UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2010
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-OR-
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________ to _____________.
CORNERSTONE FINANCIAL CORPORATION
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(Exact name of registrant, as specified in its charter)
NEW JERSEY 80-0282551
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6000 MIDLANTIC DRIVE, SUITE 120 S, NEW JERSEY 08054
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (856) 439-0300
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES NO X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act [ ]
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 past 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 .
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Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES X NO.
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, am
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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) YES NO X
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State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and ask price of such common
equity as of the last business day of the registrant's most recently completed
second fiscal quarter $7,372,722.
As of March 18, 2011, there were 1,809,656 outstanding shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be sent to shareholders in
connection with the 2010 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K, which is expected to be filed with
the Securities Exchange Commission not later than 120 days after the end of the
registrant's last fiscal year.
PART I
FORWARD-LOOKING STATEMENTS
Cornerstone Financial Corporation (the "Company") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this annual report on Form 10-K and the exhibits hereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of words such as "expects," "subject," "believe,"
"will," "intends," "will be," or "would."
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (many
of which are beyond the Company's control). The factors which could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements include those items listed under "Item 1A-Risk Factors" in this
Annual Report on Form 10-K for the year ended December 31, 2010 and the
following factors, among others: the strength of the United States economy in
general and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System ("Federal Reserve"); inflation; interest rates; market
and monetary fluctuations; the timely development of new products and services
by the Company and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors'
products and services; the success of the Company in gaining regulatory approval
of its products, services, dividends and of new branches, when required; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; the ability to continue to effectively manage costs, including the
costs incurred in connection with the opening of new branches; changes in
consumer spending and saving habits; and the success of the Company at managing
the risks resulting from these factors.
The Company cautions that the above listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
ITEM 1. DESCRIPTION OF BUSINESS
CORNERSTONE FINANCIAL CORPORATION
The Company was formed in 2008 at the direction of the Board of Directors
of Cornerstone Bank (the "Bank") to serve as a holding company for the Bank. The
Board believed that establishing a holding company would provide greater
flexibility in raising capital and conducting the Company's business. The
holding company reorganization was completed in January 2009. As such, the
Company did not have any operations in 2008, other than obtaining regulatory
approval for the holding company reorganization, and the results of operations,
and all financial data at and for the year ending December 31, 2008 presented
herein are those of the Bank on a stand alone basis.
At December 31, 2010, we had total assets of $354.0 million, total loans,
net of $239.0 million, total investment securities of $85.1 million and total
deposits of $302.3 million compared to total assets of $306.1 million, total
loans net, of $235.0 million, total investment securities of $48.1 million and
total deposits of $249.5 million at December 31, 2009. Our growth in assets and
deposits reflects our commitment to provide outstanding customer
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service and a broad array of banking products driven by our customers' needs.
We believe our strategy provides us with a competitive advantage over other
financial institutions by developing lasting customer relationships that will
enable us to continue to attract core deposits and loans within our market
area.
The Company's offices are located at 6000 Midlantic Drive, Suite 120
S, Mount Laurel New Jersey, 08054 and its phone number is (856) 439-0300.
CORNERSTONE BANK
The Bank is a New Jersey state chartered commercial bank with
administrative offices headquartered in Mount Laurel, New Jersey. The Bank
commenced operations on October 4, 1999, and conducts business from its main
office in Moorestown and from six branch offices located in Medford, New Jersey,
Burlington, New Jersey, Cherry Hill, New Jersey, Voorhees, New Jersey, Mount
Laurel, New Jersey and Marlton, New Jersey. The Bank provides a broad range of
lending, deposit and financial products. The Bank emphasizes commercial real
estate and commercial lending to small businesses and professionals.
The Bank offers a broad range of deposit and loan products and banking
services, including personal and business checking accounts, individual
retirement accounts, business money market accounts, certificates of deposit,
wire transfers, automated teller services, night depository and drive-through
banking. The Bank also offers a three-tiered form of personal demand account and
indexed money market account. Both products pay progressively higher rates of
interest as account balances increase. The Bank's deposit accounts are insured
by the Federal Deposit Insurance Corporation (the "FDIC") up to the applicable
limits.
As an enhancement to its traditional banking services, the Bank provides
remote deposit services to its commercial customers ("C-Scan"). This service
gives commercial customers the ability to scan their check deposits from the
desktops at their place of business and electronically transmit them to the Bank
for deposit processing. In addition, the Bank also offers a fully transactional
website under the domain name www.cornerstonebank.net. Customers have access to
current rates and terms on deposit and loan products, and may make balance
inquiries, request stop payments, reorder checks, pay bills and transfer funds
between existing accounts within the Bank. The information included on the
Bank's website is not part of this report.
The Bank has one subsidiary, Cornerstone Realty Holdings, Inc., a New
Jersey corporation, which was formed during the second quarter of 2005 to
acquire and sell real property that has been previously foreclosed upon by the
Bank.
MARKET AREA
The Bank's market area is comprised of approximately 300 square miles in
western Burlington County and northern Camden County, New Jersey. The Bank has
chosen this market because it believes it contains a stable, diversified
economy. Within this market area, the Bank presently focuses its activities in
the suburban communities of Moorestown, Mount Laurel, Medford, Burlington City,
Cherry Hill, Marlton, Mount Holly, Maple Shade, Medford Lakes, Evesham,
Gibbsboro and Voorhees, New Jersey. The deposit and loan activities of the Bank
are significantly affected by economic conditions it its market area. The Bank
believes that its market area provides strong opportunities in which to develop
a banking franchise. The Bank's strategy for future growth is to selectively
expand its present market into locations where it can build upon the
relationships the members of the Bank's Board of Directors and management team
have with community members to best utilize our community oriented approach to
our competitive advantage. The establishment of branches is subject to approval
by the New Jersey Department of Banking and Insurance ("NJDOBI") and the FDIC.
In November 2010, the Bank opened its newest office, located at 105
Merchants Way, in Marlton, New Jersey.
COMPETITION
The banking business is highly competitive. The Bank faces substantial
competition both in attracting deposits and in originating loans. The Bank
competes primarily with both local and regionally-based commercial banks,
savings banks and savings and loan associations, most of which have greater
assets, capital and lending limits. Other competitors include mutual funds,
mortgage bankers, insurance companies, stock brokerage firms, regulated small
loan companies, credit unions and issuers of commercial paper and other
securities.
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The Bank's larger competitors have greater financial resources than the
Bank to finance wide-ranging advertising campaigns. The Bank conducts only
limited media advertising, and its marketing efforts have depended heavily upon
its Board of Directors' and shareholders' referrals and employee calling
programs.
The Bank's core business consists of providing responsive, high quality
banking services to small businesses, professionals and retail customers living
and working in the Bank's market area. The Bank's officers and directors are
active in the Bank's market area and management believes that these communities
have supported, and will continue to support, a locally owned and managed
community bank committed to providing outstanding customer service and a broad
array of banking products driven by the Bank's customers' needs. The Bank
believes that this strategy provides the Bank with a competitive advantage over
other financial institutions by developing lasting customer relationships that
will enable the Bank to continue to attract core deposits and loans within the
Bank's market area.
LENDING ACTIVITIES
GENERAL. The Bank offers business and personal loans generally on a secured
basis, including: commercial loans (term and time); commercial lines of credit;
commercial mortgage loans; commercial and residential construction loans;
letters of credit; and consumer loans (home equity and installment). The Bank
makes commercial loans to small businesses primarily in the Bank's market area.
The Bank's legal lending limit to any one borrower is 15% of capital for most
loans, and 25% of capital for loans secured by certain types of readily
marketable collateral.
The Bank's ability to originate loans is dependent upon customer demand,
which is affected by the current and expected future level of interest rates.
Interest rates are affected by the demand for loans, the supply of money
available for lending purposes and the rates offered by competitors. Among other
things, these factors are, in turn, affected by economic conditions, monetary
policies of the federal government, including the Federal Reserve, and
legislative tax policies.
COMMERCIAL LOANS. Commercial loans include short and long-term business
loans and commercial lines of credit for the purposes of providing working
capital, supporting accounts receivable, purchasing inventory and acquiring
fixed assets. The loans generally are secured by these types of assets as
collateral and/or by personal guarantees provided by principals of the
borrowers. The majority of the Bank's customers for these loans are small and
medium sized businesses located in the Bank's market area.
At December 31, 2010, commercial loans totaled $95.4 million or 39.3% of
the total loan portfolio, including $45.9 million in lines of credit.
Commercial business loans typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial business loans
generally is substantially dependent on the success of the business itself and
the general economic environment. If the cash flow from business operations is
reduced, the borrower's ability to repay the loan may be impaired.
MORTGAGE LOANS. The Bank originates mortgage loans secured by real estate
primarily located in the Bank's market area. Included as mortgage loans are
commercial real estate, conforming residential real estate and residential real
estate loans in excess of FNMA loan limits ("jumbo real estate loans"). At
December 31, 2010, the Bank had $126.9 million, or 52.2% of the total loan
portfolio invested in commercial and residential real estate loans. The Bank's
real estate loans are primarily secured by first mortgages and to a lesser
extent by junior liens and consist of fixed-rate loans secured by various types
of real estate collateral as discussed below.
COMMERCIAL REAL ESTATE
The Bank emphasizes the origination of commercial real estate loans within
its real estate portfolio. Loans on commercial properties are generally
originated in amounts up to the lower of 75% of the appraised value or cost of
the property and are secured by improved property such as multi-family dwelling
units, office buildings, retail stores, warehouses, church buildings and other
non-residential buildings, most of which are located in the Bank's market area.
Commercial real estate loans are generally made with fixed interest rates which
mature or reprice in five to seven years with principal amortization of up to 25
years.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than one- to four-family residential mortgage loans. Of
primary concern in commercial and multi-family real estate lending, in addition
to the borrower's creditworthiness, is the feasibility and cash flow potential
of the project. Payments on loans
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secured by income producing properties are often dependent on successful
operation or management of the properties. As a result, repayment of such loans
may be subject, to a greater extent than residential real estate loans, to
adverse conditions in the real estate market or the economy.
RESIDENTIAL REAL ESTATE
The majority of the Bank's residential mortgage loans consist of loans
secured by one- to four-family residences located in the Bank's market area. The
Bank has originated one- to four-family residential mortgage loans in amounts up
to 80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. A mortgage loan originated by the
Bank, for owner occupied property, whether fixed rate or adjustable rate, can
have a term of up to 30 years. Non-owner occupied property, whether fixed rate
or adjustable rate, can have a term of up to 25 years. In all cases, the rates
and terms for these loans follow Federal National Mortgage Association ("FNMA")
guidelines and vary based on those guidelines. Adjustable rate loan terms limit
the periodic interest rate adjustment and the minimum and maximum rates that may
be charged over the term of the loan based on the type of loan.
All of the Bank's residential mortgages include "due on sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately due
and payable if the borrower sells or otherwise transfers to a third party an
interest in the property serving as security for the loan. Due-on-sale clauses
are an important means of adjusting the rates on the Bank's fixed-rate mortgage
portfolio.
In some instances, the Bank has charged a fee equal to a percentage of the
loan amount (commonly referred to as "points"). The Bank has originated
residential mortgage loans in conformity with FNMA standards so that the loans
will be eligible for sale in the secondary market. The majority, but not all, of
the residential mortgage loans originated by the Bank historically have been
sold and have not been serviced by the Bank.
APPRAISALS
Property appraisals on real estate securing the Bank's loans are made by
state certified and licensed independent appraisers approved by the Board Loan
Committee, which is made up of members of the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. It is the
Bank's policy to obtain title insurance policies on first mortgage loans
originated by the Bank.
CONSTRUCTION LOANS. The Bank may originate loans to finance the
construction of commercial real estate and to a limited extent residential real
estate in the Bank's market area. Generally, the Bank will make construction
loans only if there is a permanent mortgage commitment in place. Interest rates
on commercial construction loans are typically in line with normal commercial
mortgage loan rates, while interest rates on residential construction loans are
slightly higher than normal residential mortgage loan rates. These loans usually
are adjustable rate loans and generally have terms of up to one year.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment. At
December 31, 2010, construction loans totaled $13.1 million, or 5.4% of the
total loan portfolio.
LETTERS OF CREDIT. Standby letters of credit are conditional commitments
issued by the Bank to a third party on behalf of a customer. The credit risk
involved in issuing standby letters of credit is similar to that involved in
extending credit to customers. The Bank evaluates each customer's
creditworthiness on a case by case basis. Collateral obtained, if deemed
necessary by the Bank, is based on management's credit evaluation of the
customer. Collateral varies but may include accounts receivable, marketable
securities, inventory, property, plant and equipment, residential and commercial
real estate. At December 31, 2010, our obligations under standby letters of
credit totaled $3.0 million.
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CONSUMER LOANS. The Bank originates consumer loans, including installment
loans and home equity loans, secured by first or second mortgages on homes owned
or being purchased by the loan applicant.
Home equity term loans and credit lines are credit accommodations secured
by either a first or second mortgage on the borrower's residential property.
Interest rates charged on home equity term loans are generally fixed; interest
on credit lines is usually a floating rate related to the prime rate. Home
equity term loans are offered with terms of 5 to 15 years; home equity lines are
repaid at 1/180th of the outstanding principal balance each month. The Bank
generally requires a loan to value ratio of less than or equal to 80% of the
appraised value, including any outstanding prior mortgage balance. At December
31, 2010, home equity loans totaled $7.4 million or 3.1% of total loans.
The Bank makes a very limited number of unsecured installment loans, which
includes unsecured revolving credit reserve accounts. As of December 31, 2010,
installment loans totaled $86 thousand or 0.1% of total loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources such as loan officers, the Board of Directors, customers,
borrowers and referrals from real estate brokers, accountants, attorneys and
shareholders.
Upon receipt of a loan application, a credit report is ordered and reviewed
to verify specific information relating to the loan applicant's
creditworthiness. Depending on the type, collateral and amount of the credit
request, various levels of internal approval may be necessary.
LOAN COMMITMENTS. When a loan is approved, the Bank generally issues a
written commitment to the loan applicant. The commitment indicates the loan
approval terms and is generally valid for a period of up to 45 days. Most of the
Bank's commitments are accepted or rejected by the customer before the
expiration of the commitment. At December 31, 2010, the Bank had approximately
$58.1 million in loan commitments outstanding.
LOANS TO ONE BORROWER. Under New Jersey banking law, the Bank is generally
subject to a loans-to-one-borrower limitation of 15% of capital funds. At
December 31, 2010, this loan to one borrower limit was approximately $4.7
million. This loans-to-one-borrower limit may be increased by an additional 10%
of adjusted capital funds, which at December 31, 2010 was approximately $3.2
million, if collateralized by readily marketable collateral, as defined by
regulation. At December 31, 2010, there were no loans outstanding or committed
to any borrower which individually or in the aggregate exceeded the applicable
limits.
NON-PERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. The Bank's collection procedures generally provide that
after a loan is 15 days past due a late charge is added. The borrower is
contacted by mail or telephone and payment is requested. If the delinquency
continues, subsequent efforts are made to contact the borrower. If the loan
continues to be delinquent for 90 days or more, the Bank usually initiates legal
proceedings unless other repayment arrangements are made. Each delinquent loan
is reviewed on a case-by-case basis in accordance with the Bank's lending
policy.
Delinquent loans 90 days or more past due at December 31, 2010, consisted
of fifteen loan relationships totaling $10.7 million as compared to ten loan
relationships totaling $9.2 million at December 31, 2009. The delinquent loan
relationships as of December 31, 2010 and 2009, were considered well
collateralized and were in the process of collection.
NON-PERFORMING ASSETS. Non-performing assets consist of non-accrual loans
(loans on which the accrual of interest has ceased), loans over ninety days
delinquent and still accruing interest, renegotiated loans, impaired loans and
other real estate owned. Loans are generally placed on non-accrual status if, in
the opinion of management, collection is doubtful, or when principal or interest
is past due 90 days or more, unless the collateral is considered sufficient to
cover principal and interest and the loan is in the process of collection.
Interest accrued, but not collected at the date a loan is placed on non-accrual
status, is reversed and charged against interest income. Subsequent cash
receipts are applied either to the outstanding principal or recorded as interest
income, depending on management's assessment of the ultimate collectability of
principal and interest. Loans are returned to an accrual status when the
borrower's ability to make periodic principal and interest payments has returned
to normal (i.e., brought current with respect to principal or interest or
restructured) and the paying capacity of the borrower and/or the underlying
collateral is deemed sufficient to cover principal and interest.
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Impaired loans are measured based on the present value of expected future
discounted cash flows, the fair value of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. At December 31, 2010 the Company had twelve relationships totaling $9.8
million in non-accrual loans as compared eight relationships totaling $8.1
million at December 31, 2009. At December 31, 2010, the Company had sixteen
impaired loan relationships totaling $10.7 million (included within the
non-accrual loans discussed above) in which $3.5 million in impaired loans had a
related allowance for credit losses of $2.1 million and $7.3 million for
impaired loans in which there is no related allowance for credit losses. The
average balance of impaired loans totaled $12.3 million for 2010 as compared to
$8.2 million for 2009, and interest income recorded on impaired loans during the
year ended December 31, 2010 totaled $36 thousand as compared to $32 thousand
for December 31, 2009.
CLASSIFIED ASSETS. Federal regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful" or "loss."
An asset is considered "substandard" if it involves more than an acceptable
level of risk due to a deteriorating financial condition, unfavorable history of
the borrower, inadequate payment capacity, insufficient security or other
negative factors within the industry, market or management. Substandard loans
have clearly defined weaknesses which can jeopardize the timely payment of the
loan.
Assets classified as "doubtful" exhibit all of the weaknesses defined under
the substandard category but with enough risk to present a high probability of
some principal loss on the loan, although not yet fully ascertainable in amount.
Assets classified as "loss" are those considered uncollectible or of little
value, even though a collection effort may continue after the classification and
potential charge-off.
The Bank also internally classifies certain assets as "special mention."
Such assets do not demonstrate a current potential for loss but are monitored in
response to negative trends which, if not reversed, could lead to a substandard
rating in the future.
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it may establish specific allowances for loan
losses in an amount deemed prudent by management. When an insured institution
classifies problem assets as "loss," it is required either to establish an
allowance for losses equal to 100% of that portion of the assets so classified
or to charge off such amount.
At December 31, 2010 the Bank had sixteen loans totaling $10.8 million
classified as substandard constituting 4.5 % of the Bank's loan portfolio,
compared to eight loans totaling $7.9 million classified as substandard at
December 31, 2009, representing 3.3% of the Bank's then current loan portfolio.
The Bank had one loan classified as doubtful totaling $147 thousand at December
31, 2010 as compared to two loans totaling $380 thousand at December 31, 2009.
FORECLOSED REAL ESTATE. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as Real Estate Owned
until such time as it is sold. When real estate owned is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair value, less disposal costs. Any write-down of real estate owned is charged
to operations. At December 31, 2010 the Company had $829 thousand in real estate
owned as compared to no real estate owned at December 31, 2009. The change in
real estate owned during the year ended December 31, 2010 reflects two
relationships in which the Company took ownership of twelve properties by deed
in lieu of foreclosure.
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED. It is the policy of
management to provide for inherent losses on unidentified loans in its portfolio
in addition to classified loans. A provision for loan losses is charged to
operations based on management's evaluation of the estimated and inherent losses
in the Bank's loan portfolio. Management also periodically performs valuations
of real estate owned and establishes allowances to reduce book values of the
properties to their lower of cost or fair value, less disposal costs, when
necessary.
Although provisions have been established and segmented by type of loan,
based upon management's assessment of their differing inherent loss
characteristics, the entire allowance for losses on loans is available to absorb
further loan losses in any category.
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INVESTMENT SECURITIES ACTIVITIES
The investment policy of the Bank is established by senior management and
approved by the Board of Directors. It is based on asset and liability
management goals and is designed to provide a portfolio of high quality
investments that optimize interest income and provide acceptable limits of
safety and liquidity. At December 31, 2010, the Bank's investment policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) state and
municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, and (vii) investment grade corporate
bonds and commercial paper. The Board of Directors may authorize additional
investments.
The Bank invests in securities based on their investment grade. The
investment portfolio predominantly consists of securities issued or guaranteed
by the United States Government and its agencies. In accordance with ASC Topic
320-10-65-1,the Bank classifies its investment securities at the time of
purchase as either "trading," "available for sale" ("AFS") or "held to maturity"
("HTM"). To date, management has not purchased any securities for trading
purposes. Management classifies most securities as HTM, and to a lesser extent,
AFS. AFS securities are carried at fair value in the statements of financial
condition with an adjustment to equity, for changes in the fair value of
securities, net of tax. The adjustment to equity, net of tax, is presented in
the caption "Accumulated other comprehensive loss."
At December 31, 2010, the Bank held an HTM investment portfolio with an
amortized cost of $40.4 million, or 11.4% of total assets, with an estimated
fair market value of $39.5 million. In addition, the Bank also held an AFS
investment portfolio with a fair value of $44.6 million, or 12.6% of total
assets, with an estimated amortized cost of $47.9 million as of December 31,
2010.
SOURCES OF FUNDS
GENERAL. Deposits are the major external source of the Bank's funds for
lending and investment activities as well as for general business purposes. In
addition to deposits, the Bank derives funds from the amortization, prepayment
or sale of loans, maturities and repayments of investment securities and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
DEPOSITS. The Bank offers a broad range of deposit instruments, including
personal and business checking accounts, individual retirement accounts,
business money market accounts, statement savings, and term certificate accounts
at competitive interest rates. Deposit account terms vary according to the
minimum balance required, the time periods that the funds must remain on deposit
and the interest rate, among other factors. The Bank also offers a three-tiered
form of personal demand account, paying progressively higher rates of interest
as account balances increase. The Bank regularly evaluates the internal cost of
funds, surveys rates offered by competing institutions, reviews the Bank's cash
flow requirements for lending and liquidity and executes rate changes when
deemed appropriate.
Consumer and commercial deposits are attracted principally from within the
Bank's market area. The Bank does not obtain funds through brokers, nor does it
solicit funds outside the State of New Jersey.
BORROWINGS. Deposits are the primary source of funds for the Bank's lending
and investment activities as well as for general business purposes. However,
should the need arise, the Bank has access to unsecured, overnight lines of
credit in the amount of $3.0 million, on an uncommitted basis through Atlantic
Central Bankers Bank. This arrangement is for the sale of federal funds to the
Bank subject to the availability of such funds. At December 31, 2010 and 2009,
the Bank had no balances outstanding against this line of credit.
The Bank also has an available credit line under the Overnight Repricing
Advance Program with the Federal Home Loan Bank ("FHLB") in the aggregate amount
of $ 55.7 million. At December 31, 2010, the Bank had advances outstanding with
the FHLB in the amount of approximately $25.0 million at a weighted average
interest rate of 1.49% . At December 31, 2010 and 2009, the Bank had no advances
outstanding against the credit line under the Overnight Repricing Advance
Program. At December 31, 2010, the Bank was eligible to borrow an additional $
30.7 million.
The Bank's membership in the FHLB also provides the Bank with additional
secured borrowing capacity of up to a maximum of 25% of the Bank's total assets,
subject to certain conditions.
8
On February 17, 2009, the Company entered into a non-revolving line of
credit loan agreement with Atlantic Central Bankers Bank for an amount up to
$5.0 million. The term of the debt is for a three year period with a maturity
date of February 17, 2012. The interest rate adjusts at a variable rate equal to
prime plus 25 basis points with a floor of 4.25% . The Company has an
outstanding balance on the line of credit of $4.9 million and has contributed
$4.4 million as additional capital to the Bank.
On November 1, 2010, the Bank modified the terms of the hybrid capital
instrument originally issued on October 31, 2008, in the aggregate amount of
$3.0 million in the form of subordinated debt. This instrument qualifies as Tier
II capital. The new term of the debt is for a ten year period with a maturity
date of November 1, 2020. The interest rate is at a variable rate equal to prime
rate plus 100 basis points for the entire ten year term. The debt security is
redeemable, at the Bank's option, at par on any January 31st, April 30th,
July 31st, or October 31st that the debt security remains outstanding.
However, the Bank does not have the right to redeem the debt security prior to
April 30, 2011.
PERSONNEL
At March 18, 2010, the Bank had 61 full-time and 9 part-time employees.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that its relationship with its employees is good.
REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
GENERAL
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended, (the BHCA), we are subject to the regulation and supervision
of the Board of Governors of the Federal Reserve System (FRB). We are required
to file with the FRB annual reports and other information regarding our business
operations and those of our subsidiaries.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of any other bank, (ii) acquire direct or indirect ownership
or control or more than 5% of the outstanding voting stock of any bank (unless
it owns a majority of such bank's voting shares) or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anticompetitive impact of the proposed transaction is clearly
outweighed by a greater public interest in meeting the convenience and needs of
the community to be served. The FRB also considers capital adequacy and other
financial and managerial resources and future prospects of the companies and the
banks concerned, together with the convenience and need of the community to be
served when reviewing acquisitions or mergers.
The BHCA also generally prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company; or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries, unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to weigh the expected benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
9
In addition, the BHCA was amended through the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (the "GLBA"). Under the terms of the GLBA, bank
holding companies whose subsidiary banks meet certain capital, management and
Community Reinvestment Act standards are permitted to apply to become financial
holding companies, which may engage in a substantially broader range of
non-banking activities than is permissible for bank holding companies under the
BHCA. These activities include certain insurance, securities and merchant
banking activities. In addition, the GLBA amendments to the BHCA remove the
requirement for advance regulatory approval for a variety of activities and
acquisitions by financial holding companies. As our business is currently
limited to activities permissible for a bank, we have not elected to become a
financial holding company.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance fund in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, subsequently codified as part of the Bank
Holding Company Act under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"), a bank holding company is required to
serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The FRB also has the
authority under the BHCA to require a bank holding company to terminate any
activity or to relinquish control of a non-bank subsidiary upon the FRB's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
risk-based guidelines apply to bank holding companies with consolidated assets
of $500 million or more, and to certain bank holding companies with less then
$500 million in assets if they are engaged in substantial non-banking activity
or meet certain other criteria. We do not meet these criteria, and so the
Company is not subject to a minimum consolidated capital requirement. In
addition to the risk-based capital guidelines, the FRB has adopted a minimum
Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum. The leverage
requirement also only applies on a consolidated basis if the risk based capital
requirements discussed above apply.
BANK REGULATION
GENERAL. As a New Jersey-chartered commercial bank, the Bank is subject to
the regulation, supervision, and control of the NJDOBI. As an FDIC-insured
institution, the Bank is subject to the regulation, supervision and control of
the FDIC, an agency of the federal government. The regulations of the FDIC and
the NJDOBI affect virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
INSURANCE OF DEPOSITS. The Dodd-Frank Act has caused significant changes in
the FDIC's insurance of deposit accounts. Among other things, the Dodd-Frank Act
permanently increased the FDIC deposit insurance limit to $250 thousand per
depositor. In addition, the Dodd-Frank Act includes provisions replacing, by
statute, the FDIC's program to provide unlimited deposit insurance coverage for
noninterest bearing transactional accounts. Institutions are not required to opt
into this coverage, and can not opt out of the program. In addition,
institutions are not required to pay an additional assessment for this
additional coverage. Under the Dodd-Frank Act, this unlimited coverage for
non-interest bearing transaction accounts will expire on December 31, 2012.
The FDIC has significantly increased deposit insurance assessment rates,
commencing in the second quarter of 2009. As increased, the adjusted base
assessment rates will range from 12 to 77.5 basis points of deposits, a
significant increase over premium rates for the past several years. In addition,
the Bank is paying a special assessment of between
10
15 and 25 basis points of the amount of deposits in excess of $250,000
commencing on January 1, 2010 The FDIC also levied a special assessment of 5
basis points on assets less Tier 1 Capital as of June 30, 2009, paid September
30, 2009. The 5 basis point assessment resulted in a charge to the Bank of
approximately $138 thousand. The FDIC also required insured depository
institutions to pre-pay deposit insurance premiums through the fourth quarter
2012 in 2009. Those payments totaled $1.5 million, and as of December 31, 2010,
$981 thousand was recognized in prepaid expenses, which has been recorded with
"Other Assets" in the Statement of Financial Condition. The proposal also calls
for premium assessments to increase by three basis points in 2011. These
additional costs will adversely affect our results of operations.
On February 7, 2011 the FDIC announced the approval of the new deposit
insurance assessment system mandated by the Dodd-Frank Act. Dodd-Frank required
that the base on which deposit insurance assessments are charged be revised from
one based on domestic deposits to one based on assets. The FDIC's rule to base
the assessment base on average total consolidated assets minus average tangible
equity instead of domestic deposits may lower assessments for community banks
with less than $10 billion in assets. The new rate schedule is effective during
the second quarter of 2011 and may reduce the Company's costs.
DIVIDENDS. Currently, ownership of the Bank is the only operation of the
Company, and therefore the ability of the Company to pay dividends to its
security holders is limited by the Bank's ability to pay dividends to the
Company. Under the New Jersey Banking Act of 1948, as amended, a bank may
declare and pay dividends only if (i) after payment of the dividend the capital
stock of the bank will be unimpaired, and (ii) either the bank will have a
surplus of not less than 50% of its capital stock or the payment of the dividend
will not reduce the bank's surplus. The Federal Deposit Insurance Act generally
prohibits the payment of dividends by an insured bank if, after making the
distribution, the bank would be undercapitalized or if the bank is in default of
any assessment to the FDIC. Additionally, either the NJDOBI or the FDIC may
prohibit a bank from engaging in unsafe or unsound practices, and it is possible
that under certain circumstances such entities could claim that a dividend
payment constitutes an unsafe or unsound practice and therefore is prohibited.
The Company has not paid a cash dividend on its common stock, and it will
not likely pay a cash dividend on its common stock in the foreseeable future.
Holders of preferred stock are entitled to receive non-cumulative
dividends, as and when declared by the Board of Directors at an annual rate of
seven percent on a stated value of $1 thousand per share. The holders of
preferred stock have priority of dividends such that no dividends shall be
declared or paid to common shareholders unless full dividends on all outstanding
preferred shares have been declared and paid for the most recently completed
calendar quarter. For the year ending December 31, 2010 the Company declared and
paid full dividends on all outstanding preferred shares in the aggregate amount
of $134 thousand.
CAPITAL ADEQUACY GUIDELINES. The Bank is subject to risk-based capital
guidelines promulgated by the FDIC that are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks, to
account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under the guidelines, assets and off-balance sheet items
are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common shareholders' equity and qualifying preferred stock and other hybrid
instruments, less certain goodwill items and other intangible assets. The
remainder ("Tier II Capital") may consist of (a) the allowance for loan losses
of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred
stock, (c) non qualifying hybrid capital instruments, (d) perpetual debt, (e)
mandatory convertible securities, and (f) qualifying subordinated debt and
intermediate-term preferred stock up to 50% of Tier I capital. Total capital is
the sum of Tier I and Tier II capital less reciprocal holdings of other banking
organizations, capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the FDIC (determined on a case-by-case
basis or as a matter of policy after formal rule-making).
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier I capital (leverage) ratio, under which a bank must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank that has the highest regulatory examination rating and
is not contemplating significant growth or expansion. All other banks are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
the stated minimum.
11
The Bank was in compliance with the applicable minimum capital requirements
at December 31, 2010 and 2009. As of December 31, 2010, the Bank's management
believes that the Bank was "well-capitalized" under applicable FDIC capital
adequacy regulations.
Additional information regarding the Bank's capital is referenced in Note
18, "Regulatory Matters," to Notes To Consolidated Financial Statements in the
financial statements appearing in this Form 10-K.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act, as
amended ("CRA"), as implemented by Federal regulations, a bank has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with CRA. CRA requires the institution's
primary Federal regulator to assess an institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The CRA requires public
disclosure of an institution's CRA rating and requires that the institution's
primary Federal regulator provide a written evaluation of an institution's CRA
performance utilizing a four-tiered descriptive rating system. An institution's
CRA rating is considered in determining whether to approve branches and other
deposit facilities, relocations, mergers, consolidations and acquisitions.
Performance less than satisfactory may be the basis for denying an application.
On December 4, 2007, the last examination date, the Bank received a CRA rating
of satisfactory.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Act"), among other things, permits bank
holding companies to acquire banks in any state. A bank may also merge with a
bank in another. Interstate acquisitions and mergers are subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank. Under the Interstate Act, branches of state-chartered banks that operate
in other states are covered by the laws of the chartering state, rather than the
host state.
The requirements related to de novo interstate branching were changed by
the Dodd-Frank Act. Under provisions of the Dodd-Frank Act, insured depository
institutions are now permitted to branch across state lines, subject only to the
limits applied by a state to a bank residing in the state. Many state banking
regulators are in the process of developing procedures to implement this
provision of the Dodd-Frank Act.
GRAMM-LEACH-BLILEY ACT. In 1999, federal legislation was enacted that
allows bank holding companies to engage in a wider range of non-banking
activities, including greater authority to engage in securities and insurance
activities. The Gramm-Leach-Bliley Act ("GLB Act") provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries. National banks are also
authorized by the GLB Act to engage, through "financial subsidiaries," in any
activity that is permissible for a financial holding company and any activity
that the Secretary of the Treasury, in consultation with the Federal Reserve
Board, determines is financial in nature or incidental to any such financial
activity, except (1) insurance underwriting, (2) real estate development or real
estate investment activities (unless otherwise permitted by law), (3) insurance
company portfolio investments, and (4) merchant banking.
The GLB Act also contains a number of other provisions that affect the
Bank's operations and the operations of all financial institutions. One of the
provisions relates to the financial privacy of consumers, authorizing federal
banking regulators to adopt rules that limit the ability of banks and other
financial entities to disclose non-public information about consumers to
non-affiliated entities. These limitations require more disclosure to consumers,
and in some circumstances, require consent by the consumer before information is
allowed to be provided to a third party.
USA PATRIOT ACT. On October 26, 2001, an anti-terrorism bill, the
International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001,
was signed into law. This law restricts money laundering by terrorists in the
United States and abroad. This Act specifies new "know your customer"
requirements that obligate financial institutions to take actions to verify the
identity of the account holders in connection with opening an account at any
financial institution. Banking regulators consider compliance with the Act's
money laundering provisions in making decisions regarding approval of
acquisitions and mergers. In addition, sanctions for violations of the Act can
be imposed in an amount equal to twice the sum involved in the violating
transactions, up to $1 million.
12
SARBANES-OXLEY ACT. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was
signed into law. This Act addresses many aspects of financial reporting,
corporate governance and disclosure by publicly-held companies, including banks
and bank holding companies. Among other things, it establishes a comprehensive
framework for the oversight of public company auditing and for strengthening the
independence of auditors and the audit committees of boards of directors. Under
the Act, audit committees are responsible for the appointment, compensation and
oversight of the work of the independent auditors. Both audit and non-audit
services to be provided to a company by its independent auditor must be approved
in advance by the audit committee and the independent auditors are prohibited
from performing certain types of non-audit services for companies which they
audit. As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted
rules requiring public companies to include a report of management on the
company's internal control over financial reporting in their annual reports on
Form 10-K that contains an assessment by management of the effectiveness of the
company's internal control over financial reporting. In addition, in the future,
the independent registered public accounting firm auditing the Company's
financial statements may have to attest to the effectiveness of the Company's
internal control over financial reporting if the Company fails to qualify as a
"smaller reporting company" under SEC regulations. The Act also imposes
significant responsibilities on officers, auditors, boards of directors and
board committees. The Act imposes restrictions on and accelerated reporting
requirements for certain trading activities by insiders.
EMERGENCY ECONOMIC STABILIZATION ACT. On October 8, 2008, the Emergency
Economic Stabilization Act (the "EESA") was signed into law. On October 14,
2008, the United States Treasury (the "UST") announced its Troubled Assets
Relief Program ("TARP") Capital Purchase Program ("CPP"). Under the CPP, the UST
purchased shares of senior preferred stock in insured depository institutions or
their holding companies, bearing a dividend rate of 5%. In addition,
participating institutions issued to the UST common stock purchase warrants,
permitting the UST to purchase common stock with a value equal to 15% of the
UST's preferred stock investment. The Company applied for participation in the
CPP. However, the Company's Board of Director's elected not to participate in
the CPP due to a number of factors, including the changed public perception of
the CPP and changes to the terms of the CPP.
On February 16, 2009, the American Recovery and Reinvestment Act of 2009
(the "ARRA") was adopted. Among other things, the ARRA amended various
provisions of the EESA to, among other things, substantially restrict executive
compensation for those entities that participate in the CPP, including those
institutions that participated prior to the adoption of the ARRA, impose more
stringent reporting requirements on such institutions and require such
institutions to permit their shareholders to have a non-binding, advisory vote
on executive compensation.
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT. The Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act")
was signed into law on July 21, 2010. Generally, the Dodd-Frank Act is effective
the day after it was signed into law, but different effective dates apply to
specific sections of the law, many of which will not become effective until
various Federal regulatory agencies have promulgated rules implementing the
statutory provisions. Uncertainty remains as to the ultimate impact of the Act,
which could have a material adverse impact on the financial services industry.
The Dodd-Frank Act, among other things:
Directs the Federal Reserve to issue rules which are expected to limit
debit-card interchange fees;
Provides for an increase in the FDIC assessment for depository institutions
with assets of $10 billion or more, increases in the minimum reserve ratio for
the deposit insurance fund from 1.15% to 1.35% and changes the basis for
determining FDIC premiums from deposits to assets;
Permanently increases the deposit insurance coverage to $250 thousand and
allows depository institutions to pay interest on checking accounts;
Creates a new consumer financial protection bureau that will have
rulemaking authority for a wide range of consumer protection laws that would
apply to all banks and would have broad powers to supervise and enforce consumer
protection laws directly for large institutions;
Provides for new disclosure and other requirements relating to executive
compensation and corporate governance;
Changes standards for Federal preemption of state laws related to federally
chartered institutions and their subsidiaries;
13
Provides mortgage reform provisions regarding a customer's ability to
repay, restricting variable-rate lending by requiring the ability to repay to be
determined for variable-rate loans by using the maximum rate that will apply
during the first five years of a variable-rate loan term, and making more loans
subject to provisions for higher cost loans, new disclosures, and certain other
revisions;
Creates a financial stability oversight council that will recommend to the
Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk
management and other requirements as companies grow in size and complexity; and
Creates a permanent exemption for non-accelerated filers from the
requirement to obtain an internal control audit under section 404(b) of the
Sarbanes Oxley Act of 2002.
ITEM 1-A - RISK FACTORS
Potential investors in the Company should carefully consider the following
risk factors prior to making any investment decisions regarding the Company's
securities.
OUR NON-PERFORMING ASSETS HAVE SUBSTANTIALLY INCREASED SINCE 2009, AND THIS
HAS AFFECTED OUR RESULTS OF OPERATIONS.
At December 31, 2010 our non-performing assets have increased by $1.1
million to $11.6 million, or 3.3% of our total assets. At December 31, 2009, we
had $10.5 million in non performing assets, or 3.4% of our total assets.
Included in our non-performing assets are twelve non-accrual loan relationships
totaling $9.8 million which contributed to the increase of $776 thousand in the
provision for loan losses for the year ended December 31, 2010. The increase in
non-performing assets reflects the general economic slowdown in our marketplace
and its effect on certain borrowers. These non-accrual loan relationships have
negatively impacted our results of operations, through additional provisions for
loan losses and reduced interest income, and will continue to impact our
performance until these assets are resolved. There is always the risk of an
increase in non-performing assets therefore we can give no assurance that our
non-performing assets will not increase further.
THE NATIONWIDE RECESSION MAY ADVERSELY AFFECT OUR BUSINESS BY REDUCING REAL
ESTATE VALUES IN OUR TRADE AREA AND STRESSING THE ABILITY OF OUR CUSTOMERS
TO REPAY THEIR LOANS.
Our trade area, like the rest of the United States, is currently
experiencing weak economic conditions. As a result, many companies have
experienced reduced revenues and have laid off employees. These factors have
stressed the ability of both commercial and consumer customers to repay their
loans, and have, and may in the future, result in higher levels of non-accrual
loans. In addition, real estate values have declined in our trade area. Since
the majority of our loans are secured by real estate, declines in the market
value of real estate impact the value of the collateral securing our loans, and
could lead to greater losses in the event of defaults on loans secured by real
estate.
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO EFFECTIVELY MANAGE OUR FUTURE
GROWTH AND OUR ABILITY TO RAISE CAPITAL TO SUPPORT GROWTH.
We intend to continue to focus on growth in our asset base to enhance our
profitability. The Bank opened an additional branch in November 2010. This new
branch placed an additional burden on the Bank's management and systems,
including data processing systems and internal controls. The Bank's continued
growth and profitability depend on the ability of its officers and key employees
to manage such growth effectively, to attract and retain skilled employees and
to maintain adequate internal controls. In addition, in order to support growth
while complying with regulatory capital requirements, we will likely need to
raise additional capital. Accordingly, there can be no assurance that the Bank
will be successful in managing its expansion, raising capital or raising capital
on terms, and at prices, that are beneficial to our common shareholders and the
failure to do so would adversely affect its financial condition and results of
operations.
IF THE BANK IS UNABLE TO CONTINUE TO GROW, ITS LONG TERM PROFITABILITY AND
FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
The Bank's future profitability will depend in part on its continued
ability to grow. Various factors, such as economic conditions, regulatory and
legislative considerations and competition, may impede or prohibit the Bank's
ability to open or acquire new branch offices.
14
IF WE EXPERIENCE LOAN LOSSES IN EXCESS OF OUR ALLOWANCE, OUR EARNINGS WILL
BE ADVERSELY AFFECTED.
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management maintains
an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectability of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectability is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require it to
increase the allowance for loan losses as a part of their examination process,
our earnings and capital could be significantly and adversely affected.
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS SUBJECT TO REGIONAL
ECONOMIC FACTORS THAT COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Substantially all of the Bank's business is with customers in its market
area of southern New Jersey. The Bank emphasizes commercial real estate and
commercial lending to small businesses and professionals, many of which are
dependent upon the regional economy. Adverse changes in economic and business
conditions in the Bank's markets could adversely affect its borrowers, their
ability to repay their loans and to borrow additional funds, and consequently
our financial condition and performance.
THE LOSS OF OUR EXECUTIVE OFFICERS AND CERTAIN OTHER KEY PERSONNEL WOULD
HURT OUR BUSINESS.
Our success depends, to a great extent, upon the services of our executive
officers. From time to time, we also need to recruit personnel to fill vacant
positions for experienced lending and credit administration officers.
Competition for qualified personnel in the banking industry is intense, and
there can be no assurance that we will continue to be successful in attracting,
recruiting and retaining the necessary skilled managerial, marketing and
technical personnel for the successful operation of our existing lending,
operations, accounting and administrative functions or to support the expansion
of the functions necessary for its future growth. Our inability to hire or
retain key personnel could have a material adverse effect on our results of
operations.
THERE IS A LIMITED TRADING MARKET FOR THE COMPANY'S COMMON STOCK, WHICH MAY
ADVERSELY IMPACT AN INVESTOR'S ABILITY TO SELL SHARES AND THE PRICE IT
RECEIVED FOR SHARES.
There is no established and liquid trading market for our common stock.
Although our common stock is approved for quotation on the OTC Bulletin Board,
an electronic inter-dealer trading market, trading in our common stock is
limited, sporadic and volatile. This means that there is limited liquidity for
our common stock, which may make it difficult for investors to buy or sell our
common stock, may negatively affect the price of our common stock and may cause
volatility in the price of our common stock.
THE COMPANY OPERATES IN A COMPETITIVE MARKET WHICH COULD CONSTRAIN ITS
FUTURE GROWTH AND PROFITABILITY.
The Company operates in a competitive environment, competing for deposits
and loans with commercial banks, savings associations and other financial
entities. Competition for deposits comes primarily from other commercial banks,
savings associations, credit unions, money market and mutual funds and other
investment alternatives. Competition for loans comes primarily from other
commercial banks, savings associations, mortgage banking firms, credit unions
and other financial intermediaries. Many of the financial intermediaries
operating in the Bank's market area offer services which the Bank does not
offer. Moreover, banks with a larger capitalization and financial intermediaries
not subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. If the Bank is not able to
attract new deposit and lending customers, its future growth and profitability
will be adversely impacted.
15
WE REALIZE INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON
LOANS AND INVESTMENTS AND INTEREST PAID ON DEPOSITS AND BORROWINGS, AND
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY AND
ASSETS.
Changes in prevailing interest rates may hurt our business. We derive our
income mainly from the difference or "spread" between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. In general, the
larger the spread, the more we earn. When market rates of interest change, the
interest the Bank receives on its assets and the interest it pays on its
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Interest rates affect how much money the Bank can lend. For example, when
interest rates rise, the cost of borrowing increases and loan originations tend
to decrease. In addition, changes in interest rates can affect the average life
of loans and investment securities. A reduction in interest rates generally
results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk, because in the current rate environment the Bank
generally is not able to reinvest prepayments at rates that are comparable to
the rates it earned on the prepaid loans or securities. Changes in market
interest rates could also reduce the value of the Bank's financial assets. If we
are unsuccessful in managing the effects of changes in interest rates, our
financial condition and results of operations could suffer.
AS A PUBLIC COMPANY, OUR BUSINESS IS SUBJECT TO NUMEROUS REPORTING
REQUIREMENTS THAT ARE CURRENTLY EVOLVING AND COULD SUBSTANTIALLY INCREASE
OUR OPERATING EXPENSES AND DIVERT MANAGEMENT'S ATTENTION FROM THE OPERATION
OF OUR BUSINESS.
The Sarbanes-Oxley Act of 2002 has required changes in some of our
corporate governance, securities disclosure and compliance practices. In
response to the requirements of that Act, the Securities and Exchange Commission
("SEC") has promulgated rules covering a variety of subjects. Compliance with
these rules has significantly increased our legal and financial and accounting
costs, and we expect these increased costs to continue. In addition, compliance
with the requirements has taken a significant amount of management's and the
Board of Directors' time and resources. Likewise, these developments may make it
more difficult for us to attract and retain qualified members of our board of
directors, particularly independent directors, or qualified executive officers.
THE BANKING BUSINESS IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATIONS.
We are subject to extensive governmental supervision, regulation and
control. These laws and regulations are subject to change, and may require
substantial modifications to our operations or may cause us to incur substantial
additional compliance costs. In addition, future legislation and government
policy could adversely affect the commercial banking industry and our
operations. Such governing laws can be anticipated to continue to be the subject
of future modification. Our management cannot predict what effect any such
future modifications will have on our operations. In addition, the primary focus
of Federal and state banking regulation is the protection of depositors and not
the shareholders of the regulated institutions.
For example, the recently adopted Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Dodd-Frank Act") will result in substantial new
compliance costs, and may restrict certain sources of revenue. The Dodd-Frank
Act was signed into law on July 21, 2010. Generally, the Act is effective the
day after it was signed into law, but different effective dates apply to
specific sections of the law, many of which will not become effective until
various Federal regulatory agencies have promulgated rules implementing the
statutory provisions. Uncertainty remains as to the ultimate impact of the
Dodd-Frank Act, which could have a material adverse impact either on the
financial services industry as a whole, or on our business, results of
operations and financial condition. The Dodd-Frank Act, among other things:
o Directs the Federal Reserve to issue rules which are expected to
limit debit-card interchange fees;
o Provides for an increase in the FDIC assessment for depository
institutions with assets of $10 billion or more, increases in the
minimum reserve ratio for the deposit insurance fund from 1.15% to
1.35% and changes the basis for determining FDIC premiums from
deposits to assets;
o Permanently increases the deposit insurance coverage to $250 thousand
and allows depository institutions to pay interest on checking
accounts;
16
o Creates a new consumer financial protection bureau that will have
rulemaking authority for a wide range of consumer protection laws that
would apply to all banks and would have broad powers to supervise and
enforce consumer protection laws;
o Provides for new disclosure and other requirements relating to
executive compensation and corporate governance;
o Changes standards for Federal preemption of state laws related to
federally chartered institutions and their subsidiaries;
o Provides mortgage reform provisions regarding a customer's ability to
repay, restricting variable-rate lending by requiring the ability to
repay to be determined for variable-rate loans by using the maximum
rate that will apply during the first five years of a variable-rate
loan term, and making more loans subject to provisions for higher cost
loans, new disclosures, and certain other revisions; and
o Creates a financial stability oversight council that will recommend
to the Federal Reserve increasingly strict rules for capital,
leverage, liquidity, risk management and other requirements as
companies grow in size and complexity.
We can give no assurance that future changes in laws and regulations or
changes in their interpretation will not adversely affect our business.
WE CANNOT PREDICT HOW CHANGES IN TECHNOLOGY WILL IMPACT OUR BUSINESS.
The financial services market, including banking services, is increasingly
affected by advances in technology, including developments in:
o telecommunications;
o data processing;
o automation;
o internet-based banking;
o tele-banking; and
o debit cards and so-called "smart cards. "
Our ability to compete successfully in the future will depend on whether we
can anticipate and respond to technological changes. To develop these and other
new technologies, we will likely have to make additional capital investments.
Although we continually invest in new technology, we cannot assure you that we
will have sufficient resources or access to the necessary proprietary technology
to remain competitive in the future.
ITEM 2. DESCRIPTION OF PROPERTY
(A) PROPERTIES.
CORPORATE HEADQUARTERS. On October 11, 2007, the Bank entered into a Lease
with 6000 Midlantic Drive Associates, L.L.C. for the lease of approximately
8,121 rentable square feet of office space located at 6000 Midlantic Drive in
Mount Laurel, New Jersey. This office serves as the corporate headquarters, but
does not include a banking facility. The term of the lease is ten (10) years
beginning on February 1, 2008 and expiring on January 31, 2018. The base monthly
rent is initially set at $10,828 per month, and increases incrementally to
$12,182 per month over the ten (10) year term. The Bank must also pay additional
rent in the form of its pro rata share of taxes and operating costs for the
building in which the offices are located, which are currently $7,607 per month.
Upon expiration of the initial ten (10) year term, the Bank may choose to extend
the lease for up to two more five (5) year terms at base monthly rental rates of
$12,858 per month for the first option term and $13,535 per month for the second
option term.
MEDFORD, NJ BRANCH. On October 10, 2002, the Bank opened a new branch
office located at 170 Himmelein Road, Medford, New Jersey in a stand-alone
office facility of approximately 3,000 square feet plus two adjoining
drive-through lanes. The branch includes teller windows, a lobby area,
drive-through windows, an automated teller machine, a night depository and a
safe deposit vault.
17
The Bank's lease for this location has an initial term of ten years and
commenced November 1, 2002, with four five-year renewal options. If the Bank
does not exercise its renewal options, the current lease term will expire on
October 31, 2012. The rental expense was $7,916 per month for the first five
years and increased to $8,750 per month for the remaining five years of the
initial ten-year lease term.
BURLINGTON, NJ BRANCH. The Bank moved into its current Burlington City
branch office, located at 353 High Street in Burlington City in February 2008.
The branch office includes approximately 1,800 square feet of rentable area and
is being leased pursuant to a Lease Agreement, dated October 10, 2007. The lease
is for an initial term of one hundred twenty (120) months commencing February
2008. The monthly rental rate is initially set at $3,800 per month, and
increases incrementally over the one hundred twenty (120) month lease term to a
maximum of $4,218 per month. At the end of the initial term, the Bank may extend
the lease for up to an additional three terms of one hundred twenty (120) months
each, at rental rates ranging from $4,682 to $7,889 per month.
CHERRY HILL, NJ BRANCH. In February 2006, the Bank opened a new branch
office located at 1405 Route 70 East, Cherry Hill, New Jersey in a stand-alone
office facility of approximately 3,000 square feet plus two adjoining
drive-through lanes. The branch includes teller windows, a lobby area,
drive-through windows, an automated teller machine, a night depository and a
safe deposit vault. The Bank owns this location.
VOORHEES, NJ BRANCH. In October 2006, the Bank opened a new branch office
located at 133 Route 73, Voorhees, New Jersey in a stand-alone office facility
of approximately 3,000 square feet plus two adjoining drive-through lanes. The
branch includes teller windows, a lobby area, drive-through windows, an
automated teller machine and a night depository. The Bank owns this location.
MOORESTOWN, NJ MAIN STREET BRANCH. In November 2006, the Bank opened a new
branch office located at 253 West Main Street, in Moorestown New Jersey The new
branch located is a stand-alone- facility of approximately 3,500 square feet
that includes teller windows, a lobby area, drive-through windows, an automated
teller machine and a night depository. The Bank owns this location.
MOUNT LAUREL, NJ BRANCH. In April 2009, the Bank opened a mini branch in
its headquarters located at 6000 Midlantic Drive in Mount Laurel New Jersey. The
branch is approximately 284 square feet that includes a teller platform and an
automated teller machine. The Company pays rent at $190 per month and also
incurs office operating expenses of $277 per month.
MARLTON, NJ BRANCH. In November 2010, the Bank opened a branch located at
105 Merchants Way, Marlton, NJ. The branch is approximately 1,500 square feet
that includes a teller platform and an automated teller machine. The Company
will pay rent at $2 thousand per month beginning in September, 2011 for the next
five years.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. Management does not believe the
resolution of this litigation, if any, would have a material adverse effect on
the Company's financial condition or results of operations. However, the
ultimate outcome of any such matter, as with litigation generally, is inherently
uncertain and it is possible that some of these matters may be resolved
adversely to the Company.
ITEM 4.
N.A
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is quoted on the OTC Bulletin Board under the
symbol "CFIC". There are currently six market makers for the Company's stock
including: Boenning & Scattergood, Inc.; Hudson Securities, Inc.; Janney
Montgomery LLC ; Pershing, LLC; RBC Capital Markets Corporation; and Stifel,
Nicholas & Company, Incorporated.
18
The following sets forth the high and low bid prices of the common
stock on the OTC Bulletin Board for each of the quarters outlined below:
2010 2009
-----------------------------------------
High Low High Low
------- ------ ------ ------
First Quarter $ 5.75 $ 4.00 $ 7.00 $ 4.00
Second Quarter $ 7.00 $ 4.10 $ 5.00 $ 3.10
Third Quarter $ 5.70 $ 5.50 $ 6.00 $ 5.00
Fourth Quarter $ 6.50 $ 5.25 $ 5.00 $ 3.75
The quotations reflect inter-dealer bids, without retail mark-up, mark-down
or commission, and may not represent actual transactions. As of March 3, 2011
there were approximately 419 shareholders of record of the Company's common
stock, according to information provided by the Company's transfer agent. The
Company has not paid cash dividends in the past two years.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SUMMARY
On July 17, 2008, the Board of Directors of the Bank approved a Plan of
Acquisition ("Plan"), which provided for the establishment of a bank holding
company to serve as the parent of the Bank. The Plan provided for the transfer
and contribution of all of the Bank's common stock held by shareholders to the
Company in a one-for-one exchange for the common stock of the Company.
The Plan was adopted by a two-thirds majority of the Bank's shareholders on
October 28, 2008. The holding company reorganization was consummated as of the
close of business on January 30, 2009. As such, the Company did not have any
operations in 2008 other than obtaining approval for the Holding Company.
Therefore, the financial statements and all other operating information
contained in this annual report on Form 10-K for the year ending December 31,
2008 are of the Bank on a stand alone basis.
We engage in the business of commercial banking, primarily within a
geographic market area centered around our Corporate Headquarters located at
6000 Midlantic Drive, Suite 120S, Mount Laurel, New Jersey and its branch
locations at 170 Himmelein Road, Medford, New Jersey, 353 High Street,
Burlington City, New Jersey, 1405 Route 70 East, Cherry Hill, New Jersey, 133
Route 73, Voorhees, New Jersey, 253 West Main Street, Moorestown, New Jersey
6000 Midlantic Drive, Suite 90, Mount Laurel, New Jersey and 105 Merchants Way,
Marlton, New Jersey. We operate as an independent community bank offering a
broad range of deposit and loan products and services to the general public, and
in particular, to small businesses, local professionals and individuals residing
and working in our market area.
We have adopted a strategy of continued growth. At December 31, 2010 we had
total assets of $354.0 million, total deposits of $302.3 million and total
loans, net of $239.0 million compared to total assets of $306.1 million, total
deposits of $249.5 million and total loans, net of $235.0 million at December
31, 2009. Our growth reflects our commitment to provide outstanding customer
service and a broad array of banking products driven by our customer's needs. We
believe our strategy provides us with a competitive advantage over other
financial institutions by developing lasting customer relationships that will
enable us to continue to attract core deposits and loans within our market area.
19
Our operations are substantially dependent on net interest income, which is
the difference between the interest income received from interest-earning
assets, such as loans and investment securities, and the interest expense
incurred on interest-bearing liabilities, such as interest on deposit accounts
and borrowed money. Net interest income is affected by changes in both interest
rates and the amounts and types of interest-earning assets and interest-bearing
liabilities outstanding. We also generate non-interest income, such as service
charges on deposit accounts, fees from residential mortgage loans sold and other
miscellaneous income. Our non-interest expense primarily consists of employee
compensation and benefits, net occupancy, data processing and professional
services, marketing and other operating costs. In addition, we are subject to
losses from our loan and investment portfolios if borrowers fail to meet their
obligations or if the value of the securities is permanently impaired. The
results of our operations are also significantly affected by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by management
to be its best estimate of known and inherent losses in the portfolio.
Management considers a variety of factors when establishing the allowance, such
as the impact of current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of independent loan review and
related risk classifications. Our historic loss rates and the loss rates of peer
financial institutions are also considered. In addition, certain individual
loans which management has identified as problematic are specifically provided
for, based upon an evaluation of the borrower's perceived ability to pay, the
estimated adequacy of the underlying collateral and other relevant factors.
Consideration is also given to the findings of examinations performed by
regulatory agencies. Although provisions have been established and segmented by
type of loan, based upon management's assessment of their differing inherent
loss characteristics, the entire allowance for losses on loans is available to
absorb further loan losses in any category.
Management uses significant estimates to determine the allowance for loan
losses. Since the allowance for loan losses is dependent, to a great extent, on
conditions that may be beyond our control, it is possible that management's
estimate of the allowance for loan losses and actual results could differ
materially in the near term.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They may
require additions to the allowance based upon their judgments about information
available to them at the time of examination.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established
against deferred tax assets when, in the judgment of management, it is more
likely than not that such deferred tax assets will not become available. Because
the judgment about the level of future taxable income is dependent to a great
extent on matters that may, at least in part, be beyond our control, it is at
least reasonably possible that management's judgment about the need for a
valuation allowance for deferred taxes could change in the near term.
The following discussion focuses on the major components of the Company's
operations and presents an overview of the significant changes in the results of
operations and financial condition. This section should be read in conjunction
with the Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements.
OPERATING RESULTS
The Company recorded net income available to common shareholders of $1.9
million or $0.99 per diluted share for the year ended December 31, 2010, as
compared to a net loss of $565 thousand or $0.33 per share for the year ended
December 31, 2009. The change in our results of operations in 2010 reflects an
increase of $2.8 million in net interest income primarily related to increased
average interest earning asset balances coupled with an increase of $475
thousand in non-interest income and a reduction of $1.8 million in provision for
loan losses. These increases were partially offset by higher income tax expense
of $1.7 million, due to higher pretax income and a $830 thousand increase in
non-interest expenses. The increase in non-interest expense was primarily
related to an increase of $674 thousand in salary and employee benefit costs
along with a $288 increase in professional services. These increases were
partially offset by a decrease in net occupancy costs of $99 thousand, a
decrease of $44 thousand in FDIC premiums and a decrease in other real estate
owned expense of $95 thousand. Net income available to common shareholders for
the fourth quarter of 2010 decreased by $50 thousand over the prior year's
fourth quarter, to $410 thousand, or $0.23 per diluted share, as compared to net
income of $460 thousand, or $0.26 per share, for the same period in 2009. Net
income for the quarter before preferred stock dividends totaled $444 thousand,
versus a net income of $460 thousand for the fourth quarter 2009.
20
NET INTEREST INCOME/MARGINS
Net interest income is the difference between interest earned on loans and
investments and interest incurred on deposits and borrowed funds. Net interest
income is affected by changes in both interest rates and the amounts of
interest-earning assets and interest-bearing liabilities outstanding. Net
interest income is our principal source of income. Net interest income for the
year ended December 31, 2010 was $11.7 million compared to $8.9 million for the
year ended December 31, 2009. The increase in net interest income for the year
2010 is directly related to a $50.4 million or 18.9% increase in average
interest-earning assets as compared to 2009 and a reduction in interest expense,
as a reduced cost of funds offset growth in total deposits. The increase in
average interest-earning assets during 2010 as compared to 2009 was attributable
to $15.7 million or 7.0% growth in average loans, coupled with an increase of
$34.7 million or 78.7% in average investment securities. As a result of these
increases in interest earning assets, our total interest income increased by
$1.4 million or 9.5% to $16.3 million for 2010 from $14.8 million for 2009.
Average interest bearing deposits increased in 2010 by $45.6 million and average
borrowed funds decreased by $3.8 million over 2009 levels, reducing total
interest expense by $1.3 million or 22.1% to $4.6 million for 2010 from $5.9
million for 2009. The yield on average interest-earning assets decreased by 44
basis points to 5.12 for 2010, compared to 5.56% for 2009, and the cost of
interest-bearing liabilities decreased by 82 basis points to 1.63% in 2010,
compared to 2.45% in 2009, and was directly responsible for the 31 basis point
increase to the Bank's net interest margin between 2010 and 2009. The net
interest margin for 2010 was 3.67% compared to 3.36% for 2009. The net interest
margin for the three month period ended December 31, 2010 was 3.73% compared to
3.92% for the three month period ended December 31, 2009, 3.48% for the three
month period ended September 30, 2010, 3.79% for the three month period ended
June 30, 2010, and 3.93% for the three month period ended March 31, 2010.
The following table indicates the average volume of interest-earning assets
and interest-bearing liabilities and average yields and rates for the years
ended December 31, 2010, 2009 and 2008.
2010 2009 2008
----------------------------- --------------------------- -----------------------------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
ASSETS BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------- ---- -------- ------- ---- -------- ------- ----
Loans:
Commercial $ 92,114 $ 4,797 5.21% $ 77,925 $ 4,167 5.35% $ 44,536 $ 2,699 6.06%
Commercial mortgage 120,506 7,496 6.22 114,649 7,131 6.22 93,215 6,074 6.52
Mortgage 16,848 965 5.73 20,024 1,082 5.40 20,795 1,293 6.22
Consumer 9,009 397 4.41 10,193 462 4.53 10,145 523 5.16
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total loans 238,477 13,655 5.73 222,791 12,842 5.76 168,691 10,589 6.28
Investments:
Federal funds sold 19,068 27 .15 2,479 7 .27 4,874 108 2.22
Securities available for sale 11,451 417 3.64 - - 0.00 2,329 113 4.86
Securities held to maturity 48,259 2,212 4.43 41,610 1,991 4.79 31,540 1,670 5.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total investments 78,778 2,656 3.28 44,089 1,998 4.53 38,743 1,891 4.88
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 317,255 16,311 5.12% 266,880 14,840 5.56% 207,434 12,480 6.02%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Allowance for loan losses (3,560) (2,408) (1,208)
Cash and due from banks 5,829 5,038 4,883
Fixed assets (net) 7,812 8,101 8,007
REO 87 209 369
Other assets 10,481 8,842 7,564
-------- -------- -------
Total Assets $ 337,904 $286,662 $227,049
========= ======== ========
Liabilities and Shareholders' Equity
Deposits:
Interest-bearing demand $ 18,167 $ 99 .55% $ 18,001 $ 132 .73% $ 18,245 $ 211 1.16
Money market deposits 108,095 1,340 1.24 77,317 1,281 1.66 59,754 1,481 2.48
Statement savings 3,222 20 .62 3,306 27 .83 4,248 57 1.35
Certificates of deposit 122,435 2,420 1.98 107,731 3,259 3.02 71,391 2,757 3.86
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing deposits 251,918 3,879 1.54 206,355 4,699 2.28 153,638 4,506 2.93
Borrowed funds 29,831 699 2.35 33,618 1,174 3.49 32,625 1,083 3.32
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 281,749 4,578 1.63 239,973 5,873 2.45 186,263 5,589 3.00
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing deposits 32,046 26,315 24,742
Other liabilities 1,351 1,129 603
Shareholders' equity 22,758 19,245 15,441
-------- -------- -------
Total Liabilities and
Shareholders' Equity $337,904 $286,662 $227,049
======== ======== ========
Net interest income 11,733 8,967 6,891
======= ====== ======
Interest rate spread (1) 3.49% 3.11% 3.02%
====== ====== ======
Net interest margin (2) 3.67% 3.36% 3.32%
====== ====== ======
Ratio of average interest-earning assets to
interest-bearing liabilities 112.60% 111.21% 111.37%
====== ====== ======
Return on average assets 0.58% -0.14% -0.03%
====== ====== ======
Return on average equity 8.72% -2.15% -0.44%
====== ====== ======
(1) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
21
The level of net interest income is determined primarily by the average
balances ("volume") and the rate spreads between interest-earning assets and our
funding sources. Our ability to maximize net interest income depends on the
volume of interest-earning assets and interest-bearing liabilities, and
increases or decreases in the average rates earned and paid on such assets and
liabilities.
The following table presents the dollar amount of changes in interest
income and interest expense for interest earning assets and interest-bearing
liabilities for the year ended December 31, 2010 as compared to the year ended
December 31, 2009. The table distinguishes between changes attributable to
volume (changes in volume multiplied by the prior period's rate) and changes
attributable to rate (changes in rate multiplied by the prior period's volume).
Change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated to volume.
As shown below, the increase in net interest income was due to volume
increases in earning assets, which were funded by deposit growth.
TOTAL INCREASE
(DOLLARS IN THOUSANDS) VOLUME RATE (DECREASE)
------- ------- -------
Interest income:
Commercial $ 739 $ (108) $ 631
Commercial Mortgage 364 2 366
Mortgage (182) 65 (117)
Consumer (52) (13) (65)
Federal funds sold 24 (3) 21
Investment securities available for sale 417 - 417
Investment securities held to maturity 294 (149) 145
------- ------- -------
Total interest-earning assets 1,604 (206) 1,398
Interest expense:
Interest-bearing demand 1 (34) (33)
Money market 382 (323) 59
Statement savings (1) (6) (7)
Certificates of deposit 291 (1,130) (839)
Borrowings (89) (385) (474)
------- ------- -------
Total interest-bearing liabilities 584 (1,878) (1,294)
------- ------- -------
Net change in net interest income $ 1,020 $ 1,672 $ 2,692
------- ------- -------
22
PROVISION FOR LOAN LOSSES
We recorded a provision for loan losses for year ended December 31, 2010 of
$776 thousand compared to a provision of $2.5 million for the same period in
2009. A provision for loan losses is charged to operations based on management's
evaluation of the estimated and inherent losses in our loan portfolio. While
management has increased its allowance for loan loss for the year ended December
31, 2010, management believes the credit quality of our loan portfolio has
stabilized. We have not engaged in any sub prime lending activities that have
plagued the banking industry. At December 31, 2010, our allowance for loan
losses represented 1.58% of total loans outstanding and 38.8% of non-performing
loans.
NON-INTEREST INCOME
Non-interest income, which is comprised principally of service charges on
deposit accounts, gain on sale of loans, ATM fees, origination fees from
residential mortgage loans sold, bank owned life insurance income and other
miscellaneous fee income, was $1.1 million for the year ended December 31, 2010
compared to $611 thousand for the year ended December 31, 2009. The increase in
non-interest income during 2010 is the result of increases of $508 thousand on
gain on sale of SBA loans and $31 thousand in miscellaneous fee income, offset
by decreases of $9 thousand in bank owned life insurance income, $18 thousand in
service charges on deposit accounts, $30 thousand in origination fees on
residential mortgage loans sold and $7 thousand in gain on real estate owned.
NON-INTEREST EXPENSE
Non-interest expense, which is comprised principally of salaries and
employee benefits, net occupancy, FDIC insurance premium expense, advertising
costs, data processing, professional services and other operating costs,
increased by $830 thousand to $8.9 million for the year ended December 31, 2010
as compared to $8.1 million for the year ended December 31, 2009. The increase
in non-interest expense was primarily related to an increase of $674 thousand in
salary and employee benefit costs along with $288 in professional services.
These increases were partially offset by a decrease in net occupancy costs of
$99 thousand, a decrease of $44 thousand in FDIC premiums and a decrease in
other real estate owned expense of $95 thousand. The increase in salary and
benefit costs was related to adding necessary key administrative and branch
personnel to staff throughout 2010 to sustain continued growth, coupled with the
effect of operating expenses related to the Mount Laurel Branch office which
opened in April 2009 and the Marlton Office which opened in November 2010. The
increase in professional services represents a charge of $203 thousand in audit,
legal, and investment banking fees associated with a proposed capital
transaction terminated by the Company. This charge represented $0.07 per diluted
share.
INCOME TAXES
The Company recorded an income tax expense of $1.2 million for the year
ended December 31, 2010, compared to an income tax benefit of $461 thousand for
the year ended December 31, 2009. The change in income tax expense in 2010 is
primarily the result of higher pretax income. The effective tax rate for the
year ending December 31, 2010 was 38.9 % compared to 44.9% at December 31, 2009.
FINANCIAL CONDITION
Total assets at December 31, 2010 were $354.0 million, an increase of $47.9
million or 15.6% over total assets at December 31, 2009. This change was due to
increases in cash and cash equivalents of $4.3 million, loans receivable, net of
allowance for loan losses, of $4.0 million; investments available for sale of
$44.6 million, bank owned life insurance of $164 thousand, deferred taxes of
$1.4 million, other real estate owned of $830 thousand and accrued interest
receivable of $668 thousand. These increases were partially offset by decreases
in investments held to maturity of $7.6 million, premises and equipment of $65
thousand, Federal Home Loan Bank of New York ("FHLB") stock of $137 thousand and
other assets of $371 thousand.
Total shareholders' equity at December 31, 2010 totaled $17.7 million, a
decrease of $65 thousand or .04% over December 31, 2009. The decline in
shareholders equity is due to the recognition of accumulated other comprehensive
loss of $1.9 million related to the fair value adjustment on investment
securities available for sale, partially offset by net income of $1.8 million
available to common shareholders.
23
LOAN PORTFOLIO
We offer business and personal loans generally on a secured basis,
including: commercial loans (term and time); commercial lines of credit;
commercial mortgage loans; commercial and residential construction loans;
letters of credit; and consumer loans (home equity and installment). We make
commercial loans to small and medium-sized businesses primarily in our market
area for purposes of providing working capital, supporting accounts receivable,
purchasing inventory and acquiring fixed assets.
Loans receivable at December 31, 2010 reached $242.9 million, an increase
of $4.4 million or 1.9% from December 31, 2009. This increase was attributable
to increases in commercial loans of $3.7 million, commercial real estate loans
of $6.5 million and construction loans of $1.1 million, partially offset by
decreases in loans to consumers of $2.4 million and residential real estate
loans of $4.4 million. The increases in loans receivable are primarily related
to the competitive pricing of loan products along with the continued development
of relationships with local small businesses, which management believes are
attracted to the Company by the high level of individualized service provided
through our growing team of lenders.
The following table sets forth-selected data relating to the composition of
the loan portfolio, net of deferred loan fees, at the dates indicated.
(DOLLARS IN THOUSANDS) 2010 2009 2008 2007 2006
------------------ ---------------- ---------------- --------------- -----------------
TYPE OF LOANS: AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------------- -------- ------- -------- ------- ------- ------ ------- ------- -------- -------
Commercial $95,350 39.3% $91,679 38.5% $60,669 31.3% $31,417 21.5% $27,581 23.5%
Real Estate, Commercial 112,106 46.1% 105,605 44.3% 91,036 46.9% 73,863 50.6% 53,856 45.9%
Real Estate, Residential 14,766 6.0% 19,122 8.0% 19,326 10.0% 21,303 14.6% 15,068 12.8%
Construction 13,145 5.4% 12,093 5.1% 12,309 6.3% 10,864 7.4% 11,783 10.0%
Consumer 7,489 3.1% 9,925 4.1% 10,764 5.5% 8,594 5.9% 9,044 7.7%
-------- ------ -------- ----- -------- ------ -------- ----- -------- -----
Total $242,856 100.0% $238,424 100.0% $194,104 100.0% $146,041 100.0% $117,332 100.0%
======== ====== ======== ===== ======== ====== ======== ===== ======== =====
See Note 5 to Consolidated Notes to Financial Statements for additional
information regarding loans.
The following table sets forth the contractual maturity of the loan
portfolio, net of deferred loan fees, at December 31, 2010. The table does not
include prepayments or scheduled principal repayments.
ONE YEAR OR ONE - FIVE OVER FIVE
(DOLLARS IN THOUSANDS) LESS YEARS YEARS TOTAL
----------- ---------- --------- ---------
Commercial $ 21,845 $ 32,574 $ 40,931 $ 95,350
Real Estate Commercial 10,867 46,016 55,223 112,106
Real Estate Residential - 2,315 12,451 14,766
Construction 9,221 3,201 723 13,145
Consumer 78 1,052 6,359 7,489
-------- -------- --------- ---------
Total amount due $ 42,011 85,158 $ 115,687 $ 242,856
======== ======== ========= =========
The following table sets forth loan maturities by interest rate type at
December 31, 2010.
MATURITIES
MATURITIES LESS GREATER THAN 1
(DOLLARS IN THOUSANDS) THAN 1 YEAR YEAR TOTAL
-------- --------- ---------
Fixed Interest Rate Loans $ 12,201 $ 122,310 $ 134,511
Variable Rate Interest Loans 29,606 78,719 108,325
Overdrawn Accounts 20 - 20
-------- --------- ---------
$ 41,827 $ 201,029 $ 242,856
-------- --------- ---------
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans (loans on which the
accrual of interest has ceased), loans over ninety days delinquent and still
accruing interest, renegotiated loans, impaired loans and other real estate
owned. Loans are generally placed on non-accrual status if, in the opinion of
management, collection is doubtful, or when principal or interest is past due 90
days or more unless the collateral is considered sufficient to cover principal
and interest and the loan is in the process of collection. The Company recorded
interest income on impaired loans during the year ended December 31, 2010
totaling $36 thousand as compared to $32 thousand for December 31, 2009.
24
Impaired loans are measured based on the present value of expected future
discounted cash flows, the fair value of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. At December 31, 2010 the Company had twelve relationships totaling $9.8
million in non-accrual loans as compared to eight relationships totaling $8.1
million at December 31, 2009. At December 31, 2010, the Company had sixteen
impaired loan relationships totaling $10.7 million (included within the
non-accrual loans discussed above) in which $3.5 million in impaired loans had a
related allowance for credit losses of $2.1 million and $7.3 million in impaired
loans in which there is no related allowance for credit losses. The average
balance of impaired loans totaled $12.3 million for 2010 as compared to $8.2
million for 2009, and interest income recorded on impaired loans during the year
ended December 31, 2010 totaled $36 thousand as compared to $32 thousand for
December 31, 2009.
The balance in commercial loans 90-days past due and still accruing
remained unchanged as of December 31, 2010 from the reported levels at December
31, 2009. During the period ended December 31, 2010, the balance in commercial
real estate loans 90-days past due and still accruing decreased by $1.8 million
and represented two loan relationships totaling $1.8 million which moved into
the non-accrual loan category. Lastly, the increase in residential real estate
loans 90 days past due and still accruing reflects one loan relationship
totaling $244 thousand.
During the year ended December 31, 2010 the Company experienced a $1.7
million net increase in non-accrual loans. This change reflects the downgrading
of nine loan relationships to non-accrual status totaling $5.2 million partially
offset by the charge off of three relationships totaling $382 thousand and the
reduction of two residential real estate loans in the aggregate amount of $3.1
million. The reduction of the two residential real estate loans was related to
the repayment of one residential real estate loan in the amount of $1.9 million.
Included in the balance of the loans past due 90 days or more is a
principal balance of $634 thousand dollars representing our participation
interest in two loans originated by another New Jersey based institution.
Although the borrowers have ceased making payments on these loans, we have
received a legal opinion from our legal counsel that we have valid claims
against the lead/originating bank for violations of the participation
agreements, and we have filed suit asserting these claims. In the event the lead
bank is unable to collect from the borrowers, we believe, based on said legal
opinion that our ability to collect on these loans will depend upon the outcome
of our legal action against the lead/originating bank.
Real estate acquired by foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until it is sold. At December 31, 2010, we had
$830 thousand in real estate owned compared to no real estate owned at December
31, 2009. The change reflects the two properties taken into real estate owned
during the fourth quarter of 2010.
The following table provides information regarding risk elements in the
loan portfolio as of December 31, 2006 through 2010.
(IN THOUSANDS) DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2010 2009 2008 2007 2006
----------- ----------- ------------ ------------ -----------
Loans past due 90 days or more
and accruing
Commercial $ 634 $ 634 $ - $ 357 $ 718
Commercial Real Estate - 1,765 2,375 7 -
Construction - - - 607 -
Residential Real Estate 244 - - - -
-------- -------- ------ ------- -----
Total loans past due 90 days
or more and accruing 878 2,399 2,375 971 718
-------- -------- ------ ------- -----
Non-accrual loans:
Commercial 1,296 1,401 - - -
Commercial Real Estate 8,213 3,722 - - -
Consumer 289 - - - -
Residential Real Estate - 3,020 - - -
-------- -------- ------ ------- -----
Total non-accrual loans 9,798 8,143 - - -
Impaired loans 51 - - - -
-------- -------- ------ ------- -----
Total non-performing loans 9,849 8,143 - - -
Real estate owned 830 - 281 466 -
-------- -------- ------ ------- -----
Total non-performing assets $ 11,557 $ 10,542 2,656 $ 1,437 $ 718
======== ======== ====== ======= =====
Non-performing loans as a percentage
of loans 4.06% 3.42% 0.14% 0.32% 0.00%
======== ======== ====== ======= =====
Non-performing assets as a percentage
of loans and real estate owned 4.76% 4.42% 0.14% 0.32% 0.00%
======== ======== ====== ======= =====
Non-performing assets as a percentage
of total assets 3.14% 3.44% 0.22% 0.22% 0.00%
======== ======== ====== ======= =====
25
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by management
to be its best estimate of known and inherent losses in the portfolio.
Management considers a variety of factors when establishing the allowance, such
as the impact of current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of independent loan review and
related classifications. Our historic loss rates and the loss rates of peer
financial institutions are also considered. Management further refines its loan
loss assumptions by re-evaluating the average lives of the various components of
its loan portfolio and adjusts them to reflect the current average life cycle
attributes that we have been experiencing. In addition, certain individual loans
which management has identified as problematic are specifically provided for,
based upon an evaluation of the borrower's perceived ability to pay, the
estimated adequacy of the underlying collateral and other relevant factors.
Consideration is also given to the findings of examinations performed by
regulatory agencies.
The following table sets forth information with respect to the allowance
for losses on loans:
(DOLLARS IN THOUSANDS) DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2010 2009 2008 2007 2006
----------- ----------- ------------ ------------ ------------
Balance at beginning of year $ 3,432 $ 1,133 $ 1,050 $ 1,050 $ 948
Provision:
Commercial 286 1,476 125 - -
Commercial Real Estate 477 715 85 - -
Residential Mortgage (30) - - - -
Consumer 43 321 (9) - -
Unallocated - 18 20 - -
-------- -------- -------- -------- --------
Total Provision 776 2,530 221 - -
Charge-offs:
Commercial 382 231 138 - -
Consumer - - - - -
-------- -------- -------- -------- --------
Total Charge-offs 382 231 138 - -
-------- -------- -------- -------- --------
Recoveries:
Commercial - - - - 100
Consumer - - - - 2
-------- -------- -------- -------- --------
Total Recoveries - - - - 102
-------- -------- -------- -------- --------
Net charge-offs 382 231 138 - 102
======== ======== ======== ======== ========
Balance at end of period $3,826 $3,432 $1,133 $1,050 $1,050
======== ======== ======== ======== ========
Period-end loans outstanding $242,856 $238,424 $194,104 $146,041 $117,332
======== ======== ======== ======== ========
Average loans outstanding $238,477 $222,791 $168,691 $133,625 $104,650
======== ======== ======== ======== ========
Allowance as a percentage of
period-end loans 1.58% 1.44% 0.58% 0.72% 0.89%
Net charge-offs as a percentage
of average loans 0.16% 0.10% 0.08% NA 0.01%
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
The following table sets forth the allocation of the allowance for loan
losses by loan category at the dates indicated. Although loss provisions have
been established and segmented by type of loan, based upon management's
assessment of their differing inherent loss characteristics, the entire
allowance for losses on loans is available to absorb further loan losses in any
category:
AT DECEMBER 31,
-----------------------------------------------------------
2010 2009
-------------------------- ----------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
(DOLLARS IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ------------- ------- -------------
Commercial $ 1,743 39.3% $ 1,839 38.5%
Real Estate Commercial 1,527 46.2 1,050 44.3
Real Estate Residential 417 6.1 447 8.0
Construction - 5.4 0 5.1
Consumer 139 3.1 96 4.1
------- ------ ------- ------
Total $ 3,826 100.0% $ 3,432 100.0%
======= ====== ======= ======
26
AT DECEMBER 31,
--------------------------------------------------------------
2008 2007
--------------------------- ----------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
(DOLLARS IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- ------- -------------
Commercial $ 492 31.3% $ 460 21.5%
Real Estate Commercial 336 46.9 251 50.6
Real Estate Residential 126 10.0 173 14.6
Construction 101 6.3 113 7.4
Consumer 78 5.5 53 5.9
------- ------ ------- ------
Total $ 1,133 100.0% $ 1,050 100.0%
======= ====== ======= ======
AT DECEMBER 31,
----------------------------
2006
----------------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
(DOLLARS IN THOUSANDS) AMOUNT TOTAL LOANS
------- --------------
Commercial $ 441 23.5%
Real Estate Commercial 294 45.9
Real Estate Residential 90 12.8
Construction 177 10.1
Consumer 48 7.7
------- ------
Total $ 1,050 100.0%
======= ======
INVESTMENT SECURITIES
The investment portfolio predominantly consists of securities issued or
guaranteed by the U.S. Government and its agencies. Management classifies
investment securities at the time of purchase by one of three categories:
trading, held to maturity and available for sale. To date, management has not
purchased any securities for trading purposes. Management classifies securities
as held to maturity or available for sale.
Investment securities held to maturity totaled $40.4 million at December
31, 2010, a decrease of $7.6 million or 15.9% from December 31, 2009. The
estimated fair value of the held to maturity investment portfolio was $39.5
million at December 31, 2010 and $47.3 million at December 31, 2009.
Investment securities available for sale totaled $44.6 million at December
31, 2010, an increase of $44.6 million or 100.0% from December 31, 2009. The
estimated amortized cost of the available for sale investment portfolio was
$47.9 million at December 31, 2010. At December 31, 2009 there were no
investments classified as available for sale.
During 2010, held to maturity investment purchases totaled $44.1 million
and were concentrated in U.S. Government agency securities and GNMA mortgage
backed securities. We also purchased available for sale securities totaling
$47.9 million during 2010 concentrated in U.S Government agency securities and
U.S Treasury Bonds. During this same period, we received $52.1 million in
investment repayments in U.S. Government agency and mortgage backed securities.
The following table sets forth the carrying value of the investment
portfolio at the dates indicated:
(DOLLARS IN THOUSANDS) 2010 2009 2008
-------- -------- --------
INVESTMENT SECURITIES HELD TO MATURITY
Government agency obligations $ 32,706 $ 39,019 $ 26,653
Mortgage backed securities 7,729 9,040 1,745
-------- -------- --------
Total investment securities held to maturity $ 40,435 $ 48,059 $ 28,398
======== ======== ========
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Government agency obligations $ 35,560 $ - $ -
US Treasury Securities 9,075
-------- -------- --------
Total investment securities available for sale $ 44,635 $ - $ -
======== ======== ========
27
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth information regarding the carrying values,
estimated fair values, and weighted average yields for the investment securities
portfolio at December 31, 2010 by contractual maturity.
The following table does not take into consideration the effects of
unscheduled repayments or the effects of possible prepayments on securities with
call provisions.
UNDER 1 - 5 5 - 10 OVER 10
(DOLLARS IN THOUSANDS) 1 YEAR YEARS YEARS YEARS TOTAL
------- ----- ------ -------- --------
INVESTMENT SECURITIES HELD TO MATURITY
U.S. government agency obligations:
Carrying value $ - $ - $ 1,942 $ 30,764 $ 32,706
Weighted average yield -% -% 4.28% 4.05% 4.07%
Mortgage backed securities:
Carrying value - - - 7,729 7,729
Weighted average yield - - - 4.51% 4.51%
----- ----- ------- -------- --------
Total carrying value $ - $ - $ 1,942 $ 38,493 $ 40,435
===== ===== ======= ======== ========
Total fair value $ - $ - $ 1,999 $ 37,521 $ 39,520
===== ===== ======= ======== ========
Weighted average yield -% -% 4.28% 4.15% 4.15%
===== ===== ======= ======== ========
UNDER 1 - 5 5 - 10 OVER 10
(DOLLARS IN THOUSANDS) 1 YEAR YEARS YEARS YEARS TOTAL
------- ----- ------ -------- --------
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. government agency obligations:
Carrying value $ - $ - $ - $ 35,560 $ 35,560
Weighted average yield -% -% -% 3.79% 3.79%
US Treasury securities:
Carrying value - - - 9,075 9,075
Weighted average yield - - - 3.88% 3.88%
----- ----- ------- -------- --------
Total carrying value $ - $ - $ - $ 44,635 $ 44,635
===== ===== ======= ======== ========
Total fair value $ - $ - $ - $ 44,635 $ 44,635
===== ===== ======= ======== ========
Weighted average yield -% -% -% 3.81% 3.81%
===== ===== ======= ======== ========
SOURCES OF FUNDS
GENERAL
Deposits are the primary source of funds for our lending and investment
activities as well as for general business purposes. In addition to deposits, we
derive funds from: the amortization, prepayment or sale of loans; maturities and
repayments of investment securities; and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rate market conditions.
28
DEPOSITS
We offer a broad range of deposit instruments, including personal and
business checking accounts, individual retirement accounts, business and
personal money market accounts, statement savings and term certificate accounts
at competitive interest rates. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors. Management regularly evaluates the
internal cost of funds, surveys rates offered by competing institutions, reviews
cash flow requirements for lending and liquidity and executes rate changes when
deemed appropriate. We do not obtain funds through brokers, nor do we solicit
funds outside the State of New Jersey.
Total deposits at December 31, 2010 were $302.3 million, an increase of
$52.8 million or 21.2% from December 31, 2009. This increase in deposits was
primarily in interest bearing core deposits (an increase of $49.1 million),
certificates of deposit (an increase of $636 thousand) and non-interest bearing
deposits (an increase of $3.0 million). The change in deposits was primarily
related to the competitive pricing of deposit products coupled with the
continued development of relationships with local small businesses along with
the high level of individualized service provided by our team of retail branch
managers, which together fostered growth in deposits.
The following table sets forth the distribution of the average balance of
deposit accounts for the years ended December 31, 2010, 2009 and 2008 and the
weighted average cost for each category of deposit.
2010 2009 2008
------------------------------ ----------------------------- -----------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
--------- -------- -------- --------- -------- -------- ------- -------- --------
(dollars in thousands)
Checking $ 50,213 17.7% 0.20% $ 44,316 19.0% 0.29% $ 42,987 24.1% 0.48%
Money market deposit 108,095 38.1 1.24 77,317 33.2 1.66 59,754 33.5 2.48
Statement savings 3,222 1.1 0.62 3,306 1.4 0.83 4,248 2.4 1.35
Certificates of deposit 122,434 43.1 1.98 107,731 46.4 3.02 71,391 40.0 3.86
--------- ------ ----- ---------- ------ ----- --------- ------ -----
Total deposits $ 283,964 100.0% 1.36% $ 232,670 100.0% 2.01% $ 178,380 100.0% 2.52%
========= ====== ===== ========= ====== ===== ========= ====== =====
The following table indicates the amount of the certificates of deposit of
$100 thousand or more by time remaining until maturity as of December 31, 2010
and 2009.
2010 2009
(DOLLARS IN THOUSANDS) CERTIFICATES OF DEPOSIT CERTIFICATES OF DEPOSIT
----------------------- --- -----------------------
MATURITY PERIOD
---------------
Within three months $ 15,953 $ 8,138
Three through six months 6,166 10,456
Six through twelve months 18,860 10,335
Over twelve months 5,255 14,652
-------- --------
$ 46,234 $ 43,581
======== ========
See Note 7 to Notes to Consolidated Financial Statements for additional
information regarding deposits.
BORROWINGS
Although deposits are the primary source of funds for lending and
investment activities as well as for general business purposes, we also utilize
borrowings to supplement deposits when deposit funding is not adequate or when
borrowing costs are more favorable than comparable deposits.
At December 31, 2010, we had borrowings in the form of advances with the
FHLB in the amount of $25.0 million, a decrease of $4.9 million from December
31, 2009. The weighted average interest rate on borrowings from FHLB was 1.49%
at December 31, 2010 compared to 2.03% at December 31, 2009. Pursuant to
collateral agreements with the FHLB, advances are secured by a blanket lien on
our commercial and residential mortgage loan portfolios.
29
The following table sets forth the contractual maturity and the weighted
average interest rate of the borrowings at December 31, 2010:
UNDER
(DOLLARS IN THOUSANDS) 1 YEAR 1 - 5 YEARS 5 - 10 YEARS OVER 10 YEARS TOTAL
-------- ----------- ------------ ------------- --------
Advances from the FHLB $ 10,000 $ 15,000 $ - $ - $ 25,000
Weighted average interest rate 1.60% 1.43% -% -% 1.49%
On February 17, 2009, the Company entered into a non-revolving line of
credit loan agreement with Atlantic Central Bankers Bank in an amount up to $5.0
million. The term of the debt is for a three year period with a maturity date of
February 17, 2012. The interest rate adjusts at a variable rate equal to prime
plus 25 basis points with a floor of 4.25% . The Company has an outstanding
balance on the line of credit of $4.9 million and has contributed $4.4 million
as additional capital to the Bank.
On November 1, 2010, the Bank modified the terms of the hybrid capital
instrument originally issued on October 31, 2008, in the aggregate amount of
$3.0 million in the form of subordinated debt. This instrument qualifies as Tier
II capital. The new term of the debt is for a ten year period with a maturity
date of November 1, 2020. The interest rate is at a variable rate equal to the
prime rate plus 100 basis points for the entire ten year term. The debt security
is redeemable, at the Bank's option, at par on any January 31(st), April 30(th),
July 31(st), or October 31(st) that the debt security remains outstanding
however, the Bank shall not have the right to redeem the debt security prior to
April 30, 2011.
INTEREST RATE RISK
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on net interest income
while creating an asset/liability structure that maximizes earnings. The Asset
Liability Management Committee actively monitors and manages interest rate
exposure using gap analysis and interest rate simulation models.
Gap analysis measures the difference between volumes of rate-sensitive
assets and liabilities and quantifies these repricing differences for various
time intervals. Static gap analysis describes interest rate sensitivity at a
point in time. However, gap analysis alone does not accurately measure the
potential magnitude of changes in net interest income since changes in interest
rates do not affect assets and liabilities at the same rate, to the same extent,
or on the same basis. Furthermore, static gap analysis does not consider future
growth.
A positive gap (asset sensitive) indicates that more assets reprice during
a given period compared to liabilities, while a negative gap (liability
sensitive) indicates that more liabilities reprice during a given period
compared to assets.
Generally, during a period of falling interest rates, a positive gap would
tend to adversely affect net interest income, while a negative gap would tend to
result in an increase in net interest income. During a period of rising interest
rates, in general, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. However, certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets (e.g., adjustable rate mortgages) often
have provisions that may limit changes in interest rates each time the interest
rate changes and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals in the event of a change in interest
rates may differ significantly from those assumed in the calculations shown in
the table below. Finally, the ability of borrowers to service their debt may
decrease in the event of an interest rate increase. Consequently, any model used
to analyze interest rate sensitivity will be vulnerable to the assumptions made
with respect to the foregoing factors.
Management also uses a computer-based simulation model to assess the impact
of changes in interest rates on net interest income. The model incorporates
management's business plan assumptions and related asset and liability
yields/costs, deposit sensitivity and the size, composition and maturity or
repricing characteristics of our assets and liabilities. The assumptions are
based on what management believes at that time to be the most likely interest
rate environment. Actual results may differ from simulated results due to the
various factors described above.
30
Gap analysis and interest rate simulation models require assumptions about
certain categories of assets and deposits. For purposes of these analyses,
assets and liabilities are stated at their contractual maturity, estimated
likely call date, or earliest repricing opportunity. Interest-bearing demand
deposits, statement savings and money market accounts do not have a stated
maturity or repricing term and can be withdrawn or repriced at any time. This
may impact net interest income if more expensive alternative sources of deposits
are required to fund loan growth or deposit runoff. Management projects the
repricing characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities at December 31, 2010, which are expected to mature
or reprice in each of the time periods shown:
NON-RATE
SENSITIVE
ONE YEAR ONE-FIVE OVER ASSETS/
(DOLLARS IN THOUSANDS) OR LESS YEARS FIVE YEARS LIABILITIES TOTAL
--------- -------- ---------- ----------- --------
INTEREST-EARNING ASSETS:
------------------------
Short term investments $ 3,700 $ - $ - $ - $ 3,700
Investment securities held to maturity - 5,000 35,435 - 40,435
Investment available for sale - - 44,635 - 44,635
Loans receivable 114,769 77,471 50,617 - 242,857
--------- -------- -------- -------- --------
Total interest-earning assets 118,469 82,471 130,687 - 242,857
--------- -------- -------- -------- --------
NON-RATE SENSITIVE ASSETS:
Other Assets - - - 22,390 22,390
--------- -------- -------- -------- --------
Total assets $ 118,469 $ 82,471 $130,687 $ 22,390 $354,017
========= ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
-----------------------------
Interest-bearing demand $ 19,111 $ - $ - $ - $ 19,111
Statement savings 3,203 - - - 3,203
Money market 125,945 - - - 125,945
Certificates of deposit 98,470 15,027 - - 113,497
Subordinated Debt - 3,000 - - 3,000
Borrowings 10,000 19,877 - - 29,877
--------- -------- -------- -------- --------
Total interest-bearing liabilities 256,729 37,904 - - 294,633
--------- -------- -------- -------- --------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 40,514 40,514
Other liabilities - - - 1,122 1,122
Capital - - - 17,748 17,748
--------- -------- -------- -------- --------
Total liabilities and capital $ 256,729 $ 37,904 $ - $ 59,384 $354,017
========= ======== ======== ======== ========
Period GAP $(138,260) $ 44,567 $130,687 $(36,994)
Cumulative interest-earning assets $ 118,469 $200,940 $331,627
Cumulative interest-bearing liabilities $ 256,729 $294,633 $294,633
Cumulative GAP $(138,260) $(93,693) $ 36,994
Cumulative RSA/RSL (1) 46.15% 68.20% 112.56%
(1) Cumulative interest-earning assets divided by cumulative
interest-bearing liabilities.
Based upon the above gap analysis and other modeling techniques utilized by
management, our interest rate risk profile is within Board approved tolerance
limits.
LIQUIDITY
Liquidity represents the ability to meet normal cash flow requirements for
the funding of loans, repayment of deposits and payment of operating costs. Our
primary sources of liquidity include deposits, amortization and prepayment of
loans, maturities and repayments of investment securities, and our borrowing
capability. Management monitors liquidity daily, and on a monthly basis
incorporates liquidity analysis into its asset/liability management program.
31
In addition to using growth in deposits, loan repayments and the investment
portfolio as a source of liquidity, we have access to unsecured, overnight lines
of credit in the aggregate total of $58.7 million, consisting of $3.0 million,
on an uncommitted basis through Atlantic Central Bankers Bank and $55.7 million
through the FHLB of New York. The arrangement with Atlantic Central Bankers Bank
is for the sale of federal funds subject to the availability of such funds.
Pursuant to a collateral agreement with the FHLB, advances under this line of
credit are secured by a blanket lien on the residential mortgage loan portfolio.
At December 31, 2010 and 2009, there were no balances outstanding against those
lines of credit. In addition, the Bank's membership in the FHLB provides the
Bank with additional secured borrowing capacity of up to a maximum of 25% of the
Bank's total assets, subject to certain conditions.
We had cash and cash equivalents of $9.0 million at December 31, 2010 and
$4.7 million at December 31, 2009 in the form of cash, due from banks and
federal funds sold. At December 31, 2010, unused lines of credit available to
customers and committed, undisbursed loan proceeds including letters of credit
totaled $58.1 million. Certificates of deposit scheduled to mature in one year
or less totaled $98.5 million at December 31, 2010. Based on our experience,
management believes that a substantial amount of these certificates of deposit
will remain with the Bank upon maturity. Management anticipates that it will
continue to have sufficient funds available to meet the needs of its customers
for deposit repayments and loan fundings.
Our ability to generate deposits depends on the success of our branches and
the continued expansion of our branch network. Our success is dependent on a
number of factors, including our ability to establish branches in favorable
locations, recruit and hire experienced managers and staff to meet the needs of
its customers through personalized services and a broad array of financial
products, and the general economic conditions of the market area in which
branches are located. Unexpected changes in the national and local economy may
also adversely affect the branches' ability to attract or retain deposits and
foster new loan relationships. In addition, because we will incur startup and
operating costs associated with expansion, the opening of new branches is
expected to adversely affect future profitability in the short term.
CAPITAL RESOURCES
The maintenance of appropriate levels of capital in excess of regulatory
minimums is an important objective of the asset and liability management
process. The Bank met the definition of a "well-capitalized" institution at
December 31, 2010 and as December 31, 2009. See Note 18 of "Notes to Financial
Statements" (regulatory matters) for additional information regarding the Bank's
regulatory capital requirements.
The Bank's capital ratios at December 31, 2010, 2009 and 2008 are presented
in the following table:
2010 2009 2008
---- ---- -----
Shareholders' equity to total assets 5.6% 5.8% 6.2%
Leverage ratio 6.9% 7.3% 6.2%
Risk-based capital ratios:
Tier 1 8.9% 8.5% 7.2%
Total Capital 11.2% 10.7% 9.1%
On February 17, 2009, the Company entered into a non-revolving line of
credit loan agreement with Atlantic Central Bankers Bank in an amount up to $5.0
million. The term of the debt is for a three year period with a maturity date of
February 17, 2012. The interest rate adjusts at a variable rate equal to prime
plus 25 basis points with a floor of 4.25% . The Company has an outstanding
balance on the line of credit of $4.9 million and has contributed $4.4 million
as additional capital to the Bank.
In June 2009, the Company approved a private placement common stock
offering to accredited investors. In connection with this offering, the Board of
Directors approved the issuance of common stock warrants as part of a unit with
the common stock, such that one warrant would be issued for each share of
Cornerstone Financial Corporation common stock sold in the stock offering. The
Company authorized the issuance of 857,142 warrants in this offering. Each
warrant issued in the offering will allow the holder of the warrant to purchase
one share of Cornerstone Financial Corporation common stock for a price of $9.00
per share through June 26, 2013. The Company sold 153,889 shares in this
offering and issued 153,889 common stock warrants. The $1.1 million proceeds
received from the common stock offering were recorded as additional paid in
capital.
In December 2009, the Company authorized the establishment of 1 million
shares of no par, $1 thousand stated value, Perpetual Non-Cumulative Convertible
Preferred Stock. The preferred stock is entitled to receive, as and when
declared by the Company's Board of Directors, non-cumulative cash dividends at
the annual rate equal to 7% of the
32
stated value. In December 2009, the Company sold 1,900 preferred shares. The
preferred stock is redeemable at the Company's option at any time after six
months from the issue date at the stated value plus any dividends declared but
unpaid. The preferred shares have priority of dividends such that, no dividends
or distributions shall be declared or paid to common shareholders unless full
dividends on all outstanding preferred shares have been declared and paid for
the most recently completed calendar quarter.
On November 1, 2010, the Bank modified the terms of the hybrid capital
instrument originally issued on October 31, 2008, in the aggregate amount of
$3.0 million in the form of subordinated debt. This instrument qualifies as Tier
II capital. The new term of the debt is for a ten year period with a maturity
date of November 1, 2020. The interest rate is at a variable rate equal to prime
rate plus 100 basis points for the entire ten year term. The debt security is
redeemable, at the Bank's option, at par on any January 31st, April 30th,
July 31st, or October 31st that the debt security remains outstanding
however, the Bank shall not have the right to redeem the debt security prior to
April 30, 2011.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statements of financial
condition.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed dates or other termination clauses and may
require the payment of a fee by the customer. Some of the commitments are
expected to expire without being drawn upon, and the total commitments do not
necessarily represent future cash requirements. Total commitments to extend
credit at December 31, 2010 were $58.1 million. Management evaluates each
customer's creditworthiness on a case-by-case basis. Collateral obtained, if
deemed necessary, is based on management's credit evaluation of the customer.
Collateral varies but may include accounts receivable, marketable securities,
inventory, property, plant and equipment, residential and commercial real
estate.
Standby letters of credit are conditional commitments issued to a third
party on behalf of a customer. The credit risk involved in issuing standby
letters of credit is similar to that involved in extending credit to customers.
Management evaluates each customer's creditworthiness on a case-by-case basis.
Collateral obtained, if deemed necessary is based on management's credit
evaluation of the customer. Collateral varies but may include accounts
receivable, marketable securities, inventory, property, plant and equipment,
residential and commercial real estate. At December 31, 2010, obligations under
standby letters of credit totaled $3.0 million.
We have also entered into long term operating lease obligations for some of
its premises and equipment, the terms of which generally include options to
renew. These instruments involve, to varying degrees, elements of off-balance
sheet risk in excess of the amount recognized in the statements of financial
condition. At December 31, 2010, future minimum operating lease obligations
totaled $2.0 million.
The off-balance sheet arrangements discussed above did not have, and
management believes are not reasonably likely to have in the foreseeable future,
a material impact on our financial condition or liquidity.
See Note 12 to Notes to Consolidated Financial Statements for additional
information regarding operating leases.
See Note 13 to Notes to Consolidated Financial Statements for additional
information regarding off-balance sheet arrangements.
33
CONTRACTUAL OBLIGATIONS
The following table represents the aggregate contractual obligations to
make future payments as of December 31, 2010.
ONE YEAR OR ONE - FIVE OVER FIVE
(DOLLARS IN THOUSANDS) LESS YEARS YEARS TOTAL
---------- ---------- --------- ----------
Time deposits $ 98,517 $ 15,027 $ - $ 113,544
Long term debt 10,000 19,877 - 29,877
Subordinated Debt - 3,000 - 3,000
Operating lease 348 1,125 528 2,001
--------- -------- ------ ---------
Total $ 108,865 $ 39,029 $ 528 $ 148,422
========= ======== ====== =========
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited financial statements and related documents are set
forth in this Annual report on form 10-K on the following pages:
PAGE
----
Report of Independent Registered Public Accounting Firm 35
Consolidated Statements of Financial Condition 36
Consolidated Statements of Operations 37
Consolidated Statements of Changes in Shareholders Equity 38
Consolidated Statements of Cash Flows 39
Notes to Financial Statements 40
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CORNERSTONE FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of financial condition
of Cornerstone Financial Corporation and subsidiary (the Company) as of
December 31, 2010 and 2009, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2010 and 2009, and the results of its operations and its cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
----------------------
Philadelphia, PA
March 30, 2011
35
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 2010 DECEMBER 31, 2009
----------------- -----------------
ASSETS:
Cash and due from banks $ 5,331 $ 4,742
Federal funds sold 3,700 -
--------- ---------
Cash and cash equivalents 9,031 4,742
--------- ---------
Investment securities:
Held to maturity (fair value 2010 - $39,520;
2009 - $47,294) 40,435 48,059
Available for sale (amortized cost 2010 - $47,945;
2009 - $0) 44,635 -
Loans receivable 242,856 238,424
Less allowance for loan losses 3,826 3,432
--------- ---------
Loans receivable, net 239,030 234,992
--------- ---------
Federal Home Loan Bank stock 1,435 1,572
Premises and equipment, net 7,806 7,871
Accrued interest receivable 2,152 1,484
Bank owned life insurance 4,685 4,521
Deferred taxes 2,600 1,154
Other real estate owned 830 -
Other assets 1,378 1,749
--------- ---------
TOTAL ASSETS $ 354,017 $ 306,144
========= =========
LIABILITIES:
Non-interest bearing deposits $ 40,514 $ 37,500
Interest bearing deposits 148,259 99,132
Certificates of deposit 113,497 112,861
--------- ---------
Total deposits 302,270 249,493
--------- ---------
Advances from the Federal Home Loan Bank 25,000 29,883
Line of credit 4,877 4,672
Subordinated debt 3,000 3,000
Other liabilities 1,122 1,283
--------- ---------
TOTAL LIABILITIES 336,269 288,331
--------- ---------
Commitments and Contingencies (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock:
$0 par value; $1,000 per share stated value,
authorized 1,000,000 shares; issued and
outstanding 1,900 and 0 at December 31, 2010 and
December 31, 2009, respectively 1,900 1,900
Common stock:
$0 par value: authorized 10,000,000 shares; issued
and outstanding 1,809,656 at December 31, 2010 - -
Additional paid-in capital 16,727 16,623
Accumulated other comprehensive loss (1,988) -
Retained earnings (deficit) 1,109 (710)
--------- ---------
Total Shareholders' Equity 17,748 17,813
--------- ---------
Total Liabilities and Shareholders' Equity $ 354,017 $ 306,144
========= =========
See accompanying notes to consolidated financial statements
36
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 2010 DECEMBER 31, 2009
------------------- -------------------
INTEREST INCOME
Interest and fees on loans $ 13,655 $ 12,842
Interest on investment securities 2,629 1,991
Interest on federal funds 27 7
-------- --------
TOTAL INTEREST INCOME 16,311 14,840
INTEREST EXPENSE
Interest on deposits 3,879 4,699
Interest on borrowings 699 1,174
-------- --------
TOTAL INTEREST EXPENSE 4,578 5,873
-------- --------
Net interest income 11,733 8,967
Provision for loan losses 776 2,530
-------- --------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 10,957 6,437
-------- --------
NON-INTEREST INCOME
Service charges on deposits 195 213
Origination fees on mortgage loans sold - 30
Bank owned life insurance income 164 173
Gain on sale of real estate owned - 7
Gain on sale of loans 609 101
Miscellaneous fee income 118 87
-------- --------
TOTAL NON-INTEREST INCOME 1,086 611
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 5,016 4,342
Net occupancy 1,256 1,355
Data processing and other service costs 484 430
Professional services 790 502
Advertising and promotion 133 128
Other real estate owned expense 110 205
FDIC expense 484 528
Other operating expenses 631 584
-------- --------
TOTAL NON-INTEREST EXPENSE 8,904 8,074
-------- --------
Income (loss before income taxes) 3,139 (1,026)
Income tax expense ( benefit) 1,220 (461)
-------- --------
NET INCOME (LOSS) $ 1,919 $ (565)
======== ========
Preferred stock Dividends 133 -
Net income (loss) available to common shareholders $ 1,786 $ (565)
Earnings per share
Basic $ 0.99 $ (0.33)
Diluted $ 0.99 $ (0.33)
Weighted average shares outstanding
Basic 1,810 1,717
Diluted 1,810 1,717
See accompanying notes to consolidated financial statements
37
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL ACCUMULATED OTHER
COMPREHENSIVE PREFERRED PAID-IN EARNINGS COMPREHENSIVE
LOSS STOCK COMMON STOCK CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
------------- --------- ------------ ---------- ------------ --------------- --------
Balance at
December 31, 2008 $ - $ 8,279 $ 7,244 $ (145) $ - $ 15,378
======== ======= ======== ======= ======== ========
Comprehensive loss
Net loss $ (565) $ - $ - $ - $ (565) $ - $ (565)
--------
Comprehensive loss $ (565)
========
Stock based
compensation - - 23 - - 23
Issuance of Common
Stock - - 1,077 - - 1,077
Issuance of Preferred
Stock 1,900 - - - - 1,900
Creation of Holding
Company (8,279) 8,279 - - -
------- ------ -------- ------- -------- --------
Balance at
December 31, 2009 $ 1,900 $ - $ 16,623 $ (710) - $ 17,813
======= ====== ======== ======= ======== ========
Comprehensive loss
Net income $ 1,919 $ - $ - $ - $ 1,919 - $ 1,919
--------
Unrealized loss on
securities available for
sale, net of tax (1,988) (1,988) (1,988)
========
Comprehensive loss $ (69)
========
Stock based
compensation - - 137 - - 137
Preferred Stock Dividend
Payment - - (33) (100) - (133)
------- ------ -------- ------- -------- --------
Balance at
December 31, 2010 $ 1,900 $ - $ 16,727 $ 1,109 $ (1,988) $ 17,748
======= ====== ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS) DECEMBER 31, 2010 DECEMBER 31, 2009
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 1,919 $ (565)
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Provision for loan losses 776 2,530
Income on Bank Owned Life Insurance (164) (173)
Depreciation 397 696
Amortization of premiums and discounts, net 42 34
Stock option expense 137 23
Deferred tax benefit (124) (692)
(Increase) decrease on other real estate owned (830) 89
Proceeds on sale of real estate owned - 199
Gain on sale of real estate owned - (7)
Loans originated for sale - (6,122)
Proceeds from sales of loans held for sale - 6,122
Increase in accrued interest receivable and other assets (298) (1,372)
(Decrease) increase in other liabilities (162) 413
--------- -----------
Net cash provided by operating activities 1,693 1,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (44,509) (58,105)
Repayment of investments held to maturity 52,091 38,410
Purchase of investments available for sale (47,943) -
Redemption (purchase) of Federal Home Loan Bank Stock 137 (195)
Net increase in loans (4,814) (44,551)
Purchases of premises and equipment (332) (98)
--------- -----------
Net cash used by investing activities (45,370) (64,539)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 52,777 47,463
Proceeds from borrowings 260,305 1,262,872
Principal payments on borrowings (264,983) (1,254,574)
--------- -----------
Net proceeds from issuance of preferred stock - 1,900
Net proceeds from issuance of common stock - 1,077
Cash dividend paid for declaration of preferred stock (133) -
--------- -----------
Net cash provided by financing activities 47,966 58,738
Net decrease in cash and cash equivalents 4,289 (4,626)
Cash and cash equivalents at the beginning of the year 4,742 9,368
--------- -----------
Cash and cash equivalents at the end of the year $ 9,031 $ 4,742
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 4,613 $ 5,928
Cash paid (received) during the year for income taxes 1,426 (81)
Net change in unrealized loss on securities available
for sale, net of tax (1,988) -
See accompanying notes to consolidated financial statements
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Cornerstone Financial Corporation (the "Company") was formed in 2008 at the
direction of the Board of Directors of Cornerstone Bank (the "Bank") to
serve as a holding company for the Bank. The holding company reorganization
was completed in January 2009. The statement of financial condition as of
December 31, 2009 has been derived from audited financial statements.
Cornerstone Bank is a state-chartered commercial bank that offers a variety
of traditional commercial banking products and services to small and
medium-sized businesses, local professionals and individuals, throughout
Burlington and northern Camden counties in New Jersey. The Bank is
supervised and regulated by the New Jersey State Department of Banking and
Insurance and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank's deposits are insured by the FDIC to the extent provided by law.
The Bank is managed as one business segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accounting and reporting policies of the Company and conform with
U.S. generally accepted accounting principles ("GAAP") and predominant
practices within the banking industry. The consolidated financial
statements of the Company include the accounts of the Bank.
Intercompany balances and transactions are eliminated in
consolidation.
(B) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the allowance for loan losses and
the evaluation of income taxes.
(C) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash and amounts due from banks, interest-bearing deposits and
federal funds sold. Generally, federal funds sold are repurchased the
following day.
(D) INVESTMENT SECURITIES
Debt securities that management has the positive intent and ability to
hold until maturity are classified as held to maturity and are carried
at their remaining unpaid principal balance, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and discounts
are accreted using a method that produces results which approximate
level yield over the estimated remaining term of the underlying
security.
Securities not classified as held to maturity are classified as
available for sale, and are stated at fair value. Changes in
unrealized gains and losses relating to available for sale securities
are excluded from earnings and reported as accumulated other
comprehensive loss, a separate component of shareholders' equity, net
of tax. Gains and losses are determined using the
specific-identification method and are accounted for on a trade-date
basis.
40
We evaluate securities for other-than-temporary impairment at least
quarterly. When evaluating a security for impairment, we consider the
length of time and the amount to which the fair value is less than the
amortized cost, the investment issuer's credit-worthiness and ability
to meet its cash flow requirements, our intent to sell, and whether it
is more likely than not we will be required to sell, an impaired debt
security before a recovery of its amortized cost basis.
Other-than-temporary charges are recorded through earnings.
Other-than-temporary impairment charges are recorded through earnings
for the amount of credit losses, regardless of the intent or
requirement to sell. Credit loss is measured as the difference between
the present value of an impaired debt security's cash flows and its
amortized cost basis. Non-credit related write-downs to fair value
must be recorded as decreases to accumulated other comprehensive
income as long as the Company has no intent or it is more likely than
not that the Company would not be required to sell an impaired
security before a recovery of amortized cost basis. The Company did
not have any other-than temporary impairment for 2010 and 2009.
(E) LOANS HELD FOR SALE
The Bank originates and sells residential mortgage loans (without
recourse) on a servicing released basis to the secondary market. This
activity enables the Bank to fulfill the credit needs of the community
while reducing its overall exposure to interest rate and credit risk.
These loans are reported at the lower of their cost or fair market
value.
(F) LOANS
Loan origination fees and related direct loan origination costs of
completed loans are deferred, and then recognized over the life of the
loan as an adjustment of yield reflected as interest income in the
statements of operations. The unamortized balances of such net
deferred loan origination fees/costs are reported on the Company's
statements of financial condition as a component of loans receivable.
Interest income is recorded on the accrual basis. Loans are reported
as non-accrual if they are past due as to principal or interest
payments for a period of ninety days or more. Exceptions may be made
if a loan is deemed by management to be well collateralized and in the
process of collection. Loans that are on a current payment status may
also be classified as non-accrual if there is serious doubt as to the
borrower's ability to continue interest or principal payments. When a
loan is placed in the non-accrual category, interest accruals cease
and uncollected accrued interest receivable is reversed and charged
against current interest income. Non-accrual loans are generally not
returned to accruing status until principal and interest payments have
been brought current and full collectability is reasonably assured.
Payments received on non-accrual loans are to be applied against
principal until principal is reduced to zero. Additional payments are
then to be applied against (1) legal and operating expenses associated
with the loan, (2) any principal previously charged off, and (3)
uncollected interest, in that order.
Impaired loans are measured based on the present value of expected
future discounted cash flows, the market price of the loan or the fair
value of the underlying collateral if the loan is collateral
dependent. For purposes of applying the measurement criteria for
impaired loans, management excludes large groups of smaller balance
homogeneous loans, primarily consisting of residential real estate and
consumer loans, as well as commercial loans with balances of less than
$100 thousand. The recognition of interest income on impaired loans is
the same as for non-accrual loans discussed above.
(G) ALLOWANCE FOR LOAN LOSSES
The allowance for losses on loans is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by
management to be its best estimate of known and inherent losses in the
portfolio. Management considers a variety of factors when establishing
the allowance, such as the impact of current economic conditions,
diversification of the loan portfolio, delinquency statistics, results
of loan reviews and related classifications, and historic loss rates.
In addition, certain individual loans which management has identified
as problematic are specifically provided for, based upon an evaluation
of the borrower's perceived ability to pay, the estimated adequacy of
the underlying collateral and other relevant
41
factors. Consideration is also given to examinations performed by
regulatory agencies. Although provisions have been established and
segmented by type of loan, based upon management's assessment of their
differing inherent loss characteristics, the entire allowance for
losses on loans is available to absorb loan losses in any category.
Management uses significant estimates to determine the allowance for
loan losses. Since the allowance for loan losses is dependent, to a
great extent, on conditions that may be beyond the Company's control,
it is at least reasonably possible that management's estimate of the
allowance for loan losses and actual results could differ in the near
term.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They
may require additions to the allowance based upon their judgments
about information available to them at the time of examination.
The Company utilizes its own loss experience to estimate inherent
losses on loans. Internal risk ratings are assigned to each
commercial, real estate commercial, real estate construction and land
development loan.
A portion of the allowance is allocated to the remaining loans by
applying projected rate loss ratios, base on numerous factors such as
recent charge-off experience, trends with respect to adversely risk
rated commercial, real estate commercial, real estate construction and
land development loans, trends with respect to past due and nonaccrual
loans, changes in economic conditions and trends, changes in the value
of underlying collateral and other credit risk factors.
Historical loss rates are calculated using the last nine quarters of a
variable factor analysis. The analysis consists of economic
conditions, concentrations of industry, quality management and
systems, general collateral quality, delinquency trends over the last
four quarters, loan grade trends over the past four quarters, annual
portfolio growth and credit/borrower concentration.
The loans are grouped into the following categories. Commercial loans
and letters of credit, Commercial Mortgage Loans, Residential Mortgage
Loans, Installment Loan, Home equity and Credit Lines and lease Backed
term Loans.
(H) FHLB STOCK
The Company carries its investment in Federal Home Loan Bank (FHLB)
Stock at its amortized cost. The Company had $1.4 million in FHLB
stock at December 31, 2010 compared to $1.6 million at December 31,
2009.
(I) PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the expected useful lives of the
assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the useful lives or the
remaining lease terms. No events have occurred, or changes in
management's intentions, that would impact the amortization period or
recoverability of premises and equipment, including leasehold
improvements. Software costs, furniture and equipment have depreciable
lives of 3 to 10 years. The costs of maintenance and repairs are
expensed as they are incurred and renewals and betterments are
capitalized.
(J) BANK OWNED LIFE INSURANCE
The Bank initially purchased $2.9 million of Bank Owned Life Insurance
on December 31, 2005, $610 thousand on March 3, 2006 and $400 thousand
on July 23, 2008. BOLI is carried at its aggregate cash surrender
value less surrender charges and totaled $4.7 million at December 31,
2010. Income of $164 thousand was recognized on the BOLI during the
year ended December 31, 2010 compared to $173 thousand of income
recognized on the BOLI during the year ended December 31, 2009. The
Bank is the sole beneficiary of the BOLI.
42
(K) REAL ESTATE OWNED
Real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Real estate owned is recorded at the lower of the
carrying value of the loan or the fair value of the property, net of
estimated selling costs. Costs relating to the development or
improvement of the properties are capitalized while expenses related
to the operation and maintenance of properties are recorded as an
expense as incurred. Gains or losses upon dispositions are reflected
in earnings as realized. The Company had $830 thousand in real estate
owned at December 31, 2010 compared to no real estate owned at
December 31, 2009. The Company did not recorded any gain or loss on
the sale of real estate property owned for the year ending December
31, 2010 as compared to a $ 7 thousand gain on the sale of a real
estate owned property for the year ending December 31, 2009.
(L) EARNINGS PER SHARE
Basic earnings per share is calculated on the basis of net income
available to common holders divided by the weighted average number of
shares outstanding. Diluted earnings per share includes dilutive
potential shares as computed under the treasury stock method using
average common stock prices. Diluted earnings per share is calculated
on the basis of the weighted average number of shares outstanding plus
the weighted average number of additional dilutive shares that would
have been outstanding had all common stock options granted been
exercised.
(M) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases, as well as operating loss carry forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date. A valuation allowance is established against deferred tax assets
when in the judgment of management, it is more likely than not that
such deferred tax assets will not become available. Because the
judgment about the level of future taxable income is dependent to a
great extent on matters that may, at least in part be beyond the
Company's control, it is at least reasonably possible that
management's judgment about the need for a valuation allowance for
deferred taxes could change in the near term.
(N) STOCK OPTIONS
Stock Options are accounted for in accordance with FASB Accounting
Standards Codification (ASC) Topic 718 "Stock Compensation." This
Standard establishes the accounting for share-based payment
transactions in which an enterprise receives employee services in
exchange for equity instruments of the enterprise or liabilities that
are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. ASC
Topic 718 requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees
in the statement of operations.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
ASU UPDATE FOR IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENT
In January 2010, the Financial Accounting Standards Board (FASB)
issued an Accounting Standard Codification Update (ASU) for improving
disclosures about fair value measurements. This update requires
companies to disclose, and provide the reasons for, all transfers of
assets and liabilities between the Level 1 and 2 fair value
categories. It also clarifies that companies should provide fair value
measurement disclosures for classes of assets and liabilities which
are subsets of line items within the balance sheet, if necessary. In
addition, the update clarifies that companies provide disclosures
about the fair value techniques and inputs for assets and liabilities
classified within Level 2 or 3 categories. The disclosure requirements
prescribed by this update are effective for fiscal years beginning
after December 31, 2009, and for interim periods within those fiscal
years, or March 31, 2010 for the
43
Company. This update also requires companies to reconcile changes in
Level 3 assets and liabilities by separately providing information
about Level 3 purchases, sales, issuances and settlements on a gross
basis. This provision of this update is effective for fiscal years
beginning after December 15, 2010, and for interim periods within
those fiscal years, or March 31, 2011 for the Company. The adoption of
this update did not materially impact the Company's current fair value
measurement disclosures.
ASU NO. 2010-20 DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING
RECEIVABLES AND THE ALLOWANCE FOR CREDIT LOSSES
In July 2010, the FASB issued ASU No. 2010-20, "Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit
Losses," which will require the Company to provide a greater level of
disaggregated information about the credit quality of the Company's
loans and leases and the allowance for loan and lease losses. This ASU
will also require the Company to disclose additional information
related to credit quality indicators, past due information, and
information related to loans modified in a troubled debt
restructuring. The provisions of this ASU are effective for the
Company's reporting period ending December 31, 2010. As this ASU
amends only the disclosure requirements for loans and leases and the
allowance, the adoption will have no impact on the Company's
statements of operation and condition.
(P) LIQUIDITY RISK
Liquidity risk represents the ability to meet normal cash flow
requirements for the funding of loans, repayment of deposits and
payment of operating costs. Our primary sources of liquidity include
deposits, amortization and prepayment of loans, maturities and
repayments of investment securities, and our borrowing capability.
Management monitors liquidity daily, and on a monthly basis
incorporates liquidity analysis into its asset/liability management
program.
In addition to using growth in deposits, loan repayments and the
investment portfolio as a source of liquidity, we have access to
unsecured, overnight lines of credit in the aggregate total of $58.7
million, consisting of $3.0 million, on an uncommitted basis through
Atlantic Central Bankers Bank and $55.7 million through the FHLB of
New York. The arrangement with Atlantic Central Bankers Bank is for
the sale of federal funds subject to the availability of such funds.
Pursuant to a collateral agreement with the FHLB, advances under this
line of credit are secured by a blanket lien on residential mortgage
loan portfolio. At December 31, 2010 and 2009, there were no balances
outstanding against those lines of credit. In addition, the Bank's
membership in the FHLB provides the Bank with additional secured
borrowing capacity of up to a maximum of 25% of the Bank's total
assets, subject to certain conditions.
We had cash and cash equivalents of $9.0 million at December 31, 2010
and $4.7 million at December 31, 2009 in the form of cash, due from
banks and federal funds sold. At December 31, 2010, unused lines of
credit available to customers and committed, undisbursed loan proceeds
including letters of credit totaled $58.1 million. Certificates of
deposit scheduled to mature in one year or less totaled $98.5 million
at December 31, 2010.
(3) INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity and available for sale at December 31, 2010 and
2009 is as follows:
DECEMBER 31, 2010
-----------------------------------------------------------------------
(IN THOUSANDS) GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 32,706 $ 68 $ (1,131) $ 31,643
Mortgage backed securities 7,729 148 - 7,877
-------- ------- -------- --------
Total $ 40,435 $ 216 $ (1,131) $ 39,520
======== ======= ======== ========
44
DECEMBER 31, 2010
-----------------------------------------------------------------------
(IN THOUSANDS) GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
INVESTMENTS AVAILABLE FOR SALE:
Government agency obligations $ 38,056 $ - $ (2,496) $ 35,560
US Treasury Securities 9,889 - (814) 9,075
-------- ------- -------- --------
Total $ 47,945 $ - $ (3,310) $ 44,635
======== ======= ======== ========
DECEMBER 31, 2009
-----------------------------------------------------------------------
(IN THOUSANDS) GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 39,019 $ 42 $ (721) $ 38,340
Mortgage backed securities 9,040 46 (132) 8,954
-------- ------- -------- --------
Total $ 48,059 $ 88 $ (853) $ 47,294
======== ======= ======== ========
At December 31, 2010, the Company had Federal agency securities with aggregate
amortized costs totaling $428 thousand pledged to collateralize public deposits
under the Governmental Unit Deposit Protection Act as compared to $397 thousand
pledged at December 31, 2009.
The following table sets forth the scheduled contractual maturities of
investment securities held to maturity and available for sale at December 31,
2010:
HELD TO MATURITY
------------------------------
(IN THOUSANDS) AMORTIZED COST FAIR VALUE
-------------- ----------
Within one year $ - $ -
After one year through five years - -
After five years through ten years 1,942 1,999
After ten years 38,493 37,521
-------- --------
Total $ 40,435 $ 39,520
======== ========
AVAILABLE FOR SALE
-------------------------------
(IN THOUSANDS) AMORTIZED COST FAIR VALUE
-------------- ----------
Within one year $ - $ -
After one year through five years - -
After five years through ten years - -
After ten years 47,944 44,635
-------- --------
Total $ 47,944 $ 44,635
======== ========
The following table sets forth information regarding the fair value and
unrealized losses on the Company's temporarily impaired investment securities
at December 31, 2010 and 2009 for the time periods shown:
DECEMBER 31, 2010
---------------------------------------------------------------------------
(IN THOUSANDS) LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------------------------------------------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- ------ ---------- ------- ----------
HELD TO MATURITY
Government agency obligations: $ 27,132 $ 1,131 $ - $ - $ 27,132 $ 1,131
AVAILABLE FOR SALE
Government agency obligations: $ 35,560 $ 2,495 $ - $ - $ 35,560 $ 2,495
US Treasury Securities $ 9,075 $ 814 $ - $ - $ 9,075 $ 814
-------- ------- ------ ------ -------- -------
Total temporarily impaired
investments securities $ 71,767 $ 4,440 $ - $ - $ 71,767 $ 4,440
======== ======= ====== ====== ======== =======
45
DECEMBER 31, 2009
--------------------------------------------------------------------------
(IN THOUSANDS) LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------- -------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- ----- ---------- -------- ----------
HELD TO MATURITY
Government agency obligations: $ 33,940 $ 721 $ - $ - $ 33,940 $ 721
Mortgage Backed Securities $ 4,715 $ 132 $ - $ - $ 4,715 $ 132
-------- ----- ----- ------ -------- -----
Total temporarily impaired
investments securities $ 38,655 $ 853 $ - $ - $ 38,655 $ 853
======== ===== ==== ===== ======== =====
Management has taken into consideration the following information in
reaching the conclusion that the impairment of the securities listed in the
table above are not other than temporary. The unrealized losses disclosed
above are the result of fluctuations in market interest rates currently
offered on like securities and do not reflect a deterioration or downgrade
of the investment issuer's credit-worthiness or ability to meet its cash
flow requirements. The Company believes that it is probable that it will
receive all future contractual cash flows and does not intend to sell and
will not be required to sell these investment securities until recovery or
maturity. The U.S. Government agency sponsored securities which are listed
have call provisions priced at par if called prior to their respective
maturity dates.
(4) OTHER COMPREHENSIVE INCOME (LOSS)
The change in other comprehensive (loss) components and related tax benefit
are as follows for the year ended December 31, 2010. The Company had no
unrealized gains or losses on available for sale securities at December 31,
2009. (in thousands):
2010
-----------------------------------------------
UNREALIZED GAINS ON SECURITIES BEFORE-TAX NET-OF-TAX
AVAILABLE FOR SALE: AMOUNT TAX BENEFIT AMOUNT
---------- ----------- ----------
Unrealized holding losses arising
during the year $ (3,310) $ 1,322 $ (1,988)
-------- ------- --------
Other comprehensive loss $ (3,310) $ 1,322 $ (1,988)
======== ======= ========
(5) LOANS RECEIVABLE
The Company monitors and asses the credit risk of its loan portfolio using
the classes set forth below. These classes also represent the segments by
which the company monitors the performance of its loan portfolio and
estimates its allowance for loan losses.
Commercial loans include short and long-term business loans and commercial
lines of credit for the purposes of providing working capital, supporting
accounts receivable, purchasing inventory and acquiring fixed assets. The
loans generally are secured by these types of assets as collateral and/or
by personal guarantees provided by principals of the borrowers.
Commercial real estate loans are generally originated in amounts up to the
lower of 75% of the appraised value or cost of the property and are secured
by improved property such as multi-family dwelling units, office buildings,
retail stores, warehouses, church buildings and other non-residential
buildings, most of which are located in the Company's market area.
Commercial real estate loans are generally made with fixed interest rates
which mature or reprice in five to seven years with principal amortization
of up to 25 years.
Residential real estate loans consist of loans secured by one- to
four-family residences located in the Bank's market area. The Bank has
originated one- to four-family residential mortgage loans in amounts up to
80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. A mortgage loan originated
by the Bank, for owner occupied property, whether fixed rate or adjustable
rate, can have a term of up to 30 years. Non-owner occupied property,
whether fixed rate or adjustable rate, can have a term of up to 25 years.
Adjustable rate loan terms limit the periodic interest rate adjustment and
the minimum and maximum rates that may be charged over the term of the loan
based on the type of loan.
Construction Loans will be made only if there is a permanent mortgage
commitment in place. Interest rates on commercial construction loans are
typically in line with normal commercial mortgage loan rates, while
interest rates on residential construction loans are slightly higher than
normal residential mortgage loan rates. These loans usually are adjustable
rate loans and generally have terms of up to one year.
46
Consumer Loans includes installment loans and home equity loans, secured by
first or second mortgages on homes owned or being purchased by the loan
applicant. Home equity term loans and credit lines are credit
accommodations secured by either a first or second mortgage on the
borrower's residential property. Interest rates charged on home equity term
loans are generally fixed; interest on credit lines is usually a floating
rate related to the prime rate. The Bank generally requires a loan to value
ratio of less than or equal to 80% of the appraised value, including any
outstanding prior mortgage balance.
Loans receivable consist of the following:
(IN THOUSANDS) DECEMBER 31, 2010 DECEMBER 31, 2009
----------------- -----------------
Commercial $ 95,441 $ 91,717
Real estate -- commercial 112,217 105,702
Real estate -- residential 14,780 19,137
Construction 13,177 12,104
Consumer loans 7,450 9,875
-------- ---------
Subtotal 243,065 238,535
Allowance for loan losses (3,826) (3,432)
Net deferred loan fees (209) (111)
-------- ---------
Loans receivable, net $239,030 $ 234,992
======== =========
Under the New Jersey Banking Act of 1948, the Bank is subject to a
loans-to-one-borrower limitation of 15% of capital funds. At December 31,
2010, the loans-to-one-borrower limitation was $4.7 million; this excluded
an additional 10% of adjusted capital funds or $3.2 million, which may be
loaned if collateralized by readily marketable securities as defined by
regulations. At December 31, 2010 there were no loans outstanding or
committed to any one borrower, which individually or in the aggregate
exceeded that limit.
The Bank lends primarily to customers in its market area. The majority of
loans are mortgage loans secured by real estate. Included as mortgage loans
are commercial real estate, conforming residential real estate and real
estate loans in excess of FNMA loan limits ("jumbo real estate loans").
Accordingly, lending activities could be affected by changes in the general
economy, the regional economy or real estate values. At December 31, 2010
and 2009 mortgage loans secured by real estate totaled $127.0 million and
$124.8 million, respectively. Mortgage loans represented 52.2% and 52.3% of
total loans at December 31, 2010 and 2009, respectively.
A summary of the Company's credit quality indicators is as follow:
Pass - A credit which is assigned a rating of Pass shall exhibit some or
all of the following characteristics:
a. Loans that present an acceptable degree of risk associated with
the financing being considered as measured against earnings and
balance sheet trends, industry averages, etc. Actual and
projected indicators and market conditions provide satisfactory
evidence that the credit will perform as agreed.
b. Loans to borrowers that display acceptable financial conditions
and operating results. Debt service capacity is demonstrated and
future prospects are considered good.
c. Loans to borrowers where a comfort level is achieved by the
strength of the cash flows from the business or project and the
strength and quantity of the collateral or security position
(i.e.: receivables, inventory and other readily marketable
securities) as supported by a current valuation and/or the strong
capabilities of a guarantor.
Special Mention - Loans on which the credit risk requires more than
ordinary attention by the Loan Officer. This may be the result of some
erosion in the borrower's financial condition, the economics of the
industry, the capability of management, or changes in the original
transaction. Loans which are currently sound yet exhibit potentially
unacceptable credit risk or deteriorating long term prospects, will receive
this classification. Loans which deviate from loan policy or regulations
will not generally be classified in this category, but will be separately
reported as an area of concern
Classified -- Classified loans include those considered by the Company to
be substandard, doubtful or loss.
An asset is considered "substandard" if it involves more than an acceptable
level of risk due to a deteriorating financial condition, unfavorable
history of the borrower, inadequate payment capacity, insufficient security
or other negative factors within the industry, market or management.
Substandard loans have clearly defined weaknesses which can jeopardize the
timely payment of the loan.
47
Assets classified as "doubtful" exhibit all of the weaknesses defined under
the substandard category but with enough risk to present a high probability
of some principal loss on the loan, although not yet fully ascertainable in
amount.
Assets classified as "loss" are those considered uncollectible or of little
value, even though a collection effort may continue after the
classification and potential charge-off.
Non Performing Loans
Non-performing loans consist of non-accrual loans (loans on which the
accrual of interest has ceased), loans over ninety days delinquent and
still accruing interest, renegotiated loans and impaired loans. Loans are
generally placed on non-accrual status if, in the opinion of management,
collection is doubtful, or when principal or interest is past due 90 days
or more, unless the collateral is considered sufficient to cover principal
and interest and the loan is in the process of collection.
The following table represents loans by credit quality indicator at December
31, 2010.
(IN THOUSANDS) SPECIAL NON
MENTION CLASSIFIED PERFORMING
PASS LOANS LOANS LOANS TOTAL
------- ------- ---------- ---------- -------
Commercial 93,209 845 0 1,296 95,350
Real Estate, Commercial 101,718 2,175 0 8,213 112,106
Real Estate, Residential 13,596 0 1,170 0 14,766
Construction 13,145 0 0 0 13,145
Consumer 6,905 244 51 289 7,489
------- ----- ----- ----- -------
Total Loans and Leases 228,572 3,264 1,221 9,798 242,856
======= ===== ===== ===== =======
The following table represents past-due loans and leases as of December 31,
2010.
30-89
(IN THOUSANDS) DAYS 90 DAYS OR TOTAL PAST
PAST DUE MORE PAST DUE AND ACCRUING NON-
AND STILL DUE AND STILL CURRENT ACCRUAL TOTAL LOAN
ACCRUING STILL ACCRUING ACCRUING BALANCES BALANCES BALANCES
--------- -------------- ---------- -------- -------- ----------
Commercial 209 634 843 94,054 1,296 95,350
Real Estate, Commercial 0 0 0 103,893 8,213 112,106
Real Estate, Residential 0 244 244 14,766 0 14,766
Construction 0 0 0 13,145 0 13,145
Consumer 0 0 0 7,200 289 7,489
--- ---- ----- ------- ----- -------
Total Loans and Leases 209 878 1,087 233,058 9,798 242,856
=== ==== ===== ======= ===== =======
Percentage of Total loans
and leases 0.09% 0.36% 0.45% 95.97% 4.03%
48
Impaired loans are measured based on the present value of expected future
discounted cash flows, the fair value of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition
of interest income on impaired loans is the same as for non-accrual loans
discussed above. At December 31, 2010 the Company had twelve loan
relationships totaling $9.8 million in non-accrual loans as compared eight
relationships totaling $8.1 million at December 31, 2009. At December 31,
2010, the Company had fifteen impaired loan relationships totaling $10.7
million (included within the non-accrual loans discussed above) in which
$3.5 million in impaired loans had a related allowance for credit losses of
$2.1 million and $7.3 million in impaired loans in which there is no
related allowance for credit losses. The average balance of impaired loans
totaled $12.3 million for 2010 as compared to $8.2 million for 2009, and
interest income recorded on impaired loans during the year ended December
31, 2010 totaled $36 thousand as compared to $32 thousand for December 31,
2009.
At December 31, 2010 the Company had two loan relationships totaling $878
thousand which were delinquent ninety days or more and still accruing
interest. At December 31, 2009, the Company had four loan relationships
totaling $2.4 million which were delinquent ninety days or more and still
accruing interest.
The following table represents data on impaired loans at December 31, 2010 and
December 31, 2009.
(IN THOUSANDS) 2010 2009
------ -----
Impaired loans for which a valuation allowance
has been provided 3,457 4,386
Impaired loans for which no valuation allowance
has been provided 7,271 6,156
------ ------
Total Loans determined to be impaired 10,728 10,542
====== ======
Allowance for loan losses related to impaired
loans 2,081 1,775
====== ======
For the years ended December 31: 2010 2009
------ ------
Average recorded investment in impaired loans 12,280 8,248
====== ======
Cash basis interest income recognized on impaired
loans 36 32
====== ======
The following table presents impaired loans by portfolio class at December 31,
2010.
(IN THOUSANDS) INTEREST
INCOME
AVERAGE RECOGNIZED
UNPAID RELATED ANNUAL WHILE ON
RECORDED PRINCIPAL VALUATION RECORDED IMPAIRED
INVESTMENT BALANCE ALLOWANCE INVESTMENT STATUS
---------- --------- --------- ---------- ----------
Impaired loans with a valuation allowance:
Commercial 1,198 1,198 962 1,209 6
Real Estate, Commercial 2,060 2,060 1,020 2,064 0
Real Estate, Residential 0 0 0 0 0
Construction 0 0 0 0 0
Consumer 199 199 99 200 5
------ ------ ----- ------ --
Subtotal 3,457 3,457 2,081 3,473 11
------ ------ ----- ------ --
Impaired loans with no valuation allowance:
Commercial 732 732 0 1,341 2
Real Estate, Commercial 6,153 6,153 0 7,085 10
Real Estate, Residential 0 0 0 0 0
Construction 0 0 0 0 0
Consumer 385 385 0 381 13
------ ------ ----- ------ --
Subtotal 7,271 7,271 0 8,807 25
====== ====== ===== ====== ==
Total Impaired loans:
Commercial 1,930 1,930 962 2,550 8
Real Estate, Commercial 8,213 8,213 1,020 9,149 10
Real Estate, Residential 0 0 0 0 0
Construction 0 0 0 0 0
Consumer 584 584 99 581 18
------ ------ ----- ------ --
Total 10,728 10,728 2,081 12,280 36
====== ====== ===== ====== ==
49
The following is a summary of the activity of the allowance for loan losses:
(in thousands) 2010 2009
------- -------
Balance, beginning of year $ 3,432 $ 1,133
Provision for loan losses 776 2,530
Recoveries (charge-offs), net (382) (231)
------- -------
Balance, end of year $ 3,826 $ 3,432
======= =======
Additional details for changes in the allowance for loan and leases by loan
portfolio as of and for the years ended December 31, 2010 are as follows:
COMMERCIAL RESIDENTIAL
ALLOWANCE FOR LOAN AND LEASE LOSSES COMMERCIAL REAL ESTATE REAL ESTATE CONSUMER TOTAL
----------------------------------- ---------- ----------- ----------- -------- -----
Beginning Balance 1,839 1,050 447 96 3,432
Charge-off (382) 0 0 0 (382)
Provision 286 477 (30) 43 776
----- ----- --- --- -----
Ending Balance 1,743 1,527 417 139 3,826
===== ===== === === =====
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2010 and 2009, stated at cost less
accumulated depreciation and amortization, are summarized as follows:
(In Thousands) 2010 2009
------- -------
Land $ 2,534 $ 2,534
Buildings 4,504 4,494
Furniture and equipment 1,455 1,254
Automobiles 4 20
Leasehold improvements 654 570
------- -------
Cost 9,151 8,872
Accumulated depreciation and
amortization (1,345) (1,001)
------- -------
Total $ 7,806 $ 7,871
======= =======
Depreciation and amortization expense was $397 thousand for the year ended
December 31, 2010 and $696 thousand for the year ended December 31, 2009.
During 2010 the Company retired fully depreciated assets of $57 thousand.
50
At December 31, 2010, the Medford, Burlington, Mount Laurel and Marlton
offices were leased; these leases include options for renewal. See Note 12
to Consolidated Notes to Financial Statements for additional information
regarding operating leases.
(7) DEPOSITS
Deposits consist of the following major classifications:
(IN THOUSANDS) DECEMBER 31, 2010 DECEMBER 31, 2009
------------------- -------------------------
Interest bearing checking accounts $ 19,111 6.3% $ 19,282 7.7%
Non-interest bearing checking accounts 40,514 13.4 37,500 15.0
Statement savings 3,203 1.1 3,430 1.4
Money market demand accounts 125,945 41.7 76,420 30.6
--------- ------ --------- ------
Total core deposits $ 188,773 62.5% $ 136,632 54.7%
--------- ------ --------- ------
Jumbo certificates of one hundred thousand or
more 46,234 15.2 43,581 17.5
Non-jumbo certificates:
Current maturities of six months or less 27,467 9.1 27,872 11.2
Current maturities of more than six months 39,796 13.2 41,408 16.6
--------- ------ --------- ------
Total time deposits 113,497 37.5 112,861 45.3
--------- ------ --------- ------
Total deposits $ 302,270 100.0% $ 249,493 100.0%
========= ====== ========= ======
The weighted average rate on certificates of deposit was 1.98% and 3.02% at
December 31, 2010 and 2009, respectively.
The aggregate amount of demand accounts overdrawn that are included in
loans as of December 31, 2010 and 2009 are $20 thousand and $85 thousand
respectively.
Interest expense on deposits for the years ended December 31, 2010 and 2009
consisted of the following:
(IN THOUSANDS) 2010 2009
------- ------
Checking and money market demand accounts $ 1,439 $ 1,413
Statement savings 20 27
Certificates of deposit 2,420 3,259
------- -------
Total $ 3,879 $ 4,699
------- -------
The following is a schedule of certificates of deposit by maturities as of
December 31, 2010:
YEAR ENDING DECEMBER 31,
------------------------
(in thousands)
2011 98,470
2012 11,498
2013 1,894
2014 1,635
---------
Total $ 113,497
=========
Deposits held by related parties, which include officers, directors, and
companies in which directors of the Board have a significant ownership
interest, approximated $8.2 million and $25.1 million at December 31, 2010
and 2009, respectively.
(8) BORROWINGS
The Bank is a member of the FHLB. Membership provides the Bank with
additional secured borrowing capacity of up to a maximum of 25% of the
Bank's total assets, subject to certain conditions. At December 31, 2010,
the Bank had advances outstanding with the FHLB in the amount of
approximately $25.0 million at a weighted
51
average interest rate of 1.49% . At December 31, 2010, the Bank was
eligible to borrow an additional $30.7 million. Pursuant to collateral
agreements with the FHLB, advances are secured by a blanket lien on the
Bank's residential mortgage loan portfolio as well as Bank owned
securities. At December 31, 2010, the Bank had an available line of credit
under the Overnight Repricing Advance Program with the FHLB in the
aggregate amount of $55.7 million. In addition, the Bank also has access to
an unsecured overnight line of credit in the amount of $3.0 million, on an
uncommitted basis through Atlantic Central Bankers Bank. This arrangement
is for the sale of federal funds to the Bank subject to the availability of
such funds. At December 31, 2010 and 2009, the Bank had no balances
outstanding against those lines of credit.
The following is a schedule of advances by maturities (in thousands) as of
December 31, 2010:
Year ending December 31,
------------------------
2011 10,000
2012 15,000
--------
Total $ 25,000
========
On February 17, 2009, the Company entered into a non-revolving line of
credit loan agreement with Atlantic Central Bankers Bank for an amount up
to $5.0 million. The term of the debt is for a three year period with a
maturity date of February 17, 2012. The interest rate adjusts at a variable
rate equal to prime plus 25 basis points with a floor of 4.25% . The
Company has an outstanding balance on the line of credit of $4.9 million
and has contributed $4.4 million as additional capital to the Bank.
On November 1, 2010, the Bank modified the terms of the hybrid capital
instrument originally issued on October 31, 2008, in the aggregate amount
of $3.0 million in the form of subordinated debt. This instrument qualifies
as Tier II capital. The new term of the debt is for a ten year period with
a maturity date of November 1, 2020. The interest rate is at a variable
rate equal to prime rate plus 100 basis points for the entire ten year
term. The debt security is redeemable, at the Bank's option, at par on any
January 31st, April 30th, July 31st, or October 31st that the debt
security remains outstanding however, the Bank shall not have the right to
redeem the debt security prior to April 30, 2011.
(9) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and dilutive earnings per share calculation for the years ended
December 31, 2010 and 2009:
2010 2009
------- -------
(in thousands, except per share data)
Net income (loss) $ 1,786 $ (565)
Weighted average basic number of shares 1,810 1,717
Dilutive effect of options 1,810 -
Dilutive effect of common stock warrants - -
Weighted average diluted number of shares 1,810 1,717
Basic (loss) earnings per share $ 0.99 $ (0.33)
Diluted (loss) earnings per share $ 0.99 $ (0.33)
For the year ended December 31, 2010, the Company had 3,691 stock
options with an anti-dilutive effect.
For the year ended December 31, 2009, there were stock options on 112,899
shares and 153,889 outstanding common stock warrants which were
anti-dilutive due to the Company's net loss for the period ending December
31, 2009.
(10) FAIR VALUE
ASC Topic 820 Fair Value Measurements and Disclosures establishes a
framework for measuring fair value under U.S. generally accepted accounting
principles, and expands disclosure requirements for fair value
measurements. ASC Topic 820 does not require any new fair value
measurements. The adoption of ASC Topic 820 did not have a material impact
on the Company's consolidated financial statements.
ASC Topic 820 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels, as described below:
52
o Level 1. Level 1 inputs are unadjusted quoted prices in active markets for
identical assets or liabilities.
o Level 2. Level 2 inputs are inputs other than quoted prices included in
Level 1 that are observable, either directly or indirectly. Level
2 inputs include quoted prices for similar assets, quoted prices
in markets that are not considered to be active, and observable
inputs other than quoted prices such as interest rates.
o Level 3. Level 3 inputs are unobservable inputs.
The fair value of securities available for sale are determined by obtaining
quoted prices on a nationally recognized securites exchange ( Level 1 inputs)
or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices
for the specific securities but rather by relying on the securities'
relationship to other benchmark quoted securities( Level 2 inputs).
A financial instrument's level within the fair value hierarchy is based upon
the lowest level of any input significant to the fair value measurement.
As of December 31, 2010, the Company had investment securities available for
sale carried at fair value as compared to December 31, 2009, where the Company
did not have any assets or liabilities measured at fair value on a recurring
basis.
ASSETS AND LIABILITIES MEASURED ON A RECURRING BASIS
----------------------------------------------------
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
FAIR VALUE MEASUREMENTS FAIR VALUE MEASUREMENTS
AT DECEMBER 31, 2010 AT DECEMBER 31, 2009
---------------------------------------------- --------------------------------------------
QUOTED PRICES QUOTED PRICES
IN ACTIVE SIGNIFICANT SIGNIFICANT IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS OTHER OTHER MARKETS OTHER OTHER
FOR IDENTICAL OBSERVABLE UNOBSERVABLE FOR IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS ASSETS INPUTS INPUTS
(LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVEL 1) (LEVEL 2) (LEVEL 3)
------------ ----------- ------------ ----------- ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Investment Securities
US Government Obligations $ -- $ 35,560 $ -- $ -- $ -- $ --
US Treasury Securities $ 9,075 $ -- $ -- $ -- $ -- $ --
------- -------- -------- ------- ------- -------
Total as sets on a recurring
basis at fair value $ 9,075 $ 35,560 $ -- $ -- $ -- $ --
======= ======== ======== ======= ======= =======
53
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
FAIR VALUE MEASUREMENTS FAIR VALUE MEASUREMENTS
AT DECEMBER 31, 2010 AT DECEMBER 31, 2009
---------------------------------------------- --------------------------------------------
QUOTED PRICES QUOTED PRICES
IN ACTIVE SIGNIFICANT SIGNIFICANT IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS OTHER OTHER MARKETS OTHER OTHER
FOR IDENTICAL OBSERVABLE UNOBSERVABLE FOR IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS ASSETS INPUTS INPUTS
(LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVEL 1) (LEVEL 2) (LEVEL 3)
------------ ----------- ------------ ----------- ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Impaired loans $ -- $ 10,728 $ -- $ -- $ 10,542 $ --
Other real Estate Owned -- 830 -- -- -- --
Total assets measured on a
non-recurring basis
at fair value $ -- $ 11,558 $ -- $ -- $ 10,542 $ --
The fair value of impaired loans with specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach.
The following required disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
(A) CASH AND CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE, AND ACCRUED
INTEREST PAYABLE
The items are generally short-term in nature and, accordingly, the carrying
amounts reported in the consolidated statements of financial condition are
reasonable approximations of their fair values.
(B) INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
(C) LOANS
For variable rate loans that reprice frequently and with no significant change
in credit risk, fair value is based on carrying value. The fair value for other
loans receivable was estimated using a discounted cash flow analysis, which
uses interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Consideration was given to the rates of
prepayment, economic conditions, risk characteristics and other factors
considered appropriate. The method of estimating fair value does not
incorporate the exit price concept of fair value, but is a permitted
methodology for purposes of this disclosure.
(D) FHLB STOCK
The carrying value of FHLB Stock in the accompanying statements of financial
condition approximates fair value.
54
(E) BANK OWNED LIFE INSURANCE
The carrying value of Bank owned life insurance in the accompanying statements
of financial condition approximates fair value.
(F) DEPOSITS
The fair values of deposits subject to immediate withdrawal, such as interest
and non-interest checking, statement savings, and money market deposit accounts
are equal to their carrying amounts in the accompanying statements of financial
condition. Fair values for time deposits are estimated by discounting future
cash flows using interest rates currently offered on time deposits with similar
remaining maturities.
(G) FHLB ADVANCES AND LINES OF CREDIT WITH ACBB
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing FHLB
Advances.
(H) SUBORDINATED DEBENTURE
For variable rate subordinated debentures that reprice frequently and with no
significant change in credit risk, fair value is based on carrying value.
(I) OFF-BALANCE SHEET INSTRUMENTS
Off-balance sheet instruments are primarily comprised of loan commitments and
unfunded lines of credit which are generally priced at market rate at the time
of funding. Therefore, these instruments have nominal value prior to funding. As
required by ASC topic 825-10-65, the estimated fair value of financial
instruments at December 31, 2010 and December 31, 2009 was as follows:
2010 2009
--- ------------ ------ ------------- --- ------------ ------ -------------
CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--- ------------ ------ ------------- --- ------------ ------ -------------
Financial assets:
Cash and cash equivalents $ 9,031 $ 9,031 $ 4,742 $ 4,742
Investments held to maturity:
Federal Agency Securities 32,706 31,643 39,019 38,340
Mortgage-backed Securities 7,729 7,877 9,040 8,954
Investments available for sale:
Federal Agency Securities 35,560 35,560 - -
US Treasury Securities 9,075 9,075 - -
Loans receivable 242,856 265,397 238,424 266,399
FHLB stock 1,435 1,435 1,572 1,572
Bank Owned Life Insurance 4,685 4,685 4,521 4,521
Accrued interest receivable 2,152 2,152 1,484 1,484
------------ ------ ------------- ------------ ------ -------------
Total financial assets $ 345,229 $ 366,855 $ 298,802 $ 326,012
------------ ------------- ------------ -------------
Financial Liabilities:
Checking Accounts $ 59,625 $ 59,625 $ 56,783 $ 56,783
Statement savings accounts 3,203 3,203 3,430 3,430
Money market demand accounts 10,248 10,248 19,658 19,658
Index Accounts 115,697 115,697 56,761 56,761
Certificates of deposit 113,497 112,495 112,861 111,908
FHLB Borrowings 25,000 25,000 29,883 29,883
Line Borrowings 4,877 4,877 4,672 4,672
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 187 187 222 222
------------ ------ ------------- ------------ ------ -------------
Total financial liabilities $ 335,334 $ 334,332 $ 287,270 $ 286,317
------------ ------------- ------------ -------------
CONTRACT ESTIMATED CONTRACT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--- ------------ ------ ------------- --- ------------ ------ -------------
Off-balance sheet instruments:
Commitments to extend credit $ 58,051 $ - $ 45,684 $ -
------------ ------------- ------------ -------------
55
(11) INCOME TAXES
The Company is subject to U.S. federal income tax as well as income tax of the
state of NJ. Income tax expense (benefit) for the years ended December 31, 2010
and 2009 consisted of the following:
(IN THOUSANDS) 2010 2009
--- ---------- --- ---- -----
Federal:
Current $ 998 $ 170
Deferred (111) (595)
State:
Current 346 61
Deferred (13) (97)
--- ---------- --- ---- -----
$ 1,220 $ (461)
---------- ---- -----
The following is a reconciliation between expected tax benefit at the statutory
rate of 34% and actual tax expense:
(IN THOUSANDS) 2010 2009
--- -------- --- ---- -----
At federal statutory rate $ 1,067 $ (349)
Adjustments resulting from:
State tax, net of federal benefit 207 (56)
Bank owned life insurance (56) (59)
Other 2 3
-------- ---- -----
$ 1,220 $ (461)
-------- ---- -----
A summary of deferred tax assets and liabilities of the Company at December 31,
2010 and 2009, are as follows:
(IN THOUSANDS) 2010 2009
----------- ------ --- ---- ------
Deferred tax assets:
Book bad debt reserves -- loans $ 1,528 $ 1,371
NJ depreciation 10 16
Unrealized loss on available for sale securities 1,322 -
Accrued Bonus 38 -
Deferred Compensation 143 81
Stock Options 69 15
Fraud/Forgery/Uninsured losses 1 -
Organization costs 2 16
----------- ------ ---- ------
Total deferred tax assets 3,113 1,499
----------- ------ ---- ------
Deferred tax liabilities:
Tax bad debts (89) (65)
Deferred loan costs (294) (239)
Depreciation (130) (41)
----------- ------ ---- ------
Total deferred tax liabilities (513) (345)
----------- ------ ---- ------
Net deferred tax asset $ 2,600 $ 1,154
------ ---- ------
The ability to realize deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management determined
that it is more likely than not that the Company will realize the benefits of
these deferred tax assets and, therefore, there is no valuation allowance
required.
The Company had no material unrecognized tax benefits or accrued interest and
penalties. The Company's policy is to account for interest as a component of
interest expense and penalties as a component of other expense. Federal tax
years 2007 through 2009 were open for examination as of December 31, 2010.
56
(12) OPERATING LEASES
At December 31, 2010, the Bank was obligated under non-cancelable operating
leases, which generally include options to renew, for the Bank's premises in
Medford, Burlington, Marlton and Mt. Laurel, New Jersey and for certain
equipment.
Future minimum payments, including anticipated renewals, under these leases for
the years 2011 through 2015 and thereafter are as follows (in thousands):
2011 $ 348
2012 341
2013 258
2014 258
2015 and thereafter 796
-----
Total $ 2,001
-----
Total lease expense for all leases for the years ended December 31, 2010 and
2009 was $292 thousand and $322 thousand, respectively.
(13) COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments
to extend credit to meet the financing needs of its customers. Commitments
issued to potential borrowers of the Bank amounted to approximately $58.1
million at December 31, 2010 and $45.7 million at December 31, 2009. At
December 31, 2010 $56.9 million in commitments were at variable rates while
$1.2 million were at fixed rates. Such commitments have been made in the normal
course of business and at current prevailing market terms. The commitments,
once funded, are principally to originate commercial loans and other loans
secured by real estate.
LEGAL PROCEEDINGS
At December 31, 2010 and 2009, the Company was neither engaged in any existing
nor aware of any significant pending legal proceedings. From time to time, the
Company is a party to litigation that arises in the normal course of business.
Management does not believe the resolution of this litigation, if any, would
have a material adverse effect on the Company's financial condition or results
of operation. However, the ultimate outcome of any such matter, as with
litigation generally, is inherently uncertain and it is possible that some of
these matters may be resolved adversely to the Company.
(14) RELATED PARTY TRANSACTIONS
At December 31, 2010 and 2009 and for the periods then ended, the Bank has
made no extensions of credit to any director or officer of the Bank.
The Company obtained certain legal, engineering and 401(k) plan investment
services from other entities which are or were affiliated with directors of the
Company. Such aggregate services amounted to fees of $3 thousand for the year
ended December 31, 2010 and $1 thousand for the year ended December 31, 2009.
In management's opinion, the terms of such services were substantially
equivalent to those which would have been obtained from unaffiliated parties.
(15) STOCK OPTION PLAN
In April 2000, the Bank's Shareholders approved the Bank's 2000 Stock Option
Plan A and Plan B (together the "Stock Option Plans"). Pursuant to the Stock
Option Plans, a total of 77,382 shares of common stock have been reserved for
issuance upon exercise of stock options to be granted to officers, directors,
key employees and other persons from time to time.
In May 2000, options to purchase a total of 73,467 shares of common stock were
granted under the Stock Option Plans at an exercise price of $10.00 per share,
of which 51,800 shares became vested immediately and 21,667 shares became
vested on a one-third per year basis, with one-third being immediately vested.
In July 2001, options to purchase a total of 1,600 shares of common stock were
granted at an exercise price of $10.00 per share, with vesting on a one-third
per year basis, with one-third being immediately vested. In August 2004,
options to purchase a total of 2,250 shares of common stock were granted at an
exercise price of $12.00 per
57
share, with vesting on a one-third per year basis, with one-third being
immediately vested. In October 2007, options to purchase a total of 2,430
shares of common stock were granted at an exercise price of $10.10 per share,
with vesting on a one-third per year basis, with one-third being immediately
vested. In March 2008, options to purchase a total of 1,750 shares of common
stock were granted at an exercise price of $8.05 per share, with vesting on a
one-third per year basis, with one-third being immediately vested. In July
2009, options to purchase a total of 45,000 shares of common stock were granted
at an exercise price of $5.00 per share, with vesting on a one-third per year
basis beginning on July 16, 2010. In January 2010, options to purchase a total
of 111,000 shares of common stock were granted at an exercise price of $4.50
per share, with vesting on a one-third per year basis beginning on January 21,
2011.
All options expire ten years from the date of the grant. The exercise price of
each option equals the market price of the Company's common stock on the date
of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model. The fair value of options granted in 2010
was $2.61 and fair value of options granted in 2009 was $2.88. Significant
assumptions used in the model for 2010 grants included a risk-free interest
rate of 3.76%; an expected life of ten years; and expected volatility of 41%.
Assumptions used in the model for 2009 grants included a risk-free interest
rate of 3.59%; an expected life of five years; and expected volatility of 41%.
The remaining unrecognized compensation cost relating to non-vested stock based
compensation awards at December 31, 2010 is $264 thousand which will be
recognized over the next three years.
A summary status of the Company's Stock Option Plans as of December 31, 2010
and 2009 and the changes during the years ended is as follows:
2010 2009
-------- ----- ---------- -------- ----- ----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
-------- ----- ---------- -------- ----- ----------
Outstanding, beginning of year 112,054 $ 7.36 67,899 $ 8.63
Granted 111,000 4.50 45,000 5.00
Forfeited 19,022 4.63 845 8.67
Expired 62,841 8.86 - -
-------- ----- ---------- -------- ----- ----------
Outstanding, end of year 141,191 $ 4.76 112,054 $ 7.36
======== ===== ========== ======== ===== ==========
Options exercisable at December 31, 18,691 $ 5.69 66,537 $ 8.86
======== ===== ========== ======== ===== ==========
There were no options exercised during the years ended December 31, 2010 and
2009.
A summary status of all stock options outstanding and exercisable for the Stock
Option Plans as of December 31, 2010, segmented by range of exercise prices is
as follows:
OUTSTANDING EXERCISABLE
---------- --------------- ----------- ----------- --------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE
SHARES EXERCISE PRICE LIFE SHARES EXERCISE PRICE
---------- --------------- ----------- ----------- --------------
Stock Options:
$4.50 - $9.40 141,191 $ 4.76 6.5 years 18,691 $ 5.69
In 2010, the Company had stock based compensation expense of $137 thousand
compared to an expense of $23 thousand in 2009. The Company recorded a tax
benefit from stock based compensation of $54 thousand and $9 thousand during
the years ended December 31, 2010 and December 31, 2009, respectively.
(16) PRIVATE PLACEMENT COMMON STOCK OFFERING AND PREFERRED STOCK ISSUANCE
In June 2009, the Board of Directors of the Company approved a private
placement common stock offering to accredited investors. In connection with
this offering, the Board of Directors approved the issuance of common stock
purchase warrants. As part of the offering, one warrant was issued for each
share of common stock, no par value, sold in stock offering. Each warrant
issued under the offering will allow the
58
holder of the warrant to purchase one share of common stock for a price of
$9.00 per share through June 26, 2013. For the year ended December 31, 2009,
the Company sold 153,889 shares under this offering and issued 153,889 common
stock warrants. The $1.1 million proceeds received from the common stock
offering were recorded as additional paid in capital.
In December 2009, the Company authorized the establishment of 1 million shares
of no par value, $1 thousand stated value Perpetual Non-Cumulative Convertible
Preferred Stock. The preferred stock is entitled to receive, as and when
declared by the Company's Board of Directors, non-cumulative cash dividends at
the annual rate equal to 7% of the stated value. In December 2009, the Company
sold 1,900 preferred shares. The preferred stock is redeemable at the Company's
option at any time after six months from the issue date at the state value plus
any dividends declared but unpaid. The preferred shares have priority with
regard to dividends such that, no dividends or distributions shall be declared
or paid to common shareholders unless full dividends on all outstanding
preferred shares have been declared and paid for the most recently completed
calendar quarter.
(17) DEFERRED COMPENSATION PLANS
Effective January 1, 2006, the Bank adopted a Nonqualified Deferred
Compensation Plan (the "Executive Plan") and the Directors' Fee Deferral and
Death Benefit Plan (the "Directors' Plan"). Both plans provide for payments of
deferred compensation to participants. The Company recorded $156 thousand and
$96 thousand in deferred compensation expense during the years ended December
31, 2010 and 2009, respectively.
(18) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
cause certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2010 and
2009, the Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2010, the most recent notification from the FDIC
categorized the Bank as "well-capitalized" under the regulatory framework for
prompt corrective action.
The Bank's actual capital amounts and ratios at December 31, 2010 and 2009 are
presented in the following table:
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------- ------ --------------- ------ -----------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ------ --------------- ------ ---------- ------------
At December 31, 2010:
Total Capital (to risk
weighted assets) $ 31,130 11.2 % $ 22,236 8.0 % $ 27,795 10.0 %
Tier I Capital (to risk
weighted assets) $ 24,599 8.9 % $ 11,118 4.0 % $ 16,677 6.0 %
Tier I Capital (to
average assets) $ 24,599 6.9 % $ 14,342 4.0 % $ 17,928 5.0 %
At December 31, 2009:
Total Capital (to risk
weighted assets) $ 27,902 10.7 % $ 20,837 8.0 % $ 26,046 10.0 %
Tier I Capital (to risk
weighted assets) $ 22,248 8.6 % $ 10,418 4.0 % $ 15,628 6.0 %
Tier I Capital (to
average assets) $ 22,248 7.3 % $ 12,215 4.0 % $ 15,269 5.0 %
59
(19) DIVIDEND POLICY
The future dividend policy of the Company is subject to the discretion of the
Board of Directors and will be dependent upon a number of factors, including
operating results, financial condition and general business conditions. As a
practical matter, unless the Company establishes subsidiaries or operations
other then the Bank, dividends from the Bank will be the sole source of income
to the Company out of which dividends may be paid. Therefore the ability of the
Company to pay dividends is subject to any legal restrictions on the ability of
the Bank to pay dividends to the Company. Under New Jersey law, the directors
of a New Jersey state-chartered bank, such as the Bank, are permitted to
declare dividends on common stock only if, after payment of the dividend, the
capital stock of the Bank will be unimpaired and either the Bank will have
surplus (additional paid- in capital) of not less than 50% of its capital stock
or the payment of the dividend will not reduce the Bank's surplus.
(20) SUBSEQUENT EVENT
The Company has evaluated subsequent events through the filing date of this
report, and has determined that there were no recognized subsequent events to
report in the December 31, 2010 financial statements. However, the Company did
identify non-recognized events for which disclosure in the December 31, 2010
financial statements was required. In March 2011, the Company was informed that
three borrowers, whose loans were classified as impaired at December 31, 2010
and for which the Company has established adequate reserves, had filed for
protection under the US bankruptcy code. The Company has determined that the
bankruptcy filings represent sufficient evidence that the Company will incur the
losses that had been reserved for as of December 31, 2010. As such, the Company
will record $1.6 million in charge-offs in the first quarter of 2011. These
charge-offs will also be considered by the Company in the analysis of historical
losses within the respective portfolios and will result in an increased
provision in the first quarter of 2011.
On March 17, 2011 the Company declared an 8% common stock dividend payable May
16, 2011 to shareholders of record as of the close of business on April 15,
2011. This stock dividend will result in per share data and per share amounts
being retroactively adjusted to account for the 8% increase as of the April 15,
2011. This would result in adjusted basic and diluted earnings per share of
$0.91 for the year ended December 31, 2010.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this annual report, have
concluded that as of such date, the Company's disclosure controls and
procedures were effective to ensure at a reasonable assurance level that
material information relating to the Company is recorded, processed, summarized
and reported in a timely manner.
60
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934). The Company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial
reporting can also be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to
design into the process safeguards to reduce, though not eliminate, risk. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2010. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. Based on this assessment using the COSO criteria,
management concluded that the Company's internal control over financial
reporting was effective as of December 31, 2010.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's fourth fiscal quarter of 2010 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
George W. Matteo, Jr. President & CEO
Keith Winchester, Chief Financial Officer
ITEM 9B. OTHER INFORMATION
Not Applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information contained under the sections captioned "Election of
Directors," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 2010 Annual
Meeting of Shareholders, to be filed with the SEC prior to April 30, 2010 (the
"Proxy Statement") is incorporated herein by reference.
CODE OF ETHICS. The Company has adopted a Code of Ethics for the
Company's chief executive officer and principal financial and accounting
officers. A copy of the Code of Ethics can be found on the Company's internet
website at www.cornerstonebank.net. The Company intends to disclose any
amendments to its Code of Ethics, and any waiver from a provision of the Code
of Ethics granted to the Company's principal executive officer, principal
financial officer, principal accounting officer, or persons performing similar
functions, on the Company's internet website within four business days
following such amendment or waiver. The information contained on or connected
to the Company's internet website is not incorporated by reference into this
Form 10-K and should not be considered part of this or any other report that
the Company files with or furnishes to the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein
by reference.
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information contained in the section captioned "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
is incorporated herein by reference.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth summary information regarding the Company's
equity compensation plans:
(C)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
(A) (B) FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED
AS OF DECEMBER 31, 2010 WARRANTS, AND RIGHTS (#) WARRANTS AND RIGHTS ($) IN COLUMN (A))
-------------------------------- -------------------------- ----------------------- -----------------------
Equity compensation plans
approved by security holders (1) 223,054 $5.85 405
Equity compensation plans not
approved by security holders - - -
-------------------------- ----------------------- -----------------------
Total 223,054 $5.85 405
-------------------------- ----------------------- -----------------------
(1) Represents shares of the Company's common stock which may be issued upon
the exercise of options granted under the Company's 2000 Stock Option Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information contained under the sections captioned "Certain
Business Relationships," "Corporate Governance -- Director Independence,"
"Corporate Governance -- Audit Committee" and "Corporate Governance
--Compensation Committee" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the section captioned "Relationship with
Independent Registered Public Accounting Firm" in the Proxy Statement is
incorporated herein by reference.
ITEM 15. EXHIBITS
(a) FINANCIAL STATEMENTS. Listed below are all financial statements filed
as part of this report.
1. The statements of financial condition of the Company as of December
31, 2010 and 2009 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31,
2010 and 2009, together with the related notes.
2. Schedules omitted as they are not applicable.
(b) EXHIBITS. The following exhibits are included in this Report or
incorporated herein by reference:
3.(i) Certificate of Incorporation (1)
3.(ii) By-laws (1)
10.(a) Employment Agreement with Keith Winchester dated February 15,
1999 (1)
10.(b) The Bank's Stock Option Plan dated May 8, 2000 (1)
10.(c) Director Fee Deferral and Death Benefit Plan dated December 30,
2005, as amended by Amendment No. 1 to the Director Fee Deferral and
Death Benefit Plan dated June 20, 2007 (1)
62
10.(d) Employment Agreement with George W. Matteo, Jr. dated January 10,
2008 (1)
10.(e) Amended and Restated Non-Qualified Deferred Compensation Plan dated
September 9, 2008 (1)
10.(f) Loan Agreement with Atlantic Central Bankers Bank ("ACBB") dated
February 17, 2009 (2)
10.(g) Line of Credit Note with ACBB dated February 17, 2009 (2)
10.(h) Stock Pledge Agreement with ACBB dated February 17, 2009 (2)
10.(i) Amendment to the Employment Agreement by and between the Bank and
Eugene D. D'Orazio dated February 19, 2010(3).
21 Subsidiaries of the Registrant
31.1 CEO Certification required under section 302 of Sarbanes -- Oxley Act
of 2002
31.2 CFO Certification required under section 302 of Sarbanes -- Oxley Act
of 2002
32.1 CEO Certification required under section 906 of Sarbanes -- Oxley Act
of 2002
32.2 CFO Certification required under section 906 of Sarbanes -- Oxley Act
of 2002
(1)Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on February 2, 2009.
(2)Incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on February 2, 2009.
(3)Incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on February 22, 2010.
63
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORNERSTONE BANK
March 30, 2011 By: /s/ George W. Matteo, Jr.
-------------------------------------
George W. Matteo, Jr.
Chairman of the Board
President and Chief Executive Officer
Date: March 30, 2011
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities indicated on March 30, 2011.
/s/ George W. Matteo, Jr. /s/ Keith Winchester
------------------------------------- ------------------------------------------
George W. Matteo, Jr. Keith Winchester
Chairman of the Board, Executive Vice President and
President and Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
/s/ J. Richard Carnall /s/ J. Mark Baiada
------------------------------------- ------------------------------------------
J. Richard Carnall J. Mark Baiada
Vice Chairman Director
/s/ Susan Barrett. /s/ Gaetano P. Giordano.
------------------------------------- ------------------------------------------
Susan Barrett Gaetano P. Giordano
Director Director
/s/ Robert A. Kennedy, Jr. /s/ Ronald S. Murphy
------------------------------------- ------------------------------------------
Robert A. Kennedy, Jr. Ronald S. Murphy
Director Director
/s/ Bruce Paparone
-------------------------------------
Bruce Paparone
Director
64