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EX-32.1 - EXHIBIT 32.1 - STEWARDSHIP FINANCIAL CORPex32-1.htm
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EX-31.1 - EXHIBIT 31.1 - STEWARDSHIP FINANCIAL CORPex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009

(   )           TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 0-21855

Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
   
New Jersey
22-3351447
(State or other jurisdiction of
 (I.R.S. Employer Identification No.)
incorporation or organization)
 
   
630 Godwin Avenue, Midland Park,  NJ
    07432
(Address of principal executive offices)
(Zip Code)
   
(201)  444-7100
(Registrant’s telephone number, including area code)
 
 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨      No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
   Large accelerated filer ¨
   Accelerated filer ¨
   Non-accelerated filer ¨ (Do not check if a smaller reporting company)
   Smaller reporting company ý

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨      No   ý

The number of shares outstanding, net of treasury stock, of the Issuer’s Common Stock, no par value, as of November 12, 2009 was 5,556,211.

 
 

 

Stewardship Financial Corporation

INDEX

 
PAGE
 
NUMBER
 
   
 
   
1
   
2
   
3
   
4
   
5 - 6
   
7 - 19
   
20 - 27
   
28
   
28
   
 
   
29
   
30
   
31



 
 


Stewardship Financial Corporation and Subsidiary
 
Consolidated Statements of Financial Condition
 
(Unaudited)
 
             
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
             
Cash and due from banks
  $ 13,590,000     $ 12,719,000  
Other interest-earning assets
    56,000       95,000  
       Cash and cash equivalents
    13,646,000       12,814,000  
                 
Securities available for sale
    90,460,000       90,023,000  
Securities held to maturity; estimated fair value of $77,023,000 (2009) and
               
    $49,150,000 (2008)
    75,232,000       48,856,000  
FHLB-NY stock, at cost
    3,195,000       2,420,000  
Loans, net of allowance for loan losses of $7,249,000 (2009) and $5,166,000 (2008)
    443,552,000       434,103,000  
Mortgage loans held for sale
    1,018,000       394,000  
Premises and equipment, net
    7,000,000       7,470,000  
Accrued interest receivable
    3,142,000       3,371,000  
Bank owned life insurance
    8,837,000       8,599,000  
Other assets
    3,539,000       3,766,000  
       Total assets
  $ 649,621,000     $ 611,816,000  
                 
Liabilities and stockholders' equity
               
                 
Liabilities
               
Deposits:
               
    Noninterest-bearing
  $ 90,831,000     $ 99,099,000  
    Interest-bearing
    423,781,000       407,432,000  
        Total deposits
    514,612,000       506,531,000  
                 
Other borrowings
    53,900,000       36,900,000  
Subordinated debentures
    7,217,000       7,217,000  
Securities sold under agreements to repurchase
    16,019,000       15,160,000  
Accrued interest payable
    1,494,000       1,582,000  
Accrued expenses and other liabilities
    2,307,000       1,630,000  
        Total liabilities
    595,549,000       569,020,000  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' equity
               
Preferred stock, no par value; 2,500,000 shares authorized; 10,000 shares
               
    issued and outstanding at September 30, 2009.  Liquidation preference of $10,000,000.
    9,721,000       -  
Common stock, no par value; 10,000,000 shares authorized;
               
    5,863,949 and 5,575,095 shares issued: 5,834,022 and 5,555,095 shares
               
    outstanding at September 30, 2009 and December 31, 2008, respectively
    40,759,000       37,962,000  
Treasury stock, 29,927 and 20,000 shares outstanding at September 30, 2009 and
               
    December 31, 2008, respectively
    (368,000 )     (272,000 )
Retained earnings
    2,834,000       4,383,000  
Accumulated other comprehensive income
    1,126,000       723,000  
        Total stockholders' equity
    54,072,000       42,796,000  
                 
        Total liabilities and stockholders' equity
  $ 649,621,000     $ 611,816,000  
                 
                 
See notes to unaudited consolidated financial statements.
               

 
1


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income:
                       
Loans
  $ 6,831,000     $ 7,217,000     $ 20,097,000     $ 21,478,000  
Securities held to maturity
                               
Taxable
    532,000       170,000       1,492,000       560,000  
Non-taxable
    220,000       210,000       652,000       627,000  
Securities available for sale
                               
Taxable
    934,000       1,194,000       3,137,000       3,301,000  
Non-taxable
    50,000       53,000       154,000       121,000  
FHLB dividends
    41,000       46,000       86,000       128,000  
Other interest-earning assets
    2,000     20,000       7,000     62,000  
Total interest income
    8,610,000       8,910,000       25,625,000       26,277,000  
                                 
Interest expense:
                               
Deposits
    2,131,000       2,533,000       6,706,000       8,055,000  
Borrowed money
    503,000     567,000       1,525,000     1,694,000  
Total interest expense
    2,634,000       3,100,000       8,231,000       9,749,000  
                                 
Net interest income before provision for loan losses
    5,976,000       5,810,000       17,394,000       16,528,000  
Provision for loan losses
    1,200,000     1,175,000       2,375,000     1,535,000  
Net interest income after provision for loan losses
    4,776,000       4,635,000       15,019,000       14,993,000  
                                 
Noninterest income:
                               
Fees and service charges
    492,000       370,000       1,362,000       1,067,000  
Bank owned life insurance
    79,000       85,000       238,000       244,000  
Gain on sales of mortgage loans
    188,000       47,000       272,000       156,000  
Gain on calls and sales of securities
    2,000       4,000       255,000       61,000  
Merchant processing
    -       340,000       118,000       1,070,000  
Other
    60,000     48,000       232,000     289,000  
Total noninterest income
    821,000       894,000       2,477,000       2,887,000  
                                 
Noninterest expenses:
                               
Salaries and employee benefits
    2,128,000       1,968,000       6,264,000       6,078,000  
Occupancy, net
    453,000       477,000       1,398,000       1,354,000  
Equipment
    277,000       276,000       795,000       842,000  
Data processing
    300,000       300,000       882,000       897,000  
Advertising
    150,000       106,000       369,000       342,000  
FDIC insurance premium
    197,000       77,000       886,000       223,000  
Charitable contributions
    120,000       126,000       411,000       474,000  
Stationery and supplies
    64,000       87,000       188,000       316,000  
Merchant processing
    -       299,000       108,000       944,000  
Other
    657,000     646,000       2,137,000     1,933,000  
Total noninterest expenses
    4,346,000       4,362,000       13,438,000       13,403,000  
                                 
Income before income tax expense
    1,251,000       1,167,000       4,058,000       4,477,000  
Income tax expense
    358,000     329,000       1,198,000     1,399,000  
Net income
    893,000       838,000       2,860,000       3,078,000  
Dividends on preferred stock and accretion
    138,000       -       367,000       -  
Net income available to common stockholders
  $ 755,000     $ 838,000     $ 2,493,000     $ 3,078,000  
                                 
Basic earnings per common share
  $ 0.13     $ 0.14     $ 0.43     $ 0.53  
Diluted earnings per common share
  $ 0.13     $ 0.14     $ 0.43     $ 0.52  
                                 
Weighted average number of common shares outstanding
    5,833,787       5,852,681       5,831,494       5,855,836  
Weighted average number of diluted common
                               
     shares outstanding
    5,837,797       5,863,105       5,836,225       5,869,088  
 
Share data has been restated to reflect a 5% stock dividend paid November 17, 2008 and a 5% stock dividend delared on
September 15, 2009 and payable on November 16, 2009.
                 
                       
See notes to unaudited consolidated financial statements.
                 

 
2


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
               
 
                                           
   
Nine Months Ended September 30, 2009
 
                                 
Accumulated
       
                                 
Other
       
   
Preferred
   
Common Stock
   
Treasury
   
Retained
   
Comprehensive
       
   
Stock
   
Shares
   
Amount
   
Stock
   
Earnings
   
Income (Loss)
   
Total
 
                                           
Balance -- December 31, 2008
  $ -       5,575,095     $ 37,962,000     $ (272,000 )   $ 4,383,000     $ 723,000     $ 42,796,000  
Proceeds from issuance of preferred
                                                       
    stock and a warrant
    9,731,000        -       269,000        -        -        -       10,000,000  
Preferred stock issuance costs
    (48,000 )      -        -        -        -        -       (48,000 )
Cash dividends paid on common stock
    -       -       -       -       (1,583,000 )     -       (1,583,000 )
5% stock dividend (declared on September 15,
                                                 
    2009 and payable November 16, 2009)
            279,236       2,465,000       (12,000 )     (2,453,000 )      -       -  
Payment of discount on dividend
                                                       
    reinvestment plan (DRP)
    -       -       (35,000 )     -       -       -       (35,000 )
Cash dividends accrued on preferred stock
    -       -       -       -       (335,000 )     -       (335,000 )
Common stock issued under stock plans
    -       2,288       22,000       23,000       -       -       45,000  
Stock option compensation expense
    -       -       36,000       -       -       -       36,000  
Stock options exercised
    -       7,330       40,000       (32,000 )     -       -       8,000  
Repurchase of common stock
    -       -       -       (75,000 )     -       -       (75,000 )
Accretion of discount on preferred stock
    32,000       -       -       -       (32,000 )      -       -  
Amortization of issuance costs
    6,000       -       -       -       (6,000 )      -       -  
Comprehensive income:
                                                       
Net income
    -       -       -       -       2,860,000       -       2,860,000  
   Change in unrealized holding gains on
                                                       
     securities available for sale arising during
                                                       
     the period (net of taxes of $295,000)
    -       -       -       -       -       463,000       463,000  
   Reclassification adjustment for gains in
                                                       
     net income (net of taxes of $101,000)
    -       -       -       -       -       154,000       154,000  
   Change in fair value of interest rate
                                                       
     swap (net of tax benefit of $142,000)
     -        -        -        -        -       (214,000 )     (214,000 )
Total comprehensive income
                                                    3,263,000  
                                                         
Balance -- September 30, 2009
  $ 9,721,000       5,863,949     $ 40,759,000     $ (368,000 )   $ 2,834,000     $ 1,126,000     $ 54,072,000  
 
   
Nine Months Ended September 30, 2008
 
                                 
Accumulated
       
                                 
Other
       
   
Preferred
   
Common Stock
   
Treasury
   
Retained
   
Comprehensive
       
   
Stock
   
Shares
   
Amount
   
Stock
   
Earnings
   
Income (Loss)
   
Total
 
                                           
Balance -- December 31, 2007
  $ -       5,306,828     $ 34,871,000     $ -     $ 5,943,000     $ 276,000     $ 41,090,000  
Cash dividends paid on common stock
    -       -       -       -       (1,460,000 )     -       (1,460,000 )
5% stock dividend (declared on September 16,
                                                 
    2008 and payable November 17, 2008)
     -       265,984       3,319,000       (6,000 )     (3,313,000 )      -       -  
Payment of discount on DRP
    -       -       (34,000 )     -       -       -       (34,000 )
Common stock issued under stock plans
    -       1,667       21,000       20,000       -       -       41,000  
Stock option compensation expense
    -       -       36,000       -       -       -       36,000  
Stock options exercised
    -       11,180       70,000       (21,000 )     -       -       49,000  
Tax benefit on stock options exercised
     -        -       2,000        -        -        -       2,000  
Repurchase common stock
                            (131,000 )                     (131,000 )
Comprehensive income:
                                                       
   Net income
    -       -       -       -       3,078,000       -       3,078,000  
   Change in unrealized holding losses on
                                                       
     securities available for sale arising during
                                                       
     the period (net tax benefit of $597,000)
    -       -       -       -       -       (949,000 )     (949,000 )
   Reclassification adjustment for gains
                                                       
     in net income (net taxes of $24,000)
    -       -       -       -       -       37,000       37,000  
Total comprehensive income
                                                    2,166,000  
                                                         
Balance -- September 30, 2008
  $ -       5,585,659     $ 38,285,000     $ (138,000 )   $ 4,248,000     $ (636,000 )   $ 41,654,000  
                                                         
See notes to unaudited consolidated financial statements.
                                                 

 
3


Stewardship Financial Corporation and Subsidiary
 
Consolidated Statements of Comprehensive Income (Loss)
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Change in unrealized holding gains (losses)
                       
on securities available for sale arising
                       
during the period
  $ 1,247,000     $ (423,000 )   $ 1,268,000     $ (1,422,000 )
Reclassification adjustment for gains in net income
    2,000     4,000       255,000     61,000  
Net unrealized gains (losses)
    1,245,000       (427,000 )     1,013,000       (1,483,000 )
Tax effect
    484,000     (164,000 )     396,000     (571,000 )
Net unrealized gains (losses), net of tax amount
    761,000       (263,000 )     617,000       (912,000 )
                                 
Change in fair value of interest rate swap
    (258,000 )     -       (356,000 )        
Tax effect
    (103,000 )   -       (142,000 )   -  
Change in fair value of interest rate swap, net of tax amount
    (155,000 )     -       (214,000 )     -  
                                 
Total other comprehensive income (loss)
  $ 606,000     $ (263,000 )   $ 403,000     $ (912,000 )
                                 
See notes to unaudited consolidated financial statements.
                               
                                 

 
4


Stewardship Financial Corporation and Subsidiary
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 2,860,000     $ 3,078,000  
Adjustments to reconcile net income to
               
net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    631,000       696,000  
Amortization of premiums and accretion of discounts, net
    456,000       89,000  
Accretion of deferred loan fees
    (151,000 )     (216,000 )
Provision for loan losses
    2,375,000       1,535,000  
Originations of mortgage loans held for sale
    (33,778,000 )     (15,869,000 )
Proceeds from sale of mortgage loans
    33,426,000       16,414,000  
Gain on sales of mortgage loans
    (272,000 )     (156,000 )
Gain on calls and sales of securities
    (255,000 )     (61,000 )
Loss on sale of equipment
    -       12,000  
Deferred income tax benefit
    (903,000 )     (639,000 )
Amortization of intangible assets
    24,000       24,000  
Nonqualified stock option expense
    36,000       36,000  
Increase in bank owned life insurance
    (238,000 )     (244,000 )
Decrease (increase) in accrued interest receivable
    229,000       (129,000 )
Decrease in other assets
    711,000       259,000  
Decrease in accrued interest payable
    (88,000 )     (615,000 )
Increase (decrease) in other liabilities
    400,000       (465,000 )
Net cash provided by operating activities
    5,463,000       3,749,000  
                 
Cash flows from investing activities:
               
Purchase of securities available for sale
    (46,067,000 )     (41,754,000 )
Proceeds from maturities and principal repayments on securities available for sale
    11,796,000       5,973,000  
Proceeds from calls and sales on securities available for sale
    34,854,000       16,197,000  
Purchase of securities held to maturity
    (40,703,000 )     (1,798,000 )
Proceeds from maturities and principal repayments on securities held to maturity
    4,953,000       3,191,000  
Proceeds from calls on securities held to maturity
    9,165,000       4,520,000  
Purchase of FHLB-NY stock
    (775,000 )     (873,000 )
Net increase in loans
    (11,673,000 )     (22,592,000 )
Additions to premises and equipment
    (161,000 )     (282,000 )
Sale of equipment
    -       4,000  
                 Net cash used in investing activities
    (38,611,000 )     (37,414,000 )
                 
Cash flows from financing activities:
               
Net decrease in noninterest-bearing deposits
    (8,268,000 )     (5,189,000 )
Net increase in interest-bearing deposits
    16,349,000       25,000,000  
Net increase (decrease) in securities sold under agreements to repurchase
    859,000       (986,000 )
Proceeds from term borrowings
    6,000,000       65,000,000  
Net increase (decrease) in short term borrowings
    11,000,000       (10,800,000 )
Payments on long term borrowings
    -       (36,270,000 )
Proceeds from issuance of preferred stock and warrants
    9,951,000       -  
Cash dividends paid on common stock
    (1,583,000 )     (1,460,000 )
Cash dividends paid on preferred stock
    (271,000 )     -  
Payment of discount on dividend reinvestment plan
    (35,000 )     (34,000 )
Purchase of treasury stock
    (75,000 )     (131,000 )
Options exercised
    8,000       49,000  
Tax benefit of stock options
    -       2,000  
Issuance of common stock
    45,000       41,000  
Net cash provided by financing activities
    33,980,000       35,222,000  
                 
Net increase in cash and cash equivalents
    832,000       1,557,000  
Cash and cash equivalents - beginning
    12,814,000       11,932,000  
Cash and cash equivalents - ending
  $ 13,646,000     $ 13,489,000  

 
5


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)
                 
 
   
Nine Months Ended
 
   
September 30,
 
   
2009
 
2008
 
Supplemental disclosures of cash flow information:
           
Cash paid during the period for interest
  $ 8,319,000     $ 10,364,000  
Cash paid during the period for income taxes
  $ 1,134,000     $ 1,814,000  
Noncash investing activities - security purchases due brokers
  $ -     $ 1,890,000  
                 
                 
               
               
See notes to unaudited consolidated financial statements.
       


 
6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)


Note 1.  Summary of Significant Accounting Policies

Certain information and footnote disclosures normally included in the unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation (the “Corporation”) and its wholly owned subsidiary, Atlantic Stewardship Bank (the “Bank”).  The Bank includes its wholly owned subsidiaries, Stewardship Investment Corp., Stewardship Realty, LLC and Atlantic Stewardship Insurance Company, LLC.  All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.  Certain prior period amounts have been reclassified to conform to the current presentation.  The consolidated financial statements of the Corporation have been prepared in conformity with accounting principles generally accepted in the United States of America.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses during the reporting periods.  Actual results could differ significantly from those estimates.

Material estimates

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and fair value of financial instruments.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

Basis of presentation

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.  However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results which may be expected for the entire year.  All share and per share amounts have been restated for stock splits and stock dividends.

Derivatives

Derivative financial instruments are recognized as assets or liabilities at fair value.  The Corporation’s derivative consists of an interest rate swap agreement, which is used as part of its asset liability management strategy to help manage interest rate risk related to its Subordinated Debentures.   The Corporation does not use derivatives for trading purposes.

The Corporation designated the hedge as a cash flow hedge, which is a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.  For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.  Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

The Corporation formally documented the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship.  This documentation includes linking the fair value of cash flow hedge to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.  The Corporation formally assessed, both at the hedge’s inception and on an ongoing basis, whether the derivative instrument used is highly effective in offsetting changes in fair values or cash flows of the hedged items.

 
7


When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that would be accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Subsequent events

Subsequent events have been evaluated through November 13, 2009 which is the date the financial statements were issued.

Adoption of New Accounting Standards

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards CodificationTM (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”.  This Codification has become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  The Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts, but will, instead, issue Accounting Standards Updates.  The adoption of SFAS 168 did not have a material effect on the Corporation’s results of operations or financial position.
 

In May 2009, the FASB issued Statement No. 165, “Subsequent Events”, which was codified into ASC 855-10.  This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

In April 2009, the FASB issued Staff Position 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which was codified into ASC 820-10.  This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.   In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value.  The guidance also requires increased disclosures.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

In April 2009, the FASB issued Staff Position No. 115-2 and FAS 124-2, Recognition and presentation of Other-Than-Temporary Impairments, which were codified into ASC 320-10-65.  This guidance amends existing guidance for determining whether impairment is other-than-temporary for debt securities.  This guidance requires an entity to access whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.  If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings.  For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.    Additionally, this guidance expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which were codified into ASC 825-10.  This guidance amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, which was codified into ASC 815-10.  This guidance amends and expands the disclosure requirements of SFAS 133 for derivative instruments and hedging activities.  This guidance requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51”, which was codified into ASC 810-10-65-1.  This guidance changes the accounting and reporting for minority interests, which are now re-characterized as noncontrolling interests and classified as a component

 
8


of equity within the consolidated balance sheet.  The adoption did not have a significant impact on the Corporation’s results of operations or financial position.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141 (revised 2007), “Business Combinations”, which was codified into ASC 805.  This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination.  The adoption did not have a material effect on the Corporation’s results of operations or financial position.

Recently Issued But Not Yet Effective Accounting Standards

In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), whose objective is to improve financial reporting by corporations involved with variable interest entities.  This standard has not yet been incorporated into the Codification.  SFAS 167 is effective for interim and annual reporting periods ending after November 15, 2009.  Early adoption is not permitted.  The Corporation plans to adopt this FASB in the first quarter of 2010.  The adoption SFAS 167 is not expected to have a material effect on the Corporation’s results of operations or financial position.

In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”), whose objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets.  This standard has not yet been incorporated into the Codification.  SFAS 166 is effective for interim and annual reporting periods ending after November 15, 2009.  Early adoption is not permitted.  The Corporation plans to adopt this FASB in the first quarter of 2010.  The adoption SFAS 166 is not expected to have a material effect on the Corporation’s results of operations or financial position.


 
9


Note 2.   Securities – Available for Sale and Held to Maturity

The fair value of the available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
 
   
September 30, 2009
 
         
Gross
   
Gross
       
   
Amoritzed
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Holding Gains
   
Holding Losses
   
Value
 
                         
U.S. government-sponsored agencies
  $ 25,490,000     $ 237,000     $ 27,000     $ 25,700,000  
Obligations of state and political
                               
  subdivisions
    5,286,000       175,000       -       5,461,000  
Mortgage-backed securities
    54,458,000       1,758,000       9,000       56,207,000  
Other equity investments
    3,020,000       85,000       13,000       3,092,000  
    $ 88,254,000     $ 2,255,000     $ 49,000     $ 90,460,000  
                                 
 
   
December 31, 2008
 
         
Gross
   
Gross
     
   
Amoritzed
   
Unrealized
   
Unrealized
 
Fair
 
   
Cost
   
Holding Gains
   
Holding Losses
 
Value
 
                         
U.S. government-sponsored agencies
  $ 48,949,000     $ 741,000     $ 30,000     $ 49,660,000  
Obligations of state and political
                               
  subdivisions
    6,004,000       6,000       190,000       5,820,000  
Mortgage-backed securities
    30,969,000       716,000       15,000       31,670,000  
Other equity investments
    2,908,000       -       35,000       2,873,000  
    $ 88,830,000     $ 1,463,000     $ 270,000     $ 90,023,000  
 
The following is a summary of the held to maturity securities and related unrecognized gains and losses:

   
September 30, 2009
 
         
Gross
   
Gross
       
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
   
Value
   
Holding Gains
   
Holding Losses
   
Value
 
                         
U.S. government-sponsored agencies
  $ 27,437,000     $ 199,000     $ 189,000     $ 27,447,000  
Obligations of state and political
                               
  subdivisions
    25,329,000       1,060,000       42,000       26,347,000  
Mortgage-backed securities
    22,466,000       771,000       8,000       23,229,000  
    $ 75,232,000     $ 2,030,000     $ 239,000     $ 77,023,000  
                                 
 
   
December 31, 2008
 
         
Gross
   
Gross
       
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
   
Value
   
Holding Gains
   
Holding Losses
   
Value
 
                         
U.S. government-sponsored agencies
  $ 10,290,000     $ 217,000     $ -     $ 10,507,000  
Obligations of state and political
                               
  subdivisions
    23,048,000       110,000       301,000       22,857,000  
Mortgage-backed securities
    15,518,000       271,000       3,000       15,786,000  
    $ 48,856,000     $ 598,000     $ 304,000     $ 49,150,000  

 
10


The following table presents the amortized cost and fair value of the investment securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment penalties, the actual maturities may differ from contractual maturities.  Securities not due at a single maturity date, such as mortgage-backed securities, are shown separately.

   
September 30, 2009
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
             
Maturity
           
Available for sale
           
Within one year
  $ -     $ -  
After one year, but within five years
    5,504,000       5,528,000  
After five years, but within ten years
    8,337,000       8,561,000  
After ten years
    16,935,000       17,072,000  
Mortgage-backed securities
    54,458,000       56,207,000  
Total
  $ 85,234,000     $ 87,368,000  
                 
Held to maturity
               
Within one year
  $ 1,020,000     $ 1,029,000  
After one year, but within five years
    10,665,000       10,937,000  
After five years, but within ten years
    27,267,000       27,757,000  
After ten years
    13,814,000       14,071,000  
Mortgage-backed securities
    22,466,000       23,229,000  
Total
  $ 75,232,000     $ 77,023,000  

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at September 30, 2009 and December 31, 2008, and if the unrealized loss was continuous for the twelve months prior to September 30, 2009 and December 31, 2008.

 
11


Available for Sale
                 
September 30, 2009
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
    Unrecognized    
Fair
    Unrecognized    
Fair
   
Unrecognized
 
   
Value
   
Holding Losses
   
Value
   
Holding Losses
   
Value
   
Holding Losses
 
                                     
U.S. government-
                                   
  sponsored agencies
  $ 4,486,000     $ (14,000 )   $ 1,987,000     $ (13,000 )   $ 6,473,000     $ (27,000 )
Obligations of state and
                                               
  political subdivisions
    -       -       450,000       -       450,000       -  
Mortgage-backed
                                               
  securities
    966,000       (9,000 )     -       -       966,000       (9,000 )
Other equity investments
    31,000       (4,000 )     31,000       (9,000 )     62,000       (13,000 )
     Total temporarily
                                               
          impaired securities
  $ 5,483,000     $ (27,000 )   $ 2,468,000     $ (22,000 )   $ 7,951,000     $ (49,000 )
 
December 31, 2008
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
    Unrecognized    
Fair
    Unrecognized    
Fair
   
Unrecognized
 
   
Value
   
Holding Losses
   
Value
   
Holding Losses
   
Value
   
Holding Losses
 
                                     
U.S. government-
                                   
  sponsored agencies
  $ 7,464,000     $ (30,000 )   $ -     $ -     $ 7,464,000     $ (30,000 )
Obligations of state and
                                               
  political subdivisions
    4,709,000       (190,000 )     -       -       4,709,000       (190,000 )
Mortgage-backed
                                               
  securities
    1,651,000       (8,000 )     438,000       (7,000 )     2,089,000       (15,000 )
Other equity investments
    40,000       (4,000 )     2,742,000       (31,000 )     2,782,000       (35,000 )
     Total temporarily
                                               
          impaired securities
  $ 13,864,000     $ (232,000 )   $ 3,180,000     $ (38,000 )   $ 17,044,000     $ (270,000 )
 
Held to Maturity
                 
September 30, 2009
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
    Unrecognized    
Fair
    Unrecognized    
Fair
   
Unrecognized
 
   
Value
   
Holding Losses
   
Value
   
Holding Losses
   
Value
   
Holding Losses
 
                                     
U.S. government-
                                   
  sponsored agencies
  $ 10,510,000     $ (189,000 )   $ -     $ -     $ 10,510,000     $ (189,000 )
Obligations of state and
                                               
  political subdivisions
    1,590,000       (33,000 )     408,000       (9,000 )     1,998,000       (42,000 )
Mortgage-backed