Attached files
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, 2009
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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.
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 $7,096,459.
As of March 17, 2010, 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.
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). Forward-looking statements may be
identified by the use of words such as "expects," "subject," "believe," "will,"
"intends," "will be," or "would." 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, 2009 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.
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.
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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 five additional branch offices located in Medford,
New Jersey, Burlington, New Jersey, Cherry Hill, New Jersey, Voorhees, New
Jersey and Mount Laurel, 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. At December 31, 2009,
the Company had total assets of $306.1 million, gross loans of $238.4 million,
total deposits of $249.5 million and shareholders' equity of $17.8 million.
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 legal
maximum amount.
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, 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").
In April 2009, the Bank opened its newest office, a mini branch, located at
6000 Midlantic Drive, Suite 90, in Mount Laurel, 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.
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 initial marketing efforts have depended
heavily upon its Board of Directors' and shareholders' referrals and employee
calling programs.
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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;
mortgage loans (conventional 30-year, commercial and jumbo real estate);
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, 2009, commercial loans totaled $91.7 million or 38.5% of
the total loan portfolio, including $39.5 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, 2009, the Bank had $124.8 million, or 52.3% 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, warehouse, 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 secured by income 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.
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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 generally originates 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.
The Bank offers adjustable rate loans with fixed rate periods of up to 5
years, with principal and interest calculated using a maximum 30-year (owner
occupied) or 25-year (non-owner occupied) amortization period. 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 charges a fee equal to a percentage of the loan
amount (commonly referred to as "points"). The Bank generally originates
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, 2009, construction loans totaled $12.1 million, or 5.1% 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, 2009, our obligations under standby letters of
credit totaled $1.3 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 in the range of 85% to 90% of the
appraised value, including any outstanding prior mortgage balance. At December
31, 2009, home equity loans totaled $9.7 million or 4.1% of the total loan
portfolio.
The Bank makes a very limited number of unsecured installment loans, which
includes unsecured revolving credit reserve accounts. As of December 31, 2009,
installment loans totaled $117 thousand or 0.1% of the total loan portfolio.
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, 2009, the Bank had approximately
$45.7 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, 2009, this loan to one borrower limit was approximately $4.3
million. This loans-to-one-borrower limit may be increased by an additional 10%
of adjusted capital funds, which at December 31, 2009 was approximately $2.9
million, if collateralized by readily marketable collateral, as defined by
regulation. At December 31, 2009, 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, 2009, consisted
of ten loan relationships totaling $9.2 million as compared to three loan
relationships totaling $2.4 million at December 31, 2008. The delinquent loan
relationships as of December 31, 2009 and 2008, were considered well
collateralized and were in the process of collection.
NON-PERFORMING ASSETS. Non-performing assets consist of non-accrual loans,
loans over ninety days delinquent and still accruing interest, renegotiated
loans and other real estate owned ("OREO"). Non-accrual loans are those on which
the accrual of interest has ceased. 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 market price 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, 2009 the Bank had $8.1 million in non-accrual loans as
compared to none at December 31, 2008. At December 31, 2009, the Bank had seven
impaired loan relationships totaling $8.1 million in which $6.4 million was
sufficiently collateralized and a specific reserve of $1.8 million has been
recorded for the remaining balance. The average balance of impaired loans
totaled $8.2 million for 2009 as compared to $2.4 million for 2008, and interest
income recorded on impaired loans during the year ended December 31, 2009
totaled $32 thousand as compared to $69 thousand for December 31, 2008.
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, 2009 the Bank had eight loans totaling $7.9 million
classified as substandard constituting 3.3 % of the Bank's loan portfolio,
compared to two loans totaling $261 thousand classified as substandard at
December 31, 2008, representing 0.1% of the Bank's then current loan portfolio.
The Bank had two loans classified as doubtful totaling $380 thousand at December
31, 2009 as compared to $0 at December 31, 2008.
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, 2009 the Company no real estate owned as compared
to one property with a carrying value $281 thousand at December 31, 2008. The
change reflects a sale of the property which occurred in December of 2009 on
which the Company recorded a $ 7 thousand gain on sale.
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, 2009, 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, 2009, the Bank held an HTM investment portfolio with an
amortized cost of $48.1 million, or 15.7% of total assets, with an estimated
fair market value of $47.3 million. The Bank had no AFS investments as of
December 31, 2009.
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, 2009 and 2008,
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, 2009, the Bank had advances outstanding with
the FHLB in the amount of approximately $29.9 million at a weighted average
interest rate of 2.03%. At December 31, 2009 and 2008, the Bank had no advances
outstanding against the credit line under the Overnight Repricing Advance
Program. At December 31, 2009, the Bank was eligible to borrow an additional $
25.8 million.
8
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.
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date.
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 Company has an outstanding balance on the line of credit of
$4.7 million under the loan and has contributed $4.4 million as additional
capital to the Bank.
PERSONNEL
At March 16, 2010, the Bank had 55 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 anti-competitive 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, 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 on a consolidated basis 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 are 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 to a holding
company on a consolidated basis.
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. During the third quarter of 2008, Congress
instituted the Emergency Economic Stabilization Act (the "Act") to address the
dysfunctional credit markets. Among other things, the Act authorized a temporary
increase in the FDIC insurance limit to $250 thousand from $100 thousand per
account. The FDIC also implemented a program to insure all deposits held in
noninterest-bearing transactional accounts, regardless of amount, at
institutions which do not opt out of the program and which pay an additional
assessment to the FDIC. The unlimited insurance coverage for noninterest bearing
transactional accounts will expire on June 30, 2010 for those institutions that
have elected not to opt out of the program and which pay an additional
assessment. The Bank elected not to opt out of this program, and is paying the
required assessment. The increased deposit insurance will expire on December 31,
2013, and the prior limits, described below, will go back into effect.
Prior to the fall of 2008, the Bank's deposits were insured up to a maximum
of $100 thousand per depositor ($250 thousand per IRA account) under the Deposit
Insurance Fund of the FDIC. Pursuant to the Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"), the FDIC has established a
risk-based assessment system. Premium assessments under this system are based
upon: (i) the probability that the insurance fund will incur a loss with respect
to the institution; (ii) the likely amount of the loss; and (iii) the revenue
needs of the insurance fund. To effectuate this system, the FDIC has developed a
matrix that sets the assessment premium for a particular institution in
accordance with its capital level and overall rating by the primary regulator.
10
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 will pay a special assessment of between 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 has
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, 2009, $1.4 million 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.
DIVIDENDS. 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.
The Company has declared a Preferred Stock Dividend payable on March 30,
2010, to shareholder's of record as of March 15, 2010, in the amount of $ 34
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, 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) 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.
The Bank was in compliance with the applicable minimum capital requirements
at December 31, 2009 and 2008. As of December 31, 2009, the Bank's management
believes that the Bank was "well-capitalized" under applicable FDIC capital
adequacy regulations.
11
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, the responsible federal regulatory agency is
permitted to approve the acquisition of a branch of an insured bank by an
out-of-state bank or bank holding company without the acquisition of the entire
bank or the establishment of a "DE NOVO" branch only if the law of the state in
which the branch is located permits out-of-state banks to acquire a branch of a
bank without acquiring the bank or permits out-of-state banks to establish "DE
NOVO" branches. Pennsylvania passed such a law. The corresponding New Jersey law
does not authorize establishment of interstate branches other than by means of
acquiring such branches from another institution.
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.
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 Bank's financial
statements must attest to the effectiveness of the Bank's internal control over
financial reporting. This requirement is not yet effective for smaller companies
like the Company. 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.
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.
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 DURING 2009, AND
THIS HAS AFFECTED OUR RESULTS OF OPERATIONS.
At December 31, 2009 our non-performing assets have increased to $8.1
million, or 2.6% of our total assets. At December 31, 2008, we had $281 thousand
in other real estate owned and no non-accrual loans. The change in our
non-performing assets reflected seven (7) non-accrual loan relationships
totaling $8.1 million which contributed to an increase of $2.3 million in the
provision for loan losses for the year ended December 31, 2009 from $221
thousand for the year ended December 31 2008. 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.
WE HAVE INCURRED LOSSES DURING THE PAST TWO YEARS.
We have operated at a loss for the past two years. For the year ended
December 31, 2008, we lost $87 thousand or $0.05 per share. In 2009, our loss
increased to $565 thousand, or $0.33 per share. Although we do not expect a
number of the factors that contributed to our increased losses in 2009, to
recur, such as FDIC special assessment, we can give you no assurances that we
will return to profitable operation, or, that we do retain profitability, we
will be able to consistently sustain profitability.
OUR FDIC DEPOSIT INSURANCE PREMIUMS HAVE INCREASED AND MAY CONTINUE TO
INCREASE, SUBSTANTIALLY INCREASING OUR NON-INTEREST EXPENSE.
13
During 2009, the FDIC has significantly increased its assessments for deposit
insurance due to the weakness in the economy and the increased number of bank
failures. In 2008, we paid $201 thousand in deposit insurance assessments, and
in 2009 this increased to $528 thousand. Premium assessment rates in the first
quarter of 2009 ranged from 5 to 43 basis points. The FDIC announced an
increased assessment, which went into effect for the second quarter of 2009,
which raised insurance premiums for the healthiest banks by 7 basis points, with
the new assessments ranging from 12 to 77.5 basis points. Banks like the Bank
that have opted to remain eligible for the FDIC's increased insurance program
for non-interest bearing deposit must also pay an assessment of 15-25 basis
points of the amount of non-interest bearing deposits in excess of $250
thousand. 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. This special
assessment resulted in additional premiums of $138 thousand.
Finally in December 2009, the FDIC required all insured depository institutions
to prepay premiums for the fourth quarter 2009 through the fourth quarter 2012.
This totaled $1.5 million for the Bank, and was paid in December 2009. The Bank
recorded this assessment as a prepaid expense and will amortize this amount over
the above mentioned period. As of December 31, 2009, the Bank had a $1.4 million
in prepaid expenses related to this assessment which has been recorded within
"Other Assets" in the Statement of Financial Condition.
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
economic contraction. 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.
The Bank opened an additional branch in April 2009. 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. Accordingly, there can be no assurance that the Bank
will be successful in managing its expansion, 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.
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.
14
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 Bank 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.
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 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.
15
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.
FUTURE GOVERNMENTAL REGULATION AND LEGISLATION COULD NEGATIVELY AFFECT OUR
FUTURE RESULTS OF OPERATION.
We are subject to extensive state and federal regulation, supervision and
legislation that govern almost all aspects of our operations. These laws may
change from time to time and are primarily intended for the protection of
consumers and depositors. Any changes to these laws may increase our costs and
negatively impact our business. While we cannot predict what effect any
presently contemplated or future changes in the laws or regulations or their
interpretations would have on us, these changes could be materially adverse to
our shareholders.
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.
16
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 on 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. On February 10, 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.
VOORHEES, NJ BRANCH. On October 18, 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.
MOORESTOWN, NJ MAIN STREET BRANCH . In November 2006, the Bank acquired a
site in Moorestown, New Jersey for a purchase price of $445,000, where the Bank
built and now operates a full service branch. The new branch located at 253 West
Main Street in Moorestown, is a stand-alone- facility opened in June 2008. The
branch includes teller windows, a lobby area, drive-through windows, an
automated teller machine and a night depository.
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 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.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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 eight market makers for the Company's stock
including: Automated Trading Desk Financial Services, LLC; Boenning &
Scattergood, Inc.; Janney Montgomery Scott LLC; RBC Capital Markets Corporation;
Monroe Securities, Inc.; Knight Equity Markets, L.P.; Pershing, LLC; and Stifel,
Nicholas & Company, Incorporated.
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:
17
2009 2008
----------------------------------- -----------------------------------
HIGH LOW HIGH LOW
--------------- --------------- --------------- ----------------
First Quarter $7.00 $4.00 $8.51 $6.84
Second Quarter $5.00 $3.10 $8.45 $6.60
Third Quarter $6.00 $5.00 $7.50 $6.25
Fourth Quarter $5.00 $3.75 $7.55 $6.55
The quotations reflect inter-dealer bids, without retail mark-up, mark-down
or commission, and may not represent actual transactions. As of March 2, 2010
there were approximately 426 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.
The Bank engages in the business of commercial banking, primarily within a
geographic market area centered around its 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 and
6000 Midlantic Drive, Suite 90, Mount Laurel, New Jersey. The Bank operates 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 the
Bank's market area.
We have adopted a strategy of continued growth. At December 31, we had
total assets of $306.1 million, total deposits of $249.5 million and total
loans, net of $235.0 million compared to total assets of $247.5 million, total
deposits of $202.0 million and total loans, net of $193.0 million at December
31, 2008. 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.
18
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income received from its
interest-earning assets, such as loans and investment securities, and the
interest expense incurred in connection with the Bank's 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. The Bank also generates non-interest income such as service charges
on deposit accounts, fees from residential mortgage loans sold and other
miscellaneous income. The Bank's non-interest expense primarily consists of
employee compensation and benefits, net occupancy, data processing and
professional services, marketing and other operating costs. In addition, the
Bank is subject to losses from its loan and investment portfolios if borrowers
fail to meet their obligations or if the value of the securities is permanently
impaired. The results of the Bank's 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. The Bank's 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 the Bank's 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 a net loss of $565 thousand or $0.33 per share for the
year ended December 31, 2009, compared to a net loss of $87 thousand or $0.05
per share for the year ended December 31, 2008. The change in our results of
operations in 2009 reflects an increase of $2.1 million in net interest income,
offset by increases of $2.3 million in the provision for loan losses, $327
thousand in special assessment and regular FDIC insurance premium
19
expense and $407 thousand in salary and benefit costs, net occupancy costs and
other non-interest expenses incurred in connection with the Bank's expansion
including costs relating to the Bank's Moorestown Main Street Branch office
which opened in June 2008. Net income for the fourth quarter of 2009 increased
by $ 422 thousand over earnings in the prior year's fourth quarter, to $460
thousand, or $0.25 per diluted share, as compared to net income of $ 38
thousand, or $0.02 per diluted share for the same period in 2008 and net income
of $269 thousand or $0.15 per diluted share, for the third quarter of 2009.
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 the principal source of income for the Bank. Net interest
income for the year ended December 31, 2009 was $9.0 million compared to $6.9
million for the year ended December 31, 2008. The increase in net interest
income for the year 2009 is directly related to the $59.4 million or 28.7%
increase in average interest-earning assets as compared to 2008. The increase in
average interest-earning assets during 2009 as compared to 2008 was attributable
to $54.1 million or 32.1% growth in average loans, coupled with an increase of
$5.3 million or 13.8% in average investment securities. As a result of these
increases in interest earning assets, our total interest income increased by
$2.4 million or 18.9% to $14.8 million for 2009 from $12.5 million for 2008.
Average interest bearing deposits increased in 2009 by $52.7 million and average
borrowed funds increased by $993 thousand over 2008 levels, increasing total
interest expense by $284 thousand or 5.1% to $5.9 million for 2009 from $5.6
million for 2008. The yield on average interest-earning assets decreased by 46
basis points to 5.56% for 2009, compared to 6.02% for 2008, and the cost of
interest-bearing liabilities decreased by 55 basis points to 2.45% in 2009,
compared to 3.00% in 2008, and was directly responsible for the 4 basis point
increase to the Bank's net interest margin between 2009 and 2008. The net
interest margin for 2009 was 3.36% compared to 3.32% for 2008. The net interest
margin for the three month period ended December 31, 2009 was 3.92% compared to
3.33% for the three month period ended December 31, 2008, 3.49% for the three
month period ended September 30, 2009, 3.27% for the three month period ended
June 30, 2009, and 3.10% for the three month period ended March 31, 2009. The
net interest margin improvement experienced during 2009 was caused by a
favorable and competitive interest rate environment, which compelled the Bank to
price loans and deposits as such to remain competitive within the Bank's primary
market area.
20
The following table indicates the average volume of interest-earning assets and
interest-bearing liabilities and average yields and rates for the Bank for the
years ended December 31, 2009, 2008 and 2007.
2009 2008 2007
---------------------------- ---------------------------- -----------------------------
(dollars in thousands)
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------ -------- ------- ------- -------- ------ ------- -------- --------
Assets
Loans:
Commercial $ 77,925 $ 4,167 5.35% $ 44,536 $ 2,699 6.06% $ 28,046 $ 2,197 7.83%
Commercial mortgage 114,649 7,131 6.22 93,215 6,074 6.52 74,929 5,336 7.12
Mortgage 20,024 1,082 5.40 20,795 1,293 6.22 22,063 1,383 6.27
Consumer 10,193 462 4.53 10,145 523 5.16 8,588 608 7.08
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans 222,791 12,842 5.76 168,691 10,589 6.28 133,626 9,524 7.13
Investments:
Federal funds sold 2,479 7 .27 4,874 108 2.22 2,281 113 4.95
Securities available for sale - - 0.00 2,329 113 4.86 6,178 263 4.26
Securities held to maturity 41,610 1,991 4.79 31,540 1,670 5.29 33,745 1,548 4.59
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total investments 44,089 1,998 4.53 38,743 1,891 4.88 42,204 1,924 4.56
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 266,880 14,840 5.56% 207,434 12,480 6.02% 175,830 11,448 6.51%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Allowance for loan losses (2,408) (1,208) (1,066)
Cash and due from banks 5,038 4,883 4,412
Fixed assets (net) 8,101 8,007 6,941
REO 209 369 351
Other assets 8,842 7,564 5,395
------- -------- --------
Total Assets $286,662 $227,049 $191,863
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Interest-bearing demand $ 18,001 $ 132 .73% $ 18,24 $ 211 1.16% $ 21,071 $ 581 2.76%
Money market deposits 77,317 1,281 1.66 59,754 1,481 2.48 31,289 1,092 3.49
Statement savings 3,306 27 .83 4,248 57 1.35 5,055 164 3.24
Certificates of deposit 107,731 3,259 3.02 71,391 2,757 3.86 79,480 3,937 4.95
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing deposits 206,355 4,699 2.28 153,638 4,506 2.93 136,895 5,774 4.22
Borrowed funds 33,618 1,174 3.49 32,625 1,083 3.32 13,465 648 4.81
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 239,973 5,873 2.45 186,263 5,589 3.00 150,360 6,422 4.27
-------- ------- ------ -------- ------- ------ -------- ------- ------
Non-interest bearing deposits 26,315 24,742 25,454
Other liabilities 1,129 603 568
Shareholders' equity 19,245 15,441 15,481
-------- ------- -------
Total Liabilities and
Shareholders' Equity $286,662 $227,049 $191,863
======== ======== ========
Net interest income 8,967 6,891 5,026
====== ====== ======
Interest rate spread (1) 3.11% 3.02% 2.24%
====== ====== ======
Net interest margin (2) 3.36% 3.32% 2.86%
====== ====== ======
Ratio of average interest-earning
assets to interest-bearing
liabilities 111.21% 111.37% 116.94%
====== ====== ======
Return on average assets -0.14% -0.03% -0.05%
====== ====== ======
Return on average equity -2.15% -0.44% -0.57%
====== ====== ======
(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 the Bank's interest-earning
assets and the Bank's funding sources. The Bank's ability to maximize its net
interest income depends on the volume of its 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. 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.
------------------------------------------
YEAR ENDED DECEMBER 31, 2009 VS.
YEAR ENDED DECEMBER 31, 2008
------------------------------------------
TOTAL
INCREASE
(dollars in thousands) VOLUME RATE (DECREASE)
-------- -------- ----------
Interest income:
Commercial $ 1,785 $ (317) $ 1,468
Commercial Mortgage 1,333 (276) 1,057
Mortgage (42) (170) (212)
Consumer 2 (63) (61)
Federal funds sold (7) (94) (101)
Investment securities available for
sale - (112) (112)
Investment securities held to maturity 482 (161) 321
-------- ------- --------
Total interest-earning assets 3,553 (1,193) 2,360
Interest expense:
Interest-bearing demand (2) (77) (79)
Money market 291 (491) (200)
Statement savings (8) (22) (30)
Certificates of deposit 1,099 (597) 502
Borrowings 35 56 91
-------- ------- --------
Total interest-bearing liabilities 1,415 (1,131) 284
-------- ------- --------
Net change in net interest income $ 2,138 $ (62) $ 2,076
======== ======= ========
PROVISION FOR LOAN LOSSES
We recorded a provision for loan losses for year ended December 31, 2009 of
$2.5 million of which $1.8 million was related to four specific loan
relationships, compared to a provision of $221 thousand for the same period in
2008. 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, 2009, management believes the credit quality of our loan portfolio remains
strong during this turbulent time in the market. At December 31, 2009, our
`allowance for loan losses represented 1.44% of total loans outstanding and
42.1% of non-performing loans.
NON-INTEREST INCOME
Non-interest income, which is comprised principally of service charges on
deposit accounts, ATM fees, origination fees from residential mortgage loans
sold, bank owned life insurance income and other miscellaneous fee income, was
$611 thousand for the year ended December 31, 2009 compared to $419 thousand for
the year ended December 31, 2008. The increase in non-interest income during
2009 is the result of increases of $10 thousand in bank owned life insurance
income, $109 thousand in service charges on deposit accounts, $22 thousand in
origination fees on residential mortgage loans sold and $101 thousand on gain on
sale of SBA loans, offset by a $57 thousand decrease in gain on sale of fixed
assets related to the sale of the Bank's Burlington Branch office in March 2008.
22
NON-INTEREST EXPENSE
Non-interest expense, which is comprised principally of salaries and
employee benefits, net occupancy, advertising, data processing, professional
services and other operating costs, increased by $734 thousand to $8.1 million
for the year ended December 31, 2009 as compared to $7.3 million for the year
ended December 31, 2008. This increase was primarily the result of $327 thousand
in increased special assessment and regular FDIC premium expense and $407
thousand in increased salary and benefit costs attributable to staff expansion
to sustain the Bank's continued growth, net occupancy costs, and other
non-interest expenses incurred in connection with the Bank's expansion coupled
with the operational costs relating to the Bank's Main Street office which
opened in June 2008.
INCOME TAXES
The Company recorded an income tax benefit of $461 thousand for the year
ended December 31, 2009, compared to an income tax benefit of $164 thousand for
the year ended December 31, 2008. The change in income tax benefit in 2009 is
primarily the result of a higher pretax loss as well as increased tax exempt
income from Bank Owned Life Insurance for December 31, 2009 compared to December
31, 2008.
FINANCIAL CONDITION
Total assets at December 31, 2009 were $306.1 million, an increase of $58.6
million or 23.7% over total assets at December 31, 2008. This change was due to
increases in loans receivable, net of allowance for loan losses, of $42.0
million; investments held to maturity of $19.7 million; bank owned life
insurance of $173 thousand; Federal Home Loan Bank of New York ("FHLB") stock of
$195 thousand; deferred taxes of $692 thousand and accrued interest receivable
and other assets in the aggregate amount of $1.4 million. These increases were
partially offset by decreases in cash and cash equivalents of $4.6 million,
premises and equipment of $598 thousand and other real estate owned of $281
thousand.
Total shareholders' equity at December 31, 2009 amounted to $17.8 million,
an increase of $2.4 million or 15.8% over December 31, 2008. The increase in
shareholders equity is attributable to the issuance of $1.1 million in common
stock in June 2009 and the issuance of $1.9 million in preferred stock in
December 2009, partially offset by a net loss of $565 thousand.
LOAN PORTFOLIO
The Bank offers business and personal loans generally on a secured basis,
including: commercial loans (term and time); commercial lines of credit;
mortgage loans (conventional 30-year, commercial and jumbo residential real
estate); commercial and residential construction loans; letters of credit; and
consumer loans (home equity and installment). The Bank makes commercial loans to
small and medium-sized businesses primarily in the Bank's market area for
purposes of providing working capital, supporting accounts receivable,
purchasing inventory and acquiring fixed assets.
Loans receivable at December 31, 2009 reached $238.4 million, an increase
of $44.3 million or 22.8% from December 31, 2008. This increase was attributable
to increases in commercial loans of $31.1 million and commercial real estate
loans of $14.6 million, partially offset by decreases in construction loans of
$219 thousand, loans to consumers of $846 thousand and residential real estate
loans of $209 thousand. The increases in loans receivable are primarily related
to the competitive pricing of the Bank's loan products along with the continued
development of relationships with local small businesses, which management
believes are attracted to the Bank by the high level of individualized service
provided by the Bank through its growing team of lenders.
The following table sets forth-selected data relating to the composition of
the Bank's loan portfolio, net of deferred loan fees, at the dates indicated.
(dollars in thousands) 2009 2008 2007 2006 2005
---------------- ----------------- ------------------ ------------------- ----------------
TYPE OF LOANS: AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------------
Commercial $91,679 38.5% $60,669 31.3% $31,417 21.5% $27,581 23.5% $22,791 24.7%
Real Estate, Commercial 105,605 44.3% 91,036 46.9% 73,863 50.6% 53,856 45.9% 44,125 47.9%
Real Estate, Residential 19,122 8.0% 19,326 10.0% 21,303 14.6% 15,068 12.8% 7,621 8.3%
Construction 12,093 5.1% 12,309 6.3% 10,864 7.4% 11,783 10.0% 9,074 9.8%
Consumer 9,925 4.1% 10,764 5.5% 8,594 5.9% 9,044 7.7% 8,549 9.3%
-------- ----- -------- ----- -------- ----- -------- ----- ------- ------
Total $238,424 100.0% $194,104 100.0% $146,041 100.0% $117,332 100.0% $92,160 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======= ======
See Note 5 to Consolidated Notes to Financial Statements for additional
information regarding loans.
23
The following table sets forth the contractual maturity of the Bank's loan
portfolio, net of deferred loan fees, at December 31, 2009. 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 $ 18,721 $ 36,776 $ 36,182 $ 91,679
Real Estate Commercial 14,951 35,169 55,485 105,605
Real Estate Residential 1,170 910 17,042 19,122
Construction 10,321 1,028 744 12,093
Consumer 68 562 9,295 9,925
-------- -------- --------- --------
Total amount due $ 45,231 $ 74,445 $ 118,748 $ 238,424
======== ========= ========= =========
The following table sets forth loan maturities by interest rate type at
December 31, 2009.
MATURITIES MATURITIES
LESS THAN 1 GREATER THAN
(dollars in thousands) YEAR 1 YEAR TOTAL
----------- ------------ --------
Fixed Interest Rate Loans $14,728 $132,661 $147,389
Variable Rate Interest Loans 26,612 64,338 90,950
Overdrawn Accounts 85 - 85
------- -------- --------
$41,425 $196,999 $238,424
======= ======== ========
NON-PERFORMING ASSETS
Non-performing assets include non-accrual loans, which are loans on which
the accrual of interest has ceased, impaired loans, restructured loans and 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. 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. At December 31, 2009, the Bank
had $8.1 million in non-accrual loans as compared to none at December 31, 2008.
At December 31, 2009, the Bank had seven impaired loan relationships totaling
$8.1 million of which $6.4 million was sufficiently collateralized and a
specific reserve of $1.8 million has been recorded for the remaining balance. At
December 31, 2008, the Bank had three impaired loan relationships totaling $2.4
million which were sufficiently collateralized and therefore no specific
reserves have been recorded against them. The average balance of impaired loans
totaled $8.2 million for 2009, interest income recorded on impaired loans during
the year ended December 31, 2009 totaled $32 thousand.
Included in the balance of the loans past due 90 days or more is a
principal balance of $634 thousand dollars representing the Bank's 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 the Bank has 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, 2009, the Bank
had no real estate owned compared to $281 thousand in real estate owned at
December 31, 2008. The change reflects the sale of real estate owned in December
of 2009.
24
The following table provides information regarding risk elements in the
loan portfolio as of December 31, 2005 through 2009.
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(dollars in thousands) 2009 2008 2007 2006 2005
----------- ----------- ------------ ------------ ------------
Loans past due 90 days or more and accruing
Commercial $ - $ - $ 357 $ 718 $ 336
Real Estate 2,399 2,375 7 - -
Construction - - 607 - -
Consumer - - - - -
------ ------ ------ ------ ------
Total loans past due 90 days or more and
accruing 2,399 2,375 971 718 336
====== ====== ====== ====== ======
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(dollars in thousands) 2009 2008 2007 2006 2005
----------- ----------- ------------ ------------ ------------
Non-performing assets:
Non-accrual loans:
Commercial $5,123 - - - -
Real Estate 3,020 - - - -
Construction - - - - -
Consumer - - - - -
------ ------ ------ ------ ------
Total 8,143 - - - -
Restructured loans - - - - -
------ ------ ------ ------ ------
Total non-performing loans
8,143 - - - -
Real estate owned - 281 466 - -
------ ------ ------ ------ ------
Total non-performing assets $8,143 $ 281 $ 466 $ - $ -
====== ====== ====== ====== ======
Non-performing loans as a percentage of loans 3.41% 0.14% 0.32% 0.00% 0.00%
====== ====== ====== ====== ======
Non-performing assets as a percentage of
loans and real estate owned 3.41% 0.14% 0.32% 0.00% 0.00%
====== ====== ====== ====== ======
Non-performing assets as a percentage of
total assets 2.66% 0.11% 0.22% 0.00% 0.00%
====== ====== ====== ====== ======
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. The Bank's historic loss rates and the loss rates of
peer financial institutions are also considered. During 2009, the Bank further
refined its loan loss assumptions by re-evaluating the average lives of the
various components of its loan portfolio and adjusted them to reflect the
current average life cycle attributes that the Bank had 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.
25
The following table sets forth information with respect to the Bank's
allowance for losses on loans:
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(dollars in thousands) 2009 2008 2007 2006 2005
------------ ----------- ------------ ------------ -------------
Balance at beginning of year $ 1,133 $ 1,050 $ 1,050 $ 948 $ 1,005
Provision:
Commercial 1,476 125 - - 153
Real Estate 715 85 - - (15)
Construction - - - - 101
Consumer 321 (9) - - 4
Unallocated 18 20 - - -
-------- -------- -------- -------- -------
Total Provision 2,530 221 - - 243
Charge-offs:
Commercial 231 138 - - 311
Consumer - - - - 4
-------- -------- -------- -------- -------
Total Charge-offs 231 138 - - 315
-------- -------- -------- -------- -------
Recoveries:
Commercial - - - 100 15
Consumer - - - 2 -
-------- -------- -------- -------- -------
Total Recoveries - - - 102 15
-------- -------- -------- -------- -------
Net charge-offs 231 138 - 102 300
======== ======== ======== ======== =======
Balance at end of period $3,432 $1,133 $1,050 $1,050 $948
======== ======== ======== ======== =======
Period-end loans outstanding $238,424 $194,104 $146,041 $117,332 $92,160
======== ======== ======== ======== =======
Average loans outstanding $222,791 $168,691 $133,625 $104,650 $84,213
======== ======== ======== ======== =======
Allowance as a percentage of period-end loans 1.44% 0.58% 0.72% 0.89% 1.03%
Net charge-offs as a percentage of average
loans 0.10% 0.08% NA 0.01% 0.39%
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
The following table sets forth the allocation of the Bank's 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,
------------------------------------------------------------------
2009 2008
------------------------- ---------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
(dollars in thousands) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------- -------------
Commercial $1,724 38.5% $ 492 31.3%
Real Estate Commercial 1,050 44.3 336 46.9
Real Estate Residential 447 8.0 126 10.0
Construction 115 5.1 101 6.3
Consumer 96 4.1 78 5.5
------ ----- ------ -----
Total $3,432 100.0% $1,133 100.0%
====== ===== ====== ======
AT DECEMBER 31,
------------------------------------------------------------------
2009 2008
------------------------- ---------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
(dollars in thousands) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------- -------------
Commercial $ 460 21.5% $ 441 23.5%
Real Estate Commercial 251 50.6 294 45.9
Real Estate Residential 173 14.6 90 12.8
Construction 113 7.4 177 10.1
Consumer 53 5.9 48 7.70
------ ----- ------ -----
Total $1,050 100.0% $1,050 100.0%
====== ===== ====== =====
AT DECEMBER 31,
----------------------
2005
-----------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
(dollars in thousands) AMOUNT TOTAL LOANS
------ -------------
Commercial $474 24.7%
Real Estate Commercial 241 47.9
Real Estate Residential 24 8.3
Construction 179 9.8
Consumer 30 9.3
---- -----
Total $948 100.0%
==== =====
26
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 most
securities as held to maturity, and to a lesser extent, available for sale. As
of December 31, 2009 there were no investments classified as available for sale.
Investment securities held to maturity totaled $48.1 million at December
31, 2009, an increase of $19.7 million or 69.2% from December 31, 2008. The
estimated fair value of the held to maturity investment portfolio was $47.3
million at December 31, 2009 and $28.5 million at December 31, 2008. The
increase in investment securities reflects management's efforts to further
diversify its growing balance sheet and to more prudently manage its capital
base by investing in lower risk weighted assets.
During 2009, held to maturity investment purchases totaled $58.1 million
and were concentrated in U.S. Government agency securities and GNMA mortgage
backed securities. The Bank did not purchase any available for sale securities
during 2009. During this same period, the Bank received $38.4 million in
investment repayments in U.S. Government agency and mortgage backed securities.
The following table sets forth the carrying value of the Bank's investment
portfolio at the dates indicated:
(dollars in thousands) 2009 2008 2007
------- ------- -------
INVESTMENT SECURITIES HELD TO MATURITY
Government agency obligations $39,019 $26,653 $33,915
Mortgage backed securities 9,040 1,745 2,412
------- ------- ------
Total investment securities held to maturity $48,059 $28,398 $36,327
======= ======= =======
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Government agency obligations $ - $ - $2,984
------- ------- ------
Total investment securities available for $ - $ - $2,984
======= ======= =======
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth information regarding the carrying values,
estimated fair values, and weighted average yields for the Bank's investment
securities portfolio at December 31, 2009 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 $ - $ - $18,750 $20,269 $39,019
Weighted average yield -% -% 4.25% 4.57% 4.42%
Mortgage backed securities:
Carrying value - - - 9,040 9,040
Weighted average yield - - - 4.70% 4.70%
------ ----- ------- ------- -------
Total carrying value $ - $ - $18,750 $29,309 $48,059
====== ===== ======= ======= =======
Total fair value $ - $ - $18,471 $28,823 $47,294
====== ===== ======= ======= =======
Weighted average yield -% -% 4.25% 4.61% 4.47%
====== ===== ======= ======= =======
27
SOURCES OF FUNDS
GENERAL
Deposits are the primary source of funds for the Bank's 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 rate market conditions.
DEPOSITS
The Bank offers 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. 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. The Bank does not obtain funds through brokers,
nor does it solicit funds outside the State of New Jersey.
Total deposits at December 31, 2009 were $249.5 million, an increase of
$47.5 million or 23.5% from December 31, 2008. This increase in deposits
occurred in interest bearing deposits ($9.7 million increase) in certificates of
deposit ($21.5 million increase) in non-interest bearing deposits ($16.3 million
increase). The change in deposits was primarily related to the competitive
pricing of the Bank's deposit products coupled with the continued development of
relationships with local small businesses along with the high level of
individualized service provided by the Bank's team of retail branch managers,
which together fostered growth in deposits.
The following table sets forth the distribution of the Bank's average
balance of deposit accounts for the years ended December 31, 2009, 2008 and 2007
and the weighted average cost for each category of deposit.
2009 2008 2007
--------------------------------- -------------------------------- --------------------------------
PERCENT PERCENT
OF WEIGHTED OF WEIGHTED PERCENT WEIGHTED
AVERAGE TOTAL AVERAGE AVERAGE TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
(dollars in thousands) BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
-------- -------- --------- -------- -------- -------- -------- --------- ---------
Checking $ 44,316 19.0% 0.29% $ 42,987 24.1% 0.48% $ 46,525 28.7% 1.24%
Money market deposit 77,317 33.2 1.66 59,754 33.5 2.48 31,289 19.3 3.49
Statement savings 3,306 1.4 0.83 4,248 2.4 1 35 5,055 3.0 3.24
Certificates of deposit 107,731 46.4 3.02 71,391 40.00 3 86 79,480 49.0 4.95
------- ----- ---- -------- ----- ---- -------- ----- ----
Total deposits $232,670 100.0% 2.01% $178,380 100.0% 2.52% $162,349 100.0% 3.55%
======== ===== ==== ======== ===== ==== ======== ===== ====
The following table indicates the amount of the Bank's certificates of
deposit of $100 thousand or more by time remaining until maturity as of December
31, 2009 and 2008.
2009 2008
CERTIFICATES OF CERTIFICATES OF
(dollars in thousands) DEPOSIT DEPOSIT
--------------- ---------------
MATURITY PERIOD
Within three months $ 8,138 $ 6,483
Three through six months 10,456 5,285
Six through twelve months 10,335 16,818
Over twelve months 14,652 4,499
------- -------
$43,581 $33,085
======= =======
See Note 7 to Notes to Consolidated Financial Statements for additional
information regarding deposits.
28
BORROWINGS
Although deposits are the primary source of funds for the Bank's lending
and investment activities as well as for general business purposes, the Bank
also utilizes borrowings to supplement deposits when deposit funding is not
adequate or when borrowing costs are more favorable than comparable deposits.
At December 31, 2009, the Bank had borrowings in the form of advances with
the FHLB in the amount of $29.9 million, an increase of $3.6 million from
December 31, 2008. The weighted average interest rate on borrowings from FHLB
was 2.03% at December 31, 2009 compared to 3.62% at December 31, 2008. Pursuant
to collateral agreements with the FHLB, advances are secured by a blanket lien
on the Bank's residential mortgage loan portfolio and securities held in
safekeeping with FHLB.
The following table sets forth the contractual maturity and the weighted
average interest rate of the Bank's borrowings at December 31, 2009:
UNDER 1 - 5 5 - 10 OVER 10
(dollars in thousands) 1 YEAR YEARS YEARS YEARS TOTAL
------ ----- ------ ------- -------
Advances from the FHLB $19,883 $10,000 $ - $ - $29,883
Weighted average interest rate 2.25% 1.60% -% -% 2.03%
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date.
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 Company has an outstanding balance on the line of credit of $4.7
million under the loan and has contributed $4.4 million as additional capital to
the Bank.
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 the Bank's net
interest income while creating an asset/liability structure that maximizes
earnings. The Asset Liability Management Committee actively monitors and manages
the Bank's 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.
29
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.
The Bank 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 the Bank's 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.
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 the Bank's interest-earning
assets and interest-bearing liabilities at December 31, 2009, 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 $ - $ - $ - $ - $ -
Investment securities held to
maturity - - 48,059 - 48,059
Loans receivable 107,755 75,250 55,419 - 238,424
-------- -------- ----------- -------- --------
Total interest-earning assets 107,755 73,250 103,478 - 286,483
-------- -------- ----------- -------- --------
NON-RATE SENSITIVE ASSETS:
Other Assets - - - 19,661 19,661
-------- -------- ----------- -------- --------
Total assets $107,755 $ 75,250 $103,478 $ 19,661 $306,144
======== ======== =========== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand $ 19,282 $ - $ - $ - $ 19,282
Statement savings 3,430 - - - 3,430
Money market 76,420 - - - 76,420
Certificates of deposit 71,976 40,885 - - 112,861
Subordinated Debt 3,000 - - - 3,000
Borrowings 19,883 14,672 - - 34,555
-------- -------- ----------- -------- --------
Total interest-bearing
liabilities 193,991 55,557 - - 249,548
-------- -------- ----------- -------- --------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 37,500 37,500
Other liabilities - - - 1,283 1,283
Capital - - - 17,813 17,813
-------- -------- ----------- -------- --------
Total liabilities and capital $193,991 $ 55,557 $ - $ 56,596 $306,144
======== ======== =========== ======== ========
Period GAP $(86,236) $ 19,693 $103,478 $(36,935)
Cumulative interest-earning assets $107,755 $183,005 $286,483
Cumulative interest-bearing
liabilities $193,991 $249,548 $249,548
Cumulative GAP $(86,236) $(66,543) $ 36,935
Cumulative RSA/RSL (1) 55.55% 73.3% 114.80%
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
30
Based upon the above gap analysis and other modeling techniques utilized by the
Bank, the interest rate risk profile of the Bank is within Board approved
tolerance limits.
LIQUIDITY
Liquidity represents the Bank's ability to meet its normal cash flow
requirements for the funding of loans, repayment of deposits and payment of
operating costs. The Bank's primary sources of liquidity include deposits,
amortization and prepayment of loans, maturities and repayments of investment
securities, and the Bank's 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, the Bank has 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 to the Bank 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 Bank's
residential mortgage loan portfolio. At December 31, 2009 and 2008, the Bank had
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.
The Bank had cash and cash equivalents of $4.7 million at December 31, 2009
and $9.4 million at December 31, 2008 in the form of cash, due from banks and
federal funds sold. At December 31, 2009, unused lines of credit available to
the Bank's customers and committed, undisbursed loan proceeds including letters
of credit totaled $45.7 million. Certificates of deposit scheduled to mature in
one year or less totaled $72.0 million at December 31, 2009. Based on the Bank's
experience, management believes that a substantial amount of these certificates
of deposit will remain with the Bank upon maturity. The Bank anticipates that it
will continue to have sufficient funds available to meet the needs of its
customers for deposit repayments and loan fundings.
The Bank's ability to generate deposits depends on the success of its
branches and the continued expansion of its branch network. The Bank's success
is dependent on a number of factors, including the Bank's 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 the Bank will
incur start-up 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 Bank's asset and liability management
process. The Bank met the definition of a "well-capitalized" institution at
December 31, 2009 and "adequately-capitalized" as December 31, 2008. 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, 2009, 2008 and 2007 are presented in
the following table:
2009 2008 2007
----- ---- ----
Shareholders' equity to total assets 5.8% 6.2% 7.3%
Leverage ratio 7.3% 6.2% 7.5%
Risk-based capital ratios:
Tier 1 8.5% 7.2% 9.4%
Total Capital 10.7% 9.1% 10.0%
31
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date.
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 Company has an outstanding balance on the line of credit of
$4.7 million under the loan 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 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank 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, 2009 were $45.7 million. 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.
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, 2009, the
Bank's obligations under standby letters of credit totaled $1.3 million.
The Bank has 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, 2009, the Bank's future minimum operating lease
obligations totaled $1.8 million.
32
The off-balance sheet arrangements discussed above did not have, and the
Bank believes are not reasonably likely to have in the foreseeable future, a
material impact on the Bank's 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.
CONTRACTUAL OBLIGATIONS
The following table represents the Bank's aggregate contractual obligations
to make future payments as of December 31, 2009.
ONE YEAR OR ONE - FIVE OVER FIVE
(dollars in thousands) LESS YEARS YEARS TOTAL
----------- ---------- --------- --------
Time deposits $71,976 $40,885 $ - $112,861
Long term debt 19,883 10,000 - 29,883
Subordinated Debt - 3,000 - 3,000
------- ------- ---- --------
Operating lease 292 946 606 1,844
------- ------- ---- --------
Total $92,151 $54,831 $606 $147,588
======= ======= ==== ========
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 34
Consolidated Statements of Financial Condition 35
Consolidated Statements of Operations 36
Consolidated Statements of Changes in Shareholders Equity 37
Consolidated Statements of Cash Flows 38
Notes to Financial Statements 39
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2009 and 2008, and the related consolidated statements of operations,
changes in shareholders' 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 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Cornerstone
Financial Corporation and subsidiary as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
------------------------
Philadelphia, PA
March 30, 2010
34
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data) December 31, 2009 December 31, 2008
----------------- -----------------
ASSETS:
Cash and due from banks $ 4,742 $ 5,033
Federal funds sold - 4,335
-------- --------
Cash and cash equivalents 4,742 9,368
-------- --------
Investment securities:
Held to maturity (fair value 2009 - $47,294;
2008 - $28,487) 48,059 28,398
Loans receivable 238,424 194,104
Less allowance for loan losses 3,432 1,133
-------- --------
Loans receivable, net 234,992 192,971
-------- --------
Federal Home Loan Bank stock 1,572 1,377
Premises and equipment, net 7,871 8,469
Accrued interest receivable 1,484 1,217
Bank owned life insurance 4,521 4,348
Deferred taxes 1,154 462
Other Real Estate Owned - 281
Other assets 1,749 644
-------- --------
TOTAL ASSETS $306,144 $247,535
======== ========
LIABILITIES:
Non-interest bearing deposits $ 37,500 $ 21,187
Interest bearing deposits 99,132 89,450
Certificates of deposit 112,861 91,393
-------- --------
Total deposits 249,493 202,030
-------- --------
Advances from the Federal Home Loan Bank 29,883 26,257
Line of Credit 4,672 -
Subordinated debt 3,000 3,000
Other liabilities 1,283 870
-------- --------
TOTAL LIABILITIES 288,331 232,157
-------- --------
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, 2009 and December 31, 2008, respectively 1,900 -
Common stock:
$0 par value: authorized 10,000,000 shares; issued and
outstanding 1,809,656 at December 31, 2009 - -
$5 par value: authorized 7,000,000 shares; issued and
outstanding 1,655,767 at December 31, 2008 - 8,279
Additional paid-in capital 16,623 7,244
Retained deficit (710) (145)
-------- --------
Total Shareholders' Equity 17,813 15,378
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $306,144 $247,535
======== ========
See accompanying notes to consolidated financial statements
35
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED
(in thousands, except per share data) DECEMBER 31, 2009 DECEMBER 31, 2008
----------------- -----------------
INTEREST INCOME
Interest and fees on loans $12,842 $10,589
Interest on investment securities 1,991 1,783
Interest on federal funds 7 108
------- -------
TOTAL INTEREST INCOME 14,840 12,480
INTEREST EXPENSE
Interest on deposits 4,699 4,506
Interest on borrowings 1,174 1,083
------- -------
TOTAL INTEREST EXPENSE 5,873 5,589
------- -------
Net interest income 8,967 6,891
Provision for loan losses 2,530 221
------- -------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 6,437 6,670
------- -------
NON-INTEREST INCOME
Service charges on deposits 213 104
Origination fees on mortgage loans sold 30 8
Bank owned life insurance income 173 163
Gain on sale of fixed assets - 57
Gain on sale of real estate owned 7 -
Gain on sale of Loans 101 -
Miscellaneous fee income 87 87
------- -------
TOTAL NON-INTEREST INCOME 611 419
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,342 4,011
Net occupancy 1,355 1,272
Data processing and other service costs 430 372
Professional services 502 491
Advertising and promotion 128 141
Other real estate owned expense 205 69
Impairment loss on other real estate owned - 155
FDIC expense 528 201
Other operating expenses 584 628
------- -------
TOTAL NON-INTEREST EXPENSE 8,074 7,340
------- -------
Loss before income taxes (1,026) (251)
Income tax benefit (461) (164)
------- -------
NET LOSS $ (565) $ (87)
======= =======
EARNINGS PER SHARE
Basic $ (0.33) $ (0.05)
Diluted $ (0.33) $ (0.05)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,717 1,656
Diluted 1,717 1,656
See accompanying notes to consolidated financial statements
36
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL ACCUMULATED COMPREHENSIVE
COMPREHENSIVE PREFERRE PAID-IN EARNINGS INCOME
LOSS STOCK COMMON STOCK CAPITAL (DEFICIT) (LOSS) TOTAL
------------- -------- ------------- --------- ----------- ------------- -------
Balance at
December 31, 2007 $ - $ 7,703 $ 7,316 $ 440 $ 4 $15,463
======== ======= ======= ===== ===== =======
Comprehensive loss
Net loss $ (87) $ - $ - $ - $ (87) $ - $ (87)
Unrealized loss on
securities available
for sale, net of tax (4) - - - - (4) (4)
-----
Comprehensive loss $ (91)
=====
Stock based compensation - - 9 - - 9
Declaration of 7.5%
common stock dividend - 576 (81) (498) - (3)
-------- ------- ------- ----- ----- -------
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
======== ======= ======= ===== ===== =======
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED
(in thousands) DECEMBER 31, 2009 DECEMBER 31, 2008
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (565) $ (87)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for loan losses 2,530 221
Income on Bank Owned Life Insurance (173) (163)
Gain on sale of fixed assets - (57)
Depreciation 696 422
Amortization of premiums and discounts, net 34 4
Stock option expense 23 9
Deferred tax benefit (692) (146)
Decrease on other real estate owned 89 -
Impairment loss on other real estate owned - 155
Proceeds on sale of real estate owned 199 -
Gain on sale of real estate owned (7) -
Insurance proceeds on other real estate owned - 30
Loans originated for sale (6,122) (2,488)
Proceeds from sales of loans held for sale 6,122 2,488
Increase in accrued interest receivable and other
assets (1,372) (340)
Increase in other liabilities 413 200
----------- -----------
Net cash provided by operating activities 1,175 248
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (58,105) (27,714)
Repayment of investments held to maturity 38,410 35,636
Repayment of investments available for sale - 2,980
Purchase of Federal Home Loan Bank Stock (195) (656)
Purchase of Bank Owned Life Insurance - (400)
Proceeds from sale of fixed assets - 582
Net increase in loans (44,551) (48,201)
Purchases of premises and equipment (98) (2,097)
----------- -----------
Net cash used by investing activities (64,539) (39,870)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 47,463 17,940
Proceeds from borrowings 1,262,872 1,438,990
Principal payments on borrowings (1,254,574) (1,422,021)
Net proceeds from issuance of preferred stock 1,900 -
Net proceeds from issuance of common stock 1,077 -
Cash paid in lieu of fractional shares on stock dividend - (3)
----------- -----------
Net cash provided by financing activities 58,738 34,906
Net decrease in cash and cash equivalents (4,626) (4,716)
Cash and cash equivalents at the beginning of the year 9,368 14,084
----------- -----------
Cash and cash equivalents at the end of the year $ 4,742 $ 9,368
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 5,928 $ 5,572
Cash paid (received) during the year for income taxes (81) 10
Net change in unrealized loss on securities available
for sale, net of tax - (4)
Issuance of stock dividend - 576
See accompanying notes to consolidated financial statements
38
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, 2008 has been derived from audited financial statements. As
the Company did not have any operations in 2008, the results of operations,
the statement of financial condition, and the related financial data for
period prior to 2009 are those of the Bank on a stand alone basis.
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 Bank 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.
39
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 2009 and 2008.
(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, the Bank 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
40
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 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.
(H) FHLB STOCK
The Bank carries its investment in Federal Home Loan Bank (FHLB) Stock
at its amortized cost. The Company had $1.6 million in FHLB stock at
December 31, 2009 compared to $1.4 million at December 31, 2008.
(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 $4.5 million at December 31,
2009. Income of $173 thousand was recognized on the BOLI during the
year ended December 31, 2009 compared to $163 thousand of income
recognized on the BOLI during the year ended December 31, 2008. The
Bank is the sole beneficiary of the BOLI.
(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 $0 in real estate owned at
December 31, 2009 compared to $281 thousand of real estate owned at
December 31, 2008. The Company recorded a $ 7 thousand gain on the
sale of a real estate owned property in December of 2009.
(L) EARNINGS PER SHARE
Basic earnings per share is calculated on the basis of net income
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.
41
(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
FASB STATEMENT NO. 168, THE FASB ACCOUNTING STANDARDS CODIFICATION AND
THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In June 2009, the FASB issued FASB Statement No. 168 "The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No.
162" (SFAS No. 168). SFAS No. 168 established the FASB Accounting
Standards Codification. The Codification will become the exclusive
authoritative reference for nongovernmental U.S. GAAP for use in
financial statements issued for interim and annual periods ending
after September 15, 2009, except for SEC rules and interpretive
releases, which are also authoritative GAAP for SEC registrants. The
contents of the Codification will carry the same level of authority,
eliminating the four-level GAAP hierarchy. All authoritative GAAP
issued by the FASB after this Statement will be referred to as
Accounting Standards Updates. Accounting Standards Updates will not be
considered authoritative in their own right, rather they will only
serve to update the Codification, provide background information about
the guidance, and provide basis for conclusions on changes in the
Codification. The Codification is effective for the Company for the
interim period ending September 30, 2009. All references to
authoritative literature are required to cite the Codification as
opposed to legacy accounting pronouncements.
ASC TOPIC 820 "FAIR VALUE MEASUREMENTS AND DISCLOSURES"
On January 1, 2008, the Bank adopted ASC Topic 820 "Fair Value
Measurements and Disclosures." ASC Topic 820 defines fair value,
establishes a framework for measuring fair value in 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 Bank's consolidated financial statements.
In conjunction with the adoption of ASC Topic 820, the Bank also
adopted the guidance from ASC paragraphs 820-10-50-8A, 55-23A, and
55-23B on January 1, 2008. This guidance defers the effective date of
ASC Topic 820 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis, to fiscal
years beginning after November 15, 2008, or January 1, 2009 for the
Company.
42
ASC TOPIC 820-10-65, DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL
OF ACTIVITY FOR THE ASSET OR LIABILITY HAVE SIGNIFICANTLY DECREASED
AND IDENTIFYING TRANSACTIONS THAT ARE NOT ORDERLY
In April 2009, the FASB issued guidance regarding identifying
circumstances that indicate a transaction is not orderly and on
estimating fair value when the volume and level of activity for the
asset or liability have significantly decreased. The guidance
emphasizes that fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date under current
market conditions. This guidance was adopted by the Company for the
interim period beginning April 1, 2009 and did not have a material
effect on the Company's financial position or results of operations.
ASC TOPIC 320-10-65, RECOGNITION AND PRESENTATION OF
OTHER-THAN-TEMPORARY IMPAIRMENTS
In April 2009, the FASB issued guidance regarding the recognition and
presentation of other-than-temporary impairments ("OTTI") on debt and
equity securities in the financial statements. This guidance modified
the presentation of losses and expands existing disclosure
requirements about OTTI. The guidance was adopted by the Company for
the interim period beginning April 1, 2009, and did not have a
material effect on the Company's financial position or results of
operations.
ASC TOPIC 855, SUBSEQUENT EVENTS
In May 2009, the FASB issued additional guidance on the evaluation and
disclosure through the date the financial statements are issued. This
guidance was adopted by the Company for the interim period ending June
30, 2009 and the required disclosures are included in Footnote 20.
(3) INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity at December 31, 2009 and 2008 is as follows:
DECEMBER 31, 2009
-----------------------------------------------------------------------
GROSS
GROSS UNREALIZED
(in thousands) AMORTIZED COST UNREALIZED 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
======= ======= ======= =======
DECEMBER 31, 2008
-----------------------------------------------------------------------
GROSS
GROSS UNREALIZED
(in thousands) AMORTIZED COST UNREALIZED GAINS LOSSES FAIR VALUE
-------------- ---------------- ----------- ----------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $26,653 $ 108 $ - $26,761
Mortgage backed securities 1,745 - (19) 1,726
------- ------- ------- -------
Total $28,398 $ 108 $ (19) $28,487
======= ======= ======= =======
At December 31, 2009, the Bank had Federal agency securities with aggregate
amortized costs totaling $397 thousand pledged to collateralize public
deposits under the Governmental Unit Deposit Protection Act as compared to
$201 thousand pledged at December 31, 2008.
43
The following table sets forth the scheduled contractual maturities of
investment securities held to maturity at December 31, 2009:
HELD TO MATURITY
-------------------------------
(in thousands) AMORTIZED COST FAIR VALUE
-------------- ----------
Within one year $ - $ -
After one year through five years - -
After five years through ten
years 18,750 18,471
After ten years 29,309 28,823
------- -------
Total $48,059 $47,294
======= =======
The following table sets forth information regarding the fair value and
unrealized losses on the Company's temporarily impaired investment
securities at December 31, 2009 and 2008 for the time periods shown:
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
========= ======== ======= ======= ========= =========
DECEMBER 31, 2008
(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
Mortgage Backed Securities $ - $ - $ 1,726 $ 19 $ 1,726 $ 19
--------- -------- ------- -------- --------- ---------
Total temporarily impaired
investments securities $ - $ - $ 1,726 $ 19 $ 1,726 $ 19
========= ======== ======= ======= ========= =========
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 income (loss) components and related tax
(expense) benefit are as follows for the years ended December 31, 2009 and
2008 (in thousands):
2009
-------------------------------------------------
BEFORE-TAX NET-OF-TAX
UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE: AMOUNT TAX BENEFIT AMOUNT
--------- ----------- ----------
Unrealized holding gains arising during the year $ - $ - $ -
--------- ------- -------
Other comprehensive income $ - $ - $ -
========= ======= =======
2008
-------------------------------------------------
BEFORE-TAX NET-OF-TAX
UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE: AMOUNT TAX EXPENSE AMOUNT
--------- ----------- ----------
Unrealized holding losses arising during the year $ (7) $ 3 $ (4)
--------- ------- -------
Other comprehensive loss $ (7) $ 3 $ (4)
========= ======= =======
44
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
(in thousands) DECEMBER 31, 2009 DECEMBER 31, 2008
----------------- -----------------
Commercial $ 91,717 $ 60,646
Real estate - commercial 105,702 91,105
Real estate - residential 19,137 19,346
Construction 12,104 12,323
Consumer loans 9,875 10,721
-------- ---------
Subtotal 238,535 194,141
Allowance for loan losses (3,432) (1,133)
Net deferred loan fees (111) (37)
-------- ---------
Loans receivable, net $234,992 $192,971
======== ========
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,
2009, the loans-to-one-borrower limitation was $4.3 million; this excluded
an additional 10% of adjusted capital funds or $2.9 million, which may be
loaned if collateralized by readily marketable securities as defined by
regulations. At December 31, 2009 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, 2009
and 2008 mortgage loans secured by real estate totaled $124.8 million and
$110.5 million, respectively. Mortgage loans represented 52.3% and 56.9% of
total loans at December 31, 2009 and 2008, respectively.
Non-performing assets include non-accrual loans, loans on which the accrual
of interest has ceased, and impaired loans. At December 31, 2009, the
Company had $8.1 million in non-accrual loans as compared to none at
December 31, 2008. At December 31, 2009, the Company had seven impaired
loan relationships totaling $8.1 million in which $6.4 million was
sufficiently collateralized and a specific reserve of $1.8 million has been
recorded for the remaining balance. At December 31, 2008, the Bank had
three impaired loan relationships totaling $2.4 million which were
sufficiently collateralized and therefore no specific reserves have been
recorded against them. The average balance of impaired loans totaled $8.2
million and $2.4 million for 2009 and 2008, respectively. Interest income
recorded on impaired loans totaled $32 thousand and $69 thousand for 2009
and 2008, respectively.
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. At December 31, 2008, the Company had three loan relationships
totaling $2.4 million which were delinquent ninety days or more and still
accruing interest.
The following is a summary of the activity of the allowance for loan
losses:
(in thousands) 2009 2008
------ -------
Balance, beginning of year $1,133 $1,050
Provision for loan losses 2,530 221
Recoveries (charge-offs), net (231) (138)
------ ------
Balance, end of year $3,432 $1,133
====== ======
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2009 and 2008, stated at cost less
accumulated depreciation and amortization, are summarized as follows:
(in thousands) 2009 2008
------ -------
Land $2,534 $ 2,534
Buildings 4,494 4,493
Furniture and equipment 1,254 1,457
Automobiles 20 36
Leasehold improvements 570 1,183
------ -------
Cost 8,872 9,703
Accumulated depreciation and amortization (1,001) (1,234)
------ -------
Total $7,871 $ 8,469
====== =======
45
Depreciation and amortization expense was $696 thousand for the year ended
December 31, 2009 and $422 thousand for the year ended December 31, 2008.
During 2009 the Company retired fully depreciated assets of $929 thousand.
At December 31, 2009, the Burlington and Medford 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, 2009 DECEMBER 31, 2008
----------------------- ------------------------
Interest bearing checking accounts $ 19,282 7.7% $ 26,845 13.3%
Non-interest bearing checking accounts 37,500 15.0 21,187 10.5
Statement savings 3,430 1.4 3,401 1.7
Money market demand accounts 76,420 30.6 59,204 29.3
-------- ----- -------- -----
Total core deposits $136,632 54.7% $110,637 54.8%
-------- ----- -------- -----
Jumbo certificates of one hundred
thousand or more 43,581 17.5 33,085 16.4
Non-jumbo certificates:
Current maturities of six months or
less 27,872 11.2 25,566 12.6
Current maturities of more than six
months 41,408 16.6 32,742 16.2
-------- ----- -------- -----
Total time deposits 112,861 45.3 91,393 45.2
-------- ----- -------- -----
Total deposits $249,493 100.0% $202,030 100.0%
======== ===== ======== =====
The weighted average rate on certificates of deposit was 3.02% and 3.86% at
December 31, 2009 and 2008, respectively.
The aggregate amount of demand accounts overdrawn that are included in
loans as of December 31, 2009 and 2008 are $85 thousand and $148 thousand
respectively.
Interest expense on deposits for the years ended December 31, 2009 and 2008
consisted of the following:
(in thousands) 2009 2008
------ -------
Checking and money market demand accounts $1,413 $1,692
Statement savings 27 57
Certificates of deposit 3,259 2,757
------ ------
Total $4,699 $4,506
====== ======
The following is a schedule of certificates of deposit by maturities as of
December 31, 2009:
YEAR ENDING DECEMBER 31,
------------------------
(in thousands)
2010 $ 71,976
2011 36,724
2012 3,477
2013 684
2014 -
--------
Total $112,861
========
Deposits held at the Bank by related parties, which include officers,
directors, and companies in which directors of the Board have a significant
ownership interest, approximated $25.1 million and $7.2 million at December
31, 2009 and 2008, respectively.
46
(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, 2009,
the Bank had advances outstanding with the FHLB in the amount of
approximately $29.9 million at a weighted average interest rate of 2.03%.
At December 31, 2009, the Bank was eligible to borrow an additional $25.8
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, 2009, 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, 2009 and 2008, 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, 2009:
YEAR ENDING DECEMBER 31,
------------------------
2010 $19,883
2011 10,000
-------
Total $29,883
=======
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $ 3.0 million in the form of subordinated debt. A
portion of this instrument qualifies as Tier II capital. The term of the
debt is for a six year period with a maturity date of November 1, 2014,
and the interest rate is 5.00% fixed for the first year then adjusts at a
variable rate equal to prime rate for the remaining five years. The debt
security is redeemable, at the Bank's option, at par on any April 30th or
October 31st through the maturity date.
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 Company has an outstanding balance on the line of
credit of $4.7 million under the loan and has contributed $4.4 million as
additional capital to the Bank.
(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, 2009 and 2008:
2009 2008
---- ----
(in thousands, except per share data)
Net loss $ (565) $ (87)
Weighted average basic number of shares 1,717 1,656
Dilutive effect of options - -
Dilutive effect of common stock warrants - -
Weighted average diluted number of shares 1,717 1,656
Basic (loss) earnings per share $(0.33) $(0.05)
Diluted (loss) earnings per share $(0.33) $(0.05)
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.
For the year ended December 31, 2008, there were stock options on 67,899
shares which were anti-dilutive due to the Company's net loss for the
period ending December 31, 2008.
(10) FAIR VALUE
ASC Topic No. 820, "Fair Value Measurements and Disclosures" establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
o Level 1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the entity has the ability to
access as of the measurement date.
47
o Level 2: Significant other observable inputs other than Level 1
prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
o Level 3: Significant unobservable inputs that reflect a reporting
entity's own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The Company had no assets and liabilities measured at fair value on a
recurring basis.
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, 2009 AT DECEMBER 31, 2008
----------------------------------------------- ----------------------------------------------
QUOTED PRICES QUOTES PRICES
IN ACTIVE SIGNIFICANT SIGNIFICANT IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS OTHER OTHER MARKETS OTHER OTHER
FOR IDENTICAL OBSERVABLE UNDELIVERABLE FOR IDENTICAL OBSERVABLE UNDELIVERABLE
ASSETS INPUTS INPUTS ASSETS INPUTS INPUTS
(LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVELS 1) (LEVEL 2) (LEVEL 3)
------------- ------------ ------------ -------------- ------------ -------------
(IN THOUSANDS) (IN THOUSANDS)
Assets
Impaired loans $ - $2,611 $ - $ - $ - $ -
------ ----- ---- ---- --- ---
Other real estate owned - - - - 281 -
Total assets measured
on a non-recurring
basis at fair value $ - $2,611 $ - $ - $281 $ -
====== ===== ==== ==== === ===
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.
48
(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.
(E) BANK OWNED LIFE INSURANCE
The carrying value of FHLB Stock 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 reprices 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.
The estimated fair value of the Company's financial instruments at
December 31, 2009 and 2008 was as follows:
2009 2008
------------------------------ ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Financial assets:
Cash and cash equivalents $ 4,742 $ 4,742 $ 9,368 $ 9,368
Investments held to maturity:
Federal Agency Securities 39,019 38,340 26,653 26,761
Mortgage-backed Securities 9,040 8,954 1,746 1,726
Loans receivable 238,424 266,399 194,104 193,861
FHLB stock 1,572 1,572 1,377 1,377
Bank Owned Life Insurance 4,521 4,521 4,348 4,348
Accrued interest receivable 1,484 1,484 1,217 1,217
-------- -------- -------- --------
Total financial assets $298,802 $326,012 $238,812 $238,658
======== ======== ======== ========
Financial Liabilities:
Checking Accounts $ 56,783 $ 56,783 $ 48,032 $ 48,032
Statement savings accounts 3,430 3,430 3,401 3,401
Money market demand accounts 19,658 19,658 9,110 9,110
Index Accounts 56,761 56,761 50,094 50,094
Certificates of deposit 112,861 111,908 91,393 91,674
FHLB Borrowings 29,883 29,883 26,257 26,257
Line Borrowings 4,672 4,672 - -
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 222 222 278 278
-------- -------- -------- --------
Total financial liabilities $287,270 $286,317 $231,565 $231,846
======== ======== ======== ========
CONTRACT ESTIMATED CONTRACT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
Off-balance sheet instruments:
Commitments to extend credit $ 45,684 $ - $ 42,514 $ -
======== ======== ======== ========
49
(11) INCOME TAXES
The Bank 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,
2009 and 2008 consisted of the following:
(in thousands) 2009 2008
----- -----
Federal:
Current $ 170 $ (20)
Deferred (595) (122)
State:
Current 61 4
Deferred (97) (26)
----- -----
$(461) $(164)
===== =====
The following is a reconciliation between expected tax benefit at the
statutory rate of 34% and actual tax expense:
(in thousands) 2009 2008
----- ----
At federal statutory rate $(349) $ (85)
Adjustments resulting from:
State tax, net of federal benefit (56) (23)
Bank owned life insurance (59) (55)
Other 3 (1)
----- -----
$(461) $(164)
----- -----
A summary of deferred tax assets and liabilities of the Company at December
31, 2009 and 2008, are as follows:
(in thousands) 2009 2008
---- -----
Deferred tax assets:
Book bad debt reserves - loans $1,371 $ 452
NJ depreciation 16 2
Net Operating Loss- State - 22
Deferred Compensation 81 42
OREO Impairment - 62
Stock Options 15 5
Charitable Contribution Carryforward - 22
Depreciation 16 79
------ -----
Total deferred tax assets 1,499 686
------ -----
Deferred tax liabilities:
Tax bad debts (65) (41)
Deferred loan costs (239) (183)
Depreciation (41) -
------ -----
Total deferred tax liabilities (345) (224)
------ -----
Net deferred tax asset $1,154 $ 462
====== =====
50
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 Bank 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 2006 through 2008 were open for examination as of December 31,
2009.
(12) OPERATING LEASES
At December 31, 2009, the Bank was obligated under non-cancelable operating
leases, which generally include options to renew, for the Bank's premises
in Medford, Burlington and Mt. Laurel, New Jersey and for certain
equipment.
Future minimum payments, including anticipated renewals, under these leases
for the years 2010 through 2014 and thereafter are as follows (in
thousands):
2010 $292
2011 298
2012 271
2013 188
2014 and thereafter 795
------
Total $1,844
======
Total lease expense for all leases for the years ended December 31, 2009
and 2008 was $322 thousand and $376 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 $45.7 million at December 31, 2009 and $42.5 million at
December 31, 2008. 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, 2009 and 2008, 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, 2009 and 2008 and for the periods then ended, the Bank has
made no extensions of credit to any director or officer of the Bank.
The Bank obtained certain legal, engineering and 401(k) plan investment
services from other entities which are or were affiliated with directors of
the Bank. Such aggregate services amounted to fees of $1 thousand for the
year ended December 31, 2009 and $51 thousand for the year ended December
31, 2008. In management's opinion, the terms of such services were
substantially equivalent to those which would have been obtained from
unaffiliated parties.
51
(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
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.
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 2009 was $2.88 and fair value of options granted in 2008 was $2.65.
Significant assumptions used in the model for 2009 grants included a
risk-free interest rate of 3.59%; an expected life of ten years; and
expected volatility of 41%. Assumptions used in the model for 2008 grants
included a risk-free interest rate of 3.53%; an expected life of five
years; and expected volatility of 30%.
The remaining unrecognized compensation cost relating to non-vested stock
based compensation awards at December 31, 2009 is $110 thousand which will
be recognized over the next two and one half years.
A summary status of the Company's Stock Option Plans as of December 31,
2009 and 2008 and the changes during the years ended is as follows:
2009 2008
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
-------- -------- ------ ---------
Outstanding, beginning of year 67,899 $8.63 66,015 $8.88
Granted 45,000 5.00 1,884 7.49
Forfeited 845 8.67 - -
Exercised - - - -
-------- ----- ------ -----
Outstanding, end of year 112,054 $7.36 67,899 $8.63
======== ===== ====== =====
Options exercisable at December 31, 66,537 $8.86 65,775 $8.86
======== ===== ====== =====
A summary status of all stock options outstanding and exercisable for the
Stock Option Plans as of December 31, 2009, 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:
$5.00 - $9.40 112,054 $7.20 4.2 years 66,537 $8.86
52
In 2009, the Company had stock based compensation expense of $23 thousand
compared to an expense of $8 thousand in 2008. The Company recorded no tax
benefit from stock based compensation during the years ended December 31,
2009 and December 31, 2008, 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 along with the shares of common stock. As part of the
offering, one warrant was issued for each share of Cornerstone Financial
Corporation common stock, no par, sold in the stock offering. Each warrant
issued under 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. 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 of
$0 par, $1 thousand stated value, Perpetual Non-Cumulative Convertible
Preferred Stock, Series A. 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 $96
thousand and $67 thousand in deferred compensation expense during the years
ended December 31, 2009 and 2008, 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 initiate 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, 2009
and 2008, the Bank met all capital adequacy requirements to which it was
subject.
As of December 31, 2009, the most recent notification from the FDIC
categorized the Bank as "well-capitalized" under the regulatory framework
for prompt corrective action.
53
The Bank's actual capital amounts and ratios at December 31, 2009 and 2008
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, 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%
At December 31, 2008:
Total Capital (to risk
weighted assets) $19,511 9.1% $17,065 8.0% $21,331 10.0%
Tier I Capital (to risk
weighted assets) $15,378 7.2% $ 8,533 4.0% $12,799 6.0%
Tier I Capital (to
average assets) $15,378 6.2% $ 9,861 4.0% $12,327 5.0%
(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 determined that there were no recognized or non-recognized
subsequent events to report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Not applicable.
ITEM 9A(T). 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 Bank'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 Bank's disclosure controls and procedures
were effective to ensure at a reasonable assurance level that material
information relating to the Bank is recorded, processed, summarized and reported
in a timely manner.
54
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, 2009. 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, 2009.
This Annual Report on Form 10-K does not include an attestation report of
the Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management's report in this Annual Report on
Form 10-K.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's fourth fiscal quarter of 2009 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 Bank'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.
55
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
(A) (B) FOR FUTURE ISSUANCE
NUMBER OF SECURITIES WEIGHTED-AVERAGE UNDER EQUITY
TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED
AS OF DECEMBER 31, 2009 WARRANTS, AND RIGHTS (#) AND RIGHTS ($) IN COLUMN (A))
----------------------- ----------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders (1) 112,054 $7.20 111,405
Equity compensation plans
not approved by security
holders - - -
------- ----- -------
Total 112,054 $7.20 111,405
======= ===== =======
(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,
2009 and 2008 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31,
2009 and 2008, 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)
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)
56
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.
57
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, 2010 By: /S/ GEORGE W. MATTEO, JR.
-------------------------------------
George W. Matteo, Jr.
Chairman of the Board
President and Chief Executive Officer
Date: March 30, 2010
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, 2010.
/S/ GEORGE W. MATTEO, /S/ KEITH WINCHESTER JR.
-------------------------------------- ---------------------------------------------
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/ GAETANO P. GIORDANO /S/ ROBERT A. KENNEDY, JR.
-------------------------------------- --------------------------------------------
Gaetano P. Giordano Robert A. Kennedy, Jr.
Director Director
/S/ RONALD S. MURPHY /S/ BRUCE PAPARONE
-------------------------------------- ---------------------------------------------
Ronald S. Murphy Bruce Paparone
Director Director
58
