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| SOMH > SEC Filings for SOMH > Form 10-K on 20-Mar-2009 | All Recent SEC Filings |
20-Mar-2009
Annual Report
Special Note Regarding Forward-Looking Statements
Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other "forward-looking" information. Those statements are subject to known and unknown risk; uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and
º the success or failure of our efforts to implement our business strategy;
º the effect of changing economic conditions and in particular changes in interest rates;
º changes in government regulations, tax rates and similar matters;
º our ability to attract and retain quality employees; and
º other risks which may be described in our future filings with the SEC.
We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements other than material changes to such information.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto included herein. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability.
"Management's Discussion and Analysis of Financial Condition and Results of Operation," is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgements that effect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company's Audited Consolidated Financial Statements for the year ended December 31, 2008 contains a summary of the Company's significant accounting policies. Management believes the Company's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically reviewed with the Audit Committee and the Board of Directors.
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 collectibility may not be assured, the existence and estimated net realizable 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 allowance for loan losses remains an estimate which is subject to significant judgement and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Company's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the northern New Jersey area experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control.
The Company serves as a holding company for the Bank, which is its primary asset and only operating subsidiary. The Bank conducts a traditional banking business, making commercial loans, consumer loans, and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies primarily upon deposits as the funding source for its assets. The Bank offers traditional deposit products. In addition, as an alternative to traditional certificate of deposit accounts, the Bank offers its Paramount Checking Account, an interest paying checking account which also provides a suite of additional services, such as free checks, free telephone banking and free bill payment, free safe deposit box and refunds for foreign ATM fees. Although the rate the Bank pays on the Paramount Checking Account is higher than the rate offered on most interest paying checking accounts by the Bank's competitors, management believes the account has helped to reduce the Bank's overall cost of funds and has been an integral part of the Bank's core account acquisition strategy. Core accounts consist of noninterest-bearing deposits-demand, NOW, money market and savings accounts. Paramount Checking Account balances are generally higher than other account balances, and the account helps the Bank develop an overall relationship with its customers, which frequently leads to cross-selling opportunities, which the Bank actively pursues through direct mailings and other special promotions. Another component to the Bank's core account acquisition strategy is the generation of deposit accounts which result from new commercial loan customers who move their deposit relationship to the bank and the continued expansion of the Bank's Escrow Ease product. Escrow Ease is specially designed to meet the trust account needs of attorneys, realtors and title companies. At December 31, 2008, the core accounts represented 76.8% of total deposit accounts.
Through its Sullivan Financial Services subsidiary ("Sullivan"), the Bank also engages in mortgage banking operations, originating loans for resale into the secondary market. We treat the operations of Sullivan as a separate reporting segment apart from our commercial banking business. See Note 13 to the accompanying Audited Financial Statements for financial information on our business segments.
For the year ended December 31, 2008, the Company earned net income of $1.6 million or $0.30 per diluted and basic share, compared to net income of $382 thousand, or $0.07 per diluted and basic share for 2007. The increase in 2008 income reflects the Company's write off of $1.2 million in goodwill associated with the 2000 acquisition of Sullivan Financial Services, its mortgage banking unit in the fourth quarter of 2007, and a $516,000 decrease in the provision for loan losses in 2008 compared to 2007. The Company's performance in 2008 also reflects a substantial decrease in interest income from the loan portfolio due to a decrease in loan rates partially offset by decreased interest expense, reflecting a decrease in deposit rates.
RESULTS OF OPERATIONS - 2008 versus 2007
The Company's results of operations depend primarily on its net interest income, which is the difference between the interest earned on its interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, as well as the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of non-interest income and other non-interest expenses.
Net Income
For the year ended December 31, 2008, the Company had net income of $1.6 million or $0.30 per basic share compared to net income of $382 thousand or $.07 per basic share for the year ended December 31, 2007. All per share data has been restated to reflect all subsequent stock dividends.
Net Interest Income
Net interest income remained constant at $10.7 million from 2007 to 2008. Total interest income decreased 16.2% or $2.9 million from $17.9 million in 2007 to $15.0 million in 2008. This decrease in interest income was partially offset by a decrease of 39.4% or $2.8 million in total interest expense to $4.3 million in 2008 from $7.1 million in 2007. The decrease in total interest income was the result of a decline in average interest earning
Total average interest earning assets decreased $7.2 million or 2.7% from an average of $267.0 million in 2007 to an average of $259.8 million in 2008. We experienced a decline in average securities during 2008 of $10.1 million, a decrease in average volume for Federal funds sold of $6.8 million and a decline in average loans held for sale of $1.8 million. These decreases were partially offset by an increase of $9.3 million in the average balance of loans.
Average total interest-bearing liabilities decreased by $10.9 million in 2008, consisting of a decrease of $21.4 million in average interest bearing demand deposits and $1.9 million in money market deposits. The decrease in interest expense of $2.8 million resulted from the decreases in average balances as well as the decrease in rate on interest-bearing liabilities. Average FHLB borrowings increased to $11.1 million in 2008 from $422 thousand in 2007.
The net interest margin for the year ended December 31, 2008 was 4.12% compared to 4.02% for 2007. The increase in net interest margin was due primarily to a decrease in the rate paid on our interest-bearing liabilities while the yield on our interest-earning assets declined at a slower pace. The average yield on earning assets for 2008 was 5.77% or 92 basis points lower than the 6.69% for 2007. The 2008 average cost of interest-bearing liabilities was 2.19%, or 127 basis points lower than the 3.46% for 2007. The net interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds, increased 35 basis points from 3.23% in 2007 to 3.58% in 2008. This increase was the result of the Company's ability to decrease rates on interest bearing liabilities at a faster rate than the decline in interest rates on earning assets.
Average Balance Sheets
The following table sets forth certain information relating to the Company's average assets and liabilities for the years ended December 31, 2008, 2007, and 2006, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Securities available for sale are reflected in the following table at amortized cost. Non-accrual loans are included in the average loan balance.
--------------------------------------------------------------------------------
For the years ended December 31,
---------------------------------------------------------------------------------------------------------------------------
2008 2007 2006
--------------------------------------- ------------------------------------- ---------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(dollars in thousands)
ASSETS:
Interest-Earning
Assets:
Cash and due
from banks $ 2,634 $ 25 0.93 % $ 957 $ 47 4.94 % $ 786 $ 38 4.84 %
Loans receivable 208,116 12,740 6.12 198,807 14,320 7.20 179,130 12,974 7.24
Investment
securities 38,793 1,834 4.73 48,929 2,490 5.09 41,459 1,954 4.71
Loans held for
sale 3,905 238 6.11 5,705 360 6.30 9,645 627 6.50
Restricted Stock 865 45 5.16 344 25 7.29 527 31 5.84
Federal funds
sold 5,462 106 1.94 12,295 625 5.08 3,069 158 5.16
--------- --------- -------- --------- --------- -------- --------- --------- --------
Total interest
earning assets 259,775 14,988 5.77 % 267,037 17,867 6.69 % 234,616 15,782 6.73 %
Non-interest
earning assets 24,672 27,134 21,985
Allowance for
loan losses (3,073 ) (2,205 ) (2,104 )
--------- ------- ---------
TOTAL ASSETS $ 281,374 $ 291,966 $ 254,497
--------- --------- ---------
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LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
Interest bearing
demand deposits $ 121,153 $ 2,140 1.77 % $ 142,641 $ 4,777 3.35 % $ 116,346 $ 3,745 3.22 %
Savings accounts 5,426 45 0.83 5,305 72 1.35 6,421 97 1.51
Money Market
accounts 17,375 261 1.50 19,259 481 2.50 24,255 766 3.16
Certificates of
deposit 39,785 1,444 3.63 38,644 1,795 4.65 28,045 1,174 4.19
FHLB advances 11,109 373 3.36 422 17 3.92 5,399 271 5.02
Federal funds
purchased 506 12 2.39 - - - 14 1 4.69
--------- --------- -------- --------- --------- -------- --------- --------- --------
Total interest
bearing
liabilities 195,354 4,275 2.19 % 206,271 7,142 3.46 % 180,480 6,054 3.35 %
Non-interest
bearing deposits 48,055 46,505 43,640
Other
liabilities 993 1,461 1,542
--------- --------- ---------
Total
liabilities 244,402 254,237 225,662
Stockholders'
Equity 36,972 37,729 28,835
--------- --------- ---------
TOTAL
LIABILITIES AND
STOCKHOLDERS'
EQUITY $ 281,374 $ 291,966 $ 254,497
--------- --------- --------- --------- --------- ---------
Net Interest
Income $ 10,713 $ 10,725 $ 9,728
--------- --------- ---------
Net Interest
Rate Spread(1) 3.58 % 3.23 % 3.38 %
Net Interest
Margin(2) 4.12 % 4.02 % 4.15 %
Ratio of Average
Interest-Earning
Assets to
Average
Interest-Bearing
Liabilities 132.98 % 129.46 % 130.00 %
--------- --------- ---------
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(2) Net Interest Margin equals Net Interest Income divided by Total average interest earning assets.
Rate/Volume Analysis
The following table presents, by category, the major factors that contributed
to the changes in net interest income on a tax equivalent basis for each of the
years ended December 31, 2008 and 2007.
Year Ended December 31, Year Ended December 31,
2008 versus 2007 2007 versus 2006
------------------------------------- -----------------------------------------------
Increase (Decrease) Increase (Decrease)
due to change in Average due to change in Average
------------------------------------- -----------------------------------------------
Volume Rate Net Volume Rate Net
--------- ----------- ----------- ---------- -------------------- -----------
(in thousands)
Interest Income:
Cash and due from banks $ 16 $ (38 ) $ (22 ) $ 8 $ 1 $ 9
Loans 570 (2,150 ) (1,580 ) 1,425 (79 ) 1,346
Securities (479 ) (176 ) (655 ) 352 184 536
Loans held for sale (110 ) (12 ) (122 ) (256 ) (11 ) (267 )
Restricted stock 26 (7 ) 19 (11 ) 5 (6 )
Federal funds sold (133 ) (386 ) (519 ) 476 (9 ) 467
------- --------- --------- -------- ---------------- --------
Total interest income $ (110 ) $ (2,769 ) $ (2,879 ) $ 1,994 $ 91 $ 2,085
------- --------- --------- -------- ---------------- --------
Interest Expense:
Interest bearing deposits $ (380 ) $ (2,257 ) $ (2,637 ) $ 847 $ 185 $ 1,032
Savings accounts 1 (28 ) (27 ) (17 ) (8 ) (25 )
Money Market accounts (29 ) (192 ) (221 ) (158 ) (127 ) (285 )
Certificates of deposit 42 (393 ) (351 ) 444 177 621
FHLB advances 359 (2 ) 357 (250 ) (4 ) (254 )
Federal funds purchased 12 - 12 (1 ) - (1 )
------- --------- --------- -------- ---------------- --------
Total interest expense 5 (2,872 ) (2,867 ) 865 223 1,088
------- --------- --------- -------- ---------------- --------
Net interest income $ (115 ) $ 103 $ (12 ) $ 1,129 $ (132 ) $ 997
------- --------- --------- -------- ---------------- --------
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Provision for Loan Losses
For the year ended December 31, 2008, the Company's provision for loan losses was $515 thousand, a decrease of $516 thousand from the provision of $1.0 million for the year ended December 31, 2007. The reduced provision primarily reflects the decrease in non accrual loans from $3.0 million for the year ended December 31, 2007 to $1.4 million for the year ended December 31, 2008. The change in the provision for loan losses reflects management's judgment concerning the risks inherent in the Company's existing portfolio and the size of the allowance necessary to provide for probable losses inherent in the portfolio. The provision reflects management's current view of current economic conditions, borrowers' financial condition and growth of the Bank's loan portfolio. The allowance for loan losses was approximately $2.8 million at December 31, 2008, representing 1.33% of total outstanding loans. The allowance for loan losses at December 31, 2007 was approximately $3.2 million or 1.54% of total outstanding loans at that date.
Non-Interest Income
Our non-interest income consists primarily of gains on sales of mortgage loans originated by our mortgage company subsidiary. For the year ended December 31, 2008, our non-interest income decreased by $639 thousand from the prior year. For the year ended December 31, 2008, we recognized $1.7 million in total non-interest income, a decrease of 26.8% from the comparable period in 2007. The decline primarily reflects the state of the residential mortgage market during 2008, as housing activity, and so mortgage activity, substantially declined and loss on sale of other real estate owned.
Other components of non-interest income include fees on deposit accounts, which decreased $16 thousand or 4.9%, to $313 thousand from $329 thousand in 2007. In addition, our other income increased by $12 thousand, or 2.1%, to $593 thousand for the year ended December 31, 2008. The increase primarily reflects income received from the change in value of bank owned life insurance, which increased $38 thousand or 12.3% to $348 thousand from $310 thousand in 2007. There was also a loss on sale of other real estate owned of $109 thousand in 2008 versus no loss in 2007.
For the year ended December 31, 2008, our non-interest expense decreased $1.4 million or 12.5% to $9.8 million compared to $11.2 million for the year ended December 31, 2007. The decrease primarily reflects the write off of goodwill of $1.2 million for the year ended December 31, 2007. In addition there were decreases in salaries and employee benefits of $22 thousand, or 0.4%, to $5.1 million in 2008 from $5.2 million in 2007. Printing and supplies expense decreased $93 thousand, or 33.7%, to $183 thousand in 2008 from $276 thousand in 2007. Advertising and business promotion expense decreased $91 thousand, or 24.9%, to $274 thousand in 2008 from $365 thousand in 2007. Occupancy expense increased $53 thousand, or 2.8%, to $1.9 million in 2008 from $1.9 million in 2007. Data processing increased $19 thousand, or 3.6%, to $540 thousand in 2008 from $521 thousand in 2007. Other operating expenses decreased $54 thousand, or 3.0%, to $1.7 million in 2008 from $1.8 million in 2007.
Income Tax Expense
The income tax provision for the years ended December 31, 2008 and 2007 was $599 thousand and $539 thousand, respectively. The effective tax rate for the years ended December 31, 2008 and 2007 was 27.7% and 58.5%, respectively. The decrease in the effective tax rate reflects the fact that the Company's write off of goodwill in 2007 was not tax deductible.
Financial Condition
Total assets at December 31, 2008 increased by $14.2 million or 5.0%, to $299.7 million compared to $285.5 million at December 31, 2007. Total loans, net were $208.4 million, loans held for sale were $2.4 million, total investment securities available for sale were $36.8 million, total investment securities held to maturity were $12.3 million and total cash and cash equivalents were $21.5 million. Total deposits at December 31, 2008 increased by $5.1 million, or 2.1% to $249.8 million compared to $244.7 million at December 31, 2007. Stockholders' equity increased $908 thousand or 2.5%, to $37.5 million in 2008 compared to $36.6 million at December 31, 2007, reflecting the impact of earnings from 2008 operations of $1.6 million, the exercise of common stock options of $1.2 million, the payment of cash dividends of $1.0 million and the repurchase of common stock of $1.4 million.
Loan Portfolio
Gross loans, excluding loans held for sale, grew by $2.7 million, or 1.3%, during 2008 from $208.4 million as of December 31, 2007 to $211.1 million at year-end 2008. The modest increase in gross loans was due to $57.5 million of originations of new loans and loan commitments, substantially offset by loan payoffs and pay-downs. The composition of the loan portfolio, by category, as of December 31, 2008 is as follows: 40.1% of our loans are secured by commercial real estate, 30.6% are commercial and industrial (primarily secured by liquid assets, real estate and/or business assets), 6.0% are residential mortgages secured by first liens on residential real estate and 23.3% are consumer, primarily home equity loans and home equity lines of credit secured by first or second liens. Commercial real estate loans consist primarily of loans secured by first mortgage liens on commercial property and may be used to finance the purchase, refinance or construction of such properties, and increased by $2.7 million, or 3.3%. Commercial and industrial loans are primarily secured by collateral, such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Loans secured by first liens on residential real estate are generally purchase mortgages or refinances of purchase mortgages made to existing customers of the Bank. This category, increased by $3.1 million, or 31.8%. Consumer loans primarily consist of home equity loans. Our consumer loans grew 165 thousand or . . .
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