UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2002
or
[ ] 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 or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization
2650 Route 130, P.O. Box 634, Cranbury, NJ 08512
------------------------------------------ --------------
(Address of principal executive officers) (Zip Code)
(609) 655-4500
--------------
(Registrant'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 subjected to
such filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of April 15, 2002 there were 1,402,595 shares of common stock, no par value
outstanding.
1
1st Constitution Bancorp
FORM 10-QSB
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements and Notes to 3
Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
ITEM 3 - Market Risk 17
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 2 - Changes in Securities 19
ITEM 3 - Defaults upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 19
2
1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
CASH AND DUE FROM BANKS $ 8,057,613 $ 8,173,550
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS 7,513,177 13,754,664
------------- -------------
Total cash and cash equivalents 15,570,790 21,928,214
------------- -------------
SECURITIES:
Available for sale, at market value 63,131,098 61,605,057
Held to maturity (market value of $5,672,928 and $6,103,760 in 2002
and 2001, respectively) 5,585,043 6,034,927
------------- -------------
Total securities 68,716,141 67,639,984
------------- -------------
LOANS HELD FOR SALE 5,387,272 7,158,950
------------- -------------
LOANS 126,720,287 124,937,483
Less - Allowance for loan losses (1,488,104) (1,414,495)
------------- -------------
Net loans 125,232,183 123,522,988
------------- -------------
PREMISES AND EQUIPMENT, net 1,022,963 998,744
ACCRUED INTEREST RECEIVABLE 1,045,778 1,047,670
OTHER ASSETS 919,009 886,913
------------- -------------
Total assets $ 217,894,136 $ 223,183,463
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing $ 32,236,139 $ 32,633,895
Interest bearing 145,988,226 151,630,901
------------- -------------
Total deposits 178,224,365 184,264,796
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 3,977,952 3,808,183
OTHER BORROWINGS 15,500,000 15,500,000
ACCRUED INTEREST PAYABLE 1,297,959 1,557,392
ACCRUED EXPENSES AND OTHER LIABILITIES 1,093,789 620,148
------------- -------------
Total liabilities 200,094,065 205,750,519
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000,000 shares authorized;
1,404,895 shares issued and 1,397,595 and 1,398,395
outstanding as of March 31, 2002 and December 31, 2001,
respectively 15,193,231 15,198,339
Retained earnings 2,959,000 2,360,437
Treasury Stock, shares at cost (7,300 shares and 6,500 shares at March 31,
2002 and December 31, 2001, respectively) (99,923) (83,190)
Accumulated other comprehensive loss (252,237) (42,642)
------------- -------------
Total shareholders' equity 17,800,071 17,432,944
------------- -------------
Total liabilities and shareholders' equity $ 217,894,136 $ 223,183,463
============= =============
See accompanying notes to consolidated financial statements.
3
1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
--------------------------------
2002 2001
---------- ----------
INTEREST INCOME:
Interest on loans $2,465,046 $2,620,502
Interest on securities:
Taxable 820,998 923,868
Tax-exempt 37,582 31,554
Interest on Federal funds sold and short-term investments 59,537 59,139
---------- ----------
Total interest income 3,383,163 3,635,063
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,038,023 1,393,506
Interest on Federal funds purchased and securities sold
under agreements to repurchase 16,742 75,691
Interest on other borrowings 207,987 207,987
---------- ----------
Total interest expense 1,262,752 1,677,184
---------- ----------
Net interest income 2,120,411 1,957,879
PROVISION FOR LOAN LOSSES 60,000 60,000
---------- ----------
Net interest income after provision for loan losses 2,060,411 1,897,879
---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts 120,934 86,475
Gain on sale of loans held for sale 313,128 115,016
Other income 56,986 77,445
---------- ----------
Total other income 491,048 278,936
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 868,956 750,192
Occupancy Expense 181,323 181,914
Other operating expenses 557,575 486,630
---------- ----------
Total other expense 1,607,854 1,418,736
---------- ----------
Income before income taxes 943,605 758,079
INCOME TAXES 344,713 277,825
---------- ----------
Net income $ 598,892 $ 480,254
========== ==========
NET INCOME PER SHARE:
Basic $ 0.43 $ 0.34
Diluted $ 0.41 $ 0.33
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,398,185 1,402,155
Diluted 1,461,129 1,432,690
---------- ----------
See accompanying notes to consolidated financial statements.
4
1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income $ 598,892 $ 480,254
Adjustments to reconcile net income
to net cash provided by (used in) operating activities -
Provision for loan losses 60,000 60,000
Depreciation and amortization 59,341 53,008
Net amortization (accretion) on securities 61,503 (6,547)
Gain on sale of loans held for sale (313,128) (115,016)
Originations of loans held for sale (17,691,474) (15,705,276)
Proceeds from sales of loans held for sale 19,776,280 12,204,757
Decrease in accrued interest receivable 1,892 60,599
Decrease (increase) in other assets 48,508 (30,273)
(Decrease) increase in accrued interest payable (259,433) 103,947
Increase in accrued expenses and other liabilities 473,641 148,208
------------ ------------
Net cash provided by (used in) operating activities 2,816,022 (2,746,339)
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale (5,799,804) (7,301,249)
Proceeds from maturities and prepayments of securities -
Available for sale 3,899,851 2,324,713
Held to maturity 449,884 217,521
Net increase in loans (1,769,195) (6,486,198)
Capital expenditures (83,560) (51,747)
------------ ------------
Net cash used in investing activities (3,302,824) (11,296,960)
------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand, savings and time deposits (6,040,431) 23,071,455
Net increase in securities sold under agreements to repurchase 169,769 4,330,190
------------ ------------
Net cash (used in) provided by financing activities (5,870,622) 27,401,645
------------ ------------
(Decrease) increase in cash and cash equivalents (6,357,424) 13,358,346
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 21,928,214 7,539,966
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 15,570,790 $ 20,898,312
============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 1,522,185 $ 1,573,237
Income taxes 340,000 265,000
============ ============
See accompanying notes to consolidated financial statements.
5
1ST CONSTITUTION BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements herein
have been prepared by 1st Constitution Bancorp (the "Company"), in
accordance with accounting principles generally accepted in the United
States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission. 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 financial statements and the notes thereto.
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.
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 2002.
(2) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by
the weighted average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income
by the weighted average number of shares outstanding, as adjusted for
the assumed exercise of potential common stock options, using the
treasury stock method. Potential shares of common stock resulting from
stock option agreements totaled 62,944 and 30,535 for the three months
ended March 31, 2002 and March 31, 2001, respectively. All share
amounts have been restated for the effect of a 5% stock dividend
declared in 2001.
(3) RECENT ACCOUNTING PRONOUNCEMENT
On October 3, 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. While SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", it retains many of
the fundamental provisions of that Statement. The Statement is
effective for fiscal years beginning after December 15, 2001. The
initial adoption of SFAS No. 144 did not have a significant impact on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived
assets. The Company is required to adopt the provisions of SFAS No. 143
for fiscal years beginning after June 15, 2002. The Company does not
anticipate that SFAS No. 143 will significantly impact the Company's
consolidated financial statements.
6
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
periodically reviewed for impairment.
The Company adopted the provisions of SFAS No. 142 on January 1, 2002.
The Company currently has no recorded goodwill and the adoption of SFAS
No. 142 did not significantly impact the Company's accounting for
currently recorded intangible assets, primarily core deposit
intangibles.
7
ITEM 2 --- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion of the operating results and financial condition at
March 31, 2002 is intended to help readers analyze the accompanying financial
statements, notes and other supplemental information contained in this document.
Results of operations for the three-month period ended March 31, 2002 is not
necessarily indicative of results to be attained for any other period.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by such forward-looking terminology as "expect", "believe",
"anticipate", or by expressions of confidence such as "continuing" or "strong"
or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties. These include, but are not
limited to, interest rate fluctuations; continued levels of loan quality and
origination volume; continued relationship with major customers; inflation and
technology changes; the Bank's ability to generate deposits and loans; income or
revenues being lower than expected or operating costs higher; competitive
pressures in the banking or financial services industries increasing
significantly; weakening of general economic conditions nationally or in New
Jersey; changes in legal and regulatory barriers and structures; as well as
other risks and uncertainties detailed from time to time in filings of the
Company with the U.S. Securities and Exchange Commission. Actual results may
differ materially from such forward-looking statements. The Company assumes no
obligation for updating any such forward-looking statements at any time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
Summary
The Company realized net income of $598,892 for the three months ended March 31,
2002 as compared to $480,254 reported for the same period in 2001. Net income
per diluted share was $0.41 for the three months ended March 31, 2002 compared
to $0.33 per diluted share for the prior year.
EARNINGS ANALYSIS
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 81.2% of the Company's net revenues in 2002. Net interest
income also depends upon the relative amount of interest earning assets,
interest-bearing liabilities, and the interest rate earned or paid on them.
The following table sets forth the Company's consolidated average balances of
assets and liabilities and shareholder's equity as well as interest income
(tax-equivalent basis) and expense on related items, and the Company's average
yield or rate for the three month periods ended March 31, 2002 and 2001. The
average rates are derived by dividing interest income and expenses by the
average balance of assets and liabilities, respectively.
8
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, interest bearing liabilities,
related yields, and associated funding costs.
The Company's net interest income totaled $2,120,411 for the three months ended
March 31, 2002 compared to $1,957,879 for the three months ended March 31, 2001.
The principal factor contributing to the current period increase in net interest
income was increased loan portfolio and investment securities portfolio volumes.
This was partially offset by decreases in both loan and investment securities
portfolio yields due to the declining interest rate environment that existed
throughout 2001 and continued into the first quarter of 2002.
AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
-------------------------------------------------------------------------------------------------------------------------
(yields on a tax-equivalent basis) Three months ended March 31, 2002 Three months ended March 31, 2001
------------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
ASSETS:
Federal Funds Sold/Short-Term
Investments $12,703,088 $59,537 1.90% $4,842,594 $59,139 4.95%
Securities:
U.S. Treasury Bonds -- -- 0.00% 499,489 6,358 5.16%
Collateralized Mortgage
Obligations/Mortgage
Backed Securities 64,268,958 820,998 5.11% 54,479,932 917,510 6.74%
States and Political
Subdivisions 3,191,284 55,620 6.97% 2,749,251 46,699 6.79%
-------------------------------------------------------------------------------------
Total 67,460,242 876,618 5.20% 57,728,672 970,567 6.73%
Loan Portfolio:
Commercial 22,595,451 479,412 8.60% 24,759,297 716,520 11.74%
Installment 14,430,601 285,241 8.02% 15,441,222 300,158 7.88%
Commercial Mortgages and 8.44%
Construction Wholesale 65,574,691 1,099,646 6.80% 49,327,016 1,026,055
Residential Mortgages and
Construction Retail 21,099,380 392,051 7.54% 18,714,433 375,309 8.13%
All Other Loans 8,123,987 208,696 10.90 7,313,061 202,460 11.07%
-------------------------------------------------------------------------------------
Total 131,824,110 2,465,046 7.58% 115,555,029 2,620,502 9.20%
TOTAL INTEREST-EARNING ASSETS 211,987,440 3,401,201 6.51% 178,126,295 3,650,208 8.31%
============= =========
Allowance for Loan Losses (1,463,243) (1,166,649)
Cash and Due From Bank 6,737,694 5,681,361
Other Assets 3,422,621 3,045,830
------------ ---------------
TOTAL ASSETS $220,684,512 $185,686,837
============ ===============
Interest-Bearing Liabilities:
Money Market and NOW Accounts $63,504,614 $234,242 1.50% $41,067,138 $327,191 3.23%
Savings Accounts 12,037,480 44,655 1.50% 10,515,075 70,139 2.71%
Certificates of Deposit 54,468,098 577,317 4.30% 48,583,317 740,486 6.18%
Certificates of Deposit of
$100,000 and Over 18,368,052 181,809 4.01% 17,318,100 255,690 5.99%
Federal Funds Purchased/Other
Borrowed Funds 19,279,219 224,729 4.73% 20,689,932 283,678 5.56%
------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 167,657,463 1,262,752 3.05% 138,173,562 1,677,182 4.92%
============================= ======================
NET INTEREST SPREAD 3.45% 3.39%
============= =========
Demand Deposits 31,626,518 29,532,862
Other Liabilities 3,646,530 2,650,325
------------ ---------------
Total Liabilities 202,930,511 170,356,749
Shareholders' Equity 17,754,002 15,330,088
------------ ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 220,684,513 185,686,837
============ ===============
NET INTEREST MARGIN $2,138,449 4.09% $1,973,026 4.49%
============================= ======================
9
Average interest earning assets increased by $33,861,145 or 19.0% for the three
month period ended March 31, 2002 versus the comparable 2001 period with
increases of $16,269,081 in loans and $9,731,570 in investment securities. Led
by commercial mortgages and construction loans, the Company's average loan
portfolio grew by 14.1% and loan yields averaged 7.58% in 2002, 162 basis points
lower than 2001. This decrease was primarily the result of 2002 loan growth at
lower yields amid a decreasing interest rate environment for the majority of
2001 and the first quarter of 2002. The Company's average investment securities
portfolio grew 16.9%, and the yield on that portfolio decreased 153 basis points
when comparing the three month ended March 31, 2002 with the comparable 2001
period. Overall, the yield on interest earning assets decreased 180 basis points
to 6.51% in 2002 from 8.31% in 2001.
The net interest margin (tax-equivalent basis), which is net interest income
divided by average interest earning assets, was 4.09% for the three months ended
March 31, 2002 compared with 4.49% for the comparable 2001 period. The principal
factor causing the decrease in the Company's net interest margin was the sharp
decline in market interest rates during 2001 that continues into 2002. This
resulted in yields on short-term investments and floating rate loans tied to the
prime rate to decline more quickly than those of the Company's interest-bearing
liabilities. As a result of the interest rate movement, the yield on the
Company's total interest-earning assets declined 180 basis and the cost of
interest-bearing liabilities decreased 187 basis points compared to 2001, as
depositors sought higher yields in certificate of deposit accounts.
Average non-interest bearing demand deposits increased 7.1% to $31,625,518 for
the three-month period ended March 31, 2002 from $29,532,862 for the comparable
2001 period. Business checking accounts and expanding new business relationships
have generated most of this increase. Throughout the comparative periods,
increases in average non-interest bearing deposits contributed to the increases
in net interest income.
Provision for Loan Losses
For the three months ended March 31, 2002 and 2001, the provision for loan
losses was $60,000. The comparable provisions were the result of stable loan
portfolio growth combined with lower levels of non-performing loans. The amount
of the loan loss provisions and the level of the allowance for loan losses are
based upon a number of factors including Management's evaluation of potential
losses in the portfolio after consideration of appraised collateral values,
financial conditions and past credit history of the borrowers as well as
prevailing and anticipated economic conditions.
Non-Interest Income
For the three months ended March 31, 2002, compared to the same period of 2001,
total non-interest income increased $212,112 or 76.0%, to $491,048 compared to
$278,936. The increase was due primarily to an increase of $198,112 in gains on
sale of loans held for sale.
Gain on sales of loans held for sale increased significantly to $313,128 for the
three month period ended March 31, 2002 compared to $115,016 for the 2001
period. The declining interest rate environment that existed in 2001 and
continues in 2002 greatly fueled the volume of mortgage loan originations and
subsequent secondary market mortgage loan sales.
10
Non-Interest Expense
For the three months ended March 31, 2002, non-interest expense amounted to
$1,607,854, an increase of $189,118, or 13.3%, from the same period last year.
Salaries and employee benefits increased $118,764 compared to the prior year
period primarily due to increased staffing levels to manage the continuing
growth of the Company plus normal salary increases. Occupancy expense decreased
$591 while other operating expenses increased $70,945.
An important industry productivity measure is the efficiency ratio. The
efficiency ratio is calculated by dividing total operating expenses by net
interest income and other 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 for the quarter ended March
31, 2002 to 61.6% compared to 65.17% for the quarter ended March 31, 2001.
The Company's ratio of non-interest expense to average assets improved to 2.95%
for the three month period ended March 31, 2002 compared to 3.10% for the
comparable 2001 period.
FINANCIAL CONDITION
March 31, 2002 Compared with December 31, 2001
Total consolidated assets at March 31, 2002 totaled $217,894,136 compared to
$223,183,463 at December 31, 2001. The decrease in the Company's asset base
during the first three months of 2002 was primarily due to a decrease in
interest bearing deposits. Historically, during periods similar to the current
lower interest rate environment, customers with maturing time deposits at higher
rates may migrate from the Company in searching for higher competitive rates.
Total deposits decreased by $6,040,431 or 3.3% to $178,224,365 at March 31, 2002
compared to $184,264,796 at December 31, 2001.
Cash and Cash Equivalents
Cash and Cash Equivalents at March 31, 2002 totaled $15,570,790 compared to
$21,928,214 at December 31, 2001. Cash and cash equivalents at March 31,2002
consisted of cash and due from banks of $8,057,613 and Federal funds sold/short
term investments of $7,513,177. The corresponding balances at December 31, 2001
were $8,173,550 and $13,754,664, respectively. The balance of cash and cash
equivalents at March 31, 2002 decreased primarily due to decreased interest
bearing deposit balances.
Securities
Securities represented 31.5% of total assets at March 31, 2002 and 30.3% at
December 31, 2001. Total securities increased $1,076,157 or 1.6% at March
31,2002 to $68,716,141 compared to $67,639,984 at year-end 2001.
Information relative to the Company's securities portfolio at March 31,2002, is
as follows:
11
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ----------- -----------
MARCH 31, 2002
Available for sale --
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $28,060,716 $137,402 $ 468,615 $27,729,503
Mortgage backed securities 25,870,808 140,816 112,282 25,899,342
FHLB stock and other securities 9,581,752 23,124 102,623 9,502,253
----------- -------- ----------- -----------
$63,513,276 $301,342 $ 683,520 $63,131,098
=========== ======== =========== ===========
Held to maturity --
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 3,182,510 $ 40,500 $ 14,273 $ 3,208,737
Mortgage backed securities 2,402,533 61,658 0 2,464,191
----------- -------- ----------- -----------
$ 5,585,043 $102,158 $ 14,273 $ 5,672,928
=========== ======== =========== ===========
Securities available for sale totaled $63,131,098 at March 31, 2002, an increase
of $1,526,041 or 2.5% from year-end 2001. During the first three months of 2002,
$5,799,804 of securities available for sale were purchased (predominantly
mortgage backed securities) and funded by calls and maturities of securities
held to maturity, securities available for sale and short-term investments.
Securities held to maturity totaled $5,585,043 at March 31,2002, a decrease of
$449,884 or 7.5% from year-end 2001.
Loans
The loan portfolio, which represents the Company'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
Company's primary lending focus continues to be commercial loans, owner-occupied
commercial mortgage loans and tenanted commercial real estate loans.
The following table sets forth the classification of loans by major category at
March 31, 2002 and December 31, 2001.
LOAN PORTFOLIO COMPOSITION March 31, 2002 December 31, 2001
% %
Component Amount of total Amount of total
------------ -------- ------------ --------
Construction loans $26,136,417 20.6% $29,385,096 23.5%
Residential real estate loans 10,029,672 7.9% 11,634,097 9.3%
Commercial and industrial loans 68,055,675 53.7% 62,043,318 49.7%
Loans to individuals 16,397,225 12.9% 15,587,772 12.5%
Lease financing 5,744,791 4.5% 6,117,261 4.9%
All other loans 356,507 0.3% 169,939 0.1%
------------ -------- ------------ --------
$126,720,287 100.0% $124,937,483 100.0%
============ ======== ============ ========
The loan portfolio increased at March 31, 2002 to $126,720,287 from $124,937,483
at December 31, 2001. The ability of the Company to enter into larger loan
relationships and management's philosophy of relationship banking are key
factors in continued loan growth. Strong competition from both bank and
12
non-bank competitors could result in comparatively lower yields on new and
established lending relationships. The ultimate collectability of the loan
portfolio and the recovery of the carrying amount of real estate are subject to
changes in the Company's market region's economic environment and real estate
market.
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,
(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 and (3) loans
whose terms have been restructured to provide a reduction or deferral of
interest on principal because of a deterioration in the financial position of
the borrower.
The Company's policy with regard to non-accrual loans varies by the type of loan
involved. Generally, commercial 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 90 days past due.
Residential mortgage loans are not generally placed on a non-accrual status
unless the value of the real estate has deteriorated to the point that a
potential loss of principal or interest exists. Subsequent payments are credited
to income only if collection of principal is not in doubt.
Nonaccrual loans amounted to $60,867 at March 31, 2002, a decrease of $557,235
from $618,102 at year-end 2001. As the table demonstrates, loan quality and
ratios remain strong. This was accomplished through quality loan underwriting, a
proactive approach to loan monitoring and aggressive workout strategies.
NON-PERFORMING ASSETS AND LOANS March 31 December 31
2002 2001
---------------------------
Non-Performing loans:
Loans 90 days or more past due and still accruing $ 0 $ 0
Non-accrual loans 60,867 618,102
---------------------------
Total non-performing loans 60,867 618,102
Other real estate owned 0 0
---------------------------
Total non-performing assets $60,867 $618,102
===========================
Non-performing loans to total loans 0.05% 0.49%
Non-performing assets to total assets 0.03% 0.28%
The Company had no restructured loans, other real estate owned or impaired loans
at March 31, 2002. Impaired loans totaled $609,237 at December 31, 2001.
Allowance for Loan Losses
The allowance for loan losses is a critical accounting policy of the Company and
is maintained at a level believed by management sufficient to absorb probable
credit losses inherent 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 in the loan portfolio and other extensions of credit.
Management utilizes a systematic and documented allowance adequacy methodology
for loan losses that requires specific allowance assessment for all loans,
including real estate mortgages and consumer loans.
13
This methodology assigns reserves based upon credit risk ratings for all loans.
The reserves are based upon various factors, including historical performance,
general economic conditions as well as the current economic conditions of
borrowers and underlying collateral values. Management periodically reviews the
process used to determine the adequacy of the allowance for loan losses.
Allocations to the allowance for loan losses, both specific and general, are
determined after this review. Loans are classified based on internal reviews and
evaluations performed by the lending staff. These evaluations are, in turn,
examined by the Company's internal loan review specialist. A formal loan review
function, independent of loan origination, is used to identify and monitor risk
classifications. The determination of the adequacy of the allowance for loan
losses is inherently subjective in nature and subject to significant near term
change based upon the underlying factors discussed above.
The allowance for loan losses amounted to $1,488,104 at March 31, 2002, an
increase of $73,609 from December 31, 2001. The ratio of the allowance for loan
losses to total loans was 1.17% at March 31, 2002 and 1.13% at December 31,
2001, respectively. The allowance for loan losses as a percentage of
non-performing loans was 2444.85% at March 31, 2002, compared to 228.84% at the
end of 2001. The quality of the loan portfolio remains strong and it is
management's belief that the allowance for loan losses is adequate in relation
to credit risk exposure levels.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
ALLOWANCE FOR LOAN LOSSES March 31, March 31,
2002 2001
------------ ------------
Balance, beginning of period 1,414,495 $1,132,555
Provision charged to operating expenses 60,000 60,000
Loans charged off (7,337) 0
Recoveries 20,946 781
------------ ------------
Net (charge offs) / recoveries 13,609 781
------------ ------------
Balance, end of period $1,488,104 $1,193,336
============ ============
Loans:
At period end $126,720,287 $117,118,450
Average during the period 131,824,110 115,555,029
Net charge offs to average loans outstanding 0.01% 0.00%
Allowance for loan losses to:
Total loans at period end 1.17% 1.02%
Non-performing loans 2,444.85% 269.58%
Deposits
Deposits, which include demand deposits (interest bearing and non-interest
bearing), savings and time deposits, are a fundamental and cost-effective source
of funding the Company's operations. The Company offers a variety of products
designed to attract and retain customers, with management's primary focus being
on building and expanding long-term relationships.
AVERAGE DEPOSIT BALANCE
Three months ended March 31, 2002
---------------------------------
Percentage
Balance of Total
------------ ----------
Non-interest bearing demand deposits $ 31,626,518 17.6%
Interest bearing demand deposits 63,504,614 35.3%
Savings deposits 12,037,480 6.7%
Certificates of deposit of $100,000 or more 18,368,052 10.2%
Other time deposits 54,468,098 30.3%
------------ -----
Total $180,004,762 100.0%
============ =====
14
Total deposits decreased $6,040,431 or 3.3% to $178,224,365 at March 31, 2002
from $184,264,796 at December 31, 2001. This decrease in total deposits was
primarily the result of a $5,642,675 decrease in interest bearing deposits to
$145,988,226 as customers with maturing time deposits migrated from the Company
in searching for higher competitive rates during this period of lower market
interest rates.
Other Borrowings
Other Borrowings are comprised of fixed rate convertible advances from the
Federal Home Loan Bank ("FHLB"). These borrowings are primarily used to fund
asset growth not supported by deposit generation. These advances are fully
secured by marketable securities and qualifying one-to-four family mortgage
loans.
The balances of other borrowed funds was $15,500,000 at March 31, 2002 and
December 31, 2001.
Shareholders' Equity And Dividends
Shareholders' equity at March 31, 2002 totaled $17,800,071, an increase of
$367,127, or 2.11%, compared to December 31, 2001. Book value per common share
rose to $12.74 at March 31, 2002 compared to $12.47 at December 31, 2001.
In 2000, the Board of Directors authorized a stock buyback program that allows
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 three months ended March 31,
2002, 800 shares of common stock were purchased and, during 2001, 4,610 shares
were purchased under this program. Treasury stock totaled $99,923 at March 31,
2002 compared to $83,190 at December 31, 2001.
During December 2001, the Company's stock became listed for trading on the
NASDAQ National Market System, under the symbol, "FCCY".
The table below presents the actual capital amounts and ratios of the Company
for the periods indicated:
CAPITAL RATIOS
Amount Ratio
----------------------------------
As of March 31, 2002 -
Total capital to risk weighted assets $19,540,412 13.28%
Tier 1 capital to risk weighted assets 18,052,308 12.27%
Tier 1 capital to average assets 18,052,308 8.18%
As of December 31, 2001-
Total capital to risk weighted assets $18,890,081 12.82%
Tier 1 capital to risk weighted assets 17,475,586 11.86%
Tier 1 capital to average assets 17,475,586 7.57%
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total
15
capital to risk weighted assets ratio of 8.0%. To be considered "well
capitalized," an institution must have a minimum Tier 1 leverage ratio of 5.0%.
At March 31, 2002, the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is management's goal to monitor and maintain
adequate capital levels to continue to support asset growth and continue its
status as a well-capitalized institution.
Liquidity
At March 31, 2002, the amount of liquid assets 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 measures the ability to satisfy current and future cash flow needs as
they become due. Liquidity management refers to the Company's ability to support
asset growth while satisfying the borrowing needs and deposit withdrawal
requirements of customers. In addition to maintaining liquid assets, factors
such as capital position, profitability, asset quality and availability of
funding affect a banks' 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, 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 Company has established borrowing relationship with the FHLB and its
correspondent banks which further support and enhance liquidity.
The Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities.
Net cash provided by operating activities totaled $2,816,022 in 2002 compared to
$2,746,339 used in operating activities in 2001. The primary source of funds is
net income from operations adjusted for provision for loan losses, depreciation
expenses, and amortization of intangibles.
Net cash used in investing activities totaled $3,302,824 in 2002 compared to
$11,296,960 in 2001. The decrease in usage was the result of a lower volume of
loan originations and securities purchases for the three months ended March 31,
2002.
Net cash used in financing activities amounted to $5,870,622 in 2002 compared to
$27,401,645 provided by financing activities in 2001. The decrease in 2002
resulted primarily from the decrease in deposits.
The securities portfolio is also a source of liquidity, providing cash flows
from maturities and periodic repayments of principal. During 2002, maturities of
investment securities totaled $4,349,735. Another source of liquidity is the
loan portfolio, which provides a steady flow of payments and maturities.
On April 10, 2002, 1st Constitution Capital Trust I (the "Trust"), a statutory
business trust, and a wholly owned subsidiary of the Company, issued $5.0
million of floating rate Trust Preferred Securities in a pooled institutional
placement transaction and $155,000 of floating rate Common Securities to the
Company. Proceeds from the issuance of the Trust Preferred Securities were
immediately used by the Trust to purchase $5.2 million of floating rate
Subordinated Debentures maturing
16
April 22, 2032 from the Company. The subordinated debentures have an initial
rate of 6.02%. The Trust exists for the sole purpose is issuing Trust Preferred
Securities and investing the proceeds into Subordinated Debentures of the
Company. These Subordinated debentures constitute the sole assets of the Trust.
The Subordinated Debentures are redeemable in whole or in part prior to maturity
after April 22, 2007. The Trust is obligated to distribute all proceeds of a
redemption, whether voluntary or upon maturity, to holders of the Trust
Preferred Securities. The Company's obligation with respect to the Trust
Preferred Securities and the Subordinated Debentures, when taken together,
provides a full and unconditional guarantee on a subordinated basis by the
Company of the obligations of the Trust to pay amounts when due on the Trust
Preferred Securities.
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. Interest rate risk is derived from timing
differences 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-sensitive liabilities.
The Company continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes that
hedging instruments currently available are not cost-effective, and therefore,
has focused its efforts on increasing the Company's spread by attracting
lower-costing retail deposits.
MARKET RISK ANALYSIS
To measure the impacts of longer-term asset and liability mismatches beyond two
years, the Company utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models. The modified duration of equity measures the
potential price risk of equity to changes in interest rates. A longer modified
duration of equity indicates a greater degree of risk to rising interest rates.
Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows, with
rates ranging up or down 200 basis points. The economic value of equity is
likely to be different as interest rates change. Results falling outside
prescribed ranges require action by management. At March 31, 2002 and December
31, 2001, the Company's variance in the economic value equity as a percentage of
assets with an instantaneous and sustained parallel shift of 200 basis points is
within the negative 3% guideline, as shown in the tables below.
The market capitalization of the Company should not be equated to the EVPE,
which only deals with the valuation of balance sheet cash flows using
conservative assumptions. Calculated core deposit premiums may be less than what
is available in an outright sale. The model does not consider potential premiums
on floating rate loan sales, the impact of overhead expense, non-interest
income, taxes, industry market price multiples and other factors reflected in
the market capitalization of a company.
The following tables set forth certain information relating to the Company's
financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the instruments fair value at
March 31, 2002 and December 31, 2001.
17
MARKET RISK ANALYSIS
March 31, 2002 December 31, 2001
---------------------------------------- ----------------------------------------
Change in Rates Flat -200bp +200bp Flat -200bp +200bp
----------------------------------------------------------- ----------------------------------------
Economic Value
of Portfolio
Equity $23,490,000 $23,969,000 $19,605,000 $22,128,000 $21,465,000 $19,109,000
Change 480,000 (3,884,000) (663,000) (3,019,000)
Change as a %
of assets 0.22% (1.78%) (0.30%) (1.35%)
18
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Report
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 2.1 of the Registrant's Form 10-SB filed June 15,
2001).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 2.2 of the
Registrant's Form 10-SB filed June 15, 2001).
4.1 Specimen Share of Common Stock (incorporated by reference to Exhibit
4.1 of the Registrant's Form 10-K SB for the year ended December 31,
2001 filed March 22, 2002).
4.2 Amended and Restated Declaration of Trust of 1st Constitution Capital
Trust I dated as of April 10, 2002 among the Registrant, as sponsor,
Wilmington Trust Company, as Delaware and institutional trustee, and
the Administrators named therein (filed herewith).
4.3 Indenture dated as of April 10, 2002 between the Registrant, as
issuer, and Wilmington Trust Company, as trustee, relating to the
Floating Rate Junior Subordinated Debt Securities due 2032 (filed
herewith).
4.4 Guarantee Agreement dated as of April 10, 2002 between the Registrant
and the Wilmington Trust Company, as guarantee trustee (filed
herewith).
10.1 Amended and Restated 1990 Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 6.1 of the Registrant's Form
10-SB filed June 15, 2001).
10.2 1996 Employee Stock Option Plan, as amended (incorporated by reference
to Exhibit 6.2 of the Registrant's Form 10-SB filed June 15, 2001).
10.3 2000 Employee Stock Option Plan (incorporated by reference to Exhibit
6.3 of the Registrant's Form 10-SB filed June 15, 2001).
10.4 Stock Option Plan for Non-Employee Director (incorporated by reference
to Exhibit 6.4 of the Registrant's Form 10-SB filed June 15, 2001).
10.5 Employment Agreement between the Company and Robert F. Mangano dated
April 22, 1999 (incorporated by reference to Exhibit 6.5 of the
Registrant's Form 10-SB filed June 15, 2001).
(b) Form 8-K
There has been no Form 8-K filed during the first quarter of
2002.
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
------------------------------------
(Registrant)
Dated: May 8, 2002 By: /s/ Robert F. Mangano
------------------------------------
Robert F. Mangano
President
Chief Executive Officer
/s/ Joseph M. Reardon
------------------------------------
Joseph M. Reardon
Vice President and Treasurer
(Principal Accounting Officer)
19
Exhibit Index
Exhibit
Number Description
-------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 2.1 of the Registrant's Form 10-SB filed June 15,
2001).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 2.2 of
the Registrant's Form 10-SB filed June 15, 2001).
4.1 Specimen Share of Common Stock (incorporated by reference to Exhibit
4.1 of the Registrant's Form 10-K SB for the year ended December 31,
2001 filed March 22, 2002).
4.2 Amended and Restated Declaration of Trust of 1st Constitution Capital
Trust I dated as of April 10, 2002 among the Registrant, as sponsor,
Wilmington Trust Company, as Delaware and institutional trustee, and
the Administrators named therein (filed herewith).
4.3 Indenture dated as of April 10, 2002 between the Registrant, as
issuer, and Wilmington Trust Company, as trustee, relating to the
Floating Rate Junior Subordinated Debt Securities due 2032 (filed
herewith).
4.4 Guarantee Agreement dated as of April 10, 2002 between the Registrant
and the Wilmington Trust Company, as guarantee trustee (filed
herewith).
10.1 Amended and Restated 1990 Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 6.1 of the Registrant's Form
10-SB filed June 15, 2001).
10.2 1996 Employee Stock Option Plan, as amended (incorporated by
reference to Exhibit 6.2 of the Registrant's Form 10-SB filed June
15, 2001).
10.3 2000 Employee Stock Option Plan (incorporated by reference to Exhibit
6.3 of the Registrant's Form 10-SB filed June 15, 2001).
10.4 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 6.4 of the Registrant's Form 10-SB filed June
15, 2001).
10.5 Employment Agreement between the Company and Robert F. Mangano dated
April 22, 1999 (incorporated by reference to Exhibit 6.5 of the
Registrant's Form 10-SB filed June 15, 2001).