Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
o
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ________ to _______
Commission
file Number: 000-32891
1ST
CONSTITUTION BANCORP
(Exact
Name of Registrant as Specified in Its Charter)
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New
Jersey
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22-3665653
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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IRS
Employer Identification Number)
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2650
Route 130, P.O. Box 634, Cranbury, NJ 08512
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(Address
of Principal Executive Offices, including Zip Code)
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(609)
655-4500
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(Registrant’s
telephone number, including area code)
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Common
Stock, No Par Value
Stock
Purchase Rights Relating to Common Stock, No Par Value
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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None
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(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes
o No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer
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o |
Accelerated
filer
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o |
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Non-accelerated
filer
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o |
Smaller
reporting company
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x |
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the price at which the common stock
was last sold, or the average bid and asked price of such common stock, as of
the last business day of the registrant’s most recently completed second
quarter, is $31,395,130.
As of
March 25, 2010, 4,515,924 shares of the registrant’s common stock were
outstanding.
Portions
of the registrant’s definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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FORM
10-K
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TABLE OF
CONTENTS
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PART I
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1
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11
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17
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18
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19
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19
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PART II
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19
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20
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20
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41
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41
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41
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41
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42
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PART III
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42
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42
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42
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44
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44
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PART IV
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44
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49
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Forward-Looking
Statements
This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 relating to,
without limitation, our future economic performance, plans and objectives for
future operations, and projections of revenues and other financial items that
are based on our beliefs, as well as assumptions made by and information
currently available to us. The words “may,” “will,” “anticipate,” “should,”
“would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,”
“estimate,” “continue,” and “intend,” as well as other similar words and
expressions of the future, are intended to identify forward-looking
statements.
These
forward-looking statements generally relate to our plans, objectives and
expectations for future events and include statements about our expectations,
beliefs, plans, objectives, intentions, assumptions and other statements that
are not historical facts. These statements are based upon our opinions and
estimates as of the date they are made. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, such
forward-looking statements are subject to known and unknown risks and
uncertainties that may be beyond our control, which could cause actual results,
performance and achievements to differ materially from results, performance and
achievements projected, expected, expressed or implied by the forward-looking
statements.
Examples
of events that could cause actual results to differ materially from historical
results or those anticipated, expressed or implied include, without limitation,
changes in the overall economy and the interest rate environment; the ability of
our customers to repay their obligations; the adequacy of the allowance for loan
losses; competition; significant changes in accounting, tax or regulatory
practices and requirements; changes in deposit flows, loan demand or real estate
values; legislation or regulatory changes; changes in loan delinquency rates or
in our levels of non-performing assets; changes in the economic climate in the
market areas in which we operate; and the economic impact of any future
terrorist threats and attacks, acts of war or threats thereof and the response
of the United States to any such threats and attacks. Although management has
taken certain steps to mitigate any negative effect of the aforementioned items,
significant unfavorable changes could severely impact the assumptions used and
have an adverse effect on profitability.
Additional
information concerning the factors that could cause actual results to differ
materially from those in the forward-looking statements is contained in Item 1.
“Business”, Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, and elsewhere in this Annual Report on Form 10-K and
in our other filings with the Securities and Exchange Commission (the
“SEC”). We undertake no obligation to publicly revise any
forward-looking statements or cautionary factors, except as required by
law.
PART
I
Item
1. Business.
1st
Constitution Bancorp
1st
Constitution Bancorp (the “Company”) is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was organized
under the laws of the State of New Jersey in February 1999 for the purpose of
acquiring all of the issued and outstanding stock of 1st Constitution Bank (the
“Bank”) and thereby enabling the Bank to operate within a bank holding company
structure. The Company became an active bank holding company on July 1, 1999. As
of December 31, 2009, the Company has two employees, both of whom are full-time.
The Bank is a wholly-owned subsidiary of the Company. Other than its investment
in the Bank, the Company currently conducts no other significant business
activities.
The main
office of the Company and the Bank is located at 2650 Route 130 North, Cranbury,
New Jersey 08512, and the telephone number is (609) 655-4500.
1st
Constitution Bank
The Bank
is a commercial bank formed under the laws of the State of New Jersey and
engages in the business of commercial and retail banking. As a community bank,
the Bank offers a wide range of services (including demand, savings and time
deposits and commercial and consumer/installment loans) to individuals, small
businesses and not-for-profit organizations principally in the Fort Lee area of
Bergen County and in Middlesex, Mercer and Somerset Counties, New Jersey. The
Bank conducts its operations through its main office located in Cranbury, New
Jersey, and operates ten additional branch offices in downtown Cranbury,
Hamilton Square, Hightstown, Jamesburg, Montgomery, Perth Amboy, Plainsboro,
West Windsor, Fort Lee and Princeton, New Jersey. The Bank’s deposits are
insured up to applicable legal limits by the Federal Deposit Insurance
Corporation (“FDIC”). As of December 31, 2009, the Bank has 127
employees, of which 115 are full-time employees.
Management
efforts focus on positioning the Bank to meet the financial needs of the
communities in Middlesex, Mercer and Somerset Counties and the Fort Lee area of
Bergen County and to provide financial services to individuals, families,
institutions and small businesses. To achieve this goal, the Bank is focusing
its efforts on:
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personal
service;
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expansion
of its branch network;
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innovative
product offerings; and
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technological
advances and e-commerce.
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Personal
Service
The Bank
provides a wide range of commercial and consumer banking services to
individuals, families, institutions and small businesses in central New Jersey
and the Fort Lee area of Bergen County. The Bank’s focus is to understand the
needs of the community and the customers and tailor products, services and
advice to meet those needs. The Bank seeks to provide a high level of
personalized banking services, emphasizing quick and flexible responses to
customer demands.
Expansion
of Branch Banking
The Bank
continually evaluates opportunities for branch bank expansion, either mini
branches or full service branches, to continue to grow and meet the needs of the
community.
Innovative
Product Offerings
In
January 2008, the Bank’s Mortgage Warehouse Unit introduced a revolving line of
credit that is available to licensed mortgage banking companies (the “Warehouse
Line of Credit”) and that has been successful since inception. The
Warehouse Line of Credit is used by the mortgage banker to originate one-to-four
family residential mortgage loans that are pre-sold to the secondary mortgage
market, which includes state and national banks, national mortgage banking
firms, insurance companies and government-sponsored enterprises, including the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and others. On average, an advance under the Warehouse
Line of Credit remains outstanding for a period of less than 30 days, with
repayment coming directly from the sale of the loan into the secondary mortgage
market. Interest (the spread between our borrowing cost and the rate
charged to the client) and a transaction fee are collected by the Bank at the
time of repayment. Additionally, customers of the Warehouse Lines of
Credit are required to maintain deposit relationships with the Bank that, on
average, represent 10% to 15% of the loan balances. The Bank had
outstanding Warehouse Line of Credit advances of $119,382,078 at December 31,
2009.
Technological
Advances and e-Commerce
The Bank
recognizes that customers want to receive service via their most convenient
delivery channel, be it the traditional branch office, by telephone, ATM, or the
internet. For this reason, the Bank continues to enhance its e-commerce
capabilities. At www.1stconstitution.com, customers have easy access to online
banking, including account access, and to the Bank’s bill payment system.
Consumers can apply online for loans and interact with senior management through
the e-mail system. Business customers have access to cash management information
and transaction capability through the Bank’s online Cash Manager product which
permits business to originate ACH payments, initiate wire transfers and retrieve
account information and place “stop payment” orders. This overall expansion in
electronic banking offers the Bank’s customers another means to access the
Bank’s services easily and at their own convenience.
Competition
The Bank
experiences substantial competition in attracting and retaining deposits and in
making loans. In attracting deposits and borrowers, the Bank competes with
commercial banks, savings banks, and savings and loan associations, as well as
regional and national insurance companies and non-bank financial institutions,
regulated small loan companies and local credit unions, regional and national
issuers of money market funds and corporate and government
borrowers. Within the direct market area of the Bank, there are a
significant number of offices of competing financial institutions. In
New Jersey generally, and in the Bank’s local market specifically, large
commercial banks, as well as savings banks and savings and loan associations,
including Provident Savings Bank and Hudson City Savings Bank, hold a dominant
market share and there has been significant merger activity in the last few
years, creating even larger competitors.
Locally,
the Bank’s most direct competitors include Bank of America, PNC Bank, Wachovia
Bank (a subsidiary of Wells Fargo) and Sovereign Bank. The Bank is at
a competitive disadvantage compared with these larger national and regional
commercial and savings banks. By virtue of their larger capital,
asset size or reserves, many of such institutions have substantially greater
lending limits (ceilings on the amount of credit a bank may provide to a single
customer that are linked to the institution’s capital) and other resources than
the Bank. Many such institutions are empowered to offer a wider range
of services, including trust services, than the Bank and, in some cases, have
lower funding costs (the price a bank must pay for deposits and other borrowed
monies used to make loans to customers) than the Bank. In addition to
having established deposit bases and loan portfolios, these institutions,
particularly large national and regional commercial and savings banks, have the
financial ability to finance extensive advertising campaigns and to allocate
considerable resources to locations and products perceived as
profitable.
In
addition, non-bank financial institutions offer services that compete for
deposits with the Bank. For example, brokerage firms and insurance
companies offer such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. It is
expected that competition in these areas will continue to increase. Some of
these competitors are not subject to the same degree of regulation and
supervision as the Company and the Bank and therefore may be able to offer
customers more attractive products than the Bank.
However,
management of the Bank believes that loans to small and mid-sized businesses and
professionals, which represent the main commercial loan business of the Bank,
are not always of primary importance to the larger banking institutions. The
Bank competes for this segment of the market by providing responsive
personalized services, local decision-making, and knowledge of its customers and
their businesses.
Lending
Activities
The
Bank’s lending activities include both commercial and consumer loans. Loan
originations are derived from a number of sources including real estate broker
referrals, mortgage loan companies, direct solicitation by the Bank’s loan
officers, existing depositors and borrowers, builders, attorneys, walk-in
customers and, in some instances, other lenders. The Bank has established
disciplined and systematic procedures for approving and monitoring loans that
vary depending on the size and nature of the loan.
Commercial
Lending
The Bank
offers a variety of commercial loan services, including term loans, lines of
credit, and loans secured by equipment and receivables. A broad range of
short-to-medium term commercial loans, both secured and unsecured, are made
available to businesses for working capital (including inventory and
receivables), business expansion (including acquisition and development of real
estate and improvements), and the purchase of equipment and machinery. The Bank
also makes construction loans to real estate developers for the acquisition,
development and construction of residential subdivisions.
Commercial
loans are granted based on the borrower’s ability to generate cash flow to
support its debt obligations and other cash related expenses. A borrower’s
ability to repay commercial loans is substantially dependent on the success of
the business itself and on the quality of its management. As a general practice,
the Bank takes as collateral a security interest in any available real estate,
equipment, inventory, receivables or other personal property of its borrowers,
although occasionally the Bank makes commercial loans on an unsecured basis.
Generally, the Bank requires personal guaranties of its commercial loans to
offset the risks associated with such loans.
Residential
Consumer Lending
A portion
of the Bank’s lending activities consists of the origination of fixed and
adjustable rate residential first mortgage loans secured by owner-occupied
property located in the Bank’s primary market areas. Home mortgage lending is
unique in that a broad geographic territory may be serviced by originators
working from strategically placed offices either within the Bank’s traditional
banking facilities or from affordable storefront locations in commercial
buildings. The Bank also offers construction loans, second mortgage home
improvement loans and home equity lines of credit.
The Bank
finances the construction of individual, owner-occupied houses on the basis of
written underwriting and construction loan management guidelines. First mortgage
construction loans are made to contractors secured by real estate that is both a
pre-sold and a “speculation” basis. Such loans are also made to qualified
individual borrowers and are generally supported by a take-out commitment from a
permanent lender. The Bank makes residential construction loans to
individuals who intend to erect owner occupied housing on a purchased parcel of
real estate. The construction phase of these loans has certain risks, including
the viability of the contractor, the contractor’s ability to complete the
project and changes in interest rates.
In most
cases, the Bank will sell its mortgage loans with terms of 15 years or more in
the secondary market. The sale to the secondary market allows the Bank to hedge
against the interest rate risks related to such lending operations. This
brokerage arrangement allows the Bank to accommodate its clients’ demands while
eliminating the interest rate risk for the 15- to 30- year period generally
associated with such loans.
The Bank
in most cases requires borrowers to obtain and maintain title, fire, and
extended casualty insurance, and, where required by applicable regulations,
flood insurance. The Bank maintains its own errors and omissions
insurance policy to protect against loss in the event of failure of a mortgagor
to pay premiums on fire and other hazard insurance policies. Mortgage loans
originated by the Bank customarily include a “due on sale” clause, which gives
the Bank the right to declare a loan immediately due and payable in certain
circumstances, including, without limitation, upon the sale or other disposition
by the borrower of the real property subject to a mortgage. In general, the Bank
enforces due on sale clauses. Borrowers are typically permitted to refinance or
repay loans at their option without penalty.
Non-Residential
Consumer Lending
Non-residential
consumer loans made by the Bank include loans for automobiles, recreation
vehicles, and boats, as well as personal loans (secured and unsecured) and
deposit account secured loans. The Bank also conducts various indirect lending
activities through established retail companies in its market areas.
Non-residential consumer loans are attractive to the Bank because they typically
have a shorter term and carry higher interest rates than are charged on other
types of loans. Non-residential consumer loans, however, do pose additional risk
of collectibility when compared to traditional types of loans, such as
residential mortgage loans granted by commercial banks.
Consumer
loans are granted based on employment and financial information solicited from
prospective borrowers as well as credit records collected from various reporting
agencies. Stability of the borrower, willingness to pay and credit history are
the primary factors to be considered. The availability of collateral is also a
factor considered in making such a loan. The Bank seeks collateral that can be
assigned and has good marketability with a clearly adequate margin of value. The
geographic area of the borrower is another consideration, with preference given
to borrowers in the Bank’s primary market areas.
Supervision
and Regulation
Banking
is a complex, highly regulated industry. The primary goals of the bank
regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
a myriad of legislation that governs banks, bank holding companies and the
banking industry. This regulatory framework is intended primarily for the
protection of depositors and not for the protection of the Company’s
shareholders. Descriptions of, and references to, the statutes and
regulations below are brief summaries thereof, and do not purport to be
complete. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.
State
and Federal Regulations
The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the “BHCA”). As a bank holding company, the Company is
subject to inspection, examination and supervision by the Board of Governors of
the Federal Reserve System (the “Federal Reserve Board”) and is required to file
with the Federal Reserve Board an annual report and such additional information
as the Federal Reserve Board may require pursuant to the BHCA. The Federal
Reserve Board may also make examinations of the Company and its subsidiaries.
The Company is subject to capital standards similar to, but separate from, those
applicable to the Bank.
Under the
BHCA, bank holding companies that are not financial holding companies generally
may not acquire the ownership or control of more than 5% of the voting shares,
or substantially all of the assets, of any company, including a bank or another
bank holding company, without the Federal Reserve Board’s prior approval. The
Company has not applied to become a financial holding company but did obtain
such approval to acquire the shares of the Bank. A bank holding company that
does not qualify as a financial holding company is generally limited in the
types of activities in which it may engage to those that the Federal Reserve
Board had recognized as permissible for bank holding companies prior to the date
of enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of
1999. For example, a holding company and its banking subsidiary are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or lease or sale of any property or the furnishing of
services. At present, the Company does not engage in any significant
activity other than owning the Bank.
In
addition to federal bank holding company regulation, the Company is registered
as a bank holding company with the New Jersey Department of Banking and
Insurance (the “Department”). The Company is required to file with the
Department copies of the reports it files with the federal banking and
securities regulators.
As a
result of its participation in the Troubled Asset Relief Program (‘TARP”)
Capital Purchase Program (the “CPP”) under the Emergency Economic Stabilization
Act of 2008 (“EESA”) through the sale by the Company of its Fixed Rate
Cumulative Perpetual Preferred Stock, Series B (“Preferred Stock Series B”) to
the United States Department of the Treasury (the “Treasury”) the Company is
subject to restrictions contained in the agreement between the Treasury and the
Company related to the sale of the Preferred Stock Series B which, among other
things, restricts the payment of cash dividends, the making of other
distributions by the Company on its common stock and the repurchase of its
shares of common stock or other capital stock or other equity securities of any
kind of the Company or any of its or its affiliates’ trust preferred securities
until December 23, 2011, the third anniversary of the purchase of the Preferred
Stock Series B by the Treasury without approval of the Treasury, with certain
exceptions. Further, the Company is prohibited by the terms of the
Preferred Stock Series B from paying dividends on the common stock of the
Company or redeeming or otherwise acquiring its common stock or certain other of
its equity securities unless all dividends on the Preferred Stock Series B have
been declared and either paid in full or set aside, with certain limited
exceptions.
In
addition, EESA, as amended by The American Recovery and Reinvestment Act of
2009 (the “Stimulus Package Act”), and guidance issued by the
Treasury with respect to this legislation limit executive compensation, require
the reporting of information to the Treasury and others, limit the deductibility
for Federal income tax purposes of compensation paid to certain executives in
excess of $500,000 per year, limit the payment of certain severance and change
in control payments to certain executives, limit the type and amount
of compensation paid to our highest paid executive (our chief executive officer)
of the Company or the Bank, impose a claw back of certain compensation paid to
certain executives of the Company or the Bank and impose new corporate
governance requirements on the Company, including the inclusion of a non-binding
“say to pay” proposal in the Company’s annual proxy statement.
The
Federal Reserve Board has issued a supervisory letter to bank holding companies
that contains guidance on when the board of directors of a bank holding company
should eliminate or defer or severely limit dividends including, for example,
when net income available for shareholders for the past four quarters net of
previously paid dividends paid during that period is not sufficient to fully
fund the dividends. The letter also contains guidance on the redemption of stock
by bank holding companies which urges bank holding companies to advise the
Federal Reserve of any such redemption or repurchase of common stock for cash or
other value which results in the net reduction of a bank holding company’s
capital at the beginning of the quarter below the capital outstanding at the end
of the quarter.
Capital
Adequacy
The
Company is required to comply with minimum capital adequacy standards
established by the Federal Reserve Board. There are two basic measures of
capital adequacy for bank holding companies and the depository institutions that
they own: a risk based measure and a leverage measure. All applicable capital
standards must be satisfied for a bank holding company to be considered in
compliance.
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. In
addition, pursuant to FDICIA, each federal banking agency has promulgated
regulations, specifying the levels at which a bank would be considered “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” or “critically undercapitalized,” and to take certain
mandatory and discretionary supervisory actions based on the capital level of
the institution.
The
regulations implementing these provisions of FDICIA provide that a bank will be
classified as “well capitalized” if it (i) has a total risk-based capital ratio
of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least
6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv)
meets certain other requirements. A bank will be classified as “adequately
capitalized” if it (i) has a total risk-based capital ratio of at least 8.0
percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent,
(iii) has a Tier 1 leverage ratio of (a) at least 4.0 percent, or (b) at least
3.0 percent if the institution was rated 1 in its most recent examination and is
not experiencing or anticipating significant growth, and (iv) does not meet the
definition of “well capitalized.” A bank will be classified as
“undercapitalized” if it (i) has a total risk-based capital ratio of less than
8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0
percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent, or
(b) less than 3.0 percent if the institution was rated 1 in its most recent
examination and is not experiencing or anticipating significant growth. A bank
will be classified as “significantly undercapitalized” if it (i) has a total
risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based
capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of
less than 3.0 percent. An institution will be classified as “critically
undercapitalized” if it has a tangible equity to total assets ratio that is
equal to or less than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives an unsatisfactory
examination.
As of
December 31, 2009, the Bank’s capital ratios exceed the requirements to be
considered a “well capitalized” institution under these
regulations.
The
risk-based capital guidelines for bank holding companies such as the Company
currently require a minimum ratio of total capital to risk-weighted assets
(including off-balance sheet activities, such as standby letters of credit) of
8%. At least half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders’ equity, non-cumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock and
minority interest in the equity accounts of consolidated subsidiaries, less
goodwill. The remainder of the total capital (Tier 2 capital) may consist of a
limited amount of subordinated debt and intermediate-term preferred stock,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance. At
December 31, 2009, the Company maintained a Tier 1 capital ratio of 16.25% and
total qualifying capital ratio of 17.23%.
In
addition to the risk-based capital guidelines, the federal banking regulators
established minimum leverage ratio (Tier 1 capital to total assets) guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of 3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company’s
leverage ratio at December 31, 2009 was 10.99%.
On May
30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware
business trust and wholly owned subsidiary of the Company (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Capital
Securities”). Trust II utilized the $18 million proceeds along with
$557,000 invested in Trust II by the Company to purchase $18,557,000 of floating
rate junior subordinated debentures issued by the Company and due to mature on
June 15, 2036. The Capital Securities were issued in connection with
a pooled offering involving approximately 50 other financial institution holding
companies. All of the Capital Securities were sold to a single
pooling vehicle. The floating rate junior subordinated
debentures are the only asset of Trust II and have terms that mirror the Capital
Securities. These debentures are redeemable in whole or in part
prior to maturity after June 15, 2011. Trust II is obligated to
distribute all proceeds of a redemption of these debentures, whether voluntary
or upon maturity, to holders of the Capital Securities. The Company’s
obligation with respect to the Capital Securities and the debentures, when taken
together, provided a full and unconditional guarantee on a subordinated basis by
the Company of the obligations of Trust II to pay amounts when due on the
Capital Securities. Interest payments on the floating rate junior
subordinated debentures flow through Trust II to the pooling
vehicle.
On
December 23, 2008, pursuant to the TARP CPP under EESA, the Company entered into
a Letter Agreement, including the Securities Purchase Agreement – Standard
Terms, with the Treasury, pursuant to which the Company issued and sold, and the
Treasury purchased (i) 12,000 shares of the Company’s Preferred Stock Series B
and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s
common stock, no par value, at an initial exercise price of $8.99 per share, for
aggregate cash consideration of $12 million. As a result of
the declarations of stock dividends to holders of common stock since
the issuance of the warrant, the shares of common stock underlying the warrant
have been adjusted to 220,774.76 shares and the initial exercise price was
adjusted to $8.154 per share.
The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. In addition, the Treasury has agreed not to
exercise voting power with respect to any shares of common stock issued upon
exercise of the warrant.
Restrictions
on Dividends
The
primary source of cash to pay dividends, if any, to the Company’s shareholders
and to meet the Company’s obligations is dividends paid to the Company by the
Bank. Dividend payments by the Bank to the Company are subject to the New Jersey
Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act
(the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any
dividends if after paying the dividend, it would be undercapitalized under
applicable capital requirements. In addition to these explicit limitations, the
federal regulatory agencies are authorized to prohibit a banking subsidiary or
bank holding company from engaging in an unsafe or unsound banking practice.
Depending upon the circumstances, the agencies could take the position that
paying a dividend would constitute an unsafe or unsound banking
practice.
It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the immediately
preceding year and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividend that undermines the bank holding company’s ability to serve as a source
of strength to its banking subsidiary. A bank holding company may not
pay dividends when it is insolvent.
The
Company has never paid a cash dividend and the Company’s Board of Directors has
no plans to pay a cash dividend in the foreseeable future. In
addition, please refer to the discussion above of the Preferred Stock Series B
under the heading “Supervision and Regulation” for additional restrictions on
cash dividends.
The Bank
paid a stock dividend every year from 1993 to 1999 when it was acquired by the
Company. The Company has paid a stock dividend every year since its formation in
1999. From 1999 through 2006, the Company paid a 5% stock dividend
each year. In 2006 and 2007, the Company declared a 6% stock
dividend. In 2008 and 2009, the Company declared a 5% stock
dividend. The Company also declared a two-for-one stock split on
January 20, 2005, which was paid on February 28, 2005 to shareholders of record
as of the close of business on February 10, 2005. All share and per
share data has been retroactively adjusted for the stock split and stock
dividends.
Priority
on Liquidation
The
Company is a legal entity separate and distinct from the Bank. The rights of the
Company as the sole shareholder of the Bank, and therefore the rights of the
Company’s creditors and shareholders, to participate in the distributions and
earnings of the Bank when the Bank is not in bankruptcy, are subject to various
state and federal law restrictions as discussed above under the heading
“Restrictions of Dividends.” In the event of a liquidation or other
resolution of an insured depository institution such as the Bank, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of an obligation of the
institution to its shareholders (the Company) or any shareholder or creditor of
the Company. The claims on the Bank by creditors include obligations in respect
of federal funds purchased and certain other borrowings, as well as deposit
liabilities.
Financial
Institution Legislation
The
Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”)
became effective in early 2000. The Modernization Act:
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allows
bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
non-banking activities than is permissible for a bank holding company,
including insurance underwriting and making merchant banking investments
in commercial and financial companies, if a bank holding company elects to
become a financial holding company, it files a certification, effective in
30 days, and thereafter may engage in certain financial activities without
further approvals;
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allows
banks to establish subsidiaries to engage in certain activities which a
financial holding company could engage in, if the bank meets certain
management, capital and Community Reinvestment Act
standards;
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allows
insurers and other financial services companies to acquire banks and
removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to financial
holding companies that also engage in insurance and securities
operations.
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The
Modernization Act modified other laws, including laws related to financial
privacy and community reinvestment.
The
Modernization Act also amended the BHCA and the Bank Merger Act to require the
federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts.
Additional
proposals to change the laws and regulations governing the banking and financial
services industry are frequently introduced in Congress, in the state
legislatures and before the various bank regulatory agencies. The likelihood and
timing of any such changes and the impact such changes might have on the Company
cannot be determined at this time.
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30,
2002, added new legal requirements affecting corporate governance, accounting
and corporate reporting for companies with publicly traded
securities.
The
Sarbanes-Oxley Act provides for, among other things:
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a
prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank subject
to Regulation O of the Federal Reserve
Board);
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independence
requirements for audit committee
members;
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disclosure
of whether at least one member of the audit committee is a “financial
expert” (as such term is defined by the Securities and Exchange Commission
(“SEC”) and if not, why not;
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independence
requirements for outside auditors;
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a
prohibition by a company’s registered public accounting firm from
performing statutorily mandated audit services for the company if the
company’s chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had
been employed by such firm and participated in the audit of such company
during the one-year period preceding the audit initiation
date;
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certification
of financial statements and annual and quarterly reports by the principal
executive officer and the principal financial
officer;
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the
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve month period following initial publication of any financial
statements that later require restatement due to corporate
misconduct;
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disclosure
of off-balance sheet transactions;
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two-business
day filing requirements for insiders filing Forms
4;
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disclosure
of a code of ethics for financial officers and filing a Form 8-K for a
change or waiver of such code;
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“real
time” filing of periodic reports;
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posting
of certain SEC filings and other information on the company
website;
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the
reporting of securities violations “up the ladder” by both in-house and
outside attorneys;
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restrictions
on the use of non-GAAP financial
measures;
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the
formation of a public accounting oversight board;
and
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various
increased criminal penalties for violations of securities
laws.
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Additionally,
Section 404 of the Sarbanes-Oxley Act requires that a public company subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), include in its annual report (i) a management’s report on
internal control over financial reporting assessing the company’s internal
controls, and (ii) an auditor’s attestation report, completed by the registered
public accounting firm that prepares or issues an accountant’s report which is
included in the company’s annual report, attesting to the effectiveness of
management’s internal control assessment. Because we are neither a
“large accelerated filer” nor an “accelerated filer”, under current rules,
compliance with the auditor’s attestation report requirement is not required
until we file our annual report for 2010.
Each of
the national stock exchanges, including the Nasdaq Global Market where the
Company’s common stock is listed, have implemented new corporate governance
rules, including rules strengthening director independence requirements for
boards, and the adoption of charters for the nominating, corporate governance,
and audit committees. The rule changes are intended to, among other
things, make the board of directors independent of management and allow
shareholders to more easily and efficiently monitor the performance of companies
and directors. These increased burdens have increased the Company’s
legal and accounting fees and the amount of time that the Board of Directors and
management must devote to corporate governance issues.
Effective
August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company’s
principal executive officer and principal financial officer are each required to
certify that the Company’s Quarterly and Annual Reports do not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of circumstances under which they were
made, not misleading. The rules have several requirements, including having
these officers certify that: they are responsible for establishing, maintaining
and regularly evaluating the effectiveness of the Company’s disclosure controls
and procedures and internal control over financial reporting; they have made
certain disclosures to the Company’s auditors and the audit committee of the
Board of Directors about the Company’s internal control over financial
reporting; and they have included information in the Company’s Quarterly and
Annual Reports about their evaluation of disclosure controls and procedures and
whether there have been significant changes in the Company’s internal controls\
over financial reporting.
As part
of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted
the International Money Laundering Abatement and Financial Anti-Terrorism Act of
2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in
consultation with the heads of other government agencies, to adopt special
measures applicable to financial institutions such as banks, bank holding
companies, broker-dealers and insurance companies. Among its other provisions,
the Act requires each financial institution: (i) to establish an anti-money
laundering program; (ii) to establish due diligence policies, procedures and
controls that are reasonably designed to detect and report instances of money
laundering in United States private banking accounts and correspondent accounts
maintained for non-United States persons or their representatives; and (iii) to
avoid establishing, maintaining, administering, or managing correspondent
accounts in the United States for, or on behalf of, a foreign shell bank that
does not have a physical presence in any country. In addition, the Act expands
the circumstances under which funds in a bank account may be forfeited and
requires covered financial institutions to respond under certain circumstances
to requests for information from federal banking agencies within 120
hours.
The
Department of Treasury has issued regulations implementing the due diligence
requirements. These regulations require minimum standards to verify customer
identity and maintain accurate records, encourage cooperation among financial
institutions, federal banking agencies, and law enforcement authorities
regarding possible money laundering or terrorist activities, prohibit the
anonymous use of “concentration accounts,” and require all covered financial
institutions to have in place an anti-money laundering compliance
program.
As a New
Jersey-chartered commercial bank, the Bank is subject to supervision and
examination by the New Jersey Department of Banking and
Insurance. The Bank is also subject to regulation by the FDIC, which
is its principal federal bank regulator.
The Bank
must comply with various requirements and restrictions under federal and state
law, including the maintenance of reserves against deposits, restrictions on the
types and amounts of loans that may be granted and the interest that may be
charged thereon, limitations on the types of investments that may be made and
the services that may be offered, and restrictions on dividends as described in
the preceding section. Consumer laws and regulations also affect the operations
of the Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board which
influence the money supply and credit availability in the national
economy.
Community
Reinvestment Act
Under the
Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a bank
has a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with CRA. CRA
requires the FDIC to assess an institution’s record of meeting the credit needs
of its community and to take such record into account in its evaluation of
certain applications by the applicable institution. The CRA requires public
disclosure of an institution’s CRA rating and requires that the FDIC provide a
written evaluation of an institution’s CRA performance utilizing a four-tiered
descriptive rating system. An institution’s CRA rating is considered in
determining whether to grant charters, branches and other deposit facilities,
relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. At its last CRA
examination, the Bank was rated “satisfactory” under CRA.
FIRREA
Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”),
a depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. These
provisions have commonly been referred to as FIRREA’s “cross guarantee”
provisions. Further, under FIRREA, the failure to meet capital guidelines could
subject a bank to a variety of enforcement remedies available to federal
regulatory authorities.
FIRREA
also imposes certain independent appraisal requirements upon a bank’s real
estate lending activities and further imposes certain loan-to-value restrictions
on a bank’s real estate lending activities. The bank regulators have
promulgated regulations in these areas.
Insurance
of Deposits
Subject
to the immediately following paragraph, the Bank’s deposits are insured up to a
maximum of $250,000 per depositor through December 31, 2009 under the Deposit
Insurance Fund. The FDICIA is applicable to depository institutions and deposit
insurance. The FDICIA requires the FDIC to establish a risk-based assessment
system for all insured depository institutions. Under this legislation, the FDIC
is required to establish an insurance premium assessment system based upon: (i)
the probability that the insurance fund will incur a loss with respect to the
institution, (ii) the likely amount of the loss, and (iii) the revenue needs of
the insurance fund. In compliance with this mandate, the FDIC has developed a
matrix that sets the assessment premium for a particular institution in
accordance with its capital level and overall rating by the primary regulator.
Under the matrix as currently in effect, the assessment rate ranges from 0 to 27
basis points of assessed deposits. Additionally, the Financing Corporation
(“FICO”), a mixed-ownership government corporation established to recapitalize
the Federal Savings & Loan Insurance Corporation, a predecessor to the
Deposit Insurance Fund, is authorized to impose and collect, with the approval
of the FDIC, assessments for anticipated interest payments, issuance costs and
custodial fees on noncallable bonds historically issued by FICO in connection
with such recapitalization. The bonds issued by FICO are due to mature in 2017
through 2019. The FICO assessment is a component of the FDIC
assessment.
In
October 2008, the FDIC announced the Temporary Liquidity Guarantee Program,
under which any participating depository institution would be able to provide
full deposit insurance coverage for non-interest bearing transaction accounts,
regardless of the dollar amount. Under the program, effective
December 5, 2008, insured depository institutions that have not opted out of the
Temporary Liquidity Guaranty Program will be subject to a 0.10% surcharge
applied to non-interest bearing transaction deposit account balances in excess
of $250,000, which surcharge will be added to the institution’s existing
risk-based deposit insurance assessments. The Bank opted in the FDIC
Temporary Liquidity Guaranty Program.
In
February 2009, the FDIC announced that it would impose an emergency special
assessment of 0.20% surcharge on all insured institutions to be collected on
September 30, 2009 and that it may also impose possible additional special
assessments of up to 0.10% to maintain public confidence in the Deposit
Insurance Fund. The FDIC subsequently reduced the amount of the
emergency special assessment to 0.10% in March 2009.
In
November 2009, the FDIC announced that it would require insured institutions to
prepay slightly over three years of estimated insurance
assessments. The prepayment allowed the FDIC to strengthen the cash
position of the Deposit Insurance Fund. Payment of the prepaid
assessment of $2,918,390, along with the $198,853 payment of the regular third
quarter assessment, was made by the Bank on December 30, 2009.
Item
1A. Risk Factors.
The following are some important
factors that could cause the Company’s actual results to differ materially from
those referred to or implied in any forward-looking statement. These
are in addition to the risks and uncertainties discussed elsewhere in this
Annual Report on Form 10-K and the Company’s other filings with the
SEC.
A
prolonged economic downturn or the return of negative developments in the
financial services industry could negatively impact our operations.
The
global and U.S. economic downturn has resulted in uncertainty in the financial
markets in general with the possibility of a slow recovery or a fall back into
recession. The Federal Reserve, in an attempt to help the overall economy, has
kept interest rates low through its targeted federal funds rate and the purchase
of mortgage- backed securities. If the Federal Reserve increases the federal
funds rate, overall interest rates will likely rise which may negatively impact
the housing markets and the U.S. economic recovery. A prolonged economic
downturn or the return of negative developments in the financial services
industry could negatively impact our operations by causing an increase in our
provision for loan losses and a deterioration of our loan portfolio. Such a
downturn may also adversely affect our ability to originate or sell loans. The
occurrence of any of these events could have an adverse impact our financial
performance.
A
prolonged or worsened downturn affecting the economy and/or the real estate
market in our primary market area would adversely affect our loan portfolio and
our growth potential.
Much of
the Company’s lending is in northern and central New Jersey. As a result of this
geographic concentration, a further significant broad-based deterioration in
economic conditions in the New Jersey metropolitan area could have a material
adverse impact on the quality of the Company’s loan portfolio, results of
operations and future growth potential. A prolonged decline in economic
conditions in our market area could restrict borrowers’ ability to pay
outstanding principal and interest on loans when due, and consequently,
adversely affect the cash flows and results of operation of the Company’s
business.
The
Company’s loan portfolio is largely secured by real estate collateral located in
the State of New Jersey. Conditions in the real estate markets in which the
collateral for the Company’s loans are located strongly influence the level of
the Company’s non-performing loans and results of operations. A continued
decline in the New Jersey real estate markets could adversely affect the
Company’s loan portfolio. Decreases in local real estate values would adversely
affect the value of property used as collateral for our loans. Adverse changes
in the economy also may have a negative effect on the ability of our borrowers
to make timely repayments of their loans, which would have an adverse impact on
our earnings.
The
Company faces significant competition.
The
Company faces significant competition from many other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in the Company’s market area. Non-bank financial institutions,
such as securities brokerage firms, insurance companies and money market funds,
engage in activities which compete directly with traditional bank business,
which has also led to greater competition. Many of these competitors have
substantially greater financial resources than the Company, including larger
capital bases that allow them to attract customers seeking larger loans than the
Company is able to accommodate and the ability to aggressively advertise their
products and to allocate considerable resources to locations and products
perceived as profitable. There can be no assurance that the Company and the Bank
will be able to successfully compete with these entities in the
future.
The
Company is subject to interest rate risk.
The
Company’s earnings are largely dependent upon its net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Company’s
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in interest rates, could
influence not only the interest the Company receives on loans and securities and
the amount of interest it pays on deposits and borrowings, but such changes
could also affect (i) the Company’s ability to originate loans and obtain
deposits, (ii) the fair value of the Company’s financial assets and liabilities,
and (iii) the average duration of the Company’s mortgage-backed securities
portfolio. If the spread between the interest rates paid on deposits and other
borrowings and the interest rates received on loans and other investments
narrows, the Company’s net interest income, and therefore earnings, could be
adversely affected. This also includes the risk that interest-earning
assets may be more responsive to changes in interest rates than interest-bearing
liabilities, or vice versa (repricing risk), the risk that the individual
interest rates or rate indices underlying various interest-earning assets and
interest bearing liabilities may not change in the same degree over a given time
period (basis risk), and the risk of changing interest rate relationships across
the spectrum of interest-earning asset and interest-bearing liability maturities
(yield curve risk).
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Company’s results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on the Company’s
financial condition and results of operations.
The
Company is subject to risks associated with speculative construction
lending.
The risks
associated with speculative construction lending include the borrower’s
inability to complete the construction process on time and within budget, the
sale of the project within projected absorption periods, the economic risks
associated with real estate collateral, and the potential of a rising interest
rate environment. Such loans may include financing the development and/or
construction of residential subdivisions. This activity may involve financing
land purchase, infrastructure development (i.e. roads, utilities, etc.), as well
as construction of residences or multi-family dwellings for subsequent sale by
developer/builder. Because the sale of developed properties is integral to the
success of developer business, loan repayment may be especially subject to the
volatility of real estate market values. Management has established underwriting
and monitoring criteria to minimize the inherent risks of speculative commercial
real estate construction lending. Further, management concentrates
lending efforts with developers demonstrating successful performance on
marketable projects within the Bank’s lending areas.
Federal
and state government regulation impacts the Company’s operations.
The
operations of the Company and the Bank are heavily regulated and will be
affected by present and future legislation and by the policies established from
time to time by various federal and state regulatory authorities. In particular,
the monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of banks in the past and are expected to continue to do
so in the future. Among the instruments of monetary policy used by the Federal
Reserve Board to implement its objectives are changes in the discount rate
charged on bank borrowings. It is not possible to predict what changes, if any,
will be made to the monetary policies of the Federal Reserve Board or to
existing federal and state legislation or the effect that such changes may have
on the future business and earnings prospects of the Company.
The
Company and the Bank are subject to examination, supervision and comprehensive
regulation by various federal and state agencies. Compliance with the rules and
regulations of these agencies may be costly and may limit growth and restrict
certain activities, including payment of dividends, investments, loans and
interest rate charges, interest rates paid on deposits, and locations of
offices. The Bank is also subject to capitalization guidelines set forth in
federal legislation and regulations.
The laws
and regulations applicable to the banking industry could change at any time, and
we cannot predict the impact of these changes on our business and profitability.
Because government regulation greatly affects the business and financial results
of all commercial banks and bank holding companies, the cost of compliance could
adversely affect the Company’s result of operations.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.
We make various assumptions and
judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of our
loans. In determining the amount of the allowance for loan losses, we
review our loans and our loan and delinquency experience, and we evaluate
economic conditions. If our assumptions are incorrect, our allowance
for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in additions to our allowance. Material
additions to our allowance would materially decrease our net
income.
In addition, bank regulators
periodically review our allowance for loan losses and may require us to increase
our provision for loan losses or recognize further loan
charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities might have a material
adverse effect on our financial condition and results of
operations.
Market
Reform Efforts May Result in Our Businesses Becoming Subject to Extensive and
Pervasive Additional Regulations.
Recent
economic and market conditions have led to numerous proposals for changes in
the regulation of the financial industry in an effort to prevent
future crises and reform the financial regulatory system. President Obama’s
administration has released a comprehensive plan for regulatory reform in the
financial industry. The Administration’s plan contains significant proposed
structural reforms, including heightened powers for the Federal Reserve to
regulate risk across the financial system; a new Financial Services Oversight
Council chaired by the U.S. Treasury; and two new federal agencies, a Consumer
Financial Protection Agency and a new National Bank Supervisor. The plan also
calls for new substantive regulation across the financial industry, including
more heightened scrutiny and regulation for any financial firm whose combination
of size, leverage, and interconnectedness could pose a threat to financial
stability if it failed.
There can
be no assurance as to whether or when any of the parts of the Administration’s
plan or other proposals will be enacted into legislation, and if adopted, what
the final provisions of such legislation will be. The financial services
industry is highly regulated, and the Company and the Bank are subject to
regulation by several government agencies, including the Federal Reserve Board
and the FDIC. Legislative and regulatory changes, as well as changes in
governmental economic and monetary policy, not only can affect our ability to
attract deposits and make loans, but can also affect the demand for business and
personal lending and for real estate mortgages. Government regulations affect
virtually all areas of our operations, including our range of permissible
activities, products and services, the amount of service fees or the ability to
assess such fees, the geographic locations in which our services can be offered,
the amount of capital required to be maintained to support operations, the right
to pay dividends and the amount which we can pay to obtain deposits. New
legislation and regulatory changes could require the Company to change certain
of its business practices, impose additional costs on us, or otherwise adversely
affect our business, results of operations or financial condition.
The
price of our common stock may fluctuate.
The price
of our common stock on the NASDAQ Global Market constantly changes and recently,
given the uncertainty in the financial markets, has fluctuated
widely. From the beginning of fiscal year 2008 through the end of
fiscal year 2009, our stock price fluctuated between a high of $16.28 per share
and a low of $4.04 per share. We expect that the market price of our
common stock will continue to fluctuate. Consequently, the current market price
of our common stock may not be indicative of future market prices, and we may be
unable to sustain or increase the value of an investment in our common
stock.
Our
common stock price can fluctuate as a result of a variety of factors, many of
which are beyond our control. These factors include:
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quarterly
fluctuations in our operating and financial
results;
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operating
results that vary from the expectations of management, securities analysts
and investors;
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changes
in expectations as to our future financial performance, including
financial estimates by securities analysts and
investors;
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events
negatively impacting the financial services industry which result in a
general decline in the market valuation of our common
stock;
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announcements
of material developments affecting our operations or our dividend
policy;
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future
sales of our equity securities;
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|
new
laws or regulations or new interpretations of existing laws or regulations
applicable to our business;
|
|
|
·
|
changes
in accounting standards, policies, guidance, interpretations or
principles; and
|
|
|
·
|
general
domestic economic and market
conditions.
|
In
addition, recently the stock market generally has experienced extreme price and
volume fluctuations, and industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of our operating results.
The
Company is subject to liquidity risk.
Liquidity
risk is the potential that the Company will be unable to meet its obligations as
they become due, capitalize on growth opportunities as they arise, or pay
regular dividends because of an inability to liquidate assets or obtain adequate
funding in a timely basis, at a reasonable cost and within acceptable risk
tolerances.
Liquidity
is required to fund various obligations, including credit commitments to
borrowers, mortgage and other loan originations, withdrawals by depositors,
repayment of borrowings, dividends to shareholders, operating expenses and
capital expenditures.
Liquidity
is derived primarily from retail deposit growth and retention; principal and
interest payments on loans; principal and interest payments; sale, maturity and
prepayment of investment securities; net cash provided from operations and
access to other funding sources.
Our
access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity due
to a market downturn or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a
severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole.
Our
agreements with the Treasury impose restrictions and obligations on us that
limit our ability to pay cash dividends and repurchase our common stock or
trust preferred securities.
On
December 23, 2008, we issued Preferred Stock Series B and a warrant to purchase
our common stock to the Treasury as part of its TARP CPP. Prior to
December 23, 2011, unless we have redeemed all of the Preferred Stock Series B
or the Treasury has transferred all of the Preferred Stock Series B to a third
party, the consent of the Treasury will be required for us to, among other
things, pay cash dividends on our common stock or repurchase our common stock or
other trust preferred securities (with certain exceptions, including the
repurchase of our common stock in connection with an employee benefit plan in
the ordinary course of business and consistent with past practice).
Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.
FDIC
insurance premiums have increased substantially in 2009 and we may have to pay
significantly higher FDIC premiums in the future and prepay insurance premiums.
Market developments during 2009 significantly depleted the insurance fund of the
FDIC and reduced the ratio of reserves to insured
deposits.
The FDIC
adopted a revised risk-based deposit insurance assessment schedule during the
first quarter of 2009, which raised regular deposit insurance premiums. In May
2009, the FDIC also implemented a five basis point special assessment of each
insured depository institution’s total assets minus Tier 1 capital as of June
30, 2009, but no more than 10 basis points times the institution’s assessment
base for the second quarter of 2009, collected by the FDIC on September 30,
2009. The amount of this special assessment for the Bank was
$272,518.
In
November 2009, the FDIC announced that it would require insured institutions to
prepay slightly over three years of estimated insurance
assessments. The prepayment allowed the FDIC to strengthen the cash
position of the Deposit Insurance Fund. Payment of the prepaid
assessment of $2,918,390, along with the $198,853 payment of the regular third
quarter assessment, was made by the Bank on December 30, 2009.
The FDIC
may impose additional special assessments for future quarters or may increase
the FDIC standard assessments. We cannot provide you with any assurances that we
will not be required to pay additional FDIC insurance assessments, which could
have an adverse effect on our results of operations.
Our
shares of Preferred Stock Series B impact net income available to our common
stockholders and our earnings per share.
As long
as there are shares of Preferred Stock Series B outstanding, no cash dividends
may be paid on our common stock unless all dividends on the Preferred Stock
Series B have been paid in full. The dividends declared on our
Preferred Stock Series B reduce the net income available to common shareholders
and our earnings per common share. Additionally, warrants to purchase
the Company’s common stock issued to the Treasury, in conjunction with the
issuance of shares of Preferred Stock Series B, may be dilutive to our earnings
per share. The shares of Preferred Stock Series B will also receive
preferential treatment in the event of liquidation, dissolution or winding up of
the Company.
We are
not required to declare cash dividends on our common stock and have never paid a
cash dividend on our common stock. Until the earlier of (i) December
23, 2011 or (ii) the date the Treasury no longer owns any shares of Preferred
Stock Series B, we may not pay any dividends on our common stock without
obtaining the prior consent of the Treasury.
Future
offerings of debt or other securities may adversely affect the market price of
our stock.
In the
future, we may attempt to increase our capital resources or, if our or the
Bank’s capital ratios fall below the required minimums, we or the Bank could be
forced to raise additional capital by making additional offerings of debt or
preferred equity securities, including medium-term notes, trust preferred
securities, senior or subordinated notes and preferred stock. Upon liquidation,
holders of our debt securities and shares of preferred stock and lenders with
respect to other borrowings will receive distributions of our available assets
prior to the holders of our common stock. Additional equity offerings may dilute
the holdings of our existing shareholders or reduce the market price of our
common stock, or both. Holders of our common stock are not entitled to
preemptive rights or other protections against dilution.
The
Company may lose lower-cost funding sources.
Checking,
savings, and money market deposit account balances and other forms of customer
deposits can decrease when customers perceive alternative investments, such as
the stock market, as providing a better risk/return tradeoff. If
customers move money out of bank deposits and into other investments, the
Company could lose a relatively low-cost source of funds, increasing its funding
costs and reducing the Company’s net interest income and net
income.
There
may be changes in accounting policies or accounting standards.
The
Company’s accounting policies are fundamental to understanding its financial
results and condition. Some of these policies require use of
estimates and assumptions that may affect the value of the Company’s assets or
liabilities and financial results. The Company identified its
accounting policies regarding the allowance for loan losses, security
impairment, goodwill and other intangible assets, and income taxes to be
critical because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain. Under
each of these policies, it is possible that materially different amounts would
be reported under different conditions, using different assumptions, or as new
information becomes available.
From time
to time the Financial Accounting Standards Board and the SEC change the
financial accounting and reporting standards that govern the form and content of
the Company’s external financial statements. In addition, accounting
standard setters and those who interpret the accounting standards (such as the
FASB, SEC, banking regulators and the Company’s outside auditors) may change or
even reverse their previous interpretations or positions on how these standards
should be applied. Changes in financial accounting and reporting
standards and changes in current interpretations may be beyond the Company’s
control, can be hard to predict and could materially impact how the Company
reports its financial results and condition. In certain cases, the
Company could be required to apply a new or revised standard retroactively or
apply an existing standard differently (also retroactively) which may result in
the Company restating prior period financial statements in material
amounts.
The
Company encounters continuous technological change.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in the Company’s operations. Many of the
Company’s competitors have substantially greater resources to invest in
technological improvements. The Company may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on the Company’s business and, in turn, the Company’s financial condition
and results of operations.
The
Company is subject to operational risk.
The
Company faces the risk that the design of its controls and procedures, including
those to mitigate the risk of fraud by employees or outsiders, may prove to be
inadequate or are circumvented, thereby causing delays in detection of errors or
inaccuracies in data and information. Management regularly reviews
and updates the Company’s internal controls, disclosure controls and procedures,
and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of the
Company’s controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company’s
business, results of operations and financial condition.
The
Company may also be subject to disruptions of its systems arising from events
that are wholly or partially beyond its control (including, for example,
computer viruses or electrical or telecommunications outages), which may give
rise to losses in service to customers and to financial loss or
liability. The Company is further exposed to the risk that its
external vendors may be unable to fulfill their contractual obligations (or will
be subject to the same risk of fraud or operational errors by their respective
employees as is the Company) and to the risk that the Company’s (or its
vendors’) business continuity and data security systems prove to be
inadequate.
The
Company’s performance is largely dependent on the talents and efforts of highly
skilled individuals. There is intense competition in the financial
services industry for qualified employees. In addition, the Company
faces increasing competition with businesses outside the financial services
industry for the most highly skilled individuals. The Emergency
Economic Stabilization Act and the agreements between the Company and the
Treasury related to the purchase of the Company’s Preferred Stock Series B and
common stock warrants place restrictions on the Company’s ability to pay
compensation to its senior officers. The Company’s business
operations could be adversely affected if it were unable to attract new
employees and retain and motivate its existing employees.
There
may be claims and litigation.
From time
to time as part of the Company’s normal course of business, customers make
claims and take legal action against the Company based on actions or inactions
of the Company. If such claims and legal actions are not resolved in
a manner favorable to the Company, they may result in financial liability and/or
adversely affect the market perception of the Company and its products and
services. This may also impact customer demand for the Company’s
products and services. Any financial liability or reputation damage
could have a material adverse effect on the Company’s business, which, in turn,
could have a material adverse effect on its financial condition and results of
operations.
Severe
weather, acts of terrorism and other external events could significantly impact
our business.
A
significant portion of our primary markets are located near coastal waters which
could generate naturally occurring severe weather, or in response to climate
change, that could have a significant impact on our ability to conduct
business. Additionally, surrounding areas, including New Jersey, may
be central targets for potential acts of terrorism against the United States.
Such events could affect the stability of our deposit base, impair the ability
of borrowers to repay outstanding loans, impair the value of collateral securing
loans, cause significant property damage, result in loss of revenue and/or cause
us to incur additional expenses. Although we have established disaster recovery
policies and procedures, the occurrence of any such event in the future could
have a material adverse effect on our business, which, in turn, could have a
material adverse effect on our financial condition and results of
operations.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
The
following table provides certain information with respect to our offices as of
December 31, 2009:
| Location |
Leased
or
Owned
|
Original
Year Leased
or
Acquired
|
Year
of Lease
Expiration
|
|
| Main Office | ||||
|
2650
Route 130
|
Leased
|
1989
|
2010
|
|
|
Cranbury,
New Jersey
|
||||
| Village Office | ||||
|
74
North Main Street
|
Owned
|
2005
|
---
|
|
|
Cranbury,
New Jersey
|
||||
| Montgomery Office | ||||
|
947
State Road
|
Leased
|
1995
|
2013
|
|
|
Princeton,
New Jersey
|
||||
| Plainsboro Office | ||||
|
Plainsboro
Village Center
|
Leased
|
1998
|
2021
|
|
|
11
Shalks Crossing Road
|
||||
|
Plainsboro,
New Jersey
|
||||
| Hamilton Office | ||||
|
3659
Nottingham Way
|
Leased
|
1999
|
2014
|
|
|
Hamilton,
New Jersey
|
||||
| Princeton Office | ||||
|
The
Windrows at Princeton Forrestal
|
Leased
|
2001
|
2011
|
|
|
200
Windrow Drive
|
||||
|
Princeton,
New Jersey
|
||||
| Perth Amboy Office | ||||
|
145
Fayette Street
|
Leased
|
2003
|
2018
|
|
|
Perth
Amboy, New Jersey
|
||||
| Jamesburg Office | ||||
|
1
Harrison Street
|
Owned
|
2002
|
---
|
|
|
Jamesburg,
New Jersey
|
||||
| West Windsor Office | ||||
|
44
Washington Road
|
Leased
|
2004
|
2019
|
|
|
Princeton
Jct, New Jersey
|
||||
|
Fort
Lee Office
|
||||
|
180
Main Street
|
Leased
|
2006
|
2014
|
|
|
Fort
Lee, New Jersey
|
|
|
|
|
|
|
||||
|
Hightstown
Office
|
||||
|
140
Mercer Street
|
Leased
|
2007
|
2014
|
|
|
Hightstown,
New Jersey
|
||||
|
Mortgage
Warehouse Funding Office
|
||||
|
285
Davidson Avenue
|
Leased
|
2009
|
2015
|
|
|
Somerset,
New Jersey
|
||||
| Lawrenceville Property | ||||
|
146
Lawrenceville-Pennington Road,
|
Owned
|
2009
|
---
|
|
|
Lawrenceville,
New Jersey
|
||||
Management
believes the foregoing facilities are suitable for the Company’s and the Bank’s
present and projected operations.
Item
3. Legal Proceedings.
The
Company may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business. Management is not aware of
any present material legal proceedings or contingent liabilities and commitments
that would have a material impact on the Company’s financial position or results
of operations.
Item
4. (Removed and Reserved).
PART
II
Item
5. Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity Securities.
The
common stock of the Company trades on the Nasdaq Global Market under the trading
symbol “FCCY”. The following are the high and low sales prices per
share for each quarter during 2009 and 2008, as reported on the Nasdaq Global
Market.
|
2009(1)
|
2008(1)
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 10.25 | $ | 3.85 | $ | 13.43 | $ | 9.97 | ||||||||
|
Second
Quarter
|
9.51 | 5.71 | 12.08 | 9.71 | ||||||||||||
|
Third
Quarter
|
8.67 | 7.00 | 10.79 | 7.38 | ||||||||||||
|
Fourth
Quarter
|
7.76 | 5.25 | 11.57 | 6.13 | ||||||||||||
(1) All
per share data has been retroactively adjusted for stock dividends.
As of March
25, 2010, there were approximately 318 record holders of the Company’s common
stock.
The
Company paid 5% stock dividends on February 3, 2010 and February 2, 2009 and a
6% stock dividend on February 6, 2008.
The
Company has never paid a cash dividend on its common stock and there are no
plans to pay a cash dividend on its common stock at this time. In
addition, please refer to the discussion above of the Preferred Stock Series B
under the heading “Supervision and Regulation” for additional restrictions on
cash dividends.
Issuer Purchases of Equity
Securities
On July
21, 2005, the Board of Directors authorized a stock repurchase program under
which the Company may repurchase in open market or privately negotiated
transactions up to 5% of its common shares outstanding at that
date. The Company undertook this repurchase program in order to
increase shareholder value. The following table provides common stock
repurchases made by or on behalf of the Company during the three months ended
December 31, 2009, which purchases were made under the stock repurchase
program.
Issuer
Purchases of Equity Securities (1)
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number
of
Shares
Purchased
As
Part of
Publicly
Announced
Plan
or
Program
|
Maximum
Number
of
Shares
That
May
Yet
be
Purchased
Under
the
Plan
or
Program
|
|||||||||||||
|
Beginning
|
Ending
|
||||||||||||||||
|
October
1, 2009
|
October
31, 2009
|
1,093
|
$
|
7.31
|
1,093
|
163,233
|
|||||||||||
|
November
1, 2009
|
November
30, 2009
|
-
|
-
|
-
|
-
|
||||||||||||
|
December
1, 2009
|
December
31, 2009
|
-
|
-
|
-
|
-
|
||||||||||||
|
Total
|
1,093
|
$
|
7.31
|
1,093
|
163,233
|
||||||||||||
|
|
(1)
|
The
Company’s common stock repurchase program covers a maximum of 195,076
shares of common stock of the Company, representing 5% of the outstanding
common stock of the Company on July 21, 2005, as adjusted for subsequent
stock dividends.
|
As a
result of the Company’s issuance on December 23, 2008 of Preferred Stock Series
B and a warrant to purchase common stock to the Treasury as part of its TARP
CPP, the Company may not repurchase its common stock or other equity securities
except under certain limited circumstances. Please refer to the
discussion above of the Preferred Stock Series B under the heading “Supervision
and Regulation” for restrictions on the Company’s repurchase of its common stock
or other equity securities.
Item
6. Selected Financial Data.
Not
required.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operation.
This
discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this
report. Throughout the following sections, the “Company” refers to
1st Constitution Bancorp and its wholly owned subsidiaries, 1st Constitution
Bank and 1st Constitution Capital Trust II, the “Bank” refers to 1st
Constitution Bank, and the “Trust II” refers to 1st Constitution Capital Trust
II. The purpose of this discussion and analysis is to assist in the
understanding and evaluation of the Company’s financial condition, changes in
financial condition and results of operations.
Critical
Accounting Policies and Estimates
“Management’s
Discussion and Analysis of Financial Condition and Results of Operation” is
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. Note
1 to the Company’s Consolidated Financial Statements for the year ended December
31, 2009 contains a summary of the Company’s significant accounting
policies. Management believes the Company’s policies with respect to
the methodologies for the determination of the allowance for loan losses and for
determining other-than-temporary security impairment involve a higher degree of
complexity and requires management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could materially impact
results of operations. These critical policies and their application
are periodically reviewed with the Audit Committee and the Board of
Directors. The provision for loan losses is based upon management’s
evaluation of the adequacy of the allowance, including an assessment of known
and inherent risks in the portfolio, giving consideration to the size and
composition of the loan portfolio, actual loan loss experience, level of
delinquencies, detailed analysis of individual loans for which full
collectibility may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management uses the best
information available to it, the level of the allowance for loan losses remains
an estimate which is subject to significant judgment and short-term change.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such
agencies may require the Company to make additional provisions for loan losses
based upon information available to them at the time of their
examination. Furthermore, the majority of the Company’s loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the Company’s
loan portfolio is susceptible to changes in local market conditions and may be
adversely affected should real estate values decline or the Central New Jersey
area experience an adverse economic shock. Future adjustments to the
allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Company’s control.
Management
utilizes various inputs to determine the fair value of its investment
portfolio. To the extent they exist, unadjusted quoted market prices
in active markets (level 1) or quoted prices on similar assets (level 2) are
utilized to determine the fair value of each investment in the
portfolio. In the absence of quoted prices, valuation techniques
would be used to determine fair value of any investments that require inputs
that are both significant to the fair value measurement and unobservable (level
3). Valuation techniques are based on various assumptions, including,
but not limited to cash flows, discount rates, rate of return, adjustments for
nonperformance and liquidity, and liquidation values. A significant
degree of judgment is involved in valuing investments using level 3
inputs. The use of different assumptions could have a positive or
negative effect on consolidated financial condition or results of
operations.
Management
must periodically evaluate if unrealized losses (as determined based on the
securities valuation methodologies discussed above) on individual securities
classified as held to maturity or available for sale in the investment portfolio
are considered to be other-than-temporary. The analysis of
other-than-temporary impairment requires the use of various assumptions,
including, but not limited to, the length of time an investment’s book value is
greater than fair value, the severity of the investment’s decline, as well as
any credit deterioration of the investment. If the decline in value
of an investment is deemed to be other-than-temporary, the investment is written
down to fair value and a non-cash impairment charge is recognized in the period
of such evaluation.
Results
of Operations
The
Company reported net income for the year ended December 31, 2009 of $2,560,761,
a decrease of 7.2% from the $2,759,458 reported for the year ended December 31,
2008. The decrease is primarily due to (i) a larger provision for
loan losses, (ii) a substantial increase in the FDIC deposit insurance premiums,
(iii) an other-than temporary security impairment and (iv) increases in salaries
and employee benefits which was offset by (A) an increase in net interest
income, (B) the increase in non-interest income, which was principally increased
by gains on sale of securities available for sale and gains on sales of loans,
and (C) a reduction of income taxes. Net income available to common
shareholders fell from $2,759,458 for the year ended December 31, 2008 to
$1,841,160 for the year ended December 31, 2009 for the reasons indicated above
and the payment of dividends on the Company’s Preferred Stock Series B in
2009.
Diluted
net income per common share was $0.41 for the year ended December 31, 2009
compared to $0.62 reported for the year ended December 31,
2008. Basic net income per common share for the year ended December
31, 2009 was $0.41 as compared to the $0.63 reported for the year ended December
31, 2008. Net income available to common shareholders was reduced in
2009 by an aggregate of $719,601 attributable to dividends and discount
accretion related to the preferred stock issued to the United States Department
of the Treasury. No similar amount was recorded in
2008. All share information has been restated for the effect of a 5%
stock dividend declared on December 17, 2009 and paid on February 3, 2010 to
shareholders of record on January 19, 2010.
Return on
average assets (“ROA”) and return on average equity (“ROE”) were 0.41% and
4.52%, respectively, for the year ended December 31, 2009, compared to 0.56% and
6.52%, respectively, for the year ended December 31, 2008 and 1.29% and 14.32%,
respectively, for the year ended December 31, 2007. Key performance
ratios declined for the 2009 fiscal year as compared to the prior year due to
the lower net income for the year ended December 31, 2009 as compared to the
year ended December 31, 2008.
The
Bank’s results of operations depend primarily on net interest income, which is
primarily affected by the market interest rate environment, the shape of the
U.S. Treasury yield curve, and the difference between the yield on
interest-earning assets and the rate paid on interest-bearing
liabilities. Other factors that may affect the Bank’s operating
results are general and local economic and competitive conditions, government
policies and actions of regulatory authorities. The net interest
margin for the year ended December 31, 2009 was 3.06% as compared to the 3.64%
net interest margin recorded for the year ended December 31, 2008, a reduction
of 58 basis points. The Company will continue to closely monitor the
mix of earning assets and funding sources to maximize net interest income during
this challenging interest rate environment.
Net
Interest Income
Net
interest income, the Company’s largest and most significant component of
operating income, is the difference between interest and fees earned on loans
and other earning assets, and interest paid on deposits and borrowed
funds. This component represented 79.9% of the Company’s net revenues
for the year ended December 31, 2009. Net interest income also
depends upon the relative amount of interest earning assets, interest-bearing
liabilities, and the interest rate earned or paid on them,
respectively.
The
following tables set forth the Company’s consolidated average balances of assets
and liabilities and shareholders’ equity as well as interest income and expense
on related items, and the Company’s average yield or rate for the years ended
December 31, 2009, 2008 and 2007. The average rates are derived by
dividing interest income and expense by the average balance of assets and
liabilities, respectively.
Average
Balance Sheets with Resultant Interest and Rates
|
(yields
on a tax-equivalent basis)
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal
Funds Sold/Short-Term
Investments
|
$
|
39,676,869
|
$
|
116,070
|
0.29
|
%
|
$
|
4,667,073
|
$
|
112,427
|
2.41
|
%
|
$
|
1,653,896
|
$
|
101,171
|
6.12
|
%
|
||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
136,588,291
|
5,143,123
|
3.77
|
%
|
84,611,384
|
4,158,923
|
4.92
|
%
|
80,876,181
|
4,278,288
|
5.29
|
%
|
||||||||||||||||||||||||
|
Tax-exempt
(4)
|
12,483,060
|
720,245
|
5.77
|
%
|
14,471,144
|
829,249
|
5.73
|
%
|
22,968,401
|
1,296,032
|
5.64
|
%
|
||||||||||||||||||||||||
|
Total
|
149,071,351
|
5,863,368
|
3.93
|
%
|
99,082,528
|
4,988,172
|
5.03
|
%
|
103,844,582
|
5,574,320
|
5.37
|
%
|
||||||||||||||||||||||||
|
Loan
Portfolio:
|
||||||||||||||||||||||||||||||||||||
|
Construction
|
89,202,415
|
5,451,941
|
6.11
|
%
|
115,517,676
|
8,090,444
|
7.00
|
%
|
129,285,776
|
11,486,481
|
8.88
|
%
|
||||||||||||||||||||||||
|
Residential
Real Estate
|
10,834,490
|
675,464
|
6.23
|
%
|
10,376,822
|
652,728
|
6.29
|
%
|
8,878,427
|
657,928
|
7.41
|
%
|
||||||||||||||||||||||||
|
Home
Equity
|
14,722,638
|
869,531
|
5.91
|
%
|
15,490,320
|
986,117
|
6.37
|
%
|
14,118,025
|
1,063,025
|
7.53
|
%
|
||||||||||||||||||||||||
|
Commercial
and commercial
real
estate
|
140,449,945
|
9,751,822
|
6.94
|
%
|
127,377,980
|
9,302,815
|
7.30
|
%
|
117,463,693
|
9,140,693
|
7.78
|
%
|
||||||||||||||||||||||||
|
Mortgage
warehouse lines
|
114,749,562
|
5,305,911
|
4.62
|
%
|
57,477,364
|
2,755,003
|
4.79
|
%
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Installment
|
770,169
|
60,572
|
7.86
|
%
|
1,204,297
|
96,375
|
8.00
|
%
|
1,542,082
|
129,483
|
8.40
|
%
|
||||||||||||||||||||||||
|
All Other Loans
|
32,843,891
|
2,275,030
|
6.93
|
%
|
26,660,793
|
2,405,176
|
9.02
|
%
|
21,083,348
|
2,635,877
|
12.50
|
%
|
||||||||||||||||||||||||
|
Total
(1)
|
403,573,110
|
24,390,271
|
6.04
|
%
|
354,105,252
|
24,288,658
|
6.86
|
%
|
292,371,351
|
25,113,487
|
8.59
|
%
|
||||||||||||||||||||||||
|
Total
Interest-Earning Assets
|
592,321,330
|
30,369,709
|
5.13
|
%
|
457,854,853
|
29,389,257
|
6.42
|
%
|
397,869,829
|
30,788,978
|
7.74
|
%
|
||||||||||||||||||||||||
|
Allowance
for Loan Losses
|
(4,155,438
|
)
|
(3,612,156
|
)
|
(3,270,810
|
)
|
||||||||||||||||||||||||||||||
|
Cash
and Due From Banks
|
18,414,336
|
12,446,849
|
10,254,911
|
|||||||||||||||||||||||||||||||||
|
Other
Assets
|
21,030,355
|
22,180,579
|
17,648,099
|
|||||||||||||||||||||||||||||||||
|
Total
Assets
|
$
|
627,610,583
|
$
|
488,870,125
|
$
|
422,502,029
|
||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders' Equity:
|
||||||||||||||||||||||||||||||||||||
|
Interest-Bearing
Liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Money
Market and NOW Accounts
|
$
|
105,526,965
|
$
|
1,987,269
|
1.88
|
%
|
$
|
89,274,785
|
$
|
2,164,369
|
2.42
|
%
|
$
|
83,597,940
|
$
|
1,737,487
|
2.08
|
%
|
||||||||||||||||||
|
Savings
Accounts
|
154,261,417
|
2,907,443
|
1.88
|
%
|
79,864,816
|
1,990,479
|
2.49
|
%
|
64,408,442
|
2,017,580
|
3.13
|
%
|
||||||||||||||||||||||||
|
Certificates
of Deposit under $100,000
|
84,121,374
|
2,454,236
|
2.92
|
%
|
76,921,495
|
3,096,986
|
4.03
|
%
|
67,236,813
|
3,170,322
|
4.72
|
%
|
||||||||||||||||||||||||
|
Certificates
of Deposit of
$100,000
and Over
|
93,913,185
|
2,480,084
|
2.64
|
%
|
70,297,311
|
2,855,024
|
4.06
|
%
|
54,252,087
|
2,711,467
|
5.00
|
%
|
||||||||||||||||||||||||
|
Other
Borrowed Funds
|
29,526,575
|
1,353,489
|
4.58
|
%
|
37,111,612
|
1,556,238
|
4.19
|
%
|
29,580,685
|
1,514,907
|
5.12
|
%
|
||||||||||||||||||||||||
|
Trust
Preferred Securities
|
18,557,000
|
1,072,827
|
5.78
|
%
|
18,557,000
|
1,069,351
|
5.76
|
%
|
19,534,247
|
1,438,876
|
7.37
|
%
|
||||||||||||||||||||||||
|
Total
Interest-Bearing Liabilities
|
485,906,516
|
12,255,348
|
2.52
|
%
|
372,027,019
|
12,732,447
|
3.42
|
%
|
318,610,214
|
12,590,639
|
3.95
|
%
|
||||||||||||||||||||||||
|
Net
Interest Spread (2)
|
2.61
|
%
|
3.00
|
%
|
3.79
|
%
|
||||||||||||||||||||||||||||||
|
Non-interest
Bearing
Demand
Deposits
|
78,588,727
|
69,907,048
|
60,892,433
|
|||||||||||||||||||||||||||||||||
|
Other
Liabilities
|
6,480,126
|
4,608,108
|
4,989,809
|
|||||||||||||||||||||||||||||||||
|
Total
Liabilities
|
570,975,369
|
446,542,175
|
384,492,456
|
|||||||||||||||||||||||||||||||||
|
Shareholders'
Equity
|
56,635,214
|
42,327,950
|
38,009,573
|
|||||||||||||||||||||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$
|
627,610,583
|
$
|
488,870,125
|
$
|
422,502,029
|
||||||||||||||||||||||||||||||
|
Net
Interest Margin (3)
|
$
|
18,114,361
|
3.06
|
%
|
$
|
16,656,810
|
3.64
|
%
|
$
|
18,198,339
|
4.57
|
%
|
||||||||||||||||||||||||
|
(1)
|
Loan
origination fees are considered an adjustment to interest
income. For the purpose of calculating loan yields, average
loan balances include nonaccrual loans with no related interest income.
Please refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation under the heading “Non-Performing
Assets” for a discussion of the Bank’s policy with regard to non-accrual
loans.
|
|
(2)
|
The
interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities.
|
|
(3)
|
The
net interest margin is equal to net interest income divided by average
interest earning assets.
|
|
(4)
|
Tax
equivalent basis.
|
Changes
in net interest income and margin result from the interaction between the volume
and composition of interest earning assets, interest bearing liabilities,
related yields, and associated funding costs. The Rate/Volume Table
demonstrates the impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in interest
rates earned and paid.
The
Company’s net interest income increased on a tax equivalent basis by $1,457,551,
or 8.8%, to $18,114,361 for the year ended December 31, 2009, from the
$16,656,810 reported for the year ended December 31, 2008. As
indicated in the Rate/Volume Table, the principal factor contributing to the
increase in net interest income for the year ended December 31, 2009 was an
increase in the interest income of $980,451, resulting from increased volumes on
the earning assets components. This was combined with a decrease in
interest expense resulting from decreases in the rates of the deposit
components.
The
Company’s net interest income decreased on a tax-equivalent basis by $1,541,529,
or 8.5%, to $16,656,810 for the year ended December 31, 2008, from the
$18,198,339 reported for the year ended December 31, 2007. As
indicated in the Rate/Volume Table, the principal factor contributing to the
decrease in net interest income for the year ended December 31, 2008 was a
decrease in the interest income of $1,399,721, resulting from decreased rates on
the earning assets components. This was combined with an increase in
interest expense resulting from increases in the balances of the deposit
components.
|
Rate/Volume
Table
|
Amount
of Increase (Decrease)
|
|||||||||||||||||||||||
|
Year
Ended December 31,
2009
versus 2008
|
Year
Ended December 31,
2008
versus 2007
|
|||||||||||||||||||||||
|
Due
to Change in:
|
Due
to Change in:
|
|||||||||||||||||||||||
|
(Tax-equivalent
basis)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Interest
Income:
|
||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Construction
|
$
|
(1,693,382
|
)
|
$
|
(945,121
|
)
|
$
|
(2,638,503
|
)
|
$
|
(1,094,267
|
)
|
$
|
(2,302,233
|
)
|
$
|
(3,396,500
|
)
|
||||||
|
Residential
Real Estate
|
28,874
|
(6,138
|
)
|
22,736
|
94,238
|
(99,438
|
)
|
(5,200
|
)
|
|||||||||||||||
|
Home
Equity
|
(47,116
|
)
|
(69,469
|
)
|
(116,586
|
)
|
95,054
|
(172,050
|
)
|
(76,996
|
)
|
|||||||||||||
|
Commercial
and Commercial Real Estate
|
870,410
|
(421,403
|
)
|
449,007
|
748,916
|
(586,243
|
)
|
162,673
|
||||||||||||||||
|
Mortgage
Warehouse Lines
|
2,695,979
|
(145,072
|
)
|
2,550,908
|
2,755,003
|
0
|
2,755,003
|
|||||||||||||||||
|
Installment
|
(34,424
|
)
|
(1,379
|
)
|
(35,803
|
)
|
(26,940
|
)
|
(6,168
|
)
|
(33,108
|
)
|
||||||||||||
|
All
Other Loans
|
492,389
|
(622,537
|
)
|
(130,147
|
)
|
600,091
|
(830,792
|
)
|
(230,701
|
)
|
||||||||||||||
|
Total
Loans
|
2,312,730
|
(2,221,118
|
)
|
101,612
|
3,172,095
|
(3,996,924
|
)
|
(824,829
|
)
|
|||||||||||||||
|
Investment
Securities :
|
||||||||||||||||||||||||
|
Taxable
|
2,257,248
|
(1,273,048
|
)
|
984,200
|
188,735
|
(308,100
|
)
|
(119,365
|
)
|
|||||||||||||||
|
Tax-exempt
|
(114,354
|
)
|
5,350
|
(109,004
|
)
|
(483,349
|
)
|
16,566
|
(466,783
|
)
|
||||||||||||||
|
Total
Investment Securities
|
2,142,894
|
(1,267,697
|
)
|
875,196
|
(294,614
|
)
|
(291,534
|
)
|
(586,148
|
)
|
||||||||||||||
|
Federal
Funds Sold / Short-Term Investments
|
180,375
|
(176,732
|
)
|
3.643
|
128,512
|
(117,256
|
)
|
11,256
|
||||||||||||||||
|
Total
Interest Income
|
4,635,999
|
(3,655,548
|
)
|
980,451
|
3,005,993
|
(4,405,714
|
)
|
(1,399,721
|
)
|
|||||||||||||||
|
Interest
Expense :
|
||||||||||||||||||||||||
|
Money
Market and NOW Accounts
|
$
|
349,145
|
$
|
(526,243
|
)
|
$
|
(177,098
|
)
|
$
|
130,364
|
$
|
296,518
|
$
|
426,880
|
||||||||||
|
Savings
Accounts
|
1,628,306
|
(711,343
|
)
|
916,963
|
434,450
|
(461,551
|
)
|
(27,101
|
)
|
|||||||||||||||
|
Certificates
of Deposit under $100,000
|
250,617
|
(893,368
|
)
|
(642,751
|
)
|
423,858
|
(497,194
|
)
|
(73,336
|
)
|
||||||||||||||
|
Certificates
of Deposit of $100,000 and Over
|
791,043
|
(1,165,984
|
)
|
(374,941
|
)
|
727,894
|
(584,337
|
)
|
143,557
|
|||||||||||||||
|
Other
Borrowed Funds
|
(332,648
|
)
|
129,899
|
(202,749
|
)
|
351,007
|
(309,676
|
)
|
41,331
|
|||||||||||||||
|
Trust
Preferred Securities
|
0
|
3,476
|
3,476
|
(84,797
|
)
|
(284,728
|
)
|
(369,525
|
)
|
|||||||||||||||
|
Total
Interest Expense
|
2,686,463
|
(3,163,563
|
)
|
(477,100
|
)
|
1,982,776
|
(1,840,968
|
)
|
141,808
|
|||||||||||||||
|
Net
Interest Income
|
$
|
1,949,536
|
$
|
(491,985
|
)
|
$
|
1,457,551
|
$
|
1,023,217
|
$
|
(2,564,746
|
)
|
$
|
(1,541,529
|
)
|
|||||||||
Average
interest earning assets increased by $134,466,477, or 29.4%, to $592,321,330 for
the year ended December 31, 2009 from $457,854,853 for the year ended December
31, 2008. Led by the mortgage warehouse lines component, the average
total loan portfolio increased by $49,467,858, or 14.0%, to $403,573,110 for the
year ended December 31, 2009 from $354,105,252 for the year ended December 31,
2008. However, due to the low level of market interest rates during
2009, loan yields averaged 6.04% for the year ended December 31, 2009, 82 basis
points lower than for the year ended December 31, 2008. The average
investment securities portfolio increased 50.5%, while the yield on that
portfolio decreased 110 basis points for the year ended December 31, 2009
compared to the year ended December 31, 2008. Overall, the yield on
interest earning assets decreased 129 basis points to 5.13% in the year ended
December 31, 2009 from 6.42% in the year ended December 31, 2008.
Average
interest earning assets increased by $59,985,025, or 15.1%, to $457,854,853 for
the year ended December 31, 2008 from $397,869,829 for the year ended December
31, 2007, consisting primarily of an increase of $61,733,901 in loans
for 2008 as compared to 2007. Led by the mortgage warehouse lines
component, the average total loan portfolio grew by 21.1%. However,
due to the declining level of market interest rates during 2008, loan yields
averaged 6.86% for the year ended December 31, 2008, 173 basis points lower than
for the year ended December 31, 2007. The average investment
securities portfolio decreased 4.6%, and the yield on that portfolio decreased
34 basis points for the year ended December 31, 2008 compared to the year ended
December 31, 2007. Overall, the yield on interest earning assets
decreased 132 basis points to 6.42% in the year ended December 31, 2008 from
7.74% in the year ended December 31, 2007.
Interest
expense decreased by $477,100, or 3.7%, to $12,255,348 for the year ended
December 31, 2009, from $12,732,447 for the year ended December 31,
2008. This decrease in interest expense is principally attributable
to higher levels of interest-bearing liabilities priced at a significantly lower
market interest rate level. Savings accounts, helped by higher FDIC
deposit insurance limits that will remain until the end of 2013, increased on
average by $74,396,601 in 2009, or 93.2%, as compared to 2008, contributing to
the funding of loan portfolio growth. The cost on these deposits
decreased 61 basis points in 2009 as compared to 2008. Average
interest bearing liabilities rose 30.6% in 2009 from 2008. The cost
of total interest-bearing liabilities decreased 90 basis points to 2.52% in 2009
from 3.42% in 2008.
Interest
expense increased by $141,808, or 1.1%, to $12,732,447 for the year ended
December 31, 2008, from $12,590,639 for the year ended December 31,
2007. This increase in interest expense is principally attributable
to higher levels of interest-bearing liabilities priced at a lower market
interest rate level. Certificates of deposit of $100,000 and over
increased on average by $16,045,224 in 2008, or 29.6%, as compared to 2007,
contributing to the funding of loan portfolio growth. The cost on
these deposits decreased 94 basis points in 2008 as compared to
2007. Average interest bearing liabilities rose 16.8% in 2008 from
2007. The cost of total interest-bearing liabilities decreased 53
basis points to 3.42% in 2008 from 3.95% in 2007.
Average
non-interest bearing demand deposits increased by $8,681,679, or 12.4%, to
$78,588,727 for the year ended December 31, 2009 from $69,907,048 for the year
ended December 31, 2008. The primary cause of this increase for
2009 was the requirement for customers of the Warehouse Line of Credit to
maintain deposit relationships with the Bank that, on average, represent 10% to
15% of the loan balances.
Non-Interest
Income
Non-interest
income increased by $1,225,200, or 37.4%, to $4,505,076 for the year ended
December 31, 2009 from $3,279,876 for the year ended December 31,
2008.
Service
charges on deposit accounts represents a consistent source of non-interest
income. Service charge revenues increased by $1,820 to $885,702 for
the year ended December 31, 2009 compared to $883,882 for the year ended
December 31, 2008. This component of non-interest income represented
19.7% and 26.9% of the total non-interest income for the years ended December
31, 2009 and 2008, respectively.
Gains on
sales of loans held for sale increased by $284,358, or 27.3%, to $1,325,274 for
the year ended December 31, 2009, from $1,040,916 for the year ended December
31, 2008. The Bank sells both residential mortgage loans and Small
Business Administration loans in the secondary market. The low
interest rate environment that continued into 2009 has positively impacted the
volume of sales transactions in the mortgage loan market and the resultant gains
from these sales transactions.
Gains from the sales of
available-for-sale securities totaled $1,138,655 for the year ended December 31,
2009. The gains resulted from the sales of mortgage-backed securities
in the low interest rate environment that continued in 2009. There
were no security sales for the year ended December 31, 2008.
During the quarter ended December 31,
2009, the Bank recognized an other-than-temporary impairment charge of $864,727
attributed to its only pooled trust preferred security. Of this
amount, $363,783 was a credit loss recorded in the income statement and $500,944
was a non-credit related loss recorded as an increase to the other comprehensive
loss component of shareholders’ equity in the balance sheet. The Bank
recognized no other charges for other-than-temporary impairment during the years
ended December 31, 2009 and 2008.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $389,851 for the year ended December 31, 2009 compared to $378,852
for the year ended December 31, 2008. The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduce
the Company’s overall effective tax rate.
The Bank
also generates non-interest income from a variety of fee-based
services. These include safe deposit rentals, wire transfer service
fees and Automated Teller Machine fees for non-Bank
customers. Increased customer demand for these services contributed
to the increase in the other income component of non-interest income, amounting
to $1,129,377 for the year ended December 31, 2009, as compared to $976,226 for
the year ended December 31, 2008.
Non-Interest
Expenses
Non-interest
expenses increased by $2,086,860, or 13.9%, to $17,115,801 for the year ended
December 31, 2009 from $15,028,941 for the year ended December 31,
2008. The following table presents the major components of
non-interest expenses for the years ended December 31, 2009 and
2008.
|
Non-interest
Expenses
|
||||||||
|
2009
|
2008
|
|||||||
|
Salaries
and employee benefits
|
$
|
9,352,360
|
$
|
8,426,729
|
||||
|
Occupancy
expense
|
1,783,031
|
1,802,723
|
||||||
|
Data
processing services
|
1,085,257
|
896,724
|
||||||
|
Equipment
expense
|
631,677
|
626,467
|
||||||
|
Marketing
|
130,393
|
246,879
|
||||||
|
Regulatory,
professional and consulting fees
|
1,006,830
|
861,006
|
||||||
|
Office
expense
|
572,477
|
649,461
|
||||||
|
FDIC
deposit insurance
|
1,193,309
|
196,072
|
||||||
|
Directors’
fees
|
105,700
|
108,000
|
||||||
|
Other
real estate owned expenses
|
123,795
|
120,688
|
||||||
|
Other
expenses
|
1,130,972
|
1,094,192
|
||||||
|
Total
|
$
|
17,115,801
|
$
|
15,028,941
|
||||
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $925,631, or 11.0%, to $9,352,360 for the year ended
December 31, 2009 compared to $8,426,729 for the year ended December 31,
2008. The increase in salaries and employee benefits for the year
ended December 31, 2009 was a result of an increase in the number of employees,
regular merit increases and increased health care costs. Staffing
levels overall increased to 121 full-time equivalent employees as of December
31, 2009, comprised of 115 full time employees and 6 full-time equivalent
employees, as compared to 113 full-time equivalent employees at December 31,
2008.
Marketing expense decreased by
$116,486, or 47.2%, to $130,393 for the year ended December 31, 2009 compared to
$246,879 for the year ended December 31, 2008. During 2009, the Bank
utilized the less costly print media in promoting products and services as
opposed to the more costly radio broadcast media used in prior
years.
Regulatory,
professional and other fees increased by $145,824, or 16.9%, to $1,006,830 for
the year ended December 31, 2009 compared to $861,006 for the year ended
December 31, 2008. During 2009, the Company incurred additional legal
fees primarily in connection with the recovery of non-performing asset
balances. The Bank also incurred additional fees in connection with
examinations performed by independent consultants during 2009 to assess the
effectiveness of internal controls as required by the Sarbanes-Oxley
Act.
The FDIC
substantially increased its assessment rate for all insured banks and charged a
special assessment in 2009 in an effort to increase its reserve ratio, resulting
in an increased expense of $1,193,309 for the year ended December 31, 2009
compared with $196,072 for the year ended December 31, 2008. In
addition to significantly higher assessment rates, the FDIC announced a special
assessment on all insured institutions equal to the lesser of 10% of deposits or
5% of assets minus tier 1 equity. Included in the current year’s
expense was a one-time $272,518 payment for the special assessment.
Data
processing services increased by $188,533, or 21.0%, to $1,085,257 for the year
ended December 31, 2009 compared to $896,724 for the year ended December 31,
2008. The increase in expense was primarily attributable to increased
costs in enhancing the Bank’s data security systems.
Other
real estate owned expenses increased by $3,107, or 2.6%, to $123,795 for the
year ended December 31, 2009 compared to $120,688 for the year ended December
31, 2008, as the Company incurred maintenance costs on more properties held as
Other Real Estate Owned than were held during 2008.
All other
categories of expenses, in the aggregate, decreased by $56,986, or 1.3%, to
$4,223,857 for the year ended December 31, 2009 compared to $4,280,843 for the
year ended December 31, 2008. These expenses are comprised of a
variety of operating expenses and fees as well as expenses associated with
lending activities.
The
Bank’s ratio of non-interest expense to average assets has remained consistently
favorable at 2.73% for the year ended December 31, 2009 compared to 3.08% for
the year ended December 31, 2008.
26
Income
Taxes
The Company
had income tax expense of $156,282 for the year ended December 31, 2009 compared
to income tax expense of $1,239,341 for year ended December 31,
2008. The reduced income tax expense for the year ended December 31,
2009 was primarily due to (1) a significantly lower level of pretax income in
2009 compared with the year ended December 31, 2008 and (2) the reversal of an
over-accrual of income taxes during 2006 and 2007 that coincided with the
completion of an Internal Revenue Service examination of the Company’s 2006 and
2007 Federal income tax returns.
During
2009, the Internal Revenue Service completed an examination of the Company’s
2006 and 2007 Federal tax returns and issued its Revenue Agent Report on June
30, 2009. The Company had deferred the annual process of adjusting
the recorded Federal and State liability balances pending the completion of the
examination which began in September 2008. The examination
adjustments were included in this annual process of adjusting recorded
liabilities with balances per the tax returns and resulted in over-accrued
Federal and State liabilities being reversed by a credit to income tax expense
during the year ended December 31, 2009.
Financial
Condition
Cash
and Cash Equivalents
At
December 31, 2009, cash and cash equivalents totaled $25,854,285 compared to
$14,333,119 at December 31, 2008. Cash and cash equivalents at
December 31, 2009 consisted of cash and due from banks of $25,842,901 and
federal funds sold/short-term investments of $11,384. The
corresponding balances at December 31, 2008 were $14,321,777 and $11,342,
respectively. Despite several rounds of interest rate reductions for
the Bank’s deposit accounts during the fourth quarter of 2009, deposits
continued to increase as loan demand declined contributing to the increase in
cash and cash equivalents. To the extent that the Bank did not
utilize the funds for loan originations or securities purchases, the cash
inflows accumulated in cash and cash equivalents.
Investment
Securities
The
investment securities portfolio amounted to $227,727,830, or 33.6% of total
assets, at December 31, 2009, compared to $130,027,600, or 23.8% of total
assets, at December 31, 2008. Due to the continued uncertain economic
environment during 2009, combined with strong deposit growth, funds were used
primarily to purchase investment securities at a reduced net interest spread
than that generally available if the funds were utilized by lending
activities. On an average balance basis, the investment securities
portfolio represented 25.2% and 21.6%, respectively, of average interest-earning
assets for each of the years ended December 31, 2009 and 2008. The
average yield earned on the portfolio was 3.93% for the year ended December 31,
2009, a decrease of 110 basis points from 5.03% earned for the year ended
December 31, 2008.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes. Activity in this portfolio is undertaken primarily to
manage liquidity and interest rate risk and to take advantage of market
conditions that create economically more attractive returns. At
December 31, 2009, available-for-sale securities amounted to $204,118,850, an
increase of $110,641,827 from December 31, 2008.
Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
2009
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available
for sale-
|
||||||||||||||||
|
U.
S. Treasury securities and
|
||||||||||||||||
|
obligations
of U.S. Government
|
||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
138,351,028
|
$
|
291,906
|
$
|
(673,252
|
)
|
$
|
137,969,682
|
|||||||
|
Residential
collateralized mortgage obligations
|
34,749,123
|
172,698
|
(252,023
|
)
|
34,669,798
|
|||||||||||
|
Residential
mortgage backed securities
|
24,182,584
|
1,449,071
|
0
|
25,631,655
|
||||||||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
2,633,210
|
45,644
|
(91,212
|
)
|
2,587,642
|
|||||||||||
|
Trust
preferred debt securities
|
2,457,262
|
0
|
(687,089
|
)
|
1,770,173
|
|||||||||||
|
Restricted
Stock
|
1,464,900
|
0
|
0
|
1,464,900
|
||||||||||||
|
Mutual
Fund
|
25,000
|
0
|
0
|
25,000
|
||||||||||||
|
$
|
203,863,107
|
$
|
1,959,319
|
$
|
(1,703,576
|
)
|
$
|
204,118,850
|
||||||||
|
Held
to maturity-
|
||||||||||||||||
|
Residential
collateralized mortgage obligations
|
$
|
4,881,475
|
$
|
150,055
|
$
|
0
|
$
|
5,031,530
|
||||||||
|
Residential
mortgage backed securities
|
6,111,131
|
97,782
|
(29,521
|
)
|
6,179,392
|
|||||||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
8,600,596
|
270,947
|
0
|
8,871,543
|
||||||||||||
|
Trust
preferred debt securities
|
133,054
|
0
|
0
|
133,054
|
||||||||||||
|
Corporate
debt securities
|
3,882,724
|
117,287
|
0
|
4,000,011
|
||||||||||||
|
$
|
23,608,980
|
$
|
636,071
|
$
|
(29,521
|
)
|
$
|
24,215,530
|
||||||||
The
$133,054 amortized cost of held to maturity trust preferred debt securities is
net of a $500,944 noncredit-related impairment charge recorded as of December
31, 2009. The
Company did not record any other noncredit-related impairment on its held to
maturity securities during 2009.
At
December 31, 2009, all of the Company’s residential mortgage-backed securities
and all but four of the Company’s residential collateralized mortgage
obligations were issued by Government Sponsored Enterprises
(“GSE”). The four non-GSE issues had, at December 31, 2009, an
aggregate amortized cost and aggregate fair value of $8,208,000 and $8,146,000,
respectively.
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
2008
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available
for sale-
|
||||||||||||||||
|
U.
S. Treasury securities and
|
||||||||||||||||
|
obligations
of U.S. Government
|
||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
22,802,334
|
$
|
415,626
|
$
|
0
|
$
|
23,217,960
|
||||||||
|
Residential
collateralized mortgage obligations
|
7,014,272
|
16,792
|
(253,432
|
)
|
6,777,632
|
|||||||||||
|
Residential
mortgage backed securities
|
54,727,033
|
1,930,299
|
(594
|
)
|
56,656,738
|
|||||||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
2,868,049
|
6,872
|
(16,234
|
)
|
2,858,687
|
|||||||||||
|
Trust
preferred debt securities
|
2,454,969
|
0
|
(1,173,163
|
)
|
1,281,806
|
|||||||||||
|
Restricted
stock
|
2,659,200
|
0
|
0
|
2,659,200
|
||||||||||||
|
Mutual
fund
|
25,000
|
0
|
0
|
25,000
|
||||||||||||
|
$
|
92,550,857
|
$
|
2,369,589
|
$
|
(1,443,423
|
)
|
$
|
93,477,023
|
||||||||
|
Held
to maturity-
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
U.S.
Government sponsored corporations
and
agencies
|
$
|
10,000,000
|
$
|
193,800
|
$
|
0
|
$
|
10,193,800
|
||||||||
|
Residential
collateralized mortgage obligations
|
8,727,315
|
49,897
|
(9,675
|
)
|
8,767,537
|
|||||||||||
|
Residential
mortgage backed securities
|
3,794,931
|
33,007
|
(212
|
)
|
3,827,726
|
|||||||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
10,516,726
|
75,515
|
(93,502
|
)
|
10,498,739
|
|||||||||||
|
Trust
preferred debt securities
|
982,160
|
0
|
(635,172
|
)
|
346,988
|
|||||||||||
|
Corporate
debt securities
|
2,529,445
|
0
|
(23,856
|
)
|
2,505,589
|
|||||||||||
|
$
|
36,550,577
|
$
|
352,219
|
$
|
(762,417
|
)
|
$
|
36,140,379
|
||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
2007
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available
for sale-
|
||||||||||||||||
|
U.
S. Treasury securities and
|
||||||||||||||||
|
obligations
of U.S. Government
|
||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
21,455,563
|
$
|
315,075
|
$
|
(14,043
|
)
|
$
|
21,756,595
|
|||||||
|
Residential
collateralized mortgage obligations
|
8,106,154
|
2,170
|
(407,560
|
)
|
7,700,764
|
|||||||||||
|
Residential
mortgage backed securities
|
37,769,517
|
457,725
|
(57,365
|
)
|
38,169,877
|
|||||||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
3,446,517
|
14,778
|
(7,713
|
)
|
3,453,582
|
|||||||||||
|
Trust
preferred debt securities
|
2,451,122
|
0
|
(272,504
|
)
|
2,178,618
|
|||||||||||
|
Restricted
stock
|
1,907,701
|
0
|
0
|
1,907,701
|
||||||||||||
|
Mutual
fund
|
25,000
|
0
|
0
|
25,000
|
||||||||||||
|
$
|
75,161,574
|
$
|
789,748
|
$
|
(759,185
|
)
|
$
|
75,192,137
|
||||||||
|
Held
to maturity-
|
||||||||||||||||
|
Residential
mortgage backed securities
|
$
|
4,502,574
|
$
|
2,132
|
$
|
(121,197
|
)
|
$
|
4,383,509
|
|||||||
|
Obligations
of State and
|
||||||||||||||||
|
Political
subdivisions
|
18,013,721
|
142,232
|
(4,718
|
)
|
18,151,235
|
|||||||||||
|
Trust
preferred debt securities
|
996,051
|
0
|
(119,526
|
)
|
876,525
|
|||||||||||
|
$
|
23,512,346
|
$
|
144,364
|
$
|
(245,441
|
)
|
$
|
23,411,269
|
||||||||
Proceeds
from maturities and prepayments of securities available for sale amounted to
$87,005,097 for the year ended December 31, 2009 and $26,324,998 for the year
ended December 31, 2008. At December 31, 2009, the portfolio had net
unrealized gains of $255,743, compared to net unrealized gains of $926,166 at
December 31, 2008. These unrealized gains are reflected net of tax in
shareholders’ equity as a component of accumulated other comprehensive
loss.
Securities held to maturity, which are
carried at amortized historical cost, are investments for which there is the
positive intent and ability to hold to maturity. At December 31,
2009, securities held to maturity were $23,608,980, a decrease of $12,941,597
from $36,550,577 at December 31, 2008. The fair value of the
held-to-maturity portfolio at December 31, 2009 was $24,215,530, resulting in a
net unrealized gain of $606,550.
The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2009, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Federal Home Loan Bank stock is
included in “Held to maturity - Due in one year or less.”
|
Amortized
Cost
|
Fair
Value
|
Weighted
Average
Yield*
|
||||||||||
|
Available
for sale-
|
||||||||||||
|
Due
in one year or less
|
$
|
8,402,324
|
$
|
8,446,700
|
2.15
|
%
|
||||||
|
Due
after one year through five years
|
91,063,870
|
91,249,993
|
1.74
|
%
|
||||||||
|
Due
after five years through ten years
|
30,143,402
|
30,412,489
|
3.36
|
%
|
||||||||
|
Due
after ten years
|
74,253,511
|
74,009,668
|
3.74
|
%
|
||||||||
|
Total
|
$
|
203,863,107
|
$
|
204,118,850
|
2.73
|
%
|
||||||
|
Held
to maturity-
|
||||||||||||
|
Due
in one year or less
|
$
|
3,874,956
|
$
|
3,952,332
|
4.68
|
%
|
||||||
|
Due
after one year through five years
|
3,107,832
|
3,227,191
|
5.21
|
%
|
||||||||
|
Due
after five years through ten years
|
5,300,104
|
5,472,483
|
5.58
|
%
|
||||||||
|
Due
after ten years
|
11,326,088
|
11,563,524
|
4.85
|
%
|
||||||||
|
Total
|
$
|
23,608,980
|
$
|
24,215,530
|
4.91
|
%
|
||||||
* computed on a tax equivalent
basis.
The
Company regularly reviews the composition of the investment securities
portfolio, taking into account market risks, the current and expected interest
rate environment, liquidity needs, and its overall interest rate risk profile
and strategic goals.
On a
quarterly basis, management evaluates each security in the portfolio with an
individual unrealized loss to determine if that loss represents
other-than-temporary impairment. During the fourth quarter of 2009,
management determined that it was necessary, following other-than-temporary
impairment requirements, to write down the cost basis of the Company’s only
pooled trust preferred security. The trust preferred security, which
is held in our held to maturity portfolio, was issued by a two issuer pool
(Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods,
Inc. and First Tennessee (“PreTSL XXV”)), consisting primarily of financial
institution holding companies. The primary factor used to determine
the credit portion of the impairment loss to be recognized in the income
statement for this security was the discounted present value of projected cash
flow where that present value of cash flow was less than the amortized cost
basis of the security. The present value of cash flow was developed
using an EITF 99-20 model that considered performing collateral ratios, the
level of subordination to senior tranches of the security, credit ratings of and
projected credit defaults in the underlying collateral.
The
following table sets forth information with respect to this security at December
31, 2009:
|
Pooled
Trust Preferred Security Detail
|
||||||||
|
Security
|
Class
|
Book
Value
|
Fair
Value
|
Unrealized
Gain
(Loss)
|
Percent
of
Underlying
Collateral
Performing
|
Percent
of
Underlying
Collateral
In
Deferral
|
Percent
of
Underlying
Collateral
In
Default
|
Moody’s/
S
& P /
FITCH
Ratings
|
|
PreTSL
XXV
|
B-1
|
$133,054
|
$133,054
|
-
|
69.0%
|
18.4%
|
12.6%
|
Ca/NR/CC
|
The original cost of PreTSL XXV at
December 31, 2009 was $997,781. In reviewing our investment in PreTSL
XXV at December 31, 2009, we have assumed average deferrals and defaults of
1.50% per year through the remaining term of the security (through June
2027).
During the fourth quarter of 2009, the
Company recognized an other-than-temporary impairment charge of $864,727 on this
held to maturity security, of which $363,783 was determined to be a credit loss
and charged to operations and $500,944 was determined to be non-credit related
and recognized in the other comprehensive loss component of shareholders’
equity.
A number of factors or combinations of
factors could cause management to conclude in one or more future reporting
periods that an unrealized loss that exists with respect to PreTSL XXV
constitutes an additional credit impairment. These factors include,
but are not limited to, failure to make interest payments, an increase in the
severity of the unrealized loss, an increase in the continuous duration of the
unrealized loss without an impairment in value or changes in market conditions
and/or industry or issuer specific factors that would render management unable
to forecast a full recovery in value. In addition, the fair value of
trust preferred securities could decline if the overall economy and the
financial condition of the issuers continue to deteriorate and there remains
limited liquidity for these securities.
All other unrealized securities losses
are deemed temporary at December 31, 2009. Additional discussions of
these unrealized losses can be found in Note 2 to the consolidated financial
statements.
Loans
Held for Sale
Loans
held for sale at December 31, 2009 amounted to $21,514,785 compared to
$5,702,082 at December 31, 2008. The primary cause for this increase was a
significantly higher volume of mortgage loan refinance activity during 2009
compared with the level of activity during 2008. As indicated in the
Consolidated Statements of Cash Flows, the amount of loans originated for sale
was $159,468,307 for 2009 compared with $81,465,974 for 2008. This increased
volume has lengthened the operational processing time for the loans as they
migrate from origination to ultimate funding by investors.
Loans
The loan
portfolio, which represents our largest asset, is a significant source of both
interest and fee income. Elements of the loan portfolio are subject to differing
levels of credit and interest rate risk. The Bank’s primary lending
focus continues to be mortgage warehouse lines, construction loans, commercial
loans, owner-occupied commercial mortgage loans and tenanted commercial real
estate loans. Total loans averaged $403,573,110 for the year ended
December 31, 2009, an increase of $49,467,858, or 14.0%, compared to an average
of $354,105,252 for the year ended December 31, 2008. At December 31,
2009, total loans amounted to $379,945,735 compared to $377,348,416 at December
31, 2008, an increase of $2,597,319. The average yield earned
on the loan portfolio was 6.04% for the year ended December 31, 2009 compared to
6.86% for the year ended December 31, 2008, a decrease of 82 basis
points. This decrease is primarily due to the low interest rate
environment that continued throughout 2009.
The
following table represents the components of the loan portfolio for the dates
indicated.
|
December 31, |
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||||||||
|
Construction
loans
|
$
|
79,805,278
|
21
|
%
|
$
|
94,163,997
|
25
|
%
|
$
|
132,735,920
|
45
|
%
|
$
|
125,268,871
|
47
|
%
|
$
|
109,862,614
|
46
|
%
|
||||||||||||||||||||
|
Residential
real estate
loans
|
10,253,895
|
3
|
%
|
11,078,402
|
3
|
%
|
10,088,515
|
3
|
%
|
7,670,370
|
3
|
%
|
8,602,975
|
4
|
%
|
|||||||||||||||||||||||||
|
Commercial
business
|
57,925,392
|
15
|
%
|
57,528,879
|
15
|
%
|
57,232,295
|
19
|
%
|
48,112,857
|
18
|
%
|
47,869,396
|
19
|
%
|
|||||||||||||||||||||||||
|
Commercial
real estate
|
96,306,097
|
25
|
%
|
90,904,418
|
24
|
%
|
77,896,347
|
27
|
%
|
66,784,183
|
26
|
%
|
56,578,800
|
24
|
%
|
|||||||||||||||||||||||||
|
Mortgage
warehouse lines
|
119,382,078
|
32
|
%
|
106,000,231
|
28
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
|||||||||||||||||||||||||
|
Loans
to individuals
|
15,554,027
|
4
|
%
|
16,797,194
|
5
|
%
|
16,324,817
|
6
|
%
|
16,728,025
|
6
|
%
|
16,441,994
|
7
|
%
|
|||||||||||||||||||||||||
|
Lease
financing
|
0
|
0
|
%
|
0
|
0
|
%
|
0
|
0
|
%
|
0
|
0
|
%
|
21,073
|
0
|
%
|
|||||||||||||||||||||||||
|
Deferred
loan fees
|
489,809
|
0
|
%
|
647,673
|
0
|
%
|
302,818
|
0
|
%
|
404,074
|
0
|
%
|
466,678
|
0
|
%
|
|||||||||||||||||||||||||
|
All
other loans
|
229,159
|
0
|
%
|
227,622
|
0
|
%
|
180,006
|
0
|
%
|
173,933
|
0
|
%
|
170,819
|
0
|
%
|
|||||||||||||||||||||||||
|
Total
|
$
|
379,945,735
|
100
|
%
|
$
|
377,348,416
|
100
|
%
|
$
|
294,760,718
|
100
|
%
|
$
|
265,142,313
|
100
|
%
|
$
|
240,014,349
|
100
|
%
|
||||||||||||||||||||
Commercial
and commercial real estate loans averaged $140,449,945 for the year ended
December 31, 2009, an increase of $13,071,965, or 10.3%, compared to
$127,377,980 for the year ended December 31, 2008. Commercial loans
consist primarily of loans to small and middle market businesses and are
typically working capital loans used to finance inventory, receivables or
equipment needs. These loans are generally secured by business assets
of the commercial borrower. The average yield on the commercial and
commercial real estate loan portfolio decreased 36 basis points to 6.94% for
2009 from 7.30% for 2008.
Construction
loans averaged $89,202,415 for the year ended December 31, 2009, a decrease of
$26,315,261, or 22.8%, compared to $115,517,676 for the year ended December 31,
2008. Generally, these loans represent owner-occupied or investment
properties and usually complement a broader commercial relationship between the
bank and the borrower. Construction loans are structured to provide
for advances only after work is completed and inspected by qualified
professionals. The average yield on the construction loan portfolio
decreased 89 basis points to 6.11% for 2009 from 7.00% for 2008.
During 2008, the
Bank’s Mortgage Warehouse Unit introduced a revolving line of credit that is
available to licensed mortgage banking companies (the “Warehouse Line of
Credit”) and that has been successful since inception. The Warehouse
Line of Credit is used by the mortgage banker to originate one-to-four family
residential mortgage loans that are pre-sold to the secondary mortgage market,
which includes state and national banks, national mortgage banking firms,
insurance companies and government-sponsored enterprises, including the Federal
National Mortgage Association , the Federal Home Loan Mortgage Corporation and
others. On average, an advance under the Warehouse Line of Credit
remains outstanding for a period of less than 30 days, with repayment coming
directly from the sale of the loan into the secondary mortgage
market. Interest (the spread between our borrowing cost and the rate
charged to the client) and a transaction fee are collected by the Bank at the
time of repayment. Additionally, customers of the Warehouse Lines of
Credit are required to maintain deposit relationships with the Bank that, on
average, represent 10% to 15% of the loan balances. The Bank had
outstanding Warehouse Line of Credit advances of $119,382,078 at December 31,
2009 and $106,000,231 at December 31, 2008.
The
following table provides information concerning the interest rate sensitivity of
the commercial and commercial real estate loans and construction loans at
December 31, 2009.
|
Maturity
Range
|
||||||||||||||||
|
Type
|
Within
One
Year
|
After
One But
Within
Five
Years
|
After
Five
Years
|
Total
|
||||||||||||
|
Commercial
& commercial real estate
|
$
|
35,661,773
|
$
|
36,961,743
|
$
|
81,607,973
|
$
|
154,231,489
|
||||||||
|
Construction
|
72,979,941
|
5,899,341
|
925,996
|
79,805,278
|
||||||||||||
|
Total
|
$
|
108,641,714
|
$
|
42,861,084
|
$
|
82,553,969
|
$
|
234,036,767
|
||||||||
|
Fixed
rate loans
|
$
|
4,761,909
|
$
|
18,580,941
|
$
|
13,783,655
|
$
|
37,126,505
|
||||||||
|
Floating
rate loans
|
103,879,805
|
24,280,143
|
68,750,314
|
196,910,262
|
||||||||||||
|
Total
|
$
|
108,641,714
|
$
|
42,861,084
|
$
|
82,553,969
|
$
|
234,036,767
|
||||||||
Non-Performing
Assets
Non-performing
assets consist of non-performing loans and other real estate
owned. Non-performing loans are composed of (1) loans on a
non-accrual basis, (2) loans which are contractually past due 90 days or more as
to interest and principal payments but have not been classified as non-accrual,
and (3) loans whose terms have been restructured to provide a reduction or
deferral of interest on principal because of a deterioration in the financial
position of the borrower.
The
Bank’s policy with regard to non-accrual loans is that generally, loans are
placed on a non-accrual status when they are 90 days past due, unless these
loans are well secured and in the process of collection or, regardless of the
past due status of the loan, when management determines that the complete
recovery of principal or interest is in doubt. Consumer loans are generally
charged off after they become 120 days past due. Subsequent payments on loans in
non-accrual status are credited to income only if collection of principal is not
in doubt.
Non-performing
loans increased by $955,749 to $4,307,526 at December 31, 2009, from $3,351,777
at December 31, 2008 as the disruptions in the financial system and the real
estate market during those two years have negatively affected certain of the
Bank’s construction borrowers. The major segments of non-accrual
loans consist of land designated for residential development where the required
approvals to begin construction have been received, commercial loans which are
in the process of collection and residential real estate which is either in
foreclosure or under contract to close after December 31, 2009. The
table below sets forth non-performing assets and risk elements in the Bank’s
portfolio for the years indicated.
As the
table demonstrates, non-performing loans to total loans increased to 1.13% at
December 31, 2009 from 0.89% at December 31, 2008. Loan quality is
still considered to be sound. This was accomplished through quality
loan underwriting, a proactive approach to loan monitoring and aggressive
workout strategies.
In
addition to the foregoing, in the fourth quarter of 2009, the Bank acquired a
property, via deed in lieu of foreclosure, securing a $2,606,677 loan, which
will be used in the Bank’s operations. This property is included in
premises and equipment at December 31, 2009.
At
December 31, 2009, the Bank had two loans that totaled $145,898 in loans that
were 90 days or more past due and still accruing interest income. The
Bank had no loans that were 90 days or more past due and still accruing income
at December 31, 2008.
Non-performing
assets decreased by $1,978,166 to $5,670,147 at December 31, 2009 from
$7,648,313 at December 31, 2008. Other real estate owned decreased by
$2,933,915 to $1,362,621 at December 31, 2009 from $4,296,536 at December 31,
2008. During 2009, the Bank acquired other real estate owned securing
loans in the principal amount of $1,828,687 in full satisfaction of loans in
foreclosure. During 2009, management was successful in selling
$5,241,431 of real estate owned properties without incurring any
losses. The Bank continues to complete the remaining units from an
18-unit condominium project for which it has, as of December 31, 2009,
commitments from individual buyers to purchase. Non-performing assets
represented 0.84% of total assets at December 31, 2009 and 1.40% at December 31,
2008.
The Bank
had no loans classified as restructured loans at December 31, 2009 or
2008.
|
Non-Performing
Assets and Loans
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Non-Performing
loans:
|
||||||||||||||||||||
|
Loans
90 days or more past due and
still
accruing
|
$
|
145,898
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
209
|
||||||||||
|
Non-accrual
loans
|
4,161,628
|
3,351,777
|
2,036,858
|
4,193,209
|
833,150
|
|||||||||||||||
|
Total
non-performing loans
|
4,307,526
|
3,351,777
|
2,036,858
|
4,193,209
|
833,359
|
|||||||||||||||
|
Other
real estate owned:
|
1,362,621
|
4,296,536
|
2,960,727
|
0
|
0
|
|||||||||||||||
|
Total
non-performing assets
|
$
|
5,670,147
|
$
|
7,648,313
|
$
|
4,997,585
|
$
|
4,193,209
|
$
|
833,359
|
||||||||||
|
Non-performing
loans to total loans
|
1.13
|
%
|
0.89
|
%
|
0.67
|
%
|
1.50
|
%
|
0.32
|
%
|
||||||||||
|
Non-performing
assets to total assets
|
0.84
|
%
|
1.40
|
%
|
1.16
|
%
|
1.07
|
%
|
0.22
|
%
|
||||||||||
Management
takes a proactive approach in addressing delinquent loans. The Company’s
President meets weekly with all loan officers to review the status of credits
past-due ten days or more. An action plan is discussed for any delinquent loans
to determine the steps necessary to induce the borrower to cure the delinquency
and restore the loan to a current status. Also, delinquency notices are system
generated when loans are five days past-due and again at 15 days
past-due.
In most
cases, the Company’s collateral is real estate and when the collateral is
foreclosed upon, the real estate is carried at the lower of fair market value
less the estimated selling costs, or the initially recorded
amount. The amount, if any, by which the recorded amount of the loan
exceeds the fair market value of the collateral is a loss which is charged to
the allowance for loan losses at the time of foreclosure or repossession.
Resolution of a past-due loan can be delayed if the borrower files a bankruptcy
petition because a collection action cannot be continued unless the Company
first obtains relief from the automatic stay provided by the bankruptcy
code.
Allowance
for Loan Losses and Related Provision
The
allowance for loan losses is maintained at a level sufficient to absorb
estimated credit losses in the loan portfolio as of the date of the financial
statements. The allowance for loan losses is a valuation reserve
available for losses incurred or inherent in the loan portfolio and other
extensions of credit. The determination of the adequacy of the
allowance for loan losses is a critical accounting policy of the
Company.
The
Company’s primary lending emphasis is the origination of commercial and
commercial real estate loans. Based on the composition of the loan
portfolio, the inherent primary risks are deteriorating credit quality, a
decline in the economy, and a decline in New Jersey real estate market
values. Any one or a combination of these events may adversely affect
the loan portfolio and may result in increased delinquencies, loan losses and
increased future provision levels.
All, or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans 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. Consumer loans are generally charged off no later
than 120 days past due on a contractual basis, earlier in the event of
bankruptcy, or if there is an amount deemed uncollectible. 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.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan losses has been charged against earnings in an
amount necessary to maintain the allowance at a level that is adequate based on
management’s assessment of probable estimated losses. The Company’s
methodology for assessing the adequacy of the allowance for loan losses consists
of several key elements. These elements may include a specific
reserve for doubtful or high risk loans, an allocated reserve, and an
unallocated portion.
The
Company consistently applies the following comprehensive
methodology. During the quarterly review of the allowance for loan
losses, the Company considers a variety of factors that include:
|
|
·
|
General
economic conditions.
|
|
|
·
|
Trends
in charge-offs.
|
|
|
·
|
Trends
and levels of delinquent loans.
|
|
|
·
|
Trends
and levels of non-performing loans, including loans over 90 days
delinquent.
|
|
|
·
|
Trends
in volume and terms of loans.
|
|
|
·
|
Levels
of allowance for specific classified
loans.
|
|
|
·
|
Credit
concentrations.
|
A
specific reserve for high risk loans is established for commercial loans,
commercial real estate loans, and construction loans which have been identified
by management as being high risk or impaired loans. A high risk or
impaired loan is assigned a doubtful risk rating grade because the loan has not
performed according to payment terms and there is reason to believe that
repayment of the loan principal in whole, or in part, is
unlikely. The specific portion of the allowance is the total amount
of potential unconfirmed losses for such individual doubtful
loans. To assist in determining the fair value of loan collateral,
the Company often utilizes independent third party qualified appraisal firms
which, in turn, employ their own criteria and assumptions that may include
occupancy rates, rental rates, and property expenses, among others.
The
second category of reserves consists of the allocated portion of the
allowance. The allocated portion of the allowance is determined by
taking pools of loans outstanding that have similar characteristics and applying
historical loss experience for each pool. This estimate represents
the potential unconfirmed losses within the portfolio. Individual loan pools are
created for commercial and commercial real estate loans, construction loans, and
various types of loans to individuals. The historical estimation for
each loan pool is then adjusted to account for current conditions, current loan
portfolio performance, loan policy or management changes, or any other factor
which may cause future losses to deviate from historical levels.
During
the quarterly reviews, the Company may determine that an unallocated allowance
is appropriate. The unallocated allowance is used to cover any
factors or conditions which may cause a potential loan loss but are not
specifically identifiable. It is prudent to maintain an unallocated
portion of the allowance because no matter how detailed an analysis of potential
loan losses is performed, these estimates inherently lack
precision. Management must make estimates using assumptions and
information which is often subjective and changing rapidly. At
December 31, 2009, management believed that the allowance for loan losses was
adequate.
While
management uses the best information available to make such evaluations, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank’s allowance for
loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
The
following table presents, for the years indicated, an analysis of the allowance
for loan losses and other related data.
|
Allowance
for Loan Losses
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Balance,
beginning of year
|
$
|
3,684,764
|
$
|
3,348,080
|
$
|
3,228,360
|
$
|
2,361,375
|
$
|
2,005,169
|
||||||||||
|
Provision
charged to operating expenses
|
2,553,000
|
640,000
|
130,000
|
893,500
|
405,000
|
|||||||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Construction
loans
|
(1,226,754
|
)
|
(53,946
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Residential
real estate loans
|
-
|
(31,865
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Commercial
and commercial real
estate
loans
|
(511,791
|
)
|
(220,565
|
)
|
(88,891
|
)
|
(11,154
|
)
|
(39,150
|
)
|
||||||||||
|
Loans
to individuals
|
(1,973
|
)
|
-
|
(1,614
|
)
|
(18,314
|
)
|
(13,653
|
)
|
|||||||||||
|
Lease
financing
|
-
|
-
|
(478
|
-
|
-
|
|||||||||||||||
|
All
other loans
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
(1,740,518
|
)
|
(306,376
|
)
|
(90,983
|
)
|
(29,468
|
)
|
(52,803
|
)
|
|||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Construction
loans
|
-
|
-
|
75,000
|
-
|
-
|
|||||||||||||||
|
Residential
real estate loans
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Commercial
and commercial real
estate
loans
|
2,575
|
3,060
|
-
|
153
|
1,498
|
|||||||||||||||
|
Loans
to individuals
|
5,566
|
-
|
5,703
|
2,800
|
2,511
|
|||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
All
other loans
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
8,141
|
3,060
|
80,703
|
2,953
|
4,009
|
||||||||||||||||
|
Net
(charge offs) / recoveries
|
(1,732,377
|
)
|
(303,316
|
)
|
(10,280
|
)
|
(26,515
|
)
|
(48,794
|
)
|
||||||||||
|
Balance,
end of year
|
$
|
4,505,387
|
$
|
3,684,764
|
$
|
3,348,080
|
$
|
3,228,360
|
$
|
2,361,375
|
||||||||||
|
Loans
(excluding held for sale loans):
|
||||||||||||||||||||
|
At
year end
|
$
|
379,945,735
|
$
|
377,348,416
|
$
|
294,760,718
|
$
|
265,142,313
|
$
|
240,014,349
|
||||||||||
|
Average
during the year
|
384,314,052
|
340,666,744
|
281,176,955
|
259,397,578
|
220,475,472
|
|||||||||||||||
|
Net
(charge offs) recoveries to
average
loans outstanding |
(0.45
|
%)
|
(0.09
|
%)
|
0.00
|
%
|
(0.01
|
%)
|
(0.02
|
%)
|
||||||||||
|
Allowance
for loan losses to:
|
||||||||||||||||||||
|
Total
loans at year end
|
1.19
|
%
|
0.98
|
%
|
1.14
|
%
|
1.22
|
%
|
0.98
|
%
|
||||||||||
|
Non-performing
loans
|
104.59
|
%
|
109.93
|
%
|
164.37
|
%
|
76.99
|
%
|
283.36
|
%
|
||||||||||
Management
considers a complete review of the following specific factors in determining the
provisions for loan losses: historical losses by loan category,
non-accrual loans, problem loans as identified through internal classifications,
collateral values, and the growth and size of the loan portfolio. In
addition to these factors, management takes into consideration current economic
conditions and local real estate market conditions. Using this
evaluation process, the Company’s provision for loan losses was $2,553,000 for
the year ended December 31, 2009 and $640,000 for the year ended December 31,
2008. While the risk profile of the loan portfolio was reduced by a
change in its composition via a $14,358,719 reduction in higher risk
construction loans, non-performing loans increased by $955,749 and the total
loan portfolio grew by $2,597,319 from December 31, 2008 to December 31,
2009. This increase in both the loan portfolio and non-performing
loans as well as the adverse economic conditions that resulted in depreciation
of collateral values securing construction and commercial loans necessitated the
increased provision. Also, management replenished the reserves to
compensate for the current period net charge-offs. Net charge
offs/recoveries amounted to a net charge-off of $1,732,377 for the year ended
December 31, 2009.
At
December 31, 2009, the allowance for loan losses was $4,505,387 compared to
$3,684,764 at December 31, 2008, an increase of $820,623, or
22.3%. The ratio of the allowance for loan losses to total loans at
December 31, 2009 and 2008 was 1.19% and 0.98%, respectively. The
allowance for loan losses as a percentage of non-performing loans was 104.59% at
December 31, 2009, compared to 109.93% at December 31, 2008. Management believes
the quality of the loan portfolio remains sound and that the allowance for loan
losses is adequate in relation to credit risk exposure levels.
The
following table describes the allocation of the allowance for loan losses among
the various categories of loans and certain other information as of the dates
indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may
occur. The total allowance is available to absorb losses from any
segment of loans.
|
Allocation of the Allowance for
Loan Losses
|
|||||||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
December
31, 2006
|
December
31, 2005
|
|||||||||||||||||||||||||||||||||||||
|
Amount
|
% of
loans
in
each
category
to
total
loans
|
Amount
|
% of
loans
in
each
category
to
total
loans
|
Amount
|
% of
loans
in
each
category
to
total
loans
|
Amount
|
% of
loans
in
each
category
to
total
loans
|
Amount
|
% of
loans
in
each
category
to
total
loans
|
||||||||||||||||||||||||||||||||
|
Balance
at end of period applicable to:
|
|||||||||||||||||||||||||||||||||||||||||
|
Domestic:
|
|||||||||||||||||||||||||||||||||||||||||
|
Commercial
and commercial
real
estate loans
|
$
|
1,486,659
|
40
|
%
|
$
|
1,477,550
|
39
|
%
|
$
|
1,671,059
|
46
|
%
|
$
|
1,131,266
|
44
|
%
|
$
|
1,393,210
|
43
|
%
|
|||||||||||||||||||||
|
Construction
loans
|
1,739,332
|
21
|
%
|
1,478,520
|
25
|
%
|
1,308,651
|
45
|
%
|
1,696,175
|
47
|
%
|
578,537
|
46
|
%
|
||||||||||||||||||||||||||
|
Mortgage
warehouse lines
|
537,219
|
32
|
%
|
477,001
|
28
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
||||||||||||||||||||||||||
|
Residential
real estate loans
|
72,718
|
3
|
%
|
71,087
|
3
|
%
|
104,326
|
3
|
%
|
61,634
|
3
|
%
|
141,683
|
4
|
%
|
||||||||||||||||||||||||||
|
Loans
to individuals
|
145,542
|
4
|
%
|
149,386
|
5
|
%
|
154,437
|
6
|
%
|
139,055
|
6
|
%
|
236,138
|
7
|
%
|
||||||||||||||||||||||||||
|
Lease
financing
|
-
|
0
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
-
|
0
|
%
|
4,723
|
0
|
%
|
||||||||||||||||||||||||||
|
Unallocated
|
523,917
|
31,220
|
109,607
|
200,230
|
7,084
|
||||||||||||||||||||||||||||||||||||
|
$
|
4,505,387
|
100
|
%
|
$
|
3,684,764
|
100
|
%
|
$
|
3,348,080
|
100
|
%
|
$
|
3,228,360
|
100
|
%
|
$
|
2,361,375
|
100
|
%
|
||||||||||||||||||||||
Deposits
Deposits,
which include demand deposits (interest bearing and non-interest bearing),
savings and time deposits, are a fundamental and cost-effective source of
funding. The flow of deposits is influenced significantly by general
economic conditions, changes in market interest rates and
competition. The Bank offers a variety of products designed to
attract and retain customers, with the Bank’s primary focus being on the
building and expanding of long-term relationships. Deposits in the
year ended December 31, 2009 averaged $516,411,668, an increase of $130,146,213,
or 33.7%, compared to $386,265,455 in the year ended December 31,
2008. At December 31, 2009, total deposits were $572,155,354, an
increase of $157,470,623, or 38.0%, from $414,684,731 at December 31,
2008. Management believes that the primary cause of this increase for
the year ended December 31, 2009 was the reluctance of investors to maintain
funds in the stock market due to the uncertain economic conditions and instead
to deposit funds in FDIC insured deposit products such as savings
accounts. The average rate paid on the Bank’s interest-bearing
deposit balances for 2009 was 2.24%, decreasing from the 3.20% average rate for
2008. Average interest bearing deposits increased by $121,464,534, or
38.4%, to $437,822,941 for 2009 from $316,358,407 for 2008.
The
significant contributors to the increased level of deposit growth in the year
ended December 31, 2009 were an increase in average savings deposits, followed
by increases in certificates of deposit of $100,000 or more, and other time
deposits.
Time
deposits consist primarily of retail certificates of deposit and certificates of
deposit of $100,000 or more. Time deposits at December 31, 2009 were
$170,783,163, a decrease of $5,876,264, or 3.3%, from $176,659,427 at December
31, 2008. The retail certificates of deposit component of time
deposits increased by $7,199,879, or 9.4%, to an average of $84,121,374 for 2009
from an average of $76,921,495 for 2008. The average cost of these
deposits decreased by 111 basis points to 2.92% for 2009 from 4.03% for
2008. Certificates of deposit of $100,000 or more increased by
$23,615,874 to an average of $93,913,185 for 2009 from an average of $70,297,311
for 2008. Certificates of deposit of $100,000 or more are a less
stable funding source and are used primarily as an alternative to other sources
of borrowed funds. For information concerning time deposits
of $100,000 or more by time remaining until maturity, see Note 9
of the Notes to Consolidated Financial Statements.
Average
non-interest bearing demand deposits increased by $8,681,679, or 12.4%, to
$78,588,727 for the year ended December 31, 2009 from $69,907,048 for the year
ended December 31, 2008. At December 31, 2009, non-interest bearing
demand deposits totaled $82,473,328, an increase of 14.9% compared to
$71,772,486 at December 31, 2008. Non-interest bearing demand
deposits made up 14.4% and 17.3% of total deposits at December 31, 2009 and
2008, respectively, and represent a stable, interest-free source of
funds.
Savings
accounts, helped by higher FDIC deposit insurance limits that will remain until
the end of 2013, increased by $109,959,235, or 131.8%, to $193,369,640 at
December 31, 2009 from $83,410,405 at December 31, 2008. The average
balance of savings accounts for 2009 increased by $74,396,601 to $154,261,417
compared to an average balance of $79,864,816 for 2008.
Interest
bearing demand deposits, which include interest-bearing checking, money market
and the Bank’s premier money market product, 1st Choice account, increased by
$16,252,180, or 18.2%, to an average of $105,526,965 for 2009 from an average of
$89,274,785 in 2008. The average cost of interest bearing demand
deposits decreased 54 basis points to 1.88% for 2009 compared to 2.42% for
2008.
The
following table illustrates the components of average total deposits for the
dates indicated.
|
Average
Deposit Balances
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Average
Balance
|
Percentage
of
Total
|
Average
Balance
|
Percentage
of
Total
|
Average
Balance
|
Percentage
of
Total
|
|||||||||||||||||||
|
Non-interest
bearing demand
deposits
|
$
|
78,588,727
|
15
|
%
|
$
|
69,907,048
|
18
|
%
|
$
|
60,892,433
|
18
|
%
|
||||||||||||
|
Interest
bearing demand deposits
|
105,526,965
|
21
|
%
|
89,274,785
|
23
|
%
|
83,597,940
|
25
|
%
|
|||||||||||||||
|
Savings
deposits
|
154,261,417
|
30
|
%
|
79,864,816
|
21
|
%
|
64,408,442
|
19
|
%
|
|||||||||||||||
|
Certificates
of deposit of $100,000
or
more
|
93,913,185
|
18
|
%
|
70,297,311
|
18
|
%
|
54,252,087
|
16
|
%
|
|||||||||||||||
|
Other
certificates of deposit
|
84,121,374
|
16
|
%
|
76,921,495
|
20
|
%
|
67,236,813
|
20
|
%
|
|||||||||||||||
|
Total
|
$
|
516,411,668
|
100
|
%
|
$
|
386,265,455
|
100
|
%
|
$
|
330,387,715
|
100
|
%
|
||||||||||||
Borrowings
Borrowings
are mainly comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight
funds purchased. These borrowings are primarily used to fund asset
growth not supported by deposit generation. The average balance of
other borrowed funds decreased by $7,585,037, or 20.4%, to $29,526,575 for the
year ended December 31, 2009 from the average balance of $37,111,612 for the
year ended December 31, 2008. The average cost of other borrowed
funds increased 39 basis points to 4.58% for 2009 compared to 4.19% for
2008.
The
balance of borrowings was $22,500,000 at December 31, 2009, consisting entirely
of long-term FHLB borrowings. The balance of borrowings at December
31, 2008 was $51,500,000 and consisted of FHLB borrowings of $30,500,000 and
overnight funds purchased of $21,000,000.
The Bank
has four ten-year fixed rate convertible advances from the FHLB that total
$22,500,000 in the aggregate. These advances, in the amounts of
$2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at the rates of
5.50%, 5.34%, 5.06%, and 4.08%, respectively. These advances may be
called by the FHLB quarterly at the option of the FHLB if rates rise and the
rate earned by the FHLB is no longer a “market” rate. These advances
are fully secured by marketable securities.
Shareholders’
Equity and Dividends
Shareholders’
equity increased by $1,781,401, or 3.2%, to $57,401,053 at December 31, 2009,
from $55,619,652 at December 31, 2008. Tangible book value per common
share increased by $0.16, or 1.6%, to $10.03 at December 31, 2009 from $9.88 at
December 31, 2008. The ratio of shareholders’ equity to total assets
was 9.15%, 10.18% and 9.55% at December 31, 2009, December 31, 2008 and December
31, 2007, respectively. The increase in shareholders’ equity from
December 31, 2008 to December 31, 2009 was primarily the result of net income of
$2,560,761.
On
December 23, 2008, pursuant to the TARP CPP under the EESA, the Company entered
into a Letter Agreement, including the Securities Purchase Agreement – Standard
Terms, with the Treasury pursuant to which the Company issued and sold, and the
Treasury purchased (i) 12,000 shares of the Company’s Preferred Stock Series B
and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s
common stock, no par value, at an initial exercise price of $8.99 per share, for
aggregate cash consideration of $12 million. As a result of the 5%
stock dividends paid on February 3, 2010 and February 2, 2009, the
shares of common stock underlying the warrant were adjusted to 220,744.76 shares
and the exercise price was adjusted to $8.154 per share.
The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. In addition, the Treasury has agreed not to exercise
voting power with respect to any shares of common stock issued upon exercise of
the warrant.
The
Company is subject to restrictions contained in the agreement between the
Treasury and the Company related to the sale of the Preferred Stock Series B
which among other things restricts the payment of cash dividends or making other
distributions by the Company on its common stock or the repurchase of its shares
of common stock or other capital stock or other equity securities of any kind of
the Company or any of its or its affiliates’ trust preferred securities until
the third anniversary of the purchase of the Preferred Stock Series B by the
Treasury with certain exceptions without approval of the Treasury and the
Company is prohibited by the terms of the Preferred Stock Series B from paying
dividends on the common stock of the Company or redeeming or otherwise acquiring
its common stock or certain other of its equity securities unless all dividends
on the Preferred Stock Series B have been declared and either paid in full or
set aside with certain limited exceptions.
In
addition, EESA, as amended by The American Recovery and Reinvestment Act of 2009
(the “Stimulus Package Act”), and guidance issued by the Treasury with respect
to this legislation limit executive compensation, require the reporting of
information to the Treasury and others, limit the deductibility for Federal
income tax purposes of compensation paid to certain executives in excess of
$500,000 per year, limit the payment of certain severance and change in control
payments to certain executives, limit the type and amount of compensation paid
to our highest paid executive (our chief executive officer) of the Company or
the Bank, impose a claw back of certain compensation paid to certain executives
of the Company or the Bank and impose new corporate governance requirements on
the Company, including the inclusion of a non-binding “say to pay” proposal in
the Company’s annual proxy statement.
The
Federal Reserve Board has issued a supervisory letter to bank holding companies
that contains guidance on when the board of directors of a
bank holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
In lieu
of cash dividends, the Company (and its predecessor the Bank) has declared a
stock dividend every year since 1992 and has paid such dividends every year
since 1993. 5% stock dividends were declared in 2009 and 2008 and
paid in 2010 and 2009, respectively. A 6% stock dividend was declared
in 2007 and paid in 2008
The
Company’s common stock is quoted on the Nasdaq Global Market under the symbol
“FCCY”.
The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal Reserve Board and the Federal Deposit Insurance
Corporation. For information on regulatory capital, see Note 18
of the Notes to Consolidated Financial Statements.
Off-Balance
Sheet Arrangements
The
following table shows the amounts and expected maturities of significant
commitments as of December 31, 2009. Further discussion of these
commitments is included in Note 16 to the Consolidated Financial
Statements.
|
One
Year
or
Less
|
One
to
Three
Years
|
Three
to
Five
Years
|
Over
Five
Years
|
Total
|
||||||||||||||||
|
Standby
letters of credit
|
$
|
3,387,018
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
3,387,018
|
||||||||||
|
Commitments
to extend credit
|
$
|
216,651,774
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
216,651,774
|
||||||||||
|
Commitments
to sell residential loans
|
$
|
21,514,785
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
21,514,785
|
||||||||||
Liquidity
At
December 31, 2009, the amount of liquid assets remained at a level management
deemed adequate to ensure that contractual liabilities, depositors’ withdrawal
requirements, and other operational and customer credit needs could be
satisfied.
Liquidity
management refers to the Company’s ability to support asset growth while
satisfying the borrowing needs and deposit withdrawal requirements of
customers. In addition to maintaining liquid assets, factors such as
capital position, profitability, asset quality and availability of funding
affect a bank’s ability to meet its liquidity needs. On the asset
side, liquid funds are maintained in the form of cash and cash equivalents,
Federal funds sold, investment securities held to maturity maturing within one
year, securities available for sale and loans held for
sale. Additional asset-based liquidity is derived from scheduled loan
repayments as well as investment repayments of principal and interest from
mortgage-backed securities. On the liability side, the primary source
of liquidity is the ability to generate core deposits. Short-term
borrowings are used as supplemental funding sources when growth in the core
deposit base does not keep pace with that of earnings assets.
The Bank
has established a borrowing relationship with the FHLB and a correspondent bank
which further supports and enhances liquidity. At December 31, 2009, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $58,584,800
plus a One-Month Overnight Repricing Line of Credit of $58,584,800. Advances
issued under these programs are subject to FHLB stock level and collateral
requirements. Pricing of these advances may fluctuate based on existing market
conditions. The Bank also maintains an unsecured federal funds line of
$20,000,000 with a correspondent bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At December 31, 2009,
the balance of cash and cash equivalents was $25,854,285.
Net cash
used in operating activities totaled $14,015,564 for the year ended December 31,
2009 compared to net cash provided by operations of $8,336,322 for the year
ended December 31, 2008. The primary source of funds is net income
from operations adjusted for activity related to loans originated for sale, the
provision for loan losses, depreciation expenses, and net amortization of
premiums on securities.
Net cash
used in investing activities decreased by $12,264,165 to $102,649,885 for the
year ended December 31, 2009 from $114,914,050 for the year ended December 31,
2008. The decrease in cash usage for 2009 compared to 2008 resulted
from decreased lending activity during 2009 plus increased volume of securities
repayments during 2009.
Net cash
provided by financing activities increased by $14,823,870 to $128,186,615 for
the year ended December 31, 2009 from $113,362,745 for the year ended December
31, 2008. The cash provided in 2009 resulted primarily from an
increase in demand, savings and time deposits partially offset by decreased
borrowings.
The
securities portfolios are also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. For the year ended
December 31, 2009, prepayments and maturities of investment securities totaled
$103,889,952. Another source of liquidity is the loan portfolio,
which provides a flow of payments and maturities.
Interest
Rate Sensitivity Analysis
The
largest component of the Bank’s total income is net interest income, and the
majority of the Bank’s financial instruments are composed of interest
rate-sensitive assets and liabilities with various terms and
maturities. The primary objective of management is to maximize net
interest income while minimizing interest rate risk. Interest rate
risk is derived from timing differences in the repricing of assets and
liabilities, loan prepayments, deposit withdrawals, and differences in lending
and funding rates. Management actively seeks to monitor and control
the mix of interest rate-sensitive assets and interest rate-sensitive
liabilities.
The
following tables set forth certain information relating to the Bank’s financial
instruments that are sensitive to changes in interest rates, categorized by
expected maturity or repricing and the fair value of such instruments at
December 31, 2009.
|
Interest
Rate Sensitivity Analysis at December 31, 2009
|
||||||||||||||||||||||||||||||||||||
|
Total
Within
One
Year
|
One
Year
to
Five
Years
|
|||||||||||||||||||||||||||||||||||
|
( $
in thousands )
|
Interest
Sensitivity Period
|
Over
Five
Years
|
Non-interest
Sensitive
|
|||||||||||||||||||||||||||||||||
|
30
Day
|
90
Day
|
180
Day
|
365
Day
|
Total
|
||||||||||||||||||||||||||||||||
|
Assets
:
|
||||||||||||||||||||||||||||||||||||
|
Cash
and due from banks
|
$ | 13,962 | $ | - | $ | - | $ | - | $ | 13,962 | $ | - | $ | - | $ | 11,881 | $ | 25,843 | ||||||||||||||||||
|
Federal
funds sold
|
11 | - | - | - | 11 | - | - | - | 11 | |||||||||||||||||||||||||||
|
Investment
securities
|
4,560 | 6,937 | 10,653 | 24,734 | 46,884 | 41,223 | 139,621 | - | 227,728 | |||||||||||||||||||||||||||
|
Loans
held for sale
|
21,515 | - | - | - | 21,515 | - | - | - | 21,515 | |||||||||||||||||||||||||||
|
Loans,
net of allowance for loan losses
|
263,571 | 6,656 | 9,882 | 12,457 | 292,566 | 19,391 | 67,988 | (4,505 | ) | 375,440 | ||||||||||||||||||||||||||
|
Other
assets
|
- | - | - | - | - | - | - | 27,461 | 27,461 | |||||||||||||||||||||||||||
| $ | 303,619 | $ | 13,593 | $ | 20,535 | $ | 37,191 | $ | 374,938 | $ | 60,614 | $ | 207,609 | $ | 34,837 | $ | 677,996 | |||||||||||||||||||
|
Sources
of Funds :
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits - noninterest bearing
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 82,473 | $ | 82,473 | ||||||||||||||||||
|
Demand
deposits - interest bearing
|
55,252 | - | - | - | 55,252 | 59,376 | 10,901 | - | 125,529 | |||||||||||||||||||||||||||
|
Savings
deposits
|
135,920 | - | - | 31 | 135,961 | 23,913 | 33,496 | - | 193,370 | |||||||||||||||||||||||||||
|
Time
deposits
|
21,986 | 40,953 | 38,671 | 40,532 | 142,132 | 28,651 | - | - | 170,783 | |||||||||||||||||||||||||||
|
Borrowings
|
- | - | - | 12,500 | 12,500 | - | 10,000 | - | 22,500 | |||||||||||||||||||||||||||
|
Redeemable
subordinated debentures
|
- | - | - | - | - | 18,557 | - | - | 18,557 | |||||||||||||||||||||||||||
|
Non-interest-bearing
sources
|
- | - | - | - | - | - | - | 64,784 | 64,784 | |||||||||||||||||||||||||||
| $ | 213,158 | $ | 40,953 | $ | 38,671 | $ | 53,063 | $ | 345,845 | $ | 130,497 | $ | 54,397 | $ | 147,257 | $ | 677,996 | |||||||||||||||||||
|
Asset
(Liability) Sensitivity Gap :
|
||||||||||||||||||||||||||||||||||||
|
Period
Gap
|
$ | 90,461 | $ | (27,360 | ) | $ | (18,136 | ) | $ | (15,872 | ) | $ | 29,093 | $ | (69,883 | ) | $ | 153,212 | $ | (112,420 | ) | - | ||||||||||||||
|
Cumulative
Gap
|
$ | 90,461 | $ | 63,101 | $ | 44,965 | $ | 29,093 | $ | 29,093 | $ | (40,790 | ) | $ | 112,420 | - | - | |||||||||||||||||||
|
Cumulative
Gap to Total Assets
|
13.4 | % | 9.3 | % | 6.6 | % | 4.3 | % | 4.3 | % | (6.0 | )% | - | - | - | |||||||||||||||||||||
The Bank
continually evaluates interest rate risk management opportunities, including the
use of derivative financial instruments. Management believes that hedging
instruments currently available are not cost-effective, and therefore has
focused its efforts on increasing the Bank’s spread by attracting lower-cost
retail deposits.
In
addition to utilizing the gap ratio for interest rate risk assessment,
management utilizes simulation analysis whereby the model estimates the variance
in net income with a change in interest rates of plus or minus 200 basis points
over 12 and 24 month periods. Given recent simulations, net interest
income would be within policy guidelines regardless of the direction of market
rates.
Item
7A. Quantitative and Qualitative Disclosures About
Market Risk.
Not
required.
Item
8. Financial Statements and Supplementary
Data.
Reference
is made to Item 15(a)(1) and (2) on page F-1 for a list of financial
statements and supplementary data required to be filed pursuant to this Item
8. The information required by this Item 8 is provided beginning on
page F-1 hereof.
Item
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this annual
report. Based upon such evaluation, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures are effective as of the end of the period
covered by this annual report.
Management’s Report on Internal
Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
The
Company’s internal control over financial reporting includes those policies and
procedures that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the receipts and expenditures of the
Company are being made only in accordance with authorizations of its
management and directors; and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on its financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may
deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A significant
deficiency is a control deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the company’s financial reporting.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on their assessment using
those criteria, management concluded that, as of December 31, 2009, the
Company’s internal control over financial reporting was effective.
The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Attestation
Report
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this annual
report.
Item
9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Shareholders under the captions
“Directors and Executive Officers” and “Corporate Governance”.
Item
11. Executive Compensation.
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Shareholders under the caption
“Executive Compensation.”
Item
12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters.
Equity
Compensation Plan Information
The
following table provides information about the Company’s common stock that may
be issued upon the exercise of options, warrants and rights under all of the
Company’s equity compensation plans as of December 31, 2009. The
information in the table has been adjusted for the 5% stock dividend declared
December 17, 2009 and paid February 3, 2010 to shareholders of record on January
19, 2010.
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise
price
of outstanding options,
warrants
and rights
(b)
|
Number
of securities
remaining
available for
future
issuance under equity
compensation
plans
(excluding
securities
reflected
in column (a))
(c)
|
|||||||||
|
Equity
compensation plans approved by
security
holders (1)
|
139,282
|
$
|
11.58
|
272,888
|
||||||||
|
Equity
compensation plans not approved by
security
holders (2)
|
15,428
|
$
|
6.14
|
-
|
||||||||
|
Total
|
154,710
|
$
|
11.04
|
272,888
|
||||||||
|
|
(1)
|
Includes
the Company’s 2000 Employee Stock Option and Restricted Stock Plan, 2005
Equity Incentive Plan and 2006 Directors Stock
Plan.
|
The
Company’s 2000 Employee Stock Option and Restricted Stock Plan was adopted by
the Board of the Company and approved by the shareholders in April 2000, the
Company’s 2005 Equity Incentive Plan was adopted by the Board of the Company on
February 17, 2005 and approved by the shareholders in May 2005 and the Company’s
2006 Directors Stock Plan was adopted by the Board of the Company on March 23,
2006 and approved by the shareholders in May 2006.
|
|
(2)
|
Directors
Stock Option and Restricted Stock
Plan.
|
The
Company’s Directors Stock Option and Restricted Stock Plan was adopted by the
Board, and became effective, on April 22, 1999, prior to the listing of the
Company’s common stock on the Nasdaq National Market System. The plan provides
for grants of non-qualified stock options and restricted stock awards to
directors of the Company and its subsidiaries. Participants in the plan may be
granted non-qualified stock options or restricted stock. All stock option grants
have an exercise price per share of no less than the fair market value per share
of common stock on the grant date and may have a term of no longer than 10 years
after the grant date.
The
additional information required by this item is incorporated by reference from
the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders under
the caption “Stock Ownership of Management and Principal
Shareholders.”
Item
13. Certain Relationships and Related Transactions,
and Director Independence.
This
information required by this item is incorporated by reference from the
Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders under the
captions “Certain Transactions With Management” and “Director
Independence”.
Item 14. Principal Accounting Fees and Services.
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Shareholders under the caption
“Principal Accounting Fees and Services.”
PART
IV
Item
15. Exhibits, Financial Statement
Schedules.
(a) Financial
Statements and Financial Statement Schedules
The
following documents are filed as part of this Annual Report on Form
10-K:
1.
Financial Statements of 1st Constitution Bancorp.
Consolidated
Balance Sheets – December 31, 2009 and 2008.
Consolidated
Statements of Income – For the Years Ended December 31, 2009 and
2008.
Consolidated
Statements of Changes in Shareholders’ Equity – For the Years Ended December 31,
2009 and 2008.
Consolidated
Statements of Cash Flows – For the Years Ended December 31, 2009 and
2008.
Notes to
Consolidated Financial Statements
Report of
Independent Registered Public Accounting Firm
These
statements are incorporated by reference to the Company’s Annual Report to
Shareholders for the year ended December 31, 2009.
2.
All schedules are omitted because either they are inapplicable or not
required, or because the information required therein is included in the
Consolidated Financial Statements and Notes thereto.
3.
Exhibits
|
Exhibit No.
|
Description
|
||
|
3
|
(i)(A)
|
Certificate
of Incorporation of the Company (conformed copy) (incorporated by
reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC
on March 27, 2009)
|
|
|
3
|
(i)(B)
|
Certificate
of Amendment to the Certificate of Incorporation increasing the number of
shares designated as Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed
with the SEC on December 23, 2008)
|
|
|
3
|
(i)(C)
|
Certificate
of Amendment to the Certificate of Incorporation establishing the terms of
the Fixed Rate Cumulative Perpetual Preferred Stock, Series B
(incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed
with the SEC on December 23, 2008)
|
|
|
3
|
(ii)(A)
|
Bylaws
of the Company (conformed copy) (incorporated by reference to Exhibit
3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22,
2007)
|
|
|
Exhibit No.
|
Description
|
||
|
3
|
(ii)(B)
|
Amendment
No. 2 to By-laws of the Company (incorporated by reference to Exhibit
3(ii)(B) to the Company’s Form 8-K filed with the SEC on October 22,
2007)
|
|
|
4.1
|
Specimen
Share of Common Stock (incorporated by reference to Exhibit 4.1 to the
Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March
22, 2002)
|
||
|
4.2
|
Amended
and Restated Declaration of Trust of 1st Constitution Capital Trust I
dated as of April 10, 2002 among the Registrant, as sponsor, Wilmington
Trust Company, as Delaware and institutional trustee, and the
Administrators named therein (incorporated by reference to Exhibit 4.2 to
the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on
May 8, 2002)
|
||
|
4.3
|
Indenture
dated as of April 10, 2002 between the Registrant, as issuer, and
Wilmington Trust Company, as trustee, relating to the Floating Rate Junior
Subordinated Debt Securities due 2032 (incorporated by reference to
Exhibit 4.3 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed
with the SEC on May 8, 2002)
|
||
|
4.4
|
Guarantee
Agreement dated as of April 10, 2002 between the Registrant and the
Wilmington Trust Company, as guarantee trustee (incorporated by reference
to Exhibit 4.4 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed
with the SEC on May 8, 2002)
|
||
|
4.5
|
Rights
Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp
and Registrar and Transfer Company, as Rights Agent, (incorporated by
reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No.
000-32891) filed with the SEC on March 18, 2004)
|
||
|
4.6
|
Warrant,
dated December 23, 2008, to purchase shares of 1st Constitution Bancorp
common stock (incorporated by reference to Exhibit 3.3 to the Company’s
Form 8-K filed with the SEC on December 23, 2008)
|
||
|
10.1
|
#
|
1st
Constitution Bancorp Supplemental Executive Retirement Plan, dated as of
October 1, 2002 (Incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on
November 13, 2002)
|
|
|
10.2
|
#
|
Amended
and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective
as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the
Company’s Form 8-K filed with the SEC on March 24,
2006)
|
|
|
10.3
|
#
|
1st
Constitution Bancorp Form of Executive Life Insurance Agreement
(Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-QSB
(SEC File No. 000-32891) filed with the SEC on November 13,
2002)
|
|
|
10.4
|
#
|
2000
Employee Stock Option and Restricted Stock Plan (incorporated by reference
to Exhibit No. 6.3 to the Company’s Form 10-SB (SEC File No. 000-32891)
filed with the SEC on June 15, 2001)
|
|
|
10.5
|
#
|
Directors
Stock Option and Restricted Stock Plan (incorporated by reference to
Exhibit No. 6.4 to the Company’s Form 10-SB (SEC File No. 000-32891) filed
with the SEC on June 15, 2001)
|
|
|
10.6
|
#
|
Employment
Agreement between the Company and Robert F. Mangano dated April 22, 1999
(incorporated by reference to Exhibit No. 6.5 to the Company’s Form 10-SB
(SEC File No. 000-32891) filed with the SEC on June 15,
2001)
|
|
|
Exhibit No.
|
Description
|
||
|
10.7
|
#
|
Amendment
No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan,
effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to
the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on
August 11, 2004)
|
|
|
10.8
|
#
|
Change
of Control Agreement, effective as of April 1, 2004, by and between the
Company and Joseph M. Reardon (incorporated by reference to Exhibit 10.13
to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on
August 11, 2004)
|
|
|
10.9
|
#
|
Form
of Stock Option Agreement under the 1st Constitution
Bancorp Employee Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.14 to the Company’s Form 8-K (SEC
File No. 000-32891) filed with the SEC on December 22,
2004)
|
|
|
10.10
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution
Bancorp Employee Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.15 to the Company’s Form 8-K (SEC
File No. 000-32891) filed with the SEC on December 22,
2004)
|
|
|
10.11
|
#
|
Employment
Agreement between the Company and Robert F. Mangano dated February 22,
2005 (incorporated by reference to Exhibit No. 10.16 to the Company’s Form
8-K (SEC File No. 000-32891) filed with the SEC on February 24,
2005)
|
|
|
10.12
|
#
|
The
1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by
reference to Appendix A of the Company's proxy statement filed with the
SEC on April 15, 2005)
|
|
|
10.13
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution Bancorp 2005
Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the
Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
10.14
|
#
|
Form
of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to
the Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
10.15
|
#
|
Form
of Incentive Stock Option Agreement under the 1st Constitution Bancorp
2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to
the Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
10.16
|
#
|
1st
Constitution Bancorp 2006 Directors Stock Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 19,
2006)
|
|
|
10.17
|
#
|
Form
of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
2006 Directors Stock Plan (incorporated by reference to Exhibit 10.2 to
the Company’s Form 8-K filed with the SEC on May 19,
2006)
|
|
|
10.18
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution Bancorp 2006
Directors Stock Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Form 8-K filed with the SEC on May 19, 2006)
|
|
|
10.19
|
Amended
and Restated Declaration of Trust of 1st Constitution Capital Trust II,
dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the
Delaware and institutional trustee named therein, and the administrators
named therein (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed with the SEC on June 16,
2006)
|
||
|
Exhibit No.
|
Description
|
||
|
10.20
|
Indenture,
dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer,
and the trustee named therein, relating to the Floating Rate Junior
Subordinated Debt Securities due 2036 (incorporated by reference to
Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on June 16,
2006)
|
||
|
10.21
|
Guarantee
Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and
the guarantee trustee named therein (incorporated by reference to Exhibit
10.3 to the Company’s Form 8-K filed with the SEC on June 16,
2006)
|
||
|
10.22
|
#
|
Amendment
No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
Plan, effective as of December 31, 2004 (incorporated by reference to
Exhibit 10.24 to the Company’s Form 10-K filed with the SEC on April 15,
2008)
|
|
|
10.23
|
#
|
1st
Constitution Bancorp 2005 Supplemental Executive Retirement Plan,
effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1
to the Company’s Form 8-K filed with the SEC on December 28,
2006)
|
|
|
10.24
|
Letter
Agreement, dated December 23, 2008, including Securities Purchase
Agreement – Standard Terms incorporated by reference therein, between 1st
Constitution Bancorp and the U.S. Department of the Treasury (incorporated
by reference to Exhibit 10 to the Company’s Form S-3 filed with the SEC on
January 29, 2009)
|
||
|
10.25
|
#
|
Form
of Waiver, executed by each of Messrs. Robert Mangano and Joseph M.
Reardon (incorporated by reference to Exhibit 10.2 to the Company’s Form
8-K filed with the SEC on December 23, 2008)
|
|
|
10.26
|
#
|
Form
of Senior Executive Officer Agreement, executed by each of Messrs. Robert
Mangano and Joseph M. Reardon (incorporated by reference to Exhibit 10.3
to the Company’s Form 8-K filed with the SEC on December 23,
2008)
|
|
|
10.27
|
#*
|
Letter
Agreement with Robert F. Mangano dated November 5, 2009 and executed by
Mr. Mangano on November 7, 2009
|
|
|
10.28
|
#*
|
Letter
Agreement with Joseph M. Reardon dated November 5, 2009 and executed by
Mr. Reardon on November 7, 2009
|
|
|
14
|
Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on
March 25, 2004)
|
||
|
21
|
*
|
Subsidiaries
of the Company
|
|
|
23
|
*
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
31.1
|
*
|
Certification
of the principal executive officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a)
|
|
|
31.2
|
*
|
Certification
of the principal financial officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a)
|
|
|
32
|
*
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002, signed by the principal executive officer
and the principal financial officer of the
Company
|
|
|
Exhibit No.
|
Description
|
||
|
99.1
|
*
|
Certification
of principal executive officer of the Company, pursuant to Section 111(b)
(4) of the Emergency Economic Stability Act of 2008,
as amended by the American Recovery and Reinvestment Act of
2009
|
|
|
99.2
|
*
|
Certification
of principal financial officer of the Company, pursuant to Section 111(b)
(4) of the Emergency Economic Stability Act of 2008,
as amended by the American Recovery and Reinvestment Act of
2009
|
|
___________________________
* Filed
herewith.
# Management
contract or compensatory plan or arrangement.
(b) Exhibits.
Exhibits
required by Section 601 of Regulation S-K (see (a) above)
(c) Financial Statement
Schedules
See the
notes to the Consolidated Financial Statements included in this Annual Report on
Form 10-K.
1st
CONSTITUTION BANCORP
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
To the
Board of Directors and Shareholders of
1st
Constitution Bancorp
Cranbury,
New Jersey
We have
audited the accompanying consolidated balance sheets of 1st Constitution Bancorp
(the “Company”) and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows for the years then ended. The Company’s management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of 1st Constitution Bancorp and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
ParenteBeard LLC
Clark,
New Jersey
March 26,
2010
CONSOLIDATED
BALANCE SHEETS
December
31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CASH
AND DUE FROM BANKS
|
$
|
25,842,901
|
$
|
14,321,777
|
||||
|
FEDERAL
FUNDS SOLD / SHORT TERM INVESTMENTS
|
11,384
|
11,342
|
||||||
|
Total
cash and cash equivalents
|
25,854,285
|
14,333,119
|
||||||
|
INVESTMENT
SECURITIES
|
||||||||
|
Available
for sale, at fair value
|
204,118,850
|
93,477,023
|
||||||
|
Held
to maturity (fair value of $24,215,530 and $36,140,379
at
December 31, 2009 and 2008, respectively)
|
23,608,980
|
36,550,577
|
||||||
|
Total
securities
|
227,727,830
|
130,027,600
|
||||||
|
LOANS
HELD FOR SALE
|
21,514,785
|
5,702,082
|
||||||
|
LOANS
|
379,945,735
|
377,348,416
|
||||||
|
Less-
Allowance for loan losses
|
(4,505,387
|
)
|
(3,684,764
|
)
|
||||
|
Net
loans
|
375,440,348
|
373,663,652
|
||||||
|
PREMISES
AND EQUIPMENT, net
|
4,899,091
|
2,302,489
|
||||||
|
ACCRUED
INTEREST RECEIVABLE
|
2,274,087
|
2,192,601
|
||||||
|
BANK-OWNED
LIFE INSURANCE
|
10,319,055
|
9,929,204
|
||||||
|
OTHER
REAL ESTATE OWNED
|
1,362,621
|
4,296,536
|
||||||
|
OTHER
ASSETS
|
8,604,378
|
3,839,246
|
||||||
|
Total
assets
|
$
|
677,996,480
|
$
|
546,286,529
|
||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Deposits
|
||||||||
|
Non-interest
bearing
|
$
|
82,473,328
|
$
|
71,772,486
|
||||
|
Interest bearing
|
489,682,026
|
342,912,245
|
||||||
|
Total
deposits
|
572,155,354
|
414,684,731
|
||||||
|
BORROWINGS
|
22,500,000
|
51,500,000
|
||||||
|
REDEEMABLE
SUBORDINATED DEBENTURES
|
18,557,000
|
18,557,000
|
||||||
|
ACCRUED
INTEREST PAYABLE
|
1,757,151
|
1,984,102
|
||||||
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
5,625,922
|
3,941,044
|
||||||
|
Total
liabilities
|
620,595,427
|
490,666,877
|
||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
Preferred
Stock, no par value; 5,000,000 shares authorized, of which 12,000
shares of
Series
B, $1,000 liquidation preference, 5% cumulative increasing to 9%
cumulative on
February
15, 2014, were issued and outstanding
|
11,473,262
|
11,387,828
|
||||||
|
Common
stock, no par value; 30,000,000 shares authorized; 4,526,827 and
4,414,412 shares
issued
and 4,515,924 and 4,408,815 shares outstanding as of December
31, 2009 and 2008,
respectively
|
36,774,621
|
35,180,433
|
||||||
|
Retained
earnings
|
10,307,331
|
9,653,923
|
||||||
|
Treasury
Stock, at cost, 10,903 shares and 5,597 shares
at
December 31, 2009 and 2008, respectively
|
(73,492
|
)
|
(53,331
|
)
|
||||
|
Accumulated
other comprehensive loss
|
(1,080,669
|
)
|
(549,201
|
)
|
||||
|
Total
shareholders’ equity
|
57,401,053
|
55,619,652
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
677,996,480
|
$
|
546,286,529
|
||||
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF INCOME
For
the Years Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
INTEREST
INCOME:
|
||||||||
|
Loans,
including fees
|
$ | 24,390,271 | $ | 24,288,658 | ||||
|
Securities:
|
||||||||
|
Taxable
|
5,143,123 | 4,158,923 | ||||||
|
Tax-exempt
|
486,652 | 560,303 | ||||||
|
Federal
funds sold and
|
||||||||
|
short-term
investments
|
116,070 | 112,427 | ||||||
|
Total
interest income
|
30,136,116 | 29,120,311 | ||||||
|
INTEREST
EXPENSE:
|
||||||||
|
Deposits
|
9,829,032 | 10,106,856 | ||||||
|
Borrowings
|
1,353,489 | 1,556,240 | ||||||
|
Redeemable
subordinated debentures
|
1,072,827 | 1,069,351 | ||||||
|
Total
interest expense
|
12,255,348 | 12,732,447 | ||||||
|
Net
interest income
|
17,880,768 | 16,387,864 | ||||||
|
PROVISION
FOR LOAN LOSSES
|
2,553,000 | 640,000 | ||||||
|
Net
interest income after provision
|
||||||||
|
for
loan losses
|
15,327,768 | 15,747,864 | ||||||
|
NON-INTEREST
INCOME:
|
||||||||
|
Service
charges on deposit accounts
|
885,702 | 883,882 | ||||||
|
Gain
on sales of loans
|
1,325,274 | 1,040,916 | ||||||
|
Gain
on sales of securities available for sale
|
1,138,655 | 0 | ||||||
|
Income
on Bank-owned life insurance
|
389,851 | 378,852 | ||||||
|
Other-than
temporary security impairment:
|
||||||||
|
Total
|
(864,727 | ) | 0 | |||||
|
Less: Portion
recognized in other comprehensive loss
|
500,944 | 0 | ||||||
|
Portion
recognized in earnings
|
(363,783 | ) | 0 | |||||
|
Other
income
|
1,129,377 | 976,226 | ||||||
|
Total
other income
|
4,505,076 | 3,279,876 | ||||||
|
NON-INTEREST
EXPENSES:
|
||||||||
|
Salaries
and employee benefits
|
9,352,360 | 8,426,729 | ||||||
|
Occupancy
expense
|
1,783,031 | 1,802,723 | ||||||
|
Data
processing expenses
|
1,085,257 | 896,724 | ||||||
|
FDIC
insurance expense
|
1,193,309 | 196,072 | ||||||
|
Other
operating expenses
|
3,701,844 | 3,706,693 | ||||||
|
Total
other expenses
|
17,115,801 | 15,028,941 | ||||||
|
Income
before income taxes
|
2,717,043 | 3,998,799 | ||||||
|
INCOME
TAXES
|
156,282 | 1,239,341 | ||||||
|
Net
income
|
2,560,761 | 2,759,458 | ||||||
|
Dividends
and accretion on preferred stock
|
719,601 | 0 | ||||||
|
Net
income available to common shareholders
|
$ | 1,841,160 | $ | 2,759,458 | ||||
|
NET
INCOME PER COMMON SHARE
|
||||||||
|
Basic
|
$ | 0.41 | $ | 0.63 | ||||
|
Diluted
|
$ | 0.41 | $ | 0.62 | ||||
|
WEIGHTED
AVERAGE SHARES
|
||||||||
|
OUTSTANDING
|
||||||||
|
Basic
|
4,470,420 | 4,402,368 | ||||||
|
Diluted
|
4,485,628 | 4,425,753 | ||||||
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For
the Years Ended December 31, 2009 and 2008
|
Accumulated
|
||||||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||||||
|
Preferred
|
Common
|
Retained
|
Treasury
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||
|
Stock
|
Stock
|
Earnings
|
Stock
|
Loss
|
Equity
|
|||||||||||||||||||
|
BALANCE,
January 1, 2008
|
$ | - | $ | 32,514,936 | $ | 9,009,955 | $ | (18,388 | ) | $ | (533,186 | ) | $ | 40,973,317 | ||||||||||
|
Cumulative
effect of adoption of new accounting
standard
for split dollar life insurance benefit
|
(329,706 | ) | (329,706 | ) | ||||||||||||||||||||
|
Proceeds
from issuance of preferred stock
and
warrants, net
|
11,387,828 | 562,172 | 11,950,000 | |||||||||||||||||||||
|
Exercise
of stock options, net and issuance of vested
|
||||||||||||||||||||||||
|
shares
under employee benefit programs
|
195,325 | 35,584 | 230,909 | |||||||||||||||||||||
|
Share-based
compensation
|
122,216 | 122,216 | ||||||||||||||||||||||
|
Treasury
Stock purchased (6,416 shares)
|
(70,527 | ) | (70,527 | ) | ||||||||||||||||||||
|
5%
stock dividend declared December 2008
|
1,785,784 | (1,785,784 | ) | - | ||||||||||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income - 2008
|
2,759,458 | 2,759,458 | ||||||||||||||||||||||
|
Pension
liability
|
||||||||||||||||||||||||
|
net
of tax of $23,267
|
33,637 | 33,637 | ||||||||||||||||||||||
|
Unrealized
loss on interest rate swap contract
|
||||||||||||||||||||||||
|
net
of tax benefit of $423,906
|
(635,496 | ) | (635,496 | ) | ||||||||||||||||||||
|
Unrealized
gain on securities available for sale
|
||||||||||||||||||||||||
|
net
of tax of $309,759
|
585,844 | 585,844 | ||||||||||||||||||||||
|
Comprehensive
Income
|
2,743,443 | |||||||||||||||||||||||
|
BALANCE,
December 31, 2008
|
11,387,828 | 35,180,433 | 9,653,923 | (53,331 | ) | (549,201 | ) | 55,619,652 | ||||||||||||||||
|
Exercise
of stock options, net and issuance of vested
|
||||||||||||||||||||||||
|
shares
under employee benefit programs
|
295,320 | 58,305 | 353,625 | |||||||||||||||||||||
|
Share-based
compensation
|
111,116 | 111,116 | ||||||||||||||||||||||
|
Treasury
Stock purchased (12,353 shares)
|
(78,466 | ) | (78,466 | ) | ||||||||||||||||||||
|
5%
stock dividend declared December 2009
|
1,187,752 | (1,187,752 | ) | - | ||||||||||||||||||||
|
Dividends
on preferred stock
|
(611,667 | ) | (611,667 | ) | ||||||||||||||||||||
|
Preferred
stock issuance costs
|
(22,500 | ) | (22,500 | ) | ||||||||||||||||||||
|
Accretion
of discount on preferred stock
|
107,934 | (107,934 | ) | - | ||||||||||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income - 2009
|
2,560,761 | 2,560,761 | ||||||||||||||||||||||
|
Pension
liability
|
||||||||||||||||||||||||
|
net
of tax of $45,694
|
68,517 | 68,517 | ||||||||||||||||||||||
|
Unrealized
gain on interest rate swap contract
|
||||||||||||||||||||||||
|
net
of tax benefit of $109,976
|
165,374 | 165,374 | ||||||||||||||||||||||
|
Unrealized
loss on securities available for sale
|
||||||||||||||||||||||||
|
net
of tax of $235,686
|
(434,736 | ) | (434,736 | ) | ||||||||||||||||||||
|
Impairment
loss on securities net of tax of
$170,321
|
(330,623 | ) | (330,623 | ) | ||||||||||||||||||||
|
Comprehensive
Income
|
2,029,293 | |||||||||||||||||||||||
|
BALANCE,
December 31, 2009
|
$ | 11,473,262 | $ | 36,774,621 | $ | 10,307,331 | $ | (73,492 | ) | $ | (1,080,669 | ) | $ | 57,401,053 | ||||||||||
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
OPERATING
ACTIVITIES:
|
||||||||
|
Net
income
|
$
|
2,560,761
|
$
|
2,759,458
|
||||
|
Adjustments
to reconcile net income
|
||||||||
|
to
net cash provided by operating activities-
|
||||||||
|
Provision
for loan losses
|
2,553,000
|
640,000
|
||||||
|
Depreciation
and amortization
|
628,407
|
698,807
|
||||||
|
Net
amortization of premiums on securities
|
51,773
|
87,594
|
||||||
|
Other
than temporary securities impairment loss
|
363,783
|
-
|
||||||
|
Gains
on sales of securities available for sale
|
(1,138,655
|
)
|
-
|
|||||
|
Gains
on sale of equipment
|
-
|
(17,301)
|
||||||
|
Gains
on sales of other real estate owned
|
(82,690
|
)
|
(14,961)
|
|||||
|
Gains
on sales of loans held for sale
|
(1,325,274
|
)
|
(1,040,916)
|
|||||
|
Originations
of loans held for sale
|
(159,468,307
|
)
|
(81,465,974)
|
|||||
|
Proceeds
from sales of loans held for sale
|
144,980,878
|
87,126,813)
|
||||||
|
Income
on Bank-owned life insurance
|
(389,851
|
)
|
(378,852)
|
|||||
|
Share-based
compensation expense
|
255,275
|
334,316
|
||||||
|
Deferred
tax benefit
|
(1,296,270
|
)
|
(364,651)
|
|||||
|
(Increase)
decrease in accrued interest receivable
|
(81,486
|
)
|
303,131
|
|||||
|
(Increase)
in other assets
|
(3,255,237
|
)
|
(23,130)
|
|||||
|
Decrease
in accrued interest payable
|
(226,951
|
)
|
(8,085)
|
|||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
1,855,280
|
(299,927)
|
||||||
|
Net
cash (used in) provided by operating activities
|
(14,015,564
|
)
|
8,336,322
|
|||||
|
INVESTING
ACTIVITIES:
|
||||||||
|
Purchases
of securities -
|
||||||||
|
Available
for sale
|
(215,232,453
|
)
|
(43,765,333)
|
|||||
|
Held
to maturity
|
(4,908,323
|
)
|
(21,443,565)
|
|||||
|
Proceeds
from maturities and repayments
|
||||||||
|
of
securities -
|
||||||||
|
Available
for sale
|
87,005,097
|
26,324,998
|
||||||
|
Held
to maturity
|
16,884,855
|
8,368,792
|
||||||
|
Proceeds
from sales of securities available for sale
|
18,102,327
|
-
|
||||||
|
Net
Increase in loans
|
(8,765,060
|
)
|
(84,280,195)
|
|||||
|
Proceeds
from sale of equipment
|
-
|
32,049
|
||||||
|
Capital
expenditures
|
(581,620
|
)
|
(219,129)
|
|||||
|
Additional
investment in other real estate owned
|
(396,139
|
)
|
(2,104,284
|
|||||
|
Proceeds
from sales of other real estate owned
|
5,241,431
|
2,172,617
|
||||||
|
Net
cash used in investing activities
|
(102,649,885
|
)
|
(114,914,050)
|
|||||
|
FINANCING
ACTIVITIES:
|
||||||||
|
Exercise
of stock options and issuance of treasury stock
|
353,625
|
230,909
|
||||||
|
Purchase
of treasury stock
|
(78,466
|
)
|
(70,527)
|
|||||
|
Dividends
paid on preferred stock
|
(536,667
|
)
|
-
|
|||||
|
Preferred
stock issuance costs paid
|
(22,500
|
)
|
-
|
|||||
|
Net
increase in demand, savings and time deposits
|
157,470,623
|
85,352,363
|
||||||
|
Net
(decrease) increase in borrowings
|
(29,000,000
|
)
|
15,900,000
|
|||||
|
Proceeds
from issuance of preferred stock
|
-
|
11,950,000
|
||||||
|
Net
cash provided by financing activities
|
128,186,615
|
113,362,745
|
||||||
|
Increase
in cash and cash equivalents
|
11,521,166
|
6,785,017
|
||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||
|
AT
BEGINNING OF YEAR
|
14,333,119
|
7,548,102
|
||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||
|
AT
END OF YEAR
|
$
|
25,854,285
|
$
|
14,333,119
|
||||
|
SUPPLEMENTAL
DISCLOSURES
|
||||||||
|
OF
CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid during the year for -
|
||||||||
|
Interest
|
$
|
12,482,299
|
$
|
12,740,532
|
||||
|
Income
taxes
|
775,916
|
2,380,200
|
||||||
|
Non-cash
investing activities
|
||||||||
|
Real
estate acquired in full satisfaction of loans in
foreclosure
|
4,435,364
|
1,389,181
|
||||||
|
Foreclosed
real estate transferred to bank premises for bank use
|
2,606,677
|
-
|
||||||
The
accompanying notes are an integral part of these financial
statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
1.
Summary of Significant Accounting Policies
1st
Constitution Bancorp (the “Company”) is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and was organized under the
laws of the State of New Jersey. The Company is parent to 1st
Constitution Bank (the “Bank”), a state chartered commercial
bank. The Bank provides community banking services to a broad range
of customers, including corporations, individuals, partnerships and other
community organizations in the central and northeastern New Jersey
area. The Bank conducts its operations through its main office
located in Cranbury, New Jersey, and operates ten additional branch offices in
downtown Cranbury, Fort Lee, Hamilton Square, Hightstown, Jamesburg, Montgomery,
Perth Amboy, Plainsboro, West Windsor, and Princeton, New Jersey.
The
Company has evaluated events and transactions occurring subsequent to the
balance sheet date of December 31, 2009 for items that should potentially be
recognized or disclosed in these financial statements. The evaluation
was conducted through the date these financial statements were
issued.
Basis
of Presentation
The
accounting and reporting policies of the Company conform to accounting
principals generally accepted in the United States of America (“U.S. GAAP”) and
to the accepted practices within the banking industry. The following
is a description of the more significant of these policies and
practices.
Principles
of Consolidation
The
accompanying consolidated financial statements include the Company and its
wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 1st
Constitution Investment Company of Delaware, Inc., 1st Constitution Investment
Company of New Jersey, Inc., FCB Assets Holdings, Inc. and 1st
Constitution Title Agency, LLC. 1st Constitution Capital Trust II, a
subsidiary of the Company (“Trust II”), is not included in the Company’s
consolidated financial statements as it is a variable interest entity and the
Company is not the primary beneficiary. All significant intercompany
accounts and transactions have been eliminated in consolidation and certain
prior period amounts have been reclassified to conform to current year
presentation.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of 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, other-than-temporary security impairment, the
fair value of other real estate owned and the valuation of deferred tax
assets.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company and its subsidiaries to
concentrations of credit risk primarily consist of investment securities and
loans. At December 31, 2009, over 79% of our investment securities
consisted of U.S. Government and Agency issues, mortgage-backed securities and
municipal bonds. In addition, another 17% of our portfolio consisted
of highly rated collateralized mortgage obligations. The remaining 4%
of our investment securities consisted primarily of corporate debt issues and
restricted stock of the Federal Home Loan Bank of New York. The
Bank’s lending activity is primarily concentrated in loans collateralized by
real estate located in the State of New Jersey. As a result, credit
risk is broadly dependent on the real estate market and general economic
conditions in that state.
Interest
Rate Risk
The Bank
is principally engaged in the business of attracting deposits from the general
public and using these deposits, together with other funds, to purchase
securities and to make loans secured by real estate. The potential
for interest-rate risk exists as a result of the generally shorter duration of
interest-sensitive assets compared to the generally longer duration of
interest-sensitive liabilities. In a volatile rate environment,
assets held by the Bank will re-price faster than liabilities of the Bank,
thereby affecting net interest income. For this reason, management
regularly monitors the maturity structure and rate adjustment features of the
Bank’s assets and liabilities in order to measure its level of interest-rate
risk and to plan for future volatility.
Investment
Securities
Investment
Securities which the Company has the intent and ability to hold until maturity
are classified as held to maturity and are recorded at cost, adjusted for
amortization of premiums and accretion of discounts. Investment
Securities which are held for indefinite periods of time, which management
intends to use as part of its asset/liability management strategy, or that may
be sold in response to changes in interest rates, changes in prepayment risk,
increased capital requirements or other similar factors, are classified as
available for sale and are carried at fair value, except for restricted stock of
the Federal Home Loan Bank of New York and Atlantic Central Banker Bank, which
are carried at cost. Unrealized gains and losses on such securities
are recorded as a separate component of shareholders’
equity. Realized gains and losses, which are computed using the
specific identification method, are recognized on a trade date
basis.
If the fair value of a security is less
than its amortized cost, the security is deemed to be
impaired. Management evaluates all securities with unrealized losses
quarterly to determine if such impairments are temporary or other-than-temporary
in accordance with the Accounting Standards Codification (“ASC”) of the
Financial Accounting Standards Board (“FASB”).
Temporary impairments on available for sale securities are recognized, on a
tax-effected basis, through other comprehensive income (“OCI”) with offsetting
adjustments to the carrying value of the security and the balance of related
deferred taxes. Temporary impairments of held to maturity securities are not
recorded in the consolidated financial statements; however, information
concerning the amount and duration of impairments on held to maturity securities
is disclosed.
Other-than-temporary
impairments on all equity securities and on debt securities that the Company has
decided to sell, or will, more likely than not, be required to sell prior to the
full recovery of fair value to a level equal to or exceeding amortized cost, are
recognized in earnings. If neither of these conditions regarding the likelihood
of sale for a debt security apply, the other-than-temporary impairment is
bifurcated into credit-related and noncredit-related components. Credit-related
impairment generally represents the amount by which the present value of the
cash flows that are expected to be collected on a debt security fall below its
amortized cost. The noncredit-related component represents the remaining portion
of the impairment not otherwise designated as credit-related. The Company
recognizes credit-related other-than-temporary impairments in earnings.
Noncredit-related other-than-temporary impairments on debt securities are
recognized in OCI. For held to maturity debt securities, the amount
of any other-than-temporary impairment recorded in OCI is amortized
prospectively over the remaining lives of the securities based on the timing of
future estimated cash flows related to those securities.
Premiums
and discounts on all securities are amortized/accreted to maturity by use of the
level-yield method considering the impact of principal amortization and
prepayments.
Federal
law requires a member institution of the Federal Home Loan Bank (“FHLB”) system
to hold restricted stock of its district FHLB according to a predetermined
formula. The Bank’s investment in the restricted stock of the FHLB of
New York, while included in investment securities available for sale, is carried
at cost.
Management evaluates the FHLB
restricted stock for impairment in accordance with U.S.
GAAP. Management’s determination of whether these investments are
impaired is based on their assessment of the ultimate recoverability of their
cost rather than by recognizing temporary declines in value. The
determination of whether a decline affects the ultimate recoverability of their
cost is influenced by criteria such as (1) the significance of the decline in
net assets of the FHLB as compared to the capital stock amount for the FHLB and
the length of time this situation has persisted, (2) commitments by the FHLB to
make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, and (3) the impact of
legislative and regulatory changes on institutions and, accordingly, on the
customer base of the FHLB. Management believes no impairment charge is necessary
related to the FHLB stock as of December 31, 2009.
Bank-Owned
Life Insurance
The
Company invests in bank-owned life insurance (“BOLI”). BOLI involves
the purchasing of life insurance by the Company on a chosen group of
employees. The Company is the owner and beneficiary of the
policies. This pool of insurance, due to the advantages of the Bank,
is profitable to the Company. This profitability will be used to
offset a portion of future benefit costs and is intended to provide a funding
source for the payment of future benefits. The Bank’s deposits fund
BOLI and the earnings from BOLI are recognized as non-interest
income.
Loans
And Loans Held For Sale
Loans
that management intends to hold to maturity are stated at the principal amount
outstanding, net of unearned income. Unearned income is recognized
over the lives of the respective loans, principally using the effective interest
method. Interest income is generally not accrued on loans, including
impaired loans, where interest or principal is 90 days or more past due, unless
the loans are adequately secured and in the process of collection, or on loans
where management has determined that the borrowers may be unable to meet
contractual principal and/or interest obligations. When it is
probable that, based upon current information, the Bank will not collect all
amounts due under the contractual terms of the loan, the loan is reported as
impaired. Smaller balance homogenous type loans, such as residential
loans and loans to individuals, which are collectively evaluated, are excluded
from consideration for impairment. Loan impairment is measured based
upon the present value of the expected future cash flows discounted at the
loan’s effective interest rate or the underlying fair value of collateral for
collateral dependent loans. When a loan, including an impaired loan,
is placed on non-accrual, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Non-accrual
loans are generally not returned to accruing status until principal and interest
payments have been brought current and full collectibility is reasonably
assured. Cash receipts on non-accrual and impaired loans are applied
to principal, unless the loan is deemed fully collectible. Loans held
for sale are carried at the aggregate lower of cost or market
value. Realized gains and losses on loans held for sale are
recognized at settlement date and are determined based on the cost, including
deferred net loan origination fees and the costs of the specific loans
sold.
The Bank
accounts for its transfers and servicing of financial assets in accordance with
ASC Topic 860, “Transfers and Servicing.” The Bank originates
mortgages under a definitive plan to sell those loans with servicing generally
released. Mortgage loans originated and intended for sale in the
secondary market are carried at the lower aggregate cost or estimated fair
value. Gains and losses on sales are also accounted for in accordance
with Topic 860, which requires that an entity engaged in mortgage banking
activities classify the retained mortgage-backed security or other interest,
which resulted from the securitizations of a mortgage loan held for sale, based
upon its ability and intent to sell or hold these investments.
The Bank
enters into commitments to originate loans whereby the interest rate on the loan
is determined prior to funding (rate lock commitments). Rate lock
commitments on mortgage loans that are intended to be sold are considered to be
derivatives. Time elapsing between the issuance of a loan commitment
and closing and sale of the loan generally ranges from 30 to 120
days. The Bank protects itself from changes in interest rates through
the use of best efforts forward delivery contracts, whereby the Bank commits to
sell a loan at the time the borrower commits to an interest rate with the intent
that the buyer has assumed interest rate risk on the loan. As a
result, the Bank is not exposed to losses nor will it realize significant gains
related to its rate lock commitments due to changes in interest
rates.
The
market value of rate lock commitments and best efforts contracts is not readily
ascertainable with precision because rate lock commitments and best efforts
contracts are not actively traded in stand-alone markets. The Bank
determines the fair value of rate lock commitments and best efforts contracts by
measuring the change in the value of the underlying asset while taking into
consideration the probability that the rate lock commitments will
close. Due to high correlation between rate lock commitments and best
efforts contracts, no gain or loss occurs on the rate lock
commitments.
ASC Topic
460, “Guarantees,” requires a guarantor entity, at the inception of a guarantee
covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing the
guarantee.
Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the financial performance of a customer to a third party. Those
guarantees are primarily issued to support contracts entered into by
customers. Most guarantees extend for one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank defines
the fair value of these letters of credit as the fees paid by the customer or
similar fees collected on similar instruments. The Bank amortizes the
fees collected over the life of the instrument. The Bank generally
obtains collateral, such as real estate or liens on customer assets for these
types of commitments. The Bank’s potential liability would be reduced
by any proceeds obtained in liquidation of the collateral held. The
Bank had standby letters of credit for customers aggregating $3,706,974 and
$3,946,649 at December 31, 2009 and 2008, respectively. These letters
of credit are primarily related to our real estate lending and the approximate
value of underlying collateral upon liquidation is expected to be sufficient to
cover this maximum potential exposure at December 31, 2009. The
current amount of the liability related to guarantees under standby letters of
credit issued was not material as of December 31, 2009 and 2008.
Allowance
for Loan Losses
The
allowance for loan losses is a valuation reserve available for losses or
expected losses on extensions of credit. Management maintains the
allowance for loan losses at a level that is considered adequate to absorb
losses on existing loans that may become uncollectible based upon an evaluation
of known and inherent risks in the portfolio. Additions to the
allowance are made by charges to the provision for loan losses. The
evaluation considers a complete review of the following specific
factors: historical losses by loan category, non-accrual loans,
problem loans as identified through internal classifications, collateral values,
and the growth and size of the portfolio. Additionally, current
economic conditions and local real estate market conditions are
considered.
The
methodology includes the segregation of the loan portfolio into loan types with
a further segregation into risk rating categories, such as special mention,
substandard, doubtful, and loss. This allows for an allocation of the allowance
for loan losses by loan type; however, the allowance is available to absorb any
loan loss without restriction. Larger balance, non-homogeneous loans
representing significant individual credit exposures are evaluated individually
through the internal loan review process. It is this process that
produces the watch list. The borrower’s overall financial condition, repayment
sources, guarantors and value of collateral, if appropriate, are
evaluated. Based on these reviews, an estimate of probable losses for
the individual larger-balance loans are determined, whenever possible, and used
to establish loan loss reserves. In general, for non-homogeneous
loans not individually assessed, and for homogeneous groups, such as residential
mortgages and consumer credits, the loans are collectively evaluated based on
delinquency status, loan type, and industry historical losses. These loan groups
are then internally risk rated.
The watch
list includes loans that are assigned a rating 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 rated as doubtful in whole, or in part, are placed
in nonaccrual status. Loans classified as a loss are considered
uncollectible and are charged to the allowance for loan losses.
The
Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions which may cause a potential
loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed, these estimates by definition
lack precision. Management must make estimates using assumptions and
information that is often subjective and changing rapidly.
Loans are
placed in a nonaccrual status when the ultimate collectibility of principal or
interest in whole, or part, is in doubt. Past-due loans contractually
past-due 90 days or more for either principal or interest are also placed in
nonaccrual status unless they are both well secured and in the process of
collection. Impaired loans are evaluated individually.
All, or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans 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. Consumer loans are generally charged off no later
than 120 days past due on a contractual basis, earlier in the event of
bankruptcy, or if there is an amount deemed uncollectible.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed primarily on the straight-line
method over the estimated useful lives of the related assets for financial
reporting purposes and using the mandated methods by asset type for income tax
purposes. Building, furniture and fixtures, equipment and leasehold
improvements are depreciated or amortized over the estimated useful lives of the
assets or lease terms, as applicable. Estimated useful lives of
building is forty years, furniture and fixtures and equipment are three to
fifteen years, and three to ten years for leasehold
improvements. Expenditures for maintenance and repairs are charged to
expense as incurred.
The
Company accounts for impairment of long lived assets in accordance with ASC
Topic 360, “Property, Plant, and Equipment,” which requires recognition and
measurement for the impairment of long lived assets to be held and used or to be
disposed of by sale. The Bank had no impaired long lived assets at
December 31, 2009 and 2008.
Derivative
Contracts
Derivative
contracts, as required by ASC Topic 815, “Derivatives and Hedging,” are carried
at fair value as either assets or liabilities in the statement of financial
condition with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders’ equity, net of related income tax
effects. Gains and losses on derivative contracts are recognized upon
realization utilizing the specific identification method.
Income
Taxes
There are
two components of income tax expense: current and deferred. Current
income tax expense approximates cash to be paid or refunded for taxes for the
applicable period. Deferred tax assets and liabilities are recognized
due to differences between the basis of assets and liabilities as measured by
tax laws and their basis as reported in the financial
statements. Deferred tax assets are subject to management’s judgment
based upon available evidence that future realizations are likely. If
management determines that the Company may not be able to realize some or all of
the net deferred tax asset in the future, a charge to income tax expense may be
required to reduce the value of the net deferred tax asset to the expected
realizable value. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date. Deferred tax expense or benefit is recognized for the change in
deferred tax liabilities.
The
Company accounts for uncertainty in income taxes recognized in its consolidated
financial statements in accordance with ASC Topic 740, “Income Taxes,” which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return, and also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company has not identified any significant income
tax uncertainties through the evaluation of its income tax positions for the
years ended December 31, 2009 and 2008, and has not recognized any liabilities
for tax uncertainties as of December 31, 2009 and 2008. Our policy is to
recognize interest and penalties on unrecognized tax benefits in income tax
expense; such amounts were not significant during the years ended December 31,
2009 and 2008. The tax years subject to examination by the taxing authorities
are, for federal purposes, the year ended December 31, 2008, and for state
purposes, the years ended December 31, 2008, 2007 and 2006.
Other
Real Estate Owned
Other
real estate owned obtained through loan foreclosures or the receipt of
deeds-in-lieu of foreclosure is carried at the lower of fair value of the
related property, as determined by current appraisals less estimated costs to
sell, or the recorded investment in the property. Write-downs on
these properties, which occur after the initial transfer from the loan
portfolio, are recorded as operating expenses. Costs of holding such
properties are charged to expense in the current period. Gains, to
the extent allowable, and losses on the disposition of these properties are
reflected in current operations.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquired entity over the fair value of
the identifiable net assets acquired in accordance with the purchase method of
accounting. Goodwill is not amortized but is reviewed for potential
impairment on an annual basis, or more often if events or circumstances
indicated that there may be impairment, in accordance with ASC Topic 350,
“Intangibles – Goodwill and Other.” Goodwill is tested for impairment
at the reporting unit level and an impairment loss is recorded to the extend
that the carrying amount of goodwill exceeds its implied fair value. Core
deposit intangibles are a measure of the value of checking and savings deposits
acquired in business combinations accounted for under the purchase
method. Core deposit intangibles are amortized on a straight-line
basis over their estimated lives (ranging from five to ten years) and
identifiable intangible assets are evaluated for impairment if events and
circumstances indicate a possible impairment. Any impairment loss
related to goodwill and other intangible assets is reflected as other
non-interest expense in the statement of operations in the period in which the
impairment was determines. No assurance can be given that future
impairment tests will not result in a charge to earnings. See Note 8
– Goodwill and Other Intangibles for additional information.
Share-Based
Compensation
The
Company recognizes compensation expense for stock options in accordance with ASC
Topic 718, “Compensation – Stock Compensation.” The expense of the
option is generally measured at fair value at the grant date with compensation
expense recognized over the service period, which is usually the vesting
period. The Company utilizes the Black-Scholes option-pricing model
to estimate the fair value of each option on the date of grant. The
Black-Scholes model takes into consideration the exercise price and expected
life of the options, the current price of the underlying stock and its expected
volatility, the expected dividends on the stock and the current risk-free
interest rate for the expected life of the option. The Company’s
estimate of the fair value of a stock option is based on expectations derived
from historical experience and may not necessarily equate to its market value
when fully vested. See Note 15 – Stock-Based compensation for
additional information.
Benefit
Plans
The
Company provides certain retirement benefits to employees under a 401(k)
plan. The Company’s contributions to the 401(k) plan are expensed as
incurred.
The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan. The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan. In accordance with ASC Topic
715, “Compensation – Retirement Benefits,” the Company recognizes the under
funded status of this postretirement plan as a liability in its statement of
financial position and recognizes changes in that funded status in the year in
which the changes occur through comprehensive income.
In
September 2006, the Financial Accounting Standards Board (“FASB”) Emerging
Issues Task Force finalized guidance which requires that a liability be recorded
during the service period when a split-dollar life insurance agreement continues
after participants’ employment or retirement. The required accrued
liability is based on either the post-retirement benefit cost for the continuing
life insurance or based on the future death benefit depending on the contractual
terms of the underlying agreement. The Company adopted this guidance
on January 1, 2008, and recorded a cumulative effect adjustment of $329,706 as a
reduction of retained earnings effective January 1, 2008.
Cash
And Cash Equivalents
Cash and
cash equivalents includes cash on hand, interest and non-interest bearing
amounts due from banks, Federal funds sold and short-term
investments. Generally, Federal funds are sold and short-term
investments are made for a one or two-day period.
Reclassifications
Certain
reclassifications have been made to the prior period amounts to conform with the
current period presentation. Such reclassification had no impact on
net income or total stockholders’ equity.
Advertising
Costs
It is the
Company’s policy to expense advertising costs in the period in which they are
incurred.
Earnings
Per Common Share
Basic net
income per common share is calculated by dividing net income less dividends and
discount accretion on preferred stock, by the weighted average number of common
shares outstanding during each period.
Diluted
net income per common share is calculated by dividing net income less dividends
and discount accretion on preferred stock by the weighted average number of
common shares outstanding, as adjusted for the assumed exercise of potential
common stock options and unvested restricted stock awards, using the treasury
stock method. All share information has been restated for the effect
of a 5% stock dividend declared on December 17, 2009 and paid on February 3,
2010 to shareholders of record on January 19, 2010. For 2008, dividends
and discount accretion on preferred stock were immaterial and were not included
in income available for common shareholders or basic and diluted net income per
common share.
The
following tables illustrate the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS)
calculations:
|
Year
Ended December 31, 2009
|
||||||||||||
|
Income
|
Weighted-
average
shares
|
Per
share
Amount
|
||||||||||
|
Basic
EPS
|
||||||||||||
|
Net
income
|
$
|
2,560,761
|
||||||||||
|
Preferred
stock dividends and accretion
|
(719,601
|
)
|
||||||||||
|
Income
available to common shareholders
|
1,841,160
|
4,470,420
|
$
|
0.41
|
||||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Stock
options and unvested stock awards
|
-
|
15,208
|
-
|
|||||||||
|
Diluted
EPS
|
||||||||||||
|
Net
income available to common shareholders
plus assumed conversion |
$
|
1,841,060
|
4,485,628
|
$
|
0.41
|
|||||||
|
Year
Ended December 31, 2008
|
||||||||||||
|
Income
|
Weighted-
average
shares
|
Per
share
Amount
|
||||||||||
|
Basic
EPS
|
||||||||||||
|
Net
income available to common stockholders
|
$ | 2,759,458 | ||||||||||
|
Preferred
stock dividends and accretion
|
- | |||||||||||
|
Income
available to common shareholders
|
2,759,458 | 4,402,368 | $ | 0.63 | ||||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Stock
options and unvested stock awards
|
- | 23,385 | (0.01 | ) | ||||||||
|
Diluted
EPS
|
||||||||||||
|
Net
income available to common stockholders plus
assumed conversion |
$ | 2,759,458 | 4,425,753 | $ | 0.62 | |||||||
For the
years ended December 31, 2009 and 2008, 134,678 and 94,204 options were
anti-dilutive and were not included in the computation of diluted earnings per
common share.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities
available for sale, other-than-temporary non-credit related security
impairments, unrealized gains and losses on cash flows hedges, and changes in
the funded status of benefit plans which are also recognized in
equity.
Variable
Interest Entities
Management
has determined that Trust II qualifies as a variable interest entity under ASC
Topic 810, “Consolidation.” Trust II issued mandatorily redeemable preferred
stock to investors, loaned the proceeds to the Company and holds, as its sole
asset, subordinated debentures issued by the Company. As a qualified
variable interest entity, Trust II’s Balance Sheet and Statement of Operations
have never been consolidated with those of the Company.
In March
2005, the Federal Reserve Board adopted a final rule that would continue to
allow the inclusion of trust preferred securities in Tier 1 capital, but with
stricter quantitative limits. Under the final rule, after a five-year transition
period, the aggregate amount of trust preferred securities and certain other
capital elements would be limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other elements in
excess of the limit could be included in Tier 2 capital, subject to
restrictions. Based on the final rule, the Company has included all
of its $18.0 million in trust preferred securities in Tier 1 capital at December
31, 2009 and 2008.
Segment
Information
U.S. GAAP
establishes standards for public business enterprises to report information
about operating segments in their annual financial statements and requires that
those enterprises report selected information about operating segments in
subsequent interim financial reports issued to shareholders. It also
established standards for related disclosure about products and services,
geographic areas, and major customers. Operating segments are
components of an enterprise, which are evaluated regularly by the chief
operating decision-maker in deciding how to allocate and assess resources and
performance. The Company’s chief operating decision-maker is the
President and Chief Executive Officer. The Company has applied the
aggregation criteria for its operating segments to create one reportable
segment, “Community Banking.”
The
Company’s Community Banking segment consists of construction, commercial, retail
and mortgage banking. The Community Banking segment is managed as a
single strategic unit, which generates revenue from a variety of products and
services provided by the Company. For example, construction and
commercial lending is dependent upon the ability of the Company to fund itself
with retail deposits and other borrowings and to manage interest rate and credit
risk. This situation is also similar for consumer and residential
real estate lending.
Recent
Accounting Pronouncements
In October 2009, the FASB
issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing
(Topic 860) - Accounting for Transfers of Financial Assets (“ASU
2009-16”). ASU 2009-16 amends the Codification for the issuance of
FASB Statement No. 166, Accounting for Transfers of Financial Assets-an
amendment of FASB Statement No. 140. The amendments in ASU 2009-16 improve
financial reporting by eliminating the exceptions for qualifying special-purpose
entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the
amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for
transferred financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. ASU 2009-16 is effective at the start of a
reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company is currently
reviewing the effect this new guidance will have on its consolidated financial
statements.
In
October 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities (“ASU 2009-17”). ASU 2009-17 amends the
Codification for the issuance of FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in ASU 2009-17
also require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. ASU 2009-17 is effective at the start of a reporting
entity’s first fiscal year beginning after November 15, 2009. Early
application is not permitted. The Company is currently reviewing the effect this
new guidance will have on its consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) - Accounting for
Distributions to Shareholders with Components of Stock and Cash (“ASU
2010-01”). The amendments in ASU 2010-01 clarify that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share
issuance that is reflected in earnings per share prospectively and is not a
stock dividend. ASU 2010-01 codifies the consensus reached in
Emerging Issues Task Force Issue No. 09-E, “Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and Cash.” ASU
2010-01is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis. This guidance did not
have any impact on the Company’s consolidated financial statements.
The FASB
has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements (“ASU
2010-06”). ASU 2010-06 requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
(1) A reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and (2) In the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: (1) For purposes of reporting fair value
measurement for each class of assets and liabilities, a reporting entity needs
to use judgment in determining the appropriate classes of assets and
liabilities; and (2) A reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Early adoption is permitted. The Company is
currently reviewing the effect this new guidance will have on its consolidated
financial statements and does not intend to early adopt this
guidance.
2.
Investment Securities
Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
|
Gross
|
Gross
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
2009
|
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available
for sale-
|
|||||||||||||||||
|
U.
S. Treasury securities and
|
|||||||||||||||||
|
obligations
of U.S. Government
|
|||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
138,351,028
|
$
|
291,906
|
$
|
(673,252
|
)
|
$
|
137,969,682
|
||||||||
|
Residential
collateralized mortgage
Obligations
|
34,749,123
|
172,698
|
(252,023
|
)
|
34,669,798
|
||||||||||||
|
Residential
mortgage backed securities
|
24,182,584
|
1,449,071
|
-
|
25,631,655
|
|||||||||||||
|
Obligations
of State and
|
|||||||||||||||||
|
Political
subdivisions
|
2,633,210
|
45,644
|
(91,212
|
)
|
2,587,642
|
||||||||||||
|
Trust
preferred debt securities
|
2,457,262
|
-
|
(687,089)
|
1,770,173
|
|||||||||||||
|
Restricted
stock
|
1,464,900
|
0-
|
-
|
1,464,900
|
|||||||||||||
|
Mutual
fund
|
25,000
|
0-
|
-
|
25,000
|
|||||||||||||
|
$
|
203,863,107
|
$
|
1,959,319
|
$
|
(1,703,576
|
)
|
$
|
204,118,850
|
|||||||||
|
Held
to maturity-
|
|||||||||||||||||
|
Residential
collateralized mortgage
Obligations
|
$
|
4,881,475
|
$
|
150,055
|
$
|
-
|
$
|
5,031,530
|
|||||||||
|
Residential
mortgage backed securities
|
6,111,131
|
97,782
|
(29,521
|
)
|
6,179,392
|
||||||||||||
|
Obligations
of state and
|
|||||||||||||||||
|
political
subdivisions
|
8,600,596
|
270,947
|
-
|
8,871,543
|
|||||||||||||
|
Trust
preferred debt securities
|
133,054
|
-
|
-
|
133,054
|
|||||||||||||
|
Corporate
debt securities
|
3,882,724
|
117,287
|
-
|
4,000,011
|
|||||||||||||
|
$
|
23,608,980
|
$
|
636,071
|
$
|
(29,521
|
)
|
$
|
24,215,530
|
|||||||||
The
$133,054 amortized cost of held to maturity trust preferred debt securities is
net of a $500,944 noncredit-related impairment charge recorded as of December
31, 2009. The Company did not record any other noncredit-related
impairment on its held to maturity securities during 2009.
At
December 31, 2009, all of the Company’s residential mortgage-backed securities
and all but four of the Company’s residential collateralized mortgage
obligations were issued by Government Sponsored Enterprises
(“GSE”). The four non-GSE issues had, at December 31, 2009, an
aggregate amortized cost and aggregate fair value of $8,208,000 and $8,146,000,
respectively.
Restricted
stock at December 31, 2009 consists of $1,449,900 of Federal Home Loan Bank of
New York stock and $15,000 of Atlantic Central Bankers Bank stock.
|
Gross
|
Gross
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
2008
|
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available
for sale-
|
|||||||||||||||||
|
U.
S. Treasury securities and
|
|||||||||||||||||
|
obligations
of U.S. Government
|
|||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
22,802,334
|
$
|
415,626
|
$
|
-
|
$
|
23,217,960
|
|||||||||
|
Residential
collateralized mortgage
obligations
|
7,014,272
|
16,792
|
(253,432
|
)
|
6,777,632
|
||||||||||||
|
Residential
mortgage backed securities
|
54,727,033
|
1,930,299
|
(594
|
)
|
56,656,738
|
||||||||||||
|
Obligations
of state and
|
|||||||||||||||||
|
political
subdivisions
|
2,868,049
|
6,872
|
(16,234
|
)
|
2,858,687
|
||||||||||||
|
Trust
preferred debt securities
|
2,454,969
|
-
|
(1,173,163
|
)
|
1,281,806
|
||||||||||||
|
Restricted
stock
|
2,659,200
|
-
|
-
|
2,659,200
|
|||||||||||||
|
Mutual
fund
|
25,000
|
-
|
-
|
25,000
|
|||||||||||||
|
$
|
92,550,857
|
$
|
2,369,589
|
$
|
(1,443,423
|
)
|
$
|
93,477,023
|
|||||||||
|
Held
to maturity-
|
|||||||||||||||||
|
U.
S. Treasury securities and
|
|||||||||||||||||
|
obligations
of U.S. Government
|
|||||||||||||||||
|
sponsored
corporations and agencies
|
$
|
10,000,000
|
$
|
193,800
|
$
|
-
|
$
|
10,193,800
|
|||||||||
|
Residential
collateralized mortgage
obligations
|
8,727,315
|
49,897
|
(9,675
|
)
|
8,767,537
|
||||||||||||
|
Residential
mortgage backed securities
|
3,794,931
|
33,007
|
(212
|
)
|
3,827,726
|
||||||||||||
|
Obligations
of state and
|
|||||||||||||||||
|
political
subdivisions
|
10,516,726
|
75,515
|
(93,502
|
)
|
10,498,739
|
||||||||||||
|
Trust
preferred debt securities
|
982,160
|
-
|
(635,172
|
)
|
346,988
|
||||||||||||
|
Corporate
debt securities
|
2,529,445
|
-
|
(23,856
|
)
|
2,505,589
|
||||||||||||
|
$
|
36,550,577
|
$
|
352,219
|
$
|
(762,417
|
)
|
$
|
36,140,379
|
|||||||||
The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2009, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Restricted stock is included in
“Available for sale - Due in one year or less.”
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
Available
for sale-
|
||||||||
|
Due
in one year or less
|
$
|
8,402,324
|
$
|
8,446,700
|
||||
|
Due
after one year through five years
|
91,063,870
|
91,249,993
|
||||||
|
Due
after five years through ten years
|
30,143,402
|
30,412,489
|
||||||
|
Due
after ten years
|
74,253,511
|
74,009,668
|
||||||
|
Total
|
$
|
203,863,107
|
$
|
204,118,850
|
||||
|
Held
to maturity-
|
||||||||
|
Due
in one year or less
|
$
|
3,874,956
|
$
|
3,952,332
|
||||
|
Due
after one year through five years
|
3,107,832
|
3,227,191
|
||||||
|
Due
after five years through ten years
|
5,300,104
|
5,472,483
|
||||||
|
Due
after ten years
|
11,326,088
|
11,563,524
|
||||||
|
Total
|
$
|
23,608,980
|
$
|
24,215,530
|
||||
Gross
unrealized losses on securities and the estimated fair value of the related
securities aggregated by security category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2009 and 2008 are as follows:
|
2009
|
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||||||||||
|
Number
of
Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||||||
|
U.S.
Government sponsored
corporations
and agencies
|
33 | $ | 73,177,106 | $ | (673,252 | ) |
$
|
- |
$
|
- | $ | 73,177,106 | $ | (673,252 | ) | |||||||||||||
|
Residential
collateralized mortgage
obligations
|
5 | 9,399,574 | (158,696 | ) | 428,264 | (93,327 | ) | 9,827,838 | (252,023 | ) | ||||||||||||||||||
|
Residential
mortgage backed securities
|
1 | 2,885,660 | (29,521 | ) | - | - | 2,885,660 | (29,521 | ) | |||||||||||||||||||
|
Obligations
of state and political
subdivisions
|
1 | 924,549 | (91,212 | ) | - | - | 924,549 | (91,212 | ) | |||||||||||||||||||
|
Trust
preferred debt securities
|
4 | - | - | 1,770,172 | (687,089 | ) | 1,770,172 | (687,089 | ) | |||||||||||||||||||
|
Total
temporarily impaired securities
|
44 | $ | 86,386,889 | $ | (952,681 | ) | $ | 2,198,436 | $ | (780,416 | ) | $ | 88,585,325 | $ | (1,733,097 | ) | ||||||||||||
|
2008
|
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||||||||||
|
Number
of
Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||||||
|
Residential
collateralized mortgage
obligations
|
18 | $ | 3,283,040 | $ | (15,797 | ) | $ | 5,245,569 | $ | (247,310 | ) | $ | 8,528,609 | $ | (263,107 | ) | ||||||||||||
|
Residential
mortgage backed securities
|
3 | 283,264 | (806 | ) | - | - | 283,264 | (806 | ) | |||||||||||||||||||
|
Obligations
of state and political
subdivisions
|
16 | 5,551,850 | (109,736 | ) | - | - | 5,551,850 | (109,736 | ) | |||||||||||||||||||
|
Trust
preferred debt securities
|
5 | - | 1,628,794 | (1,808,335 | ) | 1,628,794 | (1,808,335 | ) | ||||||||||||||||||||
|
Corporate
debt securities
|
3 | 2,001,805 | (23,856 | ) | - | - | 2,001,805 | (23,856 | ) | |||||||||||||||||||
|
Total
temporarily impaired securities
|
45 | $ | 11,119,959 | $ | (150,195 | ) | $ | 6,874,363 | $ | (2,055,645 | ) | $ | 17,994,322 | $ | (2,205,840 | ) | ||||||||||||
U.S. Treasury securities and
obligations of U.S. Government sponsored corporations and
agencies: The unrealized losses on investments in these
securities were caused by interest rate increases. The contractual
terms of these investments do not permit the issuer to settle the securities at
a price less than the amortized cost of the investment. Because the
Company does not intend to sell these investments and it is not more likely than
not that the Company will be required to sell these investments before a market
price recovery or maturity, these investments are not considered other-than
temporarily impaired.
Residential collateralized mortgage
obligations and residential mortgage-backed securities: The unrealized
losses on investments in residential collateralized mortgage obligations and
residential mortgage-backed securities were caused by interest rate increases.
The contractual cash flows of these securities are guaranteed by the issuer,
primarily government or government sponsored agencies. It is expected that the
securities would not be settled at a price less than the amortized cost of the
investment. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Company does not intend to sell
these investments and it is not more likely than not that the Company will be
required to sell these investments before a market price recovery or
maturity, these investments are not considered other-than-temporarily
impaired.
Obligations of State and Political
Subdivisions: The unrealized losses or investments in these
securities were caused by interest rate increases. It is expected
that the securities would not be settled at a price less than the amortized cost
of the investment. Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because the Company
does not intend to sell these investments and it is not more likely than not
that the Company will be required to sell these investments before a market
price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
Trust preferred debt
securities: The investments in these securities with
unrealized losses are comprised of corporate trust preferred securities that
mature in 2027, all of which were single-issuer securities. The
contractual terms of the trust preferred securities do not allow the issuer to
settle the securities at a price less than the face value of the trust preferred
securities, which is greater than the amortized cost of the trust preferred
securities. None of the corporate issuers have defaulted on interest
payments. Because the decline in fair value is attributable to the
widening of interest rate spreads and the lack of an active trading market for
these securities and to a lesser degree market concerns on the issuers’ credit
quality, and because the Company does not intend to sell these investments and
it is not more likely than not that the Company will be required to sell these
investments before a market price recovery or maturity, these investments are
not considered other-than-temporarily impaired.
The Company regularly reviews the
composition of the investment securities portfolio, taking into account market
risks, the current and expected interest rate environment, liquidity needs, and
its overall interest rate risk profile and strategic goals.
On a quarterly basis, management
evaluates each security in the portfolio with an individual unrealized loss to
determine if that loss represents other-than-temporary
impairment. During the fourth quarter of 2009, management determined
that it was necessary, following other-than-temporary impairment requirements,
to write down the cost basis of the Company’s only pooled trust preferred
security. The trust preferred security was issued by a two issuer
pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and
Woods, Inc. and First Tennessee (“PreTSL XXV”)), consisting primarily of
financial institution holding companies. The primary factor used to
determine the credit portion of the impairment through the income statement for
this security was the discounted present value of projected cash flow where that
present value of cash flow was less than the amortized cost basis of the
security. The present value of cash flow was developed using a model
that considered performing collateral ratios, the level of subordination to
senior tranches of the security, credit ratings of and projected credit defaults
in the underlying collateral.
The following table sets forth
information with respect to this security at December 31,
2009:
|
Pooled
Trust Preferred Security Detail
|
||||||||
|
Security
|
Class
|
Book
Value
|
Fair
Value
|
Unrealized
Gain
(Loss)
|
Percent
of
Underlying
Collateral
Performing
|
Percent
of
Underlying
Collateral
In
Deferral
|
Percent
of
Underlying
Collateral
In
Default
|
Moody’s/
S
& P /
FITCH
Ratings
|
|
PreTSL
XXV
|
B-1
|
$133,054
|
$133,054
|
-
|
69.0%
|
18.4%
|
12.6%
|
Ca/NR/CC
|
The original cost of PreTSL XXV at
December 31, 2009 was $997,781. In reviewing our investment in PreTSL
XXV at December 31, 2009, we have assumed average deferrals and defaults of
1.50% per year through the remaining term of the security (through June
2027).
During the fourth quarter of 2009, the
Company recognized an other-than-temporary impairment charge of $864,727 of
which $363,783 was determined to be a credit loss and charged to operations and
$500,944 was recognized in the other comprehensive loss component of
shareholders’ equity.
A number of factors or combinations of
factors could cause management to conclude in one or more future reporting
periods that an unrealized loss that exists with respect to PreTSL XXV
constitutes an additional impairment that is
other-than-temporary. These factors include, but are not limited to,
failure to make interest payments, an increase in the severity of the unrealized
loss, an increase in the continuous duration of the unrealized loss without an
impairment in value or changes in market conditions and/or industry or issuer
specific factors that would render management unable to forecast a full recovery
in value. In addition, the fair value of trust preferred securities
could decline if the overall economy and the financial condition of the issuers
continue to deteriorate and there remains limited liquidity for these
securities.
The
Company recorded gross gains and losses on sales of securities available for
sale of $1,138,655 and zero respectively, in 2009. There were no
sales of securities in 2008.
As of
December 31, 2009 and 2008, securities having a book value of $25,388,488 and
$31,844,825, respectively, were pledged to secure public deposits, other
borrowings and for other purposes required by law.
3. Loans
and Loans Held for Sale
Loans are
as follows:
|
2009
|
2008
|
|||||||
|
|
||||||||
|
Commercial
business
|
$
|
57,925,392
|
$
|
57,528,879
|
||||
|
Commercial
real estate
|
96,306,097
|
90,904,418
|
||||||
|
Mortgage
warehouse lines
|
119,382,078
|
106,000,231
|
||||||
|
Construction
loans
|
79,805,278
|
94,163,997
|
||||||
|
Residential
real estate loans
|
10,253,895
|
11,078,402
|
||||||
|
Loans
to individuals
|
15,554,027
|
16,797,194
|
||||||
|
Deferred
loan fees
|
489,809
|
647,673
|
||||||
|
All
other loans
|
229,159
|
227,622
|
||||||
|
$
|
379,945,735
|
$
|
377,348,416
|
|||||
The
Bank’s business is concentrated in New Jersey, particularly Middlesex, Mercer
and Somerset counties. A significant portion of the total loan
portfolio is secured by real estate or other collateral located in these
areas.
The Bank
had residential mortgage loans held for sale of $21,514,785 at December 31, 2009
and $5,702,082 at December 31, 2008. The Bank sells residential
mortgage loans in the secondary market on a non-recourse basis. The
related loan servicing rights are generally released to the
purchaser. Loans held for sale at December 31, 2009 and 2008 are
residential mortgage loans that the Bank intends to sell under forward contracts
providing for delivery to purchasers generally within a two month
period. Changes in fair value of the forward sales contracts, and the
related loan origination commitments and closed loans, were not significant at
December 31, 2009 and 2008.
4.
Allowance for Loan Losses
A summary
of the allowance for loan losses is as follows:
|
2009
|
2008
|
|||||||
|
Balance,
beginning of year
|
$
|
3,684,764
|
$
|
3,348,080
|
||||
|
Provision
charged to operations
|
2,553,000
|
640,000
|
||||||
|
Loans
charged off
|
(1,740,518
|
)
|
(306,376)
|
)
|
||||
|
Recoveries
of loans charged off
|
8,141
|
3,060
|
||||||
|
Balance,
end of year
|
$
|
4,505,387
|
$
|
3,684,764
|
||||
The
amount of loans which were not accruing interest amounted to $4,161,628 and
$3,351,777 at December 31, 2009 and 2008, respectively. Impaired
loans totaled $5,267,533 and $3,351,777 at December 31, 2009 and 2008,
respectively. There were specific valuation allowances of $176,781 on
$1,292,910 of impaired loans at December 31, 2009 and $485,339 of specific
valuation allowances on $1,913,012 of impaired loans at December 31,
2008. At December 31, 2009, the Bank had two loans that totaled
$145,898 in loans that were 90 days or more past due and still accruing interest
income. There were no loans 90 days or more past due and still
accruing interest at December 31, 2008.
Additional
income before taxes amounting to $624,224 and $314,675 would have been
recognized in 2009 and 2008, respectively, if interest on all loans had been
recorded based upon original contract terms. No interest was
recognized on non-accrual loans in 2009 or 2008. The average recorded
investment in impaired loans for the years ended December 31, 2009 and 2008 was
approximately $5,469,035 and $2,231,205, respectively.
5.
Loans to Related Parties
Activity
related to loans to directors, executive officers and their affiliated interests
during 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Balance,
beginning of year
|
$
|
4,795,649
|
$
|
4,288,296
|
||||
|
Loans
granted
|
68,252
|
1,996,042
|
||||||
|
Repayments
of loans
|
(492,862)
|
(1,488,689)
|
||||||
|
Balance,
end of year
|
$
|
4,371,039
|
$
|
4,795,649
|
||||
All such
loans were made under customary terms and conditions and were current as to
principal and interest payments as of December 31, 2009 and 2008.
6.
Premises and Equipment
Premises
and equipment consist of the following:
|
Estimated
Useful
Lives
|
2009
|
2008
|
||||||||
|
Land
|
$
|
241,784
|
$
|
241,784
|
||||||
|
Construction
in progress
|
2,929,011
|
45,734
|
||||||||
|
Building
|
40
Years
|
735,579
|
735,579
|
|||||||
|
Leasehold
improvements
|
10
Years
|
2,287,324
|
2,225,660
|
|||||||
|
Furniture
and equipment
|
3 –
15 Years
|
2,907,147
|
2,663,791
|
|||||||
|
9,100,845
|
5,912,548
|
|||||||||
|
Less
Accumulated depreciation
|
(4,201,754
|
)
|
(3,610,059
|
)
|
||||||
|
$
|
4,899,091
|
$
|
2,302,489
|
|||||||
Construction
in progress at December 31, 2009, consists primarily of a $2,606,677 property
acquired via the receipt of deed-in-lieu of a foreclosure on a commercial real
estate loan and subsequent costs incurred in preparing this property for use in
the Company’s operations.
Depreciation
expense was $591,695 and $662,095 for the years ended December 31, 2009 and
2008, respectively.
7.
Other Real Estate Owned (“OREO”)
The Bank
held four properties valued at $1,362,621 at December 31, 2009 and three
properties valued at $4,296,536 at December 31, 2008. The Company did
not incur any write downs on OREO properties during the years ended December 31,
2009 and 2008. There was no impairment on these properties at
December 31, 2009 or 2008, respectively. Further declines in real
estate values may result in increased foreclosed real estate expense in the
future. Routine holding costs are charged to expense as incurred and
improvements to real estate owned that enhance the value of the real estate are
capitalized. Net OREO expenses amounted to $123,795 and $120,688 for
the years ended December 31, 2009 and 2008, respectively.
8.
Goodwill and Intangible Assets
Goodwill
and intangible assets are summarized as follows:
|
2009
|
2008
|
|||||||
|
Goodwill
|
$ | 472,726 | $ | 472,726 | ||||
|
Core
deposits intangible
|
173,647 | 210,358 | ||||||
|
Total
|
$ | 646,373 | $ | 683,084 | ||||
Amortization
expense of intangible assets was $36,712 for each of the years ended December
31, 2009 and 2008.
Scheduled
amortization of the core deposits intangible for each of the next five years and
thereafter is as follows:
|
2010
|
$ |
36,712
|
||
|
2011
|
36,712
|
|||
|
2012
|
36,712
|
|||
|
2013
|
36,712
|
|||
|
2014
|
26,799
|
|||
| $ |
173,647
|
9.
Deposits
Deposits
consist of the following:
|
2009
|
2008
|
|||||||
|
Demand
|
||||||||
|
Non-interest
bearing
|
$
|
82,473,328
|
$
|
71,772,486
|
||||
|
Interest
bearing
|
125,529,223
|
82,842,413
|
||||||
|
Savings
|
193,369,640
|
83,410,405
|
||||||
|
Time
|
170,783,163
|
176,659,427
|
||||||
|
$
|
572,155,354
|
$
|
414,684,731
|
|||||
At
December 31, 2009, time deposits have contractual maturities as
follows:
|
Year
|
Amount
|
|||
|
2010
|
$ | 142,131,744 | ||
|
2011
|
24,566,792 | |||
|
2012
|
2,747,887 | |||
|
2013
|
546,130 | |||
|
2014
|
780,390 | |||
|
2015
|
10,220 | |||
| $ | 170,783,163 | |||
Individual
time deposits $100,000 or greater amounted to $87,499,947 and $97,752,068 at
December 31, 2009 and 2008, respectively. As of December 31, 2009,
time certificates of deposit in amounts of $100,000 or more have remaining
maturity time as follows:
|
Maturity
Range
|
Amount
|
|||
|
Three
months or less
|
$
|
35,957,940
|
||
|
Over
three months through six months
|
18,101,625
|
|||
|
Over
six months through twelve months
|
21,651,532
|
|||
|
Over
twelve months
|
11,788,850
|
|||
|
$
|
87,499,947
|
|||
10. Borrowings
The
balance of borrowings was $22,500,000 at December 31, 2009, consisting entirely
of long-term FHLB borrowings. The balance of borrowings was
$51,500,000 at December 31, 2008 and consisted of long-term FHLB borrowings of
$30,500,000 and overnight funds purchased of $21,000,000.
At
December 31, 2009, the Bank maintained an Overnight Line of Credit at the FHLB
in the amount of $58,584,800 and a One Month Overnight Repricing Line of Credit
of $58,584,800. Each of these established credit lines were effective
on August 10, 2009 and expire on August 9, 2010 at which time they will be
subject to review and renewal. Advances issued under these programs
are subject to FHLB stock level and collateral requirements. Pricing
of these advances may fluctuate based on existing market
conditions. The Bank also maintains an unsecured federal funds line
of $20,000,000 with a correspondent bank that will expire on June 30, 2010 at
which time it will be subject to review and renewal.
The Bank
has four ten-year fixed rate convertible advances from the FHLB that total
$22,500,000 in the aggregate. These advances, in the amounts of
$2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at the rates of
5.50%, 5.34%, 5.06% and 4.08%, respectively. These advances are
convertible quarterly at the option of the FHLB. These advances are
fully secured by marketable securities.
The FHLB
advances mature as follows:
|
2009
|
||||
|
2010
|
$
|
12,500,000
|
||
|
2017
|
10,000,000
|
|||
|
$
|
22,500,000
|
|||
These
callable advances have original maturity dates of ten years and call dates of
one year to five years after the date that the original advance was
made. After the original call period expires, the borrowings are
callable quarterly. Due to the call provisions, expected maturities
could differ from contractual maturities.
11. Redeemable
Subordinated Debentures
On May
30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware
business trust and wholly owned subsidiary of the Company (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Capital
Securities”). Trust II utilized the $18 million proceeds along with
$557,000 invested in Trust II by the Company to purchase $18,557,000 of floating
rate junior subordinated debentures issued by the Company and due to mature on
June 15, 2036. The subordinated debentures carry a floating interest
rate based on the three-month LIBOR plus 165 basis points (1.96% at December 31,
2009). The Capital Securities were issued in connection with a pooled
offering involving approximately 50 other financial institution holding
companies. All of the Capital Securities were sold to a single
pooling vehicle. The floating rate junior subordinated
debentures are the only asset of Trust II and have terms that mirrored the
Capital Securities. These debentures are redeemable in whole or
in part prior to maturity after June 15, 2011. Trust II is obligated
to distribute all proceeds of a redemption of these debentures, whether
voluntary or upon maturity, to holders of the Capital Securities. The
Company’s obligation with respect to the Capital Securities and the debentures,
when taken together, provided a full and unconditional guarantee on a
subordinated basis by the Company of the obligations of Trust II to pay amounts
when due on the Capital Securities. Interest payments on the floating
rate junior subordinated debentures flow through Trust II to the pooling
vehicle.
12. Income
Taxes
The
components of income tax expense (benefit) are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Federal-
|
||||||||
|
Current
|
$
|
1,338,992
|
$
|
1,322,618
|
||||
|
Deferred
|
(1,015,655
|
)
|
(282,481
|
)
|
||||
|
323,337
|
1,040,137
|
|||||||
|
State-
|
||||||||
|
Current
|
113,560
|
281,374
|
||||||
|
Deferred
|
(280,615
|
)
|
(82,170
|
)
|
||||
|
(167,055
|
)
|
199,204
|
||||||
|
$
|
156,282
|
$
|
1,239,341
|
|||||
A
comparison of income tax expense at the Federal statutory rate in 2009 and 2008
to the Company’s provision for income taxes is as follows:
|
2009
|
2008
|
|||||||
|
Federal
income tax
|
$ | 923,795 | $ | 1,359,592 | ||||
|
Add
(deduct) effect of:
|
||||||||
|
State income taxes net of federal income tax
effect
|
(110,257 | ) | 131,475 | |||||
|
Tax-exempt interest income
|
(165,462 | ) | (190,503 | ) | ||||
|
Bank-owned life insurance
|
(132,549 | ) | (128,809 | ) | ||||
|
Other items, net
|
(359,245 | ) | 67,586 | |||||
|
Provision
for income taxes
|
$ | 156,282 | $ | 1,239,341 | ||||
The tax
effects of existing temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as
follows:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets (liabilities):
|
||||||||
|
Allowance for loan losses
|
$
|
1,799,452
|
$
|
1,471,694
|
||||
|
Employee benefits
|
25,782
|
95,861
|
||||||
|
Unrealized gain on securities available for
sale
|
(86,953
|
)
|
(322,639
|
)
|
||||
|
SERP Liability
|
1,171,736
|
912,131
|
||||||
|
Unrealized loss on interest rate swap
|
353,772
|
463,748
|
||||||
|
State
net operating loss carryover
|
45,319
|
-
|
||||||
|
Other
than temporary impairment loss
|
294,007
|
-
|
||||||
|
Depreciation
|
310,523
|
(86,971
|
)
|
|||||
|
Nonaccrual
interest
|
249,315
|
-
|
||||||
|
FAS
158 pension liability
|
258,425
|
304,119
|
||||||
|
Other
|
1,048
|
(7,443
|
)
|
|||||
|
Subtotal
|
4,422,426
|
2,830,500
|
||||||
|
Valuation
allowance
|
(45,319
|
)
|
-
|
|||||
|
Net
deferred tax assets
|
$
|
4,377,107
|
$
|
2,830,500
|
||||
Based
upon the current facts, management has determined that it is more likely than
not that there will be sufficient taxable income in future years to realize the
deferred tax assets. However, there can be no assurances about the
level of future earnings.
During
the year ended December 31, 2009, the Company set up a valuation allowance
against the State of New Jersey net operating loss carryforward. At
December 31, 2009, the Bank (on an unconsolidated basis) had a net operating
loss carryforward of approximately $750,000, expiring in the year 2017 for state
income tax purposes.
13. Comprehensive
Income and Accumulated Other Comprehensive Income
The components of accumulated other
comprehensive loss and their related income tax effects are as
follows:
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
Unrealized
holding gains on securities available for sale
|
$ | 255,744 | $ | 926,166 | ||||
|
Related
income tax effect
|
(86,953 | ) | (322,639 | ) | ||||
| 168,791 | 603,527 | |||||||
|
Unrealized
impairment loss on held to maturity security
|
(500,944 | ) | - | |||||
|
Related
income tax effect
|
170,321 | - | ||||||
| (330,623 | ) | - | ||||||
|
Unrealized
holding loss interest rate swap contract
|
(883,806 | ) | (1,159,156 | ) | ||||
|
Related
income tax effect
|
353,772 | 463,748 | ||||||
| (530,034 | ) | (695,408 | ) | |||||
|
Pension
Liability
|
(647,228 | ) | (761,439 | ) | ||||
|
Related
income tax effect
|
258,425 | 304,119 | ||||||
| (388,803 | ) | (457,320 | ) | |||||
|
Accumulated
other comprehensive loss
|
$ | (1,080,669 | ) | $ | (549,201 | ) | ||
The components of other accumulated
comprehensive income (loss), net of tax, which is a component of shareholders
equity were as follows:
|
Net
Unrealized
Gains
(Losses)
On
Available for
Sale
Securities
|
Net
Unrealized
Impairment
Loss
On
Held to
Maturity
Security
|
Net
Change
in
Fair
Value of
Interest
Rate
Swap
Contract
|
Net
Change
Related
to
Defined
Benefit
Pension
Plans
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 17,683 | $ | - | $ | (59,912 | ) | $ | (490,957 | ) | $ | (533,186 | ) | |||||||
|
Net
Change
|
585,844 | - | (635,496 | ) | 33,637 | (16,015 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
603,527 | - | (695,408 | ) | (457,320 | ) | (549,201 | ) | ||||||||||||
|
Net
Change
|
(434,736 | ) | (330,623 | ) | 165,374 | 68,517 | (531,468 | ) | ||||||||||||
|
Balance,
December 31, 2009
|
$ | 168,791 | $ | (330,623 | ) | $ | (530,034 | ) | $ | (388,803 | ) | $ | (1,080,669 | ) | ||||||
14. Benefit
Plans
Retirement
Savings Plan
The Bank
has a 401(K) plan which covers substantially all employees with six months or
more of service. The plan permits all eligible employees to make
basic contributions to the plan up to 12% of base compensation. Under
the plan, the Bank provided a matching contribution of 50% in 2009 and 2008 up
to 6% of base compensation. Employer contributions to the plan
amounted to $150,298 in 2009 and $124,396 in 2008.
Benefit
Plans
The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan. The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan. The present value of the
benefits accrued under these plans as of December 31, 2009 and 2008 is
approximately $3,609,184 and $3,045,192, respectively, and is included in other
liabilities and accumulated other comprehensive income in the accompanying
consolidated balance sheet. Compensation expense of $688,179 and
$550,800 is included in the accompanying consolidated statement of income for
the years ended December 31, 2009 and 2008, respectively.
In
connection with the benefit plans, the Bank has life insurance policies on the
lives of its executives, directors and divisional officers. The Bank
is the owner and beneficiary of the policies. The cash surrender
values of the policies total approximately $10.3 million and $9.9 million as of
December 31, 2009 and 2008, respectively.
The
following table sets forth the changes in benefit obligations of the Company’s
supplemental executive retirement plan.
|
2009
|
2008
|
|||||||
|
Change
in Benefit Obligation
|
||||||||
|
Liability
for pension, beginning
|
$
|
3,045,192
|
$
|
2,551,295
|
||||
|
Service
cost
|
286,843
|
230,546
|
||||||
|
Interest
cost
|
188,057
|
159,320
|
||||||
|
Actuarial
loss
|
89,092
|
104,032
|
||||||
|
Liability
for pension, ending
|
$
|
3,609,184
|
$
|
3,045,192
|
||||
|
Amount
Recognized in Consolidated Balance Sheets
|
||||||||
|
Liability
for pension
|
$
|
(3,609,184
|
)
|
$
|
(3,045,192
|
)
|
||
|
Net
actuarial loss included in accumulated other comprehensive
income
|
330,510
|
355,265
|
||||||
|
Prior
service cost included in accumulated other comprehensive
income
|
306,742
|
406,174
|
||||||
|
Net
recognized pension expense
|
$
|
(2,971,932
|
)
|
$
|
(2,283,753
|
)
|
||
|
Information
for pension plans with an accumulated
benefit obligation in excess of plan assets
|
||||||||
|
Projected
benefit obligation
|
$
|
3,609,184
|
$
|
3,045,192
|
||||
|
Accumulated
benefit obligation
|
3,393,837
|
2,754,427
|
||||||
|
Components
of Net Periodic Benefit Cost
|
2009
|
2008
|
||||||
|
Service
cost
|
$
|
286,843
|
$
|
230,546
|
||||
|
Interest
cost
|
188,057
|
159,320
|
||||||
|
Amortization
of prior service cost
|
99,432
|
99,432
|
||||||
|
Recognized
net actuarial gain
|
113,847
|
61,502
|
||||||
|
Net
periodic benefit expense
|
$
|
688,179
|
$
|
550,800
|
||||
The net
periodic benefit cost for the year ended December 31, 2010 is projected to be
$669,706.
During
the year ended December 31, 2010, actuarial losses and prior service cost of
$154,069 and $99,432, respectively, are expected to be removed from accumulated
other comprehensive income and recognized as a component of net periodic benefit
expense.
|
Weighted-Average
Assumptions, December 31
|
2009
|
2008
|
||||||
|
Discount
Rate
|
6.00%
|
|
6.00%
|
|
||||
|
Salary
Scale
|
4.00%
|
|
4.00%
|
|
||||
|
Projected
Annual Benefit Payments
|
||||
|
2010
|
$
|
699,831
|
||
|
2011
|
$
|
268,840
|
||
|
2012
|
$
|
268,840
|
||
|
2013
|
$
|
328,503
|
||
|
2014
|
$
|
328,503
|
||
|
2015-2019
|
$
|
1,839,588
|
||
15. Share
Based Compensation
The
Company’s Stock Plans authorize the issuance of an aggregate of 1,177,500 shares
of common stock pursuant to awards that may be granted in the form of stock
options to purchase common stock (“options”) and awards of shares of common
stock (“stock awards”). The purpose of the Company’s stock-based
incentive plans is to attract and retain personnel for positions of substantial
responsibility and to provide additional incentive to certain officers,
directors, employees and other persons to promote the success of the
Company. Under the Company’s Stock Plans, options expire ten years
after the date of grant. Options are granted at the then fair market
value of the Company’s stock. The grant date fair value is calculated
using the Black-Scholes option valuation model. As of December 31, 2009, there
were 272,888 shares of common stock (as adjusted for the 5% stock dividend
declared December 17, 2009 and paid February 3, 2010 to shareholders of record
on January 19, 2010) available for future grants under the Company’s Stock
Plans.
Stock-based
compensation expense related to stock options was $111,116 and $122,216 for the
years ended December 31, 2009 and 2008, respectively.
Transactions
under the Company’s stock option plans during the years ended December 31, 2009
and 2008 (as adjusted to reflect the 5% stock dividend declared in December
2009) are summarized as follows:
|
Stock Options
|
Shares
|
Weighted
Average
Exercise
Price |
Weighted
Average
Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
172,914 | $ | 9.45 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
(671 | ) | 3.09 | |||||||||||||
|
Forfeited
|
- | - | ||||||||||||||
|
Expired
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2008
|
172,243 | 9.45 | 4.3 | $ | 342,658 | |||||||||||
|
Granted
|
38,346 | 8.64 | ||||||||||||||
|
Exercised
|
(55,879 | ) | 4.48 | |||||||||||||
|
Forfeited
|
- | - | ||||||||||||||
|
Expired
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2009
|
154,710 | $ | 11.04 | 6.1 | $ | 11,274 | ||||||||||
|
Exercisable
at December 31, 2009
|
112,790 | $ | 10.82 | 5.1 | $ | 11,274 | ||||||||||
The total
intrinsic value (market value on date of exercise less grant price) of options
exercised during the years ended December 31, 2009 and 2008 was $83,322 and
$2,955, respectively.
The
following table summarizes stock options outstanding and exercisable at December
31, 2009:
|
Outstanding
Options
|
Exercisable
Options
|
||||||||||||||||||||||||
|
Exercise Price Range
|
Number
|
Average
Life in Years |
Average
Exercise Price |
Number
|
Average
Life in Years |
Average
Exercise Price |
|||||||||||||||||||
| $3.17 to $6.58 | 22,147 | 1.8 | $ | 5.61 | 22,147 | 1.8 | $ | 5.61 | |||||||||||||||||
| $7.86 to $12.44 | 72,491 | 7.5 | $ | 9.71 | 36,015 | 5.8 | $ | 10.17 | |||||||||||||||||
| $13.32 to $15.94 | 60,072 | 6.1 | $ | 14.70 | 54,628 | 6.0 | $ | 14.68 | |||||||||||||||||
| 154,710 | 6.1 | $ | 11.04 | 112,790 | 5.1 | $ | 10.82 | ||||||||||||||||||
The fair value of each option and the
significant weighted average assumptions used to calculate the fair value of the
options granted for the year ended December 31, 2009 are as
follows:
|
January
2009
|
August
2009
|
|||||||
|
Number
of options granted
|
18,080 | 20,266 | ||||||
|
Fair
value of options granted
|
$ | 3.26 | $ | 2.89 | ||||
|
Risk-free
rate of return
|
1.60% | 2.57% | ||||||
|
Expected
option life in years
|
7 | 7 | ||||||
|
Expected
volatility
|
27.58% | 27.58% | ||||||
|
Expected
dividends (1)
|
- | - | ||||||
(1) To
date, the Company has not paid cash dividends on its common stock.
As of
December 31, 2009, there was approximately $150,008 of unrecognized compensation
cost related to non-vested stock option-based compensation arrangements granted
under the Company’s stock incentive plans. That cost is expected to
be recognized over the next four years.
The
following table summarizes nonvested restricted shares for the years ended
December 31, 2009 and 2008 (as adjusted to reflect the 5% stock dividend
declared in December 2009):
|
Nonvested
Shares
|
Number
of
Shares
|
Average
Grant-Date Fair
Value
|
||||||
|
Nonvested
at January 1, 2008
|
52,913
|
$
|
13.92
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Vested
|
(20,919
|
)
|
13.65
|
|||||
|
Forfeited
|
-
|
-
|
||||||
|
Nonvested
at December 31, 2008
|
31,994
|
14.10
|
||||||
|
Granted
|
59,598
|
8.51
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Vested
|
(15,822
|
)
|
13.59
|
|||||
|
Forfeited
|
-
|
-
|
||||||
|
Nonvested
at December 31, 2009
|
75,769
|
$
|
9.53
|
|||||
The value
of restricted shares is based upon the closing price of the common stock on the
date of grant. The shares vest over a four year service period with
compensation expense recognized on a straight-line respectively.
Stock
based compensation expense related to stock grants was $142,000 and $212,100 for
the year ended December 31, 2009 and 2008.
As of
December 31, 2009, there was approximately $584,090 of unrecognized compensation
cost related to non-vested stock grants that will be recognized over the next
three years.
16. Commitments
and Contingencies
As of
December 31, 2009, future minimum rental payments under non-cancelable operating
leases are as follows:
|
2010
|
$ | 862,842 | ||
|
2011
|
886,711 | |||
|
2012
|
914,336 | |||
|
2013
|
937,037 | |||
|
2014
|
698,628 | |||
|
Thereafter
|
1,914,507 | |||
| $ | 6,214,061 |
Rent
expense aggregated $1,112,313 and $846,166 for the years ended December 31, 2009
and 2008, respectively.
Commitments
With Off-Balance Sheet Risk
The
consolidated balance sheet does not reflect various commitments relating to
financial instruments which are used in the normal course of
business. Management does not anticipate that the settlement of those
financial instruments will have a material adverse effect on the Company’s
financial position. These instruments include commitments to extend
credit and letters of credit. These financial instruments carry
various degrees of credit risk, which is defined as the possibility that a loss
may occur from the failure of another party to perform according to the terms of
the contract. As these off-balance sheet financial instruments have
essentially the same credit risk involved in extending loans, the Bank generally
uses the same credit and collateral policies in making these commitments and
conditional obligations as it does for on-balance sheet investments.
Additionally, as some commitments and conditional obligations are expected to
expire without being drawn or returned, the contractual amounts do not
necessarily represent future cash requirements.
Commitments
to extend credit are legally binding loan commitments with set expiration
dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank receives a fee for
providing a commitment. The Bank was committed to advance
$216,651,774 and $180,965,000 to its borrowers as of December 31, 2009 and
December 31, 2008, respectively.
The Bank
issues financial standby letters of credit that are within the scope of ASC
Topic 460, “Guarantees.” These are irrevocable undertakings by the
Bank to guarantee payment of a specified financial obligation. Most
of the Bank’s financial standby letters of credit arise in connection with
lending relationships and have terms of one year or less. The maximum
potential future payments the Bank could be required to make under these standby
letters of credit amounted to $3,387,018 at December 31, 2009 and $3,946,649 at
December 31, 2008. The current amount of the liability as of December
31, 2009 and 2008, for guarantors under standby letters of credit is not
material.
The Bank
also enters into forward contracts to sell residential mortgage loans it has
closed (loans held for sale) or that it expects to close (commitments to
originate loans held for sale). These contracts are used to reduce
the Bank’s market price risk during the period from the commitment date to the
sale date. The notional amount of the Bank’s forward sales contracts
was approximately $21.5 million at December 31, 2009 and $5.7 million at
December 31, 2008. Changes in fair value of the forward sales
contracts, and the related loan origination commitments and closed loans, were
not significant at December 31, 2009 and 2008.
Litigation
The
Company may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business. The Company may also have
various commitments and contingent liabilities which are not reflected in the
accompanying consolidated statement of condition. Management is not
aware of any present legal proceedings or contingent liabilities and commitments
that would have a material impact on the Company’s financial position or results
of operations.
17. Other
Operating Expenses
The
components of other operating expenses for the years ended December 31, 2009 and
2008 are as follows:
|
2009
|
2008
|
|||||||
|
Equipment
expense
|
$
|
631,677
|
$
|
626,467
|
||||
|
Advertising
|
130,393
|
246,879
|
||||||
|
Regulatory,
professional and other
consulting
fees
|
1,006,830
|
861,006
|
||||||
|
Office
expense
|
572,477
|
649,461
|
||||||
|
Directors’
fees
|
105,700
|
108,000
|
||||||
|
Other
real estate owned expenses, net
|
123,795
|
120,688
|
||||||
|
All
other expenses
|
1,130,972
|
1,094,192
|
||||||
|
$
|
3,701,844
|
$
|
3,706,693
|
|||||
18. Regulatory
Requirements
The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal and state banking agencies. Failure to
meet 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 and the Company’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Company’s
and the Bank’s assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company’s and
the Bank’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital to average assets (as defined). As of December
31, 2009, the Company and the Bank met all capital adequacy requirements to
which they are subject.
To be
categorized as adequately capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. As of December 31, 2009, the Bank's capital
ratios exceed the regulatory standards for well-capitalized institutions.
Certain bank regulatory limitations exist on the availability of the Bank’s
assets for the payment of dividends by the Bank without prior approval of bank
regulatory authorities.
Actual
capital amounts and ratios for the Company and the Bank as of December 31, 2009
and 2008 are as follows:
|
To
Be Well Capitalized
|
||||||||||||||||||||||||
|
Under
Prompt
|
||||||||||||||||||||||||
|
For
Capital
|
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
As of December 31, 2009
-
|
||||||||||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets)
|
$
|
79,091,277
|
17.23
|
%
|
$
|
36,713,599
|
>8
|
%
|
N/A
|
N/A
|
||||||||||||||
|
Tier I Capital (to Risk Weighted Assets)
|
74,585,890
|
16.25
|
%
|
18,356,800
|
>4
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
Tier I Capital (to Average Assets)
|
74,585,890
|
10.99
|
%
|
27,143,523
|
>4
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
Bank
|
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets)
|
$
|
77,370,821
|
16.90
|
%
|
$
|
36,633,760
|
>8
|
%
|
$
|
45,792,200
|
>10
|
%
|
||||||||||||
|
Tier I Capital (to Risk Weighted Assets)
|
72,865,434
|
15.91
|
%
|
18,316,040
|
>4
|
%
|
27,475,320
|
>6
|
%
|
|||||||||||||||
|
Tier I Capital (to Average Assets)
|
72,865,434
|
10.78
|
%
|
27,043,305
|
>4
|
%
|
33,804,131
|
>5
|
%
|
|||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets)
|
$
|
76,475,124
|
17.90
|
%
|
$
|
34,184,717
|
>8
|
%
|
N/A
|
N/A
|
||||||||||||||
|
Tier I Capital (to Risk Weighted Assets)
|
72,790,360
|
17.03
|
%
|
17,092,359
|
>4
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
Tier I Capital (to Average Assets)
|
72,790,360
|
14.05
|
%
|
20,715,932
|
>4
|
%
|
N/A
|
N/A
|
||||||||||||||||
|
Bank
|
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets)
|
$
|
75,316,536
|
17.67
|
%
|
$
|
34,096,080
|
>8
|
%
|
$
|
42,620,100
|
>10
|
%
|
||||||||||||
|
Tier I Capital (to Risk Weighted Assets)
|
71,631,772
|
16.81
|
%
|
17,048,040
|
>4
|
%
|
25,572,060
|
>6
|
%
|
|||||||||||||||
|
Tier I Capital (to Average Assets)
|
71,631,772
|
13.88
|
%
|
20,636,440
|
>4
|
%
|
25,795,550
|
>5
|
%
|
|||||||||||||||
Dividend
payments by the Bank to the Company are subject to the New Jersey Banking Act of
1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the
“FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any
dividends if after paying the dividend, it would be undercapitalized under
applicable capital requirements. In addition to these explicit
limitations, the federal regulatory agencies are authorized to prohibit a
banking subsidiary or bank holding company from engaging in an unsafe or unsound
banking practice. Depending upon the circumstances, the agencies
could take the position that paying a dividend would constitute an unsafe or
unsound banking practice.
In the
event the Company defers payments on the junior subordinated debentures used to
fund payments to be made pursuant to the terms of the Capital
Securities, the Company would be unable to pay cash dividends on its common
stock until the deferred payments are made. In addition to the junior
subordinated debenture restrictions on common stock dividends, the dividend
rights of the Company’s common stockholders are qualified by and subject to the
terms of the Preferred Stock Series B and the agreement with the Treasury
pursuant to which the Preferred Stock Series B was sold (see discussion below
under Footnote 19, Shareholders’ Equity).
19. Shareholders’
Equity
On
December 23, 2008, pursuant to the Troubled Asset Relief Program (‘TARP”)
Capital Purchase Program (the “CPP”) under the Emergency Economic Stabilization
Act of 2008 (“EESA”), the Company entered into a Letter Agreement, including the
Securities Purchase Agreement – Standard Terms, with the United States
Department of the Treasury (the “Treasury”) pursuant to which the Company issued
and sold, and the Treasury purchased (i) 12,000 shares of the Company’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series B (“Preferred Stock Series B”)
and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s
common stock, no par value, at an initial exercise price of $8.99 per share, for
aggregate cash consideration of $12,000,000. As a result of the 5%
stock dividends paid on February 2, 2009 and February 3, 2010, the shares of
common stock initially underlying the warrant were adjusted to 220,744.76 shares
and the initial exercise price was adjusted to $8.154 per share.
The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. The Treasury has agreed not to exercise
voting power with respect to any shares of common stock issued upon exercise of
the warrant.
The
Company is subject to restrictions contained in the agreement between the
Treasury and the Company related to the sale of the Preferred Stock Series B
which among other things restricts the payment of cash dividends or making other
distributions by the Company on its common stock or the repurchase of its shares
of common stock or other capital stock or other equity securities of any kind of
the Company or any of its or its affiliates’ trust preferred securities until
the third anniversary of the purchase of the Preferred Stock Series B by the
Treasury with certain exceptions without approval of the Treasury and the
Company is prohibited by the terms of the Preferred Stock Series B from paying
dividends on the common stock of the Company or redeeming or otherwise acquiring
its common stock or certain other of its equity securities unless all dividends
on the Preferred Stock Series B have been declared and either paid in full or
set aside with certain limited exceptions.
In
addition, EESA, as amended by the American Recovery and Reinvestment Act of 2009
(“AARA”), and guidance issued by the Treasury limit executive compensation,
require the reporting of information to the Treasury and others and limit the
deductibility for Federal income tax purposes of compensation paid to certain
executives in excess of $500,000 per year and the payment of certain
severance and change in control payments to certain executives,
provide for the claw back of certain compensation paid to certain executives of
the Company or the Bank and impose new corporate governance requirements on the
Company, including the inclusion of a non-binding “say to pay” proposal in the
Company’s annual proxy statement.
The Board
of Governors of the Federal Reserve System has issued a supervisory letter to
bank holding companies that contains guidance on when the board of directors of
a bank holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
The
Company’s Preferred Stock Series B and the warrant issued under the TARP CCP
qualify and are accounted for as permanent equity on the Company’s balance
sheet. Of the $12 million in issuance proceeds, $11.4 million and
$0.6 million were allocated to the Preferred Stock Series B and the warrant,
respectively, based upon their estimated relative fair values as of December 23,
2008. The resulting discount of $0.6 million recorded for the
Preferred Stock Series B is being accreted by a charge to retained earnings over
a five year estimated life of the securities based on the likelihood of their
redemption by the Company within that timeframe. Offering costs of
$72,500 were incurred resulting in net proceeds of $11,927,500.
In July,
2005, the Board of Directors of the Company authorized a common stock repurchase
program that allows for the repurchase of a limited number of the company’s
shares at management’s discretion on the open market. The Company
undertook this repurchase program in order to increase shareholder
value. During the years ended December 31, 2009 and 2008, the Company
repurchased 12,353 and 6,416 shares, respectively, as adjusted for subsequent
stock dividends, for an aggregate price of approximately $78,466 and $70,527,
respectively.
20. Fair
Value Disclosures
U.S. GAAP
has established 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 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.
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value.
In
general, fair value is based upon quoted market prices, where
available. If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value. These adjustments may include amounts to reflect counterparty
credit quality and counterparty creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied
consistently over time. The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective value or reflective of future values. While
management believes the Company’s valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
Securities Available for
Sale. Securities classified as available for sale are reported
at fair value utilizing Level 2 Inputs. For these securities, the
Company obtains fair value measurements from an independent pricing
service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayments
speeds, credit information and the security’s terms and conditions, among other
things.
Impaired
loans. Loans included in the following table are those which
the Company has measured and recognized impairment generally based on the fair
value of the loan’s collateral. Fair value is generally determined
based upon independent third party appraisals of the properties, or discounted
cash flows based on the expected proceeds. These assets are included
as Level 3 fair values, based upon the lowest level of input that is significant
to the fair value measurements. The fair value consists of the loan
balances less specific valuation allowances.
Other Real Estate
Owned. Foreclosed properties are
adjusted to fair value less estimated selling costs at the time of foreclosure
in preparation for transfer from portfolio loans to other real estate owned
(“OREO”), establishing a new accounting basis. The Company subsequently
adjusts the fair value on the OREO utilizing Level 3 inputs on a non-recurring
basis to reflect partial write-downs based on the observable market price,
current appraised value of the asset or other estimates of fair
value.
Derivatives – Interest Rate
Swap. Derivatives are reported at fair value utilizing Level 2
Inputs. The Company obtains dealer quotations to value its interest
rate swap.
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:
|
Level
1
Inputs |
Level
2
Inputs |
Level
3
Inputs |
Total
Fair
Value |
|||||||||||||
|
December
31, 2009:
|
||||||||||||||||
|
Securities
available for sale
|
- | $ | 204,118,850 | - | $ | 204,118,850 | ||||||||||
|
Derivative
liabilities
|
- | (883,806 | ) | - | (883,806 | ) | ||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
Securities
available for sale
|
- | $ | 93,477,023 | - | $ | 93,477,023 | ||||||||||
|
Derivative
liabilities
|
- | (1,159,156 | ) | - | (1,159,156 | ) | ||||||||||
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets and financial liabilities measured at
fair value on a non-recurring basis at December 31, 2009 are as
follows:
|
Level
1
Inputs |
Level
2
Inputs |
Level
3
Inputs |
Total
Fair
Value |
|||||||||||||
|
December
31, 2009:
|
||||||||||||||||
|
Impaired
loans
|
- | - | $ | 1,116,129 | $ | 1,116,129 | ||||||||||
|
Other
real estate owned
|
- | - | 1,362,621 | 1,362,621 | ||||||||||||
|
Security
held to maturity
|
- | 133,054 | - | 133,054 | ||||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
Impaired
loans
|
- | - | $ | 1,427,673 | $ | 1,427,673 | ||||||||||
|
Other
real estate owned
|
- | - | 4,296,536 | 4,296,536 | ||||||||||||
Impaired
loans measured at fair value and included in the above table, consisted of
twelve loans having an aggregate principal balance of $1,292,910 and specific
loan loss allowances of $176,781 at December 31, 2009 and eleven loans at
December 31, 2008, having an aggregate principal balance of $1,913,012 and
specific loan loss allowances of $485,339.
The fair
value of other real estate owned was determined using appraisals, which may be
discounted based on management’s review and changes in market
conditions.
The
following is a summary of fair value versus the carrying value of all the
Company’s financial instruments. For the Company and the Bank, as for
most financial institutions, the bulk of its assets and liabilities are
considered financial instruments. Many of the financial instruments
lack an available trading market as characterized by a willing buyer and willing
seller engaging in an exchange transaction. Therefore, significant
estimations and present value calculations were used for the purpose of this
note. Changes in assumptions could significantly affect these
estimates.
Estimated
fair values have been determined by using the best available data and an
estimation methodology suitable for each category of financial instruments as
follows:
Cash and Cash Equivalents, Accrued
Interest Receivable and Accrued Interest Payable (Carried at Cost). The
carrying amounts reported in the balance sheet for cash and cash equivalents,
accrued interest receivable and accrued interest payable approximate fair
value.
Securities Held to Maturity (Carried
at Amortized Cost). The fair values of securities held to maturity are
determined in the same manner as for securities available for sale.
Loans Held For Sale (Carried at
Lower of Aggregated Cost or Fair Value). The fair values of loans held
for sale are determined, when possible, using quoted secondary market prices. If
no such quoted market prices exist, fair values are determined using quoted
prices for similar loans, adjusted for the specific attributes of the
loans.
Gross Loans Receivable (Carried at
Cost). The fair values of loans, excluding impaired loans subject to
specific loss reserves, 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
re-price frequently and with no significant change in credit risk, fair values
are based on carrying values.
Deposit Liabilities (Carried at
Cost). The fair values disclosed for demand deposits (e.g., interest and
non-interest demand and savings 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.
Borrowings and Subordinated
Debentures (Carried at Cost). The carrying amounts of short-term
borrowings approximate their fair values. The fair values of long-term FHLB
advances and subordinated debentures are estimated using discounted cash flow
analysis, based on quoted or estimated interest rates for new borrowings with
similar credit risk characteristics, terms and remaining
maturity.
The
estimated fair values, and the recorded book balances, were as
follows:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Value
|
Fair
Value
|
Value
|
Fair
Value
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
25,854,285
|
$
|
25,854,285
|
$
|
14,333,119
|
$
|
14,333,119
|
||||||||
|
Securities
available for sale
|
204,118,850
|
204,118,850
|
93,477,023
|
93,477,023
|
||||||||||||
|
Securities
held to maturity
|
23,608,980
|
24,215,530
|
36,550,557
|
36,140,379
|
||||||||||||
|
Loans
held for sale
|
21,514,785
|
21,514,785
|
5,702,082
|
5,702,082
|
||||||||||||
|
Gross
loans
|
379,945,735
|
379,617,000
|
377,348,416
|
382,020,000
|
||||||||||||
|
Accrued
interest receivable
|
2,274,087
|
2,274,087
|
2,192,601
|
2,192,601
|
||||||||||||
|
Deposits
|
(572,155,354
|
)
|
(573,596,000
|
)
|
(414,684,731
|
)
|
(416,809,000
|
)
|
||||||||
|
Other
borrowings
|
(22,500,000
|
)
|
(25,321,000
|
)
|
(51,500,000
|
)
|
(54,486,000
|
)
|
||||||||
|
Redeemable
subordinated debentures
|
(18,557,000
|
)
|
(18,557,000
|
)
|
(18,557,000
|
)
|
(18,583,000
|
)
|
||||||||
|
Interest
rate swap contract
|
(883,806
|
)
|
(883,806
|
)
|
(1,159,156
|
)
|
(1,159,156
|
)
|
||||||||
|
Accrued
interest payable
|
(1,757,151
|
)
|
(1,757,151
|
)
|
(1,984,102
|
)
|
(1,984,102
|
)
|
||||||||
Loan
commitments and standby letters of credit as of December 31, 2009 and 2008 are
based on fees charged for similar agreements; accordingly, the estimated fair
value of loan commitments and standby letters of credit is nominal.
21. Condensed
Financial Statements of 1st Constitution Bancorp (Parent Company
Only)
CONDENSED STATEMENTS OF
CONDITION
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
Assets:
|
||||||||
|
Cash
|
$
|
690,968
|
$
|
658,093
|
||||
|
Investment
securities available for sale
|
557,000
|
557,000
|
||||||
|
Investment
in subsidiaries
|
73,681,106
|
71,898,891
|
||||||
|
Other
assets
|
1,028,979
|
1,062,668
|
||||||
|
Total
Assets
|
$
|
75,958,053
|
$
|
74,176,652
|
||||
|
Liabilities
And Shareholders’ Equity
|
||||||||
|
Subordinated
debentures
|
$
|
18,557,000
|
$
|
18,557,000
|
||||
|
Shareholders’
equity
|
57,401,053
|
55,619,652
|
||||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
75,958,053
|
$
|
74,176,652
|
||||
CONDENSED
STATEMENTS OF INCOME
|
Year
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Income:
|
||||||||
|
Interest
|
$
|
15,796
|
$
|
36,347
|
||||
|
Total
Income
|
15,796
|
36,347
|
||||||
|
Expense:
|
||||||||
|
Interest
|
1,087,748
|
1,096,756
|
||||||
|
Total
Expense
|
1,087,748
|
1,096,756
|
||||||
|
Loss
before income taxes and equity in undistributed income of
Subsidiaries
|
(1,071,952
|
)
|
(1,060,409
|
)
|
||||
|
Federal
income tax benefit
|
(364,661
|
)
|
(352,152
|
)
|
||||
|
Loss
before equity in undistributed income of subsidiaries
|
(706,781
|
)
|
(708,257
|
)
|
||||
|
Equity
in undistributed income of subsidiaries
|
3,268,052
|
3,467,715
|
||||||
|
Net
Income
|
$
|
2,560,761
|
$
|
2,759,458
|
||||
CONDENSED
STATEMENTS OF CASH FLOWS
|
Year
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Operating
Activities:
|
||||||||
|
Net
Income
|
$
|
2,560,761
|
$
|
2,759,457
|
||||
|
Adjustments:
|
||||||||
|
Decrease
in other assets
|
33,689
|
43,760
|
||||||
|
Equity
in undistributed income of subsidiaries
|
(3,268,052
|
)
|
(3,467,714
|
)
|
||||
|
Net
cash used in operating activities
|
(673,602
|
)
|
(664,497
|
)
|
||||
|
Investing
Activities:
|
||||||||
|
Investment
in subsidiaries
|
-
|
(12,000,000
|
)
|
|||||
|
Repayment
of investment in subsidiaries
|
967,985
|
273,382
|
||||||
|
Net
cash provided by (used in) investing activities
|
967,985
|
(11,726,618
|
)
|
|||||
|
Financing
Activities:
|
||||||||
|
Issuance
of common stock, net
|
353,625
|
230,909
|
||||||
|
Purchase
of treasury stock
|
(78,466
|
)
|
(70,527
|
)
|
||||
|
Issuance
of preferred stock and warrants, net
|
-
|
11,950,000
|
||||||
|
Dividend
paid on preferred stock
|
(536,667
|
)
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
(261,508
|
)
|
12,110,382
|
|||||
|
Net
increase (decrease) in cash
|
32,875
|
(280,733
|
)
|
|||||
|
Cash
at beginning of year
|
658,093
|
938,826
|
||||||
|
Cash
at end of year
|
$
|
690,968
|
$
|
658,093
|
||||
22. Unaudited
Quarterly Financial Data
The
following sets forth a condensed summary of the Company’s quarterly results of
operations:
|
2009
|
||||||||||||||||
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||||||
|
Summary
of Operations
|
||||||||||||||||
|
Interest
income
|
$
|
7,663,197
|
$
|
7,467,175
|
$
|
7,591,339
|
$
|
7,414,405
|
||||||||
|
Interest
expense
|
2,851,147
|
3,117,646
|
3,072,139
|
3,214,416
|
||||||||||||
|
Net
interest income
|
4,812,050
|
4,349,529
|
4,519,200
|
4,199,989
|
||||||||||||
|
Provision
for loan losses
|
1,260,000
|
505,000
|
325,000
|
463,000
|
||||||||||||
|
Net
interest income after provision
|
||||||||||||||||
|
for
loan losses
|
3,552,050
|
3,844,529
|
4,194,200
|
3,736,989
|
||||||||||||
|
Non-interest
income
|
1,482,026
|
1,233,197
|
942,801
|
847,052
|
||||||||||||
|
Non-interest
expense
|
3,953,516
|
4,350,106
|
4,791,566
|
4,020,613
|
||||||||||||
|
Income
before income taxes
|
1,080,560
|
727,620
|
345,435
|
563,428
|
||||||||||||
|
Income
taxes (benefit)
|
152,333
|
106,386
|
(189,175
|
)
|
86,738
|
|||||||||||
|
Net income
|
$
|
928,227
|
$
|
621,234
|
$
|
534,610
|
$
|
476,690
|
||||||||
|
Net
income per share :
|
||||||||||||||||
|
Basic
|
$
|
0.16
|
$
|
0.10
|
$
|
0.08
|
$
|
0.07
|
||||||||
|
Diluted
|
$
|
0.16
|
$
|
0.10
|
$
|
0.08
|
$
|
0.07
|
||||||||
|
2008
|
||||||||||||||||
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||||||
|
Summary
of Operations
|
||||||||||||||||
|
Interest
income
|
$
|
7,371,872
|
$
|
7,389,253
|
$
|
7,192,130
|
$
|
7,167,056
|
||||||||
|
Interest
expense
|
3,185,601
|
3,201,563
|
3,181,357
|
3,163,926
|
||||||||||||
|
Net
interest income
|
4,186,271
|
4,187,690
|
4,010,773
|
4,003,130
|
||||||||||||
|
Provision
for loan losses
|
105,000
|
175,000
|
195,000
|
165,000
|
||||||||||||
|
Net
interest income after provision
|
||||||||||||||||
|
For
loan losses
|
4,081,271
|
4,012,690
|
3,815,773
|
3,838,130
|
||||||||||||
|
Non-interest
income
|
731,821
|
956,774
|
804,904
|
786,377
|
||||||||||||
|
Non-interest
expense
|
4,088,623
|
3,908,826
|
3,617,142
|
3,414,350
|
||||||||||||
|
Income
before income taxes
|
724,469
|
1,060,638
|
1,003,535
|
1,210,157
|
||||||||||||
|
Income
taxes
|
267,448
|
278,244
|
285,689
|
407,960
|
||||||||||||
|
Net income
|
$
|
457,021
|
$
|
782,394
|
$
|
717,846
|
$
|
802,197
|
||||||||
|
Net
income per share :
|
||||||||||||||||
|
Basic
|
$
|
0.10
|
$
|
0.18
|
$
|
0.16
|
$
|
0.18
|
||||||||
|
Diluted
|
$
|
0.10
|
$
|
0.17
|
$
|
0.16
|
$
|
0.18
|
||||||||
23. Derivative
Financial Instruments
The use
of derivative financial instruments creates exposure to credit
risk. This credit risk relates to losses that would be recognized if
the counterparts fail to perform their obligations under the
contracts. As part of the Company’s interest rate risk management
process, the Company entered into an interest rate derivative contract effective
November 27, 2007. Interest rate derivative contracts are typically
used to limit the variability of the Company’s net interest income that could
result due to shifts in interest rates. This derivative interest rate
contract was an interest rate swap used to modify the repricing characteristics
of a specific liability. At December 31, 2009 and December 31, 2008
the Company’s position in derivative contracts consisted entirely of this
interest rate swap.
|
Maturity
|
Hedged Liability
|
Notional
Amounts
|
Swap
Fixed
Interest Rates
|
Swap
Variable
Interest Rates
|
|
June
15, 2011
|
Trust
Preferred Securities
|
$18,000,000
|
5.87%
|
3
month LIBOR plus
165
basis points
|
During
2006, the Company issued trust preferred securities to fund loan growth and
generate liquidity. In conjunction with the trust preferred
securities issuance, the Company entered into a $18.0 million pay fixed swap
designated as fair value hedges that was used to convert floating rate quarterly
interest payments indexed to three month LIBOR, based on common notional amounts
and maturity dates. The pay fixed swap changed the repricing
characteristics of the quarterly interest payments from floating rate to fixed
rate. The fair value of the pay fixed swap outstanding at December
31, 2009 and 2008 was ($883,806) and ($1,159,156), respectively, and was
recorded in other liabilities in the consolidated balance sheets, with the
change in fair value recorded through OCI.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
1st
CONSTITUTION BANCORP
|
|||
|
Date: March
26, 2010
|
By:
|
/s/ ROBERT
F. MANGANO
|
|
|
Robert
F. Mangano
|
|||
|
President
and Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
ROBERT F. MANGANO
|
President,
Chief Executive Officer and Director
|
March
26, 2010
|
||
|
Robert
F. Mangano
/s/
CHARLES S. CROW, III
|
(Principal
Executive Officer)
Chairman
of the Board
|
March
26, 2010
|
||
|
Charles
S. Crow, III
/s/
DAVID C. REED
|
Director
|
March
26, 2010
|
||
|
David
C. Reed
/s/
WILLIAM M. RUE
|
Director
|
March
26, 2010
|
||
|
William
M. Rue
/s/
FRANK E. WALSH, III
|
Director
|
March
26, 2010
|
||
|
Frank
E. Walsh, III
/s/
JOSEPH M. REARDON
|
Senior
Vice President and Treasurer
|
March
26, 2010
|
||
|
Joseph
M. Reardon
|
(Principal
Accounting and Financial Officer)
|
EXHIBIT
INDEX
|
Exhibit No.
|
Description
|
||
|
3
|
(i)(A)
|
Certificate
of Incorporation of the Company (conformed copy) (incorporated by
reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC
on March 27, 2009)
|
|
|
3
|
(i)(B)
|
Certificate
of Amendment to the Certificate of Incorporation increasing the number of
shares designated as Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed
with the SEC on December 23, 2008)
|
|
|
3
|
(i)(C)
|
Certificate
of Amendment to the Certificate of Incorporation establishing the terms of
the Fixed Rate Cumulative Perpetual Preferred Stock, Series B
(incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed
with the SEC on December 23, 2008)
|
|
|
3
|
(ii)(A)
|
Bylaws
of the Company (conformed copy) (incorporated by reference to Exhibit
3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22,
2007)
|
|
|
3
|
(ii)(B)
|
Amendment
No. 2 to By-laws of the Company (incorporated by reference to Exhibit
3(ii)(B) to the Company’s Form 8-K filed with the SEC on October 22,
2007)
|
|
|
4.1
|
Specimen
Share of Common Stock (incorporated by reference to Exhibit 4.1 to the
Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March
22, 2002)
|
||
|
4.2
|
Amended
and Restated Declaration of Trust of 1st Constitution Capital Trust I
dated as of April 10, 2002 among the Registrant, as sponsor, Wilmington
Trust Company, as Delaware and institutional trustee, and the
Administrators named therein (incorporated by reference to Exhibit 4.2 to
the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on
May 8, 2002)
|
||
|
4.3
|
Indenture
dated as of April 10, 2002 between the Registrant, as issuer, and
Wilmington Trust Company, as trustee, relating to the Floating Rate Junior
Subordinated Debt Securities due 2032 (incorporated by reference to
Exhibit 4.3 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed
with the SEC on May 8, 2002)
|
||
|
4.4
|
Guarantee
Agreement dated as of April 10, 2002 between the Registrant and the
Wilmington Trust Company, as guarantee trustee (incorporated by reference
to Exhibit 4.4 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed
with the SEC on May 8, 2002)
|
||
|
4.5
|
Rights
Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp
and Registrar and Transfer Company, as Rights Agent, (incorporated by
reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No.
000-32891) filed with the SEC on March 18, 2004)
|
||
|
4.6
|
Warrant,
dated December 23, 2008, to purchase shares of 1st Constitution Bancorp
common stock (incorporated by reference to Exhibit 3.3 to the Company’s
Form 8-K filed with the SEC on December 23, 2008)
|
||
|
10.1
|
#
|
1st
Constitution Bancorp Supplemental Executive Retirement Plan, dated as of
October 1, 2002 (Incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on
November 13, 2002)
|
|
|
Exhibit No.
|
Description
|
||
|
10.2
|
#
|
Amended
and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective
as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the
Company’s Form 8-K filed with the SEC on March 24,
2006)
|
|
|
10.3
|
#
|
1st
Constitution Bancorp Form of Executive Life Insurance Agreement
(Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-QSB
(SEC File No. 000-32891) filed with the SEC on November 13,
2002)
|
|
|
10.4
|
#
|
2000
Employee Stock Option and Restricted Stock Plan (incorporated by reference
to Exhibit No. 6.3 to the Company’s Form 10-SB (SEC File No. 000-32891)
filed with the SEC on June 15, 2001)
|
|
|
10.5
|
#
|
Directors
Stock Option and Restricted Stock Plan (incorporated by reference to
Exhibit No. 6.4 to the Company’s Form 10-SB (SEC File No. 000-32891) filed
with the SEC on June 15, 2001)
|
|
|
10.6
|
#
|
Employment
Agreement between the Company and Robert F. Mangano dated April 22, 1999
(incorporated by reference to Exhibit No. 6.5 to the Company’s Form 10-SB
(SEC File No. 000-32891) filed with the SEC on June 15,
2001)
|
|
|
10.7
|
#
|
Amendment
No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan,
effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to
the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on
August 11, 2004)
|
|
|
10.8
|
#
|
Change
of Control Agreement, effective as of April 1, 2004, by and between the
Company and Joseph M. Reardon (incorporated by reference to Exhibit 10.13
to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on
August 11, 2004)
|
|
|
10.9
|
#
|
Form
of Stock Option Agreement under the 1st Constitution
Bancorp Employee Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.14 to the Company’s Form 8-K (SEC
File No. 000-32891) filed with the SEC on December 22,
2004)
|
|
|
10.10
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution
Bancorp Employee Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.15 to the Company’s Form 8-K (SEC
File No. 000-32891) filed with the SEC on December 22,
2004)
|
|
|
10.11
|
#
|
Employment
Agreement between the Company and Robert F. Mangano dated February 22,
2005 (incorporated by reference to Exhibit No. 10.16 to the Company’s Form
8-K (SEC File No. 000-32891) filed with the SEC on February 24,
2005)
|
|
|
10.12
|
#
|
The
1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by
reference to Appendix A of the Company's proxy statement filed with the
SEC on April 15, 2005)
|
|
|
10.13
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution Bancorp 2005
Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the
Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
10.14
|
#
|
Form
of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to
the Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
Exhibit No.
|
Description
|
||
|
10.15
|
#
|
Form
of Incentive Stock Option Agreement under the 1st Constitution Bancorp
2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to
the Company’s Form 10-Q filed with the SEC on August 8,
2005)
|
|
|
10.16
|
#
|
1st
Constitution Bancorp 2006 Directors Stock Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 19,
2006)
|
|
|
10.17
|
#
|
Form
of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
2006 Directors Stock Plan (incorporated by reference to Exhibit 10.2 to
the Company’s Form 8-K filed with the SEC on May 19,
2006)
|
|
|
10.18
|
#
|
Form
of Restricted Stock Agreement under the 1st Constitution Bancorp 2006
Directors Stock Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Form 8-K filed with the SEC on May 19, 2006)
|
|
|
10.19
|
Amended
and Restated Declaration of Trust of 1st Constitution Capital Trust II,
dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the
Delaware and institutional trustee named therein, and the administrators
named therein (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed with the SEC on June 16, 2006)
|
||
|
10.20
|
Indenture,
dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer,
and the trustee named therein, relating to the Floating Rate Junior
Subordinated Debt Securities due 2036 (incorporated by reference to
Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on June 16,
2006)
|
||
|
10.21
|
Guarantee
Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and
the guarantee trustee named therein (incorporated by reference to Exhibit
10.3 to the Company’s Form 8-K filed with the SEC on June 16,
2006)
|
||
|
10.22
|
#
|
Amendment
No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
Plan, effective as of December 31, 2004 (incorporated by reference to
Exhibit 10.24 to the Company’s Form 10-K filed with the SEC on April 15,
2008)
|
|
|
10.23
|
#
|
1st
Constitution Bancorp 2005 Supplemental Executive Retirement Plan,
effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1
to the Company’s Form 8-K filed with the SEC on December 28,
2006)
|
|
|
10.24
|
Letter
Agreement, dated December 23, 2008, including Securities Purchase
Agreement – Standard Terms incorporated by reference therein, between 1st
Constitution Bancorp and the U.S. Department of the Treasury (incorporated
by reference to Exhibit 10 to the Company’s Form S-3 filed with the SEC on
January 29, 2009)
|
||
|
10.25
|
#
|
Form
of Waiver, executed by each of Messrs. Robert Mangano and Joseph M.
Reardon (incorporated by reference to Exhibit 10.2 to the Company’s Form
8-K filed with the SEC on December 23, 2008)
|
|
|
10.26
|
#
|
Form
of Senior Executive Officer Agreement, executed by each of Messrs. Robert
Mangano and Joseph M. Reardon (incorporated by reference to Exhibit 10.3
to the Company’s Form 8-K filed with the SEC on December 23,
2008)
|
|
|
10.27
|
#*
|
Letter
Agreement with Robert F. Mangano dated November 5, 2009 and executed by
Mr. Mangano on November 7, 2009
|
|
|
10.28
|
#*
|
Letter
Agreement with Joseph M. Reardon dated November 5, 2009 and executed by
Mr. Reardon on November 7, 2009
|
|
|
Exhibit No.
|
Description
|
||
|
14
|
Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on
March 25, 2004)
|
||
|
21
|
*
|
Subsidiaries
of the Company
|
|
|
23
|
*
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
31.1
|
*
|
Certification
of the principal executive officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a)
|
|
|
31.2
|
*
|
Certification
of the principal financial officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a)
|
|
|
32
|
*
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002, signed by the principal executive officer
and the principal financial officer of the Company
|
|
|
99.1
|
*
|
Certification
of principal executive officer of the Company, pursuant to Section 111(b)
(4) of the Emergency Economic Stability Act of 2008,
as amended by the American Recovery and Reinvestment Act of
2009
|
|
|
99.2
|
*
|
Certification
of principal financial officer of the Company, pursuant to Section 111(b)
(4) of the Emergency Economic Stability Act of 2008,
as amended by the American Recovery and Reinvestment Act of
2009
|
|
* Filed
herewith.
# Management
contract or compensatory plan or arrangement.
53