SB ONE BANCORP Overview
We are a bank holding company of a community bank primarily operating in northernNew Jersey andNew York that provides diversified financial services to both consumer and business customers. Our primary source of revenues, approximately 80%, is derived from net interest income which represents the difference between the interest we earn on our assets, principally loans and investment securities, and interest we pay on our deposits and borrowings. Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin. The net interest margin remained unchanged at 3.36% for the years endedDecember 31, 2019 when compared to the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , we reported net income of$22.5 million , or$2.41 per basic share and$2.40 per diluted share, an increase of 127.2%, as compared to$9.9 million , or$1.26 per basic share and$1.25 per diluted share, for the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , net income growth was driven by an increase in net interest income of$15.0 million , or 34.0%, resulting from growth of$24.2 million in loan interest income which was attributable to average loan growth and the merger with Enterprise, which resulted in an increase in the loan portfolio of$257 million . In addition, non-interest income increased$3.6 million , or 33.5%, as compared to the year endedDecember 31, 2018 due to a$1.4 million increase in insurance commissions and fees and a$2.0 million increase in gain on security transactions. The increase in net income was partially offset by an increase in non-interest expense of$825 thousand , or 2.0%. We augment our primary revenue source through non-interest income sources that include insurance commissions from our wholly owned subsidiary,SB One Insurance , service charges on deposits, bank-owned life insurance ("BOLI") income and commissions on mutual funds and annuities. In addition, we from time to time may recognize income on gains on sales of securities; however, we do not consider this a primary source of income. Total loans receivable, net of unearned income, increased$154.1 million , or 10.5%, to$1.6 billion atDecember 31, 2019 , from$1.5 billion at year-end 2018. Our total deposits increased$171.1 million , or 12.6%, to$1.5 billion atDecember 31, 2019 , from$1.4 billion atDecember 31, 2018 . The increase in deposits was primarily due to an increase in interest bearing deposits of$172.6 million , or 15.8%, atDecember 31, 2019 , as compared toDecember 31, 2018 . The growth in both loans and deposits was primarily the result of the mergers with Community and Enterprise augmented by organic growth. AtDecember 31, 2019 , our total stockholders' equity was$199.2 million , an increase of$13.8 million when compared toDecember 31, 2018 . AtDecember 31, 2019 , the leverage, Tier I risk-based capital, total risk-based capital and common equity Tier I capital ratios for the Bank were 10.16%, 11.65%, 12.27% and 11.65%, respectively, all in excess of the ratios required to be deemed "well-capitalized."
Management Strategy
Our goal is to serve as a community-oriented financial institution serving northernNew Jersey and theNew York marketplace. While offering traditional community bank loan and deposit products and services, we obtain significant non-interest income throughSB One Insurance's insurance brokerage operations.
We report the operations of
Critical Accounting Policies
Our accounting policies are fundamental to understanding Management's Discussion
and Analysis of Financial Condition and Results of Operations. Our accounting
policies are more fully described in Note 1 to our consolidated financial
statements included elsewhere in this report. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions about future events that affect the amounts reported in our
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consolidated financial statements and accompanying notes. Since future events and their effect cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us are subject to change if different assumptions as to the outcome of future events are subsequently made. We evaluate our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management believes the following critical accounting policies encompass the more significant judgments and estimates used in preparation of our consolidated financial statements. Allowance for Loan Losses. The allowance for loan losses reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio. Management's judgment is based on the evaluation of the past loss experience of individual loans, the assessment of current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance. Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these estimates, including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent to a great extent on conditions that may be beyond our control, it is possible that management's estimates of the allowance for loan losses and actual results could differ in the near term. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could cause increases in non-performing loans. Additionally, a decline in real estate values could cause some of our loans to become inadequately collateralized.
In
either case, this may require us to increase our provisions for loan losses, which would negatively impact earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact earnings. Finally, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance for loan losses based upon their judgments about information available to them at the time of examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, could adversely affect our future results of operations. Appraisal Policy. We have a detailed policy covering the real estate appraisal process, including the selection of qualified appraisers, review of appraisal reports upon receipt, and complying with the federal regulatory standards that govern the minimum requirements for obtaining appraisals or evaluations to support the determination of the allowance for loan losses. Appraisals and evaluations are considered to be current when the valuation date is within 12 months of a new loan or 24 months of any renewal of an existing loan, provided that certain conditions are met. The appraisal is not considered to be current if there has been a substantial change in value, demand, supply or competitive factors.
The following types of transactions require a real estate appraisal:
· Non-residential transactions when the transaction value exceeds
· Loan transactions in which real estate is used as the primary security for the
loan, regardless of the type of loan (commercial, installment or mortgage),
including:
o New loans, loan modifications, loan extensions and renewals, provided that
certain conditions are met.
o The purchase, sale, exchange or investment in real property or an interest in
real property where the "transaction value" of the real property interest
exceeds $250,000 .
o The long-term lease of real estate, which is the economic equivalent of apurchase or sale where the "transaction value" of the real property interest
exceeds $250,000 .
o Purchase of a loan or pool of loans, or participation therein, or of aninterest in real property, providing that any individual loan or property
interest exceeds $250,000 , and further provided that a satisfactory
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appraisal of the property relating to that loan or interest has not been made available to the Bank by another party to the transaction.
The need for real estate appraisals applies to initial loan underwriting and subsequently when the value of the real estate collateral might be materially affected by changing market conditions, changes in the occupancy of the property, changes in cash flow generated by the property, changes in the physical conditions of the property, or other factors. These factors include changes in the sales prices of comparable properties, absorption rates, capitalization rates, effective rental rates and current construction costs.
Real estate appraisals are not required for the following transactions:
· New loans, loan modifications, loan extensions and renewals with real property
interest value of
· Purchase, sale, exchange, long-term lease or investment in real property where
the "transaction value" of the real property interest does not exceed
· Renewal or extension of an existing loan in excess of
certain conditions are met.
· Purchase of a loan or pool of loans, or participation therein, or of an
interest in real property where a satisfactory appraisal of the property
relating to that loan or interest has been made available to the Bank by
another federally insured depository institution that is subject to Title XI of
Financial Institutions Reform Recovery and Enforcement Act of 1989.
While real estate appraisals are not required for transactions of$250,000 or less, we will consider obtaining an appraisal if the orderly liquidation of the collateral is the primary source of repayment. To the extent that an appraisal is not required for a real estate collateralized transaction, we will obtain for its credit files another acceptable form of valuation (i.e. equalized value with a reasonable market relevance or evaluation). Additionally, real estate appraisals are not required on transactions over$250,000 when taking a lien on real property as collateral solely through an "abundance of caution," and where the terms of the transaction have not been made more favorable than would have been in the absence of the mortgage lien.
In determining whether an appraisal can be waived due to this reason, approval
must be obtained from our
Generally, we obtain updated appraisals for real estate loan renewals and
modifications or certain classified loans depending on the age of the last
appraisal, volatility of the local market, and other factors. In certain
circumstances, if we can support an appraisal that is greater than one year old
with an evaluation, utilizing current information, including, but not limited
to, current comparable sales, independent appraisal, consultant data or tax
assessment values, then we may continue to use the existing appraisal. For
classified/criticized loans, when it is determined that a deficiency exists
utilizing the above evaluation methods, a new appraisal will be ordered.
Foreclosed real estate is primarily comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure.
Foreclosed real estate is initially recorded at fair value, less cost to sell at
the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less costs to sell.
Revenues and expenses from operations and changes in the valuation allowance are
included in expenses related to foreclosed real estate.
Derivatives. The Company utilizes derivative instruments in the form of interest
rate swaps to hedge the variability in its cash flows due to interest rate risk.
The variability in cash flows is managed as part of the Company's
asset/liability management process. In accordance with accounting requirements,
the Company formally designates all of its hedging relationships as cash flow
hedges, intended to offset changes in the cash flows of certain financial
instruments due to movement in interest rates, and documents the strategy for
undertaking the hedge transactions and its method of assessing ongoing
effectiveness.
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All derivatives are recognized as either assets or liabilities in the
Consolidated Financial Statements at their fair values. Should the cash flow
hedge become ineffective, the ineffective portion of changes in fair value (i.e.
gain or loss) is reported in current period earnings. The effective portion of
the change in fair value is initially recorded as a component of other
comprehensive income (loss) and subsequently reclassified into earnings when the
hedged transaction affects earnings.
Derivative effectiveness and ineffectiveness will be assessed and measured at
the date of designation (inception), each reporting date, and whenever a
designated hedge period is terminated to ensure that ongoing high effectiveness
is expected by regression analysis of the periodic change in fair value of the
hedging instrument and the periodic change in fair value of the hypothetical
derivative.
The Company's interest rate derivatives are comprised entirely of interest rate
swaps hedging floating-rate and forecasted issuances of fixed-rate liabilities
and accounted for as cash flow hedges. The carrying value of interest rate
derivatives is included in the balance of other assets or other liabilities.
Changes in fair value are offset against accumulated other comprehensive income,
net of deferred income tax.
Income Taxes. Management considers accounting for income taxes as a critical
accounting policy due to the subjective nature of certain estimates that are
involved in the calculation and evaluation of the timing and recognition of
resulting tax assets and liabilities. Management uses the asset liability
method of accounting for income taxes in which deferred tax assets and
liabilities are established for the temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities. Deferred tax
expense is the result of changes between deferred tax assets and liabilities.
The principal types of differences between assets and liabilities for financial
statement and tax return purposes are allowance for loan losses, deferred
compensation, securities available for sale and interest rate swaps. Significant
estimation is required to determine if a valuation allowance for deferred tax
assets is required. A valuation allowance is established against deferred tax
assets when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become available. Because the judgment about the
level of future taxable income is dependent to a great extent on matters that
may, at least in part, be beyond the Company's control, it is at least
reasonably possible that management's judgment about the need for a valuation
allowance for deferred taxes could change in the near term.
Goodwill . We have recorded goodwill of $27.3 million at December 31, 2019 ,
primarily related to the acquisitions of Community and Enterprise of $22.3
million and $2.2 million , respectively. Our recorded goodwill total includes
$2.3 million related to the acquisition of SB One Insurance in October of
2001. Our recorded goodwill total also includes $486 thousand related to the
2006 acquisition of $6.3 million in deposits in our Port Jervis branch. During
the quarter ended March 31, 2016 we announced the closing of the Port Jervis
branch and the deposits from that branch were transferred to our Montague, New
Jersey branch. As of December 31, 2019 , deposits originated in that branch were
$5.8 million . FASB ASC 350, Intangibles-Goodwill and Others, requires that
goodwill is not amortized to expense, but rather be tested for impairment at
least annually. We periodically assess whether events or changes in
circumstances indicate that the carrying amounts of goodwill require additional
impairment testing. We perform our annual impairment test on the goodwill of SB
One Insurance in the fourth quarter of each calendar year. If the fair value of
the reporting unit exceeds the book value, no write-downs of goodwill are
necessary. If the fair value is less than the book value, an additional test is
necessary to assess the proper carrying value of goodwill. We determined that
no impairment write-offs were necessary during 2019 and 2018.
Reporting unit valuation is inherently subjective, with a number of factors
based on assumptions and management judgments. Among these are future growth
rates, discount rates and earnings capitalization rates. Changes in assumptions
and results due to economic conditions, industry factors and reporting unit
performance could result in different assessments of the fair value and could
result in impairment charges in the future.
Investment Securities Impairment Evaluation. The Company periodically
evaluates the security portfolio to determine if a decline in the fair value of
any security below its cost basis is other-than-temporary. The Company's
evaluation of other-than-temporary impairment considers the duration and
severity of the impairment, the company's intent and ability to hold the
securities and our assessments of the reason for the decline in value and the
likelihood of a near-term recovery. If a determination is made that a debt
security is other-than-temporarily impaired, the Company will estimate the
amount of the unrealized loss that is attributable to credit and all other
non-credit related factors. The credit
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related component will be recognized as an other-than-temporary impairment
charge in non-interest income. The non-credit related component will be
recorded as an adjustment to AOCI, net of tax. For held to maturity securities,
the amount of an other-than-temporary impairment recorded in other comprehensive
income for the noncredit portion of a previous other-than-temporary impairment
should be amortized prospectively over the remaining life of the security on the
basis of the timing of future estimated cash flows of the security. No
available for sale and held to maturity securities at December 31, 2019 or
December 31, 2018 were deemed to be impaired.
Fair Value Measurements. We use fair value measurements to record fair value
adjustments to certain assets to determine fair value disclosures. Investment,
mortgage-backed securities available for sale, and interest rate swaps are
recorded at fair value on a recurring basis. Additionally, from time to time, we
may be required to record at fair value other assets on a nonrecurring basis,
such as impaired loans, real estate owned and certain other assets. These
nonrecurring fair value adjustments typically involve application of
lower-of-cost-or-market accounting or write-downs of individual assets. FASB ASC
Topic 820 "Fair Value Measurements and Disclosures" ("ASC Topic 820"),
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The three levels of the fair value
hierarchy under ASC Topic 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 2 includes debt securities with quoted prices that are traded less frequently then exchange-traded instruments. Valuation techniques include matrix pricing 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.
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).
Under ASC Topic 820, we base our fair values on 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. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon our or other third-party's estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Management uses its best judgment in estimating the fair value of our 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 we could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period end 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 period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
COMPARISON OF FINANCIAL CONDITION AT YEAR-END
General. AtDecember 31, 2019 , we had total assets of$2.0 billion compared to total assets of$1.8 billion atDecember 31, 2018 , an increase of$206.0 million , or 11.5%. Gross loans increased$154.1 million , or 10.4%, to$1.6 billion atDecember 31, 2019 , from$1.5 billion atDecember 31, 2018 . Total deposits increased 12.6% to$1.5 billion atDecember 31, 2019 , from$1.4 billion atDecember 31, 2018 .
Cash and Cash Equivalents. Our cash and cash equivalents increased
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Securities Portfolio. Our securities portfolio is designed to provide interest
income, including tax-exempt income, provide a source of liquidity, diversify
the earning assets portfolio, allow for management of interest rate risk, and
provide collateral for public fund deposits and borrowings. Securities are
classified as either, available for sale or held to maturity. The portfolio is
composed primarily of obligations of U.S. government agencies and government
sponsored entities, including collateralized mortgage obligations issued by such
agencies and entities, and tax-exempt municipal bonds.
We periodically conduct reviews to evaluate whether unrealized losses on our
investment securities portfolio are deemed temporary or whether an
other-than-temporary impairment has occurred. Various inputs to economic models
are used to determine if an unrealized loss is other-than-temporary. All of our
debt securities in an unrealized loss position have been evaluated as of
December 31, 2019 , and we do not consider any security to be
other-than-temporarily impaired. We evaluated the prospects of the issuers in
relation to the severity and the duration of the unrealized losses. Our
securities in unrealized loss positions are mostly driven by wider credit
spreads and changes in interest rates. Based on that evaluation we do not
intend to sell any security in an unrealized loss position, and it is more
likely than not that we will not have to sell any of our securities before
recovery of its cost basis.
Our available for sale securities are carried at fair value while securities
held to maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts. Unrealized gains and losses on securities available for
sale are excluded from results of operations, and are reported as a separate
component of stockholders' equity net of taxes. Securities classified as
available for sale include securities that may be sold in response to changes in
interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar requirements. Management determines the appropriate
classification of securities at the time of purchase.
The following table shows the carrying value of our available for sale security
portfolio as of
December 31,
(Dollars in thousands) 2019 2018 2017
U.S. government agencies $ 8,679 $ 24,794 $18,861
6,061
State and political subdivisions 32,214 60,362 41,234
Mortgage-backed securities
Private mortgage-backed securities 22,445 - -
Corporate debt 13,125 3,008 2,030
Total available for sale $ 212,181 $ 182,139 $ 98,730 Our securities available for sale, increased by
During 2019, we purchased$141.6 million in new securities,$105.3 million in securities were sold and$11.2 million in securities matured, were called or were repaid. AtDecember 31, 2019 , there was an unrealized gain of$1.0 million in securities available for sale as compared to an unrealized loss of$1.6 million atDecember 31, 2018 . During 2019 there was a net realized gain of$2.1 million on the sale of available for sale securities as compared to a$36 thousand realized gain in 2018. We had$4.0 million of our security portfolio classified as held to maturity atDecember 31, 2019 , a decrease of$66 thousand fromDecember 31, 2018 . Held to maturity securities, carried at amortized cost, consist of the following atDecember 31, 2019 , 2018 and 2017. (Dollars in thousands) 2019 2018 2017 State and political subdivisions$ 4,012 $ 4,078 $ 5,304 Total held to maturity securities$ 4,012 $ 4,078 $ 5,304
The securities portfolio contained no high-risk securities or derivatives as of
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The contractual maturity distribution and weighted average yield of our
available for sale securities at December 31, 2019 , are summarized in the
following table. Securities available for sale are carried at amortized cost in
the table for purposes of calculating the weighted average yield received on
such securities. Weighted average yield is calculated by dividing income within
each maturity range by the outstanding amount of the related investment and has
not been tax-effected on the tax-exempt obligations.
Due under 1 Year Due 1-5 Years Due 5-10 Years Due over 10 Years
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
Available for sale:
U.S. Government agencies $ - - % $ - - % $ 1,312 2.39 % $ 7,446 2.41 %
U.S. Government sponsored
agencies - - % - - % - - % 54,338 2.61 %
State and political
subdivisions - - % - - % 1,913 3.02 % 29,588 3.00 %
Mortgage-backed
securities -
U.S. government-sponsored
enterprises - - % - - % 19,516 2.63 % 61,933 2.73 %
Private mortgage-backed
securities - - % - - % - - % 22,110 3.03 %
Corporate debt - - % - - % 11,019 3.76 % 2,000 5.25 %
Total Available for Sale $ - - % $ - - % $ 33,760 3.01 % $ 177,415 2.79 %
The contractual maturity distribution and weighted average yield of our
securities held to maturity, at cost, at December 31, 2019 , are summarized in
the following table. Weighted average yield is calculated by dividing income
within each maturity range by the outstanding amount of the related investment
and has not been tax-effected on the tax-exempt obligations.
Due under 1 Year Due 1-5 Years Due 5-10 Years Due over 10 Years(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Held to maturity: State and political subdivisions$ 1,490 2.15 %$ 1,505 3.21 %$ 1,017 4.56 % $ - - % Total held to maturity$ 1,490 2.15 %$ 1,505 3.21 %$ 1,017 4.56 % $ - - %
We held
Loans. The loan portfolio comprises the largest component of our earning assets. Total loans receivable, net of unearned income, atDecember 31, 2019 , increased$154.1 million , or 10.5%, to$1.6 billion from$1.5 billion atDecember 31, 2018 . Loan growth for 2019 occurred primarily in commercial real estate loans (an increase of$116.8 million , or 13.3%), commercial and industrial (an increase of$43.2 million , or 52.9%), and residential real estate loans (an increase of$11.6 million , or 3.1%). In 2018, at each acquisition date, the Company acquired$236.0 million in loans resulting from the merger with Community and$257.2 million in loans resulting from the merger with Enterprise. 26 Table of Contents
The following table summarizes the composition of our loan portfolio by type as
of
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Commercial and industrial loans $ 124,937 $ 81,709 $ 54,759 $ 40,280 $ 20,023
Construction 125,291 142,321 42,484 25,360 13,348
Commercial real estate 995,220 878,449 551,445 479,227 382,262
Residential real estate 382,567 370,955 171,844 150,237 127,204
Consumer and other 2,097 2,393 1,130 1,038 1,253
Total gross loans $ 1,630,112 $ 1,475,827 $ 821,662 $ 696,142 $ 544,090 Loan growth of
The maturity ranges of the loan portfolio and the amounts of loans with
predetermined interest rates and floating rates in each maturity range, as of
December 31, 2019
Due Under Due 1-5 Due Over
(Dollars in thousands) 1 Year Years 5 Years
Commercial and industrial $ 46,947 $ 22,056 $ 55,934
Construction 88,684 34,615 1,992
Commercial real estate 36,640 54,067 904,514
Residential real estate 7,972 13,204 361,391
Consumer and other 835 403 859
Total loans $ 181,078 $ 124,345 $ 1,324,690
Interest rates:
Fixed or predetermined $ 164,218 $ 75,461 $ 269,492
Floating or adjustable 16,860 48,884 1,055,198
Total loans $ 181,078 $ 124,345 $ 1,324,690
Loan and Asset Quality. NPAs consist of non-accrual loans, loans over 90 days
delinquent and still accruing interest, troubled debt restructured loans still
accruing and foreclosed real estate. Total NPAs decreased by $9.1 million , or
35.3%, to $16.7 million at year-end 2019 from $25.8 million at year-end 2018.
The ratio of NPAs to total assets for December 31, 2019 and December 31, 2018
were 0.83% and 1.43%, respectively.
Our non-accrual loan balance decreased $9.3 million , or 44.9%, to $11.4 million
at December 31, 2019 , from $20.7 million at December 31, 2018 . Troubled debt
restructured loans still accruing increased $550 thousand , or 60.7%, to $1.5
million at December 31, 2019 , from $906 thousand at December 31, 2018 .
Foreclosed assets decreased
Management continues to monitor our asset quality and believes that the non-accrual loans are adequately collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses.
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The following table provides information regarding risk elements in the loan and
securities portfolio as of
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Non-accrual loans:
Commercial and industrial $ 701 $ 372 $ 20 $ 33 $ 20
Construction - - 105 - -
Commercial real estate 5,643 15,760 4,313 4,048 4,016
Residential real estate 5,070 4,572 1,582 1,752 1,138
Consumer and other 1 - - - 138
Total nonaccrual loans 11,415 20,704 6,020 5,833 5,312
Loans past due 90 days and still
accruing - - - 468 -
Troubled debt restructured loans still
accruing 1,456 906 932 679 1,553
Total non-performing loans 12,871 21,610 6,952 6,980 6,865
Foreclosed real estate 3,793 4,149 2,275 2,367 3,354
Total non-performing assets $ 16,664 $ 25,759 $ 9,227 $ 9,347 $ 10,219
Non-accrual loans to total loans 0.70 % 1.40 % 0.73 % 0.84 % 0.98 %
Non-performing assets to total assets 0.83 % 1.43 % 0.94 % 1.10 % 1.49 %
Interest income received on nonaccrual
loans $ 316 $ 790 $ 157 $ 165 $ 138
Interest income that would have been
recorded under the original terms of the
loans $ 464 $ 866 $ 210 $ 213 $ 264
In addition to monitoring non-performing loans we continue to monitor our
portfolio for potential problem loans. Potential problem loans are defined as
loans which cause management to have serious concerns as to the ability of such
borrowers to comply with the present loan repayment terms and which may cause
the loan to be placed on non-accrual status. As of December 31, 2019 , we had a
total of $3.8 million of loans that we deemed as potential problem loans.
Management is actively monitoring these loans.
Future increases in the allowance for loan losses may be necessary based on the
growth of the loan portfolio, the change in composition of the loan portfolio,
possible future increases in non-performing loans and charge-offs, and the
impact of deterioration of the real estate and economic environments in our
lending region. Although we use the best information available, the level of
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. For additional information, see Critical
Accounting Policies above and as more fully described in Note 1 to our
consolidated financial statements included elsewhere in this report.
Allowance for Loan Losses. The allowance for loan losses consists of general,
specific and unallocated components. The specific component relates to loans
that are classified as impaired. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan. The general component covers all other loans and is based on
historical loss experience adjusted for qualitative factors. Other adjustments
may be made to the allowance for pools of loans after an assessment of internal
or external influences on credit quality that are not fully reflected in the
historical loss or risk rating data.
The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the reserve is reasonable and adequate for each of the periods presented.
At
The provision for loan losses was
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charge-offs and $207 thousand in recoveries during 2019. The allowance for loan
losses as a percentage of total loans was 0.63% at December 31, 2019 compared to
0.60% at December 31, 2018 .
The table below presents information regarding our provision and allowance for loan losses for each of the periods presented.
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Balance, beginning of period $ 8,775 $ 7,335 $ 6,696 $ 5,590 $ 5,641
Provision charged to operating
expenses 2,531 1,437 1,586 1,291 636
Recoveries of loans previously
charged-off:
Commercial and industrial 3 3 2 268 17
Commercial real estate 124 17 7 37 41
Residential real estate 71 91 10 21 17
Consumer and other 9 20 7 7 7
Total recoveries 207 131 26 333 82
Loans charged-off:
Commercial and industrial 198 11 13 227 19
Commercial real estate 473 26 874 187 560
Residential real estate 499 22 49 67 165
Consumer and other 76 69 37 37 25
Total charge-offs 1,246 128 973 518 769
Net charge-offs 1,039 (3) 947 185 687
Balance, end of period $ 10,267 $ 8,775 $ 7,335 $ 6,696 $ 5,590
Net charge-offs to average loans
outstanding 0.01 % - % 0.13 % 0.03 % 0.14 %
Allowance for loan losses total loans
at year-end 0.63 % 0.60 % 0.89 % 0.96 % 1.03 %
The table below presents details concerning the allocation of the allowance for
loan losses to the various categories for each of the periods presented. The
allocation is made for analytical purposes and it is not necessarily indicative
of the categories in which future credit losses may occur. The total allowance
is available to absorb losses from any category of loans.
Allowance for
Loans Losses at
2019 2018 2017
Percentage of Percentage of Percent
Loans In Each Loans In Each of Loans
Category To Category To in Each
(Dollars in thousands) Amount to Total Amount Gross Loans Amount to Total
Commercial and industrial $ 1,175 7.7 % $ 603 6.6 % $ 208 6.7 %
Construction 537 7.7 % 663 6.9 % 336 5.2 %
Commercial real estate 6,717 61.0 % 5,575 66.2 % 5,185 67.1 %
Residential real estate 1,338 23.5 % 1,371 20.2 % 1,032 20.9 %
Consumer and other loans 9 0.1 % 23 0.1 % 26 0.1 %
Unallocated 491 - % 540 - % 548 -
Total $ 10,267 100.0 % $ 8,775 100.0 % $ 7,335 100.0 %
29
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Allowance for Loans Losses at December 31,
2016 2015
Percent Percent
of Loans of Loans
in Each in Each
Category Category(Dollars in thousands) Amount to Total Amount to Total
Commercial and industrial $ 110 5.8 % $ 85 3.7 %
Construction 359 3.6 % 220 2.5 %
Commercial real estate 3,932 68.9 % 3,646 70.2 %
Residential real estate 899 21.6 % 784 23.4 %
Consumer and other loans 19 0.1 % 87 0.2 %
Unallocated 1,377 - 768 -
Total $ 6,696 100.0 % $ 5,590 100.0 %
Bank-owned Life Insurance. Our BOLI carrying value increased to $37.2 million
at December 31, 2019 from $35.8 million at December 31, 2018 . The increase was
partially the result of the addition of one new policy for $500 thousand during
the fourth quarter of 2019. Additionally there was $931 thousand in net
earnings on BOLI policies in 2019.
Deposits. Total deposits increased $171.1 million , or 12.6%, to $1.5 billion
at December 31, 2019 , from $1.4 billion at December 31, 2018 . The increase in
deposits was due to increases in interest bearing demand deposits of $172.6
million , or 15.8%, mainly attributable to a $14.2 million increase in brokered
money market deposits, and an increase in time deposits of $164.5 million , or
42.3%, which were offset by a decrease in non-interest bearing
transaction deposits of $1.5 million , or 0.6%, at December 31, 2019 , as compared
to December 31, 2018 .
Total average deposits increased $385.1 million from $1.1 billion for the year
ended December 31, 2018 to $1.5 billion for the year ended December 31, 2019 , a
35.2% increase. Average time deposits increased $228.0 million , or 84.2%, from
$270.8 million for 2018 to $498.8 million for 2019. Average money market
balances increased $113.1 million , or 90.5%, from $125.0 million for 2018 to
$238.1 million for 2019. Average savings accounts increased $6.1 million or
2.8%, from $216.3 million for 2018 to $222.4 million for 2019. Average demand
accounts increased $44.1 million , or 19.7% from $224.0 million for 2018 to
$268.1 million for 2019. Average NOW accounts decreased $6.1 million , or 2.4%,
from $257.3 million for 2018 to $251.2 million for 2019.
The average balances and weighted average rates paid on deposits for 2019, 2018 and 2017 are presented below.
Year Ended December 31,
2019 Average 2018 Average 2017 Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
Demand, non-interest bearing $ 268,079 - % $ 223,984 - % $ 139,611 - %
NOW 251,171 0.75 % 257,314 0.59 % 183,457 0.32 %
Money market 238,052 1.84 % 124,973 1.56 % 93,505 0.90 %
Savings 222,392 0.61 % 216,275 0.38 % 137,120 0.21 %
Time 498,798 2.00 % 270,807 1.40 % 171,163 1.09 %
Total deposits $ 1,478,492 1.19 % $1,093,353 0.74 %$ 724,856 0.49 % 30 Table of Contents
The remaining maturity for certificates of deposit accounts of
(Dollars in thousands)
3 months or less $ 49,348
3 to 6 months 44,207
6 to 12 months 109,835
Over 12 months 34,296
Total $ 237,686
Borrowings. Borrowings may consist of short and long-term advances from the
FHLBNY and a line of credit at Atlantic Central Bankers Bank . The FHLBNY
advances are secured under terms of a blanket collateral agreement by a pledge
of qualifying residential and commercial mortgage loans. At December 31, 2019 ,
we had $40.1 million in long-term FHLB advances outstanding at a weighted
average interest rate of 2.12%.
The following table summarizes short-term borrowings and weighted average interest rates paid during the past three years.
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017
Average daily amount of short-term borrowings
outstanding during the period $ 132,317 $ 123,073 $ 19,713
Weighted average interest rate on average daily
short-term borrowings 2.46 % 2.19 % 1.21 %
Maximum short-term borrowings outstanding at any
month-end $ 196,685 $ 175,295 $ 60,696
Short-term borrowings outstanding at period end $ 193,000 $ 175,295 $ 55,350
Weighted average interest rate on short-term
borrowings at period end 1.81 % 2.66 % 1.58 %
Subordinated Debentures. On June 28, 2007, we raised $12.9 million in capital
through the issuance of subordinated debentures to a non-consolidated statutory
trust subsidiary. The subsidiary in turn issued $12.5 million in variable rate
capital trust pass through securities to investors in a private placement. The
interest rate is based on the three-month LIBOR plus 144 basis points and
adjusts quarterly. The rate at December 31, 2019 was 3.33%. The capital
securities are currently redeemable by us at par in whole or in part. These
trust preferred securities must be redeemed upon final maturity on September 15,
2037 . The proceeds of these trust preferred securities, which have been
contributed to the Bank, are included in the Bank's capital ratio calculations
and treated as Tier I capital.
During the quarter ended March 31, 2016 , the Company entered into an interest
rate swap agreement related to the subordinated notes where the Company pays a
fixed rate of 3.10% and receives the three-month LIBOR plus 144 basis points.
The Company utilizes the interest rate swap to hedge the risk of variability in its future cash flows attributable to changes in the three-month LIBOR rate.
In accordance with FASB ASC 810, Consolidation, our wholly owned subsidiary, Sussex Capital Trust II, is not included in our consolidated financial statements. For regulatory reporting purposes, theFederal Reserve Board allows trust preferred securities to continue to qualify as Tier I capital subject to specified limitations. During the quarter endedDecember 31, 2016 , the Company completed a$15 million private placement of fixed-to-floating rate subordinated notes to an institutional investor. The subordinated notes have a maturity date ofDecember 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3month LIBOR plus 350 basis points over the remainder of the term. Equity. Stockholders' equity inclusive of AOCI, net of income taxes, was$199.2 million atDecember 31, 2019 , an increase of$13.8 million , from the$185.4 million at year-end 2018. The increase in stockholders' equity was mostly due to$22.5 million in net income in 2019, which was partially offset by$3.0 million in dividends declared during 2019. 31
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In 2019, the Company approved a common stock repurchase plan with authorization to purchase up to 470,000 shares. During the year endedDecember 31, 2019 , the Company repurchased 231,207 shares.
COMPARISON OF OPERATING RESULTS FOR YEAR-END
Results of Operations. Our net income is impacted by five major components and each of them is reviewed in more detail in the following discussion:
· net interest income, or the difference between interest income earned on loans
and investments and interest expense paid on deposits and borrowed funds;
· provision for loan losses, or the amount added to the allowance for loan losses
to provide reserves for inherent losses on loans;
· non-interest income, which is made up primarily of certain loan and deposit
fees, insurance commissions and gains and losses from sales of securities or
other transactions;
· non-interest expense, which consists primarily of salaries, employee benefits,
credit collection and write-off costs, merger-related expenses and other
operating expenses; and
· income taxes.
For the year ended December 31, 2019 , the Company reported net income of $22.5
million , or $2.41 per basic share and $2.40 per diluted share, an increase of
127.2%, as compared to $9.9 million , or $1.26 per basic share and $1.25 per
diluted share, for the year ended December 31, 2018 . For the year ended December
31, 2019 , net income growth was driven by an increase in net interest income of
$15.0 million , or 34.0%, resulting from growth of $24.2 million in loan interest
income which was attributable to average loan growth and the merger with
Enterprise. In addition, non-interest income increased $3.6 million , or 33.5%,
as compared to the year ended December 31, 2018 due to a $1.4 million increase
in insurance commissions and fees and a $2.0 million increase in gain on
security transactions. The increase in net income was partially offset by an
increase in non-interest expense of $825 thousand , or 2.0%.
Net Interest Income. Net interest income is the most significant component of
our income from operations. Net interest income is the difference between
interest earned on total interest-earning assets (primarily loans and investment
securities), on a fully taxable equivalent basis, where appropriate, and
interest paid on total interest-bearing liabilities (primarily deposits and
borrowed funds). Fully taxable equivalent basis represents income on total
interest-earning assets that is either tax-exempt or taxed at a reduced rate,
adjusted to give effect to the prevailing incremental federal tax rate, and
adjusted for nondeductible carrying costs and state income taxes, where
applicable. Yield calculations, where appropriate, include these adjustments.
Net interest income depends on the volume and interest rate earned on
interest-earning assets and the volume and interest rate paid on
interest-bearing liabilities.
32
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Comparative Average Balance and Average Interest Rates. The following table
presents, on a fully taxable equivalent basis (a non-GAAP measurement), a
summary of our interest-earning assets and their average yields, and
interest-bearing liabilities and their average costs for each of the years ended
December 31, 2019 , 2018 and 2017. The average balances of loans include
non-accrual loans, and associated yields include loan fees, which are considered
adjustment to yields.
Year Ended December 31,
2019 2018 2017
Average Average Average Average Average Average
(Dollars in thousands) Balance Interest Rate (2) Balance Interest Rate (2) Balance Interest Rate (2)
Earning Assets:
Securities(2):
Tax exempt (3) $ 36,031 $ 1,579 4.38 % $ 61,673 $ 2,632 4.27 % $ 46,449 $ 1,918 4.13 %
Taxable 175,597 5,466 3.11 % 126,104 3,507 2.78 % 64,636 1,437 2.22 %
Total securities 211,628 7,045 3.33 %187,777 6,139 3.27 % 111,085 3,355 3.02 % Total loans receivable (1) (4) 1,539,816 75,537 4.91 %
1,139,199 51,359 4.51 % 756,766 32,953 4.35 % Other interest-earning assets
23,308 258 1.11 % 10,586 99 0.94 % 8,611 35 0.41 %
Total earning assets $ 1,774,752 $ 82,840 4.67 % 1,337,562 57,597 4.31 % 876,462 36,343 4.15 %
Non-interest earning assets 119,108 97,078 45,398
Allowance for loan losses (9,516) (8,185) (7,113)
Total Assets $ 1,884,344 $ 1,426,455 $ 914,747
Sources of Funds:
Interest bearing deposits:
NOW $ 251,171 $ 1,879 0.75 % $ 257,314 $ 1,527 0.59 % $ 183,457 $ 584 0.32 %
Money market 238,052 4,388 1.84 % 124,973 1,952 1.56 % 93,505 843 0.90 %
Savings 222,392 1,351 0.61 % 216,275 818 0.38 % 137,120 285 0.21 %
Time 498,798 9,977 2.00 %270,807 3,781 1.40 % 171,163 1,872 1.09 % Total interest bearing deposits 1,210,413 17,595 1.45 %
869,369 8,078 0.93 % 585,245 3,584 0.61 %
Borrowed funds 171,523 4,388 2.56 %150,294 3,288 2.19 % 78,551 1,749 2.23 % Junior subordinated debentures
27,864 1,266 4.54 % 27,853 1,263 4.53 % 27,844 1,278 4.59 %
Total interest bearing
liabilities $ 1,409,800 $ 23,249 1.65 % 1,047,516 12,629 1.21 % 691,640 6,611 0.96 %
Non-interest bearing liabilities:
Demand deposits 268,079 223,984 139,611
Other liabilities 13,133 5,060 4,167
Total non-interest bearing
liabilities 281,212 229,044 143,778
Stockholders' equity 193,332 149,895 79,329
Total Liabilities and
Stockholders' Equity $ 1,884,344 $ 1,426,455 $ 914,747
Net Interest Income and Margin
(5) 59,591 3.36 % 44,968 3.36 % 29,732 3.39 %
Tax-equivalent basis adjustment (531) (888) (644)
Net Interest Income $ 59,060 $ 44,080 $ 29,088 --------------------------------------------------------------------------------
(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 21% (2019) and 34% (2019 and 2018)
effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal
Responsibility Act) interest expense disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid, divided
by average total interest-earning assets
Net interest income on a fully tax equivalent basis increased$14.6 million , or 32.5%, to$59.6 million for the year endedDecember 31, 2019 as compared to$45.0 million for the year endedDecember 31, 2018 . The increase in net interest income was largely due to a$437.2 million , or 32.7%, increase in average interest earning assets, principally loans receivable, which increased$400.6 million , or 35.2%, driven by organic growth and the Enterprise merger. In addition, the increase in net interest income was due to an increase in purchase accounting accretion, related to the Enterprise and Community mergers, of$2.3 million ($1.8 million related to loan accretion) to$3.9 million ($3.0 million related to loan accretion) for the year ended 2019, as compared to$1.6 million in 2018. 33 Table of Contents
Interest Income. Total interest income, on a fully taxable equivalent basis,
increased
The
increase in interest income was largely due to a$437.2 million , or 32.7%, increase in average interest earning assets, principally loans receivable, which increased$400.6 million , or 35.2%. The increase in interest income benefited from an increase in average rate of 36 basis points to 4.67% for the year endedDecember 31, 2019 as compared to the same period in 2018. Interest income from securities, on a fully taxable equivalent basis, increased$906 thousand , or 14.8%, for the year endedDecember 31, 2019 compared to the same period in 2018. The increase was due to an increase in the average balance of the securities portfolio of$23.9 million , or 12.7%, to$211.6 million for the year endedDecember 31, 2019 as compared to the same period in 2018. The increase in the average balance of the securities portfolio was complimented by an increase in the average rate of six basis points to 3.33% for 2019 from 3.27% for 2018. Interest income from the loan portfolio increased by$24.2 million , or 47.1%, to$75.5 million for 2019 from$51.4 million for 2018. The improvement was due to an increase in the average balance on loans, which increased$400.6 million , or 35.2%, for the year endedDecember 31, 2019 as compared to the same period in 2018. The increase in the average balance on loans was complimented by an increase of 40 basis points in the average rate on the loan portfolio for the year endedDecember 31, 2019 as compared to the same period in 2018. Interest Expense. Total interest expense increased$10.6 million , or 84.1%, to$23.2 million for the year endedDecember 31, 2019 from$12.6 million for the same period in 2018. The increase was principally due to growth in the average balance of interest-bearing deposits of$341.0 million and average balance of borrowed funds of$21.2 million in 2019 compared to 2018. The average rate increased 44 basis points for 2019 compared to 2018. The following table reflects the impact on net interest income from changes in the volume of earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balance.
Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.
December 31, 2019 v. 2018 December 31, 2018 v. 2017
Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in:
(Dollars in thousands) Volume Rate Total Volume Rate Total
Securities:
Tax exempt (1) $ (1,122) $ 69 $ (1,053) $ 648 $ 66 $ 714
Taxable 1,503 456 1,959 1,638 432 2,070
Total securities 381 525 906 2,286 498 2,784
Total loans receivable (2) 19,334 4,844 24,178 17,203 1,203 18,406
Other interest-earning assets 138 21 159 9 55 64
Total net change in income on
interest-earning assets 19,853 5,390 25,243 19,498 1,756 21,254
Interest bearing deposits:
NOW (37) 389 352 299 644 943
Money market 2,031 405 2,436 350 759 1,109
Savings 24 509 533 220 313 533
Time 4,093 2,103 6,196 1,294 615 1,909
Total interest bearing deposits 6,111 3,406 9,517 2,163 2,331 4,494
Borrowed funds 500 600 1,100 1,571 (32) 1,539
Subordinated debentures - 3 3 - (15) (15)
Total net change in expense on
interest-bearing liabilities 6,611 4,009 10,620 3,734 2,284 6,018
Change in net interest income $ 13,242 $ 1,381 $
14,623
--------------------------------------------------------------------------------
(1) Fully taxable equivalent basis, using 21% (2019 and 2018) and 34% (2017)
effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal
Responsibility Act) interest expense disallowance
34
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(2) Includes loan fee income
Provision for Loan Losses. Provision for loan losses increased$1.1 million to$2.5 million for the year endedDecember 31, 2019 , as compared to$1.4 million for the same period in 2018. The provision for loan losses reflects management review, analysis and judgment of the credit quality of the loan portfolio for 2019 and the effects of current economic environment and changes in real estate collateral values from the time the loans were originated. Our non-accrual loans, excluding$2.5 million of Purchased Credit Impaired ("PCI") loans, decreased$9.3 million , or 44.9%, to$11.4 million atDecember 31, 2019 , as compared to$20.7 million atDecember 31, 2018 . We believe these loans are adequately provided for in our loan loss allowance or are sufficiently collateralized atDecember 31 , 2019.The decrease in non-accrual loans was attributable to the payoff of two commercial real estate loans totaling approximately$8.9 million . The provision for loan losses reflects management's judgment concerning the risks inherent in our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods. Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as deemed necessary. Also see Note 7 to our consolidated financial statements herein for further discussion. Non-Interest Income. Non-interest income consists of all income other than interest and dividend income and is principally derived from: service charges on deposits; insurance commission income; commissions on sales of annuities and mutual funds; ATM and debit card income; BOLI income; and net gains on sale of securities and loans. We recognize the importance of supplementing net interest income with other sources of income as we continue to explore new opportunities to generate non-interest income. Non-interest income increased$3.6 million , or 33.5%, to$14.3 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The increase was principally due to a$1.4 million increase in insurance commissions and fees relating toSB One Insurance Agency , and a$2.0 million increase in gains on sale of securities, which were partially offset by a$334 thousand loss on the disposal of fixed assets relating to closing of the Company's corporate center inRockaway, NJ , and the sale of theAndover branch. The increase in commissions and fees relating toSB One Insurance Agency in 2019 was driven by higher property and casualty income, agency fee income and contingency income, as compared to 2018. The Company's gain on sale of securities of$2.0 million for the year endedDecember 31, 2019 , was due to a restructure of its investment portfolio to take advantage of market opportunities. Non-Interest Expense. Total non-interest expense increased$825 thousand , or 2.0%, to$41.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The increase in non-interest expense was primarily due to increases in salaries and employee benefits of$4.2 million , data processing of$641 thousand and occupancy of$607 thousand . The aforementioned increases were partially offset by a decrease in merger related expenses of$5.8 million . Income Taxes. The provision for income taxes increased$4.0 million to$7.1 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 as a result of an increase in pre-tax income. The Company's effective tax rate for the year endedDecember 31, 2019 was 23.9%, as compared to 23.6% for the year endedDecember 31, 2018 . See Notes 1 and 19 to our consolidated financial statements for further discussion on income taxes.
Operational Risk
We are exposed to a variety of operational risks that can affect each of our business activities, particularly those involving processing and servicing of loans. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people or systems from external events. The risk of loss also includes losses that may arise from potential legal actions that could result from operational deficiencies or noncompliance with contracts, laws or regulations. We monitor and evaluate operational risk on an ongoing basis through systems of internal control, formal corporate-wide policies and procedures, and an internal audit function.
Liquidity, Capital Resources and Off-Balance Sheet Arrangements
Liquidity. A fundamental component of our business strategy is to manage liquidity to ensure the availability of sufficient resources to meet all financial obligations and to finance prospective business opportunities. Liquidity
35
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management is critical to our stability. Our liquidity position over any given period of time is a product of our operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and loan demand.
Traditionally, financing for our loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments.
AtDecember 31, 2019 , total deposits amounted to$1.5 billion , an increase of$171.1 million , or 12.6%, fromDecember 31, 2018 . AtDecember 31, 2019 , borrowings from the FHLBNY and subordinated debentures totaled$261.0 million and represented 13.0% of total assets as compared to$247.8 million and 13.8% of total assets, atDecember 31, 2018 .
Loan production continued to be our principal investing activity. Loans
receivable, net of unearned income, at
Our most liquid assets are cash and cash equivalents. AtDecember 31, 2019 , the total of such assets amounted to$43.7 million , or 2.2%, of total assets, compared to$26.7 million , or 1.5%, of total assets at year-end 2018. Another significant liquidity source is our available for sale securities. AtDecember 31, 2019 , available for sale securities amounted to$212.2 million compared to$182.1 million at year-end 2018. In addition to the aforementioned sources, we have available various other sources of liquidity, including federal funds purchased from other banks and theFederal Reserve Board discount window. The Bank also has the capacity to borrow an additional$143.7 million through its membership in the FHLBNY and$10.0 million line of credit at ACBB atDecember 31, 2019 . Management believes that our sources of funds are sufficient to meet our present funding requirements. Capital Resources. The Bank's regulators have classified and defined bank capital as consisting of Tier I capital, which includes tangible stockholders' equity for common stock and certain preferred stock and other hybrid instruments, and Total risk based capital. Total risk based capital includes Tier I capital and Tier II capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify for Tier I capital. The Bank's regulators have implemented risk-based guidelines which require banks to maintain certain minimum capital as a percent of such assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). Banks are required to maintain Tier I capital as a percent of risk-adjusted assets of 7.875% and Total risk based capital as of risk-adjusted assets of 9.875% at a minimum, both including the capital conservation buffer. AtDecember 31, 2019 , the Bank's Tier I and Total risk based capital ratios were 11.65% and 12.27%, respectively. In addition to the risk-based guidelines discussed above, the Bank's regulators require that banks, which meet the regulators' highest performance and operational standards, maintain a minimum leverage ratio (Tier I capital as a percent of tangible assets) of 4.0%. For those banks with higher levels of risk or that are experiencing or anticipating growth, the minimum will be proportionately increased. Minimum leverage ratios for each bank and bank holding company are established and updated through the ongoing regulatory examination process. As ofDecember 31, 2019 , the Bank had a leverage ratio of 10.16%. Off-Balance Sheet Arrangements. Our consolidated financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These unused commitments atDecember 31, 2019 totaled$336.2 million , which consisted of$55.5 million in commitments to grant commercial and residential loans,$278.5 million in unfunded commitments under lines of credit and$2.1 million in outstanding letters of credit. These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to us. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. 36 Table of Contents
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