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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES ACT OF 1934
1st CONSTITUTION BANCORP
(Name of Small Business Issuer in Its Charter)
NEW JERSEY 22-3665653
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Each
To be so Registered Class to be Registered___
NONE NONE
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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Description Page
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS...........................................1
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
ITEM 3. - DESCRIPTION OF PROPERTY.........................................30
ITEM 4. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................31
ITEM 5. - DIRECTORS AND EXECUTIVE OFFICERS................................32
ITEM 6. -- EXECUTIVE COMPENSATION.........................................33
ITEM 7. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................35
ITEM 8. -- DESCRIPTION OF SECURITIES......................................36
PART II 37
ITEM 1. -- MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS...........................37
ITEM 2. -- LEGAL PROCEEDINGS..............................................38
ITEM 3. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS..................38
ITEM 4. -- RECENT SALES OF UNREGISTERED SECURITIES........................38
ITEM 5. -- INDEMNIFICATION OF DIRECTORS AND OFFICERS......................38
PART III
ITEM 1 - INDEX TO EXHIBITS................................................61
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
1ST CONSTITUTION BANCORP
1st Constitution Bancorp (the "Company") is a New Jersey state
chartered bank holding company organized in February, 1999. The Company was
incorporated for the purpose of acquiring all of the issued and outstanding
stock of 1st Constitution Bank (the "Bank") and thereby enabling the Bank to
operate within a bank holding company structure. The Company became an active
bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of
the Company. Other than its investment in the Bank, the Company currently
conducts no other significant business activities.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company as the sole shareholder of the Bank, and therefore the
rights of the Company's creditors and shareholders, to participate in the
distributions and earnings of the Bank, are subject to the prior claims of
creditors of the Bank. Such claims on the Bank by creditors include obligations
in respect of federal funds purchased and certain other borrowings, as well as
deposit liabilities.
As of December 31, 2000, the Company, on a consolidated basis, had
total assets of approximately $178.8 million, total deposits of approximately
$129.2 million, total loans of approximately $110.6 million and total
shareholders' equity of approximately $15.2 million.
The main office of the Company and the Bank is located at 2650 Route
130 North, Cranbury, New Jersey 08512, and the telephone number is (609)
655-4500.
1ST CONSTITUTION BANK
The Bank, a commercial bank formed under the laws of the State of New
Jersey, engages in the business of commercial and retail banking. As a
community bank, the Bank offers a wide range of services (including demand,
savings and time deposits and commercial and consumer/installment loans) to
individuals, small businesses and not-for-profit organizations principally in
Middlesex, Mercer and Somerset Counties , New Jersey. The Bank conducts its
operations through its main office located in Cranbury, New Jersey, and four
branch offices in downtown Cranbury, Hamilton Square, Plainsboro and Montgomery
Township, New Jersey. The Bank's deposits are insured up to applicable legal
limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank began operations in August 1989 during a period of slower
economic expansion and a severe downturn in the real estate market in New
Jersey. The Bank experienced modest profitability in the early years of
operation, but lagged behind its competition in performance. In September 1996,
the Board of Directors designated a new management team to change the direction
of the Bank. Management efforts have focused on positioning the Bank as the
dominant bank in the local market serving small businesses and consumers. To
achieve this goal, the Bank is focusing its efforts on:
- personal service;
- expansion of it branch network;
- innovative product offerings; and
- technological advances and e-commerce
Personal Service. The Bank provides a wide range of commercial and
consumer banking services to individuals, families, institutions and small
businesses in central New Jersey. The Bank's focus is to understand the needs of
the community and the customers and tailor products, services and advice to meet
those needs. The Bank seeks to provide a high level of personalized banking
services, emphasizing quick and flexible responses to customer demands.
Expansion of Branch Banking. The Bank is strategically positioned in a
growth area of central New Jersey, easily accessible to an extensive
transportation network. Increased demand for banking services has
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occurred over the last few years due to steady growth in population, personal
income and employment in Middlesex, Mercer and Somerset counties. This steady
population and business growth fuels the need for more health and personal
services as well as work on schools, municipal buildings, warehouses and roads.
The Bank continually evaluates opportunities for branch expansion, either mini
branches or full services banks, to continue to grow and meet the needs to of
the community.
Innovative Product Offerings. During the third quarter of 2000, the
Bank entered into an agreement to provide discount brokerage services to
customers through a joint venture agreement with National Discount Brokers
Group, Inc./ndb.com. A link on the Bank's website will enable customers to carry
out discounted securities trading, with the Bank sharing in the commissions
generated. This added feature to the Bank's website allows the Bank to offer
sophisticated financial services to its customers, thereby adding value and
convenience.
In 2000, the Bank introduced "1st Choice Banking", a seamless cash
management solution that links checking and investments into one account for
customers. With a minimum balance of $10,000, customers enjoy all the
flexibility of a free checking account while earning an investment rate of
return which keeps pace with the current short-term money markets.
Technological Advances and e-Commerce. The Bank recognizes that
customers want to receive service via their most convenient delivery channel, be
it the traditional branch office, by telephone, ATM, or the Internet. For this
reason, the Bank continues to enhance e-Commerce capabilities. At
www.1stconstitution.com, customers have easy account access to online banking
and bill payment system. Consumers can apply online for loans, execute trades
through the Bank's brokerage affiliate, and interact with senior management
through the e-mail system. Business customers have access to cash management
information and transaction capability through the Bank's online Business
Express, product offering. This overall expansion in electronic banking offers
the Bank's customers another means to access the Bank's services easily and at
their own convenience.
COMPETITION
The Bank experiences substantial competition in attracting and
retaining deposits and in making loans. In attracting deposits and borrowers,
the Bank competes with commercial banks, savings banks, and savings and loan
associations, as well as regional and national insurance companies and non-bank
banks, regulated small loan companies and local credit unions, regional and
national issuers of money market funds and corporate and government borrowers.
In New Jersey generally, and in the Bank's local market specifically, large
commercial banks, as well as savings banks and savings and loan associations,
hold a dominant market share and there has been significant merger activity in
the last few years, creating even larger competitors. By virtue of their larger
capital, asset size or reserves, many such institutions have substantially
greater lending limits and other resources than the Bank. In addition, many
such institutions are empowered to offer a wider range of services, including
trust services, than the Bank.
In addition to having established deposit bases and loan portfolios,
these institutions, particularly the large regional commercial and savings
banks, have the ability to finance extensive advertising campaigns and to
allocate considerable resources to locations and products perceived as
profitable. These institutions may have significantly larger lending limits
(ceilings on the amount of credit a bank may provide to a single customer that
are linked to the institution's capital) and, in certain cases, lower funding
costs (the price a bank must pay for deposits and other borrowed monies used to
make loans to customers) than the Bank.
Furthermore, in recent years non-bank financial institutions have begun
to offer more expanded services and it is expected that competition in these
areas will continue to increase. Some of these competitors are not subject to
the same degree of regulation and supervision as the Company and the Bank and
therefore may be able to offer customers more attractive products than the Bank.
Management of the Bank believes that loans to small and mid-sized
businesses and professionals are not always of primary importance to the larger
banking institutions, whereas they represent the main commercial loan business
of the Bank. The Bank competes for this segment of the market by providing
responsive personalized services, local decision-making and knowledge of its
customers and their businesses.
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LENDING ACTIVITIES
The Company's lending activities include both commercial and consumer
loans. Loan originations are derived from a number of sources including real
estate broker referrals, mortgage loan companies, direct solicitation by the
Company's loan officers, existing depositors and borrowers, builders, attorneys,
walk-in customers and, in some instances, other lenders. The Company has
established disciplined and systematic procedures for approving and monitoring
loans that vary depending on the size and nature of the loan.
Commercial Lending
The Bank offers a variety of commercial loan services including term
loans, lines of credit, equipment and receivable financing and agricultural
loans. A broad range of short-to-medium term commercial loans, both secured and
unsecured are made available to businesses for working capital (including
inventory and receivables), business expansion (including acquisition and
development of real estate and improvements), and the purchase of equipment and
machinery. At times, the Company also makes construction loans to real estate
developers for the acquisition, development and construction of residential
subdivisions.
Commercial loans are granted based on the borrower's ability to
generate cash flow to support its debt obligations and other cash related
expenses. A borrower's ability to repay commercial loans is substantially
dependent on the success of the business itself and of the quality of its
management. As a general practice, the Bank takes as collateral a security
interest in any available real estate, equipment, inventory, receivables or
other personal property, although such loans may also be made infrequently on an
unsecured basis. Generally, the Bank requires personal guaranties of its
commercial loans to offset the risks associated with such loans.
Residential Consumer Lending
A portion of the Bank's lending activities consists of the origination
of fixed and adjustable rate residential mortgage loans secured by
owner-occupied property located in the Bank's primary market areas. Home
mortgage lending is unique in that a broad geographic territory may be serviced
by originators working from strategically placed offices either within the
Bank's traditional banking facilities or from affordable storefront locations in
commercial buildings. In addition, the Bank offers construction loans, second
mortgage home improvement loans and home equity lines of credit.
The Bank finances the construction of individual, owner-occupied houses
on the basis of written underwriting and construction loan management
guidelines. First mortgage construction loans are made to solvent and competent
contractors on both a pre-sold and a "speculation" basis. Such loans are also
made to qualified individual borrowers and are generally supported by a take-out
commitment from a permanent lender. The Bank makes residential construction
loans to individuals who intend to erect owner occupied housing on a purchased
parcel of real estate. The construction phase of these loans have certain risks,
including the viability of the contractor, the contractor's ability to complete
the project and changes in interest rates.
In most cases, the Bank will sell its mortgage loans with terms of 15
years or more in the secondary market. The sale to the secondary market allows
the Bank to hedge against the interest rate risks related to such lending
operations. This brokerage arrangement allows the Bank to accommodate its
clients' demands while eliminating the interest rate risk for the 15 to 30 year
period generally associated with such loans.
The Bank in most cases requires title, fire, extended casualty
insurance, and where required by applicable regulations, flood insurance to be
obtained by the borrower. The Bank maintains its own errors and omissions
insurance policy to protect against loss in the event of failure of a mortgagor
to pay premiums on fire and other hazard insurance policies. Mortgage loans
originated by the Bank customarily include a "due on sale" clause giving the
Bank the right to declare a loan immediately due and payable in the event, among
other matters, that the borrower sells or otherwise disposes of the real
property subject to a mortgage. In general, the Bank enforces due on sales
clauses. Borrowers are typically permitted to refinance or repay loans at their
option without penalty.
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Non-Residential Consumer Lending
Non-residential consumer loans made by the Bank include loans for
automobiles, recreation vehicles, boats, personal (secured and unsecured) and
deposit account secured loans. The Bank also conducts various indirect lending
activities through established retail companies in its market areas.
Non-residential consumer loans are attractive to the Bank because they typically
have a shorter term and carry higher interest rates than that charged on other
types of loans. Non-residential consumer loans, however, do pose additional risk
of collectability when compared to traditional types of loans granted by
commercial banks such as residential mortgage loans.
Consumer loans are granted based on employment and financial
information solicited from prospective borrowers as well as credit records
collected from various reporting agencies. Stability of the borrower,
willingness to pay and credit history are the primary factors to be considered.
The availability of collateral is also a factor considered in making such a
loan. The Bank seeks collateral that can be assigned and has good marketability
with a clearly adequate margin of value. The geographic area of the borrower is
another consideration, with preference given to borrowers in the Bank's primary
market areas.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of
the bank regulatory scheme are to maintain a safe and sound banking system and
to facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
myriad legislation that governs banks, bank holding companies and the banking
industry. This regulatory framework is intended primarily for the protection of
depositors and not for the protection of the Company's stockholders.
Descriptions of and references to the statutes and regulations below are brief
summaries thereof, and do not purport to be complete. The descriptions are
qualified in their entirety by reference to the specific statutes and
regulations discussed.
THE COMPANY
State and Federal Bank Holding Company Regulations
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As a bank holding company,
the Company is required to file with the Federal Reserve Board an annual report
and such additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may also make examinations of
the Company and its subsidiaries. In addition, the Company is subject to capital
standards similar to, but separate from, those applicable to the Bank.
Under the BHCA, bank holding companies that are not financial holding
companies (as defined below) generally may not acquire the ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
company, including a bank or another bank holding company, without the Federal
Reserve Board's prior approval. The Company it is not a financial holding
company and did obtain such approval to acquire the shares of the Bank. A bank
holding company that does not qualify as a financial holding company is
generally limited in the types of activities in which it may engage to those
that the Federal Reserve Board had recognized as permissible for bank holding
companies prior to the date of enactment of the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 ("GLBA"). At present, the Company does not
engage in any significant activity other than owning the Bank.
A holding company and its banking subsidiary are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or lease or sale of any property or the furnishing of services.
The GLBA which was enacted in November 1999 and most provisions of
which became effective in March 2000, permits greater affiliation among banks,
securities firms, insurance companies, and other companies under a new type of
financial services company known as "financial holding company". A financial
holding company essentially is a bank holding company with significantly
expanded powers. The Company has not elected to become a financial holding
company. The Company believes that the GLBA will not have a material adverse
effect on its operations in the near-term. However, to the extent that it
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
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result in a growing number of larger financial institutions that offer a wider
variety of financial services than the Company currently offers and that can
aggressively compete in the markets that the Company currently serves.
In addition to Federal bank holding company regulation, the Company is
registered as a bank holding company with the New Jersey Department of Banking
and Insurance (the "Department"). The Company is required to file with the
Department copies of the reports it files with the Federal banking and
securities regulators.
Capital Adequacy
The Company is required to comply with minimum capital adequacy
standards established by the Federal Reserve. There are two basic measures of
capital adequacy for bank holding companies and the depository institutions that
they own: a risk based measure and a leverage measure. All applicable capital
standards must be satisfied for a bank holding company to be considered in
compliance.
The risk-based capital guidelines for bank holding companies, such as
the Company currently require a minimum ratio of total capital to risk-weighted
assets (including off-balance sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital is required to be Tier 1
capital, consisting principally of common shareholders' equity, noncumulative
perpetual preferred stock, a limited amount of cumulative perpetual preferred
stock and minority interest in the equity accounts of consolidated subsidiaries,
less goodwill. The remainder (Tier 2 capital) may consist of a limited amount of
subordinated debt and intermediate-term preferred stock, certain hybrid capital
instruments and other debt securities, perpetual preferred stock and a limited
amount of the general loan loss allowance. At December 31, 2000, the Company
maintained a Tier 1 capital ratio of 12.53% and total qualifying capital ratio
of 13.46%. As of March 31, 2001, these ratios were 10.98%, and 11.81%,
respectively.
In addition to the risk-based capital guidelines, the Federal banking
regulators established minimum leverage ratio (Tier 1 capital to total assets)
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are required
to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum.
The Company's leverage ratio at December 31, 2000 was 8.61%. As of March 31,
2001, this ratio was 8.52%
Restrictions on Dividends
The primary source of dividends paid to the Company's stockholders is
dividends paid to the Company by the Bank. Dividend payments by the Bank to the
Company are subject to the New Jersey Banking Act of 1948 (the "Banking Act")
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Act and
the FDIA, the Bank may not pay any dividends, if after paying the dividend, it
would be undercapitalized under applicable capital requirements. In addition to
these explicit limitations, the federal regulatory agencies are authorized to
prohibit a banking subsidiary or bank holding company from engaging in an
unsafe or unsound banking practice. Depending upon the circumstances, the
agencies could take the position that paying a dividend would constitute an
unsafe or unsound banking practice
It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income
available over the past year and only if prospective earnings retention is
consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain
a level of cash dividend that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiary.
The Bank has never paid a cash dividend, and the Bank's Board of
Directors does not plan to pay a cash dividend in the foreseeable future. The
Bank has paid a stock dividend every year from 1993 to 1999 when it was
acquired by the Company. The Company has paid a 5% stock dividend every year
since its formation in 1999 and anticipates the consideration of stock
dividends in the future.
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THE BANK
The Bank, a New Jersey-chartered commercial bank, is subject to
supervision and examination by the New Jersey Department of Banking and
Insurance. In addition, because the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC") the Bank is subject to
regulation by the FDIC.
The Bank must comply with various requirements and restrictions under
Federal and state law, including the maintenance of reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, limitations on the types of investments
that may be made and the services that may be offered, and restrictions on
dividends as described in the preceding section. Consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board which influence the money supply and credit availability
in the national economy.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods. CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with CRA. CRA requires the FDIC to assess an institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires that the FDIC
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. An institution's CRA rating is
considered in determining whether to grant charters, branches and other deposit
facilities, relocations, mergers, consolidations and acquisitions. Performance
less than satisfactory may be the basis for denying an application. The Bank is
currently rated "satisfactory" under CRA.
Insurance of Deposits
The Bank's deposits are insured up to a maximum of $100,000 per
depositor under the Bank Insurance Fund (BIF). The Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA") is applicable to depository
institutions and deposit insurance. FDICIA requires the FDIC to establish a
risk-based assessment system for all insured depository institutions. Under this
legislation, the FDIC is required to establish an insurance premium assessment
system based upon: (i) the probability that the insurance fund will incur a loss
with respect to the institution, (ii) the likely amount of the loss, and (iii)
the revenue needs of the insurance fund. In compliance with this mandate, the
FDIC has developed a matrix that sets the assessment premium for a particular
institution in accordance with its capital level and overall rating by the
primary regulator. Under the matrix as currently in effect, the assessment rate
ranges from 0 to 27 basis points of assessed deposits. The Bank is also subject
to a quarterly FICO assessment.
EMPLOYEES
The Company is a bank holding company and has two paid employees.
Banking operations are conducted by the Bank, and as of March 31, 2001, the Bank
had 48 full-time employees and 7 part-time employees. The Bank's employees are
not represented by any collective bargaining group. The Bank considers its
relations with such employees to be good.
SPECIAL FACTORS
THE COMMON STOCK OF THE COMPANY IS SPECULATIVE IN NATURE AND INVOLVES
A SIGNIFICANT DEGREE OF RISK. THE SPECIAL FACTORS BELOW ARE NOT LISTED IN ORDER
OF IMPORTANCE.
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LIMITED MARKET FOR COMMON STOCK
The Company's Common Stock is presently thinly traded on the OTC
Bulletin Board. The Company intends to apply to the Nasdaq Small Cap Market to
provide quotations for its shares, however, it is not anticipated that an
active trading market in the Common Stock will develop. Therefore, no assurance
can be given that any active trading market will develop in the future or that
a stockholder will otherwise be able to dispose of his or her shares of Common
Stock. Each stockholder must be prepared to bear the economic risk of any such
investment. See "MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
AND OTHER MATTERS."
ABSENCE OF CASH DIVIDENDS
Various federal and state regulations restrict the payment of dividends
by banks and bank holding companies. The Company and the Bank have never paid a
cash dividend on their respective Common Stock. The primary source of dividends
paid to the Company's stockholders is dividends paid to the Company by the
Bank. It is anticipated that the Board of Directors of the Bank will continue
to follow a policy of retaining earnings, if any, for the purpose of increasing
the Bank's capital for the foreseeable future. Therefore, it is unlikely that
cash dividends will be paid by the Company during the foreseeable future.
However, the Company has paid a stock dividend every year since formation in
1999 and anticipates the consideration of stock dividends in the future. See "
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER MATTERS."
EXPANSION
The Company has experienced growth fueled by the Bank's branch expansion
and the acquisition of large local competitors by out-of-market institutions.
The Company expects this growth to continue. To date, the Company has not
experienced any material problems as a result of this expansion. The Company
believes it has in place the management and systems, including data processing
systems, internal controls and a strong credit culture, to support continued
growth. However, the Company's continued growth and profitability depends on
the ability of its officers and key employees to manage such growth
effectively, to attract and retain skilled employees and to maintain adequate
internal controls and a strong credit culture. Accordingly, there can be no
assurance that the Company will be successful in managing its expansion, and
the failure to do so could adversely affect the Company's financial condition
and results of operations.
A natural corollary of the Company's growth, particularly its branch
expansion strategy, is a significant increase in non-interest expense. These
costs are associated with branch construction or acquisition and the increased
staffing and equipment needs necessary to create the infrastructure to support
this growth. Because the Company expects growth to continue, in part because of
its ongoing branch expansion strategy, non-interest expenses of the Company are
expected to rise in the future, which may reduce net income in the near term.
ALLOWANCE FOR LOAN LOSSES
The Bank has established an allowance for loan losses which
management believes to be adequate to offset probable losses currently
inherent in the Bank's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Bank to increase its allowance for
loan losses. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Financial Condition."
COMPETITION
The Company faces significant competition from many other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in the Company's market area. Non-bank financial
institutions, such as securities brokerage firms, insurance companies and money
market funds, have also recently been permitted to engage in activities which
compete directly with traditional bank business which has also led to greater
competition. Many of these competitors have substantially greater financial
resources than the Company, including larger capital bases that allow them to
attract customers seeking larger loans than the Company is able to
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accommodate and the ability to aggressively advertise their products. There can
be no assurance that the Company and the Bank will be able to successfully
compete in the future. See "DESCRIPTION OF BUSINESS - Competition."
ECONOMIC CONDITIONS AND RELATED UNCERTAINTIES
Commercial banking is affected, directly and indirectly, by local,
domestic, and international economic and political conditions, and by
government monetary and fiscal policies. Conditions such as inflation,
recession, unemployment, volatile interest rates, tight money supply, scarce
natural resources, real estate values, international conflicts and other
factors beyond the control of the Company may adversely affect the potential
profitability of the Company. Management does not expect any particular factor
to affect the Company's results of operations. However, a downtrend in several
areas, such as real estate, construction and consumer spending, could have a
material adverse impact on the Company's ability to maintain or increase
profitability.
FEDERAL AND STATE GOVERNMENT REGULATION
The operations of the Company and the Bank are heavily regulated and
will be affected by present and future legislation and by the policies
established from time to time by various Federal and state regulatory
authorities. In particular, the monetary policies of the Federal Reserve Board
have had a significant effect on the operating results of banks in the past and
are expected to continue to do so in the future. Among the instruments of
monetary policy used by the Federal Reserve Board to implement its objectives
is changes in the discount rate charged on bank borrowings. It is not possible
to predict what changes, if any, will be made to the monetary policies of the
Federal Reserve Board or to existing Federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
The Company and the Bank are subject to examination, supervision and
comprehensive regulation by various federal and state agencies. Compliance with
the rules and regulations of these agencies may be costly and may limit growth
and restrict certain activities, including payment of dividends, investments,
loans and interest rate charges, interest rates paid on deposits, and location
of offices. The Bank is also subject to capitalization guidelines set forth in
federal legislation. See "BUSINESS - Supervision and Regulation."
The laws and regulations applicable to the banking industry could change
at any time, and we cannot predict the impact of these changes on our business
and profitability. Because government regulation greatly effects the business
and financial results of all commercial banks and bank holding companies, the
cost of compliance could adversely affect the Company's ability to operate
profitably.
DILUTION
The Company has no present intention to issue additional stock, but may
attempt to do so in the future if additional capital is required or useful. The
Company has not attempted to determine whether additional capital should be
available or the terms on which such capital might be available. The Company's
Common Stock is not subject to any preemptive rights. Therefore, a
stockholder's percentage ownership of the Company will be diluted if the
Company sells additional shares of Common Stock, and as it grants stock awards,
options or other awards to hire or retain employees. "DESCRIPTION OF
SECURTIES-Preemptive Rights".
DEPENDENCE UPON KEY PERSONNEL
In September 1996, the Bank's Board of Directors designated a new
management team, headed by Mr. Robert F. Mangano, President and Chief Executive
Officer, to change the direction of the Bank. The Company's and the Bank's
growth and development since that time has been largely dependent upon the
services of Mr. Mangano. The Company has a three year employment agreement with
Mr. Mangano which expires in April 2004, subject to annual renewals. The loss of
Mr. Mangano could have a material adverse effect on the Company and the Bank.
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FORWARD LOOKING STATEMENTS
When used in this and in future filings by the Company with the
Securities and Exchange Commission, 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 likely result," "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 my cause actual results to differ from those results
expressed or implied, include, but are no limited to, 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;
and technological changes. 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. Such risks and other aspects of the Company's
business and operations are described in "Description of the Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to provide information
about the financial condition and results of operations of the Company for the
years ended December 31, 2000 and 1999 and for the periods ended March 31, 2001
and 2000 and should be read in conjunction with the Financial Statements of the
Company and related notes included elsewhere herein. Throughout the following
sections, the Company is defined as 1st Constitution Bancorp and its wholly
owned subsidiary, 1st Constitution Bank and its wholly owned subsidiaries, 1st
Constitution Investment Company and FCB Asset Holdings, Inc.
OVERVIEW
The Company's record earnings for 2000 reflect continuing momentum
across a broad range of products and services offerings. Increased lending
activity, coupled with a rise in demand deposits fueled record earnings and
balance sheet growth. The following table presents selected financial data as of
December 31, 2000 and 1999, respectively, and for the years then ended. This
table should be read in conjunction with the Company's financial statements and
the notes thereto included herein.
9
12
AT OR FOR THE YEARS ENDED DECEMBER 31 2000 1999
--------------------------------------------------------------------------------
HIGHLIGHTS
Net income $1,729,778 $1,446,842
Return on average assets 1.08% 1.03%
Return on average equity 13.09% 11.74%
Net interest margin 4.75% 4.29%
--------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net interest income $7,167,837 $5,629,062
Provision for loan losses 215,875 188,875
Non-interest income 865,878 1,270,868
Non-interest expenses 5,095,732 4,425,213
--------------------------------------------------------------------------------
BALANCE SHEET DATA
Total Assets $178,840,375 $146,802,481
Total Deposits 129,193,041 117,933,572
Total Loans 110,631,471 84,917,615
Shareholders' Equity 15,220,830 12,479,498
Intangible Assets 16,355 33,629
Allowance for Loan Losses 1,132,555 941,556
--------------------------------------------------------------------------------
SHARE INFORMATION*
Earnings per share - Basic $1.29 $1.08
Earnings per share - Diluted $1.27 $1.05
Book value per share $11.37 $9.32
Average diluted shares outstanding 1,359,937 1,380,556
--------------------------------------------------------------------------------
CAPITAL RATIOS
Total capital to risk-weighted assets 13.46% 15.14%
Tier 1 capital to risk-weighted assets 12.53% 14.17%
Tier 1 capital to average assets 8.61% 9.44%
*All per share data has been restated to reflect the five percent stock
dividends paid in the first quarter of fiscal 2000 and 2001.
The Company reported earnings of $1,729,778 or $1.27 per share
(diluted) for the year ended December 31, 2000 compared to $1,446,842 or $1.05
per share (diluted) in 1999. Net income and earnings per share grew 19.6% and
21.0%, respectively, in 2000. The increase in earnings per share in 2000 is
principally attributable to increased loan originations, deposits and fee
income.
Net income totaled $480,254 for the three months ended March 31, 2001,
an increase of 30.4% over the $368,176 for the same period in 2000. On a diluted
per share basis, net income for the first quarter of 2001 was $0.35 per share
compared to $0.27 per share for the first quarter of 2000. All per share amounts
have been restated to give effect to a 5% stock dividend declared on December
21, 2000.
Return on average assets and return on average equity for the first
quarter of 2001 were 1.05% and 12.71%, respectively, compared to 1.02% and
11.83%, respectively, for the same 2000 period.
10
13
NET INTEREST INCOME
The following tables set forth the Company's consolidated average
balances of assets, liabilities and shareholders' equity as well as interest
income and expense on related items, and the Company's average rate for the
years ended December 31, 2000 and 1999. The average rates are derived by
dividing interest income and expense by the average balance of assets or
liabilities.
11
14
AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis) 2000 1999
Average Average Average Average
Balance Interest Rate Balance Interest Rate
ASSETS:
Federal Funds Sold/Short-Term Investments $3,758,186 $240,055 6.39% $3,426,114 $168,684 4.92%
Investment Securities:
U.S. Treasury Bonds 494,042 25,592 5.18% 835,475 46,620 5.58%
Collateralized Mortgage Obligations 45,961,785 3,104,238 6.75% 39,076,271 2,493,490 6.38%
States and Political Subdivisions 2,184,257 146,911 6.73% 1,582,653 107,725 6.81%
Total 48,640,084 3,276,741 6.74% 41,494,399 2,647,835 6.38%
Loan Portfolio:
Commercial 25,892,635 2,809,913 10.85% 21,115,219 9.56%
2,019,239
Installment 15,158,706 1,179,061 7.78% 13,542,197 7.53%
1,020,378
Commercial Mortgages and Construction 34,840,215 3,062,187 8.79% 30,339,251 8.25%
Wholesale 2,503,163
Residential Mortgages and Construction 17,690,917 1,411,992 7.98% 17,263,568 7.61%
Retail 1,313,025
All Other Loans 5,889,591 859,934 14.60% 4,885,578 10.14%
495,192
Total 99,472,064 9,323,088 9.37% 87,145,813 7,350,998 8.44%
TOTAL INTEREST-EARNING ASSETS $151,870,334 $12,839,884 8.45% $132,066,326 $10,167,517 7.70%
Allowance for Loan Losses (1,029,538)
(871,581)
Cash and Due From Bank 5,610,092
5,954,894
Other Assets
3,513,307 2,644,170
TOTAL ASSETS $159,964,195 $139,793,809
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Money Market and NOW Accounts $33,113,533 $897,502 2.71% $28,862,160 $840,587 2.91%
Savings Accounts 10,600,178 288,724 2.72% 9,956,583 271,485 2.73%
Certificates of Deposit 43,590,728 2,533,022 5.81% 43,300,649 2,348,076 5.42%
Certificates of Deposit of $100,000 and 8,446,002 511,190 6.05% 6,969,581 367,723 5.28%
Over
Federal Funds Purchased/Other Borrowed 23,688,305 1,393,962 5.88% 14,309,202 675,645 4.72%
Funds
TOTAL INTEREST-BEARING LIABILITIES $119,438,746 $5,624,400 4.71% $103,398,174 $4,503,516 4.36%
NET INTEREST SPREAD 3.74% 3.34%
Demand Deposits 25,596,993 21,842,138
Other Liabilities 1,715,203 2,232,419
Total Liabilities 146,750,942 127,472,731
Shareholders' Equity 13,213,254 12,321,077
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $159,964,196 $139,793,809
NET INTEREST MARGIN $7,215,484 4.75% $5,664,000 4.29%
------------------------------------------------------------------------------------------------------------------------------------
12
15
================================================================================
AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
--------------------------------------------------------------------------------
(yields on a tax-equivalent basis) Three months ended March 31, 2001
----------------------------------------------------
Average Average
Balance Interest Rate
----------------------------------------------------
ASSETS
Fed funs Sold/Short Term Investments $4,842,594 $59,140 4.95%
Investment Securities:
U.S. Treasury Bonds 499,489 6,358 5.16%
Collateralized Mortgage Obligations 54,479,932 917,510 6.74%
States and Political Subdivisions 2,749,251 46,699 6.79%
----------------------------------------------------
Total 57,728,672 970,567 6.73%
Loan Portfolio:
Commercial 24,759,297 716,520 11.74%
Installment 15,441,222 300,156 7.88%
Commercial Mortgages &
Construction Wholesale 49,327,016 1,026,055 8.44%
Residential Mortgage &
Construction Retail 18,714,433 375,309 8.13%
All Other Loans 7,313,061 202,460 11.07%
----------------------------------------------------
Total 115,555,029 2,620,503 9.20%
----------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 178,126,295 3,650,210 8.31%
=============
Allowance for Loan Losses (1,166,649)
Cash and Due form Bank 5,681,361
Other Assets 3,045,830
---------------
TOTAL ASSETS $185,686,837
===============
Interest-Bearing Liabilities:
Money Market and NOW Accounts $32,987,168 $239,368 2.94%
Savings Accounts 10,515,075 70,139 2.71%
Certificates of Deposit 48,583,317 740,488 6.18%
Certificates of Deposit of $100,000 and
Over 17,318,100 255,690 5.99%
Fed Funds Purchases/Other Borrowed Funds 28,769,902 371,499 5.24%
----------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 138,173,562 1,677,184 4.92%
====================================================
NET INTEREST SPREAD 3.39%
=============
Demand Deposits 29,532,862
Other Liabilities 2,650,325
---------------
Total Liabilities 170,356,749
Shareholder's Equity 15,330,088
---------------
Total Liabilities and Shareholders' Equity
185,686,837
===============
NET INTEREST MARGIN $1,973,026 4.49%
=================================
================================================================================
================================================================================
(yields on a tax-equivalent basis) Three months ended March 31, 2000
----------------------------------------------------
Average Average
Balance Interest Rate
----------------------------------------------------
ASSETS
Fed funs Sold/Short Term Investments $2,871,436 $43,186 6.03%
Investment Securities:
U.S. Treasury Bonds 492,292 6,391 5.21%
Collateralized Mortgage Obligations 43,996,055 728,785 6.63%
States and Political Subdivisions 1,579,205 26,866 6.80%
----------------------------------------------------
Total 46,067,552 762,042 6.62%
Loan Portfolio:
Commercial 25,266,467 634,937 10.08%
Installment 13,835,794 259,237 7.52%
Commercial Mortgages &
Construction Wholesale 29,319,867 617,788 8.45%
Residential Mortgage &
Construction Retail 14,058,778 264,057 7.53%
All Other Loans 5,421,311 288,612 14.60%
----------------------------------------------------
Total 87,902,217 2,064,631 9.42%
----------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 136,841,205 2,869,859 8.41%
=============
Allowance for Loan Losses (967,750)
Cash and Due form Bank 5,614,183
Other Assets 3,240,383
---------------
TOTAL ASSETS $144,728,021
===============
Interest-Bearing Liabilities:
Money Market and NOW Accounts $27,449,921 $168,484 2.46%
Savings Accounts 10,427,937 68,837 2.65%
Certificates of Deposit 43,748,762 586,939 5.38%
Certificates of Deposit of $100,000 and
Over 8,535,003 110,508 5.19%
Fed Funds Purchases/Other Borrowed Funds 17,876,675 246,081 5.52%
----------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 108,038,298 1,180,849 4.38%
====================================================
NET INTEREST SPREAD 4.03%
=============
Demand Deposits 22,665,847
Other Liabilities 1,501,762
Total Liabilities 132,205,907
Shareholder's Equity 12,522,114
---------------
Total Liabilities and Shareholders' Equity
144,728,021
===============
NET INTEREST MARGIN $1,689,010 4.95%
=================================
================================================================================
13
16
-----------------------------------------------------------------------------------------------------------------------------------
Rate/Volume Table Amount of Increase (Decrease)
Twelve Months Ended December 31,
2000 versus 1999
Due to Change in:
---------------------------------------
(Tax-equivalent basis) Volume Rate Total
--------- --------- ---------
Interest Income:
Loans:
Commercial $ 493,046 $ 297,628 $ 790,674
Installment 123,555 35,128 158,683
Commercial Mortgages and Construction- Wholesale 385,409 173,615 559,024
Residential Mortgages and Construction- Retail 34,038 64,929 98,967
All Other Loans 128,379 236,363 364,742
-----------------------------------------------------------------------------------------------
Total loans 1,164,427 807,664 1,972,090
-----------------------------------------------------------------------------------------------
Investment Securities:
U.S. Treasury Bonds (18,014) (3,014) (21,028)
Collateralized mortgage obligations 455,583 155,165 610,748
States and political subdivisions 40,576 (1,390) 39,186
-----------------------------------------------------------------------------------------------
Total Investment Securities 478,145 150,761 628,906
-----------------------------------------------------------------------------------------------
Federal Funds Sold / Short-Term Investments 17,459 53,912 71,371
-----------------------------------------------------------------------------------------------
Total Interest Income 1,660,031 1,012,337 2,672,367
-----------------------------------------------------------------------------------------------
Interest Expense:
Money Market and NOW Accounts 116,817 (59,902) 56,915
Savings Accounts 18,075 (836) 17,239
Certificates of Deposit 15,957 168,988 184,945
Certificates of Deposit of $100,000 And Over 85,892 57,575 143,467
Federal Funds Purchased / Other Borrowed Funds 516,150 202,167 718,317
-----------------------------------------------------------------------------------------------
Total interest expense 752,891 367,991 1,120,883
-----------------------------------------------------------------------------------------------
Net Interest Income $ 907,140 $ 644,346 $1,551,484
=======================================
14
17
==================================================================================================================
RATE/VOLUME TABLE Amount of Increase/(Decrease)
March 31, 2001 versus March 31, 2000
Due to Change in:
(Tax-equivalent basis) Volume Rate Total
---------- ---------- ----------
Interest Income:
Loans:
Commercial ($12,781) $94,363 $81,582
Installment 29,326 11,595 40,921
Commercial Mortgages & Construction-Wholesale 409,000 (733) 408,267
Residential Mortgages and Construction-Retail 88,903 22,349 111,252
All Other Loans 18,406 (104,558) (86,152)
----------------------------------------------------------- ---------- ---------- ----------
Total Loans 532,854 23,016 555,870
----------------------------------------------------------- ---------- ---------- ----------
Investment Securities:
U.S. Treasury Bonds 94 (127) (33)
Collateralized Mortgage Obligations 175,198 13,527 188,725
States and Political Subdivisions 19,872 (39) 19,833
----------------------------------------------------------- ---------- ---------- ----------
Total Investment Securities 195,164 13,361 208,525
----------------------------------------------------------- ---------- ---------- ----------
Federal Funds Sold/Short-Term Investments 26,711 (10,758) 15,953
----------------------------------------------------------- ---------- ---------- ----------
Total Interest Income 754,729 25,619 780,348
----------------------------------------------------------- ---------- ---------- ----------
Interest Expense:
Money Market and NOW Accounts 35,999 34,884 70,883
Savings Accounts 157 1,145 1,302
Certificates of Deposit 65,537 88,010 153,547
Certificates of Deposit of $100,000 and Over 121,037 24,145 145,182
Federal Funds Purchased/Other Borrowed Funds 137,932 (12,514) 125,418
----------------------------------------------------------- ---------- ---------- ----------
Total Interest Expense 360,662 135,670 496,332
----------------------------------------------------------- ---------- ---------- ----------
Net Interest Income $394,067 ($110,051) $284,016
----------------------------------------------------------- ========== ========== ==========
==================================================================================================================
Net interest income, the Company's largest and most significant
component of operating income, is the difference between interest and fees
earned on loans and other interest earning assets, and interest paid on deposits
and borrowed funds. Net interest income also depends upon the relative amount of
interest-earning assets, interest-bearing liabilities, and the interest rate
earned or paid on them. Net interest income represented 89.2% of the Company's
net revenues in 2000 and 81.6% of net revenues in 1999.
The Company's net interest income totaled $7,167,837 in 2000, an
increase of 27.3% from the $5,629,062 reported in 1999. As indicated in the
Rate/Volume Table, the principal factor contributing to the 2000 increase in net
interest income was an increase in the tax-equivalent interest income of
$2,672,367 resulting from increased loan and investment securities volumes. This
was supplemented by increases in both loan and investment securities yields due
to the higher interest rate environment in 2000.
Average interest-earning assets increased by $19,804,008 or 15.0% for
2000 primarily as a result of increases of $12,326,251 in loans and $7,145,685
in investment securities. Led by commercial loans, the Company's average loan
portfolio grew by 14.1% and loan yields averaged 9.37% in 2000 or 93 basis
points higher than 1999. This increase was primarily the result of 2000 loan
growth at higher yields amid a rising interest rate environment for the majority
of the year. The Company's average investment securities portfolio grew 17.2%,
and the yield on that portfolio increased 36 basis points when comparing 2000 to
1999. Overall, the yield on interest-earning assets increased 75 basis points to
8.45% in 2000 from 7.70% in 1999.
Interest expense was $5,624,400 for 2000, an increase of $1,120,884 or
24.9% from $4,503,516 a year ago. The increase in interest expense for the
comparable period is principally attributable to a rising interest rate
environment combined with higher levels of money market and NOW deposits and
other borrowed funds. Certificates of deposit of $100,000 and over were
aggressively priced throughout 2000 to contribute in the funding of loan growth.
The cost on these deposits increased 77 basis points in 2000 from 1999. Average
interest-bearing liabilities rose 15.5% in 2000 from 1999. The cost of total
interest-bearing liabilities increased 35 basis points to 4.71% in 2000 from
4.36% in 1999.
Changes in net interest income and net interest margin result from the
interaction between the volume and composition of earning assets,
interest-bearing liabilities, related yields, and associated funding costs. The
Rate/Volume table demonstrates the impact on net interest income of changes in
the volume of interest-earning assets and interest-bearing liabilities and
changes in interest rates earned and paid.
While the Company seeks to fund asset growth with lower cost savings,
money market, interest bearing checking and non-interest bearing demand
deposits, this is not always achievable, as asset growth rates can exceed the
growth rate in these deposit types. To attract lower cost deposits to fund asset
growth, management has continued to aggressively market certain lower costing
products and management anticipates that, over time, these products should
result in lower cost core deposits providing a higher percentage of new funding
than has recently been experienced. However, the ability of the Company to lower
the cost of interest bearing liabilities is dependent on market conditions.
The Company's net interest income for the first three months of 2001
was $1,957,879, an increase of $227,582 or 16.5% from net interest income of
$1,680,297 for the first three months of 2000. As indicated in the Rate/Volume
Table, the principal factor contributing to this increase was an increase in the
tax-equivalent interest income of $780,348, resulting from increased loan and
investment securities volumes. Offsetting this increase was a $496,332 increase
in interest expense. This increase in interest expense was primarily due to both
higher average balances of certificates of deposit and other borrowed funds and
higher rates on most liability categories.
The Company's net interest margin (tax-equivalent basis), which is net
interest income divided by average interest earning assets, was 4.49% for the
three month period ended March 31, 2001, a 46 basis point or 9.3% decline
compared to 4.95% for the three month period ended March 31, 2000. The principal
factor causing the decrease in the Company's net interest margin was the sharp
decline in market interest rates during the first quarter of 2001. This resulted
in yields on short-term investments and floating rate loans tied to the prime
rate to decline more quickly than the Company's interest bearing liabilities. As
a result of the interest rate movement, the yield on the Company's total
interest earning assets declined 10 basis points and the cost of interest
bearing liabilities increased 54 basis points compared to the prior year period,
as depositors shifted funds from lower yielding money market and savings
accounts to higher yielding certificates of deposit accounts.
15
18
The net interest margin (tax equivalent basis), which is net interest
income divided by average interest-earning assets, was 4.75% in 2000 compared
with 4.29% in 1999. The increase in the net interest margin resulted from those
factors discussed previously.
Average non-interest bearing demand deposits increased 17.2% to
$25,596,993 in 2000 from $21,842,138 in 1999. Business checking accounts and
expanding new business relationships have generated most of this increase.
Throughout the comparative periods, increases in average non-interest bearing
deposits contributed to the increases in net interest income.
NON-INTEREST INCOME
Non-interest income amounted to $865,878 in 2000 compared to $1,270,868
the prior year, a decrease of $404,990 or 31.9%.
Service charges on deposit accounts represent the largest single source
of non-interest income. Service charge revenues in 2000 totaled $326,441, a
decrease of 27.8% compared to $451,829 in 1999. This component of non-interest
income represented 37.7% and 35.6% of the total non-interest income in 2000 and
1999, respectively. Service charge income decreased in 2000 principally due to
the decrease in income from overdraft fees. The Company attributes the decrease
to pricing initiatives instituted in 2000. Management continues to utilize a
strategy of requiring compensating balances from its commercial customers. Those
who meet balance requirements are not assessed service charges.
The Company also generates non-interest income from a variety of
fee-based services. These include safe deposit rentals, wire transfer service
fees and Automated Teller Machine fees for non-customers. Deposit and service
fee charges are monitored annually by management to reflect current costs amid
the Company's competitive market.
Gains on sales of loans, net, decreased in 2000 to $285,681 from
$600,628 in 1999. The rising interest rate environment that existing during 2000
decreased the volume of mortgage loan originations and subsequent secondary
market mortgage loan sales. In 1999, a lower rate environment existed that
resulted in the reported gains on loan sales for those years.
The Company recorded net securities gains of $26,247 and $17,149 in
2000 and 1999, respectively. The gain in 2000 is primarily the result of a
modest portfolio restructuring in the last quarter of 2000. The purpose was to
improve the Company's longer-term interest rate risk position.
Non-interest income was $278,936 for the three months ended March 31,
2001, an increase of $129,825 or 87.1%, compared to non-interest income of
$149,111 for the same period in 2000. The increase was due primarily to gains on
sale of loans held for sale which increased by $91,749 over the same period of
2000.
Gain on sale of loans held for sale for the three months ended March
31, 2001 was $115,016 compared to $23,267 for the three months ended March 31,
2000. In January 2001, the Company added four full-time mortgage loan
originators in an effort to increase loan origination and secondary market sales
volumes. During 2000, the Company engaged non-employee contractors for this
service. During the first quarter of 2001, the volume of loans sold in the
secondary market amounted to $12,089,741 and resulted in the reported gain of
$115,016 compared to total loan sales volume of $4,117,807 and reported gain of
$23,267 for the comparable period of 2000.
NON-INTEREST EXPENSE
Twelve Months Ended December 31, 2000 Compared to December 31, 1999
Non-interest expense totaled $5,095,732 in 2000, an increase of
$670,519 or 15.2%, compared to $4,425,213 in 1999. The largest increase in
non-interest expense in 2000 compared to 1999 was in salaries and
16
19
employees benefits. To a lesser extent, occupancy, and other non-interest
expense also reflect increases for the comparable periods.
Salaries and employee benefits, which represents the largest portion of
non-interest expense, increased $272,216 in 2000, to $2,510,713, or 12.2% over
1999. During 2000, an increase in staffing levels was necessary to support the
Company's strong balance sheet growth and additional branches. Also contributing
to the increase were annual merit salary increases. Staffing costs, not
including benefits, rose 19.1% in 2000 compared to 1999. Salaries and employee
benefits as a percent of average assets were 1.57% in 2000 and 1.60% in 1999.
During 2000, net occupancy expense increased $119,283 to $709,169 from
$589,886 reported in 1999. The increase in occupancy expenses in 2000 compared
to 1999 was due primarily to a full year's operating expenses associated with
the Bank's Hamilton, Mercer County branch office. In October 1999, the Bank
occupied and began lease payments on this full service branch facility. The
occupancy expense component of total non-interest expense has remained constant
as a percentage of average assets at 0.4% in 2000 and 1999, respectively.
Equipment expenses increased $43,918 or 18.1% to $286,632 in 2000 from
$242,714 in 1999. Equipment expense includes depreciation on furniture and
equipment as well as maintenance on that equipment. Throughout 1999 management
upgraded equipment in preparation for Year 2000 and increased processing
capability to enhance productively. The Company's enhanced technology has
allowed management to further diversify business and consumer product lines.
Marketing expenses increased by $17,487, or 9.2% in 2000 to $208,294,
compared to $190,807 in 1999. In 2000, marketing efforts were concentrated on
advertising to generate deposits to support continuing asset growth in addition
to the Company's emphasis on participation in community activities. The
Company's entry into Hamilton, Mercer County in 1999 resulted in additional
marketing costs to enhance the Company's profile in a new market.
The Company's ratio of non-interest expense to average assets amounted
to 3.18% for 2000 compared to 3.16% for 1999.
An important industry productivity measure is the efficiency ratio. The
efficiency ratio is calculated by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio indicates
that more resources are being utilized to generate the same or greater volume of
income, while a decrease would indicate a more efficient allocation of
resources. The Company's efficiency ratio decreased in 2000 to 63.4% compared to
64.1% in 1999.
The following table presents the major components of non-interest
expense for the years indicated.
================================================================================
NON-INTEREST EXPENSES
2000 1999
-----------------------------
Salaries and employee benefits $2,510,713 $2,238,497
Occupancy expense 709,169 589,886
Equipment expense 286,632 242,714
Marketing 208,294 190,807
Computer services 415,627 314,970
Regulatory, professional and other fees 304,263 206,720
Office expense 255,387 233,908
All other expenses 405,647 407,711
------- -------
--------------------------------------------------------------------------------
Total $5,095,732 $4,425,213
---------- ----------
================================================================================
Three Months Ended March 31, 2001 Compared to March 31, 2000
Non-interest expense totaled $1,418,736 for the first three months of
2001, an increase of $215,204 or 17.9%, compared to $1,203,532 for the same
period in 2000. The largest increase in non-interest expense was in salaries and
employee benefits. To a lesser extent, occupancy and other operating expenses
also reflect increases for the first quarter of 2001 compared to 2000.
17
20
The following table presents the major components of non-interest
expenses for the periods indicated.
================================================================================
NON-INTEREST EXPENSES
Three months ended March 31,
2001 2000
------------ ------------
Salaries and employee benefits $750,192 $619,505
Occupancy expense 181,914 171,888
Equipment expense 70,465 75,150
Marketing 42,926 53,372
Computer services 118,067 92,683
Regulatory, professional and other fees 72,620 70,777
Office expense 82,409 62,217
All other expenses 100,143 57,940
------------ ------------
Total $1,418,736 $1,203,532
============ ============
================================================================================
Salaries and employee benefits increased $130,687 or 21.1% to $750,192
for the three months ended March 31, 2001 compared to $619,505 for the three
months ended March 31, 2000. Salary expense increased $122,545 or 22.3%
reflecting the increase in staffing for the mortgage loan origination function
plus normal annual salary increases. The increase in salaries and employee
benefits in the first quarter of 2001 accounted for 60.7% of the total increase
in non-interest expense when compared to the same period in 2000.
The Company's ratio of non-interest expense to average assets decreased
to 3.10% for the first quarter of 2001 compared to 3.33% for the first quarter
of 2000. The Company's efficiency ratio decreased to 63.4% for the first three
months of 2001 compared to a ratio of 65.8% for the first three months of 2000.
FINANCIAL CONDITION
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
December 31, 2000 Compared with December 31, 1999
Average interest-earning assets totaled $151,870,334 in 2000, an
increase of $19,804,008, or 15.0%, compared to 1999, reflecting growth in the
loan and investment securities portfolios. Loans increased $12,326,251, or
14.1%, to average $99,472,064, while investment securities increased $7,145,685,
or 17.2%, to average $48,640,084. The growth in interest-earning assets was
funded by increases in money market and NOW accounts, demand deposits, other
borrowed funds and shareholders' equity.
As a result of interest rates rising in the latter part of 1999 and
continuing to rise through most of the year 2000, the annual average rate earned
on interest-earning assets increased 75 basis points from 7.70% in 1999 to 8.45%
in 2000.
Average interest-bearing liabilities totaled $119,438,746 in 2000, an
increase of $16,040,572, or 15.5%, compared to 1999. The increase resulted
primarily from growth in money market and NOW accounts and Other Borrowed Funds.
The average balance of money market and NOW accounts increased $4,251,373, or
14.7%, to $33,113,533. The average balance of Other Borrowed Funds increased
$9,379,104, or 65.5%, to $23,688,305 in 2000 primarily due to an increase in
Federal Home Loan Bank ("FHLB") borrowings. The average interest rate paid on
interest-bearing liabilities increased 35 basis points to 4.71% in 2000.
18
21
March 31, 2001 Compared with December 31, 2000
Total consolidated assets at March 31, 2001 totaled $207,151,954, an
increase of $28,311,579 or 15.8% compared to $178,840,375 at December 31, 2000.
The growth in the Company's asset base during the first three months of 2001 was
primarily due to increases in cash and cash equivalents, securities available
for sale and the loan portfolio. These increases in assets were the result of a
significant increase in total deposits at March 31, 2001. Total deposits
increased by $23,071,455 or 17.8% to $152,264,496 at March 31, 2001 compared to
$129,193,041 at December 31, 2000.
Cash and Cash Equivalents At March 31, 2001, cash and cash equivalents
totaled $20,898,312 compared to $7,539,966 at December 31, 2000. Cash and cash
equivalents at March 31, 2001 consisted of cash and due from banks of
$12,041,030 and Federal funds sold/short term investments of $8,857,282. The
corresponding balances at December 31, 2000 were $6,839,966 and $700,000,
respectively. The higher balances of cash and cash equivalents at March 31, 2001
were primarily due to increased interest bearing deposit balances raised to fund
loan growth and manage the Company's liquidity position.
SECURITIES
December 31, 2000 Compared with December 31, 1999
The Company's investment securities portfolio amounted to $57,041,246,
or 31.9% of total assets at December 31, 2000 compared to $45,743,973, or 31.2%
of total assets at December 31, 1999. On an average balance basis, the
investment securities portfolio represented 32.0% of average interest-earning
assets for the year ended December 31, 2000 compared to 31.4% for the year ended
December 31, 1999. The average yield earned on the portfolio was 6.74% in 2000,
an increase of 36 basis points from 6.38% earning in 1999.
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 December 31, 2000, available-for-sale securities amounted
to $48,537,571, an increase of $11,185,382, or 29.9%, from year-end 1999. The
largest component of the portfolio, U.S. Government and Federal agency
securities, amounted to $45,677,219 at December 31, 2000, compared to
$18,726,883 at year-end 1999.
Sales of securities available for sale generated a gain of $26,247 in
2000, compared to a gain of $17,149 in 1999. Maturities of securities available
for sale amounted to $1,948,157 in 2000 and $7,283,842 in 1999. At December 31,
2000, the portfolio had a reduced level of net unrealized losses of $254,618,
compared to net unrealized losses of $1,822,471 at the end of the prior year as
a result of increasing interest rates in the latter part of 1999 that continued
into 2000. These unrealized losses are reflected net of tax in shareholders'
equity as other comprehensive income or 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 U.S.
Government and Federal agency securities. At December 31, 2000, securities held
to maturity totaled $8,503,675, an increase of $111,891, or 1.3%, from
$8,391,784 the prior year. The market value of the held-to-maturity portfolio at
year-end 2000 was $8,528,995, resulting in a net unrealized gain of $25,320.
19
22
March 31, 2001 Compared to December 31, 2000
Information relative to the Company's securities portfolio at March 31,
2001, is as follows:
=======================================================================================================================
Gross
Amortized Gross Unrealized Unrealized Estimated
March 31, 2001 Cost Gains Losses Market Value
------------------------------------------------ ----------- ---------------- ------------ ------------
Available for sale -
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $36,551,568 $44,126 $65,193 $36,530,501
Mortgage backed securities 15,236,782 76,918 861 15,312,839
FHLB stock and other securities 1,980,375 -- -- 1,980,375
----------- -------- ------- -----------
$53,768,725 $121,044 $66,054 $53,823,715
=========== ======== ======= ===========
Held to maturity -
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $4,591,199 $67,172 $15,851 $4,642,520
Mortgage backed securities 3,694,955 62,819 138 3,757,636
----------- -------- ------- -----------
$8,286,154 $129,991 $15,989 $8,400,156
=========== ======== ======= ===========
=======================================================================================================================
Securities represented 30.0% of total assets at March 31, 2001, and
31.9% at December 31, 2000. Total securities increased $5,068,623 or 8.9% at
March 31, 2001 to $62,109,869 compared to $57,041,246 at year-end 2000.
Securities available for sale totaled $53,823,715 at March 31, 2001, an
increase of $5,286,144 or 10.9% from year-end 2000. During the first quarter of
2001, $7,301,249 of securities available for sale were purchased, (predominantly
mortgage backed securities) and funded by deposit generation and calls and
maturities of securities held to maturity and securities available for sale.
Securities held to maturity totaled $8,286,154 at March 31, 2001, a
decrease of $217,521 or 2.6% from year-end 2000. This decline in held to
maturity securities was a result of calls and maturities and their subsequent
reinvestment in the securities available for sale portfolio.
The net unrealized gain on securities available for sale was $54,990 at
March 31, 2001 compared to a net unrealized loss of $254,618 at December 31,
2000. The net unrealized gain, net of tax effect, was $36,294 as reported in
accumulated other comprehensive income/(loss) in Shareholders' Equity at March
31, 2001, and the net unrealized loss, net of tax effect of $168,048 was
reported at December 31, 2000. The change from net unrealized loss to net
unrealized gain on securities available for sale is primarily due to the changes
in interest rates between December 31, 2000 and March 31, 2001.
20
23
The amortized cost, estimated market value and average yield of debt
securities at March 31, 2001, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
===================================================================================================
SECURITIES PORTFOLIO
Amortized Estimated
Cost Market Value Average Yield
----------- ------------ -------------
Maturity Range:
Due in one year or less $4,890,146 $4,894,526 5.22%
Due after one year through five years 7,301,197 7,357,919 6.48%
Due after five years through ten years 24,853,269 25,018,943 6.29%
Due after ten years 25,007,383 24,952,483 6.59%
----------- ----------- -------------
Total $62,051,995 $62,223,871 6.36%
----------- ----------- -------------
===================================================================================================
LOANS
December 31, 2000 Compared with December 31, 1999
The loan portfolio, which represents the Company's largest asset, is a
significant source of both interest and fee income. Elements of the loan
portfolio are subject to differing levels of credit and interest rate risk. The
Company's primary lending focus continues to be commercial loans, owner-occupied
commercial mortgage loans and tenanted commercial real estate loans. Total loans
averaged $99,472,064 during 2000, an increase of $12,326,251, or 12.4%, compared
to an average of $87,145,813 in 1999. Growth in the average loan portfolio
balance was generated by increases of $4,777,416, or 22.6% in commercial loans
and $4,500,964, or 14.8%, in commercial mortgage and construction wholesale
loans. At December 31, 2000, total loans amounted to $110,631,471 compared to
$84,917,615 the prior year, an increase of $25,713,856 or 30.3%. The average
yield earned on the loan portfolio was 9.37% in 2000 compared to 8.44% in 1999,
an increase of 93 basis points. This increase is primarily due to the higher
interest rate environment in 2000.
Commercial loans averaged $25,892,635 for 2000, an increase of 22.6%
compared to 1999. Commercial loans are made to small to middle market businesses
and are typically working capital loans used to finance inventory, receivables
or equipment needs. These loans are generally secured by business assets of the
commercial borrower. The average yield on the commercial loan portfolio
increased 129 basis points to 10.85% in 2000 from 9.56% the prior year. The
increased yield on this portfolio is primarily due to the higher interest rate
environment that existed throughout most of 2000, especially the higher average
prime rate, and competitive pricing.
Commercial mortgages and construction wholesale loans averaged
$34,840,215 for 2000, an increase of 14.8% compared to 1999. Generally, these
loans represent owner-occupied or investment properties and complement a broader
commercial relationship with the borrower. These loans are strictly underwritten
with advances made only after work is completed and inspected by qualified
professionals. The average yield on the commercial mortgages and construction
wholesale loan portfolio increased 54 basis points to 8.79% from 8.25% the prior
year.
Residential mortgages and construction retail loans averaged
$17,690,917 for 2000, an increase of 2.5% compared to 1999. These loans consist
primarily of residential mortgage loans, home equity loans and business loans
secured by residential real estate. The average yield on this portfolio
increased 37 basis points to 7.98% for 2000 from 7.61% the prior year.
21
24
March 31, 2001 Compared with December 31, 2000
The following table sets forth the classification of loans by major
category at March 31, 2001 and December 31, 2000.
======================================================================================================
LOAN PORTFOLIO COMPOSITION March 31, 2001 December 31, 2000
% %
Component Amount of total Amount of total
---------------------------------- ------------- ---------- ------------ ----------
Construction loans $23,026,420 19.7% $17,957,852 16.2%
Residential real estate loans 14,007,870 12.0% 14,854,583 13.4%
Commercial and industrial loans 57,468,855 49.1% 54,974,300 49.7%
Loans to individuals 14,892,365 12.7% 14,767,100 13.3%
Lease financing 7,422,253 6.3% 7,809,845 7.1%
All other loans 300,687 0.2% 267,791 0.3%
------------- ---------- ------------ ----------
$117,118,450 100.0% $110,631,471 100.0%
============ ====== ============ ======
======================================================================================================
The loan portfolio increased $6,486,979 or 5.9% at March 31, 2001 to
$117,118,450 from $110,631,471 at December 31, 2000. The Company's lending focus
continues to be on commercial and industrial loans and construction loans. The
ability of the Company to enter into larger loan relationships and management's
philosophy of relationship banking are key factors in continued loan growth.
Strong competition from both bank and non-bank competitors could result in
comparatively lower yields on new and established lending relationships. The
ultimate collectability of the loan portfolio and the recovery of the carrying
amount of real estate are subject to changes in the Company's market region's
economic environment and real estate market.
The following table provides information concerning the interest rate
sensitivity of the Company's commercial and industrial loans and construction
loans at March 31, 2001.
======================================================================================================
Loan Interest Rate Sensitivity
March 31, 2001
Within After One After
One But Within Five Total
Maturity Range Year Five Years Years
---------------------------------- ----------- ----------- ---------- -----------
Commercial and industrial loans $29,405,226 $26,987,602 $1,076,027 $57,468,855
Construction loans 22,636,405 390,015 0 23,026,420
----------- ----------- ---------- -----------
Total $52,041,631 $27,377,617 $1,076,027 $80,495,275
=========== =========== ========== ===========
Type
----------------------------------
Fixed rate loans $7,351,306 $6,746,900 $0 $14,098,206
Floating rate loans 44,690,325 20,630,717 1,076,027 $66,397,069
----------- ----------- ---------- -----------
Total $52,041,631 $27,377,617 $1,076,027 $80,495,275
=========== =========== ========== ===========
======================================================================================================
22
25
NON-PERFORMING ASSETS
Non-performing assets consist of non-performing loans and other real
estate owned. Non-performing loans are composed of (1) loans on a non-accrual
basis, (2) loans which are contractually past due 90 days or more as to interest
and principal payments but have not been classified as non-accrual and (3) loans
whose terms have been restructured to provide a reduction or deferral of
interest on principal because of a deterioration in the financial position of
the borrower.
The Company's policy with regard to non-accrual loans varies by the
type of loan involved. Generally, commercial loans are placed on a non-accrual
status when they are 90 days past due unless these loans are well secured and in
the process of collection or, regardless of the past due status of the loan,
when management determines that the complete recovery of principal or interest
is in doubt. Consumer loans are generally charged off after they become 120 days
past due. Residential mortgage loans are not generally placed on a non-accrual
status unless the value of the real estate has deteriorated to the point that a
potential loss of principal or interest exists. Subsequent payments are credited
to income only if collection of principal is not in doubt.
Non-performing loans totaled $577,999 at December 31, 2000, a decrease
of $59,355 from the $637,354 reported at December 31, 1999. The table below sets
forth non-performing assets and risk elements in the Company's portfolio by type
for the years and the period indicated. As the table demonstrates, loan quality
and ratios remain strong. This was accomplished through quality loan
underwriting, a proactive approach to loan monitoring and aggressive workout
strategies.
Non-performing assets decreased $59,355 to $577,999 at December 31,
2000 compared to $637,354 at December 31, 1999. Non-performing assets
represented 0.32% of total assets at December 31, 2000 and 0.43% at December 31,
1999. Non-performing assets as a percentage of total loans were 0.52% at
December 31, 2000, compared to 0.75% at December 31, 1999. There is no assurance
this positive trend will continue in the future.
The Company had no restructured loans, other real estate owned or
potential problem loans at March 31, 2001 and 1999.
At December 31, 2000, loans that were 90 days or more past due but
still accruing interest income represented only $471,040, or 0.43% of total
loans compared to $135,598, or 0.16% of total loans at December 31, 1999.
Management's decision to accrue income on these loans was based on the level of
collateral and the status of collection efforts.
===============================================================================================================
NON-PERFORMING ASSETS AND LOANS March 31 December 31 December 31
2001 2000 1999
--------------------------------------------------
Non-Performing loans:
Loans 90 days or more past due and still accruing $132,807 $471,040 $135,598
Non-accrual loans 309,857 106,959 501,756
--------------------------------------------------
Total non-performing 442,664 577,999 637,354
Other real estate owned 0 0 0
--------------------------------------------------
Total non-performing assets $442,664 $577,999 $637,354
==================================================
Non-performing loans to total loans 0.38% 0.52% 0.75%
Non-performing assets to total assets 0.21% 0.32% 0.43%
===============================================================================================================
Nonaccrual loans amounted to $309,857 at March 31, 2001, an increase of
$202,898 from $106,959 at year-end 2000. Loans 90 days or more past due and
still accruing decreased $338,233 from $471,040 at December 31, 2000 to $132,807
at March 31, 2001. The Bank held no other real estate owned at March 31, 2001
and at December 31, 2000. As the table demonstrates, loan quality and ratios
remain strong. This was accomplished through quality loan underwriting, a
proactive approach to loan monitoring and aggressive workout strategies.
23
26
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
The allowance for loan losses is maintained at a level believed by
management sufficient to absorb estimated credit losses in the loan portfolio as
of the date of the financial statements. The allowance for loan losses is a
valuation reserve available for losses incurred or inherent in the loan
portfolio and other extensions of credit.
Management utilizes a systematic and documented allowance adequacy
methodology for loan losses that requires specific allowance assessment for all
loans, including real estate mortgages and consumer loans. This methodology
assigns reserves based upon credit risk ratings for all loans. The reserves are
based upon various factors, including historical performance and the current
economic environment. Management continually reviews the process used to
determine the adequacy of the allowance for loan losses. Allocations to the
allowance for loan losses, both specific and general, are determined after this
review. Loans are classified based on internal reviews and evaluations performed
by the lending staff. These evaluations are, in turn, examined by the Company's
internal loan review specialist. A formal loan review function, independent of
loan origination, is used to identify and monitor risk classifications. The
following table presents, for the years indicated, an analysis of the allowance
for loan losses and other related data.
At December 31, 2000, the allowance for loan losses was $1,132,555
compared to $941,556 at the end of the prior year, an increase of $190,999, or
20.3%. The allowance for loan losses amount to $1,193,336 at March 31, 2001, an
increase of $60,781 from December 31, 2000. The ratio of the allowance for loan
losses to total loans were 1.02% at both March 31, 2001 and December 31, 2000
and 1.11%, at December 31, 1999 respectively. The allowance for loan losses as a
percentage of non-performing loans was 195.94% at December 31, 2000, compared to
147.73% at the end of 1999. This ratio was 269.58% at March 31, 2001. The
quality of the loan portfolio remains strong and it is management's belief that
the allowance for loan losses is adequate in relation to credit risk exposure
levels.
The provision for loan losses was $215,875 for the year ended December
31, 2000, an increase of $27,000, or 14.3%, from $188,875 recorded in 1999.
While the quality of the loan portfolio remains sound, the increase in the
provision for loan losses was due to loan growth and the inherent risk in the
loan portfolio. Net charge offs in 2000 amounted to $24,876 compared to $22,849
recorded in 1999.
======================================================================================================================
ALLOWANCE FOR LOAN LOSSES March 31 March 31 December 31 December 31
2001 2000 2000 1999
------------ ----------- ------------ -----------
Balance, beginning of period $1,132,555 $941,556 $941,556 $775,530
Provision charged to operating expenses 60,000 45,000 215,875 188,875
Loans charged off 0 (6,327) (28,158) (26,662)
Recoveries 781 0 3,282 3,813
Net (charge offs)/recoveries 781 (6,327) (24,876) (22,849)
------------ ----------- ------------ -----------
Balance, end of period $1,193,336 $980,229 $1,132,555 $941,556
============ =========== ============ ===========
Loans:
At year end $117,118,450 $88,977,880 $110,631,471 $84,917,615
Average during the year 115,555,029 87,902,217 99,472,064 87,145,813
Net charge offs to average loans outstanding 0.00% (0.01%) (0.03%) (0.03%)
Allowance for loan losses to:
Total loans at year end 1.02% 1.10% 1.02% 1.11%
Non-performing loans 269.58% 119.08% 195.94% 147.73%
======================================================================================================================
24
27
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 Bank 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. Deposits in 2000 averaged
$121,347,434, an increase of $10,416,323, or 9.4% compared to the 1999 average.
At December 31, 2000, total deposits were $129,193,041, an increase of
$11,259,469, or 9.5%, from year-end 1999. The average rate paid on the Company's
deposit balances in 2000 was 3.49%, increasing modestly from the 3.45% average
rate for 1999.
A significant contributor to the record level of deposit growth in the
year 2000 were demand deposits (interest bearing and non-interest bearing) which
increased $14,943,303, or 22.1%, from year-end 1999 to $67,640,717 at December
31, 2000. Average non-interest bearing demand deposits were $25,596,993 for
2000, an increase of $3,754,855, or 17.2%, from the prior year. Non-interest
bearing demand deposits represent a stable, interest-free source of funds.
Growth in business and personal checking accounts generated most of the
increase, primarily due to competitive minimum balance requirements.
Interest bearing demand deposits, which include interest-bearing
checking, money market and the Bank's premier money market product, 1st Choice
accounts, increased $4,251,373, or 14.7%, to an average of $33,113,533 in 2000.
The average cost of interest-bearing demand deposits decreased 20 basis points
to 2.71% in 2000 compared to 2.91% in 1999. Other time deposits, which consist
primarily of retail certificates of deposit, increased $290,079, or 0.7%, in
2000 to average $43,590,728. The average cost of other time deposits increased
39 basis points to 5.81% in 2000 from 5.42% in 1999.
Certificates of deposit of $100,000 and over are primarily used as an
additional funding source to support balance sheet growth and as an alternative
to other sources of borrowed funds. These deposits averaged $8,446,002 during
2000, an increase of $1,476,421or 21.2%, from 1999. The average cost of these
deposits increased 77 basis points during the year to 6.05% compared with 5.28%
in 1999.
The following table illustrates the components of average total
deposits for the years indicated.
==============================================================================================================
AVERAGE DEPOSIT BALANCES
2000 1999
---------------------------- ----------------------------
Average Percentage Average Percentage
Balance of Total Balance of Total
---------------------------- ----------------------------
Non-interest bearing demand deposits $25,596,993 21.09% $21,842,138 19.69%
Interest bearing demand deposits 33,113,533 27.29% 28,862,160 26.02%
Savings deposits 10,600,178 8.74% 9,956,583 8.98%
Certificates of deposit of $100,000 or more 8,446,002 6.96% 6,969,581 6.28%
Other time deposits 43,590,728 35.92% 43,300,649 39.03%
---------------------------- ----------------------------
Total $121,347,434 100.00% $110,931,111 100.00%
============================ ============================
==============================================================================================================
25
28
The following table provides information concerning the Company's total deposit
base at March 31, 2001 and December 31, 2000.
==============================================================================================================
--------------------------- ---------------------------
AVERAGE DEPOSIT BALANCES Three Months ended
March 31, 2001 December 31, 2000
--------------------------- ---------------------------
% of % of
Balance total Balance Total
--------------------------- ---------------------------
Non-interest bearing demand deposits $29,532,862 21.3% $31,462,624 24.4%
Interest bearing demand deposits 32,987,168 23.7% 36,178,093 28.0%
Savings deposits 10,515,075 7.6% 10,244,003 7.9%
Certificates of deposit of $100,000 or more 17,318,100 12.5% 6,617,511 5.1%
Other time deposits 48,583,317 35.0% 44,690,810 34.6%
--------------------------- ---------------------------
Total $138,936,521 100.0% $129,193,041 100.0%
--------------------------- ---------------------------
===============================================================================================================
Total deposits increased $23,071,455, or 17.9% to $152,264,496 at March
31, 2001 from $129,193,041 at December 31, 2000. The increase in deposits was
primarily the result of a $15,014,917 increase in certificates of deposit of
$100,000 or more totaling $21,632,428 at March 31, 2001 compared to $6,617,511
at December 31, 2000.
Individual time deposits of $100,000 or greater amounted to $21,632,428
at March 31, 2001. At March 31, 2001, time deposits mature as follows:
$62,802,615 within twelve months; $9,963,029 in over one year through three
years, and $671,011 in over three years.
OTHER BORROWED FUNDS
Other borrowed funds are mainly comprised of repurchase agreements,
Federal funds purchased and Federal Home Loan Bank ("FHLB") borrowings. These
borrowings are primarily used to fund asset growth not supported by deposit
generation. During 2000, the average balance of other borrowed funds was
$23,688,305, an increase of $9,379,104, or 65.5% from the average balance of
$14,309,201 for 1999.
The balances of other borrowed funds was $15,500,000 at December 31,
2000 and March 31, 2001, an increase of $12,500,000 from the prior year. The
average cost of other borrowed funds increased 116 basis points during the year
to 5.88% compared with 4.72% in 1999.
During 2000, the Company purchased three ten-year fixed rate
convertible advances from the FHLB. These advances, in the amounts of
$2,500,000; $5,000,000; and $5,000,000 bear interest at the rates of 5.50%;
5.34%; and 5.06%, respectively. These advances are convertible at the end of 1
year; 2 years; and 3 years and quarterly thereafter and reduce the Company's
exposure to rising interest rates.
During 1999, the Company purchased a $3,000,000 ten-year fixed rate
advance convertible at the end of three years, and quarterly thereafter, from
the FHLB. The interest rate on this advance is 5.815%. In 1999, the FHLB called
$2,000,000 in ten-year fixed rate convertible advances which were purchased in
1998. The Company purchased no advances from the FHLB during the first quarter
of 2001.
These advances are fully secured by marketable securities and
qualifying on-to-four family mortgage loans.
SHAREHOLDERS' EQUITY AND DIVIDENDS
Shareholders' equity at December 31, 2000 was $15,220,830, an increase
of $2,741,332, or 22.0%, compared to the prior year. Book value per common share
rose to $11.37 compared to $9.32 at December 31, 1999. The increase in
shareholders' equity and book value per share at December 31, 2000 resulted from
net income of $1,729,778, less the effect of the stock buyback discussed below
and net unrealized holding losses on securities.
26
29
Shareholders' equity at March 31, 2001 totaled $15,878,609, an increase
of $657,779, or 4.3%, compared to December 31, 2000. Book value per common share
rose to $11.87 at March 31, 2001. The increase in shareholders' equity and book
value per share at March 31, 2001 resulted from net income of $480,254 for the
first quarter of 2001 plus the net unrealized gain on securities available for
sale was $36,294 at March 31, 2001 compared to a net unrealized loss of $168,048
at December 31, 2000. This shift from a net unrealized loss to a net unrealized
gain resulted in a $204,342 increase in shareholders' equity. These increases
were partially offset by the $24,511 increase in Treasury Stock to $44,715 at
March 31, 2001 as a result of continuation of the Company's stock buyback
program.
In 2000, the Board of Directors authorized a stock buyback program that
allows for the repurchase of the Company's shares at management's discretion on
the open market.. During the three months ended March 31, 2001, 2,800 shares of
common stock were purchased and, during 2000, 1,890 shares were purchased under
this program. Treasury stock totaled $44,715 at March 31, 2001 compared to
$20,204 at December 31, 2000.
During the period 1996 - 2000, the Company has achieved a four year
compounded growth rate for shareholders' equity of 27.9% per annum. In addition,
the Company's book value per share has increased over this period at a
compounded growth rate of 14.7% per annum. In lieu of cash dividends, the
Company and, prior to its acquisition by the Company, the Bank, have declared a
stock dividend every year since 1992, which has been paid every year since 1993.
A 5% stock dividend was declared in the years 2000 and 1999 .
The Company's stock is not listed for trading on any securities
exchange, but quotations appear on the OTC Bulletin Board under the symbol
"FCCY". The Company intends to apply to the NASDAQ Small Cap Market to provide
quotations for its shares.
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Liquidity management refers to the Company's ability
to support asset growth while satisfying the borrowing needs and deposit
withdrawal requirements of customers. In addition to maintaining liquid assets,
factors such as capital position, profitability, asset quality and availability
of funding affect a banks' ability to meet its liquidity needs. On the asset
side, liquid funds are maintained in the form of cash and cash equivalents,
Federal funds sold, investment securities held to maturity maturing within one
year, securities available for sale and loans held for sale. Additional
asset-based liquidity is derived from scheduled loan repayments as well as
investment repayments of principal and interest from mortgage-backed securities.
On the liability side, the primary source of liquidity is the ability to
generate core deposits. Short-term borrowings are used as supplemental funding
sources when growth in the core deposit base does not keep pace with that of
earnings assets.
The Company has established borrowing relationship with the FHLB and
its correspondent banks which further support and enhance liquidity.
The Consolidated Statements of Cash Flows present the changes in cash
from operating, investing and financing activities. At December 31, 2000, the
cash balance was $7,539,966.
Net cash provided by operating activities totaled $2,202,761 in 2000
compared to $6,725,018 in 1999. The primary source of funds is net income from
operations adjusted for provision for loan losses, depreciation expenses, and
amortization of intangibles.
Net cash used in investing activities totaled $35,620,727 in 2000
compared to $19,992,719 in 1999. The increase in usage resulted from an increase
in loans.
Net cash provided by financing activities amounted to $28,541,065 in
2000 compared to $17,207,675 in 1999. The increase in 2000 resulted primarily
from an increase in other borrowed funds and deposits.
The securities portfolios are also a source of liquidity, providing
cash flows from maturities and periodic repayments of principal. During 2000,
maturities of investment securities totaled $3,201,266. Contractual and
anticipated principal payments from the securities portfolios are expected to be
approximately $4,274,643 in 2001. Another source of liquidity is the loan
portfolio, which provides a steady flow of payments and maturities.
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30
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.
One measure of interest rate risk is the gap ratio, which is defined as
the difference between the dollar volume of interest-earning assets and
interest-bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest rate-sensitive liabilities exceeds that of interest
rate-sensitive assets within comparable time periods. As indicated in the table
below, the one year gap position at December 31, 2000 and at March 31, 2001 was
a negative 5.2% and 5.7%, respectively. Generally, a financial institution with
a negative gap position will most likely experience decreases in net interest
income during periods of rising rates and increases in net interest income
during periods of falling interest rates.
The negative gap realized by the Company in 2000 was due largely to
customer preferences for short-term and floating rate deposit products which
caused interest-rate sensitive liabilities to exceed interest-rate sensitive
assets during the earlier time periods presented. While gap analysis represents
a useful asset/liability management tool, it does not necessarily indicate the
effect of general interest rate movements on the Company's net interest income,
due to discretionary repricing of assets and liabilities, and other competitive
pressures.
Included in the analysis of the gap position are certain savings
deposit and demand accounts which are less sensitive to fluctuations in interest
rates than other interest-bearing sources of funds. In determining the
sensitivity of such deposits, management reviews the movement of its deposit
rates for the past four years relative to market rates. Using regression
analysis, management has estimated that these deposits are approximately 25-30%
sensitive to interest rate changes (i.e., if short term rates were to increase
100 basis points, the interest rate on such deposits would increase 25-30 basis
points).
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective,
and therefore, has focused its efforts on increasing the Company's spread by
attracting lower-costing retail deposits.
In addition to utilizing the gap ratio for interest rate risk
assessment, management utilizes simulation analysis whereby the model estimates
the variance in net income with a change in interest rates of plus or minus 300
basis points over a twelve and twenty-four month period. Given recent
simulations, net interest income would be within policy guidelines regardless of
the direction of market rates.
The Company reports its callable agency investments ($25.3 million at
December 31, 2000) at their Option Adjusted Spread ("OAS") modified duration
date, as opposed to the call or maturity date. In management's opinion, using
modified duration dates on callable agency securities provides a better estimate
of the option exercise date under any interest rate environment. The OAS
methodology is an approach whereby the likelihood of option exercise takes into
account the coupon on the security, the distance to the call date, the maturity
date and current interest rate volatility. In addition, expected prepayment
assumptions have been applied to mortgage-related securities, which are included
in investments.
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-----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AT DECEMBER 31, 2000
($ in thousand)
Interest Sensitivity Period Total One Year
------------------------------------------------------- Within To
30 Day 90 Day 180 Day 365 Day One Year Two Years
---------------------------------------------------------------------------------------
Earning Assets:
Total Investment Securities $3,972 $3,583 $4,528 $4,995 $17,078 $6,201
Loans 45,856 2,075 2,753 5,091 55,775 9,351
Other Interest-earning assets 2,938 2,938
---------- --------- --------- ---------- ---------- ----------
$52,766 $5,658 $7,281 $10,086 $75,791 $15,552
---------- --------- --------- ---------- ---------- ----------
Source of Funds:
Savings and time deposits 5,467 10,222 11,925 17,774 45,388 7,576
Other interest-bearing
liabilities 34,058 275 412 824 35,569 1,647
Non-interest-bearing sources 4,203 4,203
---------- --------- --------- ---------- ---------- ----------
43,728 10,497 12,337 18,598 85,160 9,223
---------- --------- --------- ---------- ---------- ----------
Asset (Liability Sensitivity Gap:
Period Gap $9,038 ($4,839) ($5,056) ($8,512) ($9,369) $6,329
Cumulative Gap $9,038 $4,199 ($857) ($9,369) ($9,369) ($3,040)
Cumulative Gap to Total Assets 5.1% 2.3% (0.5%) (5.2%) (5.2%) (1.7%)
-----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AT DECEMBER 31, 2000
($ in thousand)
Non-interest
Sensitive and
Over Two
Years Total
----------------------------------
Earning Assets:
Total Investment Securities $33,762 $57,041
Loans 45,505 110,631
Other Interest-earning assets 8,230 11,168
----------------------------------
$87,497 $178,840
----------------------------------
Source of Funds:
Savings and time deposits 6,824 59,788
Other interest-bearing liabilities 33,063 70,279
Non-interest-bearing sources 44,570 48,773
----------------------------------
84,457 178,840
----------------------------------
Asset (Liability Sensitivity Gap:
Period Gap $3,040 $0
Cumulative Gap
Cumulative Gap to Total Assets
---------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AT MARCH 31, 2001
($ in thousands)
Interest Sensitivity Period Total One Year
------------------------------------------------------- Within To
30 Day 90 Day 180 Day 365 Day One Year Two Years
---------------------------------------------------------------------------------------
Earning Assets:
Total investment securities $4,902 $4,989 $2,662 $6,436 $18,989 $13,680
Loans 51,659 2,219 3,702 5,944 63,524 10,791
Other interest-earning assets 14,969 14,969
------ ----- ----- ------ ------ ------
71,530 7,208 6,364 12,380 97,482 24,471
------ ----- ----- ------ ------ ------
Sources of Funds:
Savings and time deposits 9,849 20,097 12,848 23,335 66,129 9,959
Other interest-bearing
liabilities 38,219 250 375 751 39,595 1,502
Non-interest bearing sources 3,561 3,561
------ ----- ----- ------ ------ ------
51,629 20,347 13,223 24,086 109,285 11,461
------ ----- ----- ------ ------ ------
Asset (Liability) Sensitivity Gap:
Period Gap $19,901 ($13,139) ($6,859) ($11,706) ($11,803) $13,010
Cumulative Gap $19,901 $6,762 ($97) ($11,803) ($11,803) $1,207
Cumulative Gap to Total Assets 9.6% 3.3% 0.0% (5.7%) (5.7%) 0.6%
-----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AT MARCH 31, 2001
($ in thousand)
Non-interest
Sensitive and
Over Two
Years Total
----------------------------------
Earning Assets:
Total investment securities $28,250 $60,919
Loans 42,805 117,120
Other interest-earning assets 14,144 29,113
------ -------
85,199 207,152
------ -------
Sources of Funds:
Savings and time deposits 6,292 82,380
Other interest-bearing
liabilities 32,010 73,107
Non-interest bearing sources 48,104 51,665
------ -------
86,406 207,152
------ -------
Asset (Liability) Sensitivity Gap:
Period Gap ($1,207) $0
Cumulative Gap
Cumulative Gap to Total Assets
---------------------------------------------------------------------------------
MARKET RISK ANALYSIS
To measure the impacts of longer-term asset and liability mismatches
beyond two years, the Company utilizes Modified Duration of Equity and Economic
Value of Portfolio Equity ("EVPE") models. The modified duration of equity
measures the potential price risk of equity to changes in interest rates. A
longer modified duration of equity indicates a greater degree of risk to rising
interest rates. Because of balance sheet optionality, an EVPE analysis is also
used to dynamically model the present value of asset and liability cash flows,
with rates ranging up or down 200 basis points. The economic value of equity is
likely to be different as interest rates change. Results
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falling outside prescribed ranges require action by management. At March 31,
2001, December 31, 2000 and 1999, the Company's variance in the economic value
equity as a percentage of assets with an instantaneous and sustained parallel
shift of 200 basis points is within the negative 3% guideline, as shown in the
tables below.
The market capitalization of the Company should not be equated to the
EVPE, which only deals with the valuation of balance sheet cash flows using
conservative assumptions. Calculated core deposit premiums may be less than what
is available in an outright sale. The model does not consider potential premiums
on floating rate loan sales, the impact of overhead expense, non-interest
income, taxes, industry market price multiples and other factors reflected in
the market capitalization of a company.
The following tables set forth certain information relating to the
Company's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the instruments fair value at
March 31, 2001 and December 31, 2000 and 1999.
----------------------------------------------------------------------------------------------------
MARKET RISK ANALYSIS
($ in thousand)
March 31, 2001
----------------------------------------------------------------------------------
Change in Rates Flat -200bp +200bp
----------------------------------------------------------------------------------
Economic Value
Of Portfolio Equity $22,534,000 $18,560,000 $20,321,000
Change (3,974,000) (2,212,000)
Change as a %
of assets (1.92%) (1.07%)
----------------------------------------------------------------------------------------------------
---------------------------------------------------------------
MARKET RISK ANALYSIS
($ in thousand)
December 31, 2000
------------------------------------------
Change in Rates FLAT -200bp +200bp
---------------------------------------------------------------
Economic Value of
Portfolio Equity $22,759,000 $19,559,000 $19,727000
Change (3,200,000) (3,032,000)
Change as a % of
assets (1.79%) (1.70%)
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1999
------------------------------------------
Change in Rates FLAT -200bp +200bp
---------------------------------------------------------------
Economic Value
of Portfolio
Equity $16,798,000 $18,515,600 $12,467,000
Change $1,717,600 (4,330,600)
Change as a % of
assets 1.17% (2.95%)
---------------------------------------------------------------
ITEM 3. - DESCRIPTION OF PROPERTY
GENERAL
The Company's and the Bank's principal office in Cranbury, New Jersey
(the "Principal Office") was sold in December 2000 by Constitution Center, LLC,
a limited liability company which includes certain Company and Bank directors as
members, to an unrelated third party. See "Certain Relationships and Related
Transactions." The new building owner assumed the existing lease and terms. The
current lease provides for an aggregate monthly rental of $17,428 subject to
annual rental increases plus real estate taxes and certain common space charges
allocated by the landlord and expires in December 2010. The Bank has 2
additional 5 year renewal periods. The Bank also has the right of first refusal
to purchase the premises of which the Principal Office is a part on the same
terms and conditions as any bona fide offer.
The Bank also leases approximately 2,400 square feet for its branch
office in Montgomery Township, New Jersey for an aggregate monthly rental of
$5,362. This lease expires on September 30, 2001 and the Bank may renew for one
three (3) year period through September 2004 for an increased monthly rental.
The Bank also leases approximately 3,780 square feet for its branch
office in downtown Cranbury, New Jersey for an aggregate monthly rental of
$3,460 per month. This lease expires on August 15, 2002 and the Bank may renew
for two five (5) year periods at aggregate monthly rental rates adjusted based
on the consumer price index. The Bank has the right of first refusal to purchase
this branch office on the same terms and conditions as any
30
33
bona fide offer. Notwithstanding receipt of a bona fide offer, the Bank also has
the option to purchase this branch office at any time during the initial term or
renewal term provided the Bank has exercised its option to renew the lease for
the branch office.
In March 1998, the Bank entered into a lease for the branch located in
Plainsboro, New Jersey. This lease expires on June 8, 2003 and provides for the
rental of approximately 2,000 square feet. The Bank has three five (5) year
renewal options for this space. The aggregate monthly payment for this lease is
$2,810 with annual escalations.
The Bank entered into a lease for the branch located in Hamilton
Square, New Jersey in April 1999. This lease expires in July, 2014 and provides
for a rental of approximately 4,170 square feet. The Bank has two five year
renewal options for this space. The aggregate monthly rental payment for this
lease is $8,320 with annual escalations.
Management believes the foregoing facilities are suitable for the
Company's and the Bank's present and projected operations.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation
or clean up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. There is a risk that the Company could
be required to investigate and clean up hazardous or toxic substances or
chemical releases at such properties after acquisition by the Company, and could
be held liable to a governmental entity or to third parties for property damage,
personal injury, and investigation and cleanup costs incurred by such parties in
connection with the contamination. The costs of investigation, remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate such property, may adversely
affect the owner's ability to sell or remediate such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not the facility is owned or operated by such person. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damage and costs resulting from environmental
contamination emanating from such property.
ITEM 4. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock as of June 4, 2001 by each Director, by
all Directors and Executive Officers as a group, and by any individual or group
owning 5% or more of the Company's Common Stock. Except as set forth in the
table, the Company knows of no person or group that beneficially owns 5% or more
of the Company's Common Stock. Beneficial ownership includes shares, if any,
held in the name of the spouse, minor children or other relatives of the holder
living in such persons home, as well as shares, if any, held in the name of
another person under an arrangement whereby the holder can vest title in himself
at once or at some future time. Unless otherwise specified, all persons listed
below have sole voting and investment power with respect to their shares of
Company Common Stock. Percentage ownership is based on 1,331,905 shares of
Common Stock (net of treasury stock) on June 4, 2001.
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34
Number of Shares Percent
Name of Beneficial Owner(a) Beneficially Owned of Stock
------------------------ -------------------- -----------
Charles S. Crow, III 4,099(b) *
Edward D. Knapp 24,639(c) 1.85%
Robert F. Mangano 72,102(d) 5.14%
William M. Rue, C.P.C.U. 42,034(e) 3.15%
Frank E. Walsh, III 62,586(f) 4.69%
All Directors and Executives Officers of the Company
as a Group (5 Persons) 205,460(g) 14.53%
----------
(a) The address for all persons listed is c/o 1st Constitution Bancorp,
2650 Route 130 North, Cranbury, New Jersey 08512.
(b) Includes options to purchase 2,205 shares of Company Common Stock, and
does not include 1,157 shares of Company Common Stock held by Crow &
Tartanella Profit Sharing Plan.
(c) (i) Includes 5,090 shares of Company Common Stock held by Mr. Knapp's
wife, and (ii) includes options to purchase 5,512 shares of Company
Common Stock, of which 3,307 are currently exercisable and included in
the table; and (iii) excludes a grant of 1,000 shares of Restricted
Stock, which will vest 25% a year commencing December 2001 based on
continued service.
(d) Options to purchase 76,389 shares of Company Common Stock have been
granted, of which 71,979 are currently exercisable and included in the
table.
(e) Includes (i) 5,737 shares of Company Common Stock held by or on behalf
of Mr. Rue's children and (ii) options to purchase 2,205 shares of
Company Common Stock.
(f) Includes (i) 59,204 shares of Company Common Stock owned by Waterville
Partners, L.P., over which Mr. Walsh may be deemed to have beneficial
ownership and (ii) options to purchase 2,205 shares of Company Common
Stock.
(g) Includes options to purchase 81,901 shares of Company Common Stock.
* less than 1%
ITEM 5. - DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the executive officers and directors of the
Company and the positions they hold with the Company. Directors of the Company
hold office for a term of one year or until their successors are duly elected
and have qualified. Executive officers of the Company are elected by the
Company's Board of Directors at the Company's annual meeting and hold office
until the next annual meeting of the Company's Board of Directors or until the
respective successors are duly elected and have qualified.
-----------------------------------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH THE COMPANY (OTHER DIRECTOR
THAN DIRECTOR) AGE SINCE PRINCIPAL OCCUPATION
-----------------------------------------------------------------------------------------------------------------------------------
Charles S. Crow, III, Secretary 51 1999 Attorney, Crow & Associates, Princeton, NJ
-----------------------------------------------------------------------------------------------------------------------------------
Edward D. Knapp, Chairman of the Board 66 1999 Chairman of the Board and Loan Review Officer, 1st
Constitution Bank
-----------------------------------------------------------------------------------------------------------------------------------
Robert F. Mangano, President and Chief 55 1999 President and Chief Executive Officer, 1st Constitution Bank
Executive Officer
-----------------------------------------------------------------------------------------------------------------------------------
William M. Rue, C.P.C.U. 53 1999 President, Rue Insurance, Trenton, NJ
-----------------------------------------------------------------------------------------------------------------------------------
Frank E. Walsh, III 34 1999 V.P., Jupiter Capital Management, Morristown, NJ
-----------------------------------------------------------------------------------------------------------------------------------
Joseph M. Reardon, Vice President and 48 N.A. Vice President and Treasurer, 1st Constitution Bank
Treasurer
-----------------------------------------------------------------------------------------------------------------------------------
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DIRECTORS
Set forth below is the name of certain biographical information
regarding the directors of the Company.
Charles S. Crow, III has been a partner in the law firm of Crow &
Associates in Princeton, New Jersey since December 1, 1998 and prior to that was
a partner in the law firm of Crow & Tartanella in Somerset, New Jersey from
January 1, 1992 to November 30, 1998.
Edward D. Knapp is the Chairman of the Board and has been Chairman of
the Bank since 1995. He is the Loan Review Officer of the Bank. He is the
retired President and Chief Executive Officer of First Fidelity Bank, N.A., New
Jersey. He began his career at First Fidelity in 1956, was elected its president
in 1978, and retired in 1990.
Robert F. Mangano is the President and Chief Executive Officer of the
Company and of the Bank. Prior to joining the Bank in 1996, Mr. Mangano was
President and Chief Executive Officer of Urban National Bank, a community bank
in the northern part of New Jersey for a period of three years and a Senior Vice
President of another bank for one year. Prior to that he held a senior position
with the Midlantic Corporation for 21 years. He is a Director of the Englewood
Hospital Medical Center and serves as Vice Chairman of the Board. Mr. Mangano is
on the Executive Board of the George Washington Council of the Boy Scouts of
America and has served as Treasurer of the John Harms Theater.
William M. Rue, C.P.C.U. is President of Rue Insurance in Trenton, New
Jersey. He is also a director of Selective Insurance Group. He has been a
Chartered Property Casualty Underwriter since 1972 and an Associate in Risk
Management since 1994. Mr. Rue also serves as a trustee of Rider University and
a director of the Robert Wood Johnson University Hospital at Hamilton. He is a
member of the Cranbury Township Zoning Board of Adjustment.
Frank E. Walsh, III has been a Vice President of Jupiter Capital
Management based in Morristown, New Jersey, since 1991. Jupiter, and its
affiliated entities, make investments across numerous asset classes for their
clients. Prior to joining Jupiter, Mr. Walsh was an analyst for Kidder Peabody,
Inc., in New York City. In addition to the Company's Board, Mr. Walsh serves as
a director for several other charitable and for-profit boards.
No Director of the Company is also a director of any company registered pursuant
to Section 12 of the Securities Exchange Act of 1934 or any company registered
as an investment company under the Investment Company Act of 1940.
All of the above directors of the Company also serve as directors of the Bank.
EXECUTIVE OFFICER
Set forth below is the name of, and certain biographical information
regarding, the additional principal officer of the Company who does not also
serve as a Director of the Company.
Joseph M. Reardon is the Vice President and Treasurer of the Company
and the Bank. Prior to joining the Bank in May 2000, Mr. Reardon held financial
executive positions with a number of firms including most recently 13 years with
B.M.J. Financial Corp., a bank holding company ending in April 1997. Mr. Reardon
came out of retirement after one year to act as chief financial officer of the
New Jersey State Aquarium at Camden, a position he held from April 1998 to April
2000.
ITEM 6. -- EXECUTIVE COMPENSATION
The following table is a summary of certain information concerning
compensation during the last three fiscal years paid to the Company's President
and Chief Executive Officer (the only executive officer of the Company whose
total cash compensation exceeded $100,000).
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SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Salary and Other Annual Securities underlying Other
Name and Principal Position Year Bonus Compensation Stock Option Grants Compensation
------------------------------------------------------------------------------------------------------------------------------
Robert F. Mangano, President 2000 $274,000(1) $11,032(3) --
and Chief Executive Officer
1999 $270,000(2) $10,552(3) 11,025(5) --
1998 $232,500(4) $11,152(3) --
----------
(1) Includes bonus accrued for services performed in 2000 and paid in 2001.
(2) Includes bonus accrued for services performed in 1999 and paid in 2000.
(3) Includes the value of life insurance in excess of $50,000 and an
annuity contract.
(4) Includes bonus accrued for services performed in 1998 and paid 1999.
(5) As adjusted for a 5% stock dividend declared on December 21, 2000.
During 2000, no stock options were granted or exercised by, and no
restricted stock was awarded to, the person named in the table.
EMPLOYMENT AGREEMENT
The Company entered into a 3 year employment agreement with Mr.
Mangano, its President and Chief Executive Officer, dated as of April 22, 1999
(the "Employment Agreement"), which by its terms is automatically extended for
one year on each anniversary date until terminated. The Employment Agreement
provides for a base salary of $180,000 per annum or such higher rate as the
Board may thereafter establish. The Employment Agreement also provides for: (i)
participation by Mr. Mangano in the Company's stock option plans, (ii) the
creation of a bonus plan for Mr. Mangano, and (iii) participation in the
Company's employee benefit plans. The Employment Agreement may be terminated in
the event of the death or Disability (as defined in the Employment Agreement) of
Mr. Mangano or for Just Cause (as defined in the Employment Agreement). The
Employment Agreement further provides for the payment of certain amounts to Mr.
Mangano upon a change of control of the Company, as more fully described in such
agreement. Mr. Mangano is subject to a covenant not to compete for one year
following the termination or discontinuation of his employment with the Company.
DIRECTOR COMPENSATION
Non-employee directors of the Company do not receive a cash fee for
Board and/or committee meetings attended; however, such non-employee directors
who are also directors of the Board of the Bank were compensated for services
rendered in that capacity in 2000 at the rate of $250 per Bank Board meeting and
$250 per Bank committee meeting attended. The Bank paid a total of $12,000 to
its non-employee directors for 2000. During 2000, the Company granted 1,000
shares of Restricted Stock to Edward D. Knapp, Chairman of the Board, under the
2000 Employee Stock Option and Restricted Stock Plan discussed below and subject
to vesting based on continued service, in exchange for services rendered to the
Company.
STOCK OPTION PLANS
Key Employee Plan and 1996 Stock Option Plan.
The Bank's 1990 Employee Stock Option Plan for Key Employees, as
amended (the "Key Employee Plan"), was adopted by the Board of the Bank and
approved by the shareholders of the Bank in March 1990. The Bank's 1996 Employee
Stock Option Plan (the "Stock Option Plan") was adopted by the Board and
approved by the shareholders in March 1997. In connection with the consummation
of the holding company structure, the Key Employee Plan and the Stock Option
Plan (collectively, the "Option Plans") was each amended so that no further
grants may be made under the Option Plans. In addition, each Option Plan was
amended to provide that each option to purchase one share of Bank Common Stock
was converted into an option to purchase one share of Company
34
37
Common Stock and that such plans will be administered by a committee of the
Board of Directors of the Company rather than a committee of the Board of
Directors of the Bank.
As of March 31, 2001, options for 41,525 shares (as adjusted for all
stock dividends) were outstanding under the Key Employee Plan, and options for
53,208 shares (as adjusted for all stock dividends) were outstanding under the
Stock Option Plan.
Employee Stock Option Plan
The 2000 Employee Stock Option and Restricted Stock Plan (the "Plan")
was adopted by the Board of the Company and approved by the shareholders in
April 2000. Under the Plan, the Company may issue stock options ("Options") for
up to 210,000 shares of its Common Stock (as adjusted for all stock dividends)
to eligible employees, independent contractors, agents and consultants of the
Company and its subsidiaries, but excluding non-employee directors of the
Company, to aid in attracting and retaining employees, independent contractors,
agents and consultants, and to closely align their interests with those of
shareholders. The Company may also issue shares of Company Common Stock under
the Plan (the "Restricted Stock") as a bonus to any employee for such
consideration as determined by the committee in accordance with applicable laws.
The Plan is administered by a committee of the Board of the Company,
which consists of all members of the Board who are not eligible to receive
options under the Plan and who are outside directors. The committee determines
the terms of each grant under the Plan. Under the Plan, the option price must
equal the fair market value of the Company Common Stock at the time of grant,
and the term of any option cannot exceed 10 years from the date of the grant.
The number of shares of Company Common Stock covered by the Plan, and the amount
and option price for each outstanding option shall be proportionally adjusted
for any increase or decrease in the number of issued shares of Company Common
Stock resulting from the subdivision or consolidation of shares or the payment
of a stock dividend or any other increase or decrease in the number of shares
effected without receipt of consideration by the Company.
As of March 31, 2001, options for 2,700 shares (as adjusted for all
stock dividends) were outstanding under the Plan and 2,400 shares of Restricted
Stock (as adjusted for all stock dividends), subject to vesting based on
continued service, have been granted under the Plan.
Directors Plan
The Board has adopted a Directors Stock Option and Restricted Stock
Plan for nonemployee directors (the "Directors Plan"). The Directors Plan
provides for options to purchase a total of not more than 55,125 shares (as
adjusted for all stock dividends) of Company Common Stock by nonemployee
directors of the Company and its subsidiaries, including the Bank. The Company
may also issue shares of Company Common Stock under the Directors Plan as a
bonus to any employee for such consideration as determined by the committee in
accordance with applicable laws. As of March 31, 2001, options for 20,727 shares
(as adjusted for all stock dividends) were outstanding under the Directors Plan.
The Directors Plan is administered by a committee of the Board of the
Company, comprised of two (2) members of the Board who are outside directors,
which determines the terms of each grant under such Directors Plan. Under the
Directors Plan, the option price must equal the fair market value of the Company
Common Stock at the time of grant, and the term of any option cannot exceed 10
years from the date of the grant. The number of shares of Company Common Stock
covered by the Directors Plan, and the amount and option price for each
outstanding option shall be proportionally adjusted for any increase or decrease
in the number of issued shares of Company Common Stock resulting from the
subdivision or consolidation of shares or the payment of a stock dividend or any
other increase or decrease in the number of shares effected without receipt of
consideration by the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, through its Bank subsidiary, has had, and expects in the
future to have, banking transactions in the ordinary course of business with its
directors and executive officers (and their associates) on substantially the
same terms as those prevailing for comparable transactions with others. All
loans by the Bank to such persons (i) were made in the ordinary course of
business; (ii) were made on substantially the same terms, including interest
35
38
rates and collateral, as those prevailing at the time for comparable
transactions with other persons; and (iii) did not involve more than the normal
risk of collectibility or present other unfavorable features. As of March 31,
2001, the Bank had total loans and loan commitments outstanding to directors and
executive officers and their affiliates of approximately $3.2 million, or
approximately 20.1% of total shareholder's equity at that date.
The Company and the Bank lease their respective Principal Offices for
an aggregate monthly rental of $17,428 plus real estate taxes and certain common
space charges allocated by the landlord. Prior to December 2000, the building
was owned by Constitution Center, LLC, a limited liability company. Charles S.
Crow, III and William M. Rue, each a director of the Company and the Bank, and
shareholders of the Company, as well certain directors of the Bank, are the
owners of a small interest in Constitution Center, LLC. Constitution Center,
LLC, sold the building to an unrelated third party in December 2000. The new
owner assumed the obligations under the existing lease and terms.
William M. Rue, a director of the Company and the Bank, and a
shareholder of the Company is the President of Rue Insurance which provides
property, liability, workers compensation and health insurance for the Bank.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000
shares of common stock, without par value.
Dividends.
The holders of the Company's Common Stock are entitled to dividends,
when, as, and if declared by the Company's Board of Directors. Generally, New
Jersey law prohibits corporations from paying dividends, if after giving effect
to the distribution, the corporation would be unable to pay its debts as they
become due in the usual course of its business or the corporation's total assets
would be less than its total liabilities.
The primary source of dividends paid to the Company's stockholders is
dividends paid to the Company by the Bank. Dividend payments by the Bank to the
Company are subject to the Banking Act and the FDIA. Under the Banking Act and
the FDIA, the Bank may not pay any dividends, if after paying the dividend, it
would be undercapitalized under applicable capital requirements. In addition to
these explicit limitations, the federal regulatory agencies are authorized to
prohibit a banking subsidiary or bank holding company from engaging in an unsafe
or unsound banking practice. Depending upon the circumstances, the agencies
could take the position that paying a dividend would constitute an unsafe or
unsound banking practice.
It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income available
over the past year and only if prospective earnings retention consistent with
the organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividend that undermines the bank holding company's ability to serve as a source
of strength to its banking subsidiary.
Liquidation Rights.
In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to receive, on a pro rata per share basis,
any assets distributable to shareholders, after the payment of debts and
liabilities and after the distribution to holders of any outstanding shares
hereafter issued that have prior rights upon liquidation.
Voting Rights.
Each holder of the Common Stock is entitled to one vote for each share
held on all matters voted upon by the shareholders, including the election of
directors. There is no cumulative voting in the election of directors.
36
39
Preemptive Rights.
Holders of shares of the Common Stock are not entitled to preemptive
rights with respect to any shares of the Common Stock that may be issued.
Transfer Agent.
The Company's transfer agent for the Common Stock is Registrar and
Transfer Company, with offices at 10 Commerce Drive, Cranford, New Jersey 07016.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's Common Stock is thinly traded in the over-the-counter
market. Information concerning the asked and bid prices of the Common Stock is
available from the OTC Bulletin Board under the symbol "FCCY." The Company
intends to apply for listing on Nasdaq Small Cap Market and there is no
assurance that the Company will be accepted for listing and, if accepted for
listing, an active market will develop in the future.
The following table sets forth high and low bid prices per share for
the Company's Common Stock for each quarter of 1999 and 2000 and the first
quarter of 2001, based upon information obtained from the OTC Bulletin Board.
All such bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
1999 High Bid Low Bid
-------- -------
First Quarter $14.90 $12.31
Second Quarter $15.12 $12.09
Third Quarter $16.84 $14.04
Fourth Quarter $15.98 $15.12
2000
First Quarter $17.38 $15.00
Second Quarter $15.95 $10.71
Third Quarter $11.90 $ 9.52
Fourth Quarter $11.31 $ 9.76
2001
First Quarter $16.38 $10.00
As of March 31, 2001, 1,334,305 shares of Common Stock were outstanding
held of record by approximately 416 persons, and there were outstanding options
which were exercisable on that date (or within 90 days thereof) for 95,581
shares of Common Stock.
37
40
Since its formation, the Company has not paid any cash dividends to its
shareholders. The future dividend policy of the Company is subject to the
discretion of the Board of Directors and will depend upon a number of factors,
including future earnings, financial conditions, cash needs, general business
conditions and applicable dividend limitations. At the present time, the Board
of Directors does not intend to pay cash dividends to its shareholders at any
time during the foreseeable future.
In lieu of cash dividends, the Company has declared a stock dividend in
each of the two years since its formation in 1999 and anticipates the
consideration of stock dividends in the future. The stock dividends were
declared and paid at the following times in the indicated amounts:
Declaration Date Payment Date Dividend
---------------- ------------ --------
December, 1999 January 31, 2000 5%
December, 2000 January 31, 2001 5%
The holders of the Company's Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. The Company's ability to pay dividends is subject to
restrictions imposed by New Jersey law. Generally, New Jersey law prohibits
corporations from paying dividends if after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual
course of its business or the corporation's total assets would be less than its
total liabilities.
The primary source of dividends paid to the Company's stockholders is
dividends paid to the Company by the Bank. Dividend payments by the Bank to the
Company are subject to the Banking Act and the FDIA. Under the Banking Act and
the FDIA, the Bank may not pay any dividends, if after paying the dividend, it
would be undercapitalized under applicable capital requirements. In addition to
these explicit limitations, the federal regulatory agencies are authorized to
prohibit a banking subsidiary or bank holding company from engaging in an unsafe
or unsound banking practice. Depending upon the circumstances, the agencies
could take the position that paying a dividend would constitute an unsafe or
unsound banking practice.
It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income available
over the past year and only if prospective earnings retention consistent with
the organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividend that undermines the bank holding company's ability to serve as a source
of strength to its banking subsidiary.
ITEM 2. -- LEGAL PROCEEDINGS
The Company and the Bank may, in the ordinary course of business,
become a party to litigation involving collection matters, contract claims and
other legal proceedings relating to the conduct of its business. The Bank may
also have various commitments and contingent liabilities which are not reflected
in the Bank's consolidated statement of condition. Management is not aware of
any present legal proceedings or contingent liabilities and commitments that
would have a material impact on the Bank's financial position or results of
operations.
ITEM 3. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
NONE
ITEM 4. -- RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities over the past three years.
Issuance of the Common Stock in connection with the acquisition of the Bank as a
wholly owned subsidiary was exempt from registration pursuant to Section
3(a)(12) of the Securities Act of 1933, as amended.
ITEM 5. -- INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company provides that the
Company will indemnify to the full extent from time to time permitted by law,
any person made, or threatened to be made, a party to, or a witness or other
participant in, any threatened, pending or completed action, suit or proceeding,
whether civil or criminal,
38
41
administrative, arbitrative, legislative, investigative or of any other kind, by
reason of the fact that such person is or was a director, officer, employee or
other agent of the Company or any subsidiary of the Company or serves or served
any other enterprise at the request of the Company against expenses, judgments,
fines, penalties and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding and any appeal
therein. The Federal Deposit Insurance Act generally prohibits indemnification
of a holding company's directors and officers for any penalty or judgment
resulting from any administrative or civil action instituted by a federal
banking agency.
The Certificate of Incorporation of the Company contains provisions
that may limit the liability of any director or officer of the Company to the
Company or its shareholders for damages for an alleged breach of any duty owed
to the Company or its shareholders. This limitation will not relieve an officer
or director from liability based on any act or omission (i) that was in breach
of such person's duty of loyalty to the Company or its shareholders; (ii) that
was not in good faith or involved a knowing violation of law; or (iii) that
resulted in receipt by such officer or director of an improper personal benefit.
These provisions are explicitly permitted by New Jersey law.
The New Jersey Business Corporation Act empowers a corporation to
indemnify a corporate agent against his expenses and liabilities incurred in
connection with any proceeding (other than a derivative lawsuit) involving the
corporate agent by reason of his being or having been a corporate agent if (a)
the agent acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and (b) with respect to
any criminal proceeding, the corporate agent had not reasonable cause to believe
his conduct was unlawful. For purposes of the Act, the term "corporate agent"
includes any present or former director, officer, employee or agent of the
corporation, and a person serving as a "corporate agent" for any other
enterprise at the request of the corporation.
With respect to any derivative action, the corporation is empowered to
indemnify a corporate agent against his expenses (but not his liabilities)
incurred in connection with any proceeding involving the corporate agent by
reason of his being or having been a corporate agent if the agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, only the court in which the proceeding
was brought can empower a corporation to indemnify a corporate agent against
expenses with respect to any claim, issue or matter as to which the agent was
adjudged liable for negligence or misconduct.
The corporation may indemnify a corporate agent in a specific case if a
determination is made by any of the following that the applicable standard of
conduct was met: (i) the Board of Directors, or a committee thereof, acting by a
majority vote of a quorum consisting of disinterested directors; (ii) by
independent legal counsel if there is not a quorum of disinterested directors or
if the disinterested quorum empowers counsel to make the determination; or (iii)
by the stockholders.
A corporate agent is entitled to mandatory indemnification to the
extent that the agent is successful on the merits or otherwise in any
proceeding, or in defense of any claim, issue or matter in the proceeding. If a
corporation fails or refuses to indemnify a corporate agent, whether the
indemnification is permissive or mandatory, the agent may apply to a court to
grant him the requested indemnification. In advance of the final disposition of
a proceeding, the corporation may pay an agent's expenses if the agent agrees to
repay the expenses if it is ultimately determined that he is not entitled to
indemnification.
39
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT............................................................................ 41
FINANCIAL STATEMENTS
Consolidated Statements of Condition, December 31, 2000 and 1999,
respectively................................................................................. 42
Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998, respectively............................................................ 43
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998, respectively................................... 44
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998, respectively........................................................ 45
Notes to Consolidated Financial Statements, December 31, 2000, 1999
and 1998..................................................................................... 46
Consolidated Statements of Condition, March 31, 2001 and December
31, 2000. Unaudited........................................................................... 57
Consolidated Statements of Income for the three months ended March
31, 2001 and 2000. Unaudited.................................................................. 58
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000. Unaudited............................................................ 59
Notes to Consolidated Financial Statements, March 31, 2001. Unaudited......................... 60-
40
43
INDEPENDENT AUDITORS'
REPORT
To the Shareholders and Board of Directors
of 1ST Constitution Bancorp:
We have audited the accompanying consolidated statements of
condition of 1st Constitution Bancorp and subsidiary as of
December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period
ended December 31, 2000. These consolidated financial
statements are the responsibility of the Bank's management.
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of 1st Constitution Bancorp and subsidiary
as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States
of America.
/s/ KPMG
Short Hills, New Jersey
January 18, 2001
41
44
CONSOLIDATED
STATEMENTS OF CONDITION
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
---- ----
CASH AND DUE FROM BANKS $6,839,966 $5,616,867
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED
UNDER AGREEMENTS TO RESELL 700,000 6,800,000
---------- ----------
Total cash and cash equivalents 7,539,966 12,416,867
---------- ----------
SECURITIES (Notes 2 and 8):
Available for sale, at market value 48,537,571 37,352,189
Held to maturity (market value of $8,528,995 and $8,196,386
in 2000 and 1999, respectively) 8,503,675 8,391,784
---------- ----------
Total securities 57,041,246 45,743,973
---------- ----------
LOANS HELD FOR SALE (Note 3) 1,306,806 914,157
---------- ----------
LOANS (Notes 3, 4, 5 and 8) 110,631,471 84,917,615
Less- Allowance for loan losses (1,132,555) (941,556)
---------- ----------
Net loans 109,498,916 83,976,059
----------- ----------
PREMISES AND EQUIPMENT, net (Note 6) 939,838 974,483
----------- ----------
ACCRUED INTEREST RECEIVABLE 1,287,741 852,546
----------- ----------
OTHER ASSETS (Note 9) 1,225,862 1,924,396
----------- ----------
Total assets $178,840,375 $146,802,481
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 7)
Non-interest bearing $31,462,624 24,957,079
Interest bearing 97,730,417 92,976,493
----------- ----------
Total deposits 129,193,041 117,933,572
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 8) 16,835,430 12,053,834
OTHER BORROWINGS (Note 8) 15,500,000 3,000,000
ACCRUED INTEREST PAYABLE 1,541,439 928,776
ACCRUED EXPENSES AND OTHER LIABILITIES 549,635 406,801
----------- ----------
Total liabilities 163,619,545 134,322,983
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (Notes 9, 10 and 13):
Common stock, no par value; 10,000,000
shares authorized; 1,337,995 and 1,274,473 shares issued
and 1,336,105 and 1,274,473 outstanding
as of December 31, 2000 and 1999, respectively 13,912,814 13,187,006
Retained earnings 1,496,268 495,323
Treasury Stock, 1,890 shares at cost (20,204) 0
Accumulated other comprehensive loss (168,048) (1,202,831)
----------- ----------
Total shareholders' equity 15,220,830 12,479,498
----------- ----------
Total liabilities and shareholders' equity $178,840,375 $146,802,481
============ ============
42
See Accompanying notes to Consolidated Financial Statements
45
CONSOLIDATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
INTEREST INCOME:
Interest on loans $9,323,088 $7,350,998 $6,281,548
Interest on securities
Taxable 3,129,830 2,540,109 1,744,912
Tax-exempt 99,264 72,787 63,081
Interest on Federal funds sold and securities
purchased under agreements to resell 240,055 168,684 240,854
---------- ---------- ----------
Total interest income $12,792,237 10,132,578 8,330,395
=========== ========== =========
INTEREST EXPENSE :
Interest on deposits 4,230,438 3,827,871 3,138,296
Interest on Federal funds purchased and
securities sold under agreements
to repurchase 1,089,396 506,681 492,801
Interest on other borrowings 304,566 168,964 87,561
---------- ---------- ----------
Total interest expense 5,624,400 4,503,516 3,718,658
---------- ---------- ----------
Net interest income 7,167,837 5,629,062 4,611,737
PROVISION FOR LOAN LOSSES (Note 4) 215,875 188,875 178,000
---------- ---------- ----------
Net interest income after provision
for loan losses 6,951,962 5,440,187 4,433,737
---------- ---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts 326,441 451,829 306,028
Gain on sale of loans held for sale 285,681 600,628 560,637
Gain on sale of securities available for sale 26,247 17,149 -
Other income 227,509 201,262 138,305
---------- ---------- ----------
Total other income 865,878 1,270,868 1,004,970
---------- ---------- ----------
NON-INTEREST EXPENSES:
Salaries and employee benefits 2,510,713 2,238,497 1,970,901
Occupancy expense (Note 11) 709,169 589,886 476,172
Other operating expenses (Note 12) 1,875,850 1,596,830 1,412,437
---------- ---------- ----------
Total other expenses 5,095,732 4,425,213 3,859,510
---------- ---------- ----------
Income before income taxes 2,722,108 2,285,842 1,579,197
INCOME TAXES (Note 9) 992,330 839,000 579,100
---------- ---------- ----------
Net income $1,729,778 $1,446,842 $1,000,097
========== ========== ==========
NET INCOME PER SHARE
Basic $1.29 $1.08 $.91
Diluted $1.27 $1.05 $.89
========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 1,337,929 1,337,986 1,104,706
Diluted 1,359,937 1,380,556 1,124,718
========== ========== ==========
43
See Accompanying Notes to Consolidated Financial Statements
46
CONSOLIDATED
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Accumulated
Other Total
Retained Treasury Comprehensive Shareholders'
Common Stock Earnings Stock (Loss) Income Equity
------------ -------- ----- ------------- ------
BALANCE, December 31, 1997 $6,352,962 -- $19,578 $6,372,540
Issuance of common stock,
Net of $75,000 in expenses
(400,000 shares) 4,825,000 -- -- 4,825,000
Exercise of stock options
(2,000 shares) 16,122 -- -- 16,122
5% stock dividend declared in
December, 1998
(57,567 shares) 866,653 (866,653) -- --
Comprehensive Income:
Net income - 1998 -- 1,000,097 -- 1,000,097
Other comprehensive income
Unrealized gain on
Securities available for
Sale, net of tax of $24,452 -- -- 47,464 47,464
------
Comprehensive Income -- -- -- 1,047,561
-------------------------------------------------------------------------
BALANCE, December 31, 1998 12,060,737 133,444 -- 67,042 12,261,223
Exercise of stock options
(5,044 shares) 41,306 -- -- 41,306
5% stock dividend declared
in December, 1999
(60,528 shares) 1,084,963 (1,084,963) -- --
Comprehensive Income:
Net income - 1999 -- 1,446,842 -- 1,446,842
Other comprehensive loss
Unrealized loss
on securities available for
sale, net of tax benefit
of $660,326 -- -- (1,258,894) (1,258,894)
less reclassification
adjustment for gains
included in net income net
of tax of $6,170 -- -- (10,979) (10,979)
---------
Comprehensive Income -- -- -- 176,969
-------------------------------------------------------------------------
BALANCE, December 31, 1999 13,187,006 495,323 -- (1,202,831) 12,479,498
Treasury Stock, 1,890 shares,
At cost (20,204) (20,204)
5% stock dividend declared
in December, 2000, including
fractional share cash payments
(63,723 shares) 725,808 (728,833) (3,025)
Comprehensive Income:
Net income - 2000 1,729,778 1,729,778
Other comprehensive income
Unrealized gain on
securities available for
sale, net of tax expense of
$533,070 1,034,783 1,034,783
------------------------------------------------------------------------
Comprehensive Income
BALANCE, December 31, 2000 $13,912,814 $1,496,268 ($20,204) ($168,048) $15,220,830
=========================================================================
See accompanying Notes to Consolidated Financial Statements
44
47
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 1,729,778 $ 1,446,842 $ 1,000,097
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities-
Provision for loan losses 215,875 188,875 178,000
Depreciation and amortization 218,268 209,233 122,471
Net amortization (accretion) on securities (4,351) 33,065 43,750
Gain on sale of loans held for sale (285,681) (600,628) (560,637)
Gain on sale of securities available for sale (26,247) (17,149) --
Originations of loans held for sale (40,834,113) (59,458,042) (39,041,500)
Proceeds from sales of loans held for sale 40,727,145 65,793,682 33,715,968
Decrease (increase) in accrued (435,195) 9,359 (176,118)
interest receivable
Decrease (increase) in other assets 141,785 (489,545) (242,376)
Increase in accrued
interest payable 612,663 101,500 130,368
(Decrease) increase in accrued
expenses and other liabilities 142,834 (492,174) 158,580
------------ ------------ ------------
Net cash provided by (used in) operating
activities 2,202,761 6,725,018 (4,671,397)
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale (15,039,088) (24,969,454) (20,839,946)
Held to maturity (1,365,000) (654,469) (1,543,221)
Proceeds from maturities and prepayments
of securities -
Available for sale 1,948,157 7,283,842 13,436,857
Held to maturity 1,253,109 385,442 2,653,258
Proceeds from sales of securities available
for sale 3,504,450 6,138,600 --
Net increase in loans (25,738,732) (7,668,319) (13,810,527)
Capital expenditures (183,623) (508,361) (325,893)
------------ ------------ ------------
Net cash used in investing activities (35,620,727) (19,992,719) (20,429,472)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of common stock, net -- 41,306 4,841,122
Net increase in demand, savings
and time deposits 11,259,469 13,516,113 18,857,536
Net increase in securities
sold under agreements to repurchase 4,781,596 2,650,256 1,051,773
Net increase in other borrowings 12,500,000 1,000,000 2,000,000
------------ ------------ ------------
Net cash provided by financing activities 28,541,065 17,207,675 26,750,431
------------ ------------ ------------
(Decrease) increase in cash and
cash equivalents (4,876,901) 3,939,974 1,649,562
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 12,416,867 8,476,893 6,827,331
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,539,966 $ 12,416,867 $ 8,476,893
============ ============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ 5,011,737 $ 4,402,016 $ 3,588,290
Income taxes 866,397 1,040,498 802,373
============ ============ ============
See accompanying Notes to Consolidated Financials
45
48
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL-
1ST Constitution Bancorp, a New Jersey state chartered bank holding
company is parent to 1st Constitution Bank, a state chartered
commercial bank which commenced operations in July 1989.The Bank
provides community banking services to a broad range of customers,
including corporations, individuals, partnerships and other community
bodies in the area. The Bank operates five branches in Cranbury,
Hamilton Square, Plainsboro and Princeton, New Jersey.
PRINCIPLES OF CONSOLIDATION-
The accompanying consolidated financial statements include the accounts
of 1st Constitution Bancorp and its wholly-owned subsidiary 1ST
Constitution Bank and its wholly-owned subsidiaries, 1ST Constitution
Investment Company and FCB Assets Holdings, Inc., collectively "The
Bank" or "The Company". All significant intercompany amounts have been
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
SECURITIES-
Securities, which the Bank has the intent and ability to hold until
maturity, are classified as held to maturity and are recorded at cost,
adjusted for amortization of premiums and accretion of discounts using
the interest method.
Securities, which are held for indefinite periods of time which
management intends to use as part of its asset/liability strategy, or
that may be sold in response to changes in interest rates, changes in
prepayment risk, increased capital requirements or other similar
factors, are classified as available for sale and are carried at
estimated market value, except for Federal Home Loan Bank stock which
is carried at cost. Unrealized gains and losses on such securities are
recorded as a separate component of shareholders' equity. Realized
gains and losses, which are computed using the specific identification
method, are recognized on a trade date basis.
ALLOWANCE FOR LOAN LOSSES-
The allowance for loan losses is a valuation reserve available for
losses incurred or expected on extensions of credit. Credit losses
primarily arise from the loan portfolio, but may also be derived from
other credit-related sources including commitments to extend credit.
Additions are made to the allowance through periodic provisions which
are charged to expense. All losses of principal are charged to the
allowance when incurred or when a determination is made that a loss is
expected. Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance for loan losses is determined through a
periodic review of outstanding loans and commitments to extend credit.
The impact of economic conditions on the creditworthiness of the
borrowers is considered, as well as loan loss experience, changes in
the composition and volume of the loan portfolio and management's
assessment of the risks inherent in the loan portfolio. These and other
factors are used in assessing the overall adequacy of the allowance for
loan losses and the resulting provision for loan losses. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based upon changes
in economic conditions. In addition, various regulatory agencies
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based upon
their judgment of information available to them at the time of their
examination.
46
49
PREMISES AND EQUIPMENT-
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on the
straight-line method over the estimated useful lives of the assets.
Furniture and fixtures, equipment and leasehold improvements are
depreciated or amortized over the estimated useful lives of the assets
or lease terms, as applicable. Estimated useful lives of furniture and
fixtures and equipment are three to fifteen years, and three to twenty
five years for leasehold improvements. Maintenance and repairs are
charged to expense as incurred.
LOANS-
Loans are stated at the principal amount outstanding, net of unearned
income. Unearned income is recognized over the lives of the respective
loans, principally using the effective interest method. Income from
direct financing leases is recorded over the life of the lease under
the financing method of accounting. The investment includes the sum of
aggregate rentals receivable and the estimated residual value of leased
equipment, less deferred income. Interest income is generally not
accrued on loans, including impaired loans, where interest or principal
is 90 days or more past due, unless the loans are adequately secured
and in the process of collection, or on loans where management has
determined that the borrowers may be unable to meet contractual
principal and/or interest obligations. When it is probable that, based
upon current information, the Bank will not collect all amounts due
under the contractual terms of the loan, the loan is reported as
impaired. Smaller balance homogenous type loans, such as residential
loans and loans to individuals, which are collectively evaluated are
excluded from consideration for impairment. Loan impairment is measured
based upon the present value of the expected future cash flows
discounted at the loan's effective interest rate or the underlying
value of collateral for collateral dependent loans. When a loan,
including an impaired loan, is placed on non-accrual, interest accruals
cease and uncollected accrued interest is reversed and charged against
current income. Non-accrual loans are generally not returned to
accruing status until principal and interest payments have been brought
current and full collectibility is reasonably assured. Cash receipts on
non-accrual and impaired loans are applied to principal, unless the
loan is deemed fully collectible. Loans held for sale are carried at
the aggregate lower of cost or market value.
INCOME TAXES-
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
OTHER REAL ESTATE-
Other real estate is carried at the lower of fair value of the related
property, as determined by current appraisals less estimated costs to
sell, or the recorded investment in the property. Write-downs on these
properties, which occur after the initial transfer from the loan
portfolio, are recorded as operating expenses. Costs of holding such
properties are charged to expense in the current period. Gains, to the
extent allowable, and losses on the disposition of these properties are
reflected in current operations. The Bank held no other real estate at
December 31, 2000 and 1999.
STOCK-BASED COMPENSATION-
Stock-based compensation is accounted for under the intrinsic value
based method as prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Included in these
Notes to the Consolidated Financial Statements are the pro forma
disclosures required by SFAS No. 123, "Accounting for Stock-Based
Compensation," which assumes the fair value based method of accounting
had been adopted.
CASH AND CASH EQUIVALENTS-
Cash and cash equivalents includes cash on hand, interest and
non-interest bearing amounts due from banks, Federal funds sold and
securities purchased under agreements to resell. Generally, Federal
funds are sold for a one or two-day period.
47
50
RECLASSIFICATIONS-
Certain reclassifications have been made to the prior period amounts to
conform with the current period.
NET INCOME PER SHARE-
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding plus the
weighted-average number of net shares that would be issued upon
exercise of dilutive stock options and grants pursuant to the treasury
stock method. Options to purchase 25,115 shares of common stock at a
weighted average price of $13.63 per share were outstanding during
2000, and 5,094 shares of common stock at a weighted average price of
$13.39 were outstanding in 1999, but were not considered in the
computation of diluted net income per share because the options'
exercise price exceeded the average market price of the Bank's common
shares for the period. The options expire through June, 2009. Options
in the amount of 22,008, 42,570, and 20,012 for 2000, 1999, and 1998,
respectively, are included in the diluted weighted average shares
outstanding. All share information reported in the statements of income
reflects a 5% stock dividend declared December 21, 2000.
COMPREHENSIVE INCOME-
Comprehensive income consists of net income and net unrealized gains
(losses) on securities available for sale and is presented in the
consolidated statements of changes in shareholders' equity.
(2) SECURITIES
Information relative to the Bank's securities portfolio as of December
31, is as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
2000 Cost Gains Losses Value
---- ---- ----- ------ -----
Available for sale-
U. S. Treasury securities and
obligations of U.S. Government
corporations and agencies $45,928,517 $104,990 $356,288 $45,677,219
Mortgage backed securities 1,453,305 - 3,320 1,449,985
FHLB stock and other securities 1,410,367 - - 1,410,367
----------- -------- -------- -----------
$48,792,189 $104,990 $359,608 $48,537,571
=========== ======== ======== ===========
Held to maturity-
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $8,109,394 $37,461 $14,726 $8,132,129
Mortgage backed securities 394,281 2,585 - 396,866
----------- -------- -------- -----------
$8,503,675 $40,046 $14,726 $8,528,995
========== ======= ======= ==========
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Gross Gross Estimated
Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
---- ---- ----- ------ -----
Available for sale-
U. S. Treasury securities and
obligations of U.S. Government
corporations and agencies $20,065,627 $6,769 $1,345,513 $18,726,883
Mortgage backed securities 16,856,118 186 482,382 16,373,922
FHLB stock and other securities 2,252,915 - 1,531 2,251,384
----------- ------ ---------- -----------
$39,174,660 $6,955 $1,829,426 $37,352,189
=========== ====== ========== ===========
Held to maturity-
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $3,079,746 $1,147 $122,327 $2,958,566
Mortgage backed securities 5,312,038 343 74,561 5,237,820
----------- ------ ---------- -----------
$8,391,784 $1,490 $196,888 $8,196,386
=========== ====== ========== ===========
The amortized cost and estimated market value of debt securities at December
31, 2000, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
---- -----
Available for sale-
Due in one year or less $2,909,643 $2,906,573
Due after one year through five years 7,913,998 7,925,786
Due after five years through ten years 20,104,086 19,926,990
Due after ten years 17,864,462 17,778,222
---------- ----------
Total available for sale $48,792,189 $48,537,571
=========== ===========
Held to maturity-
Due in one year or less $1,365,000 $1,365,000
Due after one year through five years 1,697,965 1,704,281
Due after five years through ten years 3,479,065 3,466,191
Due after ten years 1,961,645 1,993,523
---------- ----------
Total held to maturity $8,503,675 $8,528,995
========== ==========
Gross gains on securities sales were $26,247 in 2000, and $17,149 in 1999.
There were no sales of securities during 1998.
As of December 31, 2000 and 1999, securities having a book value of
$29,920,801 and $17,725,562, respectively, were pledged to secure public
deposits, repurchase agreements, other borrowings, and for other purposes as
required by law.
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52
(3) LOANS AND LOANS HELD FOR SALE
Loans outstanding by classification at December 31, 2000 and 1999 are
as follows-
2000 1999
---- ----
Construction loans $17,957,852 $7,130,325
Residential real estate loans 14,854,583 12,288,205
Commercial and industrial loans 54,974,300 46,566,697
Loans to individuals 14,767,100 13,220,968
Lease financing 7,809,845 5,500,055
All other loans 267,791 211,365
------------ -----------
$110,631,471 $84,917,615
============ ===========
The Bank's business is concentrated in New Jersey, particularly Middlesex,
Mercer and Somerset counties. A significant portion of the total loan
portfolio is secured by real estate or other collateral located in these
areas.
The Bank had residential mortgage loans held for sale of $1,306,806 at
December 31, 2000 and $914,157 at December 31, 1999. The Bank currently
sells loans, servicing released.
(4) ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses is as follows-
2000 1999 1998
---- ---- ----
Balance, beginning of year $941,556 $775,530 $627,722
Provision charged to expense 215,875 188,875 178,000
Loans charged off (28,158) (26,662) (32,971)
Recoveries 3,282 3,813 2,779
---------- -------- --------
Balance, end of year $1,132,555 $941,556 $775,530
========== ======== ========
The amount of loans which were not accruing interest amounted to $106,959
and $501,756 at December 31, 2000 and 1999, respectively. Impaired loans
totaled $35,927 and $56,801 at December 31, 2000 and 1999, respectively.
There was no valuation allowance on impaired loans in 2000 or 1999. Loans
90 days or more past due and still accruing totaled $471,070 and $135,598
in 2000 and 1999, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 2000, 1999 and 1998, was approximately $46,000, $66,000, and
$100,000, respectively.
(5) LOANS TO RELATED PARTIES
Activity related to loans to directors, executive officers and their
affiliated interests during 2000 is as follows-
Balance, beginning of year $4,377,487
Loans granted 250,000
Repayments of loans (1,465,090)
----------
Balance, end of year $3,162,397
==========
All such loans were made under customary terms and conditions and were
current as to principal and interest payments as of December 31, 2000 and
1999.
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53
(6) PREMISES AND EQUIPMENT
Premises and equipment consist of the following as of December 31, 2000 and
1999-
2000 1999
---- ----
Leasehold improvements $ 550,912 $ 443,653
Furniture and equipment 1,292,695 1,233,138
--------- ---------
1,843,607 1,676,791
Less- Accumulated depreciation (903,769) (702,308)
======== ========
$ 939,838 $ 974,483
=========== ===========
(7) DEPOSITS
Deposits at December 31, 2000 and 1999 consist of the following:
2000 1999
---- ----
Demand
Non-interest bearing $ 31,462,624 $ 24,957,079
Interest bearing 36,178,093 27,740,335
Savings 10,244,003 10,010,496
Time 51,308,321 55,225,662
------------ ------------
$129,193,041 $117,933,572
============ ============
Individual time deposits $100,000 or greater, amounted to $6,617,511 and
$11,439,335 at December 31, 2000 and 1999, respectively. As of December 31,
2000, time deposits mature as follows: $42,256,480 in 2001; $6,590,781 in
2002; $1,909,883 in 2003; $227,454 in 2004; and $323,723 in 2005.
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
Securities sold under agreements to repurchase are summarized as follows.
2000 1999 1998
---- ---- ----
Balance outstanding at year end $16,835,430 $12,053,834 $9,403,578
Weighted average interest rate at year end 4.75% 4.46% 4.33%
Average daily balance outstanding during year 19,071,365 10,865,091 9,045,613
Weighted average interest rate during year 5.38% 4.52% 5.17%
Highest month-end outstanding balance 34,643,386 12,053,834 10,466,294
Collateral underlying the agreements is held by an outside custodian.
During 2000, the Bank purchased three ten-year fixed rate convertible
advances from the Federal Home Loan Bank of New York ("FHLB"). These
advances, in the amounts of $2,500,000; $5,000,000; and $5,000,000 bear
interest at the rates of 5.50%; 5.34%; and 5.06%, respectively. These
advances are convertible at the end of 1 year; 2 years; and 3 years and
quarterly thereafter.
During 1999, the Bank purchased a $3,000,000 ten-year fixed rate advance
convertible at the end of three years, and quarterly thereafter, from the
FHLB. The interest rate on this advance is 5.815%. In 1999, the FHLB called
$2,000,000 in ten-year fixed rate convertible advances which were purchased
in 1998.
These advances are fully secured by marketable securities and
qualifying one-to-four family mortgage loans.
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(9) INCOME TAXES
The components of income taxes (benefit) are summarized as follows-
2000 1999 1998
---- ---- ----
Federal-
Current $ 952,240 $ 789,716 $ 549,768
Deferred (89,920) (61,216) (49,268)
--------- --------- ---------
863,320 728,500 500,500
--------- --------- ---------
State-
Current 144,641 121,196 90,658
Deferred (15,631) (10,696) (12,056)
--------- --------- ---------
129,010 110,500 78,600
--------- --------- ---------
$ 992,330 $ 839,000 $ 579,100
========= ========= =========
A comparison of income tax expense at the Federal statutory rate in 2000, 1999
and 1998 to the Company's provision for income taxes is as follows-
2000 1999 1998
---- ---- ----
Federal income tax at 34% $ 925,517 $ 777,186 $ 536,927
Add (deduct) effect of:
State income taxes net of federal income tax effect 85,147 72,930 51,876
Tax-exempt interest income (33,750) (24,748) (21,448)
Other items, net 15,416 13,632 11,745
--------- --------- ---------
Provision for income taxes $ 992,330 $ 839,000 $ 579,100
========= ========= =========
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows-
2000 1999
---- ----
Deferred tax assets-
Allowance for loan losses $452,342 $376,057
Unrealized loss on securities available for sale 86,570 619,640
Other 20,379 -
-------- ---------
Total deferred tax assets 559,291 995,697
-------- ---------
Deferred tax liabilities-
Other - 8,437
Total Deferred Tax Liabilities - 8,437
-------- ---------
Net Deferred Tax Asset $559,291 $987,260
======== ========
Based upon the current facts, management has determined that it is more likely
than not that there will be sufficient taxable income in future years to realize
the deferred tax assets. However, there can be no assurances about the level of
future earnings.
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(10) SHAREHOLDERS' EQUITY
The Bank's shareholders have approved a stock option plan for
employees and directors, and entered into an employment agreement with
additional options awarded to its President. The Bank accounts for the
award of stock options in accordance with Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these option awards been determined consistent with
FASB Statement No. 123, the Bank's net income and net income per share
for 2000, 1999 and 1998 would have been reduced to the following pro
forma amounts-
2000 1999 1998
---- ---- ----
Net income -
As reported $1,729,778 $1,446,842 $1,000,097
Pro forma $1,719,778 $1,385,159 $975,862
Net income per share -
As reported -
Basic $1.29 $1.08 $.91
Diluted $1.27 $1.05 $.89
Pro forma -
Basic $1.29 $1.04 $.89
Diluted $1.27 $1.00 $.87
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1999 and 1998: dividend yield of
0%; expected volatility of 25% and 25%, respectively; risk-free interest
rates of 5.75% and 5.50%, respectively; and expected lives of 5 years.
A summary of the status of the Bank's stock options at December 31,
2000, 1999 and 1998 and changes during the years then ended is presented
below-
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Shares Avg. Price Shares Avg. Price Shares Avg. Price
------ ---------- ------ ---------- ------ ----------
Outstanding, at beginning of year 119,751 $ 10.55 82,811 $ 8.59 75,866 $ 8.10
Granted -- -- 42,236 $ 14.06 9,261 $ 12.23
Exercised -- -- (5,296) $ 7.80 (2,316) $ 6.96
Forfeited (6,278) $ 12.09 -- -- -- --
------ --------- ------ --------- ------ ---------
Outstanding, at end of year 113,473 10.50 119,751 $ 10.55 82,811 $ 8.59
------- --------- ------ --------- ------ ---------
(Range of Exercise Prices - $7.31-$14.76)
Exercisable, at end of year 96,891 9.61 99,024 $ 9.91 82,811 $ 8.59
------ --------- ------ --------- ------ ---------
(2000 Range of Exercise Prices - $7.52-$14.06)
Weighted average remaining 6.8 years 7.8 years 8.0 years
contractual life
Weighted average fair value of
options granted during the year $ - $ 4.26 $4.10
In December 2000, 1999 and 1998, the Bank declared a 5%, stock dividend
to shareholders. All amounts in the table above and elsewhere in this
note have been adjusted to reflect such stock dividends.
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(11) COMMITMENTS AND CONTINGENCIES
COMMITMENTS-
The Bank's main office is leased from a partnership which includes
certain Bank directors at a monthly rental of $13,919 plus real estate
taxes and certain common space charges allocated by the landlord. The
lease contains renewal options for two additional five-year terms at the
Bank's discretion.
As of December 31, 2000, future minimum rental payments under
noncancellable operating leases are as follows-
2001 $386,755
2002 $365,459
2003 $298,592
2004 $294,180
2005 $304,145
Thereafter $2,217,192
Rent expense aggregated $512,805, $426,883 and $284,198 for the years
ended December 31, 2000, 1999 and 1998, respectively.
COMMITMENTS WITH OFF-BALANCE SHEET RISK-
The statement of condition does not reflect various commitments relating
to financial instruments which are used in the normal course of
business. Management does not anticipate that the settlement of those
financial instruments will have a material adverse effect on the Bank's
financial position. These instruments include commitments to extend
credit and letters of credit. These financial instruments carry various
degrees of credit risk, which is defined as the possibility that a loss
may occur from the failure of another party to perform according to the
terms of the contract. As these off-balance sheet financial instruments
have essentially the same credit risk involved in extending loans, the
Bank generally uses the same credit and collateral policies in making
these commitments and conditional obligations as it does for on-balance
sheet investments. Additionally, as some commitments and conditional
obligations are expected to expire without being drawn or returned, the
contractual amounts do not necessarily represent future cash
requirements.
Commitments to extend credit are legally binding loan commitments with
set expiration dates. They are intended to be disbursed, subject to
certain conditions, upon request of the borrower. The Bank receives a
fee for providing a commitment. The Bank was committed to advance
$28,190,000 to its borrowers as of December 31, 2000. At December 31,
2000, the Bank was contingently liable for outstanding letters of credit
to customers in the amount of $758,487.
LITIGATION-
The Bank may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. The Bank may also
have various commitments and contingent liabilities which are not
reflected in the accompanying consolidated statement of condition.
Management is not aware of any present legal proceedings or contingent
liabilities and commitments that would have a material impact on the
Bank's financial position or results of operations.
(12) OTHER OPERATING EXPENSES:
The components of other operating expenses for the years ended December
31, 2000, 1999 and 1998 are as follows-
2000 1999 1998
---- ---- ----
Equipment expense $286,632 $242,714 $155,446
Marketing 208,294 190,807 178,143
Computer services 415,627 314,970 299,690
Regulatory, professional and other fees 304,263 206,720 226,085
Office expense 255,387 233,908 195,130
All other expenses 405,647 407,711 357,943
---------- ---------- ----------
$1,875,850 $1,596,830 $1,412,437
========== ========== ==========
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(13) REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements
administered by the Federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier
I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Bank's
primary regulator categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must maintain minimum total risk-based;
tier I risk-based, and tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category. Certain bank regulatory
limitations exist on the availability of Bank assets available for the
payment of dividends without prior approval of bank regulatory
authorities.
The Holding Company and Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999 are as follows:
For Capital
Actual Adequacy Purposes
------ -----------------
As of December 31, 2000 - Amount Ratio Amount Ratio
------ ----- ------ -----
Total capital (to Risk Weighted Assets) $16,505,078 13.46% $9,811,360 Greater than, Equal to 8%
Tier I Capital (to Risk Weighted
Assets) ............................... 15,372,523 12.53% 4,905,680 Greater than, Equal to 4%
Tier I Capital (to Average Assets) .... 15,372,523 8.61% 7,140,120 Greater than, Equal to 4%
As of December 31, 1999 -
Total capital (to Risk Weighted Assets) $14,590,256 15.14% $7,707,760 Greater than, Equal to 8%
Tier I Capital (to Risk Weighted
Assets) ............................... 13,648,700 14.17% 3,853,880 Greater than, Equal to 4%
Tier I Capital (to Average Assets) .... 13,648,700 9.44% 5,785,560 Greater than, Equal to 4%
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-----------------
As of December 31, 2000 - Amount Ratio
------ -----
Total capital (to Risk Weighted Assets) $12,264,200 Greater than, Equal to 10%
Tier I Capital (to Risk Weighted
Assets) ............................... 7,358,520 Greater than, Equal to 6%
Tier I Capital (to Average Assets) .... 8,925,150 Greater than, Equal to 5%
As of December 31, 1999 -
Total capital (to Risk Weighted Assets) $ 9,634,700 Greater than, Equal to 10%
Tier I Capital (to Risk Weighted
Assets) ............................... 5,780,820 Greater than, Equal to 6%
Tier I Capital (to Average Assets) .... 7,231,950 Greater than, Equal to 5%
(14) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of fair value versus the carrying value of the
Bank's financial instruments. For the Bank, as for most financial
institutions, the bulk of its assets and liabilities are considered
financial instruments. Many of the Bank's financial instruments lack an
available trading market as characterized by a willing buyer and willing
seller engaging in an exchange transaction. Therefore, significant
estimations and present value calculations were used by the Bank for the
purpose of this disclosure. Changes in assumptions could significantly
affect these estimates.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instruments. Financial instruments, such as securities available
for sale and securities held to maturity, actively traded in the secondary
market have been valued using available market prices. Carrying values of
cash and cash equivalents and securities sold under agreements to
repurchase approximate fair value due to the short-term nature of these
instruments. Other
55
58
borrowings are valued on a discounted cash flow method
utilizing current discount rates for instruments of similar remaining
terms.
Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating
current market for similar assets and liabilities. For those loans and
deposits with floating interest rates, it is assumed that estimated fair
values generally approximate the recorded book balances.
The estimated fair values, and the recorded book balances, were as
follows-
December 31, 2000 December 31, 1999
------------------ ------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
Cash and cash equivalents $ 7,539,966 $ 7,539,966 $ 12,416,867 $ 12,416,867
Securities available for sale 48,537,571 48,537,571 37,352,189 37,352,189
Securities held to maturity 8,503,675 8,528,995 8,391,784 8,196,386
Loans held for sale 1,306,806 1,307,000 914,157 915,000
Gross loans 110,631,471 111,692,000 84,917,615 84,332,000
Deposits 129,193,041 129,467,000 117,933,572 117,866,000
Securities sold under
agreements to repurchase 16,835,430 16,835,430 12,053,834 12,053,834
Other borrowings 15,500,000 15,694,000 3,000,000 2,996,000
Standby letters of credit as of December 31, 2000 and 1999 are based on
fees charged for similar agreements; accordingly, the estimated fair value
of standby letters of credit is nominal.
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59
CONSOLIDATED
STATEMENTS OF CONDITION
MARCH 31, 2001 AND DECEMBER 31, 2000
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
CASH AND DUE FROM BANKS $ 12,041,030 $ 6,839,966
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS 8,857,282 700,000
------------- -------------
Total cash and cash equivalents 20,898,312 7,539,966
------------- -------------
SECURITIES:
Available for sale, at market value 53,823,715 48,537,571
Held to maturity (market value of $8,400,156 and $8,528,995 in 2001
and 2000, respectively) 8,286,154 8,503,675
------------- -------------
Total securities 62,109,869 57,041,246
------------- -------------
LOANS HELD FOR SALE 4,922,341 1,306,806
------------- -------------
LOANS 117,118,450 110,631,471
Less- Allowance for loan losses (1,193,336) (1,132,555)
------------- -------------
Net loans 115,925,114 109,498,916
------------- -------------
PREMISES AND EQUIPMENT, net 938,577 939,838
------------- -------------
ACCRUED INTEREST RECEIVABLE 1,227,142 1,287,741
------------- -------------
OTHER ASSETS 1,130,599 1,225,862
------------- -------------
Total assets $ 207,151,954 $ 178,840,375
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing $ 33,442,857 $ 31,462,624
Interest bearing 118,821,639 97,730,417
------------- -------------
Total deposits 152,264,496 129,193,041
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 21,165,620 16,835,430
OTHER BORROWINGS 15,500,000 15,500,000
ACCRUED INTEREST PAYABLE 1,645,386 1,541,439
ACCRUED EXPENSES AND OTHER LIABILITIES 697,843 549,635
------------- -------------
Total liabilities 191,273,345 163,619,545
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000,000 shares authorized;
1,337,995 shares issued and 1,334,305 and
1,336,105 outstanding as of March 31, 2001 and December 31,
2000, respectively 13,912,814 13,912,814
Retained earnings 1,974,216 1,496,268
Treasury Stock, shares at cost (3,690 shares and 1,890 shares in at March 31,
2001 and December 31, 2000, respectively) (44,715) (20,204)
Accumulated other comprehensive income/(loss) 36,294 (168,048)
------------- -------------
Total shareholders' equity 15,878,609 15,220,830
------------- -------------
Total liabilities and shareholders' equity $ 207,151,954 $ 178,840,375
============= =============
See accompanying notes to consolidated financial statements.
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60
CONSOLIDATED
STATEMENTS OF INCOME
MARCH 31, 2001 AND 2000
Three Months Ended March 31,
2001 2000
---- ----
INTEREST INCOME:
Interest on loans $2,620,503 $2,064,632
Interest on securities:
Taxable 923,868 735,176
Tax-exempt 31,553 18,152
Interest on Federal funds sold and short-term
investments 59,139 43,186
---------- ----------
Total interest income 3,635,063 2,861,146
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,305,685 934,768
Interest on Federal funds purchased and
securities sold under agreements to
repurchase 163,512 201,984
Interest on other borrowings 207,987 44,097
---------- ----------
Total interest expense 1,677,184 1,180,849
Net interest income 1,957,879 1,680,297
PROVISION FOR LOAN LOSSES 60,000 45,000
---------- ----------
Net interest income after provision
for loan losses 1,897,879 1,635,297
---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts 86,475 78,058
Gain on sale of loans held for sale 115,016 23,267
Other income 77,445 47,786
---------- ----------
Total other income 278,936 149,111
---------- ----------
NON-INTEREST EXPENSES:
Salaries and employee benefits 750,192 619,505
Occupancy expense 181,914 171,888
Other operating expenses 486,630 412,139
---------- ----------
Total other expenses 1,418,736 1,203,532
---------- ----------
Income before income taxes 758,079 580,876
INCOME TAXES 277,825 212,700
---------- ----------
Net income $ 480,254 $ 368,176
---------- ----------
NET INCOME PER SHARE
Basic $ 0.36 $ 0.28
Diluted $ 0.35 $ 0.27
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,335,386 1,338,197
Diluted 1,364,467 1,376,689
---------- ----------
See accompanying notes to consolidated financial statements
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61
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three months ended March 31,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 480,254 $ 368,176
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Provision for loan losses 60,000 45,000
Depreciation and amortization 53,008 57,072
Net amortization (accretion) on securities (6,547) 1,293
Gain on sale of loans held for sale (115,016) (23,267)
Originations of loans held for sale (15,705,276) (6,233,407)
Proceeds from sales of loans held for sale 12,204,757 4,141,074
Decrease (increase) in accrued interest receivable 60,599 (1,418)
Increase (decrease) in other assets (30,273) 453,900
Increase in accrued interest payable 103,947 85,727
(Decrease) increase in accrued expenses and other
liabilities 148,208 (154,911)
---------- ----------
Net cash used in operating activities (2,746,339) (1,260,761)
---------- ----------
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale (7,301,249) (1,477,695)
Proceeds from maturities and prepayments
of securities -
Available for sale 2,324,713 210,564
Held to maturity 217,521 335,166
Net increase in loans (6,486,198) (4,066,592)
Capital expenditures (51,747) (33,498)
---------- ----------
Net cash used in investing activities (11,296,960) (5,032,055)
---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings and time deposits 23,071,455 (2,531,116)
Net increase in securities sold under agreements to repurchase 4,330,190 7,306,777
---------- ----------
Net cash provided by financing activities 27,401,645 4,775,661
---------- ----------
Increase (decrease) in cash and cash equivalents 13,358,346 (1,517,155)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,539,966 12,416,867
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,898,312 $ 10,899,712
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ 1,573,237 $ 1,095,122
Income taxes 265,000 253,472
---------- ----------
See accompanying notes to consolidated financial statements
59
62
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements included
herein have been prepared by 1st Constitution Bancorp (the "Company"),
in accordance with generally accepted accounting principles and
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted
pursuant to such rules and regulations. These Consolidated Financial
Statements should be read in conjunction with the audited financial
statements and the notes thereto.
In the opinion of the Company, all adjustments (consisting only of
normal recurring accruals) which are necessary for a fair presentation
of the operating results for the interim periods have been included.
The results of operations for periods of less than a year are not
necessarily indicative of results for the full year.
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 2001.
(2) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by
the weighted average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income
by the weighted average number of shares outstanding, as adjusted for
the assumed exercise of potential common stock options, using the
treasury stock method. Potential shares of common stock resulting from
stock option agreements totaled 29,081 and 38,492 for the three months
ended March 31, 2001 and March 31, 2000, respectively.
(3) RECENT ACCOUNTING PRONOUNCEMENT
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended in June 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", and in June 2000 by
SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", (collectively SFAS No. 133). The adoption
of the above statements did not have a material impact on the financial
statements of the Company.
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63
PART III
ITEM 1 - INDEX TO EXHIBITS
(a) The following exhibits are filed as part of this Registration
Statement:
Exhibit
Number Description
------ -----------
2.1 Certificate of Incorporation of the Company
2.2 Bylaws of the Company.
6.1 Amended and Restated 1990 Employee Stock Option Plan, as
amended.
6.2 1996 Employee Stock Option Plan, as amended.
6.3 2000 Employee Stock Option Plan
6.4 Stock Option Plan for Non-Employee Directors.
6.5 Employment Agreement between the Company and Robert F.
Mangano dated April 22, 1999.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
1st CONSTITUTION BANCORP
By: /s/ Robert F. Mangano
--------------------------
Robert F. Mangano,
President and Chief Executive Officer
Dated: June 15, 2001
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64
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Certificate of Incorporation of the Company
2.2 Bylaws of the Company.
6.1 Amended and Restated 1990 Employee Stock Option Plan, as
amended.
6.2 1996 Employee Stock Option Plan, as amended.
6.3 2000 Employee Stock Option Plan
6.4 Stock Option Plan for Non-Employee Directors.
6.5 Employment Agreement between the Company and Robert F.
Mangano dated April 22, 1999.
62