XNAS:FCCY 1st Constitution Bancorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012
or

o
TRANSITION REPORT PURSUANT TO 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)

New Jersey
 
22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

2650 Route 130, P.O. Box 634, Cranbury, NJ
 
08512
(Address of Principal Executive Offices)
 
(Zip Code)

(609) 655-4500
(Issuer’s Telephone Number, Including Area Code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x       No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x       No o
 
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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
As of May 13, 2012, there were 5,096,230 shares of the registrant’s common stock, no par value, outstanding.
 


 
 

 
 
1ST CONSTITUTION BANCORP
 
FORM 10-Q
 
 
 
   
Page
     
PART I.
FINANCIAL INFORMATION
 
     
1
     
   
   
 
1
     
   
   
 
2
     
   
   
 
3
     
     
   
   
 
4
     
   
   
 
5
     
 
6
     
 
 
33
     
48
     
48
     
PART II.
OTHER INFORMATION
 
     
49
     
50
     
51
 
 
PART I. FINANCIAL INFORMATION

 
1st Constitution Bancorp and Subsidiaries
(Unaudited)

   
March 31, 2012
   
December 31, 2011
 
ASSETS
           
  CASH AND DUE FROM BANKS
  $ 27,149,715     $ 15,183,853  
  FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS
    11,410       11,406  
    Total cash and cash equivalents
    27,161,125       15,195,259  
  INVESTMENT SECURITIES:
               
    Available for sale, at fair value
    91,154,435       93,683,774  
Held to maturity (fair value of $136,015,150 and $147,621,280 at
March 31, 2012 and December 31, 2011, respectively)
    130,659,186       142,474,423  
              Total securities
    221,813,621       236,158,197  
  LOANS HELD FOR SALE
    17,497,128       19,234,111  
  LOANS
    438,522,190       475,431,771  
Less- Allowance for loan losses
    (5,881,942 )     (5,534,450 )
Net loans
    432,640,248       469,897,321  
  PREMISES AND EQUIPMENT, net
    10,788,002       10,439,304  
  ACCRUED INTEREST RECEIVABLE
    2,523,723       2,996,848  
  BANK-OWNED LIFE INSURANCE
    13,690,903       13,578,981  
  OTHER REAL ESTATE OWNED
    11,839,585       12,409,201  
  OTHER ASSETS
    11,645,449       11,817,693  
                   Total assets
  $ 749,599,784     $ 791,726,915  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
  LIABILITIES:
               
Deposits
               
Non-interest bearing
  $ 117,360,122     $ 105,470,543  
Interest bearing
    541,203,836       518,391,942  
              Total deposits
    658,563,958       623,862,485  
  BORROWINGS
    10,000,000       88,300,000  
  REDEEMABLE SUBORDINATED DEBENTURES
    18,557,000       18,557,000  
  ACCRUED INTEREST PAYABLE
    1,074,733       1,186,511  
  ACCRUED EXPENSES AND OTHER LIABILITIES
    5,061,527       4,821,144  
                 Total liabilities
    693,257,218       736,727,140  
  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;
  5,097,781 and 5,096,054 shares issued and 5,096,230 and 5,094,503 shares outstanding
  as of March 31,2012 and December 31, 2011, respectively
    41,012,267       40,847,929  
  Retained earnings
    14,237,338       13,070,606  
   Treasury Stock, at cost, 1,551 shares at March 31, 2012
   and December 31, 2011
    (10,222 )     (10,222 )
Acc     Accumulated other comprehensive income
    1,103,183       1,091,462  
           Total shareholders’ equity
    56,342,566       54,999,775  
Total liabilities and shareholders’ equity
  $ 749,599,784     $ 791,726,915  

See accompanying notes to consolidated financial statements.
 
 
1st Constitution Bancorp and Subsidiaries
(Unaudited)

   
Three Months Ended March 31,
 
   
2012
   
2011
 
INTEREST INCOME:
           
Loans, including fees
 
$
6,414,459
   
$
5,354,207
 
Securities:
               
Taxable
   
1,184,205
     
1,284,944
 
Tax-exempt
   
420,569
     
285,072
 
Federal funds sold and short-term investments
   
15,034
     
9,106
 
   
 Total interest income
   
8,034,267
     
6,933,329
 
   
INTEREST EXPENSE:
               
Deposits
   
1,186,474
     
1,398,130
 
    Borrowings
   
117,922
     
106,920
 
Redeemable subordinated debentures
   
99,312
     
264,154
 
 Total interest expense
   
1,403,708
     
1,769,204
 
 Net interest income
   
6,630,559
     
5,164,125
 
                 
PROVISION FOR LOAN LOSSES
   
599,998
     
399,998
 
 Net interest income after provision for loan losses
   
6,030,561
     
4,764,127
 
   
NON-INTEREST INCOME:
               
Service charges on deposit accounts
   
227,972
     
175,842
 
Gain on sales of loans
   
468,217
     
436,739
 
Income on Bank-owned life insurance
   
111,922
     
95,137
 
Other income
   
357,054
     
317,032
 
 Total non-interest income
   
1,165,165
     
1,024,750
 
   
NON-INTEREST EXPENSES:
 
Salaries and employee benefits
   
2,940,350
     
2,576,664
 
Occupancy expense
   
723,786
     
566,738
 
FDIC insurance expense
   
147,393
     
227,547
 
Data processing expenses
   
263,575
     
303,473
 
Other operating expenses
   
1,537,413
     
988,410
 
Total non-interest expenses
   
5,612,517
     
4,662,832
 
                 
Income before income taxes
   
1,583,209
     
1,126,045
 
INCOME TAXES
   
416,477
     
336,177
 
Net income
 
$
1,166,732
   
$
789,868
 
                 
NET INCOME PER COMMON SHARE:
 
         Basic 
 
$
0.23
   
$
0.16
 
         Diluted 
 
$
0.23
   
$
0.15
 

See accompanying notes to consolidated financial statements.
 
 
1st Constitution Bancorp and Subsidiaries
(Unaudited)

       
   
Three months ended March 31,
 
   
2012
   
2011
 
Net Income
  $ 1,166,732     $ 789,868  
                 
Other comprehensive income (loss), net of tax
               
                 
Unrealized gains on securities available for sale
    9,795       (117,197 )
                 
Pension liability
    1,926       1,927  
                 
Unrealized gain on interest rate swap contract
    0       104,371  
                 
Other comprehensive income (loss)
    11,721       (10,899 )
                 
Comprehensive income
  $ 1,178,453     $ 778,969  
                 

The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
1st Constitution Bancorp and Subsidiaries
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)

   
 
 
Common
Stock
 
   
 
 
Retained
Earnings
 
   
 
 
Treasury
Stock
 
   
Accumulated
Other
Comprehensive
(Loss) Income
 
   
 
Total
Shareholders’
Equity
 
 
Balance, January 1, 2011
  $ 38,899,855     $ 10,741,779     $ (58,652 )   $ 98,174     $ 49,681,156  
                                         
Issuance of vested shares under
    employee benefit program
    46,294               11,597               57,891  
                                         
Share-based compensation
    17,503                               17,503  
                                         
Treasury stock purchased
                    (15,354 )             (15,354 )
                                         
 Net Income for the three months
   ended March 31, 2011
            789,868                       789,868  
                                         
 Other comprehensive loss
                            (10,899 )     (10,899 )
Balance, March 31, 2011
  $ 38,963,652     $ 11,531,647     $ (62,409 )   $ (87,275 )   $ 50,520,165  
                                         
Balance, January 1, 2012
  $ 40,847,929     $ 13,070,606     $ (10,222 )   $ 1,091,462     $ 54,999,775  
Exercise of stock options, net, and issuance of
    vested shares under employee
    benefit programs
    140,798                               140,798  
                                         
Share-based compensation
    23,540                               23,540  
 Net income for the three months
ended March 31, 2012
            1,166,732                       1,166,732  
                                         
Other comprehensive income
                            11,721       11,721  
                                         
Balance, March 31, 2012
  $ 41,012,267     $ 14,237,338     $ (10,222 )   $ 1,103,183     $ 56,342,566  
 
 
1st Constitution Bancorp and Subsidiaries
(Unaudited)
 
   
Three Months Ended March 31,
 
 
    2012    
2011
 
OPERATING ACTIVITIES: 
           
     Net income 
 
$
1,166,732
   
$
789,868
 
        Adjustments to reconcile net income to net cash provided by operating activities-
               
        Provision for loan losses 
   
599,998
     
399,998
 
        Provision for loss on other real estate owned
   
211,644
     
147,178
 
        Depreciation and amortization 
   
267,576
     
218,243
 
        Net amortization of premiums and discounts on securities 
   
366,528
     
447,515
 
        Gains on sales of loans held for sale
   
(468,217
)
   
(436,739
)
        Originations of loans held for sale 
   
(41,388,684
)
   
(25,228,512
)
         Proceeds from sales of loans held for sale 
   
43,593,884
     
41,940,375
 
         Income on Bank – owned life insurance 
   
(111,922
)
   
(95,137
)
         Share-based compensation expense
   
111,362
     
90,518
 
         Decrease (increase) in accrued interest receivable 
   
473,125
     
(44,647
)
         Decrease in other assets
   
98,912
     
(745,772
         Decrease in accrued interest payable 
   
(111,778
)
   
(215,411
)
         (Decrease) increase in accrued expenses and other liabilities 
   
155,781
     
(375,625
)
Net cash provided by operating activities
   
4,964,941
     
16,891,852
 
INVESTING ACTIVITIES:
               
     Purchases of securities - 
               
           Available for sale 
   
(18,134,939
)
   
(62,763,601
)
           Held to maturity 
   
0
     
(65,546,545
     Proceeds from maturities and prepayments of securities - 
               
           Available for sale 
   
20,607,265
     
35,216,978
 
           Held to maturity 
   
11,520,563
     
5,899,501
 
            Net decrease in loans 
   
36,657,075
     
86,597,345
 
     Capital expenditures 
   
(549,282
)
   
(255,029
)
     Additional investment in other real estate owned
   
(81,812
)
   
(139,668
)
     Proceeds from sales of other real estate owned
   
439,784
     
595,363
 
     Cash consideration received in connection with acquisition of  branches
   
0
     
101,539,588
 
             Net cash  provided by investing activities 
   
50,458,654
     
101,143,932
 
FINANCING ACTIVITIES: 
               
     Exercise of stock options and issuance of vested shares
   
140,798
     
57,891
 
     Purchase of Treasury Stock
   
0
     
(15,354
)
     Net increase (decrease)  in demand, savings and time deposits 
   
34,701,473
     
(5,829,713
)
     Net (decrease) in borrowings
   
(78,300,000
)
   
(15,900,000
Net cash used in financing activities 
   
(43,457,729
)
   
(21,687,176
)
Increase in cash and cash equivalents 
   
11,965,866
     
96,348,608
 
CASH AND CASH EQUIVALENTS 
               
AT BEGINNING OF PERIOD
   
15,195,259 
     
17,710,501 
 
CASH AND CASH EQUIVALENTS 
               
AT END OF PERIOD 
 
$
27,161,125 
   
$
114,059,109 
 
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
               
           Cash paid during the period for - 
               
Interest 
 
$
1,515,486
   
$
1,984,615
 
Income taxes 
   
-
     
-
 
 Non-cash investing activities
               
Real estate acquired in full satisfaction of loans in foreclosure
 
$
-
   
$
2,110,287
 
 
See accompanying notes to consolidated financial statements.
 
 
1st Constitution Bancorp and Subsidiaries
March 31, 2012 (Unaudited)
 
(1)  Summary of Significant Accounting Policies
 
The accompanying unaudited Consolidated Financial Statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1ST Constitution Title Agency, LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC.  1ST Constitution Capital Trust II, a subsidiary of the Company, 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.  The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Article 8 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations.  These Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2011, filed with the SEC on March 23, 2012.
 
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.
 
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2012 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.
 
(2)  Acquisition of Unaffiliated Branches

On March 25, 2011, the Bank acquired certain deposit and other liabilities, real estate and related assets of the Rocky Hill, Hillsborough and Hopewell, New Jersey branch banking offices from another financial institution for a purchase price of $9.85 million (the “March 2011 Acquisition”).  The Acquisition was completed pursuant to the terms and conditions of the Branch Purchase and Assumption Agreement and Agreement for Purchase dated as of December 30, 2010, which was previously disclosed on a Current Report on Form 8-K filed by the Company with the SEC on January 3, 2011.

The Company accounted for this transaction using applicable accounting guidance regarding business combinations. The fair value of savings and transaction deposit accounts acquired was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  A core deposit intangible was ascribed to the value of non-maturity deposits based upon an independent third party evaluation which was prepared using the actual characteristics of the deposits and assumptions we believe to be reasonable.  Certificates of deposit accounts were valued utilizing a discounted cash flows analysis based upon the underlying accounts’ contractual maturities and interest rates.  The present value of the projected cash flow was then determined using discount rates based upon certificate of deposit interest rates available in the marketplace for accounts with similar terms. The fair value of the three branch buildings was determined via appraisals performed by qualified independent third party appraisers. The fair value of loans acquired, all of which were performing, was assumed to approximate amortized cost based upon the small size and nature of those loans. 
 
As a result of the March 2011 Acquisition, the three branches became branches of the Bank.  Included in the March 2011 Acquisition were the assumption of deposit liabilities of $111.9 million, primarily consisting of demand deposits, and the acquisition of cash of approximately $101.5 million, fixed assets of approximately $4.6 million, which includes, without limitation, ownership of the real estate and improvements upon which the branches are situated, and loans of $862,000.  The Bank recorded goodwill of approximately $3.2 million and a core deposit intangible asset of approximately $1.7 million as a result of the March 2011 Acquisition.
 
 
(3)  Net Income 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 stock by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential common stock, warrants, common stock options and unvested restricted stock awards (as defined below), using the treasury stock method. All share information has been adjusted for the effect of a 5% common stock dividend declared December 15, 2011 and paid on February 2, 2012 to shareholders of record on January 17, 2012.
 
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. 
 
   
Three Months Ended March 31,
2012
 
   
Income
   
Weighted-
average
shares
   
 
Per share
Amount
 
Basic earnings per common share:
                 
                    Net income
  $ 1,166,732       5,096,186     $ 0.23  
                         
Effect of dilutive securities:
                       
                    Stock options and unvested stock awards
            54,454          
                         
Diluted EPS:
                       
                    Net income plus assumed conversion
  $ 1,166,732       5,150,640     $ 0.23  
 
   
Three Months Ended March 31,
2011
 
   
Income
   
Weighted-
average
shares
   
Per share
Amount
 
Basic earnings per common share:
                 
Net income
  $ 789,868       5,043,023     $ 0.16  
Effect of Dilutive Securities:
                       
Stock options and unvested stock awards
            93,926          
Diluted EPS:
                       
                   Net income plus assumed conversions
  $ 789,868       5,136,949     $ 0.15  
 
 
(4)           Investment Securities
 
 Amortized cost, gross unrealized gains and losses, and the estimated fair value by security type are as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for Sale Portfolio
                   
U. S. Treasury securities and
                       
     obligations of U.S. Government
                       
     sponsored corporations (“GSE”) and agencies
  $ 16,991,703     $ 41,204     $ (5,997 )   $ 17,026,910  
                                 
Residential collateralized mortgage obligations- GSE
    12,297,320       463,048       (39 )     12,760,329  
Residential collateralized mortgage obligations-
             non GSE
    3,873,351       124,123       (10,713 )     3,986,761  
                                 
Residential mortgage backed securities – GSE
    37,806,261       2,053,630       (7 )     39,859,884  
                                 
Obligations of State and Political subdivisions
    5,358,455       335,765       (2,685 )     5,691,535  
                                 
Trust preferred debt securities – single issuer
    2,464,080       0       (626,770 )     1,837,310  
                                 
Corporate debt securities
    9,116,025       10,477       (48,896 )     9,077,606  
Restricted stock
    889,100       0       0       889,100  
Mutual fund
    25,000       0       0       25,000  
                                 
    $ 88,821,295     $ 3,028,247     $ (695,107 )   $ 91,154,435  
 
 
 
 

 

March 31, 2012
 
 
 
 
 
 
Amortized
Cost
   
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
   
 
 
 
 
 
Carrying
Value
   
 
 
 
 
Gross
Unrealized
Gains
   
 
 
 
 
Gross
Unrealized
Losses
   
 
 
 
 
 
Fair
Value
 
Held to maturity-
                                   
                                     
    U. S. Treasury securities and
                                   
         obligations of U.S. Government
                                               
         sponsored corporations (“GSE”)
                                               
         and agencies  
$
4,108,136
   
$
0
   
$
4,108,136
   
$
44,229
   
$
0
   
$
4,152,365
 
Residential collateralized
                                               
         mortgage obligations – GSE
   
23,729,543
     
0
     
23,729,543
     
1,093,060
     
0
     
24,822,603
 
Residential collateralized mortgage
                                               
         obligations – non – GSE
   
13,950,860
     
0
     
13,950,860
     
724,073
     
0
     
14,674,933
 
                                                 
Residential mortgage backed
                                               
         securities – GSE
   
19,152,385
     
0
     
19,152,385
     
854,163
     
     
20,006,548 
 
                                                 
                                                 
Obligations of State and
                                               
         Political subdivisions
   
46,461,177
     
0
     
46,461,177
     
2,593,317
     
(1,002
)
   
49,053,492
 
                                                 
Trust preferred debt securities-pooled
   
649,257
     
(500,944)
     
148,313
     
0
     
(45,795
)
   
102,518
 
                                                 
Corporate debt securities
   
23,108,772 
     
     
23,108,772 
     
110,892 
     
(16,973 
   
23,202,691 
 
                                                 
   
$
131,160,130
   
$
(500,944
)
 
$
130,659,186
   
$
5,419,734
   
$
(63,770
)
 
$
136,015,150
 
 
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2011 
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for sale-
                       
U. S. Treasury securities and
                       
    obligations of U.S. Government
                       
    sponsored corporations (“GSE”) and agencies
 
$
19,400,856
   
$
71,833
   
$
0
   
$
19,472,689
 
Residential collateralized
    mortgage obligations – GSE
   
13,421,544
     
476,589
     
0
     
13,898,133
 
Residential collateralized
     mortgage obligations – non-GSE
   
4,177,115
     
143,480
     
(20,151
)
   
4,300,444
 
Residential mortgage
     backed securities – GSE
   
40,655,157
     
2,032,059
     
(7
)
   
42,687,209
 
Obligations of State and
                               
     Political subdivisions
   
5,366,145
     
339,747
     
(5,378
)
   
5,700,514
 
Trust preferred debt securities – single issuer
   
2,463,296
     
0
     
(712,055
)
   
1,751,241
 
Corporate Debt Securities
   
1,443,762
     
0
     
(7,818
   
1,435,944
 
Restricted stock
   
4,412,600
     
0
     
0
     
4,412,600
 
Mutual fund
   
25,000
     
0
     
0
     
25,000
 
                                 
   
$
91,365,475
   
$
3,063,708
   
$
(745,409
)
 
$
93,683,774
 

 
December 31, 2011
 
 
 
 
 
Amortized
Cost
   
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
   
 
 
 
 
Carrying
Value
   
 
 
 
Gross
Unrealized
Gains
   
 
 
 
Gross
Unrealized
Losses
   
 
 
 
 
Fair
Value
 
Held to maturity-
                                   
    U. S. Treasury securities and
                                   
         obligations of U.S. Government
                                   
         sponsored corporations (“GSE”) and
                                               
         agencies
 
$
11,118,649
   
$
0
   
$
11,118,649
   
$
59,571
   
$
0
   
$
11,178,220
 
    Residential collateralized
                                               
         Mortgage obligations – GSE
   
24,705,415
     
0
     
24,705,415
     
1,007,737
     
0
     
25,713,152
 
    Residential mortgage backed
                                               
         Securities – GSE
   
14,386,327
     
0
     
14,386,327
     
704,792
     
0
     
15,091,119
 
    Residential mortgage backed
                                               
         Securities – non-GSE
   
20,260,354
     
0
     
20,260,354
     
801,882
     
0
     
21,062,236
 
Obligations of State and
                                               
        Political subdivisions
   
46,820,985
     
0
     
46,820,985
     
2,848,587
     
(2,507
)
   
49,667,065
 
Trust preferred debt securities – pooled
   
646,574
     
(500,944
)
   
145,630
     
0
     
(142,122
)
   
3,508
 
Corporate debt securities
   
25,037,063
     
0
     
25,037,063
     
85,701
     
(216,784
)
   
24,905,980
 
                                                 
   
$
142,975,367
   
$
(500,944
)
 
$
142,474,423
   
$
5,508,270
   
$
(361,413
)
 
$
147,621,280
 
 
Restricted stock at March 31, 2012 and December 31, 2011 consists of $874,100 and $4,397,600, respectively, of Federal Home Loan Bank of New York stock and $15,000 of Atlantic Central Bankers Bank stock.
 
The amortized cost and estimated fair value of investment securities at March 31, 2012, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Restricted stock is included in “Available for sale - Due in one year or less.”

   
Amortized
Cost
   
Fair
Value
 
Available for sale-
     
     Due in one year or less
               
                    Corporate Debt Securities
 
$
1,344,602
   
$
1,344,371
 
                    Restricted Stock
   
889,100
     
889,100
 
                    Mutual Fund
   
25,000
     
25,000
 
   
$
2,258,702
   
$
2,258,471
 
     Due after one year through five years
               
                    U.S. Treasury securities and obligations of
     US Government sponsored corporations (“GSE”)and agencies
 
$
16,991,703
   
$
17,026,910
 
                    Residential mortgage backed securities-GSE
   
429,659
     
455,533
 
                    Obligations of State and Political subdivisions
   
593,895
     
599,201
 
                    Corporate Debt Securities
   
6,520,809
     
6,497,473
 
   
$
24,536,066
   
$
24,579,117
 
     Due after five years through ten years
               
                    Residential collateralized mortgage obligations -GSE
 
$
228,481
   
$
232,909
 
                    Residential mortgage backed Securities - GSE
   
3,680,070
     
4,017,483
 
                    Obligations of State and Political Subdivisions
   
2,718,289
     
2,951,483
 
                    Corporate Debt Securities
   
1,250,614
     
   1,235,762
 
   
$
7,877,454
   
$
   8,437,324
 
     Due after ten years
               
                    Residential collateralized mortgage obligations -GSE
 
$
12,068,839
   
$
12,527,420
 
 
 
                    Residential collateralized mortgage obligations –non GSE
   
3,873,351
     
3,986,761
 
                    Residential mortgage backed securities - GSE
   
33,696,532
     
35,386,868
 
                    Obligations of State and Political subdivisions
   
2,046,271
     
2,141,164
 
                    Trust Preferred Debt Securities
   
2,464,080
     
1,837,310
 
   
$
54,149,073
   
$
55,879,523
 
                 
Total
 
$
88,821,295
   
$
91,154,435
 
                 
Held to maturity-
               
     Due in one year or less
               
                    Obligations of State and Political subdivisions
 
$
4,115,682
   
$
4,119,232
 
                    Corporate Debt Securities
   
11,703,554
     
11,752,159
 
   
$
15,819,236
   
$
15,871,391
 
                 
     Due after one year through five years
               
                    U.S. Treasury securities and obligations of
     US Government sponsored corporations (“GSE”) and agencies
 
$
3,110,510
   
$
3,150,165
 
                    Obligations of State and Political subdivisions
   
5,272,554
     
5,461,630
 
                    Corporate Debt Securities
   
11,405,218
     
11,450,532
 
   
$
19,788,282
   
$
20,062,327
 
                 
     Due after five years through ten years
               
                    Residential collateralized mortgage obligations
                            – GSE and non GSE
 
$
801,696
   
$
824,304
 
                    Residential mortgage backed securities – GSE
   
4,322,174
     
4,420,461
 
                     Obligations of State and Political subdivisions
   
22,330,941
     
23,626,696
 
   
$
27,454,811
   
$
28,871,461
 
     Due after ten years
               
                    U.S. Treasury securities and obligations of US
                           Government sponsored corporations
                           (“GSE”) and agencies
 
$
997,626
   
$
1,002,200
 
                    Residential collateralized mortgage obligations - GSE
   
22,927,847
     
23,998,299
 
                    Residential collateralized mortgage obligations – non GSE
   
13,950,860
     
14,674,933
 
                    Residential mortgage backed securities - GSE
   
14,830,211
     
15,586,087
 
                    Obligations of State and Political subdivisions
   
14,742,000
     
15,845,934
 
                    Trust Preferred Debt Securities - Pooled
   
148,313
     
102,518
 
   
$
67,596,857
   
$
71,209,971
 
                 
                 
Total
 
$
130,659,186
   
$
136,015,150
 


Gross unrealized losses on securities and the estimated 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 March 31, 2012 and December 31, 2011 are as follows:
 
March 31, 2012
   
Less than 12 months
   
12 months or longer
   
Total
 
 
Number
of
Securities
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
U.S. Treasury securities and obligations
      of U.S. Government sponsored
          corporations and agencies
2
 
$
9,939,850
   
$
(5,997
)
 
$
0
   
$
0
   
$
9,939,850
   
$
(5,997
)
                                                   
Residential collateralized mortgage
     obligations - GSE
1
   
183,960
     
(39
)
   
0
     
0
     
183,960
     
(39
)
                                                   
Residential collateralized mortgage
       obligations – non-GSE
1
   
0
     
0
     
238,140
     
(10,713
)
   
238,140
     
(10,713
)
                                                   
Residential mortgage backed
      Securities - GSE
1
   
5,196
     
(7
)
   
0
     
0
     
5,196
     
(7
)
                                                   
Obligations of State and Political
      Subdivisions
3
   
1,050,660
     
(3,687
)
   
0
     
0
     
1,050,660
     
(3,687
)
                                                   
Trust preferred debt securities –
        single issuer
4
   
0
     
0
     
1,837,310
     
(626,770
)
   
1,837,310
     
(626,770
)
                                                   
Trust preferred debt securities –
        single issuer - pooled
1
   
0
     
0
     
102,518
     
(546,739
)
   
102,518
     
(546,739
)
                                                   
Corporate Debt Securities
18
   
10,983,223 
     
(59,598
   
667,809
     
(6,271
   
11,651,032
     
(65,869
)
                                                   
  Total temporarily impaired securities
31
 
$
22,162,689
   
$
(69,328
)
 
$
2,845,777
   
$
(1,190,493
)
 
$
25,008,666
   
$
(1,259,821
)
 


December 31, 2011
   
Less than 12 months
   
12 months or longer
   
Total
 
 
Number
of
Securities
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
                                                   
                                                   
Residential collateralized mortgage
     Obligations – non-GSE
1
 
$
0
   
$
0
   
$
251,723
   
$
(20,151
)
 
$
251,723
   
$
(20,151
)
                                                   
Residential mortgage backed securities
     GSE
1
   
5,280
     
(7
)
   
0
     
0
     
5,280
     
(7
)
                                                   
Obligations of State and Political
     Subdivisions
3
   
1,049,362
     
(7,885
)
   
0
     
0
     
1,049,362
     
(7,885
)
                                                   
Trust preferred debt securities –
        Single issuer
4
   
0
     
0
     
1,751,241
     
(712,055
)
   
1,751,241
     
(712,055
)
                                                   
Trust preferred debt securities –
        Pooled
1
   
0
     
0
     
3,508
     
(643,066
)
   
3,508
     
(643,066
)
                                                   
Corporate debt securities
25
   
13,668,246
     
(211,075
)
   
666,956
     
(13,527
)
   
14,335,202
     
(224,602
)
                                                   
  Total temporarily impaired securities
35
 
$
14,722,888
   
$
(218,967
)
 
$
2,673,428
   
$
(1,388,799
)
 
$
17,396,316
   
$
(1,607,766
)
 
 
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 interest rate increases.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.  Because 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, these investments are not considered other-than temporarily impaired.
 
 
Residential collateralized mortgage obligations and residential mortgaged-backed securities: The unrealized losses on investments in residential collateralized residential mortgage obligations and mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by the issuer, which are 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. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because 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, these investments are not considered other-than-temporarily impaired.
 
Obligations of State and Political Subdivisions:  The unrealized losses or investments in these securities were caused by interest rate increases.  It is expected that the securities would not be settled at a price less than the amortized cost of the investment.  Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because 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, these investments are not considered other-than-temporarily impaired.

Corporate debt securities:   The unrealized losses on investments in corporate debt securities were caused by interest rate increases.  None of the corporate issuers have defaulted on interest payments.  Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because 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, 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 that mature in 2027, all of which were single-issuer securities.   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.  None of the corporate issuers have defaulted on interest payments.  Because the decline in fair value is attributable to widening of interest rate spreads and the lack of an active trading market for these securities and to a lesser degree market concerns on the issuers’ credit quality, and because 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, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – pooled:  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 of $864,727, of which $363,783 was determined to be a credit loss and charged to operations and $500,944 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 a 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 March 31, 2012, our evaluation was as follows:
 
 
a.
We obtained the PRETSL XXV Depository Institutions Issuer List as of March 31, 2012 from the FTN Financial Corp. (“FTN”) website and reviewed the financial ratios and capital levels of each individual financial institution issuer.
 
 
b.
We sorted the financial institutions on the issuer list to develop three “buckets” (or categories) for further deferred/default analysis based upon the indicated “Texas Ratio.”  The Texas Ratio is calculated by dividing the institution’s Non-Performing Assets plus loans 90 days past due by the combined total of Tangible Equity plus the Allowance for Loan Losses.  The three buckets consisted of those institutions with a Texas Ratio of:
 
 
(1)
Above 100;
 
 
(2)
75 to 100; and
 
 
(3)
Below 75.
 
 
c.
We then applied the following asset specific deferral/default assumptions to each of these buckets:
 
 
(1)
Above 100 - 100% default; 0% recovery;
 
 
(2)
75 to 100 – 100% deferred; 15% recovery at 2 years from initial date of deferral; and
 
 
(3)
Below 75 – no deferral/default.
 
 
d.
We then ran a cash flow projection to analyze the impact of future deferral/default activity by applying the following assumption on those institutions in bucket (3) of our analysis:
 
 
·
Defaults at 75 basis points applied annually; 15% recovery with a 2-year lag from the initial date of deferral.
 
Our rationale for these metrics is as follows:  (1) The FDIC lists the number of bank failures each year from 1934 – 2008.  Comparing bank failures to the number of FDIC institutions produces an annual average default rate of 36 basis points. Given the continuing uncertain economic environment, we believe the doubling of this amount, or 75 basis points, to be an appropriate measurement for defaults; and (2) Standard & Poor’s published “Global Methodology for Rating Trust Preferred/Hybrid Securities Revised” on November 21, 2008.  This analysis uses a recovery assumption of 15%, which we also deem an appropriate measurement.
 
Our position is that it is appropriate to apply this future default factor in our analysis as it is not realistic to assume no adverse conditions will occur over the remaining 26-year stated maturity of this pooled security even though the individual institutions are currently performing according to terms.
 
 
e.
This March 31, 2012 projection of future cash flows produced a present value factor that exceeded the carrying value of the pooled trust preferred security; therefore, management concluded that no other-than-temporary impairment issues were present at March 31, 2012.
 
 
Any one or more factors, or combinations thereof, could cause management to conclude in future reporting periods that an unrealized loss that exists with respect to PRETSL XXV constitutes an additional credit impairment.  These factors include, but are not limited to, failure to make interest payments, an increase in the severity of the unrealized loss, an increase in the continuous duration of the unrealized loss without an impairment in value or changes in market conditions and/or industry or issuer specific factors that would render management unable to forecast a full recovery in value.  In addition, the fair value of trust preferred securities could decline if the overall economy and the financial condition of the issuers continue to deteriorate and there remains limited liquidity for this security.
 
The following table sets forth information with respect to this security at March 31, 2012:
 
Security
 
Class
 
Amortized Cost
 
Fair
Value
 
Unrealized
 (Loss)
 
Percent of
 Underlying
 Collateral
Performing
 
Percent of
Underlying
Collateral In
Deferral (1)
 
Percent of
Underlying
Collateral In
Default  (1)
 
Expected