Federal Deposit Insurance Corporation Washington, D.C

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1 Federal Deposit Insurance Corporation Washington, D.C FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to. Commission File Number: FDIC Certificate Number Harvest Community Bank. (Exact name of registrant as specified in its charter) New Jersey (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 285 N. Broadway, Pennsville, NJ (Address of principal executive offices) (Zip Code) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, par value $5.00 per share Name of each exchange on which registered Over-the-Counter exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [ X] No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [ ] No 1

2 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] On June 30, 2012, the aggregate market value of the Bank s voting stock held by non-affiliates of the Bank was $3,864,071.Shares of common stock held by each executive officer and director of the Bank, and by each person who may be deemed to be an affiliate of the Bank, have been excluded from this computation. This determination of affiliate status is not necessarily conclusive for other purposes. APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS On March 28, 2013, there were 1,147,733 outstanding shares of the issuer s common stock, par value $5.00 per share. Portions of the registrant s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. 2

3 Part 1 Financial Information Item 1 Business 4-15 Item 2 Properties 15 Item 3 Legal Proceedings 15 Item 4 Mine Safety Disclosures 16 Part II Other Information Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6 Selected Financial Data 17 Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk 30 Item 8 Financial Statements and Supplementary Data 30 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 30 Disclosures Item 9A Controls and Procedures Item 9B Other Information 31 Part III Item 10 Directors, Executive Officers and Corporate Governance 31 Item 11 Executive Compensation 31 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31 Item 13 Certain Relationships and Related Transactions and Director Independence 31 Item 14 Principal Accountant Fees and Services 32 Part IV Item 15 Exhibits and Financial Statement Schedules

4 Item 1 Business Part I Harvest Community Bank (the Bank ) is a New Jersey state chartered commercial bank headquartered in Pennsville, New Jersey. The Bank commenced operations on January 18, We provide a broad range of lending, deposit and financial products. Our lending activities focus principally upon commercial real estate and other commercial lending to small businesses and professionals. We conduct business from our main office in Pennsville, as well as additional full service branches located in Woodstown, Elmer and Salem, New Jersey. At December 31, 2012, Harvest Community Bank had total assets of $187,706,001 total deposits of $171,426,528 and stockholders equity of $15,700,931. The Bank is a community-oriented financial services provider whose business primarily consists of attracting retail deposits from the general public and small to medium-sized businesses, and originating commercial and consumer loans within our market area. The Bank s investment policy also permits it to invest in securities such as obligations of U.S. government agencies and government sponsored entities, mortgage backed securities, state and municipal obligations, bankers acceptances and certificates of deposit. As a full-service commercial bank, we emphasize personal attention and service to our customers. The Bank s deposit offerings include checking, savings and money market accounts, as well as time deposits. The Bank's credit products include loans secured by real estate and other assets, working capital lines, and other commercial loans, and consumer loans such as home equity lines of credit, fixed rate home equity loans, auto loans and personal loans. Other services we provide include those that are customary for most community banks such as ATM's at all branch locations, bank by phone, internet banking and safe deposit boxes. The Federal Deposit Insurance Corporation ( FDIC ) insures the Bank s deposits to the fullest extent provided by law. The Bank is not a member of the Federal Reserve System. At December 31, 2012, the Bank had 33 full-time employees and 7 part-time employees. The employees are not represented by a union or any collective bargaining agreement. The Bank believes its relationship with its employees to be satisfactory. Market Area The Bank currently has four branch offices located in Salem County, New Jersey, from which we originate deposit and lending relationships. Our banking activities extend beyond Salem County into other contiguous counties in Southern New Jersey, including Cumberland and Gloucester counties. Our market area has a rich agricultural foundation that, in recent years, has had an increasing level of residential development and business investment as a result of its proximity to major metropolitan centers. Our proximity to the growing peripheral communities within these metropolitan markets provides the Bank with corresponding increases in business opportunities. In the future, if economic conditions become favorable for expansion, we intend to evaluate opportunities to expand our physical presence in surrounding counties of southern New Jersey, southeastern Pennsylvania, northern Delaware, and northeastern Maryland. Competition The Bank faces substantial competition both in attracting deposits and in originating loans. The Bank competes primarily with existing New Jersey and out-of-state banking and thrift institutions, many of which have been in business for longer than we have and have established customer bases. Competition also comes from other businesses which provide financial services, including consumer loan companies, credit unions, mortgage brokers, insurance companies, securities brokerage firms, money market mutual funds and private lenders. Most of these competitors have facilities and financial, managerial and product resources that are substantially greater than our resources. They also have the advantages of established market presence and customer base, name recognition and greater capital base. 4

5 The Bank attempts to compete with these other institutions through a combination of competitive pricing, convenience and superior service. The Bank also strives to staff its facilities with local personnel familiar with our customers and their financial needs and makes use of the personal ties of the Bank s Board of Directors and management to generate business opportunities. While our strategy is to continue attracting customers by providing personalized, timely services and making use of the business and personal ties of our Board of Directors and management, there can be no assurance that we will continue to gain market acceptance and continue to operate profitably by following such strategy. Lending Activities The Bank offers business and personal loans generally on a secured basis, including commercial loans (term and time); commercial lines of credit; mortgage loans (conventional 30 year, commercial and jumbo real estate); commercial and residential construction loans; letters of credit; and consumer loans (home equity and installment). The Bank makes commercial loans to small businesses primarily in our market area for purposes of providing working capital, supporting accounts receivable, purchasing inventory and acquiring fixed assets. The Bank has to a limited degree participated in loans with other financial institutions. The majority of the Bank s commercial loan portfolio is collateralized by real estate, business assets such as inventory, equipment and accounts receivable and/or personal guarantees. The lending function entails the evaluation and the acceptance of credit and interest rate risk. The Bank manages credit risk through underwriting policies and procedures, loan monitoring practices, and portfolio diversification. Loans above predetermined thresholds are reviewed and approved by the Bank s Loan Committee of the Board of Directors. The Bank also retains an independent firm to semi-annually review management s adherence to underwriting policies and procedures and performs a stress analysis of the sampled portfolio. Interest rate risk is managed within the Bank s asset-liability management process using various modeling techniques. To help manage interest rate risk, the majority of the Bank s loans are either fixed rate for a period of five years or less or variable rate. The Bank s gross loans totaled $132,504,535 as of December 31, 2012, and $137,510,260 as of December 31, Gross loan balances represented 70.6% of the Bank s total assets on December 31, 2012 and 71.8% as of December 31, The following is a breakdown by general category, of the loan portfolio as of December 31 for the last five years: Loan Category 2012 Percent 2011 Percent 2010 Percent 2009 Percent 2008 Percent Commercial $ 112,124, % $ 108,784, % $ 112,514,893 $ 80.60% $ 111,556, % $ 114,115, % Commercial construction 4,089, % 11,247, % 10,249, % 8,946, % 10,785, % Residential real estate 2,684, % 3,320, % 2,480, % 2,822, % 2,490, % Residential construction 1,200, % 1,156, % 849, % 800, % 229, % Consumer 12,288, % 12,874, % 13,363, % 14,542, % 14,561, % Deferred loan origination (fees) costs 116, % 126, % 135, % 34, % (28,631) -0.02% Total Loans 132,504, % 137,510, % 139,592, % 138,702, % 142,154, % Less Allowance for loan Losses (2,827,985) (3,009,964) (2,025,853) (2,291,366) (1,421,578) Loans Receivable, net $ 129,676,550 $ 134,500,296 $ 137,566,997 $ $ 136,410,870 $ 140,732,514 5

6 The following table represents the contractual maturity breakdown by loan category of the Bank s loan portfolio as of December 31, 2012, inclusive of deferred costs/ (fees). Loan Category Commercial Residential Residential Maturities Commercial Construction Real Estate Construction Consumer Total Due through 1 year $ 25,443,128 $ 2,560,562 $ 125,462 $ 1,200,000 $ 5,917,400 $ 35,246,552 Greater than one year through 5 years 22,042, , ,984-1,135,439 23,878,261 Greater than 5 years 64,717,249 1,271,397 2,117,645-5,273,431 73,379,722 Total $ 112,203,215 $ 4,089,959 $ 2,685,091 $ 1,200,000 $ 12,326,270 $ 132,504,535 The following is a breakdown of the loan portfolio as of December 31, 2012 by general category and type of interest rate: Floating or 2012 Fixed Rates Adjustable Rates Total Loan category Commercial $ 101,156,598 $ 10,967,991 $ 112,124,589 Commercial construction 930,052 3,159,907 4,089,959 Residential real estate 2,684,442-2,684,442 Residential construction - 1,200,000 1,200,000 Consumer 6,476,363 5,812,627 12,288,990 Deferred loan origination (fees) costs 116, ,555 Total loans $ 111,364,010 $ 21,140,525 $ 132,504,535 Of the $21,140,525 of floating or adjustable rates loans in the above table, $2,782,800 contractually mature after one year. The following schedule sets forth the allocation of the allowance for loan losses among various loan categories for the last five years ended December 31. The entire allowance for loan losses is available to absorb loan losses in any loan category. At December 31, % of Loans in % of Loans in % of Loans in % of Loans in % of Loans in Each Category to Each Category to Each Category to Each Category to Each Category to Amount of Total Loans Amount of Total Loans Amount of Total Loans Amount of Total Loans Amount of Total Loans Allocation of allowance for loan losses: Commercial $ 2,335, % $ 2,529, % $ 1,706, % $ 1,976, % $ 1,121, % Commercial construction 388, % 363, % 242, % 147, % 158, % Residential real estate 1, % 8, % 8, % 46, % 4, % Residential construction 3, % 3, % 3, % 13, % 7, % Consumer 99, % 104, % 64, % 107, % 130, % Total $ 2,827, % $ 3,009, % $ 2,025, % $ 2,291, % $ 1,421, % 6

7 Summary of Charge-Off Experience The following table summarizes the activity in the allowance for loan losses and the charge-off experience for the past five years. For the year ended December 31, Balance at beginning of the year $ 3,009,964 $ 2,025,853 $ 2,291,366 $ 1,421,578 $ 1,024,571 Charge-offs: Commercial real estate 566,914 2,251,873 1,300, ,246 Commercial and industrial 350, , , Commercial construction 0 402,872 31,255 49,621 0 Residential real estate 1, , Residential construction Consumer 10, ,076 33, ,498 5, ,939 3,265,659 1,714, , ,483 Recoveries: Commercial real estate 183,682 11,500-20,162 1,636 Commercial and industrial Commercial construction 21,127 3,610 10, Residential real estate Residential construction Consumer 2,151 5,660 7,554 5,745 48, ,960 20,770 17,558 25,907 50,286 Net charge-offs 721,979 3,244,889 1,696, , ,197 Provision for loan loss 540,000 4,229,000 1,431,000 1,020, ,204 Balance at end of the year $ 2,827,985 $ 3,009,964 $ 2,025,853 $ 2,291,366 $ 1,421,578 Average loans outstanding (1) $ 133,670,534 $ 137,164,988 $ 141,086,343 $ 141,080,072 $ 138,202,698 Net charge-offs as a percentage of average loans 0.54% 2.37% 1.20% 0.11% 0.10% (1) Includes non-accruing loans 7

8 The following table sets forth information concerning nonperforming loans and nonperforming assets at December 31 for the last five years: Nonperforming assets Nonaccrual loans $ 12,149,989 $ 11,142,540 $ 9,571,954 $ 5,603,231 $ 2,910,855 Other real estate owned 143,981 79, , , ,533 Total nonperforming assets $ 12,293,970 $ 11,222,151 $ 9,750,910 $ 5,782,187 $ 3,193,388 Loans past due 90 days and still accruing interest $ - $ - $ - $ 11,431 $ - Performing troubled debt restructurings (1) $ 187,375 $ 1,616,783 $ 1,383,980 $ - $ - Asset Quality Ratios Allowance for loan losses to nonperforming loans 0.23% 0.27% 0.21% 0.40% 0.45% Allowance for loan losses to period end loans 2.13% 2.19% 1.45% 1.65% 1.00% Nonperforming loans to period end loans 9.17% 8.10% 6.86% 4.04% 2.05% Nonperforming assets to period end assets 6.55% 5.87% 4.87% 3.01% 1.72% (1) Performing troubled debt restructurings do not include troubled debt restructurings that remain on non accrual status and are included in non accrual loans above. The Bank also monitors potential problem loans. Potential problem loans are those where information about possible credit problems of borrowers causes management to have doubts as to the ability to comply with loan repayment terms. These loans are not included in nonperforming loans as they continue to perform. Potential problem loans totaled $21,075 as of December 31, 2012 and $544,470 as of December 31, Investment Activities The Bank s investment policies include strict standards on permissible investment categories, credit quality, maturity intervals and investment concentrations. Management formulates investment strategies and specific programs in conjunction with the Asset-Liability Committee of the Board of Directors. Management of the Bank is responsible for making specific investment purchases on behalf of the Bank within such standards. As of December 31, 2012, the Bank s investment portfolio was primarily comprised of U.S. government agency debt securities, mortgage-backed securities, collateralized mortgage obligations and municipal securities. Securities available for sale, detailed below, are stated at fair value on the balance sheet with an adjustment to equity for unrealized gains and losses. Investment Securities Available for Sale December 31, 2012 December 31, 2011 December 31, 2010 Amortized Estimated Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Cost Fair Value U.S. government sponsored entities and agencies $ 15,031,532 $ 15,693,488 $ 10,833,231 $ 11,150,196 $ 5,815,738 $ 5,767,404 U.S. government sponsored entities and agency residential mortgage-backed securities 10,427,760 10,629,164 10,422,348 10,881,146 12,620,121 13,016,081 U.S. government sponsored entities and agency collateralized mortgage obligations 6,619,256 6,686,253 4,932,048 5,050,301 6,381,716 6,487,564 Private label collateralized mortgage obligations 437, , , , , ,959 Municipal securities 9,488,245 10,062,968 12,120,903 12,955,458 12,419,797 12,515,262 Total $ 42,004,295 $ 43,506,655 $ 38,844,277 $ 40,546,619 $ 37,942,796 $ 38,500,270 8

9 The estimated fair value of the Bank s investment securities available for sale at December 31, 2012 was $43,506,655, including a pretax net unrealized gain of $1,502,360. The estimated fair value of the Bank s investment securities available for sale at December 31, 2011 was $40,546,619, including a pretax net unrealized gain of $1,702,342. The Bank s investment strategies are aimed at maximizing income, managing interest rate risk and avoiding credit risk. The Bank monitors market conditions closely, and adjusts its portfolio as necessary to meet liquidity, income and interest rate risk requirements. Although the Bank has no immediate plans to sell any securities, it has classified all investments as available for sale allowing management the flexibility to sell the securities and adjust its portfolio as future conditions change. The following table sets forth information regarding the scheduled maturities and weighted average yields for the Bank s investment securities portfolio as of December 31, 2012, by contractual maturity. The maturities of the mortgage-backed securities are the stated maturity date of each security. The table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments. 9

10 December 31, 2012 U.S. government sponsored entities and agencies Estimated Average Fair Value Yield 0-1 year $ years 218, % 5-10 years 1,254, % More than 10 years 14,220, % Total $ 15,693, % U.S. government sponsored entities and agency residential mortgage-backed securities Estimated Average Fair Value Yield 0-1 year $ years years - - More than 10 years 10,629, % Total $ 10,629, % U.S. government sponsored entities and agency collateralized residential mortgage obligations Estimated Average Fair Value Yield 0-1 year $ years 44, % 5-10 years 682, % More than 10 years 5,959, % Total $ 6,686, % Private label collateralized residential mortgage obligations Estimated Average Fair Value Yield 0-1 year $ years years 18, % More than 10 years 416, % Total $ 434, % Municipal securities Estimated Average Fair Value Yield 0-1 year $ years years 6,524, % More than 10 years 3,538, % Total $ 10,062, % Total Investment Portfolio Estimated Average Fair Value Yield 0-1 year $ years 262, % 5-10 years 8,479, % More than 10 years 34,764, % Total $ 43,506, % 10

11 Sources of Funds The Bank presently uses deposits as the major external source of the Bank s funding to finance lending and investment activities. In addition to deposits, the Bank derives funds from the amortization, prepayment or sale of loans, maturities of investment securities and cash flow from operations. Scheduled loan principal repayments and maturities of investment securities are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by market interest rates, economic conditions and competition. The Bank does not obtain funds through brokers. The Bank has available a $5,000,000 federal funds line of credit from its correspondent bank, Atlantic Central Bankers Bank, to supplement its liquidity needs. This line is available on an unsecured basis for up to $2,000,000. The remaining $3,000,000, if drawn, will be secured by investment securities. As of December 31, 2012 and 2011, the Bank had no borrowings outstanding under the line. The Bank is a member of the Federal Home Loan Bank of New York. This membership has provided the Bank with additional liquidity in the form of an overnight line of credit and a one-month overnight repricing line of credit which aggregates $17,750,000. This line of credit, when drawn, is secured by eligible mortgage related investment securities. The Bank had no FHLB borrowings outstanding at December 31, 2012 and December 31, The Bank offers a broad range of deposit instruments, including personal and business checking accounts, individual retirement accounts, business money market accounts, statement savings, and term certificate accounts at competitive interest rates. Deposit account terms vary depending upon the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank also offers a multi-tiered personal savings account, paying progressively higher rates of interest as account balances increase. The Bank regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Bank s cash flow requirements for lending and liquidity and executes interest rate changes when deemed appropriate. The Bank s deposit classifications for the last three years were as follows: Percent Percent Percent Of Of Of Category Balance Total Deposits Balance Total Deposits Balance Total Deposits Interest-bearing checking accounts $ 16,621, % $ 15,166, % $ 13,952, % Noninterest bearing checking accounts 10,904, % 11,329, % 10,883, % Savings and money market 63,566, % 67,726, % 63,669, % Certificates of deposit - $100,000 or more 21,789, % 21,801, % 29,361, % Other certificates of deposit 58,544, % 59,676, % 65,728, % Total $ 171,426, % $ 175,700, % $ 183,594, % 11

12 The scheduled maturities of certificates of deposit of $100,000 or more was as follows: Maturing in less than 3 months $ 3,663,216 $ 1,826,231 $ 3,345,337 Maturing in 3 months through 6 months 2,415,927 3,819,031 2,593,509 Maturing in 6 months through 12 months 3,885,847 7,293,238 12,406,972 Maturing 1 through 2 years 2,587,925 3,800,451 5,627,906 Maturing 2 through 3 years 3,956, ,099 1,517,811 Maturing over 3 years 5,279,343 4,221,625 3,870,236 Total $ 21,789,030 $ 21,801,675 $ 29,361,771 Interest expense on deposits for the years ended December 31, 2012, 2011 and 2010 was as follows: Checking $ 27,146 $ 34,515 $ 49,561 Savings and money market 323, , ,252 Certificates of deposit 1,205,007 1,401,316 1,803,822 Total $ 1,556,145 $ 2,110,569 $ 2,585,635 The weighted average interest rate paid on deposits by category at December 31, 2012, 2011 and 2010 was as follows; Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Interest-bearing checking accounts $ 15,694, % $ 13,823, % $ 13,176, % Savings and money market 67,476, % 67,204, % 57,160, % Certificates of deposit 82,845, % 89,103, % 96,360, % Total $ 166,017, % $ 170,132, % $ 166,697, % Supervision and Regulation Bank Regulation The Bank is subject to supervision, regulation and examination by the New Jersey Department of Banking and Insurance and the FDIC. In addition, the Bank is subject to various federal, state and local laws. The banking regulations include, but are not limited to, the following: permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and the safety and soundness of banking practices. Set forth below is a brief description of certain laws, which relate to the regulation of the Bank. General. As a New Jersey state-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the New Jersey Department of Banking and Insurance. As an FDIC-insured institution, the Bank is subject to the regulation, supervision and control of the FDIC, an agency of the federal government. The regulations, requirements and restrictions of the FDIC and the New Jersey Department of Banking and Insurance affect virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the 12

13 Bank to expand through new branches or acquisitions and various other matters. The Bank is not a member of the Federal Reserve System. Financial Regulatory Reform. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) into law. The Dodd-Frank Act represents a sweeping reform of the supervisory and regulatory framework applicable to financial institutions and capital markets in the United States. The Dodd-Frank Act creates new federal governmental entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic risks. It also shifts certain authorities and responsibilities among federal financial institution regulators, including the supervision of holding company affiliates, and the regulation of consumer financial services and products. Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies. Many of the required regulations have been issued and others have been released for public comment, but there remain a number that have yet to be released in any form. Furthermore, while the reforms primarily target systemically important financial service providers, their influence is expected to filter down in varying degrees to smaller institutions over time. Management of the Bank will continue to evaluate the effect of the changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Bank. Insurance of Deposits. The Bank s deposits are insured up to a maximum of $250,000 per depositor under current Federal Deposit Insurance Corporation regulations of the Bank Insurance Fund of the FDIC. The Bank elected during 2012 to continue participation in the Transaction Account Guarantee Program of the FDIC. This program provided FDIC insurance coverage for the full amount of balances of non interest-bearing deposit accounts including non interest-bearing transaction accounts, NOW accounts and IOLTA (Interest On Lawyer Trust Accounts) until December 31, 2012, at which time the program expired. Dividend Rights. Under the New Jersey Banking Act of 1948 (the Banking Act ), the Bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either (a) the Bank will have a surplus of not less than 50% of its capital stock, or (b) the payment of the dividend will not reduce the Bank s surplus. Under the Federal Deposit Insurance Corporation Improvement Act (the FDICIA ), an insured bank may not pay dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. In addition, state and federal authorities have adopted standards for the maintenance of adequate levels of capital by banks (see Capital Adequacy Guidelines below). Adherence to such standards further limits the ability of the Bank to pay dividends to its shareholders. Additionally, either the New Jersey Department of Banking or the FDIC may prohibit a bank from engaging in unsafe or unsound practices, and it is possible that under certain circumstances such entities could claim that a dividend payment constitutes an unsafe or unsound practice and, therefore, is prohibited. Capital Adequacy Guidelines. The Bank is subject to risk-based capital guidelines promulgated by the FDIC that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under the guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum ratio of total risk-based capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be Tier I Capital, consisting of common stockholders equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The remainder, Tier II Capital, may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) qualifying 13

14 subordinated debt and intermediate-term preferred stock up to 50% of Tier I Capital. Total risk-based capital is the sum of Tier I and Tier II Capital, less reciprocal holdings of other banking organizations, capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FDIC (determined on a case-by-case basis or as a matter of policy after formal rule-making). In addition to the risk-based capital guidelines, the FDIC has adopted a minimum Tier I Capital (leverage) ratio, under which a bank must maintain a minimum level of Tier I Capital to average total consolidated assets of at least 3% in the case of a bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage ratio of at least 1% to 2% above the stated minimum. Under these guidelines, the Bank must maintain a 4% minimum level of Tier I capital to average total consolidated assets. Prompt Corrective Action. Federal banking regulators are required to establish five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories, the severity of which will depend upon the capital category in which the institution is placed. The capital levels established for each of the five capital categories are as follows, and are based on the level of tangible equity maintained by the Bank. Total Tier 1 Tier 1 Risk-Based Risk-Based Capital Category Capital Capital Capital Well capitalized 5% or more 10% or more 6% or more Adequately capitalized 4% or more 8% or more 4% or more Under capitalized less than 4% less than 8% less than 4% Significantly undercapitalized less than 3% less than 6% less than 3% Critically undercapitalized 2% or less For purposes of the applicable regulations, the term tangible equity includes core capital elements counted as Tier I Capital for purposes of the risked-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets (with certain exceptions). A depository institution may also be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. At December 31, 2012, the Bank had the requisite capital levels to qualify as well capitalized. Sarbanes-Oxley Act of 2002 On July 30, 2002, the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley Act ) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of On December 15, 2006, the Securities and Exchange Commission delayed the internal control reporting requirements under Section 404 of the Sarbanes-Oxley Act for non-accelerated filers to periods ending after December 15, In accordance with the requirements of Section 404(a), Management s report on internal controls is included herein at Part 9A. In 2010, with the passing of the Dodd Frank legislation, the requirement for 14

15 the auditors attestation report on internal controls over financial reporting required under Section 404(b) was permanently repealed. The Bank, in compliance with the Sarbanes-Oxley Act of 2002, has made the determination that the Audit Committee of the Bank has a financial expert on the committee. This financial expert is Mr. Michael E. Cinkala, an independent director of the Bank, who is not associated with the daily management of the Bank. Mr. Cinkala is a retired bank examiner, has an understanding of financial statements and generally accepted accounting principles and has used this experience in the examination of bank financial statements and schedules. In 2003, the Audit Committee of the Bank and the Board of Directors adopted and implemented a Code of Ethics for the Chief Executive Officer and Chief Financial Officer of the Bank in compliance with the Sarbanes-Oxley Act. International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA ). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, brokerdealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions operations. Compliance with IMLAFA has not had a material impact on Harvest Community Bank s results of operations or financial condition. Item 2. Properties The Bank currently has four full service branch locations. These branches are located in Pennsville, Pilesgrove Township, Elmer and Salem, New Jersey. The Bank owns the branch properties in Pennsville and Pilesgrove Township. There are no outstanding mortgages on these properties. The branch location in Elmer is leased from an unaffiliated third party. The lease for the Elmer branch is for six years, expiring on August 31, 2015, with lease payments of $1,560 per month. The Bank's Elmer branch location had previously been operated by the Bank as a loan production office (LPO). The Salem City branch location is leased from a limited liability company owned by all of the current directors of the Bank. The lease is for a twenty year term which commenced in August 2006 and the monthly rental payments are $6,660 per month, subject to adjustment annually based upon changes in the Consumer Price Index. The Bank s headquarters are located at 285 North Broadway, Pennsville, New Jersey This facility was constructed in 1999, and is an office building of approximately 2,000 square feet in size. The Pilesgrove Township location at 863 Route 45 was constructed in 2002, and also is approximately 2,000 square feet in size. The Elmer location, at 389 Harding Highway, is located in a local shopping center consisting of approximately six retail stores and professional offices. This location is approximately 1,000 square feet in size. All branch locations feature a lobby area, teller windows, drive through windows, an ATM machine and administrative offices. The Pennsville and Pilesgrove Township locations also feature night depository facilities. The Salem City location is approximately 3,197 square feet in size and has the features mentioned above, as well as night depository facilities. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Bank. Item 3. Legal Proceedings The Bank is not involved in any pending legal proceedings, which, if adversely determined to the Bank, could have a material adverse effect on the Bank s business, assets or financial condition. 15

16 Item 4. Mine Safety Disclosures Not applicable Part II Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Bank s common stock began trading on the OTC Bulletin Board under the symbol HCBP on November 9, The Bank s common stock purchase warrants began trading on the OTC Bulletin Board under the symbol HCBPW on January 7, At December 31, 2012 and December 31, 2011, 5,000,000 shares of the Bank s common stock were authorized for issuance. At December 31, 2012 and December 31, 2011, 1,147,733 shares of the Bank s common stock were issued and outstanding and 552,000 shares were reserved for issuance pursuant to the exercise of outstanding common stock purchase warrants. Other than the common stock and the common stock purchase warrants described herein, the Bank does not have any other class of securities. As of December 31, 2012, there were approximately 941 holders of record of the Bank s common stock. The following table sets forth the closing high and low bid information, as supplied by the OTC Bulletin Board market makers for each fiscal quarter for the years ended December 31, 2012 and December 31, 2011 for the Bank's common stock and common stock purchase warrants. These bid quotations reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and do not necessarily represent actual transactions. Bid Quotations Fourth Quarter 2012 High Low Fourth Quarter 2011 High Low Common Stock Common Stock Warrants Warrants Third Quarter 2012 Third Quarter 2011 Common Stock Common Stock Warrants Warrants Second Quarter 2012 Second Quarter 2011 Common Stock Common Stock Warrants Warrants First Quarter 2012 First Quarter 2011 Common Stock Common Stock Warrants Warrants The Bank did not pay any dividends for fiscal years 2012 or At the present time, the Bank has no plans to pay cash dividends. All earnings are being retained to help finance the continued growth of the Bank. The Bank is also subject to regulatory restrictions on the payment of dividends. These restrictions are more fully explained in the Dividend Policy section of Item 7 of this report. 16

17 Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth certain information as of December 31, 2012 with respect to compensation plans under which equity securities of the Bank are authorized for issuance, aggregated as follows: Equity Compensation Plan Information Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-Average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category (a) (b) ( c ) Equity compensation plans approved by security holders 30,450 $ ,122 Equity compensation plans not approved by security holders Total 30,450 $ ,122 The Bank is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith files reports and other information with the FDIC. Reports, registration statements, proxy statements and other information filed by the Bank with the FDIC can be inspected and copied at the public reference facilities maintained by the FDIC at th Street, N.W., Washington, D.C. Item 6 Selected Financial Data Not applicable. Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The Bank may from time to time make forward-looking statements, including statements contained in the Bank s filings with the FDIC (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to shareholders and in other communications by the Bank, which are made in good faith by the Bank pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of These forward-looking statements include statements with respect to the Bank s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of the Bank, including: (i) statements 17

18 relating to the Bank s expectations and goals with respect to (a) growth in cash earnings, operating earnings, net income, shareholder value and internal tangible equity generation; (b) growth in earnings per share; (c) return on equity; (d) return on assets; (e) efficiency ratio; (f) Tier 1 leverage ratio; (g) annualized net charge-offs and other asset quality measures; (h) fee income as a percentage of total revenue; (i) tangible equity to assets; (j) book value and tangible book value per share; (k) loan and deposit portfolio compositions, employee retention, deposit retention, asset quality, reserve adequacy; and (ii) statements preceded by, followed by or that include the words may, could, should, pro forma, looking forward, would, believe, expect, anticipate, estimate, intend, plan, strive, hopefully, try, or similar expressions. Although we believe that the expectations reflected in our forward-looking statements are reasonable, these forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond the Bank s control). The following factors, among others, could cause the Bank s financial performance to differ materially from the goals, plans, objectives, intentions and expectations, forecasts and projections (and underlying assumptions) expressed in such forward-looking statements: (1) the strength of the U.S. economy in general and the strength of the regional and local economies in which the Bank conducts operations; (2) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (3) inflation, interest rate, market and monetary fluctuations; (4) the timely development of competitive new products and services by the Bank and the acceptance of such products and services by customers; (5) the willingness of customers to substitute competitors products and services and vice versa; (6) the impact of changes in financial services laws and regulations and the application of such laws and regulations (including laws concerning taxes, capital, liquidity, proper accounting treatment, securities and insurance) and the impact of changes in generally accepted accounting principles; (7) technological changes; (8) changes in consumer spending and savings habits; (9) unanticipated regulatory or judicial proceedings; (10) changes in asset quality; and (11) the success of the Bank at managing the risks involved in the foregoing. The Bank cautions that the foregoing list of important factors is not exclusive. We also caution readers not to place undue reliance on these forward-looking statements, which reflect management s analysis only as of the date on which they are given. The Bank is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date. Readers should carefully review the risk factors described in other documents the Bank files from time to time with the FDIC, including quarterly reports on Form 10-Q, annual reports on Form10-K and any current reports on Form 8-K. Critical Accounting Policies Management s discussion and analysis of its financial condition and results of operations are based upon the Bank s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to investment securities, loans, allowance for loan losses, and deferred taxes. These policies, which may significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 1 Summary of Significant Accounting Policies, in the Notes to Financial Statements included elsewhere in this report. The allowance for loan losses is based upon management s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realized value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the 18

19 allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank s allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Bank s loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of the Bank s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Bank s control. General The Bank s results of operations are dependent primarily on net interest income, i.e. the difference between interest income earned on its interest-earning assets, such as loans and securities, and interest expense paid on its interest-bearing liabilities, such as deposits. The Bank also generates noninterest income such as service charges and other fees. Noninterest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs and other operating expenses. The Bank is subject to losses from its loan portfolio if borrowers fail to meet their obligations. The Bank s results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies. The following discussion focuses on the major components of the Bank s operations. This discussion should be read in conjunction with the financial statements and accompanying notes thereto. Readers are cautioned that current performance may not be indicative of the Bank s future performance. Management Strategy Management s primary strategy is to increase the Bank s loan and deposit market shares in the communities we serve. We accomplish this through superior service, competitive pricing and marketing, selective branch location and developing the business network represented by the Bank s officers and directors. The Bank also tries to maximize earnings by obtaining deposits at the lowest cost possible and reinvesting these monies into high-yielding, high quality loans and investments, in order to obtain the largest possible interest spread. The Bank has formally structured its lending department to accommodate growth. By segregating loan administration tasks from loan origination, the Bank has enabled its loan officers to solicit more new business and service their existing customers more efficiently. Segregation of loan administration also provides a more centralized processing function to accommodate future growth without sacrificing the high standard of quality control that has existed since the Bank's inception. Management intends in 2013 to continue exploring expanding the geographic base of loan activity for the Bank. Management is also seeking expansion through the selective acquisition or construction of new branches in markets which we believe will generate meaningful lending relationships. The establishment of branches is subject to approval by the New Jersey Department of Banking and Insurance, and the Federal Deposit Insurance Corporation. Comparison of Operating Results for the Years Ended December 31, 2012 and 2011 The Bank reported net income after taxes of $1,156,941 or $1.01 per share for the year ended December 31, 2012, compared to a net loss after taxes of $2,075,842 or $1.81 per share for the year ended December 31, The following table presents the net income of the Bank as well as the average assets and average equity and the related performance ratios for the last three years. 19

20 (In thousands) Net income $ 1,157 $ (2,076) $ 624 Average assets $ 192,334 $ 197,784 $ 195,217 Average equity $ 15,213 $ 16,522 $ 15,985 Return on average assets 0.60% (1.05%) 0.32% Return on average equity 7.61% (12.57%) 3.90% Average equity to average assets 7.91% 8.35% 8.19% The Bank reported net income before taxes of $1,645,827 for 2012 compared to a net loss before taxes of $3,790,839 for This represents an increase of net income before taxes of $5,436,666 in 2012 compared to This increase of net income before taxes was mainly attributable to a decrease of the provision for loan losses for 2012 compared to 2011 as well as a reduction of costs associated with the administration of troubled assets. The provision for loan losses in 2012 was $540,000 compared to $4,229,000 in 2011, a decrease of $3,689,000. The decreased loan loss provision reflects more stability in 2012 for collateral valuations and the net book values of the Banks loan portfolio compared to Costs associated with the administration of troubled assets were $599,981 in 2012 compared to $1,398,348 in 2011, a decrease of $798,367. The decrease reflects continued management emphasis on reducing problem assets. The net interest income before the loan loss provision for 2012 was $6,715,812 compared to $6,580,346 in 2011, an increase of $135,466 or 2.1%. Average gross loan portfolio balances for the year ended December 31, 2012 decreased $3,494,454 or 2.5% compared to the same period in Net Interest Income and Average Balances The operations of the Bank are substantially dependent on its net interest income. Net interest income is affected by changes in both interest rates and the amount and types of interest-earning assets and interest-bearing liabilities outstanding. Volatility in interest rates can result in the flow of funds away from banks similar to the Bank and into direct investments, such as corporate securities and other investment vehicles which generally pay higher rates of return. Such volatility could cause the Bank to pay increased interest rates to obtain deposits. If the Bank is unable to increase interest rates on its loans and obtain higher yields on its investment portfolio, the Bank s net interest income will suffer. The following tables represent the average volume of interest-earning assets and interest-bearing liabilities and average yields and rates for the Bank for the years ended December 31, 2012, 2011 and The effect of rate-volume changes on net interest income for the year 2012 compared to 2011 and the year 2011 compared to the year 2010 are presented. The average balances are derived from daily averages. 20