UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013 | For the quarterly period ended March 31, 2014 |
or
o¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
| For the transition period from _____ to _____ |
Commission file Number: 000-32891
(Exact Name of Registrant as Specified in Its Charter)
|
New Jersey | | 22-3665653 |
(State of Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
2650 Route 130, P.O. Box 634, Cranbury, NJ | | 08512 |
(Address of Principal Executive Offices) | | (Zip Code) |
| (609) 655-4500 | |
| (Issuer’s Telephone Number, Including Area Code) | |
| | |
| (Former name, former address and former fiscal year, if changed since last report) | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o¨ | Accelerated filer | o¨ |
Non-accelerated filer (Do not check if a smaller reporting company) | o¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ Nox
As of November 12, 2013,May 7, 2014, there were 5,988,8677,084,725 shares of the registrant’s common stock, no par value, outstanding.
FORM 10-Q
INDEX
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PART I. | FINANCIAL INFORMATION | |
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PART II. | OTHER INFORMATION | |
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| 59 |
PART I. FINANCIAL INFORMATION
(unaudited)
| | September 30, 2013 | | | December 31, 2012 | |
ASSETS | | | | | | |
CASH AND DUE FROM BANKS | | $ | 123,803,713 | | | $ | 14,033,501 | |
| | | | | | | | |
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS | | | 11,425 | | | | 11,420 | |
| | | | | | | | |
Total cash and cash equivalents | | | 123,815,138 | | | | 14,044,921 | |
| | | | | | | | |
INVESTMENT SECURITIES: | | | | | | | | |
Available for sale, at fair value | | | 101,557,211 | | | | 109,840,965 | |
Held to maturity (fair value of $152,186,281 and $121,839,363 at September 30, 2013, and December 31, 2012, respectively) | | | 150,572,922 | | | | 116,027,900 | |
| | | | | | | | |
Total securities | | | 252,130,133 | | | | 225,868,865 | |
| | | | | | | | |
LOANS HELD FOR SALE | | | 14,535,681 | | | | 35,960,262 | |
| | | | | | | | |
LOANS | | | 362,549,473 | | | | 521,814,110 | |
Less- Allowance for loan losses | | | (6,820,180) | | | | (7,151,212 | ) |
| | | | | | | | |
Net loans | | | 355,729,293 | | | | 514,662,898 | |
| | | | | | | | |
PREMISES AND EQUIPMENT, net | | | 10,172,487 | | | | 10,630,295 | |
| | | | | | | | |
ACCRUED INTEREST RECEIVABLE | | | 2,143,535 | | | | 2,872,099 | |
| | | | | | | | |
BANK-OWNED LIFE INSURANCE | | | 15,374,712 | | | | 15,026,506 | |
| | | | | | | | |
OTHER REAL ESTATE OWNED | | | 2,808,554 | | | | 8,332,601 | |
| | | | | | | | |
OTHER ASSETS | | | 13,459,319 | | | | 13,569,935 | |
| | | | | | | | |
Total assets | | $ | 790,168,852 | | | $ | 840,968,382 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES: | | | | | | | | |
Deposits | | | | | | | | |
Non-interest bearing | | $ | 147,179,144 | | | $ | 152,334,759 | |
Interest bearing | | | 539,764,810 | | | | 555,354,716 | |
| | | | | | | | |
Total deposits | | | 686,943,954 | | | | 707,689,475 | |
| | | | | | | | |
BORROWINGS | | | 10,000,000 | | | | 42,400,000 | |
REDEEMABLE SUBORDINATED DEBENTURES | | | 18,557,000 | | | | 18,557,000 | |
ACCRUED INTEREST PAYABLE | | | 787,927 | | | | 1,057,779 | |
ACCRUED EXPENSES AND OTHER LIABILITIES | | | 6,727,851 | | | | 6,210,596 | |
| | | | | | | | |
Total liabilities | | | 723,016,732 | | | | 775,914,850 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock, no par value; 5,000,000 shares authorized; none issued | | | | | | | | |
Common stock, no par value, 30,000,000 shares authorized; 6,008,223 and 5,985,275 shares issued and 5,988,867 and 5,977,924 shares outstanding as of September 30, 2013 and December 31, 2012 respectively | | | 49,395,322 | | | | 48,716,032 | |
Retained earnings | | | 19,999,881 | | | | 15,594,293 | |
Treasury Stock, at cost, 19,356 shares 7,351 shares at September 30, 2013 and December 31, 2012, respectively | | | (177,537) | | | | (61,086 | ) |
Accumulated other comprehensive (loss) income | | | (2,065,546) | | | | 804,293 | |
| | | | | | | | |
Total shareholders’ equity | | | 67,152,120 | | | | 65,053,532 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 790,168,852 | | | $ | 840,968,382 | |
(Unaudited)
See | | March 31, 2014 | | | December 31, 2013 | |
ASSETS | | | | | | |
CASH AND DUE FROM BANKS | | $ | 108,819,056 | | | $ | 69,267,345 | |
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS | | | 100,000 | | | | 11,426 | |
Total cash and cash equivalents | | | 108,919,056 | | | | 69,278,771 | |
INVESTMENT SECURITIES: | | | | | | | | |
Available for sale, at fair value | | | 117,630,716 | | | | 99,198,807 | |
Held to maturity (fair value of $155,795,659 and $153,629,773 at March 31, 2014 and December 31, 2013, respectively) | | | 152,734,559 | | | | 152,816,815 | |
Total investment securities | | | 270,365,275 | | | | 252,015,622 | |
LOANS HELD FOR SALE | | | 3,253,009 | | | | 10,923,689 | |
LOANS | | | 531,405,382 | | | | 373,336,082 | |
Less- Allowance for loan losses | | | (7,030,842 | ) | | | (7,038,571 | ) |
Net loans | | | 524,374,540 | | | | 366,297,511 | |
PREMISES AND EQUIPMENT, net | | | 12,370,225 | | | | 10,043,505 | |
ACCRUED INTEREST RECEIVABLE | | | 2,943,400 | | | | 2,542,602 | |
BANK-OWNED LIFE INSURANCE | | | 20,783,304 | | | | 16,183,574 | |
OTHER REAL ESTATE OWNED | | | 2,136,341 | | | | 2,136,341 | |
GOODWILL AND INTANGIBLE ASSETS | | | 13,673,821 | | | | 4,889,575 | |
OTHER ASSETS | | | 8,271,642 | | | | 8,013,897 | |
Total assets | | $ | 967,090,613 | | | $ | 742,325,087 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES: | | | | | | | | |
Deposits | | | | | | | | |
Non-interest bearing | | $ | 166,747,113 | | | $ | 121,891,752 | |
Interest bearing | | | 672,251,094 | | | | 516,660,278 | |
Total deposits | | | 838,998,207 | | | | 638,552,030 | |
BORROWINGS | | | 20,978,549 | | | | 10,000,000 | |
REDEEMABLE SUBORDINATED DEBENTURES | | | 18,557,000 | | | | 18,557,000 | |
ACCRUED INTEREST PAYABLE | | | 937,278 | | | | 883,212 | |
ACCRUED EXPENSES AND OTHER LIABILITIES | | | 6,355,156 | | | | 5,974,531 | |
Total liabilities | | | 885,826,190 | | | | 673,966,773 | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock, no par value; 5,000,000 shares authorized, none issued | | | - | | | | - | |
Common Stock, no par value; 30,000,000 shares authorized; 7,084,725 and 6,033,683 shares issued and 7,063,996 and 6,016,845 shares outstanding as of March 31,2014 and December 31, 2013, respectively | | | 60,825,466 | | | | 49,403,450 | |
Retained earnings | | | 22,016,093 | | | | 21,374,381 | |
Treasury Stock, 20,729 shares and 16,838 shares at March 31, 2014 and December 31, 2013, respectively | | | (211,727 | ) | | | (171,883 | ) |
Accumulated other comprehensive (loss) | | | (1,365,409 | ) | | | (2,247,634 | ) |
Total shareholders’ equity | | | 81,264,423 | | | | 68,358,314 | |
Total liabilities and shareholders’ equity | | $ | 967,090,613 | | | $ | 742,325,087 | |
The accompanying notes to consolidatedare an integral part of these financial statements.
(unaudited)(Unaudited)
| | Three Months Ended March 31, | |
| | 2014 | | | 2013 | |
INTEREST INCOME: | | | | | | |
Loans, including fees | | $ | 6,238,439 | | | $ | 5,972,195 | |
Securities: | | | | | | | | |
Taxable | | | 1,121,584 | | | | 937,085 | |
Tax-exempt | | | 580,981 | | | | 512,878 | |
Federal funds sold and short-term investments | | | 55,291 | | | | 49,680 | |
Total interest income | | | 7,996,295 | | | | 7,471,838 | |
| | | | |
INTEREST EXPENSE: | | | | | | |
Deposits | | | 898,731 | | | | 956,336 | |
Borrowings | | | 115,578 | | | | 103,273 | |
Redeemable subordinated debentures | | | 85,107 | | | | 87,873 | |
Total interest expense | | | 1,099,416 | | | | 1,147,482 | |
Net interest income | | | 6,896,879 | | | | 6,324,356 | |
PROVISION FOR LOAN LOSSES | | | 499,998 | | | | - | |
Net interest income after provision for loan losses | | | 6,396,881 | | | | 6,324,356 | |
| |
NON-INTEREST INCOME: | | | | | | | | |
Service charges on deposit accounts | | | 219,116 | | | | 223,066 | |
Gain on sales of loans | | | 739,581 | | | | 731,709 | |
Income on Bank-owned life insurance | | | 129,151 | | | | 112,608 | |
Other income | | | 549,134 | | | | 541,180 | |
Total other income | | | 1,636,982 | | | | 1,608,563 | |
| |
NON-INTEREST EXPENSES: | |
Salaries and employee benefits | | | 3,587,905 | | | | 3,352,863 | |
Occupancy expense | | | 826,195 | | | | 677,806 | |
Data processing expenses | | | 316,049 | | | | 301,382 | |
FDIC insurance expense | | | 150,000 | | | | 19,687 | |
Other real estate owned expenses | | | 41,432 | | | | 545,505 | |
Merger-related expenses | | | 1,422,723 | | | | - | |
Other operating expenses | | | 1,001,721 | | | | 1,185,725 | |
Total other expenses | | | 7,346,025 | | | | 6,082,968 | |
| | | | | | | | |
Income before income taxes | | | 687,838 | | | | 1,849,951 | |
INCOME TAXES | | | 46,126 | | | | 524,633 | |
Net income | | $ | 641,712 | | | $ | 1,325,318 | |
| | | | | | | | |
NET INCOME PER COMMON SHARE: | | | | | | | | |
Basic | | $ | 0.09 | | | $ | 0.22 | |
Diluted | | $ | 0.09 | | | $ | 0.22 | |
| | | | | | | | |
WEIGHTED AVERAGE SHARES | | | | | | | | |
OUTSTANDING | | | | | | | | |
Basic | | $ | 6,756,782 | | | $ | 5,895,763 | |
Diluted | | $ | 6,942,943 | | | $ | 6,034,779 | |
| | Three months ended September 30, | | | Nine months ended September 30, | |
INTEREST INCOME | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Loans, including fees | | $ | 5,701,804 | | | $ | 6,966,886 | | | $ | 17,319,258 | | | $ | 19,700,449 | |
Securities | | | | | | | | | | | | | | | | |
Taxable | | | 980,004 | | | | 1,103,011 | | | | 2,818,800 | | | | 3,430,770 | |
Tax-exempt | | | 575,301 | | | | 409,774 | | | | 1,633,799 | | | | 1,241,568 | |
Federal funds sold and short-term investments | | | 81,745 | | | | 6,975 | | | | 221,087 | | | | 55,315 | |
Total interest income | | | 7,338,854 | | | | 8,486,646 | | | | 21,992,944 | | | | 24,428,102 | |
| | | | | | | | | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | | | | | | | | |
Deposits | | | 842,372 | | | | 1,026,154 | | | | 2,668,306 | | | | 3,291,676 | |
Borrowings | | | 103,122 | | | | 119,223 | | | | 310,649 | | | | 340,784 | |
Redeemable subordinated debentures | | | 88,338 | | | | 96,867 | | | | 263,982 | | | | 292,759 | |
Total interest expense | | | 1,033,832 | | | | 1,242,244 | | | | 3,242,937 | | | | 3,925,219 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 6,305,022 | | | | 7,244,402 | | | | 18,750,007 | | | | 20,502,883 | |
PROVISION FOR LOAN LOSSES | | | 539,998 | | | | 499,998 | | | | 776,664 | | | | 1,649,994 | |
Net interest income after provision for loan losses | | | 5,765,024 | | | | 6,744,404 | | | | 17,973,343 | | | | 18,852,889 | |
| | | | | | | | | | | | | | | | |
NON-INTEREST INCOME | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 231,169 | | | | 243,443 | | | | 675,839 | | | | 702,671 | |
Gain on sales of loans | | | 641,966 | | | | 509,138 | | | | 1,852,821 | | | | 1,472,502 | |
Income on bank-owned life insurance | | | 115,840 | | | | 112,276 | | | | 348,206 | | | | 337,374 | |
Other income | | | 627,573 | | | | 451,870 | | | | 1,796,104 | | | | 1,157,311 | |
Total non-interest income | | | 1,616,548 | | | | 1,316,727 | | | | 4,672,970 | | | | 3,669,858 | |
| | | | | | | | | | | | | | | | |
NON-INTEREST EXPENSE | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 3,060,143 | | | | 3,061,065 | | | | 9,458,247 | | | | 9,156,318 | |
Occupancy expense | | | 629,922 | | | | 523,126 | | | | 1,930,227 | | | | 1,860,446 | |
Data processing expenses | | | 273,272 | | | | 257,990 | | | | 868,960 | | | | 774,110 | |
FDIC insurance expenses | | | 111,562 | | | | 139,694 | | | | 146,249 | | | | 426,960 | |
Other operating expenses | | | 1,178,584 | | | | 2,201,299 | | | | 4,095,068 | | | | 4,951,831 | |
| | | | | | | | | | | | | | | | |
Total non-interest expenses | | | 5,253,483 | | | | 6,183,174 | | | | 16,498,751 | | | | 17,169,665 | |
Income before income taxes | | | 2,128,089 | | | | 1,877,957 | | | | 6,147,562 | | | | 5,353,082 | |
| | | | | | | | | | | | | | | | |
INCOME TAXES | | | 604,851 | | | | 523,038 | | | | 1,741,974 | | | | 1,533,323 | |
Net income | | $ | 1,523,238 | | | $ | 1,354,919 | | | $ | 4,405,588 | | | $ | 3,819,759 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NET INCOME PER SHARE | | | | | | | | | | | | | | | | |
Basic | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.74 | | | $ | 0.71 | |
Diluted | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.72 | | | $ | 0.70 | |
SeeThe accompanying notes to consolidatedare an integral part of these financial statements.
(unaudited)(Unaudited)
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | | |
NET INCOME | | $ | 1,523,238 | | | $ | 1,354,919 | | | $ | 4,405,588 | | | $ | 3,819,759 | |
| | | | | | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unrealized holding gains (losses) on securities available for sale | | | (35,468) | | | | 430,698 | | | | (2,947,683) | | | | 468,628 | |
| | | | | | | | | | | | | | | | |
Pension liability | | | 37,960 | | | | 1,925 | | | | 77,844 | | | | 5,777 | |
| | | | | | | | | | | | | | | | |
Other comprehensive (loss) income | | | 2,492 | | | | 432,623 | | | | (2,869,839) | | | | 474,405 | |
| | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 1,525,730 | | | $ | 1,787,542 | | | $ | 1,535,749 | | | $ | 4,294,164 | |
| | Three months ended March 31, | |
| | 2014 | | | 2013 | |
Net Income | | $ | 641,712 | | | $ | 1,325,318 | |
| | | | | | | | |
Other comprehensive income (loss) : | | | | | | | | |
| | | | | | | | |
Unrealized holding gains (losses) on securities available for sale | | | 1,215,201 | | | | (781,959 | ) |
Tax effect | | | (370,936 | ) | | | 348,924 | |
Net of tax amount | | | 844,265 | | | | (433,035 | ) |
| | | | | | | | |
| | | | | | | | |
Pension liability | | | 63,266 | | | | 3,220 | |
Tax effect | | | (25,306 | ) | | | (1,295 | ) |
Net of tax amount | | | 37,960 | | | | 1,925 | |
| | | | | | | | |
Total other comprehensive income (loss) | | | 882,225 | | | | (431,110 | ) |
| | | | | | | | |
Comprehensive income | | $ | 1,523,937 | | | $ | 894,208 | |
The accompanying notes are an integral part of these financial statements.
1st Constitution Bancorp and Subsidiaries
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)
| | Common Stock | | | Retained Earnings | | | Treasury Stock | | | Accumulated Other Comprehensive (Loss) Income | | | Total Shareholders’ Equity | |
Balance, January 1, 2013 | | $ | 48,716,032 | | | $ | 15,594,293 | | | $ | (61,086 | ) | | $ | 804,293 | | | $ | 65,053,532 | |
Issuance of vested shares under employee benefit program (9,307 shares) | | | 187,383 | | | | | | | | | | | | | | | | 187,383 | |
Share-based compensation | | | 25,187 | | | | | | | | | | | | | | | | 25,187 | |
Treasury stock purchased (5,224 shares) | | | | | | | | | | | (47,230 | ) | | | | | | | (47,230 | ) |
Net Income for the three month ended March 31, 2013 | | | | | | | 1,325,318 | | | | | | | | | | | | 1,325,318 | |
Other comprehensive (loss) | | | | | | | | | | | | | | | (431,110 | ) | | | (431,110 | ) |
Balance, March 31, 2013 | | $ | 48,928,602 | | | $ | 16,919,611 | | | $ | (108,316 | ) | | $ | 373,183 | | | $ | 66,113,080 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2014 | | $ | 49,403,450 | | | $ | 21,374,381 | | | $ | (171,883 | ) | | $ | (2,247,634 | ) | | $ | 68,358,314 | |
Issuance of vested shares under employee benefit program (31,800 shares) | | | 224,173 | | | | | | | | | | | | | | | | 224,173 | |
Share-based compensation | | | 37,143 | | | | | | | | | | | | | | | | 37,143 | |
Treasury stock purchased (3,891 shares) | | | | | | | | | | | (39,844 | ) | | | | | | | (39,844 | ) |
Acquisition of Rumson Fair Haven Bank (1,019,242 shares) | | | 11,160,700 | | | | | | | | | | | | | | | | 11,160,700 | |
Net income for the three months ended March 31, 2014 | | | | | | | 641,712 | | | | | | | | | | | | 641,712 | |
Other comprehensive income | | | | | | | | | | | | | | | 882,225 | | | | 882,225 | |
| | | | | | | | | | | | | | | | | | | | |
Balance March 31, 2014 | | $ | 60,825,466 | | | $ | 22,016,093 | | | $ | (211,727 | ) | | $ | (1,365,409 | ) | | $ | 81,264,423 | |
The accompanying notes are an integral part of these financial statements.
1st Constitution Bancorp and Subsidiaries
(Unaudited)
| | Three Months Ended March 31, | |
| | 2014 | | | 2013 | |
OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 641,712 | | | $ | 1,325,318 | |
Adjustments to reconcile net income to net cash provided by operating activities- | | | | | | | | |
Provision for loan losses | | | 499,998 | | | | - | |
Provision for loss on other real estate owned | | | - | | | | 662,918 | |
Depreciation and amortization | | | 487,771 | | | | 270,912 | |
Net amortization of premiums and discounts on securities | | | 240,729 | | | | 314,201 | |
Gains on sales of other real estate owned | | | - | | | | (308,010 | ) |
Gains on sales of loans held for sale | | | (739,581 | ) | | | (731,709 | ) |
Originations of loans held for sale | | | (15,191,079 | ) | | | (44,012,744 | ) |
Proceeds from sales of loans held for sale | | | 23,601,340 | | | | 49,987,702 | |
Income on Bank – owned life insurance | | | (129,151 | ) | | | (112,608 | ) |
Share-based compensation expense | | | 37,143 | | | | 170,114 | |
Decrease in accrued interest receivable | | | 195,814 | | | | 458,333 | |
Decrease in other assets | | | 231,587 | | | | 531,820 | |
Decrease in accrued interest payable | | | (93,308 | ) | | | (47,298 | ) |
Decrease in accrued expenses and other liabilities | | | (233,905 | ) | | | (255,455 | ) |
Net cash provided by operating activities | | | 9,549,070 | | | | 8,253,494 | |
INVESTING ACTIVITIES: | | | | | | | | |
Purchases of securities - | | | | | | | | |
Available for sale | | | - | | | | (12,761,368 | ) |
Held to maturity | | | (4,178,849 | ) | | | - | |
Proceeds from maturities and prepayments of securities - | | | | | | | | |
Available for sale | | | 12,660,541 | | | | 5,417,275 | |
Held to maturity | | | 4,167,587 | | | | 10,241,275 | |
Net (increase) decrease in loans | | | (15,056,113 | ) | | | 103,647,874 | |
Capital expenditures | | | (20,793 | ) | | | (68,309 | ) |
Net cash received in the acquisition | | | 21,375,071 | | | | - | |
Proceeds from sales of other real estate owned | | | - | | | | 1,683,830 | |
Net cash provided by investing activities | | | 18,947,444 | | | | 108,160,577 | |
FINANCING ACTIVITIES: | | | | | | | | |
Issuance of vested shares | | | 224,173 | | | | 187,383 | |
Purchase of Treasury Stock | | | (39,844 | ) | | | (47,230 | ) |
Net increase in demand, savings and time deposits | | | 10,959,442 | | | | 3,240,282 | |
Net increase (decrease) in borrowings | | | - | | | | (32,400,000 | ) |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 11,143,771 | | | | (29,019,565 | ) |
Increase in cash and cash equivalents | | | 39,640,285 | | | | 87,394,506 | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
AT BEGINNING OF PERIOD | | | 69,278,771 | | | | 14,044,921 | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
AT END OF PERIOD | | $ | 108,919,056 | | | | 101,439,427 | |
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION | | | | | | | | |
Cash paid during the period for - | | | | | | | | |
Interest | | $ | 1,219,917 | | | $ | 1,194,780 | |
Income taxes | | | 192,223 | | | | 750,000 | |
Non-cash investing activities | | | | | | | | |
Real estate acquired in full satisfaction of loans in foreclosure | | $ | - | | | $ | 2,001,025 | |
Acquisition of Rumson Fair Haven Bank | | | | | | | | |
Noncash assets acquired: | | | | | | | | |
Investment securities available for sale | | $ | 30,024,458 | | | | | |
Loans | | | 143,714,377 | | | | | |
Accrued interest receivable | | | 596,612 | | | | | |
Premises and equipment, net | | | 2,551,939 | | | | | |
Goodwill | | | 7,698,427 | | | | | |
Core deposit intangible | | | 1,188,836 | | | | | |
Bank-owned life insurance | | | 4,470,579 | | | | | |
Other assets | | | 885,576 | | | | | |
| | | 191,130,804 | | | | | |
| | | | | | | | |
Liabilities assumed: | | | | | | | | |
Deposits | | | 189,490,005 | | | | | |
Borrowings | | | 11,030,000 | | | | | |
Other liabilities | | | 825,170 | | | | | |
| | | 201,345,175 | | | | | |
| | | | | | | | |
Common stock issued as consideration | | $ | 11,160,700 | | | | | |
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2013 and 2012
(unaudited)
| | Common Stock | | | Retained Earnings | | | Treasury Stock | | | Accumulated Other Comprehensive (Loss) Income | | | Total Shareholders’ Equity | |
| | | | | | | | | | | | | | | | | | | | |
BALANCE, January 1, 2012 | | $ | 40,847,929 | | | $ | 13,070,606 | | | $ | (10,222 | ) | | $ | 1,091,462 | | | $ | 54,999,775 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options and issuance of vested shares under employee benefit programs | | | 442,918 | | | | | | | | 13,843 | | | | | | | | 456,761 | |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 73,965 | | | | | | | | | | | | | | | | 73,965 | |
| | | | | | | | | | | | | | | | | | | | |
Treasury stock purchased | | | | | | | | | | | (80,344 | ) | | | | | | | (80,344 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income for the nine months ended September 30, 2012 | | | | | | | 3,819,759 | | | | | | | | | | | | 3,819,759 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | | | | | | | 474,405 | | | | 474,405 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2012 | | $ | 41,364,812 | | | $ | 16,890,365 | | | $ | (76,723 | ) | | $ | 1,565,867 | | | $ | 59,744,321 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2013 | | $ | 48,716,032 | | | $ | 15,594,293 | | | $ | (61,086 | ) | | $ | 804,293 | | | $ | 65,053,532 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options, net, and issuance of vested shares under employee benefit programs | | | 603,342 | | | | | | | | | | | | | | | | 603,342 | |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 75,948 | | | | | | | | | | | | | | | | 75,948 | |
| | | | | | | | | | | | | | | | | | | | |
Treasury stock purchased | | | | | | | | | | | (116,451 | ) | | | | | | | (116,451 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net Income for the nine months ended September 30, 2013 | | | | | | | 4,405,588 | | | | | | | | | | | | 4,405,588 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) | | | | | | | | | | | | | | | (2,869,839) | | | | (2,869,839 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2013 | | $ | 49,395,322 | | | $ | 19,999,881 | | | $ | (177,537 | ) | | $ | (2,065,546) | | | $ | 67,152,120 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(unaudited)
| | Nine Months Ended September 30, | |
| | 2013 | | | 2012 | |
OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 4,405,588 | | | $ | 3,819,759 | |
Adjustments to reconcile net income | | | | | | | | |
to net cash provided by operating activities- | | | | | | | | |
Provision for loan losses | | | 776,664 | | | | 1,649,994 | |
Provision for loss on other real estate owned | | | 662,918 | | | | 1,195,288 | |
Depreciation and amortization | | | 805,823 | | | | 884,595 | |
Net amortization of premiums and discounts on securities | | | 868,639 | | | | 1,109,664 | |
Gains on sales of other real estate owned | | | (292,170 | ) | | | - | |
Gains on sales of loans held for sale | | | (1,852,821 | ) | | | (1,472,502 | ) |
Originations of loans held for sale | | | (114,126,927 | ) | | | (128,302,763 | ) |
Proceeds from sales of loans held for sale | | | 137,972,505 | | | | 126,526,811 | |
Income on Bank–owned life insurance | | | (348,206 | ) | | | (337,374 | ) |
Share-based compensation expense | | | 380,471 | | | | 336,898 | |
Decrease (increase) in accrued interest receivable | | | 728,564 | | | | 318,198 | |
Decrease (increase) in other assets | | | 925,461 | | | | (122,026 | ) |
Decrease in accrued interest payable | | | (269,852 | ) | | | (263,258 | ) |
Increase (decrease) in accrued expenses and other liabilities | | | 517,255 | | | | (35,727 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 31,153,912 | | | | 5,307,557 | |
INVESTING ACTIVITIES: | | | | | | | | |
Purchases of securities - | | | | | | | | |
Available for sale | | | (16,947,137 | ) | | | (31,800,023 | ) |
Held to maturity | | | (62,560,993 | ) | | | (6,602,385 | ) |
Proceeds from maturities and prepayments of securities - | | | | | | | | |
Available for sale | | | 20,423,187 | | | | 28,843,391 | |
Held to maturity | | | 27,488,848 | | | | 24,829,152 | |
Net decrease (increase) in loans | | | 155,845,716 | | | | (22,860,591 | ) |
Capital expenditures | | | (147,040 | ) | | | (815,581 | ) |
Additional investment in other real estate owned | | | (11,500 | ) | | | (144,454 | ) |
Proceeds from sales of other real estate owned | | | 7,183,854 | | | | 1,686,389 | |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | 131,274,935 | | | | (6,864,102 | ) |
| | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | |
Exercise of stock options and issuance of vested shares | | | 603,342 | | | | 456,761 | |
Purchase of Treasury Stock | | | (116,451 | ) | | | (80,344 | ) |
Net (decrease) increase in demand, savings and time deposits | | | (20,745,521 | ) | | | 37,135,047 | |
Net decrease in borrowings | | | (32,400,000 | ) | | | (37,150,000 | ) |
| | | | | | | | |
Net cash (used in) provided by financing activities | | | (52,658,630 | ) | | | 361,464 | |
| | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 109,770,217 | | | | (1,195,081 | ) |
| | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
AT BEGINNING OF PERIOD | | | 14,044,921 | | | | 15,195,259 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
AT END OF PERIOD | | $ | 123,815,138 | | | $ | 14,000,178 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | | | | |
OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for - | | | | | | | | |
Interest | | $ | 3,512,789 | | | $ | 4,188,477 | |
Income taxes | | | 1,721,000 | | | | 1,787,000 | |
Non-cash investing activities | | | | | | | | |
Real estate acquired in full satisfaction of loans in foreclosure | | $ | 2,311,225 | | | $ | 553,762 | |
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
September 30, 2013March 31, 2014 (Unaudited)
(1) Summary of Significant Accounting Policies
The accompanying unaudited Consolidated Financial Statementsconsolidated financial statements include 1st Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1st1st Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and, 249 New York Avenue, LLC. 1stLLC, and RFHB Investment Company. 1st Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2012,2013, filed with the SEC on March 22, 2013.31, 2014.
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2013March 31, 2014 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.
(2) Entry into a Material Definitive Agreement
On August 14, 2013, the Company and the Bank entered into an Agreement and PlanAcquisition of Merger, which was subsequently amended on September 19, 2013 by the First Amendment to Agreement and Plan of Merger (the Agreement and Plan of Merger and the First Amendment to Agreement and Plan of Merger are hereinafter referred to as the “Merger Agreement”), with Rumson-Fair Haven Bank &and Trust Company
On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company, a New Jersey state commercial bank (“RFHB”Rumson”), providing for the merger of RFHBwhich merged with and into the Bank, with the Bank as the surviving entity (the “Merger”).
Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of common stock of RFHB will be converted into the right to receive, at the election of the holder of such common stock of RFHB, (i) cash consideration of $7.50 or (ii) 0.7772 of a share of common stock of the Company, or a combination of both, subject to the payment of cash in lieu of fractional shares and customary proration and allocation procedures, if necessary, to assure that 60% of the outstanding shares of common stock of RFHB are exchanged for cash and 40% of the outstanding shares of common stock of RFHB are exchanged for shares of common stock of the Company. In addition, each outstanding option to acquire shares of common stock of RFHB will be terminated and converted to the right to receive cash and equal to the product of (i) the aggregate number of shares of common stock of RFHB underlying such outstanding option multiplied by (ii) the excess, if any, of $7.50 over the per share exercise price of such outstanding option. Stock awards will be converted into shares of common stock of the Company. Each outstanding share of common stock of the Company will remain outstanding and unaffected by the Merger.
Under New Jersey banking law, shareholders of RFHB can elect to dissent from the Merger. Any shareholder electing to dissent shall be entitled to a cash payment for such shares only to the extent permitted by and in accordance with New Jersey Banking law.
entity. The Merger Agreement contains typical representations, warranties, and covenants ofmerger agreement among the Company, the Bank and RFHB, including, among others, covenantsRumson (the “Merger Agreement”) provided that require, during the period betweenshareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the executioneffective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash, subject to proration as described in the Merger Agreement, and consummationso that 60% of the Merger, (i) RFHB to use commercially reasonable efforts to conductaggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019,242 shares of its businesscommon stock and paid $14.8 million in cash in the ordinary coursetransaction.
The merger was accounted for under the acquisition method of accounting and consistent with past banking practiceaccordingly, assets acquired, liabilities assumed and prudent banking practice;consideration exchanged were recorded at preliminary estimated fair values as of the acquisition date. Rumson’s results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.
The assets acquired and (ii) RFHB to not,liabilities assumed in the merger were recorded at their estimated fair values based on management’s best estimates using information available at the date of the merger, including the use of a third party valuation specialist. The fair values are preliminary estimates and subject to certain exceptions generally relatedadjustment for up to one year after the Board’s evaluationclosing date of the merger. The following table summarizes the estimated fair value of the acquired assets and exercise of its fiduciary duties, (a) solicit proposals relating to alternative business combination transactions or (b) enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combination transactions.liabilities.
($ in thousands) | | Amount | |
| | | |
Consideration paid: | | | |
Company stock issued | | $ | 11,161 | |
Cash payment | | | 14,770 | |
Total consideration paid | | | 25,931 | |
| | | | |
| |
Recognized amounts of identifiable assets and liabilities assumed at fair value: | | | | |
Cash and cash equivalents | | | 36,045 | |
Short-term investments | | | 100 | |
Securities available for sale | | | 30,024 | |
Loans | | | 143,714 | |
Premises and equipment, net | | | 2,552 | |
Identifiable intangible assets | | | 1,189 | |
Bank-owned life insurance | | | 4,471 | |
Accrued interest receivable and other assets | | | 1,483 | |
Deposits | | | (189,490 | ) |
Borrowings | | | (11,030 | ) |
Other liabilities | | | (825 | ) |
Total identifiable assets | | | 18,233 | |
| | | | |
Goodwill | | $ | 7,698 | |
Accounting Standards Codification (“ASC”) Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of Contentsthe reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. During the measurement period, the acquirer also shall recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period may not exceed one year from the acquisition date. As of March 31, 2014, independent appraisals of branch office real estate and leases had not been completed and the fair value of these assets and liabilities had not been determined.
Loans and leases acquired in the Rumson acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310, and there was no carryover of Rumson’s allowance for loan losses. The fair values of loans acquired from Rumson were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.
At the acquisition date, the Company recorded $141.1 million of loans without evidence of credit quality deterioration and $2.6 million of loans with evidence of credit quality deterioration. The following table summarizes the composition of the loans acquired and recorded at fair value.
| | At February 7, 2014 | |
($ in thousands) | | Loans acquired with no credit quality deterioration | | | Loans acquired with credit quality deterioration | | | Total | |
| | | | | | | | | |
Commercial | | | | | | | | | |
Construction | | $ | 11,920 | | | | - | | | $ | 11,920 | |
Commercial Real Estate | | | 62,398 | | | | 1,832 | | | | 64,230 | |
Commercial Business | | | 18,086 | | | | 368 | | | | 18,454 | |
Residential Real Estate | | | 32,743 | | | | 180 | | | | 32,923 | |
Consumer | | | 15,953 | | | | 234 | | | | 16,187 | |
Total | | $ | 141,100 | | | $ | 2,614 | | | $ | 143,714 | |
The Merger Agreementfollowing is a summary of the loans acquired with evidence of deteriorated credit quality in the Rumson acquisition as of the closing date.
($ in thousands) | | Acquired Credit Impaired Loans | |
| | | |
Contractually required principal and interest at acquisition | | $ | 4,451 | |
Contractual cash flows not expected to be collected (non-accretable difference) | | | 1,543 | |
| | | | |
Expected cash flows at acquisition | | | 2,908 | |
Interest component of expected cash flows (accretable difference) | | | 294 | |
| | | | |
Fair value of acquired loans | | $ | 2,614 | |
The core deposit intangible totaled $1.2 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The following table presents the projected amortization of the core deposits intangible for each period presented :
| | | ($ in thousands) | |
2014 | | $ | 216 | |
2015 | | | 195 | |
2016 | | | 173 | |
2017 | | | 151 | |
2018 | | | 130 | |
Thereafter | | | 324 | |
| | | | |
| | $ | 1,189 | |
The fair values of deposit liabilities with no stated maturities, such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. During the three months ended March 31, 2014, the Company incurred $1.4 million of merger and acquisition integration-related expenses, which have been separately stated in the Company’s Consolidated Statements of Income.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former Rumson operations included in our Consolidated Statements of Income from the date of the acquisition (i.e., February 7, 2014) through March 31, 2014 under the column “Actual from acquisition date to March 31, 2014.” In addition, the table provides certain termination rightsunaudited condensed pro forma financial information assuming that the Rumson acquisition had been completed as of January 1, 2013. In the table below, merger-related expenses of $1.7 million were excluded from pro forma non-interest expenses for the Company,three months ended March 31, 2014. Income taxes were also adjusted to exclude income tax benefits of $462,000 related to the Bankmerger expenses for the three months ended March 31, 2014.
The table below has been prepared for comparative purposes only and RFHB, and further provides that upon terminationis not necessarily indicative of the Merger Agreement under certain circumstances, RFHB will be obligated to payactual results that would have been attained had the Company a termination fee of $1,000,000 and out of pocket expenses incurred by the Company and the Bank in connection with the Merger of up to $275,000; provided, however, that the sumacquisition occurred as of the termination fee and such out-of-pocket expenses shall not exceed $1,275,000.
Completionbeginning of the Mergerperiods presented, nor is subject to customary closing conditions, including (i) receiptit indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the requisite approvalintegration and consolidation of the shareholders of RFHB, (ii) receipt of regulatory approvals, (iii) the absence of any law or order prohibiting the closing and (iv) and the effectiveness of the registration statement to be filed by the Company with respect to the common stock to be issued in the Merger. In addition, each party’s obligation to consummate the merger is subjectRumson’s operations. The pro forma financial information reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other conditions, including the accuracy of the representationsintangibles; and warranties of the other party and compliance of the other party with its covenants in all material respects.related income tax effects.
| | | | | | | | | | | | |
| | | Actual from acquisition date to March 31, 2014 | | | | Pro Forma for the three months ended March 31, 2014 | | | | Pro Forma for the three months ended March 31, 2013 | |
| | (in thousands, except per share amounts) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net interest income | | $ | 1,076 | | | $ | 7,696 | | | $ | 8,007 | |
Non-interest income | | | 41 | | | | 1,686 | | | | 1,898 | |
Non-interest expenses | | | 473 | | | | 7,145 | | | | 7,432 | |
Income taxes | | | 240 | | | | 623 | | | | 756 | |
Net income | | | 399 | | | | 1,614 | | | | 1,717 | |
Earnings per share – Fully diluted | | | | | | $ | 0.22 | | | $ | 0.24 | |
(3) Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period.
Diluted net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential common stock warrants, common stock options and unvested restricted stock awards (as defined below), using the treasury stock method. All share information has been adjusted for the effect of a 5% common stock dividend declared December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.
The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per common share (EPS) calculations. Dilutive securities in the tables below exclude common stock options and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation.
| | Three Months Ended September 30, 2013 | |
| | Net Income | | | Weighted- average shares | | | Per share Amount | |
Basic earnings per common share: | | | | | | | | | |
Net income | | $ | 1,523,238 | | | 5,991,480 | | | $ | 0.25 | |
| | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options and unvested stock awards | | | | | | | 155,182 | | | | | |
| | | | | | | | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversion | | $ | 1,523,238 | | | | 6,146,662 | | | $ | 0.25 | |
| | Three Months Ended March 31, 2014 | |
| | Net Income | | | Weighted- average shares | | | Per share amount | |
Basic earnings per common share: | | | | | | | | | |
Net income | | $ | 641,712 | | | | 6,756,782 | | | $ | 0.09 | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options, warrants and unvested restricted stock awards | | | | | | | 186,161 | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversion | | $ | 641,712 | | | | 6,942,943 | | | $ | 0.09 | |
| | Three Months Ended September 30, 2012 | |
| | Net Income | | | Weighted- average shares | | | Per share Amount | |
Basic earnings per common share: | | | | | | | | | |
Net income | | $ | 1,354,919 | | | | 5,378,854 | | | $ | 0.25 | |
| | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options and unvested stock awards | | | | | | | 130,019 | | | | | |
| | | | | | | | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversion | | $ | 1,354,919 | | | | 5,508,873 | | | $ | 0.25 | |
| | Three Months Ended March 31, 2013 | |
| | Net Income | | | Weighted- average shares | | | Per share amount | |
Basic earnings per common share: | | | | | | | | | |
Net income | | $ | 1,325,318 | | | | 5,895,763 | | | $ | 0.22 | |
Effect of Dilutive Securities: | | | | | | | | | | | | |
Stock options, warrants and unvested restricted stock awards | | | | | | | 139,016 | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversions | | $ | 1,325,318 | | | | 6,034,779 | | | $ | 0.22 | |
| | Nine Months Ended September 30, 2013 | |
| | Net Income | | | Weighted- average shares | | | Per share Amount | |
Basic earnings per share: | | | | | | | | | |
Net income | | $ | 4,405,588 | | | 5,960,294 | | | $ | 0.74 | |
| | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options and unvested stock awards | | | | | | | 128,539 | | | | | |
| | | | | | | | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversion | | $ | 4,405,588 | | | | 6,088,833 | | | $ | 0.72 | |
For the three months ended March 31, 2014 and 2013, 87,296 and 30,500 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common shares.
| | Nine Months Ended September 30, 2012 | |
| | Net Income | | | Weighted- average shares | | | Per share Amount | |
Basic earnings per common share: | | | | | | | | | |
Net income | | $ | 3,819,759 | | | 5,360,395 | | | $ | 0.71 | |
| | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options and unvested stock awards | | | | | | | 96,107 | | | | | |
| | | | | | | | | | | | |
Diluted EPS: | | | | | | | | | | | | |
Net income plus assumed conversion | | $ | 3,819,759 | | | | 5,456,502 | | | $ | 0.70 | |
(4) Investment Securities
Amortized cost, gross unrealized gains and losses, and the estimated fair value by security type are as follows:
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
September 30, 2013: | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | |
Available for sale | | | | | | | | | | | | |
| | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 22,382,475 | | | $ | 33,857 | | | $ | (789,667) | | | $ | 21,626,665 | |
Residential collateralized mortgage obligations – GSE | | | 4,031,094 | | | | 165,347 | | | | - | | | | 4,196,441 | |
Residential collateralized mortgage obligations – non-GSE | | | 3,001,533 | | | | 70,080 | | | | (18,950) | | | | 3,052,663 | |
Residential mortgage backed securities – GSE | | | 32,795,415 | | | | 1,002,198 | | | | (458,845) | | | | 33,338,768 | |
Obligations of State and | | | | | | | | | | | | | | | | |
Political subdivisions | | | 22,231,752 | | | | 174,056 | | | | (2,660,209) | | | | 19,745,599 | |
Trust preferred debt securities – single issuer | | | 2,468,135 | | | | - | | | | (429,935) | | | | 2,038,200 | |
Corporate Debt Securities | | | 16,267,927 | | | | 280,241 | | | | (27,393) | | | | 16,520,775 | |
Restricted stock | | | 1,013,100 | | | | - | | | | - | | | | 1,013,100 | |
Mutual fund | | | 25,000 | | | | - | | | | - | | | | 25,000 | |
| | | | | | | | | | | | | | | | |
| | $ | 104,216,431 | | | $ | 1,725,779 | | | $ | (4,384,999) | | | $ | 101,557,211 | |
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
March 31, 2014 | | Cost | | | Gains | | | Losses | | | Value | |
Available for sale- | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 11,429,804 | | | $ | - | | | $ | (661,119 | ) | | $ | 10,768,685 | |
Residential collateralized mortgage obligations- GSE | | | 4,382,539 | | | | 112,206 | | | | (49,956 | ) | | | 4,444,789 | |
Residential collateralized mortgage obligations- non GSE | | | 3,154,429 | | | | 54,710 | | | | (5,781 | ) | | | 3,203,358 | |
Residential mortgage backed securities – GSE | | | 30,427,673 | | | | 869,202 | | | | (342,213 | ) | | | 30,954,662 | |
Obligations of State and Political subdivisions | | | 22,182,476 | | | | 200,338 | | | | (1,900,821 | ) | | | 20,481,993 | |
Trust preferred debt securities – single issuer | | | 2,469,574 | | | | - | | | | (401,174 | ) | | | 2,068,400 | |
Corporate debt securities | | | 43,626,642 | | | | 384,940 | | | | (37,753 | ) | | | 43,973,829 | |
Restricted stock | | | 1,710,000 | | | | - | | | | - | | | | 1,710,000 | |
Mutual fund | | | 25,000 | | | | - | | | | - | | | | 25,000 | |
| | $ | 119,408,137 | | | $ | 1,621,396 | | | $ | (3,398,817 | ) | | $ | 117,630,716 | |
September 30, 2013: | | Amortized Cost | | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Income | | | Carrying Value | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
�� U. S. Treasury securities and | | | | | | | | | | | | | | | | | | |
obligations of U.S. Government sponsored | | | | | | | | | | | | | | | | | | |
corporations (“GSE”) and agencies | | $ | 1,537,229 | | | $ | - | | | $ | 1,537,229 | | | $ | 14,416 | | | $ | - | | | $ | 1,551,645 | |
Residential collateralized Mortgage obligations – GSE | | | 15,701,290 | | | | - | | | | 15,701,290 | | | | 578,336 | | | | - | | | | 16,279,626 | |
Residential collateralized Mortgage obligations – non-GSE | | | 11,234,867 | | | | - | | | | 11,234,867 | | | | 329,988 | | | | (1,637 | ) | | | 11,563,218 | |
Residential mortgage backed securities – GSE | | | 67,487,280 | | | | - | | | | 67,487,280 | | | | 869,664 | | | | (268,803 | ) | | | 68,088,141 | |
Obligations of State and | | | | | | | | | | | | | | | | | | | | | | | | |
political subdivisions | | | 50,960,864 | | | | - | | | | 50,960,864 | | | | 1,405,225 | | | | (1,327,248 | ) | | | 51,038,841 | |
Trust preferred debt securities – pooled | | | 656,662 | | | | (500,944 | ) | | | 155,718 | | | | - | | | | (8,311 | ) | | | 147,407 | |
Corporate debt securities | | | 3,495,674 | | | | - | | | | 3,495,674 | | | | 21,729 | | | | - | | | | 3,517,403 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 151,073,866 | | | $ | (500,944 | ) | | $ | 150,572,922 | | | $ | 3,219,358 | | | $ | (1,605,999 | ) | | $ | 152,186,281 | |
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
December 31, 2012: | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | |
Available for sale- | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 29,384,595 | | | $ | 137,847 | | | $ | (26,907 | ) | | $ | 29,495,535 | |
| | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | | | 6,349,310 | | | | 283,355 | | | | - | | | | 6,632,665 | |
Residential collateralized mortgage obligations – non-GSE | | | 3,811,933 | | | | 119,323 | | | | (7,074 | ) | | | 3,924,182 | |
| | | | | | | | | | | | | | | | |
Residential mortgage backed securities – GSE | | | 24,912,948 | | | | 1,576,387 | | | | - | | | | 26,489,335 | |
Obligations of State and Political subdivisions | | | 20,793,222 | | | | 375,416 | | | | (486,337 | ) | | | 20,682,301 | |
Trust preferred debt securities – single issuer | | | 2,466,009 | | | | - | | | | (467,643 | ) | | | 1,998,366 | |
Corporate Debt Securities | | | 17,797,681 | | | | 325,731 | | | | (23,131 | ) | | | 18,100,281 | |
Restricted stock | | | 2,493,300 | | | | - | | | | - | | | | 2,493,300 | |
Mutual fund | | | 25,000 | | | | - | | | | - | | | | 25,000 | |
| | $ | 108,033,998 | | | $ | 2,818,059 | | | $ | (1,011,092) | | | $ | 109,840,965 | |
December 31, 2012: | | Amortized Cost | | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Income | | | Carrying Value | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
Held to maturity- | | | | | | | | | | | | | | | | | | |
Obligations of U.S. Government sponsored corporations (“GSE”) and agencies | | $ | 3,073,957 | | | $ | - | | | $ | 3,073,957 | | | $ | 33,213 | | | $ | - | | | $ | 3,107,170 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | | | 19,660,625 | | | | - | | | | 19,660,625 | | | | 1,021,556 | | | | - | | | | 20,682,181 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations- non – GSE | | | 13,387,974 | | | | - | | | | 13,387,974 | | | | 796,892 | | | | (289 | ) | | | 14,184,577 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage backed securities – GSE | | | 19,950,190 | | | | - | | | | 19,950,190 | | | | 849,040 | | | | (944 | ) | | | 20,798,286 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of State and Political subdivisions | | | 42,815,706 | | | | - | | | | 42,815,706 | | | | 3,039,935 | | | | - | | | | 45,855,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – pooled | | | 656,662 | | | | (500,944 | ) | | | 155,718 | | | | - | | | | (9,638 | ) | | | 146,080 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | 16,983,730 | | | | - | | | | 16,983,730 | | | | 84,443 | | | | (2,745 | ) | | | 17,065,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 116,528,844 | | | $ | (500,944 | ) | | $ | 116,027,900 | | | $ | 5,825,079 | | | $ | (13,616 | ) | | $ | 121,839,363 | |
March 31, 2014 | | Amortized Cost | | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | | Carrying Value | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
Held to maturity- | | | | | | | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 1,512,570 | | | $ | - | | | $ | 1,512,570 | | | $ | 6,130 | | | $ | - | | | $ | 1,518,700 | |
Residential collateralized mortgage obligations – GSE | | | 14,077,130 | | | | - | | | | 14,077,130 | | | | 424,788 | | | | - | | | | 14,501,918 | |
Residential collateralized mortgage obligations – non – GSE | | | 10,210,560 | | | | - | | | | 10,210,560 | | | | 263,511 | | | | (247 | ) | | | 10,473,824 | |
Residential mortgage backed securities – GSE | | | 63,465,847 | | | | - | | | | 63,465,847 | | | | 1,021,862 | | | | (239,185 | ) | | | 64,248,524 | |
Obligations of State and | | | | | | | | | | | | | | | | | | | | | | | | |
Political subdivisions | | | 62,309,859 | | | | - | | | | 62,309,859 | | | | 1,761,685 | | | | (765,477 | ) | | | 63,306,067 | |
Trust preferred debt securities-pooled | | | 656,661 | | | | (500,944 | ) | | | 155,717 | | | | 583,269 | | | | - | | | | 738,986 | |
Corporate debt securities | | | 1,002,876 | | | | - | | | | 1,002,876 | | | | 4,764 | | | | - | | | | 1,007,640 | |
| | $ | 153,235,503 | | | $ | (500,944 | ) | | $ | 152,734,559 | | | $ | 4,066,009 | | | $ | (1,004,909 | ) | | $ | 155,795,659 | |
| | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
December 31, 2013 | | Cost | | Gains | | Losses | | Value | |
| | | | | | | | | |
Available for sale- | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | | $ | 22,386,761 | | | $ | 33,213 | | | $ | (910,274 | ) | | $ | 21,509,700 | |
Residential collateralized mortgage obligations- GSE | | | | 3,547,404 | | | | 134,388 | | | | - | | | | 3,681,792 | |
Residential collateralized mortgage obligations- non GSE | | | | 2,782,843 | | | | 52,227 | | | | (8,674 | ) | | | 2,826,396 | |
Residential mortgage backed securities - GSE | | | | 31,532,051 | | | | 872,169 | | | | (438,273 | ) | | | 31,965,947 | |
Obligations of State and Political subdivisions | | | | 22,206,959 | | | | 149,959 | | | | (2,710,874 | ) | | | 19,646,044 | |
Trust preferred debt securities-single issuer | | | | 2,468,839 | | | | - | | | | (455,739 | ) | | | 2,013,100 | |
Corporate debt securities | | | | 16,228,474 | | | | 318,590 | | | | (29,336 | ) | | | 16,517,728 | |
Restricted stock | | | | 1,013,100 | | | | - | | | | - | | | | 1,013,100 | |
Mutual fund | | | | 25,000 | | | | - | | | | - | | | | 25,000 | |
| | | $ | 102,191,431 | | | $ | 1,560,546 | | | $ | (4,553,170 | ) | | $ | 99,198,807 | |
December 31, 2013 | | Amortized Cost | | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | | Carrying Value | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
Held to maturity- | | | | | | | | | | | | | | | | | | |
Obligations of U.S. Government | | | | | | | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 1,524,860 | | | $ | - | | | $ | 1,524,860 | | | $ | 10,310 | | | $ | - | | | $ | 1,535,170 | |
Residential collateralized mortgage obligations-GSE | | | 14,803,739 | | | | - | | | | 14,803,739 | | | | 379,815 | | | | - | | | | 15,183,554 | |
Residential collateralized mortgage obligations-non- GSE | | | 10,682,363 | | | | - | | | | 10,682,363 | | | | 119,777 | | | | (27,526 | ) | | | 10,774,614 | |
Residential mortgage backed securities – GSE | | | 65,240,620 | | | | - | | | | 65,240,620 | | | | 611,062 | | | | (387,034 | ) | | | 65,464,648 | |
Obligations of State and Political subdivisions | | | 59,400,916 | | | | - | | | | 59,400,916 | | | | 1,399,938 | | | | (1,296,357 | ) | | | 59,504,497 | |
Trust preferred debt securities - pooled | | | 656,662 | | | | (500,944 | ) | | | 155,718 | | | | - | | | | (6,863 | ) | | | 148,855 | |
Corporate debt securities | | | 1,008,599 | | | | - | | | | 1,008,599 | | | | 9,836 | | | | - | | | | 1,018,435 | |
| | $ | 153,317,759 | | | $ | (500,944 | ) | | $ | 152,816,815 | | | $ | 2,530,738 | | | $ | (1,717,780 | ) | | $ | 153,629,773 | |
Restricted stock at September 30, 2013March 31, 2014 and December 31, 20122013 consisted of $998,100$1,710,000 and $2,478,300,$1,013,100, respectively, of Federal Home Loan Bank of New York stock and $15,000$65,000 of Atlantic Central Bankers Bank stock.
The amortized cost and estimated fair value of investment securities at September 30, 2013,March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Restricted stock is included in “Available for sale-Duesale - Due in one year or less.”
| | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | |
Available for sale- | | | | |
Available for sale- | | | | |
Due in one year or less | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”) and agencies | | $ | 4,998,329 | | $ | 5,004,300 | | |
Residential mortgage backed securities - GSE | | 19,397 | | 20,034 | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | | $ | - | | $ | - | |
Residential mortgage backed securities-GSE | | | 386 | | 387 | |
Obligations of State and Political subdivisions | | 110,000 | | 110,343 | | | 374,530 | | 375,968 | |
Corporate Debt Securities | | 510,694 | | 512,930 | | | 16,325,561 | | 16,333,666 | |
Restricted Stock | | 1,013,100 | | 1,013,100 | | | 1,710,000 | | 1,710,000 | |
Mutual Fund | | | 25,000 | | | 25,000 | | | | 25,000 | | | 25,000 | |
| | $ | 6,676,520 | | $ | 6,685,707 | | | $ | 18,435,477 | | $ | 18,445,021 | |
Due after one year through five years | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | $ | 6,517,816 | | $ | 6,520,515 | | |
Residential mortgage backed securities - GSE | | 4,431,874 | | 4,370,765 | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”)and agencies | | | $ | 1,545,381 | | $ | 1,523,385 | |
Residential collateralized mortgage obligations –non GSE | | | 541,290 | | 543,378 | |
Residential mortgage backed securities-GSE | | | 7,007,116 | | 6,919,178 | |
Obligations of State and Political subdivisions | | 374,281 | | 375,833 | | | 110,000 | | 110,231 | |
Corporate Debt Securities | | | 14,671,579 | | | 14,942,705 | | | | 25,195,136 | | | 25,575,393 | |
| | $ | 25,995,550 | | $ | 26,209,818 | | | $ | 34,398,923 | | $ | 34,671,565 | |
Due after five years through ten years | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”) and agencies | | $ | 10,866,330 | | $ | 10,101,850 | | |
Residential collateralized mortgage obligations - GSE | | 134,797 | | 144,639 | | |
Residential mortgage backed securities - GSE | | 11,172,951 | | 11,152,731 | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | | $ | 9,884,423 | | $ | 9,245,300 | |
Residential collateralized mortgage obligations -GSE | | | 116,140 | | 123,862 | |
Residential mortgage backed Securities - GSE | | | 7,914,672 | | 7,990,787 | |
Obligations of State and Political Subdivisions | | 3,167,509 | | 3,227,127 | | | 4,871,859 | | 4,865,849 | |
Corporate Debt Securities | | | - | | | - | | | | 1,020,784 | | | 1,016,250 | |
| | $ | 25,341,587 | | $ | 24,626,347 | | | $ | 23,807,878 | | $ | 23,242,048 | |
Due after ten years | | | | | | | | | | | | | | | | |
| | | | | | |
Residential collateralized mortgage obligations - GSE | | 3,896,296 | | 4,051,802 | | |
Residential collateralized mortgage obligations - non GSE | | 3,001,534 | | 3,052,663 | | |
Residential collateralized mortgage obligations -GSE | | | $ | 4,266,399 | | $ | 4,320,927 | |
Residential collateralized mortgage obligations –non GSE | | | 2,613,139 | | 2,659,980 | |
Residential mortgage backed securities - GSE | | 17,171,193 | | 17,795,238 | | | 15,505,499 | | 16,044,310 | |
Obligations of State and Political subdivisions | | 18,579,962 | | 16,032,296 | | | 16,826,087 | | 15,129,945 | |
Trust Preferred Debt Securities - single issuer | | 2,468,135 | | 2,038,200 | | |
Corporate Debt Securities | | | 1,085,654 | | | 1,065,140 | | | 1,085,161 | | 1,048,520 | |
Trust Preferred Debt Securities | | | | 2,469,574 | | | 2,068,400 | |
| | $ | 46,202,774 | | $ | 44,035,339 | | | $ | 42,765,858 | | $ | 41,272,081 | |
| | | | | | | | | | | | |
Total | | $ | 104,216,431 | | | $ | 101,557,211 | | | $ | 119,408,137 | | | $ | 117,630,716 | |
Held to maturity- | | | | | | | | |
Due in one year or less | | | | | | | | |
U.S. Treasury securities and obligations of US Government sponsored Corporations (“GSE”) and agencies | | $ | 1,512,570 | | | $ | 1,518,700 | |
Obligations of State and Political subdivisions | | | 11,197,967 | | | | 11,221,464 | |
Corporate Debt Securities | | | 1,002,876 | | | | 1,007,640 | |
| | $ | 13,713,413 | | | $ | 13,747,804 | |
| | | | | | | | |
Due after one year through five years | | | | | | | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | $ | - | | | $ | - | |
Obligations of State and Political subdivisions | | | 11,666,066 | | | | 12,082,277 | |
Corporate Debt Securities | | | - | | | | - | |
| | $ | 11,666,066 | | | $ | 12,082,277 | |
| | | | | | | | |
Due after five years through ten years | | | | | | | | |
Residential collateralized mortgage obligations – GSE | | $ | 12,765 | | | $ | 12,781 | |
Residential collateralized mortgage obligations-non GSE | | | 877,270 | | | | 877,023 | |
Residential mortgage backed securities – GSE | | | 21,091,526 | | | | 21,375,467 | |
Obligations of State and Political subdivisions | | | 19,914,474 | | | | 20,643,262 | |
| | $ | 41,896,035 | | | $ | 42,908,533 | |
Due after ten years | | | | | | | | |
Residential collateralized mortgage obligations - GSE | | | 14,064,365 | | | | 14,489,137 | |
Residential collateralized mortgage obligations – non GSE | | | 9,333,290 | | | | 9,596,801 | |
Residential mortgage backed securities - GSE | | | 42,374,321 | | | | 42,873,057 | |
Obligations of State and Political subdivisions | | | 19,531,352 | | | | 19,359,064 | |
Trust Preferred Debt Securities - Pooled | | | 656,661 | | | | 738,986 | |
| | $ | 85,959,989 | | | $ | 87,057,045 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 153,235,503 | | | $ | 155,795,659 | |
Held to maturity- | | | | | | | | |
Due in one year or less | | | | | | | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | $ | 1,537,229 | | | $ | 1,551,645 | |
Obligations of State and Political subdivisions | | | 1,261,544 | | | | 1,273,221 | |
Corporate Debt Securities | | | 3,495,674 | | | | 3,517,403 | |
| | $ | 6,294,447 | | | $ | 6,342,269 | |
| | | | | | | | |
Due after one year through five years | | | | | | | | |
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies | | $ | - | | | $ | - | |
Obligations of State and Political subdivisions | | | 8,937,728 | | | | 9,243,927 | |
Corporate Debt Securities | | | - | | | | - | |
| | $ | 8,937,728 | | | $ | 9,243,927 | |
| | | | | | | | |
Due after five years through ten years | | | | | | | | |
Residential collateralized mortgage obligations - GSE | | | 85,440 | | | | 86,388 | |
Residential collateralized mortgage obligations – non-GSE | | | 954,327 | | | | 952,869 | |
Residential mortgage backed securities – GSE | | | 21,772,966 | | | | 21,945,961 | |
Obligations of State and Political subdivisions | | | 20,751,372 | | | | 21,459,490 | |
| | $ | 43,564,105 | | | $ | 44,444,708 | |
Due after ten years | | | | | | | | |
Residential collateralized mortgage obligations - GSE | | $ | 15,615,850 | | | $ | 16,193,239 | |
Residential collateralized mortgage obligations – non-GSE | | | 10,280,540 | | | | 10,610,348 | |
Residential mortgage backed securities - GSE | | | 45,714,314 | | | | 46,142,180 | |
Obligations of State and Political subdivisions | | | 20,010,221 | | | | 19,062,203 | |
Trust Preferred Debt Securities - Pooled | | | 656,662 | | | | 147,407 | |
| | $ | 92,277,587 | | | $ | 92,155,377 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 151,073,866 | | | $ | 152,186,281 | |
Gross unrealized losses on available for sale and held to maturity securities and the estimated fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013March 31, 2014 and December 31, 2012 are2013 were as follows:
September 30, 2013 | | | Less than 12 months | | | 12 months or longer | | | Total | |
| Number of Securities | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies | 3 | | $ | 11,627,065 | | | $ | (789,667 | ) | | $ | - | | | $ | - | | | $ | 11,627,065 | | | $ | (789,667 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations – non-GSE | 3 | | | 952,689 | | | | (1,637 | ) | | | 1,094,497 | | | | (18,950) | | | | 2,047,186 | | | | (20,587 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage backed securities - GSE | 28 | | | 30,747,798 | | | | (727,648 | ) | | | - | | | | - | | | | 30,747,798 | | | | (727,648 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of State and Political Subdivisions | 77 | | | 24,976,580 | | | | (3,987,457 | ) | | | - | | | | - | | | | 24,976,580 | | | | (3,987,457 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – single issuer | 4 | | | - | | | | - | | | | 2,038,200 | | | | (429,935) | | | | 2,038,200 | | | | (429,935 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – pooled | 1 | | | - | | | | - | | | | 147,407 | | | | (509,255) | | | | 147,407 | | | | (509,255 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate Debt Securities | 3 | | | 2,823,855 | | | | (27,393 | ) | | | - | | | | - | | | | 2,823,855 | | | | (27,393 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | 119 | | $ | 71,127,987 | | | $ | (5,533,802) | | | $ | 3,280,104 | | | $ | (958,140) | | | $ | 74,408,091 | | | $ | (6,491,942) | |
December 31, 2012 | | | Less than 12 months | | | 12 months or longer | | | Total | |
| Number of Securities | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (GSE) and agencies | 1 | | $ | 9,842,200 | | | $ | (26,907) | | | $ | - | | | $ | - | | | $ | 9,842,200 | | | $ | (26,907) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations – non-GSE | 3 | | | 1,960,237 | | | | (4,516) | | | | 156,505 | | | | (2,847) | | | | 2,116,742 | | | | (7,363) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage backed securities GSE | 2 | | | 3,989,675 | | | | (944) | | | | - | | | | - | | | | 3,989,675 | | | | (944) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of State and Political Subdivisions | 37 | | | 12,794,007 | | | | (486,337) | | | | - | | | | - | | | | 12,794,007 | | | | (486,337) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – Single issuer | 4 | | | - | | | | - | | | | 1,998,366 | | | | (467,643) | | | | 1,998,366 | | | | (467,643) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – Pooled | 1 | | | - | | | | - | | | | 146,080 | | | | (510,582) | | | | 146,080 | | | | (510,582) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | 5 | | | 3,176,328 | | | | (25,876) | | | | - | | | | - | | | | 3,176,328 | | | | (25,876) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | 53 | | $ | 31,762,447 | | | $ | (544,580) | | | $ | 2,300,951 | | | $ | (981,072) | | | $ | 34,063,398 | | | $ | (1,525,652) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
March 31, 2014 | | | Less than 12 months | | | 12 months or longer | | | Total | |
| Number of Securities | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies | 2 | | $ | 10,768,685 | | | $ | (661,119 | ) | | $ | - | | | $ | - | | | $ | 10,768,685 | | | $ | (661,119 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations - GSE | 1 | | | 1,151,081 | | | | (49,956 | ) | | | - | | | | - | | | | 1,151,081 | | | | (49,956 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage obligations – non-GSE | 3 | | | 877,023 | | | | (247 | ) | | | 1,097,207 | | | | (5,781 | ) | | | 1,974,230 | | | | (6,028 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage backed securities - GSE | 20 | | | 16,183,114 | | | | (454,108 | ) | | | 5,259,063 | | | | (127,290 | ) | | | 21,442,177 | | | | (581,398 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of State and Political Subdivisions | 88 | | | 14,563,695 | | | | (893,734 | ) | | | 13,459,681 | | | | (1,772,564 | ) | | | 28,023,376 | | | | (2,666,298 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – single issuer | 4 | | | - | | | | - | | | | 2,068,400 | | | | (401,174 | ) | | | 2,068,400 | | | | (401,174 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate Debt Securities | 5 | | | 3,576,105 | | | | (1,112 | ) | | | 1,048,520 | | | | (36,641 | ) | | | 4,624,625 | | | | (37,753 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | 123 | | $ | 47,119,703 | | | $ | (2,060,276 | ) | | $ | 22,932,871 | | | $ | (2,343,450 | ) | | $ | 70,052,574 | | | $ | (4,403,726 | ) |
December 31, 2013 | | | Less than 12 months | | | 12 months or longer | | | Total | |
| Number of Securities | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (GSE) and agencies | 3 | | $ | 11,507,350 | | | $ | (910,274 | ) | | $ | - | | | $ | - | | | $ | 11,507,350 | | | $ | (910,274 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential collateralized mortgage Obligations – non-GSE | 8 | | | 5,328,485 | | | | (28,231 | ) | | | 1,094,754 | | | | (7,969 | ) | | | 6,423,239 | | | | (36,200 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage backed securities GSE | 38 | | | 40,504,327 | | | | (825,307 | ) | | | - | | | | - | | | | 40,504,327 | | | | (825,307 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of State and Political Subdivisions | 95 | | | 19,403,457 | | | | (2,285,759 | ) | | | 8,936,441- | | | | (1,721,472 | ) | | | 28,339,898 | | | | (4,007,231 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – single issuer | 4 | | | - | | | | - | | | | 2,013,100 | | | | (455,739 | ) | | | 2,013,100 | | | | (455,739 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred debt securities – pooled | 1 | | | - | | | | - | | | | 148,855 | | | | (507,807 | ) | | | 148,855 | | | | (507,807 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | 1 | | | - | | | | - | | | | 1,056,110 | | | | (29,336 | ) | | | 1,056,110 | | | | (29,336 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | 150 | | $ | 76,743,619 | | | $ | (4,049,571 | ) | | $ | 13,249,260 | | | $ | (2,722,323 | ) | | $ | 89,992,879 | | | $ | (6,771,894 | ) |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies: The unrealized losses on investments in these securities were caused by increases in market interest rate increases.rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity; therefore, these investments are not considered other-than temporarily impaired.
Residential collateralized mortgage obligations and residential mortgaged-backed securities: The unrealized losses on investments in residential collateralized residential mortgage obligations and mortgage-backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuer, which are primarily government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. BecauseThe decline in fair value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell these investments and it is not likely that the Company will be required to sell these investments before a market price recovery or maturity; therefore, these investments are not considered other-than-temporarily impaired.
Obligations of State and Political Subdivisions: The unrealized losses or investments in these securities were caused by increases in market interest rates. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. The decline in fair value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.
Residential collateralized mortgage obligations and residential mortgaged-backedCorporate debt securities:The unrealized losses on investments in residential collateralized residential mortgage obligations and mortgage-backedcorporate debt securities were caused by increases to market interest rate increases. The contractual cash flows of these securities are guaranteed by the issuer, which are generally government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized costrates. None of the investment. Because thecorporate issuers have defaulted on interest payments. The decline in fair value is attributable to changes in interest rates and not a decline in credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Obligations of State and Political Subdivisions: The unrealized losses on investments in these securities were caused by interest rate increases. None of the issuers have defaulted on interest payments. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Corporate debt securities: The unrealized losses on investments in corporate debt securities were caused by interest rate increases. None of the corporate issuers have defaulted on interest payments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.
Trust preferred debt securities – single issuer: The investments in these securities with unrealized losses are comprised of four corporate trust preferred securities issued by two large financial institutions that mature in 2027, all of which were single-issuer securities.2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. NoneBoth of the corporate issuers havecontinue to maintain investment grade credit ratings and neither has defaulted on interest payments. Because theThe decline in fair value is attributable to the widening of interest rate spreads and the lack of an active trading market for these securities and, to a lesser degree, market concerns onabout the issuers’ credit quality, and because thequality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.
Trust preferred debt securitysecurities – pooled: This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PreTSLPRETSL XXV”),) consisting primarily of financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge of $864,727, of which $363,783 was determined to be a credit loss and charged to operations and $500,944 was recognized in the other comprehensive income (loss) component of shareholders’ equity.
The primary factor used to determine the credit portion of the impairment loss to be recognized in the income statement for this security was the discounted present value of the projected cash flowsflow where that present value of cash flowsflow was less than the amortized cost basis of the security. The present value of cash flowsflow was developed using an EITF 99-20 model that considered performing collateral ratios, the level of subordination to senior tranches of the security, credit ratings of and projected credit defaults in the underlying collateral.
On a quarterly basis, management evaluates this security to determine if there is any additional other-than-temporary impairment (“OTTI”).is required. As of September 30, 2013,March 31, 2014, our evaluation was as follows:
| a. | We obtained the PreTSLPRETSL XXV Depository Institutions Issuer List as of September 30, 2013March 31, 2014 from the FTN Financial Corp. (“FTN”) website and reviewed the financial ratios and capital levels of each individual financial institution issuer. |
| b. | We sorted the financial institutions on the issuer list to develop three “buckets” (or categories) for further deferred/default analysis based upon the indicated “Texas Ratio.” The Texas Ratio is calculated by dividing the institution’s Non-Performing Assets plus loans 90 days past due by the combined total of Tangible Equity plus the Allowance for Loan Losses. The three buckets consisted of those institutions with a Texas Ratio of: |
| c. | We then applied the following asset specific deferral/default assumptions to each of these buckets: |
(1) | (1) | Above 100 - 100% default; 0% recovery; |
(2) | (2) | 75 to 100 – 100% deferred; 15% recovery at 2 years from initial date of deferral; and |
(3) Below 75 – no deferral/default | (3) | Below 75 – no deferral/default. |
| d. | We then ranperformed a cash flow projection to analyze the impact of future deferral/default activity by applying the following assumption on those institutions in bucket 3(3) of our analysis: |
| · | Defaults at 75 basis points applied annually; 15% recovery with a 2-year lag from the initial date of deferral. |
Our rationale for these metrics is as follows: (1) theThe FDIC lists the number of bank failures each year from 1934 – 2008; comparing2008. Comparing bank failures to the number of FDIC institutions produces an annual average default rate of 36 basis points; givenpoints. Given the continuing uncertain economic environment, we believe doublethe doubling of this amount, or 75 basis points, to be an appropriate measurement for defaults; and (2) Standard & Poor’s published “Global Methodology for Rating Trust Preferred/Hybrid Securities Revised” on November 21, 2008. This analysis uses a recovery assumption of 15%, which we also deem an appropriate measurement.
Our position is that it is appropriate to apply this future default factor in our analysis as it is not realistic to assume no adverse conditions will occur over the remaining 26 year26-year stated maturity of this pooled security even though the individual institutions are currently performing according to terms.
| e. | This September 30, 2013March 31, 2014 projection of future cash flows produced a present value factor that exceeded the carrying value of the pooled trust preferred security; therefore, management concluded that no OTTIother-than-temporary impairment issues were present at September 30, 2013.March 31, 2014. |
A number of factors or combinations of factors could cause management to conclude in one or more future reporting periods that an unrealized loss that exists with respect to PreTSLPRETSL XXV constitutes an additional credit impairment. These factors include, but are not limited to, failure to make interest payments, an increase in the severity of the unrealized loss, an increase in the continuous duration of the unrealized loss without an impairment in value or changes in market conditions and/or industry or issuer specific factors that would render management unable to forecast a full recovery in value. In addition, the fair value of trust preferred securities could decline if the overall economy and the financial condition of the issuers continue to deteriorate and there remains limited liquidity for this security.
The following table sets forth information with respect to this security at September 30, 2013:March 31, 2014:
Security | Class | Amortized Cost | Fair Value | Unrealized (Loss) and OTTI | Percent of Underlying Collateral Performing | Percent of Underlying Collateral In Deferral (1) | Percent of Underlying Collateral In Default (1) | Expected Deferrals and Defaults as a % of Remaining Performing Collateral | Moody's S&P / Ratings | Excess Subordination (2) | Class | Book Value | Fair Value | Unrealized Gain (Loss) | Percent of Underlying Collateral Performing | Percent of Underlying Collateral In Deferral (1) | Percent of Underlying Collateral In Default (1) | Expected Deferrals and Defaults as a % of Remaining Performing Collateral | Moody's S&P / Ratings | Excess Subordination (2) |
Amount | % of Current Performing Collateral | Amount | % of Current Performing Collateral |
| | | | | | | | | |
PreTSL XXV | B-1 | $656,662 | $147,407 | $(509,255) | 66.5% | 10.9% | 22.6% | 14.0% | C/ NR | $108,000 | 21.0% | B-1 | $155,717 | $738,986 | $583,269 | 70.7% | 6.7% | 22.6% | 13.6% | Ca/ NR | $146,500 | 27.0% |
Notes to table above:
(1) | This percentage represents the amount of specific deferrals / defaults that have occurred, plus those that are known for the following quarters to the total amount of original collateral. Fewer deferrals / defaults produce a lower percentage. |
(2) | "“Excess subordination"subordination” amount is the additional defaults / deferrals necessary in the next reporting period to deplete the entire credit enhancement (excess interest and over-collateralization) beneath our tranche within each pool to the point that would cause a "break“break in yield"yield”. This amount assumes that all currently performing collateral continues to perform. A break in yield means that our security would not be expected to receive all the contractual cash flows (principal and interest) by maturity. The "percent“percent of underlying collateral performing"performing” is the ratio of the "excess“excess subordination amount"amount” to current performing collateral - a higher percentpercentage means there is more excess subordination to absorb additional defaults / deferrals, and the better our security is protected from loss. |
The Company regularly reviews the composition of the investment securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs, and its overall interest rate risk profile and strategic goals.
The following table presents a cumulative roll forward of the amount of other-than-temporary impairment related to credit losses, all of which relate to PreTSLPRETSL XXV, which have been recognized in earnings for debt securities held to maturity and not intended to be sold.
(in thousands) | | Three and nine months ended September 30, 2013 | | Three and nine months ended September 30, 2012 | | | Three months ended March 31, 2014 | | Three months ended March 31, 2013 | |
Balance at beginning of period | | $ | 364 | | | $ | 364 | | | $ | 364 | | | $ | 364 | |
Change during the period | | | - | | | | - | | | | - | | | | - | |
Balance at end of period | | $ | 364 | | | $ | 364 | | | $ | 364 | | | $ | 364 | |
(5) Allowance for Loan Losses and Credit Quality DisclosuresDisclosure
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
The following table provides an aging of the loan portfolio by loan class at September 30, 2013:March 31, 2014:
| | 30-59 Days | | | 60-89 Days | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Recorded Investment > 90 Days Accruing | | | Nonaccrual Loans | | | 30-59 Days | | | 60-89 Days | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Recorded Investment > 90 Days Accruing | | | Nonaccrual Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | 995,830 | | | $ | 995,830 | | | $ | 42,237,906 | | | $ | 43,233,736 | | | $ | - | | | $ | 995,830 | | | $ | 459,002 | | | $ | - | | | $ | - | | | $ | 459,002 | | | $ | 62,331,447 | | | $ | 62,790,449 | | | $ | - | | | $ | - | |
Commercial Business | | | 130,831 | | | | - | | | | 439,887 | | | | 570,718 | | | | 65,153,689 | | | | 65,724,407 | | | | - | | | | 439,887 | | | | 1,267,501 | | | | - | | | | 726,190 | | | | 1,993,691 | | | | 116,550,108 | | | | 118,543,799 | | | | | | | | 340,787 | |
Commercial Real Estate | | | 875,624 | | | | - | | | | 6,052,984 | | | | 6,928,608 | | | | 89,548,110 | | | | 96,476,718 | | | | - | | | | 6,052,982 | | | | 2,690,508 | | | | 241,192 | | | | 5,639,123 | | | | 8,570,823 | | | | 169,634,524 | | | | 178,205,347 | | | | - | | | | 5,554,882 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | 134,534,202 | | | | 134,534,202 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 104,334,990 | | | | 104,334,990 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Real Estate | | | - | | | | 970,123 | | | | 164,541 | | | | 1,134,664 | | | | 10,521,526 | | | | 11,656,190 | | | | - | | | | 164,542 | | | | 538,410 | | | | - | | | | 1,315,189 | | | | 1,853,599 | | | | 39,921,947 | | | | 41,775,546 | | | | - | | | | 1,443,499 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | 94,898 | | | | 94,898 | | | | 9,752,485 | | | | 9,847,383 | | | | 94,898 | | | | - | | | | 79.608 | | | | - | | | | - | | | | 79,608 | | | | 24,804,917 | | | | 24,884,525 | | | | - | | | | 116,641 | |
Other | | | - | | | | - | | | | - | | | | - | | | | 170,940 | | | | 170,940 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 205,515 | | | | 205,515 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred Loan Fees | | | - | | | | - | | | | - | | | | - | | | | 905,897 | | | | 905,897 | | | | - | | | | - | | |
Deferred Loan Costs | | | | - | | | | - | | | | - | | | | - | | | | 665,211 | | | | 665,211 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,006,455 | | | | 970,123 | | | $ | 7,748,140 | | | $ | 9,724,718 | | | $ | 352,824,755 | | | $ | 362,549,473 | | | $ | 94,898 | | | $ | 7,653,241 | | | $ | 5,035,029 | | | $ | 241,192 | | | $ | 7,680,502 | | | $ | 12,956,723 | | | $ | 518,448,659 | | | $ | 531,405,382 | | | $ | - | | | $ | 7,455,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired with evidence of deteriorated credit quality of $2,575,110 at March 31, 2014 were not classified as non-performing loans.
The following table provides an aging of the loan portfolio by loan class at December 31, 2012:
| | 30-59 Days | | | 60-89 Days | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Recorded Investment > 90 Days Accruing | | | Nonaccrual Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | 1,581,031 | | | $ | 1,581,031 | | | $ | 54,110,362 | | | $ | 55,691,393 | | | $ | - | | | $ | 1,581,031 | |
Commercial Business | | | 202,451 | | | | 70,192 | | | | 518,912 | | | | 791,555 | | | | 57,073,881 | | | | 57,865,436 | | | | - | | | | 629,821 | |
Commercial Real Estate | | | - | | | | - | | | | 3,137,553 | | | | 3,137,553 | | | | 99,275,141 | | | | 102,412,694 | | | | - | | | | 3,478,605 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | 284,127,530 | | | | 284,127,530 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Real Estate | | | 320,729 | | | | 34,975 | | | | - | | | | 355,704 | | | | 10,541,603 | | | | 10,897,307 | | | | - | | | | 134,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | 49,243 | | | | - | | | | 139,852 | | | | 189,095 | | | | 9,454,290 | | | | 9,643,385 | | | | 84,948 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | 189,279 | | | | 189,279 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred Loan Fees | | | - | | | | - | | | | - | | | | - | | | | 987,086 | | | | 987,086 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 572,423 | | | $ | 105,167 | | | $ | 5,377,348 | | | $ | 6,054,938 | | | $ | 515,759,172 | | | $ | 521,814,110 | | | $ | 84,948 | | | $ | 5,878,554 | |
2013:
| | 30-59 Days | | | 60-89 Days | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Recorded Investment > 90 Days Accruing | | | Nonaccrual Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 51,002,172 | | | $ | 51,002,172 | | | $ | - | | | $ | - | |
Commercial Business | | | 385,133 | | | | 58,665 | | | | 453,325 | | | | 897,123 | | | | 81,450,932 | | | | 82,348,055 | | | | - | | | | 511,990 | |
Commercial Real Estate | | | - | | | | - | | | | 5,217,173 | | | | 5,217,173 | | | | 93,172,557 | | | | 98,389,730 | | | | - | | | | 5,555,851 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | 116,951,357 | | | | 116,951,357 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Real Estate | | | 315,615 | | | | 967,099 | | | | 33,494 | | | | 1,316,208 | | | | 12,447,970 | | | | 13,764,178 | | | | - | | | | 162,012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | - | | | | 9,766,114 | | | | 9,766,114 | | | | - | | | | 92,103 | |
Other | | | - | | | | - | | | | - | | | | - | | | | 170,526 | | | | 170,526 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred Loan Costs | | | - | | | | - | | | | - | | | | - | | | | 943,950 | | | | 943,950 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 700,748 | | | $ | 1,025,764 | | | $ | 5,703,992 | | | $ | 7,430,504 | | | $ | 365,905,578 | | | $ | 373,336,082 | | | | - | | | $ | 6,321,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 includeand is consistent with generally accepted accounting principles (GAAP) and regulatory interagency supervisory guidance. The allowance for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows Accounting Standards Codification (ASC) Topic 310 (formerly SFAS 114). The second major component is an estimation of losses under ASC Topic 450 (formerly SFAS 5), which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses which includes a specific reserve for impaired loans, an allocated reserve, and an unallocated portion.
When analyzing groups of loans under ASC 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The Company consistently appliesmethodology considers the following comprehensive methodology. During the quarterly reviewCompany’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the allowance for loan losses,loans as of the Company considers a variety ofevaluation date. These adjustment factors, thatknown as qualitative factors, include:
| · | General economic conditions.Delinquencies and nonaccruals |
| · | Trends in charge-offs.Portfolio quality |
| · | Trends and levelsConcentration of delinquent loans. |
| · | Trends and levels of non-performing loans, including loans over 90 days delinquent.credit |
| · | Trends in volume and terms of loans.loans |
| · | LevelsQuality of allowance for specific classified loans.collateral |
| · | Credit concentrations.Policy and procedures |
| · | Experience, ability, and depth of management |
| · | Economic trends – national and local |
| · | External factors – competition, legal and regulatory |
The methodology includes the segregation of the loan portfolio into loan types with a further segregation into internal risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans isare determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed and for homogeneous groups, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans classifiedrated as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in nonaccrual status. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses.
The specific reserveallowance for impaired loans is established for specific loans whichthat have been identified by management as being impaired. These impaired loans are assigned a doubtful risk rating gradeconsidered to be impaired primarily because the loan hasloans have 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 these individual doubtfulimpaired 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, warehouse lines of credit and various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other qualitative factor which may cause future losses to deviate from historical levels.
The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.
The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.
Commercial
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit.loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
Mortgage Warehouse Lines of Credit
The Company’s Mortgage Warehouse Unit provides revolving lines of credit that are available to licensed mortgage banking companies. The Warehouse Line of Credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest 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.
As a separate segment of the total portfolio, the warehouse loan portfolio is analyzed as a whole for allowance for loan losses purposes. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008; there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.
These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and nonaccruals, are also considered and may have positive or negative effects on the allocated allowance. The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in an allocated allowance for warehouse lines of credit.
Consumer
The Company’s consumer loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are created for the various types of loans to individuals.
In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and industry historical losses. These loan groups are then internally risk rated.
The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:
| · | Internal credit risk grades |
The Company’s internal credit risk grades are based on the definitions currently utilized by the bankbanking regulatory agencies. The grades assigned and their definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:
1. Excellent - Loans that are based upon cash collateral held at the Bank and adequately margined. Loans that are based upon "blue chip" stocks listed on the major exchanges and adequately margined.
2. Above Average - Loans to companies whose balance sheets show excellent liquidity and whose long-term debt is on well-spread schedules of repayment easily covered by cash flow. Such companies have been consistently profitable and have diversification in their product lines or sources of revenue. The continuation of profitable operations for the foreseeable future is likely. Management is comprised of a mix of ages, experience, and backgrounds and management succession is in place. Sources of raw materials are abundant, and for service companies, the source of revenue is abundant. Future needs have been planned for. Character and repayment ability of individuals or company principals are excellent. Loans to individuals supported by high net worths and liquid assets.
3. Good- Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such company hascompanies have established a profitable recordrecords over a number of years, and there has been growth in net worth. Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans in categories 1 and 2 above. Loans to individuals supported by good net worths but whose supporting assets are illiquid.
3w. Watch List- Included in this category are loans evidencing problems identified by Bank management that require closer supervision. Such problem has not developed to the point which requires a Special Mention rating. This category also covers situations where the Bank does not have adequate current information upon which credit quality can be determined. The account officer has the obligation to correct these deficiencies within 30 days afterfrom the time of notification.
4. Special Mention - Loans or borrowing relationships that require more than the usual amount of attention by Bank management. Industry conditions may be adverse or weak. The borrower's ability to meet current payment schedules may be questionable, even though interest and principal are being paid as agreed. Heavy reliance has been placed on the collateral. Profits, if any, are interspersed with losses. Management is "one man"“one man” or incompetent or there is no plan for management succession. Expectations of a loan loss are not immediate; however, if present trends continue, a loan loss could be expected.
5. Substandard - Loans in this category possess weaknesses that jeopardize the ultimate collection of total outstandings. These weaknesses require close supervision by Bank management. Current financial statements are unavailable and the loan is inadequately protected by the collateral pledged. This category will normally include loans that have been classified as substandard by the regulators.
6. Doubtful - Loans with the same weaknesses inherent in the substandard classification and where collection or liquidation in full is highly questionable. It is likely that the loan will not be collected in full and the Bank will suffer some loss which is not quantifiable at the time of review.
7. Loss - Loans considered uncollectable and of such little value that their continuance as an active asset is not warranted. Loans in this category should immediately be eliminated fromcharged off to the Bank's loan loss reserve. Any accrued interest should immediately be backed out of income.
The following table provides a breakdown of the loan portfolio by credit quality indictor at March 31, 2014.
Commercial Credit Exposure - By Internally Assigned Grade | | Construction | | | Commercial Business | | | Commercial Real Estate | | | Mortgage Warehouse Lines | | | | Residential Real Estate | |
| | | | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | | | | |
Pass | | $ | 59,340,092 | | | $ | 114,608,335 | | | $ | 145,137,802 | | | $ | 104,334,990 | | | | $ | 40,141,706 | |
Special Mention | | | - | | | | 2,122,133 | | | | 22,459,847 | | | | - | | | | | 1,318,225 | |
Substandard | | | 3,450,357 | | | | 1,225,596 | | | | 10,607,698 | | | | - | | | | | 315,615 | |
Doubtful | | | - | | | | 587,735 | | | | - | | | | - | | | | | - | |
Total | | $ | 62,790,449 | | | $ | 118,543,799 | | | $ | 178,205,347 | | | $ | 104,334,990 | | | | $ | 41,775,546 | |
| | | | | | | | | | | | | | | | | | | | | |
Consumer Credit Exposure - By Payment Activity | | Loans To Individuals | | | Other | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 24,767,884 | | | $ | 205,515 | | | | | | | | | | | | | | |
Nonperforming | | | 116,641 | | | | - | | | | | | | | | | | | | | |
Total | | $ | 24,884,525 | | | $ | 205,515 | | | | | | | | | | | | | | |
The following table provides a breakdown of the loan portfolio by credit quality indictor at September 30,December 31, 2013.
Commercial Credit Exposure - By Internally Assigned Grade | | Construction | | Commercial Business | | Commercial Real Estate | | Mortgage Warehouse Lines | | Residential Real Estate | | | Construction | | | Commercial Business | | | Commercial Real Estate | | | Mortgage Warehouse Lines | | | | Residential Real Estate | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 38,743,089 | | | $ | 63,079,908 | | | $ | 64,562,349 | | | $ | 134,534,202 | | | $ | 10,521,525 | | | $ | 47,539,033 | | | $ | 79,832,704 | | | $ | 68,620,450 | | | $ | 116,951,357 | | | | $ | 12,635,067 | |
Special Mention | | | - | | | | 1,465,856 | | | | 21,013,297 | | | | - | | | | 1,134,665 | | | | - | | | | 1,406,143 | | | | 19,396,574 | | | | - | | | | | 1,129,111 | |
Substandard | | | 4,490,647 | | | | 920,157 | | | | 10,901,072 | | | | - | | | | - | | | | 3,463,139 | | | | 792,057 | | | | 10,372,706 | | | | - | | | | | - | |
Doubtful | | | - | | | | 258,486 | | | | - | | | | - | | | | - | | | | - | | | | 258,486 | | | | - | | | | - | | | | | - | |
Loss | | | | - | | | | 58,665 | | | | - | | | | - | | | | | | |
Total | | $ | 43,233,736 | | | $ | 65,724,407 | | | $ | 96,476,718 | | | $ | 134,534,202 | | | $ | 11,656,190 | | | $ | 51,002,172 | | | $ | 82,348,055 | | | $ | 98,389,730 | | | $ | 116,951,357 | | | | $ | 13,764,178 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Credit Exposure - By Payment Activity | | Loans To Individuals | | Other | | | | | | | | | Loans To Individuals | | | Other | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 9,847,383 | | | $ | 170,940 | | | | | | | | | | $ | 9,674,011 | | | $ | 170,526 | | | | | | | | | | | | | | |
Nonperforming | | | - | | | | - | | | | | | | | | | 92,103 | | | | - | | | | | | | | | | | | | | |
Total | | $ | 9,847,383 | | | $ | 170,940 | | | | | | | | | | $ | 9,766,114 | | | $ | 170,526 | | | | | | | | | | | | | | |
The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2012.
Commercial Credit Exposure - By Internally Assigned Grade | Construction | | Commercial Business | | | Commercial Real Estate | | | Mortgage Warehouse Lines | | | | Residential Real Estate | |
| | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | | |
Pass | | $ | 49,373,827 | | | $ | 55,498,613 | | | $ | 76,096,964 | | | $ | 284,127,530 | | | | $ | 10,763,114 | |
Special Mention | | | - | | | | 1,019,586 | | | | 19,060,621 | | | | - | | | | | 134,193 | |
Substandard | | | 5,777,494 | | | | 1,064,799 | | | | 7,255,109 | | | | - | | | | | - | |
Doubtful | | | 540,072 | | | | 282,438 | | | | - | | | | - | | | | | - | |
Total | | $ | 55,691,393 | | | $ | 57,865,436 | | | $ | 102,412,694 | | | $ | 284,127,530 | | | | $ | 10,897,307 | |
| | | | | | | | | | | | | | | | | | | | | |
Consumer Credit Exposure - By Payment Activity | Loans to Individuals | | Other | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 9,454,288 | | | $ | 189,279 | | | | | | | | | | | | | | |
Nonperforming | | | 189,097 | | | | - | | | | | | | | | | | | | | |
Total | | $ | 9,643,385 | | | $ | 189,279 | | | | | | | | | | | | | | |
Impaired Loans Disclosures
Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When a loan is placed on nonaccrual status, it is also considered to be impaired. Loans are placed on nonaccrual status when: (1) the full collection of interest or principal becomes uncertain; or (2) they are contractually past due 90 days or more as to interest or principal payments unless theythe loans are both well secured and in the process of collection.
The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at September 30, 2013March 31, 2014 and December 31, 2012:2013:
Period-End Allowance for Loan Losses by Impairment Method – September 30, 2013 |
| | | | | Commercial | | | Commercial | | | Mortgage | | | Residential | | | | | | | | | | | | Deferred | | | Total | |
| | Construction | | | Business | | | Real Estate | | | Warehouse | | | Real Estate | | | Consumer | | | Other | | | Unallocated | | | Fees | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 1,208,023 | | | $ | 1,031,607 | | | $ | 3,064,248 | | | $ | 672,671 | | | $ | 141,826 | | | $ | 110,068 | | | $ | 2,051 | | | | 589,686 | | | $ | - | | | $ | 6,820,180 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | | - | | | | 235,027 | | | | 1,476,632 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,711,659 | |
Collectively evaluated for impairment | | | 1,208,023 | | | | 796,580 | | | | 1,587,616 | | | | 672,671 | | | | 141,826 | | | | 110,068 | | | | 2,051 | | | | 589,686 | | | | - | | | | 5,108,521 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 43,233,736 | | | $ | 65,724,407 | | | $ | 96,476,718 | | | $ | 134,534,202 | | | $ | 11,656,190 | | | $ | 9,847,383 | | | $ | 170,940 | | | $ | - | | | $ | 905,897 | | | $ | 362,549,473 | |
Individually evaluated for impairment | | | 1,015,112 | | | | 701,035 | | | | 9,646,821 | | | | - | | | | 164,542 | | | | - | | | | - | | | | - | | | | - | | | | 11,527,510 | |
Collectively evaluated for impairment | | | 42,218,624 | | | | 65,023,372 | | | | 86,829,897 | | | | 134,534,202 | | | | 11,491,648 | | | | 9,847,383 | | | | 170,940 | | | | - | | | | 905,897 | | | | 351,021,963 | |
Period-End Allowance for Loan Losses by Impairment Method – December 31, 2012 |
| | | | | Commercial | | | Commercial | | | Mortgage | | | Residential | | | | | | | | | | | | Deferred | | | Total | |
| | Construction | | | Business | | | Real Estate | | | Warehouse | | | Real Estate | | | Consumer | | | Other | | | Unallocated | | | Fees | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 1,990,292 | | | $ | 972,789 | | | $ | 2,262,221 | | | $ | 1,420,638 | | | $ | 112,103 | | | $ | 102,583 | | | $ | 2,271 | | | $ | 288,315 | | | $ | 0 | | | $ | 7,151,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | | 569,579 | | | | 253,598 | | | | 447,193 | | | | - | | | | 21,693 | | | | - | | | | - | | | | - | | | | - | | | | 1,292,063 | |
Collectively evaluated for impairment | | | 1,420,713 | | | | 719,191 | | | | 1,815,028 | | | | 1,420,638 | | | | 90,410 | | | | 102,583 | | | | 2,271 | | | | 288,315 | | | | - | | | | 5,859,149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 55,691,393 | | | $ | 57,865,436 | | | $ | 102,412,694 | | | $ | 284,127,530 | | | $ | 10,897,307 | | | $ | 9,643,385 | | | $ | 189,279 | | | | - | | | $ | 987,086 | | | $ | 521,814,110 | |
Individually evaluated for impairment | | | 2,842,031 | | | | 906,526 | | | | 3,952,546 | | | | - | | | | 134,193 | | | | 54,904 | | | | - | | | | - | | | | - | | | | 7,890,200 | |
Collectively evaluated for impairment | | | 52,849,362 | | | | 56,958,910 | | | | 98,460,148 | | | | 284,127,530 | | | | 10,763,114 | | | | 9,588,481 | | | | 189,279 | | | | - | | | | 987,086 | | | | 513,923,910 | |
Period-End Allowance for Loan Losses by Impairment Method March 31,2014 | |
| | | | | | | | Commercial | | | Mortgage | | | Residential | | | | | | | | | | | | Loan | | | Total | |
| | Construction | | | Commercial | | | Real Estate | | | Warehouse | | | Real Estate | | | Consumer | | | Other | | | Unallocated | | | Costs | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 1,265,430 | | | $ | 1,218,036 | | | $ | 3,135,727 | | | $ | 521,675 | | | $ | 182,005 | | | $ | 92,387 | | | $ | 1,623 | | | $ | 613,959 | | | $ | - | | | $ | 7,030,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | | - | | | | 73,681 | | | | 1,490,169 | | | | - | | | | 15,015 | | | | - | | | | - | | | | - | | | | - | | | | 1,578,865 | |
Collectively evaluated for impairment | | $ | 1,265,430 | | | $ | 1,144,355 | | | $ | 1,645,558 | | | $ | 521,675 | | | $ | 166,990 | | | $ | 92,387 | | | $ | 1,623 | | | $ | 613,959 | | | $ | - | | | $ | 5,451,977 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 62,790,449 | | | $ | 118,543,799 | | | $ | 178,205,347 | | | $ | 104,334,990 | | | $ | 41,775,546 | | | $ | 24,884,525 | | | $ | 205,515 | | | $ | - | | | $ | 665,211 | | | $ | 531,405,382 | |
Individually evaluated for impairment | | | 189,363 | | | | 428,885 | | | | 9,117,675 | | | | - | | | | 1,443,499 | | | | 90,711 | | | | - | | | | - | | | | - | | | | 11,270,133 | |
Loans acquired with deteriorated credit quality | | | - | | | | 376,262 | | | | 1,786,749 | | | | - | | | | 180,767 | | | | 231,332 | | | | - | | | | - | | | | - | | | | 2,575,110 | |
Collectively evaluated for impairment | | $ | 62,601,086 | | | $ | 117,738,652 | | | $ | 167,300,923 | | | $ | 104,334,990 | | | $ | 40,151,280 | | | $ | 24,562,482 | | | $ | 205,515 | | | $ | - | | | $ | 665,211 | | | $ | 517,560,139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The activity in the allowance for loan losses by loan class for the nine months ended September 30, 2013 was as follows:
| | Construction | | | Commercial Business | | | Commercial Real Estate | | | Mortgage Warehouse | | | Residential Real Estate | | | Consumer | | | Other | | | Unallocated | | | Total | |
Balance - December 31, 2012 | | $ | 1,990,292 | | | $ | 972,789 | | | $ | 2,262,221 | | | $ | 1,420,638 | | | $ | 112,103 | | | $ | 102,583 | | | $ | 2,271 | | | $ | 288,315 | | | $ | 7,151,212 | |
Provision charged to operations | | | (218,010 | ) | | | (18,319 | ) | | | 245,769 | | | | (429,900 | ) | | | 262 | | | | 50,606 | | | | (212 | ) | | | 369,804 | | | | - | |
Loans charged off | | | (561,993 | ) | | | (139,289 | ) | | | (384,688 | ) | | | - | | | | - | | | | (50,855 | ) | | | - | | | | - | | | | (1,136,825 | ) |
Recoveries of loans charged off | | | - | | | | 2,000 | | | | 6,895 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8,895 | |
Balance - March 31, 2013 | | $ | 1,210,289 | | | $ | 817,181 | | | $ | 2,130,197 | | | $ | 990,738 | | | $ | 112,365 | | | $ | 102,334 | | | $ | 2,059 | | | $ | 658,119 | | | $ | 6,023,282 | |
Provision charged to operations | | | 1,872 | | | | 160,164 | | | | 321,659 | | | | (62,039 | ) | | | (19,632 | ) | | | (2,444 | ) | | | 45 | | | | (162,958 | ) | | | 236,667 | |
Loans charged off | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Recoveries of loans charged off | | | 417 | | | | 8,574 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8,991 | |
Balance – June 30, 2013 | | $ | 1,212,578 | | | $ | 985,919 | | | $ | 2,451,856 | | | $ | 928,699 | | | $ | 92,733 | | | $ | 99,890 | | | $ | 2,104 | | | | 495,161 | | | $ | 6,268,940 | |
Provision charged to operations | | | (4,555 | ) | | | 34,446 | | | | 612,392 | | | | (256,028 | ) | | | 49,093 | | | | 10,178 | | | | (53 | ) | | | 94,525 | | | | 539,998 | |
Loans charged off | | | - | | | | (2,068 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,068) | |
Recoveries of loans charged off | | | - | | | | 13,310 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 13,310 | |
Balance - September 30, 2013 | | $ | 1,208,023 | | | $ | 1,031,607 | | | $ | 3,064,248 | | | $ | 672,671 | | | $ | 141,826 | | | $ | 110,068 | | | $ | 2,051 | | | $ | 589,686 | | | $ | 6,820,180 | |
Period-End Allowance for Loan Losses by Impairment Method December 31, 2013 | |
| | | | | | | | Commercial | | | Mortgage | | | Residential | | | | | | | | | | | | Loan | | | Total | |
| | Construction | | | Commercial | | | Real Estate | | | Warehouse | | | Real Estate | | | Consumer | | | Other | | | Unallocated | | | Costs | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 1,205,267 | | | $ | 1,271,733 | | | $ | 3,021,766 | | | $ | 584,757 | | | $ | 164,673 | | | $ | 108,849 | | | $ | 2,183 | | | $ | 679,343 | | | $ | - | | | $ | 7,038,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | | - | | | | 293,692 | | | | 1,490,169 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,783,861 | |
Collectively evaluated for impairment | | $ | 1,205,267 | | | $ | 978,041 | | | $ | 1,531,597 | | | $ | 584,757 | | | $ | 164,673 | | | $ | 108,849 | | | $ | 2,183 | | | $ | 679,343 | | | $ | - | | | $ | 5,254,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 51,002,172 | | | $ | 82,348,055 | | | $ | 98,389,730 | | | $ | 116,951,357 | | | $ | 13,764,178 | | | $ | 9,766,114 | | | $ | 170,526 | | | $ | - | | | $ | 943,950 | | | $ | 373,336,082 | |
Individually evaluated for impairment | | | 19,930 | | | | 776,101 | | | | 9,130,605 | | | | - | | | | 162,012 | | | | 92,103 | | | | - | | | | - | | | | - | | | | 10,180,751 | |
Collectively evaluated for impairment | | $ | 50,982,242 | | | $ | 81,571,954 | | | $ | 89,259,125 | | | $ | 116,951,357 | | | $ | 13,602,166 | | | $ | 9,674,011 | | | $ | 170,526 | | | $ | - | | | $ | 943,950 | | | $ | 363,155,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The activity in the allowance for loan lossesloss by loan class for the ninethree months ended September 30, 2012March 31, 2014 and 2013 was as follows:
| | Construction | | Commercial Business | | Commercial Real Estate | | Mortgage Warehouse | | Residential Real Estate | | Consumer | | Other | | Unallocated | | Total | | | Construction | | Commercial Business | | Commercial Real Estate | | Mortgage Warehouse | | Residential Real Estate | | Consumer | | Other | | Unallocated | | Total | |
Balance - December 31, 2011 | | $ | 1,054,695 | | | $ | 934,642 | | | $ | 1,597,702 | | | $ | 1,122,056 | | | $ | 91,076 | | | $ | 187,352 | | | $ | 2,377 | | | $ | 544,550 | | | $ | 5,534,450 | | |
Balance - December 31, 2013 | | | $ | 1,205,267 | | | $ | 1,271,733 | | | $ | 3,021,766 | | | $ | 584,757 | | | $ | 164,673 | | | $ | 108,849 | | | $ | 2,183 | | | $ | 679,343 | | | $ | 7,038,571 | |
Provision charged to operations | | | 217,501 | | | | 15,757 | | | | 241,180 | | | | (115,451 | ) | | | 148,497 | | | | 22,076 | | | | 6,803 | | | | 63,635 | | | | 599,998 | | | | 60,163 | | | | 454,031 | | | | 113,961 | | | | (63,082 | ) | | | 17,332 | | | | (16,462 | ) | | | (560 | ) | | | (65,385 | ) | | | 499,998 | |
Loans charged off | | | (32,650 | ) | | | (144,827 | ) | | - | | - | | (77,858 | ) | | (6,001 | ) | | - | | - | | | | (261,336 | ) | | | - | | | | (510,952 | ) | | - | | - | | - | | - | | - | | - | | | | (510,952 | ) |
Recoveries of loans charged off | | | 3,403 | | | | 5,427 | | | - | | | - | | | - | | | - | | | - | | | - | | | | 8,830 | | | | - | | | | 3,225 | | | - | | | - | | | - | | | - | | | - | | | - | | | | 3,225 | |
Balance - March 31, 2012 | | $ | 1,242,949 | | | $ | 810,999 | | | $ | 1,838,882 | | | $ | 1,006,605 | | | $ | 239,573 | | | $ | 131,570 | | | $ | 3,179 | | | $ | 608,185 | | | $ | 5,881,942 | | |
Provision charged to operations | | | 429,656 | | | | 111,410 | | | | 464,946 | | | | 147,278 | | | | 13,631 | | | | (8,357 | ) | | | (381 | ) | | | (608,185 | ) | | | 549,998 | | |
Loans charged off | | | (25,000 | ) | | (20,199 | ) | | - | | - | | (130,694 | ) | | - | | - | | - | | | | (175,893 | ) | |
Recoveries of loans charged off | | | - | | | | 1,191 | | | 182 | | | - | | | - | | | - | | | - | | | - | | | | 1,373 | | |
Balance - June 30, 2012 | | $ | 1,647,605 | | | $ | 903,401 | | | $ | 2,304,010 | | | $ | 1,153,883 | | | $ | 122,510 | | | $ | 123,213 | | | $ | 2,798 | | | $ | - | | | $ | 6,257,420 | | |
Provision charged to operations | | | 208,440 | | | | 33,129 | | | | 86,278 | | | | 102,771 | | | | (2,812 | ) | | | (9,942 | ) | | | (27 | ) | | | 82,161 | | | | 499,998 | | |
Loans charged off | | | - | | | | - | | | | (64,375 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (64,375 | ) | |
Recoveries of loans charged off | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Balance - September 30, 2012 | | $ | 1,856,045 | | | $ | 936,530 | | | $ | 2,325,913 | | | $ | 1,256,654 | | | $ | 119,698 | | | $ | 113,271 | | | $ | 2, 771 | | | $ | 82,161 | | | $ | 6,693,043 | | |
Balance - March 31, 2014 | | | $ | 1,265,430 | | | $ | 1,218,037 | | | $ | 3,135,727 | | | $ | 521,675 | | | $ | 182,005 | | | $ | 92,387 | | | $ | 1,623 | | | $ | 613,958 | | | $ | 7,030,842 | |
Balance - December 31, 2012 | | $ | 1,990,292 | | | $ | 972,789 | | | $ | 2,262,221 | | | $ | 1,420,638 | | | $ | 112,103 | | | $ | 102,583 | | | $ | 2,271 | | | $ | 288,315 | | | $ | 7,151,212 | |
Provision charged to operations | | | (218,010 | ) | | | (18,319 | ) | | | 245,769 | | | | (429,900 | ) | | | 262 | | | | 50,606 | | | | (212) | | | | 369,804 | | | | - | |
Loans charged off | | | (561,993 | ) | | | (139,289 | ) | | | (384,688 | ) | | | - | | | | - | | | | (50,855 | ) | | | - | | | | - | | | | (1,136,825 | ) |
Recoveries of loans charged off | | | - | | | | 2,000 | | | | 6,895 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8,895 | |
Balance - March 31, 2013 | | $ | 1,210,289 | | | $ | 817,181 | | | $ | 2,130,197 | | | $ | 990,738 | | | $ | 112,365 | | | $ | 102,334 | | | $ | 2,059 | | | $ | 658,119 | | | $ | 6,023,282 | |
When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In such cases, the current fair value of the collateral less selling costs is used. If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.
Impaired Loans Receivables (By Class) – September 30, 2013 | |
| | | | | | | | | | | Three months ended | |
| | | | | | | | | | | September 30, 2013 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | |
Construction | | $ | 1,015,112 | | | $ | 1,015,112 | | | $ | - | | | $ | 1,184,249 | | | $ | 4,660 | |
Commercial Business | | | 225,899 | | | | 382,356 | | | | - | | | | 157,334 | | | | 1,516 | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | 4,004,515 | | | | - | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 1,241,011 | | | | 1,397,468 | | | | - | | | | 5,346,098 | | | | 6,176 | |
Residential Real Estate | | | 164,542 | | | | 164,542 | | | | - | | | | 164,542 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | | | | | - | | | | - | | | | - | | | | - | |
With no related allowance: | | $ | 1,405,553 | | | $ | 1,562,010 | | | $ | - | | | $ | 5,510,640 | | | $ | 6,176 | |
| | | | | | | | | | | | | | | | | | | | |
With an allowance: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Business | | | 475,136 | | | | 475,136 | | | | 235,027 | | | | 566,473 | | | | 3,915 | |
Commercial Real Estate | | | 9,646,821 | | | | 9,646,821 | | | | 1,476,632 | | | | 6,184,255 | | | | 61,306 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 10,121,957 | | | | 10,121,957 | | | | 1,711,659 | | | | 6,750,728 | | | | 65,221 | |
Residential Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | - | | | | - | | | | - | | | | - | | | | - | |
With an allowance: | | | 10,121,957 | | | | 10,121,957 | | | | 1,711,659 | | | | 6,750,728 | | | | 65,221 | |
| | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 11,362,968 | | | | 11,519,425 | | | | 1,711,659 | | | | 12,096,826 | | | | 71,397 | |
Residential Real Estate | | | 164,542 | | | | 164,542 | | | | - | | | | 164,542 | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | 0 | | | | - | |
Total | | $ | 11,527,510 | | | $ | 11,683,967 | | | $ | 1,711,659 | | | $ | 12,261,368 | | | $ | 71,397 | |
Impaired Loans Receivables (By Class) – September 30, 2012 | |
| | | | | | | | | | | Three months ended | |
| | | | | | | | | | | September 30, 2012 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Business | | | 561,961 | | | | 604,643 | | | | - | | | | 585,257 | | | | - | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | 869,901 | | | | - | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 561,961 | | | | 604,643 | | | | - | | | | 1,455,158 | | | | - | |
Residential Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | |
With no related allowance: | | $ | 616,865 | | | $ | 659,547 | | | $ | - | | | $ | 1,510,062 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
With an allowance: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Business | | | 492,285 | | | | 637,112 | | | | 182,148 | | | | 466,487 | | | | 3,809 | |
Commercial Real Estate | | | 4,368,210 | | | | 4,368,210 | | | | 447,193 | | | | 3,725,809 | | | | 7,858 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 4,860,495 | | | | 5,005,322 | | | | 629,341 | | | | 4,192,296 | | | | 11,667 | |
Residential Real Estate | | | 135,963 | | | | 135,963 | | | | 28,566 | | | | 136,781 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | - | | | | - | | | | - | | | | - | | | | - | |
With an allowance: | | | 4,996,458 | | | | 5,141,285 | | | | 657,907 | | | | 4,329,077 | | | | 11,667 | |
| | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 5,422,456 | | | | 5,609,965 | | | | 629,341 | | | | 5,647,454 | | | | 11,667 | |
Residential Real Estate | | | 135,963 | | | | 135,963 | | | | 28,566 | | | | 136,781 | | | | - | |
Consumer | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | |
Total | | $ | 5,613,323 | | | $ | 5,800,832 | | | $ | 657,907 | | | $ | 5,839,139 | | | $ | 11,667 | |
Impaired Loans Receivables (By Class) | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | |
Impaired Loans Receivables (By Class) – March 31, 2014 | | Impaired Loans Receivables (By Class) – March 31, 2014 | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Year to Date Average Recorded Investment | | Year to Date Interest Income Recognized | | | | | | | | | | | | Three months ended March 31, 2014 | |
| | | | | | | | | | | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | $ | 1,360,914 | | | $ | 1,360,914 | | | $ | - | | | $ | 412,716 | | | $ | - | | | $ | 189,363 | | | $ | 189,363 | | | $ | - | | | $ | 119,741 | | | $ | 1,069 | |
Commercial Business | | | 387,950 | | | | 430,632 | | | | - | | | | 474,839 | | | | 9,490 | | | | 1,176,713 | | | | 1,176,713 | | | | - | | | | 918,192 | | | | 3,265 | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | 321,743 | | | | - | | | | 1,109,462 | | | | 1,109,462 | | | | - | | | | 783,597 | | | | 6,742 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 1,748,864 | | | | 1,791,546 | | | | - | | | | 1,209,298 | | | | 9,490 | | | | 2,475,538 | | | | 2,475,538 | | | | - | | | | 1,821,530 | | | | 11,076 | |
| | | | | | | | | | | | | |
Residential Real Estate | | | - | | | | - | | | | - | | | | 23,600 | | | | - | | | | 1,318,225 | | | | 1,318,225 | | | | - | | | | 789,481 | | | | 1,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | | | | 360,080 | | | | 360,080 | | | | - | | | | 285,458 | | | | 1,155 | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | | | | 360,080 | | | | 360,080 | | | | - | | | | 285,458 | | | | 1,155 | |
With no related allowance: | | | $ | 4,153,843 | | | $ | 4,153,843 | | | $ | - | | | $ | 2,896,469 | | | $ | 13,955 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal with no Related Allowance | | | 1,803,768 | | | | 1,846,450 | | | | - | | | | 1,287,802 | | | | - | | |
| | | | | | | | | | | | |
With an allowance: | | | | | | | | | | | | |
With a related allowance: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 1,481,117 | | | | 1,481,117 | | | | 569,579 | | | | 123,426 | | | | - | | | | | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Business | | | 518,576 | | | | 663,403 | | | | 253,598 | | | | 456,541 | | | | 15,746 | | | | 193,982 | | | | 704,934 | | | | 73,681 | | | | 471,283 | | | | - | |
Commercial Real Estate | | | 3,952,546 | | | | 3,999,032 | | | | 447,193 | | | | 2,964,744 | | | | 29,291 | | | | 9,117,675 | | | | 9,117,675 | | | | 1,490,169 | | | | 9,123,212 | | | | 48,873 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 5,952,239 | | | | 6,143,552 | | | | 1,270,370 | | | | 3,544,711 | | | | 45,037 | | | | 9,311,657 | | | | 9,822,609 | | | | 1,563,850 | | | | 9,594,495 | | | | 48,873 | |
| | | | | | | | | | | | |
Residential Real Estate | | | 134,193 | | | | 134,193 | | | | 21,693 | | | | 287,395 | | | | - | | | | 315,615 | | | | 315,615 | | | | 15,015 | | | | 105,205 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
With a related allowance: | | | | 9,627,272 | | | | 10,138,224 | | | | 1,578,865 | | | | 9,699,700 | | | | 48,873 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal with an Allowance | | | 6,086,432 | | | | 6,277,745 | | | | 1,292,063 | | | | 3,832,106 | | | | 45,037 | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 7,701,103 | | | | 7,935,098 | | | | 1,270,370 | | | | 4,754,009 | | | | 54,527 | | | | 11,787,195 | | | | 12,298,147 | | | | 1,563,850 | | | | 11,416,025 | | | | 59,949 | |
Residential Real Estate | | | 134,193 | | | | 134,193 | | | | 21,693 | | | | 310,995 | | | | - | | | | 1,633,840 | | | | 1,633,840 | | | | - | | | | 894,686 | | | | 1,724 | |
Consumer | | | 54,904 | | | | 54,904 | | | | - | | | | 54,904 | | | | - | | | | 360,080 | | | | 360,080 | | | | - | | | | 285,458 | | | | 1,155 | |
Total | | $ | 7,890,200 | | | $ | 8,124,195 | | | $ | 1,292,063 | | | $ | 5,119,908 | | | $ | 54,527 | | | $ | 13,781,115 | | | $ | 14,292,067 | | | $ | 1,578,865 | | | $ | 12,596,169 | | | $ | 62,828 | |
Impaired Loans Receivables (By Class) | | | | | | | | | Year to date | |
December 31 , 2013 | | | | | | | | | | | 12/31/2013 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
| | | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | |
Construction | | $ | 19,930 | | | $ | 19,930 | | | $ | - | | | $ | 965,268 | | | $ | 33,946 | |
Commercial Business | | | 243,840 | | | | 400,297 | | | | - | | | | 258,139 | | | | 5,094 | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | 1,032,115 | | | | - | |
Mortgage Warehouse Lines | | | - | | | | | | | | - | | | | - | | | | - | |
Subtotal | | | 263,770 | | | | 420,227 | | | | - | | | | 2,255,522 | | | | 39,040 | |
| | | | | | | | | | | | | | | | | | | | |
Residential Real Estate | | | 162,012 | | | | 162,012 | | | | - | | | | 117,746 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | 92,103 | | | | 92,103 | | | | - | | | | 34,292 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 92,103 | | | | 92,103 | | | | - | | | | 34,292 | | | | - | |
Subtotal with no Related Allowance | | | 517,885 | | | | 674,342 | | | | - | | | | 2,407,560 | | | | 39,040 | |
| | | | | | | | | | | | | | | | | | | | |
With an allowance: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | |
Construction | | | - | | | | - | | | | - | | | | 246,853 | | | | - | |
Commercial Business | | | 532,261 | | | | 532,261 | | | | 293,692 | | | | 562,346 | | | | 9,728 | |
Commercial Real Estate | | | 9,130,605 | | | | 9,130,605 | | | | 1,490,169 | | | | 5,546,690 | | | | 247,277 | |
Mortgage Warehouse Lines | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | 9,662,866 | | | | 9,662,866 | | | | 1,783,861 | | | | 6,355,889 | | | | 257,005 | |
| | | | | | | | | | | | | | | | | | | | |
Residential Real Estate | | | - | | | | - | | | | - | | | | 44,196 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Loans to Individuals | | | - | | | | - | | | | - | | | | 4,238 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Subtotal | | | - | | | | - | | | | - | | | | 4,238 | | | | - | |
Subtotal with an Allowance | | | 9,662,866 | | | | 9,662,866 | | | | 1,783,861 | | | | 6,404,323 | | | | 257,005 | |
| | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | |
Construction | | | 19,930 | | | | 19,930 | | | | - | | | | 1,212,121 | | | | 33,946 | |
Commercial Business | | | 776,101 | | | | 932,558 | | | | 293,692 | | | | 820,485 | | | | 14,822 | |
Commercial Real Estate | | | 9,130,605 | | | | 9,130,605 | | | | 1,490,169 | | | | 6,578,805 | | | | 247,277 | |
Residential Real Estate | | | 162,012 | | | | 162,012 | | | | | | | | 161,942 | | | | - | |
Consumer | | | 92,103 | | | | 92,103 | | | | - | | | | 38,530 | | | | - | |
Total | | $ | 10,180,751 | | | $ | 10,337,208 | | | $ | 1,783,861 | | | $ | 8,811,883 | | | $ | 296,045 | |
Impaired Loans Receivables (By Class) | | Three months ended | |
| | March 31, 2013 | |
| | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance: | | | | | | |
| | | | | | |
Commercial | | | | | | |
Construction | | $ | 1,270,340 | | | $ | 17,903 | |
Commercial Business | | | 313,089 | | | | 1,257 | |
Commercial Real Estate | | | | | | | - | |
Mortgage Warehouse Lines | | | | | | | - | |
Subtotal | | | 1,583,429 | | | | 19,160 | |
Residential Real Estate | | | 22,329 | | | | - | |
| | | | | | | | |
Consumer | | | | | | | | |
Loans to Individuals | | | 45,079 | | | | - | |
Other | | | - | | | | - | |
Subtotal | | | 45,079 | | | | - | |
With no related allowance: | | $ | 1,650,837 | | | $ | 19,160 | |
| | | | | | | | |
With an allowance: | | | | | | | | |
| | | | | | | | |
Commercial | | | | | | | | |
Construction | | $ | 987,411 | | | $ | - | |
Commercial Business | | | 552,611 | | | | 9,576 | |
Commercial Real Estate | | | 2,421,681 | | | | 8,800 | |
Mortgage Warehouse Lines | | | - | | | | - | |
Subtotal | | | 3,961,703 | | | | 18,376 | |
Residential Real Estate | | | 132,716 | | | | - | |
| | | | | | | | |
Consumer | | | | | | | | |
Loans to Individuals | | | 16,952 | | | | - | |
Other | | | - | | | | - | |
Subtotal | | | 16,952 | | | | - | |
With an allowance: | | | 4,111,371 | | | | 18,376 | |
| | | | | | | | |
Total: | | | | | | | | |
Commercial | | | 5,545,132 | | | | 37,536 | |
Residential Real Estate | | | 155,045 | | | | - | |
Consumer | | | 62,031 | | | | - | |
Total | | $ | 5,762,208 | | | $ | 37,536 | |
In the normal course of business, the Bank may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or as a re-amortization or extension of a loan term to better match the loan’s repayment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).
If the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for that time period. Where possible, the Bank would attempt to obtain additional collateral and/or secondary repayment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.
The Bank adopted Accounting Standards Update (“ASU”) No. 2011-02 on July 1, 2011. ASU No. 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). In evaluating whether a restructuring constitutes a troubled debt restructuring, ASU No. 2011-02applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. As a result of our adoption of ASU No. 2011-02, we reassessed
There were no loans modified that were TDRs in the terms of loan restructurings. There was no TDR activity duringperiod ended March 31, 2014 or December 31, 2013.
Changes in the accretable discount for acquired credit impaired loans for the three months ended September 30, 2013. At September 30, 2013, the Bank had 8 loans classifiedMarch 31, 2014 were as TDRs with an aggregate outstanding balance of $4,248,442.follows:
If the Bank determines that a borrower has suffered deterioration in its financial condition, a restructuring of the loan terms may occur. Such loan restructurings may include, but are not limited to, reductions in principal or interest, reductions in interest rates, and extensions of the maturity date. When modifications are implemented, such loans meet the definition of a TDR. The lower payments are determined by an analysis of the borrower’s cash flow to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.Balance at beginning of period | | $ | - | |
Acquisition of impaired loans | | | 293,976 | |
Accretion of discount | | | (19,593 | ) |
Balance at end of period | | $ | 274,383 | |
The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:
| February 7, 2014 | | March 31, 2014 |
| Acquired loans with Evidence of Credit Deterioration | | Acquired loans with Evidence of Credit Deterioration |
| | | |
Outstanding balance | $3,409,340 | | $3,351,031 |
Carrying amount | $2,613,826 | | $2,575,110 |
There were no changes in the expected cash flows of these loans during the first quarter of 2014. No allowance for loan losses has been recorded for acquired loans with or without evidence of deterioration as of the acquisition date or as of March 31, 2014.
(6) Share-Based Compensation
As of September 30, 2013,The Company’s stock-basedshare-based incentive plans (the “Stock(“Stock Plans”) authorizedauthorize the issuance of an aggregate of 440,701 shares of the Company’s common stock (as adjusted for subsequent stock dividends) pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The purpose of the Stock Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, employees and other persons to promote the success of the Company. Under the Stock Plans, options have a term of ten years after the date of grant, subject to earlier termination in certain circumstances. Options are granted with an exercise price at the then fair market value of the Company’s common stock. The grant date fair value is calculated using the Black-ScholesBlack – Scholes option valuation model. As of September 30, 2013,March 31, 2014, there were 395,763393,466 shares of common stock (as adjusted for the 5% stock dividend declared December 20, 2012 and paid January 31, 2013 to shareholders of record on January 14, 2013) available for future grants under the Stock Plans.Plans, of which 343,540 shares are available for future grants under the 2013 Equity Incentive Plan and 49,926 shares are available for future grant under the 2006 Directors Stock Plan.
Share-basedStock-based compensation expense related to options was $25,381$37,143 and $25,187 for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively. Share-based compensation expense related to options was $75,949 and $75,661 for the nine months ended September 30, 2013 and 2012, respectively.
Transactions under the Stock Plans during the ninethree months ended September 30, 2013 (as adjusted to reflect the 5% stock dividend declared December 2012)March 31, 2014 are summarized as follows:
| | | | | | Weighted | | | | | | | | | Weighted | | | |
| | | | | | Average | | | | | | | | | Average | | | |
| | | | Weighted | | Remaining | | Aggregate | | | | | Weighted | | Remaining | | Aggregate | |
| | Number of | | Average | | Contractual | | Intrinsic | | | Number of | | Average | | Contractual | | Intrinsic | |
Stock Options | | Shares | | Exercise Price | | Term (years) | | Value | | | Shares | | Exercise Price | | Term (years) | | Value | |
Outstanding at January 1, 2013 | | | 221,894 | | | $ | 8.91 | | | | | | |
Outstanding at January 1, 2014 | | | | 235,598 | | | $ | 8.81 | | | | | |
Granted | | | 25,305 | | | | 8.06 | | | | | | | | 8,700 | | | | 11.29 | | | | | |
Exercised | | | - | | | | - | | | | | | | | - | | | | - | | | | | |
Forfeited | | - | | - | | | | | | | - | | | - | | | | | |
Expired | | | - | | - | | | | | | | | - | | | - | | | | | |
Outstanding at September 30, 2013 | | | 247,199 | | | $ | 8.81 | | | | 5.6 | | | $ | 574,159 | | |
Outstanding at March 31, 2014 | | | | 244,298 | | | $ | 8.90 | | | | 5.6 | | | $ | 524,375 | |
| | | | | | | | | | | | | | | | | | | |
Exercisable at September 30, 2013 | | | 184,215 | | | $ | 9.42 | | | | 4.7 | | | $ | 352,473 | | |
Exercisable at March 31, 2014 | | | | 176,705 | | | $ | 9.45 | | | | 4.6 | | | $ | 318,997 | |
The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted for the ninethree months ended September 30, 2013March 31, 2014 are as follows:
| | | January 2014 |
| | | | |
Fair value of options granted | | $ | 2.69 | | | $ | 4.75 | |
Risk-free rate of return | | 0.81 | % | | 1.65 | % |
Expected option life in years | | 7 | | | 7 | |
Expected volatility | | 30.82 | % | | 38.01 | % |
Expected dividends (1) | | - | | | - | |
(1) To date, the Company has not paid any cash dividends on its common stock.
As of September 30, 2013,March 31, 2014, there was approximately $150,270$200,614 of unrecognized compensation cost related to nonvested stock optionoption- based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next threefour years.
The following table summarizes nonvested restricted shares for the ninethree months ended September 30, 2013 (as adjusted to reflect the 5% stock dividend declared in December 2012):March 31, 2014:
| | | | | Average | |
| | Number of | | | Grant-Date | |
Non-vested shares | | Shares | | | Fair Value | |
Non-vested at January 1, 2014 | | | 136,490 | | | $ | 6.59 | |
Granted | | | 31,800 | | | | 11.29 | |
Vested | | | (25,265 | ) | | | 6.15 | |
Forfeited | | | - | | | | - | |
Non-vested at March 31, 2014 | | | 143,025 | | | $ | 7.71 | |
| | | | | Average | |
| | Number of | | | Grant Date | |
Non-vested shares | | Shares | | | Fair Value | |
Non-vested at January 1, 2013 | | | 140,575 | | | $ | 6.41 | |
Granted | | | 19,633 | | | | 8.42 | |
Vested | | | (49,178 | ) | | | 8.97 | |
Forfeited | | | - | | | | - | |
Non-vested at September 30, 2013 | | | 111,030 | | | $ | 5.63 | |
The value of restricted shares is based upon the closing price of the common stock on the date of grant. The shares generally vest over a four-yearfour year service period with compensation expense recognized on a straight-line basis.
Share-basedStock based compensation expense related to stock grants was $87,132$126,661 and $87,289$108,695 for the three months ended September 30, 2013March 31, 2014 and 2012, respectively, and $326,085 and $262,933 for the nine months ended September 30, 2013 and 2012, respectively.2013.
As of September 30, 2013,March 31, 2014, there was approximately $673,803$1,083,520 of unrecognized compensation cost related to nonvestednon-vested stock grants that will be recognized over the next three years.
(7) Benefit Plans
The Bank has a 401(k) plan which covers substantially all employees with six months or more of service. The 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Bank’s contributions to the 401(k) plan are expensed as incurred.
The Company also provides retirement benefits to certain employees under a supplemental executive retirement plan.plans. The plan isplans are unfunded and the Company accrues actuariallyactuarial determined benefit costs over the estimated service period of the employees in the plan. The Company recognizes the over funded or under funded status of a defined benefit post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and recognizesto recognize changes in that funded status in the year in which the changes occur, through comprehensive income.
In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives, directors and divisional officers. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies total approximately $20.8 million and $16.2 million at March 31, 2014 and December 31, 2013, respectively.
The components of net periodic expense for the Bank’s planCompany’s supplemental executive retirement plans for the three and nine months ended September 30,March 31, 2014 and 2013 and 2012 were as follows:
| | | Three months ended March 31, | |
| | Three months ended September 30, | | Nine months ended September 30, | | | 2014 | | | 2013 | |
| | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | |
Service cost | | $ | 30,539 | | | $ | 61,823 | | | $ | 244,796 | | | $ | 185,469 | | | $ | 65,460 | | | $ | 183,718 | |
Interest cost | | | 22,229 | | | | 50,073 | | | | 178,179 | | | | 150,219 | | | | 49,626 | | | | 133,722 | |
Actuarial (gain) loss recognized | | | (29,893 | ) | | | 5,300 | | | | (239,614 | ) | | | 15,900 | | | | (2,378 | ) | | | (179,829 | ) |
Prior service cost recognized | | | 942 | | | | 24,858 | | | | 7,553 | | | | 74,574 | | | | - | | | | 5,669 | |
| | $ | 23,817 | | | $ | 142,054 | | | $ | 190,914 | | | $ | 426,162 | | | $ | 112,708 | | | $ | 143,280 | |
(8) Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
ComprehensiveOther comprehensive income (loss) is the total of (1) net income (loss), and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income.income (loss). The components of accumulated other comprehensive income (loss), and the related tax effects, are as follows:
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Three Months Ended September 30, 2013: | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | |
Unrealized holding gains on available-for-sale securities | | $ | (53,738 | ) | | $ | 18,270 | | | $ | (35,468 | ) |
Reclassification adjustment for (gains) realized in income | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on available-for-sale securities | | | (53,738 | ) | | | 18,270 | | | | (35,468 | ) |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and (losses) included in other comprehensive income | | | 63,265 | | | | (25,305 | ) | | | 37,960 | |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | 63,265 | | | | (25,305 | ) | | | 37,960 | |
| | | | | | | | | | | | |
Total other comprehensive gain (loss) | | $ | 9,527 | | | $ | (7,035 | ) | | $ | 2,492 | |
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Three Months Ended March 31, 2014: | | | | | | | | | |
Unrealized holding (losses) gains on available-for-sale securities: | | | | | | | | | |
Unrealized holding (losses) on available-for-sale securities | | $ | (1,777,421 | ) | | $ | 689,160 | | | $ | (1,088,261 | ) |
Reclassification adjustment for (gains) realized in income | | | - | | | | - | | | | - | |
Other comprehensive (loss) on available-for-sale securities | | | (1,777,421 | ) | | | 689,160 | | | | (1,088,261 | ) |
| | | | | | | | | | | | |
Unrealized impairment loss on held to maturity security: | | | | | | | | | | | | |
Unrealized impairment (loss) on held to maturity security | | | (500,944 | ) | | | 170,321 | | | | (330,623 | ) |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and losses included in other comprehensive income | | | 90,502 | | | | (37,027 | ) | | | 53,475 | |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | 90,502 | | | | (37,027 | ) | | | 53,475 | |
| | | | | | | | | | | | |
Accumulated other comprehensive income ( loss) | | $ | (2,187,863 | ) | | $ | 822,454 | | | $ | (1,365,409 | ) |
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Three Months Ended March 31, 2013: | | | | | | | | | |
Unrealized holding (losses) gains on available-for-sale securities: | | | | | | | | | |
Unrealized holding (losses) gains on available-for-sale securities | | $ | 1,025,006 | | | $ | (222,837 | ) | | $ | 802,169 | |
Reclassification adjustment for (gains) realized in income | | | - | | | | - | | | | - | |
Other comprehensive (loss) gain on available-for-sale securities | | | 1,025,006 | | | | (222,837 | ) | | | 802,169 | |
| | | | | | | | | | | | |
Unrealized impairment loss on held to maturity security: | | | | | | | | | | | | |
Unrealized impairment (loss) on held to maturity security: | | | (500,944 | ) | | | 170,321 | | | | (330,623 | ) |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and losses included in other comprehensive income | | | (162,561 | ) | | | 64,198 | | | | (98,363 | ) |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | (162,561 | ) | | | 64,198 | | | | (98,363 | ) |
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | 361,501 | | | $ | 11,682 | | | $ | 373,183 | |
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Three Months Ended September 30, 2012: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities | | $ | 652,571 | | | $ | (221,873 | ) | | $ | 430,698 | |
Reclassification adjustment for losses realized in income | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on available-for-sale securities | | | 652,571 | | | | (221,873 | ) | | | 430,698 | |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and (losses) included in other comprehensive income | | | 3,219 | | | | (1,294 | ) | | | 1,925 | |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | 3,219 | | | | (1,294 | ) | | | 1,925 | |
| | | | | | | | | | | | |
Total other comprehensive gain (loss) | | $ | 655,790 | | | $ | (223,167 | ) | | $ | 432,623 | |
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Nine Months Ended September 30, 2013: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities | | $ | (4,466,187 | ) | | $ | 1,518,504 | | | $ | (2,947,683 | ) |
Reclassification adjustment for losses realized in income | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on available-for-sale securities | | $ | (4,466,187 | ) | | $ | 1,518,504 | | | $ | (2,947,683 | ) |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and (losses) included in other comprehensive income | | | 129,751 | | | | (51,907 | ) | | | 77,844 | |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | 129,751 | | | | (51,907 | ) | | | 77,844 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | $ | (4,336,436 | ) | | $ | 1,466,597 | | | $ | (2,869,839 | ) |
| | Before-Tax Amount | | | Income Tax Effect | | | Net-of-Tax Amount | |
| | | | | | | | | |
Nine Months Ended September 30, 2012: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities: | | | | | | | | | |
Unrealized holding gains (losses) on available-for-sale securities | | $ | 710,040 | | | $ | (241,412 | ) | | $ | 468,628 | |
Reclassification adjustment for losses realized in income | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on available-for-sale securities | | | 710,040 | | | | (241,412 | ) | | | 468,628 | |
| | | | | | | | | | | | |
Unfunded pension liability: | | | | | | | | | | | | |
Changes from plan actuarial gains and (losses) included in other comprehensive income | | | 9,660 | | | | (3,883 | ) | | | 5,777 | |
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | | | - | | | | - | | | | - | |
Other comprehensive gain (loss) on unfunded retirement obligations | | | 9,660 | | | | (3,883 | ) | | | 5,777 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | $ | 719,700 | | | $ | (245,295 | ) | | $ | 474,405 | |
Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:
| | Unrealized Holding Gains (Losses) on Available for Sale Securities | | | Unrealized Impairment Loss on Held to Maturity Security | | | Unfunded Pension Liability | | | Accumulated Other Comprehensive Income | | | Unrealized Holding Gains (Losses) on Available for Sale Securities | | | Unrealized Impairment Loss on Held to Maturity Security | | | Unfunded Pension Liability | | | Accumulated Other Comprehensive Income (Loss) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2013: | | | | | | | | | | | | | |
Three Months Ended March 31, 2014: | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 1,235,204 | | | $ | (330,623 | ) | | $ | (100,288 | ) | | $ | 804,293 | | | $ | (1,932,526 | ) | | $ | (330,623 | ) | | $ | 15,515 | | | $ | (2,247,634 | ) |
Other comprehensive income (loss) before reclassifications | | | (2,947,683 | ) | | | - | | | | 77,844 | | | | (2,869,839 | ) | | | 844,265 | | | | - | | | | 37,960 | | | | 882,225 | |
Amounts reclassified from accumulated other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other comprehensive income (loss) | | | (2,947,683 | ) | | | - | | | | 77,844 | | | | (2,869,839 | ) | | | 844,265 | | | | - | | | | 37,960 | | | | 882,225 | |
Balance, end of period | | $ | (1,712,479 | ) | | $ | (330,673 | ) | | $ | (22,444 | ) | | $ | (2,065,546 | ) | | $ | (1,088,261 | ) | | $ | (330,623 | ) | | $ | 53,475 | | | $ | (1,365,409 | ) |
| | Unrealized Holding Gains (Losses) on Available for Sale Securities | | | Unrealized Impairment Loss on Held to Maturity Security | | | Unfunded Pension Liability | | | Accumulated Other Comprehensive Income | | | Unrealized Holding Gains (Losses) on Available for Sale Securities | | | Unrealized Impairment Loss on Held to Maturity Security | | | Unfunded Pension Liability | | | Accumulated Other Comprehensive Income | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2012: | | | | | | | | | | | | | |
Three Months Ended March 31, 2013: | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 1,530,078 | | | $ | (330,623 | ) | | $ | (107,993 | ) | | $ | 1,091,462 | | | $ | 1,235,204 | | | $ | (330,623 | ) | | $ | (100,288 | ) | | $ | 804,293 | |
Other comprehensive income (loss) before reclassifications | | | 468,628 | | | | - | | | | 5,777 | | | | 474,405 | | | | (433,035 | ) | | | - | | | | 1,925 | | | | (431,110 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other comprehensive income (loss) | | | 468,628 | | | | - | | | | 5,777 | | | | 474,405 | | | | (433,035 | ) | | | - | | | | 1,925 | | | | (431,110 | ) |
Balance, end of period | | $ | 1,998,706 | | | $ | (330,623 | ) | | $ | (162,216 | ) | | $ | 1,565,867 | | | $ | 802,169 | | | $ | (330,623 | ) | | $ | (98,363 | ) | | $ | 373,183 | |
There were no items reclassified out of each component of other comprehensive income (loss) for the three and nine months ended September 30, 2013.
(9) Recent Accounting Pronouncements
ASU 2011-112014-04 (Disclosures about offsetting Assets and LiabilitiesReceivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure)
On December 19, 2011,In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210)ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Disclosures about Offsetting AssetsReclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and Liabilities.” This new guidance affectsa creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all entities with financial instrumentsinterest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or derivativesthrough a similar legal agreements. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are either presented on a net basis in the balance sheet or subjectprocess of foreclosure according to an enforceable master netting arrangement or a similar arrangement.local requirements of the applicable jurisdiction. The ASU does not change existing offsetting criteriaamendments in U.S. generally accepted accounting principles (“U.S. GAAP”) or the permitted balance sheet presentation for items meeting the criteria. To help financial statement users better assess the effect or potential effect of offsetting arrangements on an entity’s financial position, the new guidance requires disclosures in the financial statement notes that provide both net and gross information about assets and liabilities that have been offset and the related arrangements.
The new disclosure requirements in the ASUthis update are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared in accordance with International Financial Reporting Standards (“IFRS”). The eligibility criteria for offsetting are different in U.S. GAAP and IFRS. In January 2011, the FASB and the International Accounting Standards Board issued an exposure draft proposing new common criteria for offsetting, but the boards could not agree. The FASB voted to retain existing U.S. GAAP guidance on offsetting and to require expanded disclosures for financial instruments and derivative instruments that are either offset in the balance sheet or eligible for offset subject to a master netting arrangement or similar arrangement.
The ASU is effective for public business entities for annual reporting periods, beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required byperiods, beginning after December 15, 2014. An entity can elect to adopt the amendments should be provided retrospectively for all comparative periods. The FASB has publishedin this update using either a short recap highlighting the significant issues the ASU addresses.modified retrospective transition method or a prospective transition method. The Company does not expectis currently evaluating the impact the adoption of this ASU tothe standard will have a material impact on the Company’s consolidated financial position or results of operations.
ASU 2011-05, 2011-12 and 2013-02 (Presentation of Comprehensive Income)
The provisions of ASU 2011-05 amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of shareholders’ equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous U.S. GAAP, all three presentations were acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. The Company adopted this update on January 1, 2012 and the new Consolidated Statements of Comprehensive Income are included in these financial statements.
ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“AOCI”) in Accounting Standards Update No. 2011-05,” was issued by the FASB on December 23, 2011. This ASU defers the implementation of only those provisions in ASU 2011-05, dealing only with the presentation of items reclassified out of AOCI.
The amendments in ASU 2011-12 and ASU 2011-05 are effective at the same time. For public entities, the guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The requirements are effective for nonpublic entities for fiscal years ending after December 12, 2012. The FASB has published a short recap of the reasons for the ASU 2011-12 deferrals. The adoption of this guidance did not have any impact on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) to improve the reporting of reclassifications out of accumulated comprehensive income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant impact on the Company’s consolidated financial statements.
ASU 2013-04 (Presentation of Joint and Several Liability Arrangements)
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:
| a. | The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and |
| b. | Any additional amount the reporting entity expects to pay on behalf of its co-obligors. |
ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. For public companies ASU 2013-04 is effective for reporting periods beginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
ASU No. 2013-11 (Presentation of Unrecognized Tax Benefit)
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). Currently, there is diversity in practice in the presentation of unrecognized tax benefits. The aim of ASU 2013-11 is to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except for circumstances outlined in ASU 2013-11. For public companies, ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
(10) Fair Value Disclosures
U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 2: | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. |
Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 1 andquoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 Inputs. For theseLevel 2 securities, the Company obtains fair value measurements from an independent pricing service. For Level 2 securities, theThe fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.
Impaired loans. Loans included in the following table are those which the Company has measured and recognized impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties,collateral, or discounted cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less specific valuation allowances.
Other Real Estate Owned. Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (“OREO”), thereby establishing a new accounting basis. The Company subsequently adjusts the fair value ofon the OREO utilizing Level 3 inputs on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total Fair Value | |
March 31, 2014: | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 9,245,300 | | | $ | 1,523,385 | | | $ | - | | | $ | 10,768,685 | |
Residential collateralized mortgage obligations- GSE | | | - | | | | 4,444,789 | | | | - | | | | 4,444,789 | |
Residential collateralized mortgage obligations - non GSE | | | - | | | | 3,203,358 | | | | - | | | | 3,203,358 | |
Residential mortgage backed securities – GSE | | | - | | | | 30,954,662 | | | | - | | | | 30,954,662 | |
Obligations of State and Political subdivisions | | | - | | | | 20,481,993 | | | | - | | | | 20,481,993 | |
Trust preferred debt securities – single issuer | | | - | | | | 2,086,400 | | | | - | | | | 2,086,400 | |
Corporate debt securities | | | - | | | | 43,973,829 | | | | - | | | | 43,973,829 | |
Restricted stock | | | - | | | | 1,710,000 | | | | - | | | | 1,710,000 | |
Mutual fund | | | - | | | | 25,000 | | | | - | | | | 25,000 | |
| | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total Fair Value | |
September 30, 2013: | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 20,101,450 | | | $ | 1,525,215 | | | $ | - | | | $ | 21,626,665 | |
Residential collateralized mortgage obligations- GSE | | | - | | | | 4,196,441 | | | | - | | | | 4,196,441 | |
Residential collateralized mortgage obligations – non GSE | | | - | | | | 3,052,663 | | | | - | | | | 3,052,663 | |
Residential mortgage backed securities –GSE | | | - | | | | 33,338,768 | | | | - | | | | 33,338,768 | |
Obligations of State and Political subdivisions | | | - | | | | 19,745,599 | | | | - | | | | 19,745,599 | |
Trust preferred debt securities – single issuer | | | - | | | | 2,038,200 | | | | - | | | | 2,038,200 | |
Corporate debt securities | | | - | | | | 16,520,775 | | | | - | | | | 16,520,775 | |
Restricted stock | | | - | | | | 1,013,000 | | | | - | | | | 1,013,000 | |
Mutual fund | | | - | | | | 25,000 | | | | - | | | | 25,000 | |
| | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total Fair Value | | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total Fair Value | |
December 31, 2012: | | | | | | | | | | | | | |
December 31, 2013: | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Treasury securities and | | | | | | | | | | | | | | | | | | | | | | | | |
obligations of U.S. Government | | | | | | | | | | | | | | | | | | | | | | | | |
sponsored corporations (“GSE”) and agencies | | $ | 27,923,670 | | | $ | 1,571,865 | | | $ | - | | | $ | 29,495,535 | | | $ | 19,994,430 | | | $ | 1,515,270 | | | $ | - | | | $ | 21,509,700 | |
Residential collateralized mortgage obligations- GSE | | | - | | | | 6,632,665 | | | | - | | | | 6,632,665 | | | | - | | | | 3,681,792 | | | | - | | | | 3,681,792 | |
Residential collateralized mortgage obligations - non GSE | | | - | | | | 3,924,182 | | | | - | | | | 3,924,182 | | | | - | | | | 2,826,396 | | | | - | | | | 2,826,396 | |
Residential mortgage backed securities – GSE | | | - | | | | 26,489,335 | | | | - | | | | 26,489,335 | | | | - | | | | 31,965,947 | | | | - | | | | 31,965,947 | |
Obligations of State and Political subdivisions | | | - | | | | 20,682,301 | | | | - | | | | 20,682,301 | | | | - | | | | 19,646,044 | | | | - | | | | 19,646,044 | |
Trust preferred debt securities – single issuer | | | - | | | | 1,998,366 | | | | - | | | | 1,998,366 | | | | - | | | | 2,013,100 | | | | - | | | | 2,013,100 | |
Corporate debt securities | | | - | | | | 18,100,281 | | | | - | | | | 18,100,281 | | | | - | | | | 16,517,728 | | | | - | | | | 16,517,728 | |
Restricted stock | | | - | | | | 2,493,300 | | | | - | | | | 2,493,300 | | | | - | | | | 1,013,100 | | | | - | | | | 1,013,100 | |
Mutual fund | | | - | | | | 25,000 | | | | - | | | | 25,000 | | | | - | | | | 25,000 | | | | - | | | | 25,000 | |
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis at September 30, 2013andMarch 31, 2014 and December 31, 20122013 were as follows:
| | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value | | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value | |
September 30, 2013: | | | | | | | | | | |
March 31, 2014: | | | | | | | | | | |
Impaired loans | | | $ | - | | | $ | - | | | $ | 8,048,407 | | | $ | 8,048,407 | |
| | | | | | | | | | |
| | | | | | | | | | |
December 31, 2013: | | | | | | | | | | |
Impaired loans | | | - | | | | - | | | $ | 8,410,298 | | | $ | 8,410,298 | | | $ | - | | | $ | - | | | $ | 7,879,005 | | | $ | 7,879,005 | |
Other real estate owned | | | - | | | | - | | | | 571,950 | | | | 571,950 | | | | - | | | | - | | | | 209,937 | | | | 209,937 | |
| | | | | | | | | | |
| | | | | | | | | | |
December 31, 2012: | | | | | | | | | | |
Impaired loans | | | - | | | | - | | | $ | 4,794,369 | | | $ | 4,794,369 | | |
Other real estate owned | | | - | | | | - | | | | 6,568,781 | | | | 6,568,781 | | |
Impaired loans measured at fair value and included in the above table consisted of 1310 loans having an aggregate balancerecorded investment of $10,121,957$9,627,272 and specific loan loss allowances of $1,711,659$1,578,865 at September 30, 2013March 31, 2014 and 1617 loans at December 31, 20122013, having an aggregate recorded investmentbalance of $6,086,432$9,662,866 and specific loan loss allowances of $1,292,063.
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value Estimate | | Valuation Techniques | | Unobservable Input | | Range of(Weighted AdjustmentsAverage)
|
September 30, 2013 | | | March 31, 2014 | | | | |
Impaired loans | $8,410,298 | 8,048,407 | Appraisal of | | Appraisal | | |
| | | collateral (1) | | adjustments (2) | | 5-50%10-40 (19.1%) |
Other Real Estate Owned | $571,950 | | Appraisal of | | Appraisal | | |
| | | collateral (1) | | adjustments (2) | | 8-60% |
| | | | | | | |
December 31, 2012 | | | 2013 | | | | |
Impaired loans | $4,794,369 | 7,879,005 | Appraisal of | | Appraisal | | |
| | | collateral (1) | | adjustments (2) | | 5-50%5-15 (9.7%) |
Other Real Estate Ownedreal estate owned | $6,568,781 | 209,937 | Appraisal of | | Appraisal | | |
| | | collateral (1) | | adjustments (2) | | 8-60%10-50 (32.6%) |
| (1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which generally include various Level 3 inputs that are not identifiable. |
| (2) | Includes qualitative adjustments by management and estimated liquidation expenses. |
(2) Includes qualitative adjustments by management and estimated liquidation expenses.
The fair valuesvalue of other real estate owned was determined using appraisals, which may be discounted based on management’s review and changes in market conditions.
The following is a summary of fair value versus the carrying value of all of the Company’s financial instruments. For the Company and the Bank, as for most financial institutions, the bulk of theirits assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used for the purpose of this note. Changes in assumptions could significantly affect these estimates.
Estimated fair values have been determined by using the best available data and an estimation methodology suitable for each category of financial instruments as follows:
Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost).The carrying amounts reported in the balance sheet for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value.
Securities Held to Maturity (Carried at Amortized Cost). The fair values of securities held to maturity are determined in the same manner as for securities available for sale.
Loans Held For Sale (Carried at Lower of Aggregated Cost or Fair Value).The fair values of loans held for sale are determined, when possible, using quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans.
Gross Loans Receivable (Carried at Cost).The fair values of loans, excluding impaired loans subject to specific loss reserves, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that re-price frequently and havewith no significant change in credit risk, fair values are based on carrying values.
Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposit to a schedule of aggregated expected monthly maturities ofon time deposits.
Borrowings and Subordinated Debentures (Carried at Cost). The carrying amounts of short-term borrowings approximate their fair values. The fair values of long-term FHLB advances and subordinated debentures are estimated using discounted cash flow analysis, based on quoted or estimated interest rates for new borrowings with similar credit risk characteristics, terms and remaining maturities.maturity.
The estimated fair values and the recorded book balances, at September 30, 2013carrying amounts of financial assets and December 31, 2012liabilities were as follows:
March 31, 2014 | |
| | Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair | |
| | Value | | | Inputs | | | Inputs | | | Inputs | | | Value | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 108,919,056 | | | $ | 108,919,056 | | | $ | - | | | $ | - | | | $ | 108,919,056 | |
Securities available for sale | | | 117,630,716 | | | | 9,245,300 | | | | 108,385,416 | | | | - | | | | 117,630,716 | |
Securities held to maturity | | | 152,734,559 | | | | - | | | | 155,795,659 | | | | - | | | | 155,795,659 | |
Loans held for sale | | | 3,253,009 | | | | - | | | | 3,298,551 | | | | - | | | | 3,298,551 | |
Loans, net | | | 524,374,540 | | | | - | | | | - | | | | 531,865,000 | | | | 531,865,000 | |
Accrued interest receivable | | | 2,943,400 | | | | - | | | | 2,943,400 | | | | - | | | | 2,943,400 | |
Deposits | | | (838,998,207 | ) | | | - | | | | (839,805,000 | ) | | | - | | | | (839,805,000 | ) |
Borrowings | | | (20,978,549 | ) | | | - | | | | (22,078,000 | ) | | | - | | | | (22,078,000 | ) |
Redeemable subordinated debentures | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) |
Accrued interest payable | | | (937,278 | ) | | | - | | | | (937,278 | ) | | | - | | | | (937,278 | ) |
| | | | | September 30, 2013 | |
| | | | | | | | | | | | | | | |
| | Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair | |
| | Value | | | Inputs | | | Inputs | | | Inputs | | | Value | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 123,815,138 | | | $ | 123,815,138 | | | | - | | | $ | - | | | $ | 123,815,138 | |
Securities available for sale | | | 101,557,211 | | | | 20,101,450 | | | | 81,455,761 | | | | - | | | | 101,557,211 | |
Securities held to maturity | | | 150,572,922 | | | | - | | | | 152,186,281 | | | | - | | | | 152,186,281 | |
Loans held for sale | | | 14,535,681 | | | | 14,535,681 | | | | - | | | | - | | | | 14,535,681 | |
Loans | | | 355,729,293 | | | | - | | | | - | | | | 361,388,000 | | | | 361,388,000 | |
Accrued interest receivable | | | 2,143,535 | | | | 2,143,535 | | | | - | | | | - | | | | 2,143,535 | |
Deposits | | | (686,943,954 | ) | | | - | | | | (688,159,000 | ) | | | - | | | | (688,159,000 | ) |
Borrowings | | | (10,000,000 | ) | | | - | | | | (11,252,000 | ) | | | - | | | | (11,252,000 | ) |
Redeemable subordinated debentures | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) |
Accrued interest payable | | | (787,927 | ) | | | (787,927 | ) | | | - | | | | - | | | | (787,927 | ) |
| | | | | December 31, 2012 | | |
| | | | | | | | | | | | | | | | |
December 31, 2013 | | December 31, 2013 | |
| | Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair | | | Carrying | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair | |
| | Value | | | Inputs | | | Inputs | | | Inputs | | | Value | | | Value | | | Inputs | | | Inputs | | | Inputs | | | Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 14,044,921 | | | $ | 14,044,921 | | | | - | | | $ | - | | | $ | 14,044,921 | | | $ | 69,278,771 | | | $ | 69,278,771 | | | $ | - | | | $ | - | | | $ | 69,278,771 | |
Securities available for sale | | | 109,840,965 | | | | 27,923,670 | | | | 81,917,295 | | | | - | | | | 109,840,965 | | | | 99,198,807 | | | | 19,994,430 | | | | 79,204,377 | | | | - | | | | 99,198,807 | |
Securities held to maturity | | | 116,027,900 | | | | - | | | | 121,839,363 | | | | - | | | | 121,839,363 | | | | 152,816,815 | | | | - | | | | 153,629,773 | | | | - | | | | 153,629,000 | |
Loans held for sale | | | 35,960,262 | | | | - | | | | 35,960,262 | | | | - | | | | 35,960,262 | | | | 10,923,689 | | | | - | | | | 10,924,000 | | | | - | | | | 10,924,000 | |
Loans | | | 514,662,898 | | | | - | | | | - | | | | 515,577,788 | | | | 515,577,788 | | | | 366,297,511 | | | | - | | | | - | | | | 372,548,000 | | | | 372,548,000 | |
Accrued interest receivable | | | 2,872,099 | | | | - | | | | 2,872,099 | | | | - | | | | 2,872,099 | | | | 2,542,602 | | | | - | | | | 2,542,602 | | | | - | | | | 2,542,602 | |
Deposits | | | (707,689,475 | ) | | | - | | | | (709,678,000 | ) | | | - | | | | (709,678,000 | ) | | | (638,552,030 | ) | | | - | | | | (639,539,000 | ) | | | - | | | | (639,539,000 | ) |
Borrowings | | | (42,400,000 | ) | | | - | | | | (43,906,000 | ) | | | - | | | | (43,906,000 | ) | | | (10,000,000 | ) | | | - | | | | (11,148,000 | ) | | | - | | | | (11,148,000 | ) |
Redeemable subordinated debentures | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) | | | - | | | | (18,557,000 | ) |
Accrued interest payable | | | (1,057,779 | ) | | | - | | | | (1,057,779 | ) | | | - | | | | (1,057,779 | ) | | | (883,212 | ) | | | - | | | | (883,212 | ) | | | - | | | | (883,212 | ) |
Loan commitments and standby letters of credit as of September 30, 2013March 31, 2014 and December 31, 2012 were2013 are based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit wasis nominal.
(11) Subsequent Event
Subsequent to March 31, 2014, management of the Bank became aware of a fraud against a lead lender in a loan facility in which the Bank is a participant. The borrower under the loan facility appears to have submitted borrowing base certificates that allegedly vastly overstated the amount of its accounts receivable and falsified verifications of those accounts receivable. The Bank’s total exposure under its participation in the loan facility at March 31, 2014 was $3,656,250. The Bank anticipates that some of that exposure will be reduced by collateral in the possession of the lead lender but the exact amount of the collateral is currently unknown. Together with the lead lender and another participant in the facility, the Bank is conducting a full review of the matter. The Bank is unable to quantify its potential loss exposure at this time due to the early stage of this investigation and has not provided a specific loan loss reserve or charged-off any portion of the loan as of March 31, 2014, but is likely to recognize losses related to the loan in 2014.
The purpose of this discussion and analysis of the operating results and financial condition at September 30, 2013March 31, 2014 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month and nine month periodsperiod ended September 30, 2013March 31, 2014 are not necessarily indicative of results to be attained for any other period.
This discussion and analysis should be read in conjunction with the Consolidated Financial Statements,consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations)Operation) for the year ended December 31, 2012,2013, as filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2013.31, 2014.
General
Throughout the following sections, the “Company” refers to 1st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1st Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and, 249 New York Avenue, LLC. and RFHB Investment Company. 1st Constitution Capital Trust II, (“Trust II”), a subsidiary of the Company, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full service commercial bank which began operations in August 1989, and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.
The Bank operates fourteennineteen branches, and manages an investment portfolio through its subsidiary,subsidiaries, 1st Constitution Investment Company of New Jersey, Inc. and RFHB Investment Company. The Bank plans to merge RFHB Investment Company into 1st Constitution Investment Company of New Jersey, Inc. during the second quarter of 2014. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.
Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company to raise additional regulatory capital.
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 speakspeaks 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 22, 2013,31, 2014, 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
On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company, a New Jersey state chartered commercial bank (“Rumson”), which merged with and into the Bank, with the Bank as the surviving entity. The merger agreement among the Company, the Bank and Rumson (the “Merger Agreement”) provided that the shareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the effective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash, subject to proration as described in the Merger Agreement, so that 60% of the aggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019,242 shares of its common stock and paid $14.8 million in cash in the transaction.
The merger was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values as of the acquisition date. Rumson’s results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
Summary
The Company reported net income of $641,712 for the three months ended March 31, 2014 compared to net income of $1,325,318 for the three months ended March 31, 2013. On a diluted per share basis, net income per share was $0.09 for the 2014 first quarter compared to $0.22 for the 2013 first quarter.
On February 7, 2014, the Company completed its merger with Rumson and during the first quarter of 2014 integrated the operations of Rumson. The Company’s financial statements reflect the impact of the merger from February 7, 2014.
The following table provides a reconciliation of net income as reported with net income adjusted for after-tax merger-related expenses :
Net income as reported | | $ | 641,712 | |
| | | | |
After-tax merger-related expenses | | 896,545 | |
| | | | |
Net income as adjusted | | $ | 1,538,257 | |
As a result of the merger, the Company incurred pre-tax merger-related expenses of $1,422,723 (or $896,545 after taxes). Excluding after-tax merger-related expenses, net income for the first quarter of 2014 would have been $1,538,254, a 15.8% increase over the first quarter net income of $1,325,318 for 2013. On a diluted per share basis, net income per share would have been $0.22 for the 2014 first quarter and equal to last year’s first quarter diluted net income per share. The Company has used the measure of net income excluding after-tax merger-related expenses, which is a non-GAAP performance measure. Management believes that it is useful to calculate net income without the impact of expenses of the merger of the Bank and Rumson that are not part of the ordinary operations of the Company and make this measure more comparable to prior-period net income. The Company cautions that non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results. At March 31, 2014, the Company’s book value and tangible book value per common share were $11.47 and $9.54, respectively.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Summary
The Company realized net income of $1,523,238 for the three months ended September 30, 2013, an increase of $168,319, or 12.4%, from the $1,354,919 reported for the three months ended September 30, 2012. The increase was due primarily to an increase in non-interest income and a lower level of non-interest expenses which, in total, offset the decrease in net interest income and a higher loan loss provision. Net income per diluted common share was $0.25 for the three months ended September 30, 2013, which was unchanged when compared to the three months ended September 30, 2012. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.
During the third quarter of 2012, the Company launched a shareholders’ common stock rights offering, which expired on October 5, 2012. The Company received gross proceeds of $5.0 million from holders of subscription rights who exercised their basic subscription rights and from holders who exercised the over-subscription privilege. The rights offering was fully subscribed. Accordingly, the Company issued a total of 555,555 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, including pursuant to the exercise of the over-subscription privilege.
Key performance ratios improved for the three months ended September 30, 2013 due to higher net income for that period compared to the three months ended September 30, 2012. Returnreturn on average assets and return on average equity were 0.76%0.30% and 9.25%3.43%, respectively, for the three months ended September 30, 2013first quarter of 2014, compared to 0.69%0.65% and 9.24%8.20%, respectively for the three months ended September 30, 2012.same quarter of 2013. Both the returns on average assets and on average equity for the first quarter of 2014 were adversely affected by the Rumson merger-related expenses. Excluding these after-tax merger-related expenses, the returns on average assets and the return on average equity would have been 0.71% and 8.21%, respectively, for the first quarter of 2014. The Company has used the measure of net income excluding after-tax merger-related expenses, which is a non-GAAP performance measure, to calculate returns on average assets and on average equity. Management believes that it is useful to calculate returns on average assets and on average equity by using net income without the impact of expenses of the merger of the Bank and Rumson that are not part of the ordinary operations of the Company and make this measure more comparable to prior-period net income. The Company cautions that non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results.
The Bank’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities. The net interest margin on a tax-equivalent basis for the three months ended September 30, 2013March 31, 2014 was 3.52%3.56% as compared to the 4.09%3.53% net interest margin recorded for the three months ended September 30, 2012, a decreaseMarch 31, 2013, an increase of 573 basis points. This decrease in the Company’s net interest margin for the three months ended September 30, 2013 compared with the corresponding 2012 period was primarily due to two factors: (1) the decline in the balance of outstanding borrowings under mortgage warehouse lines and (2) the allocation of excess liquidity to much lower yielding overnight fund balances. The decline in borrowings under mortgage warehouse lines was due to the increase in long-term interest rates during the third quarter of 2013, which led to lower levels of mortgage refinancings, and the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during thisthe challenging current interest rate environment.
Earnings Analysis
Net Interest Income
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 79.6%80.8% of the Company’s net revenues for the three-monththree month period ended September 30, 2013March 31, 2014 and 84.6%79.7% of net revenues for the three-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the three month periods ended March 31, 2014 and 2013. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.
Average Balance Sheets with Resultant Interest and Rates | |
(yields on a tax-equivalent basis) | |
| |
| | Three months ended March 31, 2014 | | | Three months ended March 31, 2013 | |
| | Average Balance | | | Interest | | | Average Yield | | | Average Balance | | | Interest | | | Average Yield | |
Assets: | | | | | | | | | | | | | | | | | | |
Federal Funds Sold/Short-Term Investments | | $ | 96,201,833 | | | $ | 55,291 | | | | 0.23 | % | | $ | 85,173,422 | | | | 49,680 | | | | 0.24 | % |
Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 184,772,750 | | | | 1,121,584 | | | | 2.43 | % | | | 159,023,828 | | | | 937,085 | | | | 2.36 | % |
Tax-exempt (4) | | | 79,584,499 | | | | 880,274 | | | | 4.42 | % | | | 63,549,292 | | | | 777,088 | | | | 4.89 | % |
Total | | | 264,357,249 | | | | 2,001,858 | | | | 3.03 | % | | | 222,573,120 | | | | 1,714,173 | | | | 3.08 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loan Portfolio: (1) | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 60,008,415 | | | | 1,020,198 | | | | 6.89 | % | | | 44,654,565 | | | | 680,811 | | | | 6.18 | % |
Residential real estate | | | 35,313,975 | | | | 333,464 | | | | 3.83 | % | | | 10,920,962 | | | | 144,890 | | | | 5.38 | % |
Home Equity | | | 18,829,088 | | | | 213,117 | | | | 4.59 | % | | | 9,222,618 | | | | 124,683 | | | | 5.48 | % |
Commercial and commercial real estate | | | 227,575,170 | | | | 3,314,871 | | | | 5.91 | % | | | 143,147,048 | | | | 2,527,366 | | | | 7.16 | % |
Mortgage warehouse lines | | | 91,860,959 | | | | 1,079,526 | | | | 4.77 | % | | | 189,436,939 | | | | 2,189,236 | | | | 4.69 | % |
Installment | | | 274,288 | | | | 4,107 | | | | 6.07 | % | | | 255,018 | | | | 4,391 | | | | 6.98 | % |
All Other Loans | | 22,406,473 | | | | 273,156 | | | | 4.94 | % | | | 49,279,947 | | | | 300,818 | | | | 2.48 | % |
Total | | | 456,268,368 | | | | 6,238,439 | | | | 5.55 | % | | | 446,917,097 | | | | 5,972,195 | | | | 5.42 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Interest-Earning Assets | | | 816,827,450 | | | | 8,295,588 | | | | 4.11 | % | | | 754,663,639 | | | | 7,736,048 | | | | 4.14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses | | | (7,740,866 | ) | | | | | | | | | | | (7,363,842 | ) | | | | | | | | |
Cash and Due From Bank | | | 17,893,491 | | | | | | | | | | | | 30,994,778 | | | | | | | | | |
Other Assets | | | 53,197,450 | | | | | | | | | | | | 51,277,385 | | | | | | | | | |
Total Assets | | $ | 880,177,525 | | | | | | | | | | | $ | 829,571,960 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market and NOW Accounts | $ | 255,097,589 | | | $ | 207,924 | | | | 0.33 | % | | $ | 231,758,247 | | | $ | 217,524 | | | | 0.38 | % |
Savings Accounts | | | 199,706,974 | | | | 222,659 | | | | 0.45 | % | | | 209,362,823 | | | | 236,745 | | | | 0.46 | % |
Certificates of Deposit | | | 160,831,323 | | | | 468,148 | | | | 1.18 | % | | | 141,505,368 | | | | 502,067 | | | | 1.44 | % |
Other Borrowed Funds | | | 15,899,762 | | | | 115,578 | | | | 2.95 | % | | | 11,155,000 | | | | 103,273 | | | | 3.75 | % |
Trust Preferred Securities | | | 18,557,000 | | | | 85,107 | | | | 1.86 | % | | | 18,557,000 | | | | 87,873 | | | | 1.92 | % |
Total Interest-Bearing Liabilities | | | 650,092,648 | | | | 1,099,416 | | | | 0.69 | % | | | 612,338,438 | | | | 1,147,482 | | | | 0.76 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Spread (2) | | | | | | | | | | | 3.42 | % | | | | | | | | | | | 3.38 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Demand Deposits | | | 146,567,857 | | | | | | | | | | | | 141,764,416 | | | | | | | | | |
Other Liabilities | | | 7,705,277 | | | | | | | | | | | | 9,973,569 | | | | | | | | | |
Total Liabilities | | | 804,365,782 | | | | | | | | | | | | 764,076,423 | | | | | | | | | |
Shareholders’ Equity | | | 75,811,743 | | | | | | | | | | | | 65,495,537 | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 880,177,525 | | | | | | | | | | | $ | 829,571,960 | | | | | | | | | |
Net Interest Margin (3) | | | | | | $ | 7,196,173 | | | | 3.56 | % | | | | | | $ | 6,588,566 | | | | 3.53 | % |
(1) | Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans. |
(2) | The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. |
(3) | The net interest margin is equal to net interest income divided by average interest earning assets. |
(4) | Tax- equivalent basis. |
The Company’s net interest income decreasedincreased on a tax-equivalent basis by $939,380,$607,607, or 13.0 %,9.2%, to $6,305,022$7,196,173 for the three months ended September 30, 2013March 31, 2014 from the $7,244,402$6,588,566 reported for the three months ended September 30, 2012. The decreaseMarch 31, 2013. This increase in the Company’s net interest incomemargin for the three months ended March 31, 2014 compared with the comparable 2013 period was primarily attributabledue to a lower level of higher yielding mortgage warehouse portfolio loansrates paid on interest-bearing liabilities during the current period. The average rate paid on interest-bearing liabilities for the three months ended September 30, 2013March 31, 2014 was 0.70%0.69%, a reduction of 147 basis points compared to 0.84%from 0.76% paid for the three months ended September 30, 2012. The average yield on assets decreased to 4.07% for the three months ended September 30, 2013 from 4.77% for the three months ended September 30, 2012 due to a shift in average assets away from loans which typically have higher yields than securities.March 31, 2013.
Average interest earning assets increased by $17,843,175,$62,163,811, or 2.5%8.2%, to $743,290,714$816,827,450 for the three-monththree month period ended September 30, 2013March 31, 2014 from $725,447,539$754,663,639 for the three-monththree month period ended September 30, 2012.March 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 703 basis points to 4.07%4.11% for the three-monththree month period ended September 30, 2013March 31, 2014 when compared to 4.77%4.14% for the three-monththree month period ended September 30, 2012.
Average interest bearing liabilities decreasedincreased by $1,138,771$37,754,210, or 6.2%, to $585,200,612$650,092,648 for the three-monththree month period ended September 30, 2013March 31, 2014 from $586,339,383$612,338,438 for the three-monththree month period ended September 30, 2012.March 31, 2013. Overall, the cost of total interest bearing liabilities decreased 147 basis points to 0.70%0.69% for the three months ended September 30, 2013 compared to 0.84%March 31, 2014 from 0.76% for the three months ended September 30, 2012.March 31, 2013.
The net interest margin (on a tax-equivalent basis), which is net interest income on a tax equivalent basis divided by average interest earning assets, was 3.52%3.56% for the three months ended September 30, 2013March 31, 2014 compared to 4.09% for3.53% the three months ended September 30, 2012.March 31, 2013.
Provision for Loan Losses
Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal classifications,review and classification, collateral values, and the growth and size of the loan portfolio.
At September 30, 2013, the loan portfolio balance was $362,549,473, which represented a decrease of $159,264,637, or 30.5%, compared to the December 31, 2012 balance of $521,814,110. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company’sCompany recorded a provision for loan losses was $539,998 for the three months ended September 30, 2013 compared toof $499,998 for the three months ended September 30, 2012. March 31, 2014 compared to no provision for the three months ended March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013. At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082. There were no changes in the expected cash flows of the acquired loans from the Rumson merger during the quarter. No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014. The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.
Non-InterestEarnings Analysis
Net Interest Income
Total non-interestNet interest income, for the three months ended September 30, 2013 was $1,616,548, an increaseCompany’s largest and most significant component of $299,821, or 22.8%, over non-interestoperating income, of $1,316,727 foris the three months ended September 30, 2012.difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 20.4%80.8% of the Company’s net revenues for the three monthsmonth period ended September 30, 2013March 31, 2014 and 15.4%79.7% of net revenues for the three-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
Service chargesThe following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased modestly to $231,169related items, and the Company’s average yield or rate for the three monthsmonth periods ended September 30, 2013 from $243,443 forMarch 31, 2014 and 2013. The average rates are derived by dividing interest income and expense by the three months ended September 30, 2012. This decrease was the resultaverage balance of a lower volume of uncollected fundsassets and overdraft fees collected on deposit accounts during the three months ended September 30, 2013 compared to the three months ended September 30, 2012.liabilities, respectively.
Gain on sales of loans held for sale increased to $641,966 for the three months ended September 30, 2013 compared to $509,138 for the three months ended September 30, 2012. The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market. The volume of mortgage loan sales increased for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $115,840 for the three months ended September 30, 2013 compared to $112,276 for the three months ended September 30, 2012. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduce the Company’s overall effective tax rate.
The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees, cash counting fees and Automated Teller Machine fees for non-Bank customers. Increased customer demand for these services contributed $627,573 to the other income component of non-interest income for the three months ended September 30, 2013 compared to $451,870 for the three months ended September 30, 2012, an increase of $175,703 for the third quarter of 2013 as compared to the third quarter of 2012.
Non-interest expenses decreased by $929,691, or 15.0%, to $5,253,483 for the three months ended September 30, 2013 from $6,183,174 for the three months ended September 30, 2012. The current period decrease in other real estate owned expenses was the primary cause for this current period decrease in total non-interest expenses when compared with the prior period’s non-interest expenses. The following table presents the major components of non-interest expenses for the three months ended September 30, 2013 and 2012.
Average Balance Sheets with Resultant Interest and Rates | |
(yields on a tax-equivalent basis) | |
| |
| | Three months ended March 31, 2014 | | | Three months ended March 31, 2013 | |
| | Average Balance | | | Interest | | | Average Yield | | | Average Balance | | | Interest | | | Average Yield | |
Assets: | | | | | | | | | | | | | | | | | | |
Federal Funds Sold/Short-Term Investments | | $ | 96,201,833 | | | $ | 55,291 | | | | 0.23 | % | | $ | 85,173,422 | | | | 49,680 | | | | 0.24 | % |
Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 184,772,750 | | | | 1,121,584 | | | | 2.43 | % | | | 159,023,828 | | | | 937,085 | | | | 2.36 | % |
Tax-exempt (4) | | | 79,584,499 | | | | 880,274 | | | | 4.42 | % | | | 63,549,292 | | | | 777,088 | | | | 4.89 | % |
Total | | | 264,357,249 | | | | 2,001,858 | | | | 3.03 | % | | | 222,573,120 | | | | 1,714,173 | | | | 3.08 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loan Portfolio: (1) | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 60,008,415 | | | | 1,020,198 | | | | 6.89 | % | | | 44,654,565 | | | | 680,811 | | | | 6.18 | % |
Residential real estate | | | 35,313,975 | | | | 333,464 | | | | 3.83 | % | | | 10,920,962 | | | | 144,890 | | | | 5.38 | % |
Home Equity | | | 18,829,088 | | | | 213,117 | | | | 4.59 | % | | | 9,222,618 | | | | 124,683 | | | | 5.48 | % |
Commercial and commercial real estate | | | 227,575,170 | | | | 3,314,871 | | | | 5.91 | % | | | 143,147,048 | | | | 2,527,366 | | | | 7.16 | % |
Mortgage warehouse lines | | | 91,860,959 | | | | 1,079,526 | | | | 4.77 | % | | | 189,436,939 | | | | 2,189,236 | | | | 4.69 | % |
Installment | | | 274,288 | | | | 4,107 | | | | 6.07 | % | | | 255,018 | | | | 4,391 | | | | 6.98 | % |
All Other Loans | | 22,406,473 | | | | 273,156 | | | | 4.94 | % | | | 49,279,947 | | | | 300,818 | | | | 2.48 | % |
Total | | | 456,268,368 | | | | 6,238,439 | | | | 5.55 | % | | | 446,917,097 | | | | 5,972,195 | | | | 5.42 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Interest-Earning Assets | | | 816,827,450 | | | | 8,295,588 | | | | 4.11 | % | | | 754,663,639 | | | | 7,736,048 | | | | 4.14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses | | | (7,740,866 | ) | | | | | | | | | | | (7,363,842 | ) | | | | | | | | |
Cash and Due From Bank | | | 17,893,491 | | | | | | | | | | | | 30,994,778 | | | | | | | | | |
Other Assets | | | 53,197,450 | | | | | | | | | | | | 51,277,385 | | | | | | | | | |
Total Assets | | $ | 880,177,525 | | | | | | | | | | | $ | 829,571,960 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market and NOW Accounts | $ | 255,097,589 | | | $ | 207,924 | | | | 0.33 | % | | $ | 231,758,247 | | | $ | 217,524 | | | | 0.38 | % |
Savings Accounts | | | 199,706,974 | | | | 222,659 | | | | 0.45 | % | | | 209,362,823 | | | | 236,745 | | | | 0.46 | % |
Certificates of Deposit | | | 160,831,323 | | | | 468,148 | | | | 1.18 | % | | | 141,505,368 | | | | 502,067 | | | | 1.44 | % |
Other Borrowed Funds | | | 15,899,762 | | | | 115,578 | | | | 2.95 | % | | | 11,155,000 | | | | 103,273 | | | | 3.75 | % |
Trust Preferred Securities | | | 18,557,000 | | | | 85,107 | | | | 1.86 | % | | | 18,557,000 | | | | 87,873 | | | | 1.92 | % |
Total Interest-Bearing Liabilities | | | 650,092,648 | | | | 1,099,416 | | | | 0.69 | % | | | 612,338,438 | | | | 1,147,482 | | | | 0.76 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Spread (2) | | | | | | | | | | | 3.42 | % | | | | | | | | | | | 3.38 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Demand Deposits | | | 146,567,857 | | | | | | | | | | | | 141,764,416 | | | | | | | | | |
Other Liabilities | | | 7,705,277 | | | | | | | | | | | | 9,973,569 | | | | | | | | | |
Total Liabilities | | | 804,365,782 | | | | | | | | | | | | 764,076,423 | | | | | | | | | |
Shareholders’ Equity | | | 75,811,743 | | | | | | | | | | | | 65,495,537 | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 880,177,525 | | | | | | | | | | | $ | 829,571,960 | | | | | | | | | |
Net Interest Margin (3) | | | | | | $ | 7,196,173 | | | | 3.56 | % | | | | | | $ | 6,588,566 | | | | 3.53 | % |
(1) | Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans. |
Non-Interest Expenses | | | | | | |
| | Three months ended September 30, | |
| | 2013 | | | 2012 | |
| | | | | | | | |
Salaries and employee benefits | | $ | 3,060,143 | | | $ | 3,061,065 | |
Occupancy expenses | | | 629,922 | | | | 523,126 | |
Data processing services | | | 273,272 | | | | 257,991 | |
Marketing | | | 79,656 | | | | 46,969 | |
Regulatory, professional and other fees | | | 303,114 | | | | 196,870 | |
FDIC insurance expense | | | 111,563 | | | | 139,693 | |
Other real estate owned expenses | | | 176,796 | | | | 1,246,221 | |
Amortization of intangible assets | | | 66,992 | | | | 66,993 | |
All other expenses | | | 552,025 | | | | 644,246 | |
| | $ | 5,253,483 | | | $ | 6,183,174 | |
| | | | | | | | |
(2) | The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. |
(3) | The net interest margin is equal to net interest income divided by average interest earning assets. |
Salaries and employee benefits, which represent the largest portion of non-interest expenses, decreased marginally(4) | Tax- equivalent basis. |
The Company’s net interest income increased on a tax-equivalent basis by $607,607, or 9.2%, to $3,060,143$7,196,173 for the three months ended September 30, 2013 compared to $3,061,065March 31, 2014 from $6,588,566 reported for the three months ended September 30, 2012.
Occupancy expenses increased by $106,796 to $629,922 for the three months ended September 30, 2013 compared to $523,126 for the three months ended September 30, 2012. TheMarch 31, 2013. This increase in expense was primarily attributable to higher maintenance costs incurred to maintain the Bank’s branch operations and the timing of these repairs.
The cost of data processing services increased to $273,272 for the three months ended September 30, 2013 from $257,991 for the three months ended September 30, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade software capabilities in branch offices in order to fully implement the Bank’s expanding mobile banking systems.
Regulatory, professional and other fees increased by $106,244 to $303,114 for the three months ended September 30, 2013 compared to $196,870 for the three months ended September 30, 2012. During the three months ended September 30, 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management programs and legal fees in connection with the proposed merger of Rumson-Fair Haven Bank & Trust Company with and into the Bank.
Other real estate owned expenses decreased by $1,069,425 to $176,796 for the three months ended September 30, 2013 compared to $1,246,221 for the three months ended September 30, 2012 as the Company incurred a lower level of property taxes, maintenance and other expenses on fewer repossessed properties during the third quarter of 2013 compared to the third quarter of 2012. At September 30, 2013, the Bank held four properties with an aggregate value of $2,808,554 as other real estate owned compared to nine properties with an aggregate value of $10,225,740 at September 30, 2012.
FDIC insurance expense decreased to $111,563 for the three months ended September 30, 2013 compared to $139,693 for the three months ended September 30, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC premium assessment rules.
All other expenses decreased to $552,025 for the three months ended September 30, 2013 from $644,246 for the three months ended September 30, 2012. Current period decreases 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 the sum of net interest income on a tax-equivalent basis and 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 decreased to 64.1% for the three months ended September 30, 2013 compared to 70.6% for the three months ended September 30, 2012 primarily as a result of the $1,069,425 decrease in other real estate owned expenses.
Income Taxes
Income tax expense increased by $81,813 to $604,851 for the three months ended September 30, 2013 from $523,038 for the three months ended September 30, 2012. The increase was primarily due to a higher level of pretax income for the third quarter of 2013 as compared to the third quarter of 2012.
Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
Summary
The Company realized net income of $4,405,588 for the nine months ended September 30, 2013, an increase of 15.3% from the $3,819,759 reported for the nine months ended September 30, 2012. The increase was due primarily to an increase in non-interest income, a lower level of the provision for loan losses and a decrease in noninterest expenses which, in total, offset a decrease in net interest income for the nine months ended September 30, 2013 compared to the same period in 2012.
Diluted net income per share was $0.72 for the nine months ended September 30, 2013 compared to diluted net income per share of $0.70 for the nine months ended September 30, 2012. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.
During the third quarter of 2012, the Company launched a shareholders’ common stock rights offering, which expired on October 5, 2012. The Company received gross proceeds of $5.0 million from holders of subscription rights who exercised their basic subscription rights and from holders who exercised the over-subscription privilege. The rights’ offering was fully subscribed. Accordingly, the Company issued a total of 555,555 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, including pursuant to the exercise of the over-subscription privilege.
Return on average assets and return on average equity were 0.73% and 8.96%, respectively, for the nine months ended September 30, 2013 compared to 0.67% and 9.01%, respectively, for the nine months ended September 30, 2012. Return on average assets improved for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 due to the higher level of net income for the 2013 period and the slight reduction in return on average equity for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily due to the issuance of new shares in the Company’s rights offering completed in October 2012.
The Bank’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities. The net interest margin for the nine months ended September 30, 2013 was 3.48% as compared to the 3.98% net interest margin recorded for the nine months ended September 30, 2012, a decrease of 50 basis points. This decrease in the Company’s net interest margin for the ninethree months ended September 30, 2013March 31, 2014 compared with the corresponding 2012comparable 2013 period was primarily due to two factors: (1) the decline in the balance of outstanding borrowings under mortgage warehouse lines and (2) the allocation of excess liquidity to much lower yielding overnight fund balances. The decline in borrowings under mortgage warehouse lines was due to the increase in long-term interest rates paid on interest-bearing liabilities during the third quartercurrent period. The average rate paid on interest-bearing liabilities for the three months ended March 31, 2014 was 0.69%, a reduction of 2013, which led to lower levels of mortgage refinancings, and7 basis points from 0.76% paid for the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close. The Company will continue to closely monitor the mix ofthree months ended March 31, 2013.
Average interest earning assets and funding sourcesincreased by $62,163,811, or 8.2%, to maximize$816,827,450 for the three month period ended March 31, 2014 from $754,663,639 for the three month period ended March 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 3 basis points to 4.11% for the three month period ended March 31, 2014 when compared to 4.14% for the three month period ended March 31, 2013.
Average interest bearing liabilities increased by $37,754,210, or 6.2%, to $650,092,648 for the three month period ended March 31, 2014 from $612,338,438 for the three month period ended March 31, 2013. Overall, the cost of total interest bearing liabilities decreased 7 basis points to 0.69% for the three months ended March 31, 2014 from 0.76% for the three months ended March 31, 2013.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.56% for the three months ended March 31, 2014 compared to 3.53% the three months ended March 31, 2013.
Provision for Loan Losses
Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal review and classification, 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 recorded a provision for loan losses of $499,998 for the three months ended March 31, 2014 compared to no provision for the three months ended March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013. At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082. There were no changes in the expected cash flows of the acquired loans from the Rumson merger during this challenging interest rate environment.the quarter. No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014. The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.
Earnings Analysis
Net Interest Income
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 80.0%80.8% of the Company’s net revenues for the nine-monththree month period ended September 30, 2013March 31, 2014 and 84.8%79.7% of net revenues for the nine-monththree-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the ninethree month periods ended September 30, 2013March 31, 2014 and 2012, respectively.2013. 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 | Average Balance Sheets with Resultant Interest and Rates | | Average Balance Sheets with Resultant Interest and Rates | |
(yields on a tax-equivalent basis) | | Nine months ended September 30, 2013 | | Nine months ended September 30, 2012 | | (yields on a tax-equivalent basis) | |
| | | |
| | | Three months ended March 31, 2014 | | Three months ended March 31, 2013 | |
| | Average Balance | | Interest | | Average Yield | | Average Balance | | Interest | | Average Yield | | | Average Balance | | Interest | | Average Yield | | Average Balance | | Interest | | Average Yield | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal Funds Sold/Short-Term Investments | | $ | 112,351,662 | | | $ | 221,087 | | | | 0.26% | | | $ | 28,950,888 | | $ | 55,315 | | 0.26% | | | $ | 96,201,833 | | | $ | 55,291 | | | | 0.23 | % | | $ | 85,173,422 | | 49,680 | | 0.24 | % |
Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 156,884,880 | | | | 2,818,801 | | | | 2.40% | | | | 171,836,158 | | 3,430,770 | | 2.66% | | | | 184,772,750 | | | | 1,121,584 | | | | 2.43 | % | | | 159,023,828 | | 937,085 | | 2.36 | % |
Tax-exempt | | | 67,610,995 | | | | 2,418,022 | | | | 4.77% | | | | 50,443,281 | | | 1,837,521 | | | 4.86% | | |
Tax-exempt (4) | | | | 79,584,499 | | | | 880,274 | | | | 4.42 | % | | | 63,549,292 | | | 777,088 | | | 4.89 | % |
Total | | | 224,495,875 | | | | 5,236,823 | | | | 3.11% | | | | 222,279,439 | | 5,268,291 | | 3.16% | | | | 264,357,249 | | | | 2,001,858 | | | | 3.03 | % | | | 222,573,120 | | 1,714,173 | | 3.08 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Portfolio: | | | | | | | | | | | | | | | | | |
Loan Portfolio: (1) | | | | | | | | | | | | | | | | |
Construction | | | 42,149,774 | | | | 1,926,931 | | | | 6.11% | | | | 57,303,861 | | 2,861,353 | | 6.67% | | | | 60,008,415 | | | | 1,020,198 | | | | 6.89 | % | | | 44,654,565 | | 680,811 | | 6.18 | % |
Residential real estate | | | 11,057,154 | | | | 430,207 | | | | 5.20% | | | | 11,920,919 | | 463,905 | | 5.20% | | | | 35,313,975 | | | | 333,464 | | | | 3.83 | % | | | 10,920,962 | | 144,890 | | 5.38 | % |
Home Equity | | | 9,208,816 | | | | 373,778 | | | | 5.43% | | | | 10,529,455 | | 445,123 | | 5.65% | | | | 18,829,088 | | | | 213,117 | | | | 4.59 | % | | | 9,222,618 | | 124,683 | | 5.48 | % |
Commercial and commercial real estate | | | 143,067,333 | | | | 7,838,953 | | | | 7.33% | | | | 145,668,346 | | 8,013,835 | | 7.35% | | | | 227,575,170 | | | | 3,314,871 | | | | 5.91 | % | | | 143,147,048 | | 2,527,366 | | 7.16 | % |
Mortgage warehouse lines | | | 166,142,165 | | | | 5,808,889 | | | | 4.67% | | | | 198,007,591 | | 7,060,451 | | 4.76% | | | | 91,860,959 | | | | 1,079,526 | | | | 4.77 | % | | | 189,436,939 | | 2,189,236 | | 4.69 | % |
Installment | | | 254,238 | | | | 12,284 | | | | 6.46% | | | | 356,875 | | 18,221 | | 6.82% | | | | 274,288 | | | | 4,107 | | | | 6.07 | % | | | 255,018 | | 4,391 | | 6.98 | % |
All Other Loans | | | 41,800,648 | | | | 928,216 | | | | 2.97% | | | | 32,771,044 | | | 837,561 | | | 3.41% | | All Other Loans | | 22,406,473 | | | | 273,156 | | | | 4.94 | % | | | 49,279,947 | | | 300,818 | | | 2.48 | % |
Total | | | 413,680,128 | | 17,319,258 | | 5.60% | | | | 456,558,091 | | | | 19,700,449 | | | | 5.76% | | | | 456,268,368 | | 6,238,439 | | 5.55 | % | | | 446,917,097 | | 5,972,195 | | 5.42 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Interest-Earning Assets | | | 750,527,665 | | | 22,777,168 | | 4.05% | | | | 707,788,418 | | | | 25,024,055 | | | | 4.72% | | | | 816,827,450 | | | 8,295,588 | | | 4.11 | % | | | 754,663,639 | | | | 7,736,048 | | | | 4.14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses | | | (6,777,671) | | | | | | | | (6,150,075) | | | | | | | | | | | | (7,740,866 | ) | | | | | | | | (7,363,842 | ) | | | | | | | | |
Cash and Due From Bank | | | 18,481,914 | | | | | | | | 10,091,843 | | | | | | | | | | | | 17,893,491 | | | | | | | | 30,994,778 | | | | | | | | | |
Other Assets | | | 48,636,271 | | | | | | | | 52,478,160 | | | | | | | | | | | | 53,197,450 | | | | | | | | 51,277,385 | | | | | | | | | |
Total Assets | | $ | 810,868,179 | | | | | | | $ | 764,208,346 | | | | | | | | | | | $ | 880,177,525 | | | | | | | | | $ | 829,571,960 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | |
Money Market and NOW Accounts | | $ | 225,215,899 | | $ | 579,798 | | 0.34% | | | $ | 203,155,986 | | | $ | 762,799 | | | | 0.50% | | Money Market and NOW Accounts | $ | 255,097,589 | | $ | 207,924 | | 0.33 | % | | $ | 231,758,247 | | | $ | 217,524 | | | | 0.38 | % |
Savings Accounts | | | 202,754,977 | | 676,979 | | 0.45% | | | | 192,802,238 | | | | 894,090 | | | | 0.62% | | | | 199,706,974 | | 222,659 | | 0.45 | % | | | 209,362,823 | | | | 236,745 | | | | 0.46 | % |
Certificates of Deposit | | | 141,258,225 | | 1,411,530 | | 1.34% | | | | 147,548,296 | | | | 1,634,787 | | | | 1.48% | | | | 160,831,323 | | 468,148 | | 1.18 | % | | | 141,505,368 | | | | 502,067 | | | | 1.44 | % |
Other Borrowed Funds | | | 10,380,769 | | 310,649 | | 4.00% | | | | 19,101,642 | | | | 340,784 | | | | 2.38% | | | | 15,899,762 | | 115,578 | | 2.95 | % | | | 11,155,000 | | | | 103,273 | | | | 3.75 | % |
Trust Preferred Securities | | | 18,557,000 | | | 263,982 | | | 1.90% | | | | 18,557,000 | | | | 292,759 | | | | 2.11% | | | | 18,557,000 | | | 85,107 | | | 1.86 | % | | | 18,557,000 | | | | 87,873 | | | | 1.92 | % |
Total Interest-Bearing Liabilities | | | 598,166,870 | | | 3,242,938 | | 0.72% | | | | 581,165,162 | | | | 3,925,219 | | | | 0.90% | | | | 650,092,648 | | | 1,099,416 | | | 0.69 | % | | | 612,338,438 | | | | 1,147,482 | | | | 0.76 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Spread | | | | | | | | | 3.33% | | | | | | | | | | | | 3.82% | | |
Net Interest Spread (2) | | | | | | | | | | | 3.42 | % | | | | | | | | | | | 3.38 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand Deposits | | | 139,542,141 | | | | | | | | 117,413,216 | | | | | | | | | | | | 146,567,857 | | | | | | | | 141,764,416 | | | | | | | | | |
Other Liabilities | | | 7,394,439 | | | | | | | | 8,790,417 | | | | | | | | | | | | 7,705,277 | | | | | | | | 9,973,569 | | | | | | | | | |
Total Liabilities | | | 745,103,450 | | | | | | | | 707,368,795 | | | | | | | | | | | | 804,365,782 | | | | | | | | 764,076,423 | | | | | | | | | |
Shareholders’ Equity | | | 65,764,729 | | | | | | | | 56,839,551 | | | | | | | | | | | | 75,811,743 | | | | | | | | 65,495,537 | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 810,868,179 | | | | | | | $ | 764,208,346 | | | | | | | | | | | $ | 880,177,525 | | | | | | | | $ | 829,571,960 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net Interest Margin(3) | | | | | | $ | 19,534,230 | | 3.48% | | | | | | $ | 21,098,837 | | | | 3.98% | | | | | $ | 7,196,173 | | 3.56 | % | | | | $ | 6,588,566 | | 3.53 | % |
| | | | | | | | | | | | | | | | | | | | | |
(1) | Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans. |
(2) | The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. |
(3) | The net interest margin is equal to net interest income divided by average interest earning assets. |
(4) | Tax- equivalent basis. |
The Company’s net interest income decreasedincreased on a tax-equivalent basis by $1,752,876,$607,607, or 8.5%9.2%, to $18,750,007$7,196,173 for the ninethree months ended September 30, 2013March 31, 2014 from $20,502,883$6,588,566 reported for the ninethree months ended September 30, 2012. The decreaseMarch 31, 2013. This increase in the Company’s net interest incomemargin for the three months ended March 31, 2014 compared with the comparable 2013 period was attributableprimarily due to a decreased volume of loans in the loan portfolio combined with lower rates earned on interest-earning assets, which more than offset the lower rates paid on interest-bearing liabilities during the current period. The average rate paid on interest-bearing liabilities for the three months ended March 31, 2014 was 0.69%, a higher volumereduction of interest-bearing liabilities.7 basis points from 0.76% paid for the three months ended March 31, 2013.
Average interest-earninginterest earning assets increased by $42,739,247,$62,163,811, or 6.0%8.2%, to $750,527,665$816,827,450 for the nine-month period ended September 30, 2013 from $707,788,418 for the nine-month period ended September 30, 2012. The average investment securities portfolio increased by $2,216,436, or 1.0%, to $224,495,875 for the nine-month period ended September 30, 2013 compared to $222,279,439 for the nine-month period ended September 30, 2012. The average loan portfolio decreased by $42,877,963, or 9.4%, to $413,680,128 for the nine-month period ended September 30, 2013 compared to $456,558,091 for the nine-month period ended September 30, 2012. The overall risk profile of the loan portfolio was reduced by a change in its composition via a reduction in average construction loans (which are generally riskier than other loans) of $15,154,087, or 26.4%, to $42,149,774 for the nine-month period ended September 30, 2013 compared to $57,303,861 for the nine-three month period ended September 30, 2012. In addition, the third quarter of 2013 saw an increase in long-term interest rates that accelerated the decrease in the balance of outstanding mortgage warehouse lines. The average balance of mortgage warehouse lines decreased by $31,865,426, or 16.1%, to $166,142,165March 31, 2014 from $754,663,639 for the nine monthsthree month period ended September 30, 2013 compared to an average balance of $198,007,591 for the nine months ended September 30, 2012. Overall, theMarch 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 673 basis points to 4.05%4.11% for the nine-monththree month period ended September 30, 2013March 31, 2014 when compared to 4.72%4.14% for the nine-monththree month period ended September 30, 2012.March 31, 2013.
Average interest-bearinginterest bearing liabilities increased by $17,001,708,$37,754,210, or 2.9%6.2%, to $598,166,870$650,092,648 for the nine-monththree month period ended September 30, 2013March 31, 2014 from $581,165,162$612,338,438 for the nine-monththree month period ended September 30, 2012.March 31, 2013. Overall, the cost of total interest-bearinginterest bearing liabilities decreased 187 basis points to 0.72%0.69% for the ninethree months ended September 30, 2013 compared to 0.90%March 31, 2014 from 0.76% for the ninethree months ended September 30, 2012.March 31, 2013.
The net interest margin (on a tax-equivalent basis), which is net interest income on a tax equivalent basis divided by average interest earning assets, was 3.48%3.56% for the ninethree months ended September 30, 2013March 31, 2014 compared to 3.98%3.53% the ninethree months ended September 30, 2012.March 31, 2013.
Provision for Loan Losses
Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal classifications,review and classification, collateral values, and the growth and size of the loan portfolio.
At September 30, 2013, the loan portfolio balance was $362,549,473, which represented a decrease of $159,264,637, or 30.5%, from the December 31, 2012 balance of $521,814,110.
In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company’sCompany recorded a provision for loan losses was $776,664of $499,998 for the ninethree months ended September 30, 2013March 31, 2014 compared to $1,649,994no provision for the ninethree months ended September 30, 2012. March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013. At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082. There were no changes in the expected cash flows of the acquired loans from the Rumson merger during the quarter. No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014. The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.
Non-Interest Income
Total non-interest income for the ninethree months ended September 30, 2013March 31, 2014 was $4,672,970,$1,636,982, an increase of $1,003,112,$28,419, or 27.3%1.8%, over non-interest income of $3,669,858$1,608,563 for the ninethree months ended September 30, 2012. This component represented 20.0% of the Company’s net revenues for the nine-month period ended September 30, 2013 and 15.2% of net revenues for the nine-month period ended September 30, 2012.March 31, 2013.
Service charges on deposit accounts represent a significantconsistent source of non-interest income. Service charges on deposit accountscharge revenues decreased by $26,832, or 3.8%,nominally to $675,839$219,116 for the ninethree months ended September 30, 2013March 31, 2014 from $702,671$223,066 for the ninethree months ended September 30, 2012. The lower service charges were primarilyMarch 31, 2013. This decrease was the result of a decrease in the numberlower volume of uncollected funds and overdraft fees collected on deposit accounts subject to service charges during the ninefirst three months ended September 30, 2013of 2014 compared to the prior-year period.first three months of 2013.
Gain on sales of loans originated for sale increased by $380,319,$7,872, or 25.8%1.1%, to $1,852,821$739,581 for the ninethree months ended September 30, 2013March 31, 2014 when compared to $1,472,502$731,709 for the ninethree months ended September 30, 2012.March 31, 2013. The Bank sells both residential mortgage loans and SBASmall Business Administration loans in the secondary market. The current higher interest rate environment for mortgage loans resulted in a lower demand for mortgage financings. The resulting volume of mortgage loan sales increasedorigination decreased for the ninefirst three months ended September 30, 2013of 2014 compared to the ninefirst three months ended September 30, 2012.
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $348,206$129,151 for the ninethree months ended September 30, 2013March 31, 2014 compared to $337,374$112,608 for the ninethree months ended September 30, 2012.March 31, 2013. The Bank purchased tax-freeacquired $4.5 million of BOLI assets to partially offsetin the cost of employee benefit plans and reduce the Company’s overall effective tax rate.Rumson merger.
The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees cash counting fees and Automated Teller Machine fees for non-Bank customers. GreaterIncreased customer demand for these services contributed to the other income component of non-interest income increasingamounting to $1,796,104$549,134 for the ninethree months ended September 30, 2013March 31, 2014, compared to $1,157,311$541,180 for the ninethree months ended September 30, 2012.March 31, 2013.
Non-Interest ExpensesExpense
Non-interest expenses decreasedincreased by $670,914,$1,263,057, or 3.9%20.8%, to $16,498,751$7,346,025 for the ninethree months ended September 30, 2013March 31, 2014 from $17,169,665$6,082,968 for the ninethree months ended September 30, 2012. The current period decreaseMarch 31, 2013. Excluding merger related expenses of $1,422,723, non-interest expenses declined to $5,963,305 in other real estate ownedthe first quarter of 2014. Non-interest expenses was the most significant factor contributingattributable to the decrease in total non-interest expenses when compared withformer Rumson operation were $473,000 from February 7, 2014 (the date of the corresponding prior year period’s non-interest expenses.closing of the Rumson merger) through March 31, 2014. The following table presents the major components of non-interest expenses for the ninethree months ended September 30, 2013March 31, 2014 and 2012.2013.
Non-Interest Expenses | | Nine months ended September 30, | | |
Non-interest Expenses | | | | | | |
| | | Three months ended March 31, | |
| | 2013 | | 2012 | | | 2014 | | 2013 | |
Salaries and employee benefits | | $ | 9,458,247 | | | $ | 9,156,318 | | | $ | 3,587,905 | | | $ | 3,352,863 | |
Occupancy expenses | | | 1,930,227 | | | | 1,860,446 | | | | 826,195 | | | | 677,806 | |
Data processing services | | | 868,960 | | | | 774,110 | | | | 316,049 | | | | 301,382 | |
Equipment expense | | | | 184,813 | | | | 311,648 | |
Marketing | | | 219,326 | | | | 145,793 | | | | 69,793 | | | | 47,583 | |
Regulatory, professional and other fees | | | 770,015 | | | | 611,606 | | | | 206,638 | | | | 194,993 | |
Office expense | | | | 188,316 | | | | 186,648 | |
Merger-related expenses | | | 1,422,723 | | - | |
FDIC insurance expense | | | 146,249 | | | | 426,960 | | | | 150,000 | | | | 19,687 | |
Directors’ fees | | | | 24,500 | | | | 32,000 | |
Other real estate owned expenses | | | 770,858 | | | | 2,128,771 | | | | 41,432 | | | | 545,505 | |
Amortization of intangible assets | | | 200,975 | | | | 200,975 | | | 103,017 | | 66,992 | |
Other expenses | | | 2,133,894 | | | 1,864,686 | | | | 224,644 | | | | 345,861 | |
Total | | | $ | 7,346,025 | | | $ | 6,082,968 | |
| | $ | 16,498,751 | | | $ | 17,169,665 | | | | | | |
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $301,929,$235,042, or 3.3%7.0%, to $9,458,247$3,587,905 for the ninethree months ended September 30, 2013March 31, 2014 compared to $9,156,318$3,352,863 for the ninethree months ended September 30, 2012.March 31, 2013. $82,980 of this increase is due to salary and benefits for former Rumson employees that were retained by the Bank. The balance of the increase in salaries and employee benefits for the ninethree months ended September 30, 2013March 31, 2014 was thea result of an increase in the number of employees, regular merit increases and increased health care costs. As a result of the Rumson merger completed on February 7, 2014 staffing levels increased to 172 full time equivalent employees at March 31, 2014 as compared to 141 full time equivalent employees at March 31, 2013.
Occupancy expenses increased by $69,781,$148,389, or 3.8%21.9%, to $1,930,227$826,195 for the ninethree months ended September 30, 2013March 31, 2014 compared to $1,860,446$677,806 for the ninethree months ended September 30, 2012.March 31, 2013. The increase in occupancy expenses for the current period was primarily attributable toincrease resulted from increased depreciation, property taxes and maintenance costs related toof the Bank’s branch properties.five properties acquired as a result of the Rumson merger.
The cost of data processing services increased to $868,960$316,049 for the ninethree months ended September 30, 2013March 31, 2014 from $774,110$301,382 for the ninethree months ended September 30, 2012March 31, 2013 as additional expenses were incurred to support and maintain the five new locations acquired through the Rumson merger to the Bank’s data systems.
Equipment expense decreased by $126,835, or 14.6%, to $184,813 for the three months ended March 31, 2014 compared to $311,648 for the three months ended March 31, 2013 primarily due to non-recurring costs associated with the expansion of mobile banking capabilities incurred during the first quarter of 2013.
During the first quarter of 2014, the Company incurred merger-related expenses of $1,422,723 in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank’s mobile banking system.
(1) change-in-control payments of $883,000; (2) data processing contract termination payments of $174,000; (3) investment banker fees of $215,000; (4) legal fees of $40,000 and (5) severance payments of $111,723.
Regulatory, professional and other fees increased by $158,409,$11,645, or 25.9%6.0%, to $770,015$206,638 for the ninethree months ended September 30, 2013March 31, 2014 compared to $611,606$194,993 for the ninethree months ended September 30, 2012.March 31, 2013. During the first ninethree months of 2013,2014, the Company incurred higher professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management programs. In addition, the increase in regulatory, professionallending, collections and other feesgeneral corporate matters.
FDIC insurance expense increased to $150,000 for the ninethree months ended September 30,March 31, 2014 compared to $19,687 for the three months ended March 31, 2013 was partially dueas a result of the inflow of deposits subject to FDIC insurance assessment as a result of the Company’s incurrence of legal feesRumson merger and changes in connection with the proposed merger of Rumson-Fair Haven Bank & Trust Company with and intoinsurance premium calculation mandated by the Bank.Sarbanes-Oxley Act in 2013.
Other real estate owned expenses decreased by $1,357,913$504,073 to $770,858$41,432 for the ninethree months ended September 30, 2013March 31, 2014 compared to $2,128,771$545,505 for the ninethree months ended September 30, 2012March 31, 2013 as the Company incurred a lower level of property tax, maintenance and other costs on fewer repossessed properties held as other real estate owned during the first nine months of2014 period compared with the 2013 compared toperiod. At March 31, 2014, the first nine months of 2012. At September 30, 2013, the BankCompany held fourthree properties with an aggregate value of $2,808,554$2,136,341 as other real estate owned compared to nineeight properties with an aggregate value of $10,225,740$8,294,887 at September 30, 2012.March 31, 2013.
FDIC insurance expense decreasedAmortization of intangible assets increased $36,025 to $146,249 for$103,017 during the nine months ended September 30, 2013 comparedfirst quarter of 2014 due to $426,960 for the nine months ended September 30, 2012increase in core deposit intangible assets of $1,189,000 as a result ofrecorded in the changes required by the Dodd-Frank Act with respect to FDIC premium assessment rules.Rumson merger.
All other expenses increaseddecreased by $269,208$121,217 to $2,133,894$224,644 for the ninethree months ended September 30, 2013 from $1,864,686March 31, 2014 compared to $345,861 for the ninethree months ended September 30, 2012March 31, 2013 as a result of current year increasesdecreases occurred in payroll processingcorrespondent bank fees, maintenance agreements and ATM operationoperating expenses. All other expenses are also comprised of a variety of operating expenses and insurance premiums.
An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operatingfees as well as expenses by the sum of net interest income on a tax-equivalent basis and 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 decreased to 68.2% for the nine months ended September 30, 2013 compared to 69.3% for the nine months ended September 30, 2012 primarily as a result of the $1,357,913 decrease in other real estate owned expenses. associated with lending activities.
Income Taxes
Pre-tax income decreased to $687,838 for the three months ended March 31, 2014 compared to $1,849,951 for the three months ended March 31, 2013.
The Company had income tax expense of $1,741,974$46,126 for the ninethree months ended September 30, 2013March 31, 2014 and an effective tax rate of 6.7% compared to income tax expense of $1,533,323$524,633 and an effective tax rate of 28.4% for the ninethree months ended September 30, 2012.March 31, 2013. The increasedecrease in the income tax expense for the 2013current period was primarily due to the higher level$1,422,723 of taxablepre-tax merger related expenses incurred by the Company as a result of the Rumson merger completed on February 7, 2014 and the effect of tax-exempt interest income for the first nine months of 2013 compared to the first nine months of 2012.income.
Financial Condition
September 30, 2013March 31, 2014 Compared with December 31, 20122013
Total consolidated assets at September 30,March 31, 2013 were $790,168,852,$967,090,613, representing a decreasean increase of $50,799,530,$224,765,526, or 6.0%30.3%, from total consolidated assets of $840,968,382$742,325,087 at December 31, 2012. 2013. The increase in assets was primarily attributable to the merger with Rumson, which was completed on February 7, 2014. The merger was accounted for under the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their fair values as of the acquisition date. Included in the acquisition were the assumption of deposit liabilities of $189.5 million, primarily consisting of demand deposits, and the acquisition of cash and cash equivalents of $36.0 million, securities available for sale of $30.0 million and loans of $143.7 million. The Bank recorded goodwill of approximately $7.7 million and a core deposit intangible asset of approximately $1.1 million as a result of the acquisition.
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2013March 31, 2014 totaled $123,815,138$108,919,056 compared to $14,044,921$69,278,771 at December 31, 2012.2013. Cash and cash equivalents at September 30, 2013March 31, 2014 consisted of cash and due from banks of $123,803,713$108,819,056 and Federal funds sold/short term investments of $11,425.$100,000. The corresponding balances at December 31, 20122013 were $14,033,501$69,267,345 and $11,420,$11,426, respectively. The current period increase in long-term market interest rates that occurred duringwas primarily due to the third quartercash inflow of 2013 reducedapproximately $30.0 million resulting from the demand for mortgage refinancings,Rumson merger, which led to a decrease in borrowings under mortgage warehouse lines extended to licensed mortgage banking companiesclosed on February 7, 2014, which was partially offset by the Bank.$14.8 million that was paid as the cash component of the merger consideration to Rumson shareholders. To the extent that the Bank did not utilize the funds for loan originations or securities purchases, the cash inflows accumulated in cash and cash equivalents.
Loans Held for Sale
Loans held for sale at September 30, 2013March 31, 2014 amounted to $14,535,681$3,253,009 compared to $35,960,262$10,923,689 at December 31, 2012.2013. As indicated in the Consolidated Statements of Cash Flows, the amount of mortgage loans originated for sale was $114,126,927$15,191,079 for the ninethree months ended September 30, 2013March 31, 2014 compared to $128,302,763$44,012,744 for the ninethree months ended September 30, 2012.March 31, 2013. The current period decrease was primarily due to the increase in long-term market interest rates that occurred during late 2013 and continued into 2014 reduced the demand for mortgage loan financings during the nine months ended September 30, 2013.
2014. As a result, the balance of Loans Held for Sale decreased accordingly.
Investment Securities
Investment securities represented 31.9%28.0% of total assets at September 30, 2013March 31, 2014 and 26.9%33.9% at December 31, 2012.2013. Total investment securities increased $26,261,268,$18,349,653, or 11.6%7.3%, to $252,130,133$270,365,275 at September 30, 2013March 31, 2014 from $225,868,865$252,015,622 at December 31, 2012.2013 primarily as a result of the Rumson merger. Purchases of investments totaled $79,508,130$4,178,849 during the ninethree months ended September 30, 2013,March 31, 2014, and proceeds from calls and repayments totaled $47,912,035$16,828,128 during the period.
Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns. At September 30, 2013,March 31, 2014, securities available for sale totaled $101,557,211,$117,630,716, which is a decreasean increase of $8,283,754,$18,431,909, or 7.5%18.6%, from securities available for sale totaling $109,840,965$99,198,807 at December 31, 2012.2013.
At September 30, 2013,March 31, 2014, the securities available for sale portfolio had net unrealized losses of $(2,659,220),$1,777,421 compared to net unrealized gainslosses of $1,806,967$2,992,624 at December 31, 2012.2013. These unrealized (losses)/gainslosses are reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income.
Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity. At September 30, 2013,March 31, 2014, securities held to maturity were $150,572,922, an increase$152,734,559, a decrease of $34,545,022, or 29.8%,$82,256, from $116,027,900$152,816,815 at December 31, 2012.2013. The fair value of the held to maturity portfolio at September 30, 2013March 31, 2014 was $152,186,281.$155,795,659.
Proceeds from maturities and prepayments of securities during the first nine months of 2013 were used primarily to reduce the Company’s borrowings.
Loans
The loan portfolio, which represents our largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’s primary lending focus continues to be mortgage warehouse lines, construction loans, commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans.
The following table sets forthrepresents the classificationcomponents of loans by major categorythe loan portfolio at September 30, 2013March 31, 2014 and December 31, 2012.2013.
Loan Portfolio Composition | | September 30, 2013 | | December 31, 2012 | | March 31, 2014 | | | December 31, 2013 | |
Component | | Amount | | | % of total | | Amount | | | % of total | | Amount | | | % | | | Amount | | | % | |
Construction loans | | $ | 43,233,737 | | | 12% | | $ | 55,691,393 | | | 11% | | $ | 62,790,449 | | | | 12 | % | | $ | 51,002,172 | | | | 14 | % |
Residential real estate loans | | | 11,656,190 | | | 3% | | | 10,897,307 | | | 2% | | | 41,775,546 | | | | 8 | % | | | 13,764,178 | | | | 4 | % |
Commercial business | | | 65,724,407 | | | 18% | | | 57,865,436 | | | 11% | | | 118,543,799 | | | | 22 | % | | | 82,348,055 | | | | 22 | % |
Commercial real estate | | | 96,490,718 | | | 27% | | | 102,412,694 | | | 20% | | | 178,205,347 | | | | 34 | % | | | 98,389,730 | | | | 26 | % |
Mortgage warehouse lines | | | 134,534,202 | | | 37% | | | 284,127,530 | | | 54% | | | 104,334,990 | | | | 20 | % | | | 116,951,357 | | | | 31 | % |
Loans to individuals | | | 9,847,383 | | | 3% | | | 9,643,385 | | | 2% | | | 24,884,525 | | | | 5 | % | | | 9,766,114 | | | | 3 | % |
Deferred loan fees and costs | | | 905,896 | | | -% | | | 987,086 | | | -% | |
Deferred loan costs | | | | 665,211 | | | | 0 | % | | | 943,950 | | | | 0 | % |
All other loans | | | 170,940 | | | -% | | | 189,279 | | | -% | | | 205,515 | | | | 0 | % | | | 170,526 | | | | 0 | % |
| | $ | 362,563,473 | | | 100% | | $ | 521,814,110 | | | 100% | | $ | 531,405,382 | | | | 100 | % | | $ | 373,336,082 | | | | 100 | % |
The loan portfolio decreasedincreased by $159,264,637,$158,069,300, or 30.5%42.3%, to $362,563,473$531,405,382 at September 30, 2013March 31, 2014 compared to $521,814,110$373,336,082 at December 31, 2012. This decrease2013. The primary cause of this increase in the loan portfolio was the Rumson merger which was completed on February 7, 2014 and added approximately $143.7 million in loans to the existing portfolio, principally in the residential real estate and commercial real estate components.
Commercial and commercial real estate loans totaled $296,749,146 at March 31, 2014, an increase of $116,011,361 when compared to $180,737,785 for the year ended December 31, 2013. Commercial loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the result of two factors: (1) the increase in long-term interest rates during the third quarter of 2013, which led to lower levels of mortgage refinancings, and (2) the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close.commercial borrower.
The Mortgage warehouse lines component of the loan portfolio decreased by $149,593,328,$12,616,367 or 52.7%10.8%, to $134,534,702$104,334,990 compared to $284,127,530$116,951,357 at December 31, 2012.
2013, as the current increased long-term interest rate environment has reduced the demand for mortgage loan financings.
The Bank’s Mortgage Warehouse Funding Group offers a revolving linelines of credit that isare available to licensed mortgage banking companies (the “Warehouse Line of Credit”) and that we believe has been successful from inception in 2008.. The Warehouse Line of Credit is used by the mortgage bankersbanker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest (the spread between our borrowing cost and the rate charged to the client) and a transaction fee are collected by the Bank at the time of repayment. Additionally, customers of the Warehouse Line of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the loan balances.
The Bank’s Construction loans portfolio decreased by $12,457,656 during the first nine months of 2013. The Bank received $13,737,207 in prepayments for the Construction loan portfolio during the first nine months of 2013. In the current highly competitive marketplace for commercial and construction loans, developing new lending relationships and limiting the amount of loan prepayments will be essential for maintaining this portion of the Bank’s loan portfolio.
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 and (2) loans which are contractually past due 90 days or more as to interest and principal payments but thatwhich have not been classified as non-accrual. Included in non-accrual loans are loans whose terms have been restructured to provide a reduction or deferral of interest and/or principal because of deterioration in the financial position of the borrower and which have not performed in accordance with the restructured terms.
The Bank’s policy with regard to non-accrual loans is tothat generally, place 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 $1,784,638$1,133,853 to $7,748,140$7,455,809 at September 30, 2013March 31, 2014 from $5,963,502$6,321,956 at December 31, 2012.2013. The major segmentsegments of non-accrual loans consist of commercial real estate loans and SBA loans, which are in the process of collection. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio for the periods indicated.
As the table demonstrates, while non-performing loans to total loans increaseddecreased to 2.14%1.40% at September 30, 2013March 31, 2014 from 1.14%1.69% at December 31, 2012, loan2013 principally due to the increase in loans from the Rumson merger. 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 | | September 30, | | December 31, | | | March 31, | | December 31, | |
| | 2013 | | 2012 | | | 2014 | | 2013 | |
Non-Performing loans: | | | | | | | | | | | | |
Loans 90 days or more past due and still accruing | | $ | 94,898 | | | $ | 84,948 | | | $ | - | | | $ | - | |
Non-accrual loans | | | 7,653,242 | | | | 5,878,554 | | | | 7,455,809 | | | | 6,321,956 | |
Total non-performing loans | | | 7,748,140 | | | | 5,963,502 | | | | 7,455,809 | | | | 6,321,956 | |
Other real estate owned | | | 2,808,554 | | | | 8,332,601 | | | | 2,136,341 | | | 2,136,341 | |
Total non-performing assets | | $ | 10,556,694 | | | $ | 14,296,103 | | | | 9,592,150 | | | | 8,458,297 | |
Performing troubled debt restructurings | | | | 3,840,255 | | | 3,858,796 | |
Performing troubled debt restructurings and total non-performing assets | | | $ | 13,432,405 | | $ | 12,317,093 | |
| | | | | | | | | | | | | | |
Non-performing loans to total loans | | | 2.14% | | | | 1.14% | | | | 1.40 | % | | | 1.69 | % |
Non-performing loans to total loans excluding mortgage warehouse lines | | | 3.40% | | | | 2.51% | | | 1.75 | % | | 2.47 | % |
Non-performing assets to total assets | | | 1.34% | | | | 1.70% | | | | 0.99 | % | | | 1.14 | % |
Non-performing assets to total assets excluding mortgage warehouse lines | | | 1.61% | | | | 2.57% | | | 1.11 | % | | 1.35 | % |
| | | | | | | | | | |
Total non-performing assets and performing troubled debt restructurings to total assets | | | 1.39 | % | | 1.66 | % |
| | | | | | |
Non-performing assets increased by $1,133,853 to $9,592,150 at March 31, 2014 from $8,458,297 at December 31, 2013. Other real estate owned totaled $2,136,341 at March 31, 2014 and December 31, 2013.
Non-performing assets decreased by $3,739,409 to $10,556,694 at September 30, 2013 from $14,296,103 at December At March 31, 2012. Other real estate owned decreased by $6,124,047 to $2,208,554 at September 30, 2013 from $8,332,601 at December 31, 2012. Since December 31, 2012, the Bank sold and transferred properties totaling approximately $7,183,854 out of other real estate owned. In addition, during the nine months ended September 30, 2013, the Bank recorded a provision for loss on other real estate owned of $662,918.
At September 30, 2013,2014, the Bank had eightseven loans totaling $4,248,442 that$4,212,561 which were classified as troubled debt restructurings. Two of these loans totaling $374,173$372,306 are included in the above table as non-accrual loans. Theloans; the remaining sixfour loans totaling $3,874,269$3,840,255 are considered performingperforming.
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired with evidence of deteriorated credit quality of $2,575,110 at March 31, 2014 were not classified as non-performing loans.
Non-performing assets represented 1.34%0.99% of total assets at September 30, 2013March 31, 2014 and 1.70%1.14% at December 31, 2012.2013.
Management takes a proactive approach in addressing delinquent loans. The Company’s President and Chief Executive Officer meets weekly with all loan officers to review the status of credits past-due 10 days or more. An action plan is discussed for delinquent loans to determine the steps necessary to induce the borrower to cure the delinquency and restore the loan to a current status. Also, delinquency notices are system generated when loans are five days past duepast-due and again at 15 days past due.past-due.
In most cases, the Company’s collateral is real estate and whenestate. If 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, less estimated selling costs, is a loss which is charged againstto the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan can be delayed if the borrower files a bankruptcy petition because a collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the bankruptcy code.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
All, or part, of the principal balance of commercial and commercial real estate loans, and construction loans are charged off against 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 includeand is consistent with generally accepted accounting principles (GAAP) and interagency supervisory guidance. The allowance for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows Accounting Standards Codification (ASC) Topic 310 (formerly SFAS 114). The second major component is an estimation of losses under ASC Topic 450 (formerly SFAS 5), which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses which includes a specific reserve for doubtful or high riskimpaired loans, an allocated reserve, and an unallocated portion.
When analyzing groups of loans under ASC 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The Company consistently appliesmethodology considers the following comprehensive methodology. During the quarterly reviewCompany’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the allowance for loan losses,loans as of the Company considers a variety ofevaluation date. These adjustment factors, thatknown as qualitative factors, include:
| · | General economic conditions;Delinquencies and nonaccruals |
| · | Trends in charge-offs;Portfolio quality |
| · | Trends and levelsConcentration of delinquent loans;credit |
| · | Trends and levels of non-performing loans, including loans over 90 days delinquent; |
| · | Trends in volume and terms of loans;loans |
| · | LevelsQuality of allowance for specific classified loans; andcollateral |
| · | Credit concentrations.Policy and procedures |
| · | Experience, ability, and depth of management |
| · | Economic trends – national and local |
50 | · | External factors – competition, legal and regulatory |
The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories.categories, such as special mention, substandard, doubtful and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans are determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed, and for homogeneous groups of loans, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in nonaccrual status. Loans classified as a loss are considered uncollectible and are chargedcharged-off against the allowance for loan losses.
The specific reserveallowance for impaired loans is established for specific loans which have been identified by management as being high-risk loan assets.impaired. These impaired loans are assigned a doubtful risk rating gradeconsidered to be impaired primarily because the loan hasloans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole, or part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual doubtfulimpaired 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 loans 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, warehouse lines of credit, and various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other factorsqualitative factor which may cause future losses to deviate from historical levels.
The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.
The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.
Commercial
LoansThe Company’s primary lending emphasis is the origination of commercial and commercial real estate loans. Based on the composition of the loan portfolio, the inherent primary risks are placeddeteriorating credit quality, a decline in the economy, and a non-accrual status whendecline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the ultimate collectabilityloan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
Mortgage Warehouse Lines of principalCredit
The Company’s Mortgage Warehouse Unit provides revolving lines of credit that are available to licensed mortgage banking companies. The Warehouse Line of Credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest 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.
As a separate segment of the total portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losses purposes. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008; there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in wholewarehouse, or part is(iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.
These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in doubt. Past-duethe volume of loans, contractually past-due 90 days or more for either principal or interestportfolio quality, delinquencies and nonaccruals, are also placedconsidered and may have positive or negative effects on the allocated allowance. The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in non-accrual status unless theyan allocated allowance for warehouse lines of credit.
Consumer
The Company’s loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are both well secured and increated for the processvarious types of collection. Impaired loans are evaluated individually.to individuals.
In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:
| · | Internal credit risk grades |
The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
Allowance for Loan Losses | | | | | | | | | | | | | | |
| | Nine Months Ended | | Year Ended | | Nine Months Ended | | | Three Months Ended March 31, | | Year Ended December 31, | | Three Months Ended March 31, | |
| | September 30, 2013 | | December 31, 2012 | | September 30, 2012 | | | 2014 | | 2013 | | 2013 | |
Balance, beginning of period | | $ | 7,151,212 | | | $ | 5,534,450 | | | $ | 5,534,451 | | | $ | 7,038,571 | | | $ | 7,151,212 | | | $ | 7,151,212 | |
| | | | | | | | | | | | | | |
Provision charged to operating expenses | | | 776,664 | | | | 2,149,992 | | | | 1,649,994 | | | 499,998 | | | | 1,076,662 | | - | |
| | | | | | | | | | | | | | |
Loans charged off : | | | | | | | | | | | | | | |
Construction loans | | | (561,993) | | | | (57,650) | | | | (57,650) | | | | - | | | | (561,993 | ) | | (561,993 | ) |
Residential real estate loans | | | - | | | | (130,694) | | | | (208,552) | | | - | | | - | | - | |
Commercial and commercial real estate | | | (486,034) | | | | (275,888) | | | | (235,402) | | | | (510,952 | ) | | | (554,827 | ) | | (483,966 | ) |
Loans to individuals | | | (90,865) | | | | (83,859) | | | | - | | | | - | | | | (91,920 | ) | | | (90,865 | ) |
Lease financing | | | - | | | | - | | | | - | | | | - | | - | | | | - | |
All other loans | | | - | | | | - | | | | - | | | | - | | | - | | | - | |
| | | (1,138,892) | | | | (548,091) | | | | (501,604) | | | | (510,952 | ) | | | (1,208,740 | ) | | | (1,136,824 | ) |
Recoveries | | | | | | | | | | | | | | |
Construction loans | | | 417 | | | | 3,403 | | | | 3,403 | | | - | | 417 | | - | |
Residential real estate loans | | | - | | | | - | | | | - | | | - | | - | | - | |
Commercial and commercial real estate | | | 17,947 | | | | 11,458 | | | | 6,799 | | | | 3,225 | | | | 19,020 | | | | 8,895 | |
Loans to individuals | | | 12,832 | | | | - | | | | - | | | - | | - | | - | |
Lease financing | | | - | | | | - | | | | - | | | - | | - | | - | |
All other loans | | | - | | | | - | | | | - | | | | - | | | - | | | - | |
| | | 31,196 | | | | 14,861 | | | | 10,202 | | | | 3,225 | | | | 19,437 | | | | 8,895 | |
| | | | | | | | | | | | | | | | | | | |
Net (charge offs) / recoveries | | | (1,107,696) | | | | (533,230) | | | | (491,402) | | | | (507,727 | ) | | | (1,189,303 | ) | | | (1,127,929 | ) |
| | | | | | | | | | | | | | | | | |
Balance, end of period | | $ | 6,820,180 | | | $ | 7,151,212 | | | $ | 6,693,043 | | | $ | 7,030,842 | | | $ | 7,038,571 | | | $ | 6,023,283 | |
| | | | | | | | | | | | | | |
Loans : | | | | | | | | | | | | | | |
At period end | | $ | 362,549,473 | | | $ | 521,814,110 | | | $ | 497,247,199 | | | $ | 531,405,382 | | | $ | 373,336,082 | | | $ | 415,037,282 | |
Average during the period | | | 386,475,158 | | | | 444,064,283 | | | | 438,292,781 | | | | 450,571,417 | | | | 248,126,605 | | | | 412,089,628 | |
Net (charge offs)/recoveries to average loans outstanding (annualized) | | | (0.29)% | | | | (0.12)% | | | | (0.11)% | | |
Net charge offs to average loans outstanding | | | | (0.11% | ) | | | (0.48% | ) | | | (0.27% | ) |
| | | | | | | | | | | | | | |
Allowance for loan losses to : | | | | | | | | | | | | | | |
Total loans at period end | | | 1.88% | | | | 1.37% | | | | 1.35% | | | | 1.32% | | | | 1.89% | | | | 1.45% | |
Total loans at period end excluding mortgage warehouse lines | | | 2.99% | | | | 3.01% | | | | 2.72% | | | 1.02% | | | 2.52% | | | 2.78% | |
Non-performing loans | | | 88.02% | | | | 119.92% | | | | 139.47% | | | | 94.30% | | | | 111.34% | | | | 0.00% | |
| | | | | | | | | | | | | | | | | |
The following table represents the allocation of the allowance for loan losses (ALL”) among the various categories of loans and certain other information as of March 31, 2014 and December 31, 2013, respectively. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
| |
| | | |
| | March 31, 2014 | | | December 31, 2013 | |
| | Amount | | | ALL as a % of Loans | | | % of Loans | | | Amount | | | ALL as a % of Loans | | | % of Loans | |
| | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate | | $ | 4,353,764 | | | | 2.41 | % | | | 56 | % | | $ | 4,293,499 | | | | 2.38 | % | | | 48 | % |
Construction loans | | | 1,265,430 | | | | 2.48 | % | | | 12 | % | | | 1,205,267 | | | | 2.36 | % | | | 14 | % |
Residential real estate loans | | | 182,005 | | | | 1.32 | % | | | 8 | % | | | 164,673 | | | | 1.20 | % | | | 4 | % |
Loans to individuals | | | 94,010 | | | | 0.96 | % | | | 5 | % | | | 111,032 | | | | 1.14 | % | | | 3 | % |
Subtotal | | | 5,895,209 | | | | 2.31 | % | | | 80 | % | | | 5,774,471 | | | | 2.26 | % | | | 69 | % |
Mortgage warehouse lines | | | 521,675 | | | | 0.45 | % | | | 20 | % | | | 584,757 | | | | 0.50 | % | | | 31 | % |
Unallocated reserves | | | 613,958 | | | | - | | | | - | | | | 679,343 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 7,030,842 | | | | 1.32 | % | | | 100 | % | | $ | 7,038,571 | | | | 1.89 | % | | | 100 | % |
The Company recorded a provision for loan losses of $776,664$499,998 for the ninethree months ended September 30, 2013 compared to $1,649,994March 31, 2014. The Company recorded no loan loss provision for the ninethree months ended September 30, 2012.March 31, 2013. In addition to the results of management’s comprehensive review of the adequacy of the allowance, the decision for the reduced levelamount of the current provision was further supported by the risk profile of the loan portfolio being reduced by a $159,264,637, or 30.5%, decreaseincreased due to the $158,069,300 increase in the total loan portfolio at September 30, 2013March 31, 2014 compared to the December 31, 2012 balance.2013 and an increase of $1,133,853 in non-performing loans at March 31, 2014 compared to December 31, 2013. Net charge offs/recoveries amounted to a net charge-off of $1,107,696$507,728 for the ninethree months ended September 30, 2013.March 31, 2014.
At September 30, 2013,March 31, 2014, the allowance for loan losses was $6,820,180$7,030,842 compared to $7,151,212$7,038,571 at December 31, 2012,2013, a decrease of $331,032.$7,729. The ratio of the allowance for loan losses to total loans was 1.88% and 1.37%, respectively, at September 30, 2013March 31, 2014 and December 31, 2012.2013 was 1.32% and 1.89%, respectively. The allowance for loan losses declined to 1.32% of loans at March 31, 2014 due to the recording of $143,714,000 of loans at fair value that were acquired in the Rumson merger. No allowance for loan losses was recorded at the date of acquisition or at March 31, 2014 with respect to these loans. The allowance for loan losses as a percentage of non-performing loans was 88.02%94.30% at September 30, 2013March 31, 2014 compared to 119.92%111.34% at December 31, 2012.2013. Management believes that the quality of the loan portfolio remains sound considering the economic climate and economy in the State of New Jersey 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 flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. The Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus being on the building and expanding of long-term relationships.
The following table summarizes deposits at September 30, 2013March 31, 2014 and December 31, 2012.2013.
| | | | | | |
| | September 30, 2013 | | | | December 31, 2012 | | March 31, 2014 | | December 31, 2013 | |
Demand | | | | | | | | | | |
Non-interest bearing | | $ | 147,179,144 | | | $ | 152,334,759 | | $ | 166,747,113 | | | $ | 121,891,752 | |
Interest bearing | | | 207,300,503 | | | 211,475,765 | | | 287,532,684 | | | | 200,737,912 | |
Savings | | | 191,785,124 | | | 202,261,035 | | | 206,170,352 | | | | 180,002,971 | |
Time | | | 140,679,183 | | | | 141,617,916 | | | 178,548,058 | | | | 135,919,395 | |
| | $ | 686,943,954, | | | $ | 707,689,475 | | $ | 838,998,207 | | | $ | 638,552,030 | |
| | | | | | | | | | | |
At September 30, 2013,March 31, 2014, total deposits were $686,943,954, a decrease$838,998,207, an increase of $20,745,521,$200,446,177 or 2.9%31.4%, from $707,689,475$638,552,030 at December 31, 2012.2013. This increase is primarily due to the inflow of deposits resulting from the Rumson merger. On the February 7, 2014 closing date, the Company assumed approximately $189.5 million in total deposits.
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 $20,978,549 at March 31, 2014, and $10,000,000 at September 30,December 31, 2013, consisting solely of long-term FHLB long-termborrowings. Two long term FHLB fixed rate convertible advances were assumed by the Bank as a result of the Rumson merger. These two advances total $10,000,000 and bear interest at 4.11% and 4.63%, respectively. As a result of acquisition accounting, the two advances were fair valued and a premium of $1,030,000 was assigned. The premium is amortized over the remaining term of the borrowings. The balancetwo advances had a carrying amount of borrowings$10,978,549 at DecemberMarch 31, 2012 consisted of long-term FHLB borrowings of $10,000,000 and overnight funds purchased of $32,400,000.2014.
The Bank also has a fixed-ratefixed rate convertible advance from the FHLB in the amount of $10,000,000 that bears interest at the rate of 4.08%. This advance 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. This advance is fully secured by marketable securities.
Shareholders’ Equity and Dividends
Shareholders’ equity increased by $2,098,588$12,906,109, or 18.9%, to $67,152,120$81,264,423 at September 30, 2013March 31, 2014 from $65,053,532$68,358,314 at December 31, 2012.2013. Tangible book value per common share increaseddecreased by $0.37, or 3.7%,$0.98 to $10.39$9.54 at September 30, 2013March 31, 2014 from $10.02$10.52 at December 31, 2012. The current period increase in tangible book value per common share was the result of net income of $4,405,588 for the nine months ended September 30, 2013. The ratio of average shareholders’ equity to total average assets was 8.50%8.61% at March 31, 2014 and 7.74%, respectively,8.26% at September 30, 2013 and December 31, 2012. The increase2014, respectively.
During the first three months of 2014, the Company issued an aggregate of 1,019,242 shares of its common stock in conjunction with the Rumson merger that increased shareholders’ equity by $11,160,700. Shareholders’ equity was primarily the result ofalso increased by net income of $4,405,588 for the nine months ended September 30, 2013, which was partially offset by thethree month period of $641,712 and other comprehensive lossincome of $2,869,839 for$882,225. Partially offsetting these increases were treasury stock purchases of $39,844 during the nine-month period.
In lieu of cash dividends to common shareholders, the Company (and its predecessor, the Bank) hashad declared a stock dividend every year (except 2013) since 1992 and has paid such dividends every year since 1993. Five percent1993 (except 2014). A 5% stock dividends weredividend was declared in 2012 and 2011 and paid in 2013 and 2012, respectively.2013. No stock dividend was declared in 2013.
The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.
In 2005, the Company’s Boardboard of Directorsdirectors 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. Disclosure of repurchases of Company shares, if any, made during the quarter ended September 30, 2013March 31, 2014 is set forth under Part II, Item 2 of this report, “Unregistered Sales of Equity Securities and Use of Proceeds.”
Actual capital amounts and ratios for the Company and the Bank as of September 30, 2013March 31, 2014 and December 31, 20122013 were as follows:
| | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provision | | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provision |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of September 30, 2013 | | | | | | | | | | | | | |
As of March 31, 2014 | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk Weighted Assets | | $ | 87,981,099 | | 19.30% | | $ | 36,455,840 | | >8% | | | N/A | | N/A | | $ | 93,986,832 | | 13.94% | | | $ | 53,951,120 | | >8% | | | N/A | | N/A |
Tier 1 Capital to Risk Weighted Assets | | | 82,261,099 | | 18.05% | | 18,227,920 | | >4% | | | N/A | | N/A | | | 86,955,832 | | 12.89% | | | | 26,975,560 | | >4% | | | N/A | | N/A |
Tier 1 Capital to Average Assets | | | 82,261,099 | | 10.36% | | 31,769,544 | | >4% | | | N/A | | N/A | | | 86,955,832 | | 10.04% | | | | 34,660,160 | | >4% | | | N/A | | N/A |
Bank | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk Weighted Assets | | $ | 85,640,189 | | 18.79% | | $ | 36,455,840 | | >8% | | $ | 45,569,800 | | >10% | | $ | 91,715,049 | | 13.60% | | | $ | 53,951,120 | | >8% | | $ | 67,438,900 | | >10% |
Tier 1 Capital to Risk Weighted Assets | | | 79,930,189 | | 17.54% | | 18,227,920 | | >4% | | | 27,341,880 | | >6% | | | 84,684,049 | | 12.56% | | | | 26,975,560 | | >4% | | | 40,463,340 | | >6% |
Tier 1 Capital to Average Assets | | | 79,930,189 | | 10.06% | | 31,769,440 | | >4% | | | 39,711,800 | | >5% | | | 84,684,049 | | 9.77% | | | | 34,660,160 | | >4% | | | 43,325,200 | | >5% |
As of December 31, 2012 | | | | | | | | | | | | | |
As of December 31, 2013 | | | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk Weighted Assets | | $ | 81,213,909 | | 12.98% | | $ | 50,044,960 | | >8% | | N/A | | N/A | | $ | 89,532,373 | | 19.29% | | | $ | 37,123,200 | | >8% | | | N/A | | N/A |
Tier 1 Capital to Risk Weighted Assets | | | 74,062,697 | | 11.84% | | 25,022,480 | | >4% | | N/A | | N/A | | | 83,716,373 | | 18.04% | | | | 18,561,600 | | >4% | | | N/A | | N/A |
Tier 1 Capital to Average Assets | | | 74,062,697 | | 9.29% | | 31,881,576 | | >4% | | N/A | | N/A | | | 83,716,373 | | 10.89% | | | | 30,757,840 | | >4% | | | N/A | | N/A |
Bank | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to Risk Weighted Assets | | $ | 78,621,740 | | 12.57% | | $ | 50,044,960 | | >8% | | $ | 62,556,200 | | >10% | | $ | 87,253,384 | | 18.80% | | | $ | 37,123,200 | | >8% | | $ | 46,404,000 | | >10% |
Tier 1 Capital to Risk Weighted Assets | | | 71,470,528 | | 11.43% | | 25,022,480 | | >4% | | 37,533,720 | | >6% | | | 81,437,384 | | 17.55% | | | | 18,561,600 | | >4% | | | 27,842,400 | | >6% |
Tier 1 Capital to Average Assets | | | 71,470,528 | | 9.05% | | 31,604,458 | | >4% | | 39,505,573 | | >5% | | | 81,437,384 | | 10.59% | | | | 30,757,840 | | >4% | | | 38,447,300 | | >5% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total capital to risk weighted assets ratio of 8.0%. To be considered “well capitalized,” an institution must have a minimum Tier 1 leverage ratio of 5.0%. At September 30, 2013,March 31, 2014, 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-capitalizedwell capitalized institution.
In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Federal Reserve Board’s final rules and the FDIC’s interim final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations will also be required to have a total capital ratio of 8% (unchanged from current rules) and a Tier 1 leverage ratio of 4% (unchanged from current rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules become effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning in January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and would increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. Management is currently evaluating the provisions of these rules and their expected impact on the Company and the Bank.
Liquidity
At September 30, 2013,March 31, 2014, 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 earningearnings assets.
The Bank has established a borrowing relationship with the FHLB which further supports and enhances liquidity. During 2010, FHLB replaced its Overnight Line of Credit and One-Month Overnight Repricing Line of Credit facilities available to member banks with a fully secured line of up to 50 percent of a bank’s quarter-end total assets. Under the terms of this facility, the Bank’s total credit exposure to FHLB cannot exceed 50 percent, or $395,084,426,$483,545,307, of its total assets at September 30, 2013.March 31, 2014. In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off-balance sheet financial contracts and advance commitments cannot exceed 30 percent of the Bank’s total assets, unless the Bank obtains approval from FHLB’s Board of Directors or its Executive Committee. These limits are further restricted by a member’s ability to provide eligible collateral to support its obligations to FHLB as well as the ability to meet the FHLB’s stock requirement. At March 31, 2014, the Bank pledged collateral to the FHLB to support additional borrowings of $97,693,371. 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 September 30, 2013,March 31, 2014, the balance of cash and cash equivalents was $123,815,138.$108,919,056.
Net cash provided by operating activities totaled $31,153,912$9,549,070 for the ninethree months ended September 30, 2013March 31, 2014 compared to net cash provided by operations of $5,307,557$8,253,494 for the ninethree months ended September 30, 2012. The primaryMarch 31, 2013. A source of funds is net income from operations adjusted for activity related to loans originated for sale, the provision for loan losses, depreciation expenses, and net amortization of premiums on securities.
Net cash provided by investing activities totaled $131,274,935$18,947,444 for the ninethree months ended September 30,March 31, 2014 compared to net cash provided by investing activities of $108,160,577 for the three months ended March 31, 2013. Net cash received as a result of the Rumson merger was the primary cause of the cash provided by investing activities in 2014, whereas the 2013 amount was primarily due to the decrease in loans.
Net cash provided by financing activities totaled $11,143,771 for the three months ended March 31, 2014 compared to net cash used in investing activities of $6,864,102 for the nine months ended September 30, 2012. The increase for the 2013 period resulted from a reduction of $155,845,716 in the loan portfolio primarily through repayments.
Net cash used in financing activities totaled $52,658,630 for the nine months ended September 30, 2013 compared to net cash provided by financing activities of $361,464$29,019,565 for the ninethree months ended September 30, 2012. March 31, 2013. The primary source of funds for the 2014 period was the net increase in deposits while in 2013, the decrease in borrowings was the primary use of funds.
The securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. For the ninethree months ended September 30, 2013,March 31, 2014, prepayments and maturities of investment securities totaled $47,912,035.$16,828,128. Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.
Interest Rate Sensitivity Analysis
The largest component of the 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 and magnitude of relative changes 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.
Not required.
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 September 30, 2013March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Issuer Purchases of Equity Securities
On July 21, 2005, the Boardboard of Directorsdirectors 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 if any, made by or on behalf of the Company during the three months ended September 30, 2013.March 31, 2013, if any.
Issuer Purchases of Equity Securities (1)
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased Purchased As Part of Publicly Announced Plan or or Program | | Maximum Number of Shares That May Yet be Purchased Under the Plan or Program |
Beginning | Ending | | | | | | | | |
JulyJanuary 1, 2013 2014 | JulyJanuary 31, 2013 2014 | | - | | - | | - | | 187,559 |
February 1, 2014 | February 29, 2014 | | - | | - | | - | | 187,559 |
March 1, 2014 | March 31, 2014 | | - | | - | | - | | 187,559 |
| | | | | | | | | |
August 1, 2013 | August 31, 2013 | | - | | - | | - | | 187,559 |
| | | | | | | | | |
September 1, 2013 | September 30, 2013 | | - | | - | | - | | 187,559 |
| Total | | - | | - | | - | | 187,559 |
(1) | The Company’s common stock repurchase program covers a maximum of 225,824 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on July 21, 2005, as adjusted for subsequent common stock dividends. |
Exhibit No.10.1 | | Description |
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2.1 | | Letter Agreement, and Plan of Merger, dated August 14, 2013, by andJanuary 31, 2014, between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust CompanyStephen J. Gilhooly (incorporated by reference to Exhibit 2.110.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013)April 1, 2014) |
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2.2 | * | First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company |
10.2 | | |
3(i)(A) | | Certificate of Incorporation ofAmendment to the Amended and Restated Employment Agreement, dated April 4, 2014, between the Company (conformed copy)and Robert F. Mangano (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC on March 27, 2009) |
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3(i)(B) | | Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.110.1 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
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3(i)(C) | | Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
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3(ii)(A) | | By-laws of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22, 2007) |
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4.1 | | Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002) |
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4.2 | | Rights Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No. 000-32891) filed with the SEC on March 18, 2004) |
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4.3 | | Warrant, dated December 23, 2008, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
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4.4 | | Subscription Agent Agreement, dated as of September 5, 2012, between 1st Constitution Bancorp and Registrar and Transfer Company (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2012) |
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4.5 | | Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
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4.6 | | Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013)April 8, 2014) |
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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,Stephen J. Gilhooly , 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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101.INS | * | XBRL Instance Document |
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101.SCH | * | XBRL Taxonomy Extension Schema Document |
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101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
_____________________
_____________________
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| 1ST CONSTITUTION BANCORP | |
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Date: November 12, 2013May 14, 2014 | By: | /s/ RobertROBERT F. Mangano MANGANO | |
| | Robert F. Mangano | |
| | President and Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| | | |
Date: November 12, 2013May 14, 2014 | By: | /s/ Joseph M. Reardon STEPHEN J. GILHOOLY | |
| | Joseph M. ReardonStephen J. Gilhooly | |
| | Senior Vice President and Treasurer | |
| | (Principal Financial and Accounting Officer) | |
EXHIBIT INDEX
Exhibit No. | | Description |
| | |
2.1 | | Agreement and Plan of Merger, dated August 14, 2013, by and between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013) |
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2.2 | * | First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company |
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3(i)(A) | | Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC on March 27, 2009) |
| | |
3(i)(B) | | Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
| | |
3(i)(C) | | Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
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3(ii)(A) | | By-laws of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22, 2007) |
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4.1 | | Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002) |
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4.2 | | Rights Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No. 000-32891) filed with the SEC on March 18, 2004) |
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4.3 | | Warrant, dated December 23, 2008, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed with the SEC on December 23, 2008) |
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4.4 | | Subscription Agent Agreement, dated as of September 5, 2012, between 1st Constitution Bancorp and Registrar and Transfer Company (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2012) |
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4.5 | | Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
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4.6 | | Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
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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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101.INS | * | XBRL Instance Document |
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101.SCH | * | XBRL Taxonomy Extension Schema Document |
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101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
_____________________
* Filed herewith.