10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file Number: 000-32891
1ST CONSTITUTION BANCORP
(Exact Name of Registrant as Specified in Its Charter)
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New Jersey | | 22-3665653 |
(State or Other Jurisdiction of Incorporation or Organization) | | IRS Employer Identification Number) |
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| 2650 Route 130, P.O. Box 634, Cranbury, NJ 08512 | |
| (Address of Principal Executive Offices, including Zip Code) | |
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| (609) 655-4500 | |
| (Registrant’s telephone number, including area code) | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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| Title of each class Common stock, no par value | Name of each exchange on which registered NASDAQ | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No ý
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 ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | ý |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrant’s most recently completed second quarter, is $70,104,546.
As of February 29, 2016, 7,954,314 shares of the registrant’s common stock were outstanding.
Portions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form10-K.
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| FORM 10-K | |
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| TABLE OF CONTENTS | |
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| PART I | |
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| PART II | |
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| PART III | |
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| PART IV | |
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When used in this Annual Report on Form 10-K for the year ended December 31, 2015 (this "Form 10-K"), the words "the Company," "we," "our," and "us" refer to 1st Constitution Bancorp and its wholly owned subsidiaries, unless we indicate otherwise.
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.
These forward-looking statements generally relate to our plans, objectives and expectations for future events and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. These statements are based upon our opinions and estimates as of the date they are made. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond our control, which could cause actual results, performance and achievements to differ materially from results, performance and achievements projected, expected, expressed or implied by the forward-looking statements.
Examples of events that could cause actual results to differ materially from historical results or those anticipated, expressed or implied include, without limitation, changes in the overall economy and interest rate changes; inflation, market and monetary fluctuations; the ability of our customers to repay their obligations; the accuracy of our financial statement estimates and assumptions, including the adequacy of the estimate made in connection with determining the adequacy of the allowance for loan losses; increased competition and its effect on the availability and pricing of deposits and loans; significant changes in accounting, tax or regulatory practices and requirements; changes in deposit flows, loan demand or real estate values; legislation or regulatory changes, including the Dodd-Frank Act; changes in monetary and fiscal policies of the U.S. Government; changes in loan delinquency rates or in our levels of non-performing assets; our ability to declare and pay dividends; changes in the economic climate in the market areas in which we operate; the frequency and magnitude of foreclosure of our loans; changes in consumer spending and saving habits; the effects of the health and soundness of other financial institutions, including the FDIC’s need to increase the Deposit Insurance Fund assessments; technological changes; the effect of harsh weather conditions, including hurricanes and man-made disasters; the economic impact of any future terrorist threats and attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks; our ability to integrate acquisitions and achieve cost savings; other risks described from time to time in our filings with the Securities and Exchange Commission (the “SEC”); and our ability to manage the risks involved in the foregoing. Although management has taken certain steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on profitability. Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Item 1. “Business”, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. However, other factors besides those listed in Item 1A. Risk Factors or discussed in this Annual Report also could adversely affect our results and you should not consider any such list of factors to be a complete list of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We undertake no obligation to publicly revise any forward-looking statements or cautionary factors, except as required by law.
PART I
Item 1. Business.
1st Constitution Bancorp
1st Constitution Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of 1st Constitution Bank (the “Bank”) and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. As of December 31, 2015, the Company has two employees, both of whom are full-time. The Bank is a wholly-owned subsidiary of the Company. Other than its investment in the Bank, the Company currently conducts no other significant business activities.
The main office of the Company and the Bank is located at 2650 Route 130 Cranbury, New Jersey 08512, and the telephone number is (609) 655-4500.
1st Constitution Bank
The Bank is a commercial bank formed under the laws of the State of New Jersey and engages in the business of commercial and retail banking. As a community bank, the Bank offers a wide range of services (including demand, savings and time deposits and commercial and consumer/installment loans) to individuals, small businesses and not-for-profit organizations principally in the Fort Lee area of Bergen County and in Middlesex, Mercer, Somerset and Monmouth Counties of New Jersey. The Bank conducts its operations through its main office located in Cranbury, New Jersey, and operates eighteen additional branch offices in downtown Cranbury, Hamilton Square, Hightstown, Hillsborough, Hopewell, Jamesburg, Lawrenceville, Perth Amboy, Plainsboro, Skillman, West Windsor, Fort Lee, Princeton, Rumson, Fair Haven, Shrewsbury, Little Silver and Asbury Park, New Jersey. The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”). As of December 31, 2015, the Bank had 183 employees, of which 169 were full-time employees.
Management efforts focus on positioning the Bank to meet the financial needs of the communities in Middlesex, Mercer, Somerset and Monmouth Counties and the Fort Lee area of Bergen County and to provide financial services to individuals, families, institutions and small businesses. To achieve this goal, the Bank is focusing its efforts on:
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• | technological advances and e-commerce. |
Expansion of the Bank
On February 7, 2014, the Company and the Bank closed on the merger of Rumson-Fair Haven Bank and Trust Company, a New Jersey state commercial bank (“Rumson”), with and into the Bank, with the Bank continuing as the surviving entity (the “2014 Merger”), pursuant to the terms and conditions of that certain Agreement and Plan of Merger, dated August 14, 2013 and as amended on September 19, 2013 (the “Merger Agreement”), by and between the Company, the Bank and Rumson. At the time of the merger, Rumson had approximately $220 million in assets, approximately $144 million in loans and approximately $190 million in deposits. Rumson operated five offices in Monmouth County, New Jersey which became branches of the Bank as a result of the 2014 Merger.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the 2014 Merger, each share of Rumson common stock issued and outstanding immediately prior to such effective time was converted into and became the right to receive, at the election of the holder, either 0.7772 shares of common stock of the Company or $7.50 in cash or a combination of cash and shares of common stock of the Company, subject to proration as described in the Merger Agreement, so that 60% of the aggregate merger consideration consisted of cash and 40% consisted of shares of common stock of the Company. Cash was paid in lieu of fractional shares. In the aggregate, the Company paid approximately $14.8 million in cash and issued 1,019,223 shares of common stock of the Company as 2014 Merger consideration to Rumson shareholders. Included in the cash and stock consideration amounts were a total of $98,919 that was used to cash out outstanding options to acquire shares of Rumson common stock and 5,829 shares of common stock of the Company that were issued in exchange for restricted stock awards for Rumson common stock. Cash used as consideration in the 2014 Merger was provided by the Bank from existing cash assets.
The Bank continually evaluates opportunities to expand its products and services to existing and new customers and expand into new markets through the acquisition of other banks and bank offices within and contiguous to its existing markets and/or by opening new branch offices.
Personal Service
The Bank provides a wide range of commercial and consumer banking services to individuals, families, institutions and small businesses in central and coastal New Jersey and the Fort Lee area of Bergen County. The Bank’s focus is to understand the needs of the community and the customers and tailor products, services and advice to meet those needs. The Bank seeks to provide a high level of personalized banking services, emphasizing quick and flexible responses to customer demands.
Technological Advances and e-Commerce
The Bank recognizes that customers want to receive service via their most convenient delivery channel, be it the traditional branch office, by telephone, ATM, or the internet. For this reason, the Bank continues to enhance its e-commerce capabilities. At www.1stconstitution.com, customers have easy access to online banking, including account access, and to the Bank’s bill payment system. Consumers and businesses may also access their accounts and make deposits through their mobile devices. Consumers can apply online for loans and interact with senior management through the e-mail system. Business customers have access to cash management information and transaction capability through the Bank’s online Cash Manager product which permits business customers to make deposits, originate ACH payments, initiate wire transfers, retrieve account information and place “stop payment” orders. This overall expansion in electronic banking offers the Bank’s customers means to access the Bank’s services easily and at their own convenience.
Competition
The Bank experiences substantial competition in attracting and retaining deposits and in making loans. In attracting deposits and borrowers, the Bank competes with commercial banks, savings banks, and savings and loan associations, as well as regional and national insurance companies and non-bank financial institutions, mutual funds, regulated small loan companies and local credit unions, regional and national sponsors of money market funds and corporate and government borrowers. Within the direct market area of the Bank, there are a significant number of offices of competing financial institutions. In New Jersey generally, and in the Bank’s local market specifically, the Bank’s most direct competitors are large commercial banks including Bank of America, PNC Bank, JP Morgan Chase, Wells Fargo and Santander Bank, as well as savings banks and savings and loan associations, including Provident Bank and Investors Bank.
The Bank is at a competitive disadvantage compared with these larger national and regional commercial and savings banks. By virtue of their larger capital, asset size and reserves, many of such institutions have substantially greater lending limits (ceilings on the amount of credit a bank may provide to a single customer that are linked to the institution’s capital) and other resources than the Bank. Many such institutions are empowered to offer a wider range of services, including trust services, than the Bank and, in some cases, have lower funding costs (the price a bank must pay for deposits and other borrowed monies used to make loans to customers) than the Bank. In addition to having established deposit bases and loan portfolios, these institutions, particularly large national and regional commercial and savings banks, have the financial ability to finance extensive advertising campaigns and to allocate considerable resources to locations and products perceived as profitable.
In addition, non-bank financial institutions offer services that compete for customers’ investable funds and deposits with the Bank. For example, brokerage firms and insurance companies offer such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. It is expected that competition in these areas will continue to increase. Some of these competitors are not subject to the same degree of regulation and supervision as the Company and the Bank and therefore may be able to offer customers more attractive products than the Bank.
However, management of the Bank believes that loans to small and mid-sized businesses and professionals, which represent the main commercial loan business of the Bank, are not always of primary importance to the larger banking institutions. The Bank competes for this segment of the market by providing responsive personalized services, making timely local decisions, and acquiring in depth knowledge of its customers and their businesses.
Lending Activities
The Bank’s lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including real estate broker referrals, mortgage loan companies, direct solicitation by the Bank’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Bank has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loans.
Commercial Lending
The Bank offers a variety of commercial loan services, including term loans, lines of credit, and loans secured by equipment and receivables. A broad range of short-to-medium term commercial loans, both secured and unsecured, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements), and the purchase of equipment and machinery. Commercial loans are granted based on the borrower’s ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower’s ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As
a general practice, the Bank takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property of its borrowers, although occasionally the Bank makes commercial loans on an unsecured basis. Generally, the Bank requires personal guarantees of its commercial loans to offset the risks associated with such loans. The Bank also offers loans of which a portion, generally 75% to 85%, are guaranteed by the Small Business Administration ("SBA"), which is a United States government agency. The Bank generally sells the guaranteed portion of these loans into the secondary market.
Commercial Construction Financing
Construction financing is provided to businesses to expand their facilities and operations and to real estate developers for the acquisition, development and construction of residential and commercial properties. First mortgage construction loans are made to developers and builders primarily for single family homes or smaller multi-family buildings (less than ten units) that are presold, or are to be sold or leased on a speculative basis.
The Bank lends to builders and developers with established relationships, successful operating histories and sound financial resources.
Residential Consumer Lending
A portion of the Bank’s lending activities consists of the origination of fixed and adjustable rate residential first mortgage loans secured by owner-occupied property located in the Bank’s primary market areas. Home mortgage lending is unique in that a broad geographic territory may be serviced by originators working from strategically placed offices either within the Bank’s traditional banking facilities or from affordable storefront locations in commercial buildings. The Bank also offers construction loans, reverse mortgages, second mortgage home improvement loans and home equity lines of credit.
The Bank finances the construction of individual, owner-occupied single-family houses on the basis of written underwriting and construction loan management guidelines. These loans are made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The construction phase of these loans has certain risks, including the viability of the contractor, the contractor’s ability to complete the project within the budget and changes in interest rates.
The Bank will generally sell its originated residential mortgage loans in the secondary market. The decision to sell is made prior to origination. The sale into the secondary market allows the Bank to mitigate its interest rate risks related to such lending operations. This brokerage arrangement allows the Bank to accommodate its clients’ demands while eliminating the interest rate risk for the 15- to 30 year period generally associated with such loans.
For commercial and residential mortgage loans the Bank in most cases requires borrowers to obtain and maintain title, fire, and extended casualty insurance, and, where required by applicable regulations, flood insurance. The Bank maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Bank customarily include a “due on sale” clause, which gives the Bank the right to declare a loan immediately due and payable in certain circumstances, including, without limitation, upon the sale or other disposition by the borrower of the real property subject to a mortgage. In general, the Bank enforces due on sale clauses.
Non-Residential Consumer Lending
Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, and boats, as well as personal loans (secured and unsecured) and deposit account secured loans. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than are charged on other types of loans. Non-residential consumer loans, however, do pose additional risk of collectability when compared to traditional types of loans, such as residential mortgage loans.
Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. The stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Bank seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration, with preference given to borrowers in the Bank’s primary market areas.
Supervision and Regulation
Banking is a complex, highly regulated industry. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of monetary policy. In furtherance of those goals, Congress has created several largely autonomous regulatory agencies and enacted a myriad of legislation that governs banks, bank holding companies and the banking industry. This regulatory framework is intended primarily for the protection of depositors and not for the protection of the Company’s shareholders or creditors. Descriptions of, and references to, the statutes and regulations below are brief summaries thereof, and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.
State and Federal Regulations
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”). As a bank holding company, the Company is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may also make examinations of the Company and its subsidiaries. The Company is subject to capital standards similar to, but separate from, those applicable to the Bank.
Under the BHCA, bank holding companies that are not financial holding companies generally may not acquire the ownership or control of more than 5% of the voting shares, or substantially all of the assets, of any company, including a bank or another bank holding company, without the Federal Reserve Board’s prior approval. The Company has not applied to become a financial holding company but did obtain such approval to acquire the shares of the Bank. A bank holding company that does not qualify as a financial holding company is generally limited in the types of activities in which it may engage to those that the Federal Reserve Board had recognized as permissible for bank holding companies prior to the date of enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. For example, a holding company and its banking subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services. At present, the Company does not engage in any significant activity other than owning the Bank.
In addition to federal bank holding company regulation, the Company is registered as a bank holding company with the New Jersey Department of Banking and Insurance (the “Department”). The Company is required to file with the Department copies of the reports it files with the federal banking and securities regulators.
The Federal Reserve Board has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends including, for example, when net income available for shareholders for the past four quarters net of dividends paid during that period is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve Board of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter.
Subsequent to the issuance of the supervisory letter, the Federal Reserve Board adopted regulations requiring bank holding companies to give prior written notice to the Federal Reserve Board before purchasing or redeeming its stock if the gross consideration for the purchase or redemption, when aggregated with the net consideration (i.e., gross consideration paid for purchases and redemptions minus gross consideration received for all stock sold) paid for all purchases or redemptions of stock during the preceding 12 months, is equal to 10 percent or more of the bank holding company’s consolidated net worth. However, if a bank holding company (i) will be well-capitalized before and immediately after the purchase or redemption, (ii) is well-managed and (iii) is not the subject of any unresolved supervisory issues, then the bank holding company will not be required to give any prior written notice to the Federal Reserve Board. At this time, the Company fits within the above exception and is not required to give prior written notice to the Federal Reserve Board before purchasing or redeeming its stock.
The Federal Reserve Board’s capital adequacy rules also limit a banking organization’s ability to pay dividends or engage in share repurchases if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. For further discussion of regulatory capital rules, please refer to the discussion under the section titled "Capital Adequacy" below.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has a broad impact on the financial services industry, including significant regulatory and compliance requirements, including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a framework for systemic risk oversight within the financial system to be distributed among federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC.
Effective in July 2011, the Dodd-Frank Act eliminated federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. As of the date of this Form 10-K, the Bank does not pay interest on demand deposits. This significant change to existing law has not had an adverse impact on our net interest margin for the years ended December 31, 2015 and 2014.
The Dodd-Frank Act also changed the base for FDIC deposit insurance assessments. Assessments are based on average consolidated total assets less tangible equity capital of a financial institution, rather than on deposits. The Dodd-Frank Act also increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per account owner. However, if an Interest on Lawyer Trust Account ("IOLTA") qualifies for pass-through coverage as a fiduciary account, then each separate client for whom a law firm holds funds in such IOLTA may be insured up to $250,000 for his or her funds. The legislation also increased the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directed the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets, including the Bank.
The Dodd-Frank Act requires publicly traded companies to give their stockholders a non-binding vote on executive compensation (“say on pay”) and so-called “golden parachute” payments. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. Such listing standards have yet to be implemented.
The Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, which authority does not extend to the Bank at this time since we do not meet the asset threshold.
The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies, which exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities; however, bank holding companies with assets of less than $15 billion as of December 31, 2009 are permitted to include trust preferred securities that were issued before May 19, 2010 as Tier 1 capital.
The Dodd-Frank Act and the rules and regulations promulgated under the Dodd-Frank Act have impacted the Bank, as well as all community banks, by increasing our operating and compliance costs. Certain yet to be written implementing rules and regulations under the Dodd-Frank Act may also further increase our operating and compliance costs.
Capital Adequacy
The Company is required to comply with minimum capital adequacy standards established by the Federal Reserve Board. There are two basic measures of capital adequacy for bank holding companies and the depository institutions that they own: a risk based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, pursuant to FDICIA, each federal banking agency has promulgated
regulations, specifying the levels at which a bank would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.
In December 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions, referred to as Basel III. Under these standards, when fully phased-in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital, and total capital ratios, as well as maintaining a “capital conservation buffer.” The Tier 1 common equity and Tier 1 capital ratio requirements have been phased-in incrementally between January 1, 2013 and January 1, 2015; the deductions from common equity made in calculating Tier 1 common equity will be phased-in incrementally over a four-year period commencing on January 1, 2014; and the capital conservation buffer will be phased-in incrementally between January 1, 2016 and January 1, 2019. The Basel Committee also announced that a countercyclical buffer of 0% to 2.5% of common equity or other fully loss-absorbing capital will be implemented according to national circumstances as an extension of the conservation buffer.
In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and address relevant provisions of the Dodd-Frank Act. The Federal Reserve Board’s final rules and the FDIC’s interim final rules (which became final in April 2014 with no substantive changes) apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% (unchanged from current rules) and a Tier 1 leverage ratio of at least 4% (unchanged from current rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.
With respect to the Bank, the FDIC also revised its prompt corrective action rules by (i) introducing a Common Equity Tier 1, or CET1, ratio requirement at each capital quality level (other than critically undercapitalized); (ii) increasing the minimum Tier 1 capital ratio requirement for each category; and (iii) requiring a leverage ratio of 5 percent to be well-capitalized. Effective as of January 1, 2015, the FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a CET1 ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a CET1 ratio of at least 4.5 percent, (iv) has a Tier 1 leverage ratio of at least 4.0 percent, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has a Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies. When the capital conservation buffer is fully phased in, the capital ratios applicable to depository institutions will exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.
Under these capital rules, the Bank’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 11.90%, 11.90% ,12.80%, and 10.55%, respectively, at December 31, 2015. The Bank is classified as a non-advanced approaches bank for regulatory purposes and has permanently opted out of including the amount of accumulated other comprehensive income in the computation of regulatory capital.
On May 30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware business trust and wholly-owned subsidiary of the Company (“Trust II”), for the sole purpose of issuing $18 million of trust preferred securities (the “Capital Securities”). Trust II utilized the $18 million proceeds along with $557,000 invested in Trust II by the Company to purchase $18,557,000 of floating rate junior subordinated debentures issued by the Company and due to mature on June 15, 2036. The
Capital Securities were issued in connection with a pooled offering involving approximately 50 other financial institution holding companies. All of the Capital Securities were sold to a single pooling vehicle. The floating rate junior subordinated debentures are the only asset of Trust II and have terms that mirror the Capital Securities. These debentures are redeemable in whole or in part prior to maturity after June 15, 2011. Trust II is obligated to distribute all proceeds of a redemption of these debentures, whether voluntary or upon maturity, to holders of the Capital Securities. The Company’s obligation with respect to the Capital Securities and the debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by the Company of the obligations of Trust II to pay amounts when due on the Capital Securities. Interest payments on the floating rate junior subordinated debentures flow through Trust II to the pooling vehicle. Based on the final regulatory rule, the Company has included all of its $18 million trust preferred securities in Tier 1 capital at December 31, 2015 and 2014.
The Company issued a warrant on December 23, 2008 to the United States Department of the Treasury (the “Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”). This warrant was sold by the Treasury on November 23, 2011 and exchanged for two new warrants which permit the holders thereof to acquire as of December 31, 2015, on an adjusted basis resulting from declarations of stock dividends to holders of common stock since the issuance of the two warrants, 281,733 shares of common stock of the Company at a price of $6.389 per share.
The two warrants provide for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Company’s common stock. As of the date of this Form 10-K, the two warrants remain outstanding, are immediately exercisable and have an expiration date of December 23, 2018.
Restrictions on Dividends
The primary source of cash to pay dividends, if any, to the Company’s shareholders and to meet the Company’s obligations is dividends paid to the Company by the Bank. Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any dividends if after paying the dividend it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent.
The Federal Reserve Board’s capital adequacy rules also limit a banking organization’s ability to pay dividends if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.
The Company has never paid a cash dividend and the Company’s Board of Directors has no plans to pay a cash dividend in the foreseeable future.
Priority on Liquidation
The Company is a legal entity separate and distinct from the Bank. The rights of the Company as the sole shareholder of the Bank, and therefore the rights of the Company’s creditors and shareholders, to participate in the distributions and earnings of the Bank when the Bank is not in bankruptcy, are subject to various state and federal law restrictions as discussed above under the heading “Restrictions on Dividends.” In the event of a liquidation or other resolution of an insured depository institution such as the Bank, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of an obligation of the institution to its shareholders (the Company) or any shareholder or creditor of the Company. The claims on the Bank by creditors include obligations in respect of federal funds purchased and certain other borrowings, as well as deposit liabilities.
Financial Institution Legislation
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”) became effective in early 2000. The Modernization Act:
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• | allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than is permissible for a bank holding company, including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals; |
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• | allows banks to establish subsidiaries to engage in certain activities which a financial holding company could engage in, if the bank meets certain management, capital and Community Reinvestment Act standards; |
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• | allows insurers and other financial services companies to acquire banks and removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to financial holding companies that also engage in insurance and securities operations. |
The Modernization Act modified other laws, including laws related to financial privacy and community reinvestment.
The Modernization Act also amended the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.
Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on the Company cannot be determined at this time.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements affecting corporate governance, accounting and corporate reporting for companies with publicly traded securities.
The Sarbanes-Oxley Act provides for, among other things:
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• | a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O of the Federal Reserve Board); |
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• | independence requirements for audit committee members; |
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• | disclosure of whether at least one member of the audit committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission (“SEC”) and if not, why not; |
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• | independence requirements for outside auditors; |
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• | a prohibition by a company’s registered public accounting firm from performing statutorily mandated audit services for the company if the company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date; |
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• | certification of financial statements and annual and quarterly reports by the principal executive officer and the principal financial officer; |
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• | the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct; |
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• | disclosure of off-balance sheet transactions; |
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• | two-business day filing requirements for insiders filing Forms 4; |
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• | disclosure of a code of ethics for financial officers and filing a Form 8-K for a change or waiver of such code; |
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• | “real time” filing of periodic reports; |
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• | posting of certain SEC filings and other information on the company’s website; |
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• | the reporting of securities violations “up the ladder” by both in-house and outside attorneys; |
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• | restrictions on the use of non-GAAP financial measures; |
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• | the formation of a public accounting oversight board; and |
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• | various increased criminal penalties for violations of securities laws. |
Additionally, Section 404 of the Sarbanes-Oxley Act requires that a public company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include in its annual report (i) a management’s report on internal control over financial reporting assessing the company’s internal controls, and (ii) if the company is an “accelerated filer” or a “large accelerated filer”, an auditor’s attestation report, completed by the registered public accounting firm that prepares or issues an accountant’s report which is included in the company’s annual report, attesting to the effectiveness of management’s internal control assessment. The Company is currently classified as a “Smaller Reporting Company” and accordingly, is not subject to the auditor’s attestation report requirements.
Each of the national stock exchanges, including the Nasdaq Global Market where the Company’s common stock is listed, have in place corporate governance rules, including rules requiring director independence, and the adoption of charters for the nominating, corporate governance, and audit committees. These rules are intended to, among other things, make the board of directors independent of management and allow shareholders to more easily and efficiently monitor the performance of companies and directors. These burdens increase the Company’s legal and accounting fees and the amount of time that the Board of Directors and management must devote to corporate governance issues.
Section 302(a) of the Sarbanes-Oxley Act requires the Company’s principal executive officer and principal financial officer to certify that the Company’s Quarterly and Annual Reports do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which they were made, not misleading. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal control over financial reporting; and they have included information in the Company’s Quarterly and Annual Reports about their evaluation of disclosure controls and procedures and whether there have been significant changes in the Company’s internal controls over financial reporting.
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.
The Department of Treasury has issued regulations implementing the due diligence requirements. These regulations require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts,” and require all covered financial institutions to have in place an anti-money laundering compliance program.
As a New Jersey-chartered commercial bank, the Bank is subject to supervision and examination by the New Jersey Department of Banking and Insurance. The Bank is also subject to regulation and examination by the FDIC, which is its principal federal bank regulator.
The Bank must comply with various requirements and restrictions under federal and state law, including the maintenance of reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made and the services that may be offered, and restrictions on dividends as described in the preceding section. Consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board which influence the money supply and credit availability in the national economy.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including
low- and moderate-income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA requires the FDIC to assess an institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the applicable institution. CRA requires public disclosure of an institution’s CRA rating and requires that the FDIC provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. At its last CRA examination, the Bank was rated “satisfactory” under CRA.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. These provisions have commonly been referred to as FIRREA’s “cross guarantee” provisions. Further, under FIRREA, the failure to meet capital guidelines could subject a bank to a variety of enforcement remedies available to federal regulatory authorities.
FIRREA also imposes certain independent appraisal requirements upon a bank’s real estate lending activities and further imposes certain loan-to-value restrictions on a bank’s real estate lending activities. Banking regulators have promulgated regulations in these areas.
Insurance of Deposits
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. This limit is $250,000 per account owner. FDICIA is applicable to depository institutions and deposit insurance. FDICIA requires the FDIC to establish a risk-based assessment system for all insured depository institutions. Under this legislation, the FDIC is required to establish an insurance premium assessment system based upon: (i) the probability that the insurance fund will incur a loss with respect to the institution, (ii) the likely amount of the loss, and (iii) the revenue needs of the insurance fund. In compliance with this mandate, the FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator.
As a result of the Dodd-Frank Act, the FDIC modified its assessment rules so that an institution’s deposit insurance assessment base changed from total deposits to total assets less tangible equity. These assessment base rates range from 2.5 to 9 basis points for Risk Category I banks up to 45 basis points for Risk Category IV banks. Risk Category II and III banks have assessment base rates ranging from 9 to 33 basis points, respectively. If the risk category of the Bank changes adversely, our FDIC insurance premiums could increase.
Lending Limits
In January 2013, the New Jersey Department of Banking and Insurance issued an order requiring a New Jersey chartered bank’s calculation of lending limits to any person or entity to include credit exposure to such person or entity arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Previously, such credit exposure was not included in a New Jersey chartered bank’s calculation of lending limits. Beginning July 1, 2013, New Jersey chartered banks must comply with the operative provisions of the order, which include compliance with all of the rules set forth in the Office of the Comptroller of the Currency’s Interim Final Rule on Lending Limits (codified at 12 C.F.R pts. 32, 159 and 160). This change in the calculation of lending limits did not have a significant impact on the Bank’s operations.
Volcker Rule
On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Commodity Futures Trading Commission and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, which became effective on July 21, 2015, for investments in covered funds made after December 31, 2013. The Volcker Rule prohibits an insured depository institution and its affiliates from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (defined as “Covered Funds”) subject to certain limited exceptions. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically
permitted for trading and prohibits the use of some hedging strategies. The Company identified no investments that met the definition of Covered Funds and that were required to be divested by July 21, 2015 under the foregoing rules.
Item 1A. Risk Factors.
The following are some important factors that could cause the Company’s actual results to differ materially from those referred to or implied in any forward-looking statement. These are in addition to the risks and uncertainties discussed elsewhere in this Form 10-K and the Company’s other filings with the SEC.
A prolonging of the economic downturn or the return of negative developments in the financial services industry could negatively impact our operations.
The global and U.S. economic downturn has resulted in uncertainty in the financial markets in general with the possibility of a slow recovery or a fall back into recession. The Federal Reserve, in an attempt to help the overall economy, has kept interest rates low through its targeted federal funds rate, the purchase of mortgage- backed securities and the purchase of Treasury securities. If the Federal Reserve increases the federal funds rate, overall interest rates will likely rise which may negatively impact the housing markets and the U.S. economic recovery. A prolonging of the economic downturn or the return of negative developments in the financial services industry could negatively impact our operations by causing an increase in our provision for loan losses and a deterioration of our loan portfolio. Such a downturn may also adversely affect our ability to originate or sell loans. The occurrence of any of these events could have an adverse impact on our financial performance.
A prolonging or worsening of the downturn affecting the economy and/or the real estate market in our primary market area would adversely affect our loan portfolio and our growth potential.
Much of the Company’s lending is in northern and central New Jersey. As a result of this geographic concentration, a further continued significant broad-based deterioration in economic conditions in the New Jersey metropolitan area could have a material adverse impact on the quality of the Company’s loan portfolio, results of operations and future growth potential. A prolonged decline in economic conditions in our market area could restrict borrowers’ ability to pay outstanding principal and interest on loans when due, and consequently, adversely affect the cash flows and results of operations of the Company’s business.
The Company’s loan portfolio is largely secured by real estate collateral located in the State of New Jersey. Conditions in the real estate markets in which the collateral for the Company’s loans are located strongly influence the level of the Company’s non-performing loans and results of operations. A continued decline in the New Jersey real estate markets could adversely affect the Company’s loan portfolio. Decreases in local real estate values would adversely affect the value of property used as collateral for the Company’s loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.
The Company faces significant competition.
The Company faces significant competition from many other banks, savings institutions and other financial institutions which have branch offices or otherwise operate in the Company’s market area. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, engage in activities which compete directly with traditional bank business, which has also led to greater competition. Many of these competitors have substantially greater financial resources than the Company, including larger capital bases that allow them to attract customers seeking larger loans than the Company is able to accommodate and the ability to aggressively advertise their products and to allocate considerable resources to locations and products perceived as profitable. There can be no assurance that the Company and the Bank will be able to successfully compete with these entities in the future.
The Company is subject to interest rate risk.
The Company’s earnings are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the spread between the interest rates paid
on deposits and other borrowings and the interest rates received on loans and other investments narrows, the Company’s net interest income, and therefore earnings, could be adversely affected. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk).
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations.
Historically low interest rates may adversely affect our net interest income and profitability.
During the last eight years, it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities and Treasury securities. As a result, yields have been at levels lower than were available prior to 2008 on securities we have purchased and loans we have originated. Consequently, the average yield on our interest-earning assets has decreased during the low interest rate environment. As a general matter, our interest-bearing assets re-price or mature more quickly than our interest-bearing liabilities. Our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may continue to decrease. While the Federal Reserve Board raised the targeted federal funds rate and discount rate in December 2015 and may further raise the targeted federal funds rate and discount rate in 2016, we believe that interest rates may remain relatively low for the near future. Accordingly, our net interest margin may decline, which may have an adverse effect on our profitability.
The Company is subject to risks associated with speculative construction lending.
The risks associated with speculative construction lending include the borrower’s inability to complete the construction process on time and within budget, the sale of the project within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment. Such loans may include financing the development and/or construction of residential subdivisions. This activity may involve financing land purchases, infrastructure development (i.e. roads, utilities, etc.), as well as construction of residences or multi-family dwellings for subsequent sale by the developer/builder. Because the sale of developed properties is integral to the success of developer business, loan repayment may be especially subject to the volatility of real estate market values. Management has established underwriting and monitoring criteria to minimize the inherent risks of speculative commercial real estate construction lending. Further, management concentrates lending efforts with developers demonstrating successful performance on marketable projects within the Bank’s lending areas.
Our mortgage warehouse lending business represents a significant portion of our overall lending activity and is subject to numerous risks.
Our primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of our loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
A significant portion of our loan portfolio consists of the mortgage warehouse lines of credit. Risks associated with these loans include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.
The impact of interest rates on our mortgage warehouse business can be significant. Changes in interest rates can impact the number of residential mortgages originated and initially funded under mortgage warehouse lines of credit and thus our mortgage warehouse related revenues. A decline in mortgage rates generally increases the demand for mortgage loans. Conversely, in a constant or increasing rate environment, we would expect fewer loans may be originated. Although we use models to assess the impact of interest rates on mortgage related revenues, the estimates of net income produced by these models are dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may overstate or understate actual subsequent experience. Further, the concentration of our loan portfolio on loans originated through our mortgage warehouse business increases the risk associated with our loan portfolio because of the concentration of loans in a single line of business,
namely one-to-four family residential mortgage lending, and in a particular segment of that business, namely mortgage warehouse lending.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loan and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.
In addition, bank regulators periodically review our loan portfolio and our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs or reclassify loans. Any increase in our allowance for loan losses or loan charge-offs or loan reclassifications as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
If we do not successfully integrate banks that we may acquire in the future, the combined bank may be adversely affected.
If we make any acquisitions in the future, we will need to integrate those acquired entities into our existing business and systems. We may experience difficulties in accomplishing this integration or in effectively managing the combined bank after any future acquisitions. The integration of any acquired entity will also divert the attention of our management. We cannot assure you that we will be successful in integrating any future acquisitions into our own business.
The expected benefits from acquiring another entity may not be realized if the combined bank does not achieve certain cost savings and other benefits.
Our belief that cost savings and revenue enhancements are achievable in any future acquisition is a forward-looking statement that is inherently uncertain. The combined bank’s actual cost savings and revenue enhancements, if any, for any future acquisition cannot be quantified at this time. Any actual cost savings or revenue enhancements will depend on future expense levels and operating results, the timing of certain events and general industry, regulatory and business conditions. Many of these events will be beyond the control of the combined bank.
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.
We believe that the implementation of our strategy will depend in large part on the skills of our executive management team and our ability to motivate and retain these and other key personnel. Accordingly, the loss of service of one or more of our executive officers or key personnel could reduce our ability to successfully implement our business strategy and materially and adversely affect us. Leadership changes will occur from time to time, and if significant resignations occur, we may not be able to recruit additional qualified personnel. We believe our executive management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although our Chief Executive Officer and President has entered into an employment agreement with us, it is possible that he may not complete the term of his employment agreement or may choose not to renew it upon expiration.
Our customers also rely on us to deliver personalized financial services. Our success depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of the service of these individuals could undermine the confidence of our customers in our ability to provide such personalized services. We need to continue to attract and retain these individuals and to recruit other qualified individuals to ensure continued growth. In addition, competitors may recruit these individuals in light of the value of the individuals’ relationships with their customers and communities and we may not be able to retain such relationships absent the individuals. If we are unable to attract and retain our branch managers and lending officers, and recruit individuals with appropriate skills and knowledge to support our business, our business strategy, business, financial condition and results of operations may be adversely affected.
Our directors and executive officers own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of December 31, 2015, our directors and executive officers, together with their affiliates and related persons, beneficially own, in the aggregate, approximately 19.7% of our outstanding shares of common stock. These shareholders, if acting together,
may have the ability to determine the outcome of matters submitted to our shareholders for approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by:
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• | delaying, deferring, or preventing a change in control; |
| |
• | entrenching our management and/or the board of directors; |
| |
• | impeding a merger, consolidation, takeover, or other business combination involving us; or |
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• | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. |
Federal and state government regulation impacts the Company’s operations.
The operations of the Company and the Bank are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on the future business and earnings prospects of the Company.
The Company and the Bank are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Compliance with the rules and regulations of these agencies may be costly and may limit growth and restrict certain activities, including payment of dividends, investments, loans and interest rate charges, interest rates paid on deposits, and locations of offices. The Bank is also subject to capitalization guidelines set forth in federal legislation and regulations.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect the Company’s results of operations.
Legislative and regulatory reforms may materially adversely impact our financial condition, results of operations, liquidity, or stock price.
The Dodd-Frank Act restructures the regulation of depository institutions. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included was the creation of the Consumer Financial Protection Bureau, a new federal agency administering consumer and fair lending laws, a function that was previously performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions has been reduced as well. We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
In addition, international banking industry regulators have largely agreed upon significant changes in the regulation of capital required to be held by banks and their holding companies to support their businesses. The new international rules, known as Basel III, generally increase the capital required to be held and narrow the types of instruments which will qualify as providing appropriate capital and impose a new liquidity measurement. The Basel III requirements are complex and will be phased in over many years.
The Basel III rules do not apply to U.S. banks or holding companies automatically. Among other things, the Dodd-Frank Act requires U.S. regulators to reform the system under which the safety and soundness of banks and other financial institutions, individually and systemically, are regulated. That reform effort included the regulation of capital and liquidity.
On July 2, 2013, the Federal Reserve approved a final rule (the “Final Rule”) to establish a new comprehensive regulatory capital framework for all U.S. banking organizations. On July 9, 2013, the FDIC approved an interim final rule (which became final in April 2014 with no substantive changes) that was substantially similar to the Final Rule. Effective January 1, 2015, these new requirements establish the following minimum capital ratios: (1) a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. In addition, there is a new requirement to maintain a capital conservation buffer, comprised of CET1 capital, in an amount greater than 2.5% of risk-weighted assets over the minimum capital required by each of the minimum risk-based capital ratios in order to avoid limitations on the organization’s ability to pay dividends, repurchase shares or pay discretionary bonuses. The capital conservation buffer requirement will be phased in, beginning January 1, 2016, and initially require a buffer amount greater than 0.625% during 2016 in order to avoid these limitations. Following 2016, the required amount of the capital conservation buffer will continue to increase each year until January 1, 2019 when the buffer amount must be greater than 2.5% in order to avoid the above limitations.
These regulations define what qualifies as capital for purposes of meeting these various capital requirements, as well as the risk weight of certain assets for purposes of the risk-based capital ratios.
Under these regulations, in order to be considered well-capitalized for prompt corrective action purposes, the Bank will be required to maintain the following ratios: (1) a CET1 ratio of at least 6.5% of risk-weighted assets; (2) a Tier 1 capital ratio of at least 8.0% of risk weighted assets; (3) a total capital ratio of a least 10.0% of risk-weighted assets; and (4) a leverage ratio of at least 5.0%. The Bank’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 11.90%, 11.90%, 12.80%, and 10.55%, respectively, at December 31, 2015.
The application of these capital requirements could increase the Company’s required capital levels and the cost of capital, among other things. Any permanent significant increase in the Company’s cost of capital could have significant adverse impacts on the profitability of many of our products, the types of products we could offer profitably, our overall profitability, and our overall growth opportunities, among other things. Implementation of changes to asset risk weightings for risk based capital calculations or items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could also result in management modifying the Company’s business strategy and limiting the Company’s ability to repurchase our common stock. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in us having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Although most financial institutions would be affected, these business impacts could be felt unevenly, depending upon the business and product mix of each institution. Other potential adverse effects could include higher dilution of common shareholders if we had to issue additional shares and a higher risk that we might fall below regulatory capital thresholds in an adverse economic cycle.
Any additional changes in the regulation and oversight of the Company, in the form of new laws, rules and regulations, could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or operations.
The price of our common stock may fluctuate.
The price of our common stock on the NASDAQ Global Market constantly changes and recently, given the uncertainty in the financial markets, has fluctuated widely. From the beginning of fiscal year 2014 through the end of fiscal year 2015, our stock price fluctuated between a high of $12.37 per share and a low of $8.80 per share. We expect that the market closing price of our common stock will continue to fluctuate. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock.
Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
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• | quarterly fluctuations in our operating and financial results; |
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• | operating results that vary from the expectations of management, securities analysts and investors; |
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• | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
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• | events negatively impacting the financial services industry which result in a general decline in the market valuation of our common stock; |
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• | announcements of material developments affecting our operations or our dividend policy; |
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• | future sales of our equity securities; |
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• | new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
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• | changes in accounting standards, policies, guidance, interpretations or principles; and |
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• | general domestic economic and market conditions. |
In addition, recently, the stock market generally has experienced extreme price and volume fluctuations. Industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results.
The Bank is subject to liquidity risk.
Liquidity risk is the potential that the Bank will be unable to meet its obligations as they become due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures.
Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest payments; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. If we become unable to obtain funds when needed, it could have a material adverse effect on our business and in turn, our consolidated financial condition and results of operations.
The Company is subject to liquidity risk.
Our recurring cash requirements, at the holding company level, primarily consist of interest expense on junior subordinated debentures issued to capital trusts. Holding company cash needs are routinely satisfied by dividends collected from the Bank.
While we expect that the holding company will continue to receive dividends from the Bank sufficient to satisfy holding company cash needs, in the event that the Bank has insufficient resources or is subject to legal or regulatory restrictions on the payment of dividends, the Bank may be unable to provide dividends or a sufficient level of dividends to the holding company; in that event, the holding company may have insufficient funds to satisfy its obligations as they become due.
Future growth, operating results or regulatory requirements may require us to raise additional capital but that capital may not be available.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To the extent our future operating results erode capital or we elect to expand through loan growth or acquisition, we may be required to raise additional capital. Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed or on favorable terms. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These actions could negatively impact our ability to operate or further expand our operations and may result in increases in operating expenses and reductions in revenues that could have a material effect on our consolidated financial condition and results of operations.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
As a result of the Dodd-Frank Act, the FDIC modified its assessment rules so that an institution’s deposit insurance assessment base changed from total deposits to total assets less tangible equity. These assessment base rates range from 2.5 to 9 basis points for Risk Category I banks and up to 45 basis points for Risk Category IV banks. Risk Category II and III banks have assessment base rates ranging from 9 to 33 basis points, respectively. If the risk category of the Bank changes adversely, our FDIC insurance premiums could increase.
Insured depository institution failures, as well as deterioration in banking and economic conditions, could significantly increase the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the Deposit Insurance Fund to historical lows. Effective January 1, 2011, the FDIC increased the designated reserve ratio from 1.25% to 2.00%. In addition, the Dodd-Frank Act permanently increased the deposit insurance limit on FDIC deposit insurance coverage to $250,000 per insured depositor, retroactive to January 1, 2008, which may result in even larger losses to the Deposit Insurance Fund.
The FDIC may further increase or decrease the assessment rate schedule in order to manage the Deposit Insurance Fund to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank's earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.
Future offerings of debt or other securities may adversely affect the market price of our stock.
In the future, the Company may attempt to increase its capital resources or, if the Company’s or the Bank’s capital ratios fall below the required minimums, the Company or the Bank could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.
The Company may issue additional shares of common stock which may dilute the ownership and voting power of our shareholders and the book value of our common stock.
The Company is currently authorized to issue up to 30,000,000 shares of common stock, of which 7,954,314 shares were outstanding on February 29, 2016. We may decide to issue additional shares of common stock for any corporate purposes. Our Board of Directors has the authority, without action or vote of our shareholders, to issue all or part of the authorized but unissued shares of common stock in public offerings or up to 20% of our outstanding common stock in non-public offerings. Any issuance of shares of our common stock will dilute the percentage ownership interest of our common shareholders and may reduce the market price of our common stock or dilute the book value of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.
The Company may lose lower-cost funding sources.
Checking, savings, and money market deposit account balances and other forms of customer deposits can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, the Company could lose a relatively low-cost source of funds, increasing its funding costs and reducing the Company’s net interest income and net income.
There may be changes in accounting policies or accounting standards.
The Company’s accounting policies are fundamental to understanding its financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results. The Company identified its accounting policies regarding the allowance for loan losses, security impairment, goodwill and other intangible assets, and income taxes to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.
From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the form and content of the Company’s external financial statements. FASB recently adopted new accounting standards related to fair value accounting and accounting for leases that could materially change the Company’s financial statements in the future. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC, banking regulators and the Company’s independent auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond the Company’s control, can be hard to predict and could materially impact how the Company reports its financial results and condition. In certain cases, the Company could be required to apply a new or revised standard retroactively or apply an existing standard differently (also retroactively) which may result in the Company restating prior period financial statements in material amounts.
In addition, the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") recently updated the criteria in its Internal-Control Integrated Framework for assessing the effectiveness of internal controls over financial reporting. The Company has adopted such updated criteria, which materially changed the manner in which the Company assesses its internal controls over financial reporting. In the future, there may be further changes to the criteria used to assess the effectiveness of internal controls, which may result in the Company expending more resources to assess its internal controls.
Failure to maintain effective systems of internal controls over financial reporting could have a material adverse effect on our results of operations and financial condition and disclosures.
We must have effective internal controls over financial reporting in order to provide reliable financial reports, to effectively prevent fraud, and to operate successfully as a public company. If we were unable to provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of our internal controls over financial reporting, we may discover material weaknesses or significant deficiencies requiring remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We continually work to improve our internal controls; however, we cannot be certain that these measures will ensure appropriate and adequate controls over our future financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement of our internal controls could, among other things, result in losses from fraud or error, harm our reputation, or cause investors to lose confidence in our reported financial information, each of which could have a material adverse effect on our results of operations and financial condition and the market value of our common stock.
The fair value of our investment securities can flucutate due to market conditions out of our control.
As of December 31, 2015, approximately 87% of our investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises' mortgage backed securities and municipal securities. As of December 31, 2015, the fair value of our investment portfolio was approximately $222.0 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, ratings agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and instability in the credit markets. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on our business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgements about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
Because of changing economic and market conditions affecting issuers and the performance of underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
The Company encounters continuous technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
The Company is subject to operational risk.
We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations. These third parties provide key components of our business operations such as data processing, recording and monitoring
transactions, online banking interfaces and services, Internet connections and network access. While we have selected these third-party vendors carefully, we do not control their actions. Any complications caused by these third parties, including those resulting from disruptions in communication or electrical services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to provide services. Furthermore, our vendors could also be sources of operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third-party vendors could also create significant delay and expense. Problems caused by external vendors could be disruptive to our operations, which could have a material adverse impact on our business, financial condition and results of operations.
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Company’s operations, net income or reputation.
The Company regularly collects, processes, transmits and stores significant amounts of confidential information regarding its customers, employees and others. This information is necessary for the conduct of the Company’s business activities, including the ongoing maintenance of deposit, loan, investment management and other account relationships for our customers, and receiving instructions and affecting transactions for those customers and other users of the Company’s products and services. In addition to confidential information regarding its customers, employees and others, the Company compiles, processes, transmits and stores proprietary, non-public information concerning its own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on behalf of the Company.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of the Company’s operational or information security systems, or those of the Company’s third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect the Company’s systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for the Company.
If this confidential or proprietary information were to be mishandled, misused or lost, the Company could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss. Mishandling, misuse or loss of this confidential or proprietary information could occur, for example, if the confidential or proprietary information were erroneously provided to parties who are not permitted to have the information, either by fault of the systems or employees of the Company, or the systems or employees of third parties which have collected, compiled, processed, transmitted or stored the information on the Company’s behalf, where the information is intercepted or otherwise inappropriately taken by third parties or where there is a failure or breach of the network, communications or information systems which are used to collect, compile, process, transmit or store the information.
Although the Company employs a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, or that if mishandling, misuse or loss of the information did occur, those events would be promptly detected and addressed. Additionally, as information security risks and cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities.
There may be claims and litigation.
From time to time as part of the Company’s normal course of business, customers make claims and take legal actions against the Company based on actions or inactions of the Company. If such claims and legal actions are not resolved in a manner favorable to the Company, they may result in financial liability and/or adversely affect the market perception of the Company and its products and services. This may also impact customer demand for the Company’s products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
Severe weather, acts of terrorism and other external events could significantly impact our business.
A significant portion of our primary markets are located near coastal waters which could generate naturally occurring severe weather, or in response to climate change, that could have a significant impact on our ability to conduct business. Additionally, surrounding areas, including New Jersey, may be central targets for potential acts of terrorism against the United States. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause additional expenses. Although the Company has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. On October 29, 2012, Hurricane Sandy caused destruction along the East Coast, including in New Jersey, and resulted in, among other things, severe property damage and the closure of many businesses and financial markets. The financial impact to the Company was minimal as our mortgage loan customers in the areas affected by Hurricane Sandy did not sustain severe damage to their real properties and we experienced no loan delinquencies specifically related to Hurricane Sandy. In 2014 and 2015, our market area was the subject of severe cold weather and several snow storms which disrupted commercial activities and the Bank’s operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We currently operate 19 branch offices in New Jersey, including the Bank’s main office in Cranbury, New Jersey. In addition, there is an Operations Center which is leased in Cranbury, New Jersey. The following table provides certain information with respect to our offices as of February 29, 2016:
|
| | | | |
Location | Leased or
Owned | Original Year Leased or Acquired | Year of Lease
Expiration |
Main Office | | | | |
2650 Route 130
Cranbury, New Jersey | Leased | 1989 | 2017 |
| | | | |
Village Office | | | | |
74 North Main Street
Cranbury, New Jersey | Owned | 2005 | — |
| | | | |
Plainsboro Office | | | | |
Plainsboro Village Center 11 Shalks Crossing Road Plainsboro, New Jersey | Leased | 1998 | 2021 |
| | | | |
Hamilton Office | | | | |
3659 Nottingham Way Hamilton, New Jersey | Leased | 1999 | 2024 |
| | | | |
Princeton Office | | | | |
The Windrows at Princeton Forrestal 2000 Windrow Drive Princeton, New Jersey | Leased | 2001 | 2016 |
| | | | |
Perth Amboy Office | | | | |
145 Fayette Street Perth Amboy, New Jersey | Leased | 2003 | 2019 |
| | | | |
Jamesburg Office | | | | |
1 Harrison Street Jamesburg, New Jersey | Owned | 2002 | — |
| | | | |
| | | | |
West Windsor Office | | | | |
|
| | | | |
44 Washington Road Princeton Jct, New Jersey | Leased | 2004 | 2017 |
| | | | |
Fort Lee Office | | | | |
180 Main Street Fort Lee, New Jersey | Leased | 2006 | 2019 |
| | | | |
Hightstown Office | | | | |
140 Mercer Street Hightstown, New Jersey | Leased | 2007 | 2024 |
| | | | |
Lawrenceville Property | | | | |
150 Lawrenceville-Pennington Road Lawrenceville, New Jersey | Owned | 2009 | — |
| | | | |
South River Operations Center | | | | |
1246 South River Road, Bldg. 2 Cranbury, New Jersey | Leased | 2010 | 2020 |
| | | | |
Rocky Hill Office | | | | |
995 Route 518 Skillman, New Jersey | Owned | 2011 | — |
| | | | |
Hopewell Office | | | | |
86 East Broad Street Hopewell, New Jersey | Owned | 2011 | — |
| | | | |
Hillsborough Office | | | | |
32 New Amwell Road Hillsborough, New Jersey | Owned | 2011 | — |
| | | | |
Rumson Office | | | | |
20 Bingham Avenue
Rumson, New Jersey | Leased | 2014 | 2016 |
| | | | |
Fair Haven Office | | | | |
636 River Road
Fair Haven, New Jersey | Leased | 2014 | 2017 |
| | | | |
Asbury Park Office | | | | |
511 Cookman Avenue
Asbury Park, New Jersey | Owned | 2014 | — |
| | | | |
Shrewsbury Office | | | | |
500 Broad Street
Shrewsbury, New Jersey | Leased | 2014 | 2030 |
| | | | |
Little Silver Office | | | | |
517 Prospect Avenue Little Silver, New Jersey | Leased | 2015 | 2019 |
Management believes the foregoing facilities are suitable for the Company’s and the Bank’s present and projected operations.
Item 3. Legal Proceedings.
The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse effect on the Company’s financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
The common stock of the Company trades on the Nasdaq Global Market under the trading symbol “FCCY”. The following are the high and low sales prices per share for each quarter during 2015 and 2014, as reported on the Nasdaq Global Market.
|
| | | | | | | | | | | | | |
| 2015 | (1) | | 2014 | (1) |
| High | Low | | High | Low |
First Quarter | $ | 10.98 |
| $ | 9.41 |
| | $ | 10.25 |
| $ | 9.07 |
|
Second Quarter | 11.86 |
| 10.07 |
| | 9.77 |
| 9.09 |
|
Third Quarter | 11.40 |
| 10.29 |
| | 9.92 |
| 8.80 |
|
Fourth Quarter | 12.37 |
| 10.81 |
| | 10.43 |
| 9.61 |
|
(1) Prices have been retroactively adjusted for the 5% stock dividends declared February 20, 2015 and December 18, 2015.
As of February 29, 2016, there were approximately 302 record holders of the Company’s common stock.
The Company paid a 5% common stock dividend on April 7, 2015 and declared a 5% common stock dividend on December 18, 2015 that was paid on February 1, 2016. The Company did not declare a common stock dividend in 2014.
The Company has never paid a cash dividend on its common stock and there are no plans to pay a cash dividend on its common stock at this time. In addition, please refer to the discussion under the heading “Shareholders’ Equity and Dividends” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional restrictions on cash dividends.
Issuer Purchases of Equity Securities
On January 21, 2016, the Board of Directors of the Company authorized a new common stock repurchase program under which the Company may repurchase in open market or privately negotiated transactions up to 5% of its common shares outstanding on the date of the approval of the stock repurchase program. For purposes of the new repurchase program limit, common shares outstanding on the date of approval will be adjusted for any future stock dividends. The Company undertook this repurchase program in order to increase shareholder value. The new repurchase program replaces the repurchase program that was authorized on August 3, 2005. The following table provides common stock repurchases made by or on behalf of the Company during the three months ended December 31, 2015, which purchases were made under the 2005 stock repurchase program.
Issuer Purchases of Equity Securities |
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased As Part of Publicly Announced Program | | Maximum Number of Shares That May Yet be Purchased Under the Program |
Beginning | Ending | | | | | | | | |
October 1, 2015 | October 31, 2015 | | 5,879 |
| | $ | 11.69 |
| | 5,879 |
| | 100,357 |
|
November 1, 2015 | November 30, 2015 | | 1,380 |
| | 12.56 |
| | 1,380 |
| | 98,977 |
|
December 1, 2015 | December 31, 2015 | | 17,914 |
| | 11.56 |
| | 17,914 |
| | 81,063 |
|
| Total | | 25,173 |
| | $ | 11.94 |
| | 25,173 |
| | 81,063 |
|
Item 6. Selected Financial Data.
Not required.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Throughout the following sections, the “Company” refers to 1st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1st Constitution Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries as of December 31, 2015, which were 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1st Constitution Capital Trust II (“Trust II”), a subsidiary of the Company as of December 31, 2015, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Company’s financial condition, changes in financial condition and results of operations.
Critical Accounting Policies and Estimates
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Consolidated Financial Statements for the year ended December 31, 2015 contains a summary of the Company’s significant accounting policies.
Management believes the Company’s policies with respect to the methodologies for the determination of the allowance for loan losses and for determining other-than-temporary security impairment involve a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors. The provision for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available to it, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or should the Central New Jersey area experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its new cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations. Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (level 1) or quoted prices on similar assets (level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of quoted prices, valuation techniques would be used to determine fair value of any investments that require inputs that are both significant to the fair value measurement and unobservable (level 3). Valuation techniques are based on various assumptions, including, but not limited to cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using level 3 inputs. The use of different assumptions could have a positive or negative effect on consolidated financial condition or results of operations.
Management must periodically evaluate if unrealized losses (as determined based on the securities valuation methodologies discussed above) on individual securities classified as held to maturity or available for sale in the investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions, including, but not limited to, the length of time an investment’s book value is greater than fair value, the severity of the investment’s decline, as well as any credit deterioration of the investment. If the decline in value of an investment is deemed to be other-than-temporary, the investment is written down to fair value and a non-cash impairment charge is recognized in the period of such evaluation.
The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment.
Deferred tax assets are recorded on the consolidated balance sheet at net realizable value. The Company periodically performs an assessment to evaluate the amount of deferred tax assets it is more likely than not to realize. Realization of deferred tax assets is dependent upon the amount of taxable income expected in future periods, as tax benefits require taxable income to be realized. If a valuation allowance is required, the deferred tax asset on the consolidated balance sheet is reduced via a corresponding income tax expense in the consolidated statement of income.
Merger of Rumson-Fair Haven Bank and Trust Company with and into the Bank in 2014
On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company ("Rumson"), a New Jersey State chartered commercial bank, by merging Rumson with and into the Bank, with the Bank as the surviving entity. The merger agreement among the Company, the Bank and Rumson (the “Merger Agreement”) provided that the shareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the effective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash or a combination thereof, subject to proration as described in the Merger Agreement, so that 60% of the aggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019, 223 shares of its common stock and paid approximately $14.8 million in cash in the transaction.
The merger was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values as of the acquisition date. Rumson’s results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.
The merger of Rumson had a significant positive effect on the financial position and operations of the Company. At the time of the merger, Rumson had loans of $144.0 million, investment securities of $30.0 million, deposits of $190.0 million and borrowings of $10.0 million.
Results of Operations
Summary
The Company reported net income of $8.7 million or $1.07 per diluted share for the year ended December 31, 2015 compared to net income of $4.4 million or $0.55 per diluted share for the year ended December 31, 2014. The results of operations for 2014 were significantly impacted by the $1.5 million of merger expenses related to the acquisition of Rumson in the first quarter of 2014 and the additional provision for loan losses of approximately $3.7 million related to the full charge-off of a loan in the second quarter of 2014 due to fraudulent misrepresentations by a borrower and its principals. Excluding the after-tax effect of these two events, Adjusted Net Income was $7.5 million and Adjusted Net Income per Diluted Share was $0.95 for 2014. Adjusted Net Income and Adjusted Net Income per Diluted Share are considered non-GAAP measures.
The significant increase in net income for 2015 was due in part to the $3.6 million increase in net interest income to $36.3 million, which was driven by the internal growth of the Bank's loan portfolio in 2014 and 2015. The net interest margin was 4.07% in 2015 compared to 3.84% in 2014 and increased primarily due to the growth in the loan portfolio, which generated the higher yield earned on earning assets of 4.58% in 2015 compared to 4.37% earned in 2014.
The provision for loan losses declined to $1.1 million in 2015 due to the significant reduction in charge-offs and non-performing loans during the year. In 2014, the $5.8 million provision for loan losses included a $3.7 million provision for loan losses related to fraudulent misrepresentations by a borrower and its principals, which resulted in the full charge-off of the loan. Net charge-offs were $465,000 in 2015 compared to $5.9 million in 2014.
Non-interest income was $7.3 million for 2015 compared to $6.8 million in the prior year and increased primarily due to higher gains on the sale of loans, which more than offset the decline in deposit service charges and other customer charges included in other income.
Non-interest expenses increased $3.0 million to $29.8 million in 2015 compared to $26.8 million in 2014, excluding the $1.5 million of merger related expenses incurred in the acquisition of Rumson. OREO expenses were $1.5 million in 2015 and included $1.0 million of net losses on the sale or write-down of OREO assets and $382,000 of ownership expenses related to the assets sold.
The following is a reconciliation of the non-GAAP measures to reported net income and net income per diluted share for the year ended December 31, 2014.
|
| | | | |
1st Constitution Bancorp Reconciliation of Non-GAAP Measures (1) | | |
| Year ended December 31, | |
(Dollars in thousands, except per share data) | 2014 | |
Adjusted Net Income | | |
Net Income | $ | 4,356 |
| |
Adjustments: | |
| |
Provision for loan losses related to fraud (2) | 3,656 |
| |
Merger-related expenses | 1,532 |
| |
Income tax effect of adjustments (3) | (2,031 | ) | |
Adjusted net income | $ | 7,513 |
| |
| | |
Adjusted Net Income per Diluted Share | |
| |
Adjusted net income | $ | 7,513 |
| |
Diluted shares outstanding | 7,879,186 |
| |
Adjusted net income per diluted share | $ | 0.95 |
| |
| | |
Adjusted Return on Assets (4) | 0.79 | % | |
Adjusted Return on Equity (4) | 9.22 | % | |
| |
(1) | Adjusted Net Income, Adjusted Net Income per Diluted Share, Adjusted Return on Assets and Adjusted Return on Equity are measures not in accordance with Generally Accepted Accounting Principles ("GAAP"). The Company used the non-GAAP financial measures because the Company believes that it is useful for the users of financial information to understand the effect on net income of the merger-related expenses incurred in the merger with Rumson and the large provision for loan losses recorded as the result of the fraudulent misrepresentations by a borrower and its principals. Management believes that these non-GAAP financial measures improve the comparability of the current period results with the results of the prior period. The Company cautions that the non-GAAP financial measures should be considered in addition to, but not a substitute for, the Company's GAAP results. |
| |
(2) | The amount represents the full charge-off of a loan participation due to fraudulent misrepresentations by a borrower and its principals that was recorded in the second quarter of 2014. |
| |
(3) | Tax effected at an income tax rate of 39.94%, less the impact of non-deductible merger expenses. |
| |
(4) | Adjusted Return on Assets and Adjusted Return on Equity excludes the after-tax effect of the merger-related expenses and loan loss provision in 2014. |
Return on average assets (“ROAA”) and return on average equity (“ROAE”) as reported were 0.89% and 9.49%, respectively, for the year ended December 31, 2015, compared to 0.46% and 5.34%, respectively, for the year ended December 31, 2014.
The Bank’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
Net Interest Income
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 83% of the Company’s net revenues (net interest income plus non-interest income) for the years ended December 31, 2015 and December 31, 2014. Net interest income also depends upon the relative amount of average interest earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
The Company’s net interest income increased on a tax equivalent basis by $3.5 million, or 10.4%, to $37.3 million for the year ended December 31, 2015 from $33.8 million reported for the year ended December 31, 2014. The increase was driven principally by the internal growth of the loan portfolio.
The net interest margin for the year ended December 31, 2015 was 4.07% compared to the 3.84% net interest margin recorded for the year ended December 31, 2014, an increase of 23 basis points. This increase in the Company’s net interest income and net interest margin for the year ended December 31, 2015 compared with the corresponding 2014 period was primarily due to the increase in the average loan to average asset ratio to 70.0% in 2015 compared to 59.6% in 2014 and an increase of 21 basis points in the average yield of interest-earning assets to 4.58% for the year ended December 31, 2015 compared to 4.37% for the year ended December 31, 2014.
The following tables set forth the Company’s consolidated average balances of assets, liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the years ended December 31, 2015, 2014 and 2013, respectively. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.
Net Interest Margin Analysis
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(yields on a tax-equivalent basis) | 2015 | | 2014 | | 2013 |
(Dollars in thousands) | Average Balance | | Interest | | Average Yield | | Average Balance | | Interest | | Average Yield | | Average Balance |
| | Interest | | Average Yield |
Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Federal Funds Sold/Short-Term Investments | $ | 23,131 |
| | $ | 50 |
| | 0.22 | % | | $ | 60,933 |
| | $ | 150 |
| | 0.25 | % | | $ | 120,125 |
| | $ | 300 |
| | 0.25 | % |
Investment Securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Taxable | 127,859 |
| | 3,167 |
| | 2.48 | % | | 168,992 |
| | 4,022 |
| | 2.38 | % | | 162,246 |
| | 3,915 |
| | 2.41 | % |
Tax-exempt (4) | 81,612 |
| | 3,153 |
| | 3.86 | % | | 87,455 |
| | 3,419 |
| | 3.91 | % | | 69,158 |
| | 3,270 |
| | 4.73 | % |
| | | | | | | | | | | | | | | | | |
Total | 209,471 |
| | 6,320 |
| | 3.02 | % | | 256,447 |
| | 7,441 |
| | 2.90 | % | | 231,404 |
| | 7,185 |
| | 3.10 | % |
| | | | | | | | | | | | | | | | | |
Loan Portfolio (1): | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Construction | 95,627 |
| | 5,961 |
| | 6.23 | % | | 77,159 |
| | 5,233 |
| | 6.78 | % | | 43,391 |
| | 2,757 |
| | 6.35 | % |
Residential Real Estate | 43,048 |
| | 1,804 |
| | 4.19 | % | | 45,572 |
| | 1,855 |
| | 4.07 | % | | 11,492 |
| | 589 |
| | 5.13 | % |
Home Equity | 22,217 |
| | 1,028 |
| | 4.63 | % | | 22,070 |
| | 1,201 |
| | 5.44 | % | | 9,293 |
| | 495 |
| | 5.33 | % |
Commercial Business and Commercial Real Estate | 290,301 |
| | 16,381 |
| | 5.64 | % | | 271,888 |
| | 15,893 |
| | 5.85 | % | | 145,470 |
| | 10,392 |
| | 7.14 | % |
SBA Loans | 19,409 |
| | 1,100 |
| | 5.67 | % | | 13,971 |
| | 771 |
| | 5.52 | % | | 14,081 |
| | 847 |
| | 6.02 | % |
Mortgage Warehouse Lines | 203,074 |
| | 8,894 |
| | 4.38 | % | | 124,127 |
| | 5,589 |
| | 4.50 | % | | 151,336 |
| | 7,096 |
| | 4.69 | % |
Installment | 497 |
| | 22 |
| | 4.47 | % | | 340 |
| | 19 |
| | 5.58 | % | | 266 |
| | 17 |
| | 6.39 | % |
All Other Loans | 10,312 |
| | 407 |
| | 3.95 | % | | 8,252 |
| | 318 |
| | 3.85 | % | | 24,133 |
| | 374 |
| | 1.55 | % |
Total | 684,485 |
| | 35,597 |
| | 5.20 | % | | 563,379 |
| | 30,879 |
| | 5.48 | % | | 399,462 |
| | 22,567 |
| | 5.65 | % |
| | | | | | | | | | | | | | | | | |
Total Interest-Earning Assets | 917,087 |
| | 41,967 |
| | 4.58 | % | | 880,759 |
| | 38,470 |
| | 4.37 | % | | 750,991 |
| | 30,052 |
| | 4.00 | % |
| | | | | | | | | | | | | | | | | |
Allowance for Loan Losses | (7,484 | ) | | |
| | |
| | (7,487 | ) | | |
| | |
| | (6,857 | ) | | |
| | |
|
Cash and Due From Banks | 6,272 |
| | |
| | |
| | 14,620 |
| | |
| | |
| | 9,999 |
| | |
| | |
|
Other Assets | 62,149 |
| | |
| | |
| | 57,689 |
| | |
| | |
| | 47,401 |
| | |
| | |
|
Total Assets | $ | 978,024 |
| | |
| | |
| | $ | 945,581 |
| | |
| | |
| | $ | 801,534 |
| | |
| | |
|
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest-Bearing Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Money Market and NOW Accounts | $ | 300,813 |
| | $ | 1,013 |
| | 0.34 | % | | $ | 286,235 |
| | $ | 954 |
| | 0.33 | % | | $ | 222,581 |
| | $ | 758 |
| | 0.34 | % |
Savings Accounts | 196,844 |
| | 950 |
| | 0.48 | % | | 199,078 |
| | 904 |
| | 0.45 | % | | 198,169 |
| | 894 |
| | 0.45 | % |
Certificates of Deposit under $100,000 | 87,306 |
| | 875 |
| | 1.00 | % | | 70,574 |
| | 910 |
| | 1.29 | % | | 68,741 |
| | 860 |
| | 1.25 | % |
Certificates of Deposit of $100,000 and Over | 71,449 |
| | 866 |
| | 1.21 | % | | 98,891 |
| | 1,031 |
| | 1.04 | % | | 71,616 |
| | 976 |
| | 1.36 | % |
Other Borrowed Funds | 38,472 |
| | 577 |
| | 1.50 | % | | 23,724 |
| | 515 |
| | 2.18 | % | | 10,285 |
| | 415 |
| | 4.04 | % |
Trust Preferred Securities | 18,557 |
| | 355 |
| | 1.91 | % | | 18,557 |
| | 344 |
| | 1.90 | % | | 18,557 |
| | 352 |
| | 1.90 | % |
| | | | | | | | | | | | | | | | | |
Total Interest-Bearing Liabilities | 713,441 |
| | 4,636 |
| | 0.65 | % | | 697,059 |
| | 4,658 |
| | 0.67 | % | | 589,949 |
| | 4,255 |
| | 0.72 | % |
| | | | | | | | | | | | | | | | | |
Net Interest Spread (2) | |
| | |
| | 3.93 | % | | |
| | |
| | 3.70 | % | | |
| | |
| | 3.28 | % |
| | | | | | | | | | | | | | | | | |
Demand Deposits | 164,419 |
| | |
| | |
| | 159,935 |
| | |
| | |
| | 137,873 |
| | |
| | |
|
Other Liabilities | 8,857 |
| | |
| | |
| | 7,065 |
| | |
| | |
| | 7,500 |
| | |
| | |
|
Total Liabilities | 886,717 |
| | |
| | |
| | 864,059 |
| | |
| | |
| | 735,322 |
| | |
| | |
|
Shareholders' Equity | 91,307 |
| | |
| | |
| | 81,522 |
| | |
| | |
| | 66,212 |
| | |
| | |
|
Total Liabilities and Shareholders' Equity | $ | 978,024 |
| | |
| | |
| | $ | 945,581 |
| | |
| | |
| | $ | 801,534 |
| | |
| | |
|
| | | | | | | | | | | | | | | | | |
Net Interest Margin(3) | |
| | $ | 37,331 |
| | 4.07 | % | | |
| | $ | 33,812 |
| | 3.84 | % | | |
| | $ | 25,797 |
| | 3.44 | % |
| | | | | | | | | | | | | | | | | |
| |
(1) | Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income. Please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans. |
| |
(2) | The net interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. |
| |
(3) | The net interest margin is equal to net interest income divided by average interest earning assets. |
| |
(4) | Tax-equivalent basis. The tax-equivalent adjustments were $1.0 million for the year ended December 2015 and $1.1 million for the years ended December 31, 2014 and 2013. |
Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest earning assets, interest bearing liabilities, related yields and associated funding costs. The Rate/Volume Table demonstrates the impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates earned and paid.
As indicated in the Rate/Volume Table, the principal factor contributing to the increase in tax-equivalent net interest income for the year ended December 31, 2015 was an increase in the volume of loans in the loan portfolio, partially offset by a decrease in the volume of investment securities.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Rate/Volume Table | | Amount of Increase (Decrease) |
(Dollars in thousands) | | 2015 versus 2014 | | 2014 versus 2013 |
| | Due to Change in: | | Due to Change in: |
(Tax-equivalent basis) | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest Income: | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | |
Construction | | $ | 1,253 |
| | $ | (525 | ) | | $ | 728 |
| | $ | 2,216 |
| | $ | 260 |
| | $ | 2,476 |
|
Residential Real Estate | | (103 | ) | | 52 |
| | (51 | ) | | 1,568 |
| | (302 | ) | | 1,266 |
|
Home Equity | | 8 |
| | (181 | ) | | (173 | ) | | 688 |
| | 18 |
| | 706 |
|
Commercial Business and Commercial Real Estate | | 1,076 |
| | (588 | ) | | 488 |
| | 8,202 |
| | (2,701 | ) | | 5,501 |
|
Mortgage Warehouse Lines | | 3,555 |
| | (250 | ) | | 3,305 |
| | (1,248 | ) | | (259 | ) | | (1,507 | ) |
Installment | | 9 |
| | (6 | ) | | 3 |
| | 4 |
| | (2 | ) | | 2 |
|
All Other Loans | | 367 |
| | 51 |
| | 418 |
| | (646 | ) | | 514 |
| | (132 | ) |
Total Loans | | $ | 6,165 |
| | $ | (1,447 | ) | | $ | 4,718 |
| | $ | 10,784 |
| | $ | (2,472 | ) | | $ | 8,312 |
|
Investment Securities : | | | | | | | | | | | | |
Taxable | | $ | (979 | ) | | $ | 124 |
| | $ | (855 | ) | | $ | 159 |
| | $ | (52 | ) | | $ | 107 |
|
Tax-exempt | | (228 | ) | | (38 | ) | | (266 | ) | | 791 |
| | (642 | ) | | 149 |
|
Total Investment Securities | | $ | (1,207 | ) | | $ | 86 |
| | $ | (1,121 | ) | | $ | 950 |
| | $ | (694 | ) | | $ | 256 |
|
Federal Funds Sold / Short-Term Investments | | (95 | ) | | (5 | ) | | (100 | ) | | (150 | ) | | — |
| | (150 | ) |
Total Interest Income | | $ | 4,863 |
| | $ | (1,366 | ) | | $ | 3,497 |
| | $ | 11,584 |
| | $ | (3,166 | ) | | $ | 8,418 |
|
| | | | | | | | | | | | |
Interest Expense : | | | | | | | | | | | | |
Money Market and NOW Accounts | | $ | 49 |
| | $ | 10 |
| | $ | 59 |
| | $ | 217 |
| | $ | (21 | ) | | $ | 196 |
|
Savings Accounts | | (10 | ) | | 56 |
| | 46 |
| | 10 |
| | — |
| | 10 |
|
Certificates of Deposit under $100,000 | | 216 |
| | (251 | ) | | (35 | ) | | 23 |
| | 27 |
| | 50 |
|
Certificates of Deposit of $100,000 and Over | | (286 | ) | | 121 |
| | (165 | ) | | 334 |
| | (279 | ) | | 55 |
|
Other Borrowed Funds | | 321 |
| | (259 | ) | | 62 |
| | 417 |
| | (317 | ) | | 100 |
|
Trust Preferred Securities | | — |
| | 11 |
| | 11 |
| | — |
| | (8 | ) | | (8 | ) |
Total Interest Expense | | $ | 290 |
| | $ | (312 | ) | | $ | (22 | ) | | $ | 1,001 |
| | $ | (598 | ) | | $ | 403 |
|
| | | | | | | | | | | | |
Net Interest Income | | $ | 4,573 |
| | $ | (1,054 | ) | | $ | 3,519 |
| | $ | 10,583 |
| | $ | (2,568 | ) | | $ | 8,015 |
|
As of December 31, 2015, loans were $682.1 million and had increased $27.8 million compared to $654.3 million at December 31, 2014. The primary driver of the 4.3% increase in loans during 2015 was the $37.4 million or 20.9% increase in outstanding balances under mortgage warehouse lines to $216.6 million at December 3, 2015 from $179.2 million at December 31, 2014.
Average interest-earning assets increased by $36.3 million, or 4.1%, to $917.1 million for the year ended December 31, 2015 from $880.8 million for the year ended December 31, 2014. Overall, the yield on interest-earning assets, on a tax-equivalent basis, increased 21 basis points to 4.58% for the year ended December 31, 2015 compared to 4.37% for the year ended December 31, 2014 due primarily to the increase in the average balance of mortgage warehouse lines and construction, commercial real estate and commercial business loans resulting from the internal growth of loans. The growth in average interest-earning assets and the increase in loans as a percentage of average interest-earning assets generated a $3.6 million increase in total interest income for 2015.
Interest expense decreased by $22,000, or 0.5%, to $4.6 million for the year ended December 31, 2015 from $4.7 million for the year ended December 31, 2014 as the Bank managed the mix of interest-bearing liabilities and reduced its interest cost by 2 basis points to 0.65% in 2015 from 0.67% in 2014. This decrease in interest expense was principally attributable to a decrease of $10.7 million in total average certificates of deposits
which generally are a higher cost source of funding than NOW, money market and savings accounts. Money market and NOW accounts increased on average by $14.6 million in 2015, or 5.1%, compared to 2014, and the cost on these deposits increased one basis point in 2015 compared to 2014. Average interest-bearing liabilities increased $16.4 million, or 2.4%, in 2015 compared to 2014 principally due to increases in other borrowed funds and money market and NOW balances, which increases were partially offset by a decrease in total certificates of deposits.
The Company’s net interest income increased on a tax-equivalent basis by $8.0 million, or 31.1%, to $33.8 million for the year ended December 31, 2014 from $25.8 million reported for the year ended December 31, 2013. As indicated in the Rate/Volume Table, the increase was driven primarily by the internal growth of the loan portfolio and the inclusion of the operations of Rumson.
Provision for Loan Losses
Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, non-accrual loans and problem loans as identified through internal classifications, collateral values, and the growth and size of the loan portfolio.
In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company’s provision for loan losses was $1.1 million for the year ended December 31, 2015 compared to $5.8 million for the year ended December 31, 2014. Net charge-offs for the years ended December 31, 2015 and 2014 were $465,000 and $5.9 million, respectively. The decrease in the provision for loan losses and net-charge offs for 2015 was primarily attributable to the $3.7 million provision for loan losses and corresponding charge-off of the entire balance of a loan due to the fraudulent misrepresentations by a borrower and its principals that was recorded in the second quarter of 2014. Charge-offs in 2014 also included $0.9 million of gross charge-offs of specific reserves for potential loan losses that were recorded in prior periods. The lower provision for loan losses in 2015 also reflects the reduction by ten basis points (0.10%) of loan loss reserve factors across all loan portfolios. The lower loan loss reserve factors reflect the strengthening economic conditions of the Bank's markets, the stable loan quality trends experienced and the level of estimated loss in the loan portfolio. During 2015, $6.9 million of non-performing assets were resolved.
Non-Interest Income
Total non-interest income for the year ended December 31, 2015 increased to $7.3 million from $6.8 million for the year ended December 31, 2014 due primarily to higher gains from the sale of loans which more than offset the decline in deposit service charges and other customer service charges. This revenue component represented 17% of the Company’s net revenues for the years ended December 31, 2015 and 2014.
Service charges on deposit accounts decreased by $170,000 to $818,000 for the year ended December 31, 2015 compared to $988,000 for the year ended December 31, 2014 due to declines in customer activity and for non-sufficient funds charges. This component of non-interest income represented 11.2% and 14.5% of the total non-interest income for the years ended December 31, 2015 and 2014, respectively.
Gains on sales of loans held for sale increased $936,000 to $4.0 million for the year ended December 31, 2015 compared to $3.1 million for the year ended December 31, 2014. The Bank sells both residential mortgage loans and the portion of commercial loans guaranteed by the Small Business Administration ("SBA") in the secondary market.
Gains on the sale of residential mortgage loans were $2.3 million in 2015 compared to $1.9 million in 2014. In 2015, $136.4 million of residential loans were sold compared to $108.6 million in 2014. In 2015, residential mortgage rates declined and the FHA lowered the premium paid by borrowers for mortgage insurance which increased the volume of mortgages refinanced. In addition, there was an increase in residential housing sales which increased the volume of mortgage loans to finance the purchase of homes.
In 2015, $17.5 million of SBA loans were sold and generated net gains of $1.7 million compared to SBA loans sold and net gains on sale of $10.8 million and $1.2 million, respectively, in 2014.
The Bank did not sell any securities in 2015. In 2014, the Bank sold available-for-sale securities with an aggregate book value of $28.1 million that resulted in a pre-tax loss of $1,000.
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $558,000 for the year ended December 31, 2015 compared to $564,000 for the year ended December 31, 2014.
The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rentals, wire transfer service fees and Automated Teller Machine fees for non-Bank customers. The other income component of non-interest income declined to $1.9 million for the year ended December 31, 2015 compared to $2.2 million for the year ended December 31, 2014 due to lower customer activity.
Non-Interest Expenses
Total non-interest expenses increased by $1.4 million, or 5.0%, to $29.8 million for the year ended December 31, 2015 from $28.3 million for the year ended December 31, 2014. Excluding the effect of the $1.5 million in merger-related expenses incurred in the acquisition of Rumson in 2014, non-interest expenses increased $3.0 million to $29.8 million for 2015 compared to $26.8 million for 2014. The increase in non-interest expenses included increases of $1.1 million, or 6.92%, in salaries and employee benefit expenses, and a $1.3 million increase in OREO expenses. Approximately $233,000 of the total increase in non-interest expenses in 2015 reflected the inclusion of the former Rumson operations for the entire year of 2015 compared to approximately eleven months in 2014. The Company recorded $1.5 million in merger-related expenses in 2014 compared to no merger-related expenses in 2015. The following table presents the major components of non-interest expenses for the years ended December 31, 2015 and 2014.
|
| | | | | | | |
| | | |
Non-interest Expenses | Year ended December 31, |
(Dollars in thousands) | 2015 | | 2014 |
Salaries and employee benefits | $ | 17,232 |
| | $ | 16,117 |
|
Occupancy expense | 3,461 |
| | 3,355 |
|
Data processing services | 1,211 |
| | 1,264 |
|
Equipment expense | 839 |
| | 870 |
|
Marketing | 282 |
| | 197 |
|
Telephone | 449 |
| | 422 |
|
Regulatory, professional and consulting fees | 1,681 |
| | 1,360 |
|
Merger-related expenses | — |
| | 1,532 |
|
FDIC deposit insurance | 660 |
| | 715 |
|
Directors’ fees | 92 |
| | 92 |
|
Other real estate owned expenses | 1,542 |
| | 236 |
|
Amortization of intangible assets | 428 |
| | 456 |
|
Other expenses | 1,878 |
| | 1,721 |
|
Total | $ | 29,755 |
| | $ | 28,337 |
|
| | | |
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $1.1 million, or 6.9%, to $17.2 million for the year ended December 31, 2015 compared to $16.1 million for the year ended December 31, 2014. The increase in salaries and employee benefits for 2015 was due primarily to regular merit increases and increased health care costs. Approximately $115,000 of the increase was due to the inclusion of the former Rumson operations for the entire year of 2015 compared to approximately eleven months in 2014. At December 31, 2015, there were 176 full time equivalent employees compared to 179 full time equivalent employees at December 31, 2014.
Occupancy expense increased by $106,000, or 3.2%, to $3.5 million for 2015 compared to $3.4 million for 2014. The increase in occupancy expenses for the year ended December 31, 2015 was primarily attributable to increased depreciation, property taxes and maintenance costs of the Rumson branches due to the inclusion of the former Rumson operations for the entire year of 2015 compared to approximately eleven months in 2014.
The cost of data processing services decreased to $1.2 million for the year ended December 31, 2015 from $1.3 million for the year ended December 31, 2014 and reflects a continued focus on cost containment and the economies of scale achieved in the integration of the operations of Rumson.
Regulatory, professional and consulting fees increased by $321,000, or 23.6%, to $ 1.7 million for the year ended December 31, 2015 compared to $1.4 million for the year ended December 31, 2014. During 2015, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management programs. In addition, the increase in regulatory, professional and consulting fees for 2015 was partially due to higher legal fees incurred by the Company in connection with the collection and recovery of non-performing assets.
Other real estate owned expenses increased by $1.3 million to $1.5 million for 2015 compared to $236,000 for 2014 due primarily to $1.0 million of net losses on the sale or write-down of OREO assets and $386,000 of ownership expenses related to assets sold. At December 31, 2015, the Bank held one residential property with an aggregate value of $966,000 as other real estate owned compared to three properties with an aggregate value of $5.7 million at December 31, 2014. In 2015, the Bank sold $6.7 million of OREO property.
FDIC insurance expense decreased to $660,000 for the year ended December 31, 2015 compared to $715,000 for the year ended December 31, 2014 due to a lower assessment rate that reflects the improvement in asset quality and the financial performance of the Bank in 2015.
Amortization of intangible assets decreased $29,000 to $428,000 for the year ended December 31, 2015 compared to $456,000 for the year ended December 31, 2014 due to the lower amortization of core deposit intangibles.
Other expenses were $1.9 million for the year ended December 31, 2015 compared to $1.7 million for the year ended December 31, 2014 and this increase was due primarily to increases in loan fees, postage, insurance and dues.
An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by tax equivalent net interest income plus non-interest income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The Company’s efficiency ratio decreased to 66.7% for the year ended December 31, 2015 compared to 68.9% for the year ended December 31, 2014.
Income Taxes
The Company recorded income tax expense of $4.1 million for 2015 compared to income tax expense of $1.1 million for 2014. The increase in the income tax expense for 2015 compared to 2014 was primarily due to the $7.3 million increase in pre-tax income for 2015 compared to 2014. The Company’s effective tax rate increased to 31.9% in 2015 from 19.8% in 2014 due to higher pre-tax income in 2015 and the lower proportion of tax exempt interest income to pre-tax income in 2015 compared to 2014.
Financial Condition
Cash and Cash Equivalents
At December 31, 2015, cash and cash equivalents totaled $11.4 million compared to $14.5 million at December 31, 2014. Cash and cash equivalents at December 31, 2015 consisted of cash and due from banks of $11.4 million.
Investment Securities
Amortized cost, gross unrealized gains and losses, and the fair value by security type are as follows:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | | | Gross | | Gross | | |
| Amortized | | Unrealized | | Unrealized | | Fair |
2015 | Cost | | Gains | | Losses | | Value |
Available for sale- | | | | | | | |
U. S. Treasury securities and obligations of U.S. Government Sponsored corporations (“GSE”) and agencies | $ | 5,523 |
| | $ | — |
| | $ | (42 | ) | | $ | 5,481 |
|
Residential collateralized mortgage obligations- GSE | 8,255 |
| | 68 |
| | (36 | ) | | 8,287 |
|
Residential mortgage backed securities – GSE | 32,279 |
| | 541 |
| | (185 | ) | | 32,635 |
|
Obligations of state and political subdivisions | 21,125 |
| | 365 |
| | (54 | ) | | 21,436 |
|
Trust preferred debt securities – single issuer | 2,474 |
| | — |
| | (338 | ) | | 2,136 |
|
Corporate debt securities | 20,510 |
| | 65 |
| | (153 | ) | | 20,422 |
|
Other debt securities | 1,053 |
| | — |
| | (28 | ) | | 1,025 |
|
Restricted stock | 3,302 |
| | — |
| | — |
| | 3,302 |
|
| | | | | | | |
| $ | 94,521 |
| | $ | 1,039 |
| | $ | (836 | ) | | $ | 94,724 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Held to maturity- | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | $ | 13,630 |
| | $ | — |
| | $ | 13,630 |
| | $ | 404 |
| | $ | — |
| | $ | 14,034 |
|
Residential mortgage backed securities- GSE | 47,718 |
| | — |
| | 47,718 |
| | 928 |
| | (46 | ) | | 48,600 |
|
Obligations of state and political subdivisions | 61,135 |
| | — |
| | 61,135 |
| | 2,294 |
| | (14 | ) | | 63,415 |
|
Trust preferred debt securities - pooled | 657 |
| | (501 | ) | | 156 |
| | 341 |
| | — |
| | 497 |
|
Other debt securities | 622 |
| | — |
| | 622 |
| | — |
| | (11 | ) | | 611 |
|
| | | | | | | | | | | |
| $ | 123,762 |
| | $ | (501 | ) | | $ | 123,261 |
| | $ | 3,967 |
| | $ | (71 | ) | | $ | 127,157 |
|
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | | | Gross | | Gross | | |
| Amortized | | Unrealized | | Unrealized | | Fair |
2014 | Cost | | Gains | | Losses | | Value |
Available for sale- | | | | | | |
U. S. Treasury securities and obligations of U.S. Government sponsored corporations (“GSE”) and agencies | $ | 1,538 |
| | $ | — |
| | $ | (14 | ) | | $ | 1,524 |
|
Residential collateralized mortgage obligations-GSE | 4,455 |
| | 101 |
| | (23 | ) | | 4,533 |
|
Residential mortgage backed securities – GSE | 27,089 |
| | 825 |
| | (143 | ) | | 27,771 |
|
Obligations of state and political subdivisions | 21,733 |
| | 299 |
| | (329 | ) | | 21,703 |
|
Trust preferred debt securities – single issuer | 2,472 |
| | — |
| | (403 | ) | | 2,069 |
|
Corporate debt securities | 19,397 |
| | 152 |
| | (28 | ) | | 19,521 |
|
Other debt securities | 1,290 |
| | 1 |
| | (11 | ) | | 1,280 |
|
Restricted stock | 1,760 |
| | — |
| | — |
| | 1,760 |
|
| $ | 79,734 |
| | $ | 1,378 |
| | $ | (951 | ) | | $ | 80,161 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Held to maturity- | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | $ | 19,304 |
| | $ | — |
| | $ | 19,304 |
| | $ | 700 |
| | $ | — |
| | $ | 20,004 |
|
Residential mortgage backed securities -GSE | 56,528 |
| | — |
| | 56,528 |
| | 1,563 |
| | (36 | ) | | 58,055 |
|
Obligations of state and political subdivisions | 66,887 |
| | — |
| | 66,887 |
| | 2,297 |
| | (92 | ) | | 69,092 |
|
Trust preferred debt securities - pooled | 657 |
| | (501 | ) | | 156 |
| | 405 |
| | — |
| | 561 |
|
Other debt securities | 763 |
| | — |
| | 763 |
| | 1 |
| | — |
| | 764 |
|
| $ | 144,139 |
| | $ | (501 | ) | | $ | 143,638 |
| | $ | 4,966 |
| | $ | (128 | ) | | $ | 148,476 |
|
The investment securities portfolio amounted to $218.0 million, or 22.5% of total assets, at December 31, 2015 compared to $223.8 million, or 23.4% of total assets, at December 31, 2014. Proceeds from maturities and prepayments for the year ended December 31, 2015 totaled $54.5 million while purchases of investment securities totaled $49.7 million during this period. On an average balance basis, the investment securities
portfolio represented 22.8% and 29.1% of average interest-earning assets, respectively, for the years ended December 31, 2015 and 2014. The average yield earned on the portfolio, on a fully tax-equivalent basis, was 3.02% for the year ended December 31, 2015, which was an increase of 12 basis points from 2.90% earned for the year ended December 31, 2014.
Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns. At December 31, 2015, available-for-sale securities amounted to $94.7 million, an increase of $14.5 million from $80.2 million at December 31, 2014.
The following table sets forth certain information regarding the amortized cost, carrying value, fair value, weighted average yields and contractual maturities of the Company’s investment portfolio as of December 31, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Federal Home Loan Bank stock is included in “Available for Sale - Due in one year or less.”
|
| | | | | | | | | |
(Dollars in thousands) | December 31, 2015 | | |
| Amortized cost | |
Fair Value | | Yield |
Available for sale | | | | | |
Due in one year or less | $ | 10,788 |
| | $ | 10,807 |
| | 2.54% |
Due after one year through five years | 17,911 |
| | 17,863 |
| | 1.82% |
Due after five years through ten years | 31,137 |
| | 31,360 |
| | 2.43% |
Due after ten years | 34,685 |
| | 34,694 |
| | 3.23% |
Total | $ | 94,521 |
| | $ | 94,724 |
| | 2.62% |
|
| | | | | | | | | |
| Carrying Value | |
Fair Value | | Yield |
Held to maturity | | | | | |
Due in one year or less | $ | 17,040 |
| | $ | 17,051 |
| | 0.74% |
Due after one year through five years | 14,935 |
| | 15,448 |
| | 4.06% |
Due after five years through ten years | 30,657 |
| | 31,898 |
| | 3.50% |
Due after ten years | 60,629 |
| | 62,760 |
| | 3.45% |
Total | $ | 123,261 |
| | $ | 127,157 |
| | 3.18% |
Proceeds from maturities and prepayments of securities available for sale amounted to $18.8 million for the year ended December 31, 2015 compared to $23.6 million for the year ended December 31, 2014. At December 31, 2015, the portfolio had net unrealized gains of $203,000 compared to net unrealized gains of $427,000 at December 31, 2014. These unrealized gains (loss) are reflected net of tax in shareholders’ equity as a component of accumulated other comprehensive income (loss).
Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity. At December 31, 2015, securities held to maturity were $123.3 million, a decrease of $20.4 million from $143.6 million at December 31, 2014. The fair value of the held-to-maturity portfolio at December 31, 2015 was $127.2 million.
The Company regularly reviews the composition of the investment securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs and its overall interest rate risk profile and strategic goals.
On a quarterly basis, management evaluates each security in the portfolio with an individual unrealized loss to determine if that loss represents other-than-temporary impairment. During the fourth quarter of 2009, management determined that it was necessary, following other-than-temporary impairment requirements, to write down the cost basis of the Company’s only pooled trust preferred security. This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PreTSL XXV”)) consisting primarily of financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge of $865,000 with respect to this security. No other-than-temporary impairment losses were recorded during 2015 and 2014. See Note 3 to the consolidated financial statements for additional information.
Loans Held for Sale
Loans held for sale at December 31, 2015 amounted to $6.0 million compared to $8.4 million at December 31, 2014. As indicated in the Consolidated Statements of Cash Flows, the amount of loans originated for sale was $134.1 million for 2015 compared with $114.8 million for 2014. The amount of loans held for sale varies from period to period due to changes in the amount and timing of sales of residential mortgage loans.
Loans
The loan portfolio, which represents the Bank’s largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’s primary lending focus continues to be mortgage warehouse lines, construction loans, commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans. Total loans averaged $684.5 million for the year ended December 31, 2015, an increase of $121.1 million, or 21.5%, compared to an average of $563.4 million for the year ended December 31, 2014. At December 31, 2015, total loans amounted to $682.1 million, which was a $27.8 million increase when compared to $654.3 million at December 31, 2014. The average yield earned on the loan portfolio was 5.20% for the year ended December 31, 2015 compared to 5.48% for the year ended December 31, 2014, a decrease of 28 basis points.
The following table represents the components of the loan portfolio as of the dates indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | December 31, |
| 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
Construction loans | $ | 93,745 |
| | 14 | % | | $ | 95,627 |
| | 15 | % | | $ | 51,002 |
| | 14 | % | | $ | 55,691 |
| | 11 | % | | $ | 49,286 |
| | 10 | % |
Residential real estate loans | 40,744 |
| | 6 | % | | 46,446 |
| | 7 | % | | 13,764 |
| | 4 | % | | 10,897 |
| | 2 | % | | 12,885 |
| | 3 | % |
Commercial business | 99,277 |
| | 15 | % | | 110,771 |
| | 17 | % | | 82,348 |
| | 22 | % | | 57,865 |
| | 11 | % | | 50,785 |
| | 11 | % |
Commercial real estate | 207,250 |
| | 30 | % | | 198,211 |
| | 30 | % | | 98,390 |
| | 26 | % | | 102,413 |
| | 20 | % | | 99,637 |
| | 21 | % |
Mortgage warehouse lines | 216,572 |
| | 32 | % | | 179,172 |
| | 27 | % | | 116,951 |
| | 31 | % | | 284,128 |
| | 54 | % | | 249,346 |
| | 52 | % |
Loans to individuals | 23,074 |
| | 3 | % | | 23,156 |
| | 4 | % | | 9,766 |
| | 3 | % | | 9,643 |
| | 2 | % | | 12,220 |
| | 3 | % |
Deferred loan costs | 1,226 |
| | — | % | | 715 |
| | — | % | | 944 |
| | — | % | | 987 |
| | — | % | | 1,018 |
| | — | % |
All other loans | 233 |
| | — | % | | 199 |
| | — | % | | 171 |
| | — | % | | 189 |
| | — | % | | 256 |
| | — | % |
Total | $ | 682,121 |
| | 100 | % | | $ | 654,297 |
| | 100 | % | | $ | 373,336 |
| | 100 | % | | $ | 521,813 |
| | 100 | % | | $ | 475,433 |
| | 100 | % |
Commercial business and commercial real estate loans averaged $290.3 million for the year ended December 31, 2015, an increase of $18.4 million when compared to the average of $271.9 million for the year ended December 31, 2014. Commercial business loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower. The average yield on the commercial business and commercial real estate loan portfolio decreased 21 basis points to 5.64% for 2015 from 5.85% for 2014.
Construction loans averaged $95.6 million for the year ended December 31, 2015, an increase of $18.5 million, or 23.9%, compared to the average of $77.2 million for the year ended December 31, 2014. Generally, these loans represent owner-occupied or investment properties and usually complement a broader commercial relationship between the Bank and the borrower. Construction loans are structured to provide for advances only after work is completed and inspected by qualified professionals. The average yield on the construction loan portfolio decreased 55 basis points to 6.23% for 2015 from 6.78% for 2014.
The mortgage warehouse lines component of the loan portfolio increased by $37.4 million, or 20.9%, to $216.6 million at December 31, 2015 compared to $179.2 million at December 31, 2014, reflecting mortgage warehouse customers’ higher level of residential mortgage originations and sales activity. During 2015, $3.9 billion of mortgage loans were financed through our Mortgage Warehouse Funding Group.
The Bank’s Mortgage Warehouse Funding Group offers revolving lines of credit that are available to licensed mortgage banking companies (the “warehouse line of credit”). The warehouse line of credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the warehouse line of credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest and a transaction fee are collected by the Bank at the time of repayment. The Bank had outstanding warehouse line of credit advances of $216.6 million at December 31, 2015 compared to $179.2 million at December 31, 2014. During 2015 and 2014, warehouse lines of credit advances averaged $203.1 million and $124.1 million, respectively, and yielded 4.38% and 4.50%, respectively. The number of active mortgage banking customers was 46 in 2015 compared to 48 in 2014.
Average residential real estate loans decreased $2.5 million to $43.0 million at December 31, 2015 compared to $45.6 million at December 31, 2014.
Loans to individuals are comprised primarily of home equity loans and were $23.1 million at December 31, 2015 compared to $23.2 million at December 31, 2014.
The following table provides information concerning the interest rate sensitivity of the commercial and commercial real estate loans and construction loans at December 31, 2015.
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Maturity Range | | |
Type | | Within One Year | | After One But Within Five Years | | After Five Years | | Total |
| | (in thousands) | | |
Commercial Business & Commercial Real Estate | | $ | 89,779 |
| | $ | 176,103 |
| | $ | 40,645 |
| | $ | 306,527 |
|
Mortgage Warehouse Loans | | 216,572 |
| | — |
| | — |
| | 216,572 |
|
Construction Loans | | 90,302 |
| | 3,443 |
| | — |
| | 93,745 |
|
Total | | $ | 396,653 |
| | $ | 179,546 |
| | $ | 40,645 |
| | $ | 616,844 |
|
| | | | | | | | |
Fixed rate loans | | $ | 13,035 |
| | $ | 48,816 |
| | $ | 26,025 |
| | $ | 87,876 |
|
Floating rate loans | | 383,618 |
| | 130,730 |
| | 14,620 |
| | 528,968 |
|
Total | | $ | 396,653 |
| | $ | 179,546 |
| | $ | 40,645 |
| | $ | 616,844 |
|
Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on a non-accrual basis and (2) loans which are contractually past due 90 days or more as to interest and principal payments but have not been classified as non-accrual. Included in non-accrual loans are loans whose terms have been restructured to provide a reduction or deferral of interest and/or principal because of a deterioration in the financial position of the borrower and that have not performed in accordance with the restructured terms.
The Bank’s policy with regard to non-accrual loans is that generally, loans are placed on a non-accrual status when they are 90 days past due, unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 120 days past due. Subsequent payments on loans in non-accrual status are credited to income only if collection of principal is not in doubt.
During 2015, $4.4 million of loans were transferred to non-accrual status, real estate assets collateralizing $2.4 million of loans were foreclosed and transferred to OREO and $490,000 of loans were charged down. As a result, non-performing loans increased by $1.2 million to $6.0 million at December 31,2015 from $4.8 million at December 31, 2014.
At December 31, 2015, non-performing loans were comprised of six commercial real estate loans aggregating $4.3 million, three residential mortgage loans aggregating $1.1 million, two commercial loans aggregating $304,000 and one home equity loan for $263,000.
The table below sets forth non-performing assets and risk elements in the Bank's loan portfolio for the years indicated.
|
| | | | | | | | | | | | | | | | | | | |
Non-Performing Assets and Loans | | | | | | | | | |
(Dollars in thousands) | | | | | December 31, | | | | |
| 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Non-Performing loans: | | | | | | | | | |
Loans 90 days or more past due and still accruing | $ | — |
| | $ | 317 |
| | $ | — |
| | $ | 85 |
| | $ | — |
|
Non-accrual loans | 6,020 |
| | 4,523 |
| | 6,322 |
| | 5,878 |
| | 2,991 |
|
Total non-performing loans | 6,020 |
| | 4,840 |
| | 6,322 |
| | 5,963 |
| | 2,991 |
|
Other real estate owned | 966 |
| | 5,710 |
| | 2,136 |
| | 8,333 |
| | 12,409 |
|
Other repossessed assets | — |
| | 66 |
| | — |
| | — |
| | — |
|
Total non-performing assets | 6,986 |
| | 10,616 |
| | 8,458 |
| | 14,296 |
| | 15,400 |
|
Performing troubled debt restructurings | 1,535 |
| | 3,925 |
| | 3,859 |
| | 2,012 |
| | 774 |
|
Performing troubled debt restructurings and total non-performing assets | $ | 8,521 |
| | $ | 14,541 |
| | $ | 12,317 |
| | $ | 16,308 |
| | $ | 16,174 |
|
| | | | | | | | | |
Non-performing loans to total loans | 0.88 | % | | 0.74 | % | | 1.69 | % | | 1.14 | % | | 0.63 | % |
Non-performing loans to total loans excluding warehouse lines | 1.29 | % | | 1.02 | % | | 2.47 | % | | 2.51 | % | | 1.32 | % |
| | | | | | | | | |
Non-performing assets to total assets | 0.72 | % | | 1.11 | % | | 1.14 | % | | 1.70 | % | | 1.95 | % |
Non-performing assets to total assets excluding mortgage warehouse lines | 0.93 | % | | 1.37 | % | | 1.35 | % | | 2.57 | % | | 2.84 | % |
| | | | | | | | | |
Total non-performing assets and performing troubled debt restructurings to total assets | 0.88 | % | | 1.52 | % | | 1.66 | % | | 1.94 | % | | 2.04 | % |
| | | | | | | | | |
As the table demonstrates, non-performing loans to total loans increased slightly to 0.88% at December 31, 2015 from 0.74% at December 31, 2014. Despite the increase in non-performing loans to total loans, loan quality continued to be considered sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.
Additional income before taxes amounting to $579,000 and $568,000 would have been recognized in 2015 and 2014, respectively, if interest on all loans had been recorded based upon original contract terms.
Non-performing assets decreased by $3.6 million to $7.0 million at December 31, 2015 from $10.6 million at December 31, 2014. Other real estate owned decreased by $4.7 million to $966,000 at December 31, 2015 from $5.7 million at December 31, 2014. In 2015, the Bank sold $6.7 million in OREO properties. The Bank recorded loss provisions against other real estate owned properties of $382,000 during 2015 and $112,000 during 2014.
Non-performing assets represented 0.72% of total assets at December 31, 2015 compared to 1.11% at December 31, 2014.
At December 31, 2015, the Bank had ten loans totaling $4.7 million that were troubled debt restructurings. Three of these loans totaling $3.2 million are included in the above table as non-accrual loans and the remaining seven loans totaling $1.5 million are considered performing.
At December 31, 2014, the Bank had ten loans totaling $4.4 million that were troubled debt restructurings. Three of these loans totaling $491,000 are included in the above table as non-accrual loans and the remaining seven loans totaling $3.9 million are considered performing.
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the purchase of a credit impaired loan is recognized as interest income over the life of the loan. Accordingly, Rumson loans acquired with evidence of deteriorated credit quality totaling $759,000 at December 31, 2015 were not classified as non-performing loans.
In 2015, $2.4 million of non-performing loans were transferred to OREO and 5 properties totaling $6.7 million were sold during the year.
Management takes a proactive approach in addressing delinquent loans. The Company’s President and Chief Executive Officer meets weekly with all loan officers to review the status of credits past-due ten days or more. An action plan is discussed for delinquent loans to determine the steps necessary to induce the borrower to cure the delinquency and restore the loan to a current status. Also, delinquency notices are system generated when loans are five days past-due and again at 15 days past-due.
In most cases, the Company’s collateral is real estate and when the collateral is foreclosed upon, the real estate is carried at fair market value less the estimated selling costs. The amount, if any, by which the recorded amount of the loan exceeds the fair market value of the collateral less estimated selling costs is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan can be delayed if the borrower files a bankruptcy petition because a collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the bankruptcy code.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
All, or part, of the principal balance of commercial and commercial real estate loans and construction loans are charged off against the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements and is consistent with generally accepted accounting principles (GAAP) and interagency supervisory guidance. The allowance for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows Accounting Standards Codification (ASC) Topic 310 (formerly SFAS 114). The second major component estimates losses under ASC Topic 450 (formerly SFAS 5), which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses which includes a specific reserve for impaired loans, an allocated reserve and an unallocated portion.
When analyzing groups of loans under ASC 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The methodology considers the Company’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the loans as of the evaluation date. These adjustment factors, known as qualitative factors, include:
| |
• | Delinquencies and nonaccruals |
| |
• | Trends in volume of loans |
| |
• | Experience, ability, and depth of management |
| |
• | Economic trends – national and local |
| |
• | External factors – competition, legal and regulatory |
The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans are determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed and for homogeneous groups, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in nonaccrual status. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses.
The specific allowance for impaired loans is established for specific loans that have been identified by management as being impaired. These loans are considered to be impaired primarily because the loans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole or in part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual impaired loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which in turn employ their own criteria and assumptions that may include occupancy rates, rental rates and property expenses, among others.
The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial and commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other qualitative factor which may cause future losses to deviate from historical levels.
The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.
The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.
Commercial
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
Mortgage Warehouse Lines of Credit
The Company’s Mortgage Warehouse Group provides revolving lines of credit that are available to licensed mortgage banking companies. The warehouse line of credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the warehouse line of credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest (the spread between our borrowing cost and the rate charged to the client) and a transaction fee are collected by the Bank at the time of repayment.
As a separate segment of the total portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losses purposes. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008, there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.
These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and nonaccruals, are also considered and may have positive or negative effects on the allocated allowance. The
aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in an allocated allowance for warehouse lines of credit.
Consumer
The Company’s loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are created for the various types of loans to individuals.
In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:
| |
• | Internal credit risk grades |
The following table presents, for the years indicated, an analysis of the allowance for loan losses and other related data:
|
| | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses | | | | | | | | | |
(Dollars in thousands) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Balance, beginning of year | $ | 6,925 |
| | $ | 7,039 |
| | $ | 7,151 |
| | $ | 5,534 |
| | $ | 5,763 |
|
| | | | | | | | | |
Provision charged to operating expenses | 1,100 |
| | 5,750 |
| | 1,077 |
| | 2,150 |
| | 2,558 |
|
| | | | | | | | | |
Loans charged off: | |
| | |
| | |
| | |
| | |
|
Construction loans | — |
| | — |
| | (562 | ) | | (57 | ) | | (2,362 | ) |
Residential real estate loans | — |
| | (15 | ) | | — |
| | (131 | ) | | — |
|
Commercial and commercial real estate loans | (477 | ) | | (5,906 | ) | | (594 | ) | | (276 | ) | | (438 | ) |
Loans to individuals | (14 | ) | | (1 | ) | | (52 | ) | | (84 | ) | | — |
|
Lease financing | — |
| | — |
| | — |
| | — |
| | — |
|
All other loans | — |
| | — |
| | — |
| | — |
| | — |
|
| (491 | ) | | (5,922 | ) | | (1,208 | ) | | (548 | ) | | (2,800 | ) |
Recoveries: | |
| | |
| | |
| | |
| | |
|
Construction loans | — |
| | — |
| | — |
| | 3 |
| | 9 |
|
Residential real estate loans | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial and commercial real estate loans | 20 |
| | 58 |
| | 19 |
| | 12 |
| | 4 |
|
Loans to individuals | 6 |
| | — |
| | — |
| | — |
| | — |
|
Lease financing | — |
| | — |
| | — |
| | — |
| | — |
|
All other loans | — |
| | — |
| | — |
| | — |
| | — |
|
| 26 |
| | 58 |
| | 19 |
| | 15 |
| | 13 |
|
| | | | | | | | | |
Net (charge offs) | (465 | ) | | (5,864 | ) | | (1,189 | ) | | (533 | ) | | (2,787 | ) |
| | | | | | | | | |
Balance, end of year | $ | 7,560 |
| | $ | 6,925 |
| | $ | 7,039 |
| | $ | 7,151 |
| | $ | 5,534 |
|
| | | | | | | | | |
Loans: | |
| | |
| | |
| | |
| | |
|
At year end | $ | 682,121 |
| | $ | 654,297 |
| | $ | 373,336 |
| | $ | 521,814 |
| | $ | 475,432 |
|
Average during the year | 675,531 |
| | 556,362 |
| | 399,462 |
| | 463,587 |
| | 374,685 |
|
Net charge offs to average loans outstanding | (0.07 | )% | | (1.04 | )% | | (0.30 | )% | | (0.11 | )% | | (0.74 | )% |
Net charge-offs to average loans, excluding warehouse loans | (0.10 | )% | | (1.36 | )% | | (0.48 | )% | | (0.21 | )% | | (1.15 | )% |
Allowance for loan losses to: | | | |
| | |
| | |
| | |
|
Total loans at year end | 1.11 | % | | 1.06 | % | | 1.89 | % | | 1.37 | % | | 1.16 | % |
Total loans at year end excluding Mortgage warehouse lines and related allowance | 1.44 | % | | 1.27 | % | | 2.52 | % | | 2.41 | % | | 1.95 | % |
Non-performing loans | 125.59 | % | | 143.08 | % | | 111.34 | % | | 119.92 | % | | 185.01 | % |
At December 31, 2015, the allowance for loan losses was $7.6 million compared to $6.9 million at December 31, 2014, an increase of $635,000. The ratio of the allowance for loan losses to total loans at December 31, 2015 and 2014 was 1.11% and 1.06%, respectively. The allowance for loan losses as a percentage of non-performing loans was 125.59% at December 31, 2015 compared to 143.08% at December 31, 2014.
The allowance for loan losses increased primarily due to the $656,000 increase in the allowance attributed to commercial real estate loans. The historical loss rate component for commercial real estate loans increased approximately 0.50% compared to the historical loss rate component for 2014. The allowance also increased due to the $9.0 million increase in commercial real estate loans to $207.2 million in 2015. The allowance for loan losses attributed to commercial business loans increased $244,000 to $2.0 million at December 31, 2015 due primarily to an increase in the historical loss rate component for the non-guaranteed portion of SBA loans that are retained in the loan portfolio of approximately 1.2%.
The provision for loan losses for 2015 and the allowance for loan losses at December 31, 2015 increased by $373,000 due to the decline in the accretable general credit reserve related to the acquired Rumson commercial business and commercial real estate loans. Partially offsetting these increases in the allowance for loan losses attributed to commercial business and commercial real estate loans was a ten basis point (0.10%) reduction in the qualitative risk factors for all loan portfolio components due to the improving economic conditions nationally and in the Company's market areas, the reduction in loans classified as special mention and substandard at December 31, 2015 and the lower level of credit risk identified by management in the periodic review of the credit quality of the loan portfolio.
The allowance for loan losses increased as a percentage of loans to 1.11% at December 31, 2015 from 1.06% at December 31, 2014 due primarily to the increase in the allowance for loan losses. With respect to the loans acquired from Rumson, at December 31, 2015, the total credit risk adjustment was approximately $888,000 and was comprised of a non-accretive credit discount of $215,000 and an accretive general credit risk fair value discount of $673,000 compared to the total risk adjustment of $1.7 million at December 31, 2014, comprised of a non-accretive credit discount of $546,000 and an accretive general credit risk fair value discount of $1.1 million.
Management believes that the quality of the loan portfolio remains sound, considering the economic climate and economy in the State of New Jersey, and that the allowance for loan losses is adequate in relation to credit risk exposure levels.
The following tables describe the allocation of the allowance for loan losses (“ALL”) among the various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
(Dollars in thousands) | December 31, |
| 2015 | | 2014 | | 2013 |
| Amount | | ALL as a % of Loans | | % of Loans | | Amount | | ALL as a % of Loans | | % of Loans | | Amount | | ALL as a % of Loans | | % of Loans |
Commercial business and commercial real estate loans | $ | 5,054 |
| | 1.65 | % | | 45 | % | | $ | 4,154 |
| | 1.34 | % | | 47 | % | | $ | 4,294 |
| | 2.38 | % | | 48 | % |
Construction loans | 1,025 |
| | 1.09 | % | | 14 | % | | 1,215 |
| | 1.27 | % | | 15 | % | | 1,205 |
| | 2.36 | % | | 14 | % |
Residential real estate loans | 288 |
| | 0.71 | % | | 6 | % | | 197 |
| | 0.42 | % | | 7 | % | | 165 |
| | 1.20 | % | | 4 | % |
Loans to individuals | 109 |
| | 0.47 | % | | 3 | % | | 131 |
| | 0.57 | % | | 3 | % | | 111 |
| | 1.14 | % | | 3 | % |
Subtotal | 6,476 |
| | 1.39 | % | | 68 | % | | 5,697 |
| | 1.20 | % | | 73 | % | | 5,775 |
| | 2.26 | % | | 69 | % |
Mortgage warehouse lines | 866 |
| | 0.40 | % | | 32 | % | | 896 |
| | 0.50 | % | | 27 | % | | 585 |
| | 0.50 | % | | 31 | % |
Unallocated reserves | 218 |
| | — |
| | — |
| | 332 |
| | — |
| | — |
| | 679 |
| | — |
| | — |
|
Total | $ | 7,560 |
| | 1.11 | % | | 100 | % | | $ | 6,925 |
| | 1.06 | % | | 100 | % | | $ | 7,039 |
| | 1.89 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2012 | | 2011 |
| Amount | | ALL as a % of Loans | | % of Loans | | Amount | | ALL as a % of Loans | | % of Loans |
Commercial business and commercial real estate loans | $ | 3,235 |
| | 2.01 | % | | 31 | % | | $ | 2,532 |
| | 2.01 | % | | 32 | % |
Construction loans | 1,990 |
| | 3.57 | % | | 11 | % | | 1,055 |
| | 2.14 | % | | 10 | % |
Residential real estate loans | 112 |
| | 1.03 | % | | 2 | % | | 91 |
| | 0.71 | % | | 3 | % |
Loans to individuals | 105 |
| | 1.07 | % | | 2 | % | | 190 |
| | 1.52 | % | | 3 | % |
Subtotal | 5,442 |
| | 2.41 | % | | 46 | % | | 3,868 |
| | 1.95 | % | | 48 | % |
Mortgage warehouse lines | 1,421 |
| | 0.50 | % | | 54 | % | | 1,122 |
| | 0.45 | % | | 52 | % |
Unallocated reserves | 288 |
| | — |
| | — |
| | 544 |
| | — |
| | — |
|
Total | $ | 7,151 |
| | 1.37 | % | | 100 | % | | $ | 5,534 |
| | 1.16 | % | | 100 | % |
The allowance for loan losses excluding the portion related to mortgage warehouse lines increased to $6.7 million at December 31, 2015 from $6.0 million at December 31, 2014.
Deposits
The following table sets forth the balances and contractual rates payable to our customers, by account type, as of December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
(Dollars in thousands) | Amount | | Percent Of Total | | Weighted Average Contractual Rate | | Amount | | Percent Of Total | | Weighted Average Contractual Rate |
Non-interest bearing demand | $ | 159,918 |
| | 20 | % | | — | % | | $ | 162,281 |
| | 20 | % | | — | % |
Interest bearing demand | 284,547 |
| | 36 | % | | 0.34 | % | | 297,679 |
| | 37 | % | | 0.34 | % |
Savings | 196,324 |
| | 25 | % | | 0.48 | % | | 190,817 |
| | 23 | % | | 0.46 | % |
Total core deposits | $ | 640,789 |
| | 81 | % | | 0.27 | % | | $ | 650,777 |
| | 80 | % | | 0.27 | % |
| | | | | | | | | | | |
Certificates of deposit | $ | 145,968 |
| | 19 | % | | 1.10 | % | | $ | 166,984 |
| | 20 | % | | 1.14 | % |
| | | | | | | | | | | |
Total deposits | $ | 786,757 |
| | 100.00 | % | | 0.48 | % | | $ | 817,761 |
| | 100.00 | % | | 0.49 | % |
The following table indicates the amount of certificates of deposit by time remaining until maturity as of December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | |
| Maturity | | |
| 3 Months or Less | | Over 3 to 6 Months | | Over 6 to 12 Months | | Over 12 Months | | Total |
|
(Dollars in thousands) | | | | | | | | | |
| | | | | | | | | |
Certificates of deposit of $100,000 or more | $ | 12,135 |
| | $ | 16,664 |
| | $ | 22,316 |
| | $ | 37,319 |
| | $ | 88,434 |
|
Certificates of deposit less than $100,000 | 10,179 |
| | 9,314 |
| | 13,828 |
| | 24,213 |
| | 57,534 |
|
Total certificates of deposit | $ | 22,314 |
| | $ | 25,978 |
| | $ | 36,144 |
| | $ | 61,532 |
| | $ | 145,968 |
|
The following table illustrates the components of average total deposits for the years indicated:
|
| | | | | | | | | | | | | | | | | | | | |
Average Deposit Balances | |
| | |
| | |
| | |
| | |
| | |
|
(Dollars in thousands) | 2015 | | 2014 | | 2013 |
| Average Balance | | Percentage of Total | | Average Balance | | Percentage of Total | | Average Balance | | Percentage of Total |
Non-interest bearing demand | $ | 164,419 |
| | 20 | % | | $ | 159,935 |
| | 20 | % | | $ | 137,873 |
| | 20 | % |
Interest bearing demand | 300,813 |
| | 37 | % | | 286,235 |
| | 35 | % | | 222,581 |
| | 32 | % |
Savings | 196,844 |
| | 24 | % | | 199,078 |
| | 24 | % | | 198,169 |
| | 29 | % |
Certificates of deposit of $100,000 or more | 71,449 |
| | 9 | % | | 98,891 |
| | 12 | % | | 71,616 |
| | 9 | % |
Other certificates of deposit less than $100,000 | 87,306 |
| | 10 | % | | 70,574 |
| | 9 | % | | 68,741 |
| | 10 | % |
Total | $ | 820,831 |
| | 100 | % | | $ | 814,713 |
| | 100 | % | | $ | 698,980 |
| | 100 | % |
Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and certificates of deposit, are a fundamental and cost-effective source of funding. The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. The Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus on the building and expanding of long-term relationships. Deposits for the year ended December 31, 2015 averaged $820.8 million, an increase of $6.1 million, or 0.75%, compared to $814.7 million for the year ended December 31, 2014. At December 31, 2015, total deposits were $786.8 million, a decrease of $31.0 million, or 3.79%, from $817.8 million at December 31, 2014. The decrease in total deposits in 2015 was due principally to a decrease of $21.0 million in certificates of deposit balances and a decline in municipal deposits of $24.0 million, which were partially offset by the growth of non-interest bearing and interest bearing demand deposits of $16.0 million. The average rate paid on the Bank’s interest-bearing deposit balances for 2015 was 0.56%, a decrease from the average rate of 0.58% for 2014.
Average non-interest bearing demand deposits increased by $4.5 million, or 2.8%, to $164.4 million for the year ended December 31, 2015 from $159.9 million for the year ended December 31, 2014. At December 31, 2015, non-interest bearing demand deposits totaled $159.9 million, a decrease of $2.4 million, or 1.5%, compared to $162.3 million at December 31, 2014. Non-interest bearing demand deposits made up 20% of total deposits at December 31, 2015 and 2014 and represent a stable, interest-free source of funds.
Savings accounts increased by $5.5 million, or 2.90%, to $196.3 million at December 31, 2015 from $190.8 million at December 31, 2014. In 2015, the average balance of savings accounts decreased by $2.2 million to $196.8 million compared to an average balance of $199.1 million in 2014.
Interest-bearing demand deposits, which include interest-bearing checking accounts, money market accounts and the Bank’s premier money market product, 1st Choice account, increased by $14.6 million, or 5.1%, to an average of $300.8 million for 2015 from an average of $286.2 million for 2014. The average cost of interest bearing demand deposits was 0.34% for 2015 compared to 0.33% in 2014.
Certificates of deposit consist primarily of retail certificates of deposit and certificates of deposit with balances of $100,000 or more. Certificates of deposit at December 31, 2015 were $146.0 million, a decrease of $21.0 million from $167.0 million at December 31, 2014. The average cost of certificates of deposits decreased to 1.10% in 2015 from 1.15% in 2014. Retail certificates of deposit increased by $16.7 million, or 23.7%, to an average of $87.3 million for 2015 from an average of $70.6 million for 2014. The average cost of retail certificates of deposit decreased to 1.00% for 2015 from 1.29% for 2014.
Borrowings
Borrowings are comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. The average balance of other borrowed funds increased by $14.7 million to $38.5 million for 2015 from an average balance of $23.7 million for 2014 due to an increase in overnight borrowings in 2015. The average cost of other borrowed funds decreased 68 basis points to 1.50% for 2015 compared to 2.18% for 2014.
The balance of borrowings was $58.9 million at December 31, 2015, which consisted of three long-term FHLB advances totalling $20.3 million and FHLB overnight funds purchased in the amount of $38.6 million. The balance of borrowings was $25.1 million at December 31, 2014, consisting of long-term FHLB advances of $20.7 million and FHLB overnight purchased funds of $4.4 million.
Shareholders’ Equity and Dividends
Shareholders’ equity increased by $8.9 million, or 10.2%, to $96.0 million at December 31, 2015 from $87.1 million at December 31, 2014. Tangible book value per common share was $10.44 at December 31, 2015 compared to $9.33 at December 31, 2014. The ratio of average shareholders’ equity to total average assets was 9.34% and 8.62% for 2015 and 2014, respectively. The increase in shareholders’ equity from December 31, 2014 to December 31, 2015 was primarily the result of net income of $8.7 million for 2015.
The Federal Reserve Board has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends, including, for example, when net income available for shareholders for the past four quarters net of dividends paid during that period is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter.
In lieu of cash dividends, the Company (and its predecessor, the Bank) declared a stock dividend every year for the years 1992 through 2012 and paid such dividends every year for the years 1993 through 2013. The Company declared two stock dividends in 2015 and did not declare a stock dividend in 2014 or 2013.
The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation. For information on regulatory capital, see “Capital Adequacy” in the “Supervision and Regulation” section under Item 1. “Business” and Note 19 of the Notes to Consolidated Financial Statements.
The Company believes that its shareholders’ equity and regulatory capital position are adequate to support the planned operations of the Company for the foreseeable future.
Off-Balance Sheet Arrangements and Contractual Obligations
The following table shows the amounts and expected maturities of significant commitments as of December 31, 2015. Further discussion of these commitments is included in Note 17 of the Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | One Year or Less | | One to Three Years | | Three to Five Years | | Over Five Years | | Total |
Off Balance Sheet: | | | | | | | | | |
Standby letters of credit | $ | 2,106 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,106 |
|
Commitments to extend credit | $ | 290,883 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 290,883 |
|
Commitments to sell residential loans | $ | 16,870 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16,870 |
|
Total off balance sheet: | $ | 309,859 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 309,859 |
|
| | | | | | | | | |
Contractual Obligations: | |
| | |
| | |
| | |
| | |
|
Operating Leases | $ | 1,255 |
| | $ | 1,975 |
| | $ | 1,221 |
| | $ | 2,050 |
| | $ | 6,501 |
|
Borrowed funds and subordinated Debentures | 38,550 |
| | 20,346 |
| | — |
| | 18,557 |
| | 77,453 |
|
Certificates of deposit | $ | 84,436 |
| | 55,450 |
| | 6,082 |
| | — |
| | 145,968 |
|
Retirement benefit obligation | 1,368 |
| | 4,245 |
| | — |
| | — |
| | 5,613 |
|
Total contractual obligations: | $ | 125,609 |
| | 82,016 |
| | 7,303 |
| | 20,607 |
| | 235,535 |
|
| | | | | | | | | |
Total | $ | 435,468 |
| | $ | 82,016 |
| | $ | 7,303 |
| | $ | 20,607 |
| | $ | 545,394 |
|
Liquidity
At December 31, 2015, the amount of liquid assets held by the Company remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.
Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of its customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, deposits at the Federal Reserve Bank, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits. Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.
The Bank has established a borrowing relationship with the FHLB which further supports and enhances liquidity. During 2010, FHLB replaced its Overnight Line of Credit and One-Month Overnight Repricing Line of Credit facilities available to member banks with a fully secured line of up to 50 percent of a bank’s quarter-end total assets. Under the terms of this facility, the Bank’s total credit exposure to FHLB cannot exceed 50 percent, or $484.0 million, of its total assets at December 31, 2015. In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off balance sheet financial contracts and advance commitments cannot exceed 30 percent of the Bank’s total assets, unless the Bank obtains approval from FHLB’s Board of Directors or its Executive Committee. These limits are further restricted by a member bank’s ability to provide eligible collateral to support its obligations to FHLB as well as a member bank’s ability to meet the FHLB’s stock requirement. At December 31, 2015 and 2014, the Bank had collateral at FHLB-NY to support additional borrowing of $60.3 million and $108.2 million, respectively. At December 31, 2015, the Bank had $77.3 million of unpledged investment securities that were eligible collateral to support additional FHLB borrowings. The Bank also maintains an unsecured federal funds line of $25.0 million with a correspondent bank.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2015, the balance of cash and cash equivalents was $11.4 million.
Net cash provided by operating activities totaled $14.7 million for the year ended December 31, 2015 compared to net cash provided by operating activities of $16.9 million for the year ended December 31, 2014. The primary source of funds was net income from operations, adjusted for activity related to loans originated for sale, the provision for loan losses, depreciation expense and net amortization of premiums on securities. Cash was used in operations primarily for originating loans held for sale. The decline in net cash provided by operating activities was due primarily to an increase in other assets and decreases in accrued interest payable, accrued expenses and other liabilities.
Net cash used in investing activities totaled $20.5 million for the year ended December 31, 2015 compared to $65.7 million for the year ended December 31, 2014. The decrease in net cash used in investing activities for 2015 as compared to 2014 resulted from the lower net increase in loans of $30.6 million compared to the net increase in loans of $147.4 million in 2014. Net cash generated from investment securities transactions in 2015 was $4.8 million compared to $60.5 million in 2014. Proceeds from the sale of OREO properties were $6.0 million in 2015 compared to $287,000 in 2014. In 2014, the Company acquired Rumson and this resulted in $21.4 million in cash proceeds received from the acquisition and a decrease in the growth of the loan portfolio.
Net cash provided by financing activities totaled $2.7 million for the year ended December 31, 2015 compared to net cash used in financing activities of $6.0 million for the year ended December 31, 2014. The net cash provided by financing activities in 2015 was due primarily to the net increase in borrowings, which was partially offset by a net decrease in deposits. The net cash used in financing activities in 2014 was due to the net decrease in deposits, which was partially offset by an increase in borrowings.
The investment securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. For the year ended December 31, 2015, repayments and maturities of investment securities totaled $54.5 million. Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.
The Company believes that its liquidity position is adequate to service the needs of its borrowers and depositors and provide for its planned operations.
Interest Rate Sensitivity Analysis
The largest component of the Company’s total income is net interest income and the majority of the Company’s financial instruments are composed of interest rate sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. The Company’s assets consist primarily of floating rate construction and commercial lines of credit and its liabilities consist primarily of deposits. Interest rate risk is derived from timing differences and the magnitude of relative changes in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate liabilities.
The following table sets forth certain information relating to the Bank’s financial instruments that are sensitive to changes in interest rates, categorized by expected maturity or repricing of such instruments at December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Sensitivity Analysis at December 31, 2015 | | | | | | | | | | |
| | | | | | | | | | Total | | One Year | | | | | | |
($ in thousands) | | Interest Sensitivity Period | | Within | | to | | Over | | Non-interest | | |
| | 30 Day | | 90 Day | | 180 Day | | 365 Day | | One Year | | Five Years | | Five Years | | Sensitive | | Total |
Assets : | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 4,828 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,828 |
| | $ | — |
| | $ | — |
| | $ | 6,540 |
| | $ | 11,368 |
|
Federal funds sold | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Investment securities | | 9,394 |
| | 20,659 |
| | 6,418 |
| | 24,261.0 |
| | 60,732 |
| | 91,545 |
| | 65,708 |
| | — |
| | 217,985 |
|
Loans held for sale | | 5,997 |
| | — |
| | — |
| | — |
| | 5,997 |
| | — |
| | — |
| | — |
| | 5,997 |
|
Loans, net of allowance for loan losses | | 393,370 |
| | 14,640 |
| | 19,489 |
| | 40,296 |
| | 467,795 |
| | 182,437 |
| | 24,329 |
| | — |
| | 674,561 |
|
Other assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 58,080 |
| | 58,080 |
|
| | $ | 413,589 |
| | $ | 35,299 |
| | $ | 25,907 |
| | $ | 64,557 |
| | $ | 539,352 |
| | $ | 273,982 |
| | $ | 90,037 |
| | $ | 64,620 |
| | $ | 967,991 |
|
Sources of Funds : | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Demand deposits - non-interest bearing | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 159,918 |
| | $ | 159,918 |
|
Demand deposits - interest bearing | | 123,873 |
| | — |
| | — |
| | — |
| | 123,873 |
| | 132,354 |
| | 28,320 |
| | — |
| | 284,547 |
|
Savings deposits | | 109,773 |
| | — |
| | — |
| | 29 |
| | 109,802 |
| | 47,384 |
| | 39,138 |
| | — |
| | 196,324 |
|
Certificates of deposits | | 6,549 |
| | 15,765 |
| | 25,978 |
| | 36,144 |
| | 84,436 |
| | 61,532 |
| | — |
| | — |
| | 145,968 |
|
Borrowings | | 38,550 |
| | — |
| | — |
| | 10,000 |
| | 48,550 |
| | 10,000 |
| | — |
| | 346 |
| | 58,896 |
|
Redeemable subordinated debentures | | — |
| | 18,557 |
| | — |
| | — |
| | 18,557 |
| | — |
| | — |
| | — |
| | 18,557 |
|
Non-interest-bearing sources | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 103,781 |
| | 103,781 |
|
| | $ | 278,745 |
| | $ | 34,322 |
| | $ | 25,978 |
| | $ | 46,173 |
| | $ | 385,218 |
| | $ | 251,270 |
| | $ | 67,458 |
| | $ | 264,045 |
| | $ | 967,991 |
|
| | | | | | | | | | | | | | | | | | |
Asset (Liability) Sensitivity Gap : | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Period Gap | | $ | 134,844 |
| | $ | 977 |
| | $ | (71 | ) | | $ | 18,384 |
| | $ | 154,134 |
| | $ | 22,712 |
| | $ | 22,579 |
| | $ | (199,425 | ) | | — |
|
Cumulative Gap | | $ | 134,844 |
| | $ | 135,821 |
| | $ | 135,750 |
| | $ | 154,134 |
| | $ | 308,268 |
| | $ | 330,980 |
| | $ | 353,559 |
| | — |
| | — |
|
Cumulative Gap to Total Assets | | 13.9 | % | | 14.0 | % | | 14.0 | % | | 15.9 | % | | 31.8 | % | | 34.2 | % | | 36.5 | % | | — |
| | — |
|
Under the Company’s interest rate risk policy established by the Board of Directors, quantitative guidelines have been established with respect to the Company’s interest rate risk and how interest rate shocks are projected to affect the Company’s net interest income and economic value of equity (“EVE”). The Company engages the services of an outside consultant to assist with the measurement and analysis of interest rate risk. The Company uses a combination of analyses to monitor its exposure to changes in interest rates. The EVE analysis is a financial model that estimates the change in EVE over a range of instantaneously shocked interest rate scenarios. EVE is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. In calculating changes in EVE, assumptions estimating loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes are employed. The net interest income simulation uses data derived from an asset and liability analysis and applies several elements, including actual interest rate indices and margins, contractual limitations and the U.S. Treasury yield curve as of the balance sheet date. The financial model uses immediate parallel yield curve shocks (in both directions) to determine possible changes in net interest income, if the theoretical rate shocks occurred. The EVE analysis and net interest income simulation model results are presented to the Asset/Liability Committee of the Board quarterly.
Summarized below are the projected effects of a parallel shift of an increase of 200 and 300 basis points, respectively, in market rates on the Company’s net interest income and EVE.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Next 12 Months |
| | Economic Value of Equity (2) | | | | Net Interest Income |
Change in Interest Rates | | Dollar | | Dollar | | Percentage | | Dollar | | Dollar | | Percentage |
Basis Point (bp) (1) | | | | | | | | | | | | |
| | Amount | | Change | | Change | | Amount | | Change | | Change |
| | (Dollars in Thousands) |
+300 bp | | $ | 130,547 |
| | $ | 1,606 |
| | 1.25 | % | | $ | 40,860 |
| | $ | 3,697 |
| | 9.95 | % |
+200 bp | | 130,547 |
| | 1,606 |
| | 1.25 | % | | 39,513 |
| | 2,350 |
| | 6.32 | % |
0 bp | | 128,941 |
| | — |
| | — |
| | 37,163 |
| | — |
| | — |
|
| | | | | | | | | | | | |
| |
(1) | Assumes an instantaneous and parallel shift in interest rates at all maturities. |
| |
(2) | EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. |
The table above indicates at December 31, 2015, in the event of a 200 basis point increase in interest rates, the Company would be expected to experience a 1.25% increase in EVE and a $2.4 million, or 6.32%, increase in net interest income over the next twelve months. This data does not reflect any future actions management may take in response to changes in interest rates, such as changing the mix of assets and liabilities, which could change the results of the EVE and net interest income calculations.
Certain shortcomings are inherent in any methodology used in the above interest rate risk measurements. Modeling changes in EVE and net interest income require certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the estimated EVE and net interest income presented above assumes that composition of the Company’s interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions the Company may take in response to changes in interest rates. The estimates also assume a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Although the estimated EVE and net interest income provide an indication of the Company’s sensitivity to interest rate changes at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effects of changes in market interest rates on the Company’s EVE and net interest income and will differ from actual results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 8. Financial Statements and Supplementary Data.
Reference is made to Item 15(a) (1) and (2) on page F-1 for a list of financial statements and supplementary data required to be filed pursuant to this Item 8. The information required by this Item 8 is provided beginning on page F-1 hereof.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this annual report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that:
| |
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the receipts and expenditures of the Company are being made only in accordance with authorizations of its management and directors; and |
| |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on their assessment using those criteria, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was effective.
The Company adopted the Internal Control-Integrated Framework updated in 2013 by COSO for the purpose of assessing the effectiveness of the Company’s internal control over financial reporting in 2015.
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company's registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers.”
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders under the captions “Directors and Executive Officers,” “Corporate Governance” and “Stock Ownership of Management and Principal Shareholders.”
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders under the caption “Executive Compensation” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The information required by this item is incorporated by reference from the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders under the captions “Equity Plans” and “Stock Ownership of Management and Principal Shareholders.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information required by this item is incorporated by reference from the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders under the captions “Certain Transactions With Management” and “Corporate Governance.”
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to the Company’s Proxy Statement for its 2016 Annual Meeting of Shareholders under the caption “Principal Accounting Fees and Services.”
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
Financial Statements of 1st Constitution Bancorp.
Consolidated Balance Sheets – December 31, 2015 and 2014.
Consolidated Statements of Income – For the Years Ended December 31, 2015 and 2014.
Consolidated Statements of Comprehensive Income – For the Years Ended December 31, 2015 and 2014.
Consolidated Statements of Changes in Shareholders’ Equity – For the Years Ended December 31, 2015 and 2014.
Consolidated Statements of Cash Flows – For the Years Ended December 31, 2015 and 2014.
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
These statements are incorporated by reference to the Company’s Annual Report to Shareholders for the year ended December 31, 2015.
| |
2. | All schedules are omitted because they are either inapplicable or not required, or because the information required therein is included in the Consolidated Financial Statements and Notes thereto. |
3. Exhibits
|
| | |
Exhibit No. | Description |
| | |
3 | (i)(A) | Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 27, 2009) |
| | |
3 | (i)(B) | Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 23, 2008) |
| | |
3 | (i)(C) | Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 23, 2008) |
| | |
3 | (ii)(A) | By-laws, as amended, of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on October 22, 2007) |
| | |
4.1 | | Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002) |
| | |
4.2 | | Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
| | |
4.3 | | Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
| | |
10.1 | # | 1st Constitution Bancorp Supplemental Executive Retirement Plan, dated as of October 1, 2002 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002) |
| | |
|
| | |
10.2 | # | Amended and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on March 24, 2006) |
| | |
10.3 | # | 1st Constitution Bancorp Form of Executive Life Insurance Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002) |
| | |
10.4 | # | Amendment No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 11, 2004) |
| | |
10.5 | # | The 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Appendix A of the Company's proxy statement (SEC File No. 000-32891) filed with the SEC on April 15, 2005) |
| | |
10.6 | # | Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | |
10.7 | # | Form of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | |
10.8 | # | Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | |
10.9 | | Amended and Restated Declaration of Trust of 1st Constitution Capital Trust II, dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the Delaware and institutional trustee named therein, and the administrators named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
| | |
10.10 | | Indenture, dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer, and the trustee named therein, relating to the Floating Rate Junior Subordinated Debt Securities due 2036 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
| | |
10.11 | | Guarantee Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and the guarantee trustee named therein (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
| | |
10.12 | # | Amendment No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective as of December 31, 2004 (incorporated by reference to Exhibit 10.24 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on April 15, 2008) |
| | |
10.13 | # | 1st Constitution Bancorp 2005 Supplemental Executive Retirement Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 28, 2006) |
| | |
10.14 | # | Amended and Restated Employment Agreement between the Company and Robert F. Mangano dated as of July 1, 2010 (incorporated by reference to Exhibit 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on July 14, 2010) |
| | |
10.15 | # | 1st Constitution Bancorp 2013 Equity Incentive Plan (incorporated by reference to the Company's proxy statement filed with the SEC on April 11, 2013) |
| | |
10.16 | #* | Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan |
| | |
10.17 | #* | Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan |
| | |
10.18 | | Agreement and Plan of Merger, dated as of August 14, 2013, by and between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013) |
| | |
10.19 | | First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.2 to the Company’s Form 10-Q filed with the SEC on November 12, 2013) |
|
| | |
| | |
10.20 | # | Letter Agreement, dated January 31, 2014, between 1st Constitution Bank and Stephen J. Gilhooly (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 1, 2014) |
| | |
10.21 | # | Amendment to the Amended and Restated Employment Agreement, dated April 4, 2014, between 1st Constitution Bancorp and Robert F. Mangano (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 8, 2014) |
| | |
10.22 | # | 1st Constitution Bancorp 2015 Directors Stock Plan (incorporated by reference to Appendix A to the Company's proxy statement on Schedule 14A for its annual meeting of shareholders held on May 21, 2015 ( SEC File No. 000-32891) filed with the SEC on April 14, 2015) |
| | |
21 | * | Subsidiaries of the Company |
| | |
23.1 | * | Consent of BDO USA, LLP as Independent Registered Public Accounting Firm |
| | |
31.1 | * | Certification of the principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
| | |
31.2 | * | Certification of the principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
| | |
32 | * | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the principal executive officer and the principal financial officer of the Company |
| | |
101.INS | * | XBRL Instance Document |
| | |
101.SCH | * | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
___________________________
* Filed herewith.
# Management contract or compensatory plan or arrangement.
(b) Exhibits.
Exhibits required by Section 601 of Regulation S-K (see (a) above)
(c) Financial Statement Schedules
See the notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
1st Constitution Bancorp
Cranbury, New Jersey
We have audited the accompanying consolidated balance sheets of 1st Constitution Bancorp (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1st Constitution Bancorp as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
March 22, 2016
1st CONSTITUTION BANCORP
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
(Dollars in Thousands, except share data)
|
| | | | | | | |
| 2015 | | 2014 |
ASSETS | | | |
CASH AND DUE FROM BANKS | $ | 11,368 |
| | $ | 14,545 |
|
| | | |
FEDERAL FUNDS SOLD / SHORT TERM INVESTMENTS | — |
| | — |
|
Total cash and cash equivalents | 11,368 |
| | 14,545 |
|
| | | |
INVESTMENT SECURITIES | | | |
Investment securities available for sale, at fair value | 94,724 |
| | 80,161 |
|
Investment securities held to maturity (fair value of $127,157 and $148,476
at December 31, 2015 and 2014, respectively) | 123,261 |
| | 143,638 |
|
Total securities | 217,985 |
| | 223,799 |
|
| | | |
LOANS HELD FOR SALE | 5,997 |
| | 8,372 |
|
| | | |
LOANS | 682,121 |
| | 654,297 |
|
Less- Allowance for loan losses | (7,560 | ) | | (6,925 | ) |
Net loans | 674,561 |
| | 647,372 |
|
PREMISES AND EQUIPMENT, net | 11,109 |
| | 11,373 |
|
| | | |
ACCRUED INTEREST RECEIVABLE | 2,853 |
| | 3,096 |
|
| | | |
BANK-OWNED LIFE INSURANCE | 21,583 |
| | 21,218 |
|
| | | |
OTHER REAL ESTATE OWNED | 966 |
| | 5,710 |
|
| | | |
GOODWILL AND INTANGIBLE ASSETS | 13,284 |
| | 13,711 |
|
| | | |
OTHER ASSETS | 8,285 |
| | 7,583 |
|
Total assets | $ | 967,991 |
| | $ | 956,779 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
LIABILITIES: | |
| | |
Deposits | |
| | |
Non-interest bearing | $ | 159,918 |
| | $ | 162,281 |
|
Interest bearing | 626,839 |
| | 655,480 |
|
Total deposits | 786,757 |
| | 817,761 |
|
| | | |
BORROWINGS | 58,896 |
| | 25,107 |
|
REDEEMABLE SUBORDINATED DEBENTURES | 18,557 |
| | 18,557 |
|
ACCRUED INTEREST PAYABLE | 846 |
| | 907 |
|
ACCRUED EXPENSES AND OTHER LIABILITIES | 6,975 |
| | 7,337 |
|
Total liabilities | 872,031 |
| | 869,669 |
|
| | | |
| | | |
|
| | | | | | | |
COMMITMENTS AND CONTINGENCIES |
| |
|
SHAREHOLDERS’ EQUITY | | | |
Preferred stock, no par value: 5,000,000 shares authorized, none issued | — |
| | — |
|
Common stock, no par value; 30,000,000 shares authorized; 7,575,492 and 7,165,084 shares issued and 7,545,684 and 7,134,174 shares outstanding as of December 31, 2015 and 2014, respectively | 70,845 |
| | 61,448 |
|
Retained earnings | 25,589 |
| | 25,730 |
|
Treasury Stock 29,808 shares and, 30,910 shares at December 31, 2015 and 2014, respectively | (344 | ) | | (316 | ) |
Accumulated other comprehensive (loss) income | (130 | ) | | 248 |
|
Total shareholders’ equity | 95,960 |
| | 87,110 |
|
Total liabilities and shareholders’ equity | $ | 967,991 |
| | $ | 956,779 |
|
The accompanying notes are an integral part of these financial statements
1st CONSTITUTION BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2015 and 2014
(Dollars in thousands, except per share data) |
| | | | | | | |
| 2015 | | 2014 |
INTEREST INCOME: | | | |
Loans, including fees | $ | 35,597 |
| | $ | 30,879 |
|
Securities: | |
| | |
|
Taxable | 3,167 |
| | 4,022 |
|
Tax-exempt | 2,131 |
| | 2,310 |
|
Federal funds sold and short-term investments | 50 |
| | 150 |
|
Total interest income | 40,945 |
| | 37,361 |
|
INTEREST EXPENSE: | |
| | |
|
Deposits | 3,704 |
| | 3,799 |
|
Borrowings | 577 |
| | 515 |
|
Redeemable subordinated debentures | 355 |
| | 344 |
|
Total interest expense | 4,636 |
| | 4,658 |
|
| | | |
Net interest income | 36,309 |
| | 32,703 |
|
| | | |
PROVISION FOR LOAN LOSSES | 1,100 |
| | 5,750 |
|
Net interest income after provision for loan losses | 35,209 |
| | 26,953 |
|
NON-INTEREST INCOME: | |
| | |
|
Service charges on deposit accounts | 818 |
| | 988 |
|
Loss on sales of securities available for sale | — |
| | (1 | ) |
Gain on sales of loans, net | 4,039 |
| | 3,103 |
|
Income on Bank-owned life insurance | 558 |
| | 564 |
|
Other income | 1,857 |
| | 2,160 |
|
Total other income | 7,272 |
| | 6,814 |
|
NON-INTEREST EXPENSES: | |
| | |
|
Salaries and employee benefits | 17,232 |
| | 16,117 |
|
Occupancy expense | 3,461 |
| | 3,355 |
|
Data processing expenses | 1,211 |
| | 1,264 |
|
FDIC insurance expense | 660 |
| | 715 |
|
Other real estate owned expenses | 1,542 |
| | 236 |
|
Merger-related expenses | — |
| | 1,532 |
|
Other operating expenses | 5,649 |
| | 5,119 |
|
Total other expenses | 29,755 |
| | 28,338 |
|
Income before income taxes | 12,726 |
| | 5,429 |
|
INCOME TAXES | 4,062 |
| | 1,073 |
|
Net income | $ | 8,664 |
| | $ | 4,356 |
|
NET INCOME PER COMMON SHARE | |
| | |
|
Basic | $ | 1.10 |
| | $ | 0.56 |
|
Diluted | $ | 1.07 |
| | $ | 0.55 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING | | | |
Basic | 7,901,278 |
| | 7,735,303 |
|
Diluted | 8,075,752 |
| | 7,879,186 |
|
The accompanying notes are an integral part of these financial statements
1st CONSTITUTION BANCORP
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2015 and 2014
(Dollars in thousands)
|
| | | | | | | |
| 2015 | | 2014 |
Net income | $ | 8,664 |
| | $ | 4,356 |
|
| | | |
Other comprehensive (loss) income, net of tax | |
| | |
|
| | | |
Unrealized (losses) gains on securities available for sale | (224 | ) | | 3,418 |
|
Tax effect | 38 |
| | (1,210 | ) |
Net of tax amount | (186 | ) | | 2,208 |
|
| | | |
Reclassification adjustment for realized loss included in income (1) | — |
| | 1 |
|
Tax effect (2) | — |
| | — |
|
Net of tax amount | — |
| | 1 |
|
| | | |
Pension liability | (53 | ) | | 488 |
|
Tax effect | 21 |
| | (195 | ) |
Net of tax amount | (32 | ) | | 293 |
|
| | | |
Reclassification adjustment for actuarial gains included in income (3) | (266 | ) | | (10 | ) |
Tax effect (2) | 106 |
| | 4 |
|
Net of tax amount | (160 | ) | | (6 | ) |
| | | |
Total other comprehensive (loss) income | (378 | ) | | 2,496 |
|
| | | |
Comprehensive income | $ | 8,286 |
| | $ | 6,852 |
|
| |
(1) | Included in loss on sales of securities available for sale |
| |
(2) | Included in income taxes |
| |
(3) | Included in salaries and employee benefits expense |
The accompanying notes are an integral part of these financial statements
1st CONSTITUTION BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2015 and 2014
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders' Equity |
BALANCE, January 1, 2014 | $ | 49,403 |
| | $ | 21,374 |
| | $ | (172 | ) | | $ | (2,248 | ) | | $ | 68,357 |
|
| | | | | | | | | |
| | | | | | | | | |
Exercise of stock options and issuance of restricted
shares under employee benefit programs | 299 |
| | |
| | |
| | |
| | 299 |
|
| | | | | | | | | |
Share-based compensation | 585 |
| | |
| | |
| | |
| | 585 |
|
| | | | | | | | | |
Acquisition of Rumson Fair Haven Bank and Trust Company (1,019,223 shares) | 11,161 |
| | | | | | | | 11,161 |
|
| | | | | | | | | |
Treasury stock purchased, net (14,072 shares) | |
| | |
| | (144 | ) | | |
| | (144 | ) |
| | | | | | | | | |
Net Income for the year ended December 31, 2014 | |
| | 4,356 |
| | |
| | |
| | 4,356 |
|
| | | | | | | | | |
Other comprehensive income | |
| | |
| | |
| | 2,496 |
| | 2,496 |
|
BALANCE, December 31, 2014 | $ | 61,448 |
| | $ | 25,730 |
| | $ | (316 | ) | | $ | 248 |
| | $ | 87,110 |
|
| | | | | | | | | |
BALANCE, January 1, 2015 | $ | 61,448 |
| | $ | 25,730 |
| | $ | (316 | ) | | $ | 248 |
| | $ | 87,110 |
|
| | | | | | | | | |
Exercise of stock options and issuance of restricted
shares under employee benefit programs (33,800 shares issued from Treasury Stock) | (39 | ) | | |
| | 331 |
| | |
| | 292 |
|
| | | | | | | | | |
Share-based compensation | 631 |
| | |
| | |
| | |
| | 631 |
|
| | | | | | | | | |
5% Stock dividends declared February and December 2015 (737,448 shares) | 8,805 |
| | (8,805 | ) | | |
| | |
| | — |
|
| | | | | | | | | |
Treasury stock purchased, net (31,050 shares) | |
| | |
| | (359 | ) | | |
| | (359 | ) |
| | | | | | | | | |
Net Income for the year ended December 31, 2015 | |
| | 8,664 |
| | |
| | |
| | 8,664 |
|
| | | | | | | | | |
Other comprehensive (loss) | |
| | |
| | |
| | (378 | ) | | (378 | ) |
BALANCE, December 31, 2015 | $ | 70,845 |
| | $ | 25,589 |
| | $ | (344 | ) | | $ | (130 | ) | | $ | 95,960 |
|
The accompanying notes are an integral part of these financial statements
1st CONSTITUTION BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015 and 2014
(Dollars in thousands)
|
| | | | | | | |
| 2015 | | 2014 |
OPERATING ACTIVITIES: | |
| | |
|
Net income | $ | 8,664 |
| | $ | 4,356 |
|
Adjustments to reconcile net income to net cash provided by operating activities-
| | | |
Provision for loan losses | 1,100 |
| | 5,750 |
|
Provision for loss on other real estate owned | 382 |
| | 112 |
|
Depreciation and amortization | 2,388 |
| | 1,734 |
|
Net amortization of premiums and discounts on securities | 810 |
| | 1,127 |
|
Loss on sales of securities available for sale | — |
| | 1 |
|
Loss (gains) on sales of other real estate owned | 692 |
| | (43 | ) |
Gains on sales of loans held for sale | (4,039 | ) | | (3,103 | ) |
Originations of loans held for sale | (134,073 | ) | | (114,752 | ) |
Proceeds from sales of loans held for sale | 140,486 |
| | 120,407 |
|
Income on bank-owned life insurance | (558 | ) | | (564 | ) |
Share-based compensation expense | 631 |
| | 585 |
|
Deferred tax expense (benefit) | 159 |
| | (143 | ) |
Decrease (increase) in accrued interest receivable | 243 |
| | (553 | ) |
(Increase) decrease in other assets | (1,812 | ) | | 620 |
|
(Decrease) increase in accrued interest payable | (61 | ) | | 24 |
|
(Decrease) increase in accrued expense and other liabilities | (362 | ) | | 1,362 |
|
| | | |
Net cash provided by operating activities | 14,650 |
| | 16,920 |
|
| | | |
INVESTING ACTIVITIES: | | | |
|
| | | |
Purchases of securities - | | | |
|
Available for sale | (34,109 | ) | | — |
|
Held to maturity | (15,599 | ) | | (18,424 | ) |
Proceeds from maturities and repayments of securities -
| | | |
Available for sale | 18,783 |
| | 23,606 |
|
Held to maturity | 35,705 |
| | 27,238 |
|
Proceeds from sales of securities available for sale | — |
| | 28,113 |
|
Net (increase) in loans | (30,646 | ) | | (147,363 | ) |
Capital expenditures | (706 | ) | | (493 | ) |
Net cash received in the acquisition | — |
| | 21,375 |
|
Proceeds from sales of other real estate owned | 6,027 |
| | 287 |
|
| | | |
Net cash used in investing activities | (20,545 | ) | | (65,661 | ) |
FINANCING ACTIVITIES: | | | |
Exercise of stock options and issuance of restricted shares | 292 |
| | 299 |
|
Purchase of treasury stock | (359 | ) | | (144 | ) |
Net decrease in demand, savings and time deposits | (31,004 | ) | | (10,275 | ) |
Net increase in borrowings | 33,789 |
| | 4,128 |
|
| | | |
Net cash provided by (used in) financing activities | 2,718 |
| | (5,992 | ) |
Decrease in cash and cash equivalents | (3,177 | ) | | (54,733 | ) |
| | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
| 14,545 |
| | 69,278 |
|
| | | |
CASH AND CASH EQUIVALENTS AT END OF YEAR
| $ | 11,368 |
| | $ | 14,545 |
|
| | | |
|
| | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Cash paid during the year for - | | | |
Interest | $ | 4,697 |
| | $ | 4,634 |
|
Income taxes | 4,170 |
| | 784 |
|
Non-cash investing activities | | | |
Real estate acquired in full satisfaction of loans in foreclosure | 2,357 |
| | 3,995 |
|
| | | |
Acquisition of Rumson Fair Haven Bank | | | |
Non-cash assets acquired: | | | |
Investment securities available for sale | — |
| | 30,024 |
|
Loans | — |
| | 143,714 |
|
Goodwill | — |
| | 8,089 |
|
Core deposit intangible | — |
| | 1,189 |
|
Bank-owned life insurance, premises and equipment and other assets | — |
| | 8,122 |
|
| — |
| | 191,138 |
|
| | | |
Liabilities assumed: | | | |
Deposits | — |
| | 189,490 |
|
Advances from FHLB | — |
| | 11,030 |
|
Other liabilities | — |
| | 832 |
|
| — |
| | 201,352 |
|
Common stock issued for acquisition | — |
| | 11,161 |
|
The accompanying notes are an integral part of these financial statements
1st CONSTITUTION BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
1. Summary of Significant Accounting Policies
1st Constitution Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and was organized under the laws of the State of New Jersey. The Company is parent to 1st Constitution Bank (the “Bank”), a state chartered commercial bank. The Bank provides community banking services to a broad range of customers, including corporations, individuals, partnerships and other community organizations in the central and northeastern New Jersey areas. The Bank conducts its operations through its main office located in Cranbury, New Jersey and operated, as of December 31, 2015, eighteen additional branch offices in downtown Cranbury, Fort Lee, Hamilton Square, Hightstown, Hillsborough, Hopewell, Jamesburg, Lawrenceville, Perth Amboy, Plainsboro, Skillman, West Windsor, Princeton, Rumson, Fair Haven, Asbury Park, Shrewsbury and Little Silver, New Jersey.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2015 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.
The Company paid a 5% common stock dividend on April 7, 2015 and declared a 5% common stock dividend on December 18, 2015 that was paid on February 1, 2016. As appropriate, common shares and per common share data presented in the consolidated financial statements and the accompanying notes below have been adjusted to reflect the common stock dividends.
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to the accepted practices within the banking industry. The following is a description of the more significant of these policies and practices.
Principles of Consolidation
The accompanying consolidated financial statements include the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1st Constitution Capital Trust II, a subsidiary of the Company (“Trust II”), is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary security impairment, the fair value of other real estate owned, the valuation of deferred tax assets and the fair value of acquired assets and liabilities.
Concentration of Credit Risk
Financial instruments which potentially subject the Company and its subsidiaries to concentrations of credit risk primarily consist of investment securities and loans. At December 31, 2015, 49.4% of our investment securities portfolio consisted of U.S. Government and Agency issues and collateralized mortgage obligations collateralized by agency mortgage backed securities. In addition, 37.9% of the portfolio consists of municipal bonds. The remaining 12.7% of our investment securities consisted primarily of corporate debt issues and restricted stock of the Federal Home Loan Bank ("FHLB") of New York. The Bank’s lending activity is primarily concentrated in loans collateralized by real estate located in the State of New Jersey. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in that state.
Interest Rate Risk
The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with other funds, to purchase investment securities and to make loans, the majority of which are secured by real estate. The potential for interest-rate risk exists as a result of the generally shorter duration of interest-sensitive assets compared to the generally longer duration of interest-sensitive liabilities. In a changing interest rate environment, assets held by the Bank will re-price faster than liabilities of the Bank, thereby affecting net interest income. For this reason, management regularly monitors the maturity structure and rate adjustment features of the Bank’s assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility.
Investment Securities
Investment Securities which the Company has the intent and ability to hold until maturity are classified as held to maturity and are recorded at cost, adjusted for amortization of premiums and accretion of discounts. Investment Securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increased capital requirements or other similar factors, are classified as available for sale and are carried at fair value, except for restricted stock of the FHLB of New York which is carried at cost. Unrealized gains and losses on such securities are recorded as a separate component of shareholders’ equity. Realized gains and losses, which are computed using the specific identification method, are recognized on a trade date basis.
If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are temporary or other-than-temporary in accordance with the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”). Temporary impairments on available for sale securities are recognized, on a tax-effected basis, through other comprehensive income (“OCI”) with offsetting adjustments to the carrying value of the security and the balance of related deferred taxes. Temporary impairments of held to maturity securities are not recorded in the consolidated financial statements; however, information concerning the amount and duration of impairments on held to maturity securities is disclosed.
Other-than-temporary impairments ("OTTI") on all equity securities and on debt securities that the Company has decided to sell, or will, more likely than not, be required to sell prior to the full recovery of fair value to a level equal to or exceeding amortized cost, are recognized in earnings. If neither of these conditions regarding the likelihood of sale for a debt security apply, the OTTI is bifurcated into credit-related and noncredit-related components. Credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on a debt security fall below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related OTTI in earnings. Noncredit-related OTTI on debt securities are recognized in OCI. For held to maturity debt securities, the amount of any OTTI recorded in OCI is amortized prospectively over the remaining lives of the securities based on the timing of future estimated cash flows related to those securities.
Premiums and discounts on all securities are amortized/accreted to maturity by use of the level-yield method considering the impact of principal amortization and prepayments.
Federal law requires a member institution of the FHLB system to hold restricted stock of its district FHLB according to a predetermined formula. The Bank’s investment in the restricted stock of the FHLB of New York, while included in investment securities available for sale, is carried at cost.
Management evaluates the FHLB restricted stock for impairment in accordance with U.S. GAAP. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the FHLB stock as of December 31, 2015.
Bank-Owned Life Insurance
The Company invests in bank-owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner and beneficiary of the policies. This pool of insurance, due to the advantages of the Bank, is profitable to the Company. This profitability offsets a portion of current and future benefit costs and is intended to provide a funding source for the payment of future benefits. The Bank’s deposits fund BOLI and the earnings from BOLI are recognized as non-interest income.
Loans and Loans Held For Sale
Loans that management intends to hold to maturity are stated at the principal amount outstanding, net of unearned income. Unearned income is recognized over the lives of the respective loans, principally using the effective interest method. Interest income is generally not accrued on loans, including impaired loans, where interest or principal is 90 days or more past due, unless the loans are adequately secured and in the process of collection, or on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations. When it is probable that, based upon current information, the Bank will not collect all amounts due under the contractual terms of the loan, the loan is reported as impaired. Smaller balance homogeneous type loans, such as residential loans and loans to individuals, which are collectively evaluated, are generally excluded from consideration for impairment. Loan impairment is measured based upon the present value of the expected future cash flows discounted at the loan’s effective interest rate or the underlying fair value of collateral for collateral dependent loans. When a loan, including an impaired loan, is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Non-accrual loans are generally not returned to accruing status until principal and interest payments have been brought current and full collectibility is reasonably assured. Cash receipts on non-accrual and impaired loans are applied to principal, unless the loan is deemed fully collectible.
Loans held for sale are carried at the lower of aggregated cost or fair value. The fair value of loans held for sale are determined, when possible, using quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans. Realized gains and losses on loans held for sale are recognized at settlement date and are determined based on the cost, including deferred net loan origination fees and the costs of the specific loans sold. Residential mortgage loans are sold servicing released.
The Bank accounts for its transfers and servicing of financial assets in accordance with ASC Topic 860, “Transfers and Servicing” ("ASC Topic 860"). The Bank originates residential mortgages under a definitive plan to sell those loans with servicing generally released. Residential mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Bank also originates commercial loans of which a portion are guaranteed by the SBA. The guaranteed portion of the loans is generally sold into the secondary market. Gains and losses on sales are also accounted for in accordance with ASC Topic 860.
The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding “rate lock commitments”. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Time elapsing between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 120 days. The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Bank commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Bank is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates.
The market value of rate lock commitments and best efforts commitments is not readily ascertainable with precision because rate lock commitments and best efforts commitments are not actively traded in stand-alone markets. The Bank determines the fair value of rate lock commitments based upon the forward sales price that is obtained in the best efforts commitment at the time the borrower locks in the interest rate on the loan while taking into consideration the probability that the rate lock commitments will close. Due to high correlation between rate lock commitments and best efforts commitments, no gain or loss occurs on the rate lock commitments. Rate lock commitments and related derivative instruments were not deemed to be significant at December 31, 2015 and 2014 and therefore, not recorded on the balance sheet at December 31, 2015 and 2014.
ASC Topic 460, “Guarantees,” requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support contracts entered into by customers. Most guarantees
extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank defines the fair value of these letters of credit as the fees paid by the customer or similar fees collected on similar instruments. The Bank amortizes the fees collected over the life of the instrument. The Bank generally obtains collateral, such as real estate or liens on customer assets for these types of commitments. The Bank’s potential liability would be reduced by any proceeds obtained in liquidation of the collateral held. The Bank had standby letters of credit for customers aggregating $2.1 million and $2.6 million at December 31, 2015 and 2014, respectively. These letters of credit are primarily related to real estate lending and the approximate value of underlying collateral upon liquidation is expected to be sufficient to cover this maximum potential exposure at December 31, 2015. The amount of the liability related to guarantees under standby letters of credit issued was not material as of December 31, 2015 and 2014.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
All, or part, of the principal balance of commercial and commercial real estate loans and construction loans are charged off against the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans are generally charged off no later than 120 days past due on a contractual basis, or earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
Loans are placed in a nonaccrual status when the ultimate collectability of principal or interest in whole, or in part, is in doubt. Past-due loans contractually past-due 90 days or more for either principal or interest are also placed in nonaccrual status unless they are both well secured and in the process of collection. Impaired loans are evaluated individually.
Purchased Credit-Impaired (“PCI”) loans are loans acquired at a discount that is due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e.; the allowance for loan losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans or the “accretable yield”, is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference”, are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and result in an increase in yield on a prospective basis.
The following is our charge-off policy for our loan segments:
Commercial, Commercial Real Estate and Construction
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
| |
• | Management judges the loan to be uncollectible; |
| |
• | Repayment is deemed to be protracted beyond reasonable time frames; |
| |
• | The loan has been classified as a loss by either internal loan review process or external examiners; |
| |
• | The customer has filed bankruptcy and the loss becomes evident owing to a lack of assets; or |
| |
• | The loan is significantly past due unless both well secured and in the process of collection. |
Consumer
Consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and using the mandated methods by asset type for income tax purposes. Building, furniture and fixtures, equipment and leasehold improvements are depreciated or amortized over the estimated useful lives of the assets or lease terms, as applicable. Estimated useful lives of buildings are forty years, furniture and fixtures and equipment are three to fifteen years, and leasehold improvements are generally three to ten years. Expenditures for maintenance and repairs are charged to expense as incurred.
The Company accounts for impairment of long lived assets in accordance with ASC Topic 360, “Property, Plant, and Equipment,” which requires recognition and measurement for the impairment of long lived assets to be held and used or to be disposed of by sale. The Bank had no impaired long lived assets at December 31, 2015 and 2014.
Derivative Contracts
Derivative contracts, as required by ASC Topic 815, “Derivatives and Hedging,” are carried at fair value as either assets or liabilities in the balance sheet with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity, net of related income tax effects for contracts that are classified as cash flow hedges. Gains and losses on derivative contracts are recognized upon realization utilizing the specific identification method.
Income Taxes
There are two components of income tax expense or benefit: current and deferred. Current income tax expense or benefit approximates cash to be paid or refunded for taxes for the applicable period. Deferred tax assets and liabilities are recognized due to differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in the financial statements. Deferred tax assets are subject to management’s judgment based upon available evidence that future realizations are likely. If management determines that the Company may not be able to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to increase the valuation reserve of the net deferred tax asset. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax expense or benefit is recognized for the change in deferred tax liabilities.
The Company accounts for uncertainty in income taxes recognized in its consolidated financial statements in accordance with ASC Topic 740, “Income Taxes,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has not identified any significant income tax uncertainties through the evaluation of its income tax positions for the years ended December 31, 2015 and 2014 and has not recognized any liabilities for tax uncertainties as of December 31, 2015 and 2014. Our policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense; such amounts were not significant during the years ended December 31, 2015 and 2014. The tax years subject to examination by the taxing authorities are, for federal and state purposes, the years ended December 31, 2015, 2014, 2013 and 2012.
Other Real Estate Owned ("OREO")
OREO obtained through loan foreclosures or the receipt of deeds-in-lieu of foreclosure is recorded at the fair value of the related property, as determined by current appraisals less estimated costs to sell at the initial transfer from the loan portfolio. Write-downs on these properties, which occur after the initial transfer from the loan portfolio, are recorded as operating expenses. Costs of holding such properties are charged to expense in the current period. Gains, to the extent realized, and losses on the disposition of these properties are reflected in current operations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the purchase method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicated that there may be impairment, in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Core deposit intangibles are a measure of the
value of checking and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over their estimated lives (ranging from five to ten years) and identifiable intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of income in the period in which the impairment was determined. No assurance can be given that future impairment tests will not result in a charge to earnings. See Note 9 – Goodwill and Intangible Assets for additional information.
Share-Based Compensation
The Company recognizes compensation expense for stock awards and options in accordance with ASC Topic 718, “Compensation – Stock Compensation.” The expense of stock-based compensation is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each stock option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. See Note 16 – Share-Based Compensation for additional information.
Benefit Plans
The Company provides certain retirement savings benefits to employees under a 401(k) plan. The Company’s contributions to the 401(k) plan are expensed as incurred.
The Company also provides retirement benefits to certain employees under supplemental executive retirement plans. The plans are unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the plans. In accordance with ASC Topic 715, “Compensation – Retirement Benefits,” the Company recognizes the unfunded status of these postretirement plans as a liability in its consolidated balance sheets and recognizes changes in that unfunded status in the year in which the changes occur through other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, interest and non-interest bearing amounts due from banks, Federal funds sold and short-term investments. Generally, Federal funds are sold and short-term investments are made for a one or two-day period.
For purposes of the Consolidated Statements of Cash Flows, accounts affected by the Rumson acquisition are presented net of the assets and liabilities acquired. Assets and liabilities acquired are presented in the Supplemental Disclosures of Cash Flow Information.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform with the current period presentation. Such reclassification had no impact on net income or total shareholders’ equity.
Advertising Costs
It is the Company’s policy to expense advertising costs in the period in which they are incurred.
Earnings Per Common Share
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period.
Diluted net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of dilutive common stock warrants and common stock options using the treasury stock method.
The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per common share (EPS) calculations. Dilutive securities in the tables below exclude common stock options and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented. Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation.
|
| | | | | | | | | | |
(Dollars in thousands except per share data) | Year Ended December 31, 2015 |
| Net Income | | Weighted average shares | | Per share Amount |
Basic earnings per common share: | | | | | |
Net income | $ | 8,664 |
| | 7,901,278 |
| | $ | 1.10 |
|
| | | | | |
Effect of dilutive securities: | | | | | |
Stock options and warrants | | | 174,474 |
| | |
| | | | | |
Diluted EPS: | | | | | |
Net income plus assumed conversion | $ | 8,664 |
| | 8,075,752 |
| | $ | 1.07 |
|
|
| | | | | | | | | | |
| Year Ended December 31, 2014 |
| Net Income | | Weighted average shares | | Per share Amount |
Basic earnings per common share: | | | | | |
Net income | $ | 4,356 |
| | 7,735,303 |
| | $ | 0.56 |
|
| | | | | |
Effect of dilutive securities: | |
| | |
| | |
|
Stock options and warrants | |
| | 143,883 |
| | |
|
| | | | | |
Diluted EPS: | |
| | |
| | |
|
Net income plus assumed conversion | $ | 4,356 |
| | 7,879,186 |
| | $ | 0.55 |
|
For the years ended December 31, 2015 and 2014, 25,182 and 63,926 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common share.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, other-than-temporary non-credit related security impairments, unrealized gains and losses on cash flows hedges, and changes in the funded status of benefit plans.
Variable Interest Entities
Management has determined that Trust II qualifies as a variable interest entity under ASC Topic 810, “Consolidation.” Trust II issued mandatorily redeemable preferred stock to investors, loaned the proceeds to the Company and holds, as its sole asset, subordinated debentures issued by the Company. As a qualified variable interest entity, Trust II’s Balance Sheet and Statement of Operations have never been consolidated with those of the Company.
In March 2005, the Federal Reserve Board ("FRB") adopted a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the final rule, the Company has included all of its $18.0 million in trust preferred securities in Tier 1 capital at December 31, 2015 and 2014.
Segment Information
U.S. GAAP establishes standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Company’s chief operating decision-maker is the President and Chief Executive Officer. The Company has applied the aggregation criteria for its operating segments to create one reportable segment, “Community Banking.”
The Company’s Community Banking segment consists of construction, commercial, retail and mortgage banking operations. The Community Banking segment is managed as a single strategic unit, which generates revenue from a variety of products and services provided by the Company. Construction, commercial, retail and mortgage banking lending is dependent upon the ability of the Company to fund itself with retail deposits and other borrowings and to manage interest rate, liquidity and credit risk as a single unit.
Recent Accounting Pronouncements
ASU Update 2016-02: Leases
In February 2016, the FASB issued ASU 2016-02 "Leases." From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
ASU Update 2016-01 Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The guidance in the ASU, among other things, requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.
ASU Update 2015-16 Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," to require adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 and for all other entities for fiscal years beginning after December 31, 2015 and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied prospectively to measurement-period adjustments that occur after the effective date of this update. The Company does not expect that the adoption of this guidance will have a material impact on the Company's consolidated financial statements.
ASU 2014-9 Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are in the scope of other standards. This ASU, which does not apply to financial instruments, is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. The Company does not anticipate a material impact on the Company's consolidated financial statements related to this guidance.
ASU 2014-12 Accounting for Share-Based-Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (a consensus of the FAS Emerging Issues Task Force).
In June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based-Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period," which requires that a performance target included in a share-based payment award that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
2. Acquisition of Rumson-Fair Haven Bank and Trust Company
On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company, a New Jersey state commercial bank (“Rumson”), which merged with and into the Bank, with the Bank as the surviving entity. The merger agreement among the Company, the Bank and Rumson (the “Merger Agreement”) provided that the shareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the effective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash or a combination thereof, subject to proration as described in the Merger Agreement, so that 60% of the aggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019,223 shares of its common stock and paid $14.8 million in cash in the transaction.
The merger was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values as of the acquisition date. Rumsons' results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.
The following table summarizes the final fair value of the acquired assets and liabilities.
|
| | | |
(Dollars in thousands) | Amount |
Consideration paid: | |
Company stock issued | $ | 11,161 |
|
Cash payment | 14,770 |
|
Total consideration paid | 25,931 |
|
Recognized amounts of identifiable assets and liabilities assumed at fair value: | |
Cash and cash equivalents | 36,145 |
|
Securities available for sale | 30,024 |
|
Loans | 143,714 |
|
Premises and equipment, net | 1,913 |
|
Identifiable intangible assets | 1,189 |
|
Bank-owned life insurance | 4,471 |
|
Accrued interest receivable and other assets | 1,738 |
|
Deposits | (189,490 | ) |
Borrowings | (11,030 | ) |
Other liabilities | (832 | ) |
Total identifiable assets | 17,842 |
|
Goodwill | 8,089 |
|
3. Investment Securities
Amortized cost, carrying value, gross unrealized gains and losses, and the fair value by security type are as follows: |
| | | | | | | | | | | | | | | |
(Dollars in thousands) | | | Gross | | Gross | | |
| Amortized | | Unrealized | | Unrealized | | Fair |
2015 | Cost | | Gains | | Losses | | Value |
Available for sale- | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government | | | | | | | |
sponsored corporations (“GSE”) and agencies | $ | 5,523 |
| | $ | — |
| | $ | (42 | ) | | $ | 5,481 |
|
Residential collateralized mortgage obligations- GSE | 8,255 |
| | 68 |
| | (36 | ) | | 8,287 |
|
Residential mortgage backed securities – GSE | 32,279 |
| | 541 |
| | (185 | ) | | 32,635 |
|
Obligations of state and political subdivisions | 21,125 |
| | 365 |
| | (54 | ) | | 21,436 |
|
Trust preferred debt securities – single issuer | 2,474 |
| | — |
| | (338 | ) | | 2,136 |
|
Corporate debt securities | 20,510 |
| | 65 |
| | (153 | ) | | 20,422 |
|
Other debt securities | 1,053 |
| | — |
| | (28 | ) | | 1,025 |
|
Restricted stock | 3,302 |
| | — |
| | — |
| | 3,302 |
|
| $ | 94,521 |
| | $ | 1,039 |
| | $ | (836 | ) | | $ | 94,724 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Held to maturity- | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | $ | 13,630 |
| | $ | — |
| | $ | 13,630 |
| | $ | 404 |
| | $ | — |
| | $ | 14,034 |
|
Residential mortgage backed securities - GSE | 47,718 |
| | — |
| | 47,718 |
| | 928 |
| | (46 | ) | | 48,600 |
|
Obligations of state and political subdivisions | 61,135 |
| | |
| | 61,135 |
| | 2,294 |
| | (14 | ) | | 63,415 |
|
Trust preferred debt securities - pooled | 657 |
| | (501 | ) | | 156 |
| | 341 |
| | — |
| | 497 |
|
Other debt securities | 622 |
| | — |
| | 622 |
| | — |
| | (11 | ) | | 611 |
|
| $ | 123,762 |
| | $ | (501 | ) | | $ | 123,261 |
| | $ | 3,967 |
| | $ | (71 | ) | | $ | 127,157 |
|
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | | | Gross | | Gross | | |
| Amortized | | Unrealized | | Unrealized | | Fair |
2014 | Cost | | Gains | | Losses | | Value |
Available for sale- | | | | | | | |
U. S. Treasury securities and obligations of U.S. Government | | | | | | | |
sponsored corporations (“GSE”) and agencies | $ | 1,538 |
| | $ | — |
| | $ | (14 | ) | | $ | 1,524 |
|
Residential collateralized mortgage obligations - GSE | 4,455 |
| | 101 |
| | (23 | ) | | 4,533 |
|
Residential mortgage backed securities – GSE | 27,089 |
| | 825 |
| | (143 | ) | | 27,771 |
|
Obligations of state and political subdivisions | 21,733 |
| | 299 |
| | (329 | ) | | 21,703 |
|
Trust preferred debt securities – single issuer | 2,472 |
| | — |
| | (403 | ) | | 2,069 |
|
Corporate debt securities | 19,397 |
| | 152 |
| | (28 | ) | | 19,521 |
|
Other debt securities | 1,290 |
| | 1 |
| | (11 | ) | | 1,280 |
|
Restricted stock | 1,760 |
| | — |
| | — |
| | 1,760 |
|
| $ | 79,734 |
| | $ | 1,378 |
| | $ | (951 | ) | | $ | 80,161 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Held to maturity- | | | | | | | | | | | |
Residential collateralized mortgage obligations – GSE | $ | 19,304 |
| | $ | — |
| | $ | 19,304 |
| | $ | 700 |
| | $ | — |
| | $ | 20,004 |
|
Residential mortgage backed securities - GSE | 56,528 |
| | — |
| | 56,528 |
| | 1,563 |
| | (36 | ) | | 58,055 |
|
Obligations of state and political subdivisions
| 66,887 |
| | — |
| | 66,887 |
| | 2,297 |
| | (92 | ) | | 69,092 |
|
Trust preferred debt securities - pooled | 657 |
| | (501 | ) | | 156 |
| | 405 |
| | — |
| | 561 |
|
Other debt securities | 763 |
| | — |
| | 763 |
| | 1 |
| | — |
| | 764 |
|
| | | | | | | | | | | |
| $ | 144,139 |
| | $ | (501 | ) | | $ | 143,638 |
| | $ | 4,966 |
| | $ | (128 | ) | | $ | 148,476 |
|
At December 31, 2015 and December 31, 2014, $69.8 million and $101.6 million of investment securities, respectively, were pledged to collateralize borrowings from the FHLB and municipal deposits under the State of New Jersey Governmental Unit Deposit Protection Act ("GUDPA").
The following table sets forth certain information regarding the amortized cost, carrying value, fair value, weighted average yields and contractual maturities of the Company's investment portfolio as of December 31, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Restricted stock is included in “Available for sale - Due in one year or less.”
|
| | | | | | | | | | |
(Dollars in thousands) | December 31, 2015 |
| Amortized Cost | |
Fair Value | | Yield |
Available for sale | | | | | |
Due in one year or less | $ | 10,788 |
| | $ | 10,807 |
| | 2.54 | % |
Due after one year through five years | 17,911 |
| | 17,863 |
| | 1.82 | % |
Due after five years through ten years | 31,137 |
| | 31,360 |
| | 2.43 | % |
Due after ten years | 34,685 |
| | 34,694 |
| | 3.23 | % |
Total | $ | 94,521 |
| | $ | 94,724 |
| | 2.62 | % |
| | | | | |
| Carrying Value | |
Fair Value | | Yield |
Held to maturity | |
| | |
| | |
|
Due in one year or less | $ | 17,040 |
| | $ | 17,051 |
| | 0.74 | % |
Due after one year through five years | 14,935 |
| | 15,448 |
| | 4.06 | % |
Due after five years through ten years | 30,657 |
| | 31,898 |
| | 3.50 | % |
Due after ten years | 60,629 |
| | 62,760 |
| | 3.45 | % |
Total | $ | 123,261 |
| | $ | 127,157 |
| | 3.18 | % |
Gross unrealized losses on available for sale and held to maturity securities and the fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | Number of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Government sponsored corporations and agencies
| 3 |
| | $ | 5,481 |
| | $ | (42 | ) | | — |
| | — |
| | $ | 5,481 |
| | $ | (42 | ) |
| | | | | | | | | | | | | |
Residential collateralized mortgage obligations - GSE
| 2 |
| | 5,894 |
| | (36 | ) | | — |
| | — |
| | 5,894 |
| | (36 | ) |
| | | | | | | | | | | | | |
Residential mortgage backed securities - GSE
| 19 |
| | 20,911 |
| | (175 | ) | | 3,980 |
| | (56 | ) | | 24,891 |
| | (231 | ) |
| | | | | | | | | | | | | |
Obligations of state and political subdivisions
| 32 |
| | 2,760 |
| | (19 | ) | | 6,465 |
| | (49 | ) | | 9,225 |
| | (68 | ) |
| | | | | | | | | | | | | |
Trust preferred debt securities -single issuer
| 4 |
| | — |
| | — |
| | 2,136 |
| | (338 | ) | | 2,136 |
| | (338 | ) |
| | | | | | | | | | | | | |
Corporate debt securities | 4 |
| | 9,214 |
| | (153 | ) | | — |
| | — |
| | 9,214 |
| | (153 | ) |
| | | | | | | | | | | | | |
Other debt securities | 3 |
| | 586 |
| | (11 | ) | | 1,025 |
| | (28 | ) | | 1,611 |
| | (39 | ) |
| | | | | | | | | | | | | |
Total temporarily impaired securities | 67 |
| | $ | 44,846 |
| | $ | (436 | ) | | $ | 13,606 |
| | $ | (471 | ) | | $ | 58,452 |
| | $ | (907 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | Number of Securities | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Government sponsored corporations and agencies | 1 |
| | $ | 1,524 |
| | $ | (14 | ) | | — |
| | — |
| | $ | 1,524 |
| | $ | (14 | ) |
| | | | | | | | | | | | | |
Residential collateralized mortgage obligations-GSE | 1 |
| | 1,025 |
| | (23 | ) | | — |
| | — |
| | 1,025 |
| | (23 | ) |
| | | | | | | | | | | | | |
Residential mortgage backed securities - GSE | 16 |
| | 755 |
| | — |
| | 15,441 |
| | (179 | ) | | 16,196 |
| | (179 | ) |
| | | | | | | | | | | | | |
Obligations of state and political subdivisions | 57 |
| | 2,491 |
| | (23 | ) | | 15,621 |
| | (398 | ) | | 18,112 |
| | (421 | ) |
| | | | | | | | | | | | | |
Trust preferred debt securities – single issuer | 4 |
| | — |
| | — |
| | 2,068 |
| | (403 | ) | | 2,068 |
| | (403 | ) |
| | | | | | | | | | | | | |
Corporate debt securities | 7 |
| | 6,259 |
| | (5 | ) | | 1,017 |
| | (23 | ) | | 7,276 |
| | (28 | ) |
| | | | | | | | | | | | | |
Other debt securities | 2 |
| | 985 |
| | (6 | ) | | 86 |
| | (5 | ) | | 1,071 |
| | (11 | ) |
| | | | | | | | | | | | | |
Total temporarily impaired securities | 88 |
| | $ | 13,039 |
| | $ | (71 | ) | | $ | 34,233 |
| | $ | (1,008 | ) | | $ | 47,272 |
| | $ | (1,079 | ) |
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies: The unrealized losses on investments in these securities were caused by increases in market interest rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than temporarily impaired.
Residential collateralized mortgage obligations and residential mortgage backed securities: The unrealized losses on investments in residential collateralized mortgage obligations and residential mortgage backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuer, primarily government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than temporarily impaired.
Obligations of state and political subdivisions: The unrealized losses on investments in these securities were caused by increases in market interest rates. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. None of the issuers have defaulted on interest payments. These investments are not considered to be other than
temporarily impaired because the decline in fair value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than temporarily impaired.
Trust preferred debt securities – single issuer: The investments in these securities with unrealized losses are comprised of four corporate trust preferred securities issued by two large financial institutions that both mature in 2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities. One of the issuers continues to maintain an investment grade credit rating and neither has defaulted on interest payments. The decline in fair value is attributable to the widening of interest rate spreads and the lack of an active trading market for these securities and, to a lesser degree, market concerns about the issuers’ credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.
Corporate debt securities. The unrealized losses on investments in corporate debt securities were caused by an increase in market interest rates. None of the corporate issuers have defaulted on interest payments. The decline in fair value is attributable to changes in market interest rates and not credit quality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily impaired.
Trust preferred debt securities-pooled: This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PRETSL XXV”)), consisting primarily of financial institution holding companies. During 2009, the Company recognized an other-than-temporary impairment charge of $865,000, of which $364,000 was determined to be a credit loss and charged to operations and $501,000 was recognized in other comprehensive income (loss) component of shareholders’ equity.
The primary factor used to determine the credit portion of the impairment loss to be recognized in the income statement for this security was the discounted present value of projected cash flow where that present value of cash flow was less than the amortized cost basis of the security. The present value of cash flow was developed using an EITF 99-20 model that considered performing collateral ratios, the level of subordination to senior tranches of the security, credit ratings of and projected credit defaults in the underlying collateral.
On a quarterly basis, management evaluates this security to determine if any additional other-than-temporary impairment is required. As of December 31, 2015, management concluded that no additional other than temporary impairment had occurred.
The Company regularly reviews the composition of the investment securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs and its overall interest rate risk profile and strategic goals.
4. Loans and Loans Held for Sale
Loans are as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Commercial business | $ | 99,277 |
| | $ | 110,771 |
|
Commercial real estate | 207,250 |
| | 198,211 |
|
Mortgage warehouse lines | 216,572 |
| | 179,172 |
|
Construction loans | 93,745 |
| | 95,627 |
|
Residential real estate loans | 40,744 |
| | 46,446 |
|
Loans to individuals | 23,074 |
| | 23,156 |
|
All other loans | 233 |
| | 199 |
|
Gross Loans | 680,895 |
| | 653,582 |
|
Deferred loan costs | 1,226 |
| | 715 |
|
| $ | 682,121 |
| | $ | 654,297 |
|
The Bank’s lending focus and business is concentrated primarily in New Jersey, particularly Middlesex, Mercer, Monmouth and Somerset Counties and the Fort Lee area of Bergen County. A significant portion of the total loan portfolio is secured by real estate or other collateral located in these areas.
The Bank had residential mortgage loans held for sale of $6.0 million at December 31, 2015 and $8.4 million at December 31, 2014. The Bank sells residential mortgage loans in the secondary market on a non-recourse basis, generally with the related loan servicing rights released to purchasers. Loans held for sale at December 31, 2015 and 2014 were residential mortgage loans that the Bank intends to sell under best efforts forward sales commitments providing for delivery to purchasers generally within a two month period. The fair value of related derivatives of interest rate lock commitments and forward sales of closed loans were not significant at December 31, 2015 and 2014.
5. Allowance for Loan Losses and Credit Quality Disclosures
The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
The following table provides an aging of the loan portfolio by loan class at December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 30-59 Days | | 60-89 Days | | Greater than 90 Days | | Total Past Due | | Current | | Total Loans Receivable | | Recorded Investment >90 Days Accruing | | Nonaccrual Loans |
Commercial | | | | | | | | | | | | | | | |
Construction Loans | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 93,745 |
| | $ | 93,745 |
| | $ | — |
| | $ | — |
|
Commercial Business | 530 |
| | 5 |
| | 186 |
| | 721 |
| | 98,556 |
| | 99,277 |
| | — |
| | 304 |
|
Commercial Real Estate | 789 |
| | — |
| | 3,996 |
| | 4,785 |
| | 202,465 |
| | 207,250 |
| | — |
| | 4,321 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | 216,572 |
| | 216,572 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
Residential Real Estate Loans | — |
| | 166 |
| | 1,132 |
| | 1,298 |
| | 39,446 |
| | 40,744 |
| | — |
| | 1,132 |
|
| | | | | | | | | | | | | | | |
Loans to Individuals | 400 |
| | — |
| | 263 |
| | 663 |
| | 22,411 |
| | 23,074 |
| | — |
| | 263 |
|
Other | — |
| | — |
| | — |
| | — |
| | 233 |
| | 233 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
Deferred Loan Fees and Costs, Net | — |
| | — |
| | — |
| | — |
| | 1,226 |
| | 1,226 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
Total | $ | 1,719 |
| | $ | 171 |
| | $ | 5,577 |
| | $ | 7,467 |
| | $ | 674,654 |
| | $ | 682,121 |
| | $ | — |
| | $ | 6,020 |
|
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired with evidence of deteriorated credit quality in the amount of $489,000 at December 31, 2015 were not classified as non-performing loans due to the accretion of income based on expected cash flows.
The following table provides an aging of the loan portfolio by loan class at December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 30-59 Days | | 60-89 Days | | Greater than 90 Days | | Total Past Due | | Current | | Total Loans Receivable | | Recorded Investment >90 Days Accruing | | Nonaccrual Loans |
Commercial | | | | | | | | | | | | | | | |
Construction Loans | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 95,627 |
| | $ | 95,627 |
| | $ | — |
| | $ | — |
|
Commercial Business | 1,823 |
| | 51 |
| | 492 |
| | 2,366 |
| | 108,405 |
| | 110,771 |
| | — |
| | 464 |
|
Commercial Real Estate | 3,988 |
| | — |
| | 2,772 |
| | 6,760 |
| | 191,451 |
| | 198,211 |
| | — |
| | 2,435 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | 179,172 |
| | 179,172 |
| | — |
| | — |
|
Residential Real Estate Loans | — |
| | — |
| | 1,668 |
| | 1,668 |
| | 44,778 |
| | 46,446 |
| | 317 |
| | 1,361 |
|
Consumer | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Loans to Individuals | 4 |
| | — |
| | 263 |
| | 267 |
| | 22,889 |
| | 23,156 |
| | — |
| | 263 |
|
Other | — |
| | — |
| | — |
| | — |
| | 199 |
| | 199 |
| | — |
| | — |
|
Deferred Loan Fees and Costs, Net | — |
| | — |
| | — |
| | — |
| | 715 |
| | 715 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
Total | $ | 5,815 |
| | $ | 51 |
| | $ | 5,195 |
| | $ | 11,061 |
| | $ | 643,236 |
| | $ | 654,297 |
| | $ | 317 |
| | $ | 4,523 |
|
Additional income before taxes amounting to $579,000 and $568,000 would have been recognized in 2015 and 2014, respectively, if interest on all loans had been recorded based upon original contract terms.
Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements and is consistent with generally accepted accounting principles (GAAP) and interagency supervisory guidance. The allowance for loan losses methodology consists of two major components. The first component is an estimation of losses associated with individually identified impaired loans, which follows ASC Topic 310. The second major component estimates losses under ASC Topic 450, which provides guidance for estimating losses on groups of loans with similar risk characteristics. The Company’s methodology results in an allowance for loan losses which includes a specific reserve for impaired loans, an allocated reserve, and an unallocated portion.
When analyzing groups of loans under ASC Topic 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The methodology considers the Company’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the loans as of the evaluation date. These adjustment factors, known as qualitative factors, include:
| |
• | Delinquencies and nonaccruals |
| |
• | Trends in volume of loans |
| |
• | Experience, ability, and depth of management |
| |
• | Economic trends – national and local |
| |
• | External factors – competition, legal and regulatory |
The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list for loans that have indications of credit weakness. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans are determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed and for homogeneous groups, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans assigned a rating of special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in nonaccrual status. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses.
The specific allowance for impaired loans is established for specific loans that have been identified by management as being impaired. These loans are considered to be impaired primarily because the loans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole or in part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual impaired loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which in turn employ their own criteria and assumptions that may include occupancy rates, rental rates, and property expenses, among others.
The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial and commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals. The historical
loss estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other qualitative factor which may cause future losses to deviate from historical levels.
The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.
The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.
Commercial
The Company’s primary lending emphasis is the origination of commercial, construction and commercial real estate loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
Mortgage Warehouse Lines of Credit
The Company’s mortgage warehouse lending operations provides revolving lines of credit that are available to licensed mortgage banking companies. The warehouse line of credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold into the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the warehouse line of credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest and a transaction fee are collected by the Bank at the time of repayment.
As a separate segment of the total portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losses purposes. Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008; there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.
These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and nonaccruals, are also considered and may have positive or negative effects on the allocated allowance. The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in an allocated allowance for warehouse lines of credit.
Consumer
The Company’s loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are created for the various types of loans to individuals.
In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.
The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:
| |
• | Internal credit risk grades |
Internal Risk Rating of Loans
The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:
1. Excellent - Loans that are based upon cash collateral held at the Bank and adequately margined. Loans that are based upon "blue chip" stocks listed on the major exchanges and adequately margined.
2. Above Average - Loans to companies whose balance sheets show excellent liquidity and long-term debt is on well-spread schedules of repayment easily covered by cash flow. Such companies have been consistently profitable and have diversification in their product lines or sources of revenue. The continuation of profitable operations for the foreseeable future is likely. Management is comprised of a mix of ages, experience, and backgrounds and management succession is in place. Sources of raw materials and for service companies, the source of revenue is abundant. Future needs have been planned for. Character and management ability of individuals or company principals are excellent. Loans to individuals are supported by high net worths and liquid assets.
3. Good - Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such companies have established profitable records over a number of years, and there has been growth in net worth. Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans in categories 1 and 2 above. Loans to individuals are supported by good net worth but whose supporting assets are illiquid.
3w. Watch List - Included in this category are loans evidencing problems identified by Bank management that require closer supervision. Such problem has not developed to the point which requires a Special Mention rating. This category also covers situations where the Bank does not have adequate current information upon which credit quality can be determined. The account officer has the obligation to correct these deficiencies within 30 days from the time of notification.
4. Special Mention - A "special mention" loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in derterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.
5. Substandard - A "substandard" loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
6. Doubtful - A loan classified "doubtful" has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
7. Loss - A loan classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desireable to defer writing off this basically worthless loan even though partial recovery may be affected in the future.
The following table provides a breakdown of the loan portfolio by credit quality indictor at December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | |
Commercial Credit Exposure- By Internally Assigned Grade | Construction |
| | Commercial Business |
| | Commercial Real Estate |
| | Mortgage Warehouse Lines |
| | Residential Real Estate |
|
Grade: | | | | | | | | | |
Pass | $ | 93,558 |
| | $ | 90,856 |
| | $ | 191,754 |
| | $ | 216,572 |
| | $ | 39,878 |
|
Special Mention | 187 |
| | 7,768 |
| | 9,311 |
| | — |
| | 260 |
|
Substandard | — |
| | 653 |
| | 6,185 |
| | — |
| | 606 |
|
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
|
Loss | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 93,745 |
| | $ | 99,277 |
| | $ | 207,250 |
| | $ | 216,572 |
| | $ | 40,744 |
|
|
| | | | | | | |
(Dollars in thousands) | | | |
Consumer Credit Exposure -By Payment Activity | Loans to Individuals |
| | Other |
|
| | | |
Performing | $ | 22,811 |
| | $ | 233 |
|
Nonperforming | 263 |
| | — |
|
Total | $ | 23,074 |
| | $ | 233 |
|
The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | |
Commercial Credit Exposure- By Internally Assigned Grade | Construction |
| | Commercial Business |
| | Commercial Real Estate |
| | Mortgage Warehouse Lines |
| | Residential Real Estate |
|
Grade: | | | | | | | | | |
Pass | $ | 95,391 |
| | $ | 103,107 |
| | $ | 178,701 |
| | $ | 179,172 |
| | $ | 44,768 |
|
Special Mention | 236 |
| | 6,711 |
| | 12,052 |
| | — |
| | 95 |
|
Substandard | — |
| | 792 |
| | 7,458 |
| | — |
| | 1,583 |
|
Doubtful | — |
| | 161 |
| | — |
| | — |
| | — |
|
Loss | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 95,627 |
|
| $ | 110,771 |
|
| $ | 198,211 |
|
| $ | 179,172 |
|
| $ | 46,446 |
|
|
| | | | | | | |
(Dollars in thousands) | | | |
Consumer Credit Exposure - By Payment Activity | Loans to Individuals |
| | Other |
|
| | | |
Performing | $ | 22,893 |
| | $ | 199 |
|
Nonperforming | 263 |
| | — |
|
Total | $ | 23,156 |
| | $ | 199 |
|
Impaired Loans Disclosures
Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When a loan is placed on nonaccrual status, it is also considered to be impaired. Loans are placed on nonaccrual status when: (1) the full collection of interest or principal becomes uncertain; or (2) they are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.
The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at December 31, 2015 and 2014, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses as of and for the year ended December 31, 2015 | | | | | | |
(Dollars in thousands) | | Commercial | Commercial | Mortgage | Residential | Loans to | | | Deferred | Total |
| Construction | Business | Real Estate | Warehouse | Real Estate | Individuals | Other | Unallocated | Fees | |
Allowance for loan losses: | | | | | | | | | | |
Beginning balance | $ | 1,215 |
| $ | 1,761 |
| $ | 2,393 |
| $ | 896 |
| $ | 197 |
| $ | 129 |
| $ | 2 |
| $ | 332 |
| $ | — |
| $ | 6,925 |
|
Provision charged to operations | (190 | ) | 347 |
| 1,010 |
| (30 | ) | 91 |
| (13 | ) | (1 | ) | (114 | ) | — |
| 1,100 |
|
Loans charged off | — |
| (116 | ) | (361 | ) | — |
| — |
| (13 | ) | (1 | ) | — |
| — |
| (491 | ) |
Recoveries of loans charged off | — |
| 13 |
| 7 |
| — |
| — |
| 6 |
| |
| — |
| — |
| 26 |
|
Ending balance | $ | 1,025 |
| $ | 2,005 |
| $ | 3,049 |
| $ | 866 |
| $ | 288 |
| $ | 109 |
| $ | — |
| $ | 218 |
| $ | — |
| $ | 7,560 |
|
| | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| $ | 68 |
| $ | 125 |
| $ | — |
| $ | 69 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 262 |
|
Loans acquired with deteriorated credit quality | — |
| — |
| 64 |
| — |
| — |
| — |
| — |
| — |
| — |
| 64 |
|
Collectively evaluated for impairment | 1,025 |
| 1,937 |
| 2,860 |
| 866 |
| 219 |
| 109 |
| — |
| 218 |
| — |
| 7,234 |
|
Ending Balance | $ | 1,025 |
| $ | 2,005 |
| $ | 3,049 |
| $ | 866 |
| $ | 288 |
| $ | 109 |
| $ | — |
| $ | 218 |
| $ | — |
| $ | 7,560 |
|
| | | | | | | | | | |
Loans receivables: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Loans acquired with deteriorated credit quality | $ | — |
| $ | 241 |
| $ | 1,359 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,600 |
|
Individually evaluated for impairment | 494 |
| 458 |
| 4,833 |
| — |
| 1,132 |
| 263 |
| — |
| — |
| — |
| 7,180 |
|
Collectively evaluated for impairment | 93,251 |
| 98,578 |
| 201,058 |
| 216,572 |
| 39,612 |
| 22,811 |
| 233 |
| — |
| 1,226 |
| 673,341 |
|
Ending Balance | $ | 93,745 |
| $ | 99,277 |
| $ | 207,250 |
| $ | 216,572 |
| $ | 40,744 |
| $ | 23,074 |
| $ | 233 |
| $ | — |
| $ | 1,226 |
| $ | 682,121 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses as of and for the year ended December 31, 2014 | | | | | | |
(Dollars in thousands) | | Commercial | Commercial | Mortgage | Residential | Loans to | | | Deferred | Total |
| Construction | Business | Real Estate | Warehouse | Real Estate | Individuals | Other | Unallocated | Fees | |
Allowance for loan losses: | | | | | | | | | | |
Beginning balance | $ | 1,205 |
| $ | 1,272 |
| $ | 3,022 |
| $ | 585 |
| $ | 165 |
| $ | 109 |
| $ | 2 |
| $ | 679 |
| $ | — |
| $ | 7,039 |
|
Provision charged to operations | 10 |
| 4,794 |
| 914 |
| 311 |
| 47 |
| 20 |
| 1 |
| (347 | ) | — |
| 5,750 |
|
Loans charged off | — |
| (4,324 | ) | (1,582 | ) | — |
| (15 | ) | — |
| (1 | ) | — |
| — |
| (5,922 | ) |
Recoveries of loans charged off | — |
| 19 |
| 39 |
| — |
| — |
| — |
| |
| — |
| — |
| 58 |
|
Ending balance | $ | 1,215 |
| $ | 1,761 |
| $ | 2,393 |
| $ | 896 |
| $ | 197 |
| $ | 129 |
| $ | 2 |
| $ | 332 |
| $ | — |
| $ | 6,925 |
|
| | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Individually evaluated for impairment | $ | — |
| $ | 122 |
| $ | 593 |
| $ | — |
| $ | — |
| $ | 26 |
| $ | — |
| $ | — |
| $ | — |
| $ | 741 |
|
Collectively evaluated for impairment | 1,215 |
| 1,639 |
| 1,800 |
| 896 |
| 197 |
| 103 |
| 2 |
| 332 |
| — |
| 6,184 |
|
Ending Balance | $ | 1,215 |
| $ | 1,761 |
| $ | 2,393 |
| $ | 896 |
| $ | 197 |
| $ | 129 |
| $ | 2 |
| $ | 332 |
| $ | — |
| $ | 6,925 |
|
| | | | | | | | | | |
Loans receivables: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Loans acquired with deteriorated credit quality | $ | — |
| $ | 320 |
| $ | 1,705 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,025 |
|
Individually evaluated for impairment | 450 |
| 612 |
| 5,762 |
| — |
| 1,361 |
| 263 |
| — |
| — |
| — |
| 8,448 |
|
Collectively evaluated for impairment | 95,177 |
| 109,839 |
| 190,744 |
| 179,172 |
| 45,085 |
| 22,893 |
| 199 |
| — |
| 715 |
| 643,824 |
|
Ending Balance | $ | 95,627 |
| $ | 110,771 |
| $ | 198,211 |
| $ | 179,172 |
| $ | 46,446 |
| $ | 23,156 |
| $ | 199 |
| $ | — |
| $ | 715 |
| $ | 654,297 |
|
When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In such cases, the current fair value of the collateral less selling costs is used. If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.
|
| | | | | | | | | | | | | | | | | | | |
Impaired Loans Receivables (By Class) - December 31, 2015 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Year to Date 2015 Average Recorded Investment | | Year to Date 2015 Interest Income Recognized |
(Dollars in thousands) | | | | | | | | | |
With no related allowance: | | | | | | | | | |
Construction | $ | 494 |
| | $ | 494 |
| | — |
| | $ | 477 |
| | $ | 27 |
|
Commercial Business | 488 |
| | 847 |
| | — |
| | 492 |
| | 23 |
|
Commercial Real Estate | 2,417 |
| | 2,683 |
| | — |
| | 2,998 |
| | 94 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 3,399 |
| | 4,024 |
| | — |
| | 3,967 |
| | 144 |
|
| | | | | | | | | |
Residential Real Estate | 831 |
| | 831 |
| | — |
| | 981 |
| | — |
|
| | | | | | | | | |
Consumer | |
| | |
| | |
| | |
| | |
|
Loans to Individuals | 263 |
| | 280 |
| | — |
| | 88 |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 263 |
| | 280 |
| | — |
| | 88 |
| | — |
|
| | | | | | | | | |
Subtotal with no related allowance | 4,493 |
|
| 5,135 |
|
| — |
|
| 5,036 |
|
| 144 |
|
| | | | | | | | | |
With an allowance: | |
| | |
| | |
| | |
| | |
|
Commercial | |
| | |
| | |
| | |
| | |
|
Construction | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial Business | 211 |
| | 237 |
| | 68 |
| | 307 |
| | 5 |
|
Commercial Real Estate | 3,775 |
| | 3,788 |
| | 189 |
| | 4,200 |
| | 154 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 3,986 |
|
| 4,025 |
|
| 257 |
|
| 4,507 |
|
| 159 |
|
| | | | | | | | | |
Residential Real Estate | 301 |
| | 316 |
| | 69 |
| | 100 |
| | — |
|
Consumer | |
| | |
| | |
| | |
| | |
|
Loans to Individuals | — |
| | — |
| | — |
| | 175 |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | — |
|
| — |
|
| — |
|
| 175 |
|
| — |
|
| | | | | | | | | |
Subtotal with an allowance | 4,287 |
|
| 4,025 |
|
| 326 |
|
| 4,782 |
|
| 159 |
|
| | | | | | | | | |
Total: | |
| | |
| | |
| | |
| | |
|
Construction | 494 |
| | 494 |
| | — |
| | 477 |
| | 27 |
|
Commercial Business | 699 |
| | 1,084 |
| | 68 |
| | 799 |
| | 28 |
|
Commercial Real Estate | 6,192 |
| | 6,471 |
| | 189 |
| | 7,198 |
| | 248 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Residential Real Estate | 1,132 |
| | 1,147 |
| | 69 |
| | 1,081 |
| | — |
|
Consumer | 263 |
| | 280 |
| | — |
| | 263 |
| | — |
|
Total | $ | 8,780 |
|
| $ | 9,476 |
|
| $ | 326 |
|
| $ | 9,818 |
|
| $ | 303 |
|
|
| | | | | | | | | | | | | | | | | | | |
Impaired Loans Receivables (By Class) - December 31, 2014 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Year to Date 2014 Average Recorded Investment | | Year to Date 2014 Interest Income Recognized |
(Dollars in thousands) | | | | | | | | | |
With no related allowance: | | | | | | | | | |
Commercial | | | | | | | | | |
Construction | $ | 450 |
| | $ | 450 |
| | — |
| | $ | 329 |
| | $ | 18 |
|
Commercial Business | 558 |
| | 1,145 |
| | — |
| | 586 |
| | 20 |
|
Commercial Real Estate | 4,058 |
| | 4,344 |
| | — |
| | 4,144 |
| | 139 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 5,066 |
|
| 5,939 |
|
| — |
|
| 5,059 |
|
| 177 |
|
| | | | | | | | | |
Residential Real Estate | 1,361 |
| | 1,376 |
| | — |
| | 1,410 |
| | — |
|
| | | | | | | | | |
Consumer | |
| | |
| | |
| | |
| | |
|
Loans to Individuals | — |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
Subtotal with no related allowance | 6,427 |
|
| 7,315 |
|
| — |
|
| 6,469 |
|
| 177 |
|
| | | | | | | | | |
With an allowance: | |
| | |
| | |
| | |
| | |
|
| | | | | | | | | |
Commercial | |
| | |
| | |
| | |
| | |
|
Construction | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial Business | 374 |
| | 374 |
| | 122 |
| | 531 |
| | 3 |
|
Commercial Real Estate | 3,409 |
| | 3,409 |
| | 593 |
| | 3,439 |
| | 214 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
Subtotal | 3,783 |
|
| 3,783 |
|
| 715 |
|
| 3,970 |
|
| 217 |
|
| | | | | | | | | |
Residential Real Estate | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer | |
| | |
| | |
| | |
| | |
|
Loans to Individuals | 263 |
| | 263 |
| | 26 |
| | 251 |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 263 |
|
| 263 |
|
| 26 |
|
| 251 |
|
| — |
|
| | | | | | | | | |
Subtotal with an allowance | 4,046 |
| | 4,046 |
| | 741 |
| | 6,404 |
| | 217 |
|
| | | | | | | | | |
| | | | | | | | | |
Total: | |
| | |
| | |
| | |
| | |
|
Construction | 450 |
| | 450 |
| | — |
| | 329 |
| | 18 |
|
Commercial Business | 932 |
| | 1,519 |
| | 122 |
| | 1,117 |
| | 23 |
|
Commercial Real Estate | 7,467 |
| | 7,753 |
| | 593 |
| | 7,583 |
| | 353 |
|
Mortgage Warehouse Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Residential Real Estate | 1,361 |
| | 1,376 |
| | — |
| | 1,410 |
| | — |
|
Consumer | 263 |
| | 263 |
| | 26 |
| | 251 |
| | — |
|
Total | $ | 10,473 |
|
| $ | 11,361 |
|
| $ | 741 |
|
| $ | 10,690 |
|
| $ | 394 |
|
Purchased Credit-Impaired Loans
Purchased Credit-Impaired loans (“PCI”), are loans acquired at a discount that is due in part to credit quality. In conjunction with the Rumson merger, loans totaling $2.6 million were deemed to be PCI at February 7, 2014. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses).
The following table presents additional information regarding purchased credit impaired loans for the years ended December 31, 2015 and 2014:
|
| | | | | | | |
(Dollars in thousands) | |
| Purchased Loans with Evidence of Credit Deterioration |
| 12/31/2015 | | 12/31/2014 |
Outstanding balance | $ | 1,964 |
| | $ | 2,705 |
|
Carrying amount | $ | 1,600 |
| | $ | 2,024 |
|
In 2015, an allowance for loan losses in the amount of $64,000 was recorded for one PCI loan.
The following table presents changes in accretable discount for purchased credit impaired loans for the years ended December 31, 2015 and 2014:
|
| | | | | | | |
(Dollars in thousands) | | | |
| December 31, 2015 | | December 31, 2014 |
Balance at beginning of year | $ | 135 |
| | $ | — |
|
Acquisition of impaired loans | — |
| | 241 |
|
Accretion of discount | (62 | ) | | (106 | ) |
Balance at end of year | $ | 73 |
| | $ | 135 |
|
| |
| | |
| |
| | |
Non-accretable difference at end of year | $ | 215 |
| | $ | 546 |
|
The following table presents the years for the scheduled remaining accretable discount that will accrete to income based on the Company’s most recent estimates of cash flows for PCI loans:
|
| | | | | |
| Periods ending December 31, |
(Dollars in thousands) | | | |
| 2016 | | $ | 30 |
|
| 2017 | | 22 |
|
| 2018 | | 8 |
|
| Thereafter | | 13 |
|
| Total | | $ | 73 |
|
Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure
The following table summarizes the recorded investment in consumer mortgage loans secured by residential real estate in process of foreclosure:
|
| | | | | | | | | | |
(Dollars in thousands) | | December 31, | | |
2015 | | 2014 |
Number of loans | | Recorded Investment | | Number of loans | | Recorded Investment |
5 | | $ | 1,008 |
| | 1 | | $ | 33 |
|
In the normal course of business, the Bank may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan would be considered to be a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).
If the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period, maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for that time period. Where possible, the Bank would attempt to obtain additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.
In evaluating whether a restructuring constitutes a troubled debt restructuring, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. The following table is a breakdown of troubled debt restructurings, all of which are classified as impaired, which occurred during the years ended December 31, 2015 and 2014.
During 2015
|
| | | | | | | | | | |
(Dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Troubled Debt Restructurings: | | | | | |
Commercial Real Estate | 1 |
| | $ | 288 |
| | $ | 288 |
|
During 2014
|
| | | | | | | | | | |
(Dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Troubled Debt Restructurings: | | | | | |
Commercial Business | 3 |
| | $ | 162 |
| | $ | 162 |
|
There were no troubled debt restructurings that subsequently defaulted within twelve months of restructuring during the year ended December 31, 2015 or December 31, 2014.
If the Bank determines that a borrower has suffered deterioration in their financial condition, a restructuring of the loan terms may occur. Such loan restructurings may include, but are not limited to, reductions in principal or interest, reductions in interest rates, and extensions of the maturity date. When modifications are implemented, such loans meet the definition of a troubled debt restructuring. All of the modifications employed by the Bank during 2015 and 2014 have resulted in lower amortization payments. The lower payments are determined by an analysis of the borrower’s cash flow ability to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.
6. Related Parties
Activity related to loans to directors, executive officers and their affiliated interests during 2015 and 2014 is as follows:
|
| | | | | | | |
(Dollars in thousands) | December 31, |
| 2015 | | 2014 |
Balance, beginning of year | $ | 1,376 |
| | $ | 1,587 |
|
Loans granted | 16 |
| | 206 |
|
Repayments of loans | (522 | ) | | (417 | ) |
Balance, end of year | $ | 870 |
| | $ | 1,376 |
|
All such loans were made under customary terms and conditions and were current as to principal and interest payments as of December 31, 2015 and 2014.
Related party deposits were $9.0 million and $7.9 million at December 31, 2015 and 2014, respectively.
The Company has had and intends to have business transactions in the ordinary course of business with directors, officers and associates on comparable terms as those prevailing from time to time for other non-affiliated vendors of the Company. For these transactions, the expenses are not significant to the operations of the Company.
7. Premises and Equipment
Premises and equipment consist of the following:
|
| | | | | | | | | |
| | | December 31, |
(Dollars in thousands) | Estimated Useful Lives | | 2015 | | 2014 |
Land | | | $ | 1,798 |
| | $ | 1,798 |
|
Building | 40 years | | 8,083 |
| | 8,281 |
|
Leasehold improvements | 3 - 10 years | | 5,762 |
| | 5,234 |
|
Furniture, fixtures and equipment | 3 – 15 years | | 4,542 |
| | 4,286 |
|
| | | 20,185 |
| | 19,599 |
|
Less: Accumulated depreciation | | | (9,076 | ) | | (8,226 | ) |
| | | $ | 11,109 |
| | $ | 11,373 |
|
Depreciation expense was $1.0 million and $1.1 for the years ended December 31, 2015 and 2014, respectively.
8. Other Real Estate Owned (“OREO”)
Activity related to other real estate owned for the years ended December 31, 2015 and 2014 is as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 |
| | 2014 |
|
Balance, beginning of year | $ | 5,710 |
| | $ | 2,136 |
|
Transfers into real estate owned | 2,357 |
| | 3,995 |
|
Transfers to other assets | — |
| | (66 | ) |
Sale of real estate owned | (6,027 | ) | | (243 | ) |
Loss on sale of real estate owned | (692 | ) | | — |
|
Write-down of real estate owned | (382 | ) | | (112 | ) |
Balance, end of year | $ | 966 |
| | $ | 5,710 |
|
At December 31, 2015 OREO is comprised of one residential property.
9. Goodwill and Intangible Assets
Goodwill and intangible assets are summarized as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 |
| | 2014 |
|
Goodwill | $ | 11,853 |
| | $ | 11,853 |
|
Core deposits intangible | 1,431 |
| | 1,858 |
|
Total | $ | 13,284 |
| | $ | 13,711 |
|
Amortization expense of intangible assets was $428,000 and $456,000 for the years ended December 31, 2015 and 2014, respectively.
Scheduled amortization of the core deposits intangible is as follows:
|
| | | | | |
(Dollars in thousands) | | | |
| 2016 | | $ | 406 |
|
| 2017 | | 384 |
|
| 2018 | | 305 |
|
| 2019 | | 110 |
|
| 2020 | | 88 |
|
| Thereafter | | 138 |
|
| | | $ | 1,431 |
|
10. Deposits
Deposits at December 31, 2015 and 2014 are summarized as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Non-interest bearing | $ | 159,918 |
| | $ | 162,281 |
|
Interest bearing | 284,547 |
| | 297,679 |
|
Savings | 196,324 |
| | 190,817 |
|
Certificates of deposit | 145,968 |
| | 166,984 |
|
| $ | 786,757 |
| | $ | 817,761 |
|
At December 31, 2015, certificates of deposit have contractual maturities as follows:
|
| | | | | |
(Dollars in thousands) | | | |
| Year | | Amount |
| 2016 | | $ | 84,436 |
|
| 2017 | | 35,448 |
|
| 2018 | | 16,392 |
|
| 2019 | | 3,611 |
|
| 2020 | | 6,081 |
|
| | | $ | 145,968 |
|
11. Borrowings
The balance of borrowings was $58.9 million at December 31, 2015, consisting of three long-term FHLB advances totaling $20.3 million and overnight funds purchased of $38.6 million. The balance of borrowings was $25.1 million at December 31,
2014, consisting of three long-term FHLB advances of $20.7 million and overnight funds purchased of $4.4 million. These borrowings are primarily used to fund asset growth not supported by deposit generation.
Two long-term FHLB fixed rate convertible advances were assumed by the Bank as a result of the Rumson merger. These two advances total $10.0 million and bear interest at an average rate of 4.50%. As a result of acquisition accounting, the two advances were fair valued and a premium of $1.0 million was assigned. The premium is being amortized over the remaining term of the advances. The two advances had a combined carrying amount of $10.3 million at December 31, 2015. Both advances mature on December 14, 2016.
The Bank also has a fixed rate convertible advance from the FHLB in the amount of $10.0 million that bears interest at the rate of 4.08%. This advance may be called by the FHLB quarterly at the option of the FHLB if rates rise and the rate earned by the FHLB is no longer a “market” rate. This advance is fully secured by marketable securities. The FHLB advance matures on July 31, 2017. Due to the call provision, the expected maturity could differ from the contractual maturity.
12. Redeemable Subordinated Debentures
On May 30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware business trust and wholly owned subsidiary of the Company (“Trust II”), for the sole purpose of issuing $18 million of trust preferred securities (the “Capital Securities”). Trust II utilized the $18 million proceeds along with $557,000 invested in Trust II by the Company to purchase $18,557,000 of floating rate junior subordinated debentures issued by the Company and due to mature on June 15, 2036. The subordinated debentures carry a floating interest rate based on the three-month LIBOR plus 165 basis points (2.16200% at December 31, 2015). The Capital Securities were issued in connection with a pooled offering involving approximately 50 other financial institution holding companies. All of the Capital Securities were sold to a single pooling vehicle. The floating rate junior subordinated debentures are the only asset of Trust II and have terms that mirrored the Capital Securities. These debentures are redeemable in whole or in part prior to maturity after June 15, 2011. Trust II is obligated to distribute all proceeds of a redemption of these debentures, whether voluntary or upon maturity, to holders of the Capital Securities. The Company’s obligation with respect to the Capital Securities and the debentures, when taken together, provided a full and unconditional guarantee on a subordinated basis by the Company of the obligations of Trust II to pay amounts when due on the Capital Securities. Interest payments on the floating rate junior subordinated debentures flow through Trust II to the pooling vehicle.
13. Income Taxes
The components of income tax expense (benefit) are summarized as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Federal- | | | |
Current | $ | 3,199 |
| | $ | 894 |
|
Deferred | 8 |
| | 18 |
|
| 3,207 |
| | 912 |
|
State- | | | |
Current | 704 |
| | 322 |
|
Deferred | 151 |
| | (161 | ) |
| 855 |
| | 161 |
|
| $ | 4,062 |
| | $ | 1,073 |
|
A comparison of income tax expense at the Federal statutory rate in 2015 and 2014 to the Company’s provision for income taxes is as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Federal income tax | $ | 4,327 |
| | $ | 1,846 |
|
Add (deduct) effect of: | |
| | |
|
State income taxes net of federal income tax effect | 564 |
| | 106 |
|
Tax-exempt interest income | (724 | ) | | (785 | ) |
Bank-owned life insurance | (203 | ) | | (192 | ) |
Other items, net | 98 |
| | 98 |
|
Provision for income taxes | $ | 4,062 |
| | $ | 1,073 |
|
The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Deferred tax assets (liabilities): | | | |
Write-downs and expenses of OREO | $ | — |
| | $ | 145 |
|
Allowance for loan losses | 3,020 |
| | 2,766 |
|
Unrealized gain on securities available for sale | (113 | ) | | (151 | ) |
Supplemental executive retirement plan liability | 2,060 |
| | 2,003 |
|
Other than temporary impairment loss | 170 |
| | 170 |
|
Depreciation | 482 |
| | 367 |
|
Nonaccrual interest | 231 |
| | 227 |
|
Pension liability | (75 | ) | | (202 | ) |
Other | 324 |
| | 500 |
|
Acquisition accounting adjustments | 441 |
| | 709 |
|
Net deferred tax assets, included in other assets | $ | 6,540 |
| | $ | 6,534 |
|
Based upon the current facts, management has determined that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. However, there can be no assurances about the level of future earnings.
14. Comprehensive Income and Accumulated Other Comprehensive Income
Comprehensive income is the total of (1) net income and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income. The components of accumulated other comprehensive income (loss) that are included in shareholders' equity and the related tax effects are as follows:
|
| | | | | | | | | | | |
Year ended December 31, 2015: | | | | | |
(Dollars in thousands) | Before-Tax Amount | | Income Tax Effect | | Net-of-Tax Amount |
Unrealized holding (losses) gains on available for sale securities: | | | | | |
Unrealized holding gains on available for sale securities | $ | 203 |
| | $ | (113 | ) | | $ | 90 |
|
Reclassification adjustment for (gains)losses realized in income | — |
| | — |
| | — |
|
Other comprehensive gain on securities available for sale | 203 |
| | (113 | ) | | 90 |
|
Unrealized impairment (loss) on held to maturity security: | |
| | |
| | |
|
Unrealized impairment (loss) on held to maturity security | (501 | ) | | 170 |
| | (331 | ) |
Unfunded pension liability: | |
| | |
| | |
|
Changes from plan actuarial gains and losses included in other comprehensive income | 452 |
| | (181 | ) | | 271 |
|
Reclassification adjustment for (gains) realized in income | (266 | ) | | 106 |
| | (160 | ) |
Other comprehensive gain from plan actuarial gains | 186 |
| | (75 | ) | | 111 |
|
Accumulated other comprehensive (loss) | $ | (112 | ) | | $ | (18 | ) | | $ | (130 | ) |
| | | | | |
Year ended December 31, 2014: | |
| | |
| | |
|
(Dollars in thousands) | Before-Tax Amount | | Income Tax Effect | | Net-of-Tax Amount |
Unrealized holding (losses) gains on available for sale securities: | |
| | |
| | |
|
Unrealized holding gains on available for sale securities | $ | 426 |
| | $ | (151 | ) | | $ | 275 |
|
Reclassification adjustment for loss realized in income | 1 |
| | — |
| | 1 |
|
Other comprehensive gain on securities available for sale | 427 |
| | (151 | ) | | 276 |
|
Unrealized impairment (loss) on held to maturity security: | |
| | |
| | |
|
Unrealized impairment (loss) on held to maturity security | (501 | ) | | 170 |
| | (331 | ) |
Unfunded pension liability: | |
| | |
| | |
|
Changes from plan actuarial gains and losses included in other comprehensive income | 515 |
| | (206 | ) | | 309 |
|
Reclassification adjustment for (gains) realized in income | (10 | ) | | 4 |
| | (6 | ) |
Other comprehensive gain from plan actuarial gains | 505 |
| | (202 | ) | | 303 |
|
Accumulated other comprehensive income | $ | 431 |
| | $ | (183 | ) | | $ | 248 |
|
Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | Unrealized Holding (Losses) Gains on Available for Sale Securities | | Unrealized Impairment Loss On Held to Maturity Security | | Unfunded Pension Liability | | Accumulated Other Comprehensive Income (Loss) |
Balance, January 1, 2014 | $ | (1,933 | ) | | $ | (331 | ) | | $ | 16 |
| | $ | (2,248 | ) |
Other comprehensive income (loss) before reclassifications | 2,208 |
| | — |
| | 293 |
| | 2,501 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 1 |
| | — |
| | (6 | ) | | (5 | ) |
Other comprehensive income (loss) | 2,209 |
| | — |
| | 287 |
| | 2,496 |
|
Balance, December 31, 2014 | 276 |
| | (331 | ) | | 303 |
| | 248 |
|
Other comprehensive income (loss) before reclassifications | (186 | ) | | — |
| | (32 | ) | | (218 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | (160 | ) | | (160 | ) |
Other comprehensive (loss) | (186 | ) | | — |
| | (192 | ) | | (378 | ) |
Balance, December 31, 2015 | $ | 90 |
| | $ | (331 | ) | | $ | 111 |
| | $ | (130 | ) |
15. Benefit Plans
Retirement Savings Plan
The Bank has a 401(k) plan which covers substantially all employees with six months or more of service. The plan permits all eligible employees to make basic contributions to the plan up to the IRS salary deferral limit. Under the plan, the Bank provided a matching contribution of 50% in 2015 and 2014, up to 6% of base compensation. Employer contributions to the plan amounted to $274,000 in 2015 and $244,000 in 2014.
Supplemental Executive Retirement Plan
The Company also provides retirement benefits to certain employees under supplemental executive retirement plans. The plans are unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the plans. The present value of the benefits accrued under these plans as of December 31, 2015 and 2014 is approximately $5.2 million and $5.0 million, respectively, and is included in other liabilities and accumulated other comprehensive income in the accompanying consolidated balance sheets. Compensation expense related to the supplemental executive retirement plan of $184,000 and $451,000 is included in the accompanying consolidated statements of income for the years ended December 31, 2015 and 2014, respectively.
Bank-Owned Life Insurance
In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives, directors and divisional officers. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies total approximately $21.6 million and $21.2 million as of December 31, 2015 and 2014, respectively.
The following table sets forth the changes in benefit obligations of the Company’s supplemental executive retirement plan.
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Change in Benefit Obligation | | | |
Beginning January 1 | $ | 4,511 |
| | $ | 4,538 |
|
Service cost | 267 |
| | 262 |
|
Interest cost | 183 |
| | 199 |
|
Actuarial (gain) loss | 53 |
| | (488 | ) |
Benefits paid | (43 | ) | | — |
|
Ending December 31 | $ | 4,971 |
| | $ | 4,511 |
|
| | | |
Amount Recognized in Consolidated Balance Sheets | | | |
Liability for pension | $ | 4,971 |
| | $ | 4,511 |
|
Net actuarial gain included in accumulated other comprehensive income | 186 |
| | 505 |
|
Prior service cost included in accumulated other comprehensive income | — |
| | — |
|
Net recognized pension liability | $ | 5,157 |
| | $ | 5,016 |
|
| | | |
Information for pension plans with an accumulated benefit obligation in excess of plan assets | | | |
Projected benefit obligation | $ | 4,971 |
| | $ | 4,511 |
|
Accumulated benefit obligation | 4,699 |
| | 4,092 |
|
|
| | | | | | | |
Components of Net Periodic Benefit Cost | 2015 | | 2014 |
Service cost | $ | 267 |
| | $ | 262 |
|
Interest cost | 183 |
| | 199 |
|
Amortization of prior service cost | — |
| | — |
|
Recognized net actuarial gain | (266 | ) | | (10 | ) |
Net periodic benefit expense | $ | 184 |
| | $ | 451 |
|
The net periodic benefit cost is projected to be $243,000 and actuarial gains of $103,000 are expected to be removed from accumulated other comprehensive income and recognized as a component of net periodic benefit expense for the year ending December 31, 2016.
|
| | | | | |
Weighted-Average Assumptions, December 31 | 2015 | | 2014 |
Discount Rate | 4.0 | % | | 4.9 | % |
Salary Scale | 4.0 | % | | 4.0 | % |
|
| | | | | |
| Projected Annual Benefit Payments* |
(Dollars in thousands) | 2016 | | $ | 1,368 |
|
| 2017 | | $ | 4,245 |
|
| 2018 | | $ | — |
|
| 2019 | | $ | — |
|
| 2020 | | $ | — |
|
| 2021-2025 | | $ | — |
|
* Represents management’s expectation as of December 31, 2015 as to when such payments will be made.
16. Share-Based Compensation
The Company’s stock-based incentive plans (the “Stock Plans”) authorize the issuance of an aggregate of 485,873 shares of the Company’s common stock (as adjusted for stock dividends) pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The purpose of the Stock Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, employees and other persons to promote the success of the Company. Under the Stock Plans, options have a term of ten years after the date of grant, subject to earlier termination in certain circumstances. Options are granted with an exercise price at the then fair market value of the Company’s common stock. The grant date fair value is calculated using the Black-Scholes option valuation model. As of December 31, 2015, there were 267,886 shares of common stock available for future grants under the Stock Plans, of which 221,686 shares are available for future grant under the 2013 Equity Incentive Plan and 46,200 shares are available for future grant under the 2015 Directors Stock Plan.
Stock-based compensation expense related to stock options was $41,000 and $69,000 for the years ended December 31, 2015 and 2014, respectively.
Transactions under the Company’s stock option plans during the years ended December 31, 2015 and 2014 are summarized as follows:
|
| | | | | | | | | | | | | |
Stock Options | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value |
Outstanding at January 1, 2014 | | 259,747 |
| | $ | 7.99 |
| | | | |
Granted | | 12,899 |
| | 10.00 |
| | | | |
Exercised | | — |
| | — |
| | | | |
Forfeited | | (8,711 | ) | | 11.62 |
| | | | |
Expired | | (17,055 | ) | | 10.44 |
| | | | |
Outstanding at December 31, 2014 | | 246,880 |
| | 7.80 |
| | 5.3 | | $ | 607,000 |
|
Granted | | 13,892 |
| | 10.10 |
| | | | |
|
Exercised | | (43,639 | ) | | 6.68 |
| | | | |
|
Forfeited | | (27,788 | ) | | 10.55 |
| | | | |
|
Expired | | (11,751 | ) | | 11.89 |
| | | | |
|
Outstanding at December 31, 2015 | | 177,594 |
| | $ | 7.41 |
| | 5.2 | | $ | 861,000 |
|
| | | | | | | | |
Exercisable at December 31, 2015 | | 143,942 |
| | $ | 8.80 |
| | 4.7 | | $ | 707,000 |
|
There were 43,639 options exercised in 2015. The total intrinsic value (market value on date of exercise less grant price) of options exercised during the year ended December 31, 2015 was $176,000. There were no options exercised in 2014.
The following table summarizes stock options outstanding and exercisable at December 31, 2015:
|
| | | | | | | | | | | | | | | | | |
| Outstanding Options | | Exercisable Options |
Exercise Price Range | Number | | Average Life in Years | | Average Exercise Price | | Number | | Average Life in Years | | Average Exercise Price |
$5.92 to $6.21 | 59,845 |
| | 5.8 | | $ | 5.59 |
| | 47,876 |
| | 5.8 | | $ | 6.15 |
|
$6.79 to $10.75 | 84,801 |
| | 4.9 | | $ | 7.37 |
| | 75,024 |
| | 4.6 | | $ | 8.05 |
|
$11.51 to $13.77 | 32,948 |
| | 4.9 | | $ | 10.85 |
| | 21,042 |
| | 2.8 | | $ | 12.95 |
|
| 177,594 |
| | 5.2 | | $ | 7.41 |
| | 143,942 |
| | 4.7 | | $ | 8.80 |
|
The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted during the years ended December 31, 2015 and 2014 are as follows:
|
| | | | | | | |
| 2015 | | 2014 |
Fair value of options granted | $ | 3.86 |
| | $ | 4.75 |
|
Risk-free rate of return | 1.99 | % | | 1.65 | % |
Expected option life in years | 7 |
| | 7 |
|
Expected volatility | 30.66 | % | | 38.01 | % |
Expected dividends (1) | — |
| | — |
|
(1) To date, the Company has not paid cash dividends on its common stock.
As of December 31, 2015, there was approximately $64,600 of unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next four years.
The following table summarizes the activity in nonvested restricted shares for the years ended December 31, 2015 and 2014:
|
| | | | | | | |
Non-vested Shares | | Number of Shares | | Average Grant-Date Fair Value |
January 1, 2014 | | 150,480 |
| | $ | 5.98 |
|
Granted | | 70,450 |
| | 10.17 |
|
Vested | | (72,296 | ) | | 7.01 |
|
Forfeited | | — |
| | — |
|
Non-vested at December 31, 2014 | | 148,634 |
| | 7.16 |
|
Granted | | 70,515 |
| | 10.66 |
|
Vested | | (60,930 | ) | | 8.99 |
|
Forfeited | | (14,340 | ) | | 8.61 |
|
Non-vested at December 31, 2015 | | 143,879 |
| | $ | 8.32 |
|
The value of restricted shares is based upon the closing price of the common stock on the date of grant. The shares generally vest over a four year service period with compensation expense recognized on a straight-line basis.
Stock based compensation expense related to stock grants was $590,000 and $516,000 for the years ended December 31, 2015 and 2014, respectively.
As of December 31, 2015, there was approximately $1.1 million of unrecognized compensation cost related to non-vested stock grants that will be recognized over the next three years.
17. Commitments and Contingencies
As of December 31, 2015, future minimum rental payments under non-cancelable operating leases are as follows:
|
| | | | | |
(Dollars in thousands) | 2016 | | $ | 1,255 |
|
| 2017 | | 1,074 |
|
| 2018 | | 901 |
|
| 2019 | | 713 |
|
| 2020 | | 508 |
|
| Thereafter | | 2,050 |
|
| | | $ | 6,501 |
|
Rent expense aggregated $1.5 million and $1.4 million for the years ended December 31, 2015 and 2014, respectively.
Commitments With Off-Balance Sheet Risk
The consolidated balance sheet does not reflect various commitments relating to financial instruments which are used in the normal course of business. Management does not anticipate that the settlement of those financial instruments will have a material adverse effect on the Company’s financial condition. These instruments include commitments to extend credit and letters of credit. These financial instruments carry various degrees of credit risk, which is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the Bank generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet investments. Additionally, as some commitments and conditional obligations are expected to expire without being drawn or returned, the contractual amounts do not necessarily represent future cash requirements.
Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Bank receives a fee for providing a commitment. The Bank was committed to advance $290.9 million and $297.1 million to its borrowers as of December 31, 2015 and December 31, 2014, respectively.
The Bank issues financial standby letters of credit that are within the scope of ASC Topic 460, “Guarantees.” These are irrevocable undertakings by the Bank to guarantee payment of a specified financial obligation. Most of the Bank’s financial standby letters of credit arise in connection with lending relationships and have terms of one year or less. The maximum potential future payments the Bank could be required to make under these standby letters of credit amounted to $2.1 million at December 31, 2015 and $2.6 million at December 31, 2014. The current amount of the liability as of December 31, 2015 and 2014 for guarantors under standby letters of credit is not material.
The Bank also enters into best efforts forward sales commitments to sell residential mortgage loans it has closed (loans held for sale) or that it expects to close (commitments to originate loans held for sale). These commitments are used to reduce the Bank’s market price risk during the period from the commitment date to the sale date. The notional amount of the Bank’s forward sales commitments was approximately $16.9 million at December 31, 2015 and $28.2 million at December 31, 2014. Changes in fair value of the forward sales commitments, and the related loan origination commitments and closed loans, were not significant at December 31, 2015 and 2014.
Litigation
The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. The Company may also have various commitments and contingent liabilities which are not reflected in the accompanying consolidated balance sheet. Management is not aware of any present legal proceedings or contingent liabilities and commitments that would have a material impact on the Company’s financial condition or results of operations.
18. Other Operating Expenses
The components of other operating expenses for the years ended December 31, 2015 and 2014 are as follows:
|
| | | | | | | |
(Dollars in thousands) | 2015 | | 2014 |
Marketing | $ | 282 |
| | $ | 197 |
|
Equipment | 839 |
| | 870 |
|
Telephone | 449 |
| | 422 |
|
Regulatory, professional and other consulting fees | 1,681 |
| | 1,360 |
|
Amortization of intangible assets | 428 |
| | 456 |
|
Other expenses | 1,970 |
| | 1,814 |
|
| $ | 5,649 |
| | $ | 5,119 |
|
19. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the 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 Bank’s and 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 the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (Leverage ratio, as defined). As of December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they are subject.
To be categorized as adequately capitalized, the Company and the Bank must maintain minimum Common Equity Tier 1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. As of December 31, 2015, the Bank's capital ratios exceed the regulatory standards for well-capitalized institutions. Certain bank regulatory limitations exist on the availability of the Bank’s assets for the payment of dividends by the Bank without prior approval of bank regulatory authorities.
In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and address relevant provisions of the Dodd-Frank Act. The Federal Reserve Board’s final rules and the FDIC’s interim final rules (which became final in April 2014 with no substantive changes) apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are also required to have a total capital ratio of at least 8% (unchanged from current rules) and a Tier 1 leverage ratio of at least 4% (unchanged from current rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.
Actual capital amounts and ratios for the Company and the Bank as of December 31, 2015 and 2014 are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | To Be Well Capitalized Under Prompt |
| | | | | For Capital | | Corrective |
(Dollars in thousands) | Actual | | Adequacy Purposes | | Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of December 31, 2015 | | | | | | | | | | | |
Company | | | | | | | | | |
| | |
Common equity Tier 1 (CET1) | $ | 83,994 |
| | 10.03 | % | | $ | 37,628 |
| | >4.5% | | N/A |
| | N/A |
Total Capital to Risk Weighted Assets | $ | 109,554 |
| | 13.08 | % | | $ | 66,894 |
| | >8% | | N/A |
| | N/A |
Tier I Capital to Risk Weighted Assets | 101,994 |
| | 12.18 | % | | 50,170 |
| | >6% | | N/A |
| | N/A |
Tier I Capital to Average Assets | 101,994 |
| | 10.80 | % | | 37,765 |
| | >4% | | N/A |
| | N/A |
Bank | | | | | | | | | | | |
Common equity Tier 1 (CET1) | $ | 99,631 |
| | 11.90 | % | | $ | 37,628 |
| | >4.5% | | $ | 54,431 |
| | ≥6.5% |
Total Capital to Risk Weighted Assets | $ | 107,191 |
| | 12.80 | % | | $ | 66,894 |
| | >8% | | $ | 83,739 |
| | ≥10% |
Tier I Capital to Risk Weighted Assets | 99,631 |
| | 11.90 | % | | 50,170 |
| | >6% | | 66,991 |
| | ≥8% |
Tier I Capital to Average Assets (Leverage) | 99,631 |
| | 10.55 | % | | 37,765 |
| | >4% | | 47,211 |
| | >5% |
| | | | | | | | | | | |
As of December 31, 2014 | | | | | |
| | | | |
| | |
Company | | | | | |
| | | | |
| | |
Total Capital to Risk Weighted Assets | $ | 98,309 |
| | 12.28 | % | | $ | 64,045 |
| | >8% | | N/A |
| | N/A |
Tier I Capital to Risk Weighted Assets | 91,384 |
| | 11.41 | % | | 32,023 |
| | >4% | | N/A |
| | N/A |
Tier I Capital to Average Assets | 91,384 |
| | 9.53 | % | | 38,348 |
| | >4% | | N/A |
| | N/A |
Bank | | | | | | | | | |
| | |
Total Capital to Risk Weighted Assets | $ | 96,048 |
| | 12.00 | % | | $ | 64,045 |
| | >8% | | $ | 80,056 |
| | >10% |
Tier I Capital to Risk Weighted Assets | 89,123 |
| | 11.13 | % | | 32,023 |
| | >4% | | 48,034 |
| | >6% |
Tier I Capital to Average Assets (Leverage) | 89,123 |
| | 9.30 | % | | 38,348 |
| | >4% | | 47,935 |
| | >5% |
Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any dividends if after paying the dividend it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. A bank holding company may not pay dividends when it is insolvent.
The Federal Reserve Board’s capital adequacy rules also limit a banking organization’s ability to pay dividends if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.
In the event the Company defers payments on the junior subordinated debentures used to fund payments to be made pursuant to the terms of the Capital Securities, the Company would be unable to pay cash dividends on its common stock until the deferred payments are made.
20. Shareholders’ Equity
The Company issued a warrant on December 23, 2008 to the United States Department of the Treasury (the “Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”). This warrant was sold by the Treasury on November 23, 2011 and exchanged for two new warrants which permit the holders thereof to acquire, on an adjusted basis resulting from declarations of stock dividends to holders of common stock since the issuance of the two warrants, 281,733 shares of common stock of the Company at a price of $6.39 per share.
Certain terms and conditions of the warrant issued to the Treasury were modified or deleted in the two new warrants, including, without limitation, the deletion of the anti-dilution provision upon certain issuances of the Company’s common stock at or below a specified price relative to the initial exercise price. However, the two warrants still provide for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Company’s common stock. The two warrants remain outstanding, are immediately exercisable and continue to have an expiration date of December 23, 2018, which was the expiration date of the warrant originally issued to the Treasury.
The Board of Governors of the Federal Reserve System has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate or defer or severely limit dividends including for example when net income available for shareholders for the past four quarters net of dividends paid during that period is not sufficient to fully fund the dividends. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter.
On August 3, 2005, the Board of Directors of the Company authorized a common stock repurchase program that allowed for the repurchase of a limited number of the Company’s shares at management’s discretion on the open market. The Company undertook this repurchase program in order to increase shareholder value. During the year ended December 31, 2015, the Company repurchased 31,050 shares for an aggregate price of approximately $359,000. During the year ended December 31, 2014, the Company repurchased 14,072 shares for an aggregate price of approximately $144,000.
On January 21, 2016, the Board of Directors of the Company authorized a new common stock repurchase program. Under the new common stock repurchase program, the Company may purchase in open market or privately negotiated transactions up to five (5%) percent of its common shares outstanding on the date of the approval of the stock repurchase program, which limitation will be adjusted for any future stock dividends. This new repurchase program replaces the repurchase program authorized on August 3, 2005.
21. Fair Value Disclosures
U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| |
Level 1. | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| |
Level 2. | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. |
| |
Level 3. | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. For Level 2 securities, the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.
Impaired loans. Loans included in the following table are those which the Company has measured and recognized impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less specific valuation allowances.
Other Real Estate Owned. Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (“OREO”), establishing a new accounting basis. The Company subsequently adjusts the fair value on the OREO utilizing Level 3 inputs on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value |
December 31, 2015: | | | | | | | |
Securities available for sale: | | | | | | | |
U.S. Treasury Securities and obligations of U.S. Government sponsored corporations ("GSE") and agencies | $ | — |
| | $ | 5,481 |
| | $ | — |
| | $ | 5,481 |
|
Residential collateralized mortgage obligations - GSE | — |
| | 8,287 |
| | — |
| | 8,287 |
|
Residential mortgage backed securities-GSE | — |
| | 32,635 |
| | — |
| | 32,635 |
|
Obligations of state and political subdivisions | — |
| | 21,436 |
| | — |
| | 21,436 |
|
Trust preferred debt securities - single issuer | — |
| | 2,136 |
| | — |
| | 2,136 |
|
Corporate debt securities | 14,043 |
| | 6,379 |
| | — |
| | 20,422 |
|
Other debt securities | — |
| | 971 |
| | 54 |
| | 1,025 |
|
Restricted stock | — |
| | 3,302 |
| | — |
| | 3,302 |
|
Total | $ | 14,043 |
| | 80,627 |
| | 54 |
| | 94,724 |
|
| | | | | | | |
December 31, 2014: | |
| | |
| | |
| | |
|
Securities available for sale: | |
| | |
| | |
| | |
|
U.S. Treasury Securities and obligations of U.S Government sponsored corporations (“GSE”) and agencies | $ | — |
| | $ | 1,524 |
| | $ | — |
| | $ | 1,524 |
|
Residential collateralized mortgage obligations - GSE | — |
| | 4,533 |
| | — |
| | 4,533 |
|
Residential mortgage backed securities – GSE | — |
| | 27,771 |
| | — |
| | 27,771 |
|
Obligations of state and political subdivisions | — |
| | 21,703 |
| | — |
| | 21,703 |
|
Trust preferred debt securities - single issuer | — |
| | 2,069 |
| | — |
| | 2,069 |
|
Corporate debt securities | — |
| | 19,521 |
| | — |
| | 19,521 |
|
Other debt securities | — |
| | 1,194 |
| | 86 |
| | 1,280 |
|
Restricted stock | — |
| | 1,760 |
| | — |
| | 1,760 |
|
Total | $ | — |
| | 80,075 |
| | 86 |
| | 80,161 |
|
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments 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). Financial assets and financial liabilities measured at fair value on a non-recurring basis at December 31, 2015 and 2014 are as follows:
|
| | | | | | | | | | | | | |
(Dollars in thousands) | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value |
December 31, 2015: | | | | | | | |
Impaired loans | — |
| | — |
| | $ | 3,960 |
| | $ | 3,960 |
|
Other real estate owned | — |
| | — |
| | 966 |
| | 966 |
|
| | | | | | | |
December 31, 2014: | |
| | |
| | |
| | |
|
Impaired loans | — |
| | — |
| | $ | 3,883 |
| | $ | 3,883 |
|
Other real estate owned | — |
| | — |
| | 5,710 |
| | 5,710 |
|
Impaired loans, measured at fair value and included in the above table, consisted of 9 loans having an aggregate balance of $4.3 million and specific loan loss allowances of $0.3 million at December 31, 2015 and 8 loans having an aggregate balance of $4.0 million and specific loan loss allowances of $0.7 million at December 31, 2014.
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
|
| | | | | | | | | |
(Dollars in thousands) | Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value Estimate | | Valuation Techniques | | Unobservable Input | | Range (Weighted Average) |
December 31, 2015 | | | | | | | |
Impaired loans | $ | 3,960 |
| | Appraisal of collateral (1) | | Appraisal adjustments (2) | | 11%-44% (29.6%) |
Other real estate owned | $ | 966 |
| | Appraisal of collateral (1) | | Appraisal adjustments (2) | | 11% |
| | | | | | | |
December 31, 2014 | |
| | | | | | |
Impaired loans | $ | 3,883 |
| | Appraisal of collateral (1) | | Appraisal adjustments (2) | | 8%-17% (10.66%) |
Other real estate owned | $ | 5,710 |
| | Appraisal of collateral (1) | | Appraisal adjustments (2) | | 0-39% (25.1%) |
| |
(1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs that are not identifiable. |
| |
(2) | Includes qualitative adjustments by management and estimated liquidation expenses. |
The fair value of other real estate owned was determined using appraisals, which may be adjusted based on management’s review and changes in market conditions.
The following is a summary of fair value versus the carrying value of all the Company’s financial instruments. For the Company and the Bank, as for most financial institutions, the bulk of its assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations are used. Changes in assumptions could significantly affect these estimates.
Estimated fair values have been determined by using the best available data and an estimation methodology suitable for each category of financial instruments as follows:
Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost). The carrying amounts reported in the balance sheet for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value.
Securities Held to Maturity (Carried at Amortized Cost). The fair values of securities held to maturity are determined in the same manner as for securities available for sale.
Loans Held For Sale (Carried at Lower of Aggregated Cost or Fair Value). The fair values of loans held for sale are determined, when possible, using prices based on the best efforts commitment by the purchaser of the loan or quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans.
Gross Loans Receivable (Carried at Cost). The fair values of loans, excluding impaired loans subject to specific loss reserves, are estimated using discounted cash flow analyses, and market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values.
Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings and Subordinated Debentures (Carried at Cost). The carrying amounts of short-term borrowings approximate their fair values. The fair values of long-term FHLB advances and subordinated debentures are estimated using discounted cash flow analysis, based on quoted or estimated interest rates for new borrowings with similar credit risk characteristics, terms and remaining maturity.
The estimated fair values, and the recorded book balances, at December 31, 2015 and 2014 are as follows:
|
| | | | | | | | | | | | | | | | | |
December 31, 2015 |
(Dollars in thousands) | Carrying Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Fair Value |
Cash and cash equivalents | $ | 11,368 |
| | $ | 11,368 |
| | — |
| | — |
| | $ | 11,368 |
|
Securities available for sale | 94,724 |
| | 14,043 |
| | 80,627 |
| | 54 |
| | 94,724 |
|
Securities held to maturity | 123,261 |
| | — |
| | 127,157 |
| | — |
| | 127,157 |
|
Loans held for sale | 5,997 |
| | — |
| | 6,115 |
| | — |
| | 6,115 |
|
Loans, net | 674,561 |
| | — |
| | — |
| | 688,279 |
| | 688,279 |
|
Accrued interest receivable | 2,853 |
| | — |
| | 2,853 |
| | — |
| | 2,853 |
|
Deposits | (786,757 | ) | | — |
| | (786,594 | ) | | — |
| | (786,594 | ) |
Borrowings | (58,896 | ) | | — |
| | (59,347 | ) | | — |
| | (59,347 | ) |
Redeemable subordinated debentures | (18,557 | ) | | — |
| | (18,557 | ) | | — |
| | (18,557 | ) |
Accrued interest payable | (846 | ) | | — |
| | (846 | ) | | — |
| | (846 | ) |
|
| | | | | | | | | | | | | | | | | |
December 31, 2014 |
(Dollars in thousands) | Carrying Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Fair Value |
Cash and cash equivalents | $ | 14,545 |
| | $ | 14,545 |
| | — |
| | — |
| | $ | 14,545 |
|
Securities available for sale | 80,161 |
| | — |
| | 80,075 |
| | 86 |
| | 80,161 |
|
Securities held to maturity | 143,638 |
| | — |
| | 148,476 |
| | — |
| | 148,476 |
|
Loans held for sale | 8,372 |
| | — |
| | 8,500 |
| | — |
| | 8,500 |
|
Loans, net | 647,372 |
| | — |
| | — |
| | 656,153 |
| | 656,153 |
|
Accrued interest receivable | 3,096 |
| | — |
| | 3,096 |
| | — |
| | 3,096 |
|
Deposits | (817,761 | ) | | — |
| | (818,265 | ) | | — |
| | (818,265 | ) |
Borrowings | (25,107 | ) | | — |
| | (25,838 | ) | | — |
| | (25,838 | ) |
Redeemable subordinated debentures | (18,557 | ) | | — |
| | (18,557 | ) | | — |
| | (18,557 | ) |
Accrued interest payable | (907 | ) | | — |
| | (907 | ) | | — |
| | (907 | ) |
Loan commitments and standby letters of credit as of December 31, 2015 and 2014 are based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments, standby letters of credit, interest rate lock commitment mortgage servicing rights and forward sales commitments are nominal.
22. Parent-only Financial Information
The condensed financial statements of 1st Constitution Bancorp (parent company only) are presented below:
1st CONSTITUTION BANCORP
Condensed Statements of Financial Condition
(Dollars in Thousands)
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Assets: | | | |
Cash | $ | 77 |
| | $ | 66 |
|
Investment securities available for sale, at fair value | 557 |
| | 557 |
|
Investment in subsidiaries | 111,597 |
| | 102,848 |
|
Other assets | 2,286 |
| | 2,196 |
|
Total Assets | $ | 114,517 |
| | $ | 105,667 |
|
| | | |
Liabilities And Shareholders’ Equity | | | |
Subordinated debentures | $ | 18,557 |
| | $ | 18,557 |
|
Shareholders’ equity | 95,960 |
| | 87,110 |
|
Total Liabilities and Shareholders’ Equity | $ | 114,517 |
| | $ | 105,667 |
|
1st CONSTITUTION BANCORP
Consolidated Statements of Income and Comprehensive Income
(Dollars in Thousands)
|
| | | | | | | |
| Year ended December 31, |
| 2015 | | 2014 |
Income: | | | |
Interest | $ | 11 |
| | $ | 11 |
|
Total Income | 11 |
| | 11 |
|
| | | |
Expense: | | | |
Interest | 366 |
| | 355 |
|
Total Expense | 366 |
| | 355 |
|
| | | |
Loss before income taxes and equity in undistributed income of subsidiaries | (354 | ) | | (344 | ) |
Federal income tax benefit | (121 | ) | | (117 | ) |
| | | |
Loss before equity in undistributed income of subsidiaries | (233 | ) | | (227 | ) |
Equity in undistributed income of subsidiaries | 8,897 |
| | 4,583 |
|
Net Income | 8,664 |
| | 4,356 |
|
Equity in other comprehensive (loss) income of subsidiaries | (378 | ) | | 2,496 |
|
Comprehensive Income | $ | 8,286 |
| | $ | 6,852 |
|
1st CONSTITUTION BANCORP
Condensed Statements of Cash Flows
(Dollars in Thousands)
|
| | | | | | | |
| Year ended December 31, |
| 2015 | | 2014 |
Operating Activities: | | | |
Net Income | $ | 8,664 |
| | $ | 4,356 |
|
Adjustments: | | | |
(Increase) decrease in other assets | (92 | ) | | 27 |
|
Equity in undistributed income of subsidiaries | (8,897 | ) | | (4,583 | ) |
Net cash used in operating activities | (325 | ) | | (200 | ) |
| | | |
Cash Flows From Investing Activities: | | | |
Investment in subsidiary | (186 | ) | | (460 | ) |
Net cash used in investing activities | (186 | ) | | (460 | ) |
| | | |
Cash Flows From Financing Activities: | | | |
Issuance of common stock, net | 550 |
| | 815 |
|
Purchase of treasury stock, net | (28 | ) | | (144 | ) |
Net cash provided by financing activities | 522 |
| | 671 |
|
| | | |
Net increase in cash | 11 |
| | 11 |
|
Cash at beginning of year | 66 |
| | 55 |
|
Cash at end of year | $ | 77 |
| | $ | 66 |
|
23. Quarterly Financial Data (Unaudited)
The following sets forth a condensed summary of the Company’s quarterly results of operations for the years ended December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | 2015 |
| Dec. 31 | | Sept. 30 | | June 30 | | March 31 |
Summary of Operations | |
| | |
| | |
| | |
|
Interest income | $ | 9,861 |
| | $ | 10,832 |
| | $ | 10,565 |
| | $ | 9,687 |
|
Interest expense | 1,170 |
| | 1,169 |
| | 1,153 |
| | 1,144 |
|
Net interest income | 8,691 |
| | 9,663 |
| | 9,412 |
| | 8,543 |
|
Provision for loan losses | 500 |
| | 100 |
| | — |
| | 500 |
|
Net interest income after provision | | | | | | | |
for loan losses | 8,191 |
| | 9,563 |
| | 9,412 |
| | 8,043 |
|
Non-interest income | 1,620 |
| | 1,427 |
| | 1,988 |
| | 2,237 |
|
Non-interest expense | 7,437 |
| | 7,380 |
| | 7,973 |
| | 6,965 |
|
Income before income taxes | 2,374 |
| | 3,610 |
| | 3,427 |
| | 3,315 |
|
Income taxes | 747 |
| | 1,148 |
| | 1,112 |
| | 1,055 |
|
Net income | $ | 1,627 |
| | $ | 2,462 |
| | $ | 2,315 |
| | $ | 2,260 |
|
| | | | | | | |
Net income per common share (1): | | | | | | | |
Basic | $ | 0.21 |
| | $ | 0.31 |
| | $ | 0.30 |
| | $ | 0.29 |
|
Diluted | $ | 0.20 |
| | $ | 0.30 |
| | $ | 0.29 |
| | $ | 0.28 |
|
| |
(1) | The sum of quarterly income per basic and diluted common share does not equal net income per basic and diluted common share for the year ended December 31, 2015 due to differences in the computation of weighted average basic and diluted common shares on a quarterly and annual basis. |
|
| | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | 2014 |
| Dec. 31 | | Sept. 30 | | June 30 | | March 31 |
Summary of Operations | |
| | |
| | |
| | |
|
Interest income | $ | 9,668 |
| | $ | 10,133 |
| | $ | 9,564 |
| | $ | 7,996 |
|
Interest expense | 1,187 |
| | 1,186 |
| | 1,186 |
| | 1,099 |
|
Net interest income | 8,481 |
| | 8,947 |
| | 8,378 |
| | 6,897 |
|
Provision for loan losses | 500 |
| | 650 |
| | 4,100 |
| | 500 |
|
Net interest income after provision | | | | | | | |
For loan losses | 7,981 |
| | 8,297 |
| | 4,278 |
| | 6,397 |
|
Non-interest income | 1,670 |
| | 1,916 |
| | 1,413 |
| | 1,815 |
|
Non-interest expense | 6,797 |
| | 7,158 |
| | 6,859 |
| | 7,524 |
|
Income before income taxes | 2,854 |
| | 3,055 |
| | (1,168 | ) | | 688 |
|
Income taxes | 838 |
| | 917 |
| | (728 | ) | | 46 |
|
Net income (loss) | $ | 2,016 |
| | $ | 2,138 |
| | $ | (440 | ) | | $ | 642 |
|
| | | | | | | |
Net income (loss) per common share : | |
| | |
| | |
| | |
|
Basic | $ | 0.26 |
| | $ | 0.27 |
| | $ | (0.06 | ) | | $ | 0.09 |
|
Diluted | $ | 0.25 |
| | $ | 0.27 |
| | $ | (0.06 | ) | | $ | 0.09 |
|
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.
|
| | | |
| 1st CONSTITUTION BANCORP | |
| | | |
| | | |
Date: March 22, 2016 | By: | /s/ ROBERT F. MANGANO | |
| | Robert F. Mangano | |
| | President and Chief Executive Officer | |
| | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
Signature | | Capacity | | Date |
/s/ ROBERT F. MANGANO | | President, Chief Executive Officer and Director | | March 22, 2016 |
Robert F. Mangano
| | (Principal Executive Officer)
| | |
/s/ CHARLES S. CROW, III | | Chairman of the Board | | March 22, 2016 |
Charles S. Crow, III /s/ WILLIAM M. RUE | | Director | | March 22, 2016 |
William M. Rue /s/ FRANK E. WALSH, III | | Director | | March 22, 2016 |
Frank E. Walsh, III /s/ JOHN P. COSTAS | | Director | | March 22, 2016 |
John P. Costas /s/ STEPHEN J. GILHOOLY | | Senior Vice President, Treasurer and Chief Financial Officer | | March 22, 2016 |
Stephen J. Gilhooly | | (Principal Financial Officer) | | |
EXHIBIT INDEX
|
| | | |
Exhibit No. | | Description |
| | | |
3 | (i)(A) | | Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on March 27, 2009) |
| | | |
3 | (i)(B) | | Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 23, 2008) |
| | | |
3 | (i)(C) | | Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 23, 2008) |
| | | |
3 | (ii)(A) | | By-laws, as amended, of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on October 22, 2007) |
| | | |
4.1 | | | Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002) |
| | | |
4.2 | | | Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
| | | |
4.3 | | | Warrant, dated November 23, 2011, to purchase shares of the Company’s common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013) |
| | | |
10.1 | | # | 1st Constitution Bancorp Supplemental Executive Retirement Plan, dated as of October 1, 2002 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002) |
| | | |
10.2 | | # | Amended and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on March 24, 2006) |
| | | |
10.3 | | # | 1st Constitution Bancorp Form of Executive Life Insurance Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-QSB (SEC File No. 000-32891) filed with the SEC on November 13, 2002) |
| | | |
10.4 | | # | Amendment No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 11, 2004) |
| | | |
10.5 | | # | The 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Appendix A of the Company's proxy statement (SEC File No. 000-32891) filed with the SEC on April 15, 2005) |
| | | |
10.6 | | # | Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | | |
10.7 | | # | Form of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | | |
10.8 | | # | Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-Q (SEC File No. 000-32891) filed with the SEC on August 8, 2005) |
| | | |
10.9 | | | Amended and Restated Declaration of Trust of 1st Constitution Capital Trust II, dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the Delaware and institutional trustee named therein, and the administrators named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
|
| | | |
| | | |
10.10 | | | Indenture, dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer, and the trustee named therein, relating to the Floating Rate Junior Subordinated Debt Securities due 2036 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
| | | |
10.11 | | | Guarantee Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and the guarantee trustee named therein (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on June 16, 2006) |
| | | |
10.12 | | # | Amendment No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective as of December 31, 2004 (incorporated by reference to Exhibit 10.24 to the Company’s Form 10-K (SEC File No. 000-32891) filed with the SEC on April 15, 2008) |
| | | |
10.13 | | # | 1st Constitution Bancorp 2005 Supplemental Executive Retirement Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on December 28, 2006) |
| | | |
10.14 | | # | Amended and Restated Employment Agreement between the Company and Robert F. Mangano dated as of July 1, 2010 (incorporated by reference to Exhibit 10 to the Company’s Form 8-K (SEC File No. 000-32891) filed with the SEC on July 14, 2010) |
| | | |
10.15 | | # | 1st Constitution Bancorp 2013 Equity Incentive Plan (incorporated by reference to the Company's proxy statement filed with the SEC on April 11, 2013) |
| | | |
10.16 | | #* | Form of Restricted Stock Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan |
| | | |
10.17 | | #* | Form of Incentive Stock Option Agreement under the 1st Constitution Bancorp 2013 Equity Incentive Plan |
| | | |
10.18 | | | Agreement and Plan of Merger, dated as of August 14, 2013, by and between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013) |
| | | |
10.19 | | | First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.2 to the Company’s Form 10-Q filed with the SEC on November 12, 2013) |
| | | |
10.20 | | # | Letter Agreement, dated January 31, 2014, between 1st Constitution Bank and Stephen J. Gilhooly (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 1, 2014) |
| | | |
10.21 | | # | Amendment to the Amended and Restated Employment Agreement, dated April 4, 2014, between 1st Constitution Bancorp and Robert F. Mangano (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 8, 2014) |
| | | |
10.22 | | # | 1st Constitution Bancorp 2015 Directors Stock Plan (incorporated by reference to Appendix A to the Company's proxy statement on Schedule 14A for it annual meeting of shareholders held on May 21, 2015 (SEC File No. 000-32891) filed with the SEC on April 14, 2015) |
| | | |
21 | | * | Subsidiaries of the Company |
| | | |
23.1 | | * | Consent of BDO USA, LLP as Independent Registered Public Accounting Firm |
| | | |
31.1 | | * | Certification of the principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
| | | |
31.2 | | * | Certification of the principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) |
| | | |
32 | | * | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the principal executive officer and the principal financial officer of the Company |
| | | |
101.INS | | * | XBRL Instance Document |
|
| | | |
| | | |
101.SCH | | * | XBRL Taxonomy Extension Schema Document |
| | | |
101.CAL | | * | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
101.DEF | | * | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
101.LAB | | * | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
101.PRE | | * | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | |
___________________________
* Filed herewith.
# Management contract or compensatory plan or arrangement.