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 $75,000 and $240,000 for the third quarter and first nine months of 2012, respectively compared with $95,000 and $200,000 for the third quarter and first nine months of 2011, respectively. The loan loss provisions during 2012 and 2011 were largely reflective of growth in the Company’s loan portfolio. The provision for the first nine months of 2012 was also impacted by 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 declined by $154,000 to $580,000 in the third quarter of 2012 from $734,000 in the third quarter of 2011. The decline in non-interest income in the third quarter comparison resulted from a nonrecurring, tax-free mortality gain in 2011 of $267,000 on a bank-owned life insurance policy (the “BOLI gain”) and a $97,000 increase in gains on sales of residential loans at Sullivan Financial Services,
Inc. (“Sullivan”) in 2012 partly offset the decline in third quarter non-interest income. Excluding the BOLI gain, non-interest income increased 24.2% in the third quarter of 2012 from the third quarter of 2011. During the first nine months of 2012, non-interest income amounted to $1.8 million compared with $1.5 million for the first nine months of 2011. As part of its asset liability management strategy, the Bank recognized net securities gains of $161,000 during the second quarter of 2012. Excluding the aforementioned BOLI gain in 2011 and net securities gains year-to-date, non-interest income increased 37.6% in the first nine months of 2012 versus the same period of 2011. This increase in non-interest income was primarily due to increased origination volume and sales of residential loans at Sullivan. 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 $956,000 in the first nine months of 2012 versus $524,000 in the first nine months of 2011.
Non-Interest Expense
Non-interest expenses decreased by $523,000 to $2.2 million in the third quarter of 2012 from $2.7 million in the prior-year third quarter, and by $648,000 to $6.7 million in the first nine months of 2012 from $7.4 million in the first nine months of 2011. Non-interest expense in the third quarter and first nine months of 2011 included a $426,000 nonrecurring loss on the early extinguishment of $3.5 million of Federal Home Loan Bank borrowings. Excluding this item, non-interest expense decreased by $97,000, or 4.2%, in the third quarter of 2012 from $2.3 million in the third quarter of 2011, and by $222,000, or 3.2%, from $7.0 million in the third quarter of 2011. The declines in operating expenses were due primarily to decreases in (i) personnel, resulting principally from lower salary expense associated with a decline in full-time equivalent staff, (ii) occupancy, due largely to lower depreciation costs and (iii) data processing, due to lower fees paid to the bank’s technology service provider. Management continues its expense containment efforts, which have yielded cost savings in many areas of the Company’s operations.
Income Taxes
The Company recorded income tax provisions of $443,000 and $1.4 million for the third quarter and first nine months of 2012, respectively, versus $197,000 and $759,000 for the third quarter and first nine months of 2011, respectively. The effective tax rates were 35.3% for both the third quarter and first nine months of 2012, versus 21.1% and 27.6% for the third quarter and first nine months of 2011, respectively. The increase in the effective tax rates for 2012 was due to an increase in revenue from taxable sources.
FINANCIAL CONDITION
September 30, 2012 as Compared to December 31, 2011
At September 30, 2012, total assets were $351.8 million, a decrease of $12.2 million from $364.0 million at year-end 2011. The decrease was primarily due to a $16.4 million decline in investment securities and a $1.6 million decline in cash and cash equivalents, partially offset by a $6.6 million increase in loans receivable. Total deposits as of September 30, 2012 were $301.5 million, representing a $13.2 million decrease from year-end 2011. The decreases in deposit balances as of September 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” above on pages 22 and 23).
The Company’s portfolio of investment securities available for sale decreased, from $43.6 million at year-end 2011 to $29.0 million at September 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 nine months of 2012, $10.7 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 $704,000 in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $175,000 in net amortization expenses during the first nine 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 $58.4 million at September 30, 2012 and $60.0 million at December 31, 2011.
Total loans receivable at September 30, 2012 increased $6.6 million to $239.1 million from $232.5 million at year-end 2011. The changes in and composition of the loan portfolio, by category, as of September 30, 2012 compared to December 31, 2011 are as follows: commercial loans decreased $562,000 to $31.6 million; construction, land and land development loans decreased by $6.2 million to $1.4 million; commercial mortgage loans increased $18.2 million to $131.4 million; consumer loans decreased by $5.7 million to $36.4 million; and residential mortgage loans increased by $745,000 to $38.1 million.
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The following schedule presents the components of loans, net of unearned income, for each period presented:
| | | | | | | | | | | | | |
| | September 30, 2012 | | December 31, 2011 | |
| |
| |
| |
| | Amount | | Percent | | Amount | | Percent | |
| |
| |
| |
| |
| |
| | (Dollars in Thousands) | |
| |
| |
Commercial | | $ | 31,644 | | | 13.2 | % | $ | 32,206 | | | 13.9 | % |
Construction, land and land development | | | 1,354 | | | 0.6 | | | 7,505 | | | 3.2 | |
Commercial mortgage | | | 131,352 | | | 55.0 | | | 113,148 | | | 48.7 | |
Residential mortgage | | | 38,105 | | | 16.0 | | | 37,360 | | | 16.1 | |
Consumer | | | 36,414 | | | 15.2 | | | 42,074 | | | 18.1 | |
| |
|
| |
|
| |
|
| |
|
| |
Gross loans | | | 238,869 | | | 100.0 | % | | 232,293 | | | 100.0 | % |
| | | | | |
| | | | | |
| |
Net deferred costs | | | 229 | | | | | | 192 | | | | |
| |
|
| | | | |
|
| | | | |
Total loans | | | 239,098 | | | | | | 232,485 | | | | |
Less: Allowance for loan losses | | | (3,167 | ) | | | | | (2,982 | ) | | | |
| |
|
| | | | |
|
| | | | |
Net loans | | $ | 235,931 | | | | | $ | 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):
| | | | | | | |
| | September 30, 2012 | | December 31, 2011 | |
| |
| |
| |
| | | | | | | |
Non-accrual loans | | $ | 513 | | $ | 146 | |
OREO | | | — | | | — | |
| |
|
| |
|
| |
Total non-performing assets | | $ | 513 | | $ | 146 | |
| |
|
| |
|
| |
Troubled debt restructured loans | | $ | 341 | | $ | 344 | |
| |
|
| |
|
| |
Loans past due 90 days and still accruing | | $ | 554 | | | — | |
| |
|
| |
|
| |
| | | | | | | |
Non-accrual loans as a percentage of total loans | | | 0.21 | % | | 0.06 | % |
Non-performing assets as a percentage of total assets | | | 0.15 | | | 0.04 | |
Allowance for loan losses as a percentage of non-performing loans | | | 617 | | | 2,042 | |
Allowance for loan losses as a percentage of total loans | | | 1.33 | | | 1.28 | |
At September 30, 2012, the Company had two loans to one borrower with a balance of $554,000, delinquent more than 90 days and still accruing interest. Loans delinquent 30-89 days were $2.2 million at September 30, 2012, and $875,000 at December 31, 2011.
As of September 30, 2012 and December 31, 2011, impaired loans were $2.9 million and $1.3 million, respectively. The amount of the allowance for loan losses allocated for impaired loans as of September 30, 2012 and December 31, 2011 was $232,000 and $11,000, 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. For example, the Company’s central and northern New Jersey trade area was substantially impacted by Hurricane Sandy. The Hurricane, which resulted in property damage and business closures, could
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result in economic difficulties for certain of our borrowers, leading to a higher level of classified or non-performing assets and additions to the allowance.
At September 30, 2012, the allowance for loan losses was $3.2 million, an increase of $185,000 from year-end 2011. Net recoveries totaled $3,000 during the third quarter of 2012 and net charge-offs amounted to $55,000 during the first nine months of 2012. Net charge-offs totaled $114,000 during the third quarter of 2011 and $108,000 during the first nine months of 2011. The allowance for loan losses as a percentage of loans receivable was 1.33% at September 30, 2012 and 1.28% at December 31, 2011.
The following table describes the activity in the allowance for loan losses account (in thousands):
| | | | | | | |
| | For the Nine Months Ended
September 30, 2012 | | For the Nine Months Ended
September 30, 2011 | |
| |
| |
| |
| | | | | | | |
Allowance for loan losses at beginning of period | | $ | 2,982 | | | 2,875 | |
Charge-offs | | | (72 | ) | | (119 | ) |
Recoveries | | | 17 | | | 11 | |
| |
|
| |
|
| |
Net charge-offs | | | (55 | ) | | (108 | ) |
Provision for loan losses | | | 240 | | | 200 | |
| |
|
| |
|
| |
Allowance for loan losses at end of period | | $ | 3,167 | | | 2,967 | |
| |
|
| |
|
| |
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, 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 September 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 6.8%, 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 3.0%. As of September 30, 2011, our model predicted that a 200 basis-point gradual increase in general interest rates will decrease our net interest income by 0.5% and a 200 basis-point gradual 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, 2012, was -0.70% with a rate shock of up 200 basis points, and -1.14% with a rate shock of down 200 basis points. At September 30, 2011, the variances were -1.37% assuming an up 200 basis points rate shock and -0.33% 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 September 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 September 30, 2012, liquid assets (cash and due from banks, interest bearing deposits at other banks and unencumbered available-for-sale investment securities) were $81.7 million, which represented 23.2% of total assets and 26.4% 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 September 30, 2012, had the ability to borrow $84.0 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 September 30, 2012, an approximate borrowing capacity based on pledged collateral of $9.1 million. In
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addition, the Bank has in place additional borrowing capacity of $18.5 million through correspondent banks. At September 30, 2012, the Bank had aggregate available and unused credit of $104.1 million, which represents the aforementioned facilities totaling $111.6 million net of $7.5 million in outstanding borrowings. At September 30, 2012, outstanding commitments for the Bank to extend credit were $79.4 million.
Total stockholders’ equity increased to $41.5 million at September 30, 2012 from $40.4 million at year-end 2011. Activity in stockholders’ equity consisted of an increase in retained earnings of $1.3 million, which represents net income of $2.5 million earned during the first nine months of 2012 offset by cash dividend payments of $1.2 million. During the first nine months of 2012, common stock decreased by $110,000 due to common stock repurchases of $192,000, partially offset by the exercise of previously issued stock options of $47,000 and $35,000 in stock-based compensation. Accumulated comprehensive income decreased by $85,000 resulting from a net change in unrealized gain on securities available for sale.
At September 30, 2012, the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at September 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 | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
September 30, 2012 | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 39,577 | | | 11.22 | % | $ | 14,112 | | | 4.00 | % | $ | 17,639 | | | ³5.00 | % |
Tier 1-Risk Based | | | 39,577 | | | 15.02 | | | 10,539 | | | 4.00 | | | 15,808 | | | ³6.00 | |
Total Risk-Based | | | 42,744 | | | 16.22 | | | 21,078 | | | 8.00 | | | 26,347 | | | ³10.00 | |
| | | | | | | | | | | | | | | | | | | |
| | Amount | | Ratio | | Amount | | Minimum Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
September 30, 2011 | | | | | | | | | | | | | | | | | | | |
Leverage Capital | | $ | 36,141 | | | 10.51 | % | $ | 13,759 | | | 4.00 | % | $ | 17,199 | | | ³5.00 | % |
Tier 1-Risk Based | | | 36,141 | | | 13.59 | | | 10,639 | | | 4.00 | | | 15,959 | | | ³6.00 | |
Total Risk-Based | | | 36,328 | | | 14.70 | | | 21,278 | | | 8.00 | | | 26,598 | | | ³10.00 | |
The Company’s ratio of tangible equity capital to total assets was 11.79% and 11.64% as of September 30, 2012 and 2011, respectively. Since 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, 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 third 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 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
July 1 – July 30 | | | — | | $ | — | | | — | | | 286,527 | |
August 1 – August 29 | | | 450 | | | 8.70 | | | 450 | | | 286,077 | |
September 1 – September 30 | | | — | | | — | | | — | | | 286,077 | |
| |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | |
Total | | | 450 | | | 8.70 | | | 450 | | | 286,077 | |
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 10.1 – Change in Control Agreement with Alfred J. Soles dated October 1, 2012
| |
| Exhibit 31.1 – Certification of Stewart E. McClure, Jr. pursuant to SEC Rule 13a-14(a) |
| Exhibit 31.2 – Certification of Alfred J. Soles 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, 2012, 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 (vi) 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 |
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
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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 14, 2012 | | | By: /s/ Alfred J. Soles |
| | | |
| | Alfred J. Soles |
| | Executive Vice President and |
| | Chief Financial Officer |
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