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FCCY > SEC Filings for FCCY > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for 1ST CONSTITUTION BANCORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for 1ST CONSTITUTION BANCORP


14-May-2013

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 March 31, 2013 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month period ended March 31, 2013 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 Operation) for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the "SEC") on March 22, 2013.

General

Throughout the following sections, the "Company" refers to 1st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1st 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, LLC, 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, and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates 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.


Table of Contents

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 speaks 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 22, 2013, 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.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Summary

The Company reported net income of $1,325,318 for the three months ended March 31, 2013, an increase of $158,586, or 13.6%, from the $1,166,732 reported for the three months ended March 31, 2012. The increase was due primarily to a decrease of $599,998 in the loan loss provision, an increase of $443,398 in non-interest income and a reduction in FDIC insurance expense of $127,706, offset primarily by an increase of $412,513 in Salaries and employee benefits and an increase in Other real estate owned expenses of $167,878. Net income per diluted common share was $0.22 for the three months ended March 31, 2013 and 2012. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.

During the third quarter of 2012, the Company launched a shareholders' common stock rights offering, which expired on October 5, 2012. The Company received gross proceeds of $5.0 million from holders of subscription rights who exercised their basic subscription rights and from holders who exercised the over-subscription privilege. The rights offering was fully subscribed. Accordingly, the Company issued a total of 555,555 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, including pursuant to the exercise of the over-subscription privilege.

Key performance ratios remained strong for the three months ended March 31, 2013 due to higher net income for that period compared to the three months ended March 31, 2012. Return on average assets and return on average equity were 0.65% and 8.21% for the three months ended March 31, 2013 compared to 0.62% and 8.46%, respectively, for the three months ended March 31, 2012.


Table of Contents

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 three months ended March 31, 2013 was 3.53% as compared to the 3.98% net interest margin recorded for the three months ended March 31, 2012, a decrease of 45 basis points. This decrease in the Company's net interest margin for the three months ended March 31, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the expected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loan prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances. 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 79.7% of the Company's net revenues for the three month period ended March 31, 2013 and 85.1% of net revenues for the three-month period ended March 31, 2012. 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 following table sets forth the Company's consolidated average balances of assets and liabilities and shareholders' equity as well as interest income and expense on related items, and the Company's average yield or rate for the three month periods ended March 31, 2013 and 2012. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.

Average Balance Sheets with Resultant Interest and Rates
(yields on a tax-equivalent basis)

                                      Three months ended March 31, 2013                  Three months ended March 31, 2012
                                  Average                            Average         Average                            Average
                                  Balance          Interest           Yield          Balance          Interest           Yield
 Assets:
 Federal Funds
Sold/Short-Term
 Investments                   $   85,173,422     $    49,680            0.24 %   $   25,778,075     $    15,034            0.23 %
Investment Securities:
Taxable                           159,023,828         937,085            2.39 %      169,451,907       1,184,204            2.81 %
Tax-exempt                         63,549,292         759,060            4.84 %       52,496,087         622,442            4.77 %
Total                             222,573,120       1,696,145            3.09 %      221,947,994       1,806,646            3.27 %

 Loan Portfolio:
Construction                       44,654,565         680,811            6.18 %       51,229,408         886,115            6.96 %
Residential real estate            10,920,962         144,890            5.38 %       12,553,551         160,487            5.14 %
Home Equity                         9,222,618         124,683            5.48 %       11,017,237         155,074            5.66 %
Commercial and commercial
 real estate                      143,147,048       2,527,366            7.16 %      142,809,968       2,618,799            7.38 %
Mortgage warehouse lines          189,436,939       2,189,236            4.69 %      192,404,738       2,289,469            4.79 %
Installment                           255,018           4,391            6.98 %          414,501           6,927            6.72 %
All Other Loans                    49,279,947         300,818            2.48 %       32,488,520         297,588            3.68 %
Total                             446,917,097       5,972,195            5.42 %      442,917,923       6,414,459            5.82 %

   Total Interest-Earning
           Assets                 754,663,639       7,718,020            4.15 %      690,643,992       8,236,139            4.80 %

Allowance for Loan Losses         (7,363,842)                                         (5,759,191 )
Cash and Due From Bank             30,994,778                                         17,525,148
Other Assets                       51,277,385                                         53,200,991
      Total Assets             $  829,571,960                                     $  755,610,940

Liabilities and
Shareholders' Equity:
Money Market and NOW Accounts  $  231,758,247     $   217,524            0.38 %   $  204,819,526     $   306,804            0.60 %
Savings Accounts                  209,362,823         236,745            0.46 %      188,803,014         318,354            0.68 %
Certificates of Deposit           141,505,368         502,067            1.44 %      144,509,899         561,316            1.56 %
Other Borrowed Funds               11,155,000         103,273            3.75 %       22,069,231         117,922            2.15 %
Trust Preferred Securities         18,557,000          87,873            1.92 %       18,557,000          99,312            2.15 %
   Total Interest-Bearing
        Liabilities               612,338,438       1,147,482            0.76 %      578,758,670       1,403,708            0.98 %

    Net Interest Spread                                                  3.39 %                                             3.82 %

Demand Deposits                   141,764,416                                        112,977,065
Other Liabilities                   9,973,569                                          8,426,611
Total Liabilities                 764,076,423                                        700,162,346
Shareholders' Equity               65,495,537                                         55,448,594
Total Liabilities and
Shareholders' Equity            $ 829,571,960                                      $ 755,610,940
Net Interest Margin                               $ 6,570,538            3.53 %                      $ 6,832,431            3.98 %


Table of Contents

The Company's net interest income decreased on a tax-equivalent basis by $261,893, or 3.8%, to $6,570,538 for the three months ended March 31, 2013 from the $6,832,431 reported for the three months ended March 31, 2012. This decrease in the Company's net interest margin for the three months ended March 31, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the expected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loans prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances.

Average interest earning assets increased by $64,019,647, or 9.3%, to $754,663,639 for the three month period ended March 31, 2013 from $690,643,992 for the three month period ended March 31, 2012. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 65 basis points to 4.15% for the three month period ended March 31, 2013 when compared to 4.80% for the three month period ended March 31, 2012.

Average interest bearing liabilities increased by $33,579,768, or 5.8%, to $612,338,438 for the three month period ended March 31, 2013 from $578,758,670 for the three month period ended March 31, 2012. Overall, the cost of total interest bearing liabilities decreased 22 basis points to 0.76% for the three months ended March 31, 2013 compared to 0.98% for the three months ended March 31, 2012.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.53% for the three months ended March 31, 2013 compared to 3.98% the three months ended March 31, 2012.

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, the level of non-accrual loans and problem loans as identified through internal classification, collateral values, and the growth and size of the loan portfolio.


Table of Contents

At March 31, 2013, non-performing loans decreased by $3,948,652, or 66.2%, to $2,014,850 and the ratio of non-performing loans to total loans was 0.49% at March 31, 2013 compared to 1.14% at December 31, 2012. At March 31, 2013, the loan portfolio balance was $415,037,282, which represented a decrease of $106,776,828 compared to the December 31, 2012 balance of $521,814,110. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company recorded no provision for loan losses for the three months ended March 31, 2013 compared to $599,998 for the three months ended March 31, 2012.

Non-Interest Income

Total non-interest income for the three months ended March 31, 2013 was $1,608,563, an increase of $443,398, or 38.1%, over non-interest income of $1,165,165 for the three months ended March 31, 2012.

Service charges on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased nominally to $223,066 for the three months ended March 31, 2013 from $227,972 for the three months ended March 31, 2012. This decrease was the result of a lower volume of uncollected funds and overdraft fees collected on deposit accounts during the first three months of 2013 compared to the first three months of 2012.

Gain on sales of loans held for sale increased by $263,492, or 56.3%, to $731,709 for the three months ended March 31, 2013 when compared to $468,217 for the three months ended March 31, 2012. The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market. The current low interest rate environment for mortgage loans resulted in a higher volume of mortgage originations. The resulting volume of mortgage loan sales increased for the first three months of 2013 compared to the first three months of 2012.

Non-interest income also includes income from bank-owned life insurance ("BOLI"), which amounted to $112,608 for the three months ended March 31, 2013 compared to $111,922 for the three months ended March 31, 2012. 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 to the other income component of non-interest income amounting to $541,180 for the three months ended March 31, 2013, compared to $357,054 for the three months ended March 31, 2012, an increase of $184,126 for the first quarter of 2013 as compared to the first quarter of 2012.

Non-Interest Expense

Non-interest expenses increased by $470,451, or 8.4%, to $6,082,968 for the
three months ended March 31, 2013 from $5,612,517 for the three months ended
March 31, 2012. The following table presents the major components of
non-interest expenses for the three months ended March 31, 2013 and 2012.

     Non-interest Expenses
                                                 Three months ended March 31,
                                                    2013                2012
     Salaries and employee benefits            $     3,352,863       $ 2,940,350
     Occupancy expenses                                677,806           723,786
     Data processing services                          301,382           263,575
     Equipment expense                                 311,648           271,963
     Marketing                                          47,583            45,035
     Regulatory, professional and other fees           194,993           182,708
     Office expense                                    186,648            77,667
     FDIC insurance expense                             19,687           147,393
     Directors' fees                                    32,000            24,000
     Other real estate owned expenses                  545,505           377,627
     Amortization of intangible assets                  66,992            66,992
     Other expenses                                    345,861           394,553
                  Total                        $     6,082,968       $ 5,612,517


Table of Contents

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $412,513, or 14.0%, to $3,352,863 for the three months ended March 31, 2013 compared to $2,940,350 for the three months ended March 31, 2012. The increase in salaries and employee benefits for the three months ended March 31, 2013 was a result of regular merit increases and increased health care costs.

Occupancy expenses decreased by $45,980, or 6.4%, to $677,806 for the three months ended March 31, 2013 compared to $723,786 for the three months ended March 31, 2012. The decrease in expense was primarily attributable to a decrease in property taxes resulting from a successful appeal process and lower maintenance costs in maintaining the Bank's branch properties.

The cost of data processing services increased to $301,382 for the three months ended March 31, 2013 from $263,575 for the three months ended March 31, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank's expanding mobile banking systems.

Equipment expense increased by $39,685, or 14.6%, to $311,648 for the three months ended March 31, 2013 compared to $271,963 for the three months ended March 31, 2012 primarily due to increased costs associated with the number of maintenance contracts and supplies on equipment in connection with the expansion of mobile banking capabilities as compared with the prior period.

Office expense increased by $108,981 to $186,648 for the three months ended March 31, 2013 compared to $77,667 for the three months ended March 31, 2012 as the Bank incurred additional expenses in connection with the 2013 initiative that includes expansion of the web-based menu of interactive products and services made available to customers during the first three months of 2013.

Regulatory, professional and other fees increased by $12,285, or 6.7%, to $194,993 for the three months ended March 31, 2013 compared to $182,708 for the three months ended March 31, 2012. During the first three months of 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company's compliance with regulatory requirements.

FDIC insurance expense decreased to $19,687 for the three months ended March 31, 2013 compared to $147,393 for the three months ended March 31, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC assessment rules.

Other real estate owned expenses increased by $167,878 to $545,505 for the three months ended March 31, 2013 compared to $377,627 for the three months ended March 31, 2012 as the Company incurred increased loss provisions, property taxes, maintenance and other expenses on repossessed properties during the three months ended March 31, 2013 than were incurred during the same period in 2012.

All other expenses decreased by $48,692 to $345,861 for the three months ended March 31, 2013 compared to $394,553 for the three months ended March 31, 2012 as current year decreases 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.
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 76.7% for the three months ended March 31, 2013, compared to 72.0% for the three months ended March 31, 2012.


Table of Contents

Income Taxes

Income tax expense increased by $108,156 to $524,633 for the three months ended March 31, 2013 from $416,477 for the three months ended March 31, 2012. The increase was primarily due to a higher level of pretax income for the first quarter of 2013 as compared to the first quarter of 2012.

Financial Condition

March 31, 2013 Compared with December 31, 2012

Total consolidated assets at March 31, 2013 were $812,565,458, representing a decrease of $28,402,924, or 3.4%, from total consolidated assets of $840,968,382 at December 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2013 totaled $101,439,427 compared to $14,044,921 at December 31, 2012. Cash and cash equivalents at March 31, 2013 consisted of cash and due from banks of $101,428,004 and Federal funds sold/short term investments of $11,423. The corresponding balances at December 31, 2012 were $14,033,501 and $11,420, respectively. To the extent that the Bank did not utilize the funds for loan originations or securities purchases, the cash inflows accumulated in cash and cash equivalents.

Loans Held for Sale

Loans held for sale at March 31, 2013 amounted to $30,717,012 compared to $35,960,262 at December 31, 2012. As indicated in the Consolidated Statements of Cash Flows, the amount of loans originated for sale was $44,012,744 for the three months ended March 31, 2013.

Investment Securities

Investment securities represented 27.3% of total assets at March 31, 2013 and 26.9% at December 31, 2012. Total investment securities decreased $3,868,497, or 1.7%, to $222,000,368 at March 31, 2013 from $225,868,865 at December 31, 2012. Purchases of investments totaled $12,761,368 during the three months ended March 31, 2013, and proceeds from calls and repayments totaled $15,658,550 during the period.

Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns. At March 31, 2013, securities available for sale totaled $116,412,431, which is an increase of $6,571,466, or 6.0%, from securities available for sale totaling $109,840,965 at December 31, 2012.

At March 31, 2013, the securities available for sale portfolio had net unrealized gains of $1,150,853 compared to net unrealized gains of $1,806,967 at December 31, 2012. These unrealized gains are reflected, net of tax, in shareholders' equity as a component of accumulated other comprehensive income.

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. At March 31, 2013, securities held to maturity were $105,587,937, a decrease of $10,439,963, or 9.0%, from $116,027,900 at December 31, 2012. The fair value of the held to maturity portfolio at March 31, 2013 was $110,944,295.


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