Attached files
file | filename |
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EX-99.2 - EXHIBIT 99.2 - 1ST CONSTITUTION BANCORP | ex99_2.htm |
8-K - 1ST CONSTITUTION BANCORP | g3132008k.htm |
Exhibit 99.1
Shore Community Bank |
Index |
Page | |
Financial Statements | |
Balance Sheet as September 30, 2019 (unaudited) and December 31, 2018 | 2 |
Statement of Income for the nine months ended September 30, 2019 and 2018 (unaudited) | 3 |
Statement of Comprehensive Income (Loss) for the nine months ended | |
September 30, 2019 and 2018 (unaudited) | 4 |
Statement of Stockholders' Equity for the nine months ended September 30, 2019 and 2018 (unaudited) | 5 |
Statement of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) | 6 |
Notes to Financial Statements – September 30, 2019 (unaudited) | 8 |
Shore Community Bank |
Balance Sheet
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 34,504,683 | $ | 14,962,807 | ||||
Securities available-for-sale, at fair value | 11,483,174 | 13,508,751 | ||||||
Securities held-to-maturity (fair value of $16,226,847 at | ||||||||
2019 and $16,092,960 at 2018) | 15,877,618 | 16,112,785 | ||||||
Federal Home Loan Bank stock, at cost | 268,500 | 239,000 | ||||||
Loans receivable, net of allowance for loan losses of | ||||||||
$2,570,768 at 2019 and $2,556,769 at 2018 | 207,901,412 | 208,148,995 | ||||||
Premises and equipment, net | 4,028,685 | 4,045,183 | ||||||
Operating lease right of use assets | 1,034,440 | - | ||||||
Accrued interest receivable | 1,038,497 | 1,007,804 | ||||||
Prepaid expenses and other assets | 1,344,088 | 1,446,074 | ||||||
Bank owned life insurance | 7,237,436 | 7,124,428 | ||||||
Foreclosed assets | 953,568 | 953,568 | ||||||
Total assets | $ | 285,672,101 | $ | 267,549,395 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Non-interest bearing | $ | 58,896,379 | $ | 55,275,785 | ||||
Interest bearing | 191,032,387 | 180,125,323 | ||||||
Total deposits | 249,928,766 | 235,401,108 | ||||||
Accrued interest payable | 244,962 | 176,741 | ||||||
Lease liability | 1,034,440 | - | ||||||
Other liabilities | 1,450,167 | 838,001 | ||||||
Total liabilities | 252,658,335 | 236,415,850 | ||||||
Stockholders' Equity | ||||||||
Common stock, par value $5 per share; 4,000,000 shares | ||||||||
authorized; 3,123,456 shares issued and outstanding | ||||||||
at September 30, 2019 and December 31, 2018, respectively | 15,617,280 | 15,617,280 | ||||||
Surplus | 11,565,385 | 11,444,869 | ||||||
Retained earnings | 5,821,126 | 4,237,397 | ||||||
Accumulated other comprehensive income (loss) | 9,975 | (166,001 | ) | |||||
Total stockholders' equity | 33,013,766 | 31,133,545 | ||||||
Total liabilities and stockholders' equity | $ | 285,672,101 | $ | 267,549,395 |
The accompanying notes are an integral part of these unaudited financial statements.
2 |
Shore Community Bank |
Statement of Income
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Interest Income | ||||||||
Loans receivable, including fees | $ | 8,406,530 | $ | 7,946,726 | ||||
Securities: | ||||||||
Taxable | 260,913 | 263,174 | ||||||
Tax-exempt | 359,903 | 363,660 | ||||||
Federal funds sold and short-term investments | 333,927 | 329,958 | ||||||
Total interest income | 9,361,273 | 8,903,518 | ||||||
Interest Expense | ||||||||
Deposits | 1,588,262 | 1,228,081 | ||||||
Total interest expense | 1,588,262 | 1,228,081 | ||||||
Net interest income | 7,773,011 | 7,675,437 | ||||||
Provision (credit) for Loan Losses | - | (130,000 | ) | |||||
Net interest income after provision (credit) for loan losses | 7,773,011 | 7,805,437 | ||||||
Other Income | ||||||||
Service charges | 317,628 | 287,458 | ||||||
Mortgage banking activities | 2,502 | 28,267 | ||||||
Net losses on foreclosed assets | - | (12,446 | ) | |||||
Income from bank owned life insurance | 113,008 | 117,011 | ||||||
Other | 59,974 | 342,624 | ||||||
Total other income | 493,112 | 762,914 | ||||||
Other Expenses | ||||||||
Salaries, wages, and employee benefits | 2,753,528 | 2,632,953 | ||||||
Occupancy | 504,151 | 493,125 | ||||||
Equipment | 48,071 | 69,538 | ||||||
Data processing | 357,901 | 328,815 | ||||||
Advertising and promotion | 26,122 | 36,110 | ||||||
Supplies, printing, and postage | 65,797 | 77,074 | ||||||
Foreclosed assets expenses | 45,165 | 39,281 | ||||||
Federal deposit insurance premium | 37,200 | 131,585 | ||||||
Merger related expenses | 395,576 | - | ||||||
Other | 689,722 | 632,518 | ||||||
Total other expenses | 4,923,233 | 4,440,999 | ||||||
Income before income tax expense | 3,342,890 | 4,127,352 | ||||||
Income Tax Expense | 1,056,382 | 1,158,501 | ||||||
Net income | $ | 2,286,508 | $ | 2,968,851 | ||||
Earnings Per Share | ||||||||
Basic | $ | 0.73 | $ | 0.95 | ||||
Diluted | $ | 0.72 | $ | 0.94 |
The accompanying notes are an integral part of these unaudited financial statements.
3 |
Shore Community Bank |
Statement of Comprehensive Income
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Net Income | $ | 2,286,508 | $ | 2,968,851 | ||||
Other Comprehensive Income (Loss) | ||||||||
Unrealized holding gains (losses) on securities available-for sale | 244,479 | (348,497 | ) | |||||
Tax effect | (68,503 | ) | 97,579 | |||||
Total other comprehensive income (loss), net of tax | 175,976 | (250,918 | ) | |||||
Comprehensive income | $ | 2,462,484 | $ | 2,717,933 |
The accompanying notes are an integral part of these unaudited financial statements.
4 |
Shore Community Bank |
Statement of Shareholders’ Equity
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common | Retained | Comprehensive | ||||||||||||||||||
Stock | Surplus | Earnings | Income (Loss) | Total | ||||||||||||||||
Balance, December 31, 2018 | $ | 15,617,280 | $ | 11,444,869 | $ | 4,237,397 | $ | (166,001 | ) | $ | 31,133,545 | |||||||||
Net income | - | - | 2,286,508 | - | 2,286,508 | |||||||||||||||
Cash dividends paid | - | - | (702,779 | ) | - | (702,779 | ) | |||||||||||||
Other comprehensive loss | - | - | - | 175,976 | 175,976 | |||||||||||||||
Stock compensation expense | - | 120,516 | - | - | 120,516 | |||||||||||||||
Balance, September 30, 2019 | $ | 15,617,280 | $ | 11,565,385 | $ | 5,821,126 | $ | 9,975 | $ | 33,013,766 | ||||||||||
Balance, December 31, 2017 | $ | 15,494,290 | $ | 11,365,313 | $ | 1,170,310 | $ | (26,057 | ) | $ | 28,003,856 | |||||||||
Net income | - | - | 2,968,851 | - | 2,968,851 | |||||||||||||||
Cash dividends paid | - | - | (701,026 | ) | - | (701,026 | ) | |||||||||||||
Other comprehensive loss | - | - | - | (250,918 | ) | (250,918 | ) | |||||||||||||
Exercise of stock options (24,598 shares) | 122,990 | (33,013 | ) | - | - | 89,977 | ||||||||||||||
Stock compensation expense | - | 79,546 | - | - | 79,546 | |||||||||||||||
Balance, September 30, 2018 | $ | 15,617,280 | $ | 11,411,846 | $ | 3,438,135 | $ | (276,975 | ) | $ | 30,190,286 |
The accompanying notes are an integral part of these unaudited financial statements.
5 |
Shore Community Bank |
Statement of Cash Flows
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 2,286,508 | $ | 2,968,851 | ||||
Adjustments to reconcile change in net income to net cash | ||||||||
provided by operating activities: | ||||||||
Provision (credit) for loan losses | - | (130,000 | ) | |||||
Depreciation expense | 141,057 | 165,889 | ||||||
Net amortization of premiums and discounts | 351,454 | 255,023 | ||||||
Deferred income taxes | 69,885 | (181,518 | ) | |||||
Stock compensation expense | 120,516 | 79,546 | ||||||
Writedown of foreclosed assets | - | 1,040 | ||||||
Net loss on sale of foreclosed assets | - | 11,406 | ||||||
Proceeds from sale of loans held for sale | 178,615 | 418,267 | ||||||
Loans originated for sale | (175,000 | ) | (395,000 | ) | ||||
Net gain on sale of loans held for sale | (3,615 | ) | (23,267 | ) | ||||
Earnings on bank owned life insurance | (113,008 | ) | (117,011 | ) | ||||
(Increase) decrease in assets: | ||||||||
Accrued interest receivable | (30,693 | ) | (38,701 | ) | ||||
Prepaid expenses and other assets | 170,412 | 690,158 | ||||||
Increase in liabilities: | ||||||||
Accrued interest payable | 68,221 | 24,681 | ||||||
Other liabilities | 380,351 | 197,860 | ||||||
Net cash provided by operating activities | 3,444,703 | 3,927,224 | ||||||
Cash Flows from Investing Activities | ||||||||
Securities available-for-sale: | ||||||||
Maturities and principal repayments | 2,427,839 | 2,213,754 | ||||||
Securities held-to-maturity: | ||||||||
Purchases | (1,178,566 | ) | - | |||||
Maturities and principal repayments | 1,331,278 | 338,722 | ||||||
Net purchases of Federal Home Bank stock | (29,500 | ) | (45,200 | ) | ||||
Net increase in loans | (154,198 | ) | (5,692,442 | ) | ||||
Purchases of premises and equipment | (124,559 | ) | (48,415 | ) | ||||
Proceeds from sales of foreclosed assets | - | 97,223 | ||||||
Proceeds from life insurance | - | 114,468 | ||||||
Net cash provided by (used in) investing activities | 2,272,294 | (3,021,890 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Net increase in deposits | 14,527,658 | 9,147,273 | ||||||
Dividends paid | (702,779 | ) | (701,026 | ) | ||||
Proceeds from exercise of stock options | - | 89,977 | ||||||
Net cash provided by financing activities | 13,824,879 | 8,536,224 | ||||||
Net increase in cash and cash equivalents | 19,541,876 | 9,441,558 |
6 |
Shore Community Bank |
Cash and Cash Equivalents, Beginning of Year | 14,962,807 | 22,559,598 | ||||||
Cash and Cash Equivalents, End of Period | $ | 34,504,683 | $ | 32,001,156 | ||||
Supplementary Cash Flows Information | ||||||||
Interest paid | $ | 1,520,041 | $ | 818,906 | ||||
Income taxes paid | $ | 670,000 | $ | 855,000 | ||||
Supplementary Schedule of Noncash Investing Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | - | $ | 85,512 | ||||
Initial recognition of operating lease right of use assets | $ | 984,031 | $ | - | ||||
Initial recognition of operating lease liabilities | $ | 984,031 | $ | - | ||||
Acquisition of operating lease right of use assets | $ | 213,720 | $ | - | ||||
Execution of lease of operating lease liabilities | $ | 213,720 | $ | - |
The accompanying notes are an integral part of these unaudited financial statements.
7 |
Shore Community Bank |
Notes to the Financial Statements |
1. | Summary of Significant Accounting Policies |
Basis of Financial Statement Presentation
The accompanying unaudited financial statements include the accounts of Shore Community Bank ("SCB") and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the nine month period ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in the accompanying SCB’s financial statements for the year ended December 31, 2018.
SCB was incorporated March 20, 1996 under the laws of the State of New Jersey and is a New Jersey state chartered bank. SCB commenced operations on February 24, 1997 and provides full banking services. As a state bank, SCB is subject to regulation by the New Jersey Department of Banking and the Federal Deposit Insurance Corporation. The area served by SCB is principally Ocean County, New Jersey.
Subsequent Events
SCB has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2019 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through October 31, 2019, the date these financial statements were available to be issued, and SCB determined that the following item should be disclosed.
On June 24, 2019, 1st Constitution Bancorp (“1st Constitution”), the holding company for 1st Constitution Bank, and Shore Community Bank (“SCB”) jointly announced that they have entered into a definitive agreement and plan of merger pursuant to which 1st Constitution will acquire SCB in a stock and cash transaction valued at $16.54 per share, or approximately $53.1 million in total consideration. Upon the closing of the transaction, SCB will merge with and into 1st Constitution Bank. The merger has been unanimously approved by the boards of directors of both institutions, and is anticipated to be completed on November 8 2019. The transaction is subject to approval by the shareholders of SCB, as well as regulatory approvals, and other customary closing conditions. Under the terms of the merger agreement, SCB’s shareholders will receive 0.8786 of a share of 1st Constitution common stock, $16.50 in cash, or a combination of 1st Constitution common stock and cash, subject to adjustment as set forth in the merger agreement, for each share of SCB’s common stock that they own.
Included in SCB’s 2019 year-to-date non-interest expense was $395,576 in non-recurring expenses related to the merger, largely legal and other professional fees. SCB expects to incur additional non-recurring costs through the closing of the merger.
8 |
Shore Community Bank |
Notes to the Financial Statements |
Newly Issued Accounting Standard
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the lessee will primarily depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective for SCB in 2019. SCB adopted this ASU in 2019. At September 30, 2019, SCB’s operating lease right of use assets and operating lease liabilities were $1,034,440.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), to replace the incurred loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loans receivable and held-to maturity debt securities. It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees, and other similar instruments. For the assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first report period in which the guidance is effective. This new standard will be effective for SCB in 2021. SCB is currently evaluating the impact this new standard will have on the financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU No. 2018-13 modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. The amendments are based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the FASB finalized on August 28, 2018. ASU No. 2018-13 is effective for SCB in 2020. Early adoption is permitted. SCB is in the process of evaluating the potential impact this new standard will have on the financial statements.
9 |
Shore Community Bank |
Notes to the Financial Statements |
2. | Securities |
The amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 are summarized as follows:
September 30, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government agency securities | $ | 3,183,224 | $ | 103,454 | $ | (45,386 | ) | $ | 3,241,292 | |||||||
U.S. government sponsored enterprises - residential mortgage- backed securities | 8,261,093 | 34,923 | (79,134 | ) | 8,216,882 | |||||||||||
Other | 25,000 | - | - | 25,000 | ||||||||||||
$ | 11,469,317 | $ | 138,377 | $ | (124,520 | ) | $ | 11,483,174 | ||||||||
Securities held-to-maturity: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 15,877,618 | $ | 349,229 | $ | - | $ | 16,226,847 |
December 31, 2018 | ||||||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government agency securities | $ | 3,759,137 | $ | 84,645 | $ | (46,389 | ) | $ | 3,797,393 | |||||||
U.S. government sponsored enterprises - residential mortgage- backed securities | 9,955,236 | 26,686 | (295,564 | ) | 9,686,358 | |||||||||||
Other | 25,000 | - | - | 25,000 | ||||||||||||
$ | 13,739,373 | $ | 111,331 | $ | (341,953 | ) | $ | 13,508,751 | ||||||||
Securities held-to-maturity: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 16,112,785 | $ | 165,435 | $ | (185,260 | ) | $ | 16,092,960 |
10 |
Shore Community Bank |
Notes to the Financial Statements |
The amortized cost and fair value of securities as of September 30, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the borrowers may have the right to prepay obligations with or without any penalties.
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due in one year or less | $ | 111,231 | $ | 110,565 | $ | 3,804,534 | $ | 3,911,193 | ||||||||
Due after one year through five years | 2,426,469 | 2,521,939 | 6,226,324 | 6,393,240 | ||||||||||||
Due after five years through ten years | 247,182 | 237,246 | 5,302,629 | 5,363,724 | ||||||||||||
Due after ten years | 398,342 | 371,542 | 544,131 | 558,690 | ||||||||||||
3,183,224 | 3,241,292 | 15,877,618 | 16,226,847 | |||||||||||||
U.S. government sponsored enterprises - residential mortgage-backed securities | 8,261,093 | 8,216,882 | - | - | ||||||||||||
Other | 25,000 | 25,000 | - | - | ||||||||||||
$ | 11,469,317 | $ | 11,483,174 | $ | 15,877,618 | $ | 16,226,847 |
The following tables present gross unrealized losses and fair value of Shore Community Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018:
September 30, 2019 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
U.S. government agency securities | $ | 766,368 | $ | (6 | ) | $ | 612,950 | $ | (45 ,380) | $ | 1,379,318 | $ | (45,386 | ) | ||||||||||
U.S. government sponsored enterprises - residential mortgage- backed securities | - | - | 5,867,970 | (79,134 | ) | 5,879,970 | (79,134 | ) | ||||||||||||||||
Obligations of state and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total temporarily impaired securities | $ | 766,368 | $ | (6 | ) | $ | 6,480,920 | $ | (124,514 | ) | $ | 7,247,288 | $ | (124,520 | ) |
11 |
Shore Community Bank |
Notes to the Financial Statements |
December 31, 2018 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
U.S. government agency securities | $ | - | $ | - | $ | 623,150 | $ | (46,389 | ) | $ | 623,150 | $ | (46,389 | ) | ||||||||||
U.S. government sponsored enterprises - residential mortgage- backed securities | 31,864 | (63 | ) | 7,961,325 | (295,501 | ) | 7,993,189 | (295,564 | ) | |||||||||||||||
Obligations of state and political subdivisions | 536,915 | (3,739 | ) | 6,109,032 | (181,521 | ) | 6,645,947 | (185,260 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 568,779 | $ | (3,802 | ) | $ | 14,693,507 | $ | (523,411 | ) | $ | 15,262,286 | $ | (527,213 | ) |
SCB had 29 and 47 securities at September 30, 2019 and December 31, 2018, respectively, in an unrealized loss position. The decline in fair value was due only to interest rate fluctuations. SCB does not intend to sell these securities prior to their recovery and it is more likely than not that SCB will not have to sell the securities prior to recovery. No securities are deemed to be other-than-temporarily impaired. None of the individual unrealized losses are significant.
There were no sales of available-for-sale securities in the nine months ended September 30, 2019 and 2018.
Securities with a carrying value of $18,898,749 and $20,507,000 at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
12 |
Shore Community Bank |
Notes to the Financial Statements |
3. | Loans Receivable and Allowance for Loan Losses |
The composition of net loans receivable at September 30, 2019 and December 31, 2018 was as follows:
September 30, 2019 | December 31, 2018 | |||||||
Real estate: | ||||||||
Commercial | $ | 133,075,045 | $ | 123,861,449 | ||||
Commercial construction | 13,782,282 | 13,989,574 | ||||||
Residential | 34,128,633 | 36,635,127 | ||||||
Residential construction | 1,912,609 | 1,662,806 | ||||||
Home equity loans | 8,392,662 | 10,966,131 | ||||||
191,291,231 | 187,115,087 | |||||||
Commercial and industrial | 18,146,389 | 22,490,603 | ||||||
Consumer loans | 140,605 | 163,947 | ||||||
SBA loans | 880,160 | 890,410 | ||||||
210,458,385 | 210,660,047 | |||||||
Unearned net loan fees and origination costs | 13,795 | (12,515 | ) | |||||
Allowance for loan losses | (2,570,768 | ) | (2,556,769 | ) | ||||
Net loans | $ | 207,901,412 | $ | 208,148,995 |
13 |
Shore Community Bank |
Notes to the Financial Statements |
The following tables summarize the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2019 and the year ended December 31, 2018, and information in regard to the allowance for loan losses and the recorded investment in loans receivable by loan class as of September 30, 2019 and December 31, 2018:
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Beginning Balance | Charge-offs | Recoveries | Provisions | Ending Balance | Ending Balance: Individually Evaluated for Impairment | Ending Balance: Collectively Evaluated for Impairment | ||||||||||||||||||||||
Commercial | $ | 1,850,169 | $ | - | $ | 22,947 | $ | - | $ | 1,873,116 | $ | - | $ | 1,873,116 | ||||||||||||||
Residential mortgage | 443,448 | (9,062 | ) | - | - | 434,386 | 88,805 | 354,581 | ||||||||||||||||||||
Home equity and consumer, other | 35,984 | - | 114 | - | 36,098 | - | 36,098 | |||||||||||||||||||||
Unallocated | 227,168 | - | - | - | 227,168 | - | 227,168 | |||||||||||||||||||||
$ | 2,556,769 | $ | (9,062 | ) | $ | 23,061 | $ | - | $ | 2,570,768 | $ | 88,805 | $ | 2,481,963 |
September 30, 2019 | ||||||||||||||||||||||||||||
Ending Balance | Ending Balance: Individually Evaluated for Impairment | Ending Balance: Collectively Evaluated for Impairment | ||||||||||||||||||||||||||
Commercial | $ | 165,883,876 | $ | 4,379,639 | $ | 161,504,237 | ||||||||||||||||||||||
Residential mortgage | 36,041,242 | 621,509 | 35,419,733 | |||||||||||||||||||||||||
Home equity and consumer, other | 8,533,267 | 8,533,267 | ||||||||||||||||||||||||||
$ | 210,458,385 | $ | 5,001,148 | $ | 205,457,237 |
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Beginning Balance | Charge-offs | Recoveries | Provision (credit) | Ending Balance | Ending Balance: Individually Evaluated for Impairment | Ending Balance: Collectively Evaluated for Impairment | ||||||||||||||||||||||
Commercial | $ | 1,904,013 | $ | (28,992 | ) | $ | 121,239 | $ | - | $ | 1,996,260 | $ | - | $ | 1,996,260 | |||||||||||||
Residential mortgage | 526,632 | (1,442 | ) | - | - | 525,190 | - | 525,190 | ||||||||||||||||||||
Home equity and consumer, other | 35,780 | (8,638 | ) | 2,816 | - | 29,958 | - | 29,958 | ||||||||||||||||||||
Unallocated | 433,848 | - | - | (130,000 | ) | 303,848 | - | 303,848 | ||||||||||||||||||||
$ | 2,900,273 | $ | (39,072 | ) | $ | 124,055 | $ | (130,000 | ) | $ | 2,855,256 | $ | - | $ | 2,855,256 |
14 |
Shore Community Bank |
Notes to the Financial Statements |
December 31, 2018 | ||||||||||||||||||||||||||||
Ending Balance | Ending Balance: Individually Evaluated for Impairment | Ending Balance: Collectively Evaluated for Impairment | ||||||||||||||||||||||||||
Commercial | $ | 161,232,036 | $ | 4,285,471 | $ | 156,946,565 | ||||||||||||||||||||||
Residential mortgage | 38,297,933 | 484,190 | 37,813,743 | |||||||||||||||||||||||||
Home equity and consumer, other | 11,130,078 | - | 11,130,078 | |||||||||||||||||||||||||
$ | 210,660,047 | $ | 4,769,661 | $ | 205,890,386 |
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the SCB's internal risk rating system as of September 30, 2019 and December 31, 2018:
September 30, 2019 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Commercial | $ | 159,546,662 | $ | 1,957,575 | $ | 4,379,639 | $ | - | $ | 165,883,876 | ||||||||||
Residential mortgage | 35,147,090 | 272,643 | 621,509 | - | 36,041,242 | |||||||||||||||
Home equity and consumer, other | 8,533,267 | - | - | - | 8,533,267 | |||||||||||||||
$ | 203,227,019 | $ | 2,230,218 | $ | 5,001,148 | $ | - | $ | 210,458,385 |
December 31, 2018 | ||||||||||||||||||||
Commercial | $ | 152,371,632 | $ | 4,574,933 | $ | 4,285,471 | $ | - | $ | 161,232,036 | ||||||||||
Residential mortgage | 37,813,743 | - | 484,190 | - | 38,297,933 | |||||||||||||||
Home equity and consumer, other | 11,130,078 | - | - | - | 11,130,078 | |||||||||||||||
$ | 201,315,453 | $ | 4,574,933 | $ | 4,769,661 | $ | - | $ | 210,660,047 |
15 |
Shore Community Bank |
Notes to the Financial Statements |
The following tables summarize information in regards to impaired loans by loan portfolio class as of September 30, 2019 and December 31, 2018:
September 30, 2019 | ||||||||||||||||||||
Recorded Investment after Charge-offs | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 4,379,639 | $ | 4,379,639 | $ | - | $ | 4,332,555 | $ | 6,232 | ||||||||||
Residential mortgage | 457,372 | 457,372 | - | 384,124 | - | |||||||||||||||
Consumer | - | - | - | - | 1,490 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Residential mortgage | 164,137 | 252,942 | 88,805 | 168,726 | 877 | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 4,379,639 | $ | 4,379,639 | $ | - | $ | 4,332,555 | $ | 6,232 | ||||||||||
Residential mortgage | 621,509 | 710,314 | 88,805 | 552,850 | 877 | |||||||||||||||
Consumer | - | - | - | - | 1,490 | |||||||||||||||
$ | 5,001,148 | $ | 5,089,953 | $ | 88,805 | $ | 4,885,405 | $ | 8,599 |
December 31, 2018 | ||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 4,285,471 | $ | 4,285,471 | $ | - | $ | 1,611,617 | $ | 16,742 | ||||||||||
Residential mortgage | 310,876 | 310,876 | - | 173,098 | - | |||||||||||||||
Consumer | - | - | - | 10,384 | 9,501 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial | $ | - | $ | - | $ | - | $ | 388,838 | $ | - | ||||||||||
Residential mortgage | 173,314 | 253,442 | 120 | 204,843 | 4,726 | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 4,285,471 | $ | 4,285,471 | $ | - | $ | 2,000,455 | $ | 16,742 | ||||||||||
Residential mortgage | 484,190 | 564,318 | 120 | 377,941 | 4,726 | |||||||||||||||
Consumer | - | - | - | 10,384 | 9,501 | |||||||||||||||
$ | 4,769,661 | $ | 4,849,789 | $ | 120 | $ | 2,388,780 | $ | 30,969 |
16 |
Shore Community Bank |
Notes to the Financial Statements |
The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
Commercial | $ | - | $ | - | ||||
Residential mortgage | 621,509 | 484,190 | ||||||
$ | 621,509 | $ | 484,190 |
The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2019 and December 31, 2018:
September 30, 2019 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loans Receivables | Loans Receivable >90 Days and Accruing | ||||||||||||||||||||||
Commercial | $ | 980,606 | $ | - | $ | 1,550,000 | $ | 2,530,606 | $ | 163,353,270 | $ | 165,883,876 | $ | 1,550,000 | ||||||||||||||
Residential mortgage | - | - | 621,509 | 621,509 | 35,419,733 | 36,041,242 | ||||||||||||||||||||||
Home equity and consumer, other | - | - | - | - | 8,533,267 | 8,533,267 | - | |||||||||||||||||||||
$ | 980,606 | $ | - | $ | 1,550,000 | $ | 2,530,606 | $ | 207,306,270 | $ | 210,458,385 | $ | 1,550,000 |
December 31, 2018 | ||||||||||||||||||||||||||||
Commercial | $ | - | $ | - | $ | 1,550,000 | $ | 1,550,000 | $ | 159,682,036 | $ | 161,232,036 | $ | 1,550,000 | ||||||||||||||
Residential mortgage | 748,611 | - | 484,190 | 1,232,801 | 37,065,132 | 38,297,933 | - | |||||||||||||||||||||
Home equity and consumer, other | 3,495 | - | - | 3,495 | 11,126,583 | 11,130,078 | - | |||||||||||||||||||||
$ | 752,106 | $ | - | $ | 2,034,190 | $ | 2,786,296 | $ | 207,873,751 | $ | 210,660,047 | $ | 1,550,000 |
SCB may grant a concession or modification for economic or legal reasons related to a borrower's financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring ("TDR"). SCB may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers' operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating SCB's allowance for loan losses. As of September 30, 2019, and December 31, 2018, SCB has a recorded investment in troubled debt restructurings of $428,351 and $445,104, respectively. SCB has allocated $88,805 and $120 of specific allowance for these loans at September 30, 2019 and December 31, 2018, respectively, and there are no commitments to lend additional amounts.
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Shore Community Bank |
Notes to the Financial Statements |
SCB identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower's financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.
There were no troubled debt restructurings which occurred during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.
There were no troubled debt restructured loans made in prior years that subsequently defaulted in the nine months ended September 30, 2019 and the year ended December 31, 2018.
4. | Foreclosed Assets |
Foreclosed asset activity was as follows for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Beginning balance | $ | 953,568 | $ | 929,715 | ||||
Loans transferred to foreclosed assets | - | 85,512 | ||||||
Write-down of foreclosed assets | - | (1,040 | ) | |||||
Sales of foreclosed assets | - | (60,619 | ) | |||||
$ | 953,568 | $ | 953,568 |
At September 30, 2019 and December 31, 2018, the balance of foreclosed assets includes $69,560 and $69,560, respectively of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property or deed in lieu of foreclosure. At September 30, 2019 and December 31, 2018, the recorded investment of residential mortgage and consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process was $-0-.
18 |
Shore Community Bank |
Notes to the Financial Statements |
5. | Deposits |
The components of deposits at September 30, 2019 and December 31, 2018 are as follows:
September 30, 2019 | December 31, 2018 | |||||||
Demand, non-interest bearing | $ | 58,896,379 | $ | 55,275,785 | ||||
Demand, interest bearing | 36,661,311 | 38,560,054 | ||||||
Savings | 64,224,740 | 66,995,385 | ||||||
Time, $100,000 and over | 77,028,922 | 39,346,902 | ||||||
Time, other | 13,117,414 | 35,222,982 | ||||||
$ | 249,928,766 | $ | 235,401,108 |
At September 30, 2019, the scheduled maturities of time deposits are as follows:
2019 | $ | 12,069,000 | ||||||
2020 | 48,311,000 | |||||||
2021 | 24,393,336 | |||||||
2022 | 3,481,000 | |||||||
2023 | 1,576,000 | |||||||
2024 | 316,000 | |||||||
$ | 90,146,336 |
At September 30, 2019 and December 31, 2018, the total of individual time deposits with balances in excess of $250,000 (FDIC insurance limit) was approximately $13,117,413 and $8,956,000, respectively.
6. | Leases |
Effective January 1, 2019, SCB adopted ASU 2016-02, Leases (Topic 842), and all subsequent ASUs that modified Topic 842. For SCB, Topic 842 affected the accounting treatment for operation lease agreements in which SCB is the lessee by recognizing lease assets and liabilities on the balance sheet.
SCB leases the premises for two branch locations including a loan office under operating lease agreements expiring in various years through 2020. SCB is responsible to pay all real estate taxes, insurance, utilities, maintenance, and repairs on the buildings. SCB also has two land leases for two branch locations under operating lease agreements expiring through 2026. The branch buildings for these locations are owned by SCB.
All of the leases in which SCB is lessee are comprised of real estate property primarily for branches and office space. These leases are classified as operating leases. At September 30, 2019, SCB’s operating lease right of use assets and operating lease liabilities were $1,034,440.
19 |
Shore Community Bank |
Notes to the Financial Statements |
In adopting the new accounting guidance, SCB used the following practical expedients for transitional relief as provided for in a subsequent ASU:
· | An entity need not reassess whether any expired or existing contract are or contain leases. |
· | An entity need not reassess the lease classification for any expired or existing leases. |
· | An entity need not reassess initial direct costs for any existing leases. |
· | An entity may elect to apply hindsight to leases that existed during the period from the beginning of the earliest period presented in the financial statements until the effective date. |
SCB also elected not to included short-term leases (i.e., leases with initial terms of twelve months or less) or equipment leases (deemed immaterial) on the balance sheet as provided for in the accounting guidance.
The following provides additional information about SCB’s operation leases:
At September 30, 2019:
Weighted average remaining lease term | 5.53 years | |||||||
Weighted average discount rate | 3.92 | % |
At September 30, 2019, the future minimum payments are as follows:
2019 | $ | 59,912 | ||||||
2020 | 235,637 | |||||||
2021 | 233,848 | |||||||
2022 | 237,478 | |||||||
2023 | 222,478 | |||||||
2024 | 85,425 | |||||||
Thereafter | 119,790 | |||||||
Total lease payments | 1,194,568 | |||||||
Less interest | (160,128 | ) | ||||||
Operating lease liability | $ | 1,034,440 |
Rent expense was $247,847 and $247,192 for the nine months ended September 30, 2019 and 2018, respectively.
7. | Employee Benefit Plan |
SCB adopted a Savings Incentive Match Plan for Employees ("SIMPLE") individual retirement plan as of January 1, 2004. Employees may contribute up to the maximum allowable each year and SCB will match the elective deferral percentage of the employee's salary up to 3%. During the nine months ended September 30, 2019 and 2018, employer SIMPLE IRA matching contributions to the Plan charged to operations were $50,657 and $48,656, respectively.
8. | Agreements with Executives |
SCB has employment agreements with certain employees which include minimum annual salary commitments and change of control provisions. Upon resignation after a change in the control of SCB, as defined in the agreement, the individuals will receive monetary compensation in the amount set forth in the agreement. SCB also has a supplemental employee retirement plan with its Chief Executive Officer. There are $37,000 and $86,500 of accruals under this plan as of September 30, 2019 and December 31, 2018, respectively, and which are included in other liabilities in the accompanying balance sheet.
20 |
Shore Community Bank |
Notes to the Financial Statements |
9. | Stock Option Plans |
Stock option share information as of September 30, 2019 and December 31, 2018 and activity for the nine months ended September 30, 2019 and the year ended December 31, 2018 has been adjusted for the 10% stock dividend issued in 2016.
Effective May 1, 2004, SCB adopted the 2004 Non-Qualified Stock Option Plan for certain employees, officers and directors of SCB and the 2004 Incentive Stock Option Plan for certain employees and officers of SCB. Under the Plans, stock options are granted at the discretion of the Board of Directors. The 2004 Non-Qualified Stock Option Plan was allotted 62,723 shares and the 2004 Incentive Stock Option Plan was allotted 126,737 shares, respectively, of SCB's common stock. Under the 2004 Non-Qualified Stock Option Plan, the exercise price of options granted to employees and officers cannot be less than 85% of the fair market value of the common shares at the date of grant and options granted to directors cannot be less than the fair market value of the common shares. Under the 2004 Incentive Stock Option Plan, the exercise price of options granted to employees and officers cannot be less than the fair market value of the common shares at the date of grant. Stock options granted under the Plans expire in ten years. As of September 30, 2019, and December 31, 2018, there were no shares available under the 2004 Non-Qualified Stock Option Plan and the 2004 Incentive Stock Option Plan and both plans have expired.
Effective May 1, 2014, SCB adopted the 2014 Incentive Stock Option Plan for certain employees and officers of SCB. Under the Plan, stock options are granted at the discretion of the Board of Directors. The 2014 Incentive Stock Option Plan was allotted 133,100 shares of SCB's common stock. Under the 2014 Incentive Stock Option Plan, the exercise price of options granted to employees and officers cannot be less than the fair market value of the common shares at the date of grant. Stock options granted under the Plan expire in ten years. As of December 31, 2018, there were no shares available under the 2014 Incentive Stock Option Plan for issuance.
Effective May 1, 2018, SCB adopted the 2018 Incentive Stock Option Plan for certain employees and officers of SCB. Under the Plan, stock options are granted at the discretion of the Board of Directors. The 2018 Incentive Stock Option Plan was allotted 150,000 shares of SCB's common stock. Under the 2018 Incentive Stock Option Plan, the exercise price of options granted to employees and officers cannot be less than the fair market value of the common shares at the date of grant. Stock options granted under the Plan expire in ten years. As of September 31, 2019, there were 55,000 shares available under the 2018 Incentive Stock Option Plan for issuance.
21 |
Shore Community Bank |
Notes to the Financial Statements |
The following summarizes changes in stock options outstanding under the plans discussed above for the nine months ended September 30, 2019 and the year ended December 31, 2018.
Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at December 31, 2018 | 139,809 | $ | 7.85 | |||||
Granted | 50,000 | 12.06 | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Outstanding at September 30, 2019 | 189,809 | $ | 8.96 | |||||
Exercisable at September 30, 2019 | 78,270 | $ | 6.97 | |||||
Outstanding at December 31, 2017 | 119,407 | 5.42 | ||||||
Granted | 45,000 | 12.00 | ||||||
Exercised | (24,598 | ) | 3.66 | |||||
Forfeited | - | - | ||||||
Outstanding at September 30, 2018 | 139,809 | $ | 7.85 | |||||
Exercisable at September 30, 2018 | 35,864 | $ | 5.50 |
The weighted-average remaining contractual life of the above options is approximately 7.9 years. Stock options outstanding at September 30, 2019 are exercisable at prices ranging from $4.94 to $12.06 per share. The intrinsic value of options outstanding and exercisable at September 30, 2019 was $1,314,863 and $892,726, respectively.
The fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumption for grants in 2019 and 2018: dividend yield of 0.00%, risk-free interest rate of 2.52% and 2.92%, expected life of 7 years, and expected volatility of 16.97% and 28.30%, respectively. The weighted average fair value of options granted in 2019 and 2018 was $8.95 and $3.66 per share, respectively.
Total stock-based compensation cost for the nine months ended September 30, 2019 and 2018 related to stock options granted was $120,516 and $79,546, respectively.
As of September 30, 2019, there was $227,819 of unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted average period of 3.45 years through 2025.
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Shore Community Bank |
Notes to the Financial Statements |
10. | Earnings Per Share |
The following table sets forth the computations of basic and diluted earnings per share for the nine months ended September 30, 2019 and 2018 (as adjusted for the 10% stock dividend issued in 2017):
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Numerator, net income | $ | 2,286,508 | $ | 2,968,851 | ||||
Denominator: | ||||||||
Denominator for basic earnings per share, weighted average shares | $ | 3,123,456 | $ | 3,115,438 | ||||
Effect of dilutive securities, stock options | 68,872 | 52,541 | ||||||
Denominator for diluted earnings per share, weighted average shares and assumed conversions | $ | 3,192,328 | $ | 3,167,979 | ||||
Basic earnings per share | $ | 0.73 | $ | 0.95 | ||||
Diluted earnings per share | $ | 0.72 | $ | 0.94 |
11. | Income Taxes |
A reconciliation of the statutory income tax at a rate of 21% to the income tax expense included in the statements of income is as follows for the nine months ended September 30, 2019 and 2018, respectively:
Nine Months Ended September 30, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Amount | % of | Amount | % of | |||||||||||||
Federal income tax at statutory rate | $ | 702,007 | 21 | % | $ | 866,735 | 21 | % | ||||||||
Tax-exempt interest | (77,789 | ) | (2 | ) | (82,548 | ) | (2 | ) | ||||||||
Bank owned life insurance | (25,189 | ) | (1 | ) | (41,274 | ) | (1 | ) | ||||||||
Merger related expenses | 104,232 | 3 | - | - | ||||||||||||
State tax expense, net of federal benefit | 352,877 | 11 | 374,317 | 9 | ||||||||||||
Other | 244 | - | 41,274 | 1 | ||||||||||||
$ | 1,056,382 | 32 | % | $ | 1,158,501 | 28 | % |
23 |
Shore Community Bank |
Notes to the Financial Statements |
12. | Transactions with Executive Officers, Directors and Principal Stockholders |
SCB has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
Loans to related parties at September 30, 2019 and December 31, 2018 were $7,926,248 and $4,524,673, respectively. New related party loans during the nine months ended September 30, 2019 and 2018 were $3,127,500 and $-0-, respectively. SCB had lines of credit to related parties with an outstanding balance of $279,780 and $798,870 at September 30, 2019 and December 31, 2018, respectively. Deposits to related parties at September 30, 2019 and December 31, 2018 were not significant.
13. | Financial Instruments with Off-Balance Sheet Risk |
SCB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
SCB's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. SCB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of SCB's financial instrument commitments at September 30, 2019 and December 31, 2018 is as follows:
Contract Amount | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Commitments to grant loans | $ | 3,811,250 | $ | 17,873,500 | ||||
Unfunded commitments under lines of credit | 37,357,000 | 40,494,000 | ||||||
Commercial and standby letters of credit | 279,780 | 352,204 | ||||||
$ | 41,448,030 | $ | 58,719,704 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. SCB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by SCB upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
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Shore Community Bank |
Notes to the Financial Statements |
Outstanding letters of credit written are conditional commitments issued by SCB to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. SCB requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments at September 30, 2019 and December 31, 2018 was $280,000 and $352,000, respectively. The current amount of the liability as of September 30, 2019 and December 31, 2018 for guarantees under standby letters of credit issued is not material.
14. | Contingencies |
There are no material legal proceedings to which SCB is party to except proceedings which arise in the normal course of business and, in the opinion of management, will not have any material effect on the consolidated financial position of SCB.
15. | Fair Value Measurements and Disclosures |
Determination of Fair Value
SCB uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the SCB's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is determined at a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, SCB groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
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Shore Community Bank |
Notes to the Financial Statements |
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:
September 30, 2019 | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government agency securities | $ | 3,241,292 | $ | - | $ | 3,241,292 | $ | - | ||||||||
U.S. government sponsored enterprises - residential mortgage-backed securities | 8,216,882 | - | 8,216,882 | - | ||||||||||||
Other | 25,000 | - | 25,000 | - | ||||||||||||
$ | 11,483,174 | $ | - | $ | 11,483,174 | $ | - |
December 31, 2018 | ||||||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government agency securities | $ | 3,793,393 | $ | - | $ | 3,797,393 | $ | - | ||||||||
U.S. government sponsored enterprises - residential mortgage-backed securities | 9,686,358 | - | 9,686,358 | - | ||||||||||||
Other | 25,000 | - | 25,000 | - | ||||||||||||
$ | 13,508,751 | $ | - | $ | 13,508,751 | $ | - |
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Shore Community Bank |
Notes to the Financial Statements |
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:
September 30, 2019 | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Impaired loans | $ | 164,137 | $ | - | $ | - | $ | 164,137 |
December 31, 2018 | ||||||||||||||||
Impaired loans | $ | 173,194 | $ | - | $ | - | $ | 173,194 |
27 |
Shore Community Bank |
Notes to the Financial Statements |
For non-financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:
September 30, 2019 | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Foreclosed assets | $ | 953,568 | $ | $ | $ | 953,568 |
December 31, 2018 | ||||||||||||||||
Foreclosed assets | $ | 953,568 | $ | $ | $ | 953,568 |
September 30, 2019 | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range | |||||||
Impaired loans | $ | 164,137 | Appraisal of collateral | Appraisal adjustments | 0% - 7% | |||||
Liquidation expenses | 10% - 15% | |||||||||
Foreclosed assets | $ | 953,568 | Appraisal of property | Appraisal adjustments | 0% -15% | |||||
Liquidation expenses | 10% - 15% |
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Shore Community Bank |
Notes to the Financial Statements |
December 31, 2018 | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range | |||||||
Impaired loans | $ | 173,194 | Appraisal of collateral | Appraisal adjustments | 0% - 7% | |||||
Liquidation expenses | 10% - 15% | |||||||||
Foreclosed assets | $ | 953,568 | Appraisal of property | Appraisal adjustments | 0% -15% | |||||
Liquidation expenses | 10% - 15% |
Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
Below is management's estimate of the fair value of all financial instruments, whether carried at cost or fair value on SCB's balance sheet.
The following information should not be interpreted as an estimate of the fair value of the entire SCB since a fair value calculation is only provided for a limited portion of SCB's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between SCB's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of SCB's financial instruments:
Cash and Cash Equivalents (Carried at Cost)
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.
Securities
The fair value of securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices.
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Shore Community Bank |
Notes to the Financial Statements |
Loans Receivable (Carried at Cost)
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of loans held for sale is based on secondary market prices.
Impaired Loans (Generally Carried at Fair Value)
Impaired loans are those in which SCB has measured impairment generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Federal Home Loan Bank Stock (Carried at Cost)
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
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Shore Community Bank |
Notes to the Financial Statements |
The estimated fair values of SCB's financial instruments at September 30, 2019 and December 31, 2018 were as follows:
September 30, 2019 | ||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 34,505 | $ | 34,505 | $ | 34,505 | $ | - | $ | - | ||||||||||
Securities available-for- sale | 11,483 | 11,483 | - | 11,483 | - | |||||||||||||||
Securities held-to- maturity | 15,878 | 16,227 | - | 16,227 | - | |||||||||||||||
Federal Home Loan Bank stock | 269 | 269 | - | 269 | - | |||||||||||||||
Loans receivable, net | 207,901 | 208,337 | - | - | 208,337 | |||||||||||||||
Accrued interest receivable | 1,038 | 1,038 | - | 1,038 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 249,929 | $ | 249,996 | $ | - | $ | 249,996 | $ | - | ||||||||||
Accrued interest payable | 245 | 245 | - | 245 | - | |||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 14,963 | $ | 14,963 | $ | 14,963 | $ | - | $ | - | ||||||||||
Securities available-for- sale | 13,509 | 13,509 | - | 13,509 | - | |||||||||||||||
Securities held-to- maturity | 16,113 | 16,093 | - | 16,093 | - | |||||||||||||||
Federal Home Loan Bank stock | 239 | 239 | - | 239 | - | |||||||||||||||
Loans receivable, net | 208,149 | 206,318 | - | - | 206,318 | |||||||||||||||
Accrued interest receivable | 1,008 | 1,008 | - | 1,008 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 235,401 | $ | 235,329 | $ | - | $ | 235,329 | $ | - | ||||||||||
Accrued interest payable | 177 | 177 | - | 177 | - |
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