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FCCY > SEC Filings for FCCY > Form 10-Q on 14-Aug-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-Aug-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 June 30, 2013 is 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 six month periods ended June 30, 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.


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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 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 June 30, 2013 Compared to the Three Months Ended June 30, 2012

Summary

The Company reported net income of $1,557,030 for the three months ended June 30, 2013, an increase of $258,922, or 19.9%, from the $1,298,108 reported for the three months ended June 30, 2012. The increase was primarily due to a decrease of $313,332 in the loan loss provision, an increase of $259,893 in non-interest income and a reduction in non-interest expenses of $211,674. Net income per diluted common share was $0.25 for the three months ended June 30, 2013 and $0.24 for the three months ended June 30, 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 June 30, 2013 due to higher net income for that period compared to the three months ended June 30, 2012. Return on average assets and return on average equity were 0.77% and 9.40% for the three months ended June 30, 2013 compared to 0.68% and 9.18%, respectively, for the three months ended June 30, 2012.


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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 June 30, 2013 was 3.42% as compared to the 3.87% net interest margin recorded for the three months ended June 30, 2012, a decrease of 45 basis points. This decrease in the Company's net interest margin for the three months ended June 30, 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 80.9% of the Company's net revenues for the three month period ended June 30, 2013 and 84.8% of net revenues for the three-month period ended June 30, 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.

Average interest earning assets increased by $42,158,682, or 6.0%, to $749,307,863 for the three month period ended June 30, 2013 from $707,149,181 for the three month period ended June 30, 2012. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 62 basis points to 3.98% for the three month period ended June 30, 2013 when compared to 4.60% for the three month period ended June 30, 2012 due to sustained pressure on asset yields.

Average interest bearing liabilities increased by $18,917,905, or 3.3%, to $596,564,151 for the three month period ended June 30, 2013 from $577,646,246 for the three month period ended June 30, 2012. Overall, the cost of total interest bearing liabilities decreased 18 basis points to 0.71% for the three months ended June 30, 2013 compared to 0.89% for the three months ended June 30, 2012.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.42% for the three months ended June 30, 2013 compared to 3.87% the three months ended June 30, 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.

At June 30, 2013, non-performing loans decreased by $4,455,836, to $1,507,666 and the ratio of non-performing loans to total loans was 0.37% at June 30, 2013 compared to 1.14% at December 31, 2012. At June 30, 2013, the loan portfolio balance was $407,482,758, which represented a decrease of $114,331,352 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 a provision for loan losses of $236,666 for the three months ended June 30, 2013 compared to $549,998 for the three months ended June 30, 2012.


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Non-Interest Income

Total non-interest income for the three months ended June 30, 2013 was $1,447,859, an increase of $259,893, or 21.9%, over non-interest income of $1,187,966 for the three months ended June 30, 2012. This component represented 19.1% of the Company's net revenues for the three month period ended June 30, 2013 and 15.2% of net revenues for the three month period ended June 30, 2012.

Service charges on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased nominally to $221,604 for the three months ended June 30, 2013 from $231,256 for the three months ended June 30, 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 decreased by $16,001, or 3.2%, to $479,146 for the three months ended June 30, 2013 when compared to $495,147 for the three months ended June 30, 2012. The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market. The volume of mortgage loan sales decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Non-interest income also includes income from bank-owned life insurance ("BOLI"), which amounted to $119,758 for the three months ended June 30, 2013 compared to $113,176 for the three months ended June 30, 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, cash counting 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 $627,351 for the three months ended June 30, 2013, compared to $348,387 for the three months ended June 30, 2012, an increase of $278,964 for the second quarter of 2013 as compared to the second quarter of 2012.

Non-Interest Expense

Non-interest expenses decreased by $211,674, or 3.9%, to $5,162,300 for the three months ended June 30, 2013 from $5,373,974 for the three months ended June 30, 2012. The following table presents the major components of non-interest expenses for the three months ended June 30, 2013 and 2012.

      Non-interest Expenses
                                                  Three months ended June 30,
                                                     2013               2012
      Salaries and employee benefits            $     3,045,241      $ 3,154,903
      Occupancy expenses                                622,499          613,535
      Data processing services                          294,306          252,545
      Equipment expense                                 188,286          101,452
      Marketing                                          92,087           53,789
      Regulatory, professional and other fees           271,908          232,028
      FDIC insurance expense                             15,000          139,873
      Directors' fees                                    22,000           21,000
      Other real estate owned expenses                   48,557          575,343
      Amortization of intangible assets                  66,992           66,991
      Other expenses                                    495,424          162,515
                   Total                        $     5,162,300      $ 5,373,974


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Salaries and employee benefits, which represent the largest portion of non-interest expenses, decreased by $109,662, or 3.5%, to $3,045,241 for the three months ended June 30, 2013 compared to $3,154,903 for the three months ended June 30, 2012. The decrease in salaries and employee benefits for the three months ended June 30, 2013 was primarily a result of a lower level of compensation expense for stock option and stock grant awards for the current period compared to the prior year period.

Occupancy expenses increased marginally by $8,964, to $622,499 for the three months ended June 30, 2013 compared to $613,535 for the three months ended June 30, 2012. The increase in expense was primarily attributable to marginally higher maintenance costs occurred in maintaining the Bank's branch properties.

The cost of data processing services increased to $294,306 for the three months ended June 30, 2013 from $252,545 for the three months ended June 30, 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 $86,834, or 86%, to $188,286 for the three months ended June 30, 2013 compared to $101,452 for the three months ended June 30, 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.

Regulatory, professional and other fees increased by $39,880, or 17.2%, to $271,908 for the three months ended June 30, 2013 compared to $232,028 for the three months ended June 30, 2012. During the second quarter of 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company's compliance with regulatory requirements and risk management program.

FDIC insurance expense decreased to $15,000 for the three months ended June 30, 2013 compared to $139,873 for the three months ended June 30, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC assessment rules.

Other real estate owned expenses decreased by $526,786 to $48,557 for the three months ended June 30, 2013 compared to $575,343 for the three months ended June 30, 2012 as the Company incurred a lower level of property taxes, maintenance and other expenses on repossessed properties during the three months ended June 30, 2013 than were incurred during the same period in 2012. In addition, the Company entered into a number of rental agreements on certain OREO properties with the resulting rents received being offset against maintenance expenses.

All other expenses increased by $332,908 to $495,424 for the three months ended June 30, 2013 compared to $162,516 for the three months ended June 30, 2012 as current year increases occurred in correspondent bank fees, payroll processing fees, insurance premiums 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 decreased to 68.2% for the three months ended June 30, 2013, compared to 68.8% for the three months ended June 30, 2012.

Income Taxes

Income tax expense increased by $18,684 to $612,492 for the three months ended June 30, 2013 from $593,808 for the three months ended June 30, 2012. The increase was primarily due to a higher level of pretax income for the second quarter of 2013 as compared to the second quarter of 2012.


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Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Summary

The Company realized net income of $2,882,348 for the six months ended June 30, 2013, an increase of 16.9% from the $2,464,840 reported for the six months ended June 30, 2012. This increase was due primarily to a decrease in the provision for loan losses plus an increase in non-interest income which, in total, offset a decrease in net interest income plus an increase in noninterest expenses, for the six months ended June 30, 2013 compared to the same period in 2012. Diluted net income per common share was $0.47 for the six months ended June 30, 2013 compared to diluted net income per common share of $0.46 for the six months ended June 30, 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, 2012 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 improved for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 due to higher net income for the 2013 period. Return on average assets and return on average equity were 0.71% and 8.81% for the six months ended June 30, 2013 compared to 0.65% and 8.81%, respectively, for the six months ended June 30, 2012.

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 six months ended June 30, 2013 was 3.46% as compared to the 3.92% net interest margin recorded for the six months ended June 30, 2012, a decrease of 46 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 79.8% of the Company's net revenues for the six month period ended June 30, 2013 and 84.9% of net revenues for the six month period ended June 30, 2012. 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 six month periods ended June 30, 2013 and 2012, 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)                 Six months ended June 30, 2013                   Six months ended June 30, 2012
                                               Average                          Average         Average                          Average
                                               Balance          Interest         Yield          Balance          Interest         Yield

Assets:
Federal Funds Sold/Short-Term Investments   $ 108,464,994     $    139,342          0.26 %   $  36,860,458     $     48,340          0.26 %
Investment Securities:
Taxable                                       155,253,462        1,838,797          2.39 %     171,349,167        2,327,759          2.72 %
Tax-exempt                                     65,948,918        1,566,576          4.79 %      51,276,230        1,230,374          4.81 %
Total                                         221,202,380        3,405,373          3.10 %     222,625,397        3,558,133          3.21 %

Loan Portfolio:
Construction                                   42,304,486        1,295,504          6.18 %      54,948,513        1,855,335          6.77 %
Residential real estate                        11,033,073          288,311          5.27 %      12,303,773          316,592          5.16 %
Home Equity                                     9,115,975          248,644          5.50 %      10,779,569          303,956          5.65 %
Commercial and commercial real estate         141,990,388        5,078,830          7.21 %     144,033,903         5287,559          7.36 %
Mortgage warehouse lines                      175,027,892        4,074,237          4.69 %     184,622,769        4,396,188          4.78 %
Installment                                       247,069            8,070          6.59 %         378,818           12,629          6.69 %
All Other Loans                                44,819,859          623,857          2.81 %      32,259,311          561,304          3.49 %
Total                                         424,538,742       11,617,453          5.52 %     439,326,656       12,733,563          5.81 %

      Total Interest-Earning Assets           754,206,116       15,162,168          4.05 %     698,812,511       16,340,036          4.69 %

Allowance for Loan Losses                      (6,789,347 )                                     (5,955,926 )
Cash and Due From Bank                         22,409,931                                       12,726,136
Other Assets                                   51,299,291                                       52,881,065
Total Assets                                $ 821,125,991                                    $ 758,463,786

Liabilities and Shareholders' Equity:
Interest-Bearing Liabilities:
Money Market and NOW Accounts               $ 228,737,438     $    401,594          0.35     $ 204,902,097     $    542,887          0.53 %
Savings Accounts                              205,378,084          457,986          0.45       191,355,779          620,354          0.65 %
Certificates of Deposit                       141,510,623          966,354          1.38       147,499,965        1,101,598          1.50 %
Other Borrowed Funds                           10,574,309          207,527          3.96        16,220,330          221,561          2.74 %
Trust Preferred Securities                     18,557,000          175,644          1.91        18,557,000          195,892          2.12 %
   Total Interest-Bearing Liabilities         604,757,454        2,209,105          0.74       578,535,171        2,682,292          0.93 %

           Net Interest Spread                                                      3.31 %                                           3.76 %

Demand Deposits                               140,566,574                                      115,201,429
Other Liabilities                               9,826,621                                        8,634,205
Total Liabilities                             755,150,649                                      702,370,805
Shareholders' Equity                           65,975,342                                       56,092,981
Total Liabilities and Shareholders'
Equity                                      $ 821,125,991                                    $ 758,463,786

           Net Interest Margin                                $ 12,953,063          3.46 %                     $ 13,657,744          3.92 %

The Company's net interest income decreased on a tax-equivalent basis by $704,681, or 5.2%, to $12,953,063 for the six months ended June 30, 2013 from the $13,657,744 reported for the six months ended June 30, 2012. The decrease in . . .

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