2013 Annual Report
Philly’s most advanced neighborhood bank.™
BOARD OF DIRECTORS John F. McGill, Jr.
Charles A. Murray
Christopher P. McGill
James C. Hellauer
Jerry L. Cotlov
G. Daniel O’Donnell
John E. McGovern
ADVISORY BOARD MEMBERS
“East River Bank really gets it! They understand
John B. Arcidiacono
Keith T. Morris
Salvatore M. DeBunda
Charles J. Schock
Scott Z. Engel
John F. Schock
Jack McDavid
David M. Twer
my small business and its
PRINCIPAL OFFICERS
needs and I couldn’t be
John F. McGill, Jr. Chairman
happier with the personal
Christopher P. McGill President & CEO
attention that is paid
Jerry L. Cotlov Executive Vice President & CLO
to me. They make me feel extremely important. I love that!”
Winnie Clowry Owner, Winnie’s LeBus
Susan B. Look Senior Vice President & CFO Michael V. Cosden Senior Vice President & CCO Barbara VanFossen Senior Vice President & COO Laurie A. Wallace Senior Vice President, Compliance Mark E. Belt Senior Vice President, Consumer Lending Francis P. Toohey Senior Vice President, Commercial Lending Gerald D. Quill Senior Vice President, Commercial Lending John A. Pergolin Jr. Senior Vice President, Commercial Lending
Dear Fellow Shareholders, IF I’M NOT MISTAKEN, there’s a sense of optimism in the air. Can you feel it? We’re seeing it in our neighborhoods as well as in our business. There are new store fronts, new construction and expansion projects, and new interest in the City. From our vantage point, I can report that the economic recovery continues. While the pace of that recovery may be debated, with indicators ranging from “remarkable” to “low gear,” there is undeniable movement forward, and East River Bank’s mix of product, people and pricing has positioned us well to capitalize on that momentum.
• Earnings increased nearly 42% to $1.7 million. • Total Assets increased more than 4% to $247.6 million. • Total Deposits increased 4% to $205.6 million.
Have a look at your Bank’s achievements for the year ended
• Total Loans increased 9% to $212.2 million.
December 31, 2013:
• Total Capital increased 8% to $25.1 million.
These gains represent the fifth consecutive year of positive growth for East River Bank – a milestone that is even more impressive when considering our solid loan growth in the face of reportedly low loan demand. Organic loan growth is our best investment to fend off continued margin compression as our loan portfolio seasons and new originations are priced at market. Additionally, the Bank continues to grow our deposit relationships at a lower cost of funds, offering yet another tool in fighting off the margin compression and contributing to our increased interest income year over year.
Earnings
Total Deposits
2013
$1.7
2012 2011 2010
$1.2
2012
$1.0 $0.8
Total Assets 2013 2012
2013
$205.6 $197.7
2011
$184.7
2010
$184.5
Total Loans $247.6 $237.5
2013 2012
$212.2 $194.3
2011
$222.9
2011
$172.5
2010
$219.0
2010
$160.6 * Dollars in Millions
II
2013 In Review The recovering economy, combined with our strong portfolio management and growing footprint in both loans and deposits, resulted in solid overall growth in 2013. We reduced non-performing loans by 57 percent and saw a significant increase in credit quality as evidenced by the 49 percent drop in the provision for loan losses. A special note on loan growth: Your Bank increased total loans by 9 percent at a time when many bankers are saying they can’t find loans to fund. We attribute our lending success to the relationships our bankers have in the communities we serve – relationships that yield multiple accounts, referrals and real growth. Our SBA lending continues to become a larger segment of our commercial business, expanding our portfolio beyond real estate to include a full suite of short-term and long-term products across industries. On the deposit side, the good news is that we generated more than 4 percent growth year over year; the great news is that we reduced interest expense on deposits by over 11 percent – a very strong combination.
Deposit Portfolio Mix 12-31-2013
Time Deposits................................................................. $ 94.3
NOW and Money Market................................. $ 81.2 Demand Non-Interest.......................................... $ 17.2 Savings..................................................................................... $ 12.9
TOTAL DEPOSITS: $ 205.6
Loan Portfolio Mix 12-31-2013
Commercial RE and Business.................... $ 159.7
Residential and Consumer............................ $ 52.5 TOTAL LOANS: $ 212.2
* Dollars in Millions
Our net income increase stands at nearly 42 percent. While that increase does include one-time gains, even without them, earnings grew by nearly 20 percent. Overall, your Bank continued its positive trend in performance ratios. Specifically, return on assets reached 68 basis points, up from 50 basis points in 2012, placing us among the top-tier community banks in the country. III
IV
Bank Local
“Talk of a national
Our strategy of providing relationship-based community
urban revival is no longer
banking in and around high-density, stable, urban neighborhoods can be summed up in two words: Bank Local. We stand by our commitment to Philadelphia
just wishful thinking by
neighborhoods, particularly when so many of our peers set their sights on the suburbs. And here’s why: “Talk of a national urban revival is no longer just wishful thinking by
city boosters.”
city boosters. The trends and supporting data are real.”1
• A recent Brookings Institution report found that, between 2011 and 2012, city centers of the 51 largest U.S. metropolitan regions, including Philadelphia, grew more than their nearby suburbs for the first time in more than 90 years. • That’s thanks to the draw that city neighborhoods have for Millenials, born between 1979 and 1996, who seek the walkability and access to culture, entertainment, public transit, shops and restaurants. And it’s where the Millenials are establishing and contributing to the shift to creative, knowledge-based industries. • A recent article in the Wall Street Journal, “Companies Say Goodbye to the ‘Burbs,” reported that “…U.S. firms have begun a new era of corporate urbanism… The bottom line: companies are under pressure to establish an urban presence that projects an image of dynamism and innovation [to attract younger workers].” Here in Philadelphia, Mayor Nutter recently reported that: • Close to half of all college graduates in the City are staying in the City. Goodbye brain drain. • $5 billion in economic development and construction projects are changing the city skyline, and the $1.2 billion Comcast Innovation and Technology Center (the largest development project in Pennsylvania history) hasn’t even broken ground yet. • For the first time since the 1970s, Philadelphia has received an ‘A’ rating from all three municipal credit rating agencies.
1
David Butcher, “Cause for Optimism: In addition to resolving its financial crisis, Harrisburg may benefit from a growing preference for urban life,” The Burg, December 31, 2013. V
In fact, our ability to offer banking relationships to all of our customers on their terms – whether in person, by phone, online or on their mobile devices – is a testament to our position as Philly’s Most Advanced Neighborhood Bank. Banking local with East River means banking with as much technology, access and convenience as our customers wish to utilize. In fact, last year, we expanded our “portable” services with the introduction of online account opening and online mortgage applications; and, now in 2014 our new website, eastriverbank.com, has gone live.
The population is moving upward.
Cautious optimism. A recovering economy. Our
Jobs are developing, slowly. The
neighborhoods are open for business, and your Bank is playing a role in fueling the comeback.
economic engine is churning
As always, thank you for your continued commitment
forward, and your Bank is in the
and support.
right place to participate in these
Sincerely,
new opportunities.
Christopher P. McGill
VI
OUR CUSTOMERS & COMMUNITY PARTNERS
Strong relationships are key to our success. We asked some
OLD CITY DISTRICT
“East River Bank has been a great community partner with Old
of them to share a few words
City District. Bank president Christopher McGill, serving as our
about those relationships. Here
board Treasurer, dedicated a significant amount of time to lend his
is what they had to say:
professional services over the years. With their recent opening of a new branch here in Old City, and through their small business lending program with PIDC, East River Bank has made a strong commitment to community banking and making a difference.”
Graham Copeland, Executive Director
MT. AIRY USA
“East River Bank has some of the best customer service we have seen in the banking industry. From working with us to provide capital to our much needed revitalization projects along Germantown Avenue, to lending their expertise to our small businesses and prospective homebuyers, they have really been exceptional.” My experience with them in business banking also led me to become a personal customer. Having closed on home mortgages before, I was wary of the process my wife and I would go through to get a loan on our recent home purchase. Frankly, I have never experienced a more straight-forward and fast process than I did with East River’s team. I would recommend them over and over again for a home loan.”
Anuj Gupta, Executive Director
TREE HOUSE BOOKS
“East River Bank is our anchor. They approached us and asked how they could help, and that speaks volumes about their character. Their volunteers and their financial support help fill the gaps so that we can pursue our mission of growing and sustaining a community of readers, writers and thinkers in North Central Philadelphia.”
Michael Reid, Executive Director
VII
SCOUT SALVAGE
“I chose East River Bank because they are local and knew me well. When I opened my first business bank account it was with a large national chain. I thought that meant I would get better service but it wasn’t the case. After my bank left me stranded during a buying trip through a clerical error, I switched to East River and I’m very glad that I did.”
Betsey Cassel, Owner
WISSAHICKON RESTORATION VOLUNTEERS
“Wissahickon Restoration Volunteers owes East River Bank a debt of gratitude for its long-time (9 year) financial and logistical support of the annual Wissahickon Trail Classic, a 10K Trail Run and 5K Nature Hike in the Wissahickon, which provides a major source of income for WRV to restore the ecology of the Wissahickon Gorge in Philadelphia. Without the kind and consistent support of East River Bank guaranteeing the success of the Trail Classic, WRV would not be able to carry out its program of removing invasive plants, planting native trees and shrubs, and caring for those plants - key steps in preserving the forests, meadows, and streams enjoyed by so many visitors to the park. Kudos to East River Bank and its staff and management for their foresight to help lead ecological restoration of the environmentally valuable Wissahickon Park!”
Ronald Ayres, WRV Treasurer, Board Member, and Work-Crew Leader
WISSAHICKON TRAIL CLASSIC
“We are very fortunate to have a bank like East River in Northwest Philadelphia. The staff at East River takes community service extremely seriously supporting all sorts of programs and events in Philadelphia including the Wissahickon Trail Classic, and they do this with enthusiasm. Banks are not all the same. East River is better than the big banks.”
Dan Gordon, Director of the Wissahickon Trail Classic and East River Bank customer
VIII
East River Bank Consolidated Financial Statements Years Ended December 31, 2013 and 2012
The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.
East River Bank Contents
Independent Auditor’s Report
2-3
Consolidated Financial Statements Consolidated Balance Sheets
5
Consolidated Statements of Income
6
Consolidated Statements of Comprehensive Income
7
Consolidated Statements of Changes in Stockholders’ Equity
8
Consolidated Statements of Cash Flows
9
Notes to Consolidated Financial Statements
10 - 39
1
Tel: 215-564-1900 Fax: 215-564-3940 www.bdo.com
1801 Market Street, Suite 1700 Ten Penn Center Philadelphia, PA 19103
Independent Auditor’s Report To the Board of Directors East River Bank Philadelphia, Pennsylvania We have audited the accompanying consolidated financial statements of East River Bank and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
2
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of East River Bank and its subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter The 2012 consolidated financial statements of East River Bank were audited by other auditors, whose report dated April 5, 2013 expressed an unmodified opinion on those consolidated statements.
Philadelphia, Pennsylvania April 4, 2014
3
Consolidated Financial Statements
East River Bank Consolidated Balance Sheets
2013
December 31,
2012
Assets $
Cash and due from banks Certificate of deposits, short-term Cash and cash equivalents Certificate of deposits, long-term Investment securities available-for-sale Investment securities held-to-maturity (estimated fair value 2012 $15,961,439) Loans, net of allowance for loan losses (2013 $2,947,694; 2012 $2,525,928) Investment in stock of correspondent banks, at cost Bank premises and equipment, net Other real estate owned Accrued interest receivable Deferred income taxes, net Federal Deposit Insurance Corporation prepaid assessment Other assets Total Assets
7,292,606 3,675,000
$
9,107,391 2,885,000
10,967,606
11,992,391
11,715,000 12,426,997
5,880,000 8,790,043
-
14,932,425
208,488,692 1,164,600 801,530 168,253 861,437 467,891 3,586 532,258
191,059,377 1,256,200 817,403 1,032,686 888,709 416,816 101,639 369,288
$ 247,597,850
$
237,536,977
$
$
11,898,147 185,820,688
Liabilities and Stockholders' Equity Liabilities Deposits: Non-interest bearing Interest-bearing Total deposits Short-term borrowings Long-term debt Advances by borrowers for taxes and insurance Accrued interest payable Other liabilities Total Liabilities
17,204,372 188,434,401 205,638,773
197,718,835
850,000 12,350,000 1,841,187 85,777 1,726,876
500,000 13,200,000 1,555,926 96,229 1,229,871
222,492,613
214,300,861
Stockholders' Equity Preferred stock, no stated par value; authorized 1,000,000 shares; no shares issued or outstanding Common stock, par value $0.10 per share; authorized 10,000,000 shares; issued and outstanding 2013 and 2012 2,343,940 shares Surplus Accumulated other comprehensive income Retained earnings
-
-
234,394 22,507,576 220,592 2,142,675
234,394 22,507,576 38,007 456,139
Total Stockholders' Equity
25,105,237
23,236,116
Total Liabilities and Stockholders' Equity
$ 247,597,850
$
237,536,977
See accompanying notes to consolidated financial statements. 5
East River Bank Consolidated Statements of Income
2013
Years Ended December 31, Interest Income Loans receivable, including fees Investment securities Interest bearing deposits Federal funds sold
$
2012
11,057,155 443,099 99,779 -
$ 10,564,885 843,705 46,850 2,528
11,600,033
11,457,968
Interest Expense Deposits Borrowings
1,836,246 470,299
2,076,949 483,069
Total Interest Expense
2,306,545
2,560,018
Net interest income
9,293,488
8,897,950
550,000
1,075,000
8,743,488
7,822,950
Total Interest Income
Provision for Loan Losses Net Interest Income After Provision for Loan Losses Non-Interest Income Fees and service charges Gain on sales of loans Gain on sale of investment securities Loss on sale of other real estate owned Loss on disposals of premises and equipment Other income
218,504 211,120 399,583 (26,742) (910) 608
194,417 309,172 96,726 (73,579) 594
Total Non-Interest Income
802,163
527,330
Non-Interest Expenses Salaries and employee benefits Occupancy and equipment Depreciation Professional fees Advertising and promotion Data processing Loan expense Supervisory assessments, including FDIC insurance Other
3,524,148 405,642 313,847 506,741 286,519 893,812 100,068 187,460 763,878
3,374,481 350,499 251,151 430,701 238,259 712,015 336,248 219,114 626,973
Total Non-Interest Expenses
6,982,115
6,539,441
Income before income taxes
2,563,536
1,810,839
877,000
622,225
Income Tax Expense Net Income
$
1,686,536
$
1,188,614
See accompanying notes to consolidated financial statements. 6
East River Bank Consolidated Statements of Comprehensive Income
2013
Years Ended December 31, Net Income
$
Other Comprehensive Income (Loss) Unrealized gains (losses) on securities: Unrealized holding gains arising during period, net of tax Reclassification adjustment for net gains included, net of tax in net income (1) Other comprehensive income (loss) Total Comprehensive Income (1)
$
1,686,536
2012 $
1,188,614
446,310
31,590
(263,725)
(56,814)
182,585
(25,224)
1,869,121
$
1,163,390
Gross realized gains of $399,583 and $96,726 for the years ended December 31, 2013 and 2012, respectively, are included in net gains on sales of available-for-sale securities on the consolidated statements of income in other income. Related income tax expense of $135,858 and $40,238 for the years ended December 31, 2013 and 2012, respectively, is included in income tax expense.
See accompanying notes to consolidated financial statements. 7
East River Bank Consolidated Statements of Changes in Stockholders’ Equity
Common Stock Balance, December 31, 2011 Net income Other comprehensive loss Balance, December 31, 2012 Net income Other comprehensive income Balance, December 31, 2013
$
234,394
Retained Accumulated Earnings Other (Accumulated Comprehensive Deficit) Income
Surplus $
22,507,576
$
(732,475) $
63,231 $
22,072,726
-
-
1,188,614 -
234,394
22,507,576
456,139
38,007
23,236,116
-
-
1,686,536 -
182,585
1,686,536 182,585
2,142,675 $
220,592 $ 25,105,237
$ 234,394
$ 22,507,576 $
(25,224)
Total
1,188,614 (25,224)
See accompanying notes to consolidated financial statements. 8
East River Bank Consolidated Statements of Cash Flows 2013
Years Ended December 31, Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation and amortization Deferred income taxes Gain on sale of investment securities available-for-sale Loss on sale of other real estate owned Amortization of deferred loan fees Net accretion of premium/discounts Proceeds from the sale of loans Loans originated for sale Gain on sale of loans Net loss on disposals of premises and equipment Decrease in accrued interest receivable Decrease in FDIC prepaid assessment (Increase) decrease in other assets Decrease in accrued interest payable Increase in other liabilities
$
1,686,536
2012 $
1,188,614
550,000 313,847 (138,016) (399,583) 26,742 (273,060) 166,995 7,125,234 (6,914,114) (211,120) 910 27,272 98,053 (162,970) (10,452) 497,005
1,075,000 251,151 72,125 (96,726) 73,579 (221,499) (208,133) 5,775,773 (5,466,601) (309,172) 31,461 174,212 514,348 (486) 191,591
2,383,279
3,045,237
Cash Flows from Investing Activities Net increase in loans Principal repayments on investment securities held-to-maturity Principal repayments on investment securities available-for-sale Proceeds from sales of investment securities available-for-sale Purchase of long-term certificates of deposit Proceeds from maturities of long term certificates of deposit Purchases of restricted bank stock Redemptions of restricted bank stock Purchases of premises and equipment Proceeds from sale of other real estate owned
(17,751,254) 1,063,402 3,801,480 6,932,703 (16,615,000) 10,780,000 (131,600) 223,200 (298,885) 882,691
(23,335,646) 5,680,712 1,346,487 1,884,731 (9,461,000) 5,004,000 16,100 (325,830) 870,030
Net Cash Used in Investing Activities
(11,113,263)
(18,320,416)
Net Cash Provided by Operating Activities
Cash Flows from Financing Activities Net increase in deposits Assumption of deposits Repayment of short-term borrowings Net increase in advances from borrowers for taxes and insurance
7,919,938 (500,000) 285,261
9,137,349 3,836,148 316,818
Net Cash Provided by Financing Activities
7,705,199
13,290,315
Net decrease in cash and cash equivalents
(1,024,785)
(1,984,864)
Cash and Cash Equivalents, Beginning
11,992,391
13,977,255
Cash and Cash Equivalents, Ending
$
10,967,606
$
11,992,391
Supplementary Cash Flows Information Interest paid Income taxes paid
$ $
2,316,997 975,000
$ $
2,560,504 15,519
Supplementary Schedule of Noncash Activities Transfer of investments held-to-maturity to available-for-sale Transfer from loans to foreclosed assets held-for-sale Transfer of long-term borrowings to short-term
$ $ $
13,843,515 45,000 850,000
$ $ $
1,592,911 -
See accompanying notes to consolidated financial statements. 9
East River Bank Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of East River Bank and subsidiaries (the “Bank”) are prepared on the accrual basis and include the accounts of East River Bank and its wholly-owned subsidiaries, East Falls Holdings, Inc. and Realty Capital Management III, LLC. The Bank consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. All significant inter-company accounts and transactions have been eliminated from the accompanying consolidated financial statements. Organization and Nature of Operations East River Bank was incorporated on October 5, 2005 under the laws of the Commonwealth of Pennsylvania and is a Pennsylvania state chartered savings bank. The Bank commenced operations on January 23, 2006, and is a full service bank providing personal and business lending and deposit services. As a state chartered savings bank, the Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. The area served by the Bank is principally the southeastern area of Pennsylvania. On October 4, 2011, East Falls Holdings, Inc. (“EFH”), a Delaware-chartered company, was established to hold certain investment securities. EFH is wholly-owned subsidiary of the Bank. On August 17, 2011, Reality Capital Management III LLC (“RCM III”), a New Jersey limited liability company, was established to hold certain real estate. RCM III is a wholly-owned subsidiary of the Bank. Effective October 5, 2012, the Bank assumed the deposits of a branch office of another financial institution located in the Old City section of Philadelphia, Pennsylvania. Deposits assumed totaled $3,836,148. The branch was open for business on October 9, 2012. Subsequent Event The Bank has evaluated subsequent events for potential recognition and/or disclosure through April 4, 2014, the date these consolidated financial statements were available to be issued. Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments.
10
East River Bank Notes to Consolidated Financial Statements
While management uses available information to recognize estimated losses on loans, future additional amounts may be necessary based on changes in economic conditions and underlying collateral values, if any. In addition, the Bank’s regulators, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. These agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Significant Group Concentrations of Credit Risk Most of the Bank’s activities are with customers located within Philadelphia and surrounding counties in Pennsylvania. Note 2 discusses the types of securities that the Bank invests in. Note 3 discusses the types of lending that the Bank engages in. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Bank does not have any significant concentrations to any one industry or customer. The Bank has no concentration of loans to individual borrowers at December 31, 2013 and 2012. The Bank actively monitors the risk of loan concentration. Presentation of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and short-term certificates of deposit due within ninety days of the balance sheet date. Generally, federal funds are purchased or sold for one-day periods. Investment Securities Securities classified as held-to-maturity are those debt securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed by a method which approximates the interest method over the terms of the securities. During the first quarter of 2013, the Bank reclassified all of its held-to-maturity investment securities to available-for-sale. The transfer of these securities to available-for-sale allowed the Bank greater flexibility in managing its liquidity and interest rate risk. Investment securities with a total amortized cost of $13,843,515 and a fair value of $14,775,735 were transferred to availablefor-sale during the first quarter 2013. The unrealized gain of $932,220 on these securities was recorded, net of tax, as other comprehensive income and as an increase in accumulated other comprehensive income, an adjustment to stockholders’ equity. As a result, the Bank will not classify any future purchases of investment securities as held-to-maturity for at least two years from the date of transfer.
11
East River Bank Notes to Consolidated Financial Statements
Securities classified as available-for-sale are those debt securities that the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in the maturity mix of the Bank’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. On a quarterly basis, the Bank performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI�). A security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, the Bank then assesses whether the unrealized loss is other-than-temporary. The assessment considers whether the Bank intends to sell the security prior to recovery and/or maturity, whether it is more likely than not that the Bank will have to sell the security prior to recovery and/or maturity, and if the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-thantemporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For the years ended December 31, 2013 and 2012, the Bank did not recognize any losses through earnings due to other-than-temporary impairment. Loans Receivable Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial and commercial real estate. Consumer loans consist of the following classes: residential real estate, home equity, and other consumer.
12
East River Bank Notes to Consolidated Financial Statements
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Allowance for Loan Losses The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet with a corresponding charge to the related provision expense. The allowance for loan losses is increased by the provision for loan losses, and decreased by chargeoffs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
13
East River Bank Notes to Consolidated Financial Statements
The allowance consists of specific, general and unallocated 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 or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 1. Lending policies and procedures, including underwriting standards and collection, chargeoff, and recovery practices. 2. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. 3. Nature and volume of the portfolio and terms of loans. 4. Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications. 5. Existence and effect of any concentrations of credit and changes in the level of such concentrations. 6. Effect of external factors, such as competition and legal and regulatory requirements. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. A majority of the Bank’s loan assets are loans to business owners of many types. The Bank makes commercial loans for real estate development and other business purposes required by the customer base. The Bank’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets. Commercial real estate loans include long-term loans financing commercial properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan to value ratio of not greater than 80% and vary in terms.
14
East River Bank Notes to Consolidated Financial Statements
Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second lien position. Residential mortgages and home equity loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages have amortizations up to 30 years and home equity loans have maturities up to 20 years. Other consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are unsecured. An unallocated component 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 delay, the reasons 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 industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Bank’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement. 15
East River Bank Notes to Consolidated Financial Statements
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. Troubled Debt Restructurings Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring may be modified by means of extending the maturity date of the loan, reducing the interest rate on the loan to a rate which is below market, a combination of rate adjustments and maturity extensions, or by other means including covenant modifications, forbearances or other concessions. Generally, interest is not accrued on loans that were non-accrual prior to the troubled debt restructuring until they have performed in accordance with the modified terms for a period of at least six months. Interest is accrued on troubled debt restructurings which were performing in accordance with their terms prior to the restructure and continue to perform in accordance with their modified terms. Management evaluates the allowance for loan losses with respect to troubled debt restructurings under the same policy and guidelines as all other performing loans are evaluated with respect to the allowance for loan losses. Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Any writedown, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance (write-downs) are included in other non-interest expenses. Any gain or loss upon the sale of real estate owned in charged to operations as incurred. The Bank had other real estate owned of $168,253 and $1,032,686 as of December 31, 2013 and 2012, respectively. 16
East River Bank Notes to Consolidated Financial Statements
Mortgage Servicing Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of mortgage loans with servicing retained. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds and default rates and losses. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Mortgage servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against income from fees and service charges. Unamortized Premiums and Discounts Unamortized premiums and discounts on loans receivable, mortgage-backed securities, and investment securities are amortized over the estimated average lives of the loans, certificates or securities purchased using a method which approximates the interest method. Transfers of Financial Assets Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (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 Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
17
East River Bank Notes to Consolidated Financial Statements
Investment in Stock of Correspondent Banks These investments represent required investments in the common stock of correspondent banks and are carried at cost. At December 31, 2013, these investments consist of the common stock of the Federal Home Loan Bank of Pittsburgh (FHLB) in the amount of $1,114,000 and the Atlantic Central Bankers Bank (ACBB) in the amount of $50,000. At December 31, 2012, these investments consist of common stock of the FHLB in the amount of $1,206,200 and the ACBB in the amount of $50,000. The amount of the stock owned by the Bank is based on a predetermined formula. In 2013 and 2012, the Bank received capital stock redemptions from the FHLB of $223,200 and $16,100, respectively. In addition, the Bank received dividends of $9,014 and $2,217 from the FHLB during 2013 and 2012, respectively. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives, ranging from 3 to 8 years, beginning when assets are placed in service. Leasehold improvements are stated at cost, less depreciation computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Repairs and maintenance to bank premises and equipment are charged to operations as incurred. Advertising Costs The Bank follows the policy of charging the costs of advertising to expense as incurred. Income Taxes Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Bank files a consolidated federal income tax return with its subsidiaries. The Bank adopted Financial Accounting Standards Board guidance on accounting for uncertainty in income taxes effective January 1, 2009. A tax position is recognized as a benefit at the largest amount that is more-likely-than not to be sustained in a tax examination based solely on its merits. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained. Under the threshold guidelines, the Bank believes no significant uncertain tax positions exist, either individually or in the aggregate, that would result in recognition of a liability for unrecognized tax benefits as of December 31, 2013 and 2012. Interest and penalties, if any, related to uncertain tax positions will be recorded in income tax expense.
18
East River Bank Notes to Consolidated Financial Statements
Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the balance sheet, such items, along with net income, are components of total comprehensive income. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet when they are funded.
2. Investment Securities The amortized cost and approximate fair value of investment securities as of December 31, 2013 and 2012 are summarized as follows:
December 31, 2013 Securities available-for-sale: FHLMC pass-through securities FNMA pass-through securities GNMA pass-through securities SBA pass-through securities
$
Securities available-for-sale: SBA pass-through securities
Gross Unrealized Losses
Fair Value
1,172,075 1,699,689 1,995,709 7,225,294
$
100,716 78,837 70,662 89,100
$
(5,085)
$
$ 12,092,767
$
339,315
$
(5,085)
$ 12,426,997
Gross Unrealized Gains
Amortized Cost
December 31, 2012 Securities held-to-maturity: FHLMC pass-through securities FNMA pass-through securities GNMA pass-through securities
Gross Unrealized Gains
Amortized Cost
$
1,887,223 4,682,438 8,362,764
$
14,932,425
$
8,725,339
$
Gross Unrealized Losses
1,272,791 1,778,526 2,066,371 7,309,309
Fair Value
142,574 338,190 548,250
$
-
$
2,029,797 5,020,628 8,911,014
$ 1,029,014
$
-
$
15,961,439
$
$
$
8,790,043
19
84,589
(19,885)
East River Bank Notes to Consolidated Financial Statements
At December 31, 2013 and 2012, securities with amortized cost of $360,558 and $13,323,214, respectively, are pledged to secure borrowings. For the year ended December 31, 2013, proceeds from sales of securities available-for-sale amounted to $6,932,703; gross realized gains were $399,583, there were no gross realized losses. The tax provision applicable to these gains was $135,858. For the year ended December 31, 2012, proceeds from sales of securities available-for-sale amounted to $1,884,731; gross realized gains were $96,726, there were no gross realized losses. The tax provision applicable to these gains was $40,238. The amortized cost and carrying value of debt securities at December 31, 2013 are shown below by contractual maturity. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2013
Due Due Due Due
Held-to-Maturity Amortized Cost Fair Value
in one year or less in one to five years in five to ten years in ten and thereafter
Available-for-Sale Amortized Cost Fair Value
$
-
$
- $ 227,777 2,840,116 9,024,874
$
231,022 2,934,732 9,261,243
$
-
$
- $ 12,092,767
$ 12,426,997
The following table shows the Bank’s investments’ gross unrealized losses and related estimated fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012: Less than 12 Months Unrealized Fair Value Losses
December 31, 2013 Available-for-sale: SBA pass-through securities
$
$
(1,286)
Less than 12 Months Unrealized Fair Value Losses
December 31, 2012 Available-for-sale: SBA pass-through securities
221,646
$
-
$
-
12 Months or Longer Unrealized Fair Value Losses
$
361,061
$
(3,799)
12 Months or Longer Unrealized Fair Value Losses
$ 2,671,411
20
$
(19,885)
Total Unrealized Losses
Fair Value
$
582,707
$
(5,085)
Total Unrealized Losses
Fair Value
$ 2,671,411
$
(19,885)
East River Bank Notes to Consolidated Financial Statements
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent to sell or be required to sell such securities until market or market price recovery. The unrealized losses on the SBA pass-through-securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. 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 bases, which may be maturity, the Bank does not consider those investments to be other-than-temporarily impaired at December 31, 2013.
3. Loans Receivable The composition of loans receivable at December 31, 2013 and 2012 is as follows: 2013 Real estate: Commercial real estate (1) Residential real estate - 1 to 4 family Construction and land Commercial Consumer Total loans
Net Loans (1)
$ 132,341,871 52,298,332 18,342,576 8,965,060 256,043
$ 128,651,472 40,085,055 19,365,102 5,922,325 311,074
212,203,882
194,335,028
(767,496) (2,947,694)
Net deferred loan fees Allowance for loan losses
2012
$ 208,488,692
(749,723) (2,525,928) $ 191,059,377
Included in commercial real estate loans are non-owner occupied loans primarily collateralized by 1-4 family residential properties.
21
East River Bank Notes to Consolidated Financial Statements
In the ordinary course of business, the Bank has, and expects to continue to have, transactions, with its senior officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions with others. The following table presents the activity of related party loans for the years ended December 31, 2013 and 2012: 2013
2012
Balance, beginning Originations Payments
$
160,862 (89,595)
$
211,435 28,875 (79,448)
Balance, Ending
$
71,267
$
160,862
4. Allowance for Loan Losses and Recorded Investment in Financial Receivables The changes in the allowance for loan losses for the years ended December 31, 2013 and 2012 are as follows: 2013
2012
Balance, beginning Provision for loan losses Charges-offs Recoveries
$ 2,525,928 550,000 (135,154) 6,920
$ 2,106,873 1,075,000 (656,053) 108
Balance, Ending
$ 2,947,694
$ 2,525,928
The following tables summarize the activity in the allowance for loan losses by loan class for the years ended December 31, 2013 and 2012 and information in regards to the allowance for loan losses and the recorded investment in loans receivable by loan class as of December 31, 2013 and 2012: Beginning Balance
December 31, 2013 Commercial Residential Consumer Unallocated
Charge-offs
Recoveries
Ending Balance
Provisions
$
1,372,847 309,941 2,012 841,128
$
135,154 -
$
920 6,000 -
$
977,938 167,039 (5,730) (589,247)
$
2,216,551 476,980 2,282 251,881
$
2,525,928
$
135,154
$
6,920
$
550,000
$
2,947,694
22
East River Bank Notes to Consolidated Financial Statements
Allowance for Loan Losses Balance Related Balance Related to Loans to Loans Individually Collectively Evaluated for Evaluated for Balance Impairment Impairment
December 31, 2013 Commercial Residential Consumer Unallocated
Balance Individually Evaluated for Impairment
Balance
Balance Collectively Evaluated for Impairment
$ 2,216,550 $ 476,981 2,282 251,881
389,700 20,700 -
$
1,826,850 456,281 2,282 251,881
$159,649,507 52,298,332 256,043 -
$
5,383,372 74,904 -
$ 154,266,135 52,223,428 256,043 -
$ 2,947,694 $
410,400
$
2,537,294
$ 212,203,882
$
5,458,276
$ 206,745,606
Charge-offs
Recoveries
Beginning Balance
December 31, 2012 Commercial Residential Consumer Unallocated
Ending Balance
Provisions
$
1,471,004 300,195 5,790 329,884
$
267,960 367,761 20,332 -
$
108 -
$
169,695 377,507 16,554 511,244
$
1,372,847 309,941 2,012 841,128
$
2,106,873
$
656,053
$
108
$
1,075,000
$
2,525,928
Allowance for Loan Losses Balance Related Balance Related to Loans to Loans Individually Collectively Evaluated for Evaluated for Balance Impairment Impairment
December 31, 2012 Commercial Residential Consumer Unallocated
Loans Receivable
Loans Receivable Balance Individually Evaluated for Impairment
Balance
Balance Collectively Evaluated for Impairment
$ 1,372,847 309,941 2,012 841,128
$
261,200 -
$
1,111,647 309,941 2,012 841,128
$ 153,938,899 40,085,055 311,074 -
$
6,057,241 163,978 -
$ 147,881,658 39,921,077 311,074 -
$ 2,525,928
$
261,200
$
2,264,728
$ 194,335,028
$
6,221,219
$ 188,113,809
Impaired Loans The following tables summarize information in regards to impaired loans by loan portfolio class as of December 31, 2013 and 2012 and for the years then ended:
December 31, 2013
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded: Commercial Residential mortgage
$ 2,013,928 -
$ 2,013,928 -
$
-
$ 2,008,318 -
$
156,989 -
With an allowance recorded: Commercial Residential mortgage
$ 3,369,444 74,904
$ 3,369,444 74,904
$
389,700 20,700
$ 3,402,583 57,539
$
119,843 6,405
Total: Commercial Residential mortgage
$ 5,383,372 74,904
$ 5,383,372 74,904
$
389,700 20,700
$ 5,410,901 57,539
$
276,832 6,405
23
East River Bank Notes to Consolidated Financial Statements
Recorded Investment
Unpaid Principal Balance
With no related allowance recorded: Commercial Residential mortgage
$ 3,224,998 163,978
$ 3,224,998 163,978
With an allowance recorded: Commercial Residential mortgage
$ 2,832,243 -
Total: Commercial Residential mortgage
$ 6,057,241 163,978
December 31, 2012
Related Allowance
Average Recorded Investment
Interest Income Recognized
$
-
$ 2,116,442 418,243
$
150,473 2,513
$ 2,832,243 -
$
261,200 -
$ 3,306,492 -
$
130,790 -
$ 6,057,241 163,978
$
261,200 -
$ 5,422,934 418,243
$
281,263 2,513
Loan Receivables on Nonaccrual Status The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2013 and 2012: 2013 Commercial Residential Consumer
2012
$
645,935 -
$ 1,373,117 125,534 -
$
645,935
$ 1,498,651
Credit Quality Indicators The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Bank’s internal risk rating system as of December 31, 2013 and 2012: December 31, 2013 Commercial Residential Consumer
Substandard
Doubtful
Total
$ 152,069,299 51,296,990 256,043
$
3,658,614 837,227 -
$ 3,921,594 164,115 -
$
-
$ 159,649,507 52,298,332 256,043
$ 203,622,332
$
4,495,841
$ 4,085,709
$
-
$ 212,203,882
December 31, 2012 Commercial Residential Consumer
Special Mention
Pass
Special Mention
Pass
Substandard
Doubtful
Total
$
146,325,839 38,751,154 311,074
$
1,046,048 340,000 -
$
6,567,012 993,901 -
$
-
$
153,938,899 40,085,055 311,074
$
185,388,067
$
1,386,048
$
7,560,913
$
-
$
194,335,028
24
East River Bank Notes to Consolidated Financial Statements
Age Analysis of Past Due Loans Receivables The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of December 31, 2013 and 2012:
December 31, 2013 Commercial Residential Consumer
30-59 Days Past Due
Total Past Due
Current
Loans Receivable >90 Days and Accruing
Total Loans Receivables
$ 1,293,042 302,133 -
$
-
$ 645,935 -
$ 1,938,977 302,133 -
$ 157,710,530 $159,649,507 51,996,199 52,298,332 256,043 256,043
$
-
$ 1,595,175
$
-
$ 645,935
$ 2,241,110
$ 209,962,772 $212,203,882
$
-
Greater Than 90 Days
Total Past Due
Total Loans Receivables
December 31, 2012 Commercial Residential Consumer
60-89 Days Past Due
Greater Than 90 Days
30-59 Days Past Due
60-89 Days Past Due
Current
Loans Receivable >90 Days and Accruing
$ 1,063,052 -
$
-
$1,373,117 125,534 -
$ 2,436,169 125,534 -
$ 151,502,730 $ 153,938,899 39,959,521 40,085,055 311,074 311,074
$
-
$ 1,063,052
$
-
$1,498,651
$ 2,561,703
$ 191,773,325 $ 194,335,028
$
-
Modifications The Bank may grant a concession or modification for economic or legal reasons related to a borrower's financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (TDR). The Bank may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers' operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Bank's allowance for loan losses. The Bank identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower's financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.
25
East River Bank Notes to Consolidated Financial Statements
The following tables reflect information regarding the Bank’s troubled debt restructurings for the years ended December 31, 2013 and 2012. PreModification Outstanding Recorded Investments
Number of Contracts
December 31, 2013 Troubled debt restructurings: Commercial Residential Consumer
1 -
Number of Contracts
December 31, 2012 Troubled debt restructurings: Commercial Residential Consumer
33 1 -
$
36,860 -
PostModification Outstanding Recorded Investments $
PreModification Outstanding Recorded Investments $ 4,535,287 38,476 -
36,860 PostModification Outstanding Recorded Investments
$ 4,535,287 38,476 -
The modification as of December 31, 2013 is a combination of change in term, rate, and payment. The modifications as of December 31, 2012 are a combination of changes in terms, rates, and payment. In the last twelve months, there were no troubled debt restructurings that subsequently defaulted.
5. Bank Premises and Equipment The components of Bank premises and equipment at December 31, 2013 and 2012 are as follows: 2013 Leasehold improvements Furniture, fixtures and equipment Computer equipment and data processing software
$ 1,635,471 1,140,282 1,019,422
2012 $
894,223
3,795,175 (2,993,645)
Accumulated depreciation $
26
801,530
1,594,392 1,035,263 3,523,878 (2,706,475)
$
817,403
East River Bank Notes to Consolidated Financial Statements
Depreciation expense was $313,847 and $251,151 for the years ended December 31, 2013 and 2012, respectively.
6. Deposits The components of deposits at December 31, 2013 and 2012 are as follows: 2013 Demand, non-interest bearing NOW Money market accounts Savings Time, $100,000 and over Time, other
2012
$ 17,204,372 67,348,244 13,828,291 12,946,605 49,862,992 44,448,269
$
$ 205,638,773
$ 197,718,835
11,898,147 65,693,591 12,485,742 12,266,936 49,944,869 45,429,550
At December 31, 2013, the scheduled maturities of time deposits are as follows: Year ending December 31, 2014 2015 2016 2017 2018
$ 66,192,110 17,255,986 5,001,100 4,171,546 1,690,519 $ 94,311,261
Deposits from related parties, as defined in Note 3, held by the Bank at December 31, 2013 and 2012, amounted to $4,072,294 and $2,516,689, respectively.
7. Borrowings The Bank’s short-term borrowings generally consist of Federal funds purchased and borrowings with the Federal Home Loan Bank. Federal funds purchased generally represent one-day borrowings. The Bank did not have any Federal funds purchased at December 31, 2013 and 2012. The Bank had short-term borrowings with the Federal Home Loan Bank of $850,000 and $500,000 at December 31, 2013 and 2012, respectively. The short-term borrowings at December 31, 2013 consisted of one borrowing in the amount of $500,000 at 1.48% which matures on May 9, 2014 and one borrowing in the amount of $350,000 at 1.08% that matures on August 8, 2014. The short-term borrowings at December 31, 2012 consisted of one borrowing at 1.697% which matured on January 11, 2013. The Bank has a line of credit commitment with the Atlantic Central Bankers Bank for Federal funds borrowings of up to $4,000,000.
27
East River Bank Notes to Consolidated Financial Statements
At December 31, 2013, the Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $132,801,000 of which $13,200,000 was outstanding at December 31, 2013. All advances are collateralized under a blanket collateral lien agreement consisting of loans of approximately $187,250,000. Long-term borrowings consist of the following advances from the Federal Home Loan Bank at December 31, 2013 and 2012: 2013 Maturity Date July 31, 2017(1) November 1, 2017(1) May 9, 2014 August 8, 2014 May 11, 2015 August 3, 2015 August 10, 2015
Next Conversion Date January 31, 2014 February 1, 2014 N/A N/A N/A N/A N/A
Amount $
5,000,000 5,000,000 1,500,000 500,000 350,000
$ 12,350,000 (1)
2012 Interest Rate 4.390 % 3.805 1.990 1.711 1.480
Amount $ 5,000,000 5,000,000 500,000 350,000 1,500,000 500,000 350,000
Interest Rate 4.390% 3.805 1.480 1.080 1.990 1.711 1.480
$13,200,000
These borrowings are Federal Home Loan Bank advances whereby the Federal Home Loan Bank has the option at predetermined times to convert the fixed interest rate to an adjustable rate tied to the London Interbank Offered Rate (LIBOR). The Bank then has the option to prepay these advances without penalty if the Federal Home Loan Bank converts the interest rate. Accordingly, contractual maturities may differ from expected maturities. The initial conversion dates for these borrowings were July 31, 2009 and November 2, 2009, respectively. The FHLB did not exercise the conversion options on these dates nor subsequent conversion dates.
8. Lease Commitments Certain facilities are leased under various operating leases. The leases contain options to extend from 3 to 29 years. The Bank is also required to pay a monthly fee for its portion of certain operating expenses, including real estate taxes, insurance, utilities, maintenance and repairs in addition to the base rent. Rent expense for the years ended December 31, 2013 and 2012 totaled $201,351 and $172,279, respectively. Future minimum lease payments by year and in the aggregate, under non-cancellable lease agreements, are as follows: Year ending December 31, 2014 2015 2016 2017 2018 Thereafter
28
$
212,894 145,029 9,303 -
$
367,226
East River Bank Notes to Consolidated Financial Statements
9. Employment Agreements The Bank has employment agreements with its Chief Executive Officer and Executive Vice President. The agreements have terms up to three years, with one-year renewal options at the discretion of the Board of Directors annually. The agreements include minimum annual salary commitments and change of control provisions. Upon resignation after a change in the control of the Bank, as defined in the agreement, the individual will receive monetary compensation in the amount set forth in the agreement.
10. Employee Benefit Plan The Bank has established a Simple IRA Plan (the “Plan”). All employees are eligible to participate after they have received $5,000 in compensation from the Bank in the past two years, or are reasonably expected to receive $5,000 in compensation during the current year. The employees may contribute up to the maximum percentage allowable by law of their compensation to the Plan. The Bank has elected to contribute 100% of the first three percent of eligible employees’ annual salary deferral. All contributions to the Plan are fully vested at all times. The Bank’s contributions to the Plan for the years ended December 31, 2013 and 2012 was $69,742 and $66,643, respectively.
11. Stockholders’ Equity During 2010 and 2011, the Bank sold 477,765 and 20,360 shares of common stock at $10.50 per share, respectively. As part of the stock offering, each subscriber received one warrant to purchase one share of common stock for every four shares of common stock purchased in the offering. The Bank issued 88 warrants to purchase 124,541 shares of common stock at $10.50 per share. The warrants expire in 2015. There were no shares of common stock sold during 2013 and 2012, nor were any warrants exercised. In May 2013, the Bank adopted the East River Bank 2013 Stock Compensation Plan. The aggregate number of shares available under this plan is 250,000. There were no awards granted during 2013.
29
East River Bank Notes to Consolidated Financial Statements
12. Income Taxes The components of income tax expense for the year ended December 31, 2013 and 2012 is as follows: 2013 Current: Federal State
2012
$ 1,008,516 6,500
$
1,015,016
Total current
564,214 (14,114) 550,100
Deferred: Federal State
(125,210) (12,806)
84,649 (12,524)
Total deferred
(138,016)
72,125
Income Tax Expense
$
877,000
$
622,225
A reconciliation of the statutory federal income expense at a rate of 34% to the income tax expense included in the statements of income for the years ended December 31, 2013 and 2012 is as follows: 2013 Amount Federal income tax expense at statutory rate State tax, net Other
2012 % of Pretax Income
Amount
% of Pretax Income
$
871,602 (4,162) 9,560
34.0 % $ (0.2) 0.4
615,685 (17,580) 24,120
34.0 % (0.9) 1.3
$
877,000
34.2
622,225
34.4 %
30
% $
East River Bank Notes to Consolidated Financial Statements
The components of the net deferred tax asset at December 31, 2013 and 2012 are as follows: 2013 Deferred tax assets: Allowance for loan losses Other reserves Contribution carryforward Organization and start-up costs Interest income on nonaccrual loans Other real estate owned
$
742,928 35,666 26,335 52,791 41,041 24,132
2012 $
585,133 24,631 12,524 60,266 39,681 19,541
922,893
741,776
Deferred tax liabilities: Deferred loan costs Mortgage servicing rights Net deferred tax asset prepaid expenses Premises and equipment Net unrealized gain on securities available-for-sale Accretion of discounts
(169,458) (61,279) (36,913) (60,407) (113,638) (13,307)
(155,611) (51,716) (39,636) (31,327) (26,697) (19,973)
Total deferred tax liabilities
(455,002)
(324,960)
Total deferred tax assets
Net Deferred Tax Asset
$
467,891
$
416,816
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. Based on projections for future taxable income over the periods in which the deferred tax assets are deductible, the Bank believes the net deferred tax assets are more likely than not to be realized. The Bank’s federal and state income tax returns are open and subject to examination from the 2010 tax return year and forward.
13. 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 to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
31
East River Bank Notes to Consolidated Financial Statements
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 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 on-balance sheet instruments. A summary of the Bank’s financial instrument commitments as of December 31, 2013 and 2012 is as follows: 2013 Commitments to grant loans Unfunded commitments under lines of credit Standby letters of credit
2012
$ 25,592,066 10,634,347 837,410
$ 13,348,760 8,085,927 564,029
$ 37,063,823
$ 21,998,716
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness 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 customer and generally consists of real estate. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit when deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2013 and 2012 for guarantees under standby letters of credit issued is not material.
14. Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. 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 by the regulators about components, risk-weightings and other factors.
32
East River Bank Notes to Consolidated Financial Statements
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2013, that the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and ratios at December 31, 2013 and 2012 are presented below:
December 31, 2013
Total capital (to riskweighted assets) Tier 1 capital (to riskweighted assets) Tier 1 capital (to average assets)
Actual Amount $
December 31, 2012
Total capital (to riskweighted assets) Tier 1 capital (to riskweighted assets) Tier 1 capital (to average assets)
For Capital Adequacy Purposes Amount Ratio ≥12,789
≥8.0%
15.6%
≥ 6,395
9.8%
≥10,200
26,896
16.8%
24,885 24,885
Actual Amount $
Ratio
Ratio
$
≥15,987
≥10.0%
≥4.0%
≥ 9,592
≥ 6.0%
≥4.0%
≥12,750
≥ 5.0%
For Capital Adequacy Purposes Amount Ratio ≥11,878
≥8.0%
15.6
≥ 5,939
9.8
≥ 9,502
25,063
16.9
23,198 23,198
$
To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio $
To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio ≥14,847
≥10.0%
≥4.0%
≥ 8,908
≥ 6.0%
≥4.0%
≥11,878
≥ 5.0%
$
The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings.
15. Fair Value Measurements and Fair Values of Financial Instruments Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
33
East River Bank Notes to Consolidated Financial Statements
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 FASB ASC Topic 820 - “Fair Value Measurements and Disclosures,” the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in some 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 within the range that is most representative of fair value under current market conditions FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
34
East River Bank Notes to Consolidated Financial Statements
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 and 2012 are as follows:
December 31, 2013
Total
FHLMC pass-through securities $ 1,272,792 FNMA pass-through securities 1,778,526 GNMA pass-through securities 2,066,371 SBA pass-through securities 7,309,309
$
(Level 1) Quoted Prices in Active Markets for Identical Assets
(Level 2) Significant Other Observable Inputs
-
$ 1,272,792 1,778,526
-
2,066,371 7,309,309
(Level 3) Significant Unobservable Inputs $
-
$ 12,426,998
$
-
$ 12,426,998
$
-
$
$
-
$
$
-
December 31, 2012 SBA pass-through securities
8,790,043
8,790,043
Assets measured at fair value on a non-recurring basis are summarized below:
December 31, 2013 Impaired loans Other real estate owned
(Level 1) Quoted Prices in Active Markets for Identical Assets
Total
(Level 2) Significant Other Observable Inputs
(Level 3) Significant Unobservable Inputs
$ 3,033,948 168,253
$
-
$
-
$ 3,033,948 168,253
$ 3,202,201
$
-
$
-
$ 3,202,201
$ 2,571,043 1,032,686
$
-
$
-
$ 2,571,043 1,032,686
$ 3,603,729
$
-
$
-
$ 3,603,729
December 31, 2012 Impaired loans Other real estate owned
35
East River Bank Notes to Consolidated Financial Statements
The tables below present additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis:
December 31, 2013 Impaired loans Other real estate owned
December 31, 2012 Impaired loans Other real estate owned
Qualitative Information about Level 3 Fair Value Measurements Range (Weighted Fair Value Valuation Techniques Unobservable Input Average) $ 3,033,948
Fair Value of Collateral (1)
Appraised Value
(2)
Appraised Value Sales Price
(2)
168,253
Fair Value of Collateral (1)
0% - 46% (14%)(3) 2% - 8% (7%)(3)
Qualitative Information about Level 3 Fair Value Measurements Range (Weighted Fair Value Valuation Techniques Unobservable Input Average) $ 2,571,043
Fair Value of Collateral (1)
Appraised Value
(2)
Fair Value of Collateral (1)
Appraised Value Sales Price
(2)
1,032,686
0% - 46% (14%)(3) 2% - 8% (7%)(3)
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3)
The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually. The following information should not be interpreted as an estimate of the fair value of the entire Bank since a fair value calculation is only provided for a limited portion of the Bank’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Bank’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Bank’s financial instruments at December 31, 2013 and 2012: Cash and Cash Equivalents (Carried at Cost) The carrying amounts reported in the balance sheet for cash, certificates of deposit and shortterm instruments approximate those assets’ fair values.
36
East River Bank Notes to Consolidated Financial Statements
Investments Securities The fair value of securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or nontransferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments. Loans Receivable (Carried at Cost) The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Impaired Loans Impaired loans are evaluated for impairment on an individual basis under FASB ASC Topic 310 “Receivables.” The impairment analysis includes current collateral values, known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending. When the collateral value or discounted cash flows less costs to sell is less than the carrying value of the loan a specific reserve (valuation allowance) is established. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Other Real Estate Owned Other real estate owned consists of properties acquired as a result of deeds in lieu of foreclosure, foreclosure or through other means related to collateral on Bank loans. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. The Bank had $168,253 and $1,032,686 of other real estate owned as of December 31, 2013 and 2012, respectively. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
37
East River Bank Notes to Consolidated Financial Statements
Servicing Rights (Carried at Lower of Cost or Fair Value) The fair value of mortgage servicing right is based on a valuation model that calculates the present value of estimated net servicing income. The valuation incorporation assumptions that market participants would use in estimating future net servicing income. The Bank is able to compare the valuation model inputs and results to widely available published industry date for reasonableness. Restricted Investment in Bank Stock (Carried at Cost) The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities. Accrued Interest Receivable and Payable (Carried at Cost) The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. Deposit Liabilities (Carried at Cost) The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-Term Borrowings (Carried at Cost) The carrying amounts of short-term borrowings approximate their fair values. Long-Term Debt (Carried at Cost) Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Off-Balance Sheet Financial Instruments (Disclosed at Cost) Fair values for the Bank’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
38
East River Bank Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values of all the Bank’s financial instruments as of December 31, 2013 and 2012 are as follows (in thousands): 2013 Carrying Amount Assets: Cash and cash equivalents Certificate of deposits Securities available-forsale Securities held-to-maturity Loans receivable, net Restricted investment in bank stock Accrued interest receivable Liabilities: Demand and savings deposits Time deposits Accrued interest payable Short-term borrowings Long-term borrowings
$
10,968 11,715
2012 Carrying Amount
Fair Value $
10,968 11,715
$
11,992 5,880
Fair Value $
11,992 5,880
12,426 208,489
12,426 211,509
8,790 14,932 191,059
8,790 15,961 197,794
1,165 861
1,165 861
1,256 889
1,256 889
111,328 94,311 86 850 12,350
111,328 94,907 86 850 12,399
102,344 95,374 96 500 13,200
102,344 96,047 96 500 14,775
-
-
-
-
-
-
-
-
Off balance sheet asset (liability):
Commitments to extend credit Unfunded commitments under lines of credit
16. Legal Contingencies Various legal claims also arise from time to time in the normal course of business that, in the opinion of management, will have no material effect on the Bank’s consolidated financial statements.
39
LOCATIONS: East Falls Branch 4341 Ridge Avenue Philadelphia, PA 19129 267-295-6420
Roxborough Branch 6137 Ridge Avenue Philadelphia, PA 19128 215-482-9401
Old City Branch 36 North 3rd Street Philadelphia, PA 19106 215-923-4860
Philly’s most advanced neighborhood bank.™
eastriverbank.com