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,
2007
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from _____ to
_____
|
Commission
file Number: |
000-32891
|
|
1ST
CONSTITUTION BANCORP
|
|
|
(Exact
Name of Registrant as Specified in Its Charter)
|
|
New
Jersey
|
|
22-3665653
|
(State
of Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
2650
Route 130, P.O. Box 634, Cranbury, NJ
|
|
08512
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
|
(609)
655-4500
|
|
|
(Issuer’s
Telephone Number, Including Area Code)
|
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
As
of
August 8, 2007, there were 3,744,465 shares of the registrant’s common stock, no
par value, outstanding.
1ST
CONSTITUTION BANCORP
FORM
10-Q
INDEX
|
|
Page |
|
|
|
PART
I. |
FINANCIAL
INFORMATION |
|
|
|
|
Item
1.
|
Financial
Statements |
1 |
|
|
|
|
Consolidated
Balance Sheets
as
of June 30, 2007 (unaudited)
and
December 31, 2006
|
1 |
|
|
|
|
Consolidated
Statements of Income
for
the Three Months and Six Months Ended
June
30, 2007 (unaudited) and June 30, 2006 (unaudited)
|
2 |
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
for
the Six Months Ended
June
30, 2007 (unaudited) and June 30, 2006 (unaudited)
|
3 |
|
|
|
|
Consolidated
Statements of Cash Flows
for
the Six Months Ended
June
30, 2007 (unaudited) and June 30, 2006 (unaudited)
|
4 |
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited) |
5 |
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
|
12
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|
|
|
Item
4.
|
Controls
and Procedures
|
29
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
30
|
|
|
|
Item
6.
|
Exhibits
|
30
|
|
|
|
SIGNATURES |
31 |
|
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
1st
Constitution Bancorp and Subsidiaries
Consolidated
Balance Sheets
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
CASH
AND DUE FROM BANKS
|
|
$ |
9,559,584
|
|
|
$ |
10,336,334
|
|
|
|
|
|
|
|
|
|
|
FEDERAL
FUNDS SOLD / SHORT-TERM INVESTMENTS
|
|
|
20,901
|
|
|
|
25,478
|
|
Total
cash and cash equivalents
|
|
|
9,580,485
|
|
|
|
10,361,812
|
|
INVESTMENT
SECURITIES:
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
82,047,134
|
|
|
|
70,421,328
|
|
Held
to maturity (fair value of $26,041,037 and $19,164,679 in
2007
and
2006, respectively)
|
|
|
26,528,257
|
|
|
|
19,254,476
|
|
Total
investment securities
|
|
|
108,575,391
|
|
|
|
89,675,804
|
|
|
|
|
|
|
|
|
|
|
LOANS
HELD FOR SALE
|
|
|
8,937,522
|
|
|
|
13,608,942
|
|
|
|
|
|
|
|
|
|
|
LOANS
|
|
|
285,576,595
|
|
|
|
265,142,313
|
|
Less-
Allowance for loan losses
|
|
|
(3,310,080 |
) |
|
|
(3,228,360 |
) |
|
|
|
|
|
|
|
|
|
Net
loans
|
|
|
282,266,515
|
|
|
|
261,813,953
|
|
|
|
|
|
|
|
|
|
|
PREMISES
AND EQUIPMENT, net
|
|
|
2,916,754
|
|
|
|
3,033,618
|
|
|
|
|
|
|
|
|
|
|
ACCRUED
INTEREST RECEIVABLE
|
|
|
2,582,561
|
|
|
|
2,235,671
|
|
|
|
|
|
|
|
|
|
|
BANK
- OWNED LIFE INSURANCE
|
|
|
9,357,989
|
|
|
|
9,179,408
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
3,982,204
|
|
|
|
2,668,338
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
428,199,422
|
|
|
$ |
392,677,546
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
59,254,332
|
|
|
$ |
64,305,445
|
|
Interest
bearing
|
|
|
266,696,151
|
|
|
|
248,418,977
|
|
Total
deposits
|
|
|
325,950,483
|
|
|
|
312,724,422
|
|
BORROWINGS
|
|
|
43,000,000
|
|
|
|
17,200,000
|
|
REDEEMABLE SUBORDINATED
DEBENTURES
|
|
|
18,557,000
|
|
|
|
23,712,000
|
|
ACCRUED
INTEREST PAYABLE
|
|
|
1,869,468
|
|
|
|
1,957,574
|
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
|
|
1,430,128
|
|
|
|
1,886,980
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
390,807,079
|
|
|
|
357,480,976
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, no par value; 30,000,000 shares authorized; 3,732,689
shares
issued and 3,742,662 shares outstanding as of June 30, 2007
and
December 31, 2006, respectively
|
|
|
28,935,469
|
|
|
|
28,886,105
|
|
Retained
earnings
|
|
|
10,194,120
|
|
|
|
7,290,916
|
|
Treasury
Stock, shares at cost, 10,171 shares and 198 shares at
June
30, 2007 and December 31, 2006, respectively
|
|
|
(186,969 |
) |
|
|
(3,545 |
) |
Accumulated
other comprehensive (loss)
|
|
|
(1,550,277 |
) |
|
|
(976,906 |
) |
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
37,392,343
|
|
|
|
35,196,570
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
428,199,422
|
|
|
$ |
392,677,546
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
1ST
Constitution
Bancorp and Subsidiaries
|
|
Consolidated
Statements of Income
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
INTEREST
INCOME
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Loans,
including fees
|
|
$ |
6,092,841
|
|
|
$ |
5,822,356
|
|
|
$ |
12,260,566
|
|
|
$ |
10,999,172
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,083,967
|
|
|
|
795,540
|
|
|
|
2,076,294
|
|
|
|
1,601,906
|
|
Tax-exempt
|
|
|
225,791
|
|
|
|
147,052
|
|
|
|
432,359
|
|
|
|
307,843
|
|
Federal
funds sold and short-term investments
|
|
|
42,879
|
|
|
|
24,674
|
|
|
|
65,423
|
|
|
|
33,338
|
|
Total
interest income
|
|
|
7,445,478
|
|
|
|
6,789,622
|
|
|
|
14,834,642
|
|
|
|
12,942,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,435,381
|
|
|
|
1,524,009
|
|
|
|
4,651,466
|
|
|
|
2,874,339
|
|
Securities
sold under agreement to repurchase
and
other borrowed funds
|
|
|
346,073
|
|
|
|
490,796
|
|
|
|
632,412
|
|
|
|
957,133
|
|
Redeemable
subordinated debentures
|
|
|
349,507
|
|
|
|
165,708
|
|
|
|
778,574
|
|
|
|
267,552
|
|
Total
interest expense
|
|
|
3,130,961
|
|
|
|
2,180,513
|
|
|
|
6,062,452
|
|
|
|
4,099,024
|
|
Net
interest income
|
|
|
4,314,517
|
|
|
|
4,609,109
|
|
|
|
8,772,190
|
|
|
|
8,843,235
|
|
Provision
for loan losses
|
|
|
30,000
|
|
|
|
170,000
|
|
|
|
70,000
|
|
|
|
340,000
|
|
Net
interest income after provision for loan losses
|
|
|
4,284,517
|
|
|
|
4,439,109
|
|
|
|
8,702,190
|
|
|
|
8,503,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
175,181
|
|
|
|
167,042
|
|
|
|
325,036
|
|
|
|
353,601
|
|
Gain
on sale of loans
|
|
|
188,741
|
|
|
|
174,930
|
|
|
|
420,518
|
|
|
|
493,619
|
|
Losses
on sales of investment securities, net
|
|
|
0
|
|
|
|
(99,714 |
) |
|
|
0
|
|
|
|
(99,714 |
) |
Income
on bank-owned life insurance
|
|
|
88,233
|
|
|
|
82,934
|
|
|
|
178,581
|
|
|
|
163,534
|
|
Other
income
|
|
|
196,268
|
|
|
|
149,517
|
|
|
|
368,029
|
|
|
|
293,255
|
|
Total
non-interest income
|
|
|
648,423
|
|
|
|
474,709
|
|
|
|
1,292,164
|
|
|
|
1,204,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,637,213
|
|
|
|
1,712,959
|
|
|
|
3,450,012
|
|
|
|
3,397,981
|
|
Occupancy
expense
|
|
|
406,012
|
|
|
|
378,143
|
|
|
|
796,944
|
|
|
|
697,127
|
|
Other
operating expenses
|
|
|
779,101
|
|
|
|
1,017,201
|
|
|
|
1,596,583
|
|
|
|
2,103,223
|
|
Total
non-interest expenses
|
|
|
2,822,326
|
|
|
|
3,108,303
|
|
|
|
5,843,539
|
|
|
|
6,198,331
|
|
Income
before income taxes
|
|
|
2,110,614
|
|
|
|
1,805,515
|
|
|
|
4,150,815
|
|
|
|
3,509,199
|
|
INCOME
TAXES
|
|
|
612,909
|
|
|
|
448,251
|
|
|
|
1,247,610
|
|
|
|
897,177
|
|
Net
income
|
|
$ |
1,497,705
|
|
|
$ |
1,357,264
|
|
|
$ |
2,903,205
|
|
|
$ |
2,612,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.40
|
|
|
$ |
0.37
|
|
|
$ |
0.78
|
|
|
$ |
0.72
|
|
Diluted
|
|
$ |
0.39
|
|
|
$ |
0.36
|
|
|
$ |
0.76
|
|
|
$ |
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
For
the Six Months Ended June 30, 2007 and 2006
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Stock
|
|
|
(Loss)
Income
|
|
|
Equity
|
|
|
BALANCE,
December 31,
2005
|
|
$ |
25,589,320
|
|
|
$ |
5,981,803
|
|
|
$ |
(1,008,998 |
) |
|
$ |
(765,258 |
) |
|
$ |
29,796,867
|
|
|
Exercise
of stock options, net
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of vested shares
under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
benefit
programs
|
|
|
(108,992 |
) |
|
|
|
|
|
|
153,948
|
|
|
|
|
|
|
|
44,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
123R share-based
compensation
|
|
|
46,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,085
|
|
|
Treasury
Stock, shares purchased
at cost
|
|
|
|
|
|
|
|
|
|
|
(35,472 |
) |
|
|
|
|
|
|
(35,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply
FASB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
No. 158 (net of tax benefit of
$257,160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(499,194 |
) |
|
|
(499,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
for
the six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
June 30, 2006
|
|
|
|
|
|
|
2,612,022
|
|
|
|
|
|
|
|
|
|
|
|
2,612,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for sale, net of tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(756,596 |
) |
|
|
(756,596 |
) |
Total
comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,855,426
|
|
BALANCE,
June 30,
2006
|
|
$ |
25,526,413
|
|
|
$ |
8,593,825
|
|
|
$ |
(890,522 |
) |
|
$ |
(2,021,048 |
) |
|
$ |
31,208,668
|
|
|
BALANCE,
December 31,
2006
|
|
$ |
28,886,105
|
|
|
$ |
7,290,916
|
|
|
$ |
(3,545 |
) |
|
$ |
(976,906 |
) |
|
$ |
35,196,570
|
|
Exercise
of stock options, net
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of vested shares
under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
benefit
programs
|
|
|
(13,881 |
) |
|
|
|
|
|
|
45,093
|
|
|
|
|
|
|
|
31,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
123R share-based
compensation
|
|
|
63,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,245
|
|
Treasury
Stock, shares purchased
at cost
|
|
|
|
|
|
|
|
|
|
|
(228,517 |
) |
|
|
|
|
|
|
(228,517 |
) |
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
for
the six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
June 30, 2007
|
|
|
|
|
|
|
2,903,205
|
|
|
|
|
|
|
|
|
|
|
|
2,903,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
of
retirement plan defined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,823
|
|
|
|
36,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for sale, net of tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(610,194 |
) |
|
|
(610,194 |
) |
Total
comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,293,011
|
|
BALANCE,
June 30,
2007
|
|
$ |
28,935,469
|
|
|
$ |
10,194,120
|
|
|
$ |
(186,969 |
) |
|
$ |
(1,550,277 |
) |
|
$ |
37,392,343
|
|
|
See
accompanying notes to
consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
(unaudited)
|
|
|
|
Six
months ended June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,903,205
|
|
|
$ |
2,612,022
|
|
Adjustments
to reconcile net
income
|
|
|
|
|
|
|
|
|
to net cash provided by operating activities-
|
|
|
|
|
|
|
|
|
|
Provision
for loan
losses
|
|
|
70,000
|
|
|
|
340,000
|
|
Depreciation
and
amortization
|
|
|
369,719
|
|
|
|
288,413
|
|
Net amortization
of premiums on
securities
|
|
|
11,907
|
|
|
|
29,515
|
|
Gain on
sales of loans held for
sale
|
|
|
(420,518 |
) |
|
|
(493,619 |
) |
Loss on
sale of securities
available for sale
|
|
|
-
|
|
|
|
99,714
|
|
Originations
of loans held for
sale
|
|
|
(30,603,730 |
) |
|
|
(26,714,241 |
) |
Income on
Bank – owned life
insurance
|
|
|
(178,581 |
) |
|
|
(163,534 |
) |
Proceeds
from sales of loans held
for sale
|
|
|
35,695,668
|
|
|
|
31,014,958
|
|
Increase
in accrued interest
receivable
|
|
|
(346,890 |
) |
|
|
(757,644 |
) |
(Increase)
in other
assets
|
|
|
(115,036 |
) |
|
|
(298,599 |
) |
(Decrease)
increase in accrued
interest payable
|
|
|
(88,106 |
) |
|
|
340,671
|
|
(Decrease)
increase in accrued
expenses and other liabilities
|
|
|
(456,852 |
) |
|
|
1,062,056
|
|
Net cash
provided by operating
activities
|
|
|
6,840,786
|
|
|
|
7,359,712
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of
securities -
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(15,776,240 |
) |
|
|
(6,958,616 |
) |
Held to
maturity
|
|
|
(7,677,917 |
) |
|
|
-
|
|
Proceeds
from
maturities and prepayments of securities -
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
3,226,445
|
|
|
|
7,479,257
|
|
Held to
maturity
|
|
|
337,517
|
|
|
|
4,311,655
|
|
Proceeds
from
sales of securities available for sale
|
|
|
-
|
|
|
|
2,899,385
|
|
Net increase
in loans
|
|
|
(20,422,562 |
) |
|
|
(24,514,687 |
) |
Capital
expenditures
|
|
|
(252,855 |
) |
|
|
(279,000 |
) |
Cash
consideration paid to acquire branch
|
|
|
(730,257 |
) |
|
|
-
|
|
Cash and
cash
equivalents acquired from branch
|
|
|
19,514,239
|
|
|
|
-
|
|
Net cash
used in investing
activities
|
|
|
(21,781,630 |
) |
|
|
(17,062,006 |
) |
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance
of
common stock, net
|
|
|
31,212
|
|
|
|
44,956
|
|
Purchase
of
treasury stock
|
|
|
(228,517 |
) |
|
|
(35,472 |
) |
Net increase
(decrease) in demand, savings and time deposits
|
|
|
(6,288,178 |
) |
|
|
(11,884,098 |
) |
(Repayments)
proceeds from issuance of redeemable
|
|
|
|
|
|
|
|
|
subordinated debentures
|
|
|
(5,155,000 |
) |
|
|
18,557,000
|
|
Net advances
(repayments) in other borrowings
|
|
|
25,800,000
|
|
|
|
(100,000 |
) |
Net cash
provided by financing
activities
|
|
|
14,159,517
|
|
|
|
6,582,386
|
|
|
Increase
(decrease) in cash and
cash equivalents
|
|
|
(781,327 |
) |
|
|
(3,119,908 |
) |
CASH
AND CASH
EQUIVALENTS
|
|
|
|
|
|
|
|
|
AT BEGINNING
OF PERIOD
|
|
|
10,361,812
|
|
|
|
12,137,750
|
|
AT END OF
PERIOD
|
|
$ |
9,580,485
|
|
|
$ |
9,017,842
|
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
|
|
|
|
|
OF CASH
FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid
during the year for
-
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
6,150,558
|
|
|
$ |
3,758,353
|
|
Income
taxes
|
|
|
1,421,600
|
|
|
|
1,352,372
|
|
|
See
accompanying notes to
consolidated financial statements.
|
|
|
|
|
|
|
|
|
1st
Constitution Bancorp and Subsidiaries
Notes
To Consolidated Financial Statements
June
30, 2007 (Unaudited)
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 Company’s Form 10-K
for the year ended December 31, 2006, filed with the SEC on April 2,
2007.
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.
Net
Income Per Common Share
Basic
net
income per common share is calculated by dividing net income by the weighted
average number of shares outstanding during each period.
Diluted
net income per common share is calculated 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 information has been restated for the effect of a 6% stock dividend
declared on December 21, 2006 and paid on January 31, 2007 to shareholders of
record on January 23, 2007.
The
following (unaudited) tables illustrate the reconciliation of the numerators
and
denominators of the basic and diluted earnings per share (EPS)
calculations.
|
|
Three
Months Ended June 30, 2007
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
1,497,705
|
|
|
|
3,734,800
|
|
|
$ |
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
-
|
|
|
|
59,623
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders plus assumed
conversion
|
|
$ |
1,497,705
|
|
|
|
3,794,423
|
|
|
$ |
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
options have been included in the computation of diluted earnings
per
share.
|
|
|
|
Three
Months Ended June 30, 2006
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
Amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
1,357,264
|
|
|
|
3,650,024
|
|
|
$ |
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
-
|
|
|
|
125,093
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders plus assumed
conversion
|
|
$ |
1,357,264
|
|
|
|
3,775,117
|
|
|
$ |
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
options have been included in the computation of diluted earnings
per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2007
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
Amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
2,903,205
|
|
|
|
3,738,709
|
|
|
$ |
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
-
|
|
|
|
60,422
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders plus assumed
conversion
|
|
$ |
2,903,205
|
|
|
|
3,799,131
|
|
|
$ |
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
options have been included in the computation of diluted earnings
per
share.
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
|
Income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
Amount
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
2,612,022
|
|
|
|
3,647,062
|
|
|
$ |
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and Grants
|
|
|
-
|
|
|
|
125,251
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders plus assumed
conversion
|
|
$ |
2,612,022
|
|
|
|
3,772,313
|
|
|
$ |
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
options have been included in the computation of diluted earnings
per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
Compensation
Effective
January 1, 2006, the Company adopted FASB Statement No. 123 (R), “Share-Based
Payment”. Statement 123 (R) requires that compensation cost relating to
share-based payment transactions be recognized in financial statements. The
cost
is measured based on the fair value of the equity or liability instruments
issued.
The
Company adopted Statement 123 (R) using the modified prospective transition
method. Under this method, the Company records compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding as of the beginning of the
period of adoption. The Company measures share-based compensation cost using
the
Black-Scholes option pricing model for stock option grants. The assumptions
used
in the option-pricing model in 2006 were: dividend yield of 0%; expected
volatility of 26.6%; risk-free interest rate of 4.53%; and expected term of
7
years. Although the initial fair value of stock options is not
adjusted after the grant date, changes in the Company’s assumptions may change
the value of, and therefore the expense related to, future stock option
grants. Forfeitures did not affect the calculated expense based upon
historical activities of option grantees.
The
Company issued no stock options during the first six months of 2007 or
2006.
Transactions
under the Company’s stock option plans during the six months ended June 30, 2007
are summarized as follows:
Stock
Options
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2006
|
|
|
132,851
|
|
|
$ |
10.58
|
|
|
|
|
|
|
|
Options
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(852 |
) |
|
|
3.30
|
|
|
|
|
|
|
|
Options
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
131,999
|
|
|
$ |
10.58
|
|
|
|
5.6
|
|
|
$ |
915,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2007
|
|
|
100,583
|
|
|
$ |
8.54
|
|
|
|
4.6
|
|
|
$ |
901,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarized non-vested stock options activity for the six
months
ended June 30, 2007:
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Average
Grant Date Fair Value
|
|
Non-vested
stock options at December 31, 2006
|
|
|
42,780
|
|
|
$ |
16.07
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested
stock options at June 30, 2007
|
|
|
42,780
|
|
|
$ |
16.07
|
|
As
of
June 30, 2007, there was approximately $271,388 of unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Company’s stock incentive plans. That cost is expected to be
recognized over the next three years.
The
total
intrinsic value (spread between the market value and exercise price) of the
stock options exercised during the six months ended June 30, 2007 was
$12,601. The amount of cash received from the exercise of options for
the six month period ended June 30, 2007 was $2,812.
Benefit
Plans
The
Company provides certain retirement benefits to employees under a 401(k)
plan. The Company’s contributions to the 401(k) plan are expensed as
incurred.
The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan. The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan. The Company follows SFAS No.
132, as revised in December 2003, “Employers’ Disclosures about Pensions and
Other Post-retirement Benefits” and SFAS No. 158, “Employers Accounting for
Defined Benefit Pension and Other Post-retirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS No. 132 revised employers’
disclosures about pension and other post-retirement benefit plans. It requires
additional information about changes in the benefit obligation and the fair
values of plan assets. It also standardized the requirements for pensions and
other postretirement benefit plans to the extent possible, and illustrates
combined formats for the presentation of pension plan and other post-retirement
benefit plan disclosures. SFAS 158 requires an employer to recognize the over
funded or under funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in
which the changes occur through comprehensive income.
The
incremental effect of apply SFAS No. 158 on individual line items in the
December 31, 2006 Consolidated Balance Sheet is as follows (in
thousands):
|
|
Before
Application
of Statement 158
|
|
|
Adjustments
|
|
|
After
Application of Statement 158
|
|
Deferred
income taxes
|
|
$ |
1,905
|
|
|
$ |
257
|
|
|
$ |
2,162
|
|
Total
Assets
|
|
|
392,421
|
|
|
|
257
|
|
|
|
392,678
|
|
Other
liabilities
|
|
|
1,131
|
|
|
|
756
|
|
|
|
1,887
|
|
Total
liabilities
|
|
|
356,725
|
|
|
|
756
|
|
|
|
357,481
|
|
Accumulated
other comprehensive loss
|
|
|
(478 |
) |
|
|
(499 |
) |
|
|
(977 |
) |
Total
shareholders’ equity
|
|
$ |
35,696
|
|
|
$ |
(499 |
) |
|
$ |
35,197
|
|
Redeemable
Subordinated Debentures
On
April
10, 2002, 1ST
Constitution Capital Trust I (“Trust I”), a statutory business trust and a
wholly-owned subsidiary of the Company, issued $5.0 million of variable rate
trust preferred securities (the “Trust Preferred Securities”) in a pooled
institutional placement transaction maturing April 22, 2032. Trust I
utilized the $5.0 million proceeds along with $155,000 invested in Trust I
by
the Company to purchase $5,155,000 of floating rate subordinated debentures
issued by the Company and due to mature on April 22, 2032 (the “Subordinated
Debentures”). The Subordinated Debentures constituted the sole assets
of Trust I, had terms that mirrored the Trust Preferred Securities and were
redeemable in whole or part prior to maturity after April 22, 2007. Trust I
was
obligated to distribute all proceeds of a redemption of the Subordinated
Debentures, whether voluntary or upon maturity, to holders of the Trust
Preferred Securities. The Company’s obligation with respect to the Trust
Preferred Securities and the Subordinated Debentures, when taken together,
provided
a full and unconditional guarantee on a subordinated basis by the Company of
the
obligations of Trust I to pay amounts when due on the Trust Preferred
Securities. On February 23, 2007, the Company notified Wilmington Trust Company,
as Indenture Trustee, of the Company’s intention to redeem the Subordinated
Debentures on April 22, 2007, and the Company redeemed the Subordinated
Debentures on that date, as discussed below.
On
May
30, 2006, 1ST
Constitution Bancorp established 1ST Constitution
Capital Trust II, a Delaware business trust subsidiary (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Capital
Securities”). The Capital Securities were issued in connection with a
pooled offering involving approximately 50 other financial institution holding
companies. All of the Capital Securities were sold to a single
pooling vehicle.
The
proceeds from the sale of the Capital Securities were loaned to the Company
under 30-year floating rate junior subordinated debentures issued to Trust
II by
the Company. The debentures are the only asset of Trust
II. Interest payments on the debentures flow through Trust II to the
pooling vehicle. Payments of distributions by Trust II to the pooling
vehicle are guaranteed by the Company.
Effective
April 22, 2007, the Company redeemed of all of the Subordinated
Debentures. The redemption price was 100% of the aggregate $5,155,000
principal amount of the Subordinated Debentures, plus approximately $233,786
of
accrued interest thereon through the redemption date. As a result of
the redemption of the Subordinated Debentures, a like amount of capital
securities issued by 1ST Constitution
Capital Trust I will also be redeemed under the same terms and
conditions. This redemption does not impact the Capital Securities
issued by the Company’s wholly-owned subsidiary 1ST Constitution
Capital Trust II on May 30, 2006.
Variable
Interest Entities
Management
has determined that Trust I and Trust II (the “Trusts”) qualify as variable
interest entities under FASB Interpretation 46 (“FIN 46”). The Trusts issued
mandatorily redeemable preferred stock to investors and loaned the proceeds
to
the Company. Each of the Trusts holds, as its sole asset,
subordinated debentures issued by the Company. Subsequent to the
issuance of FIN 46, and prior to the establishment of Trust II, the FASB issued
a revised interpretation, FIN 46(R), the provisions of which were required
to be
applied to certain variable interest entities, including the Trust, by March
31,
2004, at which time the Trust I was deconsolidated.
In
March
2005, the Federal Reserve Board adopted a final rule that would continue to
allow the inclusion of trust preferred securities in Tier 1 capital, but with
stricter quantitative limits. Under the final rule, after a five-year transition
period, the aggregate amount of trust preferred securities and certain other
capital elements would be limited to 25% of Tier 1 capital elements, net of
goodwill. The amount of trust preferred securities and certain other elements
in
excess of the limit could be included in Tier 2 capital, subject to
restrictions. Based on the final rule, as of June 30, 2007, the Company included
all of its then-outstanding $18.6 million in trust preferred securities in
Tier 1 capital.
Segment
Information
SFAS
No.
131, Segment Reporting, establishes standards for public business
enterprises to report information about operating segments in their annual
financial statements and requires that those enterprises report selected
information about operating segments in subsequent interim financial reports
issued to shareholders. It also established standards for related
disclosure about products and services, geographic areas, and major
customers. Operating segments are components of an enterprise,
which are evaluated regularly by the chief operating decision-maker in deciding
how to allocate and assess resources and performance. The Company’s
chief operating decision-maker is the President and Chief Executive
Officer. The Company has applied the aggregation criteria set forth
in SFAS No. 131 for its operating segments to create one reportable segment,
“Community Banking.”
The
Company’s Community Banking segment consists of construction, commercial, retail
and mortgage banking. The Community Banking segment is managed as a
single strategic unit, which generates revenue from a variety of products and
services provided by the Company. For example, construction and
commercial lending is dependent upon the ability of the Company to fund itself
with retail deposits and other borrowings and to manage interest rate and credit
risk. This situation is also similar for consumer and residential
real estate lending.
Recent
Accounting Pronouncements
In
February, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments – an amendment of FASB Statements No. 133 and 140” (“SFAS
155”), to simplify and make more consistent the accounting for certain financial
instruments. SFAS 155 amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”) and permits fair value
re-measurement for any hybrid financial instrument with an embedded derivative
that otherwise would require bifurcation, provided that the whole instrument
is
accounted for on a fair value basis. Prior to fair value measurement,
interests in securitized financial assets must be evaluated to identify
interests containing embedded derivatives requiring bifurcation. The
amendments to SFAS 133 also clarify which interest-only and principal-only
strips are not subject to the requirements of SFAS 133, and that concentration
of credit risk in the form of subordination are not embedded
derivatives. SFAS 155 amends SFAS 140 to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial
instrument. SFAS 155 applies to all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The adoption of SFAS 155 did not have a material
impact on the Company’s consolidated financial statements.
In
March
2006, the Financial Accounting Standards Board (FASB) issued Statement No.
156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
No. 140” (“SFAS 156”). SFAS 156 amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
SFAS 156 permits, but does not require, an entity to choose either the
amortization method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing
liabilities. The adoption of SFAS 156 did not have a material impact
on the Company’s consolidated financial statements.
The
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. Previously, the
Company had accounted for tax contingencies in accordance with Statement of
Financial Accounting Standards 5, Accounting for
Contingencies. As required by Interpretation 48, which clarifies
Statement 109, Accounting for Income Taxes, the Company recognizes the
financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following
an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority. The Company is
subject to income taxes in the U.S. federal jurisdiction, and the states of
New
Jersey and Delaware. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply.
The
Company applied Interpretation 48 to all tax positions for which the statute
of
limitations remained open. The adoption of Interpretation 48 did not
have a material impact on the results operations or financial condition of
the
Company.
In
September 2006, FASB Issued Statement No. 157, “Fair Value
Measurements” (“SFAS 157”), which is effective for fiscal
years beginning after November 15, 2007 and for
interim periods within those years. This
statement defines fair value, establishes a framework for
measuring fair value and expands the related disclosure
requirements. The Company is currently
evaluating the impact the adoption of SFAS No. 157 will
have on its consolidated financial
statements.
At
its
September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue 06-04, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” In accordance with the EITF consensus, an
agreement by an employer to share a portion of the proceeds of a life insurance
policy with an employee during the postretirement period is a postretirement
benefit arrangement required to be accounted for under SFAS No. 106 and,
therefore, a liability for the postretirement obligation must be recognized
under SFAS No. 106 if the benefit is offered under an arrangement that
constitutes a plan or under APB No. 12 if it is not part of a
plan. The provisions of Issue 06-04 are to be applied through either
a cumulative-effect adjustment to retained earnings as of the beginning of
the
year of adoption or retrospective application. Issue 06-04 is
effective for annual or interim reporting periods beginning after December
15,
2007. The application of Issue 06-04 is not expected to have a
material effect on the Company’s financial position or results of
operations.
At
its
September 2006 meeting, the EITF reached a final consensus on Issue 06-05,
“Accounting for Purchases of Life Insurance - Determining the Amount That
Could be Realized in Accordance with FASB Technical Bulletin No.
85-4.” Issue 06-05 concludes that in determining the amount that
could be realized under an insurance contract accounted for under FASB Technical
Bulletin No. 85-4, “Accounting for Purchases of Life Insurance,” the
policyholder should (1) consider any additional amounts included in the
contractual terms of the policy; (2) assume the surrender value on an individual
life-by individual-life policy basis; and (3) not discount the cash surrender
value component of the amount that could be realized when contractual
restrictions on the ability to surrender a policy exist. Issue 06-05
should be adopted through either (1) a change in accounting principle through
a
cumulative-effect adjustment to retained earnings as of the beginning of the
year of adoption or (2) a change in accounting principle through retrospective
application to all prior periods. Issue 06-05 is effective for fiscal
years beginning after December 15, 2006. The application of Issue 06-05 did
not
have a material effect on the Company’s financial position or results of
operations.
In
February 2007, the FASB issued Statement of Financial Standards No. 159, “The
Fair Value for Financial Assets and Financial Liabilities” (Statement
159). Statement 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. The Statement is effective as of the beginning
of an entities first year that begins after November 15, 2007. The
Company does not expect the adoption of Statement 159 to have a material impact
on the consolidated financial statements.
(2) Acquisition
of Unaffiliated Branch
On
February 27, 2007, the Company, through the Bank, completed its acquisition
of
the Hightstown, New Jersey branch of another financial institution for a
purchase price of $730,257.
As
a
result of the acquisition, the Hightstown branch became a branch of the
Bank. Included in the acquisition of the branch were deposit
liabilities of $19.5 million, mostly in certificates of deposit, cash of
approximately $18.8 million, net of assets acquired, cash on hand of
approximately $137,000, fixed and other assets of approximately $91,000 and
the
assumption of the lease of the branch premises. The cash received in
the transaction was utilized to repay short term borrowings used to purchase
investment securities prior to, and in contemplation of, the completion of
the
acquisition.
In
addition, the Bank recorded goodwill of $445,653 and a core deposit intangible
asset of $274,604.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
purpose of this discussion and analysis of the operating results and financial
condition at June 30, 2007 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, 2007 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 Company’s Form 10-K (Management’s Discussion and Analysis
of Financial Condition and Results of Operations) for the year ended December
31, 2006, as filed with the SEC on April 2, 2007.
General
Throughout
the following sections, the “Company” refers to 1st Constitution
Bancorp and, as the context requires, its subsidiaries, 1st Constitution
Bank
and 1st
Constitution Capital Trust II, and its former subsidiary, 1st Constitution
Capital Trust I, the “Bank” refers to 1st Constitution
Bank,
and the “Trusts” refers to 1st Constitution
Capital Trust I and 1st Constitution
Capital Trust II, collectively.
The
Company is a bank holding company registered under the Bank Holding Company
Act
of 1956, as amended. The Company was organized under the laws of the State
of
New Jersey in February 1999 for the purpose of acquiring all of the issued
and
outstanding stock of the Bank, a full service commercial bank which began
operations in August 1989, and thereby enabling the Bank to operate within
a
bank holding company structure. The Company became an active bank holding
company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company.
Other than its ownership interest in the Bank, the Company currently conducts
no
other significant business activities.
The
Bank
operates eleven branches, and manages an investment portfolio through its
subsidiary, 1st
Constitution Investment Company of Delaware, Inc. FCB Assets
Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and
dispose of repossessed real estate.
1st
Constitution
Capital Trust II, a subsidiary of the Company, and 1st Constitution
Capital Trust I, which was formerly a subsidiary of the Company, were created
to
issue trust preferred securities to assist the Company to raise additional
regulatory capital.
Forward-Looking
Statements
When
used
in this and in future filings by the Company with the SEC, in the Company’s
press releases and in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases “will,” “will likely
result,” “could,” “anticipates,” “believes,” “continues,”
“expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or
“outlook” or similar expressions (including confirmations by an authorized
executive officer of the Company of any such expressions made by a third party
with respect to the Company) are intended to identify forward-looking
statements. The Company wishes to caution readers not to place undue reliance
on
any such forward-looking statements, each of which speak only as of the date
made. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed under “Business”, “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s Annual Report on Form 10-K filed with the SEC on
April 2, 2007, such as the overall economy and the interest rate environment;
the ability of customers to repay their obligations; the adequacy of the
allowance for loan losses; competition; significant changes in accounting,
tax
or regulatory practices and requirements; certain interest rate risks; and
risks
associated with speculative construction lending. Although management has taken
certain steps to mitigate any negative effect of the aforementioned items,
significant unfavorable changes could severely impact the assumptions used
and
have an adverse effect on profitability. The Company has no
obligation to publicly release the result of any revisions which may be made
to
any forward-looking statements to reflect anticipated or unanticipated events
or
circumstances occurring after the date of such statements.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2007 and June 30, 2006
Summary
The
Company realized net income of $1,497,705 for the three months ended June 30,
2007, an increase of 10.3% from the $1,357,264 reported for the three months
ended June 30, 2006. Diluted net income per share was $0.39 for the
three months ended June 30, 2007 compared to $0.36 per diluted share for the
three months ended June 30, 2006. All prior year share information
has been restated for the effect of a 6% stock dividend declared on December
21,
2006 and paid on January 31, 2007 to shareholders of record on January 23,
2007.
Key
performance ratios remained strong for the three months ended June 30,
2007. Return on average assets and return on average equity were
1.43% and 16.22% for the three months ended June 30, 2007 compared to 1.45%
and
17.69%, respectively, for the three months ended June 30, 2006.
A
significant factor impacting the Company’s net interest income has been the
rising level of market interest rates that characterized the marketplace in
2006
and has continued through the first half of 2007. The Federal Reserve
Bank’s Open Market Committee raised short-term interest rates four times during
2006, which raised the targeted Federal funds rate to the current 5.25% at
June
30, 2007. These increases in short-term market rates drive up the
cost of the Company’s core deposits. As a result, the Company
experienced a 92 basis point increase in the cost of its interest-bearing
deposits to 3.93% at June 30, 2007 compared to 3.01% at June 30,
2006. The Company’s net interest margin experienced a decrease of 54
basis points to 4.64% at June 30, 2007 compared to 5.18% at June 30,
2006.
A
second
significant factor impacting financial results for the first half of 2007 was
the February 27, 2007 closing of a transaction whereby the Bank acquired all
of
the deposit liabilities and related assets of the Hightstown, New Jersey branch
banking office of another financial institution. This acquisition
added approximately $19.5 million in new deposits and $18.8 million in cash
to
the balance sheet in 2007 in addition to having an impact on most components
of
income/expense on the statement of income for the six months ended June 30,
2007.
Earnings
Analysis
Interest
Income
Interest
income for the three months ended June 30, 2007 was $7,445,478, increasing
by
9.7% from the $6,789,622 reported in the three months ended June 30,
2006. This is primarily attributable to a higher volume of total
interest-earning assets when compared to the prior year period. For
the three months ended June 30, 2007, average interest earning assets increased
$43,618,780 or 12.4%, to $395,860,393 compared to $352,241,613 for the three
months ended June 30, 2006. For the three months ended June 30, 2007,
the average yield on earning assets decreased 16 basis points to 7.65% from
7.81% for the three months ended June 30, 2006.
Interest
Expense
Interest
expense for the three months ended June 30, 2007 was $3,130,961, an increase
of
$950,448 from $2,180,513 reported for the three months ended June 30,
2006. Total average interest bearing liabilities increased by
$43,929,636 to $318,230,562 for the three months ended June 30, 2007 from
$274,300,926 for the three months ended June 30, 2006. The average
cost of interest bearing liabilities increased 76 basis points to 3.95% for
the
three months ended June 30, 2007 from 3.19% for the three months ended June
30,
2006, primarily as a result of an increase in market-driven rates paid on
deposits and short-term borrowed funds.
Net
Interest Income
The
Company’s net interest income for the three months ended June 30, 2007 was
$4,314,517, a decrease of 6.4% from the $4,609,109 reported for June 30,
2006. The net interest margin (on a tax-equivalent basis), which is
net interest income divided by average interest-earning assets, decreased 85
basis points to 4.48% for the three months ended June 30, 2007 from 5.33% for
the three months ended June 30, 2006. The increased cost of deposits
in the competitive New Jersey marketplace combined with a shift in the Company’s
deposit mix to higher cost certificates of deposit accounts has been contributed
significantly to this margin compression.
Provision
for Loan Losses
Management
maintains the allowance for loan losses at a level that is considered adequate
to absorb losses on existing loans that may become uncollectible based upon
an
evaluation of known and inherent risks in the loan
portfolio. Additions to the allowance are made by charges to the
provision for loan losses. The evaluation considers a complete review
of the following specific factors: historical losses by loan
category, non-accrual loans, problem loans as identified through internal
classifications, collateral values, and the growth and size of the
portfolio. Additionally, current economic conditions and local real
estate market conditions are considered. As a result of this
evaluation process, the Company’s provision for loan losses was $30,000 for the
three months ended June 30, 2007 and $170,000 for the three months ended June
30, 2006. See “Allowance for Loan Losses” on page 23.
Non-Interest
Income
Total
non-interest income for the three months ended June 30, 2007 was $648,423,
an
increase of $173,714, or 36.6%, over non-interest income of $474,709 for the
three months ended June 30, 2006.
Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues increased by $8,139, or 4.9%, to
$175,181 for the three months ended June 30, 2007 from the $167,042 for the
three months ended June 30, 2006. This increase was the result of a
higher volume of uncollected and overdraft fees collected on deposit accounts
during the second quarter of 2007 compared to the same period in
2006.
Gain
on
sales of loans increased by $13,811, or 7.9%, to $188,741 for the three months
ended June 30, 2007 when compared to $174,930 for the three months ended June
30, 2006. The rising rate environment that existed throughout 2006
and continued into the first half of 2007 has impacted the volume of sales
transactions in the mortgage loan and SBA loan markets and resultant gains
resulting from these transactions.
Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $88,233 for the three months ended June 30, 2007 compared to $82,934
for the three months ended June 30, 2006. The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduced
the Company’s overall effective tax rate.
The
Bank
also generates non-interest income from a variety of fee-based
services. These include safe deposit box rental, wire transfer
service fees and Automated Teller Machine fees for non-Bank
customers. Increased customer demand for these services contributed
to the other income component of non-interest income amounting to $196,268
for
the three months ended June 30, 2007, compared to $149,517 for the three months
ended June 30, 2006.
The
Company recorded net losses on sales of investment securities of $99,714 for
the
three months ended June 30, 2006. These transactions were primarily
the result of modest portfolio restructurings. Their purpose was to
improve the Company’s longer-term interest rate risk position.
Non-Interest
Expense
Non-interest
expenses decreased by $285,977, or 9.2%, to $2,822,326 for the three months
ended June 30, 2007 from $3,108,303 for the three months ended June 30,
2006. The following table presents the major components of
non-interest expenses for the three months ended June 30, 2007 and
2006.
|
|
|
|
|
|
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Salaries
and employee benefits
|
|
$ |
1,637,213
|
|
|
$ |
1,712,959
|
|
Occupancy
expenses
|
|
|
406,012
|
|
|
|
378,143
|
|
Equipment
expense
|
|
|
120,796
|
|
|
|
116,163
|
|
Marketing
|
|
|
22,145
|
|
|
|
65,100
|
|
Computer
services
|
|
|
215,898
|
|
|
|
175,327
|
|
Regulatory,
professional and other fees
|
|
|
73,320
|
|
|
|
290,178
|
|
Office
expense
|
|
|
152,408
|
|
|
|
105,630
|
|
All
other expenses
|
|
|
794,534
|
|
|
|
264,803
|
|
Total
|
|
$ |
2,822,326
|
|
|
$ |
3,108,303
|
|
|
Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, decreased by $75,746, or 4.4%, to $1,637,213 for the three months
ended June 30, 2007 compared to $1,712,959 for the three months ended June
30,
2006. The decrease in salaries and employee benefits for the three
months ended June 30, 2007 was a result of a lower level of expenses incurred
in
connection with the Company’s health insurance and other employee benefit plans
partially offset by an increase in staffing levels. Staffing levels
overall increased to 97 full-time equivalent employees at June 30, 2007 as
compared to 93 full-time equivalent employees at June 30, 2006. The
February 23, 2007 acquisition of the Hightstown branch contributed to this
increase by increasing the number of full-time equivalent employees by
4.
Regulatory,
professional and other fees decreased by $216,858, or 74.7%, to $73,320 for
the
three months ended June 30, 2007 compared to $290,178 for the three months
ended
June 30, 2006. During 2006, the Company chose to incur additional
accounting, legal and consulting fees primarily as a result of the new internal
control compliance requirements contained in Section 404 of the Sarbanes-Oxley
Act in anticipation of the Company’s compliance in 2008.
An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating
expenses by net interest income plus non-interest income. An increase
in the efficiency ratio indicates that more resources are being utilized to
generate the same or greater volume of income, while a decrease would indicate
a
more efficient allocation of resources. The Bank’s efficiency ratio
decreased to 56.9% for the three months ended June 30, 2007, compared to 61.1%
for the three months ended June 30, 2006.
Six
Months Ended June 30, 2007 and June 30, 2006
Summary
The
Company realized net income of $2,903,205 for the six months ended June 30,
2007, an increase of $291,183, or 11.1%, over the $2,612,022 realized for the
six months ended June 30, 2006. Net income per diluted share was
$0.76 for the six months ended June 30, 2007 compared to $0.69 per diluted
share
for the six months ended June 30, 2006.
Key
performance ratios remained strong for the six months ended June 30,
2007. Return on average assets and return on average equity were
1.42% and 16.02%, respectively, for the six months ended June 30, 2007 compared
to 1.42% and 17.31%, respectively, for the six months ended June 30,
2006.
Earnings
Analysis
Interest
Income
For
the
six months ended June 30, 2007, total interest income was $14,834,642 an
increase of $1,892,383 or 14.6%, compared to total interest income of
$12,942,259 for the six months ended June 30, 2006.
The
following table sets forth the Company’s consolidated average balances of
assets, liabilities and shareholders’ equity as well as interest income and
expense on related items, and the Company’s average rate for the six month
periods ended June 30, 2007 and 2006.
|
Average
Balance Sheets with Resultant Interest and Rates
|
|
(yields
on a tax-equivalent basis)
|
|
Six
months ended June 30, 2007
|
|
|
Six
months ended June 30, 2006
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Funds Sold/Short-Term Investments
|
|
$ |
2,542,891
|
|
|
$ |
65,423
|
|
|
|
5.20 |
% |
|
$ |
882,764
|
|
|
$ |
33,338
|
|
|
|
4.88 |
% |
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
Mortgage Obligations/
Mortgage
Backed Securities
|
|
|
79,834,540
|
|
|
|
2,076,294
|
|
|
|
5.20 |
% |
|
|
67,267,461
|
|
|
|
1,601,907
|
|
|
|
4.76 |
% |
Obligations
of States and Political Subdivisions
|
|
|
22,534,371
|
|
|
|
639,892
|
|
|
|
5.68 |
% |
|
|
16,826,536
|
|
|
|
455,607
|
|
|
|
5.42 |
% |
Total
|
|
|
102,368,911
|
|
|
|
2,716,186
|
|
|
|
5.31 |
% |
|
|
84,093,997
|
|
|
|
2,057,514
|
|
|
|
4.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
128,038,453
|
|
|
|
5,772,790
|
|
|
|
9.09 |
% |
|
|
122,076,525
|
|
|
|
5,308,225
|
|
|
|
8.77 |
% |
Residential
Real Estate
|
|
|
7,657,934
|
|
|
|
342,816
|
|
|
|
9.03 |
% |
|
|
8,373,845
|
|
|
|
281,883
|
|
|
|
6.79 |
% |
Home
Equity
|
|
|
13,978,390
|
|
|
|
529,513
|
|
|
|
7.64 |
% |
|
|
14,349,464
|
|
|
|
510,640
|
|
|
|
7.18 |
% |
Commercial
and commercial real estate
|
|
|
112,177,995
|
|
|
|
4,341,501
|
|
|
|
7.80 |
% |
|
|
95,523,253
|
|
|
|
3,576,994
|
|
|
|
7.55 |
% |
Installment
|
|
|
1,543,012
|
|
|
|
64,859
|
|
|
|
8.48 |
% |
|
|
2,212,513
|
|
|
|
92,273
|
|
|
|
8.41 |
% |
All
Other Loans
|
|
|
21,698,761
|
|
|
|
1,209,086
|
|
|
|
11.24 |
% |
|
|
22,361,005
|
|
|
|
1,229,158
|
|
|
|
11.08 |
% |
Total
|
|
|
285,094,545
|
|
|
|
12,260,565
|
|
|
|
8.67 |
% |
|
|
264,896,605
|
|
|
|
10,999,173
|
|
|
|
8.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest-Earning Assets
|
|
|
390,006,347
|
|
|
|
15,042,174
|
|
|
|
7.78 |
% |
|
|
349,873,366
|
|
|
|
13,090,025
|
|
|
|
7.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
|
(3,202,227 |
) |
|
|
|
|
|
|
|
|
|
|
(2,521,830 |
) |
|
|
|
|
|
|
|
|
Cash
and Due From Bank
|
|
|
9,840,214
|
|
|
|
|
|
|
|
|
|
|
|
9,192,148
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
16,993,628
|
|
|
|
|
|
|
|
|
|
|
|
15,117,762
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
413,637,962
|
|
|
|
|
|
|
|
|
|
|
$ |
371,661,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market and NOW Accounts
|
|
$ |
83,227,341
|
|
|
$ |
838,662
|
|
|
|
2.03 |
% |
|
$ |
91,223,484
|
|
|
$ |
680,438
|
|
|
|
1.50 |
% |
Savings
Accounts
|
|
|
65,745,828
|
|
|
|
1,004,462
|
|
|
|
3.08 |
% |
|
|
43,010,509
|
|
|
|
369,525
|
|
|
|
1.73 |
% |
Certificates
of Deposit
|
|
|
117,341,127
|
|
|
|
2,808,342
|
|
|
|
4.83 |
% |
|
|
95,281,466
|
|
|
|
1,824,376
|
|
|
|
3.86 |
% |
Other
Borrowed Funds
|
|
|
24,034,530
|
|
|
|
632,412
|
|
|
|
5.31 |
% |
|
|
38,242,265
|
|
|
|
957,133
|
|
|
|
5.05 |
% |
Trust
Preferred Securities
|
|
|
21,093,923
|
|
|
|
778,574
|
|
|
|
7.34 |
% |
|
|
6,591,160
|
|
|
|
267,552
|
|
|
|
8.07 |
% |
Total
Interest-Bearing Liabilities
|
|
|
311,442,749
|
|
|
|
6,062,452
|
|
|
|
3.93 |
% |
|
|
274,348,884
|
|
|
|
4,099,024
|
|
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Spread
|
|
|
|
|
|
|
|
|
|
|
3.85 |
% |
|
|
|
|
|
|
|
|
|
|
4.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
60,426,470
|
|
|
|
|
|
|
|
|
|
|
|
61,998,664
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
5,212,864
|
|
|
|
|
|
|
|
|
|
|
|
4,882,757
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
377,082,083
|
|
|
|
|
|
|
|
|
|
|
|
341,230,305
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
36,555,879
|
|
|
|
|
|
|
|
|
|
|
|
30,431,141
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
413,637,962
|
|
|
|
|
|
|
|
|
|
|
$ |
371,661,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin
|
|
|
|
|
|
$ |
8,979,722
|
|
|
|
4.64 |
% |
|
|
|
|
|
$ |
8,991,001
|
|
|
|
5.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
current year increase in interest income resulted from a higher average balance
in the loan portfolio combined with higher average yields earned on the
securities and loan portfolios. Average loans increased $20,197,940,
or 7.6%, to $285,094,545 for the six months ended June 30, 2007 from
$264,896,605 for the six months ended June 30, 2006, while the yield on the
portfolio increased 30 basis points to 8.67% for the six months ended June
30,
2007 from 8.37% for the six months ended June 30, 2006. The higher
loan yield reflected the higher interest rate environment that existed during
2006 and continued through the first half of 2007.
Average
securities increased $18,274,914, or 21.7%, from $84,093,997 for the six months
ended June 30, 2006 to $102,368,911 for the six months ended June 30, 2007,
while the yield on the securities portfolio increased to 5.31% for the six
months ended June 30, 2007 from 4.89% for the six months ended June 30,
2006.
Overall,
the yield on the Company’s total interest-earning assets increased 24 basis
points to 7.78% for the six months ended June 30, 2007 from 7.54% for the six
months ended June 30, 2006.
Interest
Expense
Total
interest expense for the six months ended June 30, 2007 was $6,062,452, an
increase of $1,963,428, or 47.9%, compared to $4,099,024 for the six months
ended June 30, 2006. The increase in interest expense for the current
period resulted primarily from the impact of higher levels of interest-bearing
liabilities priced at higher market interest rate levels and a change in the
mix
of interest bearing liabilities, principally the decline in lower rate money
market and NOW accounts and an increase in higher rate savings accounts,
certificates of deposit and trust preferred securities. The average
rate paid on interest bearing liabilities for the six months ended June 30,
2007
increased 92 basis points to 3.93% from 3.01% for the six months ended June
30,
2006.
Net
Interest Income
The
Company’s net interest income for the six months ended June 30, 2007 was
$8,772,190, a decrease of $71,045, or 0.8%, compared to $8,843,235 for the
six
months ended June 30, 2006. The net interest margin (on a
tax-equivalent basis) was 4.64% for the six months ended June 30, 2007 compared
to 5.18% for the six months ended June 30, 2006. The increased cost
of deposits in the competitive New Jersey marketplace combined with a shift
in
the Company’s deposit mix to higher cost certificates of deposit accounts has
contributed significantly to this margin compression.
Provision
for Loan Losses
Management
considers a complete review of the following specific factors in determining
the
provision for loan losses: historical losses by loan category, non-accrual
loans, problem loans as identified through internal classifications, collateral
values, and the growth and size of the portfolio. In addition to
these factors, management takes into consideration current economic conditions
and local real estate market conditions. As a result of this
evaluation process, the Company’s provision for loan losses was $70,000 for the
six months ended June 30, 2007 and $340,000 for the six months ended June 30,
2006. Net charge offs/recoveries amounted to a net recovery of
$11,720 for the six months ended June 30, 2007 compared to a net charge off
of
$8,639 for the six months ended June 30, 2006. See “Allowance for
Loan Losses” on page 23.
Non-Interest
Income
Total
non-interest income for the six months ended June 30, 2007 was $1,292,164,
an
increase of $87,869, or 7.3%, from non-interest income of $1,204,295 for the
six
months ended June 30, 2006.
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,
2007 was $420,518 compared to $493,619 for the six months ended June 30,
2006. The current rising interest rate environment has significantly
impacted the volume of sales transactions in the mortgage loan and SBA loan
markets and resultant gains from these transactions.
Service
charges on deposit accounts were $325,036 for the six months ended June 30,
2007
compared to $353,601 for the six months ended June 30, 2006. Service
charge income decreased in 2007 principally due to a lower volume of uncollected
and overdraft fees collected on deposit accounts during the first six months
of
2007 compared to 2006.
Income
from Bank Owned Life Insurance (“BOLI”) amounted to $178,581 for the six months
ended June 30, 2007, compared to $163,534 for the six months ended June 30,
2006. The Company owns $9.4 million in tax-free BOLI assets which
partially offset the cost of employee benefit plans and reduced the Company’s
overall effective tax rate.
The
Company recorded net losses on sales of investment securities of $99,714 for
the
six months ended June 30, 2006. These transactions were primarily the
result of modest portfolio restructurings. Their purpose was to
improve the Company’s longer-term interest rate risk position.
Non-Interest
Expense
Total
non-interest expense for the six months ended June 30, 2007 was $5,843,539,
a
decrease of $354,792, or 5.7%, compared to non-interest expense of $6,198,331
for the six months ended June 30, 2006.
The
following table presents the major components of non-interest expense for the
six months ended June 30, 2007 and 2006.
|
|
|
|
|
|
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Salaries
and employee benefits
|
|
$ |
3,450,012
|
|
|
$ |
3,397,981
|
|
Occupancy
expense
|
|
|
796,944
|
|
|
|
697,127
|
|
Equipment
expense
|
|
|
246,209
|
|
|
|
237,167
|
|
Marketing
|
|
|
47,026
|
|
|
|
174,198
|
|
Computer
services
|
|
|
412,974
|
|
|
|
341,962
|
|
Regulatory,
professional and other fees
|
|
|
182,106
|
|
|
|
681,569
|
|
Office
expense
|
|
|
294,782
|
|
|
|
207,652
|
|
All
other expenses
|
|
|
413,486
|
|
|
|
460,676
|
|
|
|
$ |
5,843,539
|
|
|
$ |
6,198,332
|
|
|
Salaries
and employee benefits increased $52,031, or 1.5%, to $3,450,012 for the six
months ended June 30, 2007 compared to $3,397,981 for the six months ended
June
30, 2006. This increase reflects the increase in staffing levels plus
normal employee salary increases.
Regulatory,
professional and other fees decreased by $499,463, or 73.2%, to $182,106for
the
six months ended June 30, 2007 compared to $681,569 for the six months ended
June 30, 2006. During the first six months of 2006, the Company
incurred increased consulting fees primarily as a result of preparations for
internal control compliance requirements contained in Section 404 of the
Sarbanes-Oxley Act for which the Company must be in compliance at December
31,
2008.
The
Company’s efficiency ratio decreased to 58.1% for the six months ended June 30,
2007 compared to a ratio of 61.7% for the six months ended June 30,
2006.
Financial
Condition
June
30, 2007 Compared with December 31, 2006
Total
consolidated assets at June 30, 2007 totaled $428,199,422, increasing by
$35,521,876 from $392,677,546 at December 31, 2006. On February 27,
2007, the Bank acquired all of the deposit liabilities and related assets of
the
Hightstown, New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits. In connection with such acquisition, the Company recorded
$445,653 in goodwill and $274,604 in core deposit intangibles, which appear
as
“Other Assets” in the Consolidated Balance Sheet at June 30, 2007.
Cash
and Cash Equivalents
Cash
and
Cash Equivalents at June 30, 2007 totaled $9,580,485 compared to
$10,361,812 at December 31, 2006. Cash and cash equivalents at June
30, 2007 consisted of cash and due from banks of $9,559,584 and Federal funds
sold/short term investments of $20,901. The corresponding balances at
December 31, 2006 were $10,336,334 and $25,478, respectively.
Investment
Securities
The
Bank’s investment securities represented 25.4% of total assets at June 30, 2007
and 22.8% at December 31, 2006. Total investment securities increased
$18,899,587, or 21.1%, at June 30, 2007 to $108,575,391 from $89,675,804 at
December 31, 2006.
Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes. Securities available for sale consist primarily of U.S.
Government and Federal agency securities as well as mortgage-backed
securities. Activity in this portfolio is undertaken primarily to
manage liquidity and interest rate risk and to take advantage of market
conditions that create economically more attractive returns. At June
30, 2007, available-for-sale securities amounted to $82,047,134, and increase
of
$11,625,806 or 16.5%, from December 31, 2006.
At
June
30, 2007, the securities available for sale portfolio had net unrealized losses
of $1,648,343 compared to net unrealized losses of $719,367 at December 31,
2006. These unrealized losses are reflected net of tax in
shareholders’ equity as a component of other comprehensive income
(loss).
Securities
held to maturity, which are carried at amortized historical cost, are
investments for which there is the positive intent and ability to hold to
maturity. The held-to-maturity portfolio consists primarily of
obligations of states and political subdivisions. At June 30, 2007,
securities held to maturity were $26,528,257, an increase of $7,273,781, or
37.8% from $19,254,476 at December 31, 2006. The fair value of the
held-to-maturity portfolio at June 30, 2007, was $26,041,037, resulting in
a net
unrealized loss of $487,219.
During
the six months ended June 30, 2007, the Bank purchased securities in the amounts
of $15,776,240 and $7,677,917 for the available for sale and held to maturity
portfolios, respectively. These purchases were funded primarily by
the cash received in the Hightstown branch acquisition completed in February
2007.
Loans
The
loan
portfolio, which represents the Bank’s largest asset, is a significant source of
both interest and fee income. Elements of the loan portfolio are
subject to differing levels of credit and interest rate risk. The
Company’s primary lending focus continues to be construction loans, commercial
loans, owner-occupied commercial mortgage loans and tenanted commercial real
estate loans.
The
following table sets forth the classification of loans by major category at
June
30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
Loan
Portfolio Composition
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Component
|
|
Amount
|
|
|
%
of
total
|
|
|
Amount
|
|
|
%
of
total
|
|
Construction
loans
|
|
$ |
130,623,738
|
|
|
|
46 |
% |
|
$ |
125,268,871
|
|
|
|
47 |
% |
Residential
real estate loans
|
|
|
9,155,735
|
|
|
|
4 |
% |
|
|
7,670,370
|
|
|
|
3 |
% |
Commercial
and commercial real estate
|
|
|
129,611,101
|
|
|
|
45 |
% |
|
|
114,897,040
|
|
|
|
44 |
% |
Loans
to individuals
|
|
|
15,598,979
|
|
|
|
5 |
% |
|
|
16,728,025
|
|
|
|
6 |
% |
Deferred
loan fees
|
|
|
409,494
|
|
|
|
0 |
% |
|
|
404,074
|
|
|
|
0 |
% |
All
other loans
|
|
|
177,548
|
|
|
|
0 |
% |
|
|
173,933
|
|
|
|
0 |
% |
|
|
$ |
285,576,595
|
|
|
|
100 |
% |
|
$ |
265,142,313
|
|
|
|
100.0 |
% |
|
The
loan
portfolio increased $20,434,282, or 7.7%, at June 30, 2007 to $285,576,595
from
$265,142,313 at December 31, 2006. The ability of the Company to
enter into larger loan relationships and management’s philosophy of relationship
banking are key factors in the Company’s strategy for loan
growth. The ultimate collectability of the loan portfolio and the
recovery of the carrying amount of real estate are subject to changes in the
Company’s market region's economic environment and real estate
market.
Non-Performing
Assets
Non-performing
assets consist of non-performing loans and other real estate
owned. Non-performing loans are composed of (1) loans on a
non-accrual basis, (2) loans which are contractually past due 90 days or more
as
to interest and principal payments but have not been classified as non-accrual,
and (3) loans whose terms have been restructured to provide a reduction or
deferral of interest on principal because of a deterioration in the financial
position of the borrower.
The
Bank’s policy with regard to non-accrual loans is that generally, loans are
placed on a non-accrual status when they are 90 days past due unless these
loans
are well secured and in the process of collection or, regardless of the past
due
status of the loan, when management determines that the complete recovery of
principal or interest is in doubt. Consumer loans are generally
charged off after they become 120 days past due. Subsequent payments
on loans in non-accrual status are credited to income only if collection of
principal is not in doubt.
Non-performing
loans decreased by $699,453 to $3,493,756 at June 30, 2007 from $4,193,209
at
December 31, 2006. The largest segment of non-accrual loans
represents unfinished residential construction where litigation has commenced
and workout negotiations are in process. The balance of the
non-performing loans are centered in commercial loans for which litigation
has
commenced. The table below sets forth non-performing assets and risk
elements in the Bank’s portfolio by type for the years indicated. As
the table demonstrates, non-performing loans to total loans decreased to 1.23%
at June 30, 2007 from 1.58% at December 31, 2006 for the reasons previously
stated, but loan quality
is still considered to be strong. This was accomplished through
quality loan underwriting, a proactive approach to loan monitoring and
aggressive workout strategies.
Non-performing
assets decreased by $679,453 to $3,513,756 at June 30, 2007 from $4,193,209
at
December 31, 2006. Non-performing assets represented 0.82% of total
assets at June 30, 2007 and 1.07% at December 31,
2006. Non-performing loans as a percentage of total loans were 1.23%
at June 30, 2007, compared to 1.58% at December 31, 2006.
The
Bank
had no loans classified as restructured loans at June 30, 2007 or December
31,
2006.
At
June
30, 2007 and December 31, 2006, the Bank had no loans that were 90 days or
more
past due but still accruing interest.
|
|
|
|
|
|
|
|
Non-Performing
Assets and Loans
|
|
June
30
|
|
|
December
31
|
|
|
|
2007
|
|
|
2006
|
|
Non-Performing
loans:
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
$ |
0
|
|
|
$ |
0
|
|
Non-accrual
loans
|
|
|
3,493,756
|
|
|
|
4,193,209
|
|
Total
non-performing loans
|
|
|
3,493,756
|
|
|
|
4,193,209
|
|
Other
real estate owned
|
|
|
0
|
|
|
|
0
|
|
Total
non-performing assets
|
|
$ |
3,493,756
|
|
|
$ |
4,193,209
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
1.23 |
% |
|
|
1.58 |
% |
Non-performing
assets to total assets
|
|
|
0.82 |
% |
|
|
1.07 |
% |
Management
takes a proactive approach in addressing delinquent loans. The Company’s
President meets weekly with all loan officers to review the status of credits
past-due ten days or more. An action plan is discussed for each of the loans
to
determine the steps necessary to induce the borrower to cure the delinquency
and
restore the loan to a current status. Also, delinquency notices are system
generated when loans are five days past-due and again at 15 days
past-due.
In
most
cases, the Company’s collateral is real estate and when the collateral is
foreclosed upon, the real estate is carried at the lower of fair market value
less estimated selling costs, or at cost. The amount, if any, by which the
recorded amount of the loan exceeds the fair market value of the asset is a
loss
which is charged to the allowance for loan losses at the time of foreclosure
or
repossession. Resolution of a past-due loan can be delayed if the borrower
files
a bankruptcy petition because collection action cannot be continued unless
the
Company first obtains relief from the automatic stay provided by the bankruptcy
code.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level sufficient in the opinion
of
management to absorb estimated credit losses in the loan portfolio as of the
date of the financial statements. The allowance for loan losses is a
valuation reserve available for losses incurred or inherent in the loan
portfolio and other extensions of credit. The determination of the
adequacy of the allowance for loan losses is a critical accounting policy of
the
Company.
The
Company’s primary lending emphasis is the origination of commercial and
commercial real estate loans, including construction loans. Based on
the composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, increases in interest rates, a decline in the
economy, and a decline in New Jersey real estate market values. Any
one or a combination of these events
may adversely affect the loan portfolio and may result in increased
delinquencies, loan losses and increased future provision levels.
All,
or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is
unlikely. Consumer loans are generally charged off no later than 120
days past due on a contractual basis, earlier in the event of bankruptcy, or
if
there is an amount deemed uncollectible. Because all
identified losses are immediately charged off, no portion of the allowance
for
loan and lease losses is restricted to any individual loan or groups of loans,
and the entire allowance is available to absorb any and all loan and lease
losses.
Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan and lease losses has been charged against earnings
in an amount necessary to maintain the allowance at a level that is adequate
based on management’s assessment of probable estimated losses. The
Company’s methodology for assessing the adequacy of the allowance for loan and
lease losses consists of several key elements. These elements include
a specific reserve for doubtful or high risk loans, an allocated reserve, and
an
unallocated portion. The Company consistently applies the following
comprehensive methodology.
During
the quarterly review of the allowance for loan and lease losses, management
of
the Company considers a variety of factors that include:
·
|
General
economic conditions.
|
·
|
Trends
and levels of delinquent loans.
|
·
|
Trends
and levels of non-performing loans, including loans over 90 days
delinquent.
|
·
|
Trends
in volume and terms of loans.
|
·
|
Levels
of allowance for specific classified
loans.
|
The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk loan assets. These high
risk loans are assigned a doubtful risk rating grade because the loan has not
performed according to payment terms and there is reason to believe that
repayment of the loan principal in whole, or part, is unlikely. The
specific portion of the allowance is the total amount of potential unconfirmed
losses for these individual doubtful loans. To assist in determining
the fair value of loan collateral, the Company often utilizes independent third
party qualified appraisal firms which in turn employ their own criteria and
assumptions that may include occupancy rates, rental rates, and property
expenses, among others.
The
second category of reserves consists of the allocated portion of the
allowance. The allocated portion of the allowance is determined by
taking pools of loans outstanding that have similar characteristics and applying
historical loss experience for each pool. This estimate represents
the potential unconfirmed losses within the portfolio. Individual loan pools
are
created for commercial and commercial real estate loans, construction loans,
and
for the various types of loans to individuals. The historical
estimation for each loan pool is then adjusted to account for current
conditions, current loan portfolio performance, loan policy or management
changes, or any other factor which may cause future losses to deviate from
historical levels.
The
Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions which may cause a potential
loan loss but are not specifically identifiable.
It
is
prudent to maintain an unallocated portion of the allowance because no matter
how detailed an analysis of potential loan losses is performed, these estimates
by definition lack precision. Management must make estimates using
assumptions and information which is often subjective and changing
rapidly. At June 30, 2007, management believed that the allowance for
loan losses and non-performing loans was adequate.
The
allowance for loan losses amounted to $3,310,080 at June 30, 2007, an increase
of $81,720 from December 31, 2006. The ratio of the allowance for
loan losses to total loans was 1.12% at June 30, 2007 and 1.16% at December
31,
2006, respectively. Management believes the quality of the loan
portfolio remains strong and 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,
2007
|
|
|
December
31, 2006
|
|
|
June
30,
2006
|
|
Balance,
beginning of period
|
|
$ |
3,228,360
|
|
|
$ |
2,361,375
|
|
|
$ |
2,361,375
|
|
Provision
charged to operating expenses
|
|
|
70,000
|
|
|
|
893,500
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
(65,891 |
) |
|
|
(11,154 |
) |
|
|
(11,154 |
) |
Loans
to individuals
|
|
|
(1,614 |
) |
|
|
(18,314 |
) |
|
|
(285 |
) |
Lease
financing
|
|
|
(478 |
) |
|
|
-
|
|
|
|
-
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(67,983 |
) |
|
|
(29,468 |
) |
|
|
(11,439 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
Residential
real estate loans
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Commercial
and commercial real estate
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
Loans
to individuals
|
|
|
4,703
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Lease
financing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
All
other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
79,703
|
|
|
|
2,953
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(charge offs) / recoveries
|
|
|
|
|
|
|
(26,515 |
) |
|
|
(8,639 |
) |
Balance,
end of period
|
|
$ |
3,310,080
|
|
|
$ |
3,228,360
|
|
|
$ |
2,692,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
At
period end
|
|
$ |
294,514,117
|
|
|
$ |
278,751,255
|
|
|
$ |
277,471,033
|
|
Average
during the period
|
|
|
285,094,544
|
|
|
|
271,740,647
|
|
|
|
264,896,605
|
|
Net
charge offs to average loans outstanding
|
|
|
0.00 |
% |
|
|
(0.01 |
%) |
|
|
0.00 |
% |
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans at period end
|
|
|
1.12 |
% |
|
|
1.16 |
% |
|
|
0.97 |
% |
Non-performing
loans
|
|
|
94.74 |
% |
|
|
76.99 |
% |
|
|
325.25 |
% |
|
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 Company’s primary focus being on building and
expanding long-term relationships.
Total
deposits increased $13,226,061, or 4.2%, to $325,950,483 at June 30, 2007 from
$312,724,422 at December 31, 2006. On February 27, 2007, the Bank
acquired all of the deposit liabilities and related assets of the Hightstown,
New Jersey branch banking office of another financial
institution. This acquisition added approximately $19 million in new
deposits.
Borrowings
Borrowings
are mainly comprised of fixed rate convertible advances from the Federal Home
Loan Bank (“FHLB”) and federal funds purchased. These borrowings are
primarily used to fund asset growth not supported by deposit
generation. The balance of other borrowings at June 30, 2007
consisted of long-term FHLB borrowings of $15,500,000 and overnight funds
purchased of $27,500,000. The balance of borrowings at December 31,
2006 consisted of long-term FHLB borrowings of $15,500,000 and overnight funds
purchased of $1,700,000. FHLB advances are fully secured by
marketable securities.
Shareholders’
Equity And Dividends
Shareholders’
equity at June 30, 2007 totaled $37,392,343, an increase of $2,195,773, or
6.2%,
from $35,196,570 at December 31, 2006. Book value per common share
rose to $10.02 at June 30, 2007 from $9.40 at December 31, 2006. The
ratio of shareholders’ equity to total assets was 8.73% at June 30, 2007 and
8.96% at December 31, 2006.
The
increase in shareholders’ equity and book value per share resulted primarily
from net income of $2,903,205 partially offset by the increase in unrealized
holding losses on available for sale securities.
The
Company’s stock is listed for trading on the Nasdaq Global Market System, under
the symbol “FCCY.”
In
2005,
the Board of Directors authorized a common stock repurchase program that allows
for the repurchase of a limited number of the Company’s shares at management’s
discretion on the open market. The Company undertook this repurchase
program in order to increase shareholder value. A table disclosing
repurchases of Company shares made during the quarter ended June 30, 2007 is
set
forth under Part II, Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
Actual
capital amounts and ratios for the Company and the Bank as of June 30, 2007
and
December 31, 2006 are as follows:
|
|
|
Actual
|
|
|
For
Capital
Adequacy
Purposes
|
|
To
Be Well Capitalized Under Prompt Corrective Action
Provision
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As
of June 30, 2007 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
59,514,548
|
|
|
|
17.60 |
% |
|
$ |
27,048,560
|
|
>
8%
|
|
$ |
33810,700
|
|
N/A
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
51,172,360
|
|
|
|
15.13 |
% |
|
|
13,524,280
|
|
>
4%
|
|
|
20,286,420
|
|
N/A
|
Tier
1 Capital to Average Assets
|
|
|
51,172,360
|
|
|
|
12.19 |
% |
|
|
16,788,365
|
|
>
4%
|
|
|
20,985,457
|
|
N/A
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
56,921,903
|
|
|
|
16.84 |
% |
|
$ |
27,048,560
|
|
>
8%
|
|
$ |
33,810,700
|
|
>10%
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
53,611,833
|
|
|
|
15.86 |
% |
|
|
13,524,280
|
|
>
4%
|
|
|
20,286,420
|
|
>
6%
|
Tier
1 Capital to Average Assets
|
|
|
53,611,823
|
|
|
|
12.80 |
% |
|
|
16,749,000
|
|
>
4%
|
|
|
20,936,250
|
|
>
5%
|
As
of December 31, 2006 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
62,614,642
|
|
|
|
20.23 |
% |
|
$ |
24,751,678
|
|
>8%
|
|
$ |
30,939,598
|
|
N/A
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
47,720,050
|
|
|
|
15.42 |
% |
|
|
12,375,839
|
|
>4%
|
|
|
18,563,759
|
|
N/A
|
Tier
1 Capital to Average Assets
|
|
|
47,720,050
|
|
|
|
12.18 |
% |
|
|
15,752,046
|
|
>4%
|
|
|
19,690,058
|
|
N/A
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to Risk Weighted Assets
|
|
$ |
53,871,072
|
|
|
|
17.38 |
% |
|
$ |
24,751,040
|
|
>8%
|
|
$ |
30,938,800
|
|
>10%
|
Tier
1 Capital to Risk Weighted Assets
|
|
|
50,542,712
|
|
|
|
16.34 |
% |
|
|
12,375,520
|
|
>4%
|
|
|
18,563,280
|
|
>6%
|
Tier
1 Capital to Average Assets
|
|
|
50,542,712
|
|
|
|
12.87 |
% |
|
|
15,710,320
|
|
>4%
|
|
|
19,637,900
|
|
>5%
|
|
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, 2007, the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is management’s goal to monitor and
maintain adequate capital levels to continue to support asset growth and
continue its status as a well-capitalized institution.
Liquidity
At
June
30, 2007, the amount of liquid assets remained at a level management deemed
adequate to ensure that contractual liabilities, depositors withdrawal
requirements, and other operational and customer credit needs could be
satisfied.
Liquidity
measures the ability to satisfy current and future cash flow needs as they
become due. Liquidity management refers to the Company’s ability to
support asset growth while satisfying the borrowing needs and deposit withdrawal
requirements of customers. In addition to maintaining liquid assets,
factors such as capital position, profitability, asset quality and availability
of funding affect a bank’s ability to meet its liquidity needs. On
the asset side, liquid funds are maintained in the form of cash and cash
equivalents, Federal funds sold, investment securities held to maturity maturing
within one year, securities available for sale and loans held for
sale. Additional asset-based liquidity is derived from scheduled loan
repayments as well as investment repayments of principal and interest from
mortgage-backed securities. On the liability side, the primary source
of liquidity is the
ability to generate core deposits. Short-term borrowings are used as
supplemental funding sources when growth in the core deposit base does not
keep
pace with that of earnings assets.
The
Bank
has established a borrowing relationship with the FHLB and a correspondent
bank
which further supports and enhances liquidity. At June 30, 2007, the
Bank maintained an Overnight Line of Credit at the FHLB in the amount of
$16,176,500 plus a One-Month Overnight Repricing Line of Credit of
$10,176,500. Effective August 1, 2007, these lines were renewed by
FHLB at the amount of $28,883,000 for the Overnight Line of Credit and the
One-Month Overnight Repricing Line of Credit. Advances issued under
these programs are subject to FHLB stock level and collateral
requirements. Pricing of these advances may fluctuate based on
existing market conditions. The Bank also maintains an unsecured
Federal funds line of $13,500,000 with a correspondent bank.
The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At June 30, 2007, the
balance of cash and cash equivalents was $9,580,485.
Net
cash
provided by operating activities totaled $6,840,786 in the six months ended
June
30, 2007 compared to $7,359,712 in the six months ended June 30,
2006. 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 $21,781,630 in the six months ended June
30, 2007 compared to $17,062,006 used in investing activities in the six months
ended June 30, 2006. The current period amount was primarily the
result of investment securities purchases partially offset by the cash and
cash
equivalents acquired with the Hightstown branch.
Net
cash
provided by financing activities amounted to $14,159,517 in the six months
ended
June 30, 2007 compared to $6,582,386 provided by financing activities in the
six
months ended June 30, 2006. The current period amount resulted
primarily from an increase in borrowings combined with a decrease in demand,
savings and time deposits plus the repayment of redeemable subordinated
debentures during the six months period ended June 30, 2007.
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, 2007, maturities and prepayments of investment securities
totaled $3,563,962. Another source of liquidity is the loan
portfolio, which provides a flow of payments and maturities.
The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for
the
Company’s future operating, investing and financing needs. Management
will continue to monitor the Company’s liquidity and maintain it at a level that
it deems adequate and not excessive.
Interest
Rate Sensitivity Analysis
The
largest component of the Company’s total income is net interest income, and the
majority of the Company’s financial instruments are composed of interest
rate-sensitive assets and liabilities with various terms and
maturities. The primary objective of management is to maximize net
interest income while minimizing interest rate risk. Interest rate
risk is derived from timing differences in the repricing of assets and
liabilities, loan prepayments, deposit withdrawals, and differences in lending
and funding rates. Management actively seeks to monitor and control
the mix of interest rate-sensitive assets and interest rate-sensitive
liabilities.
The
Company continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective,
and therefore, has focused its efforts on increasing the Company’s spread by
attracting lower-cost retail deposits.
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, 2007 and December 31, 2006,
the Company’s variance in the economic value equity as a percentage of assets
with an instantaneous and sustained parallel shift of 200 basis points is within
the negative 3% guideline, as shown in the tables below.
The
market capitalization of the Company should not be equated to the EVPE, which
only deals with the valuation of balance sheet cash flows using conservative
assumptions. Calculated core deposit premiums may be less than what
is available in an outright sale. The model does not consider
potential premiums on floating rate loan sales, the impact of overhead expense,
non-interest income, taxes, industry market price multiples and other factors
reflected in the market capitalization of a company.
The
following tables set forth certain information relating to the Company’s
financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the instruments fair value
at
June 30, 2007 and December 31, 2006.
Market
Risk Analysis
June
30, 2007
Change
in Interest Rates
|
|
Flat
|
|
|
-200bp
|
|
|
+200bp
|
|
Economic
Value of Portfolio Equity
|
|
$ |
49,748,000
|
|
|
$ |
50,615,000
|
|
|
$ |
44,189,000
|
|
Change
|
|
|
|
|
|
$ |
867,000
|
|
|
$ |
(5,559,000 |
) |
Change
as a Percentage of Assets
|
|
|
|
|
|
|
0.20 |
% |
|
|
(1.30 |
%) |
December
31, 2006
Change
in Interest Rates
|
|
Flat
|
|
|
-200bp
|
|
|
+200bp
|
|
Economic
Value of Portfolio Equity
|
|
$ |
47,670,000
|
|
|
$ |
46,869,000
|
|
|
$ |
44,183,000
|
|
Change
|
|
|
|
|
|
$ |
(800,000 |
) |
|
$ |
(3,487,000 |
) |
Change
as a Percentage of Assets
|
|
|
|
|
|
|
(0.20 |
%) |
|
|
(0.89 |
%) |
Item
4. Controls and
Procedures.
The
Company’s chief executive officer and chief financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this quarterly report. Disclosure controls and procedures include
those designed to ensure that information required to be disclosed is
accumulated and communicated to the Company’s management as appropriate to allow
timely decisions regarding disclosure. Based upon such evaluation, the Company’s
chief executive officer and chief financial officer have concluded that the
Company’s disclosure controls and procedures are effective as of the end of the
period covered by this quarterly report.
The
Company’s chief executive officer and chief financial officer have also
concluded that there have not been any changes in the Company’s internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
Issuer
Purchases of Equity Securities
In
2005,
the Board of Directors authorized a stock repurchase program under which the
Company may purchase in open market or privately negotiated transactions up
to
5% of its common shares outstanding on that date. The Company
undertook these repurchase programs 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 months ended June 30,
2007.
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, 2007
|
April
30, 2007
|
|
|
12,000
|
|
|
$ |
18.40
|
|
|
|
12,000
|
|
|
|
153,441
|
|
May
1, 2007
|
May
30, 2007
|
|
|
225
|
|
|
$ |
18.18
|
|
|
|
225
|
|
|
|
153,216
|
|
June
1, 2007
|
June
30, 2007
|
|
|
200
|
|
|
$ |
18.13
|
|
|
|
200
|
|
|
|
153,016
|
|
Total
|
|
|
12,425
|
|
|
$ |
18.39
|
|
|
|
12,425
|
|
|
|
153,016
|
|
_________________
(1)
|
The
Company’s common stock repurchase program covers a maximum of 175,271
shares of common stock of the Company, representing 5% of the outstanding
common stock of the Company on July 21, 2005, as adjusted for the
6% stock
dividend declared December 31, 2006 and paid on January 31,
2007.
|
Item
4. |
Submission
of Matters to a Vote of Securities Holders. |
The
Company’s Annual Meeting of Shareholders (the “Annual Meeting”) was held on May
24, 2007.
There
were present at the Annual Meeting in person or by proxy shareholders holding
an
aggregate of 3,195,726 shares of common stock of a total number of 3,742,860
shares of common stock issued, outstanding and entitled to vote at the Annual
Meeting.
At
the
Annual Meeting, Frank E. Walsh III and William M. Rue were re-elected as a
Class
III directors of the Company, with 3,190,664 shares votes cast for and 5,062
shares withheld. Directors whose term of office continued following
the meeting were Charles S. Crow, III, Robert F. Mangano, and David C.
Reed.
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 Company’s independent
auditor for the year ending December 31, 2007. The proposal was
approved by the shareholders, with 3,187,463 shares voting in favor of the
proposal and 8,263 shares voting against the proposal. There were
547,134 abstentions and broker non-votes.
Item
6. |
Exhibits. |
|
|
|
|
|
|
3(i)
|
|
Certificate
of Incorporation of the Company (incorporated by reference to Exhibit
3(i)
to the Company’s Form 10-K filed with the SEC on March 24,
2005)
|
|
|
|
|
|
3(ii)
|
|
Bylaws
of the Company (incorporated by reference to Exhibit 3(ii) to the
Company’s Form 10-QSB filed with the SEC on May 14,
2003)
|
|
|
|
|
|
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.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
1ST
CONSTITUTION
BANCORP |
|
|
|
|
|
Date:
August 13,
2007
|
By:
|
/s/ ROBERT
F. MANGANO |
|
|
|
Robert
F. Mangano |
|
|
|
President
and Chief Executive
Officer |
|
|
|
(Principal
Executive
Officer) |
|
|
|
|
|
|
|
|
|
Date:
August 13, 2007 |
By:
|
/s/
JOSEPH M. REARDON |
|
|
|
Joseph
M. Reardon |
|
|
|
Senior
Vice President and Treasurer |
|
|
|
(Principal
Accounting Officer) |
|
31