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FCCY > SEC Filings for FCCY > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for 1ST CONSTITUTION BANCORP

Form 10-Q for 1ST CONSTITUTION BANCORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis of the operating results and financial condition at September 30, 2012 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month and nine month periods ended September 30, 2012 are not necessarily indicative of results to be attained for any other period.

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company's Form 10-K (Management's Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (the "SEC") on March 23, 2012.

General

Throughout the following sections, the "Company" refers to 1 st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1 st Constitution Bank (the "Bank") and the Bank's wholly-owned subsidiaries, 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st Constitution Title Agency, 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1st Constitution Capital Trust II ("Trust II") a subsidiary of the Company is not included in the Company's consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full service commercial bank which began operations in August 1989, thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates fourteen branches, and manages an investment portfolio through its subsidiary, 1st Constitution Investment Company of New Jersey, Inc. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company to raise additional regulatory capital.


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Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. When used in this and in future filings by the Company with the SEC, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will," "will likely result," "could," "anticipates," "believes," "continues," "expects," "plans," "will continue," "is anticipated," "estimated," "project" or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

Factors that may cause actual results to differ from those results, expressed or implied, include, but are not limited to, those listed under "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K filed with the SEC on March 23, 2012, such as the overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in accounting, tax or regulatory practices and requirements; certain interest rate risks; risks associated with investments in mortgage-backed securities; and risks associated with speculative construction lending. Although management has taken certain steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and could have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.

Acquisition of Three Branches in 2011

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

As a result of the March 2011 Acquisition, the three branches became branches of the Bank. Included in the March 2011 Acquisition were the assumption of deposit liabilities of $111.9 million, primarily consisting of demand deposits, and the acquisition of cash of approximately $101.5 million, fixed assets of approximately $4.6 million, which includes, without limitation, ownership of the real estate and improvements upon which the branches are situated, and loans of $862,000. The Bank recorded goodwill of approximately $3.2 million and a core deposit intangible asset of approximately $1.7 million as a result of the March 2011 Acquisition.


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RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Summary

The Company realized net income of $1,354,919 for the three months ended September 30, 2012, an increase of $141,641, or 11.7%, from the $1,213,278 reported for the three months ended September 30, 2011. The increase was due primarily to increases in net interest income and non-interest income and a lower provision for loan losses which, in total, offset the increase in non-interest expenses. Net income per diluted common share was $0.26 for the three months ended September 30, 2012 compared to net income per diluted common share of $0.24 for the three months ended September 30, 2011. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 15, 2011 and paid on February 2, 2012 to shareholders of record on January 17, 2012.

Key performance ratios improved for the three months ended September 30, 2012 due to higher net income for that period compared to the three months ended September 30, 2011. Return on average assets and return on average equity were 0.69% and 9.24% for the three months ended September 30, 2012 compared to 0.65% and 9.14%, respectively, for the three months ended September 30, 2011.

The Bank's results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank's operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities. The net interest margin on a tax-equivalent basis for the three months ended September 30, 2012 was 4.08% as compared to the 3.49% net interest margin recorded for the three months ended September 30, 2011, an increase of 59 basis points. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.

Earnings Analysis

Net Interest Income

Net interest income, the Company's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 84.6% of the Company's net revenues for the three-month period ended September 30, 2012 and 82.6% of net revenues for the three-month period ended September 30, 2011. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.

The Company's net interest income increased by $1,398,931, or 23.9 %, to $7,244,402 for the three months ended September 30, 2011 from the $5,845,471 reported for the three months ended September 30, 2011. The increase in net interest income was primarily attributable to lower rates paid on interest-bearing liabilities during the current period. The average rate paid on interest-bearing liabilities for the three months ended September 30, 2012 was 0.84%, a reduction of 38 basis points compared to 1.22% paid for the three months ended September 30, 2011. The average yield on assets increased to 4.76% from 4.43% despite declining market rates due to a shift in average assets away from securities into loans which typically have higher yields than securities.

Average interest earning assets increased by $37,183,999, or 5.4%, to $725,591,359 for the three month period ended September 30, 2012 from $688,407,360 for the three month period ended September 30, 2011. The overall yield on interest earning assets, on a tax-equivalent basis, increased 33 basis points to 4.76% for the three month period ended September 30, 2012 when compared to 4.43% for the three month period ended September 30, 2011. The portfolio yield increased despite declining market rates due to a shift in average assets away from securities and into loans.


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Average interest bearing liabilities increased by $57,182,679, or 10.8%, to $585,927,255 for the three month period ended September 30, 2012 from $528,744,576 for the three month period ended September 30, 2011. Overall, the cost of total interest bearing liabilities decreased 38 basis points to 0.84% for the three months ended September 30, 2012 compared to 1.22% for the three months ended September 30, 2011.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 4.08% for the three months ended September 30, 2012 compared to 3.49% the three months ended September 30, 2011.

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, non-accrual loans, and problem loans as identified through internal classifications, collateral values, and the growth and size of the loan portfolio. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company's provision for loan losses was $499,998 for the three months ended September 30, 2012 compared to $608,332 for the three months ended September 30, 2011. The decreased provision for 2012 was primarily the result of a lower amount of loan charge-offs during 2012 that did not necessitate a corresponding replenishment of the loan loss allowance.

Non-Interest Income

Total non-interest income for the three months ended September 30, 2012 was $1,316,727, an increase of $87,463, or 7.1%, over non-interest income of $1,229,264 for the three months ended September 30, 2011.

Service charges on deposit accounts represent a consistent source of non-interest income. Service charge revenues increased modestly to $243,443 for the three months ended September 30, 2012 from $237,716 for the three months ended September 30, 2011.

Gain on sales of loans held for sale increased marginally to $509,138 for the three months ended September 30, 2012 compared to $508,359 for the three months ended September 30, 2011. The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market. The volume of mortgage loan sales remained consistent for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Non-interest income also includes income from bank-owned life insurance ("BOLI"), which amounted to $112,276 for the three months ended September 30, 2012 compared to $100,980 for the three months ended September 30, 2011, an increase of $11,296 for the third quarter of 2012 as compared to the third quarter of 2011. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduce the Company's overall effective tax rate.

The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees and Automated Teller Machine fees for non-Bank customers. Increased customer demand for these services contributed $451,870 to the other income component of non-interest income for the three months ended September 30, 2012, compared to $382,209 for the three months ended September 30, 2011, an increase of $69,661 for the third quarter of 2012 as compared to the third quarter of 2011.

Non-Interest Expense

Non-interest expenses increased by $1,426,707, or 30.0%, to $6,183,174 for the three months ended September 30, 2012 from $4,756,467 for the three months ended September 30, 2011. The current period increase in other real estate owned expenses was the primary cause for this current period increase in total non-interest expense when compared with the prior period's non-interest expense. The following table presents the major components of non-interest expenses for the three months ended September 30, 2012 and 2011.


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 Non-Interest Expenses
                                               Three months ended September 30,
                                                 2012                    2011

 Salaries and employee benefits            $       3,061,065       $       2,892,901
 Occupancy expenses                                  523,126                 628,652
 Data processing services                            257,991                 295,739
 Marketing                                            46,969                  54,662
 Regulatory, professional and other fees             198,869                 215,138
 FDIC insurance expense                              139,693                  29,805
 Other real estate owned expenses                  1,246,221                 106,278
 Amortization of intangible assets                    66,993                  76,170
 All other expenses                                  644,245                 457,122
                                           $       6,183,173       $       4,756,467

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $168,164, or 5.8%, to $3,061,065 for the three months ended September 30, 2012 compared to $2,892,901 for the three months ended September 30, 2011. The increase in salaries and employee benefits for the three months ended September 30, 2012 was a result of regular merit increases and increased health care costs.

Occupancy expenses decreased by $105,526, to $523,126 for the three months ended September 30, 2012 compared to $628,652 for the three months ended September 30, 2011. The decrease in occupancy expenses was primarily attributable to decreased property taxes and maintenance costs in maintaining the Bank's branch properties.

The cost of data processing services has decreased to $257,991 for the three months ended September 30, 2012 from $295,739 for the three months ended September 30, 2011, as a result of Bank management's review of all data processing systems during 2012 with the goal of streamlining operating efficiencies and purging non-essential elements, resulting in lower monthly costs.

Regulatory, professional and other fees decreased by $16,269, or 7.6%, to $198,869 for the three months ended September 30, 2012 compared to $215,138 for the three months ended September 30, 2011. During the third quarter of 2011, the Company incurred non-recurring professional fees in connection with the March 2011 Acquisition, which was completed on March 25, 2011.

Other real estate owned expenses increased by $1,139,943, to $1,246,221 for the three months ended September 30, 2012 compared to $106,278 for the three months ended September 30, 2011 as the Company recorded loss provisions of $693,644 during the third quarter of 2012 and incurred increased property taxes, and maintenance expenses on more properties during the third quarter of 2012 compared to the third quarter of 2011.

FDIC insurance expense increased to $139,693 for the three months ended September 30, 2012 compared to $29,805 for the three months ended September 30, 2011 as a result of the changes required by the Dodd-Frank Act with respect to FDIC premium assessment rules. The 2011 expense amount also reflects an adjustment to reverse an over accrual of expense from earlier in 2011.

All other expenses increased to $644,245 for the three months ended September 30, 2012 from to $457,122 for the three months ended September 30, 2011. Current period increases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses. All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.


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An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income plus non-interest income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio increased to 72.2% for the three months ended September 30, 2012, compared to 67.2% for the three months ended September 30, 2011.

Income Taxes

Income tax expense increased by $26,380 to $523,038 for the three months ended September 30, 2012 from $496,658 for the three months ended September 30, 2011. The increase was primarily due to a higher level of pretax income for the third quarter of 2012 as compared to the third quarter of 2011.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Summary

The Company realized net income of $3,819,759 for the nine months ended September 30, 2012, an increase of 34.9% from the $2,832,060 reported for the nine months ended September 30, 2011. The increase was due primarily to increases in net interest income and noninterest income which, in total, offset increases in the provision for loan losses and non-interest expenses for the nine months ended September 30, 2012 compared to the same period in 2011.

Diluted net income per common share was $0.74 for the nine months ended September 30, 2012 compared to diluted net income per common share of $0.56 for the nine months ended September 30, 2011. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 15, 2011, and paid on February 2, 2012 to shareholders of record on January 17, 2012.

Key performance ratios improved for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 due to higher net income for the 2012 period. Return on average assets and return on average equity were 0.67% and 8.95% for the nine months ended September 30, 2012 compared to 0.53% and 7.43%, respectively, for the nine months ended September 30, 2011.

The Bank's results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Other factors that may affect the Bank's operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities. The net interest margin for the nine months ended September 30, 2012 was 3.99% as compared to the 3.44% net interest margin recorded for the nine months ended September 30, 2011, an increase of 55 basis points. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.

Earnings Analysis

Net Interest Income

Net interest income, the Company's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 84.8% of the Company's net revenues for the nine month period ended September 30, 2012 and 82.7% of net revenues for the nine-month period ended September 30, 2011. 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 respectively.

The following table sets forth the Company's consolidated average balances of assets, liabilities and shareholders' equity as well as interest income and expense on related items, and the Company's average yield or rate for the nine month periods ended September 30, 2012 and 2011, respectively. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.


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Average Balance Sheets with Resultant Interest and Rates
(yields on a tax-equivalent basis)               Nine months ended September 30, 2012               Nine months ended September 30, 2011
                                                Average                           Average          Average                           Average
                                                Balance            Interest        Yield           Balance            Interest        Yield
Assets:
Federal Funds Sold/Short-Term Investments   $    28,950,888      $     55,315        0.26%     $    56,991,124      $    115,634        0.27%
Investment Securities:
Taxable                                         171,836,158         3,430,770        2.67%         204,200,184         4,154,352        2.72%
Tax-exempt                                       50,443,281         1,837,521        4.87%          42,721,991         1,584,040        4.96%
Total                                           222,279,439         5,268,291        3.17%         246,922,175         5,738,392        3.11%

Loan Portfolio:
Construction                                     57,303,861         2,861,353        6.68%          62,875,175         2,970,476        6.32%
Residential real estate                          11,920,919           463,905        5.20%          10,858,304           533,740        6.57%
Home Equity                                      10,529,455           445,123        5.65%          12,290,937           527,882        5.74%
Commercial and commercial real estate           145,668,346         8,013,835        7.36%         132,440,731         7,529,942        7.60%
Mortgage warehouse lines                        198,007,591         7,060,451        4.77%         105,876,852         3,913,791        4.94%
Installment                                         356,875            18,221        6.83%             443,537            23,107        6.97%
All Other Loans                                  32,771,044           837,561        3.42%          22,375,013           655,059        3.91%
Total                                           456,558,091        19,700,449        5.77%         347,160,549        16,153,997        6.22%

      Total Interest-Earning Assets             707,788,418        25,024,055        4.73%         651,073,848        22,008,023        4.52%

Allowance for Loan Losses                       (6,150,075)                                        (5,969,108)
Cash and Due From Bank                           10,091,843                                         21,523,149
Other Assets                                     52,478,160                                         42,225,020
Total Assets                                $   764,208,346                                    $   708,852,909

Liabilities and Shareholders' Equity:
Interest-Bearing Liabilities:
Money Market and NOW Accounts               $   203,155,986      $    762,799        0.50%     $   165,857,287      $  1,324,442        1.07%
Savings Accounts                                192,802,238           894,090        0.62%         178,820,407         1,074,145        0.80%
Certificates of Deposit                         147,548,296         1,634,787        1.48%         156,192,797         1,967,080        1.68%
Other Borrowed Funds                             19,101,642           340,784        2.39%          11,317,033           315,481        3.73%
Trust Preferred Securities                       18,557,000           292,759        2.11%          18,557,000           589,497        4.25%
   Total Interest-Bearing Liabilities           581,165,162         3,925,219        0.90%         530,744,524         5,270,645        1.33%

           Net Interest Spread                                                       3.83%                                              3.19%

Demand Deposits                                 117,413,216                                        118,142,996
Other Liabilities                                 8,790,417                                          9,025,774
Total Liabilities                               707,368,795                                        657,913,294
Shareholders' Equity                             56,839,551                                         50,939,615
Total Liabilities and Shareholders'
Equity                                      $   764,208,346                                    $   708,852,909

           Net Interest Margin                                   $ 21,098,836        3.99%                          $ 16,737,378        3.44%

The Company's net interest income increased by $4,279,248, or 26.4%, to $20,502,883 for the nine months ended September 30, 2012 from the $16,223,635 reported for the nine months ended September 30, 2011. The increase in net . . .

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