Federal Deposit Insurance Corporation
Washington, D.C. 20429
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 34951
.
Harvest Community Bank
.
(Exact name of registrant as specified in its charter)
New Jersey
22-3688758
.
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
285 N. Broadway, Pennsville, NJ 08070
.
(Address of principal executive offices)
(Zip Code)
856-678-4555
.
(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
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 [ ]
Non-accelerated filer [ ]
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
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
25-26
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
26-37
38-39
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
3
40-41
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, 2000. 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
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 08070. Our telephone number is (856) 678-4555 and our website address is
www.harvestcommunitybank.com.
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
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, 2013. Gross loan balances represented 72.7% of the Bank’s total assets on December 31,
2014 and 73.2% as of December 31, 2013. The following is a breakdown by general category, of the loan
portfolio as of December 31 for the last five years:
Loan Category
Commercial
Commercial construction
Residential real estate
Residential construction
Consumer
Deferred loan origination (fees) costs
Total Loans
Less Allowance for loan losses
Loans Receivable, net
$
$
2014
102,210,688
6,060,564
5,615,324
2,067,505
17,948,945
144,017
134,047,043
(5,546,201)
128,500,842
2013
Percent
76.25% $ 107,282,405
5,040,085
4.52%
3,995,043
4.19%
1.54%
1,066,301
13.39%
15,794,304
0.11%
132,903
100.00% 133,311,041
(2,549,124)
$ 130,761,917
Percent
80.48% $
3.78%
2.99%
0.80%
11.85%
0.10%
100.00%
$
6
2012
112,124,589
4,089,959
2,684,442
1,200,000
12,288,990
116,555
132,504,535
(2,827,985)
129,676,550
Percent
84.62% $
3.09%
2.02%
0.91%
9.27%
0.09%
100.00%
$
2011
108,784,324
11,247,275
3,320,644
1,156,486
12,874,674
126,857
137,510,260
(3,009,964)
134,500,296
2010
Percent
79.12% $ 112,514,893
10,249,298
8.18%
2,480,165
2.41%
0.84%
849,313
9.36%
13,363,490
0.09%
135,691
139,592,850
100.00%
(2,025,853)
$ 137,566,997
Percent
80.60%
7.34%
1.78%
0.61%
9.57%
0.10%
100.00%
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
Due through 1 year
$ 17,240,957 $
2,321,198 $
57,466 $
435,236 $
6,360,590 $
Greater than one year through 5 years
28,230,772
1,779,123
38,600
2,100,092
Greater than 5 years
56,833,561
1,960,243
5,520,024
1,632,269
9,536,912
Total
$ 102,305,290 $
6,060,564 $
5,616,090 $
2,067,505 $ 17,997,594 $
Total
26,415,447
32,148,587
75,483,009
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:
2014
Floating or
Adjustable Rate
Fixed Rate
Loan category
Commercial
$
Commercial construction
Residential real estate
Residential construction
Consumer
Deferred loan origination (fees) costs
Total loans
$
93,527,661 $
4,451,443
5,615,324
2,067,505
12,086,968
126,735
117,875,636 $
8,683,027 $
1,609,121
5,861,977
17,282
16,171,407 $
Total
102,210,688
6,060,564
5,615,324
2,067,505
17,948,945
144,017
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.
% of Loans in
Each Category to
Amount of Total Loans
2014
Allocation of allowance
for loan losses:
Commercial
$
Commercial construction
Residential real estate
Residential construction
Consumer
Total
$
4,217,759
1,217,957
1,022
9,214
100,249
5,546,201
76.36% $
4.52%
4.19%
1.54%
13.39%
100.00% $
% of Loans in
Each Category to
Amount of Total Loans
2013
2,051,603
394,621
1,022
3,057
98,821
2,549,124
At December 31,
% of Loans in
Each Category to
Amount of Total Loans
2012
80.57% $ 2,335,335
3.78%
388,986
3.00%
1,022
0.80%
3,057
11.85%
99,585
100.00% $ 2,827,985
7
84.69% $
3.09%
2.04%
0.91%
9.27%
100.00% $
% of Loans in
Each Category to
Amount of Total Loans
2011
2,529,419
363,967
8,681
3,057
104,840
3,009,964
79.21% $
8.18%
2.41%
0.84%
9.36%
100.00% $
% of Loans in
Each Category to
Amount of Total Loans
2010
1,706,858
242,879
8,681
3,057
64,378
2,025,853
80.70%
7.34%
1.78%
0.61%
9.57%
100.00%
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:
Balance at beginning of the year
Charge-offs:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
$
2014
2,549,124 $
1,342,231
702,167
41,726
23,843
8,765
2,118,732
Recoveries:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Net charge-offs
Provision for loan loss
Balance at end of the year
$
14,425
22
169
1,193
15,809
2,102,923
5,100,000
5,546,201 $
Average loans outstanding(1)
$
136,275,023 $
Net charge-offs as a percentage of average loans
(1)
For the year ended
December 31,
2013
2012
2,827,985 $
3,009,964 $
284,532
1,401
285,933
1.54%
8
2010
2,291,366
2,251,873
471,838
402,872
139,076
3,265,659
1,300,571
343,000
31,255
5,907
33,338
1,714,071
800
5,635
637
7,072
278,861
2,549,124 $
183,682
21,127
2,151
206,960
721,979
540,000
2,827,985 $
11,500
3,610
5,660
20,770
3,244,889
4,229,000
3,009,964 $
10,004
7,554
17,558
1,696,513
1,431,000
2,025,853
132,281,072 $
133,670,534 $
137,164,988 $
141,086,343
0.21%
Includes non-accruing loans
566,914
350,026
1,360
10,639
928,939
2011
2,025,853 $
0.54%
2.37%
1.20%
The following table sets forth information concerning nonperforming loans and nonperforming
assets at December 31 for the last five years:
2013
2014
Nonperforming assets
Nonaccrual loans
Other real estate owned
Total nonperforming assets
Loans past due 90 days and
still accruing interest
$
2010
2011
2012
$
25,316,702 $
25,316,702 $
11,865,217 $
11,865,217 $
12,149,989 $
143,981
12,293,970 $
$
47,113 $
1,264,351 $
Performing troubled debt restructurings (1) $
181,134 $
184,615 $
187,375 $
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%
-
$
11,142,540 $
79,611
11,222,151 $
-
9,571,954
178,956
9,750,910
$
1,616,783 $
(1)
1,383,980
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
U.S. government sponsored entities and agencies
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
$ 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
Municipal securities
Total
116,368
8,545,072
34,158,649 $
115,858
8,842,881
34,670,840 $
151,810
9,192,344
38,892,336 $
150,850
9,284,127
38,375,019 $
437,502
9,488,245
42,004,295 $
434,782
10,062,968
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
December 31, 2014
U.S. government sponsored entities and agencies
0-1 year
$
Estimated
Average
Fair Value
Yield
60,001
5.46%
1-5 years
399,508
4.34%
5-10 years
860,519
3.04%
9,728,174
2.18%
11,048,202
3.53%
More than 10 years
Total
$
U.S. government sponsored entities and agency residential mortgage-backed s
0-1 year
$
1-5 years
5-10 years
Estimated
Average
Fair Value
Yield
-
-
-
-
-
More than 10 years
Total
$
-
8,897,365
2.80%
8,897,365
2.80%
U.S. government sponsored entities and agency collateralized residential mort
0-1 year
$
1-5 years
Estimated
Average
Fair Value
Yield
193,074
5-10 years
4.00%
-
More than 10 years
Total
$
-
5,573,460
2.53%
5,766,534
2.58%
Private label collateralized residential mortgage obligations
0-1 year
$
1-5 years
Estimated
Average
Fair Value
Yield
7,643
5-10 years
5.00%
-
More than 10 years
Total
$
-
108,215
2.49%
115,858
2.66%
Municipal securities
0-1 year
$
1-5 years
Estimated
Average
Fair Value
Yield
-
-
522,057
4.20%
5-10 years
6,208,034
4.18%
More than 10 years
2,112,790
3.30%
8,842,881
3.96%
Total
$
Total Investment Portfolio
$
0-1 year
1-5 years
5-10 years
More than 10 years
Total
$
11
Estimated
Average
Fair Value
Yield
60,001
1,122,282
7,068,553
26,420,004
34,670,840
5.46%
4.22%
4.04%
2.98%
3.28%
December 31, 2013
U.S. government sponsored entities and agencies
0-1 year
$
Average
Yield
-
1-5 years
5-10 years
More than 10 years
Total
Estimated
Fair Value
$
-
127,467
5.48%
1,571,226
3.57%
10,433,040
3.57%
12,131,733
3.59%
U.S. government sponsored entities and agency residential mortgage-backed securities
0-1 year
$
1-5 years
5-10 years
Estimated
Average
Fair Value
Yield
-
-
-
-
-
More than 10 years
Total
$
-
9,945,469
2.80%
9,945,469
2.80%
U.S. government sponsored entities and agency collateralized residential mortgage obligations
0-1 year
$
Estimated
Average
Fair Value
Yield
-
1-5 years
349,015
5-10 years
4.07%
-
More than 10 years
Total
$
-
6,513,825
2.62%
6,862,840
2.69%
Private label collateralized residential mortgage obligations
0-1 year
$
1-5 years
5-10 years
Estimated
Average
Fair Value
Yield
-
-
12,269
2.80%
-
More than 10 years
Total
$
-
138,581
2.44%
150,850
2.70%
Municipal securities
0-1 year
$
Estimated
Average
Fair Value
Yield
-
1-5 years
-
286,659
4.38%
5-10 years
6,381,487
4.16%
More than 10 years
2,615,981
3.54%
9,284,127
3.98%
Total
$
Total Investment Portfolio
$
0-1 year
Average
Yield
775,410
7,952,713
29,646,896
38,375,019
1-5 years
5-10 years
More than 10 years
Total
Estimated
Fair Value
$
12
4.43%
4.04%
3.09%
3.31%
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.
st
The Bank’s deposit classifications as of December 31 for the last three years were as follows:
2014
Category
Interest-bearing checking accounts
Noninterest bearing checking accounts
Savings and money market
Certificates of deposit - $100,000 or more
Other certificates of deposit
Total
Balance
16,457,845
11,658,196
55,361,466
29,619,567
53,587,432
$ 166,684,506
$
2013
Percent
Of
Total Deposits
Balance
9.87% $ 15,120,139
6.99%
11,525,813
33.21%
62,536,698
17.77%
23,688,346
32.16%
53,037,440
100.00% $ 165,908,436
13
Percent
Of
Total Deposits
Balance
9.11% $ 16,621,157
6.95%
10,904,828
37.69%
63,566,991
14.28%
21,789,030
31.97%
58,544,522
100.00% $ 171,426,528
2012
Percent
Of
Total Deposits
9.70%
6.36%
37.08%
12.71%
34.15%
100.00%
The scheduled maturities of certificates of deposit of $100,000 or more were as follows as of December
31st:
Maturing
Maturing
Maturing
Maturing
Maturing
Maturing
Total
in less than 3 months
in 3 months through 6 months
in 6 months through 12 months
1 through 2 years
2 through 3 years
over 3 years
$
$
2014
1,713,057 $
1,621,625
14,905,038
3,320,486
3,679,323
4,178,296
29,417,825 $
2013
3,424,835 $
1,180,442
6,375,747
5,595,848
1,770,762
5,340,712
23,688,346 $
2012
3,663,216
2,415,927
3,885,847
2,587,925
3,956,772
5,279,343
21,789,030
Interest expense on deposits for the years ended December 31, 2014, 2013 and 2012 was as
follows:
Checking
Savings and money market
Certificates of deposit
Total
$
$
2014
15,342
203,455
918,238
1,137,035
$
$
2013
15,232 $
194,198
973,443
1,182,873 $
2012
27,146
323,992
1,205,007
1,556,145
The weighted average interest rate paid on deposits by category at December 31, 2014, 2013
and 2012 was as follows;
Interest-bearing checking accounts $
Savings and money market
Certificates of deposit
Total
$
2014
Average
Average
Balance
Rate
15,363,128
0.10% $
61,267,169
0.33%
76,835,702
1.20%
153,465,999
0.74% $
2013
2012
Average
Average
Average
Average
Balance
Rate
Balance
Rate
15,341,275
0.10% $ 15,694,583
0.17%
64,075,512
0.30%
67,476,987
0.48%
79,054,837
1.23%
82,845,858
1.45%
158,471,624
0.75% $ 166,017,428
0.94%
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
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, 2011.
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
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
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, 2014. 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, 2016.
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, 2010.
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
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, 2015. 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
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
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 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“SarbanesOxley 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 1934. 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, 2007. 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
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On
October 26, 2001, the USA Patriot Act of 2001 was signed into law. This act contains the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA”). The IMLAFA
contains anti-money laundering measures affecting insured depository institutions, broker-dealers and
certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt policies and
procedures to combat money laundering and grants the Secretary of the Treasury broad authority to
establish regulations and to impose requirements and restrictions on financial institutions’ operations.
Compliance with IMLAFA has not had a material impact on Harvest Community Bank’s results of
operations or financial condition.
Community Reinvestment Act. The Community Reinvestment Act, or “CRA,” requires that
banks meet the credit needs of all of their assessment area, as established for these purposes in
accordance with applicable regulations based principally on the location of branch offices, including those
of low-income areas and borrowers. The CRA also requires that the FDIC assess all financial institutions
that it regulates to determine whether these institutions are meeting the credit needs of the community
they serve. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to
improve” or “unsatisfactory.” Our record in meeting the requirements of the CRA is made publicly
available and is taken into consideration in connection with any applications with federal regulators to
engage in certain activities, including approval of a branch or other deposit facility, mergers and
acquisitions, office relocations, or expansions into non-banking activities. As of December 31, 2014, we
maintained a “satisfactory” CRA rating.
Dodd-Frank Act. The Dodd-Frank Act became law on July 21, 2010. The Dodd-Frank Act
implements far-reaching changes across the financial regulatory landscape.
Among other things, the Dodd-Frank Act created the Bureau of Consumer Financial Protection
(the “CFPB”), which is an independent bureau within the Federal Reserve System with broad authority to
regulate the consumer finance industry, including regulated financial institutions such as us, and nonbanks and others who are involved in the consumer finance industry. The CFPB has exclusive authority
through rulemaking, orders, policy statements, guidance and enforcement actions to administer and
enforce federal consumer finance laws, to oversee non-federally regulated entities, and to impose its own
regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive or
abusive (“UDA”). The federal consumer finance laws and all of the functions and responsibilities
associated with them were transferred to the CFPB on July 21, 2011. While the CFPB has the exclusive
power to interpret, administer and enforce federal consumer finance laws and UDA, the Dodd-Frank Act
provides that the FDIC continues to have examination and enforcement powers over us relating to the
matters within the jurisdiction of the CFPB because we have less than $10 billion in assets. The DoddFrank Act also gives state attorneys general the ability to enforce federal consumer protection laws.
The Dodd-Frank Act also:
•
Applies the same leverage and risk-based capital requirements to most bank holding
companies (“BHCs”) that apply to insured depository institutions;
•
Requires the FDIC to make its capital requirements for insured depository institutions
countercyclical, so that capital requirements increase in times of economic expansion and
decrease in times of economic contractions;
•
Requires BHCs and banks to be both well-capitalized and well-managed in order to acquire
banks located outside their home state and requires any BHC electing to be treated as a
financial holding company to be both well-capitalized and well-managed;
•
Changes 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 tangible equity; eliminates the ceiling on the size of the DIF and
increases the floor on the size of the DIF;
21
•
Makes permanent the $250,000 limit for federal deposit insurance and increases the cash
limit of Securities Investor Protection Corporation protection from $100,000 to $250,000
•
Eliminates all remaining restrictions on interstate banking by authorizing national and state
banks to establish de novo branches in any state that would permit a bank chartered in that
state to open a branch at that location;
•
Repeals Regulation Q, the federal prohibitions on the payment of interest on demand
deposits, thereby permitting depository institutions to pay interest on business transaction
and other accounts;
•
Enhances the requirements for certain transactions with affiliates under Section 23A and 23B
of the Federal Reserve Act, including an expansion of the definition of “covered transactions”
and increasing the amount of time for which collateral requirements regarding covered
transactions must be maintained;
•
Expands insider transaction limitations through the strengthening of loan restrictions to
insiders and the expansion of the types of transactions subject to the various limits, including
derivative transactions, repurchase agreements, reverse repurchase agreements and
securities lending or borrowing transactions. Restrictions are also placed on certain asset
sales to and from an insider to an institution, including requirements that such sales be on
market terms and, in certain circumstances, approved by the institution’s board of directors;
and
•
Strengthens the previous limits on a depository institution’s credit exposure to one borrower
which limited a depository institution’s ability to extend credit to one person (or group of
related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded
the scope of these restrictions to include credit exposure arising from derivative transactions,
repurchase agreements, and securities lending and borrowing transactions.
While designed primarily to reform the financial regulatory system, the Dodd Frank Act also
contains a number of corporate governance provisions that will affect companies with securities
registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The DoddFrank Act requires the Securities and Exchange Commission to adopt rules which may affect our
executive compensation policies and disclosure. It also exempts smaller issuers, such as us, from the
requirement, originally enacted under Section 404(b) of the Sarbanes-Oxley Act of 2002, that our
independent auditor also attest to and report on management’s assessment of internal control over
financial reporting.
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have
been finalized, including rules regulating compensation of residential mortgage loan originators,
residential mortgage loan servicing practices, and defining qualified mortgage loans and the ability to
repay a mortgage loan, many of the new requirements called for have yet to be implemented and will
likely be subject to implementing regulations over the course of several years. Given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the
various agencies, the full extent of the impact such requirements will have on financial institutions’
operations is unclear. The Dodd-Frank Act could require us to make material expenditures, in particular
personnel training costs and additional compliance expenses, or otherwise adversely affect our business,
financial condition, results of operations or cash flow. It could also require us to change certain of our
business practices, adversely affect our ability to pursue business opportunities that we might otherwise
consider pursuing, cause business disruptions and/or have other impacts that are as of yet unknown to
us. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity,
fines or additional expenses, any of which could have an adverse effect on our business, financial
condition, results of operations or cash flow.
Jumpstart Our Business Startups (JOBS) Act. In April 2012, the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”) became law. The JOBS Act is aimed at facilitating capital-raising
by smaller companies and banks and bank holding companies by implementing the following changes:
22
•
Raising the threshold requiring registration under the Exchange Act for banks and bank
holding companies from 500 to 2,000 holders of record;
•
Raising the threshold for triggering deregistration under the Exchange Act for banks and
bank holding companies from 300 to 1,200 holders of record;
•
Raising the limit for Regulation A offerings from $5 million to $50 million per year and
exempting some Regulation A offerings from state blue sky laws;
•
Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
•
Allowing private companies to use “crowd funding” to raise up to $1 million in any 12month period, subject to certain conditions; and,
•
Creating a new category of issuer, called an “Emerging Growth Company,” for companies
with less than $1 billion in annual gross revenue, which will benefit from certain changes
that reduce the cost and burden of carrying out an equity initial public offering and
complying with public company reporting obligations for up to five years.
Federal Home Loan Bank Membership. We are a member of the Federal Home Loan Bank of
New York (the “FHLB-NY”). Each member of the FHLB-NY is required to maintain a minimum investment
in capital stock of the FHLB-NY. The Board of Directors of the FHLB-NY can increase the minimum
investment requirements in the event it has concluded that additional capital is required to allow it to meet
its own regulatory capital requirements. Any increase in the minimum investment requirements outside of
specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of
any obligation to increase our investment in the FHLB-NY depends entirely upon the occurrence of a
future event, potential payments to the FHLB-NY are not determinable.
Additionally, in the event that we fail, the right of the FHLB-NY to seek repayment of funds loaned
to us will take priority over certain other creditors.
Other Laws and Regulations. We are subject to a variety of laws and regulations which are not
limited to banking organizations. For example, in lending to commercial and consumer borrowers, and in
owning and operating our own property, we are subject to regulations and potential liabilities under state
and federal environmental laws.
We are heavily regulated by regulatory agencies at the federal and state levels. As a result of
events in the financial markets and the economy in recent years, we, like most of our competitors, have
faced and expect to continue to face increased regulation and regulatory and political scrutiny, which
creates significant uncertainty for us and the financial services industry in general.
Future Legislation and Regulation. Regulators have increased their focus on the regulation of
the financial services industry in recent years. Proposals that could substantially intensity the regulation
of the financial services industry have been and are expected to continue to be introduced in the U.S.
Congress, in state legislatures and by applicable regulatory authorities. These proposals may change
banking statutes and regulation and our operating environment in substantial and unpredictable ways. If
enacted, these proposals could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings associations, credit unions,
and other financial institutions. We cannot predict whether any of these proposals will be enacted and, if
enacted, the effect that it, or any implementing regulations, would have on our business, financial
condition and results of operations.
Item 1A. Risk Factors
As a smaller reporting company, the Bank is not required to provide the information otherwise
required by this Item.
23
Item 2. Properties
The Bank currently has four full service branch locations. These branches are located in
Pennsville, Pilesgrove Township, Elmer and Salem, New Jersey. The Bank owns the branch properties in
Pennsville and Pilesgrove Township. There are no outstanding mortgages on these properties. The
branch location in Elmer is leased from an unaffiliated third party. The lease for the Elmer branch is for six
years, expiring on August 31, 2015, with lease payments of $1,560 per month. The Bank's Elmer branch
location had previously been operated by the Bank as a loan production office (LPO). The Salem City
branch location is leased from a limited liability company owned by all current directors of the Bank, with
the exception of Frank J. Mc Entee. Mr. Michael Cinkala, Directors Emeritus of the Bank and Dennis H.
Engle, the former President & CEO of the Bank are also members of the limited liability company. The
lease is for a twenty year term which commenced in August 2006 and the monthly rental payments are
$6,660 per month, subject to adjustment annually based upon changes in the Consumer Price Index.
The Bank’s headquarters are located at 285 North Broadway, Pennsville, New Jersey 08070.
This facility was constructed in 1999, and is an office building of approximately 2,000 square feet in size.
The Pilesgrove Township location at 863 Route 45 was constructed in 2002, and also is approximately
2,000 square feet in size. The Elmer location, at 389 Harding Highway, is located in a local shopping
center consisting of approximately six retail stores and professional offices. This location is approximately
1,000 square feet in size. All branch locations feature a lobby area, teller windows, drive through
windows, an ATM machine and administrative offices. The Pennsville and Pilesgrove Township locations
also feature night depository facilities. The Salem City branch located at 473 East Broadway is
approximately 3,197 square feet in size and has the features mentioned above, as well as night
depository facilities.
In May of 2013, the Bank purchased a building at 2 South Hook Road in Pennsville, New Jersey
from an unaffiliated third party for $200,000 excluding improvements. The improvements at the building
cost $136,849 which are being depreciated over their useful life. This building was not financed and has
no outstanding mortgage. This 5,000 square foot building was occupied in November 2013 and serves as
the operation center for the Bank. The personnel with offices at this location perform accounting, deposit
and loan support functions.
Management believes that its facilities are of sound construction, in good operating condition, are
appropriately insured and are adequate for carrying on the business of the Bank.
Item 3. Legal Proceedings
From time to time, we may be a party to ordinary routine litigation incidental to our business.
Except for the Consent Orders, there were no material legal proceedings to which we were a party or by
which any of our property was affected pending or, to our knowledge, contemplated by governmental
authorities, at December 31, 2014 or as of the date of this report.
Item 4. Mine Safety Disclosures
Not applicable
24
Part II
Item 5.
Market for Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The Bank’s common stock began trading on the OTC Bulletin Board under the symbol “HCBP” on
November 9, 2004. The Bank’s common stock purchase warrants began trading on the OTC Bulletin
Board under the symbol “HCBPW” on January 7, 2005.
At December 31, 2014 and December 31, 2013, 5,000,000 shares of the Bank’s common stock
were authorized for issuance. At December 31, 2014 and December 31, 2013, 1,147,733 shares of the
Bank’s common stock were issued and outstanding and 552,000 shares were reserved for issuance
pursuant to the exercise of outstanding common stock purchase warrants. On November 21, 2014, the
Bank extended the warrant expiration date to December 31, 2015. No warrants were exercised through
December 31, 2014. Other than the common stock and the common stock purchase warrants described
herein, the Bank does not have any other class of securities outstanding. As of December 31, 2014, there
were approximately 900 holders of record of the Bank’s common stock.
The following table sets forth the closing high and low bid information, as supplied by the OTC
Bulletin Board market makers for each fiscal quarter for the years ended December 31, 2014 and
December 31, 2013 for the Bank's common stock and common stock purchase warrants. These bid
quotations reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and do not
necessarily represent actual transactions.
Bid Quotations
Fourth Quarter 2014
Common Stock
Warrants
Third Quarter 2014
Common Stock
Warrants
High
6.24
0.01
Low
Fourth Quarter 2013
5.00 Common Stock
0.01 Warrants
High
5.90
0.01
Low
5.20
0.01
7.75
0.01
Third Quarter 2013
5.91 Common Stock
0.01 Warrants
5.75
0.05
5.35
0.01
Second Quarter 2014
Common Stock
Warrants
6.10
0.01
Second Quarter 2013
5.50 Common Stock
0.01 Warrants
5.70
0.01
5.35
0.01
First Quarter 2014
Common Stock
Warrants
5.80
0.01
First Quarter 2013
5.30 Common Stock
0.01 Warrants
5.60
0.02
3.94
0.01
25
The Bank did not pay any dividends for fiscal years 2014 or 2013. At the present time, the Bank
has no plans to pay cash dividends. All earnings are being retained to help finance the continued growth
of the Bank. The Bank is also subject to regulatory restrictions on the payment of dividends. These
restrictions are more fully explained in the “Dividend Policy” section of Item 7 of this report.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2014 with respect to
compensation plans under which equity securities of the Bank are authorized for issuance, aggregated as
follows:
Equity Compensation Plan Information
Plan Category
Equity compensation
plans approved by
security holders
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Equity compensation
plans not approved by
security holders
22,450
11.40
37,122
-
-
11.40
37,122
$
-
22,450
Total
WeightedAverage exercise
price of
outstanding
options, warrants
and rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
$
The Bank is subject to the informational requirements of the Securities and Exchange Act of
1934, as amended, and in accordance therewith files reports and other information with the FDIC.
Reports, registration statements, proxy statements and other information filed by the Bank with the FDIC
th
can be inspected and copied at the public reference facilities maintained by the FDIC at 550 17 Street,
N.W., Washington, D.C.
Item 6 Selected Financial Data
Not applicable.
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations are
based upon the Bank’s financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
26
an on-going basis, management evaluates its estimates, including those related to investment securities,
loans, allowance for loan losses, and deferred taxes. These policies, which may significantly affect the
determination of financial position, results of operations and cash flows, are summarized in Note 1
Summary of Significant Accounting Policies, in the Notes to Financial Statements included elsewhere in
this report.
The allowance for loan losses is based upon management’s evaluation of the adequacy of the
allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to
the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectability may not be assured, the existence and estimated
net realized value of any underlying collateral and guarantees securing the loans, and current economic
and market conditions. Although management uses the best information available, the level of the
allowance for loan losses remains an estimate which is subject to significant judgment and short-term
change. Various regulatory agencies, as an integral part of their examination process, periodically review
the Bank’s allowance for loan losses. Such agencies may require the Bank to make additional provisions
for loan losses based upon information available to them at the time of their examination. Furthermore,
the majority of the Bank’s loans are secured by real estate in the State of New Jersey. Accordingly, the
collectability of a substantial portion of the carrying value of the Bank’s loan portfolio is susceptible to
changes in local market conditions and may be adversely affected should real estate values decline.
Future adjustments to the allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Bank’s control.
General
The Bank’s results of operations are dependent primarily on net interest income, i.e. the
difference between interest income earned on its interest-earning assets, such as loans and securities,
and interest expense paid on its interest-bearing liabilities, such as deposits. The Bank also generates
noninterest income such as service charges and other fees. Noninterest expenses primarily consist of
employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs
and other operating expenses. The Bank is subject to losses from its loan portfolio if borrowers fail to
meet their obligations. The Bank’s results of operations are significantly affected by general economic
and competitive conditions, particularly changes in market interest rates, government policies and actions
of regulatory agencies.
The following discussion focuses on the major components of the Bank’s operations. This
discussion should be read in conjunction with the financial statements and accompanying notes thereto.
Readers are cautioned that current performance may not be indicative of the Bank’s future performance.
Management Strategy
Management’s primary strategy is to increase the Bank’s loan and deposit market shares in the
communities we serve. We accomplish this through superior service, competitive pricing and marketing,
selective branch location and developing the business network represented by the Bank’s officers and
directors.
The Bank also tries to maximize earnings by obtaining deposits at the lowest cost possible and
reinvesting these monies into high-yielding, high quality loans and investments, in order to obtain the
largest possible interest spread.
The Bank expects to formally restructure its lending and credit departments in 2015 to enhance
internal control and reporting as well as to implement aggressive collection efforts consistent with current
accounting and regulatory guidance. This will be a collaborative effort of third party vendors, Bank
management and staff and the Board of Directors of the Bank. The goal of these efforts is to reduce the
level of loans experiencing difficulty and reverse the negative impact such loans have on the Bank’s
performance and earnings, as well as to ensure compliance by the Bak with the terms of the Consent
Orders.
27
Comparison of Operating Results for the Years Ended December 31, 2014 and 2013
The Bank reported a net loss after taxes of $6,916,530 or $6.03 per share for the year ended
December 31, 2014, compared to net income after taxes of $1,001,930 or $0.87 per share for the year
ended December 31, 2013. The following table presents the net income of the Bank as well as the
average assets and average equity and the related performance ratios for the last three years.
(In thousands)
Net income
Average assets
Average equity
Return on average assets
Return on average equity
Average equity to average assets
$
$
$
2014
(6,916) $
183,039 $
14,892 $
-3.78%
-46.44%
8.14%
2013
1,002 $
186,703 $
15,599 $
0.54%
6.42%
8.35%
2012
1,157
192,334
15,213
0.60%
7.61%
7.91%
The Bank reported a net loss before taxes of $5,668,560 for 2014 compared to a net income
before taxes of $1,425,804 for 2013. This represents a decrease of net income before taxes of
$7,094,364 in 2014 compared to 2013. This decrease of net income before taxes was mainly attributable
to an increase in the provision for loan losses of $5,100,000 in 2014 compared to no provision for loan
losses in 2013 as well as increased costs in 2014 associated with the administration of troubled assets
compared to 2013 and reflected in other non-interest expenses. The net interest income before the
provision for loan losses was $5,354,248 in 2014 compared to $6,150,698 in 2013, a reduction of
$796,450 or 12.9%. The increased loan loss provision reflects the estimated amount to recognize actual
and possible fair value decreases in the Bank’s collateral dependent impaired loan portfolio in 2014
compared to 2013. The Bank obtained new appraisals in 2014 for all substandard and non-accrual loans
that reflected lower appraised amounts than the book value of the assets, thereby requiring the Bank to
make a provision for these shortfalls.
Net Interest Income and Average Balances
The operations of the Bank are substantially dependent on its net interest income. Net interest
income is affected by changes in both interest rates and the amount and types of interest-earning assets
and interest-bearing liabilities outstanding. Volatility in interest rates can result in the flow of funds away
from banks similar to the Bank and into direct investments, such as corporate securities and other
investment vehicles which generally pay higher rates of return. Such volatility could cause the Bank to
pay increased interest rates to obtain deposits. If the Bank is unable to increase interest rates on its loans
and obtain higher yields on its investment portfolio, the Bank’s net interest income will suffer.
The following tables represent the average volume of interest-earning assets and interest-bearing
liabilities and average yields and rates for the Bank for the years ended December 31, 2014, 2013 and
2012. The effect of rate-volume changes on net interest income for the year 2014 compared to 2013 and
the year 2013 compared to the year 2012 are presented. The average balances are derived from daily
averages.
28
Comparative Average Balance Sheet and Net Interest Income Analysis
Assets
Loans (net of deferred costs/fees) (1)
Interest-bearing deposits with banks
Federal funds sold
Investment securities (2)
Taxable interest
Interest exempt from Federal income taxes
Total interest-earning assets
Allowance for loan losses
Cash and due from banks
Premises and equipment (net)
Other assets
Total noninterest-earning assets
Total assets
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand
Money market
Savings
Certificates of deposit
Total interest-bearing deposits
Federal funds purchased
Federal Home Loan Bank advances
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities
Stockholders' equity
Total liabilities and shareholders' equity
Net interest income
$
$
$
$
For the year ended December 31, 2012
Average
Average
Interest
Balance
Yield/Cost
(Dollars in thousands)
For the year ended December 31, 2013
Average
Average
Yield/Cost
Interest
Balance
(Dollars in thousands)
For the year ended December 31, 2014
Average
Average
Yield/Cost
Interest
Balance
(Dollars in thousands)
136,275 $
345
16
5,469
1
1
4.01% $
0.29%
0.17%
132,281 $
1,424
40
6,264
2
1
4.74% $
0.14%
0.17%
133,671 $
1,326
2,046
7,091
3
4
5.30%
0.23%
0.20%
27,505
9,149
173,290
(2,629)
3,655
2,052
6,671
9,749
183,039
696
497
6,664
2.53%
5.43%
3.84%
30,669
9,779
174,193
(2,625)
6,673
1,901
6,561
12,510
186,703
714
535
7,516
2.33%
5.47%
4.30%
30,667
10,631
178,341
(2,779)
8,158
1,864
6,750
13,993
192,334
783
592
8,473
2.55%
5.56%
4.74%
15,363 $
79
61,188
76,836
153,466
128
517
154,111
12,426
911
13,337
15,719
183,039
15
1
203
918
1,137
1
2
1,140
15,341 $
36
64,040
79,055
158,472
15
1
194
973
1,183
0.10% $
0.15%
0.30%
1.23%
0.75%
15,695 $
3
67,474
82,846
166,018
27
1
324
1,204
1,556
0.17%
0.34%
0.48%
1.45%
0.94%
158,472
11,596
1,036
12,632
15,599
186,703
1,183
0.75%
166,018
10,410
693
11,103
15,213
192,334
1,556
0.94%
$
5,524
$
0.10% $
0.15%
0.33%
1.19%
0.74%
0.47%
0.46%
0.74%
$
$
$
$
6,333
$
6,917
Interest rate spread (3)
3.09%
3.55%
3.80%
Net interest margin (4)
3.19%
3.64%
3.88%
112.54%
109.92%
107.42%
Ratio of average interest-earning assets
to interest bearing-liabilities
(1) Average loans includes non accrual loans.
(2) Investment income shown on a tax equivalent basis using 34.0% statutory tax rate.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities.
29
The following tables present a summary of the changes in interest income and expense by both rate and
volume for the periods indicated:
Effect of Rate-Volume Changes on Net Income
2014 compared to 2013
Increase (Decrease)
Due to Change in
Average Volume Average Rate
Total
(in thousands)
Assets
Loans (net of deferred costs/fees)
Interest-bearing deposits with banks
Federal funds sold
Investment securities
Total interest income
Liabilities
Deposits
Interest-bearing demand
Money market and savings
Certificates of deposit
Federal funds purchased
Federal Home Loan Bank advances
Total interest expense
Net interest income
$
189 $
(1)
(117)
71 $
$
$
-
$
(9)
(27)
1
2
(33)
104 $
$
(984) $
61
(923) $
$
18
(28)
(10)
(913) $
(795)
(1)
(56)
(852)
9
(55)
1
2
(43)
(809)
Effect of Rate-Volume Changes on Net Income
2013 compared to 2012
Increase (Decrease)
Due to Change in
Average Volume Average Rate
Total
(in thousands)
Assets
Loans (net of deferred costs/fees)
Interest-bearing deposits with banks
Federal funds sold
Investment securities
Total interest income
Liabilities
Deposits
Interest-bearing demand
Money market and savings
Certificates of deposit
Total interest expense
Net interest income
$
$
$
$
30
(66) $
3
(33)
(96) $
(761) $
(1)
(6)
(93)
(861) $
(827)
(1)
(3)
(126)
(957)
(1) $
(10)
(47)
(58)
(38) $
(11) $
(120)
(184)
(315)
(546) $
(12)
(130)
(231)
(373)
(584)
The increase or decrease due to a change in average volume has been determined by
multiplying the change in average volume by the average rate during the preceding period, and the
increase or decrease due to a change in average rate has been determined by multiplying the preceding
average volume by the change in average rate. The variations attributable to simultaneous volume and
rate changes have been allocated to the rate variance.
Average interest-earning assets of the Bank of $173.3 million for the year ended December 31,
2014 yielded an average return of 3.84%, a 46 basis point decrease over the same period in 2013.
Average interest-bearing deposits of $154.1 million for the year ended December 31, 2014, had an
average cost of 0.74%, a 1 basis point decrease in the cost of funding compared to the same period in
2013.
The net interest spread for the year ended December 31, 2014 was 3.09%, a decrease of 46
basis points from the same period in 2013. The net interest margin for the year ended December 31,
2014 was 3.19%, a decrease of 45 basis points from the same period in 2013.
The decrease in the interest rate spread in 2014 compared to 2013 and the net interest margin
reflect the impact of an increase in average non-accrual loan balances in 2014 and the resultant loss of
income associated with these balances. The non-accrued average loan balances for 2014 were $14.6
million compared to an average of $12.3 million in 2013.
Management will continue in 2015 to solicit new loan and deposit business within its’ market area
at currently competitive interest rates as a means of maintaining the net interest spread and net interest
margin compared to December 31, 2014.
Interest Income
Total tax equivalent interest income was $6.7 million in 2014, compared to $7.5 million in 2013 as
presented in the comparative average balance sheet. Interest and fees on loans and interest on
investment securities continue to be the primary source of interest income for the Bank. Interest and fees
on loans for 2014 was $5,468,825 which was a decrease of $795,602 or 12.7% over the same period in
2013. This decrease is the result of a 73 basis point decrease in the average yield, while the average loan
balances in 2014 increased $4.0 million or 3.0% compared to the same period in 2013. The average yield
decrease reflects loan renewals at lower current market interest rates than when the loan originated as
well as the impact of the increase in non-accrual loan balances in 2014 compared to 2013.
The tax equivalent interest on investment securities of $1.2 million for 2014 represents a
decrease of $56 thousand or 4.5%, compared to the similar period in 2013. Average balances for
investment securities decreased $3.8 million or 9.4% during 2014 compared to 2013. Yields on the
investment portfolio were negatively impacted by maturities and amortization of higher yielding securities.
Interest income from federal funds sold and deposits with banks of $1,456 for 2014 approximated
the same period in 2013.
Interest Expense
Average interest-bearing deposit balances for the year ended December 31, 2014 were
approximately $153.5 million, a decrease of $5.0 million or 3.2% from December 31, 2013. The cost of
these deposits decreased 1 basis point from the same period in 2013 and for 2014 the cost of funds was
0.74%. This decrease in cost is consistent with local market conditions prevalent in 2014.
The Bank borrowed $3,000,000 from the Federal Home Loan Bank of New York on October 30,
2014 for one year to mature on October 30, 2015. The borrowing was collateralized with securities from
the Bank’s investment portfolio and was for a fixed rate of 0.49%. There were no Federal Home Loan
Bank borrowings for the year ended December 31, 2013.
31
Interest Rate Sensitivity
The Bank is subject to interest rate risk inherent in its lending, investing and financing activities.
Fluctuations in interest rates will impact both interest income and interest expense on all interest-bearing
assets and interest-bearing liabilities, other than those with short-term maturities.
The Bank’s primary objective in managing interest rate risk is to minimize the adverse impact of
changes in interest rates on the Bank’s net interest income while creating an asset/liability structure that
maximizes earnings. Our Asset/Liability Management Committee actively monitors and manages the
Bank’s interest rate exposure using gap analysis and simulation models.
Gap analysis measures the difference between volumes of rate-sensitive assets and liabilities
and quantifies these repricing differences for various time intervals. Static gap analysis describes interest
rate sensitivity at a point in time. However, gap analysis alone does not accurately measure the potential
magnitude of changes in net interest income since changes in interest rates do not affect assets and
liabilities at the same rate, to the same extent, or on the same basis. Furthermore, gap analysis does not
consider future growth.
A positive gap (asset sensitive) indicates that more assets reprice during a given period
compared to liabilities, while a negative gap (liability sensitive) indicates that more liabilities reprice during
a given period compared to assets.
Generally, during a period of falling interest rates, a positive gap would tend to adversely affect
net interest income, while a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, in general, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income adversely. However, certain
assets and liabilities may react differently to changes in interest rates even though they reprice or mature
in the same or similar time periods. The interest rates on certain assets and liabilities may change at
different times than changes in market interest rates, with some changing in advance of changes in
market rates and some lagging behind changes in market rates. Also, certain assets (e.g. adjustable rate
loans) often have provisions, that may limit changes in interest rates each time the interest rate changes
and on a cumulative basis over the life of the loan. Additionally, the actual prepayments and withdrawals
in the event of a change in interest rates may differ significantly from those assumed in the calculations
shown in the table. Finally, the ability of borrowers to service their debt may decrease in the event of an
interest rate increase. Consequently, any model used to analyze interest rate sensitivity will be vulnerable
to the assumptions made with respect to the foregoing factors.
The following table sets forth the amount of the Bank’s interest-earning assets and interestbearing liabilities at December 31, 2014, using the static gap method, which are expected to mature or
reprice in each of the time periods shown:
32
GAP ANALYSIS
One Year
or Less
Non-Rate
Sensitive
Assets/
Liabilities
One to
Three to
Five Years
Three Years Five Years
or More
(dollars in thousands)
Total
Interest-earning assets
Interest-bearing deposits with banks
Investment securities available for sale
Loans receivable
Total interest-earning assets
Non-rate sensitive assets:
Other assets
Total assets
$
$
476 $
60
26,415
26,951
$
32
12,255
12,287
$
217
19,894
20,111
$
34,678 (1)
75,483
110,161
-
$
476
34,987
134,047
169,510
26,951 $
12,287 $
20,111 $
110,161 $
10,337
10,337 $
10,337
179,847
16,458 $
55,265
96
53,813
125,632
$
21,637
21,637
$
7,757
7,757
-
-
$
16,458
55,265
96
83,207
155,026
3,000
128,632 $
21,637 $
7,757 $
-
11,658
972
9,191
21,821 $
11,658
3,000
972
9,191
179,847
(101,681) $
26,951
125,632
(98,681)
21.45%
(9,350) $
39,238
147,269
(108,031)
26.64%
12,354 $
59,349
155,026
(95,677)
38.28%
Interest-bearing liabilities
Interest-bearing demand
Savings
Money market
Certificates of deposit
Total interest-bearing liabilities
Non-rate sensitive liabilities
Noninterest-bearing deposits
Short term borrowings
Other liabilities
Capital
Total liabilities and capital
Period gap
Cumulative
Cumulative
Cumulative
Cumulative
(1)
(2)
$
$
$
interest-earning assets
interest-earning liabilities
gap
RSA/RSL (2)
$
$
110,161 $
169,510
155,026
14,484
109.34%
(11,484)
169,510
-
FHLB and ACBB stock totalling $316,000 are included for purposes of this table.
Cumulative rate sensitive interest-earning assets divided by cumulative rate sensitive interest-bearing liabilities.
Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities.
These characteristics include the volume of assets and liabilities repricing, the timing of the repricing, and
the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual
challenge in a changing interest rate environment. Based on our gap position as reflected in the above
table, current accepted theory would indicate that net interest income would increase in a falling interest
rate environment and would decrease in a rising interest rate environment. We believe that an interest
rate gap table does not, however, present a complete picture of the impact of interest rate changes on net
interest income for the following reasons. First, changes in the general level of interest rates do not affect
all categories of assets and liabilities equally or simultaneously. Second, assets and liabilities which can
contractually reprice within the same time period may not, in fact, reprice at the same time or to the same
extent. Third, the table represents a one-day position; variations occur daily as we adjust our interest
sensitivity throughout the year. Fourth, assumptions must be made to construct such a table. For
example, noninterest-bearing deposits are assigned a repricing interval within three months, although our
operating history indicates a significant amount of these deposits will not move into interest-bearing
categories regardless of the general level of interest rates. Finally, the repricing distribution of interest
sensitive assets may not be indicative of the liquidity of those assets.
33
Gap analysis is a useful measurement of asset and liability management; however, it is difficult to
predict the effect of changing interest rates based solely on this measure. To present a more complete
picture of the impact of changing interest rates on our net income, we utilize a third party advisor to create
financial simulation models based on information we provide to measure our interest rate exposure.
These tools provide management with extensive information on the potential impact of net income caused
by changes in interest rates. Interest rate related risks such as pricing spreads, the lag time in pricing
administered rate accounts, prepayments and other option risks are considered. These analyses estimate
the potential effect of shifts in interest rates on net interest income.
Noninterest Income
Noninterest income totaled $563,945 in 2014, compared to $575,523 in 2013, a decrease of
$11,578 or 2.0%. This category of income consists primarily of ATM fees, service charges on deposit
accounts, gains on the sale and/or calls of investment securities, and gains on the sale of loans.
For the year ended December 31, 2014, fees and service charges were $452,652 compared to
$436,372 in 2013, an increase of $16,280 or 3.7%. This increase was primarily the result of greater loan
late fees in 2014 of $50,095 compared to $20,704 in 2013. The Bank purchased Bank Owned Life
Insurance (BOLI) in January 2010. The BOLI investment is a tax free investment purchased by the Bank
to offset employee benefit costs. The income from BOLI was $100,543 for the year ended December 31,
2014, compared to BOLI income of $107,432 for the year ended December 31, 2013.
Realized gains on sale of investment securities for the year ended December 31, 2014 was
$10,750, which was a decrease of $20,969 from 2013.These yearly gains were a result of sale activity in
2014 and 2013
Noninterest Expense
Total noninterest expense for the year ended December 31, 2014 was $6,486,753 compared to
$5,300,417 for the same period in 2013. This represents an increase of $1,186,336 or 22.4% from 2013.
The main contributor to this increase was the payment by the Bank of property taxes and other costs
associated with the administration by the Bank of workout loans during 2014. Salaries and employee
benefits of $2,111,563 for the year ended December 31, 2014 decreased $105,290 compared to the
same period in 2013 due to open staff positions and the timing of hiring replacement staff. Net occupancy
expense of $447,215 increased $68,346 for the year ended December 31, 2014 compared to the same
period in 2013 due to the costs for the entire year associated with the operations center which was initially
occupied in November 2013. Marketing and business development expense of $30,468 for the year
ended December 31, 2014 decreased $20,402 from the same period in 2013 due to the expiration and
non renewal of a contract with a marketing consultant. The Bank’s regulatory assessments increased
$186,135 for the year ended December 31, 2014 compared to the same period in 2013 due to the
resumption of actual FDIC assessments, whereas previously the prepaid assessment levied for all FDIC
insured banks from 2009 was being amortized.
Allowance for Loan Losses
The Bank makes provisions for loan losses in amounts deemed necessary to maintain the
allowance for loan losses at an appropriate level. The provision for loan losses is determined based upon
management's estimate of the amount required to maintain an adequate allowance for loan losses
reflective of the risks inherent in the Bank's loan portfolio. The Bank's provision for loan losses in 2014
and 2013 were $5,100,000 and $0, respectively. The increase in the provision for loan losses in 2014 as
compared to the amount in 2013 relates to estimated losses inherent in the Bank’s loan portfolio resulting
from updated third party appraisals which evidence decreases in the current fair market value of the
collateral which secures the Bank’s elevated level of collateral dependent troubled loans. At December
31, 2014, the allowance for loan losses was $5,546,201 or 4.14% of total loans compared to $2,549,124
or 1.91% of total loans at December 31, 2013.
The Bank prepares a quarterly analysis of the allowance for loan losses, with the objective of
quantifying portfolio risk into a dollar amount of inherent losses. The determination of the allowance for
loan losses is based on eight qualitative factors and one quantitative factor for each category and type of
34
loan along with any specific allowance for loans deemed impaired within each category. Each factor is
assigned a percentage weight and that total weight is applied to each loan category. Factors are different
for each category. Qualitative factors include: levels and trends in delinquencies and non-accrual loans,
trends in volumes and terms of loans, effects of any changes in lending policies, the experience, ability
and depth of management, national and local economic trends and conditions, concentrations of credit,
quality of the Bank's loan review system, and regulatory requirements. The total allowance required thus
changes as the percentage weight assigned to each factor is increased or decreased due to the changing
circumstances, changes in portfolio composition and changes in the evaluation of loans considered
impaired. See Notes 1 and 3 to the financial statements for additional information regarding the
determination of the provision and allowance for loan losses.
The Bank follows the guidance of ASC Topics 310 and 450 in determining general reserves for
unimpaired loans and specific reserves for loans that are deemed impaired. General reserves are
determined on the basis that losses be accrued when they are probable of occurring and estimable.
Impaired loans are measured based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment
based on a loan's observable market price, or the fair value of the collateral if the loan is collateral
dependent. Impairment analysis typically excludes smaller balance and homogeneous loans, which are
collectively evaluated for impairment, from impairment reporting. Therefore, the Bank has designated
consumer and residential mortgage loans to be excluded for this purpose unless they are troubled debt
restructurings. From the remaining loan portfolio, loans rated as substandard, classified as non-accrual,
and troubled debt restructurings may be evaluated for impairment. Slow payment on a loan is considered,
by the Bank, to only be a minimum delay.
Loans are evaluated for non-accrual status when principal or interest is delinquent for 90 days or
more and are placed on non-accrual status when a loan is specifically determined to be impaired. Any
unpaid interest previously accrued on those loans is reversed from income. Any interest payments
subsequently received are recognized as income unless, in management's opinion, a potential for loss
remains. Interest payments received on loans, where management believes a potential for loss remains,
are applied as a reduction of the loan principal balance. As of December 31, 2014 total non-accrual loans
were $25,316,702 compared to $11,865,216 at December 31, 2013. The increase in non-accrual loans
was due to several large loan relationships being unable to service their debt to the Bank due to cash flow
problems. The Bank continues pursuing an aggressive strategy with respect to these non-accrual loans to
increase cash flows from the loan collateral and/or foreclose upon the real estate collateral.
The Bank transacts a limited number of loans with interest reserves to facilitate construction
projects or collateral improvements to investment properties after the normal underwriting process has
been completed. The loans with interest reserves are monitored by the Bank directly or through third
party vendors experienced in construction that issue the Bank an official report for review prior to any loan
advances being granted. Interest reserves and revenue recognition are discontinued when collection of
the loan, including interest, becomes uncertain.
Management believes that the allowance for loan losses is adequate. There can be no
assurance, however, that adjustments to the provision for loan losses will not be required in the future.
Changes in the economic assumptions underlying management's estimates and judgments, adverse
developments in the economy on a national basis or in the Bank's market area, or changes in the
circumstances of any borrower could potentially result in increases to the allowance for loan losses.
Income Taxes
The Bank recorded an income tax expense of $1,247,970 for the year ended December 31, 2014
compared to an income tax expense of $423,874 for 2013. This income tax expense for 2014 reflects the
establishment of a valuation allowance related to reversal of the deferred tax asset of $3,360,091 as of
December 31, 2014. The income tax expense for 2013 was $423,874. The valuation allowance was
necessary to reflect the potential inability of the Bank to generate taxable income in the future.
35
Comparison of Financial Condition at December 31, 2014 and 2013
Total assets at December 31, 2014 were $179,847,222, a decrease of $2,286,449 or (1.3%),
from December 31, 2013. Cash and cash equivalents at December 31, 2014 increased $5,095,114 or
134.3%, compared to December 31, 2013. Interest-bearing deposits with banks were $476,023 at
December 31, 2014, an increase of $150,261. Investment securities available for sale at December 31,
2014 decreased $3,704,179 or 9.7% compared to December 31, 2013. Gross loan balances at December
31, 2014 increased $736,002 or 0.6%, compared to December 31, 2013. Bank Owned Life Insurance
totaled $4,074,398 at December 31, 2014, compared to $3,973,856 at December 31, 2013. Other assets,
including interest receivable of $1,208,325 decreased $1,614,738 or 57.2% compared to December 31,
2013 mainly due to the reversal of the deferred tax asset of $2,755,612 for the year 2014.
Total deposits at December 31, 2014 were $166,684,506, an increase of $776,070 or 0.5% from
December 31, 2013. Approximately 50% of the Bank’s deposits were in time certificates of deposit and
33% in the flexible savings account, a multi-tiered savings account that pays increasing rates of interest
depending upon the balance in the account. Noninterest-bearing deposits at December 31, 2014 were
$11,658,196 compared to $11,525,813 at December 31, 2013, a $132,383 or 1.1% increase. The
remaining deposits were in lower interest-bearing checking and money market accounts.
.
Short Term Borrowings
The Bank borrowed $3,000,000 from the Federal Home Loan Bank of New York on October 30,
2014 for one year to mature on October 30, 2015. The borrowing was collateralized with securities from
the Bank’s investment portfolio and was for a fixed rate of 0.49%. There were no Federal Home Loan
Bank borrowings for the year ended December 31, 2013.
Other Liabilities
Other liabilities at December 31, 2014 were $971,387, compared to $735,082 at December 31,
2013, and consisted primarily of accrued interest payable and accrued expenses in both years.
The Bank issued commitments to potential borrowers of the Bank in the amount of $15,189,249
and $14,172,254 at December 31, 2014 and 2013, respectively. The Bank had outstanding performance
guarantees and standby letters of credit totaling $793,243 and $945,513 at December 31, 2014 and
2013, respectively. The amounts are not reflected on the Balance Sheets for December 31, 2014 and
2013.
Capital Resources
The Bank is subject to various regulatory capital requirements. Regulatory capital is defined in
terms of Tier I capital (stockholders’ equity less unrealized gains or losses on available-for-sale
securities), Tier II capital (which includes a portion of the allowance for loan losses) and total capital (Tier
I plus Tier II). Risk based capital ratios are expressed as a percentage of risk-weighted assets. Riskweighted assets are determined by assigning various weights to all assets and contingent assets with offbalance sheet risk. Regulators have also adopted minimum Tier I leverage ratio standards, which
measure the ratio of Tier I capital to total assets.
The Bank’s actual capital amounts and ratios at December 31, 2014 and 2013 are discussed at
Note 12 to the Financial Statements.
Dividend Policy
The future dividend policy of the Bank is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial condition, cash needs, and
general business conditions. Holders of common stock will be entitled to receive dividends as and when
declared by the Board of Directors out of funds legally available for that purpose.
36
Under the New Jersey Banking Act of 1948 (the “Banking Act”), the Bank may declare and pay
dividends only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either
(a) the Bank will have a surplus of not less than 50% of its capital stock or (b) the payment of the dividend
will not reduce the Bank’s surplus. Under the 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” in Part 1, Item 1). Adherence to such standards further limits the ability of
the Bank to pay dividends to its shareholders. In addition, under the terms of the Consent Orders, no
capital distribution or dividend is permitted to be made by the Bank without the prior approval of the FDIC
and the NJDOBI.
Liquidity
Liquidity represents our ability to meet our normal cash flow requirements for the funding of loans,
repayment of deposits and payment of operating costs. Liquidity is generally derived from the repayments
and maturities of loans and investment securities, our borrowing capability, and the growth in deposit
accounts. Bank management monitors liquidity daily, and on a monthly basis incorporates liquidity
analysis into our asset/liability management program.
The Bank’s primary sources of funds currently include deposits, amortization and prepayment of
loans, maturities of investment securities, and cash flow from operations. While scheduled loan
repayments and maturities of investment securities are a relatively predictable source of funds, deposit
flows and prepayments of loans and investments are greatly influenced by market interest rates,
economic conditions and competition.
If need for additional funds arises, the Bank has available a $5,000,000 federal funds line of credit
from its correspondent bank, Atlantic Central Bankers Bank, to supplement its liquidity needs. This line is
available on an unsecured basis for up to $2,000,000 in principal balance outstanding. 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 this line. The Bank is a member of the
Federal Home Loan Bank of New York (FHLB). This membership has provided the Bank with additional
liquidity in the form of a line of credit line of credit aggregating $15,184,000. This line of credit, when
drawn, would be secured by eligible mortgage related investment securities owned by the Bank. The
Bank had an outstanding balance of $3,000,000 under this line of credit at December 31, 2014 and $0 at
December 31, 2013.
Maintenance of liquidity is coordinated by the Asset/Liability Management Committee of the
Board of Directors, which monitors projected liquidity needs and determines the desired level of liquidity,
based in part on the Bank’s commitments and management’s assessment of the Bank’s ability to
generate funds. At December 31, 2014, the Bank had cash and cash equivalents of $8,888,195,
compared to $3,793,081 as of December 31, 2013, in the form of cash, due from banks, and federal
funds sold.
Our ability to generate deposits depends on the success of our four branches and the continued
expansion of our branch network. Our success and, in particular, the success of these and any other
branches is largely dependent on a number of factors, including our ability to establish branches in
favorable locations, our ability to meet the needs of our customers through personalized services and a
broad array of financial products, and the general economic conditions of the market area in which they
are located. Unexpected changes in the national and local economy may adversely affect the branches’
ability to attract or retain deposits and foster new loan relationships. In addition, because we incur start up
and operating costs associated with expansion, the opening of new branches adversely affects future
short term profitability. At present, pursuant to the terms of the Consent Orders, the Bank cannot open
any new branch location without the prior approval of the FDIC ad the NJDOBI.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
37
Item 8 Financial Statements and Supplementary Data
The following audited financial statements and related documents are set forth in this Form 10-K
on the following pages:
Page(s)
Report of Independent Registered Public Accounting Firm
44
Balance Sheets
45
Statements of Operations
46
Statements of Comprehensive Income (Loss)
47
Statements of Changes in Stockholders’ Equity
47
Statements of Cash Flows
48
Notes to Financial Statements
49-81
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Management of the Bank, including the Chief Executive Officer and the Chief Financial Officer, have
conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures
pursuant to Rule 13a-14 under the Exchange Act as of December 31, 2014 (the “Evaluation Date”).
This evaluation was impacted by the consideration of material weaknesses in internal control over
financial reporting identified in Item 9A (b) of this report, “Management’s Report on Internal Control
over Financial Reporting.” Please refer to Item 9A (b) for a description of material weaknesses
identified and management plans and actions to address weaknesses noted. Due to the material
weaknesses, management has concluded the Bank’s disclosure controls and procedures are not
effective.
(b) Management’s Report on Internal Control Over Financial Reporting.
Management of the Bank is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange
Act. Under the supervision, and with participation, of the Bank’s principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the original (1992) Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Due to significant
senior management changes which occurred at the Bank during 2014 and added attention and follow
up required to address various regulatory issues, full transitioning by the Bank to the updated 2013
version of the COSO Internal Control—Integrated Framework has been moved to the 2015 reporting
period for internal control over financial reporting evaluation purposes. Material weaknesses in
internal control over financial reporting were identified as part of the overall evaluation process,
involving inconsistencies impacting the effectiveness of controls as related to:1) the application of
loan risk ratings and identification of impaired loans, due to the overall risk profiles of borrowers not
being fully reflected in customer/loan credit risk assessment processes; and 2) the calculation of the
allowance for loan losses (ALL), due to the need for enhanced recognition of significant changes in
loan portfolio qualitative factors used in management’s ALL calculation methodology.
Management has developed an action plan to remediate material weaknesses identified,
implemented a number of measures to address issues noted, and is committed to building upon such
efforts going forward, where and as appropriate, to further strengthen the effectiveness of controls in
the above noted areas. Such measures and efforts have included the following to date:
enhancements made to loan delinquencies reporting to the Board of Directors and appraisal updating
processes for impaired/non-accrual loans and related reporting thereto; and re-evaluation/updating of
qualitative factors as part of the ALL calculation methodology.
38
(c) Changes in Internal Control Over Financial Reporting.
Other than what has been previously described in this Item 9A, there have not been any changes in
the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that
have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over
financial reporting.
Item 9B Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10, relating to directors, executive officers and control
persons, is set forth in the section captioned “Proposal 1 - Election of Directors” contained in the Bank’s
definitive proxy statement to be used in connection with the 2015 Annual Meeting of the Bank’s
Shareholders, which pages are incorporated herein by reference.
The Bank has adopted a code of ethics that applies to the Bank’s chief executive officer, chief
financial officer and any person performing similar functions on behalf of the Bank. The Bank will provide
to any person without charge, upon written request, addressed to the Bank at its principal executive office
address, attention Corporate Secretary, a copy of such code of ethics.
If any substantive amendments are made to the code of ethics or we grant any waiver, including
any implicit waiver, from a provision of the code of ethics to our chief executive officer, chief financial
officer or any person performing similar functions on behalf of the Bank, we will disclose the nature of the
amendment on our website (www.harvestcommunitybank.com) or in a report on Form 8-K, as required by
applicable law.
Item 11.
Executive Compensation
The information required by this Item 11 is incorporated by reference to the information appearing
under the caption “Remuneration of Directors and Officers” in the proxy statement to be used in
connection with the Bank’s 2015 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this Item 12 is incorporated by reference to the information appearing
under the caption “Security Ownership of Certain Beneficial Owners and Management” in the proxy
statement to be used in connection with the Bank’s 2015 Annual Meeting of Shareholders.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to the information appearing
under the caption “Certain Relationships and Related Transactions” in the proxy statement to be used in
connection with the Bank’s 2015 Annual Meeting of Shareholders.
39
Item 14.
Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference to the information appearing
under the caption “Ratification of Independent Accountants-Audit Fees” in the proxy statement to be used
in connection with the Bank’s 2015 Annual Meeting of Shareholders.
Part IV
Item 15 Exhibits and Financial Statement Schedules
(a) Financial Statements and Supplementary Data
The following audited financial statements and related documents are set forth in this Form 10-K
on the following pages:
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Comprehensive Income (Loss)
Statements of Changes in Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Page(s)
44
45
46
47
47
48
49-81
(b) Exhibits
3.1
Certificate of Incorporation of Harvest Community Bank filed with the New Jersey
Department of Banking and Insurance on November 8, 2004, as amended
(incorporated by reference to Exhibit 3.1 to the Bank’s Form-10QSB filed August
11, 2006).
3.2
By-laws of Harvest Community Bank as amended (incorporated by reference to
Exhibit 3.1 to the Bank’s Form 8K filed September 26, 2012).
4.1
Specimen share certificate of the common stock of Harvest Community Bank
(incorporated by reference to Exhibit 10.1 to the Bank’s Form 10-KSB for the fiscal
year ended December 31, 2003).
4.2
Specimen certificate for common stock purchase warrants issued by Harvest
Community Bank (incorporated by reference to Exhibit 4.3 to the Bank’s Form 10KSB for the fiscal year ended December 31, 2004).
10.1
Building lease dated November 2, 2009 between Harvest Community Bank and
Fox Shopping Center Inc. (incorporated by reference to Exhibit 10.1 to the Bank’s
Form-10K for the fiscal year ended December 31, 2010).
10.2
Building lease addendum dated November 2, 2009 between Harvest Community
Bank and Fox Shopping Center Inc. (filed herewith).
10.3
Harvest Community Bank 2004 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.4 to the Bank’s Form 10-KSB for the fiscal year ended
December 31, 2004).
10.4
Harvest Community Bank 2004 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Bank’s Form 10-KSB for the fiscal year ended
December 31, 2004).
40
(c)
10.5
Building lease dated October 27, 2005 between Harvest Community Bank and
Wheat Properties LLC (incorporated by reference to Exhibit 10.6 to the Bank’s
Form-10KSB for the fiscal year ended December 31, 2005).
10.6
Stipulation and Consent to the Issuance of a Consent Order between the Bank and
the FDIC dated March 19, 2015 (incorporated by reference to Exhibit 10.1 to the
Bank’s Form 8-K filed with the FDIC on March 25, 2015).
10.7
Consent Order issued by the FDIC dated March 19, 2015 (incorporated by
reference to Exhibit 10.2 to the Bank’s Form 8-K filed with the FDIC on March 25,
2015).
10.8
Stipulation and Consent to the Issuance of a Consent Order between the Bank and
the NJDOBI dated March 20, 2015 (incorporated by reference to Exhibit 10.1 to the
Bank’s Form 8-K filed with the FDIC on March 27, 2015).
14.1
Harvest Community Bank Code of Ethics (incorporated by reference to Exhibit
14.1 to the Bank’s Form-10KSB for the fiscal year ended December 31, 2004).
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d14(a) and Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d14(a) and Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed
herewith).
Financial Statement Schedules
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned,
th
thereunto duly authorized, in the Township of Pennsville, State of New Jersey, on the 15 day of April
2015.
HARVEST COMMUNITY BANK
By:
/s/ Frank J. Mc Entee
Frank J. Mc Entee, President and
Chief Executive Officer
.
By:
/s/
John Kalitan
.
John Kalitan
Senior Vice President and Chief Financial Officer
41
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the
following persons on April 15, 2015, in the capacities indicated:
Signature
Title
/s/ Frank J. Mc Entee
Frank J. Mc Entee
President, Chief Executive Officer and Director
/s/ Ernest A. Bickford
Ernest A. Bickford
Director
/s/ Anthony W. Carapella, Jr.
Anthony W. Carapella, Jr.
Director
/s/ John H. Coombs
John H. Coombs
Director
/s/ Ronald W. Gregory
Ronald W. Gregory
Director
/s/ Grant Harris
Grant Harris
Director
/s/ Gordon J. Ostrum, Jr.,M.D.
Gordon J. Ostrum, Jr.,M.D.
Director
/s/ David J. Puma, Esquire
David J. Puma, Esquire
Director
/s/ Richard D. Rowland
Richard D. Rowland
Director
/s/ Lee Williams, Jr.
Lee Williams, Jr.
Director
/s/ Michael A. Williams
Michael A. Williams
Director
42
Part F/S
Harvest Community Bank
Index to Financial Statements and Schedules
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Comprehensive Income (Loss)
Statements of Changes in Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
.
43
PAGE(S)
44
45
46
47
47
48
49-81
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Harvest Community Bank
We have audited the accompanying balance sheets of Harvest Community Bank (the “Bank”) as of
December 31, 2014 and 2013, and the related statements of operations, comprehensive income (loss),
changes in stockholders’ equity and cash flows for the years then ended. These financial statements are
the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Bank is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Bank’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Harvest Community Bank as of December 31, 2014 and 2013, and the results of its
operations and its cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the Bank will continue as a
going concern. As discussed in Note 12 to the financial statements, quantitative measures established by
regulation to ensure capital adequacy require the bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined by the regulations) to risk-weighted assets (as defined) and of Tier 1 capital
(as defined) to average assets (as defined). The Bank has entered into Consent Orders with the Federal
Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance. The Consent
Orders contain various requirements including higher than standard capital levels. As of December 31,
2014, the bank capital levels are below the requirements of the Consent Orders. In addition, the bank
has suffered a significant operating loss in 2014. Failure to meet the capital requirements exposes the
bank to further regulatory sanctions, including, but not limited to restrictions on operations and asset
growth, mandatory asset disposition and seizure of the institution. These matters raise substantial doubt
about the ability of Harvest Community Bank to continue as a going concern. Management’s plans in
regard to these matters are described in Note 12. The accompanying financial statements do not include
any adjustments that would be necessary, should the bank be unable to continue as a going concern.
/s/McGladrey LLP
Blue Bell, Pennsylvania
April 15, 2015
44
HARVEST COMMUNITY BANK
Balance Sheets
December 31, 2014 and 2013
2014
Assets
Cash and due from banks
Cash and cash equivalents
$
Interest-bearing deposits with banks
8,888,195 $
8,888,195
476,023
Investment securities available for sale (amortized cost of
$34,158,649 and $38,892,336 at December 31, 2014
and 2013, respectively)
Loans receivable
Less allowance for loan losses
Loans receivable, net
Premises and equipment, net
Accrued interest receivable
Bank owned life insurance
Other assets
Total Assets
$
34,670,840
134,047,043
5,546,201
128,500,842
2,028,599
633,084
4,074,398
575,241
179,847,222 $
2013
3,793,081
3,793,081
325,762
38,375,019
133,311,041
2,549,124
130,761,917
2,080,973
903,428
3,973,856
1,919,635
182,133,671
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
$
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
11,658,196 $
154,382,623
166,684,506
165,908,436
3,000,000
Short term borrowings
Other liabilities
Total Liabilities
11,525,813
155,026,310
-
971,387
735,082
170,655,893
166,643,518
5,738,665
5,738,665
6,578,238
6,578,238
(3,432,889)
3,483,641
Commitment and Contingencies (Notes 9 and 10)
Stockholders' Equity:
Common stock, $5 par value:
authorized 5,000,000 shares;
issued and outstanding 1,147,733 shares at
December 31, 2014 and 2013
Additional paid-in capital
Retained Earnings
Accumulated other comprehensive income (loss), net of taxes
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to financial statements.
45
$
307,315
9,191,329
179,847,222 $
(310,391)
15,490,153
182,133,671
HARVEST COMMUNITY BANK
Statements of Operations
Years ended December 31,
2014
2013
Interest Income
Interest and fees on loans
$
5,468,825 $
6,264,427
Interest on investment securities
Taxable
696,077
714,144
Non-taxable
328,106
352,635
Interest on federal funds sold
Interest on deposits with banks
Total interest income
36
71
1,420
2,294
6,494,464
7,333,571
1,137,035
1,182,873
Interest Expense
Interest on deposits
Interest on borrowing
3,181
-
Total interest expense
1,140,216
1,182,873
Net interest income
5,354,248
6,150,698
Provision for loan losses
5,100,000
Net interest income after provision for loan losses
-
254,248
6,150,698
Fees and service charges
452,652
436,372
Bank owned life insurance income
100,543
107,432
Noninterest Income
Realized gain on sale of investment securities
Total noninterest income
10,750
31,719
563,945
575,523
2,111,563
2,216,853
Noninterest Expense
Salaries and employee benefits
Net occupancy
447,215
378,869
Equipment and data processing
766,300
763,182
Marketing and business development
Professional services
Regulatory assessments
30,468
50,870
488,870
480,815
265,180
79,045
2,377,157
1,330,783
6,486,753
5,300,417
(Loss) Income before income taxes
(5,668,560)
1,425,804
Provision for income taxes
Net (loss) income
$
1,247,970
(6,916,530) $
423,874
1,001,930
Earnings per share
Basic and diluted earnings per share
$
(6.03) $
0.87
Other operating expenses
Total noninterest expense
Weighted average shares outstanding
1,147,733
See accompanying notes to financial statements.
46
1,147,733
Harvest Community Bank
Statements of Comprehensive Income (Loss)
Years ended December 31, 2014 and 2013
2014
Net income
Other comprehensive income
Unrealized holding gains (losses) on available for sale securities
Less: Reclassification adjustment for gains included in net income
Income tax (benefit) expense
Other comprehensive income (loss)
Total comprehensive income (loss)
2013
$
(6,916,530) $
1,001,930
$
1,040,258
(10,750)
(411,802)
617,706
(6,298,824) $
(1,987,958)
(31,719)
806,969
(1,212,708)
(210,778)
See accompanying notes to financial statements
HARVEST COMMUNITY BANK
Statements of Changes in Stockholders' Equity
Years ended December 31, 2014 and 2013
Balance, December 31, 2012
Net income
Other comprehensive income (loss)
Balance, December 31, 2013
Additional
Common
Paid-in
Stock
Capital
$ 5,738,665 $ 6,578,238 $
6,578,238
5,738,665
Net loss
Other comprehensive income
Balance, December 31, 2014
$
-
5,738,665 $
See accompanying notes to financial statements.
47
6,578,238 $
Accumulated
Other
Retained
Comprehensive
Income (Loss)
Earnings
2,481,711 $
902,317 $
1,001,930
(1,212,708)
3,483,641
(310,391)
(6,916,530)
-
617,706
(3,432,889) $
307,315 $
Total
15,700,931
1,001,930
(1,212,708)
15,490,153
(6,916,530)
617,706
9,191,329
HARVEST COMMUNITY BANK
Statements of Cash Flows
For the years ended December 31, 2014 and 2013
2014
Operating activities:
Net income (loss)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses
Deferred income taxes
Gain on sale of investment securities
Depreciation and amortization
Amortization of premiums and discounts on securities, net
Gain on sale of loans
Loans originated for sale
Proceeds from sale of loans held for sale
Earnings on bank owned life insurance
Decrease in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
Net cash provided by (used in) operating activities
$
2013
(6,916,530) $
1,001,930
5,100,000
1,128,446
(10,750)
169,239
170,730
(100,542)
74,491
236,305
(148,611)
421,874
(31,719)
172,352
248,566
(695)
(120,657)
121,352
(107,432)
484,352
(285,267)
1,904,656
260,750
4,312,956
(150,261)
(2,838,925)
(116,865)
1,467,655
3,821,465
6,188,503
(7,114,855)
1,252,748
(1,085,367)
(464,100)
2,598,394
Financing activities:
Net increase (decrease) in deposits
Proceeds from Federal Home Loan Bank
Net cash provided by (used in) financing activities
776,070
3,000,000
3,776,070
(5,518,092)
(5,518,092)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
5,095,114
3,793,081
8,888,195
$
(1,015,042)
4,808,123
3,793,081
$
$
1,121,146
24,000
$
$
1,209,449
2,000
$
1,029,508
$
(2,019,677)
Investing activities:
Proceeds from sale of investment securities available for sale
Calls and maturities of investment securities available for sale
Purchases of investment securities available for sale
Net (increase) decrease in interest-bearing deposits with other banks
Net (increase) in loans
Purchases of premises and equipment
Net cash provided by investing activities
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest
Taxes
Non-cash items:
Change in unrealized gain (loss) on securities available for sale
See accompanying notes to financial statements.
48
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
(1) Summary of Significant Accounting Policies
(a) Nature of Operation
Harvest Community Bank (the “Bank”) is a state chartered commercial bank that offers
various traditional commercial banking products and services to small and medium-sized
businesses, professionals and individuals, throughout Salem and other southern counties
in New Jersey. The Bank is supervised and regulated by the New Jersey State
Department of Banking and Insurance and the Federal Deposit Insurance Corporation.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to
the extent applicable by law. The Bank is managed as one business segment.
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of
income and expenses for the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in the
near-term include the allowance for loan losses, valuation of deferred income taxes, the
determination of other than temporary impairment for investment securities and the fair
value disclosures of financial instruments.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
amounts due from banks, interest-bearing deposits with original maturities of three
months or less, and federal funds sold.
(d) Interest-Bearing Deposits with Banks
Interest-bearing deposits in banks mature within one year and are carried at cost.
(e) Investment Securities Available for Sale
The Bank classified all of its securities as available for sale at December 31, 2014 and
2013. Investments classified as available for sale are stated at fair value in the balance
sheet. Premiums and discounts are amortized or accreted using a method that produces
results that approximate level yield over the securities contractual lives and included in
interest income. Unrealized gains and losses that are deemed to be temporary are
excluded from earnings and are reported net of tax as comprehensive income, a
separate component of stockholders’ equity until realized. If management intends to sell
securities or it is more than likely that management will be required to sell securities,
losses will be recorded in earnings. Purchase premiums and discounts are recognized in
interest income using the interest method over the terms of the securities. Declines in the
fair value of individual debt securities below their cost that are deemed to be other than
temporary result in write-downs of the individual securities to their fair value. Impairment
losses on debt securities that are deemed to be other than temporarily impaired are
reflected in earnings as realized losses to the extent impairment is related to credit
losses. The amount of the impairment for debt securities related to other factors is
49
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
recognized in other comprehensive income (loss). In evaluating other than temporary
impairment losses, management considers (1) the length of time and the extent to which
the fair value has been less than cost, (2) the reasons for the decline in value, (3) the
financial position and access to capital of the issuer, including the current and future
impact of any specific events, and (4) for fixed maturity securities, whether the Bank
intends to sell the security, or it is more likely than not that the Bank will be required to
sell the security before recovery of the cost basis, which may be maturity.
(f) Loans Held for Sale
Loans held for sale are residential mortgages the Bank has the intent to sell in the near
term. These loans are reported at the lower of aggregate cost or fair value. Net
unrealized losses, if any, are recognized through a valuation allowance by charges to
income. Gains and losses on sales of loans are recognized at settlement dates and are
determined by the difference between the sales proceeds and the carrying value of the
loans. All sales are made servicing released, without recourse and with no continuing
involvement. The Bank had no loans held for sale at December 31, 2014 or at
December 31, 2013.
(g) Loans
The Bank originates loans secured by real estate and other assets, working capital lines,
and other commercial loans, consumer loans such as home equity lines of credit, fixed
rate home equity loans, auto loans and personal loans within its primary lending area of
Salem and contiguous southern counties of New Jersey. Loans receivable are stated at
the amount of unpaid principal, net of unearned loan fees and the allowance for loan
losses.
Loan origination fees and related direct loan origination costs are deferred and
recognized over the life of the loan using the interest method as an adjustment of yield.
The amortization is reflected as interest income in the statements of income. The
unamortized balances are reported on the Bank’s balance sheets as a component of
loans receivable.
Interest income is recognized based on the principal amount outstanding using the
accrual basis. Loans are placed on nonaccrual status if they are past due as to principal
or interest payments for a period of 90 days or more. Exceptions may be made if a loan is
deemed by management to be well collateralized and in the process of collection. Loans
that are on a current payment status may also be placed on nonaccrual status if there is
a serious doubt as to the borrower’s ability to continue principal or interest payments.
When a loan is placed on nonaccrual status, interest accruals cease and uncollected
accrued interest receivable is reversed and charged against current interest income.
Nonaccrual loans are generally not returned to accruing status until principal and interest
payments have been brought current and full collectability is reasonably assured.
Generally, until a loan becomes current, any payments received from borrowers are
applied to outstanding principal, until such time as management determines that the
financial condition of the borrower and other factors merit recognition of a portion of such
payments as interest income.
50
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
(h) Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred
through a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management reviews the level of the allowance for loan losses on a quarterly basis. The
standardized methodology used to assess the adequacy of the allowance includes the
allocation of specific and general reserves. The same standard methodology is used,
regardless of loan type. Specific reserves are made to individual impaired loans by loan
type, The general reserve is set based upon a representative average historical net chargeoff rate adjusted for certain environmental factors such as: delinquency and impairment
trends, charge-off and recovery trends, volume and loan term trends, risk and underwriting
policy trends, staffing and experience changes, national and local economic trends,
industry conditions and credit concentration changes.
All of the environmental factors are ranked and assigned a basis points value based on
the following scale: low, low moderate, moderate, high moderate, and high risk. The
factors are evaluated separately for each type of loan. For example, commercial loans are
broken down further into commercial loans, commercial real estate loans, and commercial
construction loans. Each type of loan is risk weighted for each environmental factor
based on its individual characteristics.
According to the Bank’s policy, a loss (“charge-off”) is to be recognized and charged to the
allowance for loan losses as soon as a loan is recognized as uncollectable. All credits
which are 90 days past due must be analyzed for the Bank’s ability to collect on the credit.
Once a loss is confirmed, the charge-off approval process is immediately expedited. This
charge-off policy is followed for all loan types.
The allowance consists of specific and general components. The specific component
relates to loans that are classified as impaired.
For loans that are classified as impaired, an allowance is established when the
discounted cash flows (or collateral value if the loan is collateral dependent or observable
market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers non-impaired loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component, if necessary, is maintained to
cover uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and general
losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the
51
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
delay, the reason for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller homogenous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately evaluate individual consumer and
residential loans for impairment, unless such loans are the subject of a restructuring
agreement.
The Bank maintains an allowance for unfunded commitments that is maintained at a level
that management believes is adequate to absorb estimated probable losses. Adjustments
to the allowance are made through other expenses and applied to the allowance which is
maintained in other liabilities. As of December 31, 2014 and 2013 management has
determined that no allowance is required for unfunded commitments.
(i) Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the expected
useful life of the assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the assets’ estimated useful lives or the remaining
lease term.
(j) Other Real Estate Owned (OREO)
Real estate acquired through foreclosure or other proceedings is initially recorded at fair
value less estimated cost of disposal, and included in Other Assets on the Balance
Sheet. Costs of improving OREO are capitalized to the extent that the carrying value
does not exceed its fair value less estimated selling costs. Holding costs are charged to
expense. Gains and losses on such sales are recognized in noninterest income or
noninterest expense as they occur. OREO was $0 as of December 31, 2014 and
December 31, 2013.
(k) Basic and Diluted Earnings Per Share
Basic earnings per share represent income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflect additional common shares that
would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Bank relate solely
to outstanding stock options and warrants and are determined using the treasury
stock method. Stock options outstanding for 22,450 and 27,950 shares of common stock
were not considered in computing diluted earnings per share for December 31, 2014 and
2013 respectively, because they were anti-dilutive. Outstanding warrants of 552,000 were
also excluded in computing diluted earnings per share for December 31, 2014 and 2013
due to being anti-dilutive.
2014
2013
$
$
Net
income
(6,916,530)
1,001,903
Average
shares
outstanding
1,147,733
1,147,733
52
$
$
Basic
Per-share
amount
(6.03)
0.87
$
$
Diluted
Per-share
Amount
(6.03)
0.87
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
(l) Income Taxes
The Bank follows FASB ASC Topic 740, "Income Taxes," which prescribes a
recognition threshold and measurement attribute criteria for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax
return, as well as guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
The Bank accounts for income taxes according to the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using the enacted tax rates applicable to taxable
income for the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation reserves
are established against certain deferred tax assets when it is more likely than not that the
deferred tax assets will not be realized. Increases or decreases in the valuation reserve
are charged or credited to the income tax provision.
When tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position that
ultimately would be sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence, management
believes it is more-likely-than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. The evaluation of a tax
position taken is considered by itself and not offset or aggregated with other positions.
Tax positions that meet the more-likely-than not recognition threshold are measured as
the largest amount of tax benefit that is more than 50 percent likely of being realized
upon settlement with the applicable taxing authority. The portion of benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are recognized in
income tax expense on the income statement. It is the Bank’s policy to recognize interest
and penalties related to unrecognized tax liabilities within income tax expense in the
statements of income.
(m) Interest Rate Risk
The Bank is principally engaged in the business of attracting deposits from the general
public and using these deposits, together with other borrowed funds, to make
commercial, residential mortgage, and consumer loans, and to invest in overnight and
term investment securities. Inherent in such activities is the potential for the Bank to
assume interest rate risk, which results from differences in the maturities and repricing
characteristics of assets and liabilities. For this reason, management regularly monitors
the level of interest rate risk and the potential impact on net income.
53
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
(n) Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when all of the components
meet the definition of a participating interest and when control over the assets has been
surrendered. A participating interest generally represents (1) a proportionate (pro rata)
ownership interest in an entire financial asset, (2) a relationship where from the date of
transfer all cash flows received from the entire financial asset are divided proportionately
among the participating interest holders in an amount equal to their share of ownership,
(3) the priority of cash flows has certain characteristics, including no reduction in priority,
subordination of interest, or recourse to the transferor other than standard representation
or warranties, and (4) no party has the right to pledge or exchange the entire financial
asset unless all participating interest holders agree to pledge or exchange the entire
financial asset. Control over transferred assets is deemed to be surrendered when (1)
the assets have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before their
maturity.
(o) Concentration of Credit Risk
The Bank’s loans are generally to diversified customers in Salem County, Southern New
Jersey and the contiguous counties. The concentrations of credit by type of loan are set
forth in Note 3. Generally, loans are collateralized by assets of the borrower and are
expected to be repaid from the cash flow or proceeds from the sale of selected assets of
the borrower. The Bank maintains various deposit accounts with other banks to meet
normal funds transaction requirements, to satisfy deposit reserve requirements and to
compensate other banks for certain correspondent services. These accounts are
insured by the Federal Deposit Insurance Corporation up to $250,000 per account under
current Federal Deposit Insurance Corporation regulations. Management is responsible
for assessing the credit risk of its correspondent banks. The withdrawal or usage
restrictions of these accounts did not have a significant impact on the operations of the
Bank as of December 31, 2014 or December 31, 2013.
(p) Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities are reported as a
separate component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income (loss).
The components of other comprehensive income (loss) and related tax effects are as
follows:
54
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
For the years ended December 31,
Net unrealized gains (losses) on securities:
Balance, beginning of period
Unrealized holding gains (losses) arising during period
$
Less Reclassification adjustment for gains realized in net income
Balance, end of period
$
Pre-tax
2014
Tax
1,040,258 $
(10,750)
1,029,508 $
416,102 $
(4,300)
411,802 $
After-tax
624,156 $
(6,450)
617,706 $
Pre-tax
2013
Tax
After-tax
(1,987,958) $
(31,719)
(2,019,677) $
(794,297) $
(12,672)
(806,969) $
(1,193,661)
(19,047)
(1,212,708)
(q) Stock based Compensation
Effective January 26, 2005, the Bank adopted the 2004 Incentive Stock Option Plan and
the 2004 Non Qualified Stock Option Plan, which are stock based incentive
compensation plans (the “Plans”) authorizing 59,572 stock based awards.
Stock based compensation accounting guidance (FASB ASC 718, Compensation-Stock
Compensation) requires that the compensation cost relating to share based payment
transactions be recognized in financial statements. That cost is measured based on the
grant date fair value of the equity or liability instruments issued. The stock compensation
accounting guidance covers a wide range of share based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all
stock awards be calculated and recognized over the employees’ service period, generally
defined as the vesting period. A Black-Scholes option pricing model is used to estimate
the fair value of stock options.
(r) Fair Value
ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. ASC Topic 820 also requires disclosure about how fair value is
determined for assets and liabilities and establishes a hierarchy for which these assets and
liabilities must be grouped, based on significant levels of inputs. See Note 7 for more
information, including a listing of our assets and liabilities required to be measured at fair
value on a recurring basis and where they are classified with the hierarchy.
(s) Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt
Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real
Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the
FASB Emerging Issues Task Force).” The amendments of this ASU clarify that an in
substance repossession or foreclosure occurs, and a creditor is considered to have
55
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
received physical possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential
real estate property upon completion of a foreclosure or (2) the borrower conveying all
interest in the residential real estate property to the creditor to satisfy that loan through
completion of a deed in lieu of foreclosure or through a similar legal agreement.
Additionally, the amendments require interim and annual disclosure of both (1) the
amount of foreclosed residential real estate property held by the creditor and (2) the
recorded investment in consumer mortgage loans collateralized by residential real estate
property that are in the process of foreclosure according to local requirements of the
applicable jurisdiction. This ASU is effective for fiscal periods, and interim periods within
those fiscal periods, beginning after December 31, 2014. The Bank does not expect the
adoption of this standard will have a material impact on its consolidated financial
statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts and Customers
(“ASU 2014-09”) which supersedes existing industry specific guidance, including ASC
360-20, Real Estate Sales. The new standard is principles-based and requires more
estimates and judgment than current guidance. Certain contracts with customers,
including lease contracts and financial instruments and other contractual rights, are not
within the scope of the new guidance. ASU 2014-09 is effective for interim and annual
reporting periods beginning after December 15, 2016. Early adoption is not permitted.
Management is evaluating the impact of the guidance on the Bank’s Financial
Statements.
(2) Investment Securities
The amortized cost and estimated fair value of investment securities available for sale at
December 31, 2014 and 2013, summarized by contractual maturity, are as shown below. The mortgagebacked securities are from U.S. government sponsored agencies and the collateralized mortgage
obligations are substantially backed by government agencies. Expected maturities will differ from
contractual maturities in mortgage-backed securities and collateralized mortgage obligations because the
issuers of the securities have the right to call or prepay their obligations without penalty. Therefore, these
securities are not included in the maturity categories in the maturity summaries listed below:
56
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
2014
U.S. government sponsored entities and agencies
Due within one year
$
Due after one through five years
Due after five years through ten years
Due after ten years
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Amortized
Cost
57,719 $
391,592
844,021
9,526,095
10,819,427
Estimated
Fair
Value
2,282 $
7,916
22,252
244,240
276,690
$
(5,754)
(42,161)
(47,915)
60,001
399,508
860,519
9,728,174
11,048,202
U.S. government sponsored entities and agency
residential mortgage-backed securities
8,852,724
105,205
(60,565)
8,897,364
U.S. government sponsored entities and agency
collateralized mortgage obligations
5,825,058
17,304
(75,827)
5,766,535
116,368
227
(737)
115,858
Private label collateralized mortgage obligations
Municipal securities
Due within one year
Due through five years
Due after five years through ten years
Due after ten years
Total
$
2013
U.S. government sponsored entities and agencies
$
Due within one year
Due after one through five years
Due after five years through ten years
Due after ten years
499,639
5,932,828
2,112,605
8,545,072
34,158,649 $
Amortized
Cost
$
121,812
1,558,200
10,617,322
12,297,334
22,418
275,206
31,946
329,570
728,996 $
Gross
Unrealized
Gains
$
5,655
39,840
87,192
132,687
(31,761)
(31,761)
(216,805) $
Gross
Unrealized
Losses
$
(26,814)
(271,474)
(298,288)
522,057
6,208,034
2,112,790
8,842,881
34,670,840
Estimated
Fair
Value
127,467
1,571,226
10,433,040
12,131,733
U.S. government sponsored entities and agency
residential mortgage-backed securities
10,180,301
78,931
(313,763)
9,945,469
U.S. government sponsored entities and agency
collateralized mortgage obligations
7,070,547
40,945
(248,652)
6,862,840
Private label collateralized mortgage obligations
151,810
1,199
(2,159)
150,850
272,302
6,185,621
2,734,421
9,192,344
38,892,336 $
14,357
207,744
40,238
262,339
516,101 $
Municipal securities
Due within one year
Due through five years
Due after five years through ten years
Due after ten years
Total
$
57
(11,878)
(158,678)
(170,556)
(1,033,418) $
286,659
6,381,487
2,615,981
9,284,127
38,375,019
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
For the years ended December 31, 2014 and 2013, proceeds from sales of securities available for sale
amounted to $260,750 and $3,821,465, respectively. Gross realized gains on the sale amounted to
$10,750 in 2014 and $31,719 in 2013.
The fair value of securities with unrealized losses by length of time that the individual securities
have been in a continuous loss position at December 31, 2014 and 2013, are as shown below;
Continuous Unrealized Losses
Existing for Less Than 12 Months
Fair Value
Unrealized Losses
2014
U.S. qovernment sponsored entities and agencies
$
-
U.S. Government sponsored entities and agency
residential mortgage-backed securities
254,878
Private label collateralized mortgage obligations
-
$
U.S. government sponsored entities and agency
collateralized mortgage obligations
Private label collateralized mortgage obligations
$
3,331,937 $
(47,915)
-
3,029,329
(60,565)
3,029,329
(60,565)
(67)
4,807,474
(75,760)
5,062,352
(75,827)
47,004
(737)
47,004
(737)
1,168,853
12,384,597 $
(31,761)
(216,738) $
1,168,853
12,639,475 $
Continuous Unrealized Losses
Existing for 12 Months or More
Fair Value
Unrealized Losses
5,859,073 $
(298,288) $
4,294,831
(123,483)
2,389,921
4,690,823
(205,853)
1,694,629
16,539,356 $
58
Unrealized
Losses
(47,915) $
(67) $
-
Total
Fair
Value
3,331,937 $
Continuous Unrealized Losses
Existing for Less Than 12 Months
Unrealized Losses
Fair Value
U.S. Government sponsored entities and agency
residential mortgage-backed securities
Municipal securities
Total temporarily impaired securities
$
-
254,878 $
$
2013
U.S. qovernment sponsored entities and agencies
-
-
U.S. government sponsored entities and agency
collateralized mortgage obligations
Municipal securities
Total temporarily impaired securities
$
Continuous Unrealized Losses
Existing for 12 Months or More
Unrealized Losses
Fair Value
-
$
-
$
Fair
Value
(31,761)
(216,805)
Total
Unrealized
Losses
5,859,073 $
(298,288)
(190,280)
6,684,752
(313,763)
877,987
(42,799)
5,568,810
(248,652)
-
64,564
(2,159)
64,564
(2,159)
(141,269)
(768,893) $
151,632
3,484,104 $
(29,287)
1,846,261
(264,525) $ 20,023,460 $
(170,556)
(1,033,418)
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
U.S. Government and Agency Obligations. There were unrealized losses on the Bank’s
investment in five U.S. Government agencies at December 31, 2014 of $47,915 and $298,288 on eight
securities at December 31, 2013. Because the decline in fair value is attributable to changes in market
interest rates and not credit quality, and because the Bank does not intend to sell the investments and it
is not more likely than not that the Bank will be required to sell the investments before recovery of their
amortized cost basis, which may be maturity, the Bank does not consider those investments to be otherthan-temporarily impaired at December 31, 2014 or December 31, 2013.
Residential Federal Agency Mortgage-Backed Securities and Collateralized Mortgage
Obligations (CMO’S). The unrealized losses on the Bank’s investment in eleven and thirteen federal
agency mortgage-backed securities at December 31, 2014 and 2013, respectively, and one private label
collateralized mortgage obligations at December 31, 2014 and December 31, 2013 respectively, were
caused by market interest rate increases. The Bank purchased those investments at a discount relative to
their face amount, and the contractual cash flows of those agency securities are guaranteed by an
agency of the U.S. government. Repayment of the private label collateralized mortgage obligations is
dependent upon the cash flows of the issuer. It is expected that the agency securities and collateralized
mortgage obligations would not be settled at a price less than the amortized cost bases of the Bank’s
investments. Because the decline in fair value is attributable to changes in market interest rates and not
credit quality, and because the Bank does not intend to sell the investments and it is not more likely than
not that the Bank will be required to sell the investments before recovery of their amortized cost basis,
which may be maturity, the Bank does not consider those investments to be other-than-temporarily
impaired at December 31, 2014 or December 31, 2013.
Municipal Securities. The Bank had unrealized losses on five investments in municipal
securities at December 31, 2014. There were unrealized losses on five municipal securities at December
31, 2013. The Bank purchased the investments for tax efficiencies and the issuers are expected to settle
the obligations at a price not less than the amortized cost basis of the investment (that is, the Bank
expects to recover the entire amortized cost basis of the security). Because the Bank does not intend to
sell the investment and it is not more likely than not that the Bank will be required to sell the investment
before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in
municipal securities to be other-than-temporarily impaired at December 31, 2014.
The Bank has a process in place to identify debt securities that could potentially have a credit
impairment that is other than temporary. This process involves monitoring late payments, pricing levels,
downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash
flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine
whether an other-than-temporary decline in value exists and whether losses should be recognized. We
consider relevant facts and circumstances in evaluating whether a credit or interest rate-related
impairment of a security is other than temporary. Relevant facts and circumstances considered include:
(1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in
value; (3) the financial position and access to capital of the issuer, including the current and future impact
of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more
likely than not we will be required to sell the security before the recovery of its amortized cost which, in
some cases, may extend to maturity. It is the policy of the Bank to purchase AAA rated securities.
Management has evaluated these securities based upon the considerations noted above, and has
determined that, as of December 31, 2014 and 2013, no other-than-temporary losses exist within the
Bank’s investment securities portfolio.
At December 31, 2014, investment securities with an aggregate amortized cost of $4,026,000
were pledged to cover public funds and FHLB advances.
59
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
(3) Loans Receivable
The Bank has certain lending policies and procedures in place that are designed to maximize
loan income within an acceptable level of risk. Management reviews and approves these policies and
procedures on a regular basis. A reporting system supplements the review process by providing
management with frequent reports related to loan production, loan quality, concentrations of credit, loan
delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a
means of managing risk associated with fluctuations in economic conditions.
The Bank’s construction lending has primarily involved lending for construction of commercial
properties although the Bank does lend funds for construction of single-family residences. Construction
loans are underwritten utilizing feasibility studies, independent appraisals, analysis of lease rates, and the
financial analysis of the developers and property owners. Construction loans are generally based upon
estimates of costs and value associated with the completed project. These estimates can be inaccurate.
Construction loans often involve the disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project. Loan proceeds are disbursed during the construction
phase according to a draw schedule based on the stage of completion. Construction projects are
inspected by contracted inspectors or bank personnel. These loans are considered to have higher risks
than other real estate loans due to their ultimate repayment being sensitive to interest rate changes,
regulations of real property, general economic conditions and the availability of long-term financing.
The Bank has sought to minimize its risk in construction lending and lending for the purchase of
raw land by offering such financing primarily to builders and developers to whom the Bank has loaned
funds in the past and to persons who have previous experience in such projects. The Bank generally
limits construction lending and loans on raw land to its market area with which management is familiar.
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans
secured by real estate. Commercial real estate lending typically involves higher loan principal amounts
and the repayment of these loans is generally largely dependent on the successful operation of the
property securing the loan or the business conducted on the property securing the loan. Commercial real
estate loans may be more adversely affected by conditions in the real estate markets or in the general
economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type
and geographic location. The Bank seeks to minimize these risks in a variety of ways, including limiting
the size and loan-to-value ratios on its commercial real estate loans. Management monitors and
evaluates commercial real estate loans based on collateral, geography and risk grade criteria.
Commercial and industrial loans are underwritten after evaluating and understanding the
borrower’s ability to operate profitably and prudently expand its business. Once it’s determined that the
borrower’s management possesses sound ethics and solid business acumen, the Bank’s management
examines current and projected cash flows to determine the ability of the borrower to repay their
obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash
flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash
flows of borrowers, however, may not be as expected and the collateral securing these loans may
fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other
business assets such as accounts receivable or inventory and may incorporate a personal guarantee to
attempt to reduce the risk of loss. Some short-term loans may be made on an unsecured basis. The risk
of loss on commercial business loans is substantially greater than the risk of loss from residential real
estate lending.
60
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Residential real estate lending involves lending to consumers through first and second lien
mortgage loans and home equity lines of credit secured by residential properties generally located within
our market area. Because payments on these loans are highly dependent upon the borrower’s financial
condition and real estate values, the Bank analyzes credit scores, financial stability and general local and
national economic conditions. The Bank carefully evaluates collateral values on the secured property to
insure the bank is fully protected at the time of origination. However, fluctuations in real estate values and
the borrower’s financial condition may change over time, thus exposing the Bank’s collateral position. The
Bank minimizes its risk by primarily lending to its consumers on first mortgages.
Consumer loans generally involve more risk than first mortgages. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the outstanding balance as a result
of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial
collection efforts against the borrower. In addition, loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness
or bankruptcy. Further application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered. Consumer loans are
generally originated at higher rates than residential mortgage loans but also tend to have a higher risk
than residential loans due to the loan being unsecured or secured by rapidly depreciable assets.
Loans receivable at December 31, 2014 and 2013 consisted of the following:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Total Loans
Net deferred loan origination costs
Allowance for loan losses
Loans Receivable, net
$
$
2014
94,134,057 $
8,076,631
6,060,564
5,615,324
2,067,505
17,948,945
133,903,026
144,017
(5,546,201)
128,500,842 $
2013
97,678,819
9,603,586
5,040,085
3,995,043
1,066,301
15,794,304
133,178,138
132,903
(2,549,124)
130,761,917
The Bank lends primarily to customers in its local market area with limited lending through participation
loans with local financial institutions. Most loans are collateralized in part by real estate. Accordingly,
lending activities could be affected by changes in the general economy, the regional economy or
declining real estate values.
61
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Age Analysis of Past Due Loans
The following table represents an aging of loans by category as of December 31, 2014 and 2013. The
table presents the principal amount outstanding on the loans which may be past due for principal and/or
interest payments contractually due.
December 31, 2014
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
30-59 Days
60-89 Days
Past Due
Past Due
621,564 $
1,033,150 $
818,678
252,452
1,033,150 $
1,692,694 $
$
$
90+ Days
and
Still Accruing
Nonaccrual
- $
21,683,246 $
1,764,771
1,805,399
56,700
47,113
6,586
47,113 $
25,316,702 $
Total
Past
Due
23,337,960 $
2,583,449
1,805,399
56,700
306,151
28,089,659 $
Deferred loan costs
Total
December 31, 2013
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Current
70,796,097 $
5,493,182
4,255,165
5,558,624
2,067,505
17,642,794
105,813,367
$
$
$
30-59 Days
60-89 Days
Past Due
Past Due
3,012,042 $
98,873 $
29,000
92,630
157,665
3,104,672 $
285,538 $
90+ Days
and
Still Accruing
Nonaccrual
1,264,351 $
9,109,519 $
2,012,759
662,396
80,543
1,264,351 $ 11,865,217 $
Deferred loan costs
Total
Total
Past
Due
13,484,785 $
2,041,759
662,396
80,543
250,295
16,519,778 $
Current
84,194,034 $
7,561,827
4,377,689
3,914,500
1,066,301
15,544,009
116,658,360
$
62
Total
Loans
94,134,057
8,076,631
6,060,564
5,615,324
2,067,505
17,948,945
133,903,026
144,017
134,047,043
Total
Loans
97,678,819
9,603,586
5,040,085
3,995,043
1,066,301
15,794,304
133,178,138
132,903
133,311,041
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Credit Quality Classifications
The Bank assigns internal credit classifications at the inception of each loan. A sample of these
ratings are reviewed by an independent third party on a semi-annual basis as well as periodic internal
reviews when loans are renewed or if the Bank experiences delinquencies in contractual expectations
that would cause a downgrade in the quality of the loan. The following definitions summarize the basis for
each classification. Credit ratings are updated at least annually with more frequent valuations performed
for problem loans or when management becomes aware of circumstances related to a participation loan
that could materially impact the loans credit rating.
Excellent credit classifications will generally reflect a credit, which is fully secured by cash and/or
near cash investments.
Good credit classifications will generally exhibit little or no credit risk, positive financial trends,
strong and stable management, minimal exposure to macro and/or micro economic fluctuations. The
credits will also generally have a clean credit history and above average loan to value ratio relative to the
collateral strength.
Satisfactory credit classifications will generally exhibit consistent performance in meeting cash
flow needs, display strong competent management capabilities and offer satisfactory collateral with easily
determinable values that meets or exceeds the Bank’s minimum loan to value ratio.
Fair credit classifications will generally exhibit satisfactory performance in meeting cash flow
needs, display satisfactory management capabilities and offer readily marketable collateral that meets, at
a minimum, the Bank’s minimum loan to value ratio.
Watch credit classifications will generally contain emerging problems such as incomplete
documentation, questionable collateral values, unmarketable collateral or lack of timely financial
information. These credits are subject to a higher level of monitoring by the Bank. Loans in this category
are considered marginally acceptable without potential for loss of principal and interest.
Special Mention credit classifications will generally have potential weaknesses that deserve
management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration
of the repayment prospects for the credit. Generally, corrective management action can remedy credits
with this classification.
Substandard credit classifications will generally be characterized by well defined weaknesses.
The weaknesses will evidence a significant probability that the credit will not be repaid in full if the
weaknesses are not corrected. Generally substandard credits will lack a consistent net worth, liquidity and
repayment capacity. These credits are characterized by the distinct possibility that the Bank will sustain
some loss if the weaknesses are not corrected.
63
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
The following tables summarize the loan portfolio by category of loan and the internally assigned credit
quality ratings for those categories at December 31, 2014 and December 31, 2013, excluding deferred
loan costs. The Bank did not acquire any loans with impaired credit quality during the years ended
December 31, 2014 or 2013.
2014
Excellent
Good
Satisfactory
Fair
Watch
Special Mention
Substandard
$
$
2013
Excellent
Good
Satisfactory
Fair
Watch
Substandard
$
$
Commercial
Commercial
Real Estate
and Industrial
242,089 $
- $
3,110,470
240,000
46,376,547
2,186,371
14,686,107
429,132
5,038,740
39,151
2,996,859
3,417,205
21,683,245
1,764,772
94,134,057 $
8,076,631 $
Commercial
Construction
- $
818,565
3,307,309
129,291
1,805,399
6,060,564 $
Residential
Real Estate
306,069 $
466,973
4,557,965
227,617
56,700
5,615,324 $
Residential
Construction
- $
2,067,505
2,067,505 $
Consumer
41,250 $
897,431
16,484,447
68,178
451,053
6,586
17,948,945 $
Total
589,408
5,533,439
74,980,144
15,540,325
5,528,944
6,414,064
25,316,702
133,903,026
Commercial
Commercial
Real Estate
and Industrial
126,835 $
- $
3,650,031
183,621
3,189,714
48,125,467
17,011,711
2,837,262
19,655,256
1,380,230
9,109,519
2,012,759
97,678,819 $
9,603,586 $
Commercial
Construction
- $
1,414,040
1,768,404
1,195,245
662,396
5,040,085 $
Residential
Real Estate
427,618 $
3,207,971
239,319
39,592
80,543
3,995,043 $
Residential
Construction
- $
1,066,301
1,066,301 $
Consumer
- $
950,639
14,273,515
91,052
479,098
15,794,304 $
Total
554,453
6,198,331
71,631,372
20,179,344
22,749,421
11,865,217
133,178,138
64
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Allowance for loan losses
The following tables summarize the allowance for loan losses as of and for the years ended
December 31, 2014 and 2013, by loan category and the amount by category of the loans evaluated
individually or collectively for impairment. The Bank did not acquire any loans with impaired credit quality
during the years ended December 31, 2014 or 2013
.
For the year ended December 31, 2014
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions
Ending Balance
Ending balance of
allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Totals
Loan ending balances
Individually evaluated for impairment
Collectively evaluated for impairment
Totals
$
$
$
$
$
$
Commercial
Commercial
Commercial
Residential
Real Estate
and Industrial
Construction
Real Estate
1,647,565 $
404,038 $
394,621 $
1,022 $
(1,342,231)
(702,167)
(41,726)
14,425
22
169
3,898,000
1,120,000
43,000
4,217,759 $
821,893 $
396,064 $
1,022 $
Residential
Construction
3,057 $
(23,843)
30,000
9,214 $
Consumer
98,821 $
(8,765)
1,193
9,000
100,249 $
Total
2,549,124
(2,118,732)
15,809
5,100,000
5,546,201
1,837,921 $
2,379,838
4,217,759 $
301,000 $
520,893
821,893 $
- $
396,064
396,064 $
- $
1,022
1,022 $
- $
9,214
9,214 $
- $
100,249
100,249 $
2,138,921
3,407,280
5,546,201
21,683,246 $
72,450,811
94,134,057 $
1,764,771 $
6,311,860
8,076,631 $
1,805,399 $
4,255,165
6,060,564 $
56,700 $
5,558,624
5,615,324 $
- $
2,067,505
2,067,505 $
6,586 $
17,942,359
17,948,945 $
25,316,702
108,586,324
133,903,026
65
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
For the year ended December 31, 2013
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions
Ending Balance
Ending balance of
allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Totals
Loan ending balances
Individually evaluated for impairment
Collectively evaluated for impairment
Totals
Commercial
Commercial
Commercial
Residential
Residential
Construction
Real Estate
Construction
and Industrial
Real Estate
$
1,931,297 $
404,038 $
388,986 $
1,022 $
3,057 $
(284,532)
800
5,635
$
1,647,565 $
404,038 $
394,621 $
1,022 $
3,057 $
$
$
$
$
Consumer
99,585 $
(1,401)
637
98,821 $
Total
2,827,985
(285,933)
7,072
2,549,124
- $
1,647,565
1,647,565 $
- $
404,038
404,038 $
- $
394,621
394,621 $
- $
1,022
1,022 $
- $
3,057
3,057 $
- $
98,821
98,821 $
2,549,124
2,549,124
9,109,519 $
88,569,300
97,678,819 $
2,012,759 $
7,590,827
9,603,586 $
662,396 $
4,377,689
5,040,085 $
80,543 $
3,914,500
3,995,043 $
- $
1,066,301
1,066,301 $
- $
15,794,304
15,794,304 $
11,865,217
121,312,921
133,178,138
The following tables summarize the impaired loans as of December 31, 2014 and December 31, 2013.
The tables segregate the loans by category of loan and illustrate those with specific allowances for losses
as well as impaired loans without specific allowance.
66
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Impaired loans
For the year ended December 31, 2014
Recorded
Investment
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Subtotal
$
12,406,398 $
1,378,956
1,805,399
56,700
6,586
15,654,039
Unpaid
Principal
Balance
13,824,975 $
1,461,198
1,845,021
77,799
6,892
17,215,885
Average
Recorded
Investment
Related
Allowance
-
$
Interest
Income
Recognized
16,405,964 $
2,056,225
3,372,338
81,903
6,586
21,923,016
-
With an allowance recorded:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Subtotal
9,276,848
385,815
9,662,663
9,276,848
385,815
9,662,663
1,837,921
301,000
2,138,921
9,276,848
385,815
9,662,663
-
Total
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Total
21,683,246
1,764,771
1,805,399
56,700
6,586
25,316,702 $
23,101,823
1,847,013
1,845,021
77,799
6,892
26,878,548 $
1,837,921
301,000
2,138,921 $
25,682,812
2,442,040
3,372,338
81,903
6,586
31,585,679 $
-
$
67
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Impaired loans
For the year ended December 31, 2013
Recorded
Investment
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Subtotal
$
With an allowance recorded:
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Subtotal
Total
Commercial real estate
Commercial and industrial
Commercial construction
Residential real estate
Residential construction
Consumer
Total
$
9,109,519 $
2,012,759
662,396
80,543
11,865,217
Unpaid
Principal
Balance
11,343,762 $
2,663,983
2,192,777
81,903
16,282,425
Average
Recorded
Investment
Related
Allowance
-
$
Interest
Income
Recognized
9,619,699 $
2,048,389
662,396
80,543
12,411,027
-
-
-
-
-
-
9,109,519
2,012,759
662,396
80,543
11,865,217 $
11,343,762
2,663,983
2,192,777
81,903
16,282,425 $
-
9,619,699
2,048,389
662,396
81,213
12,411,697 $
-
68
$
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Impaired loans include loans modified in troubled debt restructurings (“TDR’s”) where
concessions have been granted to borrowers experiencing financial difficulties. These concessions could
include a reduction of interest rate on the loan, payment extensions, forbearance, or other actions
intended to maximize collection. At December 31, 2014, the Bank had approximately $3,479,638 that
were classified as TDR’s and included in impaired loans, compared to $2,499,424 at December 31, 2013.
At December 31, 2014, $181,134 of these loans were performing under their modified terms, compared to
$184,615 at December 31, 2013. There were two new commercial loans classified as TDR’s in 2014 or
loans that were modified in 2013 that have subsequently re-defaulted. At December 31, 2014, the largest
TDR was a $1,149,300 commercial real estate loan that was not performing in accordance with the
modified contractual terms of the agreement.
(4) Premises and Equipment
Premises and equipment at December 31, 2014 and 2013 are summarized as follows:
Land and buildings
Furniture and equipment
Leasehold improvements
2014
2,140,251 $
1,878,660
26,851
4,045,762
(2,017,163)
2,028,599 $
$
Accumulated depreciation and amortization
$
2013
2,109,901
1,792,147
26,851
3,928,899
(1,847,926)
2,080,973
(5) Deposits
The Bank’s deposit classifications as of December 31, 2014 and 2013 were as follows;
2014
Category
Interest-bearing checking accounts
Noninterest bearing checking accounts
Savings and money market
Certificates of deposit
Total
$
$
Balance
16,457,845
11,658,196
55,361,466
83,206,999
166,684,506
69
Percent
Of
Total Deposits
9.88% $
6.99%
33.21%
49.92%
100.00% $
2013
Balance
15,120,139
11,525,813
62,536,698
76,725,786
165,908,436
Percent
Of
Total Deposits
9.11%
6.95%
37.69%
46.25%
100.00%
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Certificates of deposit of $250,000 or more were $7,582,000 and $6,767,667 at December 31, 2014 and
2013, respectively.
At December 31, 2014, the scheduled maturities of time deposits were as follows:
December 31,
2015
2016
2017
2018
2019
Total
$
$
Amount
53,813,081
12,944,184
8,693,018
4,038,238
3,718,478
83,206,999
6) Borrowings
At December 31, 2014, the Bank had a line of credit with Atlantic Community Bankers Bank in the
aggregate amount of $5,000,000. At December 31, 2014 and December 31, 2013, there were no
balances outstanding against this line of credit. The line, when drawn, is unsecured for $2,000,000. The
remaining $3,000,000 will be secured by investment securities owned by the Bank.
At December 31, 2014, the Bank had a line of credit with the Federal Home Loan Bank of New
York (FHLB) aggregating $15,184,000. The Bank had a $3,000,000 outstanding balance under this line at
December 31, 2014 and $0 at December 31, 2013. The 2014 advance was for one year to mature
October 30, 2015 at a fixed rate of 0.49%. Advances, when used, supplement liquidity at a more
favorable interest rate than local deposits and are secured by mortgage related securities from the Bank’s
investment portfolio.
7) Fair Value
Fair Value Measurements
The Bank uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and
Disclosures topic of FASB ASC 820, 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 Bank'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.
The 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 a reasonable point
70
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
within the range that is most representative of fair value under current market conditions. In accordance
with this guidance, the Bank groups its assets and liabilities carried at fair value in three levels as follows:
Level 1
•
Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
•
•
Quoted prices for similar assets or liabilities in active markets.
Quoted prices for identical or similar assets or liabilities in markets that are
not active.
Inputs other than quoted prices that are observable, either directly or indirectly, for the term of
the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or
volatilities) or “market corroborated inputs.”
Level 2
•
Level 3
•
Prices or valuation techniques that require inputs that are both unobservable (i.e. supported
by little or no market activity) and that are significant to the fair value of the assets or
liabilities.
An asset’s or liability’s categorization within the valuation hierarchy is based on the lowest level of input
that is significant to the fair value measurement. The Bank evaluates its hierarchy disclosure each quarter
and based on various factors, it is possible that an asset or liability may be classified differently from
quarter to quarter.
Fair Value on a Recurring Basis
Available for Sale Securities
Certain assets are measured at fair value on a recurring basis. The table below presents the
balances of assets on the balance sheets at their fair value as of December 31, 2014 and 2013 by level
within the hierarchy, as described above. Transfers between levels of the fair value hierarchy are
recognized on the actual date of the event or circumstances that caused the transfer, which generally
coincide with the Bank’ quarterly evaluation process.
2014
Assets:
Investment securities available-for-sale
U.S. government sponsored entities and agencies
U.S. government sponsored entities and agency
residential mortgage-backed securities
Assets/Liabilities
Measured at
Fair Value
December 31
11,048,202 $
-
8,897,365
U.S. government sponsored entities and agency
collateralized mortgage obligations
Private label collateralized mortgage obligations
Municipal securities
Total
$
Fair Value Measurements at Report Date Using
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
$
11,048,202 $
-
-
8,897,365
-
5,766,534
-
5,766,534
-
115,858
-
115,858
-
8,842,881
34,670,840 $
-
8,842,881
34,670,840 $
-
71
$
$
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
2013
Assets:
Investment securities available-for-sale
U.S. government sponsored entities and agencies
U.S. government sponsored entities and agency
residential mortgage-backed securities
Assets/Liabilities
Measured at
Fair Value
December 31
12,131,733 $
-
9,945,469
U.S. government sponsored entities and agency
collateralized mortgage obligations
Private label collateralized mortgage obligations
Municipal securities
Total
$
Fair Value Measurements at Report Date Using
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
$
$
12,131,733 $
-
-
9,945,469
-
6,862,840
-
6,862,840
-
150,850
-
150,850
-
9,284,127
38,375,019 $
-
9,284,127
38,375,019 $
-
$
The fair value of available for sale securities is the market value based on quoted market prices,
when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes
are not available, fair value is based upon quoted market prices for similar or identical assets or other
observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or
no market activity of the instrument (Level 3). All available for sale securities were classified as level 2
assets. Level 2 inputs were primarily determined using a market approach that uses actual quoted prices
for similar instruments and all relevant information.
Fair Value on a Nonrecurring Basis
Certain assets are not measured at fair value on a recurring basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment). The following
table presents the assets carried on the balance sheet by caption and by level within the fair value hierarchy
as of December 31, 2014 and 2013.
Total
Assets:
Impaired loans
OREO
$
$
Carrying Value at December 31, 2014
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
9,662,663 $
$
-
72
$
$
-
$
$
9,662,663
-
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Carrying Value at December 31, 2013
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Assets:
Impaired loans
OREO
$
$
-
$
$
-
$
$
-
$
$
-
Impaired Loans and Other Real Estate Owned (OREO)
Loans in the previous tables consist of impaired loans for which a fair value adjustment has been
recorded. Impaired loans and other real estate owned are evaluated and valued at the lower of cost or fair
value of the underlying collateral (less estimated costs to sell) when the loan is identified as impaired. Fair
value is measured based on the value of the collateral securing these loans and is classified as Level 3 in
the fair value hierarchy. Collateral may be real estate or business assets such as equipment, inventory, or
accounts receivable. Fair value is determined by appraisals that generally consider a market approach or
an income approach, as appropriate in the circumstance. Appraised or reported values may be
discounted based on management’s judgment concerning market developments or the client’s business.
The valuation allowance for impaired loans is included in the allowance for loan losses in the balance
sheets. The valuation allowance for impaired loans at December 31, 2014 was $2,138,921 compared to
$0 at December 31, 2013. Other real estate owned in the tables above consist of property acquired
through foreclosures and settlements of loans. Property acquired is carried at the fair value of the
property less estimated disposal costs, and is classified as Level 3 in the fair value hierarchy.
Fair Value of Financial Instruments
FASB ASC Topic 825 “Disclosure About Fair Value of Financial Instruments”, requires the
disclosure of the estimated fair value of financial instruments, including those for which the Bank did not
elect the fair value option. The methodology for estimating the fair value of financial assets and liabilities
that are measured on a recurring or non recurring basis are discussed above.
The table below represents the carrying value and fair value of the Bank’s other financial
instruments. The fair value represents management’s best estimates based on a range of methodologies
and assumptions.
•
•
•
•
•
Cash and cash equivalents and interest-bearing deposits at other banks – For these shortterm instruments, the carrying value is a reasonable estimate of fair values.
Investment securities available for sale – Fair value of investment securities are described
above.
Loans other than impaired loans, net of allowance – The fair value of loans is estimated by
discounting the future cash flows using current market rates that reflect the interest rate risk
inherent in the loan.
Deposit liabilities – The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using current market rates.
Accrued interest receivable and payable – The carrying amounts of accrued interest
approximate fair value.
73
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
•
•
Short term borrowings from the Federal Home Loan Bank are carried at face value, which
approximates fair value given the short term nature of the borrowing.
Commitments to extend credit and standby letters of credit – The approximate fair values
of commitments and standby letters of credit are based on the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements
and credit worthiness of the counterparties.
December 31, 2014
Carrying
Fair
amount
Value
Financial Assets:
Cash and cash equivalents
Interest-bearing deposits
with banks
Investment securities
available for sale
Loans receivable, net
Accrued interest receivable
Total financial assets
Financial liabilities:
Checking accounts
Savings accounts
Money market demand accounts
Time deposits
Short term borrowings-FHLB
Accrued interest payable
Total financial liabilities
$
$
$
$
Off-balance sheet financial instruments:
Commitments to extend credit
$
Standby letters of credit
$
December 31, 2013
Carrying
Fair
amount
Value
8,888,195 $
8,888,195 $
3,793,081 $
476,023
476,023
325,762
3,793,081
325,762
34,670,840
128,500,842
633,084
173,168,984 $
34,670,840
127,371,799
633,084
172,039,941 $
38,375,019
130,761,917
903,428
174,159,207 $
38,375,019
130,857,876
903,428
174,255,166
28,116,041 $
55,265,282
96,184
83,206,999
3,000,000
128,301
169,812,807 $
28,116,041 $
55,265,282
96,184
83,654,000
3,000,000
128,301
170,259,808 $
26,645,952 $
62,480,674
56,024
76,725,786
109,231
166,017,667 $
26,645,952
62,480,674
56,024
77,271,000
109,231
166,562,881
-
$
$
-
$
$
-
$
$
For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the
financial instrument. These instruments include cash and cash equivalents, demand and other nonmaturity deposits and overnight borrowings, which are classified as (Level 1 inputs). The Bank used the
following methods and assumptions in estimating the fair value of the following financial instruments:
Loans: The fair value for all loans are estimated by using discounted cash flow analysis and rates
currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3
inputs).
Deposits: The fair value of fixed maturity certificates of deposit is estimated using a discounted
cash flow calculation based on current rates offered for deposits of similar remaining maturities
(Level 2 inputs).
Off-balance sheet financial instruments: The fair value of off-balance sheet instruments are
classified as (Level 3 inputs).
74
-
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Bank premises and equipment, customer relationships, deposit base, banking center
networks, and other information required to compute the Bank’s aggregate fair value are
not included in the above information. Accordingly, the above fair values are not intended
to represent the aggregate fair value of the Bank.
8) Income Taxes
Income tax expense for the years ended December 31, 2014 and 2013 consisted of the
following:
2013
2014
Federal
Current
Deferred
State
Current
Deferred
Total
$
$
117,524 $
1,007,454
328,059
2,000
120,992
1,247,970 $
2,000
93,815
423,874
The following is reconciliation between expected tax expense at the statutory rate of 34% and
actual tax expense:
At federal statutory rate:
Adjustments resulting from:
State tax, net of federal benefit
Tax exempt income
Valuation allowance
Other
Total
$
2014
(1,927,310)
%
34.00% $
$
81,175
(147,874)
3,360,091
(118,112)
1,247,970
(1.43%)
2.61%
(59.27%)
2.08%
(22.01%) $
2013
484,773
63,238
(162,680)
38,543
423,874
Significant deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows:
2014
Deferred tax assets:
Net operating loss carry forward
Alternative minimum tax credit
Contribution carry-over
Allowance for loan loss
Stock based compensation
Unrealized losses on investment securities
Other
Total deferred tax asset before valuation allowance
Less: Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Deferred loan costs
Discount accretion
Unrealized gains on investment securities
Total deferred tax liabilities
Net deferred tax asset
75
$
$
2013
1,949,657 $
60,411
108
1,711,357
21,889
32,001
3,775,423
(3,360,091)
415,332
604,849
60,645
3,024
593,730
20,679
206,926
19,934
1,509,787
1,509,787
123,343
41,287
45,826
204,876
415,332
$
89,077
36,842
48,496
174,415
1,335,372
%
34.00%
4.44%
(11.41%)
2.70%
29.73%
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Management has evaluated the Bank’s tax positions and concluded that the Bank has taken no
uncertain tax positions that require adjustment to the financial statements. With few exceptions, the Bank
is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for the
years before 2011.
As of December 31, 2014, the Bank had approximately $4,999,261 of Federal and $4,165,136 of
New Jersey State net loss carry forwards available to offset future tax liabilities beginning to expire in
2031.
During 2014 the Bank recorded a valuation allowance of $3,360,091 against its net deferred tax
asset since it is more likely than not that the full deferred tax asset will not be realized. Management
considered all positive and negative evidence regarding the ultimate ability to fully realize the deferred tax
assets, including past operating results and the forecast of future taxable income.
(9) Operating Leases
At December 31, 2014, the Bank was obligated under non-cancellable operating leases, for certain
facilities and equipment. Future minimum payments under these leases at December 31, 2014 for the
years shown are as follows;
2015
2016
2017
2018
2019
2020-2027
Total
$
$
116,415
99,492
86,176
81,327
80,395
526,172
989,977
Total rent expense for all leases were $122,179 and $121,104 for the years ended December 31,
2014 and 2013, respectively.
(10) Commitments and Contingencies
(a) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal
course of business. These financial instruments include commitments to extend credit to
meet the financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to extend credit and
standby letters of credit. They involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the institution has in particular
classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for onbalance sheet instruments.
76
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Commitments issued to potential borrowers of the Bank amounted to $15,189,249 and
$14,172,254 at December 31, 2014 and 2013, respectively. The Bank had outstanding
performance guarantees and standby letters of credit totaling $793,243 and $945,513 at
December 31, 2014 and 2013, respectively, included in total commitments above for both
years.
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. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of credit, is
based on management’s credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties. Such commitments and
other instruments have been made in the normal course of business and at
current prevailing market terms. The commitments, once funded, are principally
to originate commercial loans secured by real estate.
b) Legal Proceedings
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the financial
statements. In the opinion of management, no material losses are anticipated as
a result of these actions or claims.
(11) Related Party Transactions
Loans to related parties include loans made to executive officers, directors and their affiliated
interests. The Bank believes that it has not entered into any transactions with these individuals or
entities, which were less favorable to the Bank than they would have been for similar transactions
with other borrowers.
An analysis of the activity of such related party loans for the years ended December 31, 2014 and
2013 is as follows:
Balance, beginning of period
Advances
Repayments
Balance, end of period
$
$
2014
3,973,339 $
2,137,500
(1,946,664)
4,164,175 $
2013
4,171,034
338,558
(536,253)
3,973,339
Deposits of related parties totaled $2,316,040 and $2,479,410 at December 31, 2014 and 2013,
respectively.
The Bank retained the services of a law firm that is affiliated with a Director of the Bank. For the
years ended December 31, 2014 and 2013, aggregate fees paid for legal and consultant services
with this law firm amounted to $22,066 and $43,319, respectively.
77
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
In each of the years 2014 and 2013 the Bank also made office rental payments for the Salem
branch to Wheat Properties LLC, a New Jersey limited liability company owned by all of the current
directors of the Bank with the exception of Frank J. Mc Entee. Mr. Michael Cinkala, Director Emeritus
of the Bank and Dennis H. Engle, former President & CEO of the Bank are also members of the
limited liability company. These payments amounted to $79,925 for the years 2014 and 2013.
The Bank made payments to JKE Marketing & Communications in 2014 and 2013 for marketing
services provided to the Bank. JKE Marketing & Communications is a proprietorship operated by the
spouse of the Bank’s former President and CEO. These payments amounted to $12,310 and
$27,990 in 2014 and 2013, respectively.
(12) Regulatory Matters and Going Concern
The Bank is subject to various regulatory capital requirements administered by the Federal and
state banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative judgments about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios set forth in the following table of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined) to average assets (as defined).
As of December 31, 2014, the most recent notification from the FDIC categorizes the Bank as
adequately capitalized under the framework for prompt corrective action. 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. To be categorized as well
capitalized, the Bank must maintain minimum core, tangible and risk-based capital ratios as set forth in
the following table. On March 19, 2015, the Bank consented to the issuance of a Consent Order (the
“Consent Orders”) with each of the FDIC and New Jersey Department of Banking and Insurance which
require, among other things, Tier 1 Leverage Ratio of 8.0%, Tier 1 Risk-Based Capital Ratio of 10.0% and
Total Risk-Based Capital Ratio of 12.0%, respectively. 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. Other provisions in the Consent Orders
require the following actions subject to approval:
a) Strengthen Board oversight of management and operations of the Bank;
b) Assess management capabilities and qualifications to perform duties under the Consent Order.
c) Develop and implement a written plan to reduce the risk position for substandard or doubtful
loans in excess of $250,000.00.
d) Eliminate by charge-off or collection any asset classified as loss in the regulatory examination
report.
e) Development and implementation of a written policy and methodology for determining the
Bank’s allowance for loan losses (ALL).
f) Development and implementation of a written plan to reduce and manage identified
concentrations of credit.
g) Development and implementation of a program of a quarterly independent loan review.
h) Review and amend subject to approval the Bank’s loan policies and procedures to address
lending deficiencies identified in the regulatory examination report.
78
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
i)
Development of a written plan for the Bank to meet and maintain 1) Tier 1 Capital at least equal
to 8.0% of total assets; 2) Tier 1 risk-based capital at least equal to 10.0% of total risk-weighted
assets; and 3) Total risk-based capital at least equal to 12.0% of total risk-weighted assets with
quarterly benchmark reports until these ratios are achieved by the Bank.
j) Development and implementation of a written profit and budget plan.
k) Development and implementation of a written strategic plans.
l) Furnish quarterly progress reports to the respective regulatory agencies.
m) Restriction on the ability of the Bank to pay dividends without prior approval of the regulators.
The Consent Orders include time frames to implement the foregoing and ongoing compliance, including
requirements to report to the regulators. The Bank has taken steps to comply with the requirements of
the Consent Orders. Harvest Community Bank’s Board of Directors and management commenced the
process to develop and implement a Strategic Financial and Capital Plan to meet 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 give 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.
Actual
Amount
Ratio
For capital
adequacy purposes
Amount
Ratio
To be
adequately capitalized
under the terms of the
Consent Order
Amount
Ratio
At December 31, 2014
Total Risked Based Capital (to Risk Weighted Assets)
Tier I capital (to Risk Weighted Assets)
Tier I capital (to Quarterly Average Assets)
$
$
$
10,505,000
8,884,000
8,884,000
8.34% $
7.06% $
4.83% $
10,072,480
5,036,240
7,355,440
8.00% $
4.00% $
4.00% $
15,108,720
12,590,600
14,710,880
12.00%
10.00%
8.00%
At December 31, 2013
Total Risked Based Capital (to Risk Weighted Assets)
Tier I capital (to Risk Weighted Assets)
Tier I capital (to Quarterly Average Assets)
$
$
$
16,002,000
14,357,000
14,357,000
12.25% $
10.99% $
7.83% $
10,451,280
5,225,640
7,337,760
8.00% $
4.00% $
4.00% $
15,676,920
13,064,100
14,675,520
12.00%
10.00%
8.00%
79
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
13) Stockholders’ Equity
On November 12, 2004, the Bank sold 552,000 Units at $12.50 per Unit. Each Unit consisted of
one share of the Bank’s common stock and one warrant to purchase one share of the Bank’s
common stock at an exercise price of $13.50 per share, until December 31, 2008. Extensions to the
expiration date were previously granted to December 31, 2009, 2010, 2011 and 2012. Effective as of
November 21, 2014, the Bank extended the warrant expiration date from December 31, 2014 to
December 31, 2015. No warrants were exercised through December 31, 2014.
(14) Defined Contribution Plan
The Bank has a 401(k) deferred contribution salary deferral plan which covers eligible
employees. The amounts charged to expense for the years ended December 31, 2014 and 2013
were approximately $3,808 and $3,365 respectively.
(15) Stock Compensation
Effective on January 26, 2005, the Bank adopted the 2004 Incentive Stock Option Plan and the
2004 Non Qualified Stock Option Plan, which are stock-based incentive compensation plans (the
“Plans”) authorizing 59,572 stock based awards. Options were granted in 2007 under this plan. There
have been no further grants since that date. At December 31, 2014, there were 37,122 options
remaining available for future grants.
Total compensation cost for the 2007 grant was $106,895. Income tax benefits recognized were
not significant. There was no unrecognized compensation cost remaining at December 31, 2014 and
December 31, 2013.
Transactions under the Bank’s stock option plans during the years ended December 31, 2014
and 2013 are summarized as follows:
80
Harvest Community Bank
Notes to Financial Statements
December 31, 2014 and 2013
Options
Outstanding at January 1, 2013
Shares
30,450
Weighted Avg.
Exercise Price
$11.40
Weighted Avg.
Remaining
Contractural
Term
3.5
$
Aggregate
Intrinsic
Value
-
Granted
-
-
-
$
-
Exercised
-
-
-
$
-
-
-
$
-
Expired/Terminated
(2,500)
Outstanding at December 31, 2013
27,950
$11.40
3.5
$
-
Exercisable at December 31, 2013
27,950
$11.40
3.5
$
-
Outstanding at January 1, 2014
27,950
$11.40
3.5
$
-
Granted
-
-
-
$
-
Exercised
-
-
-
$
-
-
-
$
-
Expired/Terminated
(5,500)
Outstanding at December 31, 2014
22,450
$11.40
2.5
$
-
Exercisable at December 31, 2014
22,450
$11.40
2.5
$
-
81
EXHIBIT 31
I, Frank J. Mc Entee, certify that:
1. I have reviewed this Form 10-K of Harvest Community Bank;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedure and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5.
The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the issuer's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
Date: April 15, 2015
/s/ Frank J. Mc Entee
Frank J. Mc Entee
President and Chief Executive Officer
82
EXHIBIT 31
I, John Kalitan, certify that:
1. I have reviewed this Form-10K of Harvest Community Bank;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedure and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5.
The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the issuer's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
Date: April 15, 2015
/s/ John Kalitan
John Kalitan
Senior Vice President-Chief Financial Officer
83
EXHIBIT 32
Statement of Chief Executive Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned, Frank J. Mc Entee the President and Chief Executive
Officer of Harvest Community Bank (the “Bank”), hereby certifies that, to the best of my knowledge:
(1) The Bank’s Annual Report on Form 10-K for the period ended December 31, 2014
(the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Bank.
Dated: April 15, 2015
.
/s/ Frank J. Mc Entee
Frank J. Mc Entee
President and Chief Executive Officer
* This certification accompanies the report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be
deemed filed by the Bank for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
84
EXHIBIT 32
Statement of Chief Financial Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 13 50 of Title 18 of the United States Code, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned, John Kalitan, the Chief Financial Officer of Harvest
Community Bank (the “Bank”), hereby certifies that, to the best of my knowledge:
(1) The Bank’s Annual Report on Form 10-K for the period ended December 31, 2014
(the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as
applicable of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Bank.
Dated: April 15, 2015
/s/ John Kalitan
John Kalitan
Chief Financial Officer
* This certification accompanies the report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be
deemed filed by the Bank for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
85
.