Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward
looking statements. When used in this and in future filings by the Company with the SEC, in the Company’s press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,”
“project” or “outlook” or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently anticipated or projected.
Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report
on Form 10-K filed with the SEC on March 27, 2009, such as 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; certain interest rate risks; risks associated with investments in mortgage-backed securities; and risks associated with speculative construction lending. 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 could have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.
Recent Developments
There have been historical disruptions in the financial system during the past year and many lenders and financial institutions have reduced, modified or ceased to provide certain types of funding to borrowers, including other lending institutions. The availability of credit and confidence in the entire financial sector have
been adversely affected and there has been increased volatility in financial markets. These disruptions have had and are likely to continue to have a material impact on institutions in the U.S. banking and financial industries. The Federal Reserve System has been providing vast amounts of liquidity into the banking systems to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could
reduce liquidity in the markets, thereby potentially increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008
Summary
The Company realized net income of $534,610 for the three months ended June 30, 2009, a decrease of 25.5% from the $717,846 reported for the three months ended June 30, 2008. The decrease is due primarily to increases in non-interest expenses relating to other operating expenses (primarily professional fees and expenses related
to operating the Bank’s other real estate owned properties), FDIC insurance premiums and salaries and employee benefits and to an increase in the loan loss provision for the three months ended June 30, 2009, which resulted from a higher level of non-performing assets during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Net income for the three months ended June 30, 2009 benefited from an income tax benefit realized in the quarter and increases in total
interest income and non-interest income when compared to the three months ended June 30, 2008. Diluted net income per common share was $0.08 for the three months ended June 30, 2009 compared to $0.17 per diluted common share for the three months ended June 30, 2008. The reduction in net income per diluted common share for the three months ended June 30, 2009 was also impacted by the dividends on, and accretion on, preferred stock of the Company issued to the Treasury on December 23, 2008. All
prior year per common share information has been adjusted for the effect of a 5% stock dividend declared on December 18, 2008 and paid on February 2, 2009 to shareholders of record on January 20, 2009.
Key performance ratios declined for the three months ended June 30, 2009 due to lower net income for that period compared to the three months ended June 30, 2008. Return on average assets and return on average equity were 0.35% and 3.81% for the three months ended June 30, 2009 compared to 0.59% and 6.90%, respectively, for the
three months ended June 30, 2008.
A significant factor impacting the Company’s net interest income has been the continued low level of market interest rates on loans and the resulting compression of the Company’s net interest margin. The net interest margin for the three months ended June 30, 2009 was 3.40% as compared to the 3.60% net interest margin
recorded for the three months ended June 30, 2008, a reduction of 20 basis points. The Federal Reserve has decreased the discount rate by 400 basis points since January 1, 2008, which has resulted in lower market interest rates on loans. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.
The Company has a significant investment in federal agency-backed collateralized mortgage obligations and trust preferred securities. The Company does not have any investments in private issuer collateralized mortgage obligations. At June 30, 2009, the Company held collateralized mortgage obligations with an aggregate
market value of $5,957,124 in the available for sale portfolio. These securities had an unrealized loss of $172,105. The Company held trust preferred securities in the available for sale portfolio with an aggregate market value of $1,381,387 and an unrealized loss of $1,074,655 at June 30, 2009. The Company also held trust preferred securities in the held to maturity portfolio with a cost of $992,904 and an unrealized loss of $809,442 at June 30, 2009. Several financial
institutions have reported significant write-downs of the value of mortgage-related and trust preferred securities. Management has considered the severity and duration of the unrealized losses within the Company’s collateralized mortgage obligations and trust preferred securities portfolios, and evaluated recent events specific to the issuers of these securities and their industries, as well as external credit ratings and downgrades thereto. Based on these considerations and evaluations, management
does not believe that any of the Company’s collateralized mortgage obligations or trust preferred securities are other-than-temporarily impaired as of June 30, 2009. 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 other-than-temporarily impairment in the Company’s portfolio of these securities, market, entity or industry conditions could further deteriorate
and result in the recognition of future impairment losses related to these securities.
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 82.6% of the Company’s net revenues for the three-month period ended
June 30, 2009 and 83.3% of net revenues for the three-month period ended June 30, 2008. 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 Company’s net interest income increased by $508,427, or 12.7%, to $4,519,200 for the three months ended June 30, 2009 from the $4,010,773 reported for the three months ended June 30, 2008. The increase in net interest income was attributable to increased volume, which was more than sufficient to offset the reduced interest spread
and margin.
Average interest earning assets increased by $85,338,512, or 18.7%, to $540,887,770 for the quarter ended June 30, 2009 from $455,549,258 for the quarter ended June 30, 2008. Overall, the yield on interest earning assets on a tax-equivalent basis, decreased 74 basis points to 5.67% for the quarter ended June 30, 2009 when compared
to 6.41% for the quarter ended June 30, 2008.
Average interest bearing liabilities increased by $98,030,859, or 27.0%, to $460,492,354 for the quarter ended June 30, 2009 from $362,461,495 for the quarter ended June 30, 2008. Overall, the cost of total interest bearing liabilities decreased 85 basis points to 2.68% for the three months ended June 30, 2009 compared to 3.53%
for the three months ended June 30, 2008.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.40% for the three months ended June 30, 2009 compared to 3.60% the three months ended June 30, 2008.
Non-Interest Income
Total non-interest income for the three months ended June 30, 2009 was $952,924, an increase of $148,020, or 18.4%, over non-interest income of $804,904 for the three months ended June 30, 2008.
Service charges on deposit accounts represents a significant source of non-interest income. Service charge revenues increased by $18,679, or 9.5%, to $216,235 for the three months ended June 30, 2009 from the $197,556 for the three months ended June 30, 2008. This increase was the result of a higher volume of uncollected funds and overdraft
fees collected on deposit accounts during the second quarter of 2009 compared to the second quarter of 2008.
Gain on sales of loans increased by $55,434, or 19.4%, to $340,993 for the three months ended June 30, 2009 when compared to $285,559 for the three months ended June 30, 2008. The Bank sells both residential mortgage loans and SBA loans in the secondary market. The volume of mortgage loan sales increased for the second
quarter of 2009 compared to the second quarter of 2008, and the margin earned as a result of these sales in the second quarter of 2009 decreased from that of the second quarter of 2008 due to the lower level of interest rates in the first quarter of 2009. The lower interest rate environment that continued throughout 2008 and into the second quarter of 2009 has significantly decreased the volume of sales transactions in the 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 $102,305 for the three months ended June 30, 2009 compared to $92,818 for the three months ended June 30, 2008. 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 $293,391
for the three months ended June 30, 2009, compared to $228,971 for the three months ended June 30, 2008.
Non-Interest Expense
Non-interest expenses increased by $1,184,547, or 32.7%, to $4,801,689 for the three months ended June 30, 2009 from $3,617,142 for the three months ended June 30, 2008. The following table presents the major components of non-interest expenses for the three months ended June 30, 2009 and 2008.
|
Non-interest Expenses |
|
|
|
|
|
|
| |
|
Three months ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
Salaries and employee benefits |
|
$ |
2,294,066 |
|
|
$ |
2,073,066 |
|
|
Occupancy expenses |
|
|
443,007 |
|
|
|
432,423 |
|
|
Equipment expense |
|
|
167,358 |
|
|
|
153,583 |
|
|
Marketing |
|
|
42,773 |
|
|
|
73,206 |
|
|
Data processing services |
|
|
276,197 |
|
|
|
217,811 |
|
|
Regulatory, professional and other fees |
|
|
358,547 |
|
|
|
273,191 |
|
|
FDIC insurance expense |
|
|
704,025 |
|
|
|
46,635 |
|
|
Office expense |
|
|
142,999 |
|
|
|
144,526 |
|
|
All other expenses |
|
|
372,717 |
|
|
|
202,701 |
|
| |
|
$ |
4,801,689 |
|
|
$ |
3,617,142 |
|
| |
|
|
|
|
|
|
|
|
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $221,000, or 10.7%, to $2,294,066 for the three months ended June 30, 2009 compared to $2,073,066 for the three months ended June 30, 2008. The increase in salaries and employee benefits for the three months ended June 30, 2009 was
a result of an increase in the number of employees, regular merit increases and increased health care costs. Staffing levels overall increased to 119 full-time equivalent employees at June 30, 2009 as compared to 108 full-time equivalent employees at June 30, 2008.
Regulatory, professional and other fees increased by $85,356, or 31.2%, to $358,547 for the three months ended June 30, 2009 compared to $273,191 for the three months ended June 30, 2008. During the second quarter of 2009, the Company incurred additional legal fees primarily in connection with the recovery of non-performing asset
balances. The Bank also incurred additional fees in connection with examinations performed by independent consultants during the second quarter of 2009 to assess the effectiveness of internal controls as required by the Sarbanes-Oxley Act.
The cost of FDIC deposit insurance has increased from $46,635 for the three months ended June 30, 2008 to $704,025 for the three months ended June 30, 2009. The FDIC has recently increased significantly the assessment rate for deposit insurance industry-wide. In addition, during the second quarter of 2009, the FDIC
announced that a special assessment to replenish the deposit insurance fund will be collected on September 30, 2009. The special assessment will be imposed on each insured institution’s total assets minus its Tier 1 Capital as reported in its June 30, 2009 Report of Condition. The special assessment is capped at 10 basis points times the institution’s assessment base as reported on June 30, 2009. Under U.S. generally accepted accounting principals, the full amount
of the estimated special assessment was accrued as a liability and an expense in the quarter ended June 30, 2009. The Bank estimated and accrued the special assessment at June 30, 2009.
Data processing services increased by $58,386, or 26.8%, to $276,197 for the three months ended June 30, 2009 compared to $217,811 for the three months ended June 30, 2008. The increase in expense was primarily attributable to increased costs in enhancing the Bank’s data security systems.
All other expenses increased by $170,016, or 83.9%, to $372,717 for the three months ended June 30, 2009 compared to $202,701 for the three months ended June 30, 2008. The primary cause for the current year increase was due to the costs incurred to maintain the Bank’s other real estate owned properties. Other
Real Estate owned expenses increased by $13,667 to $55,603 to for the three months ended June 30, 2009 compared to $41,936 for the three months ended June 30, 2008. Additional current year increases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses. All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.
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 Company’s efficiency ratio increased to 87.7% for the three months ended June 30, 2009, compared to 75.1% for the three months ended June 30, 2008. The increase in the efficiency ratio is due to the above-noted increases in non-interest expenses.
Income Taxes
Income tax benefit was $189,175 for the three months ended June 30, 2009 compared to tax expense of $285,689 for the three months ended June 30, 2008. The current period benefit was primarily due to (1) a significantly lower level of pretax income in the second quarter of 2009 compared with the second quarter of 2008 and (2)
the reversal of a prior year over-accrual of income taxes that coincided with the completion of an Internal Revenue Service examination of the Company’s 2007 and 2006 Federal income tax returns.
Pretax income decreased to $345,435 for the three months ended June 30, 2009 from $1,003,535 for the three months ended June 30, 2008. The decrease is due primarily to current period increases in non-interest expenses relating to professional fees, FDIC insurance premiums and to an increase in the loan loss provision for the
three months ended June 30, 2009, which loan loss provision increase resulted from a higher level of non-performing assets at June 30, 2009 compared to June 30, 2008.
During June 2009, the Internal Revenue Service completed an examination of the Company’s 2007 and 2006 Federal tax returns and issued its Revenue Agent Report on June 30, 2009. The Company had deferred the annual process of adjusting the recorded Federal and State liability balances pending the completion of the examination,
which began in September 2008. The examination adjustments were included in this annual process of adjusting recorded liabilities with balances per the tax returns and resulted in over-accrued Federal and State liabilities being reversed via a current period credit to income tax expense.
Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
Summary
The Company realized net income of $1,011,300 for the six months ended June 30, 2009, a decrease of 33.5% from the $1,520,043 reported for the six months ended June 30, 2008. The decrease is due primarily to increases in non-interest expenses relating to other operating expenses (primarily professional fees and expenses related
to operating the Bank’s other real estate owned properties), FDIC insurance premiums and salaries and employee benefits and to an increase in the loan loss provision for the six months ended June 30, 2009, which resulted from a higher level of non-performing assets during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Net income for the six months ended June 30, 2009 benefited from an income tax benefit realized in the six month period ended June 30, 2009 compared
to income tax expense for the six month period ended June 30, 2008 and increases in total interest income and non-interest income when compared to the six months ended June 30, 2008. Diluted net income per common share was $0.15 for the six months ended June 30, 2009 compared to $0.36 per diluted common share for the six months ended June 30, 2008. The reduction in net income per diluted common share for the six months ended June 30, 2009 was also impacted by the dividends on, and accretion
on, preferred stock of the Company issued to the Treasury on December 23, 2008. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 18, 2008 and paid on February 2, 2009 to shareholders of record on January 20, 2009.
Key performance ratios declined for the six months ended June 30, 2009 due to lower net income for that period compared to the six months ended June 30, 2008. Return on average assets and return on average equity were 0.35% and 3.65% for the six months ended June 30, 2009 compared to 0.65% and 7.34%, respectively, for the six
months ended June 30, 2008.
A significant factor impacting the Company’s net interest income has been the continued low level of market interest rates on loans and the resulting compression of the Company’s net interest margin. The net interest margin for the six months ended June 30, 2009 was 3.34% as compared to the 3.74% net interest margin
recorded for the six months ended June 30, 2008, a reduction of 40 basis points. The Federal Reserve has decreased the discount rate by 400 basis points since January 1, 2008, which has resulted in lower market interest rates on loans. Since the majority of the Company’s interest earning assets earn at floating rates, these interest rate reductions have resulted in a decreased yield. The Company will continue to closely monitor the mix of earning assets and funding sources
to maximize net interest income during this challenging interest rate environment.
The Company has a significant investment in federal agency-backed collateralized mortgage obligations and trust preferred securities. The Company does not have any investments in private issuer collateralized mortgage obligations. At June 30, 2009, the Company held collateralized mortgage obligations with an aggregate
market value of $5,957,124 in the available for sale portfolio. These securities had an unrealized loss of $172,105. The Company held trust preferred securities in the available for sale portfolio with an aggregate market value of $1,381,387 and an unrealized loss of $1,074,655 at June 30, 2009. The Company also held trust preferred securities in the held to maturity portfolio with a cost of $992,904 and an unrealized loss of $809,442 at June 30, 2009. Several financial
institutions have reported significant write-downs of the value of mortgage-related and trust preferred securities. Management has considered the severity and duration of the unrealized losses within the Company’s collateralized mortgage obligations and trust preferred securities portfolios, and evaluated recent events specific to the issuers of these securities and their industries, as well as external credit ratings and downgrades thereto. Based on these considerations and evaluations, management
does not believe that any of the Company’s collateralized mortgage obligations or trust preferred securities are other-than-temporarily impaired as of June 30, 2009. 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 other-than-temporarily impairment in the Company’s portfolio of these securities, market, entity or industry conditions could further deteriorate
and result in the recognition of future impairment losses related to these securities.
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 82.9% of the Company’s net revenues for the six month period ended June
30, 2009 and 83.4% of net revenues for the six-month period ended June 30, 2008. 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 yield or rate for the six month periods ended June 30, 2009 and 2008, 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) |
Six months ended June 30, 2009 |
Six months ended June 30, 2008 |
| |
Average
Balance |
Interest |
Average
Rate |
Average
Balance |
Interest |
Average
Rate |
|
Assets: |
|
|
|
|
|
|
|
Federal Funds Sold/Short-Term Investments |
$1,930,829 |
$32,665 |
3.41% |
$3,315,021 |
$45,948 |
2.80% |
|
Investment Securities: |
|
|
|
|
|
|
|
Taxable |
108,255,221 |
2,419,310 |
4.51% |
75,859,885 |
1,891,743 |
5.03% |
|
Tax-exempt |
12,915,459 |
373,725 |
5.84% |
14,905,787 |
421,912 |
5.71% |
|
Total |
121,170,680 |
2,793,035 |
4.65% |
90,765,672 |
2,313,655 |
5.14% |
| |
|
|
|
|
|
|
|
Loan Portfolio: |
|
|
|
|
|
|
|
Construction |
92,634,819 |
2,809,468 |
6.12% |
125,325,518 |
4,465,079 |
7.18% |
|
Residential real estate |
11,231,769 |
333,877 |
5.99% |
10,262,589 |
326,308 |
6.41% |
|
Home Equity |
14,957,939 |
438,081 |
5.91% |
14,846,031 |
483,102 |
6.56% |
|
Commercial and commercial real estate |
136,927,234 |
4,728,139 |
6.96% |
124,908,153 |
4,606,553 |
7.44% |
|
Mortgage warehouse lines |
122,836,692 |
2,792,042 |
4.58% |
42,836,780 |
1,052,384 |
4.95% |
|
Installment |
809,691 |
32,657 |
8.13% |
1,406,142 |
55,781 |
8.00% |
|
All Other Loans |
31,372,046 |
1,166,987 |
7.50% |
25,666,806 |
1,147,211 |
9.01% |
|
Total |
410,770,190 |
12,301,251 |
6.04% |
345,252,019 |
12,136,418 |
7.09% |
| |
|
|
|
|
|
|
|
Total Interest-Earning Assets |
533,871,699 |
15,126,951 |
5.71% |
439,332,712 |
14,496,021 |
6.65% |
| |
|
|
|
|
|
|
|
Allowance for Loan Losses |
(3,948,215) |
|
|
(3,503,487) |
|
|
|
Cash and Due From Bank |
37,090,915 |
|
|
11,230,919 |
|
|
|
Other Assets |
21,097,384 |
|
|
21,353,707 |
|
|
|
Total Assets |
$588,111,783 |
|
|
$468,413,851 |
|
|
|
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
Money Market and NOW Accounts |
$97,677,148 |
$967,521 |
2.00% |
$86,246,257 |
$1,054,068 |
2.46% |
|
Savings Accounts |
123,068,983 |
1,316,408 |
2.16% |
74,058,876 |
957,054 |
2.61% |
|
Certificates of Deposit |
175,994,379 |
2,744,454 |
3.14% |
137,599,681 |
3,021,208 |
4.43% |
|
Other Borrowed Funds |
32,525,967 |
725,197 |
4.50% |
34,161,538 |
778,956 |
4.60% |
|
Trust Preferred Securities |
18,557,000 |
532,975 |
5.79% |
18,557,000 |
533,997 |
5.80% |
|
Total Interest-Bearing Liabilities |
447,823,477 |
6,286,555 |
2.83% |
350,623,352 |
6,345,283 |
3.65% |
| |
|
|
|
|
|
|
|
Net Interest Spread |
|
|
2.88% |
|
|
3.00% |
| |
|
|
|
|
|
|
|
Demand Deposits |
78,934,727 |
|
|
71,276,343 |
|
|
|
Other Liabilities |
5,537,806 |
|
|
4,842,204 |
|
|
|
Total Liabilities |
532,296,010 |
|
|
426,741,899 |
|
|
|
Shareholders’ Equity |
55,815,773 |
|
|
41,671,952 |
|
|
|
Total Liabilities and Shareholders’
Equity |
$588,111,783 |
|
|
$468,413,851 |
|
|
| |
|
|
|
|
|
|
|
Net Interest Margin |
|
$8,840,396 |
3.34% |
|
$8,150,738 |
3.74% |
| |
|
|
|
|
|
|
The Company’s net interest income increased by $705,286, or 8.8%, to $8,719,189 for the six months ended June 30, 2009 from the $8,013,903 reported for the six months ended June 30, 2008. The increase in net interest income was attributable to increased volume, which was more than sufficient to offset the reduced interest spread and
margin.
Average interest earning assets increased by $94,538,987, or 21.5%, to $533,871,699 for the six month period ended June 30, 2009 from $439,332,712 for the six month period ended June 30, 2008. Overall, the yield on interest earning assets, on a tax-equivalent basis, decreased 94 basis points to 5.71% for the six month period
ended June 30, 2009 when compared to 6.65% for the six month period ended June 30, 2008.
Average interest bearing liabilities increased by $97,200,125, or 27.7%, to $447,823,477 for the six month period ended June 30, 2009 from $350,623,352 for the six month period ended June 30, 2008. Overall, the cost of total interest bearing liabilities decreased 82 basis points to 2.83% for the six months ended June 30, 2009
compared to 3.65% for the six months ended June 30, 2008.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.34% for the six months ended June 30, 2009 compared to 3.74% the six months ended June 30, 2008.
Non-Interest Income
Total non-interest income for the six months ended June 30, 2009 was $1,799,976, an increase of $208,695, or 13.1%, over non-interest income of $1,591,281 for the six months ended June 30, 2008.
Service charges on deposit accounts represents a significant source of non-interest income. Service charge revenues increased by $71,310, or 18.6%, to $454,754 for the six months ended June 30, 2009 from the $383,444 for the six months ended June 30, 2008. This increase was the result of a higher volume of uncollected funds and overdraft
fees collected on deposit accounts during the first six months of 2009 compared to the first six months of 2008.
Gain on sales of loans increased by $17,583, or 3.0%, to $613,186 for the six months ended June 30, 2009 when compared to $595,603 for the six months ended June 30, 2008. The Bank sells both residential mortgage loans and SBA loans in the secondary market. The volume of mortgage loan sales increased for the first half
of 2009 compared to the first half of 2008, while the margin earned as a result of these sales in the first half of 2009 has decreased from that of the first half of 2008 due to the lower level of interest rates in the first half of 2009.
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $193,327 for the six months ended June 30, 2009 compared to $184,645 for the six months ended June 30, 2008. 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 $538,709
for the six months ended June 30, 2009, compared to $427,589 for the six months ended June 30, 2008.
Non-Interest Expense
Non-interest expenses increased by $1,790,810, or 25.5%, to $8,822,302 for the six months ended June 30, 2009 from $7,031,492 for the six months ended June 30, 2008. The following table presents the major components of non-interest expenses for the six months ended June 30, 2009 and 2008.
|
Non-interest Expenses |
|
|
|
|
|
|
| |
|
Six months ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
Salaries and employee benefits |
|
$ |
4,521,395 |
|
|
$ |
4,051,127 |
|
|
Occupancy expenses |
|
|
895,672 |
|
|
|
864,438 |
|
|
Equipment expense |
|
|
322,438 |
|
|
|
291,374 |
|
|
Marketing |
|
|
82,214 |
|
|
|
139,535 |
|
|
Data processing services |
|
|
535,880 |
|
|
|
429,592 |
|
|
Regulatory, professional and other fees |
|
|
703,603 |
|
|
|
419,883 |
|
|
FDIC insurance expense |
|
|
803,783 |
|
|
|
71,661 |
|
|
Office expense |
|
|
271,036 |
|
|
|
285,697 |
|
|
All other expenses |
|
|
686,282 |
|
|
|
478,185 |
|
| |
|
$ |
8,822,302 |
|
|
$ |
7,031,492 |
|
| |
|
|
|
|
|
|
|
|
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $470,268, or 11.6%, to $4,521,395 for the six months ended June 30, 2009 compared to $4,051,127 for the six months ended June 30, 2008. The increase in salaries and employee benefits for the six months ended June 30, 2009 was a result
of an increase in the number of employees, regular merit increases and increased health care costs. Staffing levels overall increased to 119 full-time equivalent employees at June 30, 2009 as compared to 108 full-time equivalent employees at June 30, 2008.
Regulatory, professional and other fees increased by $283,720, or 67.6%, to $703,603 for the six months ended June 30, 2009 compared to $419,883 for the six months ended June 30, 2008. During the first six months of 2009, the Company incurred additional legal fees primarily in connection with the recovery of non-performing asset
balances. The Bank also incurred additional fees in connection with examinations performed by independent consultants during the second quarter of 2009 to assess the effectiveness of internal controls as required by the Sarbanes-Oxley Act.
The cost of FDIC deposit insurance has increased to $803,783 for the six months ended June 30, 2009 from $71,661 for the six months ended June 30, 2008. The FDIC has recently increased significantly the assessment rate for deposit insurance industry-wide. In addition, the second quarter of 2009, the FDIC announced
that a special assessment to replenish the deposit insurance fund will be collected on September 30, 2009. The special assessment will be imposed on each insured institution’s total assets minus its Tier 1 Capital as reported in its June 30, 2009 Report of Condition. The special assessment is capped at 10 basis points times the institution’s assessment base as reported on June 30, 2009. Under U.S. generally accepted accounting principals, the full amount of the estimated
special assessment was accrued as a liability and an expense in the quarter ended June 30, 2009.
Data processing services increased by $106,288, or 24.7%, to $535,880 for the six months ended June 30, 2009 compared to $429,592 for the six months ended June 30, 2008. The increase in expense was primarily attributable to increased costs in enhancing the Bank’s data security systems.
All other expenses increased by $208,097, or 43.5%, to $686,282 for the six months ended June 30, 2009 compared to $478,185 for the six months ended June 30, 2008. The primary cause for the current year increase was due to the costs incurred to maintain the Bank’s other real estate owned properties. Other Real
Estate owned expenses increased by $65,619 to $110,971 for the six months ended June 30, 2009 compared to $45,352 for the six months ended June 30, 2008. Additional current year increases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses, All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.
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 Company’s efficiency ratio increased to 83.9% for the six months ended June 30, 2009, compared to 73.2% for the six months ended June 30, 2008. The increase in the efficiency ratio is due to the above-noted increases in non-interest expenses.
Income Taxes
The Company had an income tax benefit of $102,437 for the six months ended June 30, 2009 compared to an income tax expense of $693,649 for the six months ended June 30, 2008. The current period income tax benefit was primarily due to (1) a significantly lower level of pretax income in the first six months of 2009 compared with
the first six months of 2008 and (2) the reversal of an over-accrual of income taxes that coincided with the completion of an Internal Revenue Service examination of the Company’s 2007 and 2006 Federal income tax returns.
Pretax income decreased to $908,863 for the six months ended June 30, 2009 from $2,213,692 for the six months ended June 30, 2008. The decrease is due primarily to current period increases in non-interest expenses relating to professional fees and expenses related to operating the Bank’s other real estate owned properties,
FDIC insurance premiums and to an increase in the loan loss provision for the three months ended June 30, 2009, which resulted from a higher level of non-performing assets at June 30, 2009 compared to June 30, 2008.
During June 2009, the Internal Revenue Service completed an examination of the Company’s 2007 and 2006 Federal tax returns and issued its Revenue Agent Report on June 30, 2009. The Company had deferred the annual process of adjusting the recorded Federal and State liability balances pending the completion of the examination
which began in September 2008. The examination adjustments were included in this annual process of adjusting recorded liabilities with balances per the tax returns and resulted in over-accrued Federal and State liabilities being reversed via a current period credit to income tax expense.
Financial Condition
June 30, 2009 Compared with December 31, 2008
Total consolidated assets at June 30, 2009 were $618,444,733, representing an increase of $72,158,204, or 13.2%, from $546,286,529 at December 31, 2008. The asset growth was focused in cash and cash equivalents, loans held for sale, and in our loan portfolio. The primary funding for asset growth came from deposits.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2009 totaled $48,090,458 compared to $14,333,119 at December 31, 2008. Cash and cash equivalents at June 30, 2009 consisted of cash and due from banks of $48,079,083 and Federal funds sold/short term investments of $11,375. The corresponding
balances at December 31, 2008 were $14,321,777 and $11,342, respectively. The increase was due primarily to timing of cash flows related to the Bank’s business activities. Management has invested this liquidity as market rates have improved subsequent to June 30, 2009. Aggregate investment security purchases of $9,000,000 and $21,500,000 were made in July 2009 and August 2009, respectively.
Loans Held for Sale
Loans held for sale at June 30, 2009 amounted to $24,486,425 compared to $5,702,082 at December 31, 2008. The primary cause for this increase was a significantly higher volume of mortgage loan refinance activity during the first half of 2009 compared with the level of activity during 2008. As indicated in the Consolidated Statement of Cash
Flows, the amount of loans originated for sale was $85,249,642 for the first half of 2009 compared with $43,010,217 for the first six months of 2008. This increased volume has lengthened the operational processing time for the loans as they migrate from origination to ultimate funding by investors.
Investment Securities
Investment securities represented 20.1% of total assets at June 30, 2009 and 23.8% at December 31, 2008. Total investment securities decreased $5,498,293, or 4.2%, to $124,529,307 at June 30, 2009 from $130,027,600 at December 31, 2008. Due to the continued low level of market interest rates during the first six months of 2009,
combined with strong loan and deposit growth, funds were used primarily to fund loan portfolio growth and secondarily to purchase investment securities at a reduced net interest spread.
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 and mortgage-backed securities, with smaller amounts of municipal obligations,
corporate debt and restricted stock. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns. At June 30, 2009, securities available for sale totaled $89,129,081, which is a decrease of $4,347,942, or 4.7%, from securities available for sale totaling $93,477,023 at December 31, 2008.
At June 30, 2009, the securities available for sale portfolio had net unrealized gains of $1,027,397, compared to net unrealized gains of $926,166 at December 31, 2008. These unrealized gains are reflected, net of tax, in shareholders’ equity as a component of Accumulated other comprehensive loss.
Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity. The held to maturity portfolio consists primarily of U.S. Government and Federal agency securities, mortgage-backed securities and obligations of states and political subdivisions,
with a smaller amount of corporate debt obligations. At June 30, 2009, securities held to maturity were $35,400,226, a decrease of $1,150,351, or 3.1%, from $36,550,577 at December 31, 2008. The fair value of the held to maturity portfolio at June 30, 2009 was $34,984,388, resulting in a net unrealized loss of $415,838.
During the six months ended June 30, 2009, the Company purchased securities in the amounts of $23,737,730 and $1,619,834 for the available for sale portfolio and held to maturity portfolio, respectively. During this same period, $30,924,524 in proceeds from maturities and repayments were received.
Loans
The loan portfolio, which represents the Company’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, 2009 and December 31, 2008.
|
Loan Portfolio Composition |
|
June 30, 2009 |
|
December 31, 2008 |
|
Component |
|
Amount |
|
%
of total |
|
Amount |
|
%
of total |
|
Construction loans |
|
$ |
90,769,503 |
|
22% |
|
$ |
94,163,997 |
|
25% |
|
Residential real estate loans |
|
|
10,908,031 |
|
3% |
|
|
11,078,402 |
|
3% |
|
Commercial business |
|
|
56,294,413 |
|
14% |
|
|
57,528,879 |
|
15% |
|
Commercial real estate |
|
|
96,228,145 |
|
24% |
|
|
90,904,418 |
|
24% |
|
Mortgage warehouse lines |
|
|
134,089,494 |
|
33% |
|
|
106,000,231 |
|
28% |
|
Loans to individuals |
|
|
15,088,195 |
|
4% |
|
|
16,797,194 |
|
5% |
|
Deferred loan fees and costs |
|
|
584,686 |
|
0% |
|
|
647,673 |
|
0% |
|
All other loans |
|
|
214,016 |
|
0% |
|
|
227,622 |
|
0% |
| |
|
$ |
404,176,483 |
|
100% |
|
$ |
377,348,416 |
|
100% |
The loan portfolio increased by $26,828,067, or 7.1%, to $404,176,483 at June 30, 2009, compared to $377,348,416 at December 31, 2008. The construction loan portfolio decreased by $3,394,494, or 3.6%, to $90,769,503 at June 30, 2009 compared to $94,163,997 at December 31, 2008. This current period decrease is a direct
result of the current uncertain New Jersey economic conditions and management’s actions to allow the higher risk construction loan portfolio to run off while simultaneously focusing efforts to building the balance of the lesser risk mortgage warehouse lines. In January 2008, the Bank’s Mortgage Warehouse Funding Group introduced a revolving line of credit that is available to licensed mortgage banking companies (the “Warehouse Line of Credit”) and that has been successful from
inception. The Warehouse Line of Credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and others. On average, an advance under
the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest (the spread between our borrowing cost and the rate charged to the client) and a transaction fee are collected by the Bank at the time of repayment. Additionally, customers of the Warehouse Lines of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15%
of the loan balances. The Bank had $134,089,494 and $106,000,231 in outstanding Warehouse Line of Credit advances at June 30, 2009 and December 31, 2008, respectively.
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 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 increased by $1,869,397 to $5,221,174 at June 30, 2009 from $3,351,777 at December 31, 2008, as the disruptions in the financial system and the real estate market during the past year have negatively affected certain of the Bank’s construction borrowers. The major segments of non-accrual loans consist
of land designated for residential development where the required approvals to begin construction have been received, commercial loans which are in the process of collection and residential real estate which is either in foreclosure or under contract to close after June 30, 2009. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio for the periods indicated. As the table demonstrates, non-performing loans to total loans increased to 1.29% at June
30, 2009 from 0.89% at December 31, 2008. Loan quality is still considered to be sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.
|
|
|
|
|
|
|
|
|
Non-Performing Assets and Loans |
|
June 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
Non-Performing loans: |
|
|
|
|
|
|
|
Loans 90 days or more past due and still accruing |
|
$ |
0 |
|
|
$ |
0 |
|
|
Non-accrual loans |
|
|
5,221,174 |
|
|
|
3,351,777 |
|
|
Total non-performing loans |
|
|
5,221,174 |
|
|
|
3,351,777 |
|
|
Other real estate owned |
|
|
3,234,042 |
|
|
|
4,296,536 |
|
|
Total non-performing assets |
|
$ |
8,455,216 |
|
|
$ |
7,648,313 |
|
| |
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
1.29% |
|
|
|
0.89% |
|
|
Non-performing assets to total assets |
|
|
1.37% |
|
|
|
1.40% |
|
Non-performing assets increased by $806,903 to $8,455,216 at June 30, 2009 from $7,648,313 at December 31, 2008. Other real estate owned decreased by $1,062,494 to $3,234,042 at June 30, 2009 from $4,296,536 at December 31, 2008. During the first six months of 2009, the Bank acquired other real estate owned securing loans in
the principal amount of $1,031,527 in full satisfaction of a loan in foreclosure. During the first six months of 2009, management was successful in selling $2,390,489 of other real estate owned without incurring any losses. The Bank continues to complete the remaining units of an 18-unit condominium project for which it has, as of June 30, 2009, commitments from individual buyers to purchase. Subsequent to June 30, 2009 and prior to the date of this report, the Bank sold two properties of other real estate owned
amounting to $860,794 in the aggregate without incurring a loss.
Non-performing assets represented 1.37% of total assets at June 30, 2009 and 1.40% at December 31, 2008.
The Bank had no loans classified as restructured loans at June 30, 2009 or December 31, 2008.
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 the estimated selling costs or the initially recorded amount. The amount, if any, by which the recorded amount of the loan exceeds the fair market value of the collateral
is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan can be delayed if the borrower files a bankruptcy petition because collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the bankruptcy code.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The
determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans. Based on the composition of the loan portfolio, the primary risks inherent in it are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one
or a combination of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
All, or part, of the principal balance of commercial and commercial real estate loans and construction loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans are generally charged off no later than 120 days past due on
a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology
for assessing the adequacy of the allowance for loan losses consists of several key elements. These elements may include a specific reserve for doubtful or high risk loans, an allocated reserve, and an unallocated portion.
The Company consistently applies the following comprehensive methodology. During the quarterly review of the allowance for loan losses, the Company considers a variety of factors that include:
|
|
· |
General economic conditions. |
|
|
· |
Trends 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 or impaired loans. A high risk or impaired loan is assigned a doubtful risk rating grade because the loan has not performed according
to payment terms and there is reason to believe that repayment of the loan principal in whole, or in part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for such individual doubtful loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which, in turn, employ their own criteria and assumptions that may include occupancy rates, rental rates, and
property expenses, among others.
The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses
within the portfolio. Individual loan pools are created for commercial and commercial real estate loans, construction loans, and 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. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because
no matter how detailed an analysis of potential loan losses is performed, these estimates inherently lack precision. Management must make estimates using assumptions and information which is often subjective and changing rapidly. At June 30, 2009, management believed that the allowance for loan losses was adequate.
While management uses the best information available to make such evaluations, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
|
Allowance for Loan Losses |
|
Six Months
Ended
June 30,
2009 |
|
|
Year Ended
December 31,
2008 |
|
|
Six Months
Ended
June 30,
2008 |
|
|
Balance, beginning of period |
|
$ |
3,684,764 |
|
|
$ |
3,348,080 |
|
|
$ |
3,348,080 |
|
|
Provision charged to operating expenses |
|
|
788,000 |
|
|
|
640,000 |
|
|
|
360,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans |
|
|
- |
|
|
|
(53,946 |
) |
|
|
(53,946 |
) |
|
Residential real estate loans |
|
|
- |
|
|
|
(31,865 |
) |
|
|
- |
|
|
Commercial and commercial real estate |
|
|
(270,790 |
) |
|
|
(220,565 |
) |
|
|
(18,368 |
) |
|
Loans to individuals |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Lease financing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
All other loans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
(270,790 |
) |
|
|
(306,376 |
) |
|
|
(72,314 |
) |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Residential real estate loans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Commercial and commercial real estate |
|
|
1,559 |
|
|
|
3,060 |
|
|
|
- |
|
|
Loans to individuals |
|
|
5,200 |
|
|
|
- |
|
|
|
- |
|
|
Lease financing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
All other loans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
6,759 |
|
|
|
3,060 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge offs) |
|
|
(264,031 |
) |
|
|
(303,316 |
) |
|
|
(72,314 |
) |
|
Balance, end of period |
|
$ |
4,208,733 |
|
|
$ |
3,684,764 |
|
|
$ |
3,635,766 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
At period end |
|
$ |
404,176,483 |
|
|
$ |
377,348,416 |
|
|
$ |
363,623,631 |
|
|
Average during the period |
|
|
393,845,224 |
|
|
|
340,666,744 |
|
|
|
345,252,017 |
|
|
Net annualized charge offs to average loans outstanding |
|
|
(0.13% |
) |
|
|
(0.09% |
) |
|
|
(0.04% |
) |
|
Allowance for loan losses to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at period end |
|
|
1.04% |
|
|
|
0.98% |
|
|
|
1.00% |
|
|
Non-performing loans |
|
|
80.61% |
|
|
|
109.93% |
|
|
|
147.14% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, non-accrual loans, problem loans as identified through internal classifications, collateral values, and the growth and size of the loan portfolio. In addition to these factors,
management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company’s provision for loan losses was $788,000 for the six months ended June 30, 2009 and $360,000 for the six months ended June 30, 2008. While the risk profile of the loan portfolio was reduced by a change in its composition via a $3,394,494 reduction in higher risk construction loans and a $28,089,263 increase in lower risk mortgage warehouse
lines, the total loan portfolio grew by 7.1% from December 31, 2008 to June 30, 2009. In addition, non-performing loans increased by $1,869,397. Growth in both portfolios and non-performing loans necessitated the increased provision. Also, management replenished the reserves to compensate for the current period net charge-offs as well as to take into consideration that the real estate market conditions remained weak. Net charge-offs/recoveries amounted to a net charge-off of $264,031 for
the six months ended June 30, 2009.
At June 30, 2009, the allowance for loan losses was $4,208,733 compared to $3,684,764 at December 31, 2008, an increase of $523,969, or 14.2%. The ratio of the allowance for loan losses to total loans at June 30, 2009 and December 31, 2008 was 1.04% and 0.98%, respectively. The allowance for loan losses as a percentage
of non-performing loans was 80.61% at June 30, 2009, compared to 109.93% at December 31, 2008. Management believes the quality of the loan portfolio remains sound considering the state of the New Jersey economy and that the allowance for loan losses is adequate in relation to credit risk exposure levels.
Deposits
Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits 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.
At June 30, 2009, total deposits were $505,761,524, an increase of $91,076,793, or 22.0%, from $414,684,731 at December 31, 2008. The primary causes for this increase were the successful introduction of the Bank’s internet bank, 1STConstitutionDirect.com, which opened in late 2008 and the continued expansion of our mortgage
warehouse line of credit relationships. 1STConstitutionDirect.com offers competitive rates on savings accounts and continues to facilitate growth in new accounts and deposit balances.
Savings accounts increased by $61,771,921, or 74.1%, to $145,182,326 at June 30, 2009 compared to $83,410,405 at December 31, 2008. The accounts of 1STConstitutionDirect.com are included in this component of total deposits and increased to $46,235,889 at June 30, 2009 from $19,063,938 at December 31, 2008.
Interest bearing demand deposits increased by $15,102,952, or 18.2%, to $97,945,365 at June 30, 2009, compared to $82,842,413 at December 31, 2008, as the Bank continued to require customers of its Warehouse Line of Credit to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the respective loan balances.
The following table summarizes deposits at June 30, 2009 and December 31, 2008.
| |
|
June 30,2009 |
|
|
December 31, 2008 |
|
|
Demand |
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
86,778,192 |
|
|
$ |
71,772,486 |
|
|
Interest bearing |
|
|
97,945,365 |
|
|
|
82,842,413 |
|
|
Savings |
|
|
145,182,326 |
|
|
|
83,410,405 |
|
|
Time |
|
|
175,855,641 |
|
|
|
176,659,427 |
|
| |
|
$ |
505,761,524 |
|
|
$ |
414,684,731 |
|
| |
|
|
|
|
|
|
|
|
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 balance of borrowings was $30,500,000 at June 30, 2009, consisting of long-term FHLB borrowings of
$30,500,000. The balance of borrowings at December 31, 2008 was $51,500,000 and consisted of FHLB borrowings of $30,500,000 and overnight funds purchased of $21,000,000.
The Bank has five ten-year fixed rate convertible advances from the FHLB that total $30,500,000 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 has 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 $1,084,099, or 1.9%, to $56,703,751 at June 30, 2009, from $55,619,652 at December 31, 2008. Book value per common share increased by $0.08, or 0.8%, to $10.62 at June 30, 2009 from $10.54 at December 31, 2008. The ratio of shareholders’ equity to total assets was 9.17%
and 10.18% at June 30, 2009 and December 31, 2008, respectively. The increase in shareholders’ equity was primarily the result of net income of $1,011,300 and $169,515 in other comprehensive income, partially offset by, among other items, the $311,668 in dividends recorded on the Company’s Preferred Stock Series B.
On December 23, 2008, pursuant to the TARP CPP under the EESA (each as defined and described under the heading “Recent Legislation and Other Regulatory Initiatives” below), the Company entered into a Letter Agreement, including the Securities Purchase Agreement – Standard Terms, with the Treasury pursuant to which the
Company issued and sold, and the Treasury purchased (i) 12,000 shares of the Company’s Preferred Stock Series B and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s common stock, no par value, at an initial exercise price of $8.99 per share, for aggregate cash consideration of $12,000,000. As a result of the 5% stock dividend paid on February 2, 2009 to holders of record as of the close of business on January 20, 2009, the shares of common stock initially underlying
the warrant were adjusted to 210,233 shares and the initial exercise price was adjusted to $8.562 per share.
The Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year and has a liquidation preference of $1,000 per share. The warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable
upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Company’s common stock, and upon certain issuances of the Company’s common stock at or below a specified price relative to the initial exercise price. The warrant is immediately exercisable and expires 10 years from the issuance date. If, on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less than
$12,000,000 from qualified equity offerings announced after October 13, 2008, the number of shares of common stock issuable pursuant to the Treasury’s exercise of the warrant will be reduced by one-half of the original number of shares. In addition, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.
The Company is subject to restrictions contained in the agreement between the Treasury and the Company related to the sale of the Preferred Stock Series B which among other things restricts the payment of cash dividends or making other distributions by the Company on its common stock or the repurchase of its shares of common stock or other
capital stock or other equity securities of any kind of the Company or any of its or its affiliates’ trust preferred securities until the third anniversary of the purchase of the Preferred Stock Series B by the Treasury with certain exceptions without approval of the Treasury and the Company is prohibited by the terms of the Preferred Stock Series B from paying dividends on the common stock of the Company or redeeming or otherwise acquiring its common stock or certain other of its equity securities unless
all dividends on the Preferred Stock Series B have been declared and either paid in full or set aside with certain limited exceptions.
In addition, EESA and guidance issued by the Treasury limit executive compensation and require the reporting of information to the Treasury and others and limit the deductibility for Federal income tax purposes of compensation paid to certain executives in excess of $500,000 per year and the payment of certain severance and change
in control payments to certain executives. The Stimulus Package Act contains further limitations on the payment of compensation to certain executives of the Company or the Bank, the claw-back of certain compensation paid to certain executives of the Company or the Bank and imposes new corporate governance requirements on the Company, including the inclusion of a non-binding “say to pay” proposal in the Company’s annual proxy statement.
The Board of Governors of the Federal Reserve System has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends including for example when net income available for shareholders for the past four
quarters net of previously paid dividends paid during that period is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter.
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 5% stock dividend was declared in 2008 and paid in 2009. A 6% stock dividend was declared in 2007 and paid in 2008.
The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.
In 2005, the Company’s 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, if any, made during the quarter ended June 30, 2009 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, 2009 and December 31, 2008 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, 2009 |
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
Total Capital to Risk Weighted Assets |
$77,569,672 |
17.08% |
$36,336,395 |
>8% |
N/A |
N/A |
|
Tier 1 Capital to Risk Weighted Assets |
73,360,939 |
16.15% |
18,168,198 |
>4% |
N/A |
N/A |
|
Tier 1 Capital to Average Assets |
73,360,939 |
12.15% |
24,150,172 |
>4% |
N/A |
N/A |
|
Bank |
|
|
|
|
|
|
|
Total Capital to Risk Weighted Assets |
$76,144,628 |
16.80% |
$36,266,640 |
>8% |
$45,333,300 |
>10% |
|
Tier 1 Capital to Risk Weighted Assets |
71,935,895 |
15.87% |
18,133,320 |
>4% |
27,199,980 |
>6% |
|
Tier 1 Capital to Average Assets |
71,935,895 |
11.94% |
24,108,211 |
>4% |
30,135,264 |
>5% |
|
As of December 31, 2008 |
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
Total Capital to Risk Weighted Assets |
$76,475,124 |
17.90% |
$34,184,717 |
>8% |
N/A |
N/A |
|
Tier 1 Capital to Risk Weighted Assets |
72,790,360 |
17.03% |
17,092,359 |
>4% |
N/A |
N/A |
|
Tier 1 Capital to Average Assets |
72,790,360 |
14.05% |
20,715,932 |
>4% |
N/A |
N/A |
|
Bank |
|
|
|
|
|
|
|
Total Capital to Risk Weighted Assets |
$75,316,536 |
17.67% |
$34,096,080 |
>8% |
$42,620,100 |
>10% |
|
Tier 1 Capital to Risk Weighted Assets |
71,631,772 |
16.81% |
17,048,040 |
>4% |
25,572,060 |
>6% |
|
Tier 1 Capital to Average Assets |
71,631,772 |
13.88% |
20,636,440 |
>4% |
25,795,550 |
>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, 2009, 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.
Recent Legislation and Other Regulatory Initiatives
On October 3, 2008, the President of the United States signed the Emergency Economic Stabilization Act of 2008 (“EESA”) into law. This legislation, among other things, authorized the Secretary of Treasury to establish a Troubled Asset Relief Program (“TARP”) to purchase up to $700 billion in troubled assets
from qualified financial institutions (“QFI”). EESA has been interpreted by the Department of Treasury (the “Treasury”) to allow it to make direct equity investments in QFIs. Subsequent to the enactment of EESA, the Treasury announced the TARP Capital Purchase Program (“CPP”) under which the Treasury was authorized to purchase up to $250 billion in senior perpetual preferred stock of QFIs that elect to participate in the CPP. The Treasury’s
investment in an individual QFI could not exceed the lesser of 3% of the QFIs risk-weighted assets or $25 billion and could not be less than 1% of risk-weighted assets. QFIs had until November 14, 2008 to elect to participate in the CPP. The CPP also requires the issuance of warrants exercisable for a number of shares of common stock with an aggregate value equal to 15% of the amount of the preferred stock investment.
EESA also increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments.
As a condition to selling troubled assets to the TARP and/or participating in the CPP, the QFI must agree to the Treasury’s standards for executive compensation and corporate governance. These standards generally apply to the Chief Executive Officer, Chief Financial Officer, and next three highest compensated officers of
the QFI. In general, these standards require the QFI to: (1) ensure that incentive compensation for senior executives does not encourage unnecessary and excessive risk taking; (2) recoup, or claw-back, any bonus or incentive compensation paid to a senior executive based on financial statements that later prove to be erroneous; (3) prohibit the QFI from making “golden parachute” payments in connection with certain terminations of employment; and (4) not deduct, for tax purposes, executive
compensation in excess of $500,000 for each senior executive. Participation in the CPP also results in certain restrictions on the QFIs dividend and stock repurchase activities. These restrictions remain in place until the Treasury no longer holds any equity or debt securities of the QFI. These restrictions were expanded by amendments to EESA included in the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) and interim final regulations announced by the Treasury
on June 10, 2009, which are discussed below.
As noted in the “Shareholders’ Equity and Dividends” section above, the Company exceeds the minimum regulatory capital standards by substantial margins. Furthermore, management does not currently believe that the Company has a significant exposure to troubled assets that would warrant sale of such assets under
the TARP.
Concurrent with the announcement of the CPP, the FDIC also established the Temporary Liquidity Guaranty Program (“TLGP”). This program contains two elements: (i) a debt guarantee program and (ii) an increase in deposit insurance coverage for certain types of non-interest bearing accounts. Pursuant to the
debt guarantee program, newly issued senior unsecured debt of banks, thrifts or their holding companies issued on or before June 30, 2009 would be protected in the event the issuing institution subsequently fails or its holding company files for bankruptcy. Financial institutions opting to participate in this program would be charged an annualized fee equal to 75 basis points multiplied by the amount of debt being guaranteed. The amount of debt that may be guaranteed cannot exceed 125% of
the institution’s outstanding debt at September 30, 2008 and due to mature before June 30, 2009. The guarantee would expire by June 30, 2012 even if the debt itself has not matured. Pursuant to the temporary unlimited deposit insurance coverage, a qualifying institution may elect to provide unlimited coverage for non-interest bearing transaction deposit accounts in excess of the $250,000 limit by paying a 10 basis point surcharge on the covered amounts in excess of $250,000. Institutions
may choose whether to continue the coverage and be charged the surcharge. To opt out of the program, institutions must have notified the FDIC by December 5, 2008. This coverage would expire on December 31, 2009. The Company elected to continue this coverage through December 31, 2009.
The Stimulus Act, which was signed into law on February 17, 2009, imposes extensive new restrictions applicable to the Company as a participant in the TARP. The new restrictions include, without limitation, additional limits on executive compensation such as, subject to certain exceptions, prohibiting the payment or accrual of
any bonus, retention award or incentive compensation to the Company’s most highly compensated employee except for the payment of long-term restricted stock grants; prohibiting any compensation plan that would encourage the manipulation of earnings; and extending the claw-back required by EESA to certain other highly compensated employees. The Stimulus Act also requires compliance with new corporate governance standards including an annual “say on pay” shareholder vote, the adoption of policies
regarding excessive or luxury expenditures, and a certification by the Company’s chief executive officer and chief financial officer that we have complied with the standards in the Stimulus Act. The full impact of the Stimulus Act is not yet certain because it calls for additional regulatory action. The Company will continue to monitor the effect of the Stimulus Act and the anticipated regulations.
On June 10, 2009, the Treasury issued an Interim Final Rule (the “Interim Final Rule”) that provides guidance on the executive compensation and corporate governance provisions of EESA, as amended by the Stimulus Act, that apply to entities that received financial assistance under the TARP. In summary, the Interim
Final Rule as applied to the Company requires the following:
|
|
· |
At least every six months, the Compensation Committee of the board of directors (the “Compensation Committee”) must discuss, evaluate and review with the Company’s senior risk officers the compensation plans for senior executive officers (“SEO”) and compensation plans for other employees and the risks such plans pose so that they do not encourage SEOs to take unnecessary and excessive
risks that threaten the value of the Company. For this purpose, SEO is generally defined as the group of five individuals, including all of the Company’s named executive officers identified as such in the Company’s annual filings with the SEC; |
|
|
· |
At least every six months, the Compensation Committee must discuss, evaluate, and review the employee compensation plans of the Company to ensure that those plans do not encourage the manipulation of reported earnings of the Company to enhance the compensation of any of the Company’s employees; |
|
|
· |
At least once per fiscal year, the Compensation Committee shall provide a narrative description of how the SEO compensation plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company including how these SEO compensation plans do not encourage behavior focused on short-term results rather than long-term value creation; |
|
|
· |
The Compensation Committee must certify the completion of the required reviews of the compensation plans; |
|
|
· |
The Company must ensure that any bonus payment made to an SEO or the next 20 most highly compensated employees during the TARP period is subject to a provision for recovery or “clawback” by the Company if the bonus payment was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
|
|
· |
The Company must prohibit any golden parachute payment to an SEO or any of the next five most highly compensated employees during the TARP period. For this purpose, a golden parachute payment includes any payment for the departure from the Company for any reason, or any payment due to a change in control; |
|
|
· |
The Company must prohibit the payment or accrual of any bonus, retention or incentive payment during the TARP period to the Company’s most highly compensated employee. Exceptions exist for certain types of long term restricted stock, as well as payments that are required pursuant to binding, unchanged agreements that were in place on February 11, 2009; |
|
|
· |
The Company is required to annually disclose any perquisites whose total value for the fiscal year exceeds $25,000 for the most highly compensated employee; |
|
|
· |
The Compensation Committee must provide annually a narrative description of whether the Company, the board of directors, or the Compensation Committee has engaged a compensation consultant, and all types of services provided by such compensation consultant in the prior three years; |
|
|
· |
The Company is generally prohibited from providing (formally or informally) tax gross-ups of any kind to any of the SEOs and the next 20 most highly compensated employees; |
|
|
· |
The board of directors of the Company must (i) adopt an excessive or luxury expenditures policy, (ii) provide the policy to the Treasury and the recipient’s primary regulatory agency, and (iii) post the text of the policy on its own website; |
|
|
· |
Any proxy or consent or authorization for an annual or other meeting of the Company’s shareholders must permit a separate shareholder vote to approve the compensation of executives; and |
|
|
· |
The Company’s principal executive officer and principal financial officer must certify as to compliance with the Interim Final Rule for each year in which the TARP obligations remain outstanding. |
The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what impact, EESA, the Stimulus Act, interim final regulations announced by the Treasury on June 10, 2009, TARP, other liquidity and funding initiatives of the
Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking industry and the broader U.S. and global economies, which will have an affect on all financial institutions, including the Company. We cannot
predict the full effect that this wide-ranging legislation will have on the national economy or on financial institutions.
Liquidity
At June 30, 2009, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.
Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet
its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits.
Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.
The Bank has established a borrowing relationship with the FHLB and a correspondent bank which further supports and enhances liquidity. At June 30, 2009, the Bank maintained an Overnight Line of Credit at the FHLB in the amount of $47,534,500 plus a One-Month Overnight Repricing Line of Credit of $47,534,500. 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 $20,000,000 with a correspondent bank.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At June 30, 2009, the balance of cash and cash equivalents was $48,090,458.
Net cash used in operating activities totaled $15,664,512 for the six months ended June 30, 2009 compared to net cash used in operating activities of $2,752,273 for the six months ended June 30, 2008. 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. The primary use of funds was origination of loans held for sale.
Net cash used in investing activities totaled $20,592,176 in the six months ended June 30, 2009, compared to $61,371,667 used in investing activities in the six months ended June 30, 2008. The current period amount was primarily the result of an increase in the loan portfolio and purchases of securities.
Net cash provided by financing activities amounted to $70,014,027 in the six months ended June 30, 2009, compared to $75,068,655 provided by financing activities in the six months ended June 30, 2008. The current period amount resulted primarily from an increase in deposits, partially offset by repaid short-term borrowings, during
the six months period ended June 30, 2009.
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, 2009, maturities and prepayments of investment securities totaled $30,924,524. 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.
Interest Rate Sensitivity Analysis
The largest component of the Company’s total income is net interest income, and the majority of the Company’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 Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Bank’s spread by attracting lower-cost retail deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated
to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2009 that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds.
Issuer Purchases of Equity Securities
In 2005, the Company’s 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 June 30, 2009.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2009 |
April 30, 2009 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
156,926 |
|
|
May 1, 2009 |
May 31, 2009 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
156,926 |
|
|
June 1, 2009 |
June 30, 2009 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
156,926 |
|
|
Total |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
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156,926 |
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(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 annual stock dividends, including the 5% stock dividend paid on February 2, 2009 to holders of record as of the close of business on January 20, 2009. |
As a result of the Company’s issuance on December 23, 2008 of Preferred Stock Series B and a warrant to purchase common stock to the Treasury as part of its TARP CPP, the Company may not repurchase its common stock or other equity securities except under certain limited circumstances.
Item 4. Submission of Matters to a Vote of Securities Holders.
The Company’s Annual Meeting of Shareholders (the “Annual Meeting”) was held on May 21, 2009.
There were present at the Annual Meeting in person or by proxy shareholders holding an aggregate of 3,763,437 shares of common stock of a total number of 4,226,943 shares of common stock issued, outstanding and entitled to vote at the Annual Meeting.
At the Annual Meeting, Charles S. Crow, III and David C. Reed were re-elected as Class I directors of the Company, with 3,582,654 votes cast for and 180,783 votes withheld. Directors whose term of office continued following the meeting were Frank E. Walsh III, William M. Rue and Robert F. Mangano.
An vote of the shareholders was taken at the Annual Meeting to approve an advisory proposal regarding the compensation of the Company’s named executive officers, as described in the Company’s proxy statement for the Annual Meeting. The advisory proposal was approved by the shareholders, with 3,349,930 shares voting
in favor of the advisory proposal and 267,739 shares voting against the advisory proposal. There were 145,768 abstentions and broker non-votes.
A vote of the shareholders was taken at the Annual Meeting on the proposal to approve and ratify the appointment of Beard Miller Company LLP as the Company’s independent auditor for the year ending December 31, 2009. The proposal was approved by the shareholders, with 3,392,495 shares voting in favor of the proposal and 105,540 shares
voting against the proposal. There were 265,402 abstentions and broker non-votes.
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31.1 |
* |
Certification of Robert F. Mangano, principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
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31.2 |
* |
Certification of Joseph M. Reardon, principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
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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 Robert F. Mangano, principal executive officer of the Company, and Joseph M. Reardon, principal financial officer of the Company |
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* Filed herewith. |
SIGNATURES
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.
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1ST CONSTITUTION BANCORP |
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Date: August 13, 2009 |
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By: |
/s/ ROBERT F. MANGANO |
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Robert F. Mangano |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 13, 2009 |
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By: |
/s/ JOSEPH M. REARDON |
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Joseph M. Reardon |
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Senior Vice President and Treasurer |
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(Principal Financial and Accounting Officer) |
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42