Federal Deposit Insurance Corporation Washington, D.C

Transcription

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, 2014 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). [ ] 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, 2014, the aggregate market value of the Bank s voting stock held by non-affiliates of the Bank was $3,838,992.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 April 15, 2015, there were 1,147,733 outstanding shares of the issuer s common stock, par value $5.00 per share. Portions of the Bank s definitive Proxy Statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2015 Annual Meeting of Shareholders to be held on May 21, 2015 are incorporated by reference into Part III of this report. 2

3 Part 1 Financial Information Item 1 Business 4-23 Item 2 Properties 24 Item 3 Legal Proceedings 24 Item 4 Mine Safety Disclosures 24 Part II Other Information Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6 Selected Financial Data 26 Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk 37 Item 8 Financial Statements and Supplementary Data 38 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 38 Disclosures Item 9A Controls and Procedures Item 9B Other Information 39 Part III Item 10 Directors, Executive Officers and Corporate Governance 39 Item 11 Executive Compensation 39 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 39 Item 13 Certain Relationships and Related Transactions and Director Independence 39 Item 14 Principal Accountant Fees and Services 40 Part IV Item 15 Exhibits and Financial Statement Schedules

4 Cautionary Note Regarding Forward-Looking Statements Harvest Community Bank (the Bank ) may from time to time make written or oral forwardlooking statements, including statements contained in the Bank s filings with the Federal Deposit Insurance Corporation ( 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 Section 21E of the Securities Exchange Act of 1924, as amended (the Exchange Act ). 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 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; (11) our borrowers ability to repay their loans; (12) changes in the real estate market that affect real estate that serves as collateral for some of our loans; (13) the adequacy of our allowance for loan losses; (14) our methodology for determining our allowance for loan losses; (15) interruptions and breaches in the security of our information systems; and (16) 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. Except as required by applicable law or regulation, the Bank does not undertake to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date. Item 1 Business General Harvest Community 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 4

5 Salem, New Jersey. At December 31, 2014, Harvest Community Bank had total assets of $179,847,222, total deposits of $166,684,506 and stockholders equity of $9,191,329. 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. As a state-chartered bank, we are regulated by the New Jersey Department of Banking and Insurance ( NJDOBI ) and the FDIC. The FDIC insures the Bank s deposits to the fullest extent provided by law. The Bank is not a member of the Federal Reserve System. The Bank is currently subject to a Consent Order issued by the FDIC and a substantially identical Consent Order issued by the NJDOBI. (See Supervision and Regulation Consent Orders for further information.) At December 31, 2014, the Bank had 35 full-time employees and 6 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. Our headquarters and one of our branches are located at 285 N. Broadway, Pennsville, New Jersey Our telephone number is (856) and our website address is 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. 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. 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 loan and deposit customers by providing personalized, timely services and making use of the business and personal ties of our Board of Directors and management, competition for such customers 5

6 could reduce our interest income and net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans, as well as our ability to attract new deposits. A decrease in our ability to attract deposits would also negatively affect our ability to generate the funds we require for our lending or other operations and we may need to seek other sources of funds which may be more expensive to obtain, if available at all, and increase our cost of funds. 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). Loan growth is driven by customer demand, which is influenced by individual and business indebtedness and consumer demand for goods and services. 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. Lending money will always entail some risk. To help mitigate such risk, the majority of the Bank s 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 $134,047,043 as of December 31, 2014, and $133,311,041 as of December 31, Gross loan balances represented 72.7% of the Bank s total assets on December 31, 2014 and 73.2% 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 2014 Percent 2013 Percent 2012 Percent 2011 Percent 2010 Percent Commercial $ 102,210, % $ 107,282, % $ 112,124, % $ 108,784, % $ 112,514, % Commercial construction 6,060, % 5,040, % 4,089, % 11,247, % 10,249, % Residential real estate 5,615, % 3,995, % 2,684, % 3,320, % 2,480, % Residential construction 2,067, % 1,066, % 1,200, % 1,156, % 849, % Consumer 17,948, % 15,794, % 12,288, % 12,874, % 13,363, % Deferred loan origination (fees) costs 144, % 132, % 116, % 126, % 135, % Total Loans 134,047, % 133,311, % 132,504, % 137,510, % 139,592, % Less Allowance for loan losses (5,546,201) (2,549,124) (2,827,985) (3,009,964) (2,025,853) Loans Receivable, net $ 128,500,842 $ 130,761,917 $ 129,676,550 $ 134,500,296 $ 137,566,997 6

7 Substantially all of our loans are to borrowers in our immediate markets. The following table represents the contractual maturity breakdown by loan category of the Bank s loan portfolio as of December 31, 2014, inclusive of deferred costs/ (fees): Loan Category Commercial Residential Residential Maturities Commercial Construction Real Estate Construction Consumer Total Due through 1 year $ 17,240,957 $ 2,321,198 $ 57,466 $ 435,236 $ 6,360,590 $ 26,415,447 Greater than one year through 5 years 28,230,772 1,779,123 38,600-2,100,092 32,148,587 Greater than 5 years 56,833,561 1,960,243 5,520,024 1,632,269 9,536,912 75,483,009 Total $ 102,305,290 $ 6,060,564 $ 5,616,090 $ 2,067,505 $ 17,997,594 $ 134,047,043 The following is a breakdown of the loan portfolio as of December 31, 2014 by general category and type of interest rate: Floating or 2014 Fixed Rate Adjustable Rate Total Loan category Commercial $ 93,527,661 $ 8,683,027 $ 102,210,688 Commercial construction 4,451,443 1,609,121 6,060,564 Residential real estate 5,615,324-5,615,324 Residential construction 2,067,505-2,067,505 Consumer 12,086,968 5,861,977 17,948,945 Deferred loan origination (fees) costs 126,735 17, ,017 Total loans $ 117,875,636 $ 16,171,407 $ 134,047,043 Of the $16,154,125 of floating or adjustable rate loans in the above table, $1,855,719 contractually matures 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 $ 4,217, % $ 2,051, % $ 2,335, % $ 2,529, % $ 1,706, % Commercial construction 1,217, % 394, % 388, % 363, % 242, % Residential real estate 1, % 1, % 1, % 8, % 8, % Residential construction 9, % 3, % 3, % 3, % 3, % Consumer 100, % 98, % 99, % 104, % 64, % Total $ 5,546, % $ 2,549, % $ 2,827, % $ 3,009, % $ 2,025, % 7

8 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 $ 2,549,124 $ 2,827,985 $ 3,009,964 $ 2,025,853 $ 2,291,366 Charge-offs: Commercial real estate 1,342, , ,914 2,251,873 1,300,571 Commercial and industrial 702, , , ,000 Commercial construction 41, ,872 31,255 Residential real estate - - 1,360-5,907 Residential construction 23, Consumer 8,765 1,401 10, ,076 33,338 2,118, , ,939 3,265,659 1,714,071 Recoveries: Commercial real estate 14, ,682 11,500 - Commercial and industrial Commercial construction 169 5,635 21,127 3,610 10,004 Residential real estate Residential construction Consumer 1, ,151 5,660 7,554 15,809 7, ,960 20,770 17,558 Net charge-offs 2,102, , ,979 3,244,889 1,696,513 Provision for loan loss 5,100, ,000 4,229,000 1,431,000 Balance at end of the year $ 5,546,201 $ 2,549,124 $ 2,827,985 $ 3,009,964 $ 2,025,853 Average loans outstanding (1) $ 136,275,023 $ 132,281,072 $ 133,670,534 $ 137,164,988 $ 141,086,343 Net charge-offs as a percentage of average loans 1.54% 0.21% 0.54% 2.37% 1.20% (1) Includes non-accruing loans 8

9 The following table sets forth information concerning nonperforming loans and nonperforming assets at December 31 for the last five years: Nonperforming assets Nonaccrual loans $ 25,316,702 $ 11,865,217 $ 12,149,989 $ 11,142,540 $ 9,571,954 Other real estate owned ,981 79, ,956 Total nonperforming assets $ 25,316,702 $ 11,865,217 $ 12,293,970 $ 11,222,151 $ 9,750,910 Loans past due 90 days and still accruing interest $ 47,113 $ 1,264,351 $ - $ - $ - Performing troubled debt restructurings (1) $ 181,134 $ 184,615 $ 187,375 $ 1,616,783 $ 1,383,980 Asset Quality Ratios Allowance for loan losses to nonperforming loans 21.91% 21.48% 23.00% 26.82% 20.78% Allowance for loan losses to period end loans 4.14% 1.91% 2.13% 2.19% 1.45% Nonperforming loans to period end loans 18.89% 8.90% 9.17% 8.10% 6.86% Nonperforming assets to period end assets 13.73% 6.51% 6.55% 5.87% 4.87% (1) Performing troubled debt restructurings do not include troubled debt restructurings that remain on nonaccrual status and are included in nonaccrual loans above. The Bank also monitors potential problem loans. Potential problem loans are those where information about possible credit problems of borrowers cause management of the Bank to have doubts as to the ability of the borrower to comply with loan repayment terms. 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, 2014, 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. 9

10 Investment Securities Available for Sale December 31, 2014 December 31, 2013 December 31, 2012 Amortized Estimated Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Cost Fair Value U.S. government sponsored entities and agencies $ 10,819,427 $ 11,048,202 $ 12,297,334 $ 12,131,733 $ 15,031,532 $ 15,693,488 U.S. government sponsored entities and agency residential mortgage-backed securities 8,852,724 8,897,365 10,180,301 9,945,469 10,427,760 10,629,164 U.S. government sponsored entities and agency collateralized mortgage obligations 5,825,058 5,766,534 7,070,547 6,862,840 6,619,256 6,686,253 Private label collateralized mortgage obligations 116, , , , , ,782 Municipal securities 8,545,072 8,842,881 9,192,344 9,284,127 9,488,245 10,062,968 Total $ 34,158,649 $ 34,670,840 $ 38,892,336 $ 38,375,019 $ 42,004,295 $ 43,506,655 The estimated fair value of the Bank s investment securities available for sale at December 31, 2014 was $34,670,840, including a pretax net unrealized gain of $512,191. The estimated fair value of the Bank s investment securities available for sale at December 31, 2013 was $38,375,019, including a pretax net unrealized loss of $517,317. 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, 2014, 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. 10

11 December 31, 2014 U.S. government sponsored entities and agencies Estimated Average Fair Value Yield 0-1 year $ 60, % 1-5 years 399, % 5-10 years 860, % More than 10 years 9,728, % Total $ 11,048, % U.S. government sponsored entities and agency residential mortgage-backed s Estimated Average Fair Value Yield 0-1 year $ years years - - More than 10 years 8,897, % Total $ 8,897, % U.S. government sponsored entities and agency collateralized residential mort Estimated Average Fair Value Yield 0-1 year $ years 193, % 5-10 years - - More than 10 years 5,573, % Total $ 5,766, % Private label collateralized residential mortgage obligations Estimated Average Fair Value Yield 0-1 year $ years 7, % 5-10 years - - More than 10 years 108, % Total $ 115, % Municipal securities Estimated Average Fair Value Yield 0-1 year $ years 522, % 5-10 years 6,208, % More than 10 years 2,112, % Total $ 8,842, % Total Investment Portfolio Estimated Average Fair Value Yield 0-1 year $ 60, % 1-5 years 1,122, % 5-10 years 7,068, % More than 10 years 26,420, % Total $ 34,670, % 11

12 December 31, 2013 U.S. government sponsored entities and agencies Estimated Average Fair Value Yield 0-1 year $ years 127, % 5-10 years 1,571, % More than 10 years 10,433, % Total $ 12,131, % 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 9,945, % Total $ 9,945, % U.S. government sponsored entities and agency collateralized residential mortgage obligations Estimated Average Fair Value Yield 0-1 year $ years 349, % 5-10 years - - More than 10 years 6,513, % Total $ 6,862, % Private label collateralized residential mortgage obligations Estimated Average Fair Value Yield 0-1 year $ years 12, % 5-10 years - - More than 10 years 138, % Total $ 150, % Municipal securities Estimated Average Fair Value Yield 0-1 year $ years 286, % 5-10 years 6,381, % More than 10 years 2,615, % Total $ 9,284, % Total Investment Portfolio Estimated Average Fair Value Yield 0-1 year $ years 775, % 5-10 years 7,952, % More than 10 years 29,646, % Total $ 38,375, % 12

13 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 Community 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 owned by the Bank. As of December 31, 2014 and 2013, 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 a line of credit which aggregates $16,959,000. This line of credit, when drawn, is secured by eligible mortgage related investment securities owned by the Bank and any borrowings will mature within 30 days. The Bank had $3,000,000 outstanding at December 31, 2014 and no FHLB borrowings outstanding at December 31, 2013 under this line of credit. 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 as of December 31 st 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 $ 16,457, % $ 15,120, % $ 16,621, % Noninterest bearing checking accounts 11,658, % 11,525, % 10,904, % Savings and money market 55,361, % 62,536, % 63,566, % Certificates of deposit - $100,000 or more 29,619, % 23,688, % 21,789, % Other certificates of deposit 53,587, % 53,037, % 58,544, % Total $ 166,684, % $ 165,908, % $ 171,426, % 13

14 The scheduled maturities of certificates of deposit of $100,000 or more were as follows as of December 31st: Maturing in less than 3 months $ 1,713,057 $ 3,424,835 $ 3,663,216 Maturing in 3 months through 6 months 1,621,625 1,180,442 2,415,927 Maturing in 6 months through 12 months 14,905,038 6,375,747 3,885,847 Maturing 1 through 2 years 3,320,486 5,595,848 2,587,925 Maturing 2 through 3 years 3,679,323 1,770,762 3,956,772 Maturing over 3 years 4,178,296 5,340,712 5,279,343 Total $ 29,417,825 $ 23,688,346 $ 21,789,030 Interest expense on deposits for the years ended December 31, 2014, 2013 and 2012 was as follows: Checking $ 15,342 $ 15,232 $ 27,146 Savings and money market 203, , ,992 Certificates of deposit 918, ,443 1,205,007 Total $ 1,137,035 $ 1,182,873 $ 1,556,145 The weighted average interest rate paid on deposits by category at December 31, 2014, 2013 and 2012 was as follows; Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Interest-bearing checking accounts $ 15,363, % $ 15,341, % $ 15,694, % Savings and money market 61,267, % 64,075, % 67,476, % Certificates of deposit 76,835, % 79,054, % 82,845, % Total $ 153,465, % $ 158,471, % $ 166,017, % 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. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation referenced. 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 Bank to expand through new branches or acquisitions and various other matters. The Bank is not a member of the Federal Reserve System. 14

15 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 dramatically reformed the supervisory and regulatory framework applicable to financial institutions and capital markets in the United States. The Dodd-Frank Act created new federal governmental entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic risks. It also shifted 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 regulations which govern the operation of the Bank Insurance Fund of the FDIC. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the depository institution s average total consolidated assets less average tangible equity, eliminating the ceiling on the size of the DIF and increasing the floor on the size of the Deposit Insurance Fund ( DIF ). The Dodd-Frank Act established a minimum designated reserve ratio ( DRR ) of 1.35 percent of the estimated insured deposits, mandates the FDIC to adopt a restoration plan should the DRR fall below 1.35 percent, and provides dividends to the industry should the DRR exceed 1.50 percent. On February 7, 2011, the Board of Directors of the FDIC approved a final rule on Assessments, Dividend Assessment Base and Large Bank Pricing (the Final Rule ). The Final Rule implements the changes to the deposit insurance assessment system as mandated by the Dodd-Frank Act. The Final Rule became effective April 1, The Final Rule changed the assessment base for insured depository institutions from adjusted domestic deposits to the average consolidated total assets during an assessment period less average tangible equity capital during that assessment period. Tangible equity is defined in the Final Rule as Tier 1 Capital and shall be calculated monthly, unless, like us, the insured depository institution has less than $1 billion in assets, in which case the insured depository institution will calculate Tier 1 Capital on an endof-quarter basis. The Final Rule retains the unsecured debt adjustment, which lowers an insured depository institution s assessment rate for any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule will be measured to the new assessment base and will be increased by 40 basis points. The Final Rule also contains a brokered deposit adjustment for assessments. The Final Rule provides an exemption to the brokered deposit adjustment to financial institutions that are well capitalized and have composite CAMEL ratings of 1 or 2. CAMEL ratings are confidential ratings used by the federal and state regulators for assessing the soundness of financial institutions. These ratings range from 1 to 5, with a rating of 1 being the highest rating. The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to financial institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely suspends the requirement that it pay dividends from the DIF when it reaches 1.50 percent of insured deposits, to increase the probability that the fund reserve ratio will reach a sufficient level to withstand a future crisis. In lieu of the dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve ratio exceeds 2.0 percent and 2.5 percent. 15

16 The Dodd-Frank Act made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and, during the four quarters ended December 31, 2014, averaged 1.28 basis points of average assets. The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expenses and results of operations. Management cannot predict what insurance assessment rates will be in the future. Deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed the FDIC. Dividend Restrictions. Under the New Jersey Banking Act of 1948, as amended (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. At present, under the terms and provisions of the Consent Orders issued by the FDIC and the NJDOBI, the Bank cannot pay any dividends to its shareholders without the prior approval of the FDIC and the NJDOBI. (See Supervision and Regulation Consent Orders below for further information.) 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, which range from 0 percent for assets with low credit risk, such as U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such as business loans. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and offbalance 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 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. At December 31, 2014 our leverage ratio was 4.83%. 16

17 Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions including: limitations on its ability to pay dividends; and the issuance by the applicable regulatory authority of a capital directive to increase capital, and in the case of depository institutions, the termination of deposit insurance by the FDIC, and the measures described under the FDICIA as applicable to undercapitalized depository institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends. Regulatory Capital Changes. In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, The final rules call for the following capital requirements: A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent; A minimum ratio of tier 1 capital to risk-weighted assets of 6 percent; A minimum ratio of total capital to risk-weighted assets of 8 percent (no change from the current rule); and A minimum leverage ratio of 4 percent. In addition, the final rules establish a common equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital conservation buffers for all banking organizations will begin on January 1, Under the proposed rules, accumulated other comprehensive income ( AOCI ) would have been included in a banking organization s common equity Tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule. The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. Under the new rules, mortgage servicing assets ( MSAs ) and certain deferred tax assets ( DTAs ) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. 17

18 Prompt Corrective Action. In addition to the required minimum capital levels described above, federal law establishes a system of prompt corrective actions which federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a federally-regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized. Under the rules, an institution will be deemed well capitalized or better if its leverage ratio exceeds 5 percent, its Tier 1 risk-based capital ratio exceeds 6 percent, and its Total risk-based capital ratio exceeds 10 percent. An institution will be deemed to be adequately capitalized or better if it exceeds the minimum federal regulatory capital requirements. However, it will be deemed undercapitalized if it fails to meet the minimum capital requirements; significantly undercapitalized if it has a Total risk-based capital ratio that is less than 6 percent, a Tier 1 risk-based capital ratio that is less than 3 percent, or a leverage ratio that is less than 3 percent, and critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2 percent. The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by a holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or salary increases to senior executive officers, and a prohibition on the payment of certain management fees to any controlling person. Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including: increased reporting burdens and regulatory monitoring; a limitation on the institution s ability to make acquisitions, open new branch offices, or engage in new lines of business; obligations to raise additional capital; restrictions on transactions with affiliates; and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be critically undercapitalized and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership. As of December 31, 2014, we met, based upon the most recent notification received from the FDIC, the criteria to be classified as adequately capitalized under the framework for prompt corrective action. This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of our overall financial condition or prospects. Under the framework, the Bank s capital levels do not allow the Bank to accept brokered deposits without prior approval from the regulators. Such restriction will have no impact on the Bank s operations. Beginning January 1, 2015, all insured depository institutions must incorporate the revised regulatory capital requirements into the prompt corrective action framework, including the new common equity Tier 1 capital to risk-weighted assets ratio and the higher minimum Tier 1 risk-based capital ratio requirements. In addition, pursuant to the terms and provisions of the Consent Orders entered into by the Bank with the FDIC and the NJDOBI, the Bank must develop a written plan, subject to the approval of the regulators, to meet and maintain a Tier 1 Leverage Ratio of 8.0%, a Tier 1 Risk-Based Capital Ratio of 10.0% and a Total Risk-Based Capital Ratio of 12.0%. Failure to meet any applicable capital requirements to which the Bank is subject can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material adverse effect on the Bank s overall financial condition or prospects. These actions could include restrictions on operations and growth, mandatory asset dispositions, and seizure of the Bank. Consent Orders. The Bank and the FDIC entered into a Stipulation and Consent to the Issuance of a Consent Order dated March 19, 2015, pursuant to which the Bank agreed to the issuance of a Consent Order by the FDIC (the FDIC Consent Order ). The FDIC Consent Order became effective on March 19, The description of the Stipulation and the Consent Order set forth herein is qualified, in its entirety, by reference to the Stipulation and the FDIC Consent Order, copies of which are included as Exhibits 10.1 and 10.2, respectively, to the Form 8-K filed by the Bank with the FDIC on March 25, 2015 and are incorporated herein by reference. 18

19 The Bank and the New Jersey Department of Banking and Insurance entered into a Consent Order effective as of March 20, 2015 (the NJDOBI Consent Order and, together with the FDIC Consent Order, the Consent Orders ). The terms of the NJDOBI Consent Order are consistent with the terms of the FDIC Consent Order. The description of the NJDOBI Consent Order set forth herein is qualified, in its entirety, by reference to the NJDOBI Consent Order, a copy of which is included as Exhibit 10.1 to the Form 8-K filed by the Bank with the FDIC on March 27, 2015 and is incorporated herein by reference. The Consent Orders refer to unsafe and unsound banking practices and violations of law or regulation engaged in by the Bank and principally relate to management of the affairs of the Bank by its Board of Directors and executive officers; the Bank s management of, and level of exposure to, adversely classified assets; the Bank s practices with respect to loan and lease loss allowances and charge-offs; the Bank s processes for reviewing its loan portfolio and identifying and categorizing problem credits; strategic planning; and the need to increase capital levels. The Bank consented to the issuance of the Consent Orders without admitting any charges of unsafe or unsound banking practices or violations of law or regulation. The Consent Orders arise from a routine safety and soundness examination of the Bank by the FDIC, which was conducted as of June 30, 2014, and reported upon in a Report of Examination, dated August 11, 2014 (the FDIC Report ). Among other things, the Consent Orders require the Board of Directors of the Bank to assume full responsibility for the supervision of all of the Bank s activities. The Bank is also required to retain a bank consultant to analyze and assess the Bank s current management needs for the purpose of providing qualified management for the Bank. Other requirements of the Consent Orders include (without limitation) the following: development, adoption and implementation of a written plan to reduce the Bank s risk position in each asset in excess of $250,000 which is classified as Substandard or Doubtful in the FDIC Report (which such plan shall be subject to review and approval by the regulators); elimination from the Bank s books, by charge-off or collection, of any asset classified as a Loss in the FDIC Report; development, adoption and implementation of a written policy and methodology for determining the Bank s Allowance for Loan and Lease Losses (the ALLL Policy ), which such ALLL Policy shall be subject to review and approval by the regulators and shall provide for (a) a comprehensive review of the Bank s Allowance for Loan and Lease Losses by the Bank s Board of Directors at least once each calendar quarter and (b) maintenance by the Bank of an adequate Allowance for Loan and Lease Losses at all times, subject to periodic review by the regulators; development, adoption and implementation of a written plan to reduce and manage each of the concentrations of credit identified in the FDCI Report (the Concentrations Reduction Plan ), which Concentrations Reduction Plan shall be subject to review and approval by the regulators and shall provide for a limit on concentrations of credit commensurate with the Bank s capital position, business strategy, management expertise, size, and location, safe and sound banking practices and the Bank s overall risk profile; development, adoption and implementation of a program of independent loan review (which loan review program shall be subject to review and approval by the regulators and shall provide for detailed reports to be provided to the Bank s Board of Directors at least quarterly); review and amendment of the Bank s existing loan policies and procedures (the Loan Policy ) to address, to the satisfaction of the regulators, the lending deficiencies identified in the FDIC Report, and implantation of such amended Loan Policy once it has been approved by the regulators; development of a written plan (the Capital Plan ), subject to approval by the regulators, for the Bank to meet and maintain (a) a Tier 1 Capital at least equal to 8% of total assets, (b) a 19

20 Tier 1 risk-based Capital at least equal to 10% of total risk-weighted assets, and (c) a total risk-based Capital at least equal to 12% of total risk-weighted assets, which Capital Plan is to contain quarterly benchmarks to be met by the Bank until the required capital levels are achieved; development, adoption and implementation of a written profit and budget plan (which plan shall be subject to review and approval by the regulators); development, adoption and implementation of a written strategic plan (which plan shall be subject to review and approval by the regulators); furnishing quarterly progress reports to the FDIC and the Commissioner of the New Jersey Department of Banking and Insurance (the Commissioner ); restricting the ability of the Bank to pay dividends without the prior approval of the FDIC and the Commissioner; and delivery of certain disclosures to the Bank s stockholders. The provisions of the Consent Orders will remain effective until modified, terminated, suspended or set aside by the FDIC. The Bank has taken steps to comply with the requirements of the Consent Orders. The Bank s Board of Directors and management commenced the process to develop and implement a Strategic Financial and Capital Plan to meet all applicable regulatory requirements. The Bank has engaged Veritas Risk Advisors, Inc. to assist the Bank in these efforts. The plan will include strategies to reduce operating expenses, manage and reduce the level of problem assets, improve operating policies and procedures, and manage asset levels to improve capital ratios and improve profitability. The uncertainty surrounding the Bank s ability to successfully implement the Strategic Financial and Capital Plan and to comply with the requirements of the Consent Orders gives rise to substantial doubt about the Bank s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Bank is unable to continue as a going concern. Sarbanes-Oxley Act of 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 the auditor s attestation report on internal controls over financial reporting required under Section 404(b) was permanently repealed for small reporting companies like the Bank. 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. Richard D. Rowland, an independent director of the Bank, who is not associated with the daily management of the Bank. Mr. Rowland is a Certified Public Accountant, 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. 20