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 June 30, 2004
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 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
(Issuers 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
As of August 2, 2004, there were 1,560,012 shares of the registrants common stock, no par value, outstanding.
FORM 10-Q
Page
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PART I. |
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Item 1. |
1 | |||
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 |
1 | |||
2 | ||||
3 | ||||
4 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||
Item 3. |
22 | |||
Item 4. |
22 | |||
PART II |
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Item 2. |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
23 | ||
Item 4. |
24 | |||
Item 6. |
25 | |||
26 |
1st Constitution Bancorp and Subsidiaries
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
1
1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended June 30,
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Six months ended June 30,
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2004
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2003
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2004
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2003
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INTEREST INCOME |
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Interest and fees on loans |
$ | 3,172,033 | $ | 2,849,250 | $ | 6,256,631 | $ | 5,601,937 | ||||
Interest on securities |
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Taxable |
787,495 | 600,720 | 1,601,009 | 1,311,125 | ||||||||
Tax-exempt |
83,652 | 82,015 | 167,651 | 142,209 | ||||||||
Interest on Federal funds sold and short-term investments |
646 | 1,931 | 6,857 | 5,573 | ||||||||
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Total interest income |
4,043,826 | 3,533,916 | 8,032,148 | 7,060,844 | ||||||||
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INTEREST EXPENSE |
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Interest on deposits |
760,851 | 815,259 | 1,508,178 | 1,660,349 | ||||||||
Interest on securities sold under agreement to repurchase and other borrowed funds |
245,472 | 235,113 | 469,196 | 464,135 | ||||||||
Interest on redeemable subordinated debentures |
63,454 | 64,438 | 125,637 | 130,923 | ||||||||
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Total interest expense |
1,069,777 | 1,114,810 | 2,103,011 | 2,255,407 | ||||||||
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Net interest income |
2,974,049 | 2,419,106 | 5,929,137 | 4,805,437 | ||||||||
Provision for loan losses |
60,000 | 60,000 | 120,000 | 120,000 | ||||||||
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Net interest income after provision for loan losses |
2,914,049 | 2,359,106 | 5,809,137 | 4,685,437 | ||||||||
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NON-INTEREST INCOME |
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Service charges on deposit accounts |
121,514 | 158,333 | 248,146 | 303,975 | ||||||||
Gain on sale of loans held for sale |
443,477 | 351,446 | 609,322 | 617,152 | ||||||||
Income on bank-owned life insurance |
59,250 | 69,658 | 118,500 | 139,363 | ||||||||
Other income |
70,114 | 78,737 | 133,755 | 133,051 | ||||||||
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Total other income |
694,355 | 658,174 | 1,109,723 | 1,193,541 | ||||||||
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NON-INTEREST EXPENSE |
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Salaries and employee benefits |
1,315,901 | 985,558 | 2,413,175 | 1,944,382 | ||||||||
Occupancy expense |
238,071 | 204,334 | 483,927 | 404,629 | ||||||||
Other operating expenses |
682,120 | 623,924 | 1,362,311 | 1,207,938 | ||||||||
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Total other expense |
2,236,092 | 1,813,816 | 4,259,413 | 3,556,949 | ||||||||
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Income before income taxes |
1,372,312 | 1,203,464 | 2,659,447 | 2,322,029 | ||||||||
Income taxes |
441,611 | 425,449 | 852,939 | 819,145 | ||||||||
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Net income |
$ | 930,701 | $ | 778,015 | $ | 1,806,508 | $ | 1,502,884 | ||||
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NET INCOME PER SHARE |
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Basic |
$ | 0.60 | $ | 0.50 | $ | 1.16 | $ | 0.96 | ||||
Diluted |
$ | 0.57 | $ | 0.48 | $ | 1.10 | $ | 0.92 |
See accompanying notes to consolidated financial statements
2
1st Constitution Bancorp and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
Six months ended June 30,
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2004
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2003
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OPERATING ACTIVITIES: |
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Net income |
$ | 1,806,508 | $ | 1,502,884 | ||||
Adjustments to reconcile net income to net cash provided by operating activities- |
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Provision for loan losses |
120,000 | 120,000 | ||||||
Depreciation and amortization |
157,543 | 164,870 | ||||||
Net amortization on securities |
222,294 | 672,346 | ||||||
Gain on sale of loans held for sale |
(609,322 | ) | (617,152 | ) | ||||
Originations of loans held for sale |
(40,000,337 | ) | (42,893,085 | ) | ||||
Proceeds from sales of loans held for sale |
41,013,235 | 47,195,502 | ||||||
Increase in accrued interest receivable |
(119,669 | ) | (99,182 | ) | ||||
Income on Bank-owned life insurance |
(118,500 | ) | (139,363 | ) | ||||
Increase in other assets |
(195,051 | ) | 127,688 | |||||
Increase (decrease) in accrued interest payable |
35,688 | (191,886 | ) | |||||
Increase in accrued expenses and other liabilities |
41,576 | 112,950 | ||||||
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Net cash provided by operating activities |
2,353,965 | 5,955,572 | ||||||
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INVESTING ACTIVITIES: |
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Purchases of securities - |
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Available for sale |
(28,454,928 | ) | (32,666,261 | ) | ||||
Held to maturity |
0 | (198,102 | ) | |||||
Proceeds from maturities and prepayments of securities - |
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Available for sale |
14,112,721 | 28,579,944 | ||||||
Held to maturity |
227,200 | 735,068 | ||||||
Net increase in loans |
(25,153,364 | ) | (20,142,826 | ) | ||||
Capital expenditures |
(623,963 | ) | (171,456 | ) | ||||
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Net cash used in investing activities |
(39,892,334 | ) | (23,863,633 | ) | ||||
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FINANCING ACTIVITIES: |
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Purchase of treasury stock |
(235,340 | ) | 0 | |||||
Net (decrease) increase in demand, savings and time deposits |
7,645,500 | (6,963,261 | ) | |||||
Net (decrease) increase in securities sold under agreements to repurchase |
11,266 | (289,815 | ) | |||||
Net increase in other borrowings |
23,700,000 | 20,500,000 | ||||||
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Net cash provided by financing activities |
31,121,426 | 13,246,924 | ||||||
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Decrease in cash and cash equivalents |
(6,416,843 | ) | (4,661,137 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
14,702,886 | 9,594,374 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 8,286,043 | $ | 4,933,237 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for - |
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Interest |
$ | 2,067,323 | $ | 2,447,293 | ||||
Income taxes |
$ | 1,161,112 | $ | 896,209 | ||||
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See accompanying notes to consolidated financial statements
3
1st Constitution Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
June 30, 2004 (Unaudited)
(1) Summary of Significant Accounting Policies
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 (the SEC). 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 included in the Companys Form 10-K for the year ended December 31, 2003, filed with the SEC on March 25, 2004.
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 2004.
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. All share and per share amounts have been restated for the effect of a 5% stock dividend declared on December 18, 2003 and paid on January 31, 2004 to shareholders of record on January 15, 2004.
4
The following tables illustrate the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
Three Months Ended June 30, 2004
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Income
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Weighted-
average
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Per share amount |
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Basic EPS |
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Net income available to common stockholders |
$ | 930,701 | 1,561,692 | $ | 0.60 | ||||
Effect of dilutive securities |
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Options and Grants |
| 80,392 | (0.03 | ) | |||||
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Diluted EPS |
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Net income available to common stockholders plus assumed conversion |
$ | 930,701 | 1,642,084 | $ | 0.57 | ||||
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All options have been included in the computation of diluted earnings per share.
Three Months Ended June 30, 2003
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Income
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Weighted-
average
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Per share Amount |
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Basic EPS |
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Net income available to common stockholders |
$ | 778,015 | 1,563,426 | $ | 0.50 | ||||
Effect of dilutive securities |
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Options and Grants |
| 70,379 | (0.02 | ) | |||||
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Diluted EPS |
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Net income available to common stockholders plus assumed conversion |
$ | 778,015 | 1,633,805 | $ | 0.48 | ||||
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All options have been included in the computation of diluted earnings per share.
Six Months Ended June 30, 2004
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Income
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Weighted-
average
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Per share amount |
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Basic EPS |
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Net income available to common stockholders |
$ | 1,806,508 | 1,563,285 | $ | 1.16 | ||||
Effect of dilutive securities |
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Options and Grants |
| 80,880 | (0.06 | ) | |||||
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Diluted EPS |
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Net income available to common stockholders plus assumed conversion |
$ | 1,806,508 | 1,644,165 | $ | 1.10 | ||||
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All options have been included in the computation of diluted earnings per share.
5
Six Months Ended June 30, 2003
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Income
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Weighted-
average
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Per share Amount |
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Basic EPS |
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Net income available to common stockholders |
$ | 1,502,884 | 1,557,318 | $ | 0.96 | ||||
Effect of dilutive securities |
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Options and Grants |
| 77,662 | (0.04 | ) | |||||
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Diluted EPS |
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Net income available to common stockholders plus assumed conversion |
$ | 1,502,884 | 1,634,980 | $ | 0.92 | ||||
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All options have been included in the computation of diluted earnings per share.
Stock-Based Compensation
Stock-based compensation is accounted for under the intrinsic value based method as prescribed by Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Included below are the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transaction and Disclosure which assumes the fair value based method of accounting had been adopted.
Three months ended June 30,
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2004
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2003
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Net income - |
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As reported |
$ | 930,701 | $ | 778,015 | ||||
Deduct: Stock-based employee compensation determined under fair value based method for stock options, net of related tax effects |
(6,357 | ) | (4,387 | ) | ||||
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Pro forma |
$ | 924,344 | $ | 773,628 | ||||
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Net income per share - |
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As reported - |
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Basic |
$ | 0.60 | $ | 0.50 | ||||
Diluted |
$ | 0.57 | $ | 0.48 | ||||
Pro forma - |
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Basic |
$ | 0.59 | $ | 0.50 | ||||
Diluted |
$ | 0.56 | $ | 0.48 |
6
Six months ended June 30,
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2004
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2003
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Net income - |
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As reported |
$ | 1,806,508 | $ | 1,502,884 | ||||
Deduct: Stock-based employee compensation determined under fair value based method for stock options, net of related tax effects |
(12,714 | ) | (8,774 | ) | ||||
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Pro forma |
$ | 1,793,794 | $ | 1,494,110 | ||||
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Net income per share - |
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As reported - |
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Basic |
$ | 1.16 | $ | 0.96 | ||||
Diluted |
$ | 1.10 | $ | 0.92 | ||||
Pro forma - |
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Basic |
$ | 1.15 | $ | 0.96 | ||||
Diluted |
$ | 1.09 | $ | 0.92 |
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating this proposed statement.
Trust Preferred Securities
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entitys activities, or are not exposed to the entitys losses or entitled to its residual returns (variable interest entities). Variable interest entities within the scope of FIN 46 would be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entitys expected losses, receives a majority of its expected returns, or both.
Management has determined that 1 st Constitution Capital Trust I (the Trust) qualifies as a variable interest entity under FIN 46. The Trust issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trust holds, as its sole asset, subordinated debentures issued by the Company in 2002. Prior to December 31, 2003, the Trust was included in the Companys consolidated balance sheet and statements of income. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which must be applied to certain variable interest entities, including the Trust, by March 31, 2004. The Company adopted the provisions under FIN 46 and accordingly deconsolidated the Trust as of December 31, 2003.
7
In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier I capital, but with stricter quantitative limits. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier I capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier I capital. However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier I capital for regulatory capital purposes.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the operating results and financial condition at June 30, 2004 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 and six month periods ended June 30, 2004 are not necessarily indicative of results to be attained for any other period.
This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Companys Form 10-K (Managements Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2003, as filed with the SEC on March 25, 2004.
General
Throughout the following sections, the Company refers to 1 st Constitution Bancorp and its wholly owned subsidiaries, 1 st Constitution Bank and 1 st Constitution Capital Trust I, the Bank refers to 1 st Constitution Bank, and the Trust refers to 1 st Constitution Capital Trust I. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Companys financial condition, changes in financial condition, and results of operations.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Bank is a wholly-owned subsidiary of the Company. Other than its investment in the Bank, the Company currently conducts no other significant business activities.
The Bank operates nine branches, and has two subsidiaries, 1 st Constitution Investment Company of Delaware, Inc., which manages an investment portfolio, and FCB Assets Holdings, Inc., which is used by the Bank to manage and dispose of repossessed real estate.
The Trust, a subsidiary of the Company, was created to issue trust preferred securities to assist the Company to raise additional regulatory capital.
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
8
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, expected cost savings not being realized or not being realized within the expected time frame; income or revenues being lower than expected or operating costs higher; competitive pressures in the banking or financial services industries increasing significantly; business disruption related to program implementation or methodologies; weakening of general economic conditions nationally or in New Jersey; changes in legal and regulatory barriers and structures; and unanticipated occurrences delaying planned programs or initiatives or increasing their costs or decreasing their benefits, 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. These forward-looking statements speak only as of the date of this document.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 and June 30, 2003
Summary
The Company realized net income of $930,701 for the three months ended June 30, 2004, an increase of 19.6% from the $778,015 reported for the three months ended June 30, 2003. Diluted net income per share was $0.57 for the three months ended June 30, 2004 compared to $0.48 per diluted share for the three months ended June 30, 2003.
Key performance ratios continued to improve for 2004. Return on average assets and return on average equity were 1.23% and 15.55% for the three months ended June 30, 2004 compared to 1.18% and 14.40%, respectively, for the three months ended June 30, 2003.
The Companys net interest income for the three months ended June 30, 2004 was $2,974,049, an increase of 22.9% from the $2,419,106 reported for June 30, 2003. The net interest margin for the three months ended June 30, 2004 was 4.21% compared to 3.97% reported for the three months ended June 30, 2003. During 2003, the Company was confronted with continuing net interest margin pressures due to the very low interest rate environment, as well as elevated levels of loan prepayments and accelerated amortization of premiums on mortgage-backed investment securities. During the second quarter of 2004, a rising interest rate environment evolved resulting in a lesser level of loan prepayments and amortization expense decreasing to $103,375 for the three months ended June 30, 2004 versus $335,657 for the three months ended June 30, 2003.
Non-interest expense increased by $422,276, or 23.3%, to $2,236,092 for the three months ended June 30, 2004 compared to $1,813,816 for the three months ended June 30, 2003. During the three months ended June 30, 2004, the Company opened two new branch offices, one in West Windsor, New Jersey and one in Jamesburg, New Jersey. As a result, each component of non-interest expense in the three months ended June 30, 2004 was impacted by the additional costs involved in staffing and otherwise making these two branches operational. Despite the increase in operating costs for the three months ended June 30, 2004 compared to the three months ended June 30, 2003, the Companys efficiency ratio increased only slightly to 61.0% compared to 60.9% for the three months ended June 30, 2003.
9
Earnings Analysis
Interest Income
Interest income for the three months ended June 30, 2004 was $4,043,826, increasing by 14.4% from the $3,533,916 reported in the three months ended June 30, 2003. This is primarily attributable to the rising interest rate environment that evolved during the second quarter of 2004. For the three months ended June 30, 2004, average interest earning assets increased $39,575,083 or 15.9%, to $288,261,204 compared to $248,686,121 for the three months ended June 30, 2003. The increase in interest income resulting from increases in earning asset volume was modestly offset by a decrease in the average yield earned on these assets. For the three months ended June 30, 2004, the average yield on earning assets decreased 7 basis points to 5.69% from 5.76% for the same period last year.
Interest Expense
Interest expense for the three months ended June 30, 2004 was $1,069,777, a decrease of $45,033 from $1,114,810 reported for the three months ended June 30, 2003. Total average interest bearing liabilities increased by $30,138,616 to $230,400,301 for the three months ended June 30, 2004 from $200,261,685 for the three months ended June 30, 2003. The average cost of interest bearing liabilities decreased 46 basis points to 1.87% for the three months ended June 30, 2004 from 2.33% for the three months ended June 30, 2003, primarily as a result of a decrease in rates paid on deposits and short-term borrowed funds.
Net Interest Income
The net effect of the changes in interest income and interest expense for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 was an increase of $554,943, or 22.9%, in net interest income. The net interest margin, on a fully taxable equivalent basis, increased 24 basis points to 4.21% for the three months ended June 30, 2004 from 3.97% for the three months ended June 30, 2003. The increase in the net interest margin was primarily the result of interest earning assets repricing faster than interest bearing liabilities in the rising rate environment that evolved during the second quarter of 2004, combined with a lower level of net amortization of premiums on mortgage-backed investment securities.
Provision for Loan Losses
For each of the three month periods ended June 30, 2004 and June 30, 2003, the provision for loan losses was $60,000. The comparable provisions were the result of a stable loan portfolio combined with consistent levels of non-performing loans. The amount of the loan loss provisions and the level of the allowance for loan losses are critical accounting policies of the Company and are based upon a number of factors including managements 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 economic conditions.
10
Non-Interest Income
Total non-interest income increased $36,181, or 5.5%, to $694,355 for the three months ended June 30, 2004 from $658,174 for the three months ended June 30, 2003. The increase was due primarily to increases of $92,031 in gains on sale of loans held for sale. The declining interest rate environment that existed in 2003 and the first quarter of 2004 greatly fueled the volume of mortgage loan originations and refinancing and subsequent secondary market mortgage loan sales.
Non-Interest Expense
Non-interest expense increased $422,276, or 23.3%, to $2,236,092 for the three months ended June 30, 2004, from $1,813,816 for the three months ended June 30, 2003. Salaries and employee benefits increased $330,343 for the three months ended June 30, 2004 compared to the three months ended June 30, 2003, primarily due to (a) increased branch staffing levels as a result of the opening of two de novo branches during the second quarter of 2004 plus (b) normal employee salary increases. Occupancy expense increased $33,737 and other expenses increased $58,196, primarily as a result of costs related to making these two new branches operational.
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 Companys efficiency ratio for the quarter ended June 30, 2004 was 61.0% compared to 60.9% for the quarter ended June 30, 2003.
Six Months Ended June 30, 2004 and June 30, 2003
Summary
The Company realized net income of $1,806,508 for the six months ended June 30, 2004, an increase of $303,624, or 20.2%, over the $1,502,884 realized for the six months ended June 30, 2003. Net income per diluted share was $1.10 for the six months ended June 30, 2004 compared to $0.92 per diluted share for the six months ended June 30, 2003.
Key performance ratios continued to improve during the six months ended June 30, 2004. Return on average assets and return on average equity were 1.22% and 15.23% for the six months ended June 30, 2004 compared to 1.15% and 14.21%, respectively, for the six months ended June 30, 2003.
The Companys net interest income for the six months ended June 30, 2004 was $5,929,137, an increase of 23.4% from the $4,805,437 reported for the six months ended June 30, 2003. The net interest margin for the six months ended June 30, 2004 was 4.28% compared to 3.97% reported for the six months ended June 30, 2003. During the 12 months ended December 31, 2003, the Company was confronted with continuing net interest margin pressures due to the very low interest rate environment as well as elevated levels of loan prepayments and accelerated amortization of premiums on mortgage-backed securities. During the six months ended June 30, 2004, a rising interest rate environment evolved resulting in a lesser level of loan prepayments and amortization expense decreasing to $222,294 from the six months ended June 30, 2004 versus the $672,346 reported for the six months ended June 30, 2003.
11
Non-interest expense increased by $702,464, or 19.7%, to $4,259,413 for the six months ended June 30, 2003. During the six months ended June 30, 2004, the Company opened a loan production office in Fort Lee, New Jersey, as well as two new branch offices in West Windsor, New Jersey and Jamesburg, New Jersey. As a result, each component of non-interest expense in the six months ended June 30, 2004 was impacted by the additional costs involved in staffing and otherwise making these offices operational. Despite the increase in operating costs for the six months ended June 30, 2004 compared to the six months ended June 30, 2003, the Companys efficiency ratio decreased to 60.5% for the six months ended June 30, 2004 compared to 61.1% for the six months ended June 30, 2003.
Earnings Analysis
Interest Income
For six months ended June 30, 2004, total interest income was $8,032,148, an increase of $971,304, or 13.8%, compared to total interest income of $7,060,844 for the six
months ended June 30, 2003. The following table sets forth the Companys consolidated average balances of assets, liabilities and shareholders equity as well as interest income and expense on related items, and the Companys average
Average Balance Sheets with Resultant Interest and Rates
(yields on a tax-equivalent basis)
Six months ended June 30, 2004
|
Six months ended June 30, 2003
|
|||||||||||||||||||
Average
Balance |
Interest
|
Average
Rate |
Average
Balance |
Interest
|
Average
Rate |
|||||||||||||||
Assets: |
||||||||||||||||||||
Federal Funds Sold/Short-Term Investments |
$ | 1,470,637 | $ | 6,857 | 0.94 | % | $ | 946,222 | $ | 5,573 | 1.19 | % | ||||||||
Securities: |
||||||||||||||||||||
Collateralized Mortgage Obligations/ Mortgage Backed Securities |
86,413,399 | 1,601,009 | 3.71 | % | 76,394,037 | 1,311,125 | 3.43 | % | ||||||||||||
States and Political Subdivisions |
8,798,030 | 248,124 | 5.64 | % | 7,169,731 | 210,470 | 5.87 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
95,211,429 | 1,849,133 | 3.88 | % | 83,563,768 | 1,521,595 | 3.64 | % | ||||||||||||
Loan Portfolio: |
||||||||||||||||||||
Commercial |
27,476,059 | 1,065,942 | 7.78 | % | 40,841,427 | 1,438,900 | 7.10 | % | ||||||||||||
Installment |
4,018,497 | 160,307 | 8.00 | % | 10,469,031 | 410,064 | 7.90 | % | ||||||||||||
Commercial Mortgages and Construction Wholesale |
116,413,575 | 3,453,538 | 5.95 | % | 82,893,684 | 2,585,949 | 6.29 | % | ||||||||||||
Residential Mortgages and Construction Retail |
26,517,639 | 611,300 | 4.62 | % | 19,412,960 | 676,295 | 7.03 | % | ||||||||||||
All Other Loans |
10,662,621 | 965,545 | 8.90 | % | 9,162,220 | 490,729 | 10.90 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
185,088,391 | 6,256,632 | 6.78 | % | 162,779,322 | 5,601,937 | 6.94 | % | ||||||||||||
Total Interest-Earning Assets |
281,770,457 | 8,112,622 | 5.77 | % | 247,289,312 | 7,129,075 | 5.81 | % | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for Loan Losses |
(1,855,314 | ) | (1,736,675 | ) | ||||||||||||||||
Cash and Due From Bank |
7,243,985 | 8,682,896 | ||||||||||||||||||
Other Assets |
10,363,623 | 9,189,167 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total Assets |
$ | 297,522,751 | $ | 263,424,700 | ||||||||||||||||
Interest-Bearing Liabilities: |
||||||||||||||||||||
Money Market and NOW Accounts |
$ | 84,866,100 | $ | 383,258 | 0.91 | % | $ | 73,706,913 | $ | 385,379 | 1.05 | % | ||||||||
Savings Accounts |
26,959,284 | 69,622 | 0.52 | % | 16,902,082 | 83,886 | 1.00 | % | ||||||||||||
Certificates of Deposit |
73,205,894 | 923,469 | 2.53 | % | 61,416,961 | 919,895 | 3.02 | % | ||||||||||||
Certificates of Deposit of $100,000 and Over |
10,760,904 | 131,829 | 2.46 | % | 20,042,932 | 271,189 | 2.73 | % | ||||||||||||
Federal Funds Purchased/Other Borrowed Funds |
23,627,392 | 469,197 | 3.98 | % | 22,339,542 | 464,135 | 4.19 | % | ||||||||||||
Redeemable Subordinated Debentures |
5,155,000 | 125,637 | 5.03 | % | 5,155,000 | 130,923 | 5.24 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Interest-Bearing Liabilities |
224,594,574 | 2,103,012 | 1.88 | % | 199,563,430 | 2,255,407 | 2.28 | % | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Interest Spread |
3.89 | % | 3.53 | % | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Demand Deposits |
46,517,113 | 39,629,102 | ||||||||||||||||||
Other Liabilities |
2,433,112 | 2,904,411 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total Liabilities |
273,544,799 | 242,096,943 | ||||||||||||||||||
Shareholders Equity |
23,977,952 | 21,327,757 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total Liabilities and Shareholders Equity |
297,522,751 | 263,424,700 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Interest Margin |
$ | 6,009,610 | 4.28 | % | $ | 4,873,668 | 3.97 | % | ||||||||||||
|
|
|
|
|
|
|
|
12
The current year increase in interest income resulted from higher average balances in the securities and loan portfolios which were modestly offset by a lower average yield earned on the loan portfolio. In addition, net amortization of premiums on mortgage-backed investment securities decreased to $222,294 for the six months ended June 30, 2004 compared to $672,346 for the six months ended June 30, 2003. Average loans increased $22,309,069, or 13.7%, to $185,088,391 for the six months ended June 30, 2004 from $162,779,322 for the six months ended June 30, 2003, while the yield on the portfolio decreased 16 basis points to 6.78% for the six months ended June 30, 2004 from 6.94% for the six months ended June 30, 2003. The lower loan yield reflected the lower interest rate environment that existed throughout 2003 and continued into the first quarter of 2004.
Average securities increased $11,647,661, or 13.9%, from $83,563,768 for the six months ended June 30, 2003 to $95,211,429 for the six months ended June 30, 2004, while the yield on the securities portfolio increased 24 basis points to 2.28% for the six months ended June 30, 2004 from 3.64% for the six months ended June 30, 2003.
Overall, the yield on the Companys total interest-earning assets decreased 4 basis points to 5.77% for the six months ended June 30, 2004 from 5.81% for the six months ended June 30, 2003.
Interest Expense
Total interest expense for the six months ended June 30, 2004 was $2,103,011, a decrease of $152,396, or 6.8%, compared to $2,255,407 for the six months ended June 30, 2003. The decrease in interest expense for the current period resulted primarily from the impact of higher levels of interest-bearing liabilities priced at a significantly lower market interest rate level. The average rate paid on interest bearing liabilities for the six months ended June 30, 2004 decreased 40 basis points to 1.88% from 2.28% for the six months ended June 30, 2003.
Net Interest Income
The Companys net interest income for the six months ended June 30, 2004 was $5,929,137, an increase of $1,123,700, or 23.4%, compared to $4,805,437 for the six months ended June 30, 2003.
13
For the six months ended June 30, 2004, interest income increased by $971,304 compared to the six months ended June 30, 2003, while interest expense decreased by $152,396 for the six months ended June 30, 2004 compared to the six months ended June 30, 2003.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest-earning assets, was 4.28% for the six months ended June 30, 2004 compared to 3.97% for the six months ended June 30, 2003. The principal factor causing the increase in the net interest margin was the lower interest rate environment that existed throughout 2003 and continued into early 2004 combined with a lower level of net amortization of premiums on mortgage-backed investment securities.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 2004 and 2003 was $120,000. The comparable provisions were the result of a stable loan portfolio combined with consistent levels of non-performing loans.
Non-Interest Income
Total non-interest income for the six months ended June 30, 2004 was $1,109,723, a decrease of $83,818, or 7.0%, from non-interest income of $1,193,541 for the six months ended June 30, 2003.
Gain on sale of loans held for sale represents the largest single source on non-interest income. Gain on sale of loans held for sale for the six months ended June 30, 2004 was $609,322 compared to $617,152 for the six months ended June 30, 2003. The declining interest rate environment that existed in 2003 through the first quarter of 2004 greatly fueled the volume of mortgage loan originations and refinancing and subsequent secondary market mortgage loan sales.
Service charges on deposit accounts were $248,146 for the six months ended June 30, 2004 compared to $303,975 for the six months ended June 30, 2003. Service charge income decreased in 2004 principally due to decreases in income from overdraft fees and wire transfer service fees.
The other income component of non-interest income amounted to $133,755 for the six months ended June 30, 2004 compared to $133,051 for the six months ended June 30, 2003. Income from Bank Owned Life Insurance (BOLI) amounted to $118,500 for the six months ended June 30, 2004, compared to $139,363 for the six months ended June 30, 2003. In April 2001, the Company purchased $6.0 million in tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate.
The Company also generates non-interest income from a variety of other fee-based services. Deposit and service fee charges are reviewed and adjusted as needed from time to time by management to reflect current costs incurred by the Bank to offer the products and services amid the Companys competitive market.
14
Non-Interest Expense
Total non-interest expense for the six months ended June 30, 2004 was $4,259,413, an increase of $702,464, or 19.7%, compared to non-interest expense of $3,556,949 for the six months ended June 30, 2003.
The following table presents the major components of non-interest expense for the six months ended June 30, 2004 and 2003.
Non-interest Expenses
Six months ended June 30,
|
||||||
2004
|
2003
|
|||||
Salaries and employee benefits |
$ | 2,413,175 | $ | 1,944,382 | ||
Occupancy expense |
483,927 | 404,629 | ||||
Equipment expense |
226,865 | 228,472 | ||||
Marketing |
132,808 | 121,277 | ||||
Computer services |
288,277 | 241,234 | ||||
Regulatory, professional and other fees |
290,472 | 316,218 | ||||
Office expense |
204,668 | 156,921 | ||||
All other expenses |
219,271 | 143,816 | ||||
|
|
|
|
|||
$ | 4,259,413 | $ | 3,556,949 | |||
|
|
|
|
Salaries and employee benefits increased $468,793 to $2,413,175 for the six months ended June 30, 2004 compared to $1,944,382 for the six months ended June 30, 2003. This increase reflects the increase in staffing levels due to the opening of a loan production office during the first quarter of 2004 and two de novo branches during the second quarter of 2004 plus normal employee salary increases.
The Companys ratio of non-interest expense to average assets was 2.88% for the six months ended June 30, 2004 compared to 2.72% for the six months ended June 30, 2003. The Companys efficiency ratio decreased to 60.5% for the six months ended June 30, 2004 compared to a ratio of 61.1% for the six months ended June 30, 2003.
Financial Condition
June 30, 2004 Compared with December 31, 2003
Total consolidated assets at June 30, 2004 amounted to $325,279,547, an increase of $31,796,373, or 10.8%, compared to $293,483,174 at December 31, 2003. The growth in the Companys asset base was primarily due to increases in the loan and securities portfolios.
The following discussion addresses the major components of the Companys balance sheet.
Cash and Cash Equivalents
Cash and Cash Equivalents at June 30, 2004 totaled $8,286,043 compared to $14,702,886 at December 31, 2003. Cash and cash equivalents at June 30, 2004 consisted of cash and due from banks of $8,264,150 and Federal funds sold/short term investments of $21,893. The corresponding balances at December 31, 2003 were $6,987,850 and $7,715,036, respectively.
15
The balance of cash and cash equivalents at June 30, 2004 decreased primarily due to managements efforts to optimize the use of available cash for funding loan and securities portfolio growth.
Securities
Securities represented 31.7% of total assets at June 30, 2004 and 31.1% at December 31, 2003. Total securities increased $11,908,292, or 13.1%, at June 30, 2004 to $103,099,462 compared to $91,191,170 at December 31, 2003.
Securities available for sale totaled $97,141,433 at June 30, 2004, an increase of $12,141,460, or 13.3% from December 31, 2003. During the six months ended June 30, 2004, $28,454,928 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 $5,958,029 at June 30, 2004, a decrease of $233,168, or 3.8%, from December 31, 2003.
Loans
The loan portfolio, which represents the Companys 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 Companys 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
Loan Portfolio Composition
June 30, 2004
|
December 31, 2003
|
|||||||||||
Component |
Amount
|
% of total |
Amount
|
% of total |
||||||||
Construction loans |
$ | 81,804,207 | 43.3 | % | $ | 56,971,265 | 34.7 | % | ||||
Residential real estate loans |
9,305,084 | 4.9 | % | 8,059,032 | 4.9 | % | ||||||
Commercial and industrial loans |
82,675,113 | 43.7 | % | 83,398,619 | 50.9 | % | ||||||
Loans to individuals |
14,587,682 | 7.7 | % | 13,236,895 | 8.1 | % | ||||||
Lease financing |
131,655 | 0.1 | % | 1,054,198 | 0.6 | % | ||||||
All other loans |
599,929 | 0.3 | % | 1,230,297 | 0.8 | % | ||||||
|
|
|
|
|
|
|
|
|||||
$ | 189,103,670 | 100.0 | % | $ | 163,950,306 | 100.0 | % | |||||
|
|
|
|
|
|
|
|
The loan portfolio increased $25,153,364, or 15.3%, at June 30, 2004 to $189,103,670 from $163,950,306 at December 31, 2003. The ability of the Company to enter into larger loan relationships and managements philosophy of relationship banking are key factors in the Companys strategy for loan growth. Strong competition from both bank and 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 Companys market regions economic environment and real estate market.
16
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 Companys 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 $453,133 at June 30, 2004, compared to
$330,783 at December 31, 2003. As the table demonstrates, despite the amount of non-performing assets at June 30, 2004, loan quality and ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan
Non-Performing Assets and Loans
June 30,
2004 |
December 31,
2003 |
|||||||
Non-Performing loans: |
||||||||
Loans 90 days or more past due and still accruing |
$ | 0 | $ | 0 | ||||
Non-accrual loans |
453,133 | 330,783 | ||||||
|
|
|
|
|
|
|||
Total non-performing loans |
453,133 | 330,783 | ||||||
Other real estate owned |
8,971 | 8,971 | ||||||
|
|
|
|
|
|
|||
Total non-performing assets |
$ | 462,104 | $ | 339,754 | ||||
|
|
|
|
|
|
|||
Non-performing loans to total loans |
0.24 | % | 0.20 | % | ||||
Non-performing assets to total assets |
0.14 | % | 0.12 | % |
The Company had no restructured loans at June 30, 2004 and December 31, 2003. Impaired loans totaled $453,133 at June 30, 2004 and $330,783 at December 31, 2003.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
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. This methodology assigns reserves based upon credit risk ratings for all loans. The reserves are based upon various factors, including historical performance, and the
17
current economic environment. Management continually 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 Companys internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications.
The allowance for loan losses amounted to $1,906,632 at June 30, 2004, an increase of $120,000 from December 31, 2003. The ratio of the allowance for loan losses to total loans was 1.01% at June 30, 2004 and 1.09% at December 31, 2003, respectively. The quality of the loan portfolio remained strong and it is managements 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
June 30, 2004 |
June 30, 2003 |
|||||||
Balance, beginning of period |
$ | 1,786,632 | $ | 1,669,882 | ||||
Provision charged to operating expenses |
120,000 | 120,000 | ||||||
Loans charged off |
0 | (4,894 | ) | |||||
Recoveries |
0 | 0 | ||||||
|
|
|
|
|
|
|||
Net (charge offs) / recoveries |
0 | (4,894 | ) | |||||
|
|
|
|
|
|
|||
Balance, end of period |
$ | 1,906,632 | $ | 1,784,988 | ||||
|
|
|
|
|
|
|||
Loans: |
||||||||
At period end |
$ | 189,103,670 | $ | 171,187,668 | ||||
Average during the period |
185,088,391 | 162,779,322 | ||||||
Net charge offs to average loans outstanding |
0.00 | % | 0.00 | % | ||||
Allowance for loan losses to: |
||||||||
Total loans at period end |
1.01 | % | 1.04 | % | ||||
Non-performing loans |
420.77 | % | 245.18 | % |
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 offers a variety of products designed to attract and retain customers, with the Companys primary focus being on building and expanding long-term relationships.
Total deposits increased $7,645,500, or 3.1%, to $252,999,224 at June 30, 2004 from $245,353,724 at December 31, 2003. This increase in total deposits was the result of a $4,891,296 increase in non-interest bearing deposits to $47,552,728, and a $2,754,204 increase in interest bearing deposits to $205,446,496.
Other Borrowings
Other Borrowings are mainly comprised of fixed rate convertible advances from the Federal Home Loan Bank (FHLB) and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. FHLB advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans. The balance of other borrowings at June 30, 2004 consisted of fixed rate term FHLB borrowings of $24,600,000 and overnight funds purchased of $14,600,000. The balance of other borrowings at December 31, 2003 consisted of FHLB borrowings of $15,500,000.
18
Trust Preferred Securities
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entitys activities, or are not exposed to the entitys losses or entitled to its residual returns (variable interest entities). Variable interest entities within the scope of FIN 46 would be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entitys expected losses, receives a majority of its expected returns, or both.
Management has determined that the Trust qualifies as a variable interest entity under FIN 46. The Trust issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trust holds, as its sole asset, subordinated debentures issued by the Company in 2002. Prior to December 31, 2003, the Trust was included in the Companys consolidated balance sheet and statements of income. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which must be applied to certain variable interest entities, including the Trust, by March 31, 2004. The Company adopted the provisions under FIN 46 and accordingly, deconsolidated the Trust as of December 31, 2003.
In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier I capital, but with stricter quantitative limits. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier I capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier I capital. However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier I capital for regulatory capital purposes.
Shareholders Equity And Dividends
Shareholders equity at June 30, 2004 totaled $23,963,036, an increase of $377,780, or 1.6%, from $23,585,256 at December 31, 2003. Book value per common share rose to $15.36 at June 30, 2004 from $15.07 at December 31, 2003.
The increase in shareholders equity and book value per share resulted primarily from net income of $1,806,508 less the effect of stock buybacks and the increase in unrealized holding losses on securities.
19
The Companys stock is listed for trading on the Nasdaq National Market System, under the symbol FCCY.
In 2000, the Board of Directors authorized a stock repurchase program that allows for the repurchase of a limited number of the Companys shares at managements discretion on the open market. The Company undertook this repurchase program in order to increase shareholder value. A table disclosing repurchases of Company shares made during the second quarter ended June 30, 2004 is set forth under Part II, Item 2 of this report, Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities .
The table below presents the actual capital amounts and ratios of the Company for the periods
Capital Ratios
Amount
|
Ratio
|
|||||
As of June 30, 2004 - |
||||||
Total capital to risk weighted assets |
$ | 31,928,332 | 14.02 | % | ||
Tier 1 capital to risk weighted assets |
30,021,700 | 13.18 | % | |||
Tier 1 capital to average assets |
30,021,700 | 10.09 | % | |||
As of December 31, 2003 - |
||||||
Total capital to risk weighted assets |
$ | 30,221,727 | 14.94 | % | ||
Tier 1 capital to risk weighted assets |
28,435,095 | 14.06 | % | |||
Tier 1 capital to average assets |
28,435,095 | 9.74 | % |
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 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 June 30, 2004, the ratios of the Company exceeded the ratios required to be considered well capitalized. It is managements 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 June 30, 2004, 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 Companys 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.
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The Company has established a borrowing relationship with the FHLB which further supports and enhances liquidity.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At June 30, 2004, the balance of cash and cash equivalents was $8,286,043.
Net cash provided by operating activities totaled $2,353,965 in the six months ended June 30, 2004 compared to $5,955,572 in the six months ended June 30, 2003. The primary sources of funds are net income from operations adjusted for provision for loan losses, depreciation expenses, and net proceeds from sales of loans held for sale.
Net cash used in investing activities totaled $39,892,334 in the six months ended June 30, 2004 compared to $23,863,633 provided by investing activities in the six months ended June 30, 2003. The current period amount was the result of a higher volume of securities purchases and loan originations for the six months ended June 30, 2004.
Net cash provided by financing activities amounted to $31,121,426 in the six months ended June 30, 2004 compared to $13,246,924 provided by financing activities in the six months ended June 30, 2003. The amount for the six months ended June 30, 2004 resulted primarily from a higher level in FHLB borrowings combined with an increase in the level of deposits during this period compared to the six months ended June 30, 2003.
The securities portfolio is also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. During the six months ended June 30, 2004, maturities and prepayments of investment securities totaled $14,339,921. Another source of liquidity is the loan portfolio, which provides a steady flow of payments and maturities.
Interest Rate Sensitivity Analysis
The largest component of the Companys total income is net interest income, and the majority of the Companys 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 Companys spread by attracting lower-costing retail deposits.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 June 30, 2004 and December 31, 2003, the Companys 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.
Market Risk Analysis
Change in Rates |
June 30, 2004
|
December 31, 2003
|
||||||||||||||||||||
Flat
|
-200bp
|
+200bp
|
Flat
|
-200bp
|
+200bp
|
|||||||||||||||||
Economic Value of Portfolio Equity |
$ | 32,336,000 | $ | 30,785,000 | $ | 28,909,000 | $ | 30,507,000 | $ | 27,599,000 | $ | 26,218,000 | ||||||||||
Change |
(1,551,000 | ) | (3,427,000 | ) | (2,907,000 | ) | (4,288,000 | ) | ||||||||||||||
Change as a % of assets |
(0.48 | )% | (1.06 | )% | (0.99 | )% | (1.46 | )% |
Item 4. Controls and Procedures.
The Companys Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Companys management, have evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officers have concluded that the Companys disclosure controls and procedures are effective.
The Companys Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
Issuer Purchases of Equity Securities
On March 12, 2001, the Board of Directors authorized a stock repurchase program that allows for the repurchase of a limited number of the Companys shares at
managements discretion on the open market. The Company undertook this repurchase program in an effort to increase shareholder value. The following table provides common stock repurchases made by or on behalf of the Company during the three
Issuer Purchases of Equity Securities (1)
Period |
Total
Number of Shares Purchased |
Average
Price Paid Per Share |
Total Number of
Shares Purchased As Part of Publicly Announced Plan or Program |
Maximum
Number of Shares That May Yet be Purchased Under the Plan or Program |
|||||||
Beginning |
Ending |
||||||||||
April 1, 2004 |
April 30, 2004 | 2,500 | $ | 31.95 | 2,500 | 52,634 | |||||
May 1, 2004 |
May 31, 2004 | 500 | $ | 32.78 | 500 | 52,134 | |||||
June 1, 2004 |
June 30, 2004 | 2,200 | $ | 32.05 | 2,200 | 49,934 | |||||
|
|
|
|
|
|||||||
Total | 5,200 | $ | 32.07 | 5,200 | 49,934 | ||||||
|
|
|
|
|
(1) | The stock repurchase program covers a maximum of 66,805 shares of common stock of the Company, representing 5% of the common stock of the Company on December 31, 2000, and was announced on March 12, 2001. Unless terminated earlier by resolution of the Board of Directors, the stock repurchase program will expire when the Company has repurchased all shares authorized for repurchase under the program. |
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Item 4. Submission of Matters to a Vote of Securities Holders.
The Companys Annual Meeting of Shareholders (the Annual Meeting) was held on May 20, 2004.
There were present at the Annual Meeting in person or by proxy shareholders holding an aggregate of 1,338,747 shares of common stock of a total number of 1,565,103 shares of common stock issued, outstanding and entitled to vote at the Annual Meeting.
At the Annual Meeting, (i) William M. Rue was re-elected as a Class II director of the Company, with 1,336,607 shares votes cast for and 2,140 shares withheld, (ii) Frank E. Walsh, III was re-elected as a Class II director of the Company, with 1,333,929 shares votes cast for and 4,818 shares withheld, and (iii) David C. Reed was elected as a Class I director of the Company, with 1,336,854 shares votes cast for and 1,893 shares withheld. There were no broker non-votes. Directors whose term of office continued following the meeting were Robert F. Mangano, Edward D. Knapp, and Charles Crow, III.
A vote of the shareholders was taken at the Annual Meeting on the proposal to approve and ratify the appointment of Grant Thornton LLP as the Companys independent auditor for the year ending December 31, 2004. The proposal was approved by the shareholders, with 1,335,056 shares voting in favor of the proposal, 3,114 shares voting against the proposal, and 577 shares abstaining. There were no broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K.
(a) | Exhibits |
3(i) | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(i) to the Companys Form 10-K filed with the SEC on March 25, 2004) | |
3(ii) | Bylaws of the Company (incorporated by reference to Exhibit 3(ii) to the Companys Form 10-QSB filed with the SEC on May 14, 2003) | |
10.12 * | Amendment No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan, effective January 1, 2004 | |
10.13 * | Change of Control Agreement, effective as of April 1, 2004, by and between the Company and Joseph M. Reardon | |
31.1 * | Certification of Robert F. Mangano, Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) | |
31.2 * | Certification of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a) | |
32 * | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief Executive Officer of the Company, and Joseph M. Reardon, Chief Financial Officer of the Company |
* | Filed herewith |
(b) | Reports on Form 8-K |
On April 5, 2004, the Company filed with the Commission a Form 8-K reporting a change in its certifying accountants, pursuant to Item 4 of Form 8-K.
On April 19, 2004, the Company furnished the Commission with information regarding earnings and other financial results for the quarter ended March 31, 2004, pursuant to Item 12 of Form 8-K.
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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.
1 ST CONSTITUTION BANCORP |
||||
Date: August 11, 2004 |
By: |
ROBERT F. MANGANO |
||
Robert F. Mangano |
||||
President and Chief Executive Officer |
||||
(Principal Executive Officer) |
||||
Date: August 11, 2004 |
By: |
JOSEPH M. REARDON |
||
Joseph M. Reardon |
||||
Senior Vice President and Treasurer |
||||
(Principal Accounting Officer) |
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EXHIBIT 10.12
AMENDMENT NO. 1 TO THE
1 ST CONSTITUTION BANCORP
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Adopted by the Board of Directors on June 17, 2004)
WHEREAS, 1 st Constitution Bancorp (the Bancorp) adopted the 1 st Constitution Bancorp Supplemental Executive Retirement Plan (the SERP), effective October 1, 2002, for the benefit of certain key executives of the Bancorp and 1 st Constitution Bank (the Bank, and together with the Bancorp, the Company); and
WHEREAS, Section 9.2 of the SERP authorizes the Board of Directors of the Bancorp (the Board) to, in its sole discretion, amend the SERP at any time in whole or in part; provided , that , no such amendment may reduce the vested SERP Benefit (as defined by the SERP) of a Member (as defined by the SERP) without the consent of all the Members; and
WHEREAS, the Board desires to amend the SERP, effective January 1, 2004, to permit the Board to from time to time accelerate vesting of the SERP Benefit payable to any Member under the SERP; and
WHEREAS, such amendment does not reduce the vested SERP Benefit of any Member and therefore may be adopted by the Board without the consent of the Members.
NOW, THEREFORE, be it
RESOLVED, that the Board hereby adopts the following amendment to the SERP effective January 1, 2004:
1. | The following paragraph is added to the end of Article V of the SERP: |
Notwithstanding the foregoing, the Board may, in its sole determination, from time to time accelerate the vesting of the SERP Benefit payable to any Member. In each such an event, a new vesting schedule reflecting such accelerated vesting shall be attached as an exhibit hereto.
ROBERT F. MANGANO VESTING SCHEDULE
The following vesting schedule shall apply to the SERP Benefit granted to Robert F. Mangano:
Robert F. Mangano shall be fully vested in his SERP Benefit as of June 17, 2004.
Exhibit 10.13
1 ST CONSTITUTION BANCORP
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT dated and entered into effective as of the 1 st day of April, 2004, by and between 1 ST Constitution Bancorp., a New Jersey corporation (together with any successor, the Company), and Joseph M. Reardon residing at the address set forth below his or her signature, (the Employee).
WITNESSETH:
WHEREAS , should the Company receive a proposal from, or engage in discussions with, a third person, whether solicited by the Company or unsolicited, concerning a possible business combination with or the acquisition of a substantial portion of voting securities of either party, the Board of Directors of the Company (the Board) has deemed it imperative that it and the Company be able to rely on the Employee to continue to serve in his or her position, and that the Board and the Company be able to receive and rely upon his or her advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Employee might be distracted by the personal uncertainties and risks that such a proposal or discussions might otherwise create; and
WHEREAS , the Company desires to enhance employee morale and its ability to retain existing management; and
WHEREAS , the Company desires to reward the Employee for his or her valuable, dedicated service to the Company should his or her service be terminated under circumstances hereinafter described; and
WHEREAS , the Employee is presently a key employee with whom the Company has been authorized by the Board to enter into this Agreement;
NOW, THEREFORE , to assure the Company of the Employees continued dedication and the availability of his or her advice and counsel in the event of any such proposal, to induce the Employee to remain in the employ of the Company, and to reward the Employee for his or her valuable, dedicated service to the Company should his or her service be terminated under circumstances hereinafter described, and for other good and valuable consideration, the receipt and adequacy whereof each party acknowledges, the Company and the Employee agree as follows:
1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT
(a) This Agreement shall commence on the date hereof and continue in effect until eighteen months after a Change of Control shall occur.
(b) This Agreement is effective and binding on both parties as of the date hereof. Notwithstanding its present effectiveness, the provisions of paragraphs 3 and 4 of this Agreement shall become operative only when, as and if there has been a Change in Control. For purposes of this Agreement, a Change in Control shall be deemed to have occurred if (X) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a person engaging in a transaction of the type described in clause (Z) of this subsection but which does not constitute a change in control under such clause, is or become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Companys then outstanding securities; or (Y) during any period of two consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (X) or (Z) of this Subsection) whose election by the Board or nomination for election by the Company shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (Continuing Members), cease for any reason to constitute a majority thereof; or (Z) the shareholders of the Company approve or, if no shareholder approval is required or obtained, the Company or a subsidiary of the Company completes a merger, consolidation or similar transaction of the Company or such a subsidiary with or into any other corporation, or a binding share exchange involving the Companys securities, other than any such transaction which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 66 2/3% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such transaction, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Companys assets.
2. EMPLOYMENT OF THE EMPLOYEE
Nothing herein shall affect any right which the Employee or the Company may otherwise have to terminate the Employees employment by the Company at any time in any lawful manner, subject always to the Companys providing to the Employee the payments and benefits specified in paragraphs 3 and 4 of this Agreement to the extent hereinbelow provided.
In the event any person commences a tender or exchange offer, circulates a proxy statement to the Companys shareholders or takes other steps designed to effect a Change in Control as defined in paragraph 1 of this Agreement, the Employee agrees that he or she will not voluntarily leave the employ of the Company, and will continue to perform his or her regular
2
duties and to render the services specified in the recitals of this Agreement, until such person has abandoned or terminated its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his or her employment before any such effort to effect a Change in Control has commenced, or after any such effort has been abandoned or terminated without effecting a Change in Control and no such effort is then in process, this Agreement shall lapse and be of no further force or effect.
3. TERMINATION FOLLOWING CHANGE IN CONTROL
(a) If any of the events described in paragraph 1 hereof constituting a Change in Control shall have occurred, the Employee shall be entitled to the benefits provided in paragraph 4 hereof upon the subsequent termination of his or her employment within the applicable period set forth in paragraph 4 hereof following such Change in Control unless such termination is (i) due to the Employees death or Retirement; or (ii) by the Company by reason of the Employees Disability or for Cause; or (iii) by the Employee other than for Good Reason.
(b) If following a Change in Control, the Employees employment is terminated by reason of his or her death or Disability, the Employee shall be entitled to death or long-term disability benefits, as the case may be, from the Company no less favorable than those benefits to which he or she would have been entitled had the death or termination for Disability occurred during the six-month period prior to the Change in Control. If prior to any such termination for Disability, the Employee fails to perform his or her duties as a result of incapacity due to physical or mental illness, he or she shall continue to receive his or her Base Salary less any benefits as may be available to hereunder the Companys disability plans until his or her employment is terminated for Disability.
(c) If the Employees employment shall be terminated by the Company for Cause or by the Employee other than for Good Reason, the Company shall pay to the Employee his or her full Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Employee under this Agreement.
(d) For purposes of this Agreement:
(i) Disability shall mean the Employees incapacity due to physical or mental illness such that the Employee shall have become qualified to receive benefits under the Companys long-term disability plans or any equivalent coverage required to be provided to the Employee pursuant to any other plan or agreement, whichever is applicable.
(ii) Retirement shall mean that the Employee shall have reached age 65 and shall voluntarily retire under the Companys retirement plans applicable to such Employee or any earlier actual voluntary retirement by the Employee from his or her employment with the Company.
3
(iii) Cause shall mean:
(A) the conviction of the Employee for a felony, or the willful commission by the Employee of a criminal or other act that in the judgment of the Board causes or will likely cause substantial economic damage to the Company or substantial injury to its business reputation;
(B) the commission by the Employee of an act of fraud in the performance of such Employees duties on behalf of the Company;
(C) the continuing willful failure of the Employee to perform the duties of such Employee to the Company (other than any such failure resulting from the Employees incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Employee by the compensation committee of the Board; or
(D) the order of a federal or state regulatory agency or a court of competent jurisdiction requiring the termination of the Employees employment.
For purposes of this subparagraph (d)(iii), no act, or failure to act, on the Employees part shall be considered willful unless done, or omitted to be done, by him or her not in good faith and without reasonable belief that his or her action or omission was in the best interests .
(iv) Good Reason shall mean:
(A) The assignment by the Company to the Employee of duties, without the Employees express written consent, which (i) are materially different or require travel significantly more time-consuming or extensive than the Employees duties or business travel obligations immediately prior to the Change in Control, or (ii) result, in either a significant reduction in the Employees authority and responsibility as a senior corporate executive when compared to the highest level of authority and responsibility assigned to the Employee at any time during the six (6) month period prior to the Change in Control, or, (iii) without the Employees express written consent, the removal of the Employee from, or any failure to reappoint or reelect the Employee to, the highest title held since the date six (6) months before the Change in Control, except in connection with a termination of the Employees employment by the Company for Cause, or by reason of the Employees death, Disability or Retirement;
(B) A reduction by the Company of the Employees Base Salary, or the failure to grant increases in the Employees Base Salary on a basis at least substantially comparable to those granted to other employees of comparable title, salary and performance ratings made in good faith;
(C) The relocation of the Companys principal executive offices to a location outside the State of New Jersey, or the Companys requiring the Employee to be based anywhere other than the Companys principal executive offices except for required travel on the Companys business to an extent substantially consistent with the Employees business travel obligations immediately prior to the Change in Control, or in the event of any relocation of the
4
Employee with the Employees express written consent, the failure by the Company to pay (or reimburse the Employee for) all reasonable moving expenses by the Employee relating to a change of principal residence in connection with such relocation and to indemnify the Employee against any loss realized in the sale of the Employees principal residence in connection with any such change of residence, all to the effect that the Employee shall incur no loss upon such sale on an after tax basis;
(D) The failure by the Company to continue to provide the Employee with substantially the same welfare benefits (which for purposes of this Agreement shall mean benefits under all welfare plans as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), and perquisites, including participation on a comparable basis in the Companys stock options plan and other plans in which executives of the Company of comparable title and salary participate and as were provided to the Employee immediately prior to such Change in Control, or with a package of welfare benefits and perquisites, that, though one or more of such benefits or perquisites may vary from those, including participation on a comparable basis in the Companys stock option plan, is substantially comparable in all material respects to such welfare benefits and perquisites, including participation on a comparable basis in the Companys stock option plan taken as a whole; or
(E) The failure of the Company to obtain the express written assumption of and agreement to perform this Agreement by any successor as contemplated in subparagraph 5(d) hereof.
(v) Dispute shall mean (i) in the case of termination of employment of the Employee with the Company or a Subsidiary by the Company for Disability or Cause, that the Employee challenges the existence of Disability or Cause and (ii) in the case of termination of employment of an Employee with the Company by the Employee for Good Reason, that the Company challenges the existence of Good Reason.
(vi) Base Salary shall mean the amount determined by multiplying the Employees highest semi-monthly or other periodic rate of base pay paid to the Employee during the twelve-month period immediately prior to the giving of the Notice of Termination by the number of pay periods per year. The following items are not part of base pay, as used herein: reimbursed expenses, any amount paid on account of overtime or holiday work, payment on account of insurance premiums or other contributions made to other welfare of benefit plans, any year-end or other bonuses, commissions and gifts.
(vii) Affiliate shall have the meaning given such term in Rule 405 under the Securities Act of 1933, as amended.
(e) Any purported termination of employment by the Company by reason of the Employees Disability or for Cause, or by the Employee for Good Reason shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice given by the Employee or the Company, as the case may be, which shall indicate the specific basis for termination and shall set
5
forth in reasonable detail the facts and circumstances claimed to provide a basis for determination of any payments under this Agreement. An Employee shall not be entitled to give a Notice of Termination that the Employee is terminating his or her employment with the Company for Good Reason more than eighteen months following the occurrence of the event alleged to constitute Good Reason.
(f) For purposes of this Agreement, Date of Termination shall mean the date specified in the Notice of Termination, which shall not be more than ninety (90) days after such Notice of Termination is given, as such date may be modified pursuant to the following two sentences. If within thirty (30) days after any Notice of Termination is given, the party who receives such Notice of Termination notifies the other party that a Dispute (as heretofore defined) exists, the Date of Termination shall be the date on which the Dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided that the Date of Termination shall be extended by a notice of Dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such Dispute with reasonable diligence and provided further that pending the resolution of any such Dispute, the Company shall continue to pay the Employee the same Base Salary and to provide the Employee with the same or substantially comparable welfare benefits and perquisites, including participation in the Companys stock option plan, that the Employee was paid and provided immediately prior to the Change in Control. Should a Dispute ultimately be determined in favor of the Company then all sums paid by the Company to the Employee from the date of termination specified in the Notice of Termination until final resolution of the Dispute pursuant to this paragraph shall be repaid promptly by the Employee to the Company, with interest at 70% of the prime rate charged from time to time by Citibank, N.A., New York, New York, all stock options granted to the Employee during such period shall be canceled or returned to the Company, and no service as an employee shall be credited to the Employee for such period for pension purposes. The Employee shall not be obligated to pay back the welfare benefits and perquisites for such period unless the final judgment, order or decree of a court or other body resolving the Dispute determines that the Employee acted in bad faith in giving a notice of Dispute. Should a Dispute ultimately be determined in favor of the Employee, then the Employee shall be entitled to retain all sums paid to the Employee under this subparagraph (f) pending resolution of the Dispute and shall be entitled to receive, in addition, the payments and other benefits provided for in paragraph 4 hereof to the extent not previously paid hereunder.
4. PAYMENTS UPON TERMINATION
If after a Change of Control and within eighteen months after a Change of Control shall occur, the Company shall terminate the Employees employment other than by reason of the Employees death, Disability, Retirement or for Cause or if the Employee shall terminate his or her employment for Good Reason then,
(a) the Company will pay to the Employee as compensation for services rendered, (subject to any applicable payroll or other taxes required to be withheld) commencing on the first day of the month following the month of termination, one-twelfth (1/12) of Base Salary of the Employee payable once monthly until the date which is eighteen months after the Date of Termination determined as if there were no Disputes.
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(b) In the event that any payment or benefit received or to be received by the Employee in connection with a Change in Control or the termination of the Employees employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (collectively with the payments and benefits hereunder, Total Payments) would not be deductible (in whole or part) as a result of section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder (the Code) by the Company, an affiliate or other person making such payment or providing such benefit, the payments and benefits hereunder shall be reduced until no portion of the Total Payments is not deductible, or the payments and benefits hereunder are reduced to zero. At the Companys sole discretion, such reduction may be effected by extending the date the payment would otherwise be due by not more than one year or by decreasing the amount of the payment or benefit otherwise due and payable. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing prior to the date of payment under subsection (a) shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Employee and acceptable to the Companys independent auditors, is not likely to constitute a parachute payment within the meaning of section 280G(b)(2) of the Code, (iii) the payments and benefits hereunder shall be reduced only to the extent necessary so that, in the opinion of the tax counsel referred to in clause (ii), the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety are likely to constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code or are otherwise not likely to be subject to disallowance as deductions; and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Companys independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code.
(c) In the event that any payment or benefit received or to be received by the Employee in connection with a Change in Control or the termination of the Employees employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (collectively with the payments and benefits hereunder, Total Payments) would not be deductible (in whole or part) as a result of Section 162(m) of the Code, or any combination of Section 162(m) and Section 280G of the Code, by the Company, an affiliate or other person making such payment or providing such benefit, the payments and benefits hereunder shall be reduced until no portion of the Total Payments is not deductible, or the payments and benefits hereunder are reduced to zero. At the Companys sole discretion, such reduction may be effected by extending the date the payment would otherwise be due by not more than one year or by decreasing the amount of the payment or benefit otherwise due and payable. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing prior to the date of payment under subsection (a) shall be taken into account, and (ii) the payments and benefits hereunder shall be reduced only to the extent necessary so that, in the opinion of tax
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counsel selected by the Employee and acceptable to the Companys independent auditors, the Total Payments (other than those referred to in clause (i)) in their entirety are likely to constitute performance-based compensation or remuneration payable on a commission basis within the meaning of Section 162(m)(4) of the Code, do not exceed the $1,000,000 limitation of Section 162(m)(1) of the Code, or are otherwise not likely to be subject to disallowance as deductions.
5. GENERAL
(a) The Employee shall retain in confidence any proprietary or other confidential information known to the Employee concerning the Company and its business (including the Companys subsidiaries and their businesses) so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court.
(b) If litigation or other proceedings shall be brought to enforce or interpret any provision contained herein or in connection with any tax audit to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder, the Company shall indemnify the Employee for his or her reasonable attorneys fees and disbursements incurred in connection therewith and pay prejudgment interest on any money judgment obtained by the Employee calculated at Citibank, N.A., New York, prime rate of interest in effect from time to time from the date that payment should have been made under the Agreement; provided that if the Employee initiated the proceedings, the Employee shall not have been found by the court or other fact finder to have acted in bad faith in initiating such litigation or other proceeding, which finding must be final without further rights of appeal.
(c) The Companys obligation to pay the Employee the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Employee or anyone else, except that the Company may delay any payment hereunder or will relieved of any liability for payments hereunder to the Employee, as the case may be, in the event a bank regulatory authority with jurisdiction over the Company advises the Company that it may not make payments to the Employee pursuant to this Agreement in which case the Company shall be relieved of such liability hereunder or must delay making any payments to the Employee in which case such payments will be delayed without interest or other penalty until such time as the Company is advised by the bank regulatory authority that the Company may make such payments. All amounts payable by the Company hereunder shall be paid without notice or demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Agreement in whole or in part. Except as provided in paragraph 3(f) herein, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover for any reason all or any part of such payment from the Employee or any person entitled thereto. The Employee shall not be required to mitigate the amount of any payment or other benefit provided for in this Agreement by seeking other employment or otherwise.
(d) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidated or otherwise) to all or substantially all of the business and/or
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assets of the Company, by written agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
As used in this Agreement Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 5 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.
(e) This Agreement shall inure to the benefit of, and be enforceable by, the Employees personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if he or she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employees devisee, legatee or other designee or, if there be no such designee, to the Employees estate. The rights or obligations of the Employee hereunder shall not be assignable by the Employee, except as provided in this paragraph 5(e).
(f) Nothing in this Agreement shall be deemed to entitle the Employee to continued employment with the Company and the rights of the Company to terminate the employment of the Employee shall continue as fully as though this Agreement was not in effect.
6. NOTICE
For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:
If to the Employee :
Joseph M. Reardon
1 Barbary Lane
Columbus, NJ 08022
If to the Company :
1 st Constitution Bancorp.
2650 Route 130 North
Cranbury, NJ 08512
Attention: Robert F. Mangano
or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
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7. MISCELLANEOUS
No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No assurances or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. However, this Agreement is in addition to, and not in lieu of, any other plan providing for payments to or benefits for the Employee or any agreement now existing, or which hereafter may be entered into, between the Company and the Employee. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey.
8. FINANCING
All amounts due and benefits provided under this Agreement shall constitute general obligations of the Company in accordance with the terms of this Agreement. The Employee shall have only an unsecured right to payment thereof out of the general assets of the Company. Notwithstanding the foregoing, the Company may, by agreement with one or more trustees to be selected by the Company, create a trust on such terms as the Company shall determine to make payments to the Employee in accordance with the terms of this Agreement.
9. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date set forth above.
JOSEPH M. REARDON |
||
Employee Name: |
Joseph M. Reardon |
|
Employee Address: |
1 Barbary Lane |
|
Columbus, NJ 08022 |
1 st Constitution Bancorp. | ||
By |
ROBERT MANGANO |
|
Name: | Robert Mangano | |
Title: | Chief Executive Officer |
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Exhibit 31.1
CERTIFICATIONS
I, Robert F. Mangano, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of 1 st Constitution Bancorp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 11, 2004
ROBERT F. MANGANO |
||
Name: |
Robert F. Mangano |
|
Title: |
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Joseph M. Reardon, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of 1 st Constitution Bancorp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 11, 2004
JOSEPH M. REARDON |
||
Name: |
Joseph M. Reardon |
|
Title: |
Senior Vice President and Treasurer |
Exhibit 32
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of 1 st Constitution Bancorp (the Company) for the fiscal quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof, (the Report), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |