Attached files
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EX-21 - SUBSIDIARIES OF THE REGISTRANT - TWO RIVER BANCORP | ex21.htm |
EX-32 - TWO RIVER BANCORP | ex32.htm |
EX-31.2 - TWO RIVER BANCORP | ex31_2.htm |
EX-31.1 - TWO RIVER BANCORP | ex31_1.htm |
EX-99.2 - CERTIFICATIONS - TWO RIVER BANCORP | ex99_2.htm |
EX-99.1 - CERTIFICATIONS - TWO RIVER BANCORP | ex99_1.htm |
EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - TWO RIVER BANCORP | ex23.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________ to _______
Commission
file number: 000-51889
COMMUNITY
PARTNERS BANCORP
|
(Exact
Name of Registrant as Specified in Its
Charter)
|
New
Jersey
|
20-3700861
|
|
(State
or Other Jurisdiction of
Incorporation or
Organization)
|
I.R.S.
Employer Identification Number)
|
1250
Highway 35 South, Middletown, NJ 07748
|
||
(Address
of Principal Executive Offices, including Zip Code)
|
(732)
706-9009
|
||
(Registrant’s
telephone number, including area code)
|
||
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
||
Common
Stock, no par value
|
The
NASDAQ Stock Market LLC
|
||
Securities
registered pursuant to Section 12(g) of the Act: None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, 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 o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
o |
Accelerated
filer
|
o |
Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
o |
Smaller
reporting company
|
x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
x
The
aggregate market value of the registrant’s voting and non-voting common equity
held by non-affiliates of the registrant, computed by reference to the price at
which the common stock was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter, is $26,412,796.
As of March 15, 2010, 7,182,497 shares of the registrant’s common stock were
outstanding.
Documents
incorporated by reference
Portions
of the registrant’s definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report and will
be filed within 120 days of December 31, 2009.
FORM
10-K
PART I | ||
Item
1.
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1
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Item
1A.
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17
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Item
1B.
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22
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Item
2.
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23
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Item
3.
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24
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Item
4.
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24
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PART
II
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Item
5.
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24
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Item
6.
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24
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Item
7.
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25
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Item
7A.
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47
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Item
8.
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47
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Item
9.
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47
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Item
9A(T).
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47
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Item
9B.
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48
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PART
III
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||
Item
10.
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48
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Item
11.
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48
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Item
12.
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49
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Item
13.
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49
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Item
14.
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49
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PART
IV
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Item
15.
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50
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51
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i
PART
I
Forward-Looking
Statements
When used
in this and in future filings by us with the Securities and Exchange Commission
(the “SEC”), in our press releases and in oral statements made with the approval
of an authorized executive officer of ours, the words or phrases “will,” “will
likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,”
“plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook”
or similar expressions (including confirmations by an authorized executive
officer of ours of any such expressions made by a third party with respect to
us) are intended to identify statements constituting “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by these sections. We wish to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made, even if subsequently made available on
our website or otherwise. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The
forward-looking statements are and will be based on management’s then-current
views and assumptions regarding future events and operating performance, and are
applicable only as of the dates of such statements.
Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed in this report under the heading
“Risk Factors”; the ability of customers to repay their obligations; the
adequacy of the allowance for loan losses; developments in the financial
services industry and U.S. and global credit markets; changes in the direction
of the economy nationally or in New Jersey; changes in interest rates;
competition; loss of management and key personnel; government regulation;
environmental liability; failure to implement new technologies in our
operations; changes in our liquidity; changes in our funding sources; failure of
our controls and procedures; disruptions of our operational systems and
relationships with vendors; and our success in managing risks involved in the
foregoing. Although management has taken certain steps to mitigate any negative
effect of the aforementioned items, significant unfavorable changes could
severely impact the assumptions used and have an adverse effect on
profitability. Such risks and other aspects of our business and operations are
described in Item 1. “Business”, Item 1A. “Risk Factors” and Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this report. We have no obligation to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
The
disclosures set forth in this item are qualified by Item 1A. “Risk Factors”,
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and other statements set forth in this report.
Community
Partners Bancorp
Community Partners Bancorp, which we refer to
herein as “Community Partners,” the “Company,”
“we,” “us” and “our,” is a business corporation organized under the laws of
the State of New Jersey in August 2005. The principal place of business of
Community Partners is located at 1250 Highway 35 South, Middletown, New Jersey
07748 and its telephone number is (732) 706-9009.
Effective December 31, 2008, Community Partners
consolidated its two wholly owned bank subsidiaries, The Town Bank (“Town
Bank”), based in Westfield, New Jersey, and Two River Community Bank (“Two
River”), based in Middletown, New Jersey. The two banks have been under common
partnership since Community Partners was organized to acquire them, in a
transaction that took place in April 2006. The consolidation streamlined
operations and created administrative efficiencies and reductions in overhead
costs. For legal and regulatory purposes, there is now only one New Jersey
state-chartered commercial bank, Two River Community Bank, which we also refer
to herein as the “Bank.” The Town Bank branches have used the Town
Bank name and have operated as a division of Two River Community Bank. On
or about April 1, 2010, the Town Bank branches will operate under the Two River
Community Bank title. The entire branch network comprises 15 branches in
Monmouth and Union counties, New Jersey.
Other
than its investment in the Bank, Community Partners currently conducts no other
significant business activities. Community Partners may determine to operate its
own business or acquire other commercial banks, thrift institutions or bank
holding companies, or engage in or acquire such other activities or businesses
as may be permitted by applicable law, although it has no present plans or
intentions to do so. When we refer to the business conducted by Community
Partners in this document, including any lending or other banking activities, we
are referring to the business that Community Partners conducts through the
Bank.
As of
December 31, 2009, the Company had consolidated assets of $640.0 million, total
deposits of $535.4 million and shareholders’ equity of $76.8
million.
Employees
As of
December 31, 2009, the Company and its subsidiaries had 158 employees, of whom
141 were full-time and 17 were part-time. None of the Company's employees are
represented by a union or covered by a collective bargaining agreement.
Management of the Company and the Bank believe that, in general, their employee
relations are good.
Two
River Community Bank
Two River
Community Bank was organized in January 2000 as a New Jersey state-chartered
commercial bank to engage in the business of commercial and retail banking. As a
community bank, the Bank offers a wide range of banking services including
demand, savings and time deposits and commercial and consumer/installment loans
to small and medium-sized businesses, not-for-profit organizations,
professionals and individuals principally in Monmouth and Union counties, New
Jersey. The Bank also offers its customers numerous banking products such as
safe deposit boxes, a night depository, wire transfers, money orders, travelers
checks, automated teller machines, direct deposit, telephone and internet
banking and corporate business services. The Bank currently operates 15 banking
offices in Monmouth and Union counties, New Jersey and a non-banking operations
facility. The Bank’s principal banking office is located at 1250 Highway 35
South, Middletown, New Jersey. Other banking offices are located in Allaire,
Atlantic Highlands, Cliffwood, Manasquan, Navesink, Port Monmouth, Red Bank,
Tinton Falls (2), West Long Branch, Westfield (2), Cranford and Fanwood, New
Jersey.
We believe that the Bank’s customers still want to do
business with a banker
and that they want to feel that they are
important to that banker. To accomplish this objective, we emphasize to our
employees the importance of delivering exemplary customer service and
seeking out opportunities to build further relationships with the Bank’s
customers. The Bank’s deposits are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to the statutory
limits.
Competition
The Bank faces substantial competition for deposits and
creditworthy borrowers. It competes with New Jersey and regionally based
commercial banks, savings banks and savings and loan associations, as well as
national financial institutions, most of which have assets, capital and lending
limits greater in amount than that of the
Bank. Other competitors include money market mutual funds, mortgage bankers,
insurance companies, stock brokerage firms, regulated small loan companies,
credit unions and issuers of commercial paper and other
securities.
Products
and Services
The Bank offers a full range of banking services to our
customers. These services include a wide variety of business and consumer
lending products as well as corporate services for businesses and professionals.
We offer a range of deposit products including checking, savings and money
market accounts plus certificates of deposit. In addition, the Bank participates
in the Certificate of Deposit Account Registry Service (“CDARS”), a service that
enables us to provide our customers with additional FDIC insurance on
certificate of deposit (“CD”) products. Other products and services include
remote deposit capture, safe deposit boxes; ACH services; debit and ATM card
services and Visa gift cards. Other service products include traveler’s checks,
money orders, treasurer’s checks, and direct deposit facilities. We also offer
customers the convenience of a full complement of internet banking services that
allow them to check account balances, receive email alerts, transfer funds, initiate stop payment requests, and
pay their bills.
Lending
Activities
The Bank engages in a variety of lending
activities, which are primarily categorized as either commercial or
residential real estate-consumer lending. The strategy is to focus our lending
activities on small and medium-sized business customers and retain customers by
offering them a wide range of products and personalized service. Commercial and
real estate mortgage lending (consisting of commercial real estate, commercial business, construction and
other commercial lending, including medical lending and private banking) are
currently our main lending focus. Sources to fund loans are derived primarily
from deposits, although we do occasionally borrow to fund loan growth or meet
deposit outflows.
The Bank presently generates the vast majority of
our loans in the State of New Jersey, with a significant portion in Union and
Monmouth counties. Loans are generated through marketing efforts, the Bank’s
present customers, walk-in customers, referrals, the directors, founders and
members of advisory boards of the Bank. The Bank strives to maintain a high
overall credit quality through the establishment of and adherence to prudent
lending policies and practices and sound management. The Bank has an established
written loan policy that has been adopted by the board of directors and is
reviewed annually. Any loan to Bank or Company directors or their
affiliates must be reviewed and approved by
the Bank’s board of directors in accordance with the loan policy for such loans as
well as applicable state and federal law.
Under our loan policies, approvals of affiliate transactions are made only by
independent board members.
In managing the growth and quality of the Bank’s
loan portfolio, we have focused on: (i) the application of prudent underwriting
criteria; (ii) the active involvement by senior management and the Bank’s board
of directors in the loan approval process; (iii) the active monitoring of loans
to ensure timely repayment and early detection of
potential problems; and (iv) a loan review process by an independent loan review
firm, which conducts in-depth reviews of portions of the loan portfolio on a
quarterly basis.
Our
principal earning assets are loans originated or participated in by the Bank.
The risk that certain borrowers will not be able to repay their loans under the
existing terms of the loan agreement is inherent in the lending function. Risk
elements in a loan portfolio include non-accrual loans (as defined below), past
due and restructured loans, potential problem loans, loan concentrations (by
industry or geographically) and other real estate owned, acquired through
foreclosure or a deed in lieu of foreclosure. Because the vast majority of the
loans are made to borrowers located in Union and Monmouth counties, New Jersey,
each loan or group of loans presents a geographical risk and credit risk based
upon the condition of the local economy. The local economy is influenced by
conditions such as housing prices, employment conditions and changes in interest
rates.
Construction
Loans
We
originate fixed-rate and adjustable-rate loans to individuals and builders to
finance the construction of residential dwellings. We also originate
construction loans for commercial development projects, including apartment
buildings, restaurants, shopping centers and owner-occupied properties used for
businesses. Our construction loans generally provide for the payment of interest
only during the construction phase which is usually twelve months for
residential properties and twelve to eighteen months for commercial properties.
At the end of the construction phase, the loan generally converts to a permanent
mortgage loan. Before making a commitment to fund a construction loan, we
require an appraisal of the property by a bank approved independent licensed
appraiser, an inspection of the property before disbursement of funds during the
stages of the construction process, and approval from an identified source for
the permanent takeout.
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 depends largely upon the accuracy of the initial estimate of
the property’s value at completion of construction 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, we may be required to advance funds
beyond the amount originally committed to permit completion of the building. If
the estimate of value proves to be inaccurate, we may be confronted, at or
before the maturity of the loan, with a building having a value which is
insufficient to assure full repayment. If we are forced to foreclose on a
building before or at completion due to a default, there can be no assurance
that we will be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding
costs.
Commercial Loans
We make commercial business loans to professionals, sole
proprietorships and small businesses in our market area. We extend commercial
business loans on an unsecured and secured basis. Secured commercial loans are
generally collateralized by nonresidential real estate, marketable securities,
accounts receivable, inventory, industrial/commercial machinery and equipment
and furniture and fixtures. To further enhance our security position, we
generally require personal guarantees of the principal owners of the entities to
which we lend. These loans are made on both a line of credit basis and on a
fixed-term basis ranging from one to five years in duration. When making commercial business loans, we consider the
financial statements and/or tax returns of the borrower, the borrower’s payment
history of corporate debt and its principal owners’ payment history of personal
debt, the debt service capabilities of the borrower, the projected cash flows of
the business, the viability of the industry in which the customer operates, the
value of the collateral and the financial strength of the
guarantor.
Commercial real estate loans are made to local
commercial, retail and professional firms and individuals for the acquisition of
new property or the refinancing of existing property. These loans are typically
related to commercial businesses and secured by the underlying real
estate used in these businesses or real property of the principals. These loans
are generally offered on a fixed or variable rate basis, subject to rate re-adjustments every five years and
amortization schedules ranging from 10 to 20 years.
Our established written underwriting guidelines for commercial loans are periodically
reviewed and enhanced as needed. Pursuant to these guidelines, in granting
commercial loans we look primarily to the borrower’s cash flow as the principal
source of loan repayment. To monitor cash flows on
income properties, we require borrowers and loan guarantors of loan
relationships to provide annual financial statements and/or tax returns.
Collateral and personal guarantees of the principals of the entities to
which we lend are consistent with the requirements
of our loan policy.
Commercial loans are often larger and may involve
greater risks than other types of lending. Because payments on such loans
are often dependent on the successful operation of the business involved,
repayment of such loans may be more sensitive than other types of loans subject
to adverse conditions in the real estate market or the economy. We are also
involved with off-balance sheet financial instruments, which include
collateralized commercial and standby letters of credit. We seek to minimize
these risks through our underwriting guidelines
and prudent risk management techniques. Any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.
Environmental surveys and inspections are obtained when circumstances suggest
the possibility of the presence of hazardous materials. There can be no
assurances, however, of success in the efforts to minimize these
risks.
Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property the value of which tends to be more
easily ascertainable, commercial loans are of higher risk and 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 loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value.
Residential
Real Estate and Consumer Loans
We offer
a full range of residential real estate and consumer loans. These loans consist
of residential mortgages, home equity lines of credit and loans, personal loans,
automobile loans and overdraft protection. We do not originate subprime or
negative amortization loans.
Our home
equity revolving lines of credit come with a floating interest rate tied to the
prime rate. Lines of credit are available to qualified applicants in amounts up
to $500,000 for up to 15 years. We also offer fixed rate home equity loans in
amounts up to $350,000 for a term of up to 20 years. Credit is based on the
income and cash flow of the individual borrowers, real estate collateral
supporting the mortgage debt and past credit history.
Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections depend on the borrower’s continuing financial stability, and
therefore are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy. Furthermore, the application of various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount that
can be recovered on such loans.
Participation
Loans
We
underwrite all loan participations to our own underwriting standards and will
not participate in a loan unless each participant has a substantial interest in
the loan relationship with the borrower. In addition, we also consider the
financial strength and reputation of the lead lender. To monitor cash flows on
loan participations, we look for the lead lender to provide annual financial
statements for the borrower. Generally, we also conduct an annual internal loan
review for loan participations.
Asset
Quality
We
believe that high asset quality is a key to long-term financial success. We have
sought to grow and diversify the loan portfolio, while maintaining a high level
of asset quality and moderate credit risk, using underwriting standards that we
believe are conservative and diligent monitoring and collection efforts. As we
continue to grow and leverage our capital, we envision that loans will continue
to be our principal earning assets. An inherent risk in lending is the
borrower’s ability to repay the loan under its existing terms. Risk elements in
a loan portfolio include non-accrual loans (as defined below), past due and
restructured loans, potential problem loans, loan concentrations (by industry or
geographically) and other real estate owned, acquired through foreclosure or a
deed in lieu of foreclosure.
Non-performing assets include loans that are not
accruing interest (non-accrual loans) as a result of principal or
interest being in default for a period of 90 days or more, loans past due 90
days or more and still accruing, and other real estate owned, which consists of
real estate acquired as the result of a defaulted loan. When a loan is
classified as non-accrual, interest accruals cease and all past due interest is
reversed and charged against current income. Until
the loan becomes current as to principal or interest, as applicable, any
payments received from the borrower are applied to outstanding principal, fees
and costs to the Bank, unless we determine that the financial condition of the
borrower and other factors merit recognition of such payments as interest.
Non-performing assets are further discussed within the “Asset Quality” section
under Item 7 of this report.
We utilize a risk system, as described below under the
section titled “Allowance for Loan Losses”, as an analytical tool to assess risk
and set appropriate reserves.
In addition, the FDIC has a classification system for
problem loans and other lower quality assets, classifying them as “substandard,”
“doubtful” or “loss.” A loan is classified as “substandard” when it is
inadequately protected by the current value and paying capacity of the obligor
or of the collateral pledged, if any. Loans with this classification have a
well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that some loss may occur if
the deficiencies are not corrected. A loan
is classified “doubtful” when it has all the weaknesses inherent in a loan
classified as substandard with the added characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
factors, conditions, and values, highly questionable and improbable. A loan is
classified as “loss” when it is considered uncollectible and of such little
value that the asset’s continuance as an asset on the balance sheet is not
warranted.
In addition to categories for non-accrual loans
and loans past due 90 days or more that are still accruing interest, we maintain
a “watch list” of performing loans where
management has identified conditions which potentially could cause such loans to
be downgraded into higher risk categories in
future periods. Loans on this list are subject to heightened scrutiny and more
frequent review by management.
Allowance
for Loan Losses
We
maintain an allowance for loan losses at a level that we believe is adequate to
provide for probable losses inherent in the loan portfolio. Loan losses are
charged directly to the allowance when they occur and any recovery is credited
to the allowance when realized. Risks from the loan portfolio are analyzed on a
continuous basis by loan officers, and periodically by our outside independent
loan reviewers, directors on the Bank’s Loan Committee and the Bank’s board of
directors as a whole.
The level
of the allowance is determined by assigning specific reserves to individually
identified problem credits or impaired loans and general reserves on all other
loans. The portion of the allowance that is allocated to impaired loans is
determined by estimating the inherent loss on each credit after giving
consideration to the value of the underlying collateral. A risk system,
consisting of multiple grading categories, is utilized as an analytical tool to
assess risk and set appropriate general reserves. In addition to the risk
system, management further evaluates risk characteristics of the loan portfolio
under current and anticipated economic conditions and considers such factors as
the financial condition of the borrower, past and expected loss experience, and
other factors management feels deserve recognition in establishing an
appropriate reserve. These estimates are reviewed at least quarterly, and as
adjustments become necessary, they are realized in the periods in which they
become known. Additions to the allowance are made by provisions charged to
expense and the allowance is reduced by net charge-offs (i.e., loans judged to
be uncollectible and charged against the reserve, less any recoveries on such
loans).
Although
management attempts to maintain the allowance at a level deemed sufficient to
cover any losses, future additions to the allowance may be necessary based upon
any changes in market conditions. In addition, various regulatory agencies
periodically review our allowance for loan losses, and may require us to take
additional provisions based on their judgments about information available to
them at the time of their examination.
Risk
Management
Managing
risk is an essential part of a successful financial institution. Our most
prominent risk exposures are credit risk, interest rate risk and market risk.
Credit risk is the risk of not collecting the interest and/or the principal
balance of a loan or investment when it is due. Interest rate risk is the
potential reduction of net interest income as a result of changes in interest
rates. Market risk arises from fluctuations in interest rates that may result in
changes in the values of financial instruments, such as available for sale
securities that are accounted for on a fair value basis. Other risks that we
face are operational risks, liquidity risks and reputation risk. Operational
risks include risks related to fraud, regulatory compliance, processing errors,
and technology and disaster recovery. Liquidity risk is the possible inability
to fund obligations to depositors or borrowers. Reputation risk is the risk that
negative publicity or press, whether true or not, could cause a decline in our
customer base or revenue.
Credit
Risk Management
Our
strategy for credit risk management focuses on having well-defined credit
policies and uniform underwriting criteria and providing prompt attention to
potential problem loans. To further enhance our credit risk management strategy,
we engage an industry standard third party loan review firm to provide greater
portfolio surveillance. When a borrower fails to make a required loan payment,
we take a number of steps to attempt to have the borrower cure the delinquency
and restore the loan to current status. When the loan becomes 15 days past due,
a late charge notice is generated and sent to the borrower and a series of phone
calls are made under payment resolution. If payment is not then received by the
30th day of delinquency, a further notification is sent to the borrower. If no
successful resolution can be achieved, after a loan becomes 90 days delinquent,
we may commence foreclosure or other legal proceedings. If a foreclosure action
is instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure. We may consider loan workout arrangements with certain
borrowers under certain circumstances.
Management
reports to the board of directors monthly regarding the amount of loans
delinquent more than 30 days, all loans in foreclosure and all foreclosed and
repossessed property that we own.
Investment
Portfolio
Our
investment portfolio consists primarily of obligations of U.S. Government
sponsored agencies as well as municipal and government authority bonds, with
high grade corporate bonds accounting for less than 10% of the portfolio.
Government regulations limit the type and quality of instruments in which the
Company may invest its funds.
We
conduct our asset/liability management through consultation with members of our
board of directors, senior management and an outside financial advisor. The
asset/liability investment committee, commonly known as an ALCO committee, is
comprised of the president, senior officers and certain members of our board of
directors. The ALCO committee, in consultation with our board of directors, is
responsible for the review of interest rate risk and evaluates future liquidity
needs over various time periods.
We have established a written investment policy
which is reviewed annually by the ALCO committee and our board of directors that
applies to Community Partners and the Bank. The investment policy identifies
investment criteria and states specific objectives
in terms of risk, interest rate sensitivity and liquidity and emphasizes the
quality, term and marketability of the securities acquired for its investment
portfolio.
The ALCO committee is responsible for monitoring the
investment portfolio and ensuring that investments comply with the
investment policy. The ALCO committee may from time to time consult with
investment advisors. The Bank’s president and its chief financial
officer working with the financial advisor may purchase or sell securities in
accordance with the guidelines of the ALCO committee. The board of directors review the components, including new
transactions of the investment portfolio on a monthly basis.
Deposit
Products
We
emphasize relationships with commercial and individual customers and seek to
obtain transaction accounts, which are frequently non-interest bearing deposits
or lower cost interest bearing checking, savings and money market deposit
accounts.
Deposits
are the primary source of funds used in lending and other general business
purposes. In addition to deposits, we may derive additional funds from principal
repayments on loans, the sale of investment securities and borrowings from other
financial institutions. Loan amortization payments have historically been a
relatively predictable source of funds. The level of deposit liabilities can
vary significantly and is influenced by prevailing interest rates, money market
conditions, general economic conditions and competition.
The Bank’s deposits consist of checking accounts,
savings accounts, money market accounts and certificates of deposit.
Deposits are obtained from individuals, partnerships, corporations and
unincorporated businesses in our market area. The Bank participates in CDARS, a
service that enables us to provide our customers with additional FDIC insurance
on CD products. We attempt to control the flow of deposits primarily by pricing
our accounts to remain generally competitive with
other financial institutions in our market area.
Business
Growth Strategy
Our current plan for growth emphasizes expanding our
market presence in the communities located between Union County and Monmouth
County, New Jersey by adding strategically located new offices and considering
selective acquisitions that would be accretive to earnings within the first full
year of combined operations. We believe that this strategy will continue to
build shareholder value and increase revenues and earnings per share by creating
a larger base of lending and deposit relationships and achieving economies of
scale and other efficiencies. Our efforts include opening retail banking offices
in Middlesex County, New Jersey and other attractive markets where we have
established lending relationships, as well as exploring opportunities to grow
and add other profitable banking-related businesses. We believe that by
establishing banking offices and making selective acquisitions in attractive
growth markets while providing exemplary customer service, our core deposits
will naturally increase.
Supervision
and Regulation
Overview
Community Partners operates within a system of banking
laws and regulations intended to protect bank customers and depositors and these
laws and regulations govern the permissible operations and management,
activities, reserves, loans and investments of the Company.
Community Partners Bancorp is a bank holding
company under the Federal Bank Holding Company Act of 1956 (“BHCA”), as amended
by the Financial Modernization Act of 1999, known as the Gramm-Leach-Bliley Act,
and is subject to the supervision of the Board of Governors of the Federal
Reserve System. In general, the BHCA limits the business of bank holding
companies to banking, managing or controlling banks, and performing certain
servicing activities for subsidiaries and, as a result of the Gramm-Leach-Bliley
Act amendments, permits bank holding companies that are also financial holding
companies to engage in any activity, or acquire and retain the shares of any
company engaged in any activity, that is either (1) financial in nature or
incidental to such financial activity or (2) complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally. In order for a bank
holding company to engage in the broader range of activities that are permitted
by the BHCA for bank holding companies that are also financial holding
companies, upon satisfaction of certain regulatory criteria, the bank holding
company must file a declaration with the Federal Reserve Board that it elects to
be a “financial holding company.” Community Partners does not presently intend
to seek a “financial holding company” designation at this time, and does not
believe that the current decision not to seek a financial holding company
designation will adversely affect its ability to compete in its chosen markets.
We believe that seeking such a designation for Community Partners would not
position it to compete more effectively in the offering of products and services
currently offered by the Bank. Community Partners is also subject to other
federal laws and regulations as well as the corporate laws and regulations of
New Jersey, the state of its incorporation.
The BHCA
prohibits the Company, with certain exceptions, from acquiring direct or
indirect ownership or control of more than five percent of the voting shares of
any company which is not a bank and from engaging in any business other than
that of banking, managing and controlling banks or furnishing services to
subsidiary banks. The BHCA requires prior approval by the Federal Reserve Board
of the acquisition by the Company of more than five percent of the voting stock
of any other bank. Satisfactory capital ratios, Federal Community Reinvestment
Act ratings and anti-money laundering policies are generally prerequisites to
obtaining federal regulatory approval to make acquisitions.
The Bank
is a commercial bank chartered under the laws of the State of New Jersey and is
subject to the New Jersey Banking Act of 1948 (the “Banking Act”). As such, it
is subject to regulation, supervision and examination by the New Jersey
Department of Banking and Insurance and by the FDIC. Each of these agencies
regulates aspects of activities conducted by the Bank and Community Partners, as
discussed below. The Bank is not a member of the Federal Reserve Bank of New
York.
The
following descriptions summarize the key laws and regulations to which the Bank
is subject, and to which Community Partners is subject as a registered bank
holding company. These descriptions are not intended to be complete and are
qualified in their entirety by reference to the full text of the statutes and
regulations. Future changes in these laws and regulations, or in the
interpretation and application thereof by their administering agencies, cannot
be predicted, but could have a material effect on the business and results of
Community Partners and the Bank.
Troubled
Asset Relief Program Capital Purchase Program
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the United States
Department of the Treasury (the “Treasury”) was given the authority to, among
other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.
On
October 14, 2008, the Secretary of the Treasury announced that the Treasury will
purchase equity stakes in a wide variety of banks and thrifts. Under the
program, known as the Troubled Asset Relief Program Capital Purchase Program
(the “TARP Capital Purchase Program”), from the $700 billion authorized by the
EESA, the Treasury made $250 billion of capital available to U.S. financial
institutions in the form of preferred stock. In conjunction with the purchase of
preferred stock, the Treasury received, from participating financial
institutions, warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred investment. Participating financial
institutions were required to adopt the Treasury’s standards for executive
compensation and corporate governance for the period during which the Treasury
holds equity issued under the TARP Capital Purchase Program.
At the
invitation of the Treasury, we decided in January 2009 to enter into a
Securities Purchase Agreement with the Treasury that provides for our
participation in the TARP Capital Purchase Program. On January 30, 2009, the
Company issued and sold to the Treasury 9,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred Stock”),
with a liquidation preference of $1,000 per share, and a ten-year warrant to
purchase up to 297,116 shares of the Company’s common stock at an exercise price
of $4.54 per share, as adjusted for the 3% stock dividend declared in August
2009. Under the terms of the TARP Capital Purchase Program, the Treasury’s
consent will be required for the payment of any cash dividends to common
stockholders, or the Company’s redemption, purchase or acquisition of common
stock of the Company until the third anniversary of the issuance of the Senior
Preferred Stock to the Treasury unless prior to such third anniversary the
Senior Preferred Stock are redeemed in whole or the Treasury has transferred all
of these shares to third parties.
Participants
in the TARP Capital Purchase Program were required to accept several
compensation-related limitations associated with this program. Each of our
senior executive officers in January 2009 agreed in writing to accept the
compensation standards in existence at that time under the program and thereby
cap or eliminate some of their contractual or legal rights. The provisions
agreed to were as follows:
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No golden parachute
payments. “Golden parachute payment” under the TARP Capital
Purchase Program means a severance payment resulting from involuntary
termination of employment, or from bankruptcy of the employer, that
exceeds three times the terminated employee’s average annual base salary
over the five years prior to termination. Our senior executive officers
have agreed to forego all golden parachute payments for as long as two
conditions remain true: They remain “senior executive officers” (CEO and
the next two highest-paid executive officers), and the Treasury continues
to hold our equity or debt securities we issued to it under the TARP
Capital Purchase Program (the period during which the Treasury holds those
securities is the “TARP Capital Purchase Program Covered
Period.”).
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Recovery of EIP Awards and
Incentive Compensation if Based on Certain Material Inaccuracies.
Our senior executive officers have also agreed to a “clawback provision,”
which means that we can recover incentive compensation paid during the
TARP Capital Purchase Program Covered Period that is later found to have
been based on materially inaccurate financial statements or other
materially inaccurate measurements of
performance.
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No Compensation Arrangements
That Encourage Excessive Risks. During the TARP Capital Purchase
Program Covered Period, we are not allowed to enter into compensation
arrangements that encourage senior executive officers to take “unnecessary
and excessive risks that threaten the value” of our Company. To
make sure this does not happen, the Company’s Compensation Committee is
required to meet at least once a year with our senior risk officers to
review our executive compensation arrangements in the light of our risk
management policies and practices. Our senior executive officers’ written
agreements include their obligation to execute whatever documents we may
require in order to make any changes in compensation arrangements
resulting from the Compensation Committee’s
review.
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Limit on Federal Income Tax
Deductions. During the TARP Capital Purchase Program Covered
Period, we are not allowed to take federal income tax deductions for
compensation paid to senior executive officers in excess of $500,000 per
year, with certain exceptions that do not apply to our senior executive
officers.
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On
February 17, 2009, President Obama signed the American Recovery and Reinvestment
Act of 2009 (the “Stimulus Act”) into law. The Stimulus Act modified the
compensation-related limitations contained in the TARP Capital Purchase Program,
created additional compensation-related limitations and directed the Secretary
of the Treasury to establish standards for executive compensation applicable to
participants in TARP, regardless of when participation commenced. Thus, the
newly enacted compensation-related limitations are applicable to the Company and
to the extent the Treasury may implement these restrictions unilaterally, the
Company will apply these provisions. The provisions may be retroactive. In their
January 2009 agreements, our senior executive officers waived
their contract or legal rights with respect to these new and retroactive
provisions. The compensation-related limitations applicable to the Company which
have been added or modified by the Stimulus Act are as follows, which provisions
must be included in standards established by the Treasury:
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No severance payments.
Under the Stimulus Act “golden parachutes” were redefined as any severance
payment resulting from involuntary termination of employment, or from
bankruptcy of the employer, except for payments for services performed or
benefits accrued. Consequently under the Stimulus Act the Company is
prohibited from making any severance payment to our “senior executive
officers” (defined in the Stimulus Act as the CEO and the next two
highest-paid executive officers) and our next five most highly compensated
employees during the TARP Capital Purchase Program Covered
Period.
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Recovery of Incentive
Compensation if Based on Certain Material Inaccuracies. The
Stimulus Act also contains the “clawback provision” discussed above but
extends its application to any bonus awards and other incentive
compensation paid to any of our senior executive officers or the next 20
most highly compensated employees during the TARP Capital Purchase Program
Covered Period that is later found to have been based on materially
inaccurate financial statements or other materially inaccurate
measurements of performance.
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No Compensation Arrangements
That Encourage Earnings Manipulation. Under the Stimulus Act,
during the TARP Capital Purchase Program Covered Period, we are not
allowed to enter into compensation arrangements that encourage
manipulation of the reported earnings of the Company to enhance the
compensation of any of our
employees.
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Limit on Incentive
Compensation. The Stimulus Act contains a provision that prohibits
the payment or accrual of any bonus, retention award or incentive
compensation to the Company’s most highly compensated employee during the
TARP Capital Purchase Program Covered Period other than awards of
long-term restricted stock that (i) do not fully vest during the TARP
Capital Purchase Program Covered Period, (ii) have a value not greater
than one-third of the total annual compensation of the awardee and (iii)
are subject to such other restrictions as determined by the Secretary of
the Treasury. We do not know whether the award of incentive stock options
are covered by this prohibition. The prohibition on bonus, incentive
compensation and retention awards does not preclude payments required
under written employment contracts entered into on or prior to February
11, 2009.
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Compensation Committee
Functions. The Stimulus Act requires that our Compensation
Committee be comprised solely of independent directors and that it meet at
least semiannually to discuss and evaluate our employee compensation plans
in light of an assessment of any risk posed to us from such compensation
plans.
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Compliance
Certifications. The Stimulus Act also requires a written
certification by our Chief Executive Officer and Chief Financial Officer
of our compliance with the provisions of the Stimulus Act. These
certifications must be contained in the Company’s Annual Report on Form
10-K for the fiscal year ending December 31,
2009.
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Treasury Review Excessive
Bonuses Previously Paid. The Stimulus Act directs the Secretary of
the Treasury to review all compensation paid to our senior executive
officers and our next 20 most highly compensated employees to determine
whether any such payments were inconsistent with the purposes of the
Stimulus Act or were otherwise contrary to the public interest. If the
Secretary of the Treasury makes such a finding, the Secretary of the
Treasury is directed to negotiate with the TARP Capital Purchase Program
recipient and the subject employee for appropriate reimbursements to the
federal government with respect to the compensation and
bonuses.
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Say on Pay. Under the
Stimulus Act, the SEC is required to promulgate rules requiring a
non-binding say on pay vote by the shareholders on executive compensation
at the annual meeting during the TARP Capital Purchase Program Covered
Period.
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Incentive
Compensation
On
October 22, 2009, the Federal Reserve issued a comprehensive proposal on
incentive compensation policies (the “Incentive Compensation Proposal”) intended
to ensure that the incentive compensation policies of banking organizations do
not undermine the safety and soundness of such organizations by encouraging
excessive risk-taking. The Incentive Compensation Proposal, which covers all
employees that have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon the key
principles that a banking organization’s incentive compensation arrangements
should (i) provide incentives that do not encourage risk-taking beyond the
organization’s ability to effectively identify and manage risks, (ii) be
compatible with effective internal controls and risk management, and (iii) be
supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors. Any deficiencies in
compensation practices that are identified may be incorporated into the
organization’s supervisory ratings, which can affect its ability to make
acquisitions or perform other actions. The Incentive Compensation Proposal
provides that enforcement actions may be taken against a banking organization if
its incentive compensation arrangements or related risk-management control or
governance processes pose a risk to the organization’s safety and soundness and
the organization is not taking prompt and effective measures to correct the
deficiencies. In addition, on January 12, 2010, the FDIC announced that it would
seek public comment on whether banks with compensation plans that encourage
risky behavior should be charged higher deposit assessment rates than such banks
would otherwise be charged.
The scope
and content of the U.S. banking regulators’ policies on executive compensation
are continuing to develop and are likely to continue evolving in the near
future. It cannot be determined at this time whether compliance with such
policies will adversely affect the ability of the Company and the Bank to hire,
retain and motivate their key employees.
Dividend
Restrictions
The primary source of cash to pay dividends, if
any, to the Company’s shareholders and to meet the Company’s obligations is
dividends paid to the Company by the Bank. Dividend payments by the Bank to the
Company are subject to the laws of the State of New Jersey, the Banking Act, the
Federal Deposit Insurance Act (“FDIA”) and the regulation of the New Jersey
State Department of Banking and Insurance and of the Federal Reserve. Under the
Banking Act and the FDIA, a bank may not pay any dividends if, after paying such
dividends, it would be undercapitalized under applicable capital requirements.
In addition to these explicit limitations, the federal regulatory agencies are
authorized to prohibit a banking subsidiary or bank holding company from
engaging in unsafe or unsound banking practices. Depending upon the
circumstances, the agencies could take the
position that paying a dividend would constitute an unsafe or unsound banking
practice.
It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available from the immediately
preceding year and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividend that undermines the bank holding company’s ability to serve as a source
of strength to its banking subsidiary. A bank holding company may not pay
dividends when it is insolvent.
Community
Partners did not pay any cash dividends to common shareholders in 2009 and does
not contemplate the payment of cash dividends to common shareholders in 2010. On
August 25, 2009, Community Partners declared a 3% stock dividend, which was
distributed on October 23, 2009 to common shareholders of record as of September
25, 2009.
Transactions
with Affiliates
Banking
laws and regulations impose certain restrictions on the ability of bank holding
companies to borrow from and engage in other transactions with their subsidiary
banks. Generally, these restrictions require that any extensions of credit must
be secured by designated amounts of specified collateral and be limited to (i)
10% of the bank’s capital stock and surplus per non-bank affiliated borrower,
and (ii) 20% of the bank’s capital stock and surplus aggregated as to all
non-bank affiliated borrowers. In addition, certain transactions with affiliates
must be on terms and conditions, including credit standards, at least as
favorable to the institution as those prevailing for arms-length
transactions.
FIRREA
Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”),
a depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. These provisions have
commonly been referred to as FIRREA’s “cross guarantee”
provisions. Further, under FIRREA, the failure to meet capital
guidelines could subject a bank to a variety of enforcement remedies available
to federal regulatory authorities.
FIRREA
also imposes certain independent appraisal requirements upon a bank’s real
estate lending activities and further imposes certain loan-to-value restrictions
on a bank’s real estate lending activities. The bank regulators have promulgated
regulations in these areas.
Deposit
Insurance
The Bank
is a member of the Deposit Insurance Fund of the FDIC. The Deposit Insurance
Fund was formed in 2006 when the FDIC merged the Bank Insurance Fund with the
Savings Association Insurance Fund as a requirement of the Federal Deposit
Insurance Reform Act of 2005.
The
Bank’s deposits are insured up to a maximum of $250,000 per depositor through
December 31, 2013 under the Deposit Insurance Fund. The Federal Deposit
Insurance Corporation Improvement Act (“FDICIA”) is applicable to depository
institutions and deposit insurance. The FDICIA required the FDIC to establish a
risk-based assessment system for all insured depository institutions. Under this
legislation, the FDIC was required to establish an insurance premium assessment
system. Under this ruling, the initial assessment rates will be based on the
following components: (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. In compliance with this mandate,
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. The Bank is also subject to a quarterly FICO
assessment.
In May
2009, the FDIC adopted a final special assessment rule that assessed the
industry 5 basis points on total assets less Tier 1 capital. The Company was
required to accrue the charge during the second quarter of 2009, which amounted
to approximately $288,000, even though the FDIC collected the fee at the end of
the third quarter when the regular quarterly assessments for the second quarter
were collected.
On November 12, 2009, the FDIC Board approved the final
ruling for the risk-based deposit insurance assessment system. Under this
ruling, the initial assessment rates will be based on the following components:
1) Weighted average CAMEL ratings, 2) Tier 1 leverage ratio, 3) Loans past due
30-89 days/gross assets, 4) Nonperforming assets/gross assets, 5) Net loan
charge-offs/gross assets, 6) Net income before taxes/risk-weighted assets, 7)
Adjusted brokered deposit ratio. The component data was collected as of
September 30, 2009. In addition, on November 17, 2009, the FDIC implemented a
final rule requiring insured institutions, like the Bank, to prepay their
estimated quarterly risk based assessments for the fourth quarter of 2009, and
for all of 2010, 2011 and 2012. This prepaid assessment, which amounted
to approximately $3.2 million, was collected by the FDIC on December 30, 2009
and will be amortized over the period beginning the fourth quarter of 2009
through December 2012. In October 2009, as part of its extension of the
restoration plan for the Deposit Insurance Fund for eight years, the FDIC
implemented a uniform three basis point increase in assessment rates, effective
January 1, 2011, to help ensure that the reserve ratio of the Deposit Insurance
Fund returns to normal levels at the end of the eight year period of the
restoration plan.
Capital
Adequacy
The
Federal Reserve Board has adopted risk-based capital guidelines for banks and
bank holding companies. The minimum guideline for the ratio of total capital to
risk-weighted assets is 8%. At least half of the total capital is to be
comprised of common stock, retained earnings, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock
and a limited amount of qualifying cumulative perpetual preferred stock, less
goodwill and certain other intangibles (“Tier 1 Capital”). The remainder may
consist of other preferred stock, certain other instruments and a portion of the
loan loss allowance (“Tier II and Tier III Capital”). “Total Capital” is the sum
of Tier I Capital and Tier II and Tier III Capital.
In addition, the Federal Reserve Board
has established minimum leverage ratio guidelines for banks and bank holding
companies. These guidelines provide for a minimum ratio of Tier 1 Capital to
average total assets of 3% for banks that meet certain specified
criteria, including having the highest regulatory rating. All other banks and
bank holding companies generally are required to maintain a leverage ratio of at
least 3% plus an additional cushion of 100 to 200 basis points. At December 31,
2009, Community Partners’ leverage ratio was 9.28%.
Prompt
Corrective Action
The
Federal Deposit Insurance Act (FDIA) requires
federal banking regulators to take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements. Failure
to meet minimum requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
an adverse material effect on Community Partners’ financial condition. Under the
FDIA’s Prompt Corrective Action
Regulations, the Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices.
The
Prompt Corrective Action Regulations define specific capital categories based on
an institution’s capital ratios. The capital categories, in declining order, are
“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” and “critically undercapitalized.” The FDIA imposes
progressively more restrictive constraints on operations, management and capital
distributions, depending on the capital category by which the institution is
classified. Institutions categorized as “undercapitalized” or worse may be
subject to requirements to file a capital plan with their primary federal
regulator, prohibitions on the payment of dividends and management fees,
restrictions on asset growth and executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution by the regulatory agencies, including requirements to raise
additional capital, sell assets or sell the entire institution. Once an
institution becomes “critically undercapitalized,” it generally must be placed
in receivership or conservatorship within 90 days.
The
Prompt Corrective Action Regulations provide that an institution is “well
capitalized” if the institution has a total risk-based capital ratio of 10.0% or
greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage
ratio of 5.0% or greater. The institution also may not be subject to an order,
written agreement, and capital directive or prompt corrective action directive
to meet and maintain a specific level for any capital measure. An institution is
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or
greater, a Tier I risk-based capital ratio of 4.0% or greater, and a leverage
ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a well-capitalized institution. An institution
is deemed “undercapitalized” if it has a total risk-based capital ratio that is
less than 8.0%, a Tier I risk-based capital ratio of less than 4.0%, or a
leverage ratio of less than 4.0% (or a leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a significantly undercapitalized or critically
undercapitalized institution. An institution is “significantly undercapitalized”
if the institution has a total risk-based capital ratio that is less than 6.0%,
a Tier I risk-based capital ratio of less than 3.0%, or a leverage ratio less
than 3.0% and the institution does not meet the definition of a critically
undercapitalized institution, and is “critically undercapitalized” if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2.0%.
The
appropriate federal banking agency may, under certain circumstances, reclassify
a well-capitalized insured depository institution as adequately capitalized. The
appropriate agency is also permitted to require an adequately capitalized or
undercapitalized institution to comply with the supervisory provisions as if the
institution were in the next lower category (but not to treat a significantly
undercapitalized institution as critically undercapitalized) based on
supervisory information other than an institution’s capital levels.
Unsafe
and Unsound Practices
Notwithstanding its Prompt Corrective Action
Regulations category dictated by risk-based capital ratios, the FDIA permits the
appropriate bank regulatory agency to reclassify an institution if it
determines, after notice and a hearing, that the condition of the institution is
unsafe or unsound, or if it deems the institution
to be engaging in an unsafe or unsound practice. Also, if a federal regulatory
agency with jurisdiction over a depository institution believes that the
depository institution will engage, is engaging, or has engaged in an unsafe or
unsound practice, the regulator may require that the bank cease and desist from
such practice, following notice and a hearing on the matter.
The
USA PATRIOT Act
On
October 26, 2001, the President of the United States signed into law certain
comprehensive anti-terrorism legislation known as the USA PATRIOT Act of 2001.
Title III of the USA PATRIOT Act substantially broadened the scope of the U.S.
anti-money-laundering laws and regulations by imposing significant new
compliance and due diligence obligations on financial institutions, creating new
crimes and penalties and expanding the extra-territorial jurisdiction of the
United States. The Treasury has issued a number of implementing regulations
which apply various requirements of the USA PATRIOT Act to financial
institutions such as the Bank. Those regulations impose new obligations on
financial institutions to maintain appropriate policies, procedures and controls
to detect, prevent and report money laundering and terrorist
financing.
Failure
of a financial institution to comply with the USA PATRIOT Act’s requirements
could have serious legal consequences for the institution and adversely affect
its reputation. Community Partners and the Bank adopted appropriate policies,
procedures and controls to address compliance with the requirements of the USA
PATRIOT Act under the existing regulations and will continue to revise and
update its policies, procedures and controls to reflect changes required by the
USA PATRIOT Act and by Treasury regulations.
Community
Reinvestment Act
The Federal Community Reinvestment Act (“CRA”)
requires banks to respond to the full range of credit and banking needs within
their communities, including the needs of low and moderate-income individuals
and areas. A bank’s failure to address the credit and banking needs of all
socio-economic levels within its markets may result in restrictions on growth
and expansion opportunities for the bank, including restrictions on new branch
openings, relocation, formation of subsidiaries, mergers and acquisitions. Upon
completion of a CRA examination, an overall CRA rating is assigned using a
four-tiered rating system. These ratings
are: Outstanding, Satisfactory, Needs to Improve, and Substantial
Noncompliance.
In the
latest CRA performance evaluation examination report with respect to the Bank,
dated April 2, 2009, the Bank received a rating of Satisfactory.
Consumer
Privacy
In addition to fostering the development of
“financial holding companies,” the Gramm-Leach-Bliley Act modified laws relating
to financial privacy. Its financial privacy provisions generally prohibit
financial institutions, including Community Partners and the Bank, from
disclosing or sharing nonpublic personal financial information to third parties
for marketing or other purposes not related to transactions, unless customers
have an opportunity to “opt out” of authorizing such disclosure, and have not
elected to do so. It has never been the policy of Community Partners or the
Bank, to release such information except as may be
required by law.
Loans
to One Borrower
Federal
banking laws limit the amount a bank may lend to a single borrower to 15% of the
bank’s capital base, unless the entire amount of the loan is secured by adequate
amounts of readily marketable collateral. However, no loan to one borrower may
exceed 25% of a bank’s statutory capital, notwithstanding collateral pledged to
secure it.
New
Jersey banking law limits the total loans and extensions of credit by a bank to
one borrower at one time to 15% of the capital funds of the bank when the loan
is fully secured by collateral having a market value at least equal to the
amount of the loans and extensions of credit. Such loans and extensions of
credit are limited to 10% of the capital funds of the bank when the total loans
and extensions of credit by a bank to one borrower at one time are fully secured
by readily available marketable collateral having a market value (as determined
by reliable and continuously available price quotations) at least equal to the
amount of funds outstanding. This 10% limitation shall be separate from and in
addition to the 15% limitation noted in the beginning of this paragraph. If a
bank’s lending limit is less than $500,000, the bank may nevertheless have total
loans and extensions of credit outstanding to one borrower at one time not to
exceed $500,000.
Depositor Preference Statute
In 1993, the United States enacted amendments to the
FDIA that created a preference for depositors in the distribution of the assets
of a failed bank. Section 11(d)(11)(A) of the FDIA, also known as the National Depositor Preference
Statute, states that depositors and certain claimants for administrative
expenses and employee compensation against an insured depository institution are
afforded a priority over other general unsecured
claims against the institution, in the event of a “liquidation or other
resolution” of the institution by a receiver.
Gramm-Leach-Bliley Act
The
Financial Modernization Act of 1999, or Gramm-Leach-Bliley Act, became effective
in early 2000. The Gramm-Leach-Bliley
Act:
|
·
|
allows
bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
non-banking activities than is permissible for a bank holding company,
including insurance underwriting and making merchant banking investments
in commercial and financial companies; if a bank holding company elects to
become a financial holding company, it files a certification, effective in
30 days, and thereafter may engage in certain financial activities without
further approvals;
|
|
·
|
allows
banks to establish subsidiaries to engage in certain activities which a
financial holding company could engage in, if the bank meets certain
management, capital and Community Reinvestment Act standards;
and
|
|
·
|
allows
insurers and other financial services companies to acquire banks and
removed various restrictions that applied to bank holding company
ownership of securities firms and mutual fund advisory companies; and
established the overall regulatory structure applicable to financial
holding companies that also engage in insurance and securities
operations.
|
The
Gramm-Leach-Bliley Act modified other financial laws, including laws related to
financial privacy and community reinvestment.
The
Gramm-Leach-Bliley Act also amended the BHCA and the Bank Merger Act to require
the federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts.
Additional
proposals to change the laws and regulations governing the banking and financial
services industry are frequently introduced in Congress, in the state
legislatures and before the various bank regulatory agencies. The likelihood and
timing of any such changes and the impact such changes might have on the Company
cannot be determined at this time.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which became law on July
30, 2002, created new legal requirements affecting corporate governance,
accounting and corporate reporting for companies with publicly traded
securities.
The
Sarbanes-Oxley Act provides for, among other things:
|
·
|
a
prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank subject
to Regulation O);
|
|
·
|
independence
requirements for audit committee
members;
|
|
·
|
disclosure
of whether at least one member of the audit committee is a “financial
expert” (as such term is defined by the SEC) and if not, why
not;
|
|
·
|
independence
requirements for outside auditors;
|
|
·
|
a
prohibition by a company’s registered public accounting firm from
performing statutorily mandated audit services for the company if the
company’s chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had
been employed by such firm and participated in the audit of such company
during the one-year period preceding the audit initiation
date;
|
|
·
|
certification
of financial statements and reports on Forms 10-K and 10-Q by the chief
executive officer and the chief financial
officer;
|
|
·
|
the
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve month period following initial publication of any financial
statements that later require restatement due to corporate
misconduct;
|
|
·
|
disclosure
of off-balance sheet transactions;
|
|
·
|
two-business
day filing requirements for insiders filing Forms
4;
|
|
·
|
disclosure
of a code of ethics for financial officers and filing a Form 8-K for a
change or waiver of such code;
|
|
·
|
“real
time” filing of periodic reports;
|
|
·
|
posting
of certain SEC filings and other information on the company
website;
|
|
·
|
the
reporting of securities violations “up the ladder” by both in-house and
outside attorneys;
|
|
·
|
restrictions
on the use of non-GAAP financial
measures;
|
|
·
|
the
formation of a public accounting oversight board;
and
|
|
·
|
various
increased criminal penalties for violations of securities
laws.
|
Additionally,
Section 404 of the Sarbanes-Oxley Act requires that a public company subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), include in its annual report (i) a management’s report on
internal control over financial reporting assessing the company’s internal
controls, and (ii) an auditor’s attestation report, completed by the independent
registered public accounting firm that prepares or issues an accountant’s report
that is included in the company’s annual report, attesting to the effectiveness
of management’s internal controls over financial reporting. Because we are
neither a “large accelerated filer” nor an “accelerated filer”, under current
rules, we are required to provide management’s report on internal control over
financial reporting with our annual report, and compliance with the auditor’s
attestation report requirement is not required until we file our 2010 annual
report in 2011.
All of
the national stock exchanges, including the Nasdaq Capital Market where our
common stock is listed, have implemented corporate governance rules, including
rules strengthening director independence requirements for boards, and the
adoption of charters for the nominating, corporate governance, and audit
committees. The rule changes are intended to, among other things, make the board
of directors independent of management and allow shareholders to more easily and
efficiently monitor the performance of companies and directors. These increased
burdens have increased our legal and accounting fees and the amount of time that
our board of directors and management must devote to corporate governance
issues.
Overall
Impact of New Legislation and Regulations
Various legislative initiatives are from time to time
introduced in Congress and in the New Jersey State Legislature. It cannot be predicted whether or to what extent the
business and condition of Community Partners or the Bank will be affected by new
legislation or regulations, and legislation or regulations as yet to be proposed
or enacted.
Available
Information
The
Company maintains a website at www.tworiverbank.com. The Company makes available
on its website free of charge its annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to those reports
which are filed with or furnished to the SEC pursuant to Section 13(a) of the
Securities Exchange Act of 1934. These documents are made available on the
Company’s website as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC. Also available on the website
are our Code of Conduct, our Luxury Expenditure Policy, our Shareholder
Communications Policy and the charters of our Nominating and Corporate
Governance Committee, Audit Committee, and Compensation.
The
following are some important factors that could cause the Company’s actual
results to differ materially from those referred to or implied in any
forward-looking statement. These are in addition to the risks and uncertainties
discussed elsewhere in this Annual Report on Form 10-K and the Company’s other
filings with the SEC.
We
may suffer losses in our loan portfolio despite our underwriting
practices.
We seek
to mitigate the risks inherent in our loan portfolio by adhering to specific
underwriting practices. Although we believe that our underwriting
criteria are appropriate for the various kinds of loans that we make, we may
still incur losses on loans that meet our underwriting criteria due to current
economic conditions. A significant part of our loan portfolio is secured by real
restate. As real estate values in New Jersey decline, our ability to recover on
defaulted loans by selling the underlying real estate is reduced, which
increases the possibility that we may suffer losses on defaulted loans. This may
result in significant loan losses, which may exceed the amounts, set aside in
our allowance for loan losses and have a material adverse effect on our
operating results.
Our
financial condition and results of operations would be adversely affected if our
allowance for loan losses is not sufficient to absorb actual losses or if we are
required to increase our allowance.
Despite
our underwriting criteria, we may experience loan delinquencies and losses. In
order to absorb losses associated with non-performing loans, we maintain an
allowance for loan losses based on, among other things, historical experience,
an evaluation of economic conditions, and regular reviews of delinquencies and
loan portfolio quality. Determination of the allowance inherently involves a
high degree of subjectivity and requires us to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. At any time there are likely to be loans in our portfolio that will
result in losses but that have not been identified as non-performing or
potential problem credits. We cannot be sure that we will be able to identify
deteriorating credits before they become non-performing assets or that we will
be able to limit losses on those loans that are identified.
We may be
required to increase our allowance for loan losses for any of several reasons.
State and federal regulators, in reviewing our loan portfolio as part of a
regulatory examination, may request that we increase our allowance for loan
losses. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require an increase in our
allowance. In addition, if charge-offs in future periods exceed our allowance
for loan losses, we will need additional increases in our allowance for loan
losses. Any increases in our allowance for loan losses will result in a decrease
in our net income and, possibly, our capital, and may materially affect our
results of operations in the period in which the allowance is
increased.
Recent
negative developments in the financial services industry and the U.S. and global
credit markets may adversely impact our operations and results.
Negative
developments in the latter half of 2007, the years of 2008 and 2009 in the
capital markets have resulted in uncertainty in the financial markets in general
with the expectation of the general economic downturn continuing through much of
2010. Loan portfolio performances have deteriorated at many institutions
resulting from, amongst other factors, a weak economy and a decline in the value
of the collateral supporting their loans. The competition for our deposits has
increased significantly due to liquidity concerns at many of these same
institutions. Stock prices of bank holding companies, like ours, have
been negatively affected by the current condition of the financial markets, as
has our ability, if needed, to raise capital or borrow in the debt markets
compared to recent years. As a result, there is a potential for new federal or
state laws and regulations regarding lending and funding practices and liquidity
standards, and financial institution regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in examinations,
including the expected issuance of many formal enforcement actions. Negative
developments in the financial services industry and the impact of new
legislation in response to those developments could negatively impact our
operations by restricting our business operations, including our ability to
originate or sell loans, and adversely impact our financial
performance.
Economic
conditions either locally or regionally in areas in which our operations are
concentrated may adversely affect our business.
Deterioration
in local or regional economic conditions in Monmouth or Union counties in New
Jersey could cause us to experience a reduction in deposits and new loans, an
increase in the number of borrowers who default on their loans and a reduction
in the value of the collateral securing their loans, all of which could
adversely affect our performance and financial condition. Unlike larger banks
that are more geographically diversified, we provide banking and financial
services in the State of New Jersey, primarily within Monmouth and
Union counties. Therefore, we are particularly vulnerable to
adverse local economic conditions.
If
economic conditions further deteriorate, particularly in the market areas of the
Bank, our results of operations and financial condition could be adversely
affected as borrowers’ ability to repay loans declines and the value of the
collateral securing our loans decreases.
Our
financial results may be adversely affected by changes in prevailing economic
conditions, particularly in the market areas of the Bank, including decreases in
real estate values, changes in interest rates which may cause a decrease in
interest rate spreads, adverse employment conditions, the monetary and fiscal
policies of the federal government and other significant external
events. Decreases in local real estate values would adversely affect
the value of property used as collateral for our loans. Adverse changes in the
economy also may have a negative effect on the ability of our borrowers to make
timely repayments of their loans, which would have an adverse impact on our
earnings.
Our
agreements with the Treasury impose restrictions and obligations on us that
limit our ability to pay cash dividends and repurchase our common
stock.
On
January 30, 2009, we issued Senior Preferred Stock and a warrant to purchase our
common stock to the Treasury as part of its TARP Capital Purchase Program. Prior
to January 30, 2012, unless we have redeemed all of the Senior Preferred Stock
or the Treasury has transferred all of the Senior Preferred Stock to a third
party, the consent of the Treasury will be required for us to, among other
things, pay cash dividends on our common stock or repurchase our common stock
(with certain exceptions, including the repurchase of our common stock in
connection with an employee benefit plan in the ordinary course of business and
consistent with past practice).
Our
preferred shares impact net income available to our common stockholders and our
earnings per share.
As long
as there are shares of Senior Preferred Stock outstanding, no cash dividends may
be paid on our common stock unless all dividends on the Senior Preferred Stock
have been paid in full. The dividends declared on the Senior Preferred Stock
will reduce the net income available to common shareholders and our earnings per
common share. Additionally, warrants to purchase the Company’s common stock
issued to the Treasury, in conjunction with the issuance of the Senior Preferred
Stock, may be dilutive to our earnings per share. The Senior Preferred Stock
will also receive preferential treatment in the event of liquidation,
dissolution or winding up of the Company.
We are
not required to declare cash dividends on our common stock. We have not paid any
cash dividends to shareholders since the date of our incorporation on August 8,
2005. Until the earlier of (i) January 30, 2012 or (ii) the date the Treasury no
longer owns any shares of Senior Preferred Stock, we may not pay any dividends
on our common stock without obtaining the prior consent of the
Treasury.
Changes
in interest rates could reduce our income, cash flows and asset
values.
Our
income and cash flows and the value of our assets depend to a great extent on
the difference between the interest rates we earn on interest-earning assets,
such as loans and investment securities, and the interest rates we pay on
interest-bearing liabilities such as deposits and borrowings. These rates are
highly sensitive to many factors which are beyond our control, including
general economic conditions and policies of various governmental and regulatory
agencies and, in particular, the Board of Governors of the Federal Reserve
System. Changes in monetary policy, including changes in interest rates, will
influence not only the interest we receive on our loans and investment
securities and the amount of interest we pay on deposits and borrowings but will
also affect our ability to originate loans and obtain deposits and the value of
our investment portfolio. If the rate of interest we pay on our deposits and
other borrowings increases more than the rate of interest we earn on our loans
and other investments, our net interest income, and therefore our earnings,
could be adversely affected. Our earnings also could be adversely affected if
the rates on our loans and other investments fall more quickly than those on our
deposits and other borrowings.
Competition
may decrease our growth or profits.
We face
substantial competition in all phases of our operations from a variety of
different competitors, including commercial banks, savings and loan
associations, mutual savings banks, credit unions, consumer finance companies,
factoring companies, leasing companies, insurance companies and money market
mutual funds. There is very strong competition among financial services
providers in our principal service area. Our competitors may have greater
resources, higher lending limits or larger branch systems than we do.
Accordingly, they may be able to offer a broader range of products and services
as well as better pricing for those products and services than we
can.
In
addition, some of the financial services organizations with which we compete are
not subject to the same degree of regulation as is imposed on federally insured
financial institutions such as the Bank. As a result, those non-bank competitors
may be able to access funding and provide various services more easily or at
less cost than we can, adversely affecting our ability to compete
effectively.
We
rely on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are
and will continue to be dependent upon the services of our executive management
team. The Company’s performance is largely dependent on the talents and efforts
of highly skilled individuals. There is intense competition in the financial
services industry for qualified employees. In addition, the Company faces
increasing competition with businesses outside the financial services industry
for the most highly skilled individuals. The unexpected loss of services of any
key management personnel or commercial loan officers could have an adverse
effect on our business and financial condition because of their skills,
knowledge of our market, years of industry experience and the difficulty of
promptly finding qualified replacement personnel. The EESA, the Stimulus Act and
the agreements between the Company and the Treasury related to the purchase of
the Company’s Senior Preferred Stock and common stock warrants place
restrictions on the Company’s ability to pay compensation to its senior
officers. The Company’s business operations could be adversely affected if it
were unable to attract new employees and retain and motivate its existing
employees.
We
may be adversely affected by government regulation.
The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Changes in the laws, regulations, and regulatory practices
affecting the banking industry may increase our costs of doing business or
otherwise adversely affect us and create competitive advantages for others.
Regulations affecting banks and financial services companies undergo continuous
change, and we cannot predict the ultimate effect of these changes, which could
have a material adverse effect on our profitability or financial
condition.
The
anti-money laundering or AML, and bank secrecy, or BSA, laws have imposed
far-reaching and substantial requirements on financial institutions. The
enforcement policy with respect to AML/BSA compliance has been vigorously
applied throughout the industry, with regulatory action taking various forms. We
believe that our policies and procedures with respect to combating money
laundering are effective and that our AML/BSA policies and procedures are
reasonably designed to comply with applicable standards. We cannot provide
assurance that in the future we will not face a regulatory action, adversely
affecting our ability to acquire banks or open new branches. However, we are not
prohibited from acquiring banks or opening branches based upon the results of
our most recently completed regulatory examination.
Environmental
liability associated with lending activities could result in
losses.
In the
course of our business, we may foreclose on and take title to properties
securing our loans. If hazardous substances were discovered on any of these
properties, we could be liable to governmental entities or third parties for the
costs of remediation of the hazard, as well as for personal injury and property
damage. Many environmental laws can impose liability regardless of whether we
knew of, or were responsible for, the contamination. In addition, if we arrange
for the disposal of hazardous or toxic substances at another site, we may be
liable for the costs of cleaning up and removing those substances from the site
even if we neither own nor operate the disposal site. Environmental laws may
require us to incur substantial expenses and may materially limit use of
properties we acquire through foreclosure, reduce their value or limit our
ability to sell them in the event of a default on the loans they secure. In
addition, future laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase our exposure to environmental
liability.
Failure
to implement new technologies in our operations may adversely affect our growth
or profits.
The
market for financial services, including banking services and consumer finance
services is increasingly affected by advances in technology, including
developments in telecommunications, data processing, computers, automation,
Internet-based banking and telebanking. Our ability to compete successfully in
our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be able
to properly or timely anticipate or implement such technologies or properly
train our staff to use such technologies. Any failure to adapt to new
technologies could adversely affect our business, financial condition or
operating results.
A
limited market exists for our common stock.
Our
common stock commenced trading on the NASDAQ Capital Market on April 4, 2006 and
trading volumes since that time have been modest. The limited trading market for
our common stock may cause fluctuations in the market value of our common stock
to be exaggerated, leading to price volatility in excess of that which would
occur in a more active trading market. Accordingly, you may have difficulty
selling our common stock at prices which you find acceptable or which accurately
reflect the value of the Company.
We
are subject to liquidity risk.
Liquidity
risk is the potential that we will be unable to meet our obligations as they
become due, capitalize on growth opportunities as they arise, or pay regular
cash dividends because of an inability to liquidate assets or obtain adequate
funding in a timely basis, at a reasonable cost and within acceptable risk
tolerances.
Liquidity
is required to fund various obligations, including credit commitments to
borrowers, mortgage and other loan originations, withdrawals by depositors,
repayment of borrowings, dividends to shareholders, operating expenses and
capital expenditures.
Liquidity
is derived primarily from retail deposit growth and retention; principal and
interest payments on loans; principal and interest payments; sale, maturity and
prepayment of investment securities; net cash provided from operations and
access to other funding sources.
Our
access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity due
to a market downturn or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a
severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole as evidenced
by turmoil faced by banking organizations in 2008 in the domestic and worldwide
credit markets.
Future
offerings of debt or other securities may adversely affect the market price of
our stock.
In the
future, we may attempt to increase our capital resources or, if our or the
Bank’s capital ratios fall below the required minimums, we or the Bank could be
forced to raise additional capital by making additional offerings of debt or
preferred equity securities, including medium-term notes, trust preferred
securities, senior or subordinated notes and preferred stock. Upon liquidation,
holders of our debt securities and shares of preferred stock and lenders with
respect to other borrowings will receive distributions of our available assets
prior to the holders of our common stock. Additional equity offerings may dilute
the holdings of our existing shareholders or reduce the market price of our
common stock, or both. Holders of our common stock are not entitled to
preemptive rights or other protections against dilution.
The
Company may lose lower-cost funding sources.
Checking,
savings, and money market deposit account balances and other forms of customer
deposits can decrease when customers perceive alternative investments, such as
the stock market, as providing a better risk/return tradeoff. If customers move
money out of bank deposits and into other investments, the Company could lose a
relatively low-cost source of funds, increasing its funding costs and reducing
the Company’s net interest income and net income.
The
Company is subject to operational risk.
The
Company faces the risk that the design of its controls and procedures, including
those to mitigate the risk of fraud by employees or outsiders, may prove to be
inadequate or are circumvented, thereby causing delays in detection of errors or
inaccuracies in data and information. Management regularly reviews and updates
the Company’s internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of controls,
however well designed and operated, is based in part on certain assumptions and
can provide
only reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of the Company’s controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Company’s business,
results of operations and financial condition.
The
Company may also be subject to disruptions of its systems arising from events
that are wholly or partially beyond its control (including, for example,
computer viruses or electrical or telecommunications outages), which may give
rise to losses in service to customers and to financial loss or liability. The
Company is further exposed to the risk that its external vendors may be unable
to fulfill their contractual obligations (or will be subject to the same risk of
fraud or operational errors by their respective employees as is the Company) and
to the risk that the Company’s (or its vendors’) business continuity and data
security systems prove to be inadequate.
Not
applicable.
The
following table provides certain information with respect to
properties:
Office
Location
|
Address
|
Description
|
Opened
|
|||
The Bank’s Main
Office:
|
1250
Highway 35 South
Middletown,
NJ
|
5,300
sq. ft. first-floor stand-
alone building (leased) |
02/00
|
|||
Operations
Center:
|
178
Office Max Plaza
Suite
3-A
Eatontown,
NJ
|
7,200
sq. ft.
shopping
center (leased)
|
06/02
|
|||
Allaire:
|
Monmouth
Executive Airport
229
Airport Road, Bldg 13
Farmingdale,
NJ
|
3,800
sq. ft. building (leased)
|
02/04
|
|||
Atlantic
Highlands:
|
84
First Avenue
Atlantic
Highlands, NJ
|
700
sq. ft. store front (leased)
|
03/02
|
|||
Cliffwood:
|
Angel
Street & Route 35
Aberdeen,
NJ
|
2,500
sq. ft. building (leased)
|
11/04
|
|||
Cranford
Office:
|
104
Walnut Avenue
Cranford,
NJ
|
800
sq. ft. storefront
(leased)
|
11/07
|
|||
Fanwood:
|
328
South Avenue
Fanwood,
NJ
|
2,966
sq. ft. stand-alone
building (leased) |
03/08
|
|||
Manasquan:
|
240
Route 71
Manasquan,
NJ
|
4,300
sq. ft. stand-alone
building (leased) |
06/08
|
|||
Navesink:
|
East
Pointe Shopping Center
2345
Route 36
Atlantic
Highlands, NJ
|
2,080
sq. ft in strip shopping
center (leased) |
09/05
|
|||
Port
Monmouth:
|
357
Highway 36
Port
Monmouth, NJ
|
2,180
sq. ft. stand-alone
building (leased) |
06/01
|
|||
Red
Bank:
|
City
Centre Plaza
100
Water Street
Red
Bank, NJ
|
512
sq. ft. in strip shopping
center (leased) |
09/02
|
|||
Tinton
Falls:
|
4050
Asbury Avenue
Tinton
Falls, NJ
|
3,400
sq. ft. stand-alone
building (leased) |
10/06
|
|||
Tinton
Falls:
|
656
Shrewsbury Avenue
Tinton
Falls, NJ
|
3,650
sq. ft. stand-alone
building (leased) |
08/00
|
|||
West Long
Branch:
|
359
Monmouth Road
West
Long Branch, NJ
|
3,100
sq. ft. in strip shopping
center (leased) |
01/04
|
|||
Westfield:
|
520
South Avenue
Westfield,
NJ
|
3,000
sq. ft. stand-alone
building (leased) |
10/98
|
|||
Westfield:
|
44
Elm Street
Westfield,
NJ
|
3,000
sq. ft. downtown
building (owned) |
04/01
|
|||
The
Company owns property located at 245-249 North Avenue in Cranford, NJ, which has
been reclassified to assets held for sale in other assets. This property is
currently under negotiations to be sold.
The
Company may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business. The Company may also have various
commitments and contingent liabilities which are not reflected in the
accompanying consolidated balance sheet. At December 31, 2009, we were not
involved in any material legal proceedings.
PART
II
The
common stock of the Company trades on the Nasdaq Capital Market under the
trading symbol “CPBC”. The following are the high and low sales prices per
share, which have been adjusted for the 3% stock dividend declared August 25,
2009 and the 3% stock dividend declared August 29, 2008.
2009
|
2008
|
|||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
First
Quarter
|
$ | 4.37 | $ | 2.43 | $ | 9.45 | $ | 6.36 | ||||||||
Second
Quarter
|
4.61 | 3.08 | 8.43 | 6.17 | ||||||||||||
Third
Quarter
|
4.47 | 3.40 | 8.25 | 5.66 | ||||||||||||
Fourth
Quarter
|
4.25 | 3.00 | 7.28 | 2.18 |
As of
March 15, 2010, there were approximately 529 record holders of the Company’s
common stock.
On August
25, 2009, Community Partners declared a 3% stock dividend, which was paid on
October 23, 2009 to shareholders of record as of September 25,
2009.
Community
Partners did not pay any cash dividends to common shareholders in 2009 and does
not contemplate the payment of cash dividends to common shareholders in 2010. In
addition, please refer to the discussion above of the Senior Preferred Stock
under the heading “Troubled Asset Relief Program Capital Purchase Program” and
the discussion under the heading “Dividend Restrictions” for additional
restrictions on the payment of cash dividends.
As a
result of the Company’s issuance on January 30, 2009 of Senior Preferred Stock
and a warrant to purchase common stock to the Treasury as part of its TARP
Capital Purchase Program, the Company may not repurchase its common stock or
other equity securities except under certain limited circumstances. Please refer
to the discussion above of the Senior Preferred Stock under the heading
“Troubled Asset Relief Program Capital Purchase Program” and the discussion
under the heading “Dividend Restrictions” for additional restrictions on the
Company’s repurchase of its common stock or other equity
securities.
Not
required.
The
following management’s discussion and analysis of financial condition and
results of operations is intended to provide a better understanding of the
significant changes and trends relating to the financial condition, results of
operations, capital resources, liquidity and interest rate sensitivity of
Community Partners Bancorp as of December 31, 2009 and 2008 and for the years
then ended. The following information should be read in conjunction with the
audited consolidated financial statements as of and for the years ended December
31, 2009 and 2008, including the related notes thereto.
Critical
Accounting Policies and Estimates
The
following discussion is based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.
Note 1 to
our audited consolidated financial statements for December 31, 2009 contains a
summary of the Company’s significant accounting policies. Management believes
the following critical accounting policies encompass the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Allowance for Loan Losses.
Management believes our policy with respect to the methodology for the
determination of the allowance for loan losses involves a high degree of
complexity and requires management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could materially impact the
results of operations. This critical policy and its application are reviewed
quarterly with our audit committee and board of directors.
Management
is responsible for preparing and evaluating the ALLL on a quarterly basis in
accordance with Bank policy, and the Interagency Policy Statement on the
ALLL released by the Board of Governors of the Federal Reserve System on
December 13, 2006 as well as GAAP. We believe that our allowance for loan losses
is adequate to cover specifically identifiable loan losses, as well as estimated
losses inherent in our portfolio for which certain losses are probable but not
specifically identifiable. The allowance for loan losses is based upon
management’s evaluation of the adequacy of the allowance account, including an
assessment of known and inherent risks in the portfolio, giving consideration to
the size and composition of the loan portfolio, actual loan loss experience,
level of delinquencies, detailed analysis of individual loans for which full
collectability may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management utilizes the best
information available, the level of the allowance for loan losses remains an
estimate that is subject to significant judgment and short term change. Various
regulatory agencies may require us and our banking subsidiaries to make
additional provisions for loan losses based upon information available to them
at the time of their examination. Furthermore, the majority of our loans are
secured by real estate in New Jersey, primarily in Monmouth and Union counties.
Accordingly, the collectability of a substantial portion of the carrying value
of our loan portfolio is susceptible to changes in local market conditions and
may be adversely affected should real estate values decline or the New Jersey
and/or our local market areas experience economic shock.
Stock Based
Compensation. Stock based
compensation cost has been measured using the fair value of an award on the
grant date and is recognized over the service period, which is usually the
vesting period. The fair value of each option is amortized into compensation
expense on a straight-line basis between the grant date for the option and each
vesting date. The Company estimates the fair value of stock options on the date
of grant using the Black-Scholes option pricing model. The model requires the
use of numerous assumptions, many of which are highly subjective in
nature.
Goodwill Impairment. Although
goodwill is not subject to amortization, the Company must test the carrying
value for impairment at least annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Impairment testing
requires that the fair value of our reporting unit be compared to the carrying
amount of its net assets, including goodwill. Our reporting unit was identified
as our community bank operations. If the fair value of the reporting unit
exceeds the book value, no write-down of recorded goodwill is necessary. If the
fair value of a reporting unit is less than book value, an expense may be
required on the Company’s books to write-down the related goodwill to the proper
carrying value. Impairment testing for 2009 for goodwill and intangibles was
completed and the Company recorded a goodwill impairment charge of $6.7
million during the year ended December 31, 2009.
Investment Securities Impairment
Valuation. Securities are evaluated on at least a quarterly basis, and
more frequently when market conditions warrant such an evaluation, to determine
whether a decline in their value is other-than-temporary. The analysis of
other-than-temporary impairment requires the use of various assumptions
including, but not limited to, the length of time the investment’s book value
has been greater than fair value, the severity of the investment’s decline and
the credit deterioration of the issuer. For debt securities, management assesses
whether (a) it has the intent to sell the security and (b) it is more likely
than not that it will be required to sell the security prior to its anticipated
recovery. These steps are done before assessing whether the entity will recover
the cost basis of the investment.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, the other-than-temporary impairment is separated into
(a) the amount of the total other-than-temporary impairment related to a
decrease in cash flows expected to be collected from the debt security (the
credit loss) and (b) the amount of the total other-than-temporary impairment
related to all other factors. The amount of the total other-than-temporary
impairment related to the credit loss is recognized in earnings. The amount of
the total other-than-temporary impairment related to all other factors is
recognized in other comprehensive income.
Deferred Tax Assets and
Liabilities. We recognize deferred tax assets and liabilities for future
tax effects of temporary differences, net operating loss carry forwards and tax
credits. Deferred tax assets are subject to management’s judgment based upon
available evidence that future realization is more likely than not. If
management determines that we may be unable to realize all or part of net
deferred tax assets in the future, a direct charge to income tax expense may be
required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
Executive
Summary
The
Company reported a net loss to common shareholders of $5.7 million for the year
ended December 31, 2009, compared to net income of $798,000 in 2008. Basic and
diluted loss per common share after preferred stock dividends and accretion were
both ($0.79) for the year ended December 31, 2009 compared to basic and diluted
earnings of $0.11 per common share for the same period in 2008. For the year
ended December 31, 2009, net interest income increased by $2.5 million, or
13.2%, to $21.3 million from $18.8 million recorded for the year ended December
31, 2008. Our results for 2009 were primarily affected by increased provisions
for loan losses, increased FDIC insurance premiums and the goodwill impairment
charge. All per share amounts have been
retroactively adjusted to reflect the 3% stock dividends paid by Community
Partners in 2009 and 2008.
Total
assets increased by $69.8 million, or 12.2%, to $640.0 million at December 31,
2009 from $570.2 million at December 31, 2008. The increase in total assets was
primarily the result of growth in our primary source of funding, which are
customer deposits. We used our increases in deposits to fund our loan growth and
to provide additional liquidity in the form of federal funds sold.
The
loan portfolio, net of the allowance for loan losses, amounted to $507.2 million
at December 31, 2009, which was an increase of $65.2 million, or 14.8%, over the
December 31, 2008 amount of $442.0 million. The loan growth experienced during
2009 reflects our desire to provide commercial and consumer lending to our
market’s customers in addition to maintaining our high credit standards in a
challenging market. The allowance for loan losses totaled $6.2 million, or 1.20%
of total loans, at December 31, 2009, compared to $6.8 million, or 1.52% of
loans outstanding, at December 31, 2008. The decrease of $631,000 in the
allowance for loan losses is primarily due to the net loan charge-offs of $2.8
million offset in part by the additional provision of $2.2 million during
2009.
Deposits
increased to $535.4 million at December 31, 2009 from $474.8 million at December
31, 2008, an increase of $60.6 million, or 12.8%. The increase in deposits is
primarily attributable to our strategic initiative to increase our customer base
by greater penetration of existing markets.
The
following table provides certain performance ratios for the dates
indicated.
2009
|
2008
|
2007
|
||||||||||
|
|
|
||||||||||
Return
on average assets
|
(0.82%) | 0.15% | 0.68% | |||||||||
Return
on average tangible assets
|
(0.85%) | 0.15% | 0.72% | |||||||||
Return
on average shareholders’ equity
|
(6.29%) | 1.09% | 5.19% | |||||||||
Return
on average tangible shareholders’ equity
|
(8.95%) | 1.69% | 8.30% | |||||||||
Net
interest margin
|
3.69% | 3.73% | 4.07% | |||||||||
Average
equity to average assets
|
13.03% | 13.35% | 13.14% | |||||||||
Average
tangible equity to average tangible assets assets
|
9.54% | 9.03% | 8.63% |
We
anticipate that our performance ratios will remain challenged as we expect
income from continuing operations in 2010 to continue to be impacted by poor
economic conditions in the New Jersey real estate market. In addition, should a
further general decline in economic conditions in New Jersey continue throughout
2010 and beyond, the Company may suffer higher default rates on its loans,
decreased value of assets it holds as collateral, and reduced loan originations
as we continue to pursue only quality loans based on our
guidelines.
Results
of Operations
Our principal source of revenue is net interest income,
the difference between interest income on interest earning assets and interest expense on deposits and
borrowings. Interest earning assets consist primarily of loans, investment
securities and federal funds sold. Sources to fund interest earning assets
consist primarily of deposits and borrowed funds. Our net income is also
affected by our provision for loan losses, other income and other
expenses. Other income consists primarily of service charges,
commissions and fees, while other expenses are comprised of salaries and
employee benefits, occupancy costs and other operating
expenses.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net
(Loss) Income
The
Company reported a net loss to common shareholders of $5.7 million for the year
ended December 31, 2009, compared to net income of $798,000 in 2008. Basic and
diluted loss per common share after preferred stock dividends and accretion were
both ($0.79) for the year ended December 31, 2009 compared to basic and diluted
earnings of $0.11 per common share for the same period in 2008. Our net income
for the year ended December 31, 2009 was negatively impacted as we faced the
financial challenges resulting from the downturn in the general economy. We
recorded $2.2 million in provision for loan losses in 2009 similar to the
provision of $2.3 million in 2008, primarily as a result of an increase in
impaired loans due to deteriorating economic conditions. During 2009, our
non-interest expenses increased $7.9 million, or 46.4%, from $17.2 million
during 2008 to $25.1 million during 2009. The primary reason for this increase
was due to the goodwill impairment charge of $6.7 million occurring during 2009.
Conversely, our net interest income increased by $2.5 million, or 13.2%, in 2009
over 2008, primarily due to the growth in our loan portfolio.
Net
Interest Income
For the year ended December 31, 2009, we recognized net
interest income of $21.3 million, as compared to $18.8 million for the year
ended December 31, 2008. Our net interest income increased $2.5 million, or
13.2%, as a result of the balance sheet growth and lower deposit costs during
2009. As general economic conditions continued to deteriorate, the Federal
Reserve kept short term interest rates at 0.25% throughout 2009. We
increased our earning asset average balance by $72.6 million, or 14.4%,
to $577.4 million for the year ended December 31, 2009 from $504.8 million for
the year ended December 31, 2008, while our net interest spread increased by 24
basis points to 3.34% for year ended December 31, 2009 as compared to 3.10% for
the same period in 2008. The net interest margin declined by 4 basis points to
3.69% for year ended December 31, 2009 as compared to 3.73% for the same period in 2008, primarily as a result
of increasingly competitive market conditions, changing market rates and a
higher level of excess liquidity residing in Federal funds sold due to the
strong deposit growth.
For the year ended December 31, 2009, our total interest
income decreased to $30.2 million from $30.8 million for the year ended December
31, 2008. This decrease of $628,000, or 2.0%, was driven primarily by lower
interest rates on earning assets, as rate-related decreases in interest
income of $4.1 million were partially offset by volume-related increases of $3.5
million for the year ended December 31, 2009 as compared to the prior year. Our
average loans outstanding increased by $50.5 million, or 11.6%, to $484.3
million for the year ended December 31, 2009 from $433.8 million for the year
ended December 31, 2008. The average yield on our interest-earning assets
decreased by 87 basis points to 5.23% for the fiscal year ended December 31,
2009 from 6.10 % for the prior fiscal year.
Total
interest expense decreased by $3.1 million, or 26.0%, to $8.9 million for the
year ended December 31, 2009 when compared to $12.0 million for the year ended
December 31, 2008. This decrease is primarily due to general decrease in market
interest rates as previously described. This decrease resulted from a rate
related decrease of $5.1 million, offset in part by volume-related increases in
interest expense amounting to $2.0 million. The average balance of
interest-bearing liabilities increased to $467.9 million for the year ended
December 31, 2009 from $399.7 million for the year ended December 31, 2008. Our
average balance in certificates of deposit decreased by $15.0 million, or 10.3%,
to $130.4 million with an average yield of 2.44% for 2009 from $145.4 million
with an average yield of 3.57% for 2008. This average balance decrease was more
than offset by increases of $99.3 million of savings deposits, which increased
from $76.9 million with an average yield of 3.08% during 2008, to $176.2 million
with an average yield of 1.81% during 2009. Additionally, NOW deposits increased
by $2.7 million to $40.8 million with an average yield of 0.78% during 2009 from
$38.0 million with an average yield of 1.04% during 2008. For the
year ended December 31, 2009, the average yield on our interest-bearing
liabilities was 1.89% compared to 3.00% in the prior fiscal year.
The
following table reflects, for the periods presented, the components of our net
interest income, setting forth: (1) average assets, liabilities, and
shareholders’ equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average yields earned
on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earning assets less the average rate on interest-bearing liabilities),
and (5) our yield on interest-earning assets. There have been no tax equivalent
adjustments made to yields.
Years
ended December 31,
|
|||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||
Average
balance
|
Interest
income/
expense
|
Average
rates
earned/
paid
|
Average
balance
|
Interest
income/
expense
|
Average
rates
earned/
paid
|
Average
balance
|
Interest
income/
expense
|
Average
rates
earned/
paid
|
|||||||||||||||||||||||||||
(in
thousands, except for percentages)
|
|||||||||||||||||||||||||||||||||||
ASSETS
|
|||||||||||||||||||||||||||||||||||
Interest-Earning
Assets:
|
|||||||||||||||||||||||||||||||||||
Federal
funds sold
|
$
|
35,610
|
$
|
59
|
0.17%
|
$
|
8,306
|
$
|
144
|
1.73
|
%
|
$
|
15,567
|
$
|
820
|
5.27
|
%
|
||||||||||||||||||
Investment
securities
|
57,512
|
2,397
|
4.17%
|
62,665
|
2,927
|
4.67
|
%
|
60,374
|
3,008
|
4.98
|
%
|
||||||||||||||||||||||||
Loans,
net of unearned fees (1) (2)
|
484,258
|
27,726
|
5.73%
|
433,784
|
27,739
|
6.39
|
%
|
414,215
|
32,021
|
7.73
|
%
|
||||||||||||||||||||||||
Total
Interest-Earning Assets
|
577,380
|
30,182
|
5.23%
|
504,755
|
30,810
|
6.10
|
%
|
490,156
|
35,849
|
7.31
|
%
|
||||||||||||||||||||||||
Non-Interest-Earning
Assets:
|
|||||||||||||||||||||||||||||||||||
Allowance
for loan loss
|
(6,887
|
)
|
(5,172
|
)
|
(4,618
|
)
|
|||||||||||||||||||||||||||||
Other
assets
|
53,913
|
50,425
|
50,367
|
||||||||||||||||||||||||||||||||
Total
Assets
|
$
|
624,406
|
$
|
550,008
|
$
|
535,905
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
LIABILITIES
& SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NOW
deposits
|
$
|
40,763
|
|
|
|
318
|
|
0.78%
|
$
|
38,030
|
|
|
|
395
|
|
1.04
|
%
|
$
|
39,026
|
|
|
|
763
|
|
1.96
|
%
|
|||||||||
Savings
deposits
|
|
176,199
|
|
|
|
3,186
|
|
1.81%
|
|
76,882
|
|
|
|
2,369
|
|
3.08
|
%
|
|
32,423
|
|
|
|
783
|
|
2.41
|
%
|
|||||||||
Money
market deposits
|
|
97,794
|
|
|
|
1,592
|
|
1.63%
|
|
114,247
|
|
|
|
3,268
|
|
2.86
|
%
|
|
103,133
|
|
|
|
4,183
|
|
4.06
|
%
|
|||||||||
Time
deposits
|
|
130,373
|
|
|
|
3,186
|
|
2.44%
|
|
145,416
|
|
|
|
5,188
|
|
3.57
|
%
|
|
196,546
|
|
|
|
9,579
|
|
4.87
|
%
|
|||||||||
Securities
sold under agreements to repurchase
|
|
15,233
|
|
|
|
273
|
|
1.79%
|
|
16,957
|
|
|
|
438
|
|
2.58
|
%
|
|
14,384
|
|
|
|
539
|
|
3.75
|
%
|
|||||||||
Short-term
borrowings
|
|
-
|
|
|
|
-
|
|
-
|
|
715
|
|
|
|
20
|
|
2.80
|
%
|
|
129
|
|
|
|
7
|
|
5.08
|
%
|
|||||||||
Long-term
debt
|
7,500
|
302
|
4.03%
|
7,500
|
299
|
3.98
|
%
|
658
|
25
|
3.87
|
%
|
||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||
Total
Interest-Bearing Liabilities
|
|
467,862
|
|
|
|
8,857
|
|
1.89%
|
|
399,747
|
|
|
|
11,977
|
|
3.00
|
%
|
|
386,299
|
|
|
|
15,879
|
|
4.11
|
%
|
|||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||||
Non-Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Demand
deposits
|
|
71,189
|
|
|
|
|
|
|
73,458
|
|
|
|
|
|
|
75,833
|
|
|
|
|
|
||||||||||||||
Other
liabilities
|
|
3,992
|
|
|
|
|
|
|
3,354
|
|
|
|
|
|
|
3,365
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total
Non-Interest-Bearing Liabilities
|
|
75,181
|
|
|
|
|
|
|
76,812
|
|
|
|
|
|
|
79,198
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||||
Shareholders’
Equity
|
|
81,363
|
|
|
|
|
|
|
73,449
|
|
|
|
|
|
|
70,408
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total
Liabilities and Shareholders’ Equity
|
$
|
624,406
|
|
|
|
|
|
$
|
550,008
|
|
|
|
|
|
$
|
535,905
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||||||||||
NET
INTEREST INCOME
|
|
|
|
|
$
|
21,325
|
|
|
|
|
|
$
|
18,833
|
|
|
|
|
$
|
19,970
|
|
|||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||||||||||
NET
INTEREST SPREAD (3)
|
|
|
|
|
|
|
|
3.34%
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
3.20
|
%
|
||||||||||
NET
INTEREST MARGIN (4)
|
3.69% | 3.73 | % | 4.07 | % |
(1)
|
Included
in interest income on loans are loan fees.
|
(2)
|
Includes
non-performing loans.
|
(3)
|
The
interest rate spread is the difference between the weighted average yield
on average interest-earning
assets
and the weighted average cost of average interest-bearing
liabilities.
|
(4)
|
The
interest rate margin is calculated by dividing net interest income by
average interest-earning assets.
|
Analysis
of Changes in Net Interest Income
The
following table sets forth for the periods indicated the amounts of the total
change in net interest income that can be attributed to changes in the volume of
interest-earning assets and interest-bearing liabilities and the amount of the
change that can be attributed to changes in interest rates.
Years
ended December 31,
|
||||||||||||||||||||||||||||||||||||||||||||||
2009
vs. 2008
|
2008
vs. 2007
|
|
||||||||||||||||||||||||||||||||||||||||||||
Increase
(decrease) due to change in
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Average
volume
|
Average
rate
|
Net
|
Average
volume
|
Average
rate
|
Net
|
|
||||||||||||||||||||||||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||
Interest
Earned On:
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Federal
funds sold
|
$
|
473
|
$
|
(558
|
)
|
$
|
(85
|
)
|
$
|
(382
|
)
|
$
|
(294
|
)
|
$
|
(676
|
)
|
|||||||||||||||||||||||||||||
Investment
securities
|
(241
|
) |
(289
|
)
|
(530
|
)
|
114
|
(195
|
)
|
(81
|
)
|
|||||||||||||||||||||||||||||||||||
Loans,
net of unearned fees
|
3,228
|
(3,241
|
)
|
(13
|
)
|
1,513
|
(5,795
|
)
|
(4,282
|
)
|
||||||||||||||||||||||||||||||||||||
Total
Interest Income
|
3,460
|
(4,088
|
)
|
(628
|
)
|
1,245
|
(6,284
|
)
|
(5,039
|
)
|
||||||||||||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
Interest
Paid On:
|
||||||||||||||||||||||||||||||||||||||||||||||
NOW
deposits
|
28
|
(105
|
)
|
(77
|
)
|
(19
|
)
|
(349
|
)
|
(368
|
)
|
|||||||||||||||||||||||||||||||||||
Savings
deposits
|
3,060
|
(2,243
|
)
|
817
|
1,074
|
512
|
1,586
|
|||||||||||||||||||||||||||||||||||||||
Money
market deposits
|
(471
|
) |
(1,205
|
)
|
(1,676
|
)
|
451
|
(1,366
|
)
|
(915
|
)
|
|||||||||||||||||||||||||||||||||||
Time
deposits
|
(537
|
) |
(1,465
|
)
|
(2,002
|
)
|
(2,492
|
)
|
(1,899
|
)
|
(4,391
|
)
|
||||||||||||||||||||||||||||||||||
Securities
sold under agreements to repurchase
|
(45
|
) |
(120
|
)
|
(165
|
)
|
96
|
(197
|
)
|
(101
|
)
|
|||||||||||||||||||||||||||||||||||
Short-term
borrowing
|
(20
|
) |
-
|
(20
|
)
|
29
|
(16
|
)
|
13
|
|||||||||||||||||||||||||||||||||||||
Long-term
debt
|
-
|
3
|
3
|
266
|
8
|
274
|
||||||||||||||||||||||||||||||||||||||||
Total
Interest Expense
|
2,015
|
(5,135
|
)
|
(3,120
|
)
|
(595
|
)
|
(3,307
|
)
|
(3,902
|
)
|
|||||||||||||||||||||||||||||||||||
Net
Interest Income
|
$
|
1,445
|
$
|
1,047
|
$
|
2,492
|
$
|
1,840
|
$
|
(2,977
|
)
|
$
|
(1,137
|
)
|
Provision
for Loan Losses
Our provision for loan losses, recorded for the year
ended December 31, 2009, was $2.2 million, compared to $2.3 million for the year
ended December 31, 2008. The $2.2 million provision for 2009 was due to
the assessment and evaluation of risk elements inherent in the loan portfolio,
an increase in non-performing or impaired loans due to the current economic
environment and the overall portfolio growth experienced during 2009. The
provision for loan losses is determined by an allocation process whereby an
estimated allowance is allocated to impaired loans and to pools of loans. The
allocation reflects management’s assessment of economic conditions, credit
quality and other risk factors inherent in the
loan portfolio. The provision for loan losses also reflects higher loan
balances, which increased $64.6 million, or 14.4%, to $513.4 million at December
31, 2009, from $448.8 million at December 31, 2008. The allowance for loan
losses totaled $6.2 million, or 1.20% of total loans at December 31, 2009,
compared to $6.8 million, or 1.52% of total loans, at December 31, 2008. The
decrease of $631,000 in the allowance for loan losses is primarily due to the
net loan charge-offs of $2.8 million partially offset by the additional
provision of $2.2 million during 2009. In management’s opinion, the allowance
for loan losses, totaling $6.2 million at December 31, 2009, is adequate to
cover losses inherent in the portfolio. We anticipate increased loan volume
during 2010 as we continue to target credit worthy customers that have become
dissatisfied with their relationships with larger institutions. Management will
continue to review the need for additions to our allowance for loan losses based
upon our review of the loan portfolio, the level of delinquencies and general
market and economic conditions.
Non-Interest
Income
Non-interest income amounted to $2.2 million for
the year ended December 31, 2009, compared to $1.7 million for the year ended
December 31, 2008. The increase of $583,000, or 35.0%, was primarily
attributable to the recording of $703,000 of net realized gains from the sale of
securities available for sale. Excluding net realized securities gains,
non-interest income declined $120,000, or 7.2%, from 2008. Service fees on
deposit accounts declined by $49,000 primarily due to less fee income
revenue. Other loan customer service fees declined
by $96,000 primarily due to a decrease in loan prepayment penalty fees.
Additionally, a $156,000 other-than-temporary impairment credit charge was
recorded on an investment security. Management evaluates securities for
other-than-temporary impairments at least on a quarterly basis, and more
frequently when the economic and market concerns warrant such evaluations. These
decreases in other income were partially offset by a $187,000 increase in other
income, which was primarily due to higher fees generated by our residential
mortgage department.
Non-Interest
Expenses
The
following table provides a summary of non-interest expenses by category for the
years ended December 31, 2009 and 2008.
Years ended
December
31,
|
||||||||||||||||
(dollars
in thousands)
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
||||||||||||
Salaries
and employee benefits
|
$ | 9,509 | $ | 9,076 | $ | 433 | 4.8 | % | ||||||||
Occupancy
and equipment
|
3,311 | 3,350 | (39 | ) | -1.2 | % | ||||||||||
Professional
fees
|
851 | 927 | (76 | ) | -8.2 | % | ||||||||||
Advertising
and marketing
|
251 | 339 | (88 | ) | -26.0 | % | ||||||||||
Data
processing
|
844 | 579 | 265 | 45.8 | % | |||||||||||
Insurance
|
309 | 332 | (23 | ) | -6.9 | % | ||||||||||
FDIC
insurance assessment
|
1,114 | 293 | 821 | 280.2 | % | |||||||||||
Outside
service fees
|
519 | 568 | (49 | ) | -8.6 | % | ||||||||||
Goodwill
impairment charge
|
6,725 | - | 6,725 | 100.0 | % | |||||||||||
Amortization
of identifiable intangibles
|
278 | 316 | (38 | ) | -12.0 | % | ||||||||||
Other
operating
|
1,426 | 1,390 | 36 | 2.6 | % | |||||||||||
Total
non-interest expenses
|
$ | 25,137 | $ | 17,170 | $ | 7,967 | 46.4 | % |
Non-interest
expense was $25.1 million for the year ended December 31, 2009, compared to
$17.2 million for the year ended December 31, 2008, an increase of $7.9 million,
or 46.4%. The increase is primarily due to the $6.7 million goodwill impairment
charge recorded by the Bank during 2009 as compared to no impairment charge
required during 2008. Additionally, FDIC insurance assessments increased by
$821,000, or 280.2%, primarily due to the one-time special assessment of
$288,000 recognized during the quarter ended June 30, 2009, and increased
risk-based assessment rates applicable to the Company’s deposit liabilities in
2009. In addition, salaries and employee benefits increased $433,000, or 4.8%,
of which $150,000 pertains to stock option compensation expense, to $9.5 million
for the year ended December 31, 2009 from $9.1 million for the year ended
December 31, 2008 primarily as a result of additions to staff to support our
growth, along with higher salaries and health insurance costs. The
number of our full-time equivalent employees increased from 148 at December 31,
2008 to 150 at December 31, 2009. Data processing expenses increased $265,000,
or 45.8%, primarily due to the database conversion of a former banking
subsidiary into the Two River operations. Professional fees decreased by $76,000
or 8.2%, to $851,000 for the year ended December 31, 2009 from $927,000 for the
year ended December 31, 2008 due to a stabilization of non-recurring expenses
associated with the Company’s status as a public company. Advertising expenses
decreased by $88,000, or 26.0%, to $251,000 for the year ended December 31, 2009
from $339,000 for the year ended December 31, 2008 as we continued to identify
those expenses that could be reduced during slower economic activity. Insurance
costs, exclusive of the FDIC insurance premiums and assessments, decreased by
$23,000, or 6.9%, to $309,000 for the year ended December 31, 2009 from $332,000
for the year ended December 31, 2008. Subsequent to the acquisition of Town Bank
as of April 1, 2006, we began amortizing identifiable intangible assets and
incurred $278,000 in costs during 2009 compared to $316,000 in costs during
2008. At December 31, 2009, the balance of $871,000 in core deposit intangibles
remains to be amortized through March 2016.
Income
Tax Expense
For
the year ended December 31, 2009, the Company recorded $1.4 million in income
tax expense, compared to $230,000 for the year ended December 31, 2008. The
effective tax rate for 2009, excluding the goodwill impairment charge of $6.7
million, which is a permanent difference, was higher in 2009 compared to 2008
due to lower tax-exempt income as a proportion of total pre-tax income earned
during 2009 compared to the prior year.
Financial
Condition
December
31, 2009 Compared to December 31, 2008
Assets
At
December 31, 2009, our total assets were $640.0 million, an increase of $69.8
million, or 12.2%, over total assets of $570.2 million at December 31, 2008. At
December 31, 2009, our total loans were $513.4 million, an increase of $64.6
million from the $448.8 million reported at December 31, 2008. Investment
securities were $49.3 million at December 31, 2009 as compared to $64.7 million
at December 31, 2008, a decrease of $15.4 million, or 23.7%. At December 31,
2009, Federal funds sold totaled $35.9 million compared to $14.9 million at
December 31, 2008, an increase of $21.0 million, as our liquidity position
increased due to the strong deposit growth experienced during 2009. At December
31, 2009, goodwill totaled $18.1 million from an original amount of $24.8
million. The decrease of $6.7 million is due to the $6.7 million goodwill
impairment charge recorded by the bank during 2009.
Liabilities
Total
deposits increased $60.6 million, or 12.8%, to $535.4 million at December 31,
2009, from $474.8 million at December 31, 2008. Deposits are the Company’s
primary source of funds. The deposit increase during 2009 was primarily
attributable to the Company’s strategic initiative to continue to grow our
market presence. The Company anticipates continued loan demand increases during
2010 and beyond, and will depend on the expansion and maturation of the branch
network as the primary funding source. As a secondary funding source, the
Company intends to utilize borrowed funds at opportune times during changing
rate cycles. The Company also experienced a positive change in the mix of the
deposit products through promotional activities at the branches, which were
targeted to gain market penetration. In order to fund future quality loan
demand, the Company intends to raise the most cost-effective funding available
within the market area.
Securities
Portfolio
Investment
securities, including restricted stock, totaled $49.3 million at December 31,
2009 compared to $64.7 million at December 31, 2008, a decrease of $15.4
million, or 23.7%. Investment securities purchases amounted to $31.6 million,
while repayments and maturities amounted to $35.7 million and sales of
securities available for sale amounted to $11.4 million during
2009.
The
Company maintains an investment portfolio to fund increased loans and liquidity
needs (resulting from decreased deposits or otherwise) and to provide an
additional source of interest income. The portfolio is composed of obligations
of the U.S. Government agencies and U.S. Government-sponsored entities,
municipal securities and a limited amount of corporate debt securities. All of
our mortgage-backed investment securities are collateralized by pools of
mortgage obligations that are guaranteed by privately managed, U.S.
Government-sponsored enterprises (“GSE”), such as Fannie Mae, Freddie Mac and
Government National Mortgage Association. Due to these GSE guarantees, these
investment securities are susceptible to less risk of non-performance and
default than other corporate securities which are collateralized by private
pools of mortgages. At December 31, 2009, the Company maintained $19.6 million
of GSE mortgage-backed securities in the investment portfolio, all of which are
current as to payment of principal and interest and are performing to the terms
set forth in their respective prospectuses.
Included
within the Company’s investment portfolio are trust preferred securities, which
consists of four single issue securities and one pooled issue security. These
securities have an amortized cost value of $3.1 million and a fair value of $2.1
million at December 31, 2009. The unrealized loss on these securities is related
to general market conditions, the widening of interest rate spread and
downgrades in credit ratings. The single issue securities are from large money
center banks. The pooled instrument consists of securities issued by financial
institutions and insurance companies and we hold the mezzanine tranche of such
security. Senior tranches generally are protected from defaults by
over-collateralization and cash flow default protection provided by subordinated
tranches, with senior tranches having the greatest protection and mezzanine
tranches subordinated to the senior tranches. The Company holds a mezzanine
tranche. For the pooled trust preferred security, management reviewed expected
cash flows and credit support and determined it was not probable that all
principal and interest would be repaid. Total impairment on this security was
$360,000 at December 31, 2009. As the Company does not intend to sell
this security
and it is more likely than not that the Company will not be required to sell
this security, only the credit loss portion of other-than-temporary impairment
in the amount of $156,000 was recognized on the income statement for 2009. The
Company recognized the remaining $204,000 of the other-than-temporary impairment
in other comprehensive income.
Management
evaluates all securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic and market concerns warrant
such evaluations. As of December 31, 2009, all of these securities are current
with their scheduled interest payments, with the exception of the one pooled
trust preferred security which has been remitting reduced amounts of interest as
some individual participants of the pool have deferred interest payments. Future
deterioration in the cash flow of these instruments or the credit quality of the
financial institution issuers could result in additional impairment charges in
the future.
The Company accounts for its
investment securities as available for sale or held to maturity. Management
determines the appropriate classification at the time of purchase. Based on an
evaluation of the probability of the occurrence of future events, we determine
if we have the ability and intent to hold the investment securities to maturity,
in which case we classify them as held to maturity. All other investments are
classified as available for sale.
Securities
classified as available for sale must be reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders’ equity, net of taxes. Gains or losses on the sales of securities
available for sale are recognized upon realization utilizing the specific
identification method. The net effect of unrealized gains or losses, caused by
marking our available for sale portfolio to fair value, could cause fluctuations
in the level of shareholders’ equity and equity-related financial ratios as
changes in market interest rates cause the fair value of fixed-rate securities
to fluctuate.
Securities
classified as held to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount over the terms of the maturity in a manner
that approximates the interest method.
The
following table sets forth the carrying value of the securities portfolio as of
December 31, 2009, 2008 and 2007 (in thousands).
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Investment
securities available for sale at fair value:
|
|
|
|
|||||||||
U.S.
Government agency securities
|
$ | 11,102 | $ | 23,927 | $ | 30,031 | ||||||
Municipal
securities
|
2,025 | 2,267 | 1,081 | |||||||||
U.S.
Government-sponsored enterprises
|
||||||||||||
(“GSE”) - Mortgage-backed securities
|
19,606 | 27,829 | 21,180 | |||||||||
Corporate debt securities
|
3,816 | 1,948 | 2,525 | |||||||||
Mutual fund
|
1,141 | — | — | |||||||||
|
||||||||||||
|
$ | 37,690 | $ | 55,971 | $ | 54,817 | ||||||
Investment
securities held to maturity at amortized cost:
|
||||||||||||
U.S.
Government agency securities
|
$ | 1,000 | $ | — | $ | — | ||||||
Municipal
securities
|
6,802 | 6,139 | 5,758 | |||||||||
Corporate
debt securities and other
|
2,816 | 1,801 | 1,799 | |||||||||
|
||||||||||||
|
$ | 10,618 | $ | 7,940 | $ | 7,557 |
The
contractual maturity distribution and weighted average yields, calculated on the
basis of the stated yields to maturity, taking into account applicable premiums
or discounts, of the securities portfolio at December 31, 2009 is set forth in
the following table (excluding restricted stock and mutual fund). Securities
available for sale are carried at amortized cost in the table for purposes of
calculating the weighted average yield. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. There have been no tax
equivalent adjustments made to the yields on tax-exempt securities.
December
31, 2009
|
Due
within 1
year
|
Due
1 – 5 years
|
Due 5
– 10 years
|
Due
after 10
years
|
Total
|
||||||||||||||||||||||||||
(dollars
in thousands)
|
Amortized
cost
|
Wtd
Avg
Yield
|
Amortized
cost
|
Wtd
Avg
Yield
|
Amortized
cost
|
Wtd
Avg
Yield
|
Amortized
cost
|
Wtd
Avg
Yield
|
Amortized
cost
|
Wtd
Avg
Yield
|
|||||||||||||||||||||
Investment
securities available for sale:
|
|||||||||||||||||||||||||||||||
U.S.
Government agency securities
|
$
|
2,000
|
3.04
|
%
|
$
|
7,000
|
2.14
|
%
|
$
|
-
|
-
|
$
|
2,068
|
5.95
|
%
|
$
|
11,068
|
3.01
|
%
|
||||||||||||
Municipal
securities
|
-
|
-
|
100
|
2.00
|
%
|
-
|
-
|
1,911
|
4.51
|
%
|
2,011
|
4.39
|
%
|
||||||||||||||||||
U.S.
Government-sponsored
|
|||||||||||||||||||||||||||||||
enterprises
(“GSE”) - Mortgage-
|
|||||||||||||||||||||||||||||||
backed
securities
|
261
|
4.00
|
%
|
858
|
4.50
|
%
|
1,440
|
4.83
|
%
|
16,210
|
5.17
|
%
|
18,769
|
5.10
|
%
|
||||||||||||||||
Corporate
debt securities
|
458
|
3.51
|
%
|
529
|
7.30
|
%
|
-
|
-
|
3,297
|
2.90
|
%
|
4,284
|
3.51
|
%
|
|||||||||||||||||
$
|
2,719
|
3.21
|
%
|
$
|
8,487
|
2.70
|
%
|
$
|
1,440
|
4.83
|
% |
$
|
23,486
|
4.86
|
%
|
$
|
36,132
|
4.21
|
%
|
||||||||||||
Investment
securities held to maturity:
|
|||||||||||||||||||||||||||||||
U.S.
Government agency securities
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
1,000
|
3.00
|
%
|
$
|
-
|
-
|
$
|
1,000
|
3.00
|
%
|
||||||||||||||
Municipal
securities
|
-
|
-
|
1,387
|
3.91
|
%
|
1,059
|
4.40
|
%
|
4,356
|
4.35
|
%
|
6,802
|
4.27
|
%
|
|||||||||||||||||
Corporate
debt securities and other
|
500
|
4.00
|
%
|
511
|
6.75
|
%
|
-
|
-
|
1,805
|
0.80
|
%
|
2,816
|
2.45
|
%
|
|||||||||||||||||
$
|
500
|
4.00
|
%
|
$
|
1,898
|
4.68
|
%
|
$
|
2,059
|
3.72
|
%
|
$
|
6,161
|
3.31
|
%
|
$
|
10,618
|
3.67
|
%
|
Loan
Portfolio
The
following table summarizes total loans outstanding by loan category and amount,
excluding net unearned fees, on the dates indicated.
|
December
31,
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
(in
thousands, except for percentages)
|
|||||||||||||||||||||||
Commercial
and industrial
|
$ | 133,916 | 26.1 | % | $ | 120,404 | 26.8 | % | $ | 114,657 | 27.5 | % | ||||||||||||
Real
estate - construction
|
67,011 | 13.0 | % | 76,128 | 17.0 | % | 86,937 | 20.8 | % | |||||||||||||||
Real
estate - commercial
|
228,818 | 44.5 | % | 177,650 | 39.6 | % | 167,404 | 40.1 | % | |||||||||||||||
Real
estate - residential
|
19,381 | 3.8 | % | 19,860 | 4.4 | % | 4,955 | 1.2 | % | |||||||||||||||
Consumer
|
64,547 | 12.6 | % | 54,890 | 12.2 | % | 42,627 | 10.2 | % | |||||||||||||||
Other
|
176 | 0.0 | % | 119 | 0.0 | % | 711 | 0.2 | % | |||||||||||||||
|
||||||||||||||||||||||||
Total
loans
|
$ | 513,849 | 100.0 | % | $ | 449,051 | 100.0 | % | $ | 417,291 | 100.0 | % |
December
31,
|
||||||||||||||||||||||||
2006
|
2005
|
|||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||
(in thousands, except for percentages) | ||||||||||||||||||||||||
Commercial
and industrial
|
$ | 99,994 | 24.0 | % | $ | 55,480 | 25.6 | % | ||||||||||||||||
Real
estate - construction
|
112,088 | 26.8 | % | 42,657 | 19.7 | % | ||||||||||||||||||
Real
estate - commercial
|
158,523 | 38.0 | % | 97,934 | 45.3 | % | ||||||||||||||||||
Real
estate - residential
|
2,477 | 0.6 | % | 2,625 | 1.2 | % | ||||||||||||||||||
Consumer
|
44,218 | 10.6 | % | 17,569 | 8.1 | % | ||||||||||||||||||
Other
|
117 | 0.0 | % | 181 | 0.1 | % | ||||||||||||||||||
Total
loans
|
$ | 417,417 | 100.0 | % | $ | 216,446 | 100.0 | % |
Total loans, excluding net unearned
fees, increased by $64.6 million, or 14.4%, to $513.8 million at December 31,
2009 compared to $449.1 million at December 31, 2008. The loan growth in 2009
reflects our desire to emphasize commercial and consumer lending while placing
less reliance on construction lending. Within the loan portfolio, commercial
real estate loans remained the largest component, constituting 44.5% of our
total loans outstanding at December 31, 2009, up from 39.6% for the prior year.
These loans increased by $51.2 million, or 28.8%, to $228.8 million at December
31, 2009, compared to $177.7 million at December 31, 2008. Real estate
construction loans decreased by $9.1 million, or 12.0%, to $67.0 million at
December 31, 2009, and comprised 13.0% of our total loans outstanding, down from
17.0% for the prior year. As the economic recession started to take effect, the
Company de-emphasized its real estate construction lending efforts. Commercial
and industrial loans increased $13.5 million to $133.9 million at year-end 2009
compared to $120.4 million at year-end 2008, an increase of 11.2%, and comprised
26.1% of our portfolio, slightly down from 26.8% for the prior year. Consumer
loans increased by $9.6 million, or 17.6%, to $64.5 million at December 31, 2009
compared to $54.9 million at December 31, 2008, and comprised 12.6% of our 2009
loan portfolio compared to 12.2% for 2008. Residential real estate loans
decreased by $479,000, or 2.4%, to $19.4 million at December 31, 2009 compared
to $19.9 million for 2008. Residential real estate loans comprised 3.8% of our
total loan portfolio at December 31, 2009, compared to 4.4% for the prior
year.
The
following table sets forth the aggregate maturities of loans, net of unearned
discounts and deferred loan fees, in specified categories and the amount of such
loans, which have fixed and variable rates as of December 31, 2009.
(in
thousands)
|
|
|
|
|
||||||||||||||||||||
As
of December 31, 2009
|
Due
within 1
year
|
Due
1–5 years
|
Due
after 5
years
|
Total
|
||||||||||||||||||||
Commercial
and industrial
|
$ | 72,598 | $ | 33,577 | $ | 27,741 | $ | 133,916 | ||||||||||||||||
Real
estate—construction
|
48,257 | 1,977 | 16,777 | 67,011 | ||||||||||||||||||||
Real
estate—commercial
|
5,259 | 28,476 | 195,083 | 228,818 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total
|
$ | 126,114 | $ | 64,030 | $ | 239,601 | $ | 429,745 | ||||||||||||||||
|
||||||||||||||||||||||||
Fixed
rate loans
|
$ | 34,239 | $ | 50,859 | $ | 44,344 | $ | 129,442 | ||||||||||||||||
Variable
rate loans
|
91,875 | 13,171 | 195,257 | 300,303 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total
|
$ | 126,114 | $ | 64,030 | $ | 239,601 | $ | 429,745 |
Asset Quality
One of our key operating objectives has
been, and continues to be, to maintain a high level of asset
quality. Through a variety of strategies we have been proactive in
addressing problem and non-performing assets. These strategies, as well as our
prudent maintenance of sound credit standards for new loan originations have
resulted in relatively low levels of non-performing loans and charge-offs. This
past year has been highlighted by significant disruptions and volatility in the
financial and capital marketplaces. These disruptions have been exacerbated by
the acceleration of the weakening of the real estate and housing markets. We
closely monitor local and regional real estate markets and other factors related
to risks inherent in our loan portfolio.
Non-Performing
Assets
Loans are
considered to be non-performing if they are on a non-accrual basis, past due 90
days or more and still accruing, or have been restructured to provide a
reduction of or deferral of interest or principal because of a weakening in the
financial condition of the borrowers. A loan is placed on non-accrual status
when collection of all principal or interest is considered unlikely or when
principal or interest is past due for 90 days or more, unless the loan is
well-secured and in the process of collection, in which case, the loan will
continue to accrue interest. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote.
Interest income on other non-accrual loans is recognized only to the extent of
interest payments received. At December 31, 2009 and 2008, the Company had $14.2
million and $13.0 in non-accrual loans, respectively. There were no loan
balances past due 90 days or more and still accruing interest, at December 31,
2009 and 2008, respectively.
The
following table summarizes our non-performing assets for each of the five years
in the period ended December 31, 2009.
Years ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Non-Performing
Assets:
|
||||||||||||||||||||
Non-Performing
Loans:
|
||||||||||||||||||||
Commercial
and industrial
|
$ | 4,720 | $ | 5,334 | $ | 98 | $ | --- | $ | --- | ||||||||||
Real
estate – construction
|
7,120 | 5,147 | 688 | --- | --- | |||||||||||||||
Consumer
|
2,311 | 2,477 | 103 | 61 | --- | |||||||||||||||
Total
Non-Performing Loans
|
14,151 | 12,958 | 889 | 61 | --- | |||||||||||||||
Other
Real Estate Owned
|
--- | --- | --- | --- | --- | |||||||||||||||
Total
Non-Performing Assets
|
$ | 14,151 | $ | 12,958 | $ | 889 | $ | 61 | $ | --- | ||||||||||
Ratios:
|
||||||||||||||||||||
Non-Performing
loans to total loans
|
2.76 | % | 2.89 | % | 0.21 | % | 0.01 | % | --- | |||||||||||
Non-Performing
assets to total assets
|
2.21 | % | 2.27 | % | 0.17 | % | 0.01 | % | --- | |||||||||||
Restructured
Loans
|
$ | 4,717 | $ | --- | $ | --- | $ | --- | $ | --- |
Total non-performing assets increased
by $1.2 million from December 31, 2008 to December 31, 2009. Fifteen loans
comprise the $14.2 million of non-performing loans at December 31, 2009 compared
to 22 loans which comprise the $13.0 million at December 31, 2008. At December
31, 2009, the Company believes it has a manageable level of non-performing
loans, many of which are in the final stages of resolution.
Non-performing
commercial and industrial loans decreased by $614,000 at December 31, 2009 due
primarily to a $749,000 line of credit transferred to performing status, the
payoff of one commercial time note in the amount of $99,000 and the charge-off
of one commercial time note in the amount of $224,000 coupled with the partial
write-downs of two other loans totaling $341,000. These decreases were partially
offset by the addition of one loan in the amount of $839,000.
At
December 31, 2009, non-performing real estate construction loans increased by
$2.0 million from December 31, 2008. During 2009, there were three
non-performing commercial construction loans totaling $2.1 million that were
removed and taken into other real estate owned (“OREO”) inventory as a result of
Deed-in-Lieu and one loan in the amount of $1.6 million that was charged-off. At
December 31, 2009, the OREO assets were sold and liquidated from the inventory.
During 2009, there were three loans added totaling approximately $5.6 million.
Of the $5.6 million, there is one loan in the amount of $4.2 million, which
represents our largest non-performing asset in this class.
Non-performing
consumer loans decreased by $166,000 from December 31, 2008 due primarily to two
loans totaling $327,000 transferred to performing status, the payoff of one loan
in the amount of $180,000 and a partial write down and principal reduction of
$300,000 on an existing non-performing loan. These decreases were offset in part
by the addition of two home equity loans totaling $620,000.
Historically,
the Bank has never had any restructured loans. At December 31, 2009, there were
twelve restructured loans totaling $4.7 million. These are primarily commercial
loans for which the Bank granted a concession to the borrower for economic or
legal reasons due to the borrower’s financial difficulties. The Bank continues
to work with all the related restructured loans and at December 31, 2009, all
loans continued to pay as agreed under the terms of the restructuring
agreement.
The
recorded investment in impaired loans, not requiring a specific allowance for
loan losses, was $17.3 million and $9.3 million at December 31, 2009 and 2008,
respectively. The recorded investment in impaired loans requiring a specific
allowance for loan losses was $8.3 million and $8.4 million at December 31, 2009
and 2008, respectively. The allowance allocated to these impaired loans was $1.3
million and $2.3 million at December 31, 2009 and 2008,
respectively.
Potential
Problem Loans (“Watch List”)
The
Company maintains a list of performing loans where management has identified
conditions which potentially could cause such loan to be downgraded into higher
risk categories in future periods. Loans on this watch list are subject to
heightened scrutiny and more frequent review by management. The balance of the
watch list loans at December 31, 2009 and 2008 totaled approximately $17.5
million and $12.1 million, respectively. The increase of $5.4 million was
attributable to several commercial construction loans that had projects located
in the Union County area. The loans identified represent a higher degree of risk
because of collectability, and/or inventory with limited marketability due to
unsettled economic conditions. We continue to monitor all loans identified as
“watch” to ensure timely payments and early detection of further potential
problems.
Allowance
for Loan Losses
Analysis and Determination of the
Allowance for Loan Losses
The
allowance for loan losses is a valuation allowance for probable credit losses in
the loan portfolio. We evaluate the need to establish allowances against losses
on loans on a monthly basis and such allowances are reported to the Board of
Directors on a quarterly basis. We continuously monitor the credit quality of
our loan portfolio and maintain an allowance sufficient to absorb current
probable and estimable losses inherent in our loan portfolio. We are committed
to the timely recognition of problem loans and maintaining an appropriate and
adequate allowance.
Our methodology for assessing the
appropriateness of the allowance for loan losses consists of: (1) a specific
allowance on identified problem or impaired loans; and (2) a general valuation
allowance on the remainder of the loan portfolio. Although we determine the
amount of each element of the allowance separately, the entire allowance for
loan losses is available for the entire portfolio.
Specific Allowance Required for
Identified Problem or Impaired Loans
The first
element of the allowance for loan loss analysis involves the estimation of
allowance specific to individually evaluated impaired loans including
restructured commercial and consumer loans. In this process, a specific
allowance may be established for impaired loans based on an analysis of the most
probable sources of repayment, including discounted cash flows, liquidation of
collateral, or the market value of the loan itself. Restructured
consumer loans are also evaluated in this element of the estimate.
General Valuation Allowance on the
Remainder of the Loan Portfolio
We
establish a general allowance for non-impaired loans to recognize the inherent
losses associated with lending activities. This general valuation allowance is
determined by segregating the loans by loan category and assigning percentages
to each category. The percentages are adjusted for significant factors that, in
management’s judgment, affect the collectability of the portfolio as of the
evaluation date. These significant factors include changes in existing general
economic and business conditions affecting our primary lending areas and the
national economy, staff lending experience, recent historical loss experience in
particular segments of the portfolio, specific reserve and classified asset
trends, delinquency trends and risk rating trends. These loss factors are
subject to ongoing evaluation to ensure their relevance’s in the current
economic environment.
Future adjustments to the allowance for
loan losses account may be necessary due to economic, operating, regulatory and
other conditions beyond our control. Our primary lending emphasis is the
origination of loans secured by commercial and residential real estate, in the
greater central New Jersey area. The downturn in the economy has affected our
local markets, resulting in a slowdown in residential and commercial real estate
sales. We are diligently working to address any asset quality concerns,
including working with borrowers and increasing our allowance for loan losses
when appropriate to ensure we are well positioned for any losses that we may
incur.
The following table summarizes our
allowance for loan losses for each of the five years in the period ended
December 31, 2009.
Years
ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(in
thousands, except for percentages)
|
||||||||||||||||||||
Balance
at beginning of year
|
$ | 6,815 | $ | 4,675 | $ | 4,567 | $ | 2,380 | $ | 1,927 | ||||||||||
Acquisition
of The Town Bank
|
--- | --- | --- | 1,536 | --- | |||||||||||||||
Provision
charged to expense
|
2,205 | 2,301 | 108 | 649 | 453 | |||||||||||||||
Recoveries
of loans charged off:
|
||||||||||||||||||||
Real
estate – construction
|
4 | --- | --- | |||||||||||||||||
Consumer
|
--- | --- | --- | 2 | --- | |||||||||||||||
Loans
charged-off:
|
||||||||||||||||||||
Commercial
and industrial
|
(526 | ) | --- | --- | --- | --- | ||||||||||||||
Real
estate – construction
|
(2,012 | ) | (158 | ) | --- | --- | --- | |||||||||||||
Consumer
|
(302 | ) | (3 | ) | --- | --- | --- | |||||||||||||
Charge-offs,
net
|
(2,836 | ) | (161 | ) | --- | 2 | --- | |||||||||||||
Balance
of allowance at end of year
|
$ | 6,184 | $ | 6,815 | $ | 4,675 | $ | 4,567 | $ | 2,380 | ||||||||||
Ratio
of net charge-offs to average
loans
outstanding
|
0.59 | % | 0.04 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
Balance
of allowance at period-end
as
a percent of loans at year end
|
1.20 | % | 1.52 | % | 1.12 | % | 1.10 | % | 1.10 | % | ||||||||||
Ratio
of allowance at period-end
to non-performing loans
|
43.70 | % | 52.59 | % | 286.11 | % | --- | --- |
Allocation
of the Allowance for Loan Losses
The
following table sets forth the allocation of the allowance for loan losses by
category of loans and the percentage of loans in each category to total loans
for each of the five years in the period ended December 31, 2009.
December
31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
|||||||||||||||||||||||||||||||||
(dollars
in thousands)
|
Amount
|
Allowance
to
total
allowance
|
Loans
to
total
loans
|
Amount
|
Allowance
to
total
allowance
|
Loans
to
total
loans
|
Amount
|
Allowance
to
total
allowance
|
Loans
to
total
loans
|
|||||||||||||||||||||||||||
Balance
applicable to :
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
Commercial
and industrial
|
$ | 1,974 | 31.9 | % | 26.1 | % | $ | 1,769 | 26.0 | % | 26.8 | % | $ | 1,384 | 29.6 | % | 27.5 | % | ||||||||||||||||||
Real
estate - construction
|
945 | 15.3 | % | 13.0 | % | 2,470 | 36.2 | % | 17.0 | % | 972 | 20.8 | % | 20.8 | % | |||||||||||||||||||||
Real
estate - commercial
|
2,515 | 40.7 | % | 44.5 | % | 1,632 | 24.0 | % | 39.6 | % | 1,669 | 35.7 | % | 40.1 | % | |||||||||||||||||||||
Real
estate - residential
|
126 | 2.0 | % | 3.8 | % | 146 | 2.1 | % | 4.4 | % | 36 | 0.8 | % | 1.2 | % | |||||||||||||||||||||
Consumer
|
624 | 10.1 | % | 12.6 | % | 798 | 11.7 | % | 12.2 | % | 614 | 13.1 | % | 10.2 | % | |||||||||||||||||||||
Other
|
- | 0.0 | % | 0.0 | % | - | 0.0 | % | 0.0 | % | - | 0.0 | % | 0.2 | % | |||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Total
|
$ | 6,184 | 100.0 | % | 100.0 | % | $ | 6,815 | 100.0 | % | 100.0 | % | $ | 4,675 | 100.0 | % | 100.0 | % |
December
31,
|
||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
(dollars in thousands) |
Amount
|
Allowance
to
total
allowance
|
Loans
to
total
loans
|
Amount | Allowance
to
total
allowance
|
Loans
to
total
loans
|
||||||||||||||||||
Balance
applicable to :
|
||||||||||||||||||||||||
Commercial
and industrial
|
$ | 1,297 | 28.4 | % | 24.0 | % | $ | 703 | 29.5 | % | 25.6 | % | ||||||||||||
Real
estate - construction
|
1,241 | 27.1 | % | 26.8 | % | 499 | 21.0 | % | 19.7 | % | ||||||||||||||
Real
estate - commercial
|
1,665 | 36.5 | % | 38.0 | % | 1,005 | 42.2 | % | 45.3 | % | ||||||||||||||
Real
estate - residential
|
18 | 0.4 | % | 0.6 | % | 21 | 0.9 | % | 1.2 | % | ||||||||||||||
Consumer
|
346 | 7.6 | % | 10.6 | % | 152 | 6.4 | % | 8.1 | % | ||||||||||||||
Other
|
— | 0.0 | % | 0.0 | % | — | 0.0 | % | 0.1 | % | ||||||||||||||
Total
|
$ | 4,567 | 100.0 | % | 100.0 | % | $ | 2,380 | 100.0 | % | 100.0 | % |
At
December 31, 2009, the Company’s allowance for loan losses was $6.2 million,
compared with $6.8 million at December 31, 2008. The allowance for loan losses
as a percentage of total loans at December 31, 2009 was 1.20%, compared with
1.52% at December 31, 2008. The reduction in the loan loss allowance percentage
is the result of a number of factors, including the addition of new loans to the
portfolio requiring lower reserves, and the effect of loan charge-offs during
2009. Net charge-offs for year ended December 31, 2009 were $2.8 million,
compared to $161,000 for the year ended December 31, 2008.
Bank-Owned
Life Insurance
In
November of 2004, the Company invested in $3.5 million of bank-owned life
insurance as a source of funding for additional life insurance benefits for
officers and employee benefit expenses related to the Company’s non-qualified
Supplemental Executive Retirement Plan (“SERP”) for certain executive officers
implemented in 2004 that provides for payments upon retirement, death or
disability. On December 26, 2009, the Company purchased an additional $3.5
million of bank-owned life insurance in order to provide additional life
insurance benefits for additional officers upon death or disability and to
provide a source of funding future enhancements of the benefits under the SERP.
Expenses related to the SERP were approximately $64,000 and $77,000 for the
years ended December 31, 2009 and 2008, respectively. Bank-owned life insurance
involves our purchase of life insurance on a chosen group of officers. The
Company is the owner and beneficiary of the policies. Increases in the cash
surrender values of this investment are recorded in other income in the
statements of operations.
Effective
January 1, 2008, the Company adopted new accounting guidance which required the
recognition of a liability related to the postretirement benefits covered by
endorsement split-dollar life insurance arrangements. The employer (who is also
the policyholder) has a liability for the benefit it is providing to its
employee. For transition, an entity can choose to apply the guidance using
either the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle through a cumulative-effect adjustment to the balance in retained
earnings at the beginning of the year of adoption. The Company chose approach
(b) and recorded a cumulative effect adjustment as of January 1, 2008 as a
charge to retained earnings of $385,000. Net periodic postretirement benefit
expense included in salaries and employee benefits was $46,000 and $50,000 for
the year ended December 31, 2009 and 2008, respectively.
Premises
and Equipment
Premises
and equipment totaled $3.8 million and $5.7 million at December 31, 2009 and
2008, respectively. The $1.9 million, or 33.3%, decrease in our investment in
premises and equipment in 2009 compared to 2008 is due primarily to the $1.1
million reclassification pertaining to the Company owned property in Cranford,
New Jersey to assets held for sale in other assets, coupled with the normal
recurring depreciation of existing assets. The Cranford property is currently
under sale negotiations and is carried at net realizable value, based on its
current appraised value.
Goodwill
and Intangible Assets
Intangible
assets totaled $19.0 million at December 31, 2009 compared to $26.0 million at
December 31, 2008. The Company’s intangible assets at December 31, 2009 were
comprised of $18.1 million of goodwill and $871,000 of core deposit intangibles,
net of accumulated amortization of $1.2 million. At December 31, 2008, the
Company’s intangible assets were comprised of $24.8 million of goodwill and $1.1
million of core deposit intangibles, net of accumulated amortization of
$957,000. During 2009, the Company analyzed its goodwill for impairment and
determined that $6.7 million of goodwill was impaired. Accordingly, the Company
recorded a $6.7 million non-cash goodwill impairment charge, which represents a
partial write-off of the goodwill recorded as a result of the Company’s 2006
acquisition of Town Bank.
There can
be no assurance that future testing will not result in additional material
impairment charges due to further developments in the banking industry or our
markets or otherwise. Additional goodwill discussion can be referenced in Note
6, “Goodwill and Other Intangible Assets”, in the Company’s financial
statements.
Deposits
Deposits
are the primary source of funds used by the Company in lending and for general
corporate purposes. The level of deposit liabilities may vary significantly and
is dependent upon prevailing interest rates, money market conditions, general
economic conditions and competition. Deposits consist of checking, savings and
money market accounts along with certificates of deposit and individual
retirement accounts. Deposits are obtained from individuals, partnerships,
corporations, unincorporated businesses and non-profit organizations throughout
our market area. The Company attempt’s to control the flow of deposits primarily
by pricing deposit offerings to be competitive with other financial institutions
in the market area but not by necessarily offering the highest rate. The deposit
growth experienced since the Company’s inception is primarily due to the
expansion and maturation of the branch system. The Company has generated
significant increases in deposit and customer base through promotional
activities of the branches, which were targeted to gain market penetration as
the Company expands the branch office network.
One of
the primary strategies is the accumulation and retention of core deposits. Core
deposits consist of all deposits, except certificates of deposits in excess of
$100,000. Total deposits increased to $535.4 million at December 31, 2009 from
$474.8 million at December 31, 2008, an increase of $60.6 million, or 12.8%.
Decreases in certificates of deposit and money market account balances were more
than offset by increases in our savings deposits. We believe that the net
increase in our deposits was primarily due to our pricing strategies, as we
balanced our desire to retain and grow deposits with asset funding needs and
interest expense costs. Banks generally prefer to increase non-interest-bearing
deposits, as this lowers the institution’s cost of funds. However,
due to market rate changes and competitive pressure, we have found savings
account promotions and promotions of other interest-bearing deposit products,
excluding high-cost certificate of deposit, to be our most efficient and
cost-effective source.
During 2009, we priced our certificates of deposit $100,000 and over at rates
that did not exceed our market competition. The balance of certificates of
deposit $100,000 and over amounted to $72.9 million at December 31, 2009
compared to $62.9 million at December 31, 2008, an increase of $10.0 million, or
15.9%. We believe the increase in our balance of certificates of deposit over
$100,000 to be the result of deposits invested with the “CDARS” product, which
is a deposit gathering tool that supplies customers with higher limits for
insured certificate of deposit balances.
The
following table reflects the average balances and average rates paid on deposits
for the years ended December 31, 2009, 2008 and 2007.
|
|
Years
ended December 31,
|
|
|||||||||||||||||||||||||||
(dollars in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||||||||||||||||||||
|
|
Average
Balance
|
|
Average
Rate
|
|
|
Average
Balance
|
|
Average
Rate
|
|
|
Average
Balance
|
|
Average
Rate
|
|
|||||||||||||||
|
||||||||||||||||||||||||||||||
Non-interest
bearing demand
|
|
$
|
71,189
|
0.00
|
%
|
|
$
|
73,458
|
|
0.00
|
%
|
|
$
|
75,833
|
|
0.00
|
%
|
|||||||||||||
Interest-bearing
demand (NOW)
|
|
|
40,763
|
0.78
|
%
|
|
|
38,030
|
|
1.04
|
%
|
|
|
39,026
|
|
1.96
|
%
|
|||||||||||||
Savings
deposits
|
|
|
176,199
|
1.81
|
%
|
|
|
76,882
|
|
3.08
|
%
|
|
|
32,423
|
|
2.41
|
%
|
|||||||||||||
Money
market deposits
|
|
|
97,794
|
1.63
|
%
|
|
|
114,247
|
|
2.86
|
%
|
|
|
103,133
|
|
4.06
|
%
|
|||||||||||||
Time
deposits
|
|
|
130,373
|
2.44
|
%
|
|
|
145,416
|
|
3.57
|
%
|
|
|
196,546
|
|
4.87
|
%
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||
Total
|
|
$
|
516,318
|
1.60
|
%
|
|
$
|
448,033
|
|
2.50
|
%
|
|
$
|
446,961
|
|
3.42
|
%
|
The following table sets forth a
summary of the maturities of certificates of deposit $100,000 and over at
December 31, 2009 (in thousands).
|
|
|||
December
31,
2009
|
||||
Due
in three months or less
|
$ | 40,526 | ||
Due
over three months through twelve months
|
17,868 | |||
Due
over one year through three years
|
5,612 | |||
Due
over three years
|
8,943 | |||
|
||||
Total
certificates of deposit $100,000 and over
|
$ | 72,949 |
Borrowings
The
Company has an unsecured line of credit totaling $10.0 million with another
financial institution that bears interest at a variable rate and is reviewed for
renewal annually. There were no borrowings under the line of credit at December
31, 2009 and 2008. The Company also has a maximum borrowing capacity with the
Federal Home Loan Bank (“FHLB”), of approximately $62.4 million. There were no
short-term borrowings from the FHLB at December 31, 2009 and 2008. Advances from
the FHLB are secured by qualifying assets of the Bank.
Short-term
borrowings consist of Federal funds purchased and short-term borrowings from the
FHLB and are summarized as follows:
|
|
Years
ended December 31,
|
|
|||||||||
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at year-end
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Average
during the year
|
|
—
|
|
|
715
|
|
|
129
|
||||
Maximum
month-end balance
|
|
|
—
|
|
|
|
5,346
|
|
|
|
161
|
|
Weighted
average rate during the year
|
|
|
—
|
|
|
2.80
|
%
|
|
|
5.08
|
%
|
|
Weighted
average rate at December 31
|
|
|
—
|
|
|
—
|
|
|
—
|
Long-term
debt consists of a $7.5 million convertible note due in November 2017 at an
interest rate of 3.965% from the FHLB that is collateralized by the Company’s
real estate loan portfolio. The convertible note contains an option which allows
the FHLB to adjust the rate on the note in November 2012 to the then-current
market rate offered by the FHLB. The Company has the option to repay this
advance, if converted, without penalty.
Repurchase
Agreements
Securities
sold under agreements to repurchase, which are classified as secured borrowings,
generally mature within one to four days from the transaction date. Securities
sold under agreements to repurchase are reflected as the amount of cash received
in connection with the transaction. The Company may be required to provide
additional collateral based on the fair value of the underlying
securities.
Repurchase
agreements are summarized as follows:
|
Years
ended December 31,
|
|
||||||||||
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|||
Repurchase
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at year-end
|
|
$
|
17,065
|
|
|
$
|
11,377
|
|
|
$
|
15,187
|
|
Average
during the year
|
|
15,233
|
|
|
16,957
|
|
|
14,384
|
||||
Maximum
month-end balance
|
|
|
18,330
|
|
|
|
19,553
|
|
|
|
16,260
|
|
Weighted
average rate during the year
|
|
|
1.79
|
%
|
|
|
2.58
|
%
|
|
|
3.75
|
%
|
Weighted
average rate at December 31
|
|
|
1.44
|
%
|
|
|
2.31
|
%
|
|
|
3.17
|
%
|
Liquidity
Liquidity
defines our ability to generate funds to support asset growth, meet deposit
withdrawals, maintain reserve requirements and otherwise operate on an ongoing
basis. An important component of an institution’s asset and liability management
structure is the level of liquidity which is available to meet the needs of its
customers and requirements of creditors. Our liquidity needs are primarily met
by cash on hand, Federal funds sold, maturing investment securities and
short-term borrowings on a
temporary basis. We invest the funds not needed to meet our cash
requirements in overnight Federal funds sold. With adequate deposit inflows over
the past year coupled with the above-mentioned cash resources, we believe the
level of short-term assets are adequate. Our liquidity can be affected by a
variety of factors, including general economic conditions, market disruption,
operational problems affecting third parties or us, unfavorable pricing,
competition, our credit rating and regulatory restrictions.
Off-Balance
Sheet Arrangements
Our
financial statements do not reflect off-balance sheet arrangements that we enter
into with our customers in the normal course of business. These off-balance
sheet arrangements consist of unfunded loans and letters of credit made under
the same standards as on-balance sheet instruments. These instruments have fixed
maturity dates, and because many of them will expire without being drawn upon,
they do not generally present any significant liquidity risk to us.
Management
believes that any amounts actually drawn upon these commitments can be funded in
the normal course of operations. The following table sets forth our off-balance
sheet arrangements as of December 31, 2009.
(dollars
in thousands)
|
December
31,
2009
|
|||
Commercial
lines of credit
|
$ | 29,443 | ||
One-to-four
family residential lines of credit
|
36,300 | |||
Commitments
to grant commercial and construction loans secured by real
estate
|
46,928 | |||
Commercial
letters of credit
|
5,824 | |||
$ | 118,495 |
Capital
Shareholders’ equity increased by
$3.5 million, or 4.8%, to $76.8 million at December 31, 2009 compared to $73.3
million at December 31, 2008. On January 30, 2009, the Company entered into a
Securities Purchase Agreement with the Treasury pursuant to which the Company
sold to the Treasury 9,000 shares of Series A, Cumulative Perpetual Preferred
Stock (“Senior Preferred Stock”), no par value per share and a liquidation
preference of $1,000 per share, and a warrant (“Warrant”) to purchase 297,116
shares of the Company’s common stock, no par value per share, for an aggregate
purchase price of $9.0 million in cash. The $9.0 million in TARP Capital
Purchase Program funds had a positive effect on equity, which was partially
offset by the net loss recorded during 2009 decreasing equity by $5.1 million.
The preferred stock dividend pertaining to the TARP Capital Purchase Program
funds had a negative effect on equity of $420,000. The decrease in unrealized
gains in the Company’s available for sale investment securities portfolio also
had a negative effect on equity of $128,000. An increase of $44,000 attributable
to stock options exercised and $150,000 in stock option compensation had a
positive effect on equity.
Capital
Resources
The Bank
is required to maintain cash reserve balances with the Federal Reserve Bank. The
total of such reserves was $50,000 at December 31, 2009.
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the Federal banking agencies. Failure to
meet the minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on our consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its bank subsidiary must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk-weightings and
other factors.
Quantitative
measures established by regulations to ensure capital adequacy require the
Company and its bank subsidiary to maintain minimum amounts and ratios (set
forth below) of total and Tier l capital (as defined in the regulations) to
risk-weighted assets, and of Tier l capital to average assets. Management
believes, as of December 31, 2009, that the Company and its bank subsidiary meet
all capital adequacy requirements to which they are subject.
As of
December 31, 2009, the Bank met all regulatory requirements for classification
as well-capitalized under the regulatory framework for prompt corrective action.
Management believes that there are no conditions or events that have changed the
Bank’s categories.
Community
Partners (on a consolidated basis) and its bank subsidiaries’ actual capital
amounts and ratios at December 31, 2009 and 2008 and the minimum amounts and
ratios required for capital adequacy purposes and to be well capitalized under
the prompt corrective action provisions are as follows:
Actual
|
For
Capital Adequacy
Purposes
|
To
be Well Capitalized under
Prompt
Corrective Action
Provisions
|
||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
As
of December 31, 2009
|
||||||||||||||||||||
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
$ | 63,792 | 11.74 | % | $ |
>43,470
|
≥8.00 % | $ | N/A | N/A | ||||||||||
Two
River Community Bank
|
63,601 | 11.68 | % |
>43,562
|
≥8.00 % |
>54,453
|
≥10.00 | % | ||||||||||||
Tier
1 capital (to risk-weighted assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
57,608 | 10.60 | % |
>21,739
|
≥4.00 % | N/A | N/A | |||||||||||||
Two
River Community Bank
|
57,417 | 10.55 | % |
>21,769
|
≥4.00 % |
>32,654
|
≥6.00 | % | ||||||||||||
Tier
1 capital (to average assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
57,608 | 9.28 | % |
>24,831
|
≥4.00 % | N/A | N/A | |||||||||||||
Two
River Community Bank
|
57,417 | 9.18 | % |
>24,563
|
≥4.00 % |
>30,704
|
≥5.00 | % | ||||||||||||
As
of December 31, 2008
|
||||||||||||||||||||
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
$ | 52,832 | 11.25 | % | $ |
>37,569
|
≥8.00 % | $ | N/A | N/A | ||||||||||
Two
River Community Bank
|
52,038 | 11.05 | % |
>37,675
|
≥8.00 % |
>47,093
|
≥10.00 | % | ||||||||||||
Tier
1 capital (to risk-weighted assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
46,951 | 10.00 | % |
>18,780
|
≥4.00 % | N/A | N/A | |||||||||||||
Two
River Community Bank
|
46,140 | 9.80 | % |
>18,833
|
≥4.00 % |
>28,249
|
≥6.00 | % | ||||||||||||
Tier
1 capital (to average assets)
|
||||||||||||||||||||
Community
Partners Bancorp
|
46,951 | 8.53 | % |
>22,017
|
≥4.00 % | N/A | N/A | |||||||||||||
Two
River Community Bank
|
46,140 | 8.38 | % |
>22,024
|
≥4.00 % |
>27,530
|
≥5.00 | % |
The Bank
is subject to certain legal and regulatory limitations on the amount of
dividends that it may declare without prior regulatory approval. Under Federal
Reserve regulations, the Bank is limited as to the amount that it may lend
affiliates, including the Company, unless such loans are collateralized by
specific obligations.
The
prompt corrective action regulations define specific capital categories based
upon an institution’s capital ratios. The capital categories in descending order
are “well capitalized”, “adequately capitalized”, “under capitalized”,
“significantly undercapitalized”, and “critically undercapitalized.”
Institutions categorized as “undercapitalized” or lower are subject to certain
restrictions, are not able to pay dividends and management fees, are restricted
on asset growth and executive compensation and are subject to increased
supervisory monitoring, among other matters. The regulators may impose other
restrictions. Once an institution becomes “critically undercapitalized,” it must
be placed in receivership or conservatorship within 90 days. To be considered
“adequately capitalized,” an institution must generally have Tier 1 capital to
total asset ratio of at least 4%, a Tier 1 risk-based capital ratio of at least
4%, and a total risked based capital ratio of at least 8%. An institution is
deemed to be “critically undercapitalized” if it has a tangible equity ratio,
Tier 1 capital, net of all intangibles, to tangible capital of 2% or
less.
Under the
risk-based capital guideline regulations, a banking organization’s assets and
certain off balance sheet items are classified into categories, with the least
capital required for the category deemed to have the least risk, and the most
capital required for the category deemed to have the most risk. Under current
regulations, banking organizations are required to maintain total capital of
8.00% of risk weighted assets, of which 4.00% must be in core or Tier 1
capital.
Interest
rate risk management involves managing the extent to which interest-sensitive
assets and interest-sensitive liabilities are matched. Interest rate sensitivity
is the relationship between market interest rates and earnings volatility due to
the re-pricing characteristics of assets and liabilities. Our net income is
affected by changes in the level of market interest rates. In order to maintain
consistent earnings performance, we seek to manage, to the extent possible, the
re-pricing characteristics of our assets and liabilities.
The
management of and authority to assume interest rate risk is the responsibility
of the Asset/Liability Committee (“ALCO”), which is comprised of senior
management and board members. The primary objective of Asset/Liability
management is to establish prudent risk management guidelines and to coordinate
balance sheet composition with interest rate risk management to sustain a
reasonable and stable net interest income throughout various interest rate
cycles. We have policies and practices for measuring and reporting interest rate
risk exposure, through analysis of the net interest margin, gap position,
simulation testing, liquidity ratios and the Economic Value of Portfolio Equity.
In addition, we annually review our interest rate risk policy, which includes
limits on the impact to earnings from shifts in interest rates.
Gap
Analysis
To manage
our interest sensitivity position, an asset/liability model called “gap
analysis” is used to monitor the difference in the volume of our
interest-sensitive assets and liabilities that mature or re-price within given
periods. The ratio between assets and liabilities re-pricing in specific time
intervals is referred to as an interest rate sensitivity gap. A positive gap
(asset-sensitive) indicates that more assets re-price during a given period
compared to liabilities, while a negative gap (liability-sensitive) has the
opposite effect. 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, 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.
We employ net interest income simulation modeling to assist in quantifying
interest rate risk exposure. This process measures and quantifies the impact on
net interest income through varying interest rate changes and balance sheet
compositions. The use of this model assists the ALCO to gauge the effects of the
interest rate changes on interest-sensitive assets and liabilities in order to
determine what impact these rate changes will have upon the net interest
spread.
As
of December 31, 2009, the Company’s six month cumulative gap of -3.1% of total
assets, or ($19.7) million, while its one-year cumulative gap was 0.5% of total
assets, or $3.4 million, which is within the ALCO policy guidelines of +10% or
-25%.
Simulation
Modeling
Simulation
modeling is the financial analysis whereby numerous interest rate scenarios and
balance sheets are combined to produce a variety of potential income results.
There are primarily two types of simulation analysis conducted every quarter
based on certain assumptions:
Base
Case:
|
·
|
Static
balance sheet scenario;
|
|
·
|
Interest
rates up or down 2.00% over twelve
months;
|
|
·
|
Core
deposit rate changes lag based on certain
correlations.
|
Shock
Case:
|
·
|
Static
balance sheet scenario;
|
|
·
|
Interest
rates shock up or down 3.00%
immediately;
|
|
·
|
Core
deposit rate changes lag based on certain
correlations.
|
As
economic conditions change, the ALCO will calculate additional alternative
simulation scenarios to evaluate the risk impact to net interest
income.
The ALCO
policy has established that interest rate sensitivity will be considered
acceptable if the change in simulation results that impact net interest income
are within 6.00% of net interest income over a twelve month time horizon. At
December 31, 2009, the Company’s income simulation model indicated the level of
interest rate risk was within policy guidelines, as presented
below.
Gradual
change in interest rates
|
||||||||||||||||||||
300
basis point increase
|
300
basis point decrease
|
|||||||||||||||||||
(dollars in thousands)
|
Dollar
change
|
Percent
of
change
|
Dollar
change
|
Percent
of
change
|
ALCO
Policy Guideline
|
|||||||||||||||
Twelve
month horizon:
|
||||||||||||||||||||
Net
interest income change
|
$ | (511) | -2.1% | $ | (196) | -0.08% | -6.00% |
The
method used to analyze interest rate sensitivity has a number of limitations.
Certain assets and liabilities may react differently to changes in interest
rates even though they re-price 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 changes in advance of
provisions which 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 we experience in the event of a change in
interest rates may differ significantly from the maturity dates of the loans.
Finally, the ability of borrowers to service their debts may decrease in the
event of an interest rate increase.
Economic
Value of Equity
To
measure the impact of longer-term asset and liability mismatches beyond two
years, the Company utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity (“EVPE”) models. The modified duration of equity measures the
potential price risk of equity to changes in interest rates. A longer modified
duration of equity indicates a greater degree of risk to rising interest rates.
Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows, with
rates ranging up or down 200 basis points. Our analysis of EVPE excludes
goodwill and includes only tangible equity. The economic value of equity is
likely to be different as interest rates change. Results falling outside
prescribed ranges require action by the ALCO.
At
December 31, 2009 and November 30, 2008, the Company’s variance in the EVPE as a
percentage of change from book value of tangible equity compared to no change in
interest rates, and to an instantaneous and sustained parallel shift of + or -
200 basis points, is within the Company’s negative 25% guideline as presented
below.
Economic
Value of Portfolio Equity
December 31, 2009 | ||||
Change
in Interest Rates
(dollars in
thousands)
|
Book
Value
|
-200
bp
|
+200bp
|
ALCO
Policy
Guideline
|
Economic
Value of
Equity
|
$72,946 |
$ 67,177
|
$ 70,950
|
|
$
Change
|
(5,769)
|
(1,996)
|
|
|
%
Change to PV Equity
|
-7.91%
|
-2.74%
|
-25.00%
|
|
%
Change to Assets
|
-0.90%
|
-0.31%
|
-3.00%
|
|
%
Change to PV Equity Premium
|
-40.09%
|
-13.87%
|
November 30, 2008 | ||||
Change
in Interest Rates
(dollars in
thousands)
|
Book
Value
|
-200
bp
|
+200bp
|
ALCO
Policy
Guideline
|
Economic
Value of
Equity
|
$55,176 |
$ 51,173
|
$ 47,214
|
|
$
Change
|
(4,003)
|
(7,962)
|
|
|
%
Change to PV Equity
|
-14.43%
|
-6.17%
|
-25.00%
|
|
%
Change to Assets
|
-1.38%
|
-0.59%
|
-3.00%
|
|
%
Change to PV Equity Premium
|
111.39%
|
-54.53%
|
In 2008
Community Partners Bancorp ALCO meetings were held during months prior to each
quarter end. Therefore, the 2008 Economic Value of Portfolio Equity graph data
is as of November 30, 2008, while the 2009 graph is for the year ended December
31, 2009.
Not
required.
Reference
is made to Item 15(a)(1) and (2) to page F-1 for a list of financial statements
and supplementary data required to be filed pursuant to this Item 8. The
information required by this Item 8 is provided beginning on page F-1
hereof.
None.
The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms and is accumulated and communicated to
management, including the principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
The
Company’s principal executive officer and principal financial and accounting
officer, with the assistance of other members of the Company’s management, have
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this annual report. Based upon such evaluation, the Company’s
principal executive officer and principal financial and accounting officer have
concluded that the Company’s disclosure controls and procedures are effective as
of the end of the period covered by this annual report.
The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
There are
inherent limitations in the effectiveness of any internal control, including the
possibility of human error and circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over
time.
The
Company’s 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 in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on their assessment using those
criteria, management concluded that, as of December 31, 2009, the Company’s
internal control over financial reporting was effective.
This
annual report 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 SEC that permit the Company to provide only management’s report in
this annual report.
None.
PART
III
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Shareholders under the captions
“Directors and Executive Officers”, “Corporate Governance”, “Compliance with
Section 16(a) of the Exchange Act”, “Code of Ethics” and “Audit
Committee”.
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Shareholders under the caption
“Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters.
Equity
Compensation Plan Information
The
following table provides information about the Company’s common stock that may
be issued upon the exercise of options, warrants and rights under all of the
Company’s equity compensation plans as of December 31, 2009. The information in
the table has been adjusted for the 3% stock dividends paid in 2009 and
2008.
Plan
category
|
Number
of securities
to
be issued upon
exercise
of outstanding
options,
warrants and
rights
(a)
|
Weighted-average
exercise
price
of outstanding
options,
warrants and
rights
(b)
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
(c)
|
Equity
compensation plans
approved
by security holders (1)
|
425,390
|
$
3.64
|
394,155
|
Equity
compensation plans not
approved
by security holders
|
-0-
|
N/A
|
-0-
|
Total
|
425,390
|
$
3.64
|
394,155
|
|
(1)
|
Includes
the Community Partners Bancorp 2007 Equity Incentive Plan. Does not include the
following Two River and Town Bank plans, which were acquired by Community
Partners upon its acquisition of Two River and Town Bank in 2006: Two
River Community Bank 2003 Incentive Stock Option Plan, Two River Community
Bank 2003 Non-Qualified Stock Option Plan, Two River Community Bank
Incentive Stock Option Plan (2001), Two River Community Bank Non-Qualified
Stock Option Plan (2001), The Town Bank of Westfield 2002 Employee Stock
Option Plan, The Town Bank of Westfield 2001 Employee Stock Option Plan,
The Town Bank of Westfield 2000 Employee Stock Option Plan, The Town Bank
of Westfield 1999 Employee Stock Option Plan, The Town Bank of Westfield
2001 Director Stock Option Plan, The Town Bank of Westfield 2000 Director
Stock Option Plan and The Town Bank of Westfield 1999 Director Stock
Option Plan. These plans were assumed by Community Partners Bancorp when
it acquired Two River Community Bank and The Town Bank on April 1, 2006.
Pursuant to these plans, there are 611,266 securities to be issued upon
exercise of outstanding options with a weighted average exercise price of
$9.69. No shares are available for future grants under these
plans.
|
The
additional information required by this item is incorporated by reference from
the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders under
the caption “Stock Ownership of Management and Principal
Shareholders.”
The
information required by this item is incorporated by reference from the
Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders under the
captions “Certain Transactions With Management” and “Director
Independence”.
The
information regarding principal accounting fees and services and the Company’s
pre-approval policies and procedures for audit and non-audit services provided
by the Company’s independent registered public accounting firm is incorporated
by reference to the Company’s Proxy Statement for its 2010 Annual Meeting of
Shareholders under the caption “Principal Accountant Fees and
Services.”
PART
IV
Item 15. | Exhibits and Financial Statement Schedules. | |
(a) Financial Statements and Financial Statement Schedules | ||
The following documents are filed as part of this report: | ||
1. | Financial Statements of Community Partners Bancorp | |
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets – December 31, 2009 and 2008 | ||
Consolidated Statements of Operations – Years Ended December 31, 2009 and 2008 | ||
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2009 and 2008 | ||
Consolidated Statements of Cash Flows – Years Ended December 31, 2009 and 2008 | ||
Notes to Consolidated Financial Statements | ||
2. | All schedules are omitted because either they are inapplicable or not required, or because the information required therein is included in the Consolidated Financial Statements and Notes thereto. | |
3. | See accompanying Index to Exhibits. | |
(b) | Exhibits | |
Exhibits required by Section 601 of Regulation S-K (see accompanying Index to Exhibits). | ||
(c) | Financial Statement Schedules | |
See the Notes to the Consolidated Financial Statements included in this report. | ||
COMMUNITY PARTNERS BANCORP
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
To the
Board of Directors and Shareholders
of
Community Partners Bancorp
Middletown,
New Jersey
We have
audited the accompanying consolidated balance sheets of Community Partners
Bancorp and subsidiaries (the Company) as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. The Company’s management is responsible for
these consolidated financial statements. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Community Partners Bancorp
and its subsidiaries 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
accounting principles generally accepted in the United States of
America.
/s/ ParenteBeard LLC |
Allentown,
Pennsylvania
March 31,
2010
Consolidated
Balance Sheets
December
31,
|
||||||||
|
2009
|
2008
|
||||||
(In
Thousands, Except Share Data)
|
||||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 6,841 | $ | 8,110 | ||||
Federal
funds sold
|
35,894 | 14,907 | ||||||
Cash
and Cash Equivalents
|
42,735 | 23,017 | ||||||
Securities
available for sale
|
37,690 | 55,971 | ||||||
Securities
held to maturity (fair value 2009 $10,266; 2008 $7,074)
|
10,618 | 7,940 | ||||||
Restricted
stocks, at cost
|
1,000 | 755 | ||||||
Loans
|
513,399 | 448,780 | ||||||
Allowance
for loan losses
|
(6,184 | ) | (6,815 | ) | ||||
Net
Loans
|
507,215 | 441,965 | ||||||
Bank-owned
life insurance
|
7,770 | 4,101 | ||||||
Premises
and equipment, net
|
3,764 | 5,658 | ||||||
Accrued
interest receivable
|
1,876 | 1,951 | ||||||
Goodwill
|
18,109 | 24,834 | ||||||
Other
intangible assets, net of accumulated amortization of
$1,235
|
||||||||
and
$957 at December 31, 2009 and December 31, 2008,
respectively
|
871 | 1,149 | ||||||
Other
assets
|
8,380 | 2,899 | ||||||
Total
Assets
|
$ | 640,028 | $ | 570,240 | ||||
Liabilities
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 69,980 | $ | 65,115 | ||||
Interest-bearing
|
465,432 | 409,724 | ||||||
Total Deposits
|
535,412 | 474,839 | ||||||
Securities
sold under agreements to repurchase
|
17,065 | 11,377 | ||||||
Accrued
interest payable
|
164 | 282 | ||||||
Long-term
debt
|
7,500 | 7,500 | ||||||
Other
liabilities
|
3,050 | 2,930 | ||||||
Total
Liabilities
|
563,191 | 496,928 | ||||||
Shareholders’
Equity
|
||||||||
Preferred
stock, no par value; 6,500,000 shares authorized; $1,000
liquidation preference
per share, 9,000 shares issued and outstanding at December 31, 2009 and
-0- at
December 31,2008
|
8,508 | - | ||||||
Common
stock, no par value; 25,000,000 shares
authorized; 7,182,397 and 6,959,821
shares issued and outstanding at December 31, 2009 and December 31, 2008,
respectively
|
69,794 | 68,197 | ||||||
(Accumulated
deficit) retained earnings
|
(1,714 | ) | 4,738 | |||||
Accumulated
other comprehensive income
|
249 | 377 | ||||||
Total
Shareholders’ Equity
|
76,837 | 73,312 | ||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 640,028 | $ | 570,240 |
See
notes to consolidated financial
statements.
|
Consolidated
Statements of Operations
|
Years
Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
(In
Thousands, Except Per Share Data)
|
||||||||
Interest
Income
|
||||||||
Loans,
including fees
|
$ | 27,726 | $ | 27,739 | ||||
Investment
securities
|
2,397 | 2,927 | ||||||
Federal
funds sold
|
59 | 144 | ||||||
30,182 | 30,810 | |||||||
Interest
Expense
|
||||||||
Deposits
|
8,282 | 11,220 | ||||||
Securities
sold under agreements to repurchase
|
273 | 438 | ||||||
Borrowings
|
302 | 319 | ||||||
8,857 | 11,977 | |||||||
21,325 | 18,833 | |||||||
2,205 | 2,301 | |||||||
19,120 | 16,532 | |||||||
Non-Interest
Income
|
||||||||
Total
other-than-temporary impairment losses
|
(360 | ) | -- | |||||
Less:
Portion included in other comprehensive
|
||||||||
income
(pre-tax)
|
204 | -- | ||||||
Net
other-than-temporary impairment charges
|
||||||||
to
earnings
|
(156 | ) | -- | |||||
Service
fees on deposit accounts
|
611 | 660 | ||||||
Other
loan customer service fees
|
167 | 263 | ||||||
Earnings
from investment in life insurance
|
144 | 150 | ||||||
Net
realized gains on sale of securities
|
703 | -- | ||||||
Other
income
|
780 | 593 | ||||||
2,249 | 1,666 | |||||||
Non-Interest
Expenses
|
||||||||
Salaries
and employee benefits
|
9,509 | 9,076 | ||||||
Occupancy
and equipment
|
3,311 | 3,350 | ||||||
Professional
|
851 | 927 | ||||||
Advertising
|
251 | 339 | ||||||
Data
processing
|
844 | 579 | ||||||
Insurance
|
309 | 332 | ||||||
FDIC
insurance and assessments
|
1,114 | 293 | ||||||
Outside
service fees
|
519 | 568 | ||||||
Amortization
of identifiable intangibles
|
278 | 316 | ||||||
Goodwill
impairment charge
|
6,725 | --- | ||||||
Other
operating
|
1,426 | 1,390 | ||||||
25,137 | 17,170 | |||||||
(3,768 | ) | 1,028 | ||||||
Income
Tax Expense
|
1,353 | 230 | ||||||
$ | (5,121 | ) | $ | 798 | ||||
Preferred
stock dividends and discount accretion
|
(530 | ) | -- | |||||
Net
(loss) income available to common shareholders
|
$ | (5,651 | ) | $ | 798 | |||
(Loss)
Earnings Per Common Share
|
||||||||
Basic
|
$ | (0.79 | ) | $ | 0.11 | |||
Diluted
|
$ | (0.79 | ) | $ | 0.11 |
See
notes to consolidated financial
statements.
|
Consolidated
Statements of Shareholders’ Equity
Common
Stock
|
||||||||||||||||||||||||
(Dollars
in Thousands)
|
Preferred
Stock
|
Outstanding
Shares
|
Amount
|
(Accumulated
Deficit)
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total
Shareholders’
Equity
|
||||||||||||||||||
Balance,
January 1, 2008
|
$ | - | 6,722,784 | $ | 66,552 | $ | 5,805 | $ | 100 | $ | 72,457 | |||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | - | - | 798 | - | 798 | ||||||||||||||||||
Change
in net unrealized gain (loss)
on
securities available for sale,
net
of reclassification adjustment
and
tax
|
- | - | - | - | 277 | 277 | ||||||||||||||||||
Total
comprehensive income
|
- | - | - | - | - | 1,075 | ||||||||||||||||||
Options
exercised
|
- | 34,861 | 165 | - | - | 165 | ||||||||||||||||||
Common
stock dividend – 3%
|
- | 202,176 | 1,480 | (1,480 | ) | - | - | |||||||||||||||||
Cumulative
effect adjustment –
adoption
of accounting for post
retirement
benefit costs
|
- | - | - | (385 | ) | - | (385 | ) | ||||||||||||||||
Balance,
December 31, 2008
|
- | 6,959,821 | 68,197 | 4,738 | 377 | 73,312 | ||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
- | - | - | (5,121 | ) | - | (5,121 | ) | ||||||||||||||||
Change
in net unrealized gain (loss)
|
||||||||||||||||||||||||
on
securities available for sale,
net
of reclassification adjustment
and
tax
|
- | - | - | - | (128 | ) | (128 | ) | ||||||||||||||||
Total
comprehensive loss
|
(5,249 | ) | ||||||||||||||||||||||
Preferred
stock and common stock
warrants
issued
|
8,398 | - | 602 | - | - | 9,000 | ||||||||||||||||||
Preferred
stock discount accretion
|
110 | - | - | (110 | ) | - | - | |||||||||||||||||
Dividends
on preferred stock
|
- | - | - | (420 | ) | - | (420 | ) | ||||||||||||||||
Common
stock dividend – 3%
|
- | 208,852 | 801 | (801 | ) | - | - | |||||||||||||||||
Stock
option compensation expense
|
- | - | 150 | - | - | 150 | ||||||||||||||||||
Options
exercised
|
- | 13,724 | 44 | - | - | 44 | ||||||||||||||||||
Balance,
December 31, 2009
|
$ | 8,508 | 7,182,397 | $ | 69,794 | $ | (1,714 | ) | $ | 249 | $ | 76,837 |
Consolidated
Statements of Cash Flows
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Cash
Flows from Operating Activities
|
||||||||
Net
(loss) income
|
$ | (5,121 | ) | $ | 798 | |||
Adjustments
to reconcile net (loss) income to net cash provided by
operating
activities:
|
||||||||
Goodwill
impairment charge
|
6,725 | -- | ||||||
Depreciation
and amortization
|
1,053 | 1,125 | ||||||
Provision
for loan losses
|
2,205 | 2,301 | ||||||
Intangible
amortization
|
278 | 316 | ||||||
Net
amortization of securities premiums and discounts
|
215 | 49 | ||||||
Other-than-temporary
impairment on securities available for sale
|
156 | -- | ||||||
Net
realized gain on sale of securities available for sale
|
(703 | ) | -- | |||||
Deferred
income taxes
|
(237 | ) | (908 | ) | ||||
Earnings
from investment in life insurance
|
(144 | ) | (150 | ) | ||||
Commercial
loan participations originated for sale
|
-- | (343 | ) | |||||
Proceeds
from sales of commercial loan participations
|
-- | 343 | ||||||
Stock
option compensation expense
|
150 | -- | ||||||
Net
realized gain on sale of foreclosed real estate
|
(6 | ) | -- | |||||
Decrease
(increase) in assets:
|
||||||||
Accrued
interest receivable
|
75 | 340 | ||||||
Other
assets
|
(4,057 | ) | (109 | ) | ||||
(Decrease)
increase in liabilities:
|
||||||||
Accrued
interest payable
|
(118 | ) | (249 | ) | ||||
Other
liabilities
|
56 | 78 | ||||||
Net
Cash Provided by Operating Activities
|
527 | 3,591 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Purchase
of securities held to maturity
|
(5,175 | ) | (857 | ) | ||||
Purchase
of securities available for sale
|
(26,141 | ) | (36,084 | ) | ||||
Proceeds
from sales of securities available for sale
|
11,363 | -- | ||||||
Proceeds
from repayments and maturities of securities held to
maturity
|
2,492 | 472 | ||||||
Proceeds
from repayments and maturities of securities available for
sale
|
33,181 | 35,341 | ||||||
Purchase
of restricted stocks
|
(245 | ) | (27 | ) | ||||
Proceeds
from the sale of foreclosed real estate
|
1,776 | -- | ||||||
Net
increase in loans
|
(69,225 | ) | (31,974 | ) | ||||
Purchase
of bank-owned life insurance
|
(3,525 | ) | -- | |||||
Purchase
of premises and equipment
|
(259 | ) | (1,693 | ) | ||||
Net
Cash Used in Investing Activities
|
(55,758 | ) | (34,822 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Net
increase in deposits
|
60,573 | 47,880 | ||||||
Net
increase (decrease) in securities sold under agreements to
repurchase
|
5,688 | (3,810 | ) | |||||
Proceeds
from issuance of preferred stock
|
9,000 | -- | ||||||
Cash
dividends paid on preferred stock
|
(356 | ) | -- | |||||
Proceeds
from exercise of stock options
|
44 | 165 | ||||||
Net
Cash Provided by
Financing Activities
|
74,949 | 44,235 | ||||||
Net
Increase in Cash and Cash Equivalents
|
19,718 | 13,004 | ||||||
Cash
and Cash Equivalents – Beginning
|
23,017
|
10,013
|
Cash
and Cash Equivalents – Ending
|
$ | 42,735 | $ | 23,017 | ||||
Supplementary
Cash Flows Information
|
||||||||
Interest
paid
|
$ | 8,975 | $ | 12,226 | ||||
Income
taxes paid
|
$ | 2,609 | $ | 1,280 | ||||
Supplementary
schedule of non-cash activities:
Other
real estate acquired in settlement of loans
|
$ | 1,770 | $ | -- |
See
notes to consolidated financial
statements.
|
A. Organization
and Basis of Presentation
The
accompanying consolidated financial statements include the accounts of Community
Partners Bancorp (the “Company” or “Community Partners”), a bank holding
company, and its wholly-owned subsidiary, Two River Community Bank (“the Bank”)
and the Bank’s wholly-owned subsidiary, TRCB Investment Corporation, and
wholly-owned trust, Two River Community Bank Employer’s Trust. Effective
December 31, 2008, Community Partners Bancorp finalized the legal consolidation
of its two wholly-owned bank subsidiaries, The Town Bank and Two River Community
Bank into one State chartered bank, Two River Community Bank. All inter-company
balances and transactions have been eliminated in the consolidated financial
statements.
B. Nature
of Operations
Community
Partners is a bank holding company whose principal activity is the ownership of
Two River Community Bank. Through its banking subsidiary, the Company provides
banking services to small and medium-sized businesses, professionals and
individual consumers primarily in Monmouth County, New Jersey and Union County,
New Jersey. The Company competes with other banking and financial
institutions in its market communities.
The
Company and its bank subsidiary are subject to regulations of certain state and
federal agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Company’s and the Bank’s businesses are
susceptible to being affected by state and federal legislation and
regulations.
C. Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The
principal material estimates that are particularly susceptible to significant
change in the near term relate to: the allowance for loan losses,
certain intangible assets, such as goodwill and core deposit intangible, the
potential impairment of restricted stock, the valuation of deferred tax assets
and the determination of other-than-temporary impairment on
securities.
D. Significant
Concentrations of Credit Risk
Most of
the Company’s activities are with customers located within Monmouth and Union
counties of New Jersey. Note 3 discusses the types of securities that the
Company invests in. Note 4 discusses the types of lending that the Company
engages in. Although the Company actively manages the diversification of its
loan portfolio, a substantial portion of its debtors’ ability to honor their
contracts is dependent upon the strength of the local economy. The loan
portfolio includes commercial real estate, which is comprised of owner occupied
and investment real estate, including general office, medical, manufacturing and
retail space. Construction loans, short-term in nature, comprise another portion
of the portfolio, along with commercial and industrial loans. The latter
includes lines of credit and equipment loans. From time to time, the Company may
purchase or sell an interest in a loan from or to another lender (participation
loan) in order to manage its portfolio risk. Loans purchased by the Company are
typically located in central New Jersey and meet the Company’s own independent
underwriting guidelines. The Company does not have any significant
concentrations in any one industry or customer.
E. Statement
of Cash Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing demand deposits, and Federal
funds sold. Generally Federal funds are purchased and sold for one-day
periods.
Note
1 – Summary of Significant Accounting Policies (Continued)
F. Securities
Securities
classified as available for sale are those securities that the Company intends
to hold for an indefinite period of time but not necessarily to maturity.
Securities available for sale are carried at fair value. Any decision to sell a
security classified as available for sale would be based on various factors,
including significant movement in interest rates, changes in maturity mix of the
Company’s assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Unrealized gains or losses are
reported as increases or decreases in other comprehensive income, net of the
related deferred tax effect. Realized gains or losses, determined on the basis
of the cost of the specific securities sold, are included in earnings. Premiums
and discounts are recognized in interest income using the interest method over
the terms of the securities. Gains and losses on the sale of securities
available for sale are recorded on the trade date and are determined using the
specific identification method.
Securities
classified as held to maturity are those securities the Company has both the
intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for the amortization of premium and
accretion of discount, computed by the interest method over the terms of the
securities.
Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet
date.
Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment. This recent
accounting guidance amends the recognition guidance for other-than-temporary
impairments of debt securities and expands the financial statement disclosures
for other-than-temporary impairment losses on debt and equity securities. The
recent guidance replaced the “intent and ability” indication in current guidance
by specifying that (a) if a company does not have the intent to sell a debt
security prior to recovery and (b) it is more likely than not that it will not
have to sell the debt security prior to recovery, the security would not be
considered other-than-temporary impaired unless there is a credit loss. When an
entity does not intend to sell the security, and it is more likely than not, the
entity will not have to sell the security before recovery of its cost basis, it
will recognize the credit component of an other-than-temporary impairment of a
debt security in earnings and the remaining portion in other comprehensive
income. For held to maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-than-temporary impairment should be
amortized prospectively over the remaining life of the security on the basis of
the timing of future cash flows of the security. The impact of the adoption
increased net income by approximately $122,000 for the year ended December 31,
2009, which represents the after-tax non-credit portion of the
other-than-temporary impairments for the year ended December 31, 2009. The
Company did not recognize any other-than-temporary impairment charges in
previous periods, therefore, there was no transition adjustment as of the
effective date of the new guidance.
G. Restricted
Stock
Restricted
stock, which represents the required investment in the common stock of
correspondent banks, is carried at cost and as of December 31, 2009 and 2008,
consists of the common stock of the Federal Home Loan Bank of New York (“FHLB”)
and Atlantic Central Bankers Bank (“ACBB”). Federal law requires a member
institution of the FHLB to hold stock of its district FHLB according to a
predetermined formula. The recorded investment in FHLB common stock was $925,000
and $680,000 at December 31, 2009 and 2008, respectively.
Management
evaluates the restricted stock for impairment in accordance with U.S. generally
accepted accounting principles. Management’s determination of whether these
investments are impaired is based on their assessment of the ultimate
recoverability of their cost rather than by recognizing temporary declines in
value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB. Management believes no impairment
charge is necessary related to FHLB stock as of December 31, 2009.
Note
1 – Summary of Significant Accounting Policies (Continued)
H. Loans
Receivable
Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the yield (interest income) of the related loans.
The Company is generally amortizing these amounts over the contractual life of
the loan.
The
accrual of interest is discontinued when the contractual payment of principal or
interest has become 90 days past due or management has serious doubts about
further collectability of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is
placed on non-accrual status, unpaid interest credited to income in the current
year is reversed and unpaid interest accrued in prior years is charged against
the allowance for loan losses. Interest received on non-accrual loans generally
is either applied against principal or reported as interest income, according to
management’s judgment as to the collectability of principal.
Generally,
loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectability of the total contractual principal and
interest is no longer in doubt.
I. Allowance
for Loan Losses
The
allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance.
The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management’s periodic
evaluation of the adequacy of the allowance is based on the Company’s past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower’s ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant
revision as more information becomes available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or loss. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due, according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate or
the fair value of the collateral if the loan is collateral
dependent.
Note
1 – Summary of Significant Accounting Policies (Continued)
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer, residential and home equity loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement due to financial
difficulties of the borrower.
J. Transfers
of Financial Assets
Transfers
of financial assets, including loan participation sales, are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity. The Company sold no loan participations to other banks
during the year ended December 31, 2009 and $343,000 during year ended December
31, 2008. No gains or losses were recognized. The Company had no loan
participations held for sale at December 31, 2009 and 2008. The balance of
participations sold to other banks that are serviced by the Company was
$2,411,000 and $6,979,000 at December 31, 2009 and 2008, respectively. No
servicing asset or liability has been recognized due to
immateriality.
K. Bank-Owned
Life Insurance
The
Company invests in bank-owned life insurance (“BOLI”) as a source of funding for
employee benefit expenses. BOLI involves the purchasing of life
insurance by the Company’s wholly-owned trust on a chosen group of
employees. The Company is the owner and beneficiary of the policies.
This life insurance investment is carried at the cash surrender value of the
underlying policies. Income generated from the increase in cash surrender value
of the policies is included in non-interest income on the statements of
operations.
L. Bank
Premises and Equipment
Premises
and equipment are stated at cost less accumulated depreciation. Depreciation is
charged to operations on a straight-line basis over the estimated useful lives
of the respective assets. Leasehold improvements are amortized over the shorter
of their estimated life or the lease term.
M. Advertising
The
Company expenses advertising costs as incurred.
N. Income
Taxes
Deferred
income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. The Company and its subsidiary file a consolidated Federal income tax
return.
The
Company analyzes each tax position taken in its tax returns and determines the
likelihood that the position will be realized. Only tax positions that are “more
likely than not” to be realized can be recognized in the Company’s financial
statements. For tax positions that do not meet this recognition threshold, the
Company will record an unrecognized tax benefit for the difference between the
position taken on the tax return and the amount recognized in the financial
statements. The Company does not have any material unrecognized tax benefits or
accrued interest or penalties at December 31, 2009 or 2008 or during the years
then ended. No unrecognized tax benefits are expected to arise within the next
twelve months. The Company’s policy is to account for interest as a component of
interest expense and penalties as a component of other expenses. The Company and
its subsidiaries are subject to U.S. Federal income tax as well as income tax of
the State of New Jersey. The Company is no longer subject to examination by
taxing authorities for the years before January 1, 2006.
O. Off-Balance
Sheet Financial Instruments
In the
ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit. Such financial instruments are recorded in the balance sheet when they
are funded.
P. Earnings
per Common Share
On August
25, 2009, the Company declared a 3% stock dividend on common stock outstanding
payable October 23, 2009 to shareholders of record on September 25, 2009. On
August 29, 2008, the Company declared a 3% stock dividend on common stock
outstanding payable October 17, 2008 to shareholders of record on September 30,
2008.
Earnings
per common share are calculated on the basis of the weighted average number of
common shares outstanding during the year. All weighted average, actual shares
or per share information in the financial statements have been adjusted
retroactively for the effect of the stock dividends. Basic earnings per common
share excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per common share takes into account the potential
dilution that could occur if certain outstanding securities to issue common
stock were exercised and converted into common stock. Potential common shares
relate to outstanding stock options and stock warrants, and are determined using
the treasury stock method.
Q. Stock-Based
Compensation
Stock
compensation accounting guidance requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the grant date fair value of the equity or
liability instruments issued. The stock compensation accounting guidance covers
a wide range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans.
The stock
compensation accounting guidance requires that compensation cost for all stock
awards be calculated and recognized over the employees’ service period,
generally defined as the vesting period. For awards with graded-vesting,
compensation cost is recognized on a straight-line basis over the requisite
service period for the entire award. A Black-Sholes model is used to estimate
the fair value of stock options, while the market price of the Company’s common
stock at the date of grant is used for restricted stock awards.
R. Reclassification
Certain
amounts in the 2008 financial statements have been reclassified to conform to
the presentation used in the 2009 financial statements. These reclassifications
had no effect on net income.
S. Goodwill
and Other Intangible Assets
The
Company’s goodwill was recognized in connection with the acquisition of the Town
Bank in April 2006. Accounting principles generally accepted in the
United States of America requires that goodwill be tested for impairment
annually or more frequently if impairment indicators arise utilizing a two-step
methodology. Step one requires the Company to determine the fair value of the
reporting unit and compare it to the carrying value, including goodwill, of such
reporting unit. The reporting unit was determined to be our community banking
operations, which is our only operating segment. If the fair value of the
reporting unit exceeds the carrying value, goodwill is not impaired. If the
carrying value exceeds fair value, there is an indication of impairment and the
second step is performed to determine the amount of impairment, if any. The
second step compares the fair value of the reporting unit to the aggregate fair
values of its individual assets, liabilities and identified intangibles. The
Company performed a goodwill impairment analysis as of September 30, 2009 and
based on the results, recorded a $6,725,000 impairment charge for the year ended
December 31, 2009. See Note 6 for additional details. Based on the goodwill
impairment analysis performed in 2008, the Company concluded there was no
impairment.
Note
1 – Summary of Significant Accounting Policies (Continued)
T. Segment
Reporting
The
Company acts as an independent community financial services provider, and offers
traditional banking and related financial services to individual, business and
government customers. Through its branch, automated teller machine networks, and
internet banking services, the Company offers a full array of commercial and
retail financial services, including taking of time, savings and demand
deposits; the making of commercial, consumer and mortgage loans; and the
providing of other financial services. Management does not separately allocate
expenses, including the cost of funding loan demand, between the commercial,
retail, and consumer banking operations of the Company. As such, discrete
financial information is not available and segment reporting would not be
meaningful.
U. Subsequent
Events
The
Company has evaluated events and transactions occurring subsequent to the
balance sheet date of December 31, 2009 for items that should potentially be
recognized or disclosed in these financial statements.
V. Recent
Accounting Pronouncements
On July
1, 2009, the Accounting Standards Codification (“ASC”) became the Financial
Accounting Standards Board’s (the “FASB”) officially recognized source of
authoritative U.S. GAAP applicable to all public and non-public non-governmental
entities, superseding all existing FASB, American Institute of Certified Public
Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related
literature. Rules and interpretive releases of the SEC under authority of
Federal securities laws are also sources of authoritative guidance for SEC
registrants. All other accounting literature is considered non-authoritative.
The issuance of the ASC changes the way companies refer to U.S. GAAP in
financial statements and other disclosures.
In August
2009, the FASB issued ASU 2009-05, Fair Value Measurements and
Disclosures (Topic 820): Measuring Liabilities at Fair Value. The
amendments within ASU 2009-05 clarify that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following valuation techniques:
a.
|
The
quoted price of the identical liability when traded as an
asset.
|
b.
|
Quoted
prices for similar liabilities or similar liabilities when traded as
assets, or
|
c.
|
Another
valuation technique that is consistent with the principles of Topic 820.
Two examples would be an income approach, such as a present value
technique, or a market approach, such as a technique that is based on the
amount at the measurement date that the reporting entity would pay to
transfer the identical liability or would receive to
enter into the identical
liability.
|
When
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. Both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. This guidance is effective for the first
reporting period (including interim periods) beginning after issuance. The
adoption of ASU 2009-5 did not have a material effect on the Company’s
consolidated financial condition or results of operations.
Note
1 – Summary of Significant Accounting Policies (Continued)
In
October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets. The amendments in this
Update improve financial reporting by eliminating the exceptions for qualifying
special-purpose entities from the consolidation guidance and the exception that
permitted sale accounting for certain mortgage securitizations when a transferor
has not surrendered control over the transferred financial assets. In addition,
the amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This Update is effective at the start of a
reporting entity’s first fiscal year beginning after November 15, 2009. Early
application is not permitted. The Company is continuing to evaluate the impact
the adoption of ASU 2009-16 will have on our financial position or results of
operations.
The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This
ASU requires some new disclosures and clarifies some existing
disclosure requirements about fair value measurements as set forth in
Codification Subtopic 820-10. The FASB‘s objective is to improve these
disclosures and, thus, increase transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now
require:
·
|
A
reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers;
and
|
·
|
In
the reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and
settlements.
|
In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:
·
|
For
purposes of reporting fair value measurements for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities;
and
|
·
|
A
reporting entity should provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements.
|
ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuance,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years after December
15, 2010 and for interim periods within those fiscal years. Early adoption is
permitted. The Company is continuing to evaluate the impact the adoption of ASU
2009-16 will have on our financial position or results of
operations.
Note
2 – Change in Accounting Principle
Effective
January 1, 2008, the Company adopted new accounting guidance for deferred
compensation and postretirement benefit aspects of endorsement split-dollar life
insurance arrangements. The new guidance requires the recognition of a liability
related to the postretirement benefits covered by endorsement split-dollar life
insurance arrangements. The guidance highlights that the employer (who is also
the policyholder) has a liability for the benefit it is providing to its
employee. As such, if the policyholder has agreed to maintain the insurance
policy in force for the employee’s benefit during his or her retirement, than a
liability recognized during the employee’s active service period should be based
on the future cost of insurance to be incurred during the employee’s retirement.
For transition, an entity can choose to apply the guidance using either the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption. The Company chose approach (b) and
recorded a cumulative effect adjustment as of January 1, 2008 as a charge to
retained earnings of $385,000. Net periodic post-retirement benefit expense
included in salaries and employee benefits was $49,000 and $50,000 for the years
ended December 31, 2009 and 2008, respectively.
Note
3 – Securities
The
amortized cost, gross unrealized gains and losses, and fair values of the
Company’s securities are summarized as follows:
December 31, 2009:
Gross
|
||||||||||||||||||||
Gross
|
Unrealized Losses |
|
||||||||||||||||||
Amortized
|
Unrealized
|
Noncredit |
Fair
|
|||||||||||||||||
Cost
|
Gains
|
OTTI
|
Other |
Value
|
||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||
U.S.
Government agency securities
|
$ | 11,068 | $ | 83 | $ | - | $ | (49 | ) | $ | 11,102 | |||||||||
Municipal
securities
|
2,011 | 26 | - | (12 | ) | 2,025 | ||||||||||||||
U.S.
Government-sponsored enterprises (“GSE”) -
Mortgage-backed
securities
|
18,769 | 838 | - | (1 | ) | 19,606 | ||||||||||||||
Corporate
debt securities
|
4,284 | 51 | (204 | ) | (315 | ) | 3,816 | |||||||||||||
36,132 | 998 | (204 | ) | (377 | ) | 36,549 | ||||||||||||||
Mutual
Fund
|
1,136 | 5 | - | - | 1,141 | |||||||||||||||
$ | 37,268 | $ | 1,003 | $ | (204 | ) | $ | (377 | ) | $ | 37,690 |
Securities
held to maturity:
|
||||||||||||||||||||
U.S.
Government agency securities
|
$ | 1,000 | $ | - | $ | - | $ | (21 | ) | $ | 979 | |||||||||
Municipal
securities
|
6,802 | 214 | - | (5 | ) | 7,011 | ||||||||||||||
Corporate
debt securities
|
2,816 | 16 | - | (556 | ) | 2,276 | ||||||||||||||
$ | 10,618 | $ | 230 | $ | - | $ | (582 | ) | $ | 10,266 |
December
31, 2008:
Gross
|
||||||||||||||||||||
Gross
|
Unrealized
Losses
|
|||||||||||||||||||
Amortized
|
Unrealized
|
Noncredit
|
Fair
|
|||||||||||||||||
Cost
|
Gains
|
OTTI
|
Other
|
Value
|
||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||
U.S.
Government agency securities
|
$ | 23,257 | $ | 670 | $ | - | $ | - | $ | 23,927 | ||||||||||
Municipal
securities
|
2,247 | 20 | - | - | 2,267 | |||||||||||||||
U.S.
Government-sponsored enterprises (“GSE”) -
Mortgage-backed
securities
|
27,252 | 660 | - | (83 | ) | 27,829 | ||||||||||||||
Corporate
debt securities and others
|
2,577 | 102 | - | (731 | ) | 1,948 | ||||||||||||||
$ | 55,333 | $ | 1,452 | $ | - | $ | (814 | ) | $ | 55,971 | ||||||||||
Securities
held to maturity:
|
||||||||||||||||||||
Municipal
securities
|
$ | 6,139 | $ | 90 | $ | - | $ | (73 | ) | $ | 6,156 | |||||||||
Corporate
debt securities and others
|
1,801 | - | - | (883 | ) | 918 | ||||||||||||||
$ | 7,940 | $ | 90 | $ | - | $ | (956 | ) | $ | 7,074 |
Note
3 – Securities (Continued)
The
amortized cost and fair value of the Company’s debt securities at December 31,
2009, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Available
for Sale
|
Held
to Maturity
|
|||||||||||||||
Amortized
Cost
|
Fair
Value
|
Amortized
Cost |
Fair
Value
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Due
in one year or less
|
$ | 2,458 | $ | 2,479 | $ | 500 | $ | 500 | ||||||||
Due
in one year through five years
|
7,629 | 7,627 | 1,898 | 1,995 | ||||||||||||
Due
in five years through ten years
|
- | - | 2,059 | 2,094 | ||||||||||||
Due
after ten years
|
7,276 | 6,837 | 6,161 | 5,677 | ||||||||||||
17,363 | 16,943 | 10,618 | 10,266 | |||||||||||||
GSE
- Mortgage-backed securities
|
18,769 | 19,606 | - | - | ||||||||||||
$ | 36,132 | $ | 36,549 | $ | 10,618 | $ | 10,266 |
Proceeds
from sales of securities available for sale during 2009 were $11,363,000,
resulting in net realized gains of $703,000. The Company had no sales of
securities in 2008.
Certain
of the Company’s investment securities, totaling $19,544,000 and $25,789,000 at
December 31, 2009 and 2008, respectively, were pledged as collateral to secure
securities sold under agreements to repurchase and public deposits as required
or permitted by law.
The
tables below indicate the length of time individual securities have been in a
continuous unrealized loss position at December 31, 2009 and 2008:
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses |
Fair
Value
|
Unrealized
Losses |
Fair
Value
|
Unrealized
Losses |
|||||||||||||||||||
December
31, 2009:
|
(In
Thousands)
|
|||||||||||||||||||||||
U.S.
Government agency securities
|
$ | 4,930 | $ | (70 | ) | $ | - | $ | - | $ | 4,930 | $ | (70 | ) | ||||||||||
Municipal
securities
|
1,341 | (17 | ) | - | - | 1,341 | (17 | ) | ||||||||||||||||
GSE
- Mortgage-backed securities
|
42 | (1 | ) | - | - | 42 | (1 | ) | ||||||||||||||||
Corporate
debt securities
|
325 | (5 | ) | 2,071 | (1,070 | ) | 2,396 | (1,075 | ) | |||||||||||||||
Total
Temporarily
Impaired
Securities
|
$ | 6,638 | $ | (93 | ) | $ | 2,071 | $ | (1,070 | ) | $ | 8,709 | $ | (1,163 | ) |
Note
3 – Securities (Continued)
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses |
Fair
Value
|
Unrealized
Losses |
Fair
Value
|
Unrealized
Losses |
|||||||||||||||||||
(In
Thousands)
|
||||||||||||||||||||||||
December
31, 2008:
|
||||||||||||||||||||||||
Municipal
securities
|
$ | 1,768 | $ | (73 | ) | $ | - | $ | - | $ | 1,768 | $ | (73 | ) | ||||||||||
GSE
- Mortgage-backed securities
|
1,990 | (15 | ) | 2,308 | (68 | ) | 4,298 | (83 | ) | |||||||||||||||
Corporate
debt securities
|
- | - | 1,685 | (1,614 | ) | 1,685 | (1,614 | ) | ||||||||||||||||
Total
Temporarily
Impaired
Securities
|
$ | 3,758 | $ | (88 | ) | $ | 3,993 | $ | (1,682 | ) | $ | 7,751 | $ | (1,770 | ) |
The
Company had 16 securities and 24 securities in an unrealized loss position at
December 31, 2009 and December 31, 2008, respectively. In management’s opinion,
the unrealized losses in municipal, U.S. Government agency and U.S. GSE
mortgage-backed securities reflect changes in interest rates subsequent to the
acquisition of specific securities. The unrealized loss for corporate debt
securities also reflects a widening of spreads due to the liquidity and credit
concerns in the financial markets. The Company does not intend to sell these
debt securities prior to recovery and it is more likely than not that the
Company will not have to sell these debt securities prior to
recovery.
Included
in corporate debt securities are four individual trust preferred securities
issued by large financial institutions with Moody’s ratings from A2 to Baa3. As
of December 31, 2009, all of these securities are current with their scheduled
interest payments. These single issue securities are from large money center
banks. Management concluded that these securities were not
other-than-temporarily impaired as of December 31, 2009.
The
Company also has one pooled trust preferred security with a Moody’s rating of Ca
included in corporate debt securities. This pooled trust preferred security has
been remitting reduced amounts of interest as some individual participants of
the pool have deferred interest payments. The pooled instrument consists of
securities issued by financial institutions and insurance companies and we hold
the mezzanine tranche of such security. Senior tranches generally are protected
from defaults by over-collateralization and cash flow default protection
provided by subordinated tranches, with senior tranches having the greatest
protection and mezzanine tranches subordinated to the senior tranches. For the
pooled trust preferred security, management reviewed expected cash flows and
credit support and determined it was not probable that all principal and
interest would be repaid. The most significant input to the expected cash flow
model was the assumed default rate for each pooled trust preferred security.
Financial metrics, such as capital ratios and non-performing asset ratios, of
each individual financial institution issuer that comprises the pooled trust
preferred securities were evaluated to estimate the expected default rates for
each security. Total impairment on this security was $360,000 during 2009. As
the Company does not intend to sell this security and it is more likely than not
that the Company will not be required to sell this security, only the credit
loss portion of other-than-temporary impairment in the amount of $156,000 was
recognized in operations during 2009 while $204,000 was recognized in other
comprehensive income.
Future
deterioration in the cash flow of these instruments or the credit quality of the
financial institution issuers could result in additional impairment charges in
the future.
Note
3 – Securities (Continued)
The
following roll forward reflects the amounts related to other-than-temporary
credit losses recognized in earnings for the year ended December 31,
2009:
2009
|
||||||||
(In
Thousands)
|
||||||||
Beginning
balance, January 1, 2009
|
$ | - | ||||||
Amount related to the credit loss
for which an
|
||||||||
other-than-temporary impairment
was not
|
||||||||
previously
recognized
|
156 | |||||||
Ending
balance, December 31, 2009
|
$ | 156 |
Note
4 – Loans Receivable and Allowance for Loan Losses
The
components of the loan portfolio at December 31, 2009 and 2008 are as
follows:
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Commercial
and industrial
|
$ | 133,916 | $ | 120,404 | ||||
Real
estate – construction
|
67,011 | 76,128 | ||||||
Real
estate – commercial
|
228,818 | 177,650 | ||||||
Real
estate – residential
|
19,381 | 19,860 | ||||||
Consumer
|
64,547 | 54,890 | ||||||
Other
|
176 | 119 | ||||||
513,849 | 449,051 | |||||||
Allowance
for loan losses
|
(6,184 | ) | (6,815 | ) | ||||
Unearned
fees
|
(450 | ) | (271 | ) | ||||
Net
Loans
|
$ | 507,215 | $ | 441,965 |
The
Company had $14,151,000 of loans on which the accrual of interest had been
discontinued at December 31, 2009 and $12,958,000 of loans on which the accrual
of interest had been discontinued at December 31, 2008. There were no loan
balances past due 90 days or more and still accruing interest at December 31,
2009 and December 31, 2008.
The
recorded investment in impaired loans, not requiring a specific allowance for
loan losses, was $17,266,000 and $9,324,000 at December 31, 2009 and 2008,
respectively. The recorded investment in impaired loans requiring a specific
allowance for loan losses was $8,272,000 and $8,432,000 at December 31, 2009 and
2008, respectively. The reserve allocated to such loans at December 31, 2009 and
2008 was $1,313,000 and 2,257,000, respectively. For the years ended December
31, 2009 and 2008, the average recorded investment in impaired loans was
$22,251,000 and $6,657,000 and the interest income recognized on these impaired
loans was $68,000 and $129,000, respectively.
Note
4 – Loans Receivable and Allowance for Loan Losses (Continued)
Changes
in the allowance for loan losses for the year ended December 31, 2009 and 2008
are as follows:
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Balance,
beginning of year
|
$ | 6,815 | $ | 4,675 | ||||
Provision charged to
expenses
|
2,205 | 2,301 | ||||||
Loans charged-off,
net
|
(2,836 | ) | (161 | ) | ||||
Balance,
end of year
|
$ | 6,184 | $ | 6,815 |
Note
5 – Bank Premises and Equipment
Premises
and equipment at December 31, 2009 and 2008 are as follows:
|
Estimated
Useful
Lives
|
2009
|
2008
|
|||||||||
(In
Thousands)
|
||||||||||||
Land
|
Indefinite
|
$ | 400 | $ | 1,208 | |||||||
Buildings
|
30
years
|
893 | 893 | |||||||||
Leasehold
improvements
|
5-15
years
|
4,266 | 4,193 | |||||||||
Furniture,
fixtures and equipment
|
3 -
7 years
|
4,040 | 3,896 | |||||||||
Computer
equipment and software
|
2 -
5 years
|
1,927 | 1,798 | |||||||||
Construction
in progress
|
- | - | 397 | |||||||||
11,526 | 12,385 | |||||||||||
Less
accumulated depreciation and amortization
|
(7,762 | ) | (6,727 | ) | ||||||||
$ | 3,764 | $ | 5,658 |
During
2009, land and construction in progress with an aggregate value of $1,100,000
was reclassified to held-for-sale and accordingly, transferred out of bank
premises and equipment. This balance is included in other assets.
Note
6 – Goodwill and Other Intangible Assets
The
Company’s goodwill was recognized in connection with the acquisition of the Town
Bank in April 2006. The Company performed its goodwill impairment analysis as of
September 30, 2009, and uses the fair value of the reporting unit based on the
income approach and market approach. The income approach uses a dividend
discount analysis. This approach calculates cash flows based on anticipated
financial results assuming a change of control transaction. This change of
control assumes that an acquirer will achieve an expected base level of
earnings, achieve integration cost savings and incur certain transaction costs
(including such items as legal and financial advisors fees, contract
cancellations, severance and employment obligations, and other transaction
costs). The analysis then calculates the present value of all excess cash flows
generated by the Company (above the minimum tangible capital ratio) plus the
present value of a terminal sale value.
The
market approach is used to calculate the fair value of a company by calculating
median earnings and book value pricing multiples for recent actual acquisitions
of companies of similar size and performance and then applying these multiples
to our community banking reporting unit. No company or transaction in the
analysis is identical to our community banking reporting unit and, accordingly,
the results of the analysis are only indicative of comparable value. This
technique uses historical data to create a current pricing level and is thus a
trailing indicator. Results of the market approach need to be understood in this
context, especially in periods of rapid price change and market uncertainty. The
Company applied the market valuation approach to our then current stock price
adjusted by an appropriate control premium and also to a peer group adjusted by
an appropriate control premium.
Note
6 – Goodwill and Other Intangible Assets (Continued)
Determining
the fair value involves a significant amount of judgment. The results are
dependent on attaining results consistent with the forecasts and assumptions
used in the valuation model. Based on the results of this step one analysis, the
Company concluded that the potential for goodwill impairment existed and
therefore a step two test was required to determine if there was goodwill
impairment and the amount of goodwill that might be impaired. Based on the
results of that analysis, a $6,725,000 impairment charge was recorded during the
year ended December 31, 2009.
The
Company’s goodwill impairment resulted from a number of external and internal
factors. Among the external factors that contributed to the impairment was the
decrease in the values of financial institution stocks during the past year and
the acquisition multiples paid for banks of comparable size and character to the
Company, which produced a lower fair value under the market approach. Among the
internal factors which contributed to the current year’s impairment charge was a
decrease in expected cash flows for the Company resulting from declining
operating results due to the current economic environment, which includes the
increase in non-performing assets. This produced a lower fair value under the
income approach.
The
$6,725,000 goodwill impairment charge was non-deductible for income tax
purposes. In addition, since goodwill is excluded from regulatory capital, the
impairment charge did not impact the Company’s regulatory capital
ratios.
The
following table summarizes the changes in goodwill:
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Balance
at beginning of year
|
$ | 24,834 | $ | 24,834 | ||||
Goodwill
impairment
|
(6,725 | ) | - | |||||
Balance
at end of period
|
$ | 18,109 | $ | 24,834 |
The
Company acquired core deposit intangible assets in conjunction with the
acquisition of Town Bank. This intangible asset has a carrying value of
$871,000, net of accumulated amortization of $1,200,000, as of December 31, 2009
and a carrying value of $1,149,000, net of accumulated amortization of $957,000,
as of December 31, 2008. Amortization expense related to intangible assets was
$278,000 and $316,000 for the years ended December 31, 2009 and 2008,
respectively.
The
aggregate estimated amortization expense for the next five fiscal years is
expected to be as follows (in thousands):
2010
|
$ | 239 | |||
2011
|
201 | ||||
2012
|
163 | ||||
2013
|
124 | ||||
2014
|
86 |
Note
7 – Deposits
The
components of deposits at December 31, 2009 and 2008 are as
follows:
2009 |
2008
|
|||||||
(In Thousands) | ||||||||
Demand,
non-interest bearing
|
$ | 69,980 | $ | 65,115 | ||||
Demand,
interest bearing - NOW, money market and savings
|
336,222 | 297,948 | ||||||
Time,
$100,000 and over
|
72,949 | 62,898 | ||||||
Time,
other
|
56,261 | 48,878 | ||||||
$ | 535,412 | $ | 474,839 |
Note
7 – Deposits (Continued)
At
December 31, 2009, the scheduled maturities of time deposits are as follows (in
thousands):
2010
|
$ | 102,265 | ||
2011
|
5,655 | |||
2012
|
5,728 | |||
2013
|
1,470 | |||
2014
|
14,092 | |||
$ | 129,210 |
Note
8 – Securities Sold Under Agreements to Repurchase
Securities
sold under agreements to repurchase, which are classified as secured borrowings,
generally mature within one to four days from the transaction date. Securities
sold under agreements to repurchase are reflected as the amount of cash received
in connection with the transaction. Securities sold under these agreements are
retained under the Company’s control at their safekeeping agent. The Company may
be required to provide additional collateral based on the fair value of the
underlying securities. Information concerning repurchase agreements for the
years ended December 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
(Dollars
In Thousands)
|
||||||||
Repurchase
agreements:
|
||||||||
Balance at
year-end
|
$ | 17,065 | $ | 11,377 | ||||
Average during the
year
|
15,233 | 16,957 | ||||||
Maximum month-end
balance
|
18,330 | 19,553 | ||||||
Weighted average rate during the
year
|
1.79 | % | 2.58 | % | ||||
Weighted average rate at December
31
|
1.44 | % | 2.31 | % |
Note
9 – Borrowings
Short-term
borrowings consist of Federal funds purchased and short-term advances from the
FHLB. Information concerning short-term borrowings for the years ended December
31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
(Dollars
In Thousands)
|
||||||||
Short-term
borrowings:
|
||||||||
Balance at
year-end
|
$ | - | $ | - | ||||
Average during the
year
|
- | 715 | ||||||
Maximum month-end
balance
|
- | 5,346 | ||||||
Weighted average rate during the
year
|
- | 2.80 | % |
The
Company has an unsecured line of credit totaling $10,000,000 with another
financial institution that bears interest at a variable rate and is renewed
annually. There were no borrowings under this line of credit at December 31,
2009 and 2008.
The
Company has a maximum borrowing capacity with the FHLB of approximately
$62,400,000. There were no short-term borrowings from the FHLB at December 31,
2009 and 2008. Advances from the FHLB are secured by qualifying assets of the
Bank.
Note
9 – Borrowings (Continued)
Long-term
debt consists of a $7,500,000 convertible note due in November 2017 at an
interest rate of 3.965%, from the FHLB that is collateralized by the Company’s
real estate loan portfolio. The convertible note contains an option which allows
the FHLB to adjust the rate on the note in November 2012 to the then-current
market rate offered by the FHLB. The Company has the option to repay this
advance, if converted, without penalty.
Note 10 – Employee Benefit
Plans
Under the
401(k) plan, all employees are eligible to contribute from 3% to a maximum of
20% of their annual salary. Annually, the Company matches a
percentage of employee contributions. The Company contributed $179,000 and
$181,000 for the years ended December 31, 2009 and 2008, respectively. Each
year, the Company, may at its discretion, elect to contribute profit sharing
amounts into the 401(k) plan. For the year ended December 31, 2009 and 2008, the
Company has not contributed any profit sharing amounts.
The
Company has a non-qualified Supplemental Executive Retirement Plan for certain
executive officers that provides for payments upon retirement, death or
disability. At December 31, 2009 and 2008, other liabilities included
approximately $562,000 and $505,000, respectively, accrued under this plan.
Expenses related to this plan included in the consolidated statements of income
are approximately $64,000 and $77,000 for the years ended December 31, 2009 and
2008, respectively.
Note 11 – Comprehensive Income
(Loss)
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income (loss).
The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Unrealized
holding gains on available for sale securities
|
$ | 525 | $ | 458 | ||||
Unrealized
losses on securities for which
|
||||||||
a
portion of the impairment has been
|
||||||||
recognized
in income
|
(193 | ) | - | |||||
Reclassification
adjustment for gains on
sales
of securities recognized
|
||||||||
in
net income (loss)
|
(703 | ) | - | |||||
Reclassification
adjustment for
|
||||||||
other-than-temporary
credit losses
|
||||||||
on
securities included in net income (loss)
|
156 | - | ||||||
Tax
effect
|
87 | (181 | ) | |||||
Net
of Tax Amount
|
$ | (128 | ) | $ | 277 |
Note
12 – Federal Income Taxes
The
components of income tax expense for the years ended December 31, 2009 and 2008
are as follows:
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Current
|
$ | 1,590 | $ | 1,138 | ||||
Deferred
|
(237 | ) | (908 | ) | ||||
$ | 1,353 | $ | 230 |
A
reconciliation of the statutory income tax at a rate of 34% to the income tax
expense included in the statements of operations is as follows for the years
ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
(Dollars
In Thousands)
|
||||||||||||||||
Pre-tax
book income
|
$ | (1,281 | ) | 34.0 | % | $ | 350 | 34.0 | % | |||||||
Tax
exempt interest
|
(151 | ) | 4.0 | (129 | ) | (12.5 | ) | |||||||||
Bank-owned
life insurance income
|
(49 | ) | 1.3 | (51 | ) | (5.0 | ) | |||||||||
State
income taxes, net of federal income tax benefit
|
167 | (4.4 | ) | 39 | 3.8 | |||||||||||
Goodwill
impairment
|
2,286 | (60.7 | ) | - | 0.0 | |||||||||||
Other
|
381 | (10.1 | ) | 21 | 2.1 | |||||||||||
$ | 1,353 | (35.9 | ) % | $ | 230 | 22.4 | % |
The
components of the net deferred tax asset, included in other assets, as of
December 31, 2009 and 2008, were as follows:
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 2,470 | $ | 1,993 | ||||
Depreciation
and amortization
|
527 | 518 | ||||||
Deferred
compensation
|
252 | 201 | ||||||
Other
|
94 | 28 | ||||||
3,343 | 2,740 | |||||||
Deferred
tax liabilities:
|
||||||||
Purchase
accounting adjustments
|
(574 | ) | (402 | ) | ||||
Unrealized
gain on investment securities available for sale
|
(174 | ) | (261 | ) | ||||
Other
|
(266 | ) | (72 | ) | ||||
(1,014 | ) | (735 | ) | |||||
Net
Deferred Tax Asset
|
$ | 2,329 | $ | 2,005 |
Note
13 – (Loss) Earnings Per Common Share
The
following sets forth the computation of basic and diluted (loss) earnings per
common share for the years ended December 31, 2009 and 2008:
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands, Except Per Share Data)
|
||||||||
Net
(loss) income
|
$ | (5,121 | ) | $ | 798 | |||
Preferred
stock dividends and discount accretion
|
(530 | ) | - | |||||
Net
(loss) income applicable to common shareholders
|
$ | (5,651 | ) | $ | 798 | |||
Weighted
average common shares outstanding
|
7,170 | 7,153 | ||||||
Effect
of dilutive securities, stock options and warrants
|
18 | 115 | ||||||
Weighted
average common shares outstanding used to calculate
diluted
earnings (loss) per share
|
7,188 | 7,268 | ||||||
Basic
(loss) earnings per common share
|
$ | (0.79 | ) | $ | 0.11 | |||
Diluted
(loss) earnings per common share
|
$ | (0.79 | ) | $ | 0.11 |
Dilutive
securities in the table above exclude common stock options and warrants with
exercise prices that exceed the average market price of the Company’s common
stock during the periods presented. Inclusion of these common stock options and
warrants would be anti-dilutive to the diluted earnings per common share
calculation. Stock options and warrants that had no intrinsic value because
their effect was anti-dilutive and, therefore, were not included in the diluted
earnings per common share calculation were 746,000 and 422,000 for 2009 and
2008, respectively.
Note
14 – Lease Commitments and Total Rental Expense
The
Company leases banking facilities under non-cancelable operating lease
agreements expiring through 2021. Aggregate rent expense was $1,249,000 and
$1,169,000 for the years ended December 31, 2009 and 2008,
respectively.
The
approximate future minimum rental commitments under operating leases at December
31, 2009 are as follows (in thousands):
2010
|
$ | 1,022 | ||
2011
|
1,061 | |||
2012
|
1,077 | |||
2013
|
1,028 | |||
2014
|
856 | |||
Thereafter
|
4,148 | |||
$ | 9,192 |
Note
15 – Stock Option Plans
Both Two
River and the Town Bank had stock option plans outstanding at the time of their
acquisition by Community Partners for the benefit of their employees and
directors. The plans provided for the granting of both incentive and
non-qualified stock options. All stock options outstanding at the time of
acquisition, April 1, 2006, were fully vested. There are no shares available for
grant under these prior plans.
On March
20, 2007, the Board of Directors adopted the Community Partners Bancorp 2007
Equity Incentive Plan (the “2007 Plan”), subject to shareholder approval. The
2007 Plan, which was approved by the Company’s shareholders at the Company’s
annual meeting on May 15, 2007, provides that the Compensation Committee of the
Board of Directors (the “Committee”) may grant to those individuals who are
eligible under the terms of the 2007 Plan, stock options, restricted stock, or
such other equity incentive awards as the Committee may determine. The number of
shares of common stock reserved and available under the 2007 Plan was 819,545,
after adjusting for the 3% stock dividends declared in 2009 and
2008.
Options
awarded under the 2007 Plan may be either options that qualify as incentive
stock options (“ISOs”) under section 422 of the Internal Revenue Code of 1986,
as amended (the “Code”), or options that do not, or cease to, qualify as
incentive stock options under the Code (“nonqualified stock options” or
“NQSOs”). Awards may be granted under the 2007 Plan to directors and
employees.
Shares
delivered under the 2007 Plan will be issued out of authorized and unissued
shares, or treasury shares, or partly out of each, as determined by the Board.
The exercise price per share purchasable under either an ISO or a NQSO may not
be less than the fair market value of a share of stock on the date of grant of
the option. The Committee will determine the vesting period and term of each
option, provided that no ISO may have a term in excess of ten years after the
date of grant.
Restricted
stock is stock which is subject to certain transfer restrictions and to a risk
of forfeiture. The Committee will determine the period over which any restricted
stock which is issued under the 2007 Plan will vest, and will impose such
restrictions on transferability, risk of forfeiture and other restrictions as
the Committee may in its discretion determine. Unless restricted by
the Committee, a participant granted restricted stock will have all of the
rights of a shareholder, including the right to vote the restricted stock and
the right to receive dividends with respect to that stock.
Unless
otherwise provided by the Committee in the award document or subject to other
applicable restrictions, in the event of a Change in Control (as defined in the
2007 Plan) all non-forfeited options and awards carrying a right to exercise
that was not previously exercisable and vested will become fully exercisable and
vested as of the time of the Change in Control, and all restricted stock and
awards subject to risk of forfeiture will become fully vested.
On
January 20, 2009, the Committee granted options to purchase an aggregate of
425,390 shares, after adjusting for the 3% stock dividend declared in August
2009, of Company common stock under the Plan to directors and officers of the
Company, as follows:
·
|
The
Company granted to directors non-qualified stock options to purchase an
aggregate of 66,950 shares of Company common stock. These options vested
immediately and were granted with an exercise price of $3.64 per share
based upon the average trading price of Company common stock on the grant
date.
|
·
|
The
Company granted to employees incentive stock options to purchase an
aggregate of 358,440 shares of Company common stock. These options are
scheduled to vest 20% per year over five years beginning January 20, 2010.
The options were granted with an exercise price of $3.64 per share based
upon the average trading price of Company common stock on the grant
date.
|
Stock
based compensation expense related to the above grants, totaling approximately
$150,000, was recorded during the year ended December 31, 2009, and is included
in salaries and employee benefits on the income statements. A deferred tax
benefit of $27,000 was recognized during the year ended December 31, 2009
related to this stock based compensation.
Total
unrecognized compensation cost related to non-vested options under the Plan was
$353,000 as of December 31, 2009 and will be recognized over the subsequent 4.0
years.
Note
15 – Stock Option Plans (Continued)
The
Company did not issue any shares of restricted stock during the years ended
December 31, 2009 and 2008.
The
following table summarizes information about outstanding options from all plans
at and for the years ended December 31, 2009 and 2008, as adjusted for the 3%
stock dividends in 2009 and 2008:
Number
of
Shares
|
Weighted
Average
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
Options
outstanding, December 31, 2007
|
812,491 | $ | 8.86 | ||||||||||
Options
exercised
|
(36,450 | ) | 4.45 | ||||||||||
Options
forfeited
|
(9,004 | ) | 13.70 | ||||||||||
Options
outstanding, December 31, 2008
|
767,037 | 9.01 | |||||||||||
Options
granted
|
425,390 | 3.64 | |||||||||||
Options
exercised
|
(13,724 | ) | 3.25 | ||||||||||
Options
forfeited
|
(142,047 | ) | 6.42 | ||||||||||
Options
outstanding, December 31, 2009
|
1,036,656 | $ | 7.21 |
5.58
years
|
$ | - | |||||||
Options
exercisable, end of year
|
693,666 | $ | 8.98 |
1.62
years
|
$ | - | |||||||
Options
outstanding – price range at end of year
|
$3.25 to
$15.33
|
||||||||||||
Options
exercisable – price range at end of year
|
$3.25 to
$15.33
|
The total
intrinsic value of stock options exercised was $4,681 and $101,803 during the
years ended December 31, 2009 and 2008, respectively.
The
following summarizes information about stock options outstanding at December 31,
2009.
Options
Outstanding
|
||||||
Range
of Exercise Prices
|
Number
Outstanding
at
December
31,
2009
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
|||
$3.25
- $3.64
|
587,557
|
6.9
years
|
$ 3.55
|
|||
$4.23
- $4.74
|
38,483
|
2.6
years
|
4.43
|
|||
$5.35
- $5.82
|
12,419
|
0.6
years
|
5.62
|
|||
$6.04
- $6.90
|
3,363
|
1.4
years
|
6.46
|
|||
$7.82
- $7.82
|
788
|
5.0
years
|
7.82
|
|||
$8.60
- $8.79
|
52,392
|
4.0
years
|
8.79
|
|||
$10.13
- $10.66
|
9,067
|
5.0
years
|
10.64
|
|||
$12.08
- $15.33
|
332,587
|
4.1
years
|
13.72
|
|||
1,036,656
|
Note 15 – Stock Option Plans
(Continued)
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used to estimate the fair value of the stock options granted on January 20,
2009:
Dividend
yield
|
0.00% | ||
Expected
volatility
|
28.35% | ||
Risk-free
interest rate
|
1.79% | ||
Expected
life
|
7
years
|
||
Weighted
average fair value
of
options granted
|
$ | 1.24 |
The
dividend yield assumption is based on the Company’s history and expectations of
cash dividends. The expected volatility is based on historical volatility. The
risk-free interest rate is based on the U.S. Treasury yield curve for the
periods within the contractual life of the grants. The expected life is based on
historical exercise experience.
On
January 19, 2010, the Compensation Committee of the Company awarded stock
options to officers of the Company.
The
Committee awarded incentive stock options to various officers totaling 44,100
shares. The incentive stock options awarded will vest 33.3% per year over three
years beginning January 19, 2011. The exercise price of the options is $3.25
based upon the average trading price on January 19, 2010.
Note
16 – Transactions with Executive Officers, Directors and Principal
Shareholders
Certain
directors and executive officers of Community Partners and its affiliates,
including their immediate families and companies in which they are principal
owners (more than 10%), are indebted to the Bank. In the opinion of management,
such loans are consistent with sound banking practices and are within applicable
regulatory bank lending limitations and in compliance with applicable rules and
regulations of the Securities and Exchange Commission. Community Partners relies
on such directors and executive officers for the identification of their
associates. These loans at December 31, 2009 were current as to principal and
interest payments, and did not involve more than normal risk of collectability.
At December 31, 2009 and 2008, loans to related parties amounted to $10,098,000
and $8,280,000 respectively. During 2009, new loans and advances to such related
parties totaled $3,670,000 and repayments and other reductions aggregated
$1,852,000.
A
director of the Bank is the principal of a company that provides leasehold
improvement construction services for certain of the Bank’s new offices. The
Bank paid $69,000 and $579,000 for these construction services for the years
ended December 31, 2009 and 2008, respectively. Such costs are capitalized to
leasehold improvements and are amortized over a ten to fifteen year period.
Construction costs incurred are comparable to similarly outfitted bank office
space in the market area.
Note
17 – Financial Instruments with Off-Balance Sheet Risk
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the financial
statements.
The
Company’s exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation. Collateral held varies but my include personal or
commercial real estate, accounts receivable, inventory and equipment. The
Company had commitments to extend credit, including unused lines of credit of
approximately $112,671,000 and $102,569,000 at December 31, 2009 and 2008,
respectively.
Note
17 – Financial Instruments with Off-Balance Sheet Risk (Continued)
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the financial performance of a customer to a third party. Those guarantees are
primarily issued to support contracts entered into by customers. Most guarantees
extend for one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company defines the fair value of these letters of credit as the fees paid
by the customer or similar fees collected on similar instruments. The Company
amortizes the fees collected over the life of the instrument. The Company
generally obtains collateral, such as real estate or liens on customer assets
for these types of commitments. The Company’s potential liability would be
reduced by any proceeds obtained in liquidation of the collateral held. The
Company had standby letters of credit for customers aggregating $5,824,000 and
$8,651,000 at December 31, 2009 and 2008, respectively. The approximate value of
underlying collateral upon liquidation that would be expected to cover this
maximum potential exposure was $5,824,000 and $8,254,000 at December 31, 2009
and 2008, respectively. The current amounts of the liability related to
guarantees under standby letters of credit issued are not material as of
December 31, 2009 and 2008.
Note
18 – Regulatory Matters
The Bank
is required to maintain a cash reserve balance in vault cash or with the Federal
Reserve Bank. The total of this reserve balance was $50,000 at December 31,
2009.
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet the 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 consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors.
Quantitative
measures established by regulations to ensure capital adequacy require the
Company and the Bank maintain minimum amounts and ratios (set forth below) of
total and Tier l capital (as defined in the regulations) to risk-weighted
assets, and of Tier l capital to average assets. Management believes, as of
December 31, 2009 that the Company and its bank subsidiary meet all capital
adequacy requirements to which they are subject.
Note
18 – Regulatory Matters (Continued)
As of
December 31, 2009, the Bank met all regulatory requirements for classification
as well-capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events that management believes have changed the
institutions’ categories. Community Partners and the Bank’s actual capital
amounts and ratios at December 31, 2009 and 2008 and the minimum amounts and
ratios required for capital adequacy purposes and to be well capitalized under
the prompt corrective action provisions are as follows:
Actual
|
For
Capital Adequacy
Purposes
|
To
be Well Capitalized under
Prompt
Corrective Action
Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
|
Ratio
|
||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
As
of December 31, 2009
|
||||||||||||||||||||||||
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
$
|
63,792
|
11.74
|
%
|
$
|
>43,470
|
≥8.00
|
%
|
$
|
N/A
|
N/A
|
|||||||||||||
Two
River Community Bank
|
63,601
|
11.68
|
%
|
>43,562
|
≥8.00
|
%
|
>54,453
|
≥10.00
|
%
|
|||||||||||||||
Tier
1 capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
57,608
|
10.60
|
%
|
>21,739
|
≥4.00
|
%
|
N/A
|
N/A
|
||||||||||||||||
Two
River Community Bank
|
57,417
|
10.55
|
%
|
>21,769
|
≥4.00
|
%
|
>32,654
|
≥6.00
|
%
|
|||||||||||||||
Tier
1 capital (to average assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
57,608
|
9.28
|
%
|
>24,831
|
≥4.00
|
%
|
N/A
|
N/A
|
||||||||||||||||
Two
River Community Bank
|
57,417
|
9.18
|
%
|
>24,563
|
≥4.00
|
%
|
>30,704
|
≥5.00
|
%
|
|||||||||||||||
As
of December 31, 2008
|
||||||||||||||||||||||||
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
$
|
52,832
|
11.25
|
%
|
$
|
>37,569
|
≥8.00
|
%
|
$
|
N/A
|
$
|
N/A
|
||||||||||||
Two
River Community Bank
|
52,038
|
11.05
|
%
|
>37,675
|
≥8.00
|
%
|
>47,093
|
≥10.00
|
%
|
|||||||||||||||
Tier
1 capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
46,951
|
10.00
|
%
|
>18,780
|
≥4.00
|
%
|
N/A
|
N/A
|
||||||||||||||||
Two
River Community Bank
|
46,140
|
9.80
|
%
|
>18,833
|
≥4.00
|
%
|
>28,249
|
≥6.00
|
%
|
|||||||||||||||
Tier
1 capital (to average assets)
|
||||||||||||||||||||||||
Community
Partners Bancorp
|
46,951
|
8.53
|
%
|
>22,017
|
≥4.00
|
%
|
N/A
|
N/A
|
||||||||||||||||
Two
River Community Bank
|
46,140
|
8.38
|
%
|
>22,024
|
≥4.00
|
%
|
>27,530
|
≥5.00
|
%
|
|||||||||||||||
The Bank
is subject to certain legal and regulatory limitations on the amount of
dividends that it may declare without prior regulatory approval. Under Federal
Reserve regulations, the Bank is limited as to the amount it may lend
affiliates, including the Company, unless such loans are collateralized by
specific obligations.
Note
19 – Fair Value of Financial Instruments
Financial
Accounting Standards Board (FASB) ASC Topic 820, “Fair Value Measurements and
Disclosures” establishes a fair value hierarchy that prioritizes the inputs to
valuation methods used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy are
as follows:
|
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
Level
2:
|
Quoted
prices in markets that are not active, or inputs that are observable
either directly or indirectly, for substantially the full term of the
asset or liability.
|
|
Level
3:
|
Prices
or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e. supported with little or
no market activity).
|
An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
and 2008 are as follows:
Description
|
(Level
1)
Quoted
Prices
in Active Markets for Identical Assets |
(Level
2)
Significant
Other Observable Inputs |
(Level
3)
Significant
Unobservable Inputs
|
Total
|
||||||||||||
(In
Thousands)
|
||||||||||||||||
At December 31,
2009
|
||||||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
Government agency securities
|
$ | - | $ | 11,102 | $ | - | $ | 11,102 | ||||||||
Municipal
securities
|
- | 2,025 | - | 2,025 | ||||||||||||
GSE:
Mortgage-backed securities
|
- | 19,606 | - | 19,606 | ||||||||||||
Corporate
debt securities
|
- | 3,676 | 140 | 3,816 | ||||||||||||
Mutual
Fund
|
1,141 | - | - | 1,141 | ||||||||||||
Total
|
$ | 1,141 | $ | 36,409 | $ | 140 | $ | 37,690 | ||||||||
At December 31,
2008
|
||||||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
Government agency securities
|
$ | - | $ | 23,927 | $ | - | $ | 23,927 | ||||||||
Municipal
securities
|
- | 2,267 | - | 2,267 | ||||||||||||
GSE:
Mortgage-backed securities
|
- | 27,829 | - | 27,829 | ||||||||||||
Corporate
debt securities
|
- | 1,771 | 177 | 1,948 | ||||||||||||
Total
|
$ | - | $ | 55,794 | $ | 177 | $ | 55,971 |
Note
19 – Fair Value of Financial Instruments (Continued)
The
following table presents a reconciliation of the securities available for sale
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the year ended December 31, 2009 and 2008:
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
||||||||
Securities
available for sale
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
(In
Thousands)
|
||||||||
Beginning
balance January 1
|
$ | 177 | $ | 974 | ||||
Total
gains/(losses) – (realized/unrealized):
|
||||||||
Included
in earnings
|
(156 | ) | - | |||||
Included
in other comprehensive income (loss)
|
119 | (326 | ) | |||||
Purchases,
issuances and settlements
|
- | - | ||||||
Transfers
in and/or out of Level 3
|
- | (471 | ) | |||||
Ending
Balance
|
$ | 140 | $ | 177 |
For
assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
and 2008 are as follows:
Description
|
(Level
1)
Quoted
Prices
in Active Markets for Identical Assets |
(Level
2)
Significant
Other Observable Inputs |
(Level
3)
Significant
Unobservable Inputs
|
Total
|
||||||||||||
(In
Thousands)
|
||||||||||||||||
At December 31,
2009
|
||||||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 6,959 | $ | 6,959 | ||||||||
Goodwill
|
- | - | 18,109 | 18,109 | ||||||||||||
Property
held for sale
|
- | - | 1,100 | 1,100 | ||||||||||||
At December 31,
2008
|
||||||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 6,175 | $ | 6,175 |
The
following valuation techniques were used to measure fair value of assets in the
tables above:
|
·
|
Impaired loans –
Impaired loans measured at fair value are those loans in which the
Company has measured impairment generally based on the fair value of the
loan’s collateral. Fair value is generally determined based upon
independent third party appraisals of the properties, or discounted cash
flows based upon the expected proceeds. These assets are included as Level
3 fair values, based upon the lowest level of input that is significant to
the fair value measurements. At December 31, 2009, fair value consists of
the loan balances of $6,959,000, net of valuation allowances of
$1,313,000. At December 31, 2008, fair value consists of loan balances of
$6,175,000, net of a valuation allowance of
$2,257,000.
|
Note
19 – Fair Value of Financial Instruments (Continued)
|
·
|
Goodwill – Goodwill,
which is evaluated for impairment on an annual basis, was written down to
a fair value of $18,109,000. An impairment charge of $6,725,000 was taken
during 2009. See Note 6 for further details on
goodwill.
|
|
·
|
Property held for sale
– Real estate originally classified as bank premises for a planned
branch, was reclassified during 2009 to held for sale. This property is
carried in other assets at fair value based upon the appraised value of
the property. An impairment charge of $52,000 was recorded during the year
ended December 31, 2009.
|
Below is
management’s estimate of the fair value of all financial instruments, whether
carried at cost or fair value on the Company’s balance sheet.
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and assumption were used
to estimate the fair values of the Company’s financial instruments at December
31, 2009 and 2008.
Cash and Cash
Equivalents (carried at cost):
The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets’ fair values.
Securities:
The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices. For certain securities which are not traded in
active markets or are subject to transfer restrictions, valuations are adjusted
to reflect illiquidity and/or non-transferability, and such adjustments are
generally based on available market evidence (Level 3). At December 31, 2009 and
2008, the Company determined that no active market existed for our pooled trust
preferred security. This security is classified as a Level 3 investment.
Management’s best estimate of fair value consists of both internal and external
support on the Level 3 investment. Internal cash flow models using a present
value formula that includes assumptions market participants would use along with
indicative exit pricing obtained from broker/dealers (where available) were used
to support the fair value of the Level 3 investment.
Restricted
Investment in Federal Home Loan Bank Stock and ACBB Stock:
The
carrying amount of restricted investment in FHLB and ACBB stock approximates
fair value, and considers the limited marketability of such
securities.
Loans Receivable
(carried at cost):
The fair
values of loans, excluding impaired loans, are estimated using discounted cash
flow analyses, using market rates at the balance sheet date that reflect the
credit and interest rate-risk inherent in the loans. Projected future cash flows
are calculated based upon contractual maturity or call dates, projected
repayments and prepayments of principal. Generally, for variable rate
loans that reprice frequently and with no significant change in credit risk,
fair values are based on carrying values.
Accrued Interest
Receivable and Payable (carried at cost) :
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Note
19 – Fair Value of Financial Instruments (Continued)
Deposit Liabilities (carried at
cost):
The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date, (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered in the market on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Securities Sold
Under Agreements to Repurchase (carried at cost):
The
carrying amounts of these short-term borrowings approximate their fair
values.
Long-term Debt
(carried at cost):
Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances with similar credit risk characteristics,
terms and remaining maturity. These prices obtained from this active market
represent a market value that is deemed to represent the transfer price if the
liability were assumed by a third party.
Off-Balance Sheet
Financial Instruments (disclosed at cost):
Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently
charged in the market to enter into similar agreements, taking into account, the
remaining terms of the agreements and the counterparties’
credit standing. The fair values of such fees are not material at December 31,
2009 and 2008.
The
estimated fair value of the Company’s financial instruments at December 31, 2009
and 2008 were as follows:
2009
|
2008
|
|||||||
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||
(In
Thousands)
|
Financial
assets:
|
||||||||||||||||
Cash and cash
equivalents
|
$ | 42,735 | $ | 42,735 | $ | 23,017 | $ | 23,017 | ||||||||
Securities available for
sale
|
37,690 | 37,690 | 55,971 | 55,971 | ||||||||||||
Securities held to
maturity
|
10,618 | 10,266 | 7,940 | 7,074 | ||||||||||||
Restricted
stock
|
1,000 | 1,000 | 755 | 755 | ||||||||||||
Loans receivable
|
507,215 | 486,729 | 441,965 | 444,786 | ||||||||||||
Accrued interest
receivable
|
1,876 | 1,876 | 1,951 | 1,951 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
535,412 | 536,101 | 474,839 | 475,534 | ||||||||||||
Securities sold under agreements
to repurchase
|
17,065 | 17,065 | 11,377 | 11,377 | ||||||||||||
Long-term debt
|
7,500 | 8,111 | 7,500 | 7,562 | ||||||||||||
Accrued interest
payable
|
164 | 164 | 282 | 282 | ||||||||||||
Off-balance
sheet financial instruments:
|
||||||||||||||||
Commitments to extend credit and
outstanding letters
of credit
|
- | - | - | - |
Note
20 – Shareholders’ Equity
In
connection with the Emergency Economic Stabilization Act of 2008 (“EESA”) the
Secretary of Treasury (the “Treasury”) was authorized to establish a Troubled
Asset Relief Program (“TARP”) to purchase up to $700 billion in troubled assets
from qualified financial institutions (“QFI”). EESA has also been interpreted by
the Treasury to allow it to make direct equity investments in QFIs. Subsequent
to the enactment of EESA, the Treasury announced the TARP Capital Purchase
Program under which QFIs that elected to participate in the TARP
Capital Purchase Program were allowed to issue senior perpetual preferred stock
to the Treasury, and the Treasury was authorized to purchase such preferred
stock of QFIs, subject to certain limitations and terms. EESA was developed to
stabilize the financial system and increase lending to benefit the national
economy and citizens of the United States.
On
January 30, 2009, the Company entered into a Securities Purchase Agreement with
the Treasury as part of the TARP Capital Purchase Program, pursuant to which the
Company sold to the Treasury 9,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Senior Preferred Stock”), no par value per share
and with a liquidation preference of $1,000 per share, and a warrant (the
“Warrant”) to purchase 297,116 shares of the Company’s common stock, as adjusted
for the 2009 stock dividend declared in August 2009, for an aggregate purchase
price of $9,000,000.
The
shares of Senior Preferred Stock have no stated maturity, do not have voting
rights except in certain limited circumstances and are not subject to mandatory
redemption or a sinking fund. The terms of the Senior Preferred Stock indicate
that the Company cannot redeem the shares during the first three years except
with the proceeds from a qualifying equity offering. Thereafter, the Senior
Preferred Stock may be redeemed at liquidation preference plus accrued and
unpaid dividends. The Company must provide at least 30 days and no more than 60
days notice to the holder of its intention to redeem the shares. In February
2009, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”),
which amended EESA, was signed into law. EESA, as amended by the Stimulus Act,
imposes extensive new restrictions applicable to participants in the TARP,
including the Company.
The
Senior Preferred Stock has priority over the Company’s common stock with regard
to the payment of dividends and liquidation distribution. The Senior Preferred
Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of
5% per annum for the first five years, and 9% per annum thereafter. Dividends
are payable quarterly on February 15, May 15, August 15 and November 15 of each
year. The Senior Preferred Stock may be redeemed at any time following
consultation by the Company’s primary bank regulator and the Treasury,
notwithstanding the terms of the original transaction
documents. Participants in the CPP desiring to repay part of an
investment by the Treasury must repay a minimum of 25% of the issue price of the
Senior Preferred Stock.
Prior to
the earlier of the third anniversary date (January 30, 2012) of the issuance of
the Senior Preferred Stock or the date on which the Senior Preferred Stock has
been redeemed in whole or the Treasury has transferred all of the Senior
Preferred Stock to third parties which are not affiliates of the Treasury, the
Company cannot declare or pay any cash dividend on its common stock or with
certain limited exceptions, redeem, purchase or acquire any shares of the
Company’s stock without the consent of the Treasury.
The
Warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $4.54 per
share of common stock, as adjusted for the 2009 stock dividend declared in
August 2009. In the event that the Company redeems the Senior Preferred Stock,
the Company can repurchase the Warrant at “Fair Market Value,” as defined in the
investment agreement with the Treasury.
The
proceeds received were allocated between the Series A Preferred Stock and the
warrants based upon their relative fair values as of the date of issuance, which
resulted in the recording of a discount of the Series A Preferred Stock upon
issuance that reflects the value allocated to the warrants. The discount is
accreted by a charge to accumulated deficit on a straight-line basis over the
expected life of the preferred stock of five years.
Note
20 – Shareholders’ Equity (Continued)
The
agreement with the Treasury contains limitations on certain actions by the
Company, including Treasury consent prior to the payment of cash dividends on
the Company’s common stock and the repurchase of its common stock during the
first three years of the agreement. In addition, the Company agreed that, while
the Treasury owns the Senior Preferred Stock, the Company’s employee benefit
plans and other executive compensation arrangements for its senior executive
officers must comply with Section 111(b) of EESA.
Note
21 – Condensed Financial Statements of Parent Company
Condensed
financial information pertaining to the parent company, Community Partners, is
as follows:
Condensed Balance
Sheets
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 260 | $ | 481 | ||||
Investments
in subsidiaries
|
76,646 | 72,501 | ||||||
Other
assets
|
- | 498 | ||||||
Total
assets
|
$ | 76,906 | $ | 73,480 | ||||
Liabilities
and Shareholders’ Equity
|
||||||||
Other
liabilities
|
$ | 69 | $ | 168 | ||||
Shareholders’
equity
|
76,837 | 73,312 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 76,906 | $ | 73,480 |
Condensed
Statements of Income
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Dividends
from Bank subsidiaries
|
$ | - | $ | - | ||||
Management
fees from subsidiaries
|
- | 1,094 | ||||||
- | 1,094 | |||||||
Other
operating expenses
|
150 | 1,094 | ||||||
Income
(loss) before income taxes
|
(150 | ) | - | |||||
Income
tax expense
|
244 | - | ||||||
Income
(loss) before undistributed income of subsidiaries
|
(394 | ) | - | |||||
Equity
in undistributed (loss) income of subsidiaries
|
(4,727 | ) | 798 | |||||
Net
(loss) income
|
$ | (5,121 | ) | $ | 798 |
Note
21 – Condensed Financial Statements of Parent Company (Continued)
Condensed
Statements of Cash Flows
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In
Thousands)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
(loss) income
|
$ | (5,121 | ) | $ | 798 | |||
Adjustments
to reconcile net (loss)
income to net cash provided by operating activities: |
||||||||
Equity
in undistributed net (loss) income of subsidiaries
|
4,727 | (798 | ) | |||||
Stock
option compensation expense
|
150 | - | ||||||
Other,
net
|
335 | 110 | ||||||
Net
cash provided by operating activities
|
91 | 110 | ||||||
Cash
flows from investing activities:
|
||||||||
Contribution
to subsidiary
|
(9,000 | ) | - | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from options exercised
|
44 | 165 | ||||||
Proceeds
from issuance of preferred stock
|
9,000 | - | ||||||
Payment
of dividends on preferred stock
|
(356 | ) | - | |||||
Net
cash provided by financing activities
|
8,688 | 165 | ||||||
(Decrease)
Increase in cash and cash equivalents
|
(221 | ) | 275 | |||||
Cash
and cash equivalents at beginning of period
|
481 | 206 | ||||||
Cash
and cash equivalents at end of year
|
$ | 260 | $ | 481 |
Note
22 – Summary of Quarterly Results (Unaudited)
The
following summarizes the consolidated results of operations during 2009 and
2008, on a quarterly basis, for Community Partners (in thousands, except per
share data):
2009
|
||||||||||||||||
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||||||
Interest
income
|
$ | 7,839 | $ | 7,797 | $ | 7,392 | $ | 7,154 | ||||||||
Interest
expense
|
1,947 | 2,029 | 2,266 | 2,615 | ||||||||||||
Net
interest income
|
5,892 | 5,768 | 5,126 | 4,539 | ||||||||||||
Provision
for loan losses
|
1,025 | 675 | 355 | 150 | ||||||||||||
Net
interest income after provision for loan losses
|
4,867 | 5,093 | 4,771 | 4,389 | ||||||||||||
Non-interest
income
|
650 | 368 | 357 | 874 | ||||||||||||
Goodwill
impairment charge
|
- | 6,725 | - | - | ||||||||||||
Non-interest
expense
|
4,428 | 4,675 | 4,842 | 4,467 | ||||||||||||
Income
(loss) before income taxes
|
1,089 | (5,939 | ) | 286 | 796 | |||||||||||
Income
taxes
|
707 | 282 | 80 | 284 | ||||||||||||
Net
income (loss)
|
382 | (6,221 | ) | 206 | 512 | |||||||||||
Preferred
stock dividends & discount accretion
|
(145 | ) | (145 | ) | (144 | ) | (96 | ) | ||||||||
Net
income (loss) available to common shareholders
|
$ | 237 | $ | (6,366 | ) | $ | 62 | $ | 416 | |||||||
Per
Common Share Data:
|
||||||||||||||||
Basic
earnings (loss)
|
$ | 0.03 | $ | (0.89 | ) | $ | 0.01 | $ | 0.06 | |||||||
Diluted
earnings (loss)
|
$ | 0.03 | $ | (0.89 | ) | $ | 0.01 | $ | 0.06 |
2008
|
||||||||||||||||
Fourth
Quarter
|
Third
Quarter
|
Second Quarter
|
First
Quarter
|
|||||||||||||
Interest
income
|
$ | 7,511 | $ | 7,719 | $ | 7,561 | $ | 8,019 | ||||||||
Interest
expense
|
3,137 | 2,996 | 2,692 | 3,152 | ||||||||||||
Net
interest income
|
4,374 | 4,723 | 4,869 | 4,867 | ||||||||||||
Provision
for loan losses
|
1,348 | 279 | 589 | 85 | ||||||||||||
Net
interest income after provision for loan losses
|
3,026 | 4,444 | 4,280 | 4,782 | ||||||||||||
Non-interest
income
|
417 | 486 | 385 | 378 | ||||||||||||
Non-interest
expense
|
4,432 | 4,445 | 4,249 | 4,044 | ||||||||||||
(Loss)
income before income taxes
|
(989 | ) | 485 | 416 | 1,116 | |||||||||||
Income
taxes
|
(453 | ) | 156 | 126 | 401 | |||||||||||
Net
(loss) income
|
$ | (536 | ) | $ | 329 | $ | 290 | $ | 715 | |||||||
Net
(loss) income per common share:
|
||||||||||||||||
Basic
(loss) earnings
|
$ | (0.07 | ) | $ | 0.05 | $ | 0.04 | $ | 0.10 | |||||||
Diluted
(loss) earnings
|
$ | (0.07 | ) | $ | 0.05 | $ | 0.04 | $ | 0.10 |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMMUNITY
PARTNERS BANCORP
|
|||
Date: March
31, 2010
|
By:
|
/s/ WILLIAM D. MOSS | |
William
D. Moss
|
|||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Capacity
|
Date
|
|
/s/ CHARLES T. PARTON
|
Chairman
of the Board
|
March
31, 2010
|
|
Charles
T. Parton
|
|||
/s/ JOSEPH F.X. O’SULLIVAN
|
Vice
Chairman of the Board
|
March
31, 2010
|
|
Joseph
F.X. O’Sullivan
|
|||
/s/ FRANK J. PATOCK, JR.
|
Vice
Chairman of the Board
|
March
31, 2010
|
|
Frank
J. Patock, Jr.
|
|||
/s/ MICHAEL W. KOSTELNIK,
JR.
|
Director
|
March
31, 2010
|
|
Michael
W. Kostelnik, Jr.
|
|||
/s/ ROBERT E. GREGORY
|
Director
|
March
31, 2010
|
|
Robert
E. Gregory
|
|||
/s/ FREDERICK H. KURTZ
|
Director
|
March
31, 2010
|
|
Frederick
H. Kurtz
|
|||
/s/ JOHN J. PERRI, JR. CPA
|
Director
|
March
31, 2010
|
|
John
J. Perri, Jr.
|
|||
/s/ ROBERT B. GROSSMAN, MD
|
Director
|
March
31, 2010
|
|
Robert
B. Grossman, MD
|
|||
/s/ JOHN E. HOLOBINKO, ESQ.
|
Director
|
March
31, 2010
|
|
John
E. Holobinko, ESQ.
|
|||
/s/ WILLIAM F. LaMORTE
|
Director
|
March
31, 2010
|
|
William
F. LaMorte
|
|||
/s/ WILLIAM STATTER
|
Director
|
March
31, 2010
|
|
William
Statter
|
|||
/s/ ROBIN
ZAGER
|
Director
|
March
31, 2010
|
|
Robin
Zager
|
/s/ WILLIAM D. MOSS
|
President,
Chief Executive Officer, Director
|
March
31, 2010
|
William
D. Moss
|
||
/s/ MICHAEL J. GORMLEY
|
Executive
Vice President, Chief Operating Officer
|
March
31, 2010
|
Michael
J. Gormley
|
and
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
INDEX
TO EXHIBITS
Exhibit
No.
|
Description
|
||
3
|
(i)(A)
|
Amended
and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3(i)(A) to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC on March 31,
2009)
|
|
3
|
(ii)(A)
|
By-laws
of the Registrant, as amended (conformed copy) (incorporated by reference
to Exhibit 3(ii)(A) to the Registrant’s Current Report on Form 8-K filed
with the SEC on December 19, 2007)
|
|
4.1
|
Specimen
certificate representing the Registrant’s common stock, no par value per
share (incorporated by reference to Exhibit 4.1 to the Registrant’s
Registration Statement on Form S-4/A filed with the SEC on January 6, 2006
(the “January S-4/A”))
|
||
4.2
|
Warrant,
dated January 30, 2009, to purchase up to 288,462 shares of the
Registrant’s common stock (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on January 30,
2009)
|
||
10.1
|
#
|
Form
of Change in Control Agreement between Two River Community Bank and each
of William D. Moss, Michael J. Gormley, Antha J. Stephens, and Alan B.
Turner (incorporated by reference to Exhibit 10.3 to the
S-4)
|
|
10.2
|
#
|
Supplemental
Executive Retirement Agreement between Two River Community Bank and
William D. Moss (incorporated by reference to Exhibit 10.5 to the
S-4)
|
|
10.3
|
#
|
Supplemental
Executive Retirement Agreement between Two River Community Bank and
Michael J. Gormley (incorporated by reference to Exhibit 10.6 to the
S-4)
|
|
10.4
|
#
|
Supplemental
Executive Retirement Agreement between Two River Community Bank and Antha
Stephens (incorporated by reference to Exhibit 10.7 to the
S-4)
|
|
10.5
|
#
|
Supplemental
Executive Retirement Agreement between Two River Community Bank and Alan
Turner (incorporated by reference to Exhibit 10.8 to the
S-4)
|
|
10.6
|
#
|
Two
River Community Bank 2003 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.9 to the S-4)
|
|
10.7
|
#
|
Two
River Community Bank 2003 Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.10 to the S-4)
|
|
10.8
|
#
|
Two
River Community Bank 2001 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.11 to the
S-4)
|
10.9
|
#
|
Two
River Community Bank 2001 Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the S-4)
|
|
10.10
|
Services
agreement between Two River Community Bank and Phoenix International Ltd.,
Inc. dated November 18, 1999, and subsequent amendment #1 dated February
1, 2005 (incorporated by reference to Exhibit 10.24 to the
S-4)
|
||
10.11
|
Services
agreement between Two River Community Bank and Online Resources
Corporation/Quotien, dated March 17, 2003 (incorporated by reference to
Exhibit 10.25 to the S-4)
|
||
10.12
|
#
|
The
Town Bank of Westfield 1999 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.26 to the S-4)
|
|
10.13
|
#
|
The
Town Bank of Westfield 2000 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.27 to the S-4)
|
|
10.14
|
#
|
The
Town Bank of Westfield 2001 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.28 to the S-4)
|
|
10.15
|
#
|
The
Town Bank of Westfield 2002 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.29 to the S-4)
|
|
10.16
|
#
|
The
Town Bank of Westfield 1999 Director Stock Option Plan (incorporated by
reference to Exhibit 10.30 to the S-4)
|
|
10.17
|
#
|
The
Town Bank of Westfield 2000 Director Stock Option Plan (incorporated by
reference to Exhibit 10.31 to the S-4)
|
|
10.18
|
#
|
The
Town Bank of Westfield 2001 Director Stock Option Plan (incorporated by
reference to Exhibit 10.32 to the S-4)
|
|
10.19
|
MAC(R)
Network Participation Agreement dated as of September 20, 2000 by and
between The Town Bank and Money Access Service Inc. (predecessor in
interest to Star Networks Inc.) (including all addenda, schedules and
exhibits, as amended from time to time) (incorporated by reference to
Exhibit 10.38 to the S-4)
|
||
10.20
|
#
|
Amendment
dated January 4, 2006 to The Town Bank 1999 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.49 to the January
S-4/A)
|
|
10.21
|
#
|
Amendment
dated January 4, 2006 to The Town Bank 2000 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.50 to the January
S-4/A)
|
|
10.22
|
#
|
Amendment
dated January 4, 2006 to The Town Bank 2001 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.51 to the January
S-4/A)
|
|
10.23
|
#
|
Amendment
dated January 4, 2006 to The Town Bank 2002 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.52 to the January
S-4/A)
|
|
10.24
|
#
|
Community
Partners Bancorp 2007 Equity Incentive Plan (incorporated by reference to
Exhibit A to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed with the SEC on April 17,
2007)
|
10.
25
|
#
|
Change
in Control and Assumption Agreement, made as of June 1, 2007, by and
between Community Partners Bancorp, Two River Community Bank and William
D. Moss (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed with the SEC on July 10,
2007)
|
|
10.26
|
#
|
Change
in Control and Assumption Agreement, made as of June 1, 2007, by and
between Community Partners Bancorp, Two River Community Bank and Michael
J. Gormley (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed with the SEC on July 10,
2007)
|
|
10.27
|
#
|
Excise
Tax Reimbursement Agreement, made as of June 1, 2007, by and between
Community Partners Bancorp and William D. Moss (incorporated by reference
to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with
the SEC on July 10, 2007)
|
|
10.28
|
#
|
Excise
Tax Reimbursement Agreement, made as of June 1, 2007, by and between
Community Partners Bancorp and Michael J. Gormley (incorporated by
reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K
filed with the SEC on July 10, 2007)
|
|
10.29
|
Letter
Agreement, dated January 30, 2009, including Securities Purchase Agreement
– Standard Terms incorporated by reference therein, between the Registrant
and the United States Department of the Treasury, with respect to the
issuance and sale of the Senior Preferred Stock and the Warrant
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the SEC on January 30,
2009)
|
||
10.30
|
#
|
Form
of Waiver, executed by each of Messrs. Barry B. Davall, Michael J.
Gormley, William D. Moss and Robert W. Dowens, Sr. (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed with the SEC on January 30, 2009)
|
|
10.31
|
#
|
Form
of Senior Executive Officer Agreement, executed by each of Messrs. Barry
B. Davall, Michael J. Gormley, William D. Moss and Robert W. Dowens, Sr.
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed with the SEC on January 30,
2009)
|
|
10.32
|
#
|
First
Amendment to the Two River Community Bank Supplemental Executive
Retirement Agreement dated January 1, 2005 by and between Two River
Community Bank and Michael J. Gormley, effective as of January 1, 2005
(incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2009 filed
with the SEC on May 15, 2009)
|
|
10.33
|
#
|
First
Amendment to Change in Control and Assumption Agreement dated June 1, 2007
(the “2007 Gormley CIC Agreement”) by and between Community Partners
Bancorp, Two River Community Bank and Michael J. Gormley, made as of
October 30, 2008 (incorporated by reference to Exhibit 10.8 to the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2009 filed with the SEC on May 15,
2009)
|
10.34
|
#
|
Continuation
of Benefits Agreement, made as of October 30, 2008, by and between
Community Partners Bancorp, Two River Community Bank and Michael J.
Gormley related to the 2007 Gormley CIC Agreement (incorporated by
reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2009 filed with the SEC on
May 15, 2009)
|
|
10.35
|
#
|
First
Amendment to Change in Control Agreement dated December 9, 2004 (the “2004
Gormley CIC Agreement”) by and between Community Partners Bancorp, Two
River Community Bank and Michael J. Gormley, made as of October 30, 2008
(incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2009 filed
with the SEC on May 15, 2009)
|
|
10.36
|
#
|
Continuation
of Benefits Agreement, made as of October 30, 2008, by and between
Community Partners Bancorp, Two River Community Bank and Michael J.
Gormley related to the 2004 Gormley CIC Agreement (incorporated by
reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2009 filed with the SEC on
May 15, 2009)
|
|
10.37
|
#
|
First
Amendment to Excise Tax Reimbursement Agreement dated on and as of June 1,
2007 by and between Community Partners Bancorp and Michael J. Gormley,
entered into as of October 30, 2008 (incorporated by reference to Exhibit
10.12 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2009 filed with the SEC on May 15,
2009)
|
|
10.38
|
#
|
First
Amendment to the Two River Community Bank Supplemental Executive
Retirement Agreement dated July 7, 2005 by and between Two River Community
Bank and William D. Moss, effective as of January 1, 2005 (incorporated by
reference to Exhibit 10.13 to the Registrant’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2009 filed with the SEC on
May 15, 2009)
|
|
10.39
|
#
|
First
Amendment to Change in Control and Assumption Agreement dated June 1, 2007
(the “2007 Moss CIC Agreement”) by and between Community Partners Bancorp,
Two River Community Bank and William D. Moss, made as of October 31, 2008
(incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2009 filed
with the SEC on May 15, 2009)
|
|
10.40
|
#
|
Continuation
of Benefits Agreement, made as of October 31, 2008, by and between
Community Partners Bancorp, Two River Community Bank and William D. Moss
related to the 2007 Moss CIC Agreement (incorporated by reference to
Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2009 filed with the SEC on May 15,
2009)
|
|
10.41
|
#
|
First
Amendment to Change in Control dated December 27, 2004 (the “2004 Moss CIC
Agreement”) by and between Community Partners Bancorp, Two River Community
Bank and William D. Moss, made as of October 31, 2008 (incorporated by
reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2009 filed with the SEC on
May 15, 2009)
|
10.42
|
#
|
Continuation
of Benefits Agreement, made as of October 31, 2008, by and between
Community Partners Bancorp, Two River Community Bank and William D. Moss
related to the 2004 Moss CIC Agreement (incorporated by reference to
Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2009 filed with the SEC on May 15,
2009)
|
|
10.43
|
#
|
First
Amendment to Excise Tax Reimbursement Agreement dated on and as of June 1,
2007 by and between Community Partners Bancorp and William D. Moss,
entered into as of October 31, 2008 (incorporated by reference to Exhibit
10.18 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2009 filed with the SEC on May 15,
2009)
|
|
10.44
|
#
|
First
Amendment to the Two River Community Bank Supplemental Executive
Retirement Agreement dated January 1, 2005 by and between Two River
Community Bank and Antha J. Stephens, effective as of January 1, 2005
(incorporated by reference to Exhibit 10.19 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2009 filed
with the SEC on May 15, 2009)
|
|
10.45
|
#
|
First
Amendment to the Two River Community Bank Supplemental Executive
Retirement Agreement dated January 1, 2005 by and between Two River
Community Bank and Alan B. Turner, effective as of January 1, 2005
(incorporated by reference to Exhibit 10.20 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2009 filed
with the SEC on May 15, 2009)
|
|
21
|
*
|
Subsidiaries
of the Registrant
|
|
23
|
*
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1
|
*
|
Certification
of William D. Moss, President and Chief Executive Officer of the
Registrant, pursuant to Securities Exchange Act Rule
13a-14(a)
|
|
31.2
|
*
|
Certification
of Michael J. Gormley, Chief Financial Officer of the Registrant, pursuant
to Securities Exchange Act Rule 13a-14(a)
|
|
32
|
*
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002, signed by William D. Moss, President and
Chief Executive Officer of the Registrant, and Michael J. Gormley, Chief
Financial Officer of the Registrant
|
|
99.1
|
*
|
Certification
of William D. Moss, President and Chief Executive Officer of the
Registrant, under Section 111(b)(4) of EESA
|
|
99.2
|
*
|
Certification
of Michael J. Gormley, Chief Financial Officer of the
Registrant, under Section 111(b)(4) of
EESA
|
* Filed
herewith.
# Management
contract or compensatory plan or arrangement.