid assets (cash and due from banks, interest bearing deposits at other banks and unencumbered available-for-sale investment securities) were $83.2 million, which represented 23.5% of total assets and 26.8% of total deposits and borrowings.
The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of June 30, 2012, had the ability to borrow $76.2 million. The Bank also has a credit facility with the Federal Reserve Bank of New York for direct discount window borrowings that had, as of June 30, 2012, an approximate borrowing capacity based on pledged collateral of $9.1 million. In addition, the Bank has in place additional borrowing capacity of $18.5 million through correspondent banks. At June 30, 2012, the Bank had aggregate available and unused credit of $96.3 million, which represents the aforementioned facilities totaling $103.8 million net of $7.5 million in outstanding borrowings. At June 30, 2012 outstanding commitments for the Bank to extend credit were $95.6 million.
Total stockholders’ equity increased to $41.0 million at June 30, 2012 from $40.4 million at year-end 2011. Activity in stockholders’ equity consisted of an increase in retained earnings of $921 thousand, which represents net income of $1.7 million earned during the first six months of 2012 offset by cash dividend payments of $800 thousand. During the first six months of 2012, common stock decreased by $146 thousand due to common stock repurchases of $188 thousand, partially offset by the exercise of previously issued stock options of $17 thousand and $25 thousand in stock based compensation. Accumulated comprehensive income decreased by $130 thousand resulting from a net change in unrealized gain on securities available for sale.
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At June 30, 2012 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at June 30, 2012 and 2011, for the Bank, as well as the minimum regulatory requirements.
| | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum
Regulatory Requirement | | For Classification
as Well Capitalized | |
| |
| |
| |
| |
| | Amount | | Ratio | | Amount | | Minimum Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
June 30, 2012: | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 38,745 | | | 11.17 | % | $ | 13,871 | | | 4.00 | % | $ | 17,339 | | | ³5.00 | % |
Tier 1-Risk Based | | | 38,745 | | | 14.52 | | | 10,675 | | | 4.00 | | | 16,013 | | | ³6.00 | |
Total Risk-Based | | | 41,834 | | | 15.67 | | | 21,350 | | | 8.00 | | | 26,689 | | | ³10.00 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
June 30, 2011: | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 35,390 | | | 10.67 | % | $ | 13,265 | | | 4.00 | % | $ | 16,581 | | | ³5.00 | % |
Tier 1-Risk Based | | | 35,390 | | | 13.83 | | | 10,236 | | | 4.00 | | | 15,354 | | | ³6.00 | |
Total Risk-Based | | | 38,376 | | | 15.00 | | | 20,472 | | | 8.00 | | | 25,590 | | | ³10.00 | |
The Company’s ratio of equity capital to total assets was 11.60% at June 30, 2012 and 11.92% at June 30, 2011. As the Company has less than $500 million in consolidated assets, it is not subject to regulatory capital requirements on a consolidated basis.
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, 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 250,000 shares and in October, 2011 the Board increased this program by another 250,000 shares. The following table shows the Company’s repurchases during the second quarter of 2012: |
| | | | | | | | | | | | | |
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 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
April 1 – April 30 | | | — | | $ | — | | | — | | | 293,607 | |
May 1 – May 29 | | | 5,600 | | | 8.49 | | | 5,600 | | | 288,007 | |
June 1 – June 30 | | | 1,480 | | | 8.89 | | | 1,480 | | | 286,527 | |
| | |
| | | | |
|
| | | | |
| | | | | | | | | | | | | |
Total | | | 7,080 | | | 8.57 | | | 7,080 | | | 286,527 | |
Item 3.Defaults Upon Senior Securities
Not applicable
Item 4.Mine Safety Disclosures
Not applicable
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 |
- 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: August 13, 2012 | | | By: /s/ William S. Burns |
| | | |
| | William S. Burns |
| | Executive Vice President and |
| | Chief Financial Officer |
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