Table of Contents

 

 

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

 

 

FORM 10-Q

 

 

(MARK ONE)

 

 

For the transition period from                 to               

 

Commission file number 000-23877

 

Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)

 

 

(408) 947-6900

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

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

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

The Registrant had 11,820,509 shares of Common Stock outstanding on July 31, 2009.

 

 

Table of Contents

 

 

Heritage Commerce Corp and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents

 

			Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):			3
	Consolidated Balance Sheets		3
	Consolidated Statements of Operations		4
	Consolidated Statements of Changes in Shareholders’ Equity		5
	Consolidated Statements of Cash Flows		6
	Notes to Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
	Item 4. Controls and Procedures		44
	PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	44
	Item 1A.	Risk Factors	44
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
	Item 3.	Defaults Upon Senior Securities	44
	Item 4.	Submission of Matters to a Vote of Security Holders	44
	Item 5.	Other Information	46
	Item 6.	Exhibits	46
	SIGNATURES		47
	EXHIBIT INDEX		47

 

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Part I — FINANCIAL INFORMATION

 

ITEM 1 — CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Heritage Commerce Corp

Consolidated Balance Sheets (Unaudited)

 

			June 30,			December 31,
			2009			2008
			(Dollars in thousands)
Assets
Cash and due from banks			$	31,315		$	29,996
Federal funds sold			150			100
Total cash and cash equivalents			31,465			30,096
Securities available-for-sale, at fair value			101,837			104,475
Loans held for sale, at lower of cost or market			20,506			—
Loans, including deferred costs			1,161,666			1,248,631
Allowance for loan losses			(31,398		)	(25,007		)
Loans, net			1,130,268			1,223,624
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			8,434			7,816
Company owned life insurance			41,476			40,649
Premises and equipment, net			9,312			9,517
Goodwill			43,181			43,181
Intangible assets			3,910			4,231
Accrued interest receivable and other assets			46,635			35,638
Total assets			$	1,437,024		$	1,499,227
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
Demand, noninterest bearing			$	258,464		$	261,337
Demand, interest bearing			134,318			134,814
Savings and money market			331,444			344,767
Time deposits, under $100			43,772			45,615
Time deposits, $100 and over			170,858			171,269
Brokered time deposits			224,691			196,248
Total deposits			1,163,547			1,154,050
Notes payable to subsidiary grantor trusts			23,702			23,702
Securities sold under agreement to repurchase			30,000			35,000
Note payable			—			15,000
Other short-term borrowings			15,000			55,000
Accrued interest payable and other liabilities			30,193			32,208
Total liabilities			1,262,442			1,314,960
	Shareholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 40,000 shares outstanding (liquidation preference of $1,000 per share plus accrued dividends)			39,846			39,846
Discount on preferred stock			(1,776		)	(1,946		)
Common stock, no par value; 30,000,000 shares authorized; 11,820,509 shares outstanding at June 30, 2009 and December 31, 2008			79,524			78,854
Retained earnings			57,056			67,804
Accumulated other comprehensive loss			(68		)	(291		)
Total shareholders’ equity			174,582			184,267
Total liabilities and shareholders’ equity			$	1,437,024		$	1,499,227

 

See notes to consolidated financial statements

 

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Heritage Commerce Corp

Consolidated Statements of Operations (Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
		(Dollars in thousands, except per share data)
Interest income:
Loans, including fees		$	14,862		$	17,250		$	29,892		$	35,605
Securities, taxable		954			1,410			1,949			2,887
Securities, non-taxable		4			23			8			47
Interest bearing deposits in other financial institutions		4			2			8			9
Federal funds sold		—			14			—			46
Total interest income		15,824			18,699			31,857			38,594
Interest expense:
Deposits		3,394			4,656			7,424			10,374
Notes payable to subsidiary grantor trusts		487			526			987			1,083
Repurchase agreements		227			255			469			410
Note payable		—			75			82			84
Other short-term borrowings		27			219			54			571
Total interest expense		4,135			5,731			9,016			12,522
Net interest income before provision for loan losses		11,689			12,968			22,841			26,072
Provision for loan losses		10,704			7,800			21,124			9,450
Net interest income after provision for loan losses		985			5,168			1,717			16,622
Noninterest income:
Service charges and fees on deposit accounts		537			537			1,108			952
Servicing income		408			377			828			856
Increase in cash surrender value of life insurance		415			418			827			816
Other		241			460			461			682
Total noninterest income		1,601			1,792			3,224			3,306
Noninterest expense:
Salaries and employee benefits		5,643			5,970			12,101			12,029
Professional fees		1,229			980			2,142			1,645
Regulatory assessments		1,220			196			1,959			388
Occupancy		815			866			1,585			1,768
Loan workout expense		298			5			304			14
Data processing		260			253			489			498
Software subscriptions		217			203			413			412
Low income housing investment expense		210			243			424			453
Client services		159			209			304			433
Furniture and equipment		157			178			303			395
Advertising and promotion		106			243			224			423
Other		1,766			1,652			3,194			3,120
Total noninterest expense		12,080			10,998			23,442			21,578
Loss before income taxes		(9,494		)	(4,038		)	(18,501		)	(1,650		)
Income tax benefit		4,113			955			9,165			271
Net loss		$	(5,381	)	$	(3,083	)	$	(9,336	)	$	(1,379	)
Dividends and discount accretion on preferred stock		(591		)	—			(1,176		)	—
Net loss allocable to common shareholders		$	(5,972	)	$	(3,083	)	$	(10,512	)	$	(1,379	)
Loss per common share:
Basic		$	(0.51	)	$	(0.26	)	$	(0.89	)	$	(0.11	)
Diluted		$	(0.51	)	$	(0.26	)	$	(0.89	)	$	(0.11	)

 

See notes to consolidated financial statements

 

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HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2009 and 2008

 

		Preferred Stock						Common Stock					Retained			Accumulated Other Comprehensive			Total Shareholders’			Comprehensive
		Amount			Discount			Shares		Amount			Earnings			Loss			Equity			Income (Loss)
		(Dollars in thousands, except share data)
Balance, January 1, 2008		—			—			12,774,926		$	92,414		$	73,298		$	(888	)	$	164,824
Cumulative effect adjustment upon adoption of EITF 06-4, net of deferred income taxes		—			—			—		—			(3,182		)	—			(3,182		)
Net loss		—			—			—		—			(1,379		)	—			(1,379		)	$	(1,379	)
Net change in unrealized gain/loss on securities available-for-sale and interest-only strips, net of reclassification adjustment and deferred income taxes		—			—			—		—			—			(69		)	(69		)	(69		)
Decrease in pension liability, net of deferred income taxes		—			—			—		—			—			27			27			27
Total comprehensive income (loss)																						$	(1,421	)
Amortization of restricted stock award		—			—			—		77			—			—			77
Cash dividend declared on common stock, $0.16 per share		—			—			—		—			(1,999		)	—			(1,999		)
Common stock repurchased		—			—			(1,007,749	)	(17,655		)	—			—			(17,655		)
Stock option expense		—			—			—		685			—			—			685
Stock options exercised, including related tax benefits		—			—			38,990		420			—			—			420
Balance, June 30, 2008		$	—		$	—		11,806,167		$	75,941		$	66,738		$	(930	)	$	141,749
Balance, January 1, 2009		$	39,846		$	(1,946	)	11,820,509		$	78,854		$	67,804		$	(291	)	$	184,267
Net Loss		—			—			—		—			(9,336		)	—			(9,336		)	$	(9,336	)
Net change in unrealized gain/loss on securities available-for-sale and interest-only strips, net of reclassification adjustment and deferred income taxes		—			—			—		—			—			157			157			157
Net decrease in pension and other postretirement obligations, net of deferred income taxes		—			—			—		—			—			66			66			66
Total comprehensive income (loss)																						$	(9,113	)
Amortization of restricted stock award		—			—			—		76			—			—			76
Cash dividends accrued on preferred stock		—			—			—		—			(1,006		)	—			(1,006		)
Accretion of discount on preferred stock		—			170			—		—			(170		)	—			—
Cash dividend declared on common stock, $0.02 per share		—			—			—		—			(236		)	—			(236		)
Stock option expense		—			—			—		663			—			—			663
Income tax effect of restricted stock award vesting		—			—			—		(69		)	—			—			(69		)
Balance, June 30, 2009		$	39,846		$	(1,776	)	11,820,509		$	79,524		$	57,056		$	(68	)	$	174,582

 

See notes to consolidated financial statements

 

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Heritage Commerce Corp

Consolidated Statements of Cash Flows (Unaudited)

 

		Six Months Ended
		June 30,
		2009			2008
		(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(9,336	)	$	(1,379	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		400			450
Provision for loan losses		21,124			9,450
Stock option expense		663			685
Amortization of other intangible assets		321			388
Amortization of restricted stock award		76			77
Amortization (accretion) of discounts and premiums on securities		81			167
Gain on sale of foreclosed assets		(62		)	—
Increase in cash surrender value of life insurance		(827		)	(816		)
Effect of changes in:
Accrued interest receivable and other assets		(8,189		)	2,240
Accrued interest payable and other liabilities		(1,940		)	(650		)
Net cash provided by operating activities		2,311			10,612
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans		47,859			(173,899		)
Purchases of securities available-for-sale		(24,993		)	(8,133		)
Maturities/Paydowns/Calls of securities available-for-sale		27,769			26,409
Purchase of company-owned life insurance		—			(360		)
Purchase of premises and equipment		(195		)	(194		)
Purchase of Federal Home Loan Bank stock and other investments		(618		)	(205		)
Proceeds from sale of foreclosed assets		1,011			902
Net cash (used in) provided by investing activities		50,833			(155,480		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		9,497			95,792
Exercise of stock options		—			420
Income tax effect of restricted stock award vesting		(69		)	—
Common stock repurchased		—			(17,655		)
Payment of cash dividends - common stock		(236		)	(1,999		)
Payment of cash dividends - preferred stock		(967		)	—
Payment of other liability		—			(91		)
Net change in other short-term borrowings		(40,000		)	38,000
Net change in note payable		(15,000		)	—
Net change in securities sold under agreement to repurchase		(5,000		)	24,100
Net cash provided by (used in) financing activities		(51,775		)	138,567
Net increase (decrease) in cash and cash equivalents		1,369			(6,301		)
Cash and cash equivalents, beginning of period		30,096			49,093
Cash and cash equivalents, end of period		$	31,465		$	42,792
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	9,092		$	12,682
Income taxes		$	1,250		$	1,308
Supplemental schedule of non-cash investing and financing activities:
Transfer of portfolio loans to loans held-for-sale		$	20,506		$	—
Loans transferred to foreclosed assets		$	3,867		$	439

 

See notes to consolidated financial statements

 

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HERITAGE COMMERCE CORP

Notes to Consolidated Financial Statements

June 30, 2009
(Unaudited)

 

1)                     Basis of Presentation

 

The unaudited consolidated financial statements of Heritage Commerce Corp (the “Company”) and its wholly owned subsidiary, Heritage Bank of Commerce (“HBC”), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements are not included herein.  The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company’s Form 10-K for the year ended December 31, 2008.  The Company has also established the following unconsolidated subsidiary grantor trusts: Heritage Capital Trust I; Heritage Statutory Trust I; Heritage Statutory Trust II; and Heritage Commerce Corp Statutory Trust III which are Delaware Statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities. On June 20, 2007, the Company completed its acquisition of Diablo Valley Bank (“DVB”). DVB was merged into HBC on the acquisition date.

 

HBC is a commercial bank serving customers located in Santa Clara, Alameda, and Contra Costa counties of California.  No customer accounts for more than 10 percent of revenue for HBC or the Company.  Management evaluates the Company’s performance as a whole and does not allocate resources based on the performance of different lending or transaction activities.  Accordingly, the Company and its subsidiary operate as one business segment.

 

In the Company’s opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature.  All intercompany transactions and balances have been eliminated.

 

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ significantly from these estimates.

 

The results for the three and six months ended June 30, 2009 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2009.

 

Adoption of New Accounting Standards

 

In February 2008, the FASB issued Staff Position (“FSP”) 157-2, “Effective Date of FASB Statement No. 157.”  This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. On October 10, 2008 the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active,” which illustrates key considerations in determining the fair value of a financial asset when the market for that asset is not active.   FSP 157-3 provides clarification for how to consider various inputs in determining fair value under current market conditions consistent with the principles of FAS 157. FSP 157-3 became effective upon issuance. Adoption of these FSPs has not impacted the Company.

 

In December 2007, FASB issued Statement 141 (revised 2007), “Business Combinations,” which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination.  This Statement is effective for fiscal years beginning

 

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on or after December 15, 2008.  The adoption of this standard did not impact the Company’s financial statements.

 

In December 2007, FASB issued Statement 160, “Noncontrolling Interests in Consolidated Financial Statements.” This statement is intended to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. The adoption of this standard did not impact the Company’s financial statements.

 

In March 2008, FASB issued Statement 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard did not impact the Company’s financial statements.

 

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1—“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method of FASB Statement No. 128, “Earnings Per Share.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively to conform with the provisions of this FSP. Upon adoption of FSP EITF 03-6-1 in 2009, the Company began including non vested restricted stock award shares in the computation of basic EPS. Previously, non vested restricted stock awards were excluded from the basic EPS computation and included in the diluted EPS computation. The 2008 EPS data presented has been adjusted retrospectively to conform with the provisions of this FSP, although this change in computation did not involve a sufficient number of shares to change basic and diluted EPS from the amounts previously reported.

 

In April 2009, the FASB issued FSP 115-2 & 124-2, “Recognition and Presentation of Other Than Temporary Impairments.” The FSP eliminates the requirement for the issuer to evaluate whether it has the intent and ability to hold an impaired investment until maturity. Conversely, the new FSP requires the issuer to recognize an other than temporary impairment (“OTTI”) if the issuer intends to sell the impaired security or the issuer will be required to sell the security prior to recovery. In the event that the sale of the security in question prior to its maturity is not probable but the entity does not expect to recover its amortized cost basis in that security, then the entity will be required to recognize an OTTI. In the event that the recovery of the security’s cost basis prior to maturity is not probable and an OTTI is recognized, the FSP provides that any component of the OTTI relating to a decline in the creditworthiness of the debtor should be reflected in earnings, with the remainder being recognized in Other Comprehensive Income. Conversely, in the event that the issuer determines that sale of the security in question prior to recovery is probable, then the entire OTTI will be recognized in earnings. The FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides additional guidance for determining fair value based on observable transactions. The FSP provides that if evidence suggests that an observable transaction was not executed orderly that little, if any, weight should be

 

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assigned to this indication of an asset’s or liability’s fair value. Conversely, if evidence suggests that the observable transaction was executed orderly then the transaction price of the observable transaction may be appropriate to use in determining the fair value of the asset/liability in question, with appropriate weighting given to this indication based on facts and circumstances. Finally, if there is no way for the entity to determine whether the observable transaction was executed orderly, relatively less weight should be ascribed to this indicator of fair value. The FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In April 2009, the FASB issued FSP 107-1 & APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP provides that publicly traded companies shall provide information concerning the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The FSP is effective for interim reporting periods ending after June 15, 2009.

 

In May 2009, the FASB issued Statement No. 165, “Subsequent Events.”  Statement 165 sets forth guidance concerning the recognition or disclosure of events or transactions that occur subsequent to the balance sheet date but prior to the release of the financial statements.  The statement also defines “available to be issued” financial statements as financial statements that are complete and in a format that complies with GAAP and have received all the required approvals, for example from the board of directors.  The statement sets forth that management of a public company must evaluate subsequent events for recognition and/or disclosure through the date of issuance, whereas private companies need only evaluate subsequent events through the date the financial statements became available to be issued.  The statement also delineates between and defines the recognition and disclosure requirements for Recognized Subsequent Events and Non-Recognized Subsequent Events.  Recognized Subsequent Events provide additional evidence about conditions that existed as of the balance sheet date and will be recognized in the entity’s financial statements.  Non-Recognized Subsequent Events provide evidence about conditions that did not exist as of the balance sheet date and if material will warrant disclosure of the nature of the subsequent event and the financial impact.  An entity shall disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or available to be issued.  This statement is effective for interim and annual reporting periods ending after June 15, 2009.  The Company has evaluated subsequent events through the date of issuance of these financial statements on August 10, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

Newly Issued, but not yet Effective Accounting Standards

 

In June 2009, the FASB issued Statement No. 166, “Accounting for the Transfer of Financial Assets - an Amendment of FASB Statement No. 140.”  Statement 166 removes the concept of a special purpose entity (“SPE”) from Statement 140 and removes the exception from applying FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” to qualifying SPEs. It limits the circumstances in which a transferor derecognizes a financial asset.  The statement amends the requirements for the transfer of a financial asset to meet the requirements for “sale” accounting.   The statement is effective for all interim and annual periods beginning after November 15, 2009. The Company is currently evaluating the impact of Statement 166 on its financial position and results of operations.

 

In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R).”  This Statement amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest in the variable interest entity.  The statement is effective for all interim and annual periods beginning after November 15, 2009. The Company does not expect adoption of Statement 167 to have a material impact on the Company’s financial statements.

 

On July 1, 2009, the FASB’s GAAP Codification became effective as the sole authoritative source of U.S. GAAP.  This codification was issued under FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.”  This Codification reorganizes current GAAP for non-governmental entities into a topical index to facilitate accounting research and to provide users additional assurance that they have referenced all related literature pertaining to a given topic.  Existing GAAP prior to the Codification was not altered in compilation of the GAAP Codification. Statement 168 is effective for all interim and annual periods ending after September 15, 2009.

 

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2)             Earnings Per Share

 

Basic earnings per share is computed by dividing net income, less dividends and discount accretion on preferred stock, by the weighted average common shares outstanding.  Diluted earnings per share reflects potential dilution from outstanding stock options and common stock warrants, using the treasury stock method.  Due to the Company’s net loss in 2009 and 2008, all stock options and warrants were excluded from the computation of diluted earnings (loss) per share.  For each of the periods presented, net income (loss) is the same for basic and diluted earnings (loss) per share.  Reconciliation of weighted average shares used in computing basic and diluted earnings (loss) per share is as follows:

 

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2009		2008		2009		2008
Weighted average common shares outstanding - used in computing basic earnings (loss) per share		11,820,509		11,899,899		11,820,509		12,190,520
Dilutive effect of stock options and warrants outstanding, using the treasury stock method		N/A		N/A		N/A		N/A
Shares used in computing diluted earnings (loss) per share		11,820,509		11,899,899		11,820,509		12,190,520

 

(3)         Securities

 

The amortized cost and estimated fair value of securities at June 30, 2009 and December 31, 2008 were as follows:

 

					Gross			Gross			Estimated
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(Dollars in thousands)
June 30, 2009
Securities available-for-sale:
U.S. Treasury		$	29,484		$	12		$	—		$	29,496
U.S. Government Sponsored Entities		6,487			87			—			6,574
Municipals - Tax Exempt		325			1			—			326
Mortgage-Backed Securities - Residential		58,322			1,356			(60		)	59,618
Collateralized Mortgage Obligations - Residential		5,597			226			—			5,823
Total securities available-for-sale		$	100,215		$	1,682		$	(60	)	$	101,837

 

					Gross			Gross			Estimated
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(Dollars in thousands)
December 31, 2008
Securities available-for-sale:
U.S. Treasury		$	19,370		$	126		$	—		$	19,496
U.S. Government Sponsored Entities		8,457			239			—			8,696
Municipals - Tax Exempt		696			5			—			701
Mortgage-Backed Securities - Residential		68,180			1,241			(385		)	69,036
Collateralized Mortgage Obligations - Residential		6,370			198			(22		)	6,546
Total securities available-for-sale		$	103,073		$	1,809		$	(407	)	$	104,475

 

At June 30, 2009, the Company held 59 securities, of which five had fair values below amortized cost. One security has been carried with an unrealized loss for over 12 months.  No security sustained a downgrade in credit rating.  The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.  Because the Company does not intend to sell the securities with an unrealized loss and does not believe it will be required to sell the securities prior to recovery of fair value, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

 

At December 31, 2008, the Company held 65 securities, of which six had fair values below amortized cost. Four securities have been carried with an unrealized loss for over 12 months.  No security sustained a downgrade in credit rating.  The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.  Because the Company does not intend to sell the securities with an unrealized loss and does not believe it will be required to sell the securities prior to recovery of fair value, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2008.

 

The estimated fair values of securities as of June 30, 2009, by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or pre-pay obligations with or without call or pre-payment penalties.

 

		June 30, 2009
		Maturity
		Within One Year			After One and Within Five Years			After Five and Within TenYears			After Ten Years			Total
		(Dollars in thousands)
Securities available-for-sale (at fair value)
U.S. Treasury		$	29,494		$	—		$	—		$	—		$	29,494
U.S. Government Sponsored Entities		6,574			—			—			—			6,574
Mortgage-Backed Securities		1,053			50,267			6,220			2,081			59,621
Municipals - Tax Exempt		326			—			—			—			326
Collateralized Mortgage Obligations		1,311			4,511			—			—			5,822
Total Securities Available-for-Sale		$	38,758		$	54,778		$	6,220		$	2,081		$	101,837

 

4)             Supplemental Retirement Plan

 

The Company has a supplemental retirement plan covering current and former key executives and directors.  The Plan is a nonqualified defined benefit plan.  Benefits are unsecured as there are no Plan assets.  The following table presents the amount of periodic cost recognized for the three and six months ended June 30, 2009 and 2008:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
		(Dollars in thousands)
Components of net periodic benefits cost
Service cost		$	241		$	203		$	482		$	406
Interest cost		191			182			382			364
Prior service cost		9			9			18			18
Amortization of net actuarial loss		48			14			96			28
Net periodic cost		$	489		$	408		$	978		$	816

 

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