UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x
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ANNUAL
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________ to
_______
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Commission
file Number: 000-32891
1ST
CONSTITUTION BANCORP
(Exact
Name of Registrant as Specified in Its Charter)
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
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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Stock Purchase Rights
Relating to Common Stock, No Par Value
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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 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):
Large
accelerated filer
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o |
Accelerated
filer
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o |
Non-accelerated
filer |
o |
Smaller
reporting company
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x |
(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 $57,045,025.
As of
March 25, 2008, 3,992,715 shares of the registrant’s common stock were
outstanding.
Portions
of the registrant’s definitive Proxy Statement for its 2008 Annual Meeting of
Shareholders are incorporated by reference
into Part III of this report.
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FORM
10-K
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TABLE
OF CONTENTS
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EXPLANATORY NOTE
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ii
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PART
I
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Item 1.
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Business
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1
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Item
1A. |
Risk
Factors |
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10 |
Item
1B. |
Unresolved
Staff Comments |
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13 |
Item 2.
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Properties
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13
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Item 3.
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Legal Proceedings
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14
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Item 4.
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Submission of Matters to a Vote
of Security Holders
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14
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PART
II
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Item 5.
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Market for Registrant’s Common
Equity, Related Shareholder Matters and
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Issuer Purchases of Equity
Securities
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14
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Item 6.
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Selected Financial
Data
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15
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Item 7.
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Management’s Discussion and
Analysis of Financial Condition and Results of Operation
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15
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Item
7A. |
Quantitative and Qualitative
Disclosures About Market Risk
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63
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Item 8.
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Financial Statements and
Supplementary Data
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63
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Item 9.
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Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
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63
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Item
9A. |
Controls and
Procedures
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64
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Item
9B. |
Other
Information |
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66
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PART
III
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Item 10.
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Directors, Executive Officers and
Corporate Governance
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66
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Item 11.
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Executive
Compensation
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66
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Item 12.
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Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder
Matters
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66
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Item 13.
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Certain Relationships and Related
Transactions, and Director Independence
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67
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Item 14.
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Principal Accounting Fees and
Services
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67
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PART
IV
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Item 15.
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Exhibits and Financial Statement
Schedules
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68
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SIGNATURES
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72
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ANNUAL
REPORT ON FORM 10-K
For the fiscal year ended
December 31, 2007
In this
Form 10-K, we are restating our consolidated balance sheet as of
December 31, 2006, and the related consolidated statement of operations,
shareholders’ equity and cash flows for the year ended December 31, 2006,
including the applicable notes. We have also included in this report restated
unaudited consolidated financial information for each of the first three
quarters of 2007 and the four quarters of 2006.
We do not
plan to file an amendment to our Annual Report on Form 10-K for the year ended
December 31, 2006. Nor do we plan to file amendments to our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31,
June 30, and September 30, 2007 and 2006, respectively. Thus, you
should not rely on any of the previously filed annual or quarterly reports
relating to the foregoing periods. They are superseded by this
report.
For more
detailed information about the restatement, please see Note 2, “Restatement
of Consolidated Financial Statements For the Year Ended and As At December 31,
2006” and Note 24, “Unaudited Quarterly Financial Statements and Restatement of
Interim Financial Statements” in the accompanying consolidated financial
statements and “Restatement of Previously Issued Financial Results” in the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of this Annual Report on Form 10-K.
In
addition, management has determined that we had material weaknesses in our
internal control over financial reporting relating to quantifying and reporting
current tax liabilities and deferred tax assets, failure to document and
properly evaluate certain non-interest operating expenses and failure to
accurately estimate accruals related to the Company’s Supplemental Executive
Retirement Plan. As described in more detail in Item 9A of this Annual
Report, we have identified the causes of these material weaknesses and are
implementing measures designed to remedy them.
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 the 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
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; and 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
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.
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,
a commercial bank formed under the laws of the State of New Jersey, 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 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”).
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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·
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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 banks, to continue to grow and meet the needs of the
community. During the first quarter of 2007, the Bank completed its
acquisition of the Hightstown, New Jersey branch of another financial
institution. During the third quarter of 2006, the Bank relocated its
Plainsboro branch office from 10 Schalks Crossing Road to 11 Schalks Crossing
Road and opened a new branch office at 180 Main Street, Fort Lee, Bergen County,
New Jersey.
Innovative
Product Offerings
In the
fourth quarter of 2006, the Bank launched its new EZ Deposit
service. This new product allows customers of the Bank to scan
checks, using a scanning device furnished by the Bank, at the customer’s place
of business and transmit them directly to the Bank for deposit into the
customer’s account. The Check 21 Act allows for the creation of Image
Replacement Documents (“IRD”) that are the legal equivalent of the original
check. Therefore, the check images captured at customer locations are
sent electronically to the Bank and customers can reduce the number of trips to
the Bank, as deposits are made directly from their place of business to the
Bank. The service also has a later deposit time cutoff than branch
locations and this allows customers to process deposits and have them posted the
same day rather than the following business day.
By the
end of 2007, there were 51 EZ Deposit customers using the service and a number
of customers requesting the service in 2008. Management believes that
there is great customer acceptance of this service and that the demand for this
service will be strong in 2008.
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 Business Express product
offering. 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, 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 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.
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, 2007, 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, 2007, the Company maintained a Tier 1 capital ratio of 15.59% and
total qualifying capital ratio of 17.76%.
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, 2007 was 12.67%.
On April
10, 2002, 1st
Constitution Capital Trust I (“Trust I”), a statutory business trust and
a wholly owned subsidiary of the Company, issued $5.0 million of variable rate
trust preferred securities (the “Trust Preferred Securities”) in a pooled
institutional placement transaction maturing April 22, 2032. Trust I
utilized the $5.0 million proceeds along with $155,000 invested in Trust I by
the Company to purchase $5,155,000 of floating rate subordinated debentures
issued by the Company and due to mature on April 22, 2032 (the “Subordinated
Debentures”). The Subordinated Debentures constituted the sole assets
of Trust I, had terms that mirrored the Trust Preferred Securities and were
redeemable in whole or part prior to maturity after April 22,
2007. Trust I was obligated to distribute all proceeds of a
redemption of these Subordinated Debentures, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. The Company’s
obligation with respect to the Trust Preferred Securities and the Subordinated
Debentures, when taken together, provided a full and unconditional guarantee on
a subordinated basis by the Company of the obligations of Trust I to pay amounts
when due on the Trust Preferred Securities. On February 23, 2007, the
Company notified Wilmington Trust Company, as Indenture Trustee, of the
Company’s intention to redeem the Subordinated Debentures on April 22, 2007, and
the Company redeemed the Subordinated Debentures on that date, as discussed
below.
On May
30, 2006, 1st Constitution Bancorp established 1st Constitution Capital Trust
II, a Delaware business trust subsidiary (“Trust II”), for the sole purpose of
issuing $18 million of trust preferred securities (the “Capital
Securities”). 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 proceeds from the sale of the Capital Securities
were loaned to the Company under 30-year floating rate junior subordinated
debentures issued to Trust II by the Company. The debentures are the
only asset of Trust II. Interest payments on the debentures flow
through Trust II to the pooling vehicle. Payments of distributions by
Trust II to the pooling vehicle are guaranteed by the Company.
Effective
April 22, 2007, the Company redeemed all of the Subordinated
Debentures. The redemption price was 100% of the aggregate $5,155,000
principal amount of the Subordinated Debentures, plus approximately $236,882 of
accrued interest thereon through the redemption date. As a result of
the redemption of the Subordinated Debentures, a like amount of capital
securities issued by Trust I was redeemed under the same terms and
conditions. This redemption does not impact the Capital Securities
issued by Trust II on May 30, 2006.
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. 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. On December 21, 2006, the Company declared a 6% stock
dividend, which was paid on January 31, 2007 to shareholders of record as of the
close of business on January 23, 2007. On December 20, 2007, the
Company declared another 6% stock dividend, which was paid on February 6, 2008
to shareholders of record as of the close of business on January 23,
2008. 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 on
February 10, 2005. All share and per share data has been
retroactively adjusted for 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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·
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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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·
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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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·
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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 financial laws, including laws related to
financial privacy and community reinvestment.
The
Modernization Act also amends 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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·
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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);
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·
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independence
requirements for audit committee
members;
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·
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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 SEC) and if not, why
not;
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·
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independence
requirements for outside auditors;
|
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·
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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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·
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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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·
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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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·
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disclosure
of off-balance sheet transactions;
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·
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two-business
day filing requirements for insiders filing Forms
4;
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·
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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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·
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“real
time” filing of periodic reports;
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·
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posting
of certain SEC filings and other information on the company
website;
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·
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the
reporting of securities violations “up the ladder” by both in-house and
outside attorneys;
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·
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restrictions
on the use of non-GAAP financial
measures;
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·
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the
formation of a public accounting oversight board;
and
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·
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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 we are
not required to provide management’s report on internal control over financial
reporting until we file our annual report for 2007, and compliance with the
auditor’s attestation report requirement is not required until we file our
annual report for 2008.
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. 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 internal controls; they have made certain disclosures to the Company’s
auditors and the audit committee of the Board of Directors about the Company’s
internal controls; and they have included information in the Company’s Quarterly
and Annual Reports about their evaluation and whether there have been
significant changes in the Company’s internal controls or in other factors that
could significantly affect internal controls subsequent to the
evaluation.
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, encourages cooperation among financial
institutions, federal banking agencies, and law enforcement authorities
regarding possible money laundering or terrorist activities, prohibits the
anonymous use of “concentration accounts,” and requires all covered financial
institutions to have in place an anti-money laundering compliance
program.
The Bank,
a New Jersey-chartered commercial 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
The
Bank’s deposits are insured up to a maximum of $100,000 per depositor 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. The Bank is also subject
to a quarterly FICO assessment.
Employees
The
Company has two paid employees. Banking operations are conducted by the Bank,
and as of December 31, 2007, the Bank had 100 full-time employees and 12
part-time employees. Neither the Bank’s nor the Company’s employees are
represented by any collective bargaining group. The Bank and the Company each
considers its relations with such employees to be good.
The
common stock of the Company is speculative in nature and involves a significant
degree of risk. The risk factors below are not listed in order of
importance.
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. There can be no assurance that the Company and the Bank will be able
to successfully compete with these entities in the future. See “BUSINESS --
Competition.”
The
Company’s business is affected by economic conditions and related
uncertainties.
Commercial
banking is affected, directly and indirectly, by local, domestic, and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, scarce natural resources, real estate
values, international conflicts and other factors beyond the control of the
Company may adversely affect the potential profitability of the
Company. A downtrend in several areas, such as real estate,
construction and consumer spending, could have a material adverse impact on the
Company’s ability to maintain or increase profitability.
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 Board of Governors
of the Federal Reserve System. 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 interest rates paid on
deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, the Company’s net interest income, and
therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other
borrowings.
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 impact 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 is 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. See “BUSINESS -- Supervision and Regulation.”
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 effects the business and financial results
of all commercial banks and bank holding companies, the cost of compliance could
adversely affect the Company’s ability to operate profitably.
If
economic conditions deteriorate, particularly in the Bank’s market area, our
results of operations and financial condition could be adversely affected as
borrowers' ability to repay loans declines and the value of the collateral
securing our loans decreases.
Our
financial results may be adversely affected by changes in prevailing economic
conditions, particularly in the Bank’s market area, including decreases in real
estate values, changes in interest rates which may cause a decrease in interest
rate spreads, adverse employment conditions, the monetary and fiscal policies of
the federal government and other significant external events.
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.
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 collectibility 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 loss 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.
We
have significant investments in mortgage-backed securities and securities of
this kind may be subject to deterioration in value in certain
market conditions.
The
Company owned as of December 31, 2007 $80,876,181 in collateralized mortgages
and mortgage-backed securities. Several financial institutions have
reported significant write-downs of the value of mortgage related
securities. Certain of these types of securities may also not be
marketable except at significant discounts. While management of the
Company is as of the date of this report unaware of any material exposures in
its portfolio of these securities, market conditions could further deteriorate
and result in the recognition of losses in the value of these
securities.
We have
identified deficiencies in our internal control over financial reporting and
have developed a plan to remediate such deficiencies. We cannot
assure you that such plan will adequately address these deficiencies or that we
have discovered all of the deficiencies that may exist in our internal control
over financial reporting.
Item
1B. Unresolved Staff Comments
Not
applicable.
The
following table provides certain information with respect to our eleven banking
offices as of December 31, 2007:
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
|
2010
|
|
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
|
2015
|
|
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
|
2009
|
|
Hightstown,
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. 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.
Item
4. Submission of Matters to a Vote of Security
Holders.
No
matters were submitted to a vote of the Company’s shareholders during the fourth
quarter of the fiscal year ended December 31, 2007.
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 2007 and 2006, as
reported on the Nasdaq Global Market.
|
|
2007
|
|
|
|
|
2006
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
First
Quarter
|
|
$ |
18.25 |
|
|
$ |
16.06 |
|
|
(1 |
) |
|
$ |
18.64 |
|
|
$ |
15.26 |
|
|
(1 |
) |
Second
Quarter
|
|
$ |
17.59 |
|
|
$ |
15.92 |
|
|
(1 |
) |
|
$ |
17.58 |
|
|
$ |
15.55 |
|
|
(1 |
) |
Third
Quarter
|
|
$ |
16.76 |
|
|
$ |
13.73 |
|
|
(1 |
) |
|
$ |
16.91 |
|
|
$ |
15.30 |
|
|
(1 |
) |
Fourth
Quarter
|
|
$ |
15.64 |
|
|
$ |
13.25 |
|
|
(1 |
) |
|
$ |
17.77 |
|
|
$ |
15.58 |
|
|
(1 |
) |
|
(1) Prices
have been retroactively adjusted for the 6% stock dividend declared
December 20, 2007 and paid February 6, 2008 to shareholders of record on
January 23, 2008.
|
As of
March 25, 2008, there were approximately 331 record holders of the Company’s
common stock.
The
Company paid a 6% stock dividend on February 6, 2008 and January 31, 2007 and a
5% dividend on January 31, 2006. The Company has never paid a cash
dividend and there are no plans to pay a cash dividend at this
time. All per share data has been retroactively adjusted for stock
dividends. The Company will retain its earnings in order to provide
capital for growth of the Bank.
Issuer
Purchases of Equity Securities
In 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,
2007.
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, 2007
|
October
31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
161,430 |
|
November
1, 2007
|
November
30, 2007
|
|
|
400 |
|
|
$ |
15.70 |
|
|
|
400 |
|
|
|
161,030 |
|
December
1, 2007
|
December
31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
161,030 |
|
|
Total
|
|
|
400 |
|
|
$ |
15.70 |
|
|
|
400 |
|
|
|
161,030 |
|
_________________
(1)
|
The
Company’s common stock repurchase program covers a maximum of 185,787
shares of common stock of the Company, representing 5% of the outstanding
common stock of the Company on July 21, 2005, as adjusted for the 6% stock
dividend declared December 21, 2006 and paid January 31, 2007 and the 6%
stock dividend declared December 20, 2007 and paid February 6,
2008.
|
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, 1st Constitution Capital Trust I, and 1st
Constitution Capital Trust II, the “Bank” refers to 1st Constitution Bank, and
the “Trusts” refers to 1st Constitution Capital Trust I and 1st Constitution
Capital Trust II, collectively. 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.
Restatement of Previously Issued Financial Results
The
Company is restating its consolidated balance sheet as of December 31,
2006, and the related consolidated statement of operations, shareholders’ equity
and cash flows for the year ended December 31, 2006, including the
applicable notes, as well as its unaudited consolidated financial information
for each of the first three quarters of 2007 and the four quarters of
2006. For more information about the restatement, please see the
Explanatory Note to this report and Note 2, “Restatement of Consolidated
Financial Statements For the Year Ended and As At December 31, 2006” and Note
24, “Unaudited Quarterly Financial Statements and Restatement of Interim
Financial Statements” in the accompanying consolidated financial
statements.
The following discussion and analysis
of the Company’s financial condition and results of operations incorporate the
restated amounts.
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, 2007 contains a summary of the Company’s significant accounting
policies. Management believes the Company’s policy with respect to
the methodology for the determination of the allowance for loan losses involves
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. This critical policy and its
application is 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.
Results
of Operations
The
Company reported net income for the 12 months ended December 31, 2007 of
$5,442,782, an increase of 15.2% from the $4,724,962 reported for the 12 months
ended December 31, 2006. Diluted net income per share was $1.35 for
the year ended December 31, 2007 compared to $1.18 reported for the year ended
December 31, 2006. Basic net income per share for the year ended
December 31, 2007 was $1.37 as compared to the $1.21 reported for the year ended
December 31, 2006. All share information has been restated for the
effect of a 6% stock dividend declared on December 20, 2007 and paid on February
6, 2007 to shareholders of record on January 23, 2008.
Key
performance ratios remained strong for the 2007 fiscal year as compared to the
prior year. Return on average assets (“ROA”) and return on average
equity (“ROE”) were 1.29% and 14.32%, respectively, for the year ended December
31, 2007, compared to 1.24% and 14.73%, respectively, for the year ended
December 31, 2006.
The
Company’s earnings for the 2007 fiscal year reflect continuing momentum across a
broad range of product and service offerings. Increased lending
activity, coupled with increases in deposits through branch network expansion
and secondary market loan sales volume, as well as a reduction in the provision
for loan losses in 2007 versus 2006, fueled both the record earnings and balance
sheet growth.
Management
believes that the Company has positioned itself for continued success with the
combination of a strong capital base, a commitment to provide exceptional
customer service, and a commitment to maintain the technology necessary to
provide its customers with easy access to the financial products and services
offered by the Bank.
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 87.4% of the Company’s net revenues
for the year ended December 31, 2007. 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.
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, 2007 and 2006. 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Funds Sold/Short-Term
Investments
|
|
$ |
1,653,896 |
|
|
$ |
101,171 |
|
|
|
6.12 |
% |
|
$ |
1,457,568 |
|
|
$ |
85,012 |
|
|
|
5.14 |
% |
|
$ |
850,741 |
|
|
$ |
27,181 |
|
|
|
3.19 |
% |
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
Mortgage
Obligations
/ Mortgage
Backed
Securities
|
|
|
80,876,181 |
|
|
|
4,278,288 |
|
|
|
5.29 |
% |
|
|
70,048,748 |
|
|
|
3,448,780 |
|
|
|
4.92 |
% |
|
|
75,758,305 |
|
|
|
3,017,885 |
|
|
|
3.98 |
% |
Obligations
of States and
Political
Subdivisions (4)
|
|
|
22,968,401 |
|
|
|
1,296,032 |
|
|
|
5.64 |
% |
|
|
16,198,497 |
|
|
|
895,172 |
|
|
|
5.53 |
% |
|
|
18,975,766 |
|
|
|
978,099 |
|
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
103,844,582 |
|
|
|
5,574,320 |
|
|
|
5.37 |
% |
|
|
86,247,245 |
|
|
|
4,343,952 |
|
|
|
5.04 |
% |
|
|
94,734,071 |
|
|
|
3,995,984 |
|
|
|
4.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
129,285,776 |
|
|
|
11,486,944 |
|
|
|
8.88 |
% |
|
|
125,022,769 |
|
|
|
11,129,600 |
|
|
|
8.90 |
% |
|
|
94,253,131 |
|
|
|
7,010,571 |
|
|
|
7.44 |
% |
Residential
Real Estate
|
|
|
8,878,427 |
|
|
|
657,928 |
|
|
|
7.41 |
% |
|
|
8,072,109 |
|
|
|
517,146 |
|
|
|
6.41 |
% |
|
|
9,127,634 |
|
|
|
572,844 |
|
|
|
6.28 |
% |
Commercial
and Commercial
Real
Estate
|
|
|
117,463,693 |
|
|
|
9,140,142 |
|
|
|
7.78 |
% |
|
|
99,521,245 |
|
|
|
7,706,864 |
|
|
|
7.74 |
% |
|
|
93,871,685 |
|
|
|
6,831,503 |
|
|
|
7.28 |
% |
Installment
|
|
|
1,542,082 |
|
|
|
129,483 |
|
|
|
8.40 |
% |
|
|
2,013,438 |
|
|
|
167,126 |
|
|
|
8.30 |
% |
|
|
2,394,026 |
|
|
|
200,020 |
|
|
|
8.35 |
% |
All
Other Loans
|
|
|
35,201,373 |
|
|
|
3,698,990 |
|
|
|
10.51 |
% |
|
|
37,111,086 |
|
|
|
3,645,808 |
|
|
|
9.82 |
% |
|
|
31,772,196 |
|
|
|
3,007,190 |
|
|
|
9.46 |
% |
Total
(1)
|
|
|
292,371,351 |
|
|
|
25,113,487 |
|
|
|
8.59 |
% |
|
|
271,740,647 |
|
|
|
23,166,544 |
|
|
|
8.53 |
% |
|
|
231,418,672 |
|
|
|
17,622,128 |
|
|
|
7.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest-Earning Assets
|
|
|
397,869,829 |
|
|
|
30,788,978 |
|
|
|
7.74 |
% |
|
|
359,445,460 |
|
|
|
27,595,508 |
|
|
|
7.68 |
% |
|
|
327,003,484 |
|
|
|
21,645,293 |
|
|
|
6.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
|
(3,270,810 |
) |
|
|
|
|
|
|
|
|
|
|
(2,662,370 |
) |
|
|
|
|
|
|
|
|
|
|
(2,177,263 |
) |
|
|
|
|
|
|
|
|
Cash and
Due From Banks
|
|
|
10,254,911 |
|
|
|
|
|
|
|
|
|
|
|
9,391,415 |
|
|
|
|
|
|
|
|
|
|
|
9,130,543 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
17,648,099 |
|
|
|
|
|
|
|
|
|
|
|
15,422,593 |
|
|
|
|
|
|
|
|
|
|
|
12,893,312 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
422,502,029 |
|
|
|
|
|
|
|
|
|
|
$ |
381,597,098 |
|
|
|
|
|
|
|
|
|
|
$ |
346,850,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market and NOW
Accounts
|
|
$ |
83,597,940 |
|
|
$ |
1,737,487 |
|
|
|
2.08 |
% |
|
$ |
87,135,125 |
|
|
$ |
1,455,755 |
|
|
|
1.67 |
% |
|
$ |
101,189,352 |
|
|
$ |
1,211,901 |
|
|
|
1.20 |
% |
Savings
Accounts
|
|
|
64,408,442 |
|
|
|
2,017,580 |
|
|
|
3.13 |
% |
|
|
44,867,384 |
|
|
|
939,324 |
|
|
|
2.09 |
% |
|
|
33,671,684 |
|
|
|
409,397 |
|
|
|
1.22 |
% |
Certificates
of Deposit
|
|
|
67,236,813 |
|
|
|
3,170,322 |
|
|
|
4.72 |
% |
|
|
58,183,657 |
|
|
|
2,907,883 |
|
|
|
5.00 |
% |
|
|
77,183,169 |
|
|
|
2,383,392 |
|
|
|
3.09 |
% |
Certificates
of Deposit of
$100,000
and Over
|
|
|
54,252,087 |
|
|
|
2,711,467 |
|
|
|
5.00 |
% |
|
|
43,870,647 |
|
|
|
1,385,119 |
|
|
|
3.16 |
% |
|
|
9,771,290 |
|
|
|
309,159 |
|
|
|
3.16 |
% |
Other
Borrowed Funds
|
|
|
29,580,685 |
|
|
|
1,514,907 |
|
|
|
5.12 |
% |
|
|
32,539,699 |
|
|
|
1,687,749 |
|
|
|
5.19 |
% |
|
|
31,143,663 |
|
|
|
1,363,507 |
|
|
|
4.38 |
% |
Trust
Preferred Securities
|
|
|
19,534,247 |
|
|
|
1,438,876 |
|
|
|
7.37 |
% |
|
|
14,863,014 |
|
|
|
1,141,667 |
|
|
|
7.68 |
% |
|
|
5,000,000 |
|
|
|
350,823 |
|
|
|
7.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest-Bearing Liabilities
|
|
|
318,610,214 |
|
|
|
12,590,639 |
|
|
|
3.95 |
% |
|
|
281,459,526 |
|
|
|
9,517,497 |
|
|
|
3.38 |
% |
|
|
257,959,158 |
|
|
|
6,028,179 |
|
|
|
2.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.79 |
% |
|
|
|
|
|
|
|
|
|
|
4.30 |
% |
|
|
|
|
|
|
|
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Bearing
Demand
Deposits
|
|
|
60,892,433 |
|
|
|
|
|
|
|
|
|
|
|
63,040,519 |
|
|
|
|
|
|
|
|
|
|
|
57,792,902 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
4,989,809 |
|
|
|
|
|
|
|
|
|
|
|
5,013,813 |
|
|
|
|
|
|
|
|
|
|
|
3,447,534 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
384,492,456 |
|
|
|
|
|
|
|
|
|
|
|
349,513,858 |
|
|
|
|
|
|
|
|
|
|
|
319,199,594 |
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
38,009,573 |
|
|
|
|
|
|
|
|
|
|
|
32,083,240 |
|
|
|
|
|
|
|
|
|
|
|
27,650,482 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders'
Equity
|
|
$ |
422,502,029 |
|
|
|
|
|
|
|
|
|
|
$ |
381,597,098 |
|
|
|
|
|
|
|
|
|
|
$ |
346,850,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (3)
|
|
|
|
|
|
$ |
18,198,339 |
|
|
|
4.57 |
% |
|
|
|
|
|
$ |
18,078,011 |
|
|
|
5.03 |
% |
|
|
|
|
|
$ |
15,617,114 |
|
|
|
4.78 |
% |
(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.
|
(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 $120,328,
or 0.7%, to $18,198,339 for the year ended December 31, 2007, from the
$18,078,011 reported for the year ended December 31, 2006. As
indicated in the Rate/Volume Table, the principal factor contributing to the
2007 increase in net interest income was an increase in the interest income of
$1,596,826, resulting from increased balances in the loan portfolio
components. This was partially offset by an increase in interest
expense resulting from increases in the rates paid on deposit
components.
The
Company’s net interest income on a tax-equivalent basis increased by $2,460,897,
or 15.8%, to $18,078,011 for the year ended December 31, 2006, from the
$15,617,114 reported for the year ended December 31, 2005. As
indicated in the Rate/Volume Table, the principal factor contributing to the
2006 increase in net interest income was an increase in the interest income of
$3,368,409, resulting from increased balances in the loan portfolio
components. This was partially offset by an increase in interest
expense resulting from increases in the rates paid on deposit
components.
Rate/Volume Table
|
|
Amount
of Increase (Decrease)
|
|
|
|
Year Ended December
31,
2007 versus
2006
|
|
|
Year Ended December
31,
2006 versus
2005
|
|
|
|
Due to Change
in:
|
|
|
Due to Change
in:
|
|
(Tax-equivalent
basis)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
382,349 |
|
|
$ |
(25,005 |
) |
|
$ |
357,344 |
|
|
$ |
2,516,095 |
|
|
$ |
1,602,934 |
|
|
$ |
4,119,029 |
|
Residential
Real Estate
|
|
|
55,873 |
|
|
|
84,909 |
|
|
|
140,782 |
|
|
|
(67,564 |
) |
|
|
11,866 |
|
|
|
(55,698 |
) |
Commercial
and Commercial Real Estate
|
|
|
1,393,469 |
|
|
|
39,808 |
|
|
|
1,433,278 |
|
|
|
427,419 |
|
|
|
447,942 |
|
|
|
875,361 |
|
Installment
|
|
|
(39,657 |
) |
|
|
2,013 |
|
|
|
(37,643 |
) |
|
|
(31,770 |
) |
|
|
(1,115 |
) |
|
|
(32,894 |
) |
All
Other Loans
|
|
|
(195,209 |
) |
|
|
248,390 |
|
|
|
53,182 |
|
|
|
524,238 |
|
|
|
114,380 |
|
|
|
638,618 |
|
Total
Loans
|
|
|
1,596,826 |
|
|
|
350,117 |
|
|
|
1,946,943 |
|
|
|
3,368,409 |
|
|
|
2,176,006 |
|
|
|
5,544,415 |
|
Investment
Securities :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collat.
Mortg. Obligations / Mortg. Backed Securities
|
|
|
551,519 |
|
|
|
277,989 |
|
|
|
829,508 |
|
|
|
(281,233 |
) |
|
|
712,128 |
|
|
|
430,895 |
|
States
and political subdivisions
|
|
|
378,709 |
|
|
|
22,151 |
|
|
|
400,860 |
|
|
|
(155,035 |
) |
|
|
72,108 |
|
|
|
(82,927 |
) |
Total Investment
Securities
|
|
|
930,227 |
|
|
|
300,141 |
|
|
|
347,968 |
|
|
|
(436,268 |
) |
|
|
784,236 |
|
|
|
347,968 |
|
Federal
Funds Sold / Short-Term Investments
|
|
|
16 |
|
|
|
437 |
|
|
|
454 |
|
|
|
30,300 |
|
|
|
27,531 |
|
|
|
57,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest
Income
|
|
|
2,527,069 |
|
|
|
650,695 |
|
|
|
2,295,364 |
|
|
|
2,962,440 |
|
|
|
2,987,774 |
|
|
|
5,950,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market and NOW Accounts
|
|
|
(67,296 |
) |
|
|
349,028 |
|
|
$ |
281,732 |
|
|
|
(168,651 |
) |
|
|
412,505 |
|
|
|
243,854 |
|
Savings
Accounts
|
|
|
510,021 |
|
|
|
568,235 |
|
|
|
1,078,256 |
|
|
|
186,786 |
|
|
|
343,141 |
|
|
|
529,927 |
|
Certificates
of Deposit
|
|
|
439,006 |
|
|
|
(176,567 |
) |
|
|
262,439 |
|
|
|
(1,340,184 |
) |
|
|
1,864,675 |
|
|
|
524,491 |
|
Certificates
of Deposit of $100,000 and Over
|
|
|
432,591 |
|
|
|
902,757 |
|
|
|
1,326,347 |
|
|
|
1,268,520 |
|
|
|
(192,561 |
) |
|
|
1,075,959 |
|
Other
Borrowed Funds
|
|
|
(151,819 |
) |
|
|
(21,023 |
) |
|
|
(172,842 |
) |
|
|
61,146 |
|
|
|
263,096 |
|
|
|
324,242 |
|
Trust
Preferred Securities
|
|
|
349,788 |
|
|
|
(66,929 |
) |
|
|
282,859 |
|
|
|
757,845 |
|
|
|
33,000 |
|
|
|
790,845 |
|
Total Interest
Expense
|
|
|
1,503,290 |
|
|
|
1,555,501 |
|
|
|
3,058,791 |
|
|
|
765,462 |
|
|
|
2,723,856 |
|
|
|
3,489,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$ |
1,023,779 |
|
|
$ |
(904,806 |
) |
|
|
120,328 |
|
|
$ |
2,196,979 |
|
|
$ |
263,917 |
|
|
$ |
2,460,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest earning
assets increased by $38,424,369, or 10.7%, to $397,869,829 for the year ended
December 31, 2007 from $359,445,460 for the year ended December 31, 2006,
consisting primarily of increases for 2007 of $20,630,704 in loans and
$17,597,337 in investment securities compared to 2006. Led by the
construction loans component, the Bank’s average total loan portfolio grew by
7.6% and loan yields averaged 8.59% for the year ended December 31, 2007, 6
basis points higher than for the year ended December 31, 2006. The
Bank’s average investment securities portfolio increased 20.4%, and the yield on
that portfolio increased 33 basis points for the year ended December 31, 2007
compared to the year ended December 31, 2006. Overall, the yield on
interest earning assets increased 5 basis points to 7.73% in the 2007 fiscal
year from 7.68% in the 2006 fiscal year.
Average interest earning
assets increased by $32,441,976, or 9.9%, to $359,445,460 for the year ended
December 31, 2006 from $327,003,484 for the year ended December 31, 2005,
consisting primarily of an increase for 2006 of $40,321,975 in loans partially
offset by a decrease of $8,486,826 in investment securities compared to
2005. Led by the construction loans component, the Bank’s average
total loan portfolio grew by 17.4%, and loan yields averaged 8.53% for the year
ended December 31 2006, 92 basis points higher than for the year ended December
31, 2005. This increase was primarily the result of 2006 loan growth
at floating yields amid the increasing interest rate environment that continued
during the first half of the year. The Bank’s average investment
securities portfolio decreased 9.0%, and the yield on that portfolio increased
82 basis points, for the year ended December 31, 2006 compared to the year ended
December 31, 2005. Net premium amortization for the year ended
December 31, 2006 was $41,405 compared to $139,507 for the year ended December
31, 2005. Overall, the yield on interest earning assets increased 106
basis points to 7.68% in the 2006 fiscal year from 6.62% in the 2005 fiscal
year.
Interest
expense increased by $3,073,142, or 32.3%, to $12,590,639 for the year ended
December 31, 2007, from $9,517,497 for the year ended December 31,
2006. This increase in interest expense is principally attributable
to higher levels of interest-bearing liabilities priced at a higher market
interest rate level. Savings accounts increased on average by
$19,541,058 in 2007, or 43.6%, as compared to 2006, contributing to the funding
of loans and investments portfolio growth. The cost on these deposits
increased 104 basis points in 2007 from 2006. Average interest
bearing liabilities rose 13.2% in 2007 from 2006. The cost of total
interest-bearing liabilities increased 57 basis points to 3.95% in 2007 from
3.38% in 2006.
Interest expense increased by
$3,489,318, or 57.9%, to $9,517,497 for the year ended December 31, 2006, from
$6,028,179 for the year ended December 31, 2005. This increase in
interest expense is principally attributable to higher levels of
interest-bearing liabilities priced at a higher market interest rate
level. Savings accounts increased on average by $11,195,700 in 2006,
or 33.2%, as compared to 2005, contributing to the funding of loan portfolio
growth. The cost on these deposits increased 87 basis points in 2006
from 2005. Average interest bearing liabilities rose 9.1% in 2006
from 2005. The cost of total interest-bearing liabilities increased
104 basis points to 3.38% in 2006 from 2.34% in 2005.
Average
non-interest bearing demand deposits decreased by $2,148,086, or 3.4%, to
$60,892,433 for the year ended December 31, 2007 from $63,040,519 for the year
ended December 31, 2006.
Non-Interest
Income
Non-interest
income decreased by $13,119, or 0.5%, to $2,558,329 for the year ended December
31, 2007 from $2,571,448 for the year ended December 31, 2006.
Service
charges on deposit accounts represent a significant source of non-interest
income. Service charge revenues remained level at $673,826 for the
year ended December 31, 2007 compared to $668,071 for the year ended December
31, 2006. This component of non-interest income represented 26.3% and
25.8% of the total non-interest income for the years ended December 31, 2007 and
2006, respectively.
Gains on
sales of loans held for sale decreased by $311,727, or 29.1%, to $761,004 for
the year ended December 31, 2007, from $1,072,731 for the year ended December
31, 2006. The rising interest rate environment that existed
throughout 2006 and continued into the first nine months of 2007 has impacted
the volume of sales transactions in the SBA loan secondary market and the
resultant gains from these sales transactions.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $265,601 for the year ended December 31, 2007 compared to $330,915
for the year ended December 31, 2006. The Bank purchased $6.0 million
in tax-free BOLI assets in 2002 and $2.0 million in 2005, which partially offset
the cost of employee benefit plans and reduced the 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-customers. Deposit and service fee charges are reviewed and
adjusted as needed from time to time by management to reflect current costs
incurred by the Bank to offer the products or services and prices charged by
competitor financial institutions amid the Bank’s competitive
market.
The
Company recorded net losses on sales of securities available for sale of $99,714
for the year ended December 31, 2006. The Company recorded no gains
or losses on sales of securities available for sale of in 2007. These
portfolio transactions in 2006 were primarily the result of modest portfolio
restructurings. Their purpose was to improve the Company’s
longer-term interest rate risk position.
Non-Interest
Expenses
Non-interest
expenses increased by $86,421, or 0.7%, to $12,101,268 for the year ended
December 31, 2007, from $12,014,847 for the year ended December 31,
2006. The largest increase in non-interest expenses for 2007 compared
to 2006 was in salaries and employee benefits. To a lesser extent,
occupancy expense also reflects an increase for the comparable
periods. The following table presents the major components of
non-interest expenses for the years 2007 and 2006.
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
Salaries
and employee benefits
|
|
$ |
7,196,552 |
|
|
$ |
6,741,050 |
|
Occupancy
expense
|
|
|
1,658,820 |
|
|
|
1,448,227 |
|
Data
processing services
|
|
|
829,037 |
|
|
|
733,954 |
|
Equipment
expense
|
|
|
485,792 |
|
|
|
507,402 |
|
Marketing
|
|
|
106,862 |
|
|
|
258,012 |
|
Regulatory,
professional and other fees
|
|
|
435,464 |
|
|
|
824,370 |
|
Office
expense
|
|
|
572,293 |
|
|
|
470,211 |
|
All
other expenses
|
|
|
816,448 |
|
|
|
1,031,621 |
|
Total
|
|
$ |
12,101,268 |
|
|
$ |
12,014,847 |
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $455,502, or 6.8%, to $7,196,552 for the year ended
December 31, 2007 compared to $6,741,050 for the year ended December 31,
2006. The 2007 increase was a result of an increase in staffing
levels plus normal salary increases partially offset by a lower level of
expenses incurred in connection with the Company’s health insurance and other
employee benefit plans. Salaries and employee benefits as a
percentage of average assets were 1.70% for 2007 and 1.77% for
2006.
For the
year ended December 31, 2007, occupancy expense increased by $210,593, or 14.5%,
to $1,658,820 from $1,448,227 for the year ended December 31,
2006. The February 27, 2007 acquisition of the Hightstown branch was
primarily the cause for the current year increase in occupancy
expense.
The
occupancy expense component of total non-interest expense as a percentage of
average assets was 0.39% for the year ended December 31, 2007 and 0.38% for the
year ended December 31, 2006.
Data
processing service expense increased by $95,083, or 12.96%, to $829,037 for the
year ended December 31, 2007 compared to $733,954 for the year ended December
31, 2006 as the Company incurred operating costs to bring the new branch
location online during 2007 as well as upgrading existing systems throughout the
year.
Marketing
expense decreased by $151,150, or 58.6%, to $106,862 for the year ended December
31, 2007 compared to $258,012 for the year ended December 31, 2006, as the
Company ran fewer broadcast media promotions during 2007.
The
Bank’s ratio of non-interest expense to average assets has remained consistently
favorable at 2.86% for the year ended December 31, 2007 compared to 3.15% for
the year ended December 31, 2006.
An
important industry productivity measure is the efficiency ratio. The
efficiency ratio is calculated by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same or greater
volume of income, while a decrease would indicate a more efficient allocation of
resources. The Bank’s efficiency ratio for the year ended December
31, 2007 was 59.5% compared to 59.0% for the year ended December 31,
2006.
Financial
Condition
On
February 27, 2007, the Company, through the Bank, completed its acquisition of
the Hightstown, New Jersey branch of another financial institution for a
purchase price of $747,330.
As a result of the acquisition, the
Hightstown branch became a branch of the Bank. Included in the
acquisition of the branch were deposit liabilities of $19.5 million, mostly in
certificates of deposit, cash of approximately $18.8 million, net of assets
acquired, cash on hand of approximately $137,000, fixed and other assets of
approximately $91,000 and the assumption of the lease of the branch
premises. The cash received in the transaction was utilized to repay
short term borrowings used to purchase investment securities prior to, and in
contemplation of, the completion of the acquisition.
In addition, the Bank recorded goodwill
of $445,653 and a deposit intangible asset of $274,604.
Cash
and Cash Equivalents
At
December 31, 2007, cash and cash equivalents totaled $7,548,102 compared to
$10,361,812 at December 31, 2006. Cash and cash equivalents at
December 31, 2007 consisted of cash and due from banks of $7,517,158 and federal
funds sold/short-term investments of $30,944. The corresponding
balances at December 31, 2006 were $10,336,334 and $25,478,
respectively.
Investment
Securities
The
Bank’s investment securities portfolio amounted to $98,704,483, or 23.0% of
total assets at December 31, 2007, compared to $89,675,804, or 22.8% of total
assets at December 31, 2006. On an average balance basis, the
investment securities portfolio represented 26.1% and 24.0% of average
interest-earning assets for the years ended December 31, 2007 and 2006,
respectively. The average yield earned on the portfolio was 5.37% for
the year ended December 31, 2007, an increase of 33 basis points from 5.04%
earned for the year ended December 31, 2006.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes. Securities available for sale consist primarily of U.S.
Government and Federal agency securities as well as mortgage-backed
securities. 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, 2007, available-for-sale securities amounted to $75,192,137, an
increase of $4,770,809 from December 31, 2006. The Company recorded
net losses on sales of securities available for sale of $99,714 for
2006.
Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
|
|
|
|
|
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
|
|
$ |
29,561,717 |
|
|
$ |
317,245 |
|
|
$ |
(421,604 |
) |
|
$ |
29,457,359 |
|
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 |
|
FHLB
stock and other securities
|
|
|
4,383,823 |
|
|
|
0 |
|
|
|
(272,504 |
) |
|
|
4,111,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,161,574 |
|
|
$ |
789,748 |
|
|
$ |
(759,185 |
) |
|
$ |
75,192,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Other
Securities
|
|
|
996,051 |
|
|
|
- |
|
|
|
(119,526 |
) |
|
|
876,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,512,346 |
|
|
$ |
144,364 |
|
|
$ |
(245,441 |
) |
|
$ |
23,411,269 |
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
2006
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale-
|
|
|
|
|
|
|
|
|
|
|
U.
S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
of U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
corporations and agencies
|
|
$ |
35,625,182 |
|
|
$ |
124,144 |
|
|
$ |
(694,261 |
) |
|
$ |
35,055,065 |
|
Mortgage
backed securities
|
|
|
28,305,557 |
|
|
|
113,353 |
|
|
|
(216,111 |
) |
|
|
28,202,799 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
3,655,197 |
|
|
|
15,902 |
|
|
|
(31,749 |
) |
|
|
3,639,350 |
|
FHLB
stock and other securities
|
|
|
3,554,759 |
|
|
|
304 |
|
|
|
(30,949 |
) |
|
|
3,524,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,140,695 |
|
|
$ |
253,703 |
|
|
$ |
(973,070 |
) |
|
$ |
70,421,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
$ |
5,540,670 |
|
|
$ |
2,015 |
|
|
$ |
(175,826 |
) |
|
$ |
5,366,859 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
13,713,806 |
|
|
|
131,955 |
|
|
|
(47,941 |
) |
|
|
13,797,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,254,476 |
|
|
$ |
133,970 |
|
|
$ |
(223,767 |
) |
|
$ |
19,164,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
of U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
corporations and agencies
|
|
$ |
34,032,814 |
|
|
$ |
7,198 |
|
|
$ |
(977,560 |
) |
|
$ |
33,062,452 |
|
Mortgage
backed securities
|
|
|
29,250,341 |
|
|
|
90,286 |
|
|
|
(302,193 |
) |
|
|
29,038,434 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
3,855,987 |
|
|
|
1,333 |
|
|
|
(65,063 |
) |
|
|
3,792,257 |
|
FHLB
stock and other securities
|
|
|
3,371,673 |
|
|
|
- |
|
|
|
(28,158 |
) |
|
|
3,343,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70,510,815 |
|
|
$ |
98,817 |
|
|
$ |
(1,372,974 |
) |
|
$ |
69,236,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
$ |
5,807,730 |
|
|
$ |
7,233 |
|
|
$ |
(206,275 |
) |
|
$ |
5,608,688 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
15,950,640 |
|
|
|
108,525 |
|
|
|
(146,827 |
) |
|
|
15,912,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,758,370 |
|
|
$ |
115,758 |
|
|
$ |
(353,102 |
) |
|
$ |
21,521,026 |
|
Proceeds
from maturities and prepayments of securities available for sale amounted to
$12,704,423 for the year ended December 31, 2007 and $13,736,214 for the year
ended December 31, 2006. At December 31, 2007, the portfolio had net
unrealized gains of $30,563, compared to net unrealized losses of $719,367 at
December 31, 2006. These unrealized losses are reflected net of tax
in shareholders’ equity as a component of other comprehensive income
(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. The held-to-maturity portfolio consists primarily of
obligations of states and political subdivisions. At December 31,
2007, securities held to maturity were $23,512,346, an increase of $4,257,870
from $19,254,476 at December 31, 2006. The fair value of the
held-to-maturity portfolio at December 31, 2007 was $23,411,269, resulting in a
net unrealized loss of $101,077.
The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2007, 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
|
|
$ |
5,748,287 |
|
|
$ |
5,734,053 |
|
|
|
4.88 |
% |
Due
after one year through five years
|
|
|
13,613,468 |
|
|
|
13,845,942 |
|
|
|
5.09 |
% |
Due
after five years through ten years
|
|
|
10,654,348 |
|
|
|
10,736,895 |
|
|
|
5.12 |
% |
Due
after ten years
|
|
|
45,145,471 |
|
|
|
44,875,247 |
|
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
75,161,574 |
|
|
$ |
75,192,137 |
|
|
|
5.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
7,519,727 |
|
|
$ |
7,521,621 |
|
|
|
4.49 |
% |
Due
after one year through five years
|
|
|
1,904,665 |
|
|
|
1,917,828 |
|
|
|
5.56 |
% |
Due
after five years through ten years
|
|
|
5,371,683 |
|
|
|
5,421,885 |
|
|
|
5.54 |
% |
Due
after ten years
|
|
|
8,716,271 |
|
|
|
8,549,935 |
|
|
|
5.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23,512,346 |
|
|
$ |
23,411,269 |
|
|
|
5.27 |
% |
*
computed on a tax equivalent basis.
Loans
The loan
portfolio, which represents the Bank’s 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 construction loans (wholesale and retail),
commercial loans, owner-occupied commercial mortgage loans and tenanted
commercial real estate loans. Total loans averaged $292,371,351 for
the year ended December 31, 2007, an increase of $20,630,704, or 7.6%, compared
to an average of $271,740,647 for the year ended December 31,
2006. Growth in the average loan portfolio balance was generated
primarily by an increase of $17,942,448, or 18.0%, in commercial and commercial
real estate loans. At December 31, 2007, total loans amounted to
$294,760,718 compared to $265,142,313 at December 31, 2006, an increase of
$29,618,405, or 11.2%. The average yield earned on the loan portfolio
was 8.59% for the year ended December 31, 2007 compared to 8.53% for the year
ended December 31, 2006, an increase of 6 basis points. This increase
is primarily due to the rising interest rate environment that evolved during the
last half of 2004 and continued throughout the first half of 2006.
The
following table represents the components of the loan portfolio for the dates
indicated.
|
|
|
|
|
December
31,
|
|
|
2007
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Amount
|
|
|
%
|
Amount
|
|
|
%
|
|
Amount
|
|
|
%
|
|
Amount
|
|
|
%
|
|
Amount
|
|
|
%
|
Construction
loans
|
|
$ |
132,735,920 |
|
|
|
45 |
% |
|
$ |
125,268,871 |
|
|
|
47 |
% |
|
$ |
109,862,614 |
|
|
|
46 |
% |
|
$ |
88,027,024 |
|
|
|
42 |
% |
|
$ |
56,971,265 |
|
|
|
35 |
% |
Residential real
estate
loans
|
|
|
10,088,515 |
|
|
|
3 |
% |
|
|
7,670,370 |
|
|
|
3 |
% |
|
|
8,602,975 |
|
|
|
4 |
% |
|
|
9,815,366 |
|
|
|
5 |
% |
|
|
8,059,032 |
|
|
|
5 |
% |
Commercial
and
commercial
real estate
loans
|
|
|
135,128,642 |
|
|
|
46 |
% |
|
|
114,897,040 |
|
|
|
44 |
% |
|
|
104,448,196 |
|
|
|
43 |
% |
|
|
96,021,077 |
|
|
|
46 |
% |
|
|
83,840,831 |
|
|
|
51 |
% |
Loans to
individuals
|
|
|
16,324,817 |
|
|
|
6 |
% |
|
|
16,728,025 |
|
|
|
6 |
% |
|
|
16,441,994 |
|
|
|
7 |
% |
|
|
16,002,619 |
|
|
|
7 |
% |
|
|
13,236,895 |
|
|
|
8 |
% |
Lease
financing
|
|
|
0 |
|
|
|
0 |
% |
|
|
0 |
|
|
|
0 |
% |
|
|
21,073 |
|
|
|
0 |
% |
|
|
74,543 |
|
|
|
0 |
% |
|
|
1,054,198 |
|
|
|
1 |
% |
Deferred
loan fees
|
|
|
302,818 |
|
|
|
0 |
% |
|
|
404,074 |
|
|
|
0 |
% |
|
|
466,678 |
|
|
|
0 |
% |
|
|
512,416 |
|
|
|
0 |
% |
|
|
442,212 |
|
|
|
0 |
% |
All other
loans
|
|
|
180,006 |
|
|
|
0 |
% |
|
|
173,933 |
|
|
|
0 |
% |
|
|
170,819 |
|
|
|
0 |
% |
|
|
200,118 |
|
|
|
0 |
% |
|
|
345,873 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
294,760,718 |
|
|
|
100 |
% |
|
$ |
265,142,313 |
|
|
|
100 |
% |
|
$ |
240,014,349 |
|
|
|
100 |
% |
|
$ |
210,653,163 |
|
|
|
100 |
% |
|
$ |
163,950,306 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial
real estate loans averaged $117,463,693 for the year ended December 31, 2007, an
increase of $17,942,448, or 18.0%, compared to $99,521,245 for the year ended
December 31, 2006. 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
increased 4 basis points to 7.78% for 2007 from 7.74% for 2006.
Construction
loans averaged $129,285,776 for the year ended December 31, 2007, an increase of
$4,263,007, or 3.4%, compared to $125,022,769 for the year ended December 31,
2006. 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 2 basis points to 8.88% for 2007 from 8.90% for 2006.
Residential
loans averaged $8,878,427 for the year ended December 31, 2007, an increase of
$806,318, or 10.0%, compared to $8,072,109 for the year ended December 31,
2006. These loans consist primarily of residential mortgage loans
secured by residential real estate. The average yield on this
portfolio increased 100 basis points to 7.41% for 2007 from 6.41% for
2006.
The
following table provides information concerning the interest rate sensitivity of
the Bank’s commercial and commercial real estate loans and construction loans at
December 31, 2007.
|
|
Maturity
Range
|
|
|
|
|
Type
|
|
Within
One
Year
|
|
|
After
One But
Within
Five Years
|
|
|
After
Five
Years
|
|
|
Total
|
|
Commercial
& commercial real estate
|
|
$ |
29,159,140 |
|
|
$ |
26,249,032 |
|
|
$ |
79,720,470 |
|
|
$ |
135,128,642 |
|
Construction
|
|
|
109,364,698 |
|
|
|
22,179,845 |
|
|
|
1,191,377 |
|
|
|
132,735,920 |
|
Total
|
|
$ |
138,523,838 |
|
|
$ |
48,428,876 |
|
|
$ |
80,911,847 |
|
|
$ |
267,864,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate loans
|
|
$ |
5,762,628 |
|
|
$ |
16,622,329 |
|
|
$ |
9,990,236 |
|
|
$ |
32,375,193 |
|
Floating
rate loans
|
|
|
132,761,210 |
|
|
|
31,806,547 |
|
|
|
70,921,612 |
|
|
|
235,489,368 |
|
Total
|
|
$ |
138,523,838 |
|
|
$ |
48,428,876 |
|
|
$ |
80,911,848 |
|
|
$ |
267,864,562 |
|
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 decreased by $2,156,351 to $2,036,858 at December 31, 2007 from $4,193,209
at December 31, 2006. This decrease is primarily due to a transfer to other real
estate owned of $2,960,727 for real estate acquired in full satisfaction of a
loan in foreclosure. Approximately half of the non-performing loans is an
unfinished residential construction project with the majority of the remaining
half being comprised of commercial loans. 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
decreased to 0.67% at December 31, 2007 from 1.50% at December 31, 2006 for the
reason previously stated. Loan quality is considered to be sound, and this was
accomplished through quality loan underwriting, a proactive approach to loan
monitoring and aggressive workout strategies.
Non-performing assets
increased by $804,376 to $4,997,585 at December 31, 2007 from $4,193,209 at
December 31, 2006. Non-performing assets represented 1.16% of total assets at
December 31, 2007 and 1.07% at December 31, 2006. Non-performing loans as a
percentage of total loans were 0.67% at December 31, 2007, compared to 1.50% at
December 31, 2006.
The Bank
had no loans classified as restructured loans at December 31, 2007 or
2006.
At
December 31, 2007 and December 31, 2006, the Bank had no loans that were 90 days
or more past due but still accruing interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing
Assets and Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Non-Performing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
209 |
|
|
$ |
63,130 |
|
|
$ |
0 |
|
Non-accrual
loans
|
|
|
2,036,858 |
|
|
|
4,193,209 |
|
|
|
833,150 |
|
|
|
1,049,411 |
|
|
|
330,783 |
|
Total
non-performing loans
|
|
|
2,036,858 |
|
|
|
4,193,209 |
|
|
|
833,359 |
|
|
|
1,112,541 |
|
|
|
330,783 |
|
Other
real estate owned
|
|
|
2,960,727 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8,971 |
|
Total
non-performing assets
|
|
$ |
4,997,585 |
|
|
$ |
4,193,209 |
|
|
$ |
833,359 |
|
|
$ |
1,112,541 |
|
|
$ |
339,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
0.67 |
% |
|
|
1.50 |
% |
|
|
0.32 |
% |
|
|
0.50 |
% |
|
|
0.20 |
% |
Non-performing
assets to total assets
|
|
|
1.16 |
% |
|
|
1.07 |
% |
|
|
0.22 |
% |
|
|
0.33 |
% |
|
|
0.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 each of the 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 estimated selling costs, or at cost. The amount, if any, by which the
recorded amount of the loan exceeds the fair market value of the asset 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 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 including construction loans. Based on
the composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, increases in interest rates, 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 and lease losses is restricted to any individual loan or groups of loans,
and the entire allowance is available to absorb any and all loan and lease
losses.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan and lease 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 and
lease losses consists of several key elements. These elements may
include a specific reserve for substandard or high risk loans, plus an allocated
reserve, and possibly an unallocated portion. The Company
consistently applies the following comprehensive methodology.
During
the quarterly review of the allowance for loan and lease losses, the Company
considers a variety of factors that include:
|
·
|
General
economic conditions.
|
|
·
|
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.
|
The specific reserve for high risk
loans is established for specific commercial loans, commercial real estate
loans, and construction loans which have been identified by management as being
high risk assets. High risk loans are assigned an adverse grade since
the loans are generally characterized with having weaknesses that may result in
deterioration of repayment or worse. The specific portion of the
allowance is the total amount of potential unconfirmed losses for these
individual high risk 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
for the 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. An unallocated allowance is used to cover any factors
or conditions which may cause a potential loan loss but are not specifically
identifiable. It may be 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 which is often subjective and changing rapidly. At
December 31, 2007, management believed that the allowance for loan losses and
non-performing loans 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 table
below presents, for the years indicated, an analysis of the allowance for loan
losses and other related data.
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Balance,
beginning of year
|
|
$ |
3,228,360 |
|
|
$ |
2,361,375 |
|
|
$ |
2,005,169 |
|
|
$ |
1,786,632 |
|
|
$ |
1,669,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
charged to operating expenses
|
|
|
130,000 |
|
|
|
893,500 |
|
|
|
405,000 |
|
|
|
240,000 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Residential
real estate loans
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and commercial real estate loans
|
|
|
(88,891 |
) |
|
|
(11,154 |
) |
|
|
(39,150 |
) |
|
|
(17,070 |
) |
|
|
(115,698 |
) |
Loans
to individuals
|
|
|
(1,614 |
) |
|
|
(18,314 |
) |
|
|
(13,653 |
) |
|
|
(5,203 |
) |
|
|
(7,968 |
) |
Lease
financing
|
|
|
(478 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All
other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
(90,983 |
) |
|
|
(29,468 |
) |
|
|
(52,803 |
) |
|
|
(22,273 |
) |
|
|
(123,666 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
75,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Residential
real estate loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and commercial real estate loans
|
|
|
0 |
|
|
|
153 |
|
|
|
1,498 |
|
|
|
750 |
|
|
|
|
|
Loans
to individuals
|
|
|
5,703 |
|
|
|
2,800 |
|
|
|
2,511 |
|
|
|
60 |
|
|
|
416 |
|
Lease
financing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All
other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
80,703 |
|
|
|
2,953 |
|
|
|
4,009 |
|
|
|
810 |
|
|
|
416 |
|
Net
(charge offs) / recoveries
|
|
|
(10,280 |
) |
|
|
(26,515 |
) |
|
|
(48,794 |
) |
|
|
(21,463 |
) |
|
|
(123,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$ |
3,348,080 |
|
|
$ |
3,228,360 |
|
|
$ |
2,361,375 |
|
|
$ |
2,005,169 |
|
|
$ |
1,786,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
year end
|
|
$ |
305,082,723 |
|
|
$ |
278,751,255 |
|
|
$ |
256,772,083 |
|
|
$ |
220,580,932 |
|
|
$ |
163,950,306 |
|
Average
during the year
|
|
|
292,371,351 |
|
|
|
271,740,647 |
|
|
|
231,418,672 |
|
|
|
198,452,421 |
|
|
|
170,191,619 |
|
Net
(charge offs) recoveries to average loans outstanding
|
|
|
0.00 |
% |
|
|
(0.01 |
%) |
|
|
(0.02 |
%) |
|
|
(0.01 |
%) |
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans at year end
|
|
|
1.10 |
% |
|
|
1.16 |
% |
|
|
0.92 |
% |
|
|
0.91 |
% |
|
|
1.09 |
% |
Non-performing
loans
|
|
|
164.37 |
% |
|
|
76.99 |
% |
|
|
283.36 |
% |
|
|
180.23 |
% |
|
|
540.12 |
% |
At
December 31, 2007, the allowance for loan losses was $3,348,080 compared to
$3,228,360 at December 31, 2006, an increase of $119,720, or
3.7%. The ratio of the allowance for loan losses to total loans at
December 31, 2007 and 2006 was 1.10% and 1.16%, respectively. The
allowance for loan losses as a percentage of non-performing loans was 164.37% at
December 31, 2007, compared to 76.99% at December 31, 2006. 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
provision for loan losses was $130,000 and $893,500, respectively, for the years
ended December 31, 2007 and 2006. Management considers a complete
review of the following specific factors in determining the provision 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 portfolio. In addition to these
factors, management takes into consideration current economic conditions and
local real estate market conditions. The decrease in the provision
for the year ended December 31, 2007 was primarily due to inherent risk related
to loan growth. Management believes the quality of the loan portfolio
remains sound, and the determination of the provision for loan losses amount was
primarily due to the manageable balances in non-accrual loans and management’s
assessment of economic conditions in the Bank’s marketplace.
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,
2007
|
|
December 31,
2006
|
|
December 31,
2005
|
|
December 31,
2004
|
|
December 31,
2003
|
|
|
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
|
|
$ |
1,671,059 |
|
|
|
46 |
% |
|
$ |
1,131,266 |
|
|
|
44 |
% |
|
$ |
1,393,210 |
|
|
|
43 |
% |
|
$ |
1,183,050 |
|
|
|
46 |
% |
|
$ |
1,054,113 |
|
|
|
51 |
% |
Construction
loans
|
|
|
1,308,651 |
|
|
|
45 |
% |
|
|
1,696,175 |
|
|
|
47 |
% |
|
|
578,537 |
|
|
|
46 |
% |
|
|
491,266 |
|
|
|
42 |
% |
|
|
375,193 |
|
|
|
35 |
% |
Residential
real estate loans
|
|
|
104,326 |
|
|
|
3 |
% |
|
|
61,634 |
|
|
|
3 |
% |
|
|
141,683 |
|
|
|
4 |
% |
|
|
120,310 |
|
|
|
5 |
% |
|
|
107,198 |
|
|
|
5 |
% |
Loans
to individuals
|
|
|
154,437 |
|
|
|
6 |
% |
|
|
139,055 |
|
|
|
6 |
% |
|
|
236,138 |
|
|
|
7 |
% |
|
|
200,517 |
|
|
|
7 |
% |
|
|
178,663 |
|
|
|
8 |
% |
Lease
financing
|
|
|
- |
|
|
|
0 |
% |
|
|
- |
|
|
|
0 |
% |
|
|
4,723 |
|
|
|
0 |
% |
|
|
4,010 |
|
|
|
0 |
% |
|
|
53,599 |
|
|
|
1 |
% |
Unallocated
|
|
|
109,607 |
|
|
|
|
|
|
|
200,230 |
|
|
|
N/A
|
|
|
7,084 |
|
|
|
N/A
|
|
|
6,016 |
|
|
|
N/A
|
|
|
17,866 |
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,348,080 |
|
|
|
100 |
% |
|
$ |
3,228,360 |
|
|
|
100 |
% |
|
$ |
2,361,375 |
|
|
|
100 |
% |
|
$ |
2,005,169 |
|
|
|
100 |
% |
|
$ |
1,786,632 |
|
|
|
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 Bank offers a variety of products designed to attract
and retain customers, with the Bank’s primary focus being on building and
expanding long-term relationships. Deposits in the year ended
December 31, 2007 averaged $330,387,715, an increase of $33,290,383, or 11.2%,
compared to $297,097,332 in the year ended December 31, 2006. At
December 31, 2007, total deposits were $329,332,368, an increase of $16,607,946,
or 5.3%, from $312,724,422 at December 31, 2006. The average rate
paid on the Bank’s interest-bearing deposit balances for 2007 was 3.58%,
increasing from the 2.86% average rate for 2006. Total interest
bearing deposits increased by $21,857,588, or 8.8%, to $270,276,565 at December
31, 2007 from $248,418,977 at December 31, 2006.
The
significant contributors to the increased level of deposit growth in the year
ended December 31, 2007 were an increase in average savings deposit, followed by
increases in certificates of deposit of $100,000 or more, and other time
deposits, offset by declines in interest-bearing demand deposits and
non-interest bearing demand deposits.
Time
deposits consists primarily of retail certificates of deposit and certificates
of deposit of $100,000 and over. Time deposits at December 31, 2007
were $122,013,689, an increase of $9,338,603, or 8.29%, from $112,675,086 at
December 31, 2006. The retail certificates of deposit component of
time deposits increased by $9,053,156, or 15.6%, to an average of $67,236,813
for 2007 from an average of $58,183,657 for 2006. The average cost of
these deposits decreased by 28 basis points to 4.72% for 2007 from 5.00% for
2006. Certificates of deposit of $100,000 and over increased by
$10,381,440 to an average of $54,252,087 for 2007 from an average of $43,870,647
for 2006. Certificates of deposit of $100,000 and over are a less
stable funding source and are used primarily as an alternative to other sources
of borrowed funds.
Average
non-interest bearing demand deposits decreased by $2,148,086, or 3.4%, to
$60,892,433 for the year ended December 31, 2007 from $63,040,519 for the year
ended December 31, 2006. At December 31, 2007, non-interest bearing
demand deposits totaled $59,055,803, a decrease of 8.2% compared to $64,305,445
at December 31, 2006. Non-interest bearing demand deposits represent
a stable, interest-free source of funds.
Savings
accounts increased by $8,463,706, or 15.8%, to $62,094,432 at December 31, 2007
from $53,630,726 at December 31, 2006. The average balance of savings
accounts for 2007 increased by $19,541,058 to $64,408,442 compared to an average
balance of $44,867,384 for 2006.
Interest bearing demand deposits, which include
interest-bearing checking, money market and the Bank’s premier money market
product, 1st Choice
accounts, decreased by $2,148,086, or 3.4%, to an average of $60,892,433 for
2007 from an average of $63,040,519 in 2006. The average cost of
interest bearing demand deposits increased 41 basis points to 2.08% for
2007 compared to 1.67% for 2006.
The
following table illustrates the components of average total deposits for the
dates indicated.
|
|
|
|
Average
Deposit Balances |
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
Balance
|
|
|
Percentage
of
Total
|
|
|
Average
Balance
|
|
|
Percentage
of
Total
|
|
|
Average
Balance
|
|
|
Percentage
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
deposits
|
|
$ |
60,892,433 |
|
|
|
18.43 |
% |
|
$ |
63,040,519 |
|
|
|
21.22 |
% |
|
$ |
57,792,902 |
|
|
|
20.67 |
% |
Interest
bearing demand deposits
|
|
|
83,597,940 |
|
|
|
25.30 |
% |
|
|
87,135,125 |
|
|
|
29.33 |
% |
|
|
101,189,352 |
|
|
|
36.19 |
% |
Savings
deposits
|
|
|
64,408,442 |
|
|
|
19.49 |
% |
|
|
44,867,384 |
|
|
|
15.10 |
% |
|
|
33,671,684 |
|
|
|
12.04 |
% |
Certificates
of deposit of $100,000
or
more
|
|
|
54,252,087 |
|
|
|
16.42 |
% |
|
|
43,870,647 |
|
|
|
14.77 |
% |
|
|
9,771,290 |
|
|
|
3.49 |
% |
Other
time deposits
|
|
|
67,236,813 |
|
|
|
20.35 |
% |
|
|
58,183,657 |
|
|
|
19.58 |
% |
|
|
77,183,169 |
|
|
|
27.60 |
% |
Total
|
|
$ |
330,387,715 |
|
|
|
100.00 |
% |
|
$ |
297,097,332 |
|
|
|
100.00 |
% |
|
$ |
279,608,397 |
|
|
|
100.00 |
% |
|
|
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 $2,959,014, or 9.1%, to $29,580,685 for the
year ended December 31, 2007 from the average balance of $32,539,699 for the
year ended December 31, 2006. This decrease is primarily due to the
fact that deposit growth exceeded loan portfolio growth. The average
cost of other borrowed funds decreased 7 basis points to 5.12% for 2007 compared
to 5.19% for 2006.
The balance of other
borrowings was $35,600,000 at December 31, 2007, consisting of long-term FHLB
borrowings of $30,500,000 and overnight funds purchased of
$5,100,000. The balance of other borrowings at December 31, 2006
consisted of FHLB borrowings of $15,500,000 and overnight funds purchased of
$1,700,000. The average cost of other borrowed funds increased 7
basis points to 5.12% for 2007 compared with 5.19% for 2006.
The Bank
purchased five ten-year fixed rate convertible advances from the FHLB that total
$25,500,000 in the aggregate. These advances, in the amounts of
$3,000,000, $2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at
the rates of 5.82%, 5.50%, 5.34%, 5.06% and 4.08%, respectively. The
Bank purchased one two-year advance in the amount of $5,000,000 that bears
interest at a 3.833% rate. 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 $6,026,272, or 17.2%, to $40,972,777 at December 31, 2007,
from $34,946,505 at December 31, 2006. Book value per common share
increased by $1.45, or 16.5%, to $10.26 at December 31, 2007 from $8.81 at
December 31, 2006. The increase in shareholders’ equity and book
value per share resulted primarily from net income of $5,442,782, less the
effect of stock buybacks. The ratio of shareholders’ equity to total
assets was 9.55% and 8.89% at December 31, 2007 and 2006,
respectively.
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. A 6% stock dividend was declared in 2007 and 2006 and
paid in 2008 and 2007, respectively. A 5% stock dividend was declared
in 2005 and paid in 2006.
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 20
of the Notes to Consolidated Financial Statements on page F-31.
Off-Balance
Sheet Arrangements
The
following table shows the amounts and expected maturities of significant
commitments as of December 31, 2007. Further discussion of these
commitments is included in Note 13 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
|
|
$ |
5,546,723 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
5,546,723 |
|
Commitments
to extend credit
|
|
$ |
114,175,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
114,175,000 |
|
Commitments
to sell residential loans
|
|
$ |
10,322,005 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10,322,005 |
|
Liquidity
Liquidity
measures the ability to satisfy current and future cash flow needs as they
become due.
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, 2007, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $28,883,000
plus a One-Month Overnight Repricing Line of Credit of $28,883,000. 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
$13,500,000 with a correspondent bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At December 31, 2007,
the balance of cash and cash equivalents was $7,548,102.
Net cash
provided by operating activities totaled $9,389,262 for the year ended December
31, 2007 compared to net cash provided by operations of $8,395,283 for the year
ended December 31, 2006. The primary source of funds is net income
from operations adjusted for provision for loan losses, depreciation expenses,
and net amortization of premiums on securities.
Net cash
used in investing activities decreased by $1,924,047 to $22,562,137 for the year
ended December 31, 2007 from $24,486,184 for the year ended December 31,
2006. The decrease in cash usage for 2007 compared to 2006 resulted
from the added inflow of cash and cash equivalents from the February 2007
Hightstown branch acquisition.
Net cash
provided by financing activities decreased by $3,955,797 to $10,359,165 for the
year ended December 31, 2007 from $14,314,962 for the year ended December 31,
2006. The cash provided in 2007 resulted primarily from an increase
in borrowed funds.
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, 2007, prepayments and maturities of investment securities totaled
$16,092,008. Another source of liquidity is the loan portfolio, which
provides a flow of payments and maturities.
Interest
Rate Sensitivity Analysis
The
largest component of the Bank’s total income is net interest income, and the
majority of the Bank’s financial instruments are composed of interest
rate-sensitive assets and liabilities with various terms and
maturities. The primary objective of management is to maximize net
interest income while minimizing interest rate risk. Interest rate
risk is derived from timing differences in the repricing of assets and
liabilities, loan prepayments, deposit withdrawals, and differences in lending
and funding rates. Management actively seeks to monitor and control
the mix of interest rate-sensitive assets and interest rate-sensitive
liabilities.
The
following tables set forth certain information relating to the Bank’s financial
instruments that are sensitive to changes in interest rates, categorized by
expected maturity or repricing and the fair value of such instruments at
December 31, 2007.
Interest Rate Sensitivity
Analysis At December 31, 2007
($
in thousands)
|
|
|
|
Interest Sensitivity
Period
|
|
|
Total Within
One
Year
|
|
|
One Year
To
Two
Years
|
|
|
Non-interest
Sensitive
and
Over Two
Years
|
|
|
Total
|
|
|
|
30
Day
|
|
|
90
Day
|
|
|
180
Day
|
|
|
365
Day
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investment Securities
|
|
$ |
8,375 |
|
|
$ |
5,075 |
|
|
$ |
8,501 |
|
|
$ |
11,398 |
|
|
$ |
33,349 |
|
|
$ |
15,564 |
|
|
$ |
49,792 |
|
|
$ |
98,705 |
|
Loans
|
|
|
174,501 |
|
|
|
5,565 |
|
|
|
10,915 |
|
|
|
13,084 |
|
|
|
204,065 |
|
|
|
18,898 |
|
|
|
71,798 |
|
|
|
294,761 |
|
Other
interest-earning assets
|
|
|
10,527 |
|
|
|
18,000 |
|
|
|
- |
|
|
|
- |
|
|
|
28,527 |
|
|
|
- |
|
|
|
7,158 |
|
|
|
35,685 |
|
|
|
|
193,403 |
|
|
|
28,640 |
|
|
|
19,416 |
|
|
|
24,482 |
|
|
|
265,941 |
|
|
|
34,462 |
|
|
|
128,748 |
|
|
|
429,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source of
Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and time deposits
|
|
|
54,151 |
|
|
|
27,163 |
|
|
|
43,522 |
|
|
|
28,638 |
|
|
|
153,474 |
|
|
|
17,835 |
|
|
|
22,113 |
|
|
|
193,422 |
|
Other
interest-bearing liabilities
|
|
|
49,456 |
|
|
|
18,000 |
|
|
|
- |
|
|
|
- |
|
|
|
67,456 |
|
|
|
5,366 |
|
|
|
57,632 |
|
|
|
130,454 |
|
Non-interest-bearing
sources
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
105,275 |
|
|
|
105,275 |
|
|
|
|
103,607 |
|
|
|
45,163 |
|
|
|
43,522 |
|
|
|
28,638 |
|
|
|
220,930 |
|
|
|
23,201 |
|
|
|
185,020 |
|
|
|
429,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
(Liability) Sensitivity Gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Gap
|
|
$ |
89,796 |
|
|
$ |
(16,523 |
) |
|
$ |
(24,106 |
) |
|
$ |
(4,156 |
) |
|
$ |
45,011 |
|
|
$ |
11,261 |
|
|
$ |
(56,272 |
) |
|
|
- |
|
Cumulative
Gap
|
|
$ |
89,796 |
|
|
$ |
73,273 |
|
|
$ |
49,167 |
|
|
$ |
45,011 |
|
|
$ |
45,011 |
|
|
$ |
56,272 |
|
|
|
|
|
|
|
|
|
Cumulative Gap to
Total Assets
|
|
|
20.9 |
% |
|
|
17.1 |
% |
|
|
11.5 |
% |
|
|
10.5 |
% |
|
|
10.5 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-costing
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.
Three
months ended March 31, 2007 compared to three months ended March 31,
2006
RESULTS
OF OPERATIONS
Summary
The
Company reported net income of $1,325,894 for the three months ended March 31,
2007, an increase of 24.2% over the $1,067,543 reported for the three months
ended March 31, 2006. Diluted net income per share was $0.33 for the three
months ended March 31, 2007 compared to $0.28 reported for the three months
ended March 31, 2006. All share information has been restated for the effect of
a 6% stock dividend declared on December 20, 2007 and paid on February 6, 2008
to shareholders of record on January 23, 2008.
Key
performance ratios remained strong for the three months ended March 31, 2007 as
compared to the three months ended March 31, 2006. Return on average assets and
return on average equity were 1.28% and 14.87%, respectively, for the three
months ended March 31, 2007, compared to 1.18% and 14.25%, respectively, for the
corresponding prior year period.
A
significant factor impacting the Company’s net interest income has been the
rising level of market interest rates that characterized the marketplace in 2006
and has continued through the first quarter of 2007. The Federal Reserve Bank’s
Open Market Committee raised short-term interest rates four times during 2006,
which raised the targeted Federal funds rate to the current 5.25% at March 31,
2007. These increases in short-term market rates drive up the cost of the
Company’s core deposits. As a result, the Company experienced a 106 basis point
increase in the cost of its interest-bearing deposits to 3.90% at March 31, 2007
compared to 2.84% at March 31, 2006. The Company’s net interest margin
experienced a decrease of 22 basis points to 4.81% at March 31, 2007 compared to
5.03% at March 31, 2006. Despite these interest environment challenges, the
Company increased net interest income by 5.3% to $4,457,673 for the three months
ended March 31, 2007 from the $4,234,126 for the three months ended March 31,
2006. The principal factor contributing to the 2007 increase in net interest
income was the 12.5% and 9.3% increases in the Securities and Loan portfolios,
respectively. This was partially offset by the increase in interest expense
resulting from increases in the rates paid on deposit components.
A second
significant factor impacting financial results for the first quarter of 2007 was
the February 27, 2007 settlement of the transaction whereby the Bank acquired
all of the deposit liabilities and related assets of the Hightstown, New Jersey
branch banking office of another financial institution. This acquisition added
approximately $19.5 million in cash and new deposits to the balance sheet at
March 31, 2007 in addition to the impact on most component of income/expense on
the statement of income for the three months ended March 31, 2007.
Earnings
Analysis
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 87.4% of the Company’s net revenues for the three-month
period ended March 31, 2007 and 85.3% of net revenues for the three-month period
ended March 31, 2006. 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.
The following table sets forth the
Company’s consolidated average balances of assets, liabilities and shareholders’
equity as well as interest income and expense on related items, and the
Company’s average rates for the three month periods ended March 31, 2007 and
2006, respectively. 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)
|
|
Three months ended March 31,
2007
|
|
|
Three months ended March 31,
2006
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Funds Sold/Short-Term Investments
|
|
$ |
2,003,236 |
|
|
$ |
22,544 |
|
|
|
5.20 |
% |
|
$ |
483,077 |
|
|
$ |
8,664 |
|
|
|
4.25 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
Mortgage Obligations/
Mortgage
Backed Securities
|
|
|
77,250,121 |
|
|
|
992,327 |
|
|
|
5.14 |
% |
|
|
69,219,694 |
|
|
|
806,366 |
|
|
|
4.66 |
% |
States
and Political Subdivisions
|
|
|
21,202,098 |
|
|
|
305,721 |
|
|
|
5.77 |
% |
|
|
18,271,322 |
|
|
|
237,970 |
|
|
|
5.21 |
% |
Total
|
|
|
98,452,219 |
|
|
|
1,298,048 |
|
|
|
5.27 |
% |
|
|
87,491,016 |
|
|
|
1,044,336 |
|
|
|
4.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
126,866,201 |
|
|
|
2,857,337 |
|
|
|
9.13 |
% |
|
|
116,086,386 |
|
|
|
2,446,316 |
|
|
|
8.55 |
% |
Residential
real estate
|
|
|
7,156,527 |
|
|
|
212,274 |
|
|
|
12.03 |
% |
|
|
8,694,241 |
|
|
|
134,321 |
|
|
|
6.27 |
% |
Home
Equity
|
|
|
14,392,895 |
|
|
|
270,455 |
|
|
|
7.62 |
% |
|
|
14,078,520 |
|
|
|
244,354 |
|
|
|
7.04 |
% |
Commercial
and commercial real estate
|
|
|
110,973,830 |
|
|
|
2,147,906 |
|
|
|
7.85 |
% |
|
|
94,790,357 |
|
|
|
1,748,964 |
|
|
|
7.48 |
% |
Installment
|
|
|
1,573,806 |
|
|
|
33,436 |
|
|
|
8.62 |
% |
|
|
2,253,558 |
|
|
|
47,334 |
|
|
|
8.52 |
% |
All
Other Loans
|
|
|
22,709,509 |
|
|
|
646,317 |
|
|
|
11.54 |
% |
|
|
23,616,464 |
|
|
|
555,527 |
|
|
|
9.54 |
% |
Total
|
|
|
283,672,768 |
|
|
|
6,167,725 |
|
|
|
8.82 |
% |
|
|
259,519,526 |
|
|
|
5,176,816 |
|
|
|
8.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest-Earning Assets
|
|
|
384,128,223 |
|
|
|
7,448,317 |
|
|
|
7.91 |
% |
|
|
347,493,619 |
|
|
|
6,229,816 |
|
|
|
7.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
|
(3,051,032 |
) |
|
|
|
|
|
|
|
|
|
|
(2,435,089 |
) |
|
|
|
|
|
|
|
|
Cash
and Due From Bank
|
|
|
9,414,281 |
|
|
|
|
|
|
|
|
|
|
|
9,048,644 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
16,296,108 |
|
|
|
|
|
|
|
|
|
|
|
14,861,846 |
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
406,787,580 |
|
|
|
|
|
|
|
|
|
|
$ |
368,969,020 |
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market and NOW Accounts
|
|
$ |
83,302,779 |
|
|
$ |
415,115 |
|
|
|
2.02 |
% |
|
$ |
92,090,304 |
|
|
$ |
319,961 |
|
|
|
1.41 |
% |
Savings
Accounts
|
|
|
62,486,829 |
|
|
|
449,086 |
|
|
|
2.91 |
% |
|
|
45,132,485 |
|
|
|
176,325 |
|
|
|
1.58 |
% |
Certificates
of Deposit
|
|
|
113,702,589 |
|
|
|
1,351,884 |
|
|
|
4.82 |
% |
|
|
93,253,150 |
|
|
|
854,044 |
|
|
|
3.71 |
% |
Other
Borrowed Funds
|
|
|
22,116,111 |
|
|
|
286,339 |
|
|
|
5.25 |
% |
|
|
38,933,889 |
|
|
|
466,337 |
|
|
|
4.86 |
% |
Trust
Preferred Securities
|
|
|
23,000,000 |
|
|
|
429,067 |
|
|
|
7.46 |
% |
|
|
5,000,000 |
|
|
|
101,844 |
|
|
|
8.15 |
% |
Total
Interest-Bearing Liabilities
|
|
|
304,608,308 |
|
|
|
2,931,491 |
|
|
|
3.90 |
% |
|
|
274,409,828 |
|
|
|
1,918,511 |
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Spread
|
|
|
|
|
|
|
|
|
|
|
4.01 |
% |
|
|
|
|
|
|
|
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
60,679,465 |
|
|
|
|
|
|
|
|
|
|
|
60,211,090 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
5,436,127 |
|
|
|
|
|
|
|
|
|
|
|
4,262,820 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
370,723,900 |
|
|
|
|
|
|
|
|
|
|
|
338,883,738 |
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
36,063,680 |
|
|
|
|
|
|
|
|
|
|
|
30,085,282 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’
Equity
|
|
|
406,787,580 |
|
|
|
|
|
|
|
|
|
|
|
368,969,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin
|
|
|
|
|
|
$ |
4,556,826 |
|
|
|
4.81 |
% |
|
|
|
|
|
$ |
4,311,305 |
|
|
|
5.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s net interest income on a tax-equivalent basis increased by $245,521,
or 5.7%, to $4,556,826 for the three months ended March 31, 2007 from the
$4,311,305 reported for the three months ended March 31, 2006. The increase in
net interest income was attributable to a higher volume of total
interest-earning assets and an increased yield on interest-earning assets
partially offset by the higher rates paid on interest-bearing
liabilities.
Average
interest earning assets increased by $36,634,604, or 10.5%, to $384,128,223 for
the quarter ended March 31, 2007 from $347,493,619 for the quarter ended March
31, 2006, with increases of $24,153,242 in average total loans and $10,961,203
in average total securities in the three months ended March 31, 2007 when
compared to the three months ended March 31, 2006.
The
Bank’s average loan portfolio grew by 9.3% (where growth was focused on
construction and commercial loans) when compared to the average loan portfolio
for the first quarter of 2006. The yields on loans averaged 8.82% for the first
quarter of 2007, increasing 73 basis points over the 8.09% yield on loans for
the first quarter of 2006. The Bank’s average securities portfolio increased by
12.5% and the yield on that portfolio increased by 50 basis points for the
quarter ended March 31, 2007 when compared to the quarter ended March 31, 2006.
Overall, the yield on interest earning assets increased 64 basis points to 7.91%
for the quarter ended March 31, 2007 when compared to 7.27% for the quarter
ended March 31, 2006.
Average
interest bearing liabilities increased by $30,198,480, or 11.0%, to $304,608,308
for the quarter ended March 31, 2007 from $274,409,828 for the quarter ended
March 31, 2006. Certificates of deposit increased on average by $20,449,439 for
the three months ended March 31, 2007 when compared to the three months ended
March 31, 2006. The cost of certificates of deposit increased 111 basis points
to 4.82% for the first quarter of 2007 compared to 3.71% for the first quarter
of 2006. During June 2006, the Company added approximately $18 million in trust
preferred securities, which helped fund the growth of the loan and securities
portfolios. Overall, the cost of total interest bearing liabilities increased
106 basis points to 3.90% for the three months ended March 31, 2007 compared to
2.84% for the three months ended March 31, 2006.
The net
interest margin (on a tax-equivalent basis), which is net interest income
divided by average interest earning assets, was 4.81% for the first three months
of 2007 compared to 5.03% for the first three months of 2006.
Non-Interest
Income
Total
non-interest income for the three months ended March 31, 2007 was $643,741, a
decrease of $66,283, or 9.3%, over non-interest income of $710,025 for the three
months ended March 31, 2006.
Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues decreased by $36,704, or 19.7%, to $149,855 for
the three months ended March 31, 2007 from the $186,559 for the three months
ended March 31, 2006. This decrease was the result of a lower volume of
uncollected and overdraft fees collected on deposit accounts during the first
quarter of 2007 compared to 2006.
Gain on
sales of loans decreased by $86,912, or 27.3%, to $231,777 for the three months
ended March 31, 2007 when compared to $318,689 for the three months ended March
31, 2006. The rising rate environment that existed throughout 2006 and continued
into the first quarter of 2007 has significantly impacted the volume of sales
transactions in the mortgage loan and SBA loan markets and resultant gains
resulting from these transactions.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $90,348 for the three months ended March 31, 2007 compared to
$61,039 for the three months ended March 31, 2006. The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduced
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 box rental, wire transfer service fees and Automated Teller
Machine fees for non-Bank customers. Increased customer demand for these
services contributed to the other income component of non-interest income
amounting to $171,761 for the three months ended March 31, 2007, compared to
$143,738 for the three months ended March 31, 2006.
Non-Interest
Expense
Non-interest
expenses decreased by $48,885, or 1.6%, to $3,074,224 for the three months ended
March 31, 2007 from $3,123,109 for the three months ended March 31, 2006. The
following table presents the major components of non-interest expenses for the
three months ended March 31, 2007 and 2006.
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
Salaries
and employee benefits
|
|
$ |
1,863,252 |
|
|
$ |
1,709,213 |
|
Occupancy
expenses
|
|
|
527,753 |
|
|
|
322,359 |
|
Equipment
expense
|
|
|
125,413 |
|
|
|
121,004 |
|
Marketing
|
|
|
24,881 |
|
|
|
109,098 |
|
Computer
services
|
|
|
197,076 |
|
|
|
166,635 |
|
Regulatory,
professional and other fees
|
|
|
108,786 |
|
|
|
391,391 |
|
Office
expense
|
|
|
142,374 |
|
|
|
102,023 |
|
All
other expenses
|
|
|
84,689 |
|
|
|
201,386 |
|
|
|
$ |
3,074,224 |
|
|
$ |
3,123,109 |
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $154,039, or 9.0%, to $1,863,252 for the three months
ended March 31, 2007 compared to $1,709,213 for the three months ended March 31,
2006. The increase in salaries and employee benefits for the three months ended
March 31, 2007 was a result of an increase in the number of employees, regular
merit increases and increased health care costs. Staffing levels overall
increased to 102 full-time equivalent employees at March 31, 2007 as compared to
89 full-time equivalent employees at March 31, 2006. The February 23, 2007
acquisition of the Hightstown branch contributed to this increase by increasing
the number of full-time equivalent employees by 4 and the resultant salary and
benefit expenses by approximately $25,000.
Regulatory,
professional and other fees decreased by $282,605, or 72.2%, to $108,786 for the
three months ended March 31, 2007 compared to $391,391 for the three months
ended March 31, 2006. During 2006, the Company chose to incur additional
accounting, legal and consulting fees primarily as a result of the new internal
control compliance requirements contained in Section 404 of the Sarbanes-Oxley
Act in anticipation of the Company’s compliance in 2007.
An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating expenses
by net interest income plus non-interest income. An increase in the efficiency
ratio indicates that more resources are being utilized to generate the same or
greater volume of income, while a decrease would indicate a more efficient
allocation of resources. The Bank’s efficiency ratio decreased to 60.3% for the
three months ended March 31, 2007, compared to 63.2% for the three months ended
March 31, 2006.
Provision
for Loan Losses
The
provision for loan losses was $40,000 for the three months ended March 31, 2007
and $170,000 for the three months ended March 31, 2006. Management considers a
complete review of the following specific factors in determining the provision
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 portfolio. In addition to these factors, management takes
into consideration current economic conditions and local real estate market
conditions. Net charge offs/recoveries amounted to a net recovery of $79,703 for
the three months ended March 31, 2007 compared to a net recovery of $2,515 for
the three months ended March 31, 2006. See “Allowance for Loan Losses and
Related Provision” on page 25.
Financial
Condition
March
31, 2007 Compared with December 31, 2006
Total
consolidated assets at March 31, 2007 totaled $421,607,485, increasing by
$28,675,305 from $392,932,180 at December 31, 2006. On February 27, 2007, the
Bank acquired all of the deposit liabilities and related assets of the
Hightstown, New Jersey branch banking office of another financial institution.
This acquisition added approximately $19 million
in new deposits. In connection with such acquisition, the Company recorded
$472,726 in goodwill and $274,604 in core deposit intangibles, which appear as
“Other Assets” in the Consolidated Balance Sheet for the quarter ended March 31,
2007.
Cash
and Cash Equivalents
Cash and
Cash Equivalents at March 31, 2007
totaled $20,140,928 compared to $10,361,812 at December 31, 2006. Cash and cash
equivalents at March 31, 2007 consisted of cash and due from banks of $9,212,906
and Federal funds sold/short term investments of $10,928,022. The corresponding
balances at December 31, 2006 were $10,336,334 and $25,478,
respectively.
Investment
Securities
The
Bank’s investment securities represented 25.2% of total assets at March 31, 2007
and 22.8% at December 31, 2006. Total investment securities increased
$16,667,724, or 18.6%, at March 31, 2007 to $106,343,528 from $89,675,804 at
December 31, 2006.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business purposes. Securities
available for sale consist primarily of U.S. Government and Federal agency
securities as well as mortgage-backed securities. 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 March 31, 2007, available-for-sale securities amounted to $79,765,545, and
increase of $9,344,217, or 13.3%, from December 31, 2006.
At March
31, 2007, the securities available for sale portfolio had net unrealized losses
of $424,980 compared to net unrealized losses of $719,367 at December 31, 2006.
These unrealized losses are reflected net of tax in shareholders’ equity as a
component of other comprehensive income (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. The held-to-maturity portfolio consists primarily of obligations of
states and political subdivisions. At March 31, 2007, securities held to
maturity were $26,577,983, an increase of $7,323,507, or 38.0% from $19,254,476
at December 31, 2006. The fair value of the held-to-maturity portfolio at March
31, 2007, was $26,485,649, resulting in a net unrealized loss of
$92,334.
During
the three months ended March 31, 2007, the Bank purchased securities in the
amounts of $11,920,653 and $7,677,917 for the available for sale and held to
maturity portfolios, respectively. These purchases were funded primarily by the
cash received in the Hightstown branch completed in February 2007.
Loans
The loan
portfolio, which represents the Bank’s 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 Company’s primary lending
focus continues to be construction loans, commercial loans, owner-occupied
commercial mortgage loans and tenanted commercial real estate
loans.
The
following table sets forth the classification of loans by major category at
March 31, 2006 and December 31, 2005.
Loan
Portfolio Composition
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
Component
|
|
Amount
|
|
|
%
of
total
|
|
|
Amount
|
|
|
%
of
total
|
|
Construction
loans
|
|
$ |
126,342,388 |
|
|
|
47 |
% |
|
$ |
125,268,871 |
|
|
|
47 |
% |
Residential
real estate loans
|
|
|
7,093,499 |
|
|
|
3 |
% |
|
|
7,670,370 |
|
|
|
3 |
% |
Commercial
and commercial real estate
|
|
|
121,139,279 |
|
|
|
45 |
% |
|
|
114,897,040 |
|
|
|
44 |
% |
Loans
to individuals
|
|
|
14,834,664 |
|
|
|
5 |
% |
|
|
16,728,025 |
|
|
|
6 |
% |
Deferred
loan fees
|
|
|
419,440 |
|
|
|
0 |
% |
|
|
404,074 |
|
|
|
0 |
% |
All
other loans
|
|
|
191,747 |
|
|
|
0 |
% |
|
|
173,933 |
|
|
|
0 |
% |
|
|
$ |
270,021,017 |
|
|
|
100.0 |
% |
|
$ |
265,142,313 |
|
|
|
100.0 |
% |
|
|
The loan
portfolio increased $4,878,704, or 1.8%, at March 31, 2007 to $270,021,017 from
$265,142,313 at December 31, 2006. The ability of the Company to enter into
larger loan relationships and management’s philosophy of relationship banking
are key factors in the Company’s strategy for loan growth. The ultimate
collectability of the loan portfolio and the recovery of the carrying amount of
real estate are subject to changes in the Company’s market region’s economic
environment and real estate market.
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 decreased by $627,944 to $3,565,265 at March 31, 2007 from $4,193,209 at
December 31, 2006. The largest segment of non-accrual loans represents
unfinished residential construction where litigation has commenced and workout
negotiations are in process. The balance of the non-performing loans are
centered in commercial loans for which litigation has commenced. The table below
sets forth non-performing assets and risk elements in the Bank’s portfolio by
type for the years indicated. As the table demonstrates, non-performing loans to
total loans decreased to 1.32% at March 31, 2007 from 1.58% at December 31, 2006
for the reasons previously stated, but 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.
Non-performing
assets decreased by $627,944 to $3,565,265 at March 31, 2007 from $4,193,209 at
December 31, 2006. Non-performing assets represented 0.85% of total assets at
March 31, 2007 and 1.07% at December 31, 2006. Non-performing loans as a
percentage of total loans were 1.32% at March 31, 2007, compared to 1.58% at
December 31, 2006.
The Bank
had no loans classified as restructured loans at March 31, 2007 or December 31,
2006.
At March
31, 2007 and December 31, 2006, the Bank had no loans that were 90 days or more
past due but still accruing interest.
|
|
|
|
|
|
|
Non-Performing
Assets and Loans
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Non-Performing
loans:
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
$ |
0 |
|
|
$ |
0 |
|
Non-accrual
loans
|
|
|
3,565,265 |
|
|
|
4,193,209 |
|
Total
non-performing loans
|
|
|
3,565,265 |
|
|
|
4,193,209 |
|
Other
real estate owned
|
|
|
0 |
|
|
|
0 |
|
Total
non-performing assets
|
|
$ |
3,565,265 |
|
|
$ |
4,193,209 |
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
1.27 |
% |
|
|
1.58 |
% |
Non-performing
assets to total assets
|
|
|
0.85 |
% |
|
|
1.07 |
% |
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 each of the 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 estimated selling costs, or at cost. The amount, if any, by which the
recorded amount of the loan exceeds the fair market value of the asset 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 collection action cannot be continued unless the
Company first obtains relief from the automatic stay provided by the bankruptcy
code.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level sufficient in the opinion of
management 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, including construction loans. Based on the
composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, increases in interest rates, 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
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 and
lease losses is restricted to any individual loan or groups of loans, and the
entire allowance is available to absorb any and all loan and lease
losses.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan and lease 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 and lease
losses consists of several key elements. These elements 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 and lease losses, management of
the Company considers a variety of factors that include:
|
·
|
General
economic conditions.
|
|
·
|
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.
|
The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk loan assets. These high risk loans
are 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 part, is unlikely. The specific portion of the
allowance is the total amount of potential unconfirmed losses for these
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 for the 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.
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 which is often
subjective and changing rapidly. At March 31, 2007, management believed that the
allowance for loan losses and nonperforming loans was adequate.
The
allowance for loan losses amounted to $3,348,063 at March 31, 2007, an increase
of $19,703 from December 31, 2006. The ratio of the allowance for loan losses to
total loans was 1.19% at March 31, 2007 and 1.16% at December 31, 2006,
respectively. 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 presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
Allowance
for Loan Losses
|
|
March
31,
2007
|
|
|
December
31,
2006
|
|
|
March
31,
2006
|
|
Balance,
beginning of period
|
|
$ |
3,228,360 |
|
|
$ |
2,361,375 |
|
|
$ |
2,361,375 |
|
Provision
charged to operating expenses
|
|
|
40,000 |
|
|
|
893,500 |
|
|
|
170,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Residential
real estate loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and commercial real estate
|
|
|
- |
|
|
|
(11,154 |
) |
|
|
- |
|
Loans
to individuals
|
|
|
- |
|
|
|
(18,314 |
) |
|
|
(285 |
) |
Lease
financing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All
other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
0 |
|
|
|
(29,468 |
) |
|
|
(285 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
75,000 |
|
|
|
- |
|
|
|
- |
|
Residential
real estate loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and commercial real estate
|
|
|
- |
|
|
|
153 |
|
|
|
- |
|
Loans
to individuals
|
|
|
4,703 |
|
|
|
2,800 |
|
|
|
2,800 |
|
Lease
financing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All
other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
79,703 |
|
|
|
2,953 |
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(charge offs) / recoveries
|
|
|
79,703 |
|
|
|
(26,515 |
) |
|
|
2,515 |
|
Balance,
end of period
|
|
$ |
3,348,063 |
|
|
$ |
3,228,360 |
|
|
$ |
2,533,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
At
period end
|
|
$ |
280,685,187 |
|
|
$ |
278,751,255 |
|
|
$ |
252,810,235 |
|
Average
during the period
|
|
|
283,672,768 |
|
|
|
271,740,647 |
|
|
|
259,519,526 |
|
Net
charge offs to average loans outstanding
|
|
|
0.03 |
% |
|
|
(0.01 |
%) |
|
|
0.00 |
% |
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans at period end
|
|
|
1.19 |
% |
|
|
1.16 |
% |
|
|
1.00 |
% |
Non-performing
loans
|
|
|
93.91 |
% |
|
|
76.99 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Company offers a variety of products designed to attract and retain
customers, with the Company’s primary focus being on building and expanding
long-term relationships.
Total
deposits increased $28,057,223, or 9.0%, to $340,781,645 at March 31, 2007 from
$312,724,422 at December 31, 2006. On February 27, 2007, the Bank acquired all
of the deposit liabilities and related assets of the Hightstown, New Jersey
branch banking office of another financial institution. This acquisition added
approximately $19 million in new deposits.
Borrowings
Borrowings
are mainly comprised of fixed rate convertible advances from the Federal Home
Loan Bank (“FHLB”) and federal funds purchased. These borrowings are primarily
used to fund asset growth not supported by deposit generation. The balance of
other borrowings at March 31, 2007 consisted of long-term FHLB borrowings of
$15,500,000. The balance of borrowings at December 31, 2006 consisted of
long-term FHLB borrowings of $15,500,000 and overnight funds purchased of
$1,700,000. FHLB advances are fully secured by marketable
securities.
Shareholders’
Equity And Dividends
Shareholders’
equity at March 31, 2007 totaled $36,921,769, an increase of $1,975,264, or
5.7%, from $34,946,505 at December 31, 2006. Book value per common share rose to
$9.31 at March 31, 2007 from $8.81 at December 31, 2006. The ratio of
shareholders’ equity to total assets was 8.76% at March 31, 2007 and 8.89% at
December 31, 2006.
The
increase in shareholders’ equity and book value per share resulted primarily
from net income of $1,325,894 and the decrease in unrealized holding losses on
available for sale securities.
The
Company’s stock is listed for trading on the Nasdaq Global Market System, under
the symbol “FCCY.”
In 2005,
the Board of Directors 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. A table disclosing repurchases of Company
shares made during the quarter ended March 31, 2007 is set forth under Part II,
Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
Actual
capital amounts and ratios for the Company and the Bank as of March 31, 2007 and
December 31, 2006 are as follows:
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
|
To
Be Well Capitalized Under Prompt
Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
|
As
of March 31, 2007 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
58,047,406 |
|
|
|
18.12 |
% |
|
$ |
25,629,680 |
|
>8%
|
|
$ |
32,037,100 |
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
49,160,070 |
|
|
|
15.34 |
% |
|
|
12,814,840 |
|
>4%
|
|
|
19,222,260 |
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
49,160,070 |
|
|
|
12.08 |
% |
|
|
16,271,503 |
|
>4%
|
|
|
20,339,378 |
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
55,213,150 |
|
|
|
17.23 |
% |
|
$ |
25,629,680 |
|
>8%
|
|
$ |
32,037,100 |
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
51,865,087 |
|
|
|
16.19 |
% |
|
|
12,814,840 |
|
>4%
|
|
|
19,222,260 |
|
|
>6%
|
|
Tier
1 Capital to Average Assets
|
|
|
51,865,087 |
|
|
|
12.81 |
% |
|
|
16,192,200 |
|
>4%
|
|
|
20,240,250 |
|
|
>5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006 - restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
61,652,577 |
|
|
|
19.93 |
% |
|
$ |
24,751,678 |
|
>8%
|
|
$ |
30,939,598 |
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
47,220,481 |
|
|
|
15.26 |
% |
|
|
12,375,839 |
|
>4%
|
|
|
18,563,759 |
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
47,220,481 |
|
|
|
11.99 |
% |
|
|
15,752,046 |
|
>4%
|
|
|
19,690,058 |
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
53,520,979 |
|
|
|
17.30 |
% |
|
$ |
24,751,040 |
|
>8%
|
|
$ |
30,938,800 |
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
50,292,619 |
|
|
|
16.26 |
% |
|
|
12,375,520 |
|
>4%
|
|
|
18,563,280 |
|
|
>6%
|
|
Tier
1 Capital to Average Assets
|
|
|
50,292,619 |
|
|
|
12.80 |
% |
|
|
15,710,320 |
|
>4%
|
|
|
19,637,900 |
|
|
>5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total capital to risk
weighted assets ratio of 8.0%. To be considered “well capitalized,” an
institution must have a minimum Tier 1 leverage ratio of 5.0%. At March 31,
2007, the ratios of the Company exceeded the ratios required to be considered
well capitalized.
It is management’s goal to monitor and maintain adequate capital levels to
continue to support asset growth and continue its status as a well-capitalized
institution.
Liquidity
At March
31, 2007, 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
measures the ability to satisfy current and future cash flow needs as they
become due. 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 March 31, 2007, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $16,176,500
plus a One-Month Overnight Repricing Line of Credit of $10,176,500. 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
$13,500,000 with a correspondent bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At March 31, 2007, the balance of
cash and cash equivalents was $20,140,928.
Net cash
provided by operating activities totaled $5,522,027 in the three months ended
March 31, 2007 compared to $8,325,217 in the three months ended March 31, 2006.
The primary sources of funds are net income from operations adjusted for
provision for loan losses, depreciation expenses, and net proceeds from sales of
loans held for sale.
Net cash
used in investing activities totaled $2,585,895 in the three months ended March
31, 2007 compared to $4,053,950 used in investing activities in the three months
ended March 31, 2006. The current period amount was primarily the result of
investment securities purchases partially offset by the cash and cash
equivalents acquired with the Hightstown branch.
Net cash
provided by financing activities amounted to $6,842,984 in the three months
ended March 31, 2007 compared to $5,652,768 used in financing activities in the
three months ended March 31, 2006. The current period amount resulted primarily
from an increase in deposits combined with a decrease in borrowings during the
three months period ended March 31, 2007.
The
securities portfolio is also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. During the three months ended
March 31, 2007, maturities and prepayments of investment securities totaled
$3,213,855. Another source of liquidity is the loan portfolio, which provides a
flow of payments and maturities.
The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for the
Company’s future operating, investing and financing needs, including the April
22, 2007 redemption of the Trust I securities which required a payment of
approximately $5,388,786. Management will continue to monitor the Company’s
liquidity and maintain it at a level that it deems adequate and not
excessive.
Three
months ended June 30, 2007 compared to three months ended June 30,
2006
RESULTS
OF OPERATIONS
Summary
The
Company realized net income of $1,418,099 for the three months ended June 30,
2007, an increase of 16.5% from the $1,217,716 reported for the three months
ended June 30, 2006. Diluted net income per share was $0.35 for the
three months ended June 30, 2007 compared to $0.30 per diluted share for the
three months ended June 30, 2006. All share information has been
restated for the effect of a 6% stock dividend declared on December 20, 2007 and
paid on February 6, 2008 to shareholders of record on January 23,
2008.
Key
performance ratios remained strong for the three months ended June 30,
2007. Return on average assets and return on average equity were
1.35% and 15.36% for the three months ended June 30, 2007 compared to 1.30% and
15.87%, respectively, for the three months ended June 30, 2006.
A
significant factor impacting the Company’s net interest income has been the
rising level of market interest rates that characterized the marketplace in 2006
and has continued through the first half of 2007. The Federal Reserve
Bank’s Open Market Committee raised short-term interest rates four times during
2006, which raised the targeted Federal funds rate to the current 5.25% at June
30, 2007. These increases in short-term market rates drive up the
cost of the Company’s core deposits. As a result, the Company
experienced a 92 basis point increase in the cost of its interest-bearing
deposits to 3.93% at June 30, 2007 compared to 3.01% at June 30,
2006. The Company’s net interest margin experienced a decrease of 54
basis points to 4.64% at June 30, 2007 compared to 5.18% at June 30,
2006.
A second
significant factor impacting financial results for the first half of 2007 was
the February 27, 2007 closing of a transaction whereby the Bank acquired all of
the deposit liabilities and related assets of the Hightstown, New Jersey branch
banking office of another financial institution. This acquisition
added approximately $19.5 million in new deposits and $18.8 million in cash to
the balance sheet in 2007 in addition to having an impact on most components of
income/expense on the statement of income for the six months ended June 30,
2007.
Earnings
Analysis
Interest
Income
Interest
income for the three months ended June 30, 2007 was $7,445,478, increasing by
9.7% from the $6,789,622 reported in the three months ended June 30,
2006. This is primarily attributable to a higher volume of total
interest-earning assets when compared to the prior year period. For
the three months ended June 30, 2007, average interest earning assets increased
$43,618,780 or 12.4%, to $395,860,393 compared to $352,241,613 for the three
months ended June 30, 2006. For the three months ended June 30, 2007,
the average yield on earning assets decreased 16 basis points to 7.65% from
7.81% for the three months ended June 30, 2006.
Interest
Expense
Interest
expense for the three months ended June 30, 2007 was $3,130,961, an increase of
$950,448 from $2,180,513 reported for the three months ended June 30,
2006. Total average interest bearing liabilities increased by
$43,929,636 to $318,230,562 for the three months ended June 30, 2007 from
$274,300,926 for the three months ended June 30, 2006. The average
cost of interest bearing liabilities increased 76 basis points to 3.95% for the
three months ended June 30, 2007 from 3.19% for the three months ended June 30,
2006, primarily as a result of an increase in market-driven rates paid on
deposits and short-term borrowed funds.
Net
Interest Income
The
Company’s net interest income for the three months ended June 30, 2007 was
$4,314,517, a decrease of 6.4% from the $4,609,109 reported for June 30,
2006. The net interest margin (on a tax-equivalent basis), which is
net interest income divided by average interest-earning assets, decreased 85
basis points to 4.48% for the three months ended June 30, 2007 from 5.33% for
the three months ended June 30, 2006. The increased cost of deposits
in the competitive New Jersey marketplace combined with a shift in the Company’s
deposit mix to higher cost certificates of deposit accounts has been contributed
significantly to this margin compression.
Provision
for Loan Losses
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 loan
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. As a result of this
evaluation process, the Company’s provision for loan losses was $30,000 for the
three months ended June 30, 2007 and $170,000 for the three months ended June
30, 2006. See “Allowance for Loan Losses and Related Provision” on
page 25.
Non-Interest
Income
Total
non-interest income for the three months ended June 30, 2007 was $648,423, an
increase of $173,714, or 36.6%, over non-interest income of $474,709 for the
three months ended June 30, 2006.
Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues increased by $8,139, or 4.9%, to
$175,181 for the three months ended June 30, 2007 from the $167,042 for the
three months ended June 30, 2006. This increase was the result of a
higher volume of uncollected and overdraft fees collected on deposit accounts
during the second quarter of 2007 compared to the same period in
2006.
Gain on
sales of loans increased by $13,811, or 7.9%, to $188,741 for the three months
ended June 30, 2007 when compared to $174,930 for the three months ended June
30, 2006. The rising rate environment that existed throughout 2006
and continued into the first half of 2007 has impacted the volume of sales
transactions in the mortgage loan and SBA loan markets and resultant gains
resulting from these transactions.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $88,233 for the three months ended June 30, 2007 compared to $82,934
for the three months ended June 30, 2006. The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduced
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 box rental, wire transfer
service fees and Automated Teller Machine fees for non-Bank
customers. Increased customer demand for these services contributed
to the other income component of non-interest income amounting to $196,268 for
the three months ended June 30, 2007, compared to $149,517 for the three months
ended June 30, 2006.
The
Company recorded net losses on sales of investment securities of $99,714 for the
three months ended June 30, 2006. These transactions were primarily
the result of modest portfolio restructurings. Their purpose was to
improve the Company’s longer-term interest rate risk position.
Non-Interest
Expenses
Non-interest
expenses decreased by $214,269, or 6.9%, to $2,875,337 for the three months
ended June 30, 2007 from $3,089,606 for the three months ended June 30,
2006. The following table presents the major components of
non-interest expenses for the three months ended June 30, 2007 and
2006.
Non-Interest
Expenses
|
|
Three
months ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
Salaries
and employee benefits
|
|
$
|
1,687,666
|
|
|
$
|
1,685,372
|
|
Occupancy
expenses
|
|
|
538,213
|
|
|
|
381,518
|
|
Equipment
expense
|
|
|
120,796
|
|
|
|
116,163
|
|
Marketing
|
|
|
22,145
|
|
|
|
65,100
|
|
Computer
services
|
|
|
215,898
|
|
|
|
175,327
|
|
Regulatory,
professional and other fees
|
|
|
73,320
|
|
|
|
290,178
|
|
Office
expense
|
|
|
152,408
|
|
|
|
105,630
|
|
All
other expenses
|
|
|
64,891
|
|
|
|
270,318
|
|
Total
|
|
$
|
2,875,337
|
|
|
$
|
3,089,606
|
|
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $2,294, or 0.1%, to $1,687,666 for the three months ended
June 30, 2007 compared to $1,685,372 for the three months ended June 30,
2006. The modest increase in salaries and employee benefits for the
three months ended June 30, 2007 was a result of a lower level of expenses
incurred in connection with the Company’s health insurance and other employee
benefit plans combined with a modest increase in staffing
levels. Staffing levels overall increased to 97 full-time equivalent
employees at June 30, 2007 as compared to 93 full-time equivalent employees at
June 30, 2006. The February 23, 2007 acquisition of the Hightstown
branch contributed to this increase by increasing the number of full-time
equivalent employees by 4.
Regulatory,
professional and other fees decreased by $216,858, or 74.7%, to $73,320 for the
three months ended June 30, 2007 compared to $290,178 for the three months ended
June 30, 2006. During 2006, the Company chose to incur additional
accounting, legal and consulting fees primarily as a result of the new internal
control compliance requirements contained in Section 404 of the Sarbanes-Oxley
Act in anticipation of the Company’s compliance in 2008.
An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating
expenses by net interest income plus non-interest income. An increase
in the efficiency ratio indicates that more resources are being utilized to
generate the same or greater volume of income, while a decrease would indicate a
more efficient allocation of resources. The Bank’s efficiency ratio
decreased to 57.9% for the three months ended June 30, 2007, compared to 60.8%
for the three months ended June 30, 2006.
Financial
Condition
June
30, 2007 Compared with December 31, 2006
Total
consolidated assets at June 30, 2007 totaled $428,116,992, increasing by
$35,716,868 from $392,400,124 at December 31, 2006. On February 27,
2007, the Bank acquired all of the deposit liabilities and related assets of the
Hightstown, New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits. In connection with such acquisition, the Company recorded
$472,726 in goodwill and $274,604 in core deposit intangibles, which appear as
“Other Assets” in the Consolidated Balance Sheet at June 30, 2007.
Cash
and Cash Equivalents
Cash and
Cash Equivalents at June 30, 2007
totaled $9,580,485 compared to $10,361,812 at December 31, 2006. Cash
and cash equivalents at June 30, 2007 consisted of cash and due from banks of
$9,559,584 and Federal funds sold/short term investments of
$20,901. The corresponding balances at December 31, 2006 were
$10,336,334 and $25,478, respectively.
Investment
Securities
The
Bank’s investment securities represented 25.4% of total assets at June 30, 2007
and 22.8% at December 31, 2006. Total investment securities increased
$18,899,587, or 21.1%, at June 30, 2007 to $108,575,391 from $89,675,804 at
December 31, 2006.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes. Securities available for sale consist primarily of U.S.
Government and Federal agency securities as well as mortgage-backed
securities. 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 June
30, 2007, available-for-sale securities amounted to $82,047,134, and increase of
$11,625,806 or 16.5%, from December 31, 2006.
At June
30, 2007, the securities available for sale portfolio had net unrealized losses
of $1,648,343 compared to net unrealized losses of $719,367 at December 31,
2006. These unrealized losses are reflected net of tax in
shareholders’ equity as a component of other comprehensive income
(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. The held-to-maturity portfolio consists primarily of
obligations of states and political subdivisions. At June 30, 2007,
securities held to maturity were $26,528,257, an increase of $7,273,781, or
37.8% from $19,254,476 at December 31, 2006. The fair value of the
held-to-maturity portfolio at June 30, 2007, was $26,041,037, resulting in a net
unrealized loss of $487,219.
During
the six months ended June 30, 2007, the Bank purchased securities in the amounts
of $15,776,240 and $7,677,917 for the available for sale and held to maturity
portfolios, respectively. These purchases were funded primarily by
the cash received in the Hightstown branch acquisition completed in February
2007.
Loans
The loan
portfolio, which represents the Bank’s 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
Company’s primary lending focus continues to be construction loans, commercial
loans, owner-occupied commercial mortgage loans and tenanted commercial real
estate loans.
The
following table sets forth the classification of loans by major category at June
30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
Loan
Portfolio Composition
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Component
|
|
Amount
|
|
|
%
of
total
|
|
|
Amount
|
|
|
%
of
total
|
|
Construction
loans
|
|
$
|
130,623,738
|
|
|
|
46
|
%
|
|
$
|
125,268,871
|
|
|
|
47
|
%
|
Residential
real estate loans
|
|
|
9,155,735
|
|
|
|
4
|
%
|
|
|
7,670,370
|
|
|
|
3
|
%
|
Commercial
and commercial real estate
|
|
|
129,611,101
|
|
|
|
45
|
%
|
|
|
114,897,040
|
|
|
|
44
|
%
|
Loans
to individuals
|
|
|
15,598,979
|
|
|
|
5
|
%
|
|
|
16,728,025
|
|
|
|
6
|
%
|
Deferred
loan fees
|
|
|
409,494
|
|
|
|
0
|
%
|
|
|
404,074
|
|
|
|
0
|
%
|
All
other loans
|
|
|
177,548
|
|
|
|
0
|
%
|
|
|
173,933
|
|
|
|
0
|
%
|
|
|
$
|
285,576,595
|
|
|
|
100
|
%
|
|
$
|
265,142,313
|
|
|
|
100.0
|
%
|
|
The loan
portfolio increased $20,434,282, or 7.7%, at June 30, 2007 to $285,576,595 from
$265,142,313 at December 31, 2006. The ability of the Company to
enter into larger loan relationships and management’s philosophy of relationship
banking are key factors in the Company’s strategy for loan
growth. The ultimate collectability of the loan portfolio and the
recovery of the carrying amount of real estate are subject to changes in the
Company’s market region's economic environment and real estate
market.
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 decreased by $699,453 to $3,493,756 at June 30, 2007 from $4,193,209 at
December 31, 2006. The largest segment of non-accrual loans
represents unfinished residential construction where litigation has commenced
and workout negotiations are in process. The balance of the
non-performing loans are centered in commercial loans for which litigation has
commenced. The table below sets forth non-performing assets and risk
elements in the Bank’s portfolio by type for the years indicated. As
the table demonstrates, non-performing loans to total loans decreased to 1.23%
at June 30, 2007 from 1.58% at December 31, 2006 for the reasons previously
stated, but 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.
Non-performing
assets decreased by $679,453 to $3,513,756 at June 30, 2007 from $4,193,209 at
December 31, 2006. Non-performing assets represented 0.82% of total
assets at June 30, 2007 and 1.07% at December 31,
2006. Non-performing loans as a percentage of total loans were 1.23%
at June 30, 2007, compared to 1.58% at December 31, 2006.
The Bank
had no loans classified as restructured loans at June 30, 2007 or December 31,
2006.
At June
30, 2007 and December 31, 2006, the Bank had no loans that were 90 days or more
past due but still accruing interest.
|
|
|
|
|
|
|
|
Non-Performing
Assets and Loans
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Non-Performing
loans:
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
$
|
0
|
|
|
$
|
0
|
|
Non-accrual
loans
|
|
|
3,493,756
|
|
|
|
4,193,209
|
|
Total
non-performing loans
|
|
|
3,493,756
|
|
|
|
4,193,209
|
|
Other
real estate owned
|
|
|
0
|
|
|
|
0
|
|
Total
non-performing assets
|
|
$
|
3,493,756
|
|
|
$
|
4,193,209
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
1.23
|
%
|
|
|
1.58
|
%
|
Non-performing
assets to total assets
|
|
|
0.82
|
%
|
|
|
1.07
|
%
|
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 each of the 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 estimated selling costs, or at cost. The amount, if any, by which the
recorded amount of the loan exceeds the fair market value of the asset 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 collection action cannot be continued unless the
Company first obtains relief from the automatic stay provided by the bankruptcy
code.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level sufficient in the opinion of
management 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, including construction loans. Based on
the composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, increases in interest rates, 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
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 and lease losses is restricted to any individual loan or groups of loans,
and the entire allowance is available to absorb any and all loan and lease
losses.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan and lease 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 and
lease losses consists of several key elements. These elements 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 and lease losses, management of
the Company considers a variety of factors that include:
|
·
|
General
economic conditions.
|
|
·
|
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.
|
The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk loan assets. These high
risk loans are 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 part, is unlikely. The
specific portion of the allowance is the total amount of potential unconfirmed
losses for these 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
for the 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.
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 which is often subjective and changing
rapidly. At June 30, 2007, management believed that the allowance for
loan losses and non-performing loans was adequate.
The
allowance for loan losses amounted to $3,310,080 at June 30, 2007, an increase
of $81,720 from December 31, 2006. The ratio of the allowance for
loan losses to total loans was 1.12% at June 30, 2007 and 1.16% at December 31,
2006, respectively. 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
presents, for the periods indicated, an analysis of the allowance for loan
losses and other related data.
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
|
June
30,
2006
|
|
Balance,
beginning of period
|
|
$
|
3,228,360
|
|
|
$
|
2,361,375
|
|
|
$
|
2,361,375
|
|
Provision
charged to operating expenses
|
|
|
70,000
|
|
|
|
893,500
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
(65,891
|
)
|
|
|
(11,154
|
)
|
|
|
(11,154
|
)
|
Loans
to individuals
|
|
|
(1,614
|
)
|
|
|
(18,314
|
)
|
|
|
(285
|
)
|
Lease
financing
|
|
|
(478
|
)
|
|
|
-
|
|
|
|
-
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(67,983
|
)
|
|
|
(29,468
|
)
|
|
|
(11,439
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
Loans
to individuals
|
|
|
4,703
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Lease
financing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
79,703
|
|
|
|
2,953
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(charge offs) / recoveries
|
|
|
11,720
|
|
|
|
(26,515
|
)
|
|
|
(8,639
|
)
|
Balance,
end of period
|
|
$
|
3,310,080
|
|
|
$
|
3,228,360
|
|
|
$
|
2,692,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
At
period end
|
|
$
|
294,514,117
|
|
|
$
|
278,751,255
|
|
|
$
|
277,471,033
|
|
Average
during the period
|
|
|
285,094,544
|
|
|
|
271,740,647
|
|
|
|
264,896,605
|
|
Net
charge offs to average loans outstanding
|
|
|
0.00
|
%
|
|
|
(0.01
|
%)
|
|
|
0.00
|
%
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans at period end
|
|
|
1.12
|
%
|
|
|
1.16
|
%
|
|
|
0.97
|
%
|
Non-performing
loans
|
|
|
94.74
|
%
|
|
|
76.99
|
%
|
|
|
325.25
|
%
|
|
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 Company offers a variety of products designed to attract
and retain customers, with the Company’s primary focus being on building and
expanding long-term relationships.
Total
deposits increased $13,226,061, or 4.2%, to $325,950,483 at June 30, 2007 from
$312,724,422 at December 31, 2006. On February 27, 2007, the Bank
acquired all of the deposit liabilities and related assets of the Hightstown,
New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits.
Borrowings
Borrowings
are mainly comprised of fixed rate convertible advances from the Federal Home
Loan Bank (“FHLB”) and federal funds purchased. These borrowings are
primarily used to fund asset growth not supported by deposit
generation. The balance of other borrowings at June 30, 2007
consisted of long-term FHLB borrowings of $15,500,000 and overnight funds
purchased of $27,500,000. The balance of borrowings at December 31,
2006 consisted of long-term FHLB borrowings of $15,500,000 and overnight funds
purchased of $1,700,000. FHLB advances are fully secured by
marketable securities.
Shareholders’
Equity And Dividends
Shareholders’
equity at June 30, 2007 totaled $37,312,137, an increase of $2,365,632, or 6.8%,
from $34,946,505 at December 31, 2006. Book value per common share
rose to $9.43 at June 30, 2007 from $8.81 at December 31, 2006. The
ratio of shareholders’ equity to total assets was 8.72% at June 30, 2007 and
8.89% at December 31, 2006.
The
increase in shareholders’ equity and book value per share resulted primarily
from net income of $2,903,205 partially offset by the increase in unrealized
holding losses on available for sale securities.
The
Company’s stock is listed for trading on the Nasdaq Global Market System, under
the symbol “FCCY.”
In 2005,
the Board of Directors 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. A table disclosing
repurchases of Company shares made during the quarter ended June 30, 2007 is set
forth under Part II, Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
Actual
capital amounts and ratios for the Company and the Bank as of June 30, 2007 and
December 31, 2006 are as follows:
|
|
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
To
Be Well Capitalized
Under
Prompt
Corrective
Action
Provision
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Amount
|
|
Ratio
|
As
of June 30, 2007 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
59,153,637
|
|
|
|
17.50
|
%
|
|
$
|
27,048,560
|
|
>
8%
|
|
$
|
33,810,700
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
50,671,266
|
|
|
|
14.99
|
%
|
|
|
13,524,280
|
|
>
4%
|
|
|
20,286,420
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
|
|
|
|
12.08
|
%
|
|
|
16,788,365
|
|
>
4%
|
|
|
20,985,457
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
56,560,992
|
|
|
|
16.73
|
%
|
|
$
|
27,048,560
|
|
>
8%
|
|
$
|
33,810,700
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
53,250,912
|
|
|
|
15.75
|
%
|
|
|
13,524,280
|
|
>
4%
|
|
|
20,286,420
|
|
>
6%
|
|
Tier
1 Capital to Average Assets
|
|
|
|
|
|
|
12.72
|
%
|
|
|
16,749,000
|
|
>
4%
|
|
|
20,936,250
|
|
>
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006 - restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
61,652,577
|
|
|
|
19.93
|
%
|
|
$
|
24,751,678
|
|
>8%
|
|
$
|
30,939,598
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
47,220,481
|
|
|
|
15.26
|
%
|
|
|
12,375,839
|
|
>4%
|
|
|
18,563,759
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
47,220,481
|
|
|
|
11.99
|
%
|
|
|
15,752,046
|
|
>4%
|
|
|
19,690,058
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
53,520,979
|
|
|
|
17.30
|
%
|
|
$
|
24,751,040
|
|
>8%
|
|
$
|
30,938,800
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
50,292,619
|
|
|
|
16.26
|
%
|
|
|
12,375,520
|
|
>4%
|
|
|
18,563,280
|
|
>6%
|
|
Tier
1 Capital to Average Assets
|
|
|
50,292,619
|
|
|
|
12.80
|
%
|
|
|
15,710,320
|
|
>4%
|
|
|
19,637,900
|
|
>5%
|
|
|
|
The
minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total capital to risk
weighted assets ratio of 8.0%. To be considered “well capitalized,”
an institution must have a minimum Tier 1 leverage ratio of 5.0%. At
June 30, 2007, the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is management’s goal to monitor and
maintain adequate capital levels to continue to support asset growth and
continue its status as a well-capitalized institution.
Liquidity
At June
30, 2007, 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
measures the ability to satisfy current and future cash flow needs as they
become due. 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 June 30, 2007, the
Bank maintained an Overnight Line of Credit at the FHLB in the amount of
$16,176,500 plus a One-Month Overnight Repricing Line of Credit of
$10,176,500. Effective August 1, 2007, these lines were renewed by
FHLB at the amount of $28,883,000 for the Overnight Line of Credit and the
One-Month Overnight Repricing Line of Credit. 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 $13,500,000 with a correspondent bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At June 30, 2007, the
balance of cash and cash equivalents was $9,580,485.
Net cash
provided by operating activities totaled $6,840,786 in the six months ended June
30, 2007 compared to $7,359,712 in the six months ended June 30,
2006. The primary sources of funds are net income from operations
adjusted for provision for loan losses, depreciation expenses, and net proceeds
from sales of loans held for sale.
Net cash
used in investing activities totaled $21,781,630 in the six months ended June
30, 2007 compared to $17,062,006 used in investing activities in the six months
ended June 30, 2006. The current period amount was primarily the
result of investment securities purchases partially offset by the cash and cash
equivalents acquired with the Hightstown branch.
Net cash
provided by financing activities amounted to $14,159,517 in the six months ended
June 30, 2007 compared to $6,582,386 provided by financing activities in the six
months ended June 30, 2006. The current period amount resulted
primarily from an increase in borrowings combined with a decrease in demand,
savings and time deposits plus the repayment of redeemable subordinated
debentures during the six months period ended June 30, 2007.
The
securities portfolio is also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. During the six
months ended June 30, 2007, maturities and prepayments of investment securities
totaled $3,563,962. Another source of liquidity is the loan
portfolio, which provides a flow of payments and maturities.
The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for the
Company’s future operating, investing and financing needs. Management
will continue to monitor the Company’s liquidity and maintain it at a level that
it deems adequate and not excessive.
Three
months ended September 30, 2007 compared to three months ended September 30,
2006
RESULTS
OF OPERATIONS
Summary
The
Company realized net income of $1,435,730 for the three months ended September
30, 2007, an increase of 15.8% from the $1,239,568 reported for the three months
ended September 30, 2006. Diluted net income per share was $0.36 for
the three months ended September 30, 2007 compared to $0.31 per diluted share
for the three months ended September 30, 2006. All share information
has been restated for the effect of a 6% stock dividend declared on December 20,
2007 and paid on February 6, 2008 to shareholders of record on January 23,
2008.
Key
performance ratios remained strong for the three months ended September 30,
2007. Return on average assets and return on average equity were
1.32% and 14.84% for the three months ended September 30, 2007 compared to 1.26%
and 15.08%, respectively, for the three months ended September 30,
2006.
A
significant factor impacting the Company’s net interest income has been the
rising level of market interest rates that characterized the marketplace in 2006
and has continued through the first nine months of 2007. The Federal
Reserve Bank’s Open Market Committee (“FOMC”) raised short-term interest rates
four times during 2006, which raised the
targeted Federal funds rate to 5.25%, the level that continued through
mid-September 2007. In response to reduced inflation pressures and a
level of instability in financial markets, the FOMC reduced the Federal funds
rate 50 basis points to 4.75% on September 18, 2007. Prior to this
rate cut, the increases in short-term market rates drove up the cost of the
Company’s deposits. As a result, the Company experienced a 34 basis
point increase in the cost of its interest-bearing deposits to 4.02% for the
three months ended September 30, 2007 compared to 3.68% for the three months
ended September 30, 2006. In addition, the yield on the Company’s
interest-earning assets decreased 6 basis points to 7.77% for the three months
ended September 30, 2007 compared to 7.83% for the three months ended September
30, 2006. The Company’s net interest margin experienced a decrease of
43 basis points to 4.51% for the three months ended September 30, 2007 compared
to 4.94% for the three months ended September 30, 2006.
A second
significant factor impacting financial results for the first nine months of 2007
was the February 27, 2007 closing of a transaction whereby the Bank acquired all
of the deposit liabilities and related assets of the Hightstown, New Jersey
branch banking office of another financial institution. This
acquisition added approximately $19.5 million in new deposits and $18.8 million
in cash to the balance sheet in 2007 in addition to having an impact on most
components of income/expense on the statement of income for the nine months
ended September 30, 2007.
Earnings
Analysis
Interest
Income
Interest
income for the three months ended September 30, 2007 was $7,825,738, increasing
by 9.2% from the $7,163,273 reported in the three months ended September 30,
2006. This is primarily attributable to a higher volume of total
interest-earning assets when compared to the prior year period. For
the three months ended September 30, 2007, average interest earning assets
increased $40,378,192 or 11.0%, to $407,061,783 compared to $366,683,591 for the
three months ended September 30, 2006. For the three months ended
September 30, 2007, the average yield on earning assets decreased 10 basis
points to 7.73% from 7.83% for the three months ended September 30,
2006.
Interest
Expense
Interest
expense for the three months ended September 30, 2007 was $3,307,196, an
increase of $653,443 from $2,653,753 reported for the three months ended
September 30, 2006. Total average interest bearing liabilities
increased by $39,332,097 to $326,796,485 for the three months ended September
30, 2007 from $287,464,388 for the three months ended September 30,
2006. The average cost of interest bearing liabilities increased 34
basis points to 4.02% for the three months ended September 30, 2007 from 3.68%
for the three months ended September 30, 2006, primarily as a result of an
increase in market-driven rates paid on deposits and short-term borrowed
funds.
Net
Interest Income
The
Company’s net interest income for the three months ended September 30, 2007 was
$4,518,542, increasing from the $4,509,520 reported for September 30,
2006. The net interest margin (on a tax-equivalent basis), which is
net interest income divided by average interest-earning assets, decreased 43
basis points to 4.51% for the three months ended September 30, 2007 from 4.94%
for the three months ended September 30, 2006. The increased cost of
deposits in the competitive New Jersey marketplace combined with a shift in the
Company’s deposit mix to higher cost certificates of deposit accounts has been
contributed significantly to this margin compression.
Provision
for Loan Losses
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 loan
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. As a result of this
evaluation process, the Company’s provision for loan losses was $30,000 for the
three months ended September 30, 2007 and $100,000 for the three months ended
September 30, 2006. See “Allowance for Loan Losses and Related
Provision” on page 25.
Non-Interest
Income
Total
non-interest income for the three months ended September 30, 2007 was $645,706,
a decrease of $111,979, or 14.8%, over non-interest income of $757,685 for the
three months ended September 30, 2006.
Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues increased by $15,841, or 10.4%, to
$168,578 for the three months ended September 30, 2007 from the $152,737 for the
three months ended September 30, 2006. This increase was the result
of a higher volume of uncollected and overdraft fees collected on deposit
accounts during the third quarter of 2007 compared to the same period in
2006.
Gain on
sales of loans decreased by $153,864, or 45.6%, to $183,750 for the three months
ended September 30, 2007 when compared to $337,614 for the three months ended
September 30, 2006. The rising rate environment that existed
throughout 2006 and continued into the first nine months of 2007 has impacted
the volume of sales transactions in the SBA loan secondary market and resultant
gains resulting from these sales transactions.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $95,446 for the three months ended September 30, 2007 compared to
$108,138 for the three months ended September 30, 2006. The Bank
purchased tax-free BOLI assets to partially offset the cost of employee benefit
plans and reduced 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 box rental, wire transfer
service fees and Automated Teller Machine fees for non-Bank
customers. Increased customer demand for these services contributed
to the other income component of non-interest income amounting to $197,932 for
the three months ended September 30, 2007, compared to $159,196 for the three
months ended September 30, 2006.
Non-Interest
Expense
Non-interest
expenses decreased by $113,604, or 3.6%, to $3,011,371 for the three months
ended September 30, 2007 from $3,124,975 for the three months ended September
30, 2006. The following table presents the major components of
non-interest expenses for the three months ended September 30, 2007 and
2006.
|
|
|
|
|
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated) |
|
Salaries
and employee benefits
|
|
$
|
1,810,573
|
|
|
$
|
1,670,169
|
|
Occupancy
expenses
|
|
|
431,888
|
|
|
|
413,679
|
|
Equipment
expense
|
|
|
109,336
|
|
|
|
133,116
|
|
Marketing
|
|
|
27,141
|
|
|
|
103,152
|
|
Computer
services
|
|
|
213,763
|
|
|
|
199,035
|
|
Regulatory,
professional and other fees
|
|
|
112,286
|
|
|
|
179,313
|
|
Office
expense
|
|
|
142,749
|
|
|
|
127,151
|
|
All
other expenses
|
|
|
163,635
|
|
|
|
299,360
|
|
|
|
$
|
3,011,371
|
|
|
$
|
3,124,975
|
|
Total
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $140,404, or 8.4%, to $1,810,573 for the three months
ended September 30, 2007 compared to $1,670,169 for the three months ended
September 30, 2006. The increase in salaries and employee benefits
for the three months ended September 30, 2007 was a result of an increase in
staffing levels partially offset by a lower level of expenses incurred in
connection with the Company’s health insurance and other employee benefit
plans. Staffing levels overall increased to 104 full-time equivalent
employees at September 30, 2007 as compared to 90 full-time equivalent employees
at September 30, 2006. The February 23, 2007 acquisition of the
Hightstown branch contributed to this increase by increasing the number of
full-time equivalent employees by 4.
Marketing
expense decreased by $76,011, or 73.7% to $27,141 for the three months ended
September 30, 2007 compared to $103,152 for the three months ended September 30,
2006 as the Company ran fewer broadcast media promotions during
2007.
Regulatory,
professional and other fees decreased by $67,027, or 37.4%, to $112,286 for the
three months ended September 30, 2007 compared to $179,313 for the three months
ended September 30, 2006. During 2006, the Company chose to incur
additional accounting and consulting fees primarily as a result of the new
internal control compliance requirements contained in Section 404 of the
Sarbanes-Oxley Act.
An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating
expenses by net interest income plus non-interest income. An increase
in the efficiency ratio indicates that more resources are being utilized to
generate the same or greater volume of income, while a decrease would indicate a
more efficient allocation of resources. The Bank’s efficiency ratio
decreased to 58.3% for the three months ended September 30, 2007, compared to
59.3% for the three months ended September 30, 2006.
Financial
Condition
September
30, 2007 Compared with December 31, 2006
Total
consolidated assets at September 30, 2007 totaled $429,889,889, increasing by
$36,957,709 from $392,932,180 at December 31, 2006. On February 27,
2007, the Bank acquired all of the deposit liabilities and related assets of the
Hightstown, New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits. In connection with such acquisition, the Company recorded
$472,726 in goodwill and $274,604 in core deposit intangibles, which appear as
“Other Assets” in the Consolidated Balance Sheet at September 30,
2007.
Cash
and Cash Equivalents
Cash and
Cash Equivalents at September 30, 2007
totaled $9,562,789 compared to $10,361,812 at December 31, 2006. Cash
and cash equivalents at September 30, 2007 consisted of cash and due from banks
of $8,743,801 and Federal funds sold/short term investments of
$818,988. The corresponding balances at December 31, 2006 were
$10,336,334 and $25,478, respectively.
Investment
Securities
The
Bank’s investment securities represented 24.6% of total assets at September 30,
2007 and 22.8% at December 31, 2006. Total investment securities
increased $16,251,915, or 18.1%, at September 30, 2007 to $105,927,719 from
$89,675,804 at December 31, 2006.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes. Securities available for sale consist primarily of U.S.
Government and Federal agency securities as well as mortgage-backed
securities. 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
September 30, 2007, available-for-sale securities amounted to $79,815,933, and
increase of $9,394,605 or 13.3%, from December 31, 2006.
At
September 30, 2007, the securities available for sale portfolio had net
unrealized losses of $759,345 compared to net unrealized losses of $719,367 at
December 31, 2006. These unrealized losses are reflected net of tax
in shareholders’ equity as a component of other comprehensive income
(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. The held-to-maturity portfolio consists primarily of
obligations of states and political subdivisions. At September 30,
2007, securities held to maturity were $26,111,786, an increase of $6,857,310,
or 35.6% from $19,254,476 at December 31, 2006. The fair value of the
held-to-maturity portfolio at September 30, 2007, was $25,825,988, resulting in
a net unrealized loss of $285,798.
During
the nine months ended September 30, 2007, the Bank purchased securities in the
amounts of $15,776,240 and $7,677,917 for the available for sale and held to
maturity portfolios, respectively. These purchases were funded
primarily by the cash received in the Hightstown branch acquisition completed in
February 2007.
Loans
The loan
portfolio, which represents the Bank’s 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
Company’s primary lending focus continues to be construction loans, commercial
loans, owner-occupied commercial mortgage loans and tenanted commercial real
estate loans.
The
following table sets forth the classification of loans by major category at
September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
Loan
Portfolio Composition
|
|
September
30, 2007
|
|
December
31, 2006
|
Component
|
|
Amount
|
|
|
%
of
total
|
|
Amount
|
|
|
%
of
total
|
Construction
loans
|
|
$
|
128,518,664
|
|
|
|
44
|
%
|
|
$
|
125,268,871
|
|
|
|
47
|
%
|
Residential
real estate loans
|
|
|
10,265,971
|
|
|
|
4
|
%
|
|
|
7,670,370
|
|
|
|
3
|
%
|
Commercial
and commercial real estate
|
|
|
130,731,644
|
|
|
|
46
|
%
|
|
|
114,897,040
|
|
|
|
44
|
%
|
Loans
to individuals
|
|
|
17,019,860
|
|
|
|
6
|
%
|
|
|
16,728,025
|
|
|
|
6
|
%
|
Deferred
loan fees
|
|
|
431,871
|
|
|
|
0
|
%
|
|
|
404,074
|
|
|
|
0
|
%
|
All
other loans
|
|
|
164,861
|
|
|
|
0
|
%
|
|
|
173,933
|
|
|
|
0
|
%
|
|
|
$
|
287,132,871
|
|
|
|
100
|
%
|
|
$
|
265,142,313
|
|
|
|
100
|
%
|
|
The loan
portfolio increased $21,990,558, or 8.3%, at September 30, 2007 to $287,132,871
from $265,142,313 at December 31, 2006. The ability of the Company to
enter into larger loan relationships and management’s philosophy of relationship
banking are key factors in the Company’s strategy for loan
growth. The ultimate collectability of the loan portfolio and the
recovery of the carrying amount of real estate are subject to changes in the
Company’s market region's economic environment and real estate
market.
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 decreased by $172,383 to $4,020,826 at September 30, 2007 from $4,193,209
at December 31, 2006. The largest segment of non-accrual loans
represents unfinished residential construction where litigation has commenced
and workout negotiations are in process. The balance of the
non-performing loans are centered in commercial loans for which litigation has
commenced. The table below sets forth non-performing assets and risk
elements in the Bank’s portfolio by type for the years indicated. As
the table demonstrates, non-performing loans to total loans decreased to 1.40%
at September 30, 2007 from 1.58% at December 31, 2006 for the reasons previously
stated, but 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.
Non-performing
assets decreased by $172,383 to $4,020,826 at September 30, 2007 from $4,193,209
at December 31, 2006. Non-performing assets represented 0.93% of
total assets at September 30, 2007 and 1.07% at December 31,
2006. Non-performing loans as a percentage of total loans were 1.40%
at September 30, 2007, compared to 1.58% at December 31, 2006.
The Bank
had no loans classified as restructured loans at September 30, 2007 or December
31, 2006.
At
September 30, 2007 the Bank had one loan for $302 that was 90 days or more past
due but still accruing interest. The Bank had no such loans at
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing
Assets and Loans
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Non-Performing
loans:
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
$
|
302
|
|
|
$
|
0
|
|
Non-accrual
loans
|
|
|
4,020,524
|
|
|
|
4,193,209
|
|
Total
non-performing loans
|
|
|
4,020,826
|
|
|
|
4,193,209
|
|
Other
real estate owned
|
|
|
0
|
|
|
|
0
|
|
Total
non-performing assets
|
|
$
|
4,020,826
|
|
|
$
|
4,193,209
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
1.40
|
%
|
|
|
1.58
|
%
|
Non-performing
assets to total assets
|
|
|
0.93
|
%
|
|
|
1.07
|
%
|
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 each of the 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 estimated selling costs, or at cost. The amount, if any, by which the
recorded amount of the loan exceeds the fair market value of the asset 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 collection action cannot be continued unless the
Company first obtains relief from the automatic stay provided by the bankruptcy
code.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level sufficient in the opinion of
management 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, including construction loans. Based on
the composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, increases in interest rates, 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
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 and lease losses is restricted to any individual loan or groups of loans,
and the entire allowance is available to absorb any and all loan and lease
losses.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan and lease 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 and
lease losses consists of several key elements. These elements 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 and lease losses, management of the Company
considers a variety of factors that include:
|
·
|
General
economic conditions.
|
|
·
|
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.
|
The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk loan assets. These high
risk loans are 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 part, is unlikely. The
specific portion of the allowance is the total amount of potential unconfirmed
losses for these 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
for the 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.
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 which is often subjective and changing rapidly. At
September 30, 2007, management believed that the allowance for loan losses and
non-performing loans was adequate.
The
allowance for loan losses amounted to $3,318,080 at September 30, 2007, an
increase of $89,720 from December 31, 2006. The ratio of the
allowance for loan losses to total loans was 1.11% at September 30, 2007 and
1.16% at December 31, 2006, respectively. 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 presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
|
September
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
3,228,360
|
|
|
$
|
2,361,375
|
|
|
$
|
2,361,375
|
|
Provision
charged to operating expenses
|
|
|
100,000
|
|
|
|
893,500
|
|
|
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
(88,891
|
)
|
|
|
(11,154
|
)
|
|
|
(11,154
|
)
|
Loans
to individuals
|
|
|
(1,614
|
)
|
|
|
(18,314
|
)
|
|
|
(285
|
)
|
Lease
financing
|
|
|
(478
|
)
|
|
|
-
|
|
|
|
-
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(90,983
|
)
|
|
|
(29,468
|
)
|
|
|
(11,439
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
Loans
to individuals
|
|
|
5,703
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Lease
financing
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
80,703
|
|
|
|
2,953
|
|
|
|
2,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(charge offs) / recoveries
|
|
|
(10,280
|
)
|
|
|
(26,515
|
)
|
|
|
(8,486
|
)
|
Balance,
end of period
|
|
$
|
3,318,080
|
|
|
$
|
3,228,360
|
|
|
$
|
2,792,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
At
period end
|
|
$
|
299,834,417
|
|
|
$
|
278,751,255
|
|
|
$
|
277,480,859
|
|
Average
during the period
|
|
|
289,702,788
|
|
|
|
271,740,647
|
|
|
|
277,151,149
|
|
Net
charge offs to average loans outstanding
|
|
|
0.00
|
%
|
|
|
(0.01
|
%)
|
|
|
0.00
|
%
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans at period end
|
|
|
1.11
|
%
|
|
|
1.16
|
%
|
|
|
1.00
|
%
|
Non-performing
loans
|
|
|
82.52
|
%
|
|
|
76.99
|
%
|
|
|
337.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Company offers a variety of products designed to attract
and retain customers, with the Company’s primary focus being on building and
expanding long-term relationships.
Total
deposits increased $20,220,635, or 6.5%, to $332,945,057 at September 30, 2007
from $312,724,422 at December 31, 2006. On February 27, 2007, the
Bank acquired all of the deposit liabilities and related assets of the
Hightstown, New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits.
Borrowings
Borrowings
are mainly comprised of fixed rate convertible advances from the Federal Home
Loan Bank (“FHLB”) and federal funds purchased. These borrowings are
primarily used to fund asset growth not supported by deposit
generation. The balance of other borrowings at September 30, 2007
consisted of long-term FHLB borrowings of $25,500,000 and overnight funds
purchased of $7,800,000. The balance of borrowings at December 31,
2006 consisted of long-term FHLB borrowings of $15,500,000 and overnight funds
purchased of $1,700,000. On July 27, 2007, the Bank contracted a
4.08% 10 year fixed rate advance with the FHLB in the amount of
$10,000,000. The proceeds of this advance
were used to reduce the level of higher rate overnight
borrowings. FHLB advances are fully secured by marketable
securities.
Shareholders’
Equity And Dividends
Shareholders’
equity at September 30, 2007 totaled $39,471,721, an increase of $4,525,216, or
12.9%, from $34,946,505 at December 31, 2006. Book value per common
share rose to $9.94 at September 30, 2007 from $8.81 at December 31,
2006. The ratio of shareholders’ equity to total assets was 9.18% at
September 30, 2007 and 8.89% at December 31, 2006.
The
Company’s stock is listed for trading on the Nasdaq Global Market System, under
the symbol “FCCY.”
In 2005,
the Board of Directors 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. A table disclosing
repurchases of Company shares made during the quarter ended September 30, 2007
is set forth under Part II, Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
Actual
capital amounts and ratios for the Company and the Bank as of September 30, 2007
and December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
To
Be Well Capitalized
Under
Prompt Corrective
Action
Provision
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Amount
|
|
Ratio
|
As
of September 30, 2007 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
60,725,294
|
|
|
|
18.04
|
%
|
|
$
|
26,936,560
|
|
>8%
|
|
$
|
33,670,700
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
52,772,565
|
|
|
|
15.67
|
%
|
|
|
13,468,280
|
|
>4%
|
|
|
20,202,420
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
|
|
|
|
12.24
|
%
|
|
|
17,245,170
|
|
>4%
|
|
|
21,556,463
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
58,356,510
|
|
|
|
17.33
|
%
|
|
$
|
26,936,560
|
|
>8%
|
|
$
|
33,670,700
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
55,038,430
|
|
|
|
16.35
|
%
|
|
|
13,468,280
|
|
>4%
|
|
|
20,202,420
|
|
>6%
|
|
Tier
1 Capital to Average Assets
|
|
|
|
|
|
|
12.77
|
%
|
|
|
17,204,360
|
|
>4%
|
|
|
21,505,450
|
|
>5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006 - restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
61,652,577
|
|
|
|
19.93
|
%
|
|
$
|
24,751,678
|
|
>8%
|
|
$
|
30,939,598
|
|
N/A
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
47,220,481
|
|
|
|
15.26
|
%
|
|
|
12,375,839
|
|
>4%
|
|
|
18,563,759
|
|
N/A
|
|
Tier
1 Capital to Average Assets
|
|
|
47,220,481
|
|
|
|
11.99
|
%
|
|
|
15,752,046
|
|
>4%
|
|
|
19,690,058
|
|
N/A
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$
|
53,520,979
|
|
|
|
17.30
|
%
|
|
$
|
24,751,040
|
|
>8%
|
|
$
|
30,938,800
|
|
>10%
|
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
50,292,619
|
|
|
|
16.26
|
%
|
|
|
12,375,520
|
|
>4%
|
|
|
18,563,280
|
|
>6%
|
|
Tier
1 Capital to Average Assets
|
|
|
50,292,619
|
|
|
|
12.80
|
%
|
|
|
15,710,320
|
|
>4%
|
|
|
19,637,900
|
|
>5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total capital to risk
weighted assets ratio of 8.0%. To be considered “well capitalized,”
an institution must have a minimum Tier 1 leverage ratio of 5.0%. At
September 30, 2007, the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is management’s goal to monitor and
maintain adequate capital levels to continue to support asset growth and
continue its status as a well-capitalized institution.
Liquidity
At
September 30, 2007, 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
measures the ability to satisfy current and future cash flow needs as they
become due. 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 September 30, 2007,
the Bank maintained an Overnight Line of Credit at the FHLB in the amount of
$28,883,000 plus a One-Month Overnight Repricing Line of Credit of
$28,883,000. 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 $13,500,000 with a correspondent
bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At September 30, 2007,
the balance of cash and cash equivalents was $9,562,789.
Net cash
provided by operating activities totaled $7,509,418 in the nine months ended
September 30, 2007 compared to $8,623,748 in the nine months ended September 30,
2006. The primary sources of funds are net income from operations
adjusted for provision for loan losses, depreciation expenses, and net proceeds
from sales of loans held for sale.
Net cash
used in investing activities totaled $19,954,444 in the nine months ended
September 30, 2007 compared to $24,040,280 used in investing activities in the
nine months ended September 30, 2006. The current period amount was
primarily the result of the net increase in the loan portfolio plus investment
securities purchases partially offset by the cash and cash equivalents acquired
with the Hightstown branch.
Net cash
provided by financing activities amounted to $11,646,003 in the nine months
ended September 30, 2007 compared to $13,870,237 provided by financing
activities in the nine months ended September 30, 2006. The current
period amount resulted primarily from an increase in borrowings combined with
the repayment of redeemable subordinated debentures during the nine months
period ended September 30, 2007.
The
securities portfolio is also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. During the nine
months ended September 30, 2007, maturities and prepayments of investment
securities totaled $7,148,037. Another source of liquidity is the
loan portfolio, which provides a flow of payments and maturities.
The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for the
Company’s future operating, investing and financing needs. Management
will continue to monitor the Company’s liquidity and maintain it at a level that
it deems adequate and not excessive.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations (revised
2007).” FAS 141(R) will significantly change how entities apply the acquisition
method to business combinations. The new standard requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. This Statement is broader than SFAS 141,
which only applied to business combinations in which control was obtained by
transferring consideration. SFAS 141(R) applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more
businesses including combinations achieved without the transfer of
consideration. SFAS 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. This replaces SFAS 141’s
cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. SFAS 141 required the acquirer to include the costs
incurred to effect the acquisition (acquisition-related costs) in the cost of
the acquisition that was allocated to the assets acquired and the liabilities
assumed. SFAS 141 (R) requires those costs to be recognized separately from the
acquisition. In accordance with SFAS 141, restructuring costs that the acquirer
expected but was not obligated to incur were recognized as if they were a
liability assumed at the acquisition date. SFAS 141(R) requires the acquirer to
recognize those restructuring costs that do not meet the criteria in SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities” as an
expense as incurred. Acquisition related transaction costs will be expensed as
incurred. SFAS 141(R) requires an acquirer to recognize assets or liabilities
arising from all other contingencies (contractual contingencies) as of the
acquisition date, measured at their acquisition-date fair values only if it is
more likely than not that they meet the definition of an asset or a liability on
the acquisition date. Under SFAS 141(R), changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income tax expense. Additionally, under SFAS
141(R), the allowance for loan losses of an acquiree will not be permitted to be
recognized by the acquirer. SFAS 141(R) is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of the
adoption of this FAS 141(R) on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements–an amendment of Accounting Research Bulletin
No. 51, “Consolidated Financial Statements.” FAS 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Its intention is to eliminate the diversity
in practice regarding the accounting for transactions between an entity and
noncontrolling interests. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The Company is currently assessing the impact of the adoption
of SFAS 160 on its financial statements.
In
November 2007, the SEC issued SAB 109, “Written Loan Commitments Recorded at
Fair Value through Earnings.” SAB 109 revises and rescinds portions of SAB 105,
“Application of Accounting Principles to Loan Commitments.” The SEC staff’s
current view is that the expected net future cash flows related to the
associated servicing of a loan should be included in the measurement of
derivative and other written loan commitments that are accounted for at fair
value through earnings. That view is consistent with the guidance in Financial
Accounting Standards Board (FASB) No. 156, “Accounting for Servicing of
Financial Assets” and FASB No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities.” SAB 109 retains the view expressed in SAB 105 that
internally developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment. The guidance in SAB 109 is effective
for derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. The adoption of SAB 109 is not expected to have a
material impact on the Company’s financial statements.
In June
2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11,
“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”
EITF06-11 requires companies to recognize the income tax benefit realized from
dividends or dividend equivalents that are charged to retained earnings and paid
to employees for nonvested equity-classified employee share-based payment awards
as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal
years beginning after September 15, 2007. The Company does not expect EITF 06-11
will have a material impact on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115.” SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 provides
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex
hedge accounting provisions. The Statement also establishes presentation and
disclosure requirements. The entity shall report the effect of the first
re-measurement to fair value as a cumulative-effective adjustment to the opening
balance of retained earnings. At each subsequent reporting date, unrealized
gains and losses on items for which the fair value option has been elected will
be reported in earnings. The fair value option may be applied instrument by
instrument, with a few exceptions, is irrevocable and is applied only to entire
instruments. Most of the provisions of SFAS 159 apply only to entities that
elect the fair value option. However, the amendment to SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities,” applies to all entities with
available-for-sale and trading securities. If the fair value option is elected
for any available-for-sale or held-to-maturity securities at the effective date,
the cumulative unrealized gains and losses at that date shall be included in the
cumulative-effect adjustment. SFAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. Early adoption
was permitted as of the beginning of a fiscal year that began on or before
November 15, 2007, provided that the entity also elected to apply the provisions
of SFAS 157, “Fair Value Measurements.” The Company is not currently electing to
measure any additional financial instruments at fair value under this Statement
and the adoption of FAS 159 is not expected to have a material impact on its
financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
157 clarifies the definition of fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 defines fair value as “the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.” The
Statement will require the Company to apply valuation techniques that (1) place
greater reliance on observable inputs and less reliance on unobservable inputs
and (2) are consistent with the market approach, the income approach, and/or the
cost approach. The definition and framework apply to both items recognized and
reported at fair value in the financial statements and items disclosed at fair
value in the notes to the financial statements. The Statement also requires
expanded disclosure in interim and annual financial statements about how the
Company uses fair value. The disclosures focus on items measured at fair value
based on significant unobservable inputs and the effect of fair value
measurements on earnings. The disclosures are only required for items recognized
and reported at fair value in the financial statements. The Statement does not
change existing accounting rules governing what can or what must be recognized
and reported at fair value in the Company’s financial statements, or disclosed
at fair value in the Company’s notes to the financial statements. Additionally,
SFAS 157 does not eliminate practicability exceptions that exist in accounting
pronouncements amended by this Statement when measuring fair value. As a result,
the Company will not be required to recognize any new instruments at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, although earlier application was
encouraged. Prospective application of the provisions of SFAS 157 is required as
of the beginning of the fiscal year in which it is initially applied, except for
certain circumstances specified in the Statement that require retrospective
application. In March 2008, the FASB issued FSP FAS 157-2 to partially delay the
effective implementation of SFAS 157 until fiscal years beginning after
November, 15, 2008 for all nonfinancial assets and liabilities except those that
are recognized or disclosed at fair value in financial statements on a recurring
basis (at least annually). Assets and liabilities currently reported or
disclosed at fair value on a recurring basis in the Company’s financial
statements include investment securities, impaired loans, residential mortgage
loans held for sale, mortgage servicing rights and derivatives. The Company does
not anticipate any material impact on its financial statements upon partial
adoption of FAS 157 for its fiscal year beginning January 1, 2008. The Company
is in the process of assessing the impact of the adoption of SFAS 157 for its
fiscal year beginning January 1, 2009 relating to nonfinancial assets and
liabilities on the Company’s financial statements including goodwill and other
intangible assets.
At its
September 2006 meeting, the EITF reached a final consensus on Issue 06–05,
“Accounting for Purchases of Life Insurance–Determining the Amount That Could be
Realized in Accordance with FASB Technical Bulletin No. 85–4.” Issue 06-05
concludes that in determining the amount that could be realized under an
insurance contract accounted for under FASB Technical Bulletin No. 85–4,
“Accounting for Purchases of Life Insurance,” the policyholder should (1)
consider any additional amounts included in the contractual terms of the policy;
(2) assume the surrender value on a individual–life by individual–life policy
basis; and (3) not discount the cash surrender value component of the amount
that could be realized when contractual restrictions on the ability to surrender
a policy exist. Issue 06–05 should be adopted through either (1) a change in
accounting principle through a cumulative–effect adjustment to retained earnings
as of the beginning of the year of adoption or (2) a change in accounting
principle through retrospective application to all prior periods. Issue 06–05 is
effective for fiscal years beginning after December 15, 2006. The application of
Issue 06–05 did not have a material effect on the Company’s financial position
or results of operations.
At its
September 2006 meeting, the EITF reached a final consensus on Issue 06–04,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split–Dollar Life Insurance Arrangements.” In accordance with the
EITF consensus, an agreement by an employer to share a portion of the proceeds
of a life insurance policy with an employee during the postretirement period is
a postretirement benefit arrangement required to be accounted for under
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions” or APB Opinion No. 12, “Omnibus Opinion 1967.” Furthermore, the
purchase of a split–dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. The provisions of Issue 06–04 are to be applied through either a
cumulative–effect adjustment to retained earnings as of the beginning of the
year of adoption or retrospective application. Issue 06–04 is effective for
annual or interim reporting periods beginning after December 15, 2007. The
application of Issue 06-04 is not expected to have a material effect on the
Company’s financial statements.
In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109” (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN 48 also 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. The provisions of
FIN 48 are to be applied to all tax positions upon initial adoption of this
standard. Only tax positions that meet a “more-likely-than-not” recognition
threshold at the effective date may be recognized or continue to be recognized
upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN
48 are to be reported as an adjustment to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the
statement of financial position) for that fiscal year. The new interpretation
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. The Company’s implementation of this interpretation did not have a
material impact on the Company’s financial position or results of operations and
did not result in an adjustment to opening retained earnings.
In May
2007, the FASB issued FIN 48-1, “Definition of Settlement in FIN 48” to provide
guidance on how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax
benefits. FIN 48-1 is effective retroactively to January 1, 2007. The
implementation of this standard did not have any impact on the Company’s
consolidated financial position or results of operations.
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.
Not
applicable.
Item 9A. Controls
and Procedures.
The
Company conducted an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures (“Disclosure Controls”), as defined in
Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(“Exchange Act”) as of December 31, 2007. The evaluation was done under the
supervision and with the participation of management, including the principal
executive officer and the principal financial officer, and included a review of
the controls’ objectives, design and operating effectiveness with respect to the
information generated for use in this Annual Report. In the course of the
evaluation, we sought to identify data errors, control problems or acts of fraud
and confirm that appropriate corrective actions, including process improvements,
were being undertaken. This type of Disclosure Controls evaluation is performed
on a quarterly basis so that the conclusions of management, including the
principal executive officer and the principal financial officer, concerning the
effectiveness of controls can be reported in our Quarterly Reports on Form 10-Q
and in our Annual Reports on Form 10-K. Many of the components of our Disclosure
Controls are also evaluated on an ongoing basis by other personnel in our
accounting, internal audit and compliance functions. The overall goals of these
various evaluation activities are to monitor our Disclosure Controls and to
modify them on an ongoing basis as necessary.
A control
system can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Based
upon the evaluation of our Disclosure Controls, and in light of the material
weaknesses described below under “Management’s Report on Internal Control over
Financial Reporting,” our principal executive officer and the principal
financial officer concluded that the Company’s Disclosure Controls were not
effective as of December 31, 2007 to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported in accordance with generally
accepted accounting principles and within the time periods specified in the
Securities and Exchange Commission’s rules and forms. The Company’s
Disclosure Controls were not effective as of December 31, 2007 due to
material weaknesses in our internal control over financial reporting that
existed as of December 31, 2007, as described below.
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 U.S. generally accepted accounting
principles.
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 control 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.
Material
weaknesses in internal control over financial reporting that existed as of
December 31, 2007 resulted in the following:
|
·
|
Errors
made in accounting for (i) current tax liabilities principally related to
the Company’s trust preferred securities and (ii) deferred tax
assets, in both cases in 2007 and 2006 and prior periods, resulting in an
underestimate of current tax liabilities and an overestimate of deferred
tax assets;
|
|
·
|
Overestimation
of liabilities related to future benefits to plan participants in the
Company's Supplemental Executive Retirement Plan in connection with the
implementation of FAS 158 in 2006 resulting in an increase in expenses,
and an underestimation of liabilities related to future benefits to plan
participants in the Company's Supplemental Executive Retirement Plan,
resulting in a reduction of expenses in the first three quarters of
2007; and
|
|
·
|
Failure
to adequately evaluate estimation of certain non-interest operating
expenses for, among other things, professional fees, advertising and
business development, resulting in an over-accrual of certain
non-interest operating expenses in 2006 and a resultant decrease in
tax expense for 2006.
|
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. 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”). Management’s assessment identified the
following material weakness in internal control over financial reporting, which
in all instances are impacted by the lack of adequate staffing and procedural
breakdowns in compliance with the Company’s internal policies and
procedures. Based on their assessment using those criteria,
management concluded that, as of December 31, 2007, the Company’s internal
control over financial reporting is not effective.
As of the
date of the filing of this Form 10-K, the Company has taken the following steps
to remediate the material weakness described above:
|
·
|
Current and Deferred
Tax Accounting – The Company has implemented an internal policy pursuant
to which the Company will retain external tax preparation and compliance
consultants to assist
it with analyzing the Company’s accounting for income taxes and tax
compliance for compliance with generally accepted accounting principles
and reviewing the results with the Company’s principal executive officer
and financial officer on a quarterly
basis.
|
|
·
|
Supplemental
Executive Retirement Plan – The Company’s principal executive officer,
financial officer and human resources officer will review on a quarterly
basis with the plan’s administrator and actuarial consultant to determine
that all liability balances and expense levels are properly recorded and
reflect the current life circumstances of all participants in the
plan.
|
|
·
|
Accrued
Liabilities – The Company’s principal executive officer and principal
financial officer will meet at the end of each fiscal quarter to review
documentation in support of all major operating expense accruals to
determine if expense accruals are properly supported by documentation and
that these expense accruals are consistent with generally accepted
accounting principles.
|
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 2008 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 2008 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, 2007. The
information in the table has been adjusted for the 6% stock dividend declared
December 20, 2007 and paid February 6, 2008 to shareholders of record on January
23, 2008.
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)
|
|
|
90,876 |
|
|
$ |
13.40 |
|
|
|
335,119 |
|
Equity
compensation plans not approved by security holders (2)
|
|
|
65,962 |
|
|
$ |
6.12 |
|
|
|
- |
|
Total
|
|
|
156,838 |
|
|
$ |
10.48 |
|
|
|
335,119 |
|
|
(1)
|
Includes
the Company’s 1990 Employee Stock Option Plan for Key Employees, 1996
Employee Stock Option Plan, 2000 Employee Stock Option and Restricted
Stock Plan, 2005 Equity Incentive Plan and 2006 Directors Stock
Plan.
|
|
The
1990 Employee Stock Option Plan for Key Employees was adopted by the Board
of the Bank and approved by the shareholders of the Bank in March 1990.
The 1996 Employee Stock Option Plan was adopted by the Board of the Bank
and approved by shareholders of the Bank in March 1997. In 1999, as part
of the formation of the Company as a holding company for the Bank, these
plans were each amended so that no further grants may be made thereunder,
and each option to purchase one share of Bank common stock was converted
into an option to purchase one share of Company common
stock.
|
|
|
|
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 2008 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 2008 Annual Meeting of Shareholders under the
captions “Certain Transactions With Management” and “Director
Independence”.
Item 14. Principal
Accounting Fees and Services.
The
information regarding principal accounting fees and services and the Company’s
pre-approval policies and procedures for audit and non-audit services provided
by the Company’s independent accountants is incorporated by reference to the
Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders under the
caption “Principal Accounting Fees and Services.”
PART
IV
Item 15. Exhibits
and Financial Statement Schedules.
(a)
Financial
Statements and Financial Statement Schedules
The
following documents are filed as part of this report:
|
1. |
Financial Statements
of 1st Constitution Bancorp. |
|
|
|
|
|
Consolidated Balance
Sheet – December 31, 2007 and 2006. |
|
|
|
|
|
Consolidated
Statements of Income – For the Years Ended December 31, 2007, 2006 and
2005.
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity – For the Years
Ended December 31, 2007, 2006 and 2005. |
|
|
|
|
|
Consolidated
Statements of Cash Flows – For the Years Ended December 31, 2007, 2006,
and 2005.
|
|
|
|
|
|
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, 2007. |
|
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)
|
|
Certificate
of Incorporation of the Company (incorporated by reference to Exhibit 3(i)
to the Company’s Form 10-K filed with the SEC on March 24,
2005)
|
|
|
|
|
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 the Company’s Form
10-KSB 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 the Company’s
Form 10-QSB 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 the
Company’s Form 10-QSB filed with the SEC on May 8,
2002)
|
Exhibit
No.
|
|
Description
|
|
|
|
|
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 the Company’s Form 10-QSB 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, including the form of
Certificate of Amendment to the Company’s Certificate of Incorporation as
Exhibit A thereto, the form of Rights Certificates as Exhibit B thereto,
and the Summary of Rights as Exhibit C thereto. Pursuant to the Rights
Agreement, printed Rights Certificates will not be mailed until after the
Distribution Date (as such term is defined in the Rights Agreement)
(incorporated by reference to the Company’s Form 8-A12G filed with the SEC
on March 18, 2004)
|
|
|
|
|
10.1
|
|
#
|
1st
Constitution Bancorp Supplemental Executive Retirement Plan, dated as of
October 1, 2002 (Incorporated by reference to the Company’s Form 10-QSB
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 the Company’s Form 10-QSB filed with the SEC
on November 13, 2002)
|
|
|
|
|
10.4
|
|
#
|
Amended
and Restated 1990 Stock Option Plan for Key Employees, as amended
(incorporated by reference to Exhibit No. 10.1 to the Company’s Form
10-QSB filed with the SEC on August 9, 2002)
|
|
|
|
|
10.5
|
|
#
|
1996
Employee Stock Option Plan, as amended (incorporated by reference to
Exhibit No. 10.2 to the Company’s Form 10-QSB filed with the SEC on August
9, 2002)
|
|
|
|
|
10.6
|
|
#
|
2000
Employee Stock Option and Restricted Stock Plan (incorporated by reference
to Exhibit No. 6.3 to the Company’s Form 10-SB filed with the SEC on June
15, 2001)
|
|
|
|
|
10.7
|
|
#
|
Directors
Stock Option and Restricted Stock Plan (incorporated by reference to
Exhibit No. 6.4 to the Company’s Form 10-SB filed with the SEC on June 15,
2001)
|
|
|
|
|
10.8
|
|
#
|
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
filed with the SEC on June 15, 2001)
|
|
|
|
|
10.9
|
|
#
|
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 filed with the SEC on August 11,
2004)
|
|
|
|
|
10.10
|
|
#
|
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 filed with the SEC on August 11,
2004)
|
Exhibit
No.
|
|
Description
|
|
|
|
|
10.11
|
|
#
|
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
filed with the SEC on December 22, 2004)
|
|
|
|
|
10.12
|
|
#
|
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
filed with the SEC on December 22, 2004)
|
|
|
|
|
10.13
|
|
#
|
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 filed with the SEC on February 24, 2005)
|
|
|
|
|
10.14
|
|
#
|
The
1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by
reference to Appendix A of the Company's proxy statement filed on April
15, 2005)
|
|
|
|
|
10.15
|
|
#
|
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)
|
|
|
|
|
10.16
|
|
#
|
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)
|
|
|
|
|
10.17
|
|
#
|
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)
|
|
|
|
|
10.18
|
|
#
|
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)
|
|
|
|
|
10.19
|
|
#
|
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)
|
|
|
|
|
10.20
|
|
#
|
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)
|
|
|
|
|
10.21
|
|
|
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)
|
|
|
|
|
10.22
|
|
|
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)
|
|
|
|
|
10.23
|
|
|
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)
|
Exhibit
No.
|
Description
|
|
|
|
|
10.24
|
|
*#
|
Amendment
No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
Plan, effective as of December 31, 2004
|
|
|
|
|
10.25
|
|
#
|
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)
|
|
|
|
|
10.26
|
|
|
Branch
Purchase and Assumption Agreement, dated as of November 6, 2006, by and
between 1st Constitution Bank and Sun National Bank (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on
November 13, 2006)
|
|
|
|
|
14
|
|
|
Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
the Company’s Form 10-K filed with the SEC on March 25,
2004)
|
|
|
|
|
21
|
|
*
|
Subsidiaries
of the Company
|
|
|
|
|
23.1
|
|
*
|
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
|
____________________ |
* |
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
report. |
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report of
Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated Balance
Sheets – December 31, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Income – For the Years Ended December 31, 2007 and
2006
|
F-4
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity - For the Years Ended
December 31, 2007
and 2006
|
F-5
|
|
|
Consolidated
Statements of Cash Flows - For the Years Ended December 31, 2007 and
2006
|
F-6
|
|
|
Notes to
Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
1st
Constitution Bancorp:
We have
audited the accompanying consolidated balance sheets of 1st Constitution Bancorp
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of income, changes in shareholders’ equity and cash flows for each of
the two years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.
As
discussed in Note 2 to the consolidated financial statements, the Company’s
consolidated financial statements as of and for the year ended December 31, 2006
have been restated.
As
discussed in Note 1 to the financial statements, the Company has adopted
Financial Accounting Standards Board Statement (FASB) No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements
No. 87, 88, 106 and 132(R), in 2006.
/s/ GRANT
THORNTON LLP
Philadelphia,
Pennsylvania
April 14,
2008
CONSOLIDATED
BALANCE SHEETS
December
31, 2007 and 2006
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS |
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
CASH AND DUE FROM
BANKS |
|
$ |
7,517,158
|
|
|
$ |
10,336,334
|
|
|
|
|
|
|
|
|
|
|
FEDERAL FUNDS SOLD /
SHORT TERM INVESTMENTS |
|
|
30,944 |
|
|
|
25,478
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash
equivalents
|
|
|
7,548,102
|
|
|
|
10,361,812
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
SECURITIES |
|
|
|
|
|
|
|
|
Available for sale,
at fair value
|
|
|
75,192,137
|
|
|
|
70,421,328
|
|
Held to maturity
(fair value of $23,411,269 and $19,164,679
in 2007 and 2006,
respectively)
|
|
|
23,512,346
|
|
|
|
19,254,476
|
|
Total
securities |
|
|
98,704,483
|
|
|
|
89,675,804
|
|
|
|
|
|
|
|
|
|
|
LOANS HELD FOR
SALE |
|
|
10,322,005
|
|
|
|
13,608,942
|
|
|
|
|
|
|
|
|
|
|
LOANS
|
|
|
294,760,718
|
|
|
|
265,142,313
|
|
Less- Allowance for
loan losses
|
|
|
(3,348,080
|
) |
|
|
(3,228,360
|
) |
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
291,412,638
|
|
|
|
261,913,953
|
|
|
|
|
|
|
|
|
|
|
PREMISES AND
EQUIPMENT, net |
|
|
2,760,203
|
|
|
|
3,033,618
|
|
|
|
|
|
|
|
|
|
|
ACCRUED INTEREST
RECEIVABLE |
|
|
2,495,732
|
|
|
|
2,235,671
|
|
|
|
|
|
|
|
|
|
|
BANK-OWNED LIFE
INSURANCE |
|
|
9,545,009
|
|
|
|
9,179,408
|
|
|
|
|
|
|
|
|
|
|
OTHER REAL ESTATE
OWNED |
|
|
2,960,727
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
3,402,640
|
|
|
|
2,921,496
|
|
Total
assets |
|
$ |
429,151,539
|
|
|
$ |
392,930,704
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
59,055,803
|
|
|
$ |
64,305,445
|
|
Interest bearing |
|
|
270,276,565
|
|
|
|
248,418,977
|
|
Total
deposits
|
|
|
329,332,368
|
|
|
|
312,724,422
|
|
|
|
|
|
|
|
|
|
|
BORROWINGS |
|
|
35,600,000
|
|
|
|
17,200,000
|
|
REDEEMABLE
SUBORDINATED DEBENTURES |
|
|
18,557,000
|
|
|
|
23,712,000
|
|
ACCRUED INTEREST
PAYABLE |
|
|
1,992,187
|
|
|
|
1,957,574
|
|
ACCRUED EXPENSES AND
OTHER LIABILITIES |
|
|
2,696,667
|
|
|
|
2,389,663
|
|
Total
liabilities
|
|
|
388,178,222
|
|
|
|
357,983,659
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
Common stock, no par
value; 30,000,000
shares authorized;
3,993,905 and 3,967,431 shares issued
and 3,992,715 and
3,967,222 shares outstanding
as of December 31,
2007 and 2006, respectively
|
|
|
32,514,936
|
|
|
|
28,886,105
|
|
Retained
earnings
|
|
|
9,009,955
|
|
|
|
7,010,211
|
|
Treasury Stock, at
cost, 1,190 shares and 209 shares
at December 31, 2007
and 2006, respectively
|
|
|
(18,388
|
) |
|
|
(3,545
|
) |
Accumulated
other comprehensive loss
|
|
|
(533,186
|
) |
|
|
(945,726
|
) |
Total shareholders’
equity
|
|
|
40,973,317
|
|
|
|
34,947,045
|
|
Total liabilities
and shareholders’ equity |
|
$ |
429,151,539
|
|
|
$ |
392,930,704
|
|
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF INCOME
For
the Years Ended December 31, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
25,113,488 |
|
|
$ |
23,166,544 |
|
Securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,278,288 |
|
|
|
3,448,780 |
|
Tax-exempt
|
|
|
875,697 |
|
|
|
604,846 |
|
Federal
funds sold and
|
|
|
|
|
|
|
|
|
short-term
investments
|
|
|
101,171 |
|
|
|
85,012 |
|
Total
interest income
|
|
|
30,368,644 |
|
|
|
27,305,182 |
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,636,856 |
|
|
|
6,688,080 |
|
Securities
sold under
|
|
|
|
|
|
|
|
|
agreements
to repurchase
|
|
|
|
|
|
|
|
|
and
other borrowed funds
|
|
|
1,514,907 |
|
|
|
1,687,749 |
|
Redeemable
subordinated debentures
|
|
|
1,438,876 |
|
|
|
1,141,668 |
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
12,590,639 |
|
|
|
9,517,497 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
17,778,005 |
|
|
|
17,787,685 |
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
130,000 |
|
|
|
893,500 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
17,648,005 |
|
|
|
16,894,185 |
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
673,826 |
|
|
|
668,071 |
|
Gain
on sales of loans
|
|
|
761,004 |
|
|
|
1,072,731 |
|
(Losses) gains
on sales of investment securities, net
|
|
|
0 |
|
|
|
(99,714 |
) |
Income
on Bank-owned life insurance
|
|
|
265,601 |
|
|
|
330,915 |
|
Other
income
|
|
|
857,898 |
|
|
|
599,445 |
|
Total
other income
|
|
|
2,558,329 |
|
|
|
2,571,448 |
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
7,196,552 |
|
|
|
6,741,050 |
|
Occupancy
expense
|
|
|
1,658,820 |
|
|
|
1,448,227 |
|
Data
processing expenses
|
|
|
829,037 |
|
|
|
733,954 |
|
Other
operating expenses
|
|
|
2,416,859 |
|
|
|
3,091,616 |
|
Total
other expenses
|
|
|
12,101,268 |
|
|
|
12,014,847 |
|
Income
before income taxes
|
|
|
8,105,066 |
|
|
|
7,450,786 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
2,662,284 |
|
|
|
2,725,824 |
|
Net
income
|
|
$ |
5,442,782 |
|
|
$ |
4,724,962 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.37 |
|
|
$ |
1.21 |
|
Diluted
|
|
$ |
1.35 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES
|
|
|
|
|
|
|
|
|
OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,969,943 |
|
|
|
3,894,898 |
|
Diluted
|
|
|
4,025,429 |
|
|
|
3,998,513 |
|
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For
the Years Ended December 31, 2007 and 2006
Restated
for the year ended December 31, 2006
|
|
Common
Stock
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
(Loss)
Income
|
|
|
Total
Shareholders’
Equity
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
reported balance, January 1, 2006
|
|
$ |
25,589,320 |
|
|
$ |
5,981,802 |
|
|
$ |
(1,008,998 |
) |
|
$ |
(765,258 |
) |
|
$ |
29,796,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of restatement on prior periods
|
|
|
- |
|
|
|
327,177 |
|
|
|
- |
|
|
|
5,607 |
|
|
|
332,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
opening balance, January 1, 2006
|
|
|
25,589,320 |
|
|
|
6,308,979 |
|
|
|
(1,008,998 |
) |
|
|
(759,651 |
) |
|
|
30,129,650 |
|
Exercise
of stock options, net and issuance of vested
shares
under employee benefit programs
|
|
|
(822,175 |
) |
|
|
|
|
|
|
1,418,000 |
|
|
|
|
|
|
|
595,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock, 21,749 shares at cost
|
|
|
|
|
|
|
|
|
|
|
(412,547 |
) |
|
|
|
|
|
|
(412,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
123R share-based compensation
|
|
|
95,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
stock dividend declared December 2006,
including
fractional share cash payments
|
|
|
4,023,730 |
|
|
|
(4,023,730 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply FASB Statement No. 158
net
of tax benefit of $302,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(454,266 |
) |
|
|
(454,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income – 2006
|
|
|
|
|
|
|
4,724,962 |
|
|
|
|
|
|
|
|
|
|
|
4,724,962 |
|
Unrealized
gain on securities available for sale
net
of tax expense of $287,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,191 |
|
|
|
268,191 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,993,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
$ |
28,886,105 |
|
|
$ |
7,010,211 |
|
|
$ |
(3,545 |
) |
|
$ |
(945,726 |
) |
|
$ |
34,947,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options, net and issuance of vested
shares
under employee benefit programs
|
|
|
78,773 |
|
|
|
|
|
|
|
232,060 |
|
|
|
|
|
|
|
310,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
123R share-based compensation
|
|
|
107,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Treasury Stock, 13,548 shares at cost
|
|
|
|
|
|
|
|
|
|
|
(246,903 |
) |
|
|
|
|
|
|
(246,903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
stock dividend declared December 2007,
including
fractional share cash payments
|
|
|
3,443,038 |
|
|
|
(3,443,038 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income – 2007
|
|
|
|
|
|
|
5,442,782 |
|
|
|
|
|
|
|
|
|
|
|
5,442,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability net of tax benefit of $24,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,231 |
) |
|
|
(37,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on interest rate swap contract net
of
tax benefit of $39,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,912 |
) |
|
|
(59,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale net
Of
tax expense of $240,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,683 |
|
|
|
509,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,855,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
$ |
32,514,936 |
|
|
$ |
9,009,955 |
|
|
$ |
(18,388 |
) |
|
$ |
(533,186 |
) |
|
$ |
40,973,317 |
|
The
accompanying notes are an integral part of these financial
statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,442,782 |
|
|
$ |
4,724,962 |
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities-
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
130,000 |
|
|
|
893,500 |
|
Depreciation
and amortization
|
|
|
747,647 |
|
|
|
627,833 |
|
Net
amortization of premiums on securities
|
|
|
14,188 |
|
|
|
41,405 |
|
Gains
on sales of loans
|
|
|
(761,004 |
) |
|
|
(1,072,731 |
) |
Losses
on sale of investment securities, net
|
|
|
- |
|
|
|
99,714 |
|
Originations
of loans held for sale
|
|
|
(67,164,044 |
) |
|
|
(58,696,245 |
) |
Income
on Bank-owned life insurance
|
|
|
(365,601 |
) |
|
|
(330,915 |
) |
Proceeds
from sales of loans held for sale
|
|
|
71,211,985 |
|
|
|
62,917,768 |
|
Share-based
compensation expense
|
|
|
107,020 |
|
|
|
95,230 |
|
Deferred
tax benefit
|
|
|
(204,967 |
) |
|
|
(539,809 |
) |
(Increase)
decrease in accrued interest receivable
|
|
|
(260,061 |
) |
|
|
(330,009 |
) |
Decrease
(increase) in other assets
|
|
|
211,689 |
|
|
|
(294,866 |
) |
Increase
in accrued interest payable
|
|
|
34,613 |
|
|
|
669,534 |
|
Increase
(decrease) in accrued expenses and other liabilities
|
|
|
245,015 |
|
|
|
(410,088 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
9,389,262 |
|
|
|
8,395,283 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of securities -
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(16,707,027 |
) |
|
|
(17,386,472 |
) |
Held
to maturity
|
|
|
(7,677,917 |
) |
|
|
- |
|
Proceeds
from maturities and prepayments
|
|
|
|
|
|
|
|
|
of
securities -
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
12,704,423 |
|
|
|
13,736,214 |
|
Held
to maturity
|
|
|
3,387,585 |
|
|
|
2,483,768 |
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of securities available for sale
|
|
|
- |
|
|
|
2,899,385 |
|
Net
increase in loans
|
|
|
(32,589,412 |
) |
|
|
(25,154,480 |
) |
Capital
expenditures
|
|
|
(446,698 |
) |
|
|
(1,064,599 |
) |
Cash
consolidation paid to acquire branch
|
|
|
(747,330 |
) |
|
|
- |
|
Cash
and cash equivalents acquired from branch
|
|
|
19,514,239 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(22,562,137 |
) |
|
|
(24,486,184 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
tax benefit
|
|
|
(43,472 |
) |
|
|
(40,271 |
) |
Exercise
of stock options, net
|
|
|
310,833 |
|
|
|
595,825 |
|
Purchase
of Treasury Stock
|
|
|
(246,903 |
) |
|
|
(412,547 |
) |
Net
(decrease) increase in demand, savings and time deposits
|
|
|
(2,906,293 |
) |
|
|
6,914,955 |
|
Net
advances (repayments) in other borrowings
|
|
|
18,400,000 |
|
|
|
(11,300,000 |
) |
(Repayments)
proceeds from issuance of
|
|
|
|
|
|
|
|
|
redeemable
subordinated debentures
|
|
|
(5,155,000 |
) |
|
|
18,557,000 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
10,359,165 |
|
|
|
14,314,962 |
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
|
(2,813,710 |
) |
|
|
(1,775,938 |
) |
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
AT BEGINNING OF
YEAR
|
|
|
10,361,812 |
|
|
|
12,137,750 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
AT
END OF YEAR
|
|
$ |
7,548,102 |
|
|
$ |
10,361,812 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
|
|
|
|
|
OF
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for -
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
12,052,481 |
|
|
$ |
8,847,963 |
|
Income
taxes
|
|
|
2,421,600 |
|
|
|
3,563,872 |
|
Non-cash
investing activities
|
|
|
|
|
|
|
|
|
Real
estate acquired in full satisfaction of loans
|
|
|
|
|
|
|
|
|
in
foreclosure
|
|
$ |
2,960,727 |
|
|
|
- |
|
The
accompanying notes are an integral part of these financial
statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007 and 2006
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 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.
Restatement
The Consolidated Financial Statements
as of and for the year ended December 31, 2006 and the related Notes to the
Consolidated Financial Statements reflect restated amounts as a result of the
adjustments described in Note 2, “Restatement of Consolidated Financial
Statements For the Year Ended and As At December 31, 2006”.
Basis
of Presentation
The
accounting and reporting policies of the Company conform to accounting
principals generally accepted in the United States of America 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., FCB Assets Holdings, Inc. and 1st Constitution Title Agency,
LLC. 1st Constitution Capital
Trust II, a subsidiary of the Company (“Trust II”), and 1st Constitution Capital
Trust I, which was a subsidiary of the Company until April 2007 (“Trust I”), are
not included in the Company’s consolidated financial statements as they are
variable interest entities 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. The
accounting and reporting policies of the Company and its subsidiaries conform
with accounting principles generally accepted in the United States and general
practices within the financial services industry.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment
Securities
Investment
Securities which the Bank 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 using the interest
method.
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 estimated market value, except for Federal
Home Loan Bank stock, which is 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.
In
November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments.” This FSP provides guidance on determining if an
investment is considered to be impaired, if the impairment is
other-than-temporary and the measurement of an impairment loss. It
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. This FSP was effective for reporting periods beginning
after December 15, 2005. At December 31, 2007 and 2006, the Company
had no unrecognized losses on investments that would be defined as other than
temporary under FSP 115-1.
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 is used to offset a
portion of future benefit cost increases. 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 intended 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. Income from direct financing leases is recorded over the life
of the lease under the financing method of accounting. The investment includes
the sum of aggregate rentals receivable and the estimated residual value of
leased equipment, less deferred income. 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 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 financial assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” The Bank originates mortgages under a definitive plan
to sell or securitize those loans and service the loans owned by the
investor. Upon the transfer of the mortgage loans in a sale or a
securitization, the Bank records the servicing assets retained in accordance
with SFAS No. 140. The Bank records mortgage servicing rights
and the loans based on relative fair values at the date of
origination.
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 SFAS No. 134, “Accounting
for Mortgage Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise”. This statement requires
that an entity engage 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.
The Bank
adopted FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others” (“FIN 45”), on January 1, 2003. FIN 45
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.
Allowance
for Loan Losses
The
allowance for loan losses is a valuation reserve available for losses or
expected 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
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 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, in accordance with SFAS 114, 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 Bank accounts for impairment of
long lived assets in accordance with SFAS No. 144, “Accounting for the Impairment of
Disposal of Long-Lived Assets”. The standard
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, 2007 and 2006.
Derivative Contracts
Derivative
contracts are carried at fair value 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.
The Company follows SFAS No. 133, which
was amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and
Certain Hedging Activities”, SFAS No. 149, “Amendment of Statement on Derivative
Instruments and Hedging Activities”, and SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”,
(collectively SFAS No. 133). SFAS No. 133, as amended, requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value.
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 Corporation 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.
Other
Real Estate
Other
real estate 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 SFAS No. 142,
“Goodwill and Other Intangible Assets.” 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 fro impairment if events and
circumstances indicate a possible impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company
employs general industry practices in evaluating the fair value of its goodwill
and other intangible assets. The Company calculates the fair value
using a combination of the following valuation methods: dividend
discount analysis under the income approach, which calculates the present value
of all excess cash flows plus the present value of a terminal value and
price/earnings multiple under the market approach. 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 3
– Acquisition and Note 10 – Goodwill and Other Intangibles for additional
information.
Share-Based
Compensation
The
Company recognizes compensation expense for stock options in accordance with
SFAS 123 (revised 2004), “Share-Based Payment (SFAS 123R) adopted at January 1,
2006 under the modified prospective application method of
transition. 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 (as used under SFAS 123) 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. In accordance with SFAS 123R, the Company estimates the
number of options for which the requisite service is expected to be
rendered. Prior to January, 2006, the Company followed SFAS 123 and
Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to
Employees,” with pro forma disclosures of net income and earnings per share, as
if the fair vlue-based method of accounting defined in SFAS 123 had been
applied. See Note 17 – Stock-Based compensation for additional
information.
In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110, “Certain
Assumptions Used in Valuation Methods.” SAB 110 expresses the views of the staff
regarding the use of a “simplified” method as discussed in SAB No. 107,
“Share-Based Payment,” in developing an estimate of expected term of “plain
vanilla” share options in accordance with FAS 123R. The staff stated
in SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007. Under SAB 110, the SEC
staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007 to help public companies, mostly
small firms, that lack historical data on the exercising of options by
employees. SAB 110 is not expected to have any material impact on the
Company’s financial statements.
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. The Company follows SFAS No.
132, as revised in December 2003, “Employers’ Disclosures about Pensions and
Other Post-retirement Benefits” and SFAS No. 158, “Employers Accounting for
Defined Benefit Pension and Other Post-retirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS No. 132 revised employers’
disclosures about pension and other post-retirement benefit plans. It requires
additional information about changes in the benefit obligation and the fair
values of plan assets. It also standardized the requirements for pensions and
other postretirement benefit plans to the extent possible, and illustrates
combined formats for the presentation of pension plan and other post-retirement
benefit plan disclosures. SFAS 158 requires an employer to recognize the over
funded or under funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income.
The incremental effect of apply SFAS
No. 158 on individual line items in the Consolidated Balance Sheets is as
follows (In Thousands):
|
|
Before
Application
of
Statement
158
(Restated)
|
|
Adjustments
(Restated)
|
|
After
Application
of
Statement
158
(Restated)
|
Deferred
income taxes
|
|
$1,905
|
|
$302
|
|
$2,207
|
Total
Assets
|
|
392,421
|
|
302
|
|
392,723
|
Other
liabilities
|
|
1,131
|
|
756
|
|
1,887
|
Total
liabilities
|
|
356,725
|
|
756
|
|
357,481
|
Accumulated
other comprehensive loss
|
|
(478)
|
|
(454)
|
|
(932)
|
Total
shareholders’ equity
|
|
$35,696
|
|
($454)
|
|
$35,242
|
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.
Advertising Costs
It is the Company’s policy to expense
advertising costs in the period in which they are incurred.
Earnings
Per Share
Basic net income per common share is
calculated by dividing net income by the weighted average number of shares
outstanding during each period.
Diluted net income per common share is
calculated by dividing net income by the weighted average number of shares
outstanding, as adjusted for the assumed exercise of potential common stock
options, using the treasury stock method. All share information has
been restated for the effect of a 6% stock dividend declared on December 20,
2007 and paid on February 6, 2008 to shareholders of record on January 23,
2008.
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, 2007
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
Amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
5,442,751 |
|
|
|
3,969,943 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
- |
|
|
|
55,486 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders plus assumed
conversion
|
|
$ |
5,442,751 |
|
|
|
4,025,429 |
|
|
$ |
1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
options have been included in the computation of diluted earnings per
share.
|
|
|
|
Year
Ended December 31, 2006 (Restated)
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
Amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
4,724,963 |
|
|
|
3,894,897 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
- |
|
|
|
103,616 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders plus assumed
conversion
|
|
$ |
4,724,963 |
|
|
|
3,998,513 |
|
|
$ |
1.18 |
|
Comprehensive
Income
The Company follows SFAS No. 130,
“Reporting Comprehensive Income.” SFAS No. 130 established standards to provide
prominent disclosure of comprehensive income items. Comprehensive
income is the charge in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources.
Variable
Interest Entities
Management
has determined that Trust I and Trust II (the "Trusts") qualify as variable
interest entities under FASB Interpretation 46 (“FIN 46”). The Trusts issued
mandatorily redeemable preferred stock to investors and loaned the proceeds to
the Company. Trust II holds, as its sole asset, subordinated debentures
issued by the Company. Trust I
held, as its sole asset, subordinated debentures issued by the Company until
such debentures were redeemed by the Company, and Trust I was terminated, in
April 2007. Subsequent to the issuance of FIN 46 and the establishment of
Trust I, the FASB issued a revised interpretation, FIN 46(R), the provisions of
which were required to be applied to certain variable interest entities,
including Trust I, by March 31, 2004, at which time Trust I was deconsolidated.
Because
Trust II was formed in 2006, subsequent to the adoption of FIN 46(R), its
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 included all of
its $18.0 million in trust preferred securities in Tier 1 capital at December
31, 2007.
Segment
Information
SFAS No.
131, “Segment
Reporting”, 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 set forth
in SFAS No. 131 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 December 2007, the FASB issued SFAS
No. 141(R), “Business Combinations (revised 2007).” FAS 141(R) will
significantly change how entities apply the acquisition method to business
combinations. The new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. This Statement is broader than SFAS 141, which only
applied to business combinations in which control was obtained by transferring
consideration. SFAS 141(R) applies to all transactions or other events in which
an entity (the acquirer) obtains control of one or more businesses including
combinations achieved without the transfer of consideration. SFAS 141(R)
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions specified
in the Statement. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141
required the acquirer to include the costs incurred to effect the acquisition
(acquisition-related costs) in the cost of the acquisition that was allocated to
the assets acquired and the liabilities assumed. SFAS 141 (R) requires those
costs to be recognized separately from the acquisition. In accordance with SFAS
141, restructuring costs that the acquirer expected but was not obligated to
incur were recognized as if they were a liability assumed at the acquisition
date. SFAS 141(R) requires the acquirer to recognize those restructuring costs
that do not meet the criteria in SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities” as an expense as incurred. Acquisition related
transaction costs will be expensed as incurred. SFAS 141(R) requires an acquirer
to recognize assets or liabilities arising from all other contingencies
(contractual contingencies) as of the acquisition date, measured at their
acquisition-date fair values only if it is more likely than not that they meet
the definition of an asset or a liability on the acquisition date. Under SFAS
141(R), changes in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the measurement period will
impact income tax expense. Additionally, under SFAS 141(R), the allowance for
loan losses of an acquiree will not be permitted to be recognized by the
acquirer. SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. The Company is currently assessing the impact of the adoption of this FAS
141(R) on its financial statements.
In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interest in Consolidated Financial Statements–an
amendment of Accounting Research Bulletin No. 51, “Consolidated Financial
Statements.” FAS 160 requires all entities to report noncontrolling (minority)
interests in subsidiaries as equity in the consolidated financial statements.
Its intention is to eliminate the diversity in practice regarding the accounting
for transactions between an entity and noncontrolling interests. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of the adoption of SFAS 160 on its financial
statements.
In November 2007, the SEC issued SAB
109, “Written Loan Commitments Recorded at Fair Value through Earnings.” SAB 109
revises and rescinds portions of SAB 105, “Application of Accounting Principles
to Loan Commitments.” The SEC staff’s current view is that the expected net
future cash flows related to the associated servicing of a loan should be
included in the measurement of derivative and other written loan commitments
that are accounted for at fair value through earnings. That view is consistent
with the guidance in Financial Accounting Standards Board (FASB) No. 156,
“Accounting for Servicing of Financial Assets” and FASB No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities.” SAB 109 retains the view
expressed in SAB 105 that internally developed intangible assets should not be
recorded as part of the fair value of a derivative loan commitment. The guidance
in SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 is
not expected to have a material impact on the Company’s financial
statements.
In June 2007, the FASB ratified
Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards.” EITF06-11 requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for nonvested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after September 15, 2007. The Company does not expect EITF 06-11 will
have a material impact on its financial statements.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115.” SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 provides entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Statement also establishes presentation and disclosure
requirements. The entity shall report the effect of the first re-measurement to
fair value as a cumulative-effective adjustment to the opening balance of
retained earnings. At each subsequent reporting date, unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. The fair value option may be applied instrument by
instrument, with a few exceptions, is irrevocable and is applied only to entire
instruments. Most of the provisions of SFAS 159 apply only to entities that
elect the fair value option. However, the amendment to SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities,” applies to all entities with
available-for-sale and trading securities. If the fair value option is elected
for any available-for-sale or held-to-maturity securities at the effective date,
the cumulative unrealized gains and losses at that date shall be included in the
cumulative-effect adjustment. SFAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. Early adoption
was permitted as of the beginning of a fiscal year that began on or before
November 15, 2007, provided that the entity also elected to apply the provisions
of SFAS 157, “Fair Value Measurements.” The Company is not currently electing to
measure any additional financial instruments at fair value under this Statement
and the adoption of FAS 159 is not expected to have a material impact on its
financial statements.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements.” SFAS 157 clarifies the definition of fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 defines fair value as “the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” The Statement will require the Company to
apply valuation techniques that (1) place greater reliance on observable inputs
and less reliance on unobservable inputs and (2) are consistent with the market
approach, the income approach, and/or the cost approach. The definition and
framework apply to both items recognized and reported at fair value in the
financial statements and items disclosed at fair value in the notes to the
financial statements. The Statement also requires expanded disclosure in interim
and annual financial statements about how the Company uses fair value. The
disclosures focus on items measured at fair value based on significant
unobservable inputs and the effect of fair value measurements on earnings. The
disclosures are only required for items recognized and reported at fair value in
the financial statements. The Statement does not change existing accounting
rules governing what can or what must be recognized and reported at fair value
in the Company’s financial statements, or disclosed at fair value in the
Company’s notes to the financial statements. Additionally, SFAS 157 does not
eliminate practicability exceptions that exist in accounting pronouncements
amended by this Statement when measuring fair value. As a result, the Company
will not be required to recognize any new instruments at fair value. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years, although earlier application was encouraged.
Prospective application of the provisions of SFAS 157 is required as of the
beginning of the fiscal year in which it is initially applied, except for
certain circumstances specified in the Statement that require retrospective
application. In March 2008, the FASB issued FSP FAS 157-2 to partially delay the
effective implementation of SFAS 157 until fiscal years beginning after
November, 15, 2008 for all nonfinancial assets and liabilities except those that
are recognized or disclosed at fair value in financial statements on a recurring
basis (at least annually). Assets and liabilities currently reported or
disclosed at fair value on a recurring basis in the Company’s financial
statements include investment securities, impaired loans, residential mortgage
loans held for sale, mortgage servicing rights and derivatives. The Company does
not anticipate any material impact on its financial statements upon partial
adoption of FAS 157 for its fiscal year beginning January 1, 2008. The Company
is in the process of assessing the impact of the adoption of SFAS 157 for its
fiscal year beginning January 1, 2009 relating to nonfinancial assets and
liabilities on the Company’s financial statements including goodwill and other
intangible assets.
At its September 2006 meeting, the EITF
reached a final consensus on Issue 06–05, “Accounting for Purchases of Life
Insurance–Determining the Amount That Could be Realized in Accordance with FASB
Technical Bulletin No. 85–4.” Issue 06-05 concludes that in determining the
amount that could be realized under an insurance contract accounted for under
FASB Technical Bulletin No. 85–4, “Accounting for Purchases of Life Insurance,”
the policyholder should (1) consider any additional amounts included in the
contractual terms of the policy; (2) assume the surrender value on a
individual–life by individual–life policy basis; and (3) not discount the cash
surrender value component of the amount that could be realized when contractual
restrictions on the ability to surrender a policy exist. Issue 06–05 should be
adopted through either (1) a change in accounting principle through a
cumulative–effect adjustment to retained earnings as of the beginning of the
year of adoption or (2) a change in accounting principle through retrospective
application to all prior periods. Issue 06–05 is effective for fiscal years
beginning after December 15, 2006. The application of Issue 06–05 did not have a
material effect on the Company’s financial position or results of
operations.
At its September 2006 meeting, the EITF
reached a final consensus on Issue 06–04, “Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split–Dollar Life Insurance
Arrangements.” In accordance with the EITF consensus, an agreement by an
employer to share a portion of the proceeds of a life insurance policy with an
employee during the postretirement period is a postretirement benefit
arrangement required to be accounted for under SFAS No. 106, “Employers’
Accounting for Postretirement Benefits Other than Pensions” or APB Opinion No.
12, “Omnibus Opinion 1967.” Furthermore, the purchase of a split–dollar life
insurance policy does not constitute a settlement under SFAS No. 106 and,
therefore, a liability for the postretirement obligation must be recognized
under SFAS No. 106 if the benefit is offered under an arrangement that
constitutes a plan or under APB No. 12 if it is not part of a plan. The
provisions of Issue 06–04 are to be applied through either a cumulative–effect
adjustment to retained earnings as of the beginning of the year of adoption or
retrospective application. Issue 06–04 is effective for annual or interim
reporting periods beginning after December 15, 2007. The application of Issue
06-04 is not expected to have a material effect on the Company’s financial
statements.
In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN
48 also 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. The provisions of FIN 48 are to be applied
to all tax positions upon initial adoption of this standard. Only tax positions
that meet a “more-likely-than-not” recognition threshold at the effective date
may be recognized or continue to be recognized upon adoption of FIN 48. The
cumulative effect of applying the provisions of FIN 48 are to be reported as an
adjustment to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that fiscal year. The new interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The Company’s implementation of
this interpretation did not have a material impact on the Company’s financial
position or results of operations and did not result in an adjustment to opening
retained earnings.
In May 2007, the FASB issued FIN 48-1,
“Definition of Settlement in FIN 48” to provide guidance on how an enterprise
should determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits. FIN 48-1 is effective
retroactively to January 1, 2007. The implementation of this standard did not
have any impact on the Company’s consolidated financial position or results of
operations.
2. Restatement
of Consolidated Financial Statements For the Year Ended and As At December 31,
2006
On March
14, 2008, the Company filed a Current Report on Form 8-K with the SEC disclosing
that (i) the Company’s consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2006, and the interim financial statements included in the Company’s Quarterly
Reports on Form 10-Q for the three-month periods ended March 31, 2007 and March
31, 2006, the three- and six-month periods ended June 30, 2007 and June 30,
2006, and the three- and nine-month periods ended September 30, 2007 and
September 30, 2006 (collectively, the “Previously Issued Financial Statements”)
previously filed with the SEC should no longer be relied upon and (ii) the
Previously Issued Financial Statements should be restated because of errors in
such financial statements. The
Previously Issued Financial Statements for the year ended and as at December 31,
2006 contained the following errors, which are described in more detail
below:
|
·
|
Errors
made in accounting for (i) current tax liabilities principally related to
the Company’s trust preferred securities and (ii) deferred tax assets
in 2006 and prior periods, resulting in an underestimate of current tax
liabilities and an overestimate of deferred tax
assets;
|
|
·
|
Overestimation
of liabilities related to future benefits to plan participants in the
Company's Supplemental Executive Retirement Plan in connection with the
implementation of FAS 158 in 2006, resulting in an increase in expenses;
and
|
|
·
|
Failure
to adequately evaluate estimation of certain non-interest operating
expenses for, among other things, professional fees, advertising and
business development, resulting in an over-accrual of certain
non-interest operating expenses in 2006 and a resultant decrease in
tax expense for 2006.
|
The
following sets forth the effect of the restatement adjustments on the applicable
line items with the Company’s Consolidated Statement of Income for the year
ended December 31, 2006:
1st
CONSTITUTION BANCORP
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 2006 – Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement
|
|
|
|
|
|
|
2006
|
|
|
Adjustments
|
|
|
2006
|
|
|
|
(
as filed )
|
|
|
|
|
|
(
restated )
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
23,166,544 |
|
|
|
|
|
$ |
23,166,544 |
|
Interest
on securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,448,780 |
|
|
|
|
|
|
3,448,780 |
|
Tax-
exempt
|
|
|
604,846 |
|
|
|
|
|
|
604,846 |
|
Interest
on Federal funds sold and
|
|
|
|
|
|
|
|
|
|
|
|
short-term
investments
|
|
|
85,012 |
|
|
|
|
|
|
85,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
27,305,182 |
|
|
|
|
|
|
27,305,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
6,688,080 |
|
|
|
|
|
|
6,688,080 |
|
Interest
on securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
and
other borrowed funds
|
|
|
1,687,749 |
|
|
|
|
|
|
1,687,749 |
|
Interest
on redeemable subordinated debentures
|
|
|
1,141,668 |
|
|
|
|
|
|
1,141,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
9,517,497 |
|
|
|
|
|
|
9,517,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
17,787,685 |
|
|
|
|
|
|
17,787,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
893,500 |
|
|
|
|
|
|
893,500 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
16,894,185 |
|
|
|
|
|
|
16,894,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
668,071 |
|
|
|
|
|
|
668,071 |
|
Gain
on sale of loans held for sale
|
|
|
1,072,731 |
|
|
|
|
|
|
1,072,731 |
|
(Loss)/gain
on sale of securities available for sale
|
|
|
(99,714 |
) |
|
|
|
|
|
(99,714 |
) |
Income
on Bank-owned life insurance (1)
|
|
|
350,476 |
|
|
|
(19,561 |
) |
|
|
330,915 |
|
Other
income
|
|
|
599,445 |
|
|
|
|
|
|
|
599,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
|
2,591,009 |
|
|
|
(19,561 |
) |
|
|
2,571,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits (2)
|
|
|
6,799,619 |
|
|
|
(58,569 |
) |
|
|
6,741,050 |
|
Occupancy
expense (3)
|
|
|
1,434,728 |
|
|
|
13,499 |
|
|
|
1,448,227 |
|
Other
operating expenses (4)
|
|
|
3,803,509 |
|
|
|
22,061 |
|
|
|
3,825,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
12,037,856 |
|
|
|
(23,009 |
) |
|
|
12,014,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
7,447,338 |
|
|
|
3,448 |
|
|
|
7,450,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES (5)
|
|
|
2,114,494 |
|
|
|
611,330 |
|
|
|
2,725,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
5,332,844 |
|
|
$ |
(607,882 |
) |
|
$ |
4,724,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.37 |
|
|
|
|
|
|
$ |
1.21 |
|
Diluted
|
|
$ |
1.33 |
|
|
|
|
|
|
$ |
1.18 |
|
(1) Income on Bank-owned life insurance
was reduced by $19,561 to reconcile the cash surrender value of the policies
with the balances subsequently provided by the benefit plan
administrator. (2) Salaries and employee benefits was reduced by
$58,569 which is the net result of (a) an increase of $51,778 to accrue
additional 2006 charges for employee health insurance premiums and (b) a
decrease of $110,347 to correct an over-accrual of the costs related to future
benefits to plan participants in the Company’s Supplemental Executive Retirement
Plan. (3) Occupancy Expense was restated by $13,499 to record
additional rent expense under the straight-line method in accordance with
Statement of Financial Accounting Standards no. 13, “Accounting for Leases”, (4)
Other operating expenses was restated by $22,061 which is the net result of (a)
an increase of $168,000 to increase 2006 expense for the impact of over-accrued
expenses from prior periods that were reversed into income during 2006 and (b) a
decrease of $145,939 to reverse current year over-accruals of certain operating
expenses. (5) Income taxes were increased by $611,330 which is the
net result of (a) an increase of $702,202 to restate the current tax liability
related to the Company’s trust preferred securities and deferred tax assets and
(b) a reduction of $90,872 for the tax benefits attributable to the increased
expense level resulting from the restatement adjustments.
The
following sets forth the effect of the restatement adjustments on the applicable
line items with the Company’s Consolidated Balance Sheet as at December 31,
2006:
1st
CONSTITUTION BANCORP
|
|
CONSOLIDATED
BALANCE SHEET
|
|
December
31, 2006 – Restated
|
|
|
|
|
|
|
|
Restatement
|
|
|
|
|
ASSETS
|
|
|
2006
|
|
|
Adjustments
|
|
|
2006
|
|
|
|
|
(
as filed )
|
|
|
|
|
|
(
restated )
|
|
CASH
AND DUE FROM BANKS
|
|
$ |
10,336,334 |
|
|
|
|
|
$ |
10,336,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL
FUNDS SOLD/SHORT TERM INVESTMENTS
|
|
|
25,478 |
|
|
|
|
|
|
25,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
|
10,361,812 |
|
|
|
|
|
|
10,361,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
70,421,328 |
|
|
|
|
|
|
70,421,328 |
|
Held
to maturity (fair value of $19,164,679 and $21,521,026
|
|
|
|
|
|
|
|
|
|
|
|
in
2006 and 2005, respectively)
|
|
|
19,254,476 |
|
|
|
|
|
|
19,254,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
|
89,675,804 |
|
|
|
|
|
|
89,675,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
HELD FOR SALE
|
|
|
13,608,942 |
|
|
|
|
|
|
13,608,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
|
|
|
|
265,142,313 |
|
|
|
|
|
|
265,142,313 |
|
Less-
Allowance for loan losses
|
|
|
(3,228,360 |
) |
|
|
|
|
|
(3,228,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
|
261,913,953 |
|
|
|
|
|
|
261,913,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMISES
AND EQUIPMENT, net
|
|
|
3,033,618 |
|
|
|
|
|
|
3,033,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRUED
INTEREST RECEIVABLE
|
|
|
2,235,671 |
|
|
|
|
|
|
2,235,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BANK-OWNED
LIFE INSURANCE
|
|
|
9,179,408 |
|
|
|
|
|
|
9,179,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS (1)
|
|
|
2,668,338 |
|
|
|
253,158 |
|
|
|
2,921,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
392,677,546 |
|
|
$ |
253,158 |
|
|
$ |
392,930,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
64,305,445 |
|
|
|
|
|
|
$ |
64,305,445 |
|
Interest
bearing
|
|
|
248,418,977 |
|
|
|
|
|
|
|
248,418,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
|
312,724,422 |
|
|
|
|
|
|
|
312,724,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
BORROWINGS
|
|
|
17,200,000 |
|
|
|
|
|
|
|
17,200,000 |
|
REDEEMABLE
SUBORDINATED DEBENTURES
|
|
|
23,712,000 |
|
|
|
|
|
|
|
23,712,000 |
|
ACCRUED
INTEREST PAYABLE
|
|
|
1,957,574 |
|
|
|
|
|
|
|
1,957,574 |
|
ACCRUED
EXPENSES AND OTHER LIABILITIES (2)
|
|
|
1,886,980 |
|
|
|
502,683 |
|
|
|
2,389,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
357,480,976 |
|
|
|
502,683 |
|
|
|
357,983,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, no par value; 30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
authorized; 3,967,431 shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
and
3,967,222 shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
as
of December 31, 2006.
|
|
|
28,886,105 |
|
|
|
|
|
|
|
28,886,105 |
|
Retained
earnings (3)
|
|
|
7,290,916 |
|
|
|
(280,705 |
) |
|
|
7,010,211 |
|
Treasury
Stock, at cost, 209 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2006
|
|
|
(3,545 |
) |
|
|
|
|
|
|
(3,545 |
) |
Accumulated
other comprehensive (loss) (4)
|
|
|
(976,906 |
) |
|
|
31,180 |
|
|
|
(945,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
35,196,570 |
|
|
|
(249,525 |
) |
|
|
34,947,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
392,677,546 |
|
|
$ |
253,158 |
|
|
$ |
392,930,704 |
|
1) Other
Assets was increased by $253,158 of which $247,815 represents the restatement of
the Company’s deferred tax assets due to adjustments relating to (a) the
Company’s trust preferred securities and (b) the Company’s Supplemental
Executive Retirement Plan. (2) Accrued Expenses and Other Liabilities
increased by $502,683 which consists primarily of increases to accrued liability
balances of $1,163,660 for income taxes and $37,349 for deferred rent expense
partially offset by reductions in the balance due primarily to $698,327 of
accrual reversals for over-accrued operating expenses. (3) Retained
Earnings was restated by $280,705 which represents the net of the negative
impact of 2006 adjustments of $607,882 partially offset by the cumulative effect
of restatement on prior periods of $327,177 as disclosed in the Consolidated
Statements of Changes in Shareholders’ Equity on page F-5. (4)
Accumulated other comprehensive (loss) was reduced by $31,180 primarily as a
result of the adjustment to restate balances relating to the Company’s
Supplemental Executive Retirement Plan.
The
following sets forth the effect of the restatement on the applicable line items
in the Company’s Consolidated Statement of Cash Flows for the year ended
December 31, 2006:
|
|
2006
|
|
|
Restatement
Adjustments(1)
|
|
|
2006
|
|
|
|
(as
filed)
|
|
|
|
|
|
(restated)
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,332,844 |
|
|
$ |
(607,882 |
) |
|
$ |
4,724,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
on Bank-owned life insurance
|
|
|
(350,476 |
) |
|
|
19,561 |
|
|
|
(330,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
|
(471,367 |
) |
|
|
(68,442 |
) |
|
|
(539,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in
other assets
|
|
|
(1,370,830 |
) |
|
|
1,075,964 |
|
|
|
(294,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in accrued expenses
and
other liabilities
|
|
|
64,073 |
|
|
|
346,015 |
|
|
|
(410,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
|
- |
|
|
|
95,230 |
(2) |
|
|
95,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
8,355,013 |
|
|
|
40,270 |
|
|
$ |
8,395,283 |
|
(1)
|
The
restatement adjustments to the Company’s Consolidated Statement of Cash
Flows are summarized as follows: (a) Net income represents the impact on
operations from the 2006 restatement adjustments; (b) Income on Bank-owned
life insurance was restated to reconcile the cash surrender value of the
policies with the balances subsequently provided by the benefit plan
administrator; (c) Other assets was increased primarily due to the
restatement of the Company’s deferred tax assets; and (d) Accrued expenses
and other liabilities was affected primarily by the restatement of the
Company’s income tax liabilities.
|
|
|
(2)
|
Represents a
reclassification of share-based compensation expense from Financing
Activities in the 2006 Consolidated Statement of Cash Flows as filed to
Operating Activities in the 2006 Consolidated Statement of Cash Flows as
restated.
|
3. Acquisition
of Unaffiliated Branch
On February 27, 2007, the Company,
through the Bank, completed its acquisition of the Hightstown, New Jersey branch
of another financial institution for a purchase price of $747,330.
As a result of the acquisition, the
Hightstown branch became a branch of the Bank. Included in the
acquisition of the branch were deposit liabilities of $19.5 million, mostly in
certificates of deposit, cash of approximately $18.8 million, net of assets
acquired, cash on hand of approximately $137,000, fixed and other assets of
approximately $91,000 and the assumption of the lease of the branch
premises. The cash received in the transaction was utilized to repay
short term borrowings used to purchase investment securities prior to, and in
contemplation of, the completion of the acquisition.
In addition, the Bank recorded goodwill
of $472,726 and a deposit intangible asset of $274,604.
4. Investment
Securities
Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
2007
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale-
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
of U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
corporations and agencies
|
|
$ |
29,561,717 |
|
|
$ |
317,245 |
|
|
$ |
(421,604 |
) |
|
$ |
29,457,359 |
|
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 |
|
FHLB
stock and other securities
|
|
|
4,383,823 |
|
|
|
0 |
|
|
|
(272,504 |
) |
|
|
4,111,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,161,574 |
|
|
$ |
789,748 |
|
|
$ |
(759,185 |
) |
|
$ |
75,192,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Other
Securities
|
|
|
996,051 |
|
|
|
0 |
|
|
|
(119,526 |
) |
|
|
876,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,512,346 |
|
|
$ |
144,364 |
|
|
$ |
(245,441 |
) |
|
$ |
23,411,269 |
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
2006
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale-
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
of U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
corporations and agencies
|
|
$ |
35,625,182 |
|
|
$ |
124,144 |
|
|
$ |
(694,261 |
) |
|
$ |
35,055,065 |
|
Mortgage
backed securities
|
|
|
28,305,557 |
|
|
|
113,353 |
|
|
|
(216,111 |
) |
|
|
28,202,799 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
3,655,197 |
|
|
|
15,902 |
|
|
|
(31,749 |
) |
|
|
3,639,350 |
|
FHLB
stock and other securities
|
|
|
3,554,759 |
|
|
|
304 |
|
|
|
(30,949 |
) |
|
|
3,524,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,140,695 |
|
|
$ |
253,703 |
|
|
$ |
(973,070 |
) |
|
$ |
70,421,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
$ |
5,540,670 |
|
|
$ |
2,015 |
|
|
$ |
(175,826 |
) |
|
$ |
5,366,859 |
|
Obligations
of State and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political
subdivisions
|
|
|
13,713,806 |
|
|
|
131,955 |
|
|
|
(47,941 |
) |
|
|
13,797,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,254,476 |
|
|
$ |
133,970 |
|
|
$ |
(223,767 |
) |
|
$ |
19,164,679 |
|
The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2007, 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
|
|
$ |
5,748,287 |
|
|
$ |
5,734,053 |
|
|
|
4.88 |
% |
Due
after one year through five years
|
|
|
13,613,468 |
|
|
|
13,845,942 |
|
|
|
5.09 |
% |
Due
after five years through ten years
|
|
|
10,654,348 |
|
|
|
10,736,895 |
|
|
|
5.12 |
% |
Due
after ten years
|
|
|
45,145,471 |
|
|
|
44,875,247 |
|
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
75,161,574 |
|
|
$ |
75,192,137 |
|
|
|
5.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity-
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
7,519,727 |
|
|
$ |
7,521,621 |
|
|
|
4.49 |
% |
Due
after one year through five years
|
|
|
1,904,665 |
|
|
|
1,917,828 |
|
|
|
5.56 |
% |
Due
after five years through ten years
|
|
|
5,371,683 |
|
|
|
5,421,885 |
|
|
|
5.54 |
% |
Due
after ten years
|
|
|
8,716,271 |
|
|
|
8,549,935 |
|
|
|
5.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23,512,346 |
|
|
$ |
23,411,269 |
|
|
|
5.27 |
% |
*
computed on a tax equivalent basis.
Gross
unrealized losses on securities and the estimated market 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,
2007 and December 31, 2006 are as follows:
2007
|
|
|
|
Less
than 12 months
|
|
|
12
months or longer
|
|
|
Total
|
|
|
|
Number
of
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
Treasury securities and obligations
of
U.S. Government sponsored
corporations
and agencies
|
|
25
|
|
$ |
1,491,803 |
|
|
$ |
(33,117 |
) |
|
$ |
9,418,035 |
|
|
$ |
(388,486 |
) |
|
$ |
10,909,838 |
|
|
$ |
(421,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
15 |
|
|
4,278,329 |
|
|
|
(121,197 |
) |
|
|
5,230,207 |
|
|
|
(57,365 |
) |
|
|
9,508,536 |
|
|
|
(178,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of State and Political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subdivisions
|
|
16 |
|
|
0 |
|
|
|
0 |
|
|
|
3,260,125 |
|
|
|
(12,431 |
) |
|
|
3,260,125 |
|
|
|
(12,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock and other securities
|
|
5 |
|
|
2,596,788 |
|
|
|
(354,198 |
) |
|
|
458,355 |
|
|
|
(37,832 |
) |
|
|
3,055,143 |
|
|
|
(392,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired securities
|
|
61 |
|
$ |
8,366,920 |
|
|
$ |
(508,512 |
) |
|
$ |
18,366,722 |
|
|
$ |
(496,114 |
) |
|
$ |
26,733,642 |
|
|
$ |
(1,004,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Less
than 12 months
|
|
|
12
months or longer
|
|
|
Total
|
|
|
|
Number
of
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
Treasury securities and obligations
of
U.S. Government sponsored
corporations
and agencies
|
|
28 |
|
$ |
83,506 |
|
|
$ |
(22 |
) |
|
$ |
22,760,194 |
|
|
$ |
(694,238 |
) |
|
$ |
22,843,700 |
|
|
$ |
(694,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed securities
|
|
33 |
|
|
6,274,180 |
|
|
|
(26,241 |
) |
|
|
13,608,019 |
|
|
|
(365,697 |
) |
|
|
19,882,199 |
|
|
|
(391,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of State and Political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subdivisions
|
|
30 |
|
|
2,395,099 |
|
|
|
(12,271 |
) |
|
|
7,274,761 |
|
|
|
(67,419 |
) |
|
|
9,669,860 |
|
|
|
(79,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock and other securities
|
|
3 |
|
|
967,328 |
|
|
|
(13,411 |
) |
|
|
967,960 |
|
|
|
(17,538 |
) |
|
|
1,935,288 |
|
|
|
(30,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired securities
|
|
94 |
|
$ |
9,720,113 |
|
|
$ |
(51,945 |
) |
|
$ |
44,610,934 |
|
|
$ |
(1,144,892 |
) |
|
$ |
54,331,047 |
|
|
$ |
(1,196,837 |
) |
U.S. Treasury obligations and direct
obligations of U.S. Government 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 has the ability and intent to
hold these investments until a market price recovery or maturity, these
investments are not considered other-than temporarily impaired.
Mortgage-backed
securities: The unrealized losses on investments in
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 has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.
FHLB stock and other
securities: The investments in these securities with
unrealized losses are comprised of corporate trust preferred securities that
mature in 2027. The unrealized losses on these securities were caused
by interest rate increases. 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. Because
the decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company has the intent and ability to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.
The
Company recorded no gains or losses on sales of securities available for sale in
2007 and gross losses on sales of securities available for sale of $99,714 in
2006.
As of
December 31, 2007 and 2006, securities having a book value of $50,917,850 and
$28,824,981, respectively, were pledged to secure public deposits, other
borrowings and for other purposes required by law.
5. Loans
and Loans Held for Sale
Loans are
as follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Construction
loans |
|
$ |
132,735,920 |
|
|
$ |
125,268,871 |
|
Residential
real estate loans |
|
|
10,088,515 |
|
|
|
7,670,370 |
|
Commercial and
commercial real estate loans |
|
|
135,128,642 |
|
|
|
114,897,040 |
|
Loans to
individuals |
|
|
16,324,817 |
|
|
|
16,728,025 |
|
Deferred loan
fees |
|
|
302,818 |
|
|
|
404,074 |
|
All
other |
|
|
180,006 |
|
|
|
173,933 |
|
|
|
$ |
294,760,718 |
|
|
$ |
265,142,313 |
|
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 $10,322,005 at December 31, 2007
and $13,608,942 at December 31, 2006. 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, 2007
and 2006 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, 2007 and 2006.
6. Allowance
for Loan Losses
A summary
of the allowance for loan losses is as follows:
|
|
2007
|
|
|
2006
|
|
Balance,
beginning of year
|
|
$ |
3,228,360 |
|
|
$ |
2,361,375 |
|
Provision
charged to operations
|
|
|
130,000 |
|
|
|
893,500 |
|
Loans
charged off
|
|
|
(90,983 |
) |
|
|
(29,468 |
) |
Recoveries
of loans charged off
|
|
|
80,703 |
|
|
|
2,953 |
|
Balance,
end of year
|
|
$ |
3,348,080 |
|
|
$ |
3,228,360 |
|
The
amount of loans which were not accruing interest amounted to $2,153,420 and
$4,193,209 at December 31, 2007 and 2006, respectively. Impaired
loans totaled $3,304,510 and zero at December 31, 2007 and 2006,
respectively. There was a valuation allowance of $400,876 on impaired
loans at December 31, 2007. There were no loans 90 days or more past
due and still accruing interest at December 31, 2007 or December 31,
2006.
Additional income before taxes
amounting to $129,967 and $348,344 would have been recognized in 2007 and 2006,
respectively, if interest on all loans had been recorded based upon original
contract terms. No interest was recognized on non-accrual loans in
2007 or 2006. The average recorded investment in
impaired loans for the years ended December 31, 2007 and 2006 was approximately
$899,014 and zero, respectively.
7. Loans to Related
Parties
Activity
related to loans to directors, executive officers and their affiliated interests
during 2007 and 2006 is as follows:
|
|
2007
|
|
|
2006
|
|
Balance,
beginning of year
|
|
$ |
5,124,060 |
|
|
$ |
2,632,162 |
|
Loans
granted
|
|
|
140,000 |
|
|
|
3,154,202 |
|
Repayments
of loans
|
|
|
(1,407,630 |
) |
|
|
(662,304 |
) |
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$ |
3,856,430 |
|
|
$ |
5,124,060 |
|
All such
loans were made under customary terms and conditions and were current as to
principal and interest payments as of December 31, 2007 and 2006.
8. Premises
And Equipment
Premises
and equipment consist of the following:
|
Estimated
Useful
Lives
|
|
2007
|
|
|
2006
|
|
Land
|
|
|
|
241,784 |
|
|
$ |
241,784 |
|
Building
|
40
Years
|
|
|
735,579 |
|
|
|
735,579 |
|
Leasehold
improvements
|
10
Years
|
|
|
2,187,879 |
|
|
|
2,011,056 |
|
Furniture
and equipment
|
3 –
15 Years
|
|
|
2,634,361 |
|
|
|
2,364,917 |
|
|
|
|
|
5,799,603 |
|
|
|
5,353,336 |
|
|
|
|
|
|
|
|
|
|
|
Less
Accumulated depreciation
|
|
|
|
(3,039,400 |
) |
|
|
(2,319,718 |
) |
|
|
|
$ |
2,760,203 |
|
|
$ |
3,033,618 |
|
Depreciation
expense was $720,113 and $627,833 for the years ended December 31, 2007 and
2006, respectively.
9. Other
Real Estate Owned
The Bank
held one property valued at $2,960,727 as Other Real Estate owned at December
31, 2007 and held no Other Real Estate Owned property at December 31,
2006. The Company did not incur any write downs on foreclosed
properties during the years ended December 31, 2007 and 2006. There
was no impairment on this property at December 31, 2007. 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.
10. Intangible
Assets
Intangible
assets at December 31, 2007 are summarized as follows:
|
|
2007
|
|
Goodwill
|
|
$ |
472,726 |
|
Core
deposits intangible
|
|
|
247,070 |
|
Total
|
|
$ |
719,796 |
|
The
Company had no intangible assets at December 31, 2006.
Amortization
expense of intangible assets was $27,534 for the year ended December 31,
2007.
Scheduled
amortization of the core deposits intangible for each of the next five years is
as follows:
2008
|
|
$ |
36,712 |
|
2009
|
|
|
36,712 |
|
2010
|
|
|
36,712 |
|
2011
|
|
|
36,712 |
|
2012
|
|
|
36,712 |
|
Thereafter |
|
|
63,510 |
|
11. Deposits
Deposits
consist of the following:
|
|
2007
|
|
|
2006
|
|
Demand
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
59,055,803 |
|
|
$ |
64,305,445 |
|
Interest
bearing
|
|
|
86,168,444 |
|
|
|
82,113,165 |
|
Savings |
|
|
62,094,432 |
|
|
|
53,630,726 |
|
Time |
|
|
122,013,689 |
|
|
|
112,675,086 |
|
|
|
$ |
329,332,368 |
|
|
$ |
312,724,422 |
|
Individual
time deposits $100,000 or greater amounted to $53,855,542 and $48,074,279 at
December 31, 2007 and 2006, respectively. As of December 31, 2007,
time certificates of deposit in amounts of $100,000 or more have remaining
maturity time as follows:
Maturity
Range
|
|
Amount
|
|
Three
months or less
|
|
$ |
16,677,115 |
|
Over
three months through six months
|
|
|
17,988,814 |
|
Over
six months through twelve months
|
|
|
14,942,550 |
|
Over
twelve months
|
|
|
4,247,063 |
|
|
|
$ |
53,855,542 |
|
12. Borrowings
The
balance of borrowings was $35,600,000 at December 31, 2007, consisting of
long-term FHLB borrowings of $30,500,000 and overnight funds purchased of
$5,100,000. The balance of borrowings at December 31, 2006 consisted
of FHLB borrowings of $15,500,000 and overnight funds purchased of
$1,700,000.
At
December 31, 2007, the Bank maintained an Overnight Line of Credit at the FHLB
in the amount of $23,783,000 and a One Month Overnight Repricing Line of Credit
of $28,883,000. 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 $13,500,000 with a
correspondent bank.
The Bank
purchased five ten-year fixed rate convertible advances from the FHLB that total
$25,500,000 in the aggregate. These advances, in the amounts of
$3,000,000, $2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at
the rates of 5.82%, 5.50%, 5.34%, 5.06% and 4.08%, respectively. The
Bank purchased one two-year advance in the amount of $5,000,000 that bears
interest at a 3.833% rate. 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:
|
|
2007
|
|
2008
|
|
|
- |
|
2009
|
|
$ |
8,000,000 |
|
2010
|
|
|
12,500,000 |
|
2011
|
|
|
- |
|
2012
|
|
|
- |
|
Thereafter
|
|
|
10,000,000 |
|
|
|
$ |
30,500,000 |
|
These
callable advances have original maturity dates of ten years and call dates of
one year to five years. After the original call period expires, the
borrowings are callable quarterly. Due to the call provisions,
expected maturities could differ from contractual maturities.
13. Redeemable
Subordinated Debentures
On April
10, 2002, 1st Constitution Capital Trust I (“Trust I”), a statutory business
trust and a wholly-owned subsidiary of the Company, issued $5.0 million of
variable rate trust preferred securities (the “Trust Preferred Securities”) in a
pooled institutional placement transaction maturing April 22,
2032. Trust I utilized the $5.0 million proceeds along with $155,000
invested in Trust I by the Company to purchase $5,155,000 of floating rate
subordinated debentures issued by the Company and due to mature on April 22,
2032 (the “Subordinated Debentures”). The Subordinated Debentures
constituted the sole assets of Trust I, had terms that mirrored the Trust
Preferred Securities and were redeemable in whole or part prior to maturity
after April 22, 2007. Trust I was obligated to distribute all proceeds of a
redemption of the Subordinated Debentures, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. The Company’s obligation with
respect to the Trust Preferred Securities and the Subordinated Debentures, when
taken together, provided a full and unconditional guarantee on a subordinated
basis by the Company of the obligations of Trust I to pay amounts when due on
the Trust Preferred Securities. On February 23, 2007, the Company notified
Wilmington Trust Company, as Indenture Trustee, of the Company’s intention to
redeem the Subordinated Debentures on April 22, 2007, and the Company redeemed
the Subordinated Debentures on that date, as discussed below.
On May
30, 2006, 1st Constitution Bancorp established 1st
Constitution Capital Trust II, a Delaware business trust subsidiary
(“Trust II”), for the sole purpose of issuing $18 million of trust preferred
securities (the “Capital Securities”). 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
proceeds from the sale of the Capital Securities were loaned to the Company
under 30-year floating rate junior subordinated debentures issued to Trust II by
the Company. The debentures are the only asset of Trust
II. Interest payments on the debentures flow through Trust II to the
pooling vehicle. Payments of distributions by Trust II to the pooling
vehicle are guaranteed by the Company.
Effective
April 22, 2007, the Company redeemed of all of the Subordinated
Debentures. The redemption price was 100% of the aggregate $5,155,000
principal amount of the Subordinated Debentures, plus approximately $236,882 of
accrued interest thereon through the redemption date. As a result of
the redemption of the Subordinated Debentures, a like amount of capital
securities issued by 1st Constitution Capital Trust I will also be redeemed
under the same terms and conditions. This redemption does not impact
the Capital Securities issued by the Company’s wholly-owned subsidiary 1st
Constitution Capital Trust II on May 30, 2006.
14. Income
Taxes
The
components of income tax expense (benefit) are summarized as
follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
Federal-
|
|
|
|
|
|
|
Current
|
|
$ |
2,464,723 |
|
|
$ |
2,658,827 |
|
Deferred
|
|
|
(192,456 |
) |
|
|
(449,182 |
) |
|
|
|
2,272,267 |
|
|
|
2,209,645 |
|
State-
|
|
|
|
|
|
|
|
|
Current
|
|
|
446,000 |
|
|
|
647,076 |
|
Deferred
|
|
|
(55,983 |
) |
|
|
(130,897 |
) |
|
|
|
390,017 |
|
|
|
516,179 |
|
|
|
$ |
2,662,284 |
|
|
$ |
2,725,824 |
|
A comparison of income tax expense at
the Federal statutory rate in 2007 and 2006 to the Company’s provision for
income taxes is as follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
|
Federal income tax
|
|
$ |
2,755,722 |
|
|
$ |
2,533,267 |
|
Add (deduct) effect
of:
|
|
|
|
|
|
|
|
|
State income
taxes net of federal income tax effect
|
|
|
256,015 |
|
|
|
340,678 |
|
Tax-exempt
interest income
|
|
|
(297,737 |
) |
|
|
(205,648 |
) |
Bank-owned
life insurance
|
|
|
(124,304 |
) |
|
|
(119,162 |
) |
Other items,
net
|
|
|
72,588 |
|
|
|
176,689 |
|
Provision for income
taxes
|
|
$ |
2,662,284 |
|
|
$ |
2,725,824 |
|
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:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
Deferred tax assets-
|
|
|
|
|
|
|
Allowance for
loan losses
|
|
$ |
1,337,223 |
|
|
$ |
1,289,407 |
|
Employee
benefits
|
|
|
85,670 |
|
|
|
40,271 |
|
Unrealized
loss on securities available for sale
|
|
|
(12,880 |
) |
|
|
227,367 |
|
SERP
Liability
|
|
|
1,018,988 |
|
|
|
801,311 |
|
Other
|
|
|
(94,415 |
) |
|
|
(56,720 |
) |
Net
deferred tax assets |
|
|
2,334,586
|
|
|
|
2,301,636
|
|
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.
15. Comprehensive
Income and Accumulated Other Comprehensive Income
The
components of other comprehensive income (loss) are as follows:
For
the year ended December 31, 2007
|
|
Before
tax
Amount
|
|
|
Tax
Benefit
(Expense)
|
|
|
Net
of
Tax
amount
|
|
Net
unrealized gains on available for sale securities:
Net
unrealized holding gains arising during period
|
|
|
749,930 |
|
|
$ |
(240,247 |
) |
|
$ |
509,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability
|
|
|
(61,989 |
) |
|
|
24,758 |
|
|
|
(37,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate
swap
contract
|
|
|
(99,754 |
) |
|
|
39,842 |
|
|
|
(59,912 |
) |
Other
comprehensive income, net
|
|
$ |
588,187 |
|
|
$ |
(175,647 |
) |
|
$ |
412,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2006 (Restated)
|
|
Before
Tax
Amount
|
|
|
Tax
Benefit
(Expense)
|
|
|
Net
of
Tax
amount
|
|
Net
unrealized gains on available for sale securities:
Net
unrealized holding gains arising during period
|
|
$ |
455,076 |
|
|
$ |
(253,236 |
) |
|
$ |
201,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
reclassification adjustment for net gains
realized
in net income
|
|
|
(99,714 |
) |
|
|
33,903 |
|
|
|
(65,811 |
) |
Net
unrealized gains
|
|
|
554,790 |
|
|
|
(287,139 |
) |
|
|
267,651 |
|
Other
comprehensive income, net
|
|
$ |
554,790 |
|
|
$ |
(287,139 |
) |
|
$ |
267,651 |
|
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
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, 2006 (Restated)
|
|
$ |
(492,000 |
) |
|
|
- |
|
|
$ |
(454,266 |
) |
|
$ |
(945,726 |
) |
Net Change
|
|
|
509,683 |
|
|
|
(59,912 |
) |
|
|
(37,231 |
) |
|
|
412,540 |
|
Balance,
December 31, 2007
|
|
$ |
17,683 |
|
|
$ |
(59,912 |
) |
|
$ |
(491,497 |
) |
|
$ |
(533,186 |
) |
16. 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 2007 and 2006 up
to 6% of base compensation. Employer contributions to the plan
amounted to $105,621 in 2007, and $85,899 in 2006.
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, 2007 and 2006 is
approximately $2,551,295 and $2,006,288, respectively, and is included in other
liabilities and accumulated other comprehensive income in the accompanying
consolidated balance sheet. Compensation expense of $483,019 and
$423,991 is included in the accompanying consolidated statement of income for
the years ended December 31, 2007 and 2006, respectively.
In
connection with the benefit plans, the Bank purchased $6.0 million in 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 are approximately
$9.5 million and $9.2 million as of December 31, 2007 and 2006,
respectively.
The
following table sets forth the changes in benefit obligations and plan assets of
the Company’s supplemental executive retirement plan.
|
|
2007
|
|
|
2006
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
Liability
for pension, beginning
|
|
$ |
2,006,288 |
|
|
$ |
1,536,624 |
|
Service
cost
|
|
|
227,165 |
|
|
|
210,773 |
|
Interest
cost
|
|
|
131,555 |
|
|
|
101,633 |
|
Actuarial
(gain) loss
|
|
|
186,288 |
|
|
|
- |
|
Benefits
paid
|
|
|
- |
|
|
|
- |
|
Plan
amendments
|
|
|
|
|
|
|
157,258 |
|
Liability
for pension, ending
|
|
$ |
2,551,295 |
|
|
$ |
2,006,288 |
|
|
|
|
|
|
|
|
|
|
(Accrued
liability) prepaid benefit cost
included
in balance sheet
|
|
$ |
(1,732,952 |
) |
|
$ |
(1,249,934 |
) |
|
|
|
|
|
|
Amount
Recognized in Consolidated Balance Sheets
|
|
|
|
|
|
Liability
for pension
|
|
$ |
(2,551,295 |
) |
|
$ |
(2,006,288 |
) |
Unrecognized
net actuarial loss included in other comprehensive income
|
|
|
312,736 |
|
|
|
151,315 |
|
Unrecognized
prior service cost included in other comprehensive
income
|
|
|
505,607 |
|
|
|
605,039 |
|
Net
recognized pension cost
|
|
$ |
(1,732,952 |
) |
|
$ |
(1,249,934 |
) |
|
|
|
|
|
|
|
|
|
Information
for pension plans with an accumulated
benefit
obligation in excess of plan assets
|
|
|
|
|
Projected
benefit obligation
|
|
$ |
2,551,295 |
|
|
$ |
2,006,288 |
|
Accumulated
benefit obligation
|
|
|
2,221,495 |
|
|
|
1,684,094 |
|
Fair
value of plan assets
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Components
of Net Periodic Benefit Cost
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
227,165 |
|
|
$ |
210,773 |
|
Interest
cost
|
|
|
131,555 |
|
|
|
101,633 |
|
Expected
return on plan assets
|
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost
|
|
|
99,432 |
|
|
|
111,585 |
|
Recognized
net actuarial gain
|
|
|
24,867 |
|
|
|
- |
|
Net
periodic benefit cost
|
|
$ |
483,019 |
|
|
$ |
423,991 |
|
The net
periodic benefit cost for the year ended December 31, 2008 is projected to be
$535,425.
No
amounts were recognized in other comprehensive income during the year ended
December 31, 2006.
Weighted-Average
Assumptions, December 31
|
|
2007
|
|
|
2006
|
|
Discount
Rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected
Return on Plan Assets
|
|
|
N/A |
|
|
|
N/A |
|
Salary
Scale
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Projected Annual Benefit
Payments
|
|
|
|
|
2008
|
|
$ |
0 |
|
2009
|
|
$ |
37,180 |
|
2010
|
|
$ |
284,650 |
|
2011
|
|
$ |
284,650 |
|
2012
|
|
$ |
284,650 |
|
2013-2017
|
|
$ |
1,771,228 |
|
17. Share
Based Compensation
Share-based
compensation is accounted for in accordance with SFAS No. 123 (revised 2004)
(“SFAS No. 123R”), Share-Based
Payment. The Company adopted SFAS No. 123R on January 1, 2006
using the modified prospective approach. The Company establishes fair
value for its equity awards to determine its cost and recognized the related
expense for stock options over the vesting period using the straight-line
method. The grant date fair value for stock options is calculated
using the Black-Scholes option valuation model. Prior to January 1,
2006, the Company accounted for stock-based compensation in accordance with SFAS
No. 124, Accounting for
Stock-Based Compensation, as adopted prospectively on January 1, 2003 and
in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued
to
Employees.
The
Company’s Stock Plans authorize the issuance of 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.
Stock-based
compensation expense related to stock options was $107,020 and $95,230 for the
years ended December 31, 2007 and 2006, respectively.
Transactions
under the Company’s stock option plans during the year ended December 31, 2007
are summarized as follows:
Stock
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
140,822 |
|
|
$ |
9.98 |
|
|
|
|
|
|
|
Granted
|
|
|
16,960 |
|
|
|
14.02 |
|
|
|
|
|
|
|
Exercised
|
|
|
(944 |
) |
|
|
3.11 |
|
|
|
|
|
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
156,838 |
|
|
$ |
10.43 |
|
|
|
5.3 |
|
|
$ |
876,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
121,066 |
|
|
$ |
8.94 |
|
|
|
4.2 |
|
|
$ |
862,463 |
|
The
Company granted a total of 16,960 stock options during the year ended December
31, 2007. The total intrinsic value (market value on date of exercise
less grant price) of options exercised during the year ended December 31, 2007
was $13,357.
Cash
received from option exercises under the plans for the year ended December 31,
2007 was $ 2,812. The impact of these cash receipts is
included in financing activities in the accompanying consolidated statements of
cash flows.
As of
December 31, 2007, there was approximately $246,390 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.
Significant
assumptions used to calculate the fair value of the options granted for the year
ended December 31, 2007 are as follows:
|
|
August
2007
|
|
|
December
2007
|
Fair
value of options granted
|
|
$
|
7.08 |
|
|
|
$ |
5.33 |
|
Risk-free
rate of return
|
|
|
4.43 |
%
|
|
|
|
3.49 |
% |
Expected
option life in years
|
|
|
7 |
|
|
|
|
7 |
|
Expected
volatility
|
|
|
26.60
|
%
|
|
|
|
26.60 |
% |
Expected
dividends (1)
|
|
|
- |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(1)
To date, the Company has not paid cash dividends on its common
stock.
|
|
|
|
|
|
|
|
|
|
The
following table summarizes nonvested restricted shares outstanding as of
December 31, 2007:
Nonvested
Shares
|
|
Number
of
Shares
|
|
|
Average
Grant-Date
Fair
Value
|
|
Nonvested
at January 1, 2007
|
|
|
45,346 |
|
|
$ |
15.13 |
|
Granted
|
|
|
19,981 |
|
|
|
14.71 |
|
Vested
|
|
|
(17,334 |
) |
|
|
14.38 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Nonvested
at December 31, 2007
|
|
|
47,993 |
|
|
$ |
15.35 |
|
During
the year ended December 31, 2007, 17,334 shares of common stock granted as stock
awards vested. These vested shares were valued at an aggregate amount
of $204,020 at the time of grants. The value of these 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. During the year ended December 31,
2007, stock grant awards were issued for a total of 19,981 shares valued at
$293,883 in the aggregate.
Stock
based compensation expense related to stock grants was $247,346 and $499,808 for
the year ended December 31, 2007 and 2006.
As of
December 31, 2007, there was approximately $593,876 of unrecognized compensation
cost related to non-vested stock grants that will be recognized over the next
four years.
18. Commitments
and Contingencies
As of
December 31, 2006, future minimum rental payments under non-cancelable operating
leases are as follows:
2008
|
|
$ |
783,122 |
|
2009
|
|
|
685,397 |
|
2010
|
|
|
678,552 |
|
2011
|
|
|
502,151 |
|
2012
|
|
|
520,254 |
|
Thereafter
|
|
|
2,258,892 |
|
|
|
$ |
5,428,368 |
|
Rent
expense aggregated $772,439, and $876,983 for the years ended December 31, 2007
and 2006, respectively.
Commitments With Off-Balance Sheet
Risk
The
statement of condition 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
$114,175,000 and $104,050,000 to its borrowers as of December 31, 2007 and
December 31, 2006, respectively.
The Bank
issues financial standby letters of credit that are within the scope of FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”. 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 $5,546,723 at December 31, 2007 and $5,999,658 at
December 31, 2006.
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 $10.3 million at December 31, 2007 and $13.6 million at
December 31, 2006. Changes in fair value of the forward sales
contracts, and the related loan origination commitments and closed loans, were
not significant at December 31, 2007 and 2006.
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.
19. Other
Operating Expenses
The
components of other operating expenses for the years ended December 31, 2007 and
2006 are as follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expense
|
|
$ |
485,792 |
|
|
$ |
507,402 |
|
Marketing
|
|
|
106,862 |
|
|
|
258,012 |
|
Regulatory, professional and
other fees
|
|
|
435,464 |
|
|
|
824,370 |
|
Office expense
|
|
|
572,293 |
|
|
|
470,211 |
|
All other expenses
|
|
|
816,448 |
|
|
|
1,031,621 |
|
|
|
$ |
2,416,859 |
|
|
$ |
3,091,616 |
|
20. Regulatory
Requirements
The Bank
is 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 Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and 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 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, 2007, the Bank met
all capital adequacy requirements to which it is subject.
To be
categorized as adequately capitalized, 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, 2007, the most recent notification from the
Bank’s primary regulator categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank’s category. Certain bank regulatory limitations exist on the
availability of Bank assets available for the payment of dividends without prior
approval of bank regulatory authorities.
Actual
capital amounts and ratios for the Company and the Bank as of December 31, 2007
and 2006 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, 2007 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
Risk Weighted Assets)
|
|
$ |
62,006,573 |
|
|
|
17.75 |
% |
|
$ |
27,949,600 |
|
|
|
>8 |
% |
|
$ |
34,937,000 |
|
|
|
>10 |
% |
Tier I Capital (to
Risk Weighted Assets)
|
|
|
54,437,463 |
|
|
|
15.58 |
% |
|
|
13,974,800 |
|
|
|
>4 |
% |
|
|
20,962,200 |
|
|
|
>6 |
% |
Tier I Capital (to
Average Assets)
|
|
|
54,437,463 |
|
|
|
12.66 |
% |
|
|
17,196,222 |
|
|
|
>4 |
% |
|
|
21,495,277 |
|
|
|
>5 |
% |
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
$ |
59,961,320 |
|
|
|
17.16 |
% |
|
$ |
27,949,600 |
|
|
|
>8 |
% |
|
$ |
34,937,000 |
|
|
|
>10 |
% |
Tier I Capital (to
Risk Weighted Assets)
|
|
|
56,613,240 |
|
|
|
16.20 |
% |
|
|
13,974,800 |
|
|
|
>4 |
% |
|
|
20,962,200 |
|
|
|
>6 |
% |
Tier I Capital (to
Average Assets)
|
|
|
56,613,240 |
|
|
|
13.20 |
% |
|
|
17,152,520 |
|
|
|
>4 |
% |
|
|
21,440,650 |
|
|
|
>5 |
% |
|
|
As of December
31, 2006 – restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
Risk Weighted Assets)
|
|
$ |
61,652,577 |
|
|
|
19.93 |
% |
|
$ |
24,751,678 |
|
|
|
>8 |
% |
|
$ |
30,939,598 |
|
|
|
N/A |
|
Tier I Capital (to
Risk Weighted Assets)
|
|
|
47,220,481 |
|
|
|
15.26 |
% |
|
|
12,375,839 |
|
|
|
>4 |
% |
|
|
18,563,759 |
|
|
|
N/A |
|
Tier I Capital (to
Average Assets)
|
|
|
47,220,481 |
|
|
|
11.99 |
% |
|
|
15,752,046 |
|
|
|
>4 |
% |
|
|
19,690,058 |
|
|
|
N/A |
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
Risk Weighted Assets)
|
|
$ |
53,520,979 |
|
|
|
17.30 |
% |
|
$ |
24,751,040 |
|
|
|
>8 |
% |
|
$ |
30,938,800 |
|
|
|
>10 |
% |
Tier I Capital
(to Risk Weighted Assets)
|
|
|
50,292,619 |
|
|
|
16.26 |
% |
|
|
12,375,520 |
|
|
|
>4 |
% |
|
|
18,563,280 |
|
|
|
>6 |
% |
Tier I Capital (to
Average Assets)
|
|
|
50,292,619 |
|
|
|
12.80 |
% |
|
|
15,710,320 |
|
|
|
>4 |
% |
|
|
19,637,900 |
|
|
|
>5 |
% |
The
primary source of dividends paid to the Company’s shareholders 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.
21. Stock
Repurchase Program
In July,
2005, the Board of Directors of the Company authorized a stock repurchase
program under which the Company may repurchase in open market or privately
negotiated transactions up to 5%, or 185,787 shares, adjusted for stock
dividends, of its common shares. The Company established this
repurchase program in order to increase shareholder value. During the
year ended December 31, 2007, the Company repurchased 13,548 shares for an
aggregate price of approximately $246,900.
22. Estimated
Fair Value of Financial Instruments
The
following is a summary of fair value versus the carrying value of the Bank’s
financial instruments. For the Bank, as for most financial
institutions, the bulk of its assets and liabilities are considered financial
instruments. Many of the Bank’s 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 by the Bank for the purpose
of this note. Changes in assumptions could significantly affect these
estimates.
Estimated
fair values have been determined by the Bank using the best available data and
an estimation methodology suitable for each category of financial
instruments. Financial instruments, such as securities available for
sale and securities held to maturity, actively traded in the secondary market
have been valued using available market prices. Carrying values of
cash and cash equivalents and securities sold under agreements to repurchase
approximate fair value due to the short-term nature of these
instruments. Other borrowings are valued on a discounted cash flow
method utilizing current discount rates for instruments of similar remaining
terms.
Financial instruments with stated
maturities have been valued using a present value discounted cash flow with a
discount rate approximating current market for similar assets and
liabilities. For those loans and deposits with floating interest
rates, it is assumed that estimated fair values generally approximate the
recorded book balances.
The estimated fair values, and the
recorded book balances, were as follows:
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for
sale
|
|
$ |
75,192,137 |
|
|
$ |
75,192,137 |
|
|
$ |
70,421,328 |
|
|
$ |
70,421,328 |
|
Securities held to
maturity
|
|
|
23,512,346 |
|
|
|
23,411,269 |
|
|
|
19,254,476 |
|
|
|
19,164,679 |
|
Loans held for sale
|
|
|
10,322,005 |
|
|
|
10,321,000 |
|
|
|
13,608,942 |
|
|
|
13,608,942 |
|
Gross loans
|
|
|
294,760,718 |
|
|
|
294,845,000 |
|
|
|
265,142,313 |
|
|
|
264,695,000 |
|
Deposits
|
|
|
329,332,368 |
|
|
|
329,561,000 |
|
|
|
312,724,422 |
|
|
|
312,154,000 |
|
Other borrowings
|
|
|
35,600,000 |
|
|
|
36,630,000 |
|
|
|
17,200,000 |
|
|
|
17,224,000 |
|
Redeemable subordinated
debentures
|
|
|
18,557,000 |
|
|
|
18,557,013 |
|
|
|
23,712,000 |
|
|
|
23,712,022 |
|
Interest
rate swap contract |
|
|
(99,754 |
) |
|
|
(99,754 |
) |
|
|
- |
|
|
|
- |
|
Loan
commitments and standby letters of credit as of December 31, 2007 and 2006 are
based on fees charged for similar agreements; accordingly, the estimated fair
value of loan commitments and standby letters of credit is nominal.
23. Condensed
Financial Statements of 1st Constitution Bancorp (Parent Company
Only)
The following financial statements of
the Company should be read in conjunction with the notes to the consolidated
financial statements and reflect the restatement discussed in Note 2
“Restatement of Consolidated Financial Statements For the Year Ended and As At
December 31, 2006”.
CONDENSED STATEMENTS OF
CONDITION
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
Assets:
|
|
|
|
|
(Restated)
|
|
Cash
|
|
$ |
938,826 |
|
|
$ |
7,449,167 |
|
Investment
securities available for sale
|
|
|
557,000 |
|
|
|
712,000 |
|
Investment
in subsidiaries
|
|
|
56,927,524 |
|
|
|
49,814,996 |
|
Other
assets
|
|
|
1,106,427 |
|
|
|
682,342 |
|
Total
Assets
|
|
$ |
59,529,777 |
|
|
$ |
58,658,505 |
|
|
|
|
|
|
|
|
|
|
Liabilities
And Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Subordinated
debentures
|
|
|
18,557,000 |
|
|
|
23,712,000 |
|
Shareholders’
equity
|
|
|
40,972,777 |
|
|
|
34,946,505 |
|
Total
Liabilities and Shareholder’s Equity
|
|
$ |
59,529,777 |
|
|
$ |
58,658,505 |
|
CONDENSED
STATEMENTS OF INCOME
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Income:
|
|
|
|
|
(Restated)
|
|
Interest
|
|
$ |
76,123 |
|
|
$ |
79,744 |
|
Total
Income
|
|
|
76,123 |
|
|
|
79,744 |
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,483,399 |
|
|
|
1,177,020 |
|
Other
|
|
|
11,481 |
|
|
|
32,004 |
|
Total
Expense
|
|
|
1,494,880 |
|
|
|
1,209,024 |
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and equity in undistributed income of
Subsidiaries
|
|
|
(1,418,757 |
) |
|
|
(1,129,280 |
) |
Federal
income tax benefit
|
|
|
(432,258 |
) |
|
|
(382,988 |
) |
|
|
|
|
|
|
|
|
|
Loss
before equity in undistributed income of subsidiaries
|
|
|
(986,499 |
) |
|
|
(746,292 |
) |
Equity
in undistributed income of subsidiaries
|
|
|
6,429,281 |
|
|
|
5,471,254 |
|
Net
Income
|
|
$ |
5,442,782 |
|
|
$ |
4,724,962 |
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
Activities:
|
|
|
|
|
(Restated)
|
|
Net
Income
|
|
$ |
5,442,782 |
|
|
$ |
4,724,962 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in investment securities available for sale
|
|
|
155,000 |
|
|
|
(557,000 |
) |
(Increase)
decrease in other assets
|
|
|
(587,772 |
) |
|
|
(467,044 |
) |
Equity
in undistributed income of subsidiaries
|
|
|
(6,429,281 |
) |
|
|
(5,471,254 |
) |
Net
cash (used in) provided by Operating Activities
|
|
|
(1,419,271 |
) |
|
|
(1,770,336 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Investment
in subsidiaries
|
|
|
- |
|
|
|
(10,000,000 |
) |
Repayment
of investments in subsidiaries
|
|
|
- |
|
|
|
447,898 |
|
Net
cash (used in) provided by Investing Activities
|
|
|
- |
|
|
|
(9,552,102 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net
|
|
|
310,833 |
|
|
|
595,825 |
|
Purchase
of treasury stock
|
|
|
(246,903 |
) |
|
|
(412,547 |
) |
Proceeds
from issuance of subordinated debentures
|
|
|
(5,155,000 |
) |
|
|
18,557,000 |
|
Net
cash (used in) provided by financing activities
|
|
|
(5,091,070 |
) |
|
|
18,740,278 |
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(6,510,341 |
) |
|
|
7,417,839 |
|
Cash
as of beginning of year
|
|
|
7,449,167 |
|
|
|
31,328 |
|
Cash
as of end of year
|
|
$ |
938,826 |
|
|
$ |
7,449,167 |
|
24. Unaudited
Quarterly Financial Data and Restatement of Interim Financial
Statements
The
Previously Issued Financial Statements covering the quarters ended on March 31,
June 30 and September 30, 2007 and 2006, and the quarter ended December 31,
2006, contain the following errors, which are described in more detail
below:
|
·
|
Errors
made in accounting for (i) current tax liabilities principally related to
the Company’s trust preferred securities and (ii) deferred tax
assets, in both cases in 2007 and 2006 and prior periods, resulting in an
underestimate of current tax liabilities and an overestimate of deferred
tax assets;
|
|
·
|
Overestimation
of liabilities related to future benefits to plan participants in the
Company's Supplemental Executive Retirement Plan in connection with the
implementation of FAS 158 in 2006 resulting in an increase in expenses,
and an underestimation of liabilities related to future benefits to plan
participants in the Company's Supplemental Executive Retirement Plan,
resulting in a reduction of expenses in the first three quarters of
2007; and
|
|
·
|
Failure
to adequately evaluate estimation of certain non-interest operating
expenses for, among other things, professional fees, advertising and
business development, resulting in an over-accrual of certain
non-interest operating expenses in 2006 and a resultant decrease in
tax expense for 2006.
|
The
following sets forth the effect of the restatement adjustments on the applicable
line items with the Company’s Consolidated Statement of Income for the periods
indicated:
|
|
2007
|
|
|
|
Dec.
31
|
|
|
Sept.
30
|
|
|
June
30
|
|
|
March
31
|
|
Summary
of Operations
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Interest
income
|
|
$ |
7,708,264 |
|
|
$ |
7,825,738 |
|
|
$ |
7,445,478 |
|
|
$ |
7,389,164 |
|
Interest
expense
|
|
|
3,220,991 |
|
|
|
3,307,196 |
|
|
|
3,130,961 |
|
|
|
2,931,491 |
|
Net
interest income
|
|
|
4,487,273 |
|
|
|
4,518,542 |
|
|
|
4,314,517 |
|
|
|
4,457,673 |
|
Provision
for loan losses
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
40,000 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
loan losses
|
|
|
4,457,273 |
|
|
|
4,488,542 |
|
|
|
4,284,517 |
|
|
|
4,417,673 |
|
Non-interest
income
|
|
|
620,459 |
|
|
|
645,706 |
|
|
|
648,423 |
|
|
|
643,741 |
|
Non-interest
expense
|
|
|
3,140,326 |
|
|
|
3,011,371 |
|
|
|
2,875,337 |
|
|
|
3,074,224 |
|
Income
before income taxes
|
|
|
1,937,406 |
|
|
|
2,122,877 |
|
|
|
2,057,603 |
|
|
|
1,987,190 |
|
Income
taxes
|
|
|
674,337 |
|
|
|
687,147 |
|
|
|
639,504 |
|
|
|
661,296 |
|
Net income
|
|
$ |
1,263,069 |
|
|
$ |
1,435,730 |
|
|
$ |
1,418,099 |
|
|
$ |
1,325,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.32 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.33 |
|
Diluted
|
|
$ |
0.31 |
|
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Dec.
31
|
|
|
Sept.
30
|
|
|
June
30
|
|
|
March
31
|
|
Summary
of Operations
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Interest
income
|
|
$ |
7,199,650 |
|
|
$ |
7,163,273 |
|
|
$ |
6,789,622 |
|
|
$ |
6,152,637 |
|
Interest
expense
|
|
|
2,764,720 |
|
|
|
2,653,753 |
|
|
|
2,180,513 |
|
|
|
1,918,511 |
|
Net
interest income
|
|
|
4,434,930 |
|
|
|
4,509,520 |
|
|
|
4,609,109 |
|
|
|
4,234,126 |
|
Provision
for loan losses
|
|
|
453,500 |
|
|
|
100,000 |
|
|
|
170,000 |
|
|
|
170,000 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
loan losses
|
|
|
3,981,430 |
|
|
|
4,409,520 |
|
|
|
4,439,109 |
|
|
|
4,064,126 |
|
Non-interest
income
|
|
|
629,029 |
|
|
|
757,685 |
|
|
|
474,709 |
|
|
|
710,025 |
|
Non-interest
expense
|
|
|
2,677,157 |
|
|
|
3,124,975 |
|
|
|
3,089,606 |
|
|
|
3,123,109 |
|
Income
before income taxes
|
|
|
1,933,302 |
|
|
|
2,042,230 |
|
|
|
1,824,212 |
|
|
|
1,651,042 |
|
Income
taxes
|
|
|
733,166 |
|
|
|
802,662 |
|
|
|
606,496 |
|
|
|
583,499 |
|
Net income
|
|
$ |
1,200,136 |
|
|
$ |
1,239,568 |
|
|
$ |
1,217,716 |
|
|
$ |
1,067,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.30 |
|
|
$ |
0.32 |
|
|
$ |
0.31 |
|
|
$ |
0.28 |
|
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.31 |
|
|
$ |
0.30 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present unaudited financial information for each quarter within
the two most recent years. Included herein is the restated financial
information for interim periods of 2007 and 2006. As a result, the
quarterly data presented herein does not agree to previously issued quarterly
statements covering periods beginning on or after January 1, 2006.
The
Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements included elsewhere in this
report. Results of operations for any particular quarter are not
necessary indicative of results of operations for a full fiscal
year.
The
following table presents the effects of adjustments made to the Company’s
previously reported consolidated statements of income for interim periods in
2006:
1st
Constitution Bancorp
|
|
Consolidated
Statements Of Income
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
Three
Months Ended June 30,
|
|
|
Three
Months Ended Sept. 30,
|
|
|
Three
Months Ended Dec. 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
5,176,816 |
|
|
$ |
5,176,816 |
|
|
$ |
5,822,356 |
|
|
$ |
5,822,356 |
|
|
$ |
6,082,710 |
|
|
$ |
6,082,710 |
|
|
$ |
6,084,662 |
|
|
$ |
6,084,662 |
|
Interest
on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
806,366 |
|
|
|
806,366 |
|
|
|
795,540 |
|
|
|
795,540 |
|
|
|
916,025 |
|
|
|
916,025 |
|
|
|
930,849 |
|
|
|
930,849 |
|
Tax
Exempt
|
|
|
160,791 |
|
|
|
160,791 |
|
|
|
147,052 |
|
|
|
147,052 |
|
|
|
146,864 |
|
|
|
146,864 |
|
|
|
150,139 |
|
|
|
150,139 |
|
Interest
on Federal funds sold and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
short-term
investments
|
|
|
8,664 |
|
|
|
8,664 |
|
|
|
24,674 |
|
|
|
24,674 |
|
|
|
17,674 |
|
|
|
17,674 |
|
|
|
34,000 |
|
|
|
34,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
6,152,637 |
|
|
|
6,152,637 |
|
|
|
6,789,622 |
|
|
|
6,789,622 |
|
|
|
7,163,273 |
|
|
|
7,163,273 |
|
|
|
7,199,650 |
|
|
|
7,199,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,350,330 |
|
|
|
1,350,330 |
|
|
|
1,524,009 |
|
|
|
1,524,009 |
|
|
|
1,804,271 |
|
|
|
1,804,271 |
|
|
|
2,009,470 |
|
|
|
2,009,470 |
|
Interest
on securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other borrowed funds
|
|
|
466,337 |
|
|
|
466,337 |
|
|
|
490,796 |
|
|
|
490,796 |
|
|
|
414,918 |
|
|
|
414,918 |
|
|
|
315,698 |
|
|
|
315,698 |
|
Interest
on redeemable subordinated debentures
|
|
|
101,844 |
|
|
|
101,844 |
|
|
|
165,708 |
|
|
|
165,708 |
|
|
|
434,564 |
|
|
|
434,564 |
|
|
|
439,552 |
|
|
|
439,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
1,918,511 |
|
|
|
1,918,511 |
|
|
|
2,180,513 |
|
|
|
2,180,513 |
|
|
|
2,653,753 |
|
|
|
2,653,753 |
|
|
|
2,764,720 |
|
|
|
2,764,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
4,234,126 |
|
|
|
4,234,126 |
|
|
|
4,609,109 |
|
|
|
4,609,109 |
|
|
|
4,509,520 |
|
|
|
4,509,520 |
|
|
|
4,434,930 |
|
|
|
4,434,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
170,000 |
|
|
|
170,000 |
|
|
|
170,000 |
|
|
|
170,000 |
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
453,500 |
|
|
|
453,500 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
4,064,126 |
|
|
|
4,064,126 |
|
|
|
4,439,109 |
|
|
|
4,439,109 |
|
|
|
4,409,520 |
|
|
|
4,409,520 |
|
|
|
3,981,430 |
|
|
|
3,981,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
186,559 |
|
|
|
186,559 |
|
|
|
167,042 |
|
|
|
167,042 |
|
|
|
152,737 |
|
|
|
152,737 |
|
|
|
161,733 |
|
|
|
161,733 |
|
Gain
on sale of loans held for sale
|
|
|
318,689 |
|
|
|
318,689 |
|
|
|
174,930 |
|
|
|
174,930 |
|
|
|
337,614 |
|
|
|
337,614 |
|
|
|
241,498 |
|
|
|
241,498 |
|
(Loss)gain
on sale of securities available for sale
|
|
|
0 |
|
|
|
0 |
|
|
|
(99,714 |
) |
|
|
(99,714 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Income
on Bank-owned life insurance (1)
|
|
|
80,600 |
|
|
|
61,039 |
|
|
|
82,934 |
|
|
|
82,934 |
|
|
|
108,138 |
|
|
|
108,138 |
|
|
|
78,804 |
|
|
|
78,804 |
|
Other
income
|
|
|
143,738 |
|
|
|
143,738 |
|
|
|
149,517 |
|
|
|
149,517 |
|
|
|
159,196 |
|
|
|
159,196 |
|
|
|
146,994 |
|
|
|
146,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
|
729,586 |
|
|
|
710,025 |
|
|
|
474,709 |
|
|
|
474,709 |
|
|
|
757,685 |
|
|
|
757,685 |
|
|
|
629,029 |
|
|
|
629,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits (2)
|
|
|
1,685,022 |
|
|
|
1,709,213 |
|
|
|
1,712,959 |
|
|
|
1,685,372 |
|
|
|
1,697,756 |
|
|
|
1,670,169 |
|
|
|
1,703,882 |
|
|
|
1,676,296 |
|
Occupancy
expense (3)
|
|
|
318,984 |
|
|
|
322,359 |
|
|
|
378,143 |
|
|
|
381,518 |
|
|
|
410,304 |
|
|
|
413,679 |
|
|
|
327,297 |
|
|
|
330,671 |
|
Other
operating expenses (4)
|
|
|
1,086,022 |
|
|
|
1,091,537 |
|
|
|
1,017,201 |
|
|
|
1,022,716 |
|
|
|
1,035,612 |
|
|
|
1,041,127 |
|
|
|
664,674 |
|
|
|
670,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
3,090,028 |
|
|
|
3,123,109 |
|
|
|
3,108,303 |
|
|
|
3,089,606 |
|
|
|
3,143,672 |
|
|
|
3,124,975 |
|
|
|
2,695,853 |
|
|
|
2,677,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,703,684 |
|
|
|
1,651,042 |
|
|
|
1,805,515 |
|
|
|
1,824,212 |
|
|
|
2,023,533 |
|
|
|
2,042,230 |
|
|
|
1,914,606 |
|
|
|
1,933,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES (5)
|
|
|
448,926 |
|
|
|
583,499 |
|
|
|
448,251 |
|
|
|
606,496 |
|
|
|
644,417 |
|
|
|
802,662 |
|
|
|
572,900 |
|
|
|
733,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
1,254,758 |
|
|
$ |
1,067,543 |
|
|
$ |
1,357,264 |
|
|
$ |
1,217,716 |
|
|
$ |
1,379,116 |
|
|
$ |
1,239,568 |
|
|
$ |
1,341,706 |
|
|
$ |
1,200,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.32 |
|
|
$ |
0.28 |
|
|
$ |
0.35 |
|
|
$ |
0.31 |
|
|
$ |
0.36 |
|
|
$ |
0.32 |
|
|
$ |
0.34 |
|
|
$ |
0.30 |
|
Diluted
|
|
$ |
0.31 |
|
|
$ |
0.28 |
|
|
$ |
0.34 |
|
|
$ |
0.30 |
|
|
$ |
0.34 |
|
|
$ |
0.31 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjusted balances are primarily the
result of the Company restatement of (1) Income on Bank-owned Life Insurance was
reduced by $19, 561 in the quarter ended March 31, 2006 to reconcile the cash
surrender value of the policies with the balances subsequently provided by the
benefit plan administrator; (2) Salaries and employee benefits was increased by
a net amount of $24,191 for the quarter ended March 31, 2006 which resulted from
an expense increase of $51,778 to accrue additional 2006 charges for employee
health insurance premiums which was partially offset by an expense credit of
$27,587 to correct an over-accrual of the costs related to future benefits to
plan participants in the Company’s Supplemental Executive Retirement
Plan. This credit was applied to the quarters June 30 and September
30, 2006; (3) Occupancy expense was increased to $3,375 in the quarters ended
March 31, June 30, September 30 and December 31 to record additional rent
expense under the straight-line method in accordance with Statement of Financial
Accounting Standards Number 13, “Accounting for Leases;” (4) Other Operating
expenses was increased by a net amount of $5,515 for the quarter ended March 31,
June 30, September 31 and December 31 which resulted from adjustments of
$168,000 to increase 2006 expense for the impact of over-accrued expenses from
prior periods that were reversed into income during 2006 which was partially
offset by the reversal of $145,939 in current year over-accruals of operating
expenses; (5) Income tax expense was restated by a net increase of $134,573, for
the quarter ended March 31, which consisted of $175,550 in additional expense to
restate the current and deferred tax liabilities related to the Company’s trust
preferred securities partially offset by a reduction of $40,472 for the tax
benefits attributable to the increased expense level resulting from the
restatement adjustments.
The
following table presents the effects of adjustments made to the Company’s
previously reported interim balance sheets for 2006:
1st
CONSTITUTION BANCORP
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
March
31, 2006
|
|
|
March
31, 2006
|
|
|
June
30, 2006
|
|
|
June
30, 2006
|
|
|
Sept.
30, 2006
|
|
|
Sept.
30, 2006
|
|
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
CASH
AND DUE FROM BANKS
|
|
$ |
10,743,710 |
|
|
$ |
10,743,710 |
|
|
$ |
7,997,038 |
|
|
$ |
7,997,038 |
|
|
$ |
10,572,978 |
|
|
$ |
10,572,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL
FUNDS SOLD/SHORT TERM INVESTMENTS
|
|
|
12,539 |
|
|
|
12,539 |
|
|
|
1,020,804 |
|
|
|
1,020,804 |
|
|
|
18,477 |
|
|
|
18,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
|
10,756,249 |
|
|
|
10,756,249 |
|
|
|
9,017,842 |
|
|
|
9,017,842 |
|
|
|
10,591,455 |
|
|
|
10,591,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
64,184,157 |
|
|
|
64,184,157 |
|
|
|
64,660,336 |
|
|
|
64,660,336 |
|
|
|
71,726,638 |
|
|
|
71,726,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
17,496,090 |
|
|
|
17,496,090 |
|
|
|
17,436,619 |
|
|
|
17,436,619 |
|
|
|
17,377,868 |
|
|
|
17,377,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Securities
|
|
|
81,680,247 |
|
|
|
81,680,247 |
|
|
|
82,096,955 |
|
|
|
82,096,955 |
|
|
|
89,104,506 |
|
|
|
89,104,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
HELD FOR SALE
|
|
|
10,973,442 |
|
|
|
10,973,442 |
|
|
|
12,950,636 |
|
|
|
12,950,636 |
|
|
|
13,133,085 |
|
|
|
13,133,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
|
|
|
|
252,810,235 |
|
|
|
252,810,235 |
|
|
|
264,520,397 |
|
|
|
264,520,397 |
|
|
|
265,347,774 |
|
|
|
265,347,774 |
|
Less-
Allowance for loan losses
|
|
|
(2,533,891 |
) |
|
|
(2,533,891 |
) |
|
|
(2,692,737 |
) |
|
|
(2,692,737 |
) |
|
|
(2,792,889 |
) |
|
|
(2,792,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
|
250,276,344 |
|
|
|
250,276,344 |
|
|
|
261,827,660 |
|
|
|
261,827,660 |
|
|
|
262,554,885 |
|
|
|
262,554,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMISES
AND EQUIPMENT, net
|
|
|
2,732,548 |
|
|
|
2,732,548 |
|
|
|
2,687,439 |
|
|
|
2,687,439 |
|
|
|
2,892,925 |
|
|
|
2,892,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRUED
INTEREST RECEIVABLE
|
|
|
1,940,971 |
|
|
|
1,940,971 |
|
|
|
1,992,167 |
|
|
|
1,992,167 |
|
|
|
2,290,812 |
|
|
|
2,290,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BANK-OWNED
LIFE INSURANCE
|
|
|
8,909,532 |
|
|
|
8,914,875 |
|
|
|
8,992,466 |
|
|
|
8,997,809 |
|
|
|
9,100,604 |
|
|
|
9,105,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS (1)
|
|
|
1,798,597 |
|
|
|
1,865,124 |
|
|
|
2,060,566 |
|
|
|
2,188,014 |
|
|
|
1,481,338 |
|
|
|
1,669,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
369,067,930 |
|
|
$ |
369,139,800 |
|
|
$ |
381,625,731 |
|
|
$ |
381,758,522 |
|
|
$ |
391,149,610 |
|
|
$ |
391,343,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
56,762,450 |
|
|
$ |
56,762,450 |
|
|
$ |
64,384,645 |
|
|
$ |
64,384,645 |
|
|
$ |
63,463,233 |
|
|
$ |
63,463,233 |
|
Interest
bearing
|
|
|
227,680,077 |
|
|
|
227,680,077 |
|
|
|
229,540,724 |
|
|
|
229,540,724 |
|
|
|
238,668,737 |
|
|
|
238,668,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
|
284,442,527 |
|
|
|
284,442,527 |
|
|
|
293,925,369 |
|
|
|
293,925,369 |
|
|
|
302,131,970 |
|
|
|
302,131,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
BORROWINGS
|
|
|
44,200,000 |
|
|
|
44,200,000 |
|
|
|
28,400,000 |
|
|
|
28,400,000 |
|
|
|
27,300,000 |
|
|
|
27,300,000 |
|
REDEEMABLE
SUBORDINATED DEBENTURES
|
|
|
5,155,000 |
|
|
|
5,155,000 |
|
|
|
23,712,000 |
|
|
|
23,712,000 |
|
|
|
23,712,000 |
|
|
|
23,712,000 |
|
ACCRUED
INTEREST PAYABLE
|
|
|
1,321,327 |
|
|
|
1,321,327 |
|
|
|
1,628,711 |
|
|
|
1,628,711 |
|
|
|
1,786,003 |
|
|
|
1,786,003 |
|
ACCRUED
EXPENSES AND OTHER LIABILITIES (2)
|
|
|
3,122,662 |
|
|
|
2,929,452 |
|
|
|
2,251,791 |
|
|
|
2,227,592 |
|
|
|
2,052,025 |
|
|
|
2,196,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
338,241,516 |
|
|
|
338,048,306 |
|
|
|
349,917,871 |
|
|
|
349,893,672 |
|
|
|
356,981,998 |
|
|
|
357,126,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
25,503,370 |
|
|
|
25,503,370 |
|
|
|
25,526,412 |
|
|
|
25,526,412 |
|
|
|
24,847,392 |
|
|
|
24,847,392 |
|
Retained
earnings
|
|
|
7,236,561 |
|
|
|
7,495,383 |
|
|
|
8,593,824 |
|
|
|
8,738,298 |
|
|
|
9,972,943 |
|
|
|
10,003,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock, at cost
|
|
|
(885,834 |
) |
|
|
(885,834 |
) |
|
|
(890,522 |
) |
|
|
(890,522 |
) |
|
|
(6,698 |
) |
|
|
(6,698 |
) |
Accumulated
other comprehensive (loss)
|
|
|
(1,027,683 |
) |
|
|
(1,021,425 |
) |
|
|
(1,521,854 |
) |
|
|
(1,509,338 |
) |
|
|
(646,025 |
) |
|
|
(627,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
30,826,414 |
|
|
|
31,091,494 |
|
|
|
31,707,860 |
|
|
|
31,864,850 |
|
|
|
34,167,612 |
|
|
|
34,216,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
369,067,930 |
|
|
$ |
369,139,800 |
|
|
$ |
381,625,731 |
|
|
$ |
381,758,522 |
|
|
$ |
391,149,610 |
|
|
$ |
391,343,322 |
|
The quarterly consolidated balance
sheets for 2006 presented above reflect balances in the lines (1) Other Assets,
(2) Accrued Expenses and Other Liabilities; (3) Retained Earnings and (4)
Accumulated Other Comprehensive (Loss). These restated balances
represent the impact of the 2006 restatement adjustments as discussed
above.
The
following table presents the effects of adjustments made to the Company’s
previously reported consolidated statements of income for interim periods in
2007:
1st
Constitution Bancorp
|
|
Consolidated
Statements Of Income
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Three
Months Ended March 31,
|
|
|
Three
Months Ended June 30,
|
|
|
Three
Months Ended Sept. 30,
|
|
|
December
31
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
6,167,725 |
|
|
$ |
6,167,725 |
|
|
$ |
6,092,841 |
|
|
$ |
6,092,841 |
|
|
$ |
6,493,304 |
|
|
$ |
6,493,304 |
|
|
|
6,359,618 |
|
Interest
on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
992,327 |
|
|
|
992,327 |
|
|
|
1,083,967 |
|
|
|
1,083,967 |
|
|
|
1,098,844 |
|
|
|
1,098,844 |
|
|
|
1,103,150 |
|
Tax
Exempt
|
|
|
206,568 |
|
|
|
206,568 |
|
|
|
225,791 |
|
|
|
225,791 |
|
|
|
225,503 |
|
|
|
225,503 |
|
|
|
217,835 |
|
Interest
on Federal funds sold and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
short-term
investments
|
|
|
22,544 |
|
|
|
22,544 |
|
|
|
42,879 |
|
|
|
42,879 |
|
|
|
8,087 |
|
|
|
8,087 |
|
|
|
27,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
7,389,164 |
|
|
|
7,389,164 |
|
|
|
7,445,478 |
|
|
|
7,445,478 |
|
|
|
7,825,738 |
|
|
|
7,825,738 |
|
|
|
7,708,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
2,216,085 |
|
|
|
2,216,085 |
|
|
|
2,435,381 |
|
|
|
2,435,381 |
|
|
|
2,486,055 |
|
|
|
2,486,055 |
|
|
|
2,499,335 |
|
Interest
on securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
And
other borrowed funds
|
|
|
286,339 |
|
|
|
286,339 |
|
|
|
346,073 |
|
|
|
346,073 |
|
|
|
498,681 |
|
|
|
498,681 |
|
|
|
383,814 |
|
Interest
on redeemable subordinated debentures
|
|
|
429,067 |
|
|
|
429,067 |
|
|
|
349,507 |
|
|
|
349,507 |
|
|
|
322,460 |
|
|
|
322,460 |
|
|
|
337,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
2,931,491 |
|
|
|
2,931,491 |
|
|
|
3,130,961 |
|
|
|
3,130,961 |
|
|
|
3,307,196 |
|
|
|
3,307,196 |
|
|
|
3,220,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
4,457,673 |
|
|
|
4,457,673 |
|
|
|
4,314,517 |
|
|
|
4,314,517 |
|
|
|
4,518,542 |
|
|
|
4,518,542 |
|
|
|
4,487,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
loan losses
|
|
|
4,417,673 |
|
|
|
4,417,673 |
|
|
|
4,284,517 |
|
|
|
4,284,517 |
|
|
|
4,488,542 |
|
|
|
4,488,542 |
|
|
|
4,457,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
149,855 |
|
|
|
149,855 |
|
|
|
175,181 |
|
|
|
175,181 |
|
|
|
168,578 |
|
|
|
168,578 |
|
|
|
180,212 |
|
Gain
on sale of loans held for sale
|
|
|
231,777 |
|
|
|
231,777 |
|
|
|
188,741 |
|
|
|
188,741 |
|
|
|
183,750 |
|
|
|
183,750 |
|
|
|
156,736 |
|
Income
on Bank-owned life insurance
|
|
|
90,348 |
|
|
|
90,348 |
|
|
|
88,233 |
|
|
|
88,233 |
|
|
|
95,446 |
|
|
|
95,446 |
|
|
|
(8,426 |
) |
Other
income
|
|
|
171,761 |
|
|
|
171,761 |
|
|
|
196,268 |
|
|
|
196,268 |
|
|
|
197,932 |
|
|
|
197,932 |
|
|
|
291,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
|
643,741 |
|
|
|
643,741 |
|
|
|
648,423 |
|
|
|
648,423 |
|
|
|
645,706 |
|
|
|
645,706 |
|
|
|
620,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits (1)
|
|
|
1,812,799 |
|
|
|
1,863,252 |
|
|
|
1,637,213 |
|
|
|
1,687,666 |
|
|
|
1,760,120 |
|
|
|
1,810,573 |
|
|
|
1,835,061 |
|
Occupancy
expense (2)
|
|
|
525,195 |
|
|
|
527,753 |
|
|
|
535,655 |
|
|
|
538,213 |
|
|
|
429,330 |
|
|
|
431,888 |
|
|
|
160,956 |
|
Other
operating expenses
|
|
|
683,219 |
|
|
|
683,219 |
|
|
|
649,458 |
|
|
|
649,458 |
|
|
|
768,910 |
|
|
|
768,910 |
|
|
|
1,144,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
3,021,213 |
|
|
|
3,074,224 |
|
|
|
2,822,326 |
|
|
|
2,875,337 |
|
|
|
2,958,360 |
|
|
|
3,011,371 |
|
|
|
3,140,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,040,201 |
|
|
|
1,987,190 |
|
|
|
2,110,614 |
|
|
|
2,057,603 |
|
|
|
2,175,888 |
|
|
|
2,122,877 |
|
|
|
1,937,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES (3)
|
|
|
634,701 |
|
|
|
661,296 |
|
|
|
612,909 |
|
|
|
639,504 |
|
|
|
660,552 |
|
|
|
687,147 |
|
|
|
674,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
1,405,500 |
|
|
$ |
1,325,894 |
|
|
$ |
1,497,705 |
|
|
$ |
1,418,099 |
|
|
$ |
1,515,336 |
|
|
$ |
1,435,730 |
|
|
|
1,263,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.36 |
|
|
$ |
0.33 |
|
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.32 |
|
Diluted
|
|
$ |
0.35 |
|
|
$ |
0.33 |
|
|
$ |
0.37 |
|
|
$ |
0.35 |
|
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.31 |
|
The adjusted balances are primarily the
result of the Company restatement of (1) salaries and employee benefits expense
of $50,453 in the quarters ended March 31, June 30 and September 30 to correct
the liability related to future benefits to plan participants in the Company’s
Supplemental Executive Retirement Plan; (2) Occupancy expense of $2,558 in the
quarter ended March 31, June 30 and September 30, 2007 to record additional rent
expense under the straight-line method in accordance with Statement of Financial
Accounting Standards number 13, “Accounting for Leases” and (3) Income Tax
expense was restated by a net amount of $26,595 in the quarters ended March 31,
June 30 and September 30 which consisted of $47,799 additional expense to
correct the current and deferred tax liabilities related to the Company’s trust
preferred securities partially offset by a reduction of $21,204 for the tax
benefits attributable to the increased expense level resulting from the
restatement adjustment.
The
following table presents the effects of adjustments made to the Company’s
previously reported interim balance sheets for 2007:
1st
CONSTITUTION BANCORP
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
March
31, 2007
|
|
|
March
31, 2007
|
|
|
June
30, 2007
|
|
|
June
30, 2007
|
|
|
Sept.
30, 2007
|
|
|
Sept.
30, 2007
|
|
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
|
(as
filed)
|
|
|
(restated)
|
|
CASH
AND DUE FROM BANKS
|
|
$ |
9,212,906 |
|
|
$ |
9,212,906 |
|
|
$ |
9,559,584 |
|
|
$ |
9,559,584 |
|
|
$ |
8,743,801 |
|
|
$ |
8,743,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL
FUNDS SOLD/SHORT TERM INVESTMENTS
|
|
|
10,928,022 |
|
|
|
10,928,022 |
|
|
|
20,901 |
|
|
|
20,901 |
|
|
|
818,988 |
|
|
|
818,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
|
20,140,928 |
|
|
|
20,140,928 |
|
|
|
9,580,485 |
|
|
|
9,580,485 |
|
|
|
9,562,789 |
|
|
|
9,562,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
79,765,545 |
|
|
|
79,765,545 |
|
|
|
82,047,134 |
|
|
|
82,047,134 |
|
|
|
79,815,933 |
|
|
|
79,815,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
26,577,983 |
|
|
|
26,577,983 |
|
|
|
26,528,257 |
|
|
|
26,528,257 |
|
|
|
26,111,786 |
|
|
|
26,111,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Securities
|
|
|
106,343,528 |
|
|
|
106,343,528 |
|
|
|
108,575,391 |
|
|
|
108,575,391 |
|
|
|
105,927,719 |
|
|
|
105,927,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
HELD FOR SALE
|
|
|
10,664,170 |
|
|
|
10,664,170 |
|
|
|
8,937,522 |
|
|
|
8,937,522 |
|
|
|
12,701,546 |
|
|
|
12,701,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
|
|
|
|
270,021,017 |
|
|
|
270,021,017 |
|
|
|
285,576,595 |
|
|
|
285,576,595 |
|
|
|
287,132,871 |
|
|
|
287,132,871 |
|
Less-
Allowance for loan losses
|
|
|
(3,348,063 |
) |
|
|
(3,348,063 |
) |
|
|
(3,310,080 |
) |
|
|
(3,310,080 |
) |
|
|
(3,318,080 |
) |
|
|
(3,318,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
|
266,672,954 |
|
|
|
266,672,954 |
|
|
|
282,266,515 |
|
|
|
282,266,515 |
|
|
|
283,814,791 |
|
|
|
283,814,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMISES
AND EQUIPMENT, net
|
|
|
3,039,206 |
|
|
|
3,039,206 |
|
|
|
2,916,754 |
|
|
|
2,916,754 |
|
|
|
2,912,316 |
|
|
|
2,912,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRUED
INTEREST RECEIVABLE
|
|
|
2,396,829 |
|
|
|
2,396,829 |
|
|
|
2,582,561 |
|
|
|
2,582,561 |
|
|
|
2,649,942 |
|
|
|
2,649,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BANK-OWNED
LIFE INSURANCE
|
|
|
9,269,756 |
|
|
|
9,269,756 |
|
|
|
9,357,989 |
|
|
|
9,357,989 |
|
|
|
9,453,435 |
|
|
|
9,453,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS (1)
|
|
|
2,992,749 |
|
|
|
3,333,272 |
|
|
|
3,982,204 |
|
|
|
4,152,932 |
|
|
|
3,119,576 |
|
|
|
3,120,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
421,520,120 |
|
|
$ |
421,860,643 |
|
|
$ |
428,199,422 |
|
|
$ |
428,370,150 |
|
|
$ |
430,142,114 |
|
|
$ |
430,143,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
60,435,356 |
|
|
$ |
60,435,356 |
|
|
$ |
59,254,332 |
|
|
$ |
59,254,332 |
|
|
$ |
57,674,845 |
|
|
$ |
57,674,845 |
|
Interest
bearing
|
|
|
280,346,289 |
|
|
|
280,346,289 |
|
|
|
266,696,151 |
|
|
|
266,696,151 |
|
|
|
275,270,212 |
|
|
|
275,270,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
|
340,781,645 |
|
|
|
340,781,645 |
|
|
|
325,950,483 |
|
|
|
325,950,483 |
|
|
|
332,945,057 |
|
|
|
332,945,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
BORROWINGS
|
|
|
15,500,000 |
|
|
|
15,500,000 |
|
|
|
43,000,000 |
|
|
|
43,000,000 |
|
|
|
33,300,000 |
|
|
|
33,300,000 |
|
REDEEMABLE
SUBORDINATED DEBENTURES
|
|
|
23,712,000 |
|
|
|
23,712,000 |
|
|
|
18,557,000 |
|
|
|
18,557,000 |
|
|
|
18,557,000 |
|
|
|
18,557,000 |
|
ACCRUED
INTEREST PAYABLE
|
|
|
2,005,887 |
|
|
|
2,005,887 |
|
|
|
1,869,468 |
|
|
|
1,869,468 |
|
|
|
2,135,717 |
|
|
|
2,135,717 |
|
ACCRUED
EXPENSES AND OTHER LIABILITIES (2)
|
|
|
2,687,296 |
|
|
|
3,188,867 |
|
|
|
1,430,128 |
|
|
|
1,930,587 |
|
|
|
3,483,730 |
|
|
|
3,983,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
384,686,828 |
|
|
|
385,188,399 |
|
|
|
390,807,079 |
|
|
|
391,307,538 |
|
|
|
390,421,504 |
|
|
|
390,920,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
28,918,957 |
|
|
|
28,918,957 |
|
|
|
28,935,469 |
|
|
|
28,935,469 |
|
|
|
28,968,434 |
|
|
|
28,968,434 |
|
Retained
earnings (3)
|
|
|
8,696,416 |
|
|
|
8,336,105 |
|
|
|
10,194,120 |
|
|
|
9,754,203 |
|
|
|
11,709,456 |
|
|
|
11,189,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock, at cost
|
|
|
(3,545 |
) |
|
|
(3,545 |
) |
|
|
(186,969 |
) |
|
|
(186,969 |
) |
|
|
(12,108 |
) |
|
|
(12,108 |
) |
Accumulated
other comprehensive (loss) (4)
|
|
|
(778,536 |
) |
|
|
(579,273 |
) |
|
|
(1,550,277 |
) |
|
|
(1,440,091 |
) |
|
|
(945,172 |
) |
|
|
(924,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
36,833,292 |
|
|
|
36,672,244 |
|
|
|
37,392,343 |
|
|
|
37,062,612 |
|
|
|
39,720,610 |
|
|
|
39,222,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
421,520,120 |
|
|
$ |
421,860,643 |
|
|
$ |
428,199,422 |
|
|
$ |
428,370,150 |
|
|
$ |
430,142,114 |
|
|
$ |
430,143,047 |
|
The quarterly consolidated balance
sheets for 2007 presented above reflect restated balances in the lines (1) Other
Assets, (2) Accrued Expenses and Other Liabilities, (3) Retained Earnings and
(4) Accumulated Other Comprehensive (Loss). These restated balances
represent the combined impact of 2006 and 2007 restatement adjustments as
discussed above.
25. 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. 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, 2007 the Company’s position
in derivative contracts consisted entirely of this interest rate
swap. The Company had no derivative contracts outstanding at December
31, 2006.
Maturity
|
Hedged
Liability
|
Notional
Amounts
|
Swap
Fixed
Interest
Rates
|
Swap
Variable
Interest
Rates
|
|
|
|
|
|
|
Trust
Preferred Securities
|
$18,000,000
|
5.87%
|
3
month LIBOR plus
165
basis points
|
During 2006, the Company issues 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 in 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 result was a better
match between the repricing characteristics of the quarterly interest payments
with floating rate commercial loans the Company made in 2007. The
fair value of the pay fixed swap outstanding at December 31, 2007 was ($99,754)
and was recorded in other assets in the consolidated statements of
condition. The Company had no derivative contracts outstanding at
December 31, 2006.
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
|
|
|
|
|
|
|
|
|
|
|
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
|
|
April
15, 2008
|
/s/ CHARLES S. CROW, III
|
|
(Principal
Executive Officer)
Chairman
of the Board
|
|
April
15, 2008
|
/s/ DAVID C. REED
|
|
Director
|
|
April
15, 2008
|
/s/ WILLIAM M. RUE
|
|
Director
|
|
April
15, 2008
|
/s/ FRANK E. WALSH, III
|
|
Director
|
|
April
15, 2008
|
/s/ JOSEPH M. REARDON
|
|
Senior
Vice President and Treasurer
|
|
April
15, 2008
|
Joseph
M. Reardon
|
|
(Principal
Accounting and Financial Officer)
|
|
|
1st
CONSTITUTION BANCORP
INDEX TO
EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
|
3
|
(i)
|
|
Certificate
of Incorporation of the Company (incorporated by reference to Exhibit 3(i)
to the Company’s Form 10-K filed with the SEC on March 24,
2005).
|
|
|
|
|
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 the Company’s Form
10-KSB 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 the Company’s
Form 10-QSB 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 the
Company’s Form 10-QSB 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 the Company’s Form 10-QSB 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, including the form of
Certificate of Amendment to the Company’s Certificate of Incorporation as
Exhibit A thereto, the form of Rights Certificates as Exhibit B thereto,
and the Summary of Rights as Exhibit C thereto. Pursuant to the Rights
Agreement, printed Rights Certificates will not be mailed until after the
Distribution Date (as such term is defined in the Rights Agreement)
(incorporated by reference to the Company’s Form 8-A12G filed with the SEC
on March 18, 2004)
|
|
|
|
|
10.1
|
|
#
|
1st
Constitution Bancorp Supplemental Executive Retirement Plan, dated as of
October 1, 2002 (Incorporated by reference to the Company’s Form 10-QSB
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 the Company’s Form 10-QSB filed with the SEC
on November 13, 2002)
|
|
|
|
|
10.4
|
|
#
|
Amended
and Restated 1990 Stock Option Plan for Key Employees, as amended
(incorporated by reference to Exhibit No. 10.1 to the Company’s Form
10-QSB filed with the SEC on August 9,
2002)
|
Exhibit
No.
|
Description
|
|
|
|
|
10.5
|
|
#
|
1996
Employee Stock Option Plan, as amended (incorporated by reference to
Exhibit No. 10.2 to the Company’s Form 10-QSB filed with the SEC on August
9, 2002)
|
|
|
|
|
10.6
|
|
#
|
2000
Employee Stock Option and Restricted Stock Plan (incorporated by reference
to Exhibit No. 6.3 to the Company’s Form 10-SB filed with the SEC on June
15, 2001)
|
|
|
|
|
10.7
|
|
#
|
Directors
Stock Option and Restricted Stock Plan (incorporated by reference to
Exhibit No. 6.4 to the Company’s Form 10-SB filed with the SEC on June 15,
2001)
|
|
|
|
|
10.8
|
|
#
|
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
filed with the SEC on June 15, 2001)
|
|
|
|
|
10.9
|
|
#
|
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 filed with the SEC on August 11,
2004)
|
|
|
|
|
10.10
|
|
#
|
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 filed with the SEC on August 11,
2004)
|
|
|
|
|
10.11
|
|
#
|
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
filed with the SEC on December 22, 2004)
|
|
|
|
|
10.12
|
|
#
|
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
filed with the SEC on December 22, 2004)
|
|
|
|
|
10.13
|
|
#
|
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 filed with the SEC on February 24, 2005)
|
|
|
|
|
10.14
|
|
#
|
The
1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by
reference to Appendix A of the Company's proxy statement filed on April
15, 2005)
|
|
|
|
|
10.15
|
|
#
|
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)
|
|
|
|
|
10.16
|
|
#
|
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)
|
|
|
|
|
10.17
|
|
#
|
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)
|
|
|
|
|
10.18
|
|
#
|
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)
|
Exhibit
No.
|
Description
|
|
|
|
|
10.19
|
|
#
|
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)
|
|
|
|
|
10.20
|
|
#
|
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)
|
|
|
|
|
10.21
|
|
|
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)
|
|
|
|
|
10.22
|
|
|
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)
|
|
|
|
|
10.23
|
|
|
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)
|
|
|
|
|
10.24
|
|
*#
|
Amendment
No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
Plan, effective as of December 31, 2004
|
|
|
|
|
10.25
|
|
#
|
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)
|
|
|
|
|
10.26
|
|
|
Branch
Purchase and Assumption Agreement, dated as of November 6, 2006, by and
between 1st Constitution Bank and Sun National Bank (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on
November 13, 2006)
|
|
|
|
|
14
|
|
|
Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
the Company’s Form 10-K filed with the SEC on March 25,
2004)
|
|
|
|
|
21
|
|
*
|
Subsidiaries
of the Company
|
|
|
|
|
23.1
|
|
*
|
Consent
of Independent Registered Public Accounting Firm – Grant Thornton
LLP
|
|
|
|
|
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
|
|
|
|
|
|
* |
Filed
herewith. |
|
#
|
Management
contract or compensatory plan or
arrangement.
|