PARKE BANCORP, INC. - Quarter Report: 2009 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

 

 

 

 

 

PARKE BANCORP, INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2009

 

INDEX

 

 

 

 

 

SIGNATURES

 

EXHIBITS and CERTIFICATIONS

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

 

 

 

Notes to Financial Statements (Unaudited)

 

NOTE 1. ORGANIZATION

 

Parke Bancorp, Inc. (“Parke Bancorp” or the “Company”) is a bank holding company incorporated under the laws of the State of New Jersey in January 2005 for the sole purpose of becoming the holding company of Parke Bank (the “Bank”).

 

The Bank is a commercial bank which commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and insured by the Federal Deposit Insurance Corporation (“FDIC”). Parke Bancorp and the Bank maintain their principal offices at 601 Delsea Drive, Washington Township, New Jersey. The Bank also conducts business through branches in Northfield and Washington Township, New Jersey and Philadelphia, Pennsylvania.

 

The Bank competes with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

 

The Bank is subject to regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation: The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry.

 

The financial statements include the accounts of Parke Bancorp, Inc. and its wholly owned subsidiaries, Parke Bank, Parke Capital Markets, Farm Folly LLC and Taylors Glen LLC. Parke Capital Markets and Farm Folly LLC are presently inactive and Taylors Glen LLC was sold in March of 2009. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the consolidation requirements. All significant inter-company balances and transactions have been eliminated.

 

The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in Parke Bancorp Inc.’s Annual Report for the year ended December 31, 2008 since they do not include all of the information and footnotes required by U.S. generally accepted accounting principles. The accompanying interim financial statements for the three months and six months ended June 30, 2009 and 2008 are unaudited. The balance sheet as of December 31, 2008, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three months and six months ended June 30, 2009 are not necessarily indicative of the results for the full year.

 

 

Use of Estimates: In preparing the interim financial statements, management makes estimates and assumptions based on available information that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of expenses and revenues. Actual results could differ from such estimates. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment and fair values of financial instruments are particularly subject to change.

 

Recently Issued Accounting Pronouncements: Effective April 1, 2009 the Company adopted the three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards issued by the Financial Accounting Standards Board (FASB), that became effective for Parke Bancorp, Inc. in the quarter ending June 30, 2009. These amendments are described below.

 

FASB Staff Position (FSP) No. FAS 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

 

FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with SFAS No. 157.

 

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. Adoption of this FSP did not have a significant impact on the manner in which management determines fair value of illiquid investments in the Company’s portfolio.

 

FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (OTTI)

 

FSP FAS 115-2 and FAS 124-2 clarify the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess 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. Previously, this assessment required management to assert it had both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

 

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 or it is not more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. 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. Accordingly, management has expanded the presentation and disclosure of OTTI of investment securities as more fully described in Note 3.

 

FSP No. FAS 107-1 and APB 28-1, Interim Fair Value Disclosures

 

FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Accordingly, management has included the fair value of financial instruments disclosures required by FASB Statement No. 107 as detailed in Note 7.

 

FASB Statement No. 165 Subsequent Events

 

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which the Company adopted as of June 30, 2009. This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (i.e., complete in a form and format that complies with generally accepted accounting principles (GAAP) and approved for issuance). However, Statement No. 165 does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. There are two types of subsequent events to be evaluated under this Statement:

 

Recognized subsequent events - An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.

 

Non-recognized subsequent events - An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date but before financial statements are issued or are available to be issued. Some non-recognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity must disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

 

Statement No. 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date - that is, whether that date represents the date the financial statements were issued or were available to be issued.

 

This Statement applies to both interim financial statements and annual financial statements. Statement No. 165 is effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. Parke Bancorp, Inc. management believes that Statement No. 165 will not result in significant changes in the subsequent events that the Company reports - either through recognition or disclosure - in its financial statements.

 

Accordingly, management has evaluated subsequent events through August 14, 2009, the date the financial statements were issued and has determined that no recognized or non-recognized subsequent events warranted inclusion or disclosure in the interim financial statements as of June 30, 2009.

 

 

NOTE 3. INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES

 

The following is a summary of the Company’s investment in available-for-sale and held-to-maturity securities as of June 30, 2009: 

 

 

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of June 30, 2009, are as follows:

 

 

Expected maturities will differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalties.

 

 

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009.

 

 

Corporate Debt Obligations: The Company’s unrealized loss on investments in corporate bonds relates to three trust preferred securities (TruPS) issued by financial institutions, totaling $2.0 million. The unrealized loss was primarily caused by an illiquid market for this sector of security. All three issues have been rated A or above by Moody’s. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment to be other-than-temporarily impaired at June 30, 2009.

Residential Mortgage-Backed Securities: The unrealized losses on the Company’s investment in mortgage-backed securities were caused by movement in interest rates. The securities were issued by FNMA and FHLMC, government sponsored entities. It is expected that the U.S. government will guarantee all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in these securities to be other-than-temporarily impaired at June 30, 2009.

Collateralized Mortgage Obligations: The Company’s unrealized loss relates principally to a privately issued collateralized mortgage obligation, with amortized cost basis of $887,000 and fair value of $314,000. The unrealized loss was primarily caused by an illiquid market for this sector of security and movement in interest rates. The underlying collateral has been analyzed, and projections have been made regarding the future performance, considering factors including prepayment speed, default rates and loss severities. The analysis indicates that the Company should expect to receive all contractual cash flows. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider this investment to be other-than-temporarily impaired at June 30, 2009.

 

 

Collateralized Debt Obligations: The Company’s portfolio of collateralized debt obligations (CDOs) consist of four issues totaling $5.7 million, with a fair value of $681,000. CDOs are pooled securities primarily secured by trust preferred securities (TruPS), subordinated debt and surplus notes issued by small and mid-sized banks and insurance companies. These securities are generally floating rate instruments with 30-year maturities, and are callable at par after five years. The current economic downturn has had a significant adverse impact on the financial services industry, consequently, TruPS CDOs do not have an active trading market.

 

With the assistance of competent third-party valuation specialists, the Company utilized the following methodology to determine the existence of OTTI:

 

The credit quality of each collateral pool was assessed for the purpose of projecting defaults and recoveries. In general, the credit quality of most TruPS CDO collateral has declined significantly during the credit crisis, with roughly 10% of TruPS collateral currently in default or deferral. It was assumed, conservatively, that all issuers currently in deferral will default prior to their next payment dates. Bank trust preferred issues represent the majority of TruPS CDO collateral, and issuers are typically not rated by the major statistical rating agencies. Therefore, credit quality of each bank issuer was evaluated based on financial ratios generated from fourth quarter 2008 bank regulatory call report data, and focused on CAMELS ratios (capital adequacy, asset quality, earnings, liquidity, and sensitivity to interest rates). The CAMELS model is a relative risk model, i.e. stratifying the 8,400+ banks into a 1 through 5 ranking. There are 29 separate ratios that comprise the CAMELS model. Each of these ratios is weighted to arrive at a composite rating for each component. Each component is than re-weighed to arrive at a consolidated rating of 1 to 5. All 4 and 5 rated collateral are run through a second level filter to further segment these issuers based on potential default probability. A stress test was applied to all 4 and 5 rated issuers to categorize these names into 3 buckets: high risk (100% probability of default at next payment date), medium risk (50% probability), and low risk (0% probability). Due to the current stress on the banking system, and the fact that ratio analyses are backward looking, a baseline default rate of 2% was added annually for the next two years to the default projections for specific issuers.

 

Quantifying losses given default is an important consideration in CDO valuation, as recoveries are applied to retire bond principal. TruPS collateral is deeply subordinated within issuers’ capital structures, so large recoveries are unlikely. Accordingly, recoveries of 10% were assumed on defaulted bank collateral, and zero recoveries on defaulted insurance companies.

 

The final step in the analysis involves modeling and valuing the cash flows for each deal under the assumptions described above. The fair value of each bond was assessed by discounting their projected cash flows by a discount rate ranging from 5.43% to 6.16%. The collateral discount rates were based on the yields of publicly traded TruPS and preferred stock issued by comparably rated banks. As the yields for these sectors vary, discount rates for each pool were weighted by the performing balance of each asset class.

 

The above analysis indicated that there is no break in yield, and that all contractual cash flows should be received by the Company. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider this portfolio to be other-than-temporarily impaired at June 30, 2009.

 

 

Other-Than-Temporarily Impaired Debt Securities

 

We assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

 

The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

 

We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

 

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to adoption of the FSP on April 1, 2009. OTTI recognized in earnings subsequent to adoption in 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were as follows for the six month period ended June 30, 2009.

 

 

 

 

 

A summary of investment gains and losses recognized in income during the six month period ended June 30, 2009 is as follows:

 

 

During the first half of 2009, the Company recognized $1.2 million of other-than-temporary impairment losses on available-for-sale securities, attributable to an impairment charge recognized on $2.2 million of privately issued collateralized mortgage obligations. The impairment charges for the mortgage-related securities were recognized in light of significant deterioration of housing values in the residential real estate market, the significant rise in delinquencies and charge-offs of underlying mortgage loans and resulting decline in market value of the securities.

 

With the assistance of competent third-party valuation specialists, the Company utilized the following methodologies to quantify the other-than-temporary-impairment. The underlying mortgage collateral was analyzed in order to project future cash flows and to calculate the credit component of the OTTI. Four major assumptions were utilized; prepayment (CPR), constant default rate (CDR), loss severity and risk adjusted discount rate. The methodologies for the four assumptions are:

 

CPR – An 18% CPR was utilized, was based on recent historical trends as well as adjustments made to incorporate forward looking expectations.

 

CDR - In order to develop a CDR assumption, the underlying mortgages were stratified based on loan to value ratios, the borrower’s FICO credit scores, documentation level and current delinquency status. Each of these segments was assigned a projected default rate based on historical data.

 

Loss Severity - The loss severity assumption was based on historical geographical data, adjusted for the underlying mortgage collateral’s LTV.

 

Risk Adjusted Discount Rate – The discount rate of 4.26% was derived based on the spread from the most recent active market indication for either the instrument in question or a proxy of the instrument.

 

 

The resulting spread was then used in conjunction with the swap curve to discount the expected cash flow stream.

 

NOTE 4. LOANS

The portfolio of the loans outstanding consists of:

 

Loans on non-accrual were $16.1 million at June 30, 2009 and $8.2 million at December 31, 2008. No loans with interest past due 90 days or more were still accruing at June 30, 2009 or December 31, 2008. The Company has created interest reserves for the purpose of making periodic and timely interest payments for borrowers that qualify. Total loans with interest reserves were $108.9 million at June 30, 2009 and $120.8 million at December 31, 2008. On a monthly basis management reviews loans with interest reserves to assess current and projected performance and determines whether such reserves will continue to be funded.

 

 

NOTE 5. REGULATORY RESTRICTIONS

 

The Company and the Bank are subject to various regulatory capital requirements of federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

 

 

 

 

 

 

 

NOTE 6. CAPITAL

On October 3, 2008 Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP) which provides the direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. This program is voluntary and requires an institution to comply with several restrictions and provisions, including limits on executive compensation, stock redemptions, and declaration of dividends. The CPP provides for a minimum investment of 1% of Risk-Weighted-Assets, with a maximum investment of the lesser of 3% of Risk-Weighted Assets or $25 billion. The perpetual preferred stock has a dividend rate of 5% per year until the fifth anniversary of the Treasury investment and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the U.S. Treasury. The Company received an investment in perpetual preferred stock of $16,288,000 on January 30, 2009. These proceeds were allocated between the preferred stock and warrants based on relative fair value in accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. The allocation of proceeds resulted in a discount on the preferred stock that will be accreted over five years. The Company issued 299,779 common stock warrants to the U.S. Treasury and $930,000 of the proceeds were allocated to the warrants. The warrants are accounted for as equity

 

 

securities. The warrants have a contractual life of 10 years and an exercise price of $8.15 per share of common stock.

 

The Company accounts for its stock options under the provisions of Statement of Financial Accounting Standards No. 123R, Share Based Payments. There were no awards during 2009 or 2008. Compensation expense recognized during the first six months of 2009 and 2008 amounted to $11,000 and $16,000 respectively. As of June 30, 2009, unrecognized compensation expense of $8,000 in connection with non-vested options is expected to be recognized within the next year.

 

NOTE 7. COMPREHENSIVE INCOME

 

The Company’s comprehensive income is presented in the following table:

 

 

NOTE 8. FAIR VALUE

 

Fair Value Measurements

 

Effective January 1, 2008 the Company adopted SFAS No. 157, Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles. SFAS 157 applies to all financial instruments that are being measured and reported on a fair value basis. Nonfinancial assets and nonfinancial liabilities that are recognized and disclosed at fair value on a nonrecurring basis under SFAS 157 were delayed under FASB Staff Position (FSP) No. 157-2 Effective date of FASB Statement No. 157 to fiscal years beginning after November 15, 2008. Accordingly, effective January 1, 2009, the Company began disclosing the fair value of Other Real Estate Owned (OREO) previously deferred under the provisions of this FSP.

 

 

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs applied in the valuation technique. These inputs can be classified as readily observable, market corroborated, or generally unobservable. The Company utilizes techniques that maximize the use of observable inputs whenever available and minimize the use of unobservable inputs. The Company is required to provide the following information according to the fair value hierarchy based upon observable inputs used in valuation techniques. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed as follows:

 

Level 1 Inputs:

 

 

Level 2 Inputs:

 

 

Level 3 Inputs:

 

 

The following is a description of the valuation methodologies used for instruments measured at fair value:

 

 

Fair Value on a Recurring Basis

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

 

 

The fair value of securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). When listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or significant management judgment or estimation based upon unobservable inputs due to limited or no market activity of the instrument (Level 3).

 

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:

 

 

 

 

Fair Value on a Non-recurring Basis

 

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans had a carrying amount of $24.9 million and $10.2 million at June 30, 2009 and December 31, 2008 respectively, with a valuation allowance of $1.4 million and $222,000 at June 30, 2009 and December 31, 2008 respectively.

 

Repossessed assets, consisting of stock in an unrelated bank and a mobile home, were recorded based upon management’s best estimate of fair value. Considering the financial condition, the stock was written down to $15,000 (lower of cost or market) as of June 30, 2009 resulting in a charge to current period earnings of $35,000.

 

Other real estate owned (OREO) consists of two properties which are recorded at fair value based upon current appraised value less estimated disposition costs.

 

Fair Value of Financial Instruments

 

The Company discloses estimated fair values for its significant financial instruments in accordance with SFAS 107, “Disclosures about Fair Value of Financial Instruments”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and liabilities are discussed below.

 

Cash and Cash Equivalents: The carrying amount of cash, due from banks, and federal funds sold approximates fair value.

 

Restricted Stock: The carrying value of restricted stock approximates fair value based on redemption provisions.

 

Loans (other than impaired): Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage and other consumer. Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and non-performing categories.

 

The fair value of performing loans is typically calculated by discounting scheduled cash flows through their estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans

 

 

within each group, or on the Company’s historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic conditions.

 

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information.

 

Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts.

 

Deposits: The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

 

Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings.

 

Off-Balance Sheet Instruments: Since the majority of the Company’s off-balance sheet instruments consist of non fee-producing, variable rate commitments, the Company has determined they do not have a distinguishable fair value.

 

The following table summarizes carrying amounts and fair values for financial instruments at June 30, 2009 and December 31, 2008:

 

 

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The Company may from time to time make written or oral “forward-looking statements” including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company’s plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC, including quarterly reports on Form 10-Q, Annual Reports on Form 10-K and any current reports on Form 8-K.

 

General

 

The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense paid on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as service charges, earnings from bank owned life insurance (BOLI), loan exit fees and other fees. The Company’s non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs and other operating expenses. The Company is also subject to losses in its loan portfolio if borrowers fail to meet their obligations. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

 

 

Comparison of Financial Condition at June 30, 2009 and December 31, 2008

 

At June 30, 2009, the Company’s total assets increased to $639.9 million from $602.0 million at December 31, 2008, an increase of $37.9 million or 6.3%.

 

Cash and cash equivalents decreased $913 thousand, or 12.6%, to $6.4 million at June 30, 2009 from $7.3 million at December 31, 2008.

 

Total investment securities decreased to $28.4 million at June 30, 2009 ($26.0 million classified as available-for-sale or 91.2%) from $34.4 million at December 31, 2008, a decrease of $6.0 million or 17.3%, largely due to principal paydowns and maturities. Management evaluates the portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Factors considered in the analysis include but are not limited to whether an adverse change in cash flows has occurred, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or will more likely than not be required to sell the investment before recovery of its amortized cost basis, which may be maturity, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield or a temporary interest shortfall, and management’s assessment of the financial condition of the underlying issuers.

 

During the six month period ended June 30, 2009, the collateralized debt obligation (CDO) portion of the investment portfolio declined in value by approximately $926,000. At June 30, 2009, the cost basis of such securities was $5.7 million with a fair market value of $681,000. The portion of this loss in value related to credit quality wasn’t significant to the Company’s financial position or results of operation. The market value has been adversely affected by the prolonged existence of an illiquid market for these securities.

 

For the quarter ended June 30, 2009, the Company recognized a credit related other OTTI charge (pre-tax) of $1.2 million on two private-label collateralized mortgage obligations (CMO). The credit quality of the underlying mortgage collateral of these two securities has been impacted by the continued downturn in the real estate market. One security was substantially written off, resulting in a charge to earnings of $623,000. The other security was written down to $648,000, with a loss of $565,000.

 

Total loans increased to $592.2 million at June 30, 2009 from $547.7 million at December 31, 2008, an increase of $44.6 million or 8.1%, consistent with management’s plan for loan growth. Delinquent loans increased $18.6 million to $30.6 million or 5.2% of total loans at June 30, 2009 from $12.0 million or 2.2% of total loans at December 30, 2009. Delinquent loan balances by number of days delinquent were: 31 to 59 days --- $15.0 million; 60 to 89 days --- $3.9 million; and 90 days and greater --- $11.7 million.

 

At June 30, 2009, the Company had $16.1 million in non-performing loans or 2.7% of total loans, an increase from $8.2 million or 1.5% of total loans at December 31, 2008. The three largest relationships in non-performing loans are $5.3 million, $4.5 million, and $4.3 million. All three are comprised of residential and multi-family construction loans.

 

We believe we have appropriately established adequate loss reserves on problem loans that we have identified. However, we believe that non-performing and delinquent loans will continue to increase as the current recession persists. We are aggressively managing all loan relationships, and where necessary, we will apply our loan work-out experience to protect our collateral position and actively negotiate with borrowers to resolve these non-performing loans.

 

At June 30, 2009, the Bank’s total deposits increased to $524.6 million from $495.3 million at December 31, 2008, an increase of $29.3 million or 5.9%. Non-interest bearing deposits decreased $2.1 million, or

 

 

9.3%, to $20.2 million at June 30, 2009 from $22.3 million at December 31, 2008. NOW and money market accounts increased $13.3 million, or 19.1%, to $83.0 million at June 30, 2009 from $69.7 million at December 31, 2008. Savings accounts increased $48.6 million, or 84.6%, to $106.0 million at June 30, 2009 from $57.4 million at December 31, 2008. Retail certificate of deposits increased $12.1 million, or 7.1%, to $181.9 million at June 30, 2009 from $169.8 million at December 31, 2008. This growth, generated through a successful marketing campaign to increase core deposits, has allowed us to reduce brokered deposits, which decreased $42.7 million, or 24.2%, to $133.4 million at June 30, 2009 from $176.1 million at December 31, 2008.

 

Borrowings decreased $9.5 million, or 15.4%, to $52.4 million at June 30, 2009 from $61.9 million at December 31, 2008. This decline in FHLB of New York borrowings was attributable to the deposit growth discussed above.

 

At June 30, 2009, total shareholders’ equity increased to $58.4 million from $40.3 million at December 31, 2008, an increase of $18.1 million or 44.9%. In addition to net income of $2.8 million, perpetual preferred stock issued under the Treasury Capital Purchase Program (CPP) totaling $16.3 million, contributed to the increase.

 

 

Comparison of Operating Results for the Six Months Ended June 30, 2009 and 2008

 

General:Net income for the six months ended June 30, 2009 was $2.7 million, compared to $2.3 million for the same period in 2008. Net income available to common shareholders, which includes the impact of dividends and accretion of discount on preferred stock issued in January 2009, was $2.3 million for the six month period ended June 30, 2009. The results for the 2009 period were impacted by a special assessment by the FDIC of $284,000, and a $1.2 million other-than-temporary impairment charge on CMOs.

 

Interest Income: Interest income increased $2.1 million, or 12.0%, to $19.9 million for the six months ended June 30, 2009, from $17.8 million for the six months ended June 30, 2008. The increase is attributable to higher loan volumes, offset by a lower yield on loans. Average loans for the six month period ended June 30, 2009 were $574.0 million compared to $440.2 million for the same period last year, while average loan yields were 6.66% for the six months ended June 30, 2009 compared to 7.55% for the same period in 2008.

 

Interest Expense:Interest expense decreased $1.1 million, or 11.4%, to $8.7 million for the six months ended June 30, 2009, from $9.8 million for the six months ended June 30, 2008. The decrease is primarily attributable to a lower cost of deposits. The average rate paid on deposits for the six month period ended June 30, 2009 was 3.05% compared to 4.41% for the same period last year. The Bank has been able to re-price deposits due to the current, historically low, rate environment while still maintain strong deposit growth. This strong growth has also allowed us to reduce our reliance on more expensive brokered deposits.

 

Net Interest Income: Net interest income increased $3.3 million, or 40.4%, to $11.3 million for the six months ended June 30, 2009, from $8.0 million for the six months ended June 30, 2008. We experienced an increase in our net interest rate spread of 63 basis points, to 3.48% for the six months ended June 30, 2009, from 2.85% for the same period last year. Our net interest margin increased 45 basis points, to 3.74% for the six months ended June 30, 2009, from 3.29% for the same period last year. Our ability to lower our cost of deposits and our practice of setting floors on commercial and real estate loans has allowed for this growth in net interest rate margin.

 

Provision for Loan Losses: We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of delinquent loans. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses and make provisions for loan losses on a monthly basis.

 

At June 30, 2009, the Company’s allowance for loans losses increased to $9.5 million from $7.8 million at December 31, 2008, an increase of $1.7 million or 22.3%. The allowance for loan loss ratio increased to 1.61% of gross loans at June 30, 2009, from 1.42% of gross loans at December 31, 2008. The allowance for loan losses to non-performing loans coverage ratio declined to 59.1% at June 30, 2009, from 94.8% at December 31, 2008.

 

We recorded a provision for loan losses of $1.8 million for the six months ended June 30, 2009 compared to $924,000 for the six months ended June 30, 2008. The increase in the provision for losses over the

 

 

prior year correlates to the increase in credit deterioration and management’s analysis of non-performing loans.

 

Non-interest Income: Non-interest income decreased $821,000 to a loss of $830,000 for the six months ended June 30, 2009, from a loss of $9,000 for the six months ended June 30, 2008. The decrease resulted from the Company recognizing an other-than-temporary impairment charge to non-interest income on CMO’s totaling $1.2 million for the six month period ended June 30, 2009. In addition, during the current quarter, the Company recognized $159,000 in losses related to the sale of foreclosed real estate. This was partially offset by an increase of $148,000 in other miscellaneous income, the majority of which was the reimbursement of legal fees previously charged to expense. The 2008 period included an other-than-temporary impairment charge of $488,000 on FNMA and FHLMC preferred stock.

 

Non-interest Expense: Non-interest expense increased $863,000 to $4.3 million for the six months ended June 30, 2009, from $3.4 million for the six months ended June 30, 2008. The increase includes a special assessment by the FDIC of $284,000. Compensation and benefits expenses increased $279,000 due to increased staffing, annual merit raises, and higher fringe benefit costs. Professional services increased by $65,000 due to legal fees associated with SEC and U.S. Treasury Department filings related to the EESA capital program.

 

Income Taxes: The Company recorded income tax expense of $1.7 million, on income before taxes of $4.4 million for the six months ended June 30, 2009, resulting in an effective tax rate of 39.0%, compared to income tax expense of $1.4 million on income before taxes of $3.7 million for the same period of 2008, resulting in an effective tax rate of 37.6%.

 

 

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs have been annualized.

 

 

 

 

Comparison of Operating Results for the Three Months Ended June 30, 2009 and 2008

 

General:Net income for the three months ended June 30, 2009 was $1.2 million, compared to $1.0 million for the same period in 2008. Net income available to common shareholders, which includes the impact of dividends and accretion of discount on preferred stock issued in January 2009, was $935,000 for the three month period ended June 30, 2009. The results for the 2009 period were impacted by a special assessment by the FDIC of $284,000, and a $1.2 million other-than-temporary impairment charge on CMOs.

 

Interest Income: Interest income increased $1.3 million, or 14.1%, to $10.2 million for the three months ended June 30, 2009, from $8.9 million for the three months June 30, 2008. The increase is attributable to higher loan volumes, offset by a lower yield on loans. Average loans for the three month period ended June 30, 2009 were $587.1 million compared to $456.2 million for the same period last year. The average yield on loans was 6.58% for the three months ended June 30, 2009 compared to 7.07% for the same period in 2008.

 

Interest Expense:Interest expense decreased $754,000, or 15.6%, to $4.1 million for the three months ended June 30, 2009, from $4.8 million for the three months June 30, 2008. The decrease is primarily attributable to a lower cost of deposits. The average rate paid on deposits for the three month period ended June 30, 2009 was 2.87% compared to 4.21% for the same period last year. The Bank has been able to re-price deposits due to the current, historically low, rate environment while still maintain strong deposit growth. This strong growth has also allowed us to reduce our reliance on more expensive brokered deposits.

 

Net Interest Income: Net interest income increased $2.0 million, or 48.8%, to $6.1 million for the three months ended June 30, 2009, from $4.1 million for the three months ended June 30, 2008. We experienced an increase in our net interest rate spread of 79 basis points, to 3.63% for the three months ended June 30, 2009, from 2.84% for the same period last year. Our net interest margin increased 70 basis points, to 3.96% for the three months ended June 30, 2009, from 3.26% for the same period last year. Our ability to lower our cost of deposits and our practice of setting floors on commercial and real estate loans has allowed for this growth in net interest rate margin.

 

Provision for Loan Losses: We recorded a provision for loan losses of $980,000 for the three months ended June 30, 2009 compared to $564,000 for the three months ended June 30, 2008. The increase in the provision for losses over the prior year correlates to credit deterioration and management’s analysis of non-performing loans.

 

Non-interest Income: Non-interest income decreased $708,000 to a loss of $1.0 million for the three months ended June 30, 2009, from a loss of $293,000 for the three months ended June 30, 2008. The decrease resulted from the Company recognizing an other-than-temporary impairment charge to non-interest income on CMO’s totaling $1.2 million for the three month period ended June 30, 2009. The 2008 period included an other-than-temporary impairment charge of $488,000 on FNMA and FHLMC preferred stock.

 

Non-interest Expense: Non-interest expense increased $535,000 to $2.2 million for the three months ended June 30, 2009, from $1.7 million for the three months ended June 30, 2008. The increase includes a special assessment by the FDIC of $284,000. Compensation and benefits expenses increased $141,000 due to increased staffing, annual merit raises, and higher fringe benefit cost.

 

Income Taxes: The Company recorded income tax expense of $726,000, on income before taxes of $1.9 million for the three months ended June 30, 2009, resulting in an effective tax rate of 38.3%, compared to income tax expense of $551,000 on income before taxes of $1.6 million for the same period of 2008,

 

 

resulting in an effective tax rate of 35.5%. The 2008 effective rate was affected by a $75,000 over accrual for a prior tax period.

 

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs have been annualized.

 

 

 

 

Critical Accounting Policies

In the preparation of our consolidated financial statements, management has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. The significant accounting policies are described in the Note 1 to the Consolidated Financial Statements.

Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers these accounting policies to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of assets and liabilities and results of operations.

Allowance for Loan Losses: The allowance for loan losses is considered a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

In evaluating the allowance for loan losses, management considers historical loss factors, the mix of the loan portfolio (types of loans and amounts), geographic and industry concentrations, current national and local economic conditions and other factors related to the collectability of the loan portfolio, including underlying collateral values and estimated future cash flows. All of these estimates are susceptible to significant change. Large groups of smaller balance homogeneous loans, such as residential real estate, home equity loans, and consumer loans, are evaluated in the aggregate under Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, using historical loss factors adjusted for economic conditions and other factors. Other factors include trends in delinquencies and classified loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, peer group data, and single and total credit exposure. Large balance and/or more complex loans, such as multi-family and commercial real estate loans, commercial business loans, and construction loans are evaluated individually for impairment in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures, an Amendment of SFAS No. 114”. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as projected events change.

Management reviews the level of the allowance monthly. Although management used the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Other Than Temporary Impairment on Investment Securities: Management periodically performs analyses to determine whether there has been an other-than-temporary decline in the value of one or more securities. The available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholder’s equity. The held-to-maturity securities portfolio, consisting of debt securities for which there is a positive intent and ability to hold to maturity, is carried at amortized cost. Management conducts a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is

 

 

deemed other-than-temporary, the cost basis of the security is adjusted by writing down the security to estimated fair market value through a charge to current period earnings to the extent that such decline is credit related. The market values of securities are affected by changes in interest rates.

Liquidity: Liquidity describes the ability to meet the financial obligations that arise out of the ordinary course of business. Liquidity addresses the Company’s ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund current and planned expenditures. Liquidity is derived from increased repayment and income from interest-earning assets. The loan to deposit ratio was 112.9% and 110.6% at June 30, 2009 and December 31, 2008, respectively. Funds received from new and existing depositors provided a large source of liquidity for the six month period ended June 30, 2009. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support loan growth. The Company also seeks to augment such deposits with longer term and higher yielding certificates of deposit. To the extent that retail deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds market. As of June 30, 2009, the Company had short term lines of credit with PNC Bank for $13.0 million and Atlantic Central Bankers Bank for $3.0 million. There were no outstanding borrowings on these lines at June 30, 2009. Longer term funding can be obtained through the issuance of trust preferred securities and advances from the FHLB. As of June 30, 2009, the Company maintained lines of credit with the FHLB of $95.1 million, of which $29.0 million was outstanding at June 30, 2009.

As of June 30, 2009, the Company’s investment securities portfolio included $20.5 million of mortgage-backed securities that provide significant cash flow each month. The majority of the investment portfolio is classified as available for sale, is marketable, and is available to meet liquidity needs. The Company’s residential real estate portfolio includes loans, which are underwritten to secondary market criteria, and accordingly could be sold in the secondary mortgage market if needed as an additional source of liquidity. The Company’s management is not aware of any known trends, demands, commitments or uncertainties that are reasonably likely to result in material changes in liquidity.

Capital: A strong capital position is fundamental to support the continued growth of the Company. The Company and the Bank are subject to various regulatory capital requirements. Regulatory capital is defined in terms of Tier I capital (shareholders’ equity as adjusted for unrealized gains or losses on available-for-sale securities), Tier II capital (which includes a portion of the allowance for loan losses) and total capital (Tier I plus Tier II). Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet associated risk in accordance with regulatory criteria. Regulators have also adopted minimum Tier I leverage ratio standards, which measure the ratio of Tier I capital to total assets.

At June 30, 2009, management believes that the Company and the Bank are “well-capitalized” and in compliance with all applicable regulatory requirements.

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable as the Company is a smaller reporting company.

ITEM 4T. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms.

 

Internal Controls

 

Changes in internal control over financial reporting. During the last quarter, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The Company was not a party to any material legal proceedings.

ITEM 1A. RISK FACTORS

Not applicable as the Company is a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

32            Certification required by 18 U.S.C. §1350.

 

32

 

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.