Filed Pursuant to Rule 424B3
Registration No. 333-92310
PROSPECTUS SUPPLEMENT
268,458 SHARES OF COMMON STOCK
1ST COLONIAL BANCORP, INC.
This Prospectus Supplement updates the Prospectus dated September
20, 2002 and relates to the sale from time to time by 1st Colonial Bancorp, Inc.
of shares of common stock upon the exercise of 268,458 outstanding warrants
issued in connection with our common stock and warrant offering in 2002. Each
warrant entitles the holder to purchase one share of common stock at a purchase
price of $8.71 per share until the expiration of the warrants on December 16,
2005.
We will receive cash proceeds from the exercise of the warrants. We
will use such proceeds for general corporate purposes
Our common stock is quoted on the OTC Bulletin Board under the
symbol "FCOB." The last reported sale price of the common stock was $9.15 per
share on July 13, 2004. As of July 13, 2004, the bid and asked prices for our
common stock were $9.15 and $9.75 per share, respectively.
The shares covered by this prospectus supplement have been
registered under the Securities Act of 1933.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 11.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus supplement is truthful or complete. Any
representation to the contrary is a criminal offense.
July 14, 2004
TABLE OF CONTENTS
SUMMARY...................................................................................... 3
RISK FACTORS................................................................................. 11
USE OF PROCEEDS.............................................................................. 18
MARKET FOR OUR COMMON STOCK.................................................................. 18
DIVIDEND POLICY.............................................................................. 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 23
BUSINESS..................................................................................... 44
SUPERVISION AND REGULATION................................................................... 59
MANAGEMENT................................................................................... 68
DESCRIPTION OF OUR SECURITIES................................................................ 82
LEGAL MATTERS................................................................................ 93
EXPERTS...................................................................................... 93
WHERE YOU CAN OBTAIN MORE INFORMATION........................................................ 93
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS SUPPLEMENT OR TO MAKE
REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS SUPPLEMENT. YOU MUST
NOT RELY ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER
TO SELL THOSE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR ANY SALES MADE HEREUNDER AFTER THE
DATE OF THIS PROSPECTUS SUPPLEMENT SHALL CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF 1ST COLONIAL HAVE NOT CHANGED
SINCE THE DATE HEREOF.
SUMMARY
The following summary contains all of the material terms of the
offering, but is qualified in its entirety by, and should be read in conjunction
with, the more detailed information and the financial statements (including the
notes thereto) appearing in this prospectus supplement. In this prospectus
supplement, the term "1st Colonial" refers to 1st Colonial Bancorp, Inc., the
term the "bank" refers to 1st Colonial National Bank, and the terms "us," "we"
and "our" refer to 1st Colonial or the bank, as the context may require.
1ST COLONIAL BANCORP, INC.
WHO WE ARE
1st Colonial Bancorp, Inc. is a bank holding company headquartered
in Collingswood, New Jersey, and the parent company of 1st Colonial National
Bank. We became the holding company for the bank on June 30, 2002. The bank is a
national bank that opened for business on June 30, 2000, and provides a wide
range of business and consumer financial services through its main office
located in Collingswood, New Jersey and a branch office located in Westville,
New Jersey.
Emphasizing customer service, access to decision makers and
responsive turnaround time on credit applications, we have grown quickly,
achieving profitability during our seventh month of existence. At March 31,
2004, we had $120.4 million in assets, $68.8 million in loans, and $105.9
million in deposits. These amounts reflect increases of $2.4 million or 2.0%,
$2.2 million or 3.3 % and $1.6 million or 1.5%, respectively, from our assets,
loans and deposits of $118.1 million, $66.6 million and $104.3 million,
respectively, at December 31, 2003. For the three-months ended March 31, 2004,
we had net income of $110,000, or $0.08 per share ($0.07 per share on a diluted
basis). For the year ended December 31, 2003, we had net income of $500,000, or
$0.35 per share.
Our goal is to further increase our assets, deposits and net income
by continuing to stress customer service and our identity as a locally operated
community bank. We compete with many existing and larger financial institutions
in our geographic market by emphasizing personalized service and responsive
decision making. We strive to maintain a stable employee base, which leads to
customer loyalty and retention. Our management team is led by Gerard M.
Banmiller, our president and chief executive officer, and James E. Strangfeld,
our executive vice president and senior loan officer. Each of these gentlemen
has over 30 years of banking experience, most of which has been in the markets
that we serve.
As a bank holding company registered under the Bank Holding Company
Act of 1956, we are subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System. The bank is chartered as a national
bank by Office of the Comptroller of the Currency (OCC), and its deposits are
insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
(FDIC). The bank's operations are subject to supervision and regulation by the
FDIC and the OCC. For more information, please see the section of this
prospectus supplement entitled "Supervision and Regulation."
3
Since opening in June 2000, we have accomplished the following:
- Reported 13 consecutive quarters of profitability after
becoming profitable in the first quarter of 2001, our third
quarter of operations, and achieved earnings of $500,000 for
the year ended December 31, 2003;
- Implemented a strong credit culture which has resulted in no
non-performing loans and no non-performing assets as of March
31, 2004;
- Assembled a management and lending team of six people who
collectively have more than 215 years of banking experience;
- Opened our second full service banking office in Westville,
New Jersey;
- Established our local identity in the communities we serve
through an extensive marketing campaign that includes
sponsoring a wide variety of civic and charitable events; and
- Assembled a board of directors consisting of recognized local
business people and civic leaders.
Our principal executive offices are located at 1040 Haddon Avenue,
Collingswood, NJ 08108, and our telephone number is (856) 858-1100.
OUR MARKET AREA
We are located in the southwestern part of New Jersey, approximately
five miles east of the City of Philadelphia, Pennsylvania, which is the fifth
largest city in the United States. Our market area consists of the greater
Cherry Hill, New Jersey area and the Borough of Westville, New Jersey. Our
target market includes the towns of Collingswood, Cherry Hill, Haddonfield and
Westville.
BUSINESS STRATEGY
Our mission is to become the leading community bank in our market
area by meeting the credit needs of local businesses and residents, providing
relationship banking and customer service that is superior to the larger banks
in our market area, and offering products and services responsive to local
needs. We intend to increase our market share and presence by opening additional
branch offices at convenient and strategic locations and through growth at our
existing offices.
We target small and mid-sized businesses as well as professional
practices such as lawyers, medical doctors and accountants in our market area.
In addition, we have had success marketing our deposit account services to local
government entities such as municipalities, school districts and public
authorities. This success is largely due to the experience and reputation of our
management in serving municipal and local government entities in our
marketplace. These deposit relationships are typically operating accounts and
longer-term certificates of deposit, which we believe are a stable source of
funding for us.
4
We actively pursue business relationships with our targeted
clientele through diligent calling efforts and by capitalizing on our knowledge
of the market and pre-existing business relationships. Our goal is to establish
deposit and lending relationships that are based on service, will result in
long-standing relationships and will lead to referrals from our satisfied
customers.
As an added convenience for our government and business customers,
we began offering courier pick-up and delivery services to these customers in
2003. We also are planning to add up to two full-service branches by the first
quarter of 2006.
An important element of our strategy is to capitalize on the prior
experience of our management team in our market, as well as their pre-existing
business relationships. Prior to organizing the bank, our president, Gerard M.
Banmiller, helped organize Community National Bank of New Jersey located in
Camden County, New Jersey, and served as its president from 1987 until its sale
in 1998. James E. Strangfeld, the bank's executive vice president, directed
various business and consumer banking operations for the southern New Jersey
divisions of two large regional banks from 1986 to 2000. Many of the bank's
customers, including governmental entities and local businesses, were customers
of Mr. Banmiller and Mr. Strangfeld in their prior positions. It is a
fundamental belief of management that having knowledge of our local markets
facilitates a bank's deposit gathering capabilities and its ability to make
sound credit decisions. This extensive knowledge of our local markets has
allowed us to develop and implement a highly focused and disciplined approach to
deposit and lending relationships with the customers in our market area.
We believe that our knowledge of the local banking market and our
emphasis on service, when combined with the application of sound lending
practices, will create value for our shareholders.
5
THE OFFERING
Common stock issuable upon the exercise of
outstanding warrants............................... 268,458 shares
Exercise price..................................... $8.71 per share
Market for the common stock........................ The common stock is not listed on any securities
exchange or on the NASDAQ National or SmallCap Markets.
The common stock is traded on the OTC Bulletin Board
under the symbol "FCOB."
Dividend policy.................................... We have not paid cash dividends in the past, and we do
not intend to pay cash dividends for the foreseeable
future. We paid a 10% stock dividend in December 2001, a
5% stock dividend in April 2003, and a 5% stock dividend
on April 15, 2004. We will review whether to pay
additional stock dividends in the future.
Use of proceeds.................................... We will receive cash proceeds from the exercise for cash
of the warrants. We will use such proceeds for general
corporate purposes.
Risk factors....................................... An investment in 1st Colonial and the common stock
involves certain risks. Prospective purchasers of the
common stock should consider the information discussed
under the heading "Risk Factors."
6
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data presented below is derived from, and
should be read in conjunction with, our audited financial statements for the
years ended December 31, 2003, 2002 and 2001, including the related notes,
included in this prospectus supplement beginning on page F-1. The selected
financial data for the periods ended December 31, 2003, 2002, 2001 and 2000 were
derived from our audited consolidated financial statements for the respective
periods. Effective June 30, 2002, the bank became a wholly owned subsidiary of
1st Colonial which has no material operations other than ownership of the bank.
Therefore, the financial statements of 1st Colonial prior to June 30, 2002 are
the historical statements of the bank. All per share data has been restated for
the effect of the 10% stock dividend paid on January 15, 2002 to shareholders of
record as of January 2, 2002, the 5% stock dividend paid on April 15, 2003 to
shareholders of record as of April 1, 2003 and the 5% stock dividend paid on
April 15, 2004 to shareholders of record as of April 1, 2004.
SUMMARY OF OPERATIONS
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JUNE 30, 2000
-------------------------------------- (INCEPTION) TO
2003 2002 2001 DECEMBER 31, 2000
---- ---- ---- ------------------
(DOLLARS IN THOUSANDS)
Interest income ...................... $ 4,764 $ 4,085 $ 3,188 $ 757
Interest expense ..................... 1,244 1,165 1,264 262
------- ------- ------- -------
Net interest income .................. 3,520 2,920 1,924 495
Provision for loan losses ............ 225 275 225 110
------- ------- ------- -------
Net interest income after
provision for loan losses .......... 3,295 2,645 1,699 385
Other income ......................... 299 202 169 13
Other expense ........................ 2,759 2,023 1,601 995
------- ------- ------- -------
Income (loss) before income taxes .... 835 824 267 (597)
Income tax expense (benefit) ......... 335 329 (94) --
------- ------- ------- -------
Net income (loss) .................... $ 500 $ 495 $ 361 $ (597)
======= ======= ======= =======
7
PER SHARE DATA
FOR THE PERIOD
FOR THE YEARS ENDED FROM JUNE 30,
DECEMBER 31, 2000 (INCEPTION)
---------------------------------------------------- TO DECEMBER 31,
2003 2002 2001 2000
---- ---- ---- ----
Net Income (loss)
Basic .............................. $ 0.35 $ 0.44 $ 0.35 $ (0.61)
Diluted ............................ 0.35 0.43 0.35 (0.61)
Book value .............................. 6.75 6.52 5.99 5.39
Actual period end shares outstanding .... 1,414,487 1,410,770 1,129,607 984,086
BALANCE SHEET DATA
AT DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Total Assets ........................... $ 118,072 $ 98,320 $ 79,773 $ 30,728
Investment securities(1) ............... 33,793 31,154 18,413 9,964
Total loans(2) ......................... 66,831 54,261 36,778 14,293
Allowance for loan losses .............. (768) (576) (335) (110)
Deposits ............................... 104,323 82,948 67,265 23,294
Shareholders' equity ................... $ 9,551 $ 9,202 $ 6,769 $ 5,302
8
PERFORMANCE RATIOS
FOR THE YEARS ENDED
DECEMBER 31, FOR THE PERIOD FROM JUNE
------------------------- 30, 2000 (INCEPTION) TO
2003 2002 2001 DECEMBER 31, 2000
---- ---- ---- ------------------------
Return on average assets ................................ 0.48% 0.64% 0.68% (5.32)%
Return on average shareholders' equity .................. 5.39% 7.16% 6.37% (22.34)%
Net interest spread(3) .................................. 3.18% 3.45% 3.10% 3.28%
Net interest margin(4) .................................. 3.55% 3.97% 3.85% 4.79%
Non-interest income as a percentage of
total revenue(5) ...................................... 7.83% 6.47% 8.07% 2.56%
Non-interest income as a percentage of average assets.... 0.28% 0.26% 0.32% 0.12%
Non-interest expense to average assets .................. 2.62% 2.61% 3.03% 8.87%
Efficiency ratio(6) ..................................... 72.24% 64.80% 76.49% 195.87%
ASSET QUALITY DATA
AT OR FOR THE
PERIOD FROM JUNE
AT OR FOR THE YEARS 30, 2000
ENDED DECEMBER 31 (INCEPTION) TO
------------------------- DECEMBER 31,
2003 2002 2001 2000
---- ---- ---- ----
Nonperforming loans ........................... 0 0 0 0
Nonperforming assets .......................... 0 0 0 0
Allowance for loan losses to period-end
loans(2) ...................................... 1.15% 1.06% 0.91% 0.77%
Net loan charge-offs to average total loans.... 0.05% 0.07% 0.00% 0.00%
9
SELECTED CAPITAL RATIOS (7)
AT DECEMBER 31,
--------------------------------------------
2003 2002 2001 2000
---- ---- ---- ----
Total risk-based capital........................ 14.60% 16.38% 15.76% 33.08%
Total tier 1 risk-based capital................. 13.52% 15.40% 15.00% 32.36%
Leverage ratio.................................. 8.73% 10.18% 9.84% 18.74%
Equity to assets ratio(8)....................... 8.09% 9.36% 8.49% 17.25%
----------
(1) Includes securities held to maturity and securities available for sale.
(2) Includes mortgage loans held for sale.
(3) Net interest spread is the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(4) The net interest margin is calculated by dividing net interest income by
average interest earning assets.
(5) Total revenue consists of net interest income and total other income.
(6) Efficiency ratio is total other expense divided by the sum of net interest
income and total other income.
(7) The ratios in this table are the capital ratios of the bank. The bank's
capital ratios must meet the minimum requirements of the OCC. As long as
the consolidated assets of 1st Colonial are less than $150 million, its
sole business is serving as the holding company for the bank, and it has
no publicly held debt, 1st Colonial is exempt from the consolidated
capital requirements of the Federal Reserve Board.
(8) Equity to assets ratio is period-end total equity to period-end total
assets.
10
RISK FACTORS
You should review and consider carefully the following factors,
together with the other information contained in this prospectus supplement, in
deciding whether you should make an investment in our common stock.
RISKS RELATED TO OUR BUSINESS
ESTABLISHING NEW BRANCHES INVOLVES START UP COSTS THAT WILL DECREASE NET
INCOME IN THE SHORT TERM.
We are planning to establish up to two new branches by the first
quarter of 2006, and we may establish additional branch offices in 2006 and
beyond. Growth through the establishment of new branches involves certain risks
and costs that might not be incurred if we acquired an existing branch along
with its associated deposits and loans. A bank must fund the majority of a
branch's start-up costs prior to the time the branch opens for business and
attracts deposits. In our experience, it typically takes at least 12 months for
a branch to contribute to a bank's profitability, and a branch may never become
profitable. Moreover, in establishing new branches, we are required to enter
into a market which may already be served by existing institutions and compete
without the benefit of existing customer relationships.
A LARGE PERCENTAGE OF OUR DEPOSITS ARE ATTRIBUTABLE TO A RELATIVELY SMALL
NUMBER OF CUSTOMERS, AND THE LOSS OF EVEN A FEW OF THESE CUSTOMERS MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
At December 31, 2003, 36.3% of our deposits were attributable to our
10 largest depositors. Although we believe that we have adequate liquidity to
manage the loss of one or more of these customers, we would need to raise
deposit rates to attract new deposits, sell investment securities, purchase
federal funds, or borrow funds on a short-term basis to replace such deposits.
All of these actions would decrease our net interest income and our net income.
OUR LOAN PORTFOLIO IS UNSEASONED.
All of our loans have been originated since we commenced operations
in June 2000. Although we believe we have underwriting standards to manage
normal lending risks, it is difficult to assess the future performance of our
loan portfolio due to the recent origination of most of our loans. Although as
of March 31, 2003, we did not have any non-performing loans, we can give you no
assurance that this absence of non-performing loans will continue or that future
non-performing or delinquent loans will not adversely affect our future
performance.
WE MAY NOT BE ABLE TO CONTINUE TO GROW.
We have experienced significant growth, and our future business
strategy is to continue to expand. Our ability to continue to grow depends, in
part, upon our ability to expand our market share, successfully attract core
deposits, and identify loan and investment opportunities as well as
opportunities to generate fee-based income. Our ability to manage growth
successfully will also depend on whether we can continue to efficiently fund
asset growth and maintain asset quality and cost controls, as well as on factors
beyond our control, such as economic conditions
11
and interest rate trends. The growth of our loans and deposits has been the
principal factor in our increase in net interest income. In the event that we
are unable to execute our business strategy of continued growth, our earnings
could be adversely impacted.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number
of our employees and customers and the scope of our operations. This growth may
place a significant strain on our management and operations. Our ability to
manage this growth will depend upon our ability to continue to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer relationships and to
hire, train and manage our employees.
WE DEPEND ON OUR EXECUTIVE OFFICERS AND KEY PERSONNEL TO IMPLEMENT OUR
BUSINESS STRATEGY AND COULD BE HARMED BY THE LOSS OF THEIR SERVICES.
We believe that our growth and future success will depend in large
part upon the skills of our management team, Gerard M. Banmiller, the President
and Chief Executive Officer, James E. Strangfeld, the Executive Vice President
and Senior Loan Officer, and Robert Faix, the Chief Financial Officer. The
competition for qualified personnel in the financial services industry is
intense, and the loss of our key personnel or an inability to continue to
attract, retain and motivate key personnel could adversely affect our business.
We cannot assure you that we will be able to retain our existing key personnel
or to attract additional qualified personnel. Although we have obtained key man
life insurance on our president and chief executive officer and have employment
agreements with all of our executive officers which contain noncompete
provisions, the loss of the services of one or more of our executive officers
could impair our ability to continue to develop our business strategy.
OUR FUTURE SUCCESS WILL DEPEND, IN PART, ON OUR ABILITY TO ADAPT TO
TECHNOLOGICAL CHANGES AND USE TECHNOLOGY TO PROVIDE PRODUCTS AND SERVICES
THAT ARE DESIRED BY CUSTOMERS.
Many of the bank's competitors have substantially greater resources
to invest in technological improvements and have more experience in managing
technological change. Adoption of rapid technological changes by the banking
industry or the bank's customers could put the bank at a competitive
disadvantage if we do not have the capital or personnel necessary to implement
such changes.
We began to offer Internet banking services to our customers in
2004. We incurred significant expense in doing so, and customer acceptance of
these services is uncertain. Therefore, our total other expenses have increased
and there may not be a corresponding increase in revenue. Further, if our
Internet banking system does not function in the manner we expect, we could
incur claims and liabilities related to customer privacy and security issues,
account errors and other malfunctions, in addition to a resulting loss of
business.
12
SETTLEMENT AGREEMENT MAY LIMIT OUR ABILITY TO BRANCH AND MAY DISSUADE
OTHERS FROM MAKING AN OFFER TO ACQUIRE US IN THE FUTURE.
In February 2000, Colonial Bank, a federal mutual savings bank
located in Gloucester County, New Jersey, filed an action in the Superior Court
of New Jersey, Chancery Division, Gloucester County against us alleging that our
use of the name "1st Colonial National Bank" constituted a violation of Colonial
Bank's rights to its name, unfair competition, a violation of New Jersey
trademark law and tortious interference with its business. In October 2001, this
litigation was settled by written agreement between us and Colonial Bank.
Under terms of the settlement agreement, Colonial Bank released us
from all claims relating to this matter, and the litigation was dismissed with
prejudice. In exchange, we agreed that, with the exception of any branch we open
in the Borough of Westville, New Jersey, we would not open a branch in any other
part of Gloucester County, New Jersey under a name that included the word
"Colonial." The agreement does not prohibit us from opening a branch in any
other area of Gloucester County, as long as the name of that branch does not
include the word "Colonial." In addition, we are not precluded from conducting
business in any other area of Gloucester County under the name "1st Colonial
National Bank," as long as we do not do so from a branch in that area that is
operated under a name that includes the word "Colonial."
Although federal banking regulations permit the bank, under certain
conditions, to operate a branch under a name other than "1st Colonial National
Bank," the regulatory requirements relating to operations, signage, and
documentation, in addition to the lack of name recognition by customers and the
increased marketing costs related to such a branch may cause us to refrain from
branching into areas of Gloucester County, other than Westville. This may impact
our growth, as Gloucester County is one of the fastest growing counties in New
Jersey.
The settlement agreement also provides that, in the event we enter
into a transaction pursuant to which we are acquired by another organization, we
will require, as a material term of such acquisition, that the name "1st
Colonial National Bank" not be utilized by the successor organization. This
provision may cause prospective acquirers to refrain from pursuing an
acquisition of us that you may deem to be in your best interest as a
shareholder. In a sale situation, this provision could limit the number of
bidders for us, which could adversely affect the price offered. It could also
cause bidders to offer less because the prospective acquirer would be unable to
use the goodwill generated by our name.
RISKS RELATED TO THE OFFERING
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
Our common stock trades from time to time on the OTC Bulletin Board
and we believe that it will continue to do so after the completion of the
offering. However, whether or not a stock trades on the OTC Bulletin Board is
within the sole discretion of the market makers for the stock, and we cannot
assure that the common stock will continue to trade on the OTC Bulletin Board.
Further, the OTC Bulletin Board does not provide a liquid market for trading,
and it may be more difficult for shareholders to sell large blocks of the common
stock. There is no assurance that you will be able to resell your common stock
for an aggregate amount per share
13
that is equal to or more than the price in the offering should you need to
liquidate your investment. Before purchasing, you should consider the limited
trading market for the shares and be financially prepared and able to hold your
shares for an indefinite period. See "Market for Our Common Stock" on page 18.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON THE COMMON STOCK FOR THE
FORESEEABLE FUTURE.
We intend to retain all earnings within 1st Colonial and the bank to
provide capital for future growth. Accordingly, we do not intend to pay cash
dividends on the common stock in the foreseeable future. Moreover, we are a
legal entity separate and distinct from the bank. We have no material assets
other than our ownership of the bank. 1st Colonial's earnings are wholly
dependent on the earnings of the bank, as we have no significant operations of
our own. Accordingly, 1st Colonial's earnings and our ability to pay dividends
are dependent on our receipt of the earnings of the bank in the form of
dividends. Any restriction on the ability of the bank to pay dividends would
significantly and adversely affect our ability to pay dividends on our common
stock. The bank's ability to pay dividends or make other capital distributions
to us is governed by regulations imposed by the FDIC and the OCC, the bank's
primary regulators. See "Supervision and Regulation."
IN THE FUTURE, WE MAY NEED TO ISSUE ADDITIONAL SHARES OF COMMON STOCK OR
SECURITIES CONVERTIBLE INTO COMMON STOCK TO RAISE ADDITIONAL CAPITAL. IF
WE ARE ABLE TO SELL SUCH SHARES, THEY MAY BE ISSUED AT A PRICE THAT
DILUTES THE BOOK VALUE OF SHARES OUTSTANDING AT THAT TIME.
Although this offering will increase the book value per share of our
outstanding common stock, future offerings may be at a price that dilutes the
book value of shares outstanding at that time. Any need to raise additional
capital would most likely be caused by our regulatory capital requirements. Our
future capital requirements will depend on many factors including:
- the growth in the bank's interest-earning assets;
- loan quality;
- the cost of deposits and any necessary borrowings; and
- the costs associated with our growth, such as increased
salaries and employee benefits expense and office and
occupancy costs.
If these or other factors cause the bank's capital levels to fall
below the minimum regulatory requirements, or if the bank's existing sources of
cash from operations are insufficient to fund its activities or future growth
plans, we may need to raise additional capital. If such need arises and we are
unable to raise capital, we may not be able to our continue our growth strategy
and management will be required to reorient its long-term strategy for 1st
Colonial. There can be no assurance that we will be able to generate or attract
additional capital in the future on favorable terms. In addition, future
issuances of stock may cause dilution in our earnings per share and will dilute
your ownership interest.
14
OUR STOCK IS THINLY TRADED, AND FUTURE SALES BY OUR CURRENT SHAREHOLDERS
MAY ADVERSELY AFFECT OUR STOCK PRICE.
As of June 30, 2004, there were warrants outstanding to purchase
365,482 shares of our common stock, including warrants to purchase the 268,458
shares covered by this prospectus supplement. In addition, stock options to
purchase 127,638 shares were outstanding. The sale of the common stock issued
upon the exercise of these warrants and stock options, as well as future sales
of common stock by us or by existing shareholders, or the perception that sales
could occur, could adversely affect the market price of our common stock.
MANAGEMENT HAS DISCRETIONARY USE OF THE PROCEEDS OF THIS OFFERING.
Management will have broad discretion with respect to the
expenditures of the net proceeds from the sale of the shares covered by this
prospectus supplement and, accordingly, there is no assurance that you will
agree with the uses that we choose to make of these funds. See "Use of
Proceeds."
PROVISIONS UNDER PENNSYLVANIA LAW, IN OUR CHARTER DOCUMENTS AND OTHER LAWS
AND REGULATIONS APPLICABLE TO US MAY MAKE IT HARDER FOR OTHERS TO OBTAIN
CONTROL OF 1ST COLONIAL EVEN THOUGH SOME SHAREHOLDERS MIGHT CONSIDER SUCH
A DEVELOPMENT FAVORABLE.
Provisions of our articles of incorporation and applicable
provisions of Pennsylvania law and federal law may delay, inhibit or prevent
someone from gaining control of 1st Colonial through a tender offer, business
combination, proxy contest or some other method even though some of our
shareholders might believe a change in control is desirable. See "Description of
Our Securities" on page 82.
Our articles of incorporation and bylaws contain provisions that may
discourage a change in control of 1st Colonial. These provisions include:
- the prohibition of ownership and voting of shares having
in excess of 10% of the total voting power of the
outstanding stock of 1st Colonial;
- a classified board of directors divided into three
classes serving for successive terms of three years
each;
- the prohibition of cumulative voting in the election of
directors;
- the requirement that nominations for the election of
directors made by shareholders and any shareholder
proposals for the agenda at any annual meeting generally
must be made by notice (in writing) delivered or mailed
to us not less than 90 days prior to the meeting;
- the requirement that any merger, consolidation, sale of
assets or similar transaction involving 1st Colonial
requires the affirmative vote of shareholders entitled
to cast at least 80% of the votes which all shareholders
15
are entitled to cast, unless the transaction is approved
in advance by 66 2/3% of the members of the board of
directors;
- the requirement that a person must be a shareholder of
1st Colonial or the bank for at least three years before
he or she can be elected to the board of directors;
- the requirement that any person or entity that acquires
shares of our stock having a combined voting power of
25% or more of the total voting power of our outstanding
capital stock, must offer to purchase, for cash, all
outstanding shares of our voting stock at a price equal
to the highest price paid for that stock within the
preceding 12 months by that person or entity;
- the prohibition of shareholder action without a meeting
and the prohibition of shareholders being able to call a
special meeting;
- the provision that certain provisions of our articles of
incorporation can only be amended by an affirmative vote
of shareholders entitled to cast at least 80% of all
votes which shareholders are entitled to cast, unless
approved by an affirmative vote of at least 80% of the
members of our board of directors; and
- the provision that certain sections of our bylaws can
only be amended by an affirmative vote of shareholders
entitled to cast at least 66 2/3% or 80% of all votes
that shareholders are entitled to cast, unless approved
by affirmative vote of at least 80% of the members of
our board of directors.
These provisions may serve to entrench management and may discourage
a takeover attempt that you may consider to be in your best interest or in which
you would receive a substantial premium over the current market price. These
provisions may make it extremely difficult for any one person or group of
affiliated persons to acquire voting control of 1st Colonial, with the result
that it may be extremely difficult to bring about a change in the board of
directors or management. Some of these provisions also may tend to perpetuate
present management because of the additional time required to cause a change in
the control of the board. Other provisions render it difficult for shareholders
owning less than a majority of the voting stock to be able to elect even a
single director. See "Description of Our Securities--Certain Restrictions on
Acquisition of 1st Colonial" on page 84.
RISKS RELATED TO THE BANKING INDUSTRY
WE FACE SUBSTANTIAL COMPETITION FOR CUSTOMERS, AND MANY OF OUR COMPETITORS
HAVE MUCH GREATER RESOURCES IN TERMS OF CAPITAL AND PRODUCTS.
The banking business in southern New Jersey is extremely
competitive. The region has experienced a large number of bank mergers and
acquisitions in the last several years and the resulting institutions have
significant resources. The bank currently operates from only two branches and
competes for customers with New Jersey-based and out-of-state financial
institutions that have longer operating histories, more capital, extensive
branch and automated
16
teller machine networks and established customer bases. In addition, the bank's
market area may be served in the future by new, locally-based institutions. The
bank's competition also includes Internet-based banks, securities firms,
insurance companies, credit unions, mortgage companies, mutual funds and other
entities, in addition to traditional banking institutions such as savings and
loan associations, savings banks, and commercial banks. Most of the bank's
competitors are larger than the bank and, accordingly, have higher lending
limits and resources. Banks compete for customers based on the convenience of
customer access, interest rates paid on deposits and charged on loans, the level
of bank fees and other factors. As a bank with only two branches, we are at a
competitive disadvantage to many of our competitors that have more than two
branches. The bank is not currently able to offer certain products and services
that its competitors provide, such as trust and certain investment and insurance
products and services, and may not be able to develop those services in the
future.
IF WE EXPERIENCE GREATER LOAN LOSSES THAN ANTICIPATED, IT WILL HAVE AN
ADVERSE EFFECT ON OUR NET INCOME AND OUR ABILITY TO FUND OUR GROWTH
STRATEGY.
The risk of nonpayment of loans is inherent in banking. If we
experience greater nonpayment levels than anticipated, our earnings and overall
financial condition, as well as the value of our common stock, could be
adversely affected.
We cannot assure you that our monitoring, procedures and policies
will reduce certain lending risks or that our allowance for loan losses will be
adequate to cover actual losses. Loan losses can cause insolvency and failure of
a financial institution and, in such an event, our shareholders could lose their
entire investment. In addition, future provisions for loan losses could
materially and adversely affect our results of operations. Any loan losses will
reduce the loan loss reserve. A reduction in the loan loss reserve will be
restored by an increase in our provision for loan losses. This will cause our
earnings to be reduced and reduced earnings could have an adverse effect on our
stock price.
OUR NET INCOME IS DIRECTLY AFFECTED BY CHANGES IN MONETARY POLICY AND
INTEREST RATES OVER WHICH WE HAVE NO CONTROL.
Our operating results may be significantly affected (favorably or
unfavorably) by market rates of interest which, in turn, are affected by
prevailing economic conditions, by the fiscal and monetary policies of the
United States Government and by the policies of various regulatory agencies. Our
earnings depend primarily upon the difference between income earned on our loans
and investments and the interest paid on our deposits and borrowings. Like many
financial institutions, we may be subject to the risk of fluctuations in
interest rates, which, if significant, may have a material adverse effect on our
net income. See "Supervision and Regulation" commencing on page 59.
THE LAWS AND REGULATIONS GOVERNING OUR BUSINESS ARE SUBJECT TO CHANGE AT
ANY TIME.
The Federal and state laws and regulations applicable to us give
regulatory authorities extensive discretion in connection with their supervisory
and enforcement responsibilities, and generally have been promulgated to protect
depositors and the deposit insurance funds and not for the purpose of protecting
shareholders. These laws and regulations can materially affect our
17
future business. Laws and regulations may be changed at any time, and the
interpretation of such laws and regulations by bank regulatory authorities is
also subject to change. We can give no assurance that future changes in laws and
regulations or changes in their interpretation will not adversely affect our
business. See "Supervision and Regulation" commencing on page 59.
RECENT LEGISLATION TO ADDRESS CORPORATE ACCOUNTING IRREGULARITIES COULD
CAUSE US TO INCUR SIGNIFICANT EXPENSE.
In response to highly publicized accounting restatements and alleged
improprieties by some corporate officers of certain large publicly-held
companies, in July 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002. Additional regulations have been promulgated by the Securities and
Exchange Commission (SEC) and were effective beginning August 29, 2002. Under
this law and the regulations adopted by the SEC to implement various provisions
of the law, publicly-traded companies are subject to significant additional and
accelerated reporting regulations and disclosure. These regulations also impose
significant new responsibilities on officers, auditors, boards of directors and
in particular, audit committees. Compliance with the new laws and regulations
has begun to increase our expenses; this could have a material adverse effect on
our financial results in the future. See "Supervision and Regulation --
Sarbanes-Oxley Act" on page 60.
USE OF PROCEEDS
We will receive cash proceeds from the exercise of the warrants by
their holders. We will use such proceeds for general corporate purposes.
MARKET FOR OUR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the
symbol FCOB and we believe that it will continue to be traded on the OTC
Bulletin Board after the completion of the offering. An active trading market
does not currently exist for our common stock. As of June 13, 2004, the bid
price for the common stock was $9.15, and the asked price was $9.75.
18
The following table sets forth the high and low last sale
information, as reported by the OTC Bulletin Board, as of the most recent
practicable date and for the periods indicated:
SALE PRICE INFORMATION FOR COMMON STOCK
SALE PRICE (1)
-------------------------
HIGH LOW
---- ---
2002
----
First Quarter............................................ $ 9.30 $ 8.39
Second Quarter........................................... 8.85 8.16
Third Quarter............................................ 8.62 6.57
Fourth Quarter........................................... 8.17 6.14
2003
----
First Quarter............................................ $ 9.34 $ 7.49
Second Quarter........................................... 10.48 8.30
Third Quarter............................................ 10.48 9.52
Fourth Quarter........................................... 10.57 9.57
2004
----
First Quarter............................................ $10.71 $ 9.80
Second Quarter .......................................... 10.71 9.10
----------
(1) Prices are adjusted to reflect the 5% stock dividend paid by 1st Colonial
on April 15, 2003 to shareholders of record as of April 1, 2003 and the 5%
stock dividend paid by 1st Colonial on April 15, 2004 to shareholders of
record as of April 1, 2004.
As of April 1, 2004, there were options outstanding to purchase
127,638 shares of common stock and warrants outstanding to purchase 369,752
shares of common stock. These amounts reflect the 5% stock dividend paid on
April 15, 2004 to shareholders of record as of April 1, 2004.
As of April 1, 2004, there were 296 holders of record of our common
stock.
Ryan Beck & Co.; Midwest Research Securities Corp., a subsidiary of
First Tennessee National Bank; and Janney Montgomery Scott, LLC make a market in
our common stock. Making a market involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those prices, subject to securities laws and regulatory constraints.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within our control.
An active and liquid market may not develop for the common stock.
StockTrans, Inc. serves as transfer agent and registrar for our
common stock.
19
DIVIDEND POLICY
Since our inception in June 2000, we have not paid a cash dividend,
and we do not intend to pay cash dividends for the foreseeable future. We desire
to retain our net income to support the growth of the bank. Any payment of cash
dividends to our shareholders would be dependent on the payment of a cash
dividend from the bank to us. The payment of cash dividends by the bank to us is
limited under federal banking law. See "Supervision and Regulation--Limits on
Dividends" and "Description of Capital Stock--Common Stock--Dividends."
On January 15, 2002, we effected a 10% stock split in the form of a
stock dividend to shareholders of record on January 2, 2002. On April 15, 2003,
we paid a 5% stock dividend to shareholders of record on April 1, 2003. On April
15, 2004, we paid a 5% stock dividend to shareholders of record on April 1,
2004. We will continually review whether to pay additional stock dividends in
the future.
20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement contains forward-looking statements. You
can find many of these statements before and after words such as "may," "could,"
"should," "will," "would," "believe," "expect," "anticipate," "estimate,"
"project," "intend," "plan," "seek," "assume" or similar expressions.
These forward-looking statements, implicitly and explicitly, include
the assumptions underlying the statements and other information with respect to
our beliefs, plans, objectives, goals, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and
business, including our:
- plans for the use of the proceeds of our offering of
828,000 shares of common stock, which was completed on
April 26, 2004;
- expectations for continued acceptance and success in the
banking and business communities in our market area;
- expectations as to the amount, mix, yield and other
characteristics of the deposits and loans we expect to
acquire and make; and
- expectations and estimates with respect to our revenues,
expenses, earnings, return on equity, return on assets,
efficiency ratio, asset quality and other financial data
and capital and performance ratios.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, these statements involve risks and
uncertainties that are subject to change based on various important factors
(some of which are beyond our control). The following factors, among others,
could cause our financial performance to differ materially from our goals,
plans, objectives, intentions, expectations, and other forward-looking
statements:
- the strength of the United States economy in general and
the strength of the regional and local economies in
which we conduct operations;
- the effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal
Reserve System;
- inflation, interest rate, market and monetary
fluctuations;
- our ability to raise the capital necessary on a timely
basis to support our continued asset growth and
geographic expansion;
- our ability to maintain and continue to obtain the
desired customers and employees;
21
- our timely development of new products and services in a
changing environment, including the features, pricing
and quality compared to the products and services of our
competitors;
- the willingness of prospective customers to substitute
our products and services for the bank products and
services they currently use, and the impact of
competition from banks, thrifts and others in our
market;
- changes in the timing and structure of our growth and
related transactions and other changed facts and
circumstances resulting from the passage of time;
- the impact of changes in financial services policies,
laws and regulations, including laws, regulations and
policies concerning taxes, banking, securities and
insurance, and the application thereof by regulatory
bodies;
- technological changes;
- change in consumer spending and savings habits;
- regulatory or judicial proceedings; and
- the other risks set forth under "Risk Factors" beginning
on page 11.
If one or more of the factors affecting our forward-looking information
and statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward-looking information and statements contained in this prospectus
supplement. Therefore, we caution you not to place undue reliance on our
forward-looking information and statements.
We do not intend to update our forward-looking information and
statements, whether written or oral, to reflect change. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of our
financial condition and results of operations and should be read in conjunction
with the financial statements and related notes included elsewhere in this
prospectus supplement beginning on page F-1. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed in "Risk Factors" beginning on page 11 and "Special Note Regarding
Forward-Looking Statements" beginning on page 21 in this prospectus supplement.
OVERVIEW
Effective June 30, 2002, the bank became a wholly owned subsidiary
of 1st Colonial, which has no material operations other than ownership of the
bank. Therefore, the financial statements of 1st Colonial prior to June 30, 2002
are the historical statements of the bank. All per share data has been restated
for the effect of the 10% stock dividend paid on January 15, 2002 to
shareholders of record as of January 2, 2002, the 5% stock dividend paid on
April 15, 2003 to shareholders of record as of April 1, 2003 and the 5% stock
dividend paid on April 15, 2004 to shareholders of record as of April 1, 2004.
The bank conducts community banking activities by accepting deposits
from the public and investing the proceeds in loans and investment securities.
The bank's lending products include commercial loans and lines of credit,
consumer and home equity loans, and multi-family residential and non-residential
real estate loans. In order to manage its liquidity and interest rate risk, the
bank maintains an investment portfolio consisting of municipal, U.S. government
and mortgage-backed securities, most of which are investment grade. The bank's
loan and investment portfolios are funded with deposits as well as
collateralized borrowings secured by the bank's investment securities.
Our earnings are largely dependent upon net interest income (the
difference between what we earn on our loans and investments and what we pay on
deposits and borrowings). In addition to net interest income, our net income is
impacted by our loan loss provision, other income (mostly deposit fees and
income from sale of loans held for sale) and other expense (such as salaries and
benefits, professional fees, occupancy cost and data processing expenses).
CRITICAL ACCOUNTING MATTERS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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
income and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for loan losses and the valuation of the deferred tax assets.
23
The allowance for loan losses is established through a provision for
loan losses charged to operations. The allowance is maintained at a level that
management believes will be adequate to absorb estimated losses on existing
loans based on the collectibility of the loans and prior loss experience.
Management uses significant estimates to determine the allowance for loan
losses. Management's evaluations consider such factors as changes in the nature
and volume of the portfolio, overall portfolio quality, concentrations of credit
risk, review of specific problem loans, current economic conditions and trends
that may affect the borrowers' ability to pay, and prior loss experience within
various categories of the portfolio. Loans are charged against the allowance
when they are determined to be uncollectible.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They may
require additions to the allowance based upon their judgments about information
available to them at the time of examination.
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, as well as operating loss carryforwards. 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. A valuation allowance is established against deferred tax assets
when, in the judgment of management, it is more likely that not that such
deferred tax assets will not become available.
The realizability of deferred tax assets is dependent upon various
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities, and tax
planning strategies. Based upon these and other factors, management determined
during 2001 that it is more likely than not that the bank will realize the
benefits of these deferred tax assets and, as a result, removed the previously
established valuation allowance.
COMPARISON OF FINANCIAL CONDITION
MARCH 31, 2004 VERSUS DECEMBER 31, 2003
Our assets totaled $120.4 million at March 31, 2004, as compared to
$118.1 million at December 31, 2003, an increase of $2.4 million or 2.0%. This
increase was caused principally by an increase in our deposits of $1.6 million
and an increase of $449,000 in short-term borrowings. Our assets at March 31,
2004, consisted primarily of cash and cash equivalents, including federal funds
sold and interest bearing deposits, which totaled $19.4 million, investment
securities, which totaled $31.3 million and loans, including loans available for
sale, which totaled $68.1 million. Our premises and equipment totaled $933,000
at March 31, 2004, consisting primarily of leasehold improvements at the
Collingswood main office and land and improvements for the Westville branch. Our
assets at December 31, 2003 consisted primarily of cash and cash equivalents,
including federal funds sold and interest bearing deposits, which totaled $16.5
million, investment securities totaling $33.8 million, and loans totaling $66.1
million.
24
During the first three months of 2004, we continued to concentrate
our efforts in building our loan portfolio. Total loans, including loans
available for sale, increased during such period by $2.0 million, or 3.1%.
Deposits totaled $105.9 million at March 31, 2004, as compared to $104.3 million
at December 31, 2003, an increase of $1.6 million or 1.5%. Non-interest bearing
demand deposits totaled $22.8 million and interest-bearing demand deposits
totaled $31.0 million at March 31, 2004, as compared to $20.4 million and $37.3
million, respectively, at December 31, 2003. A $2.4 million increase in demand
accounts was offset by a seasonal decrease of $3.6 million in municipal deposits
and a $3.3 million decrease in labor union deposits. Other interest bearing
demand deposits increased $655,000. Savings deposits totaled $22.6 million and
certificates of deposit totaled $29.4 million at March 31, 2004, as compared to
$20.4 and $26.2 million, respectively, at December 31, 2003.
DECEMBER 31, 2003 VERSUS DECEMBER 31, 2002
Our assets totaled $118.1 million at December 31, 2003, as compared
to $98.3 million at December 31, 2002, an increase of $19.8 million or 20.1%.
Our assets at December 31, 2003, consisted primarily of cash and cash
equivalents, including federal funds sold, which totaled $16.5 million,
investment securities, which totaled $33.8 million and loans, including loans
held for sale, which totaled $66.8 million. Premises and equipment totaled
$935,000 at December 31, 2003, and consisted primarily of our Westville branch
and leasehold improvements. Our assets at December 31, 2002 consisted primarily
of cash and cash equivalents, including federal funds sold of $12.2 million,
investment securities of $31.2 million, and loans of $54.3 million. The $19.8
million increase in total assets was primarily due to an increase in loans of
$12.4 million, an increase in investment securities of $2.6 million, and an
increase in short-term investments, such as Federal Funds sold and interest
bearing deposits of $4.2 million. This increase in assets was funded by an
increase in deposits of $21.4 million, as partially offset by a decrease in
short-term borrowings of $1.9 million. The increase in loans was due to general
growth in our loan portfolio resulting from the continued execution of our
business plan.
Our deposits totaled $104.3 million at December 31, 2003, as
compared to $82.9 million at December 31, 2002, an increase of $21.4 million or
25.8%. This increase was the direct result of the establishment of new business
relationships with municipalities and other commercial accounts and the opening
of our branch office in Westville, New Jersey on January 16, 2003. The Westville
branch location was purchased in August 2002, renovated and equipped at a total
cost of $480,000 at December 31, 2003.
Noninterest-bearing demand deposits totaled $20.4 million and
interest-bearing demand deposits totaled $37.3 million at December 31, 2003,
increases of 22.6% and 25.5% as compared to balances of $16.6 million and $29.7
million, respectively, at December 31, 2002. This increase in demand deposits
was the result of the new Westville office and new relationships established
with municipal entities and commercial accounts. Savings and money market
deposits totaled $20.4 million and certificates of deposit totaled $26.2 million
at December 31, 2003, increases of 3.6% and 55.2%, respectively, as compared to
balances of $19.7 and $16.9 million, respectively, at December 31, 2002.
25
NET INTEREST INCOME
The principal source of our revenue is net interest income. Net
interest income is the difference between income earned on loans and securities
and the interest paid on deposits and borrowed funds. Interest-earning assets
are comprised primarily of loans and securities, while deposits represent the
major portion of interest bearing liabilities. Changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income. Net interest margin is calculated as net interest income
divided by average earning assets and represents our net yield on our earning
assets.
Interest on loans is included in interest income on the accrual
method over the terms of the loans based upon the principal balances
outstanding. During the fiscal years ended December 31, 2003, 2002 and 2001,
average interest-earning assets were $99.9 million, $73.7 million and $50.2
million, respectively. During these same periods, our net yields on average
interest-earning assets (net interest margin) were 3.55%, 3.97%, and 3.85%,
respectively.
AVERAGE BALANCE, INTEREST INCOME AND EXPENSE, AVERAGE YIELD AND RATES
The following table illustrates the average balances of total
interest-earning assets and total interest-bearing liabilities for the periods
indicated, showing the average distribution of assets, liabilities,
shareholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
these tables and other statistical disclosures were calculated by using the
daily average balances. Non-accruing loans, if any, are included in the average
balances of loans.
26
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2003 2002 2001
--------------------------------- ------------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------------------------------- ------------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Interest earning assets:
Federal funds sold............ $ 6,953 $ 78 1.12% $ 11,006 $ 176 1.60% $11,776 $ 418 3.55%
Investment Securities:
Taxable(1)................. 28,945 870 3.01% 14,683 647 4.41% 12,977 810 6.24%
Tax-exempt(2).............. 3,826 71 1.86% 604 17 2.81% 564 26 4.61%
-------- -------- -------- ------- ------- ------
Total Securities......... 32,771 941 2.87% 15,287 664 4.34% 13,541 836 6.17%
Loans, net of deferred
fees/costs(3)............... 60,183 3,769 6.26% 47,430 3,251 6.85% 24,923 1,943 7.80%
-------- -------- -------- ------- ------- ------
Total interest earning
assets................... 99,907 4,788 4.79% 73,723 4,091 5.55% 50,240 3,197 6.36%
-------- -------- ---- -------- ------- ---- ------- ------
Non-interest earning assets:
Cash and due from banks....... 4,258 3,017 2,036
Other assets(4)............... 1,629 1,107 770
Less: allowance for loan
losses...................... (681) (472) (194)
-------- -------- -------
Total non-interest earning
assets................... 5,206 3,652 2,612
-------- -------- -------
Total assets............ $105,113 $ 77,375 $52,852
======== ======== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing liabilities
Deposits:
Interest bearing demand.. $ 31,344 $ 531 1.69% $ 19,772 $ 427 2.16% $ 9,460 $ 278 2.94%
Money market............. 15,109 97 0.64% 12,231 192 1.57% 13,883 403 2.90%
Savings.................. 5,293 31 0.59% 3,873 38 0.98% 1,807 27 1.49%
Time deposits............ 20,296 544 2.68% 14,342 425 2.96% 9,667 423 4.38%
-------- -------- -------- ------- ------- ------
Total interest bearing
deposits................. 72,042 1,203 1.67% 50,218 1,082 2.15% 34,817 1,131 3.25%
Short-term borrowings.... 5,284 41 0.78% 5,217 83 1.59% 3,908 133 3.40%
-------- -------- -------- ------- ------- ------
Total interest bearing
liabilities.............. 77,326 1,244 1.61% 55,435 1,165 2.10% 38,725 1,264 3.26%
-------- ---- -------- ------- ---- ------- ------ ----
Non-interest bearing
liabilities:
Demand deposit............. 18,320 14,786 8,327
Other liabilities.......... 186 237 129
-------- -------- -------
Total non-interest bearing
liabilities................. 18,506 15,023 8,456
-------- -------- -------
Total liabilities............. 95,832 70,458 47,181
-------- -------- -------
Shareholders' equity.......... 9,281 6,917 5,671
-------- -------- -------
Total liabilities and
shareholders' equity..... $105,113 $ 77,375 $52,852
======== ======== =======
Net interest spread........... 3.18% 3.45% 3.10%
Net interest income/net
interest margin............. $ 3,544 3.55% $ 2,926 3.97% $1,933 3.85%
======== ==== ======= ====
Average interest earning
assets as a percentage of
interest bearing
liabilities................. 129.20% 132.99% 129.74%
----------
(1) All taxable investment securities are classified as available for sale.
The average balance for taxable securities excludes the SFAS 115 valuation
allowance.
(2) All tax-exempt investment securities are classified as held to maturity.
Interest income on tax-exempt investment securities is presented on a
tax-equivalent basis. Tax exempt yields were adjusted to a tax-equivalent
basis using a 34% rate.
(3) Includes average balance of loans held for sale of $382 in 2003, $156 in
2002 and $160 in 2001. Interest income on loans held for sale was $23 in
2003, $13 in 2002 and $14 in 2001.
27
(4) Excludes the average balance of deferred tax assets related to the SFAS
115 valuation allowance on investment securities available for sale.
RATE/VOLUME ANALYSIS
Future net interest income will be affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following tables set forth certain information
regarding changes in interest income and interest expense for the periods
indicated for each category of interest-earning assets and interest-bearing
liabilities. Information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by prior rate), (ii) changes in
rate (changes in average rate multiplied by prior average volume), and (iii)
total change. Changes due to the combination of rate and volume changes (change
in average volume multiplied by change in average rate) have been allocated on a
consistent basis between rate and volume variances based on the percentage of
the rate or volume variance to the sum of the two absolute variances.
YEAR ENDED DECEMBER 31, 2003 VERSUS
YEAR ENDED DECEMBER 31, 2002
---------------------------------------
INCREASE (DECREASE) DUE TO
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest Income:
Federal funds sold $ (54) $ (44) $ (98)
Investment securities - taxable 478 (255) 223
Investment securities - tax exempt (1) 62 (8) 54
Loans 817 (299) 518
------- ------- -------
Total change in interest income $ 1,303 $ (606) $ 697
------- ------- -------
Interest Expense:
Interest bearing checking $ 211 $ (107) $ 104
Money market deposits 37 (132) (95)
Savings deposits 11 (18) (7)
Time deposits 163 (44) 119
Short-term borrowings 1 (43) (42)
------- ------- -------
Total change in interest expense 423 (344) 79
------- ------- -------
Total change in net interest income $ 880 $ (262) $ 618
======= ======= =======
28
YEAR ENDED DECEMBER 31, 2003 VERSUS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------
INCREASE (DECREASE) DUE TO
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest Income:
Federal funds sold $ (25) $ (217) $ (242)
Investment securities - taxable 96 (259) (163)
Investment securities - tax exempt (1) 2 (11) (9)
Loans 1,568 (260) 1,308
------- ------- -------
Total change in interest income $ 1,641 $ (747) $ 894
------- ------- -------
Interest Expense:
Interest bearing checking $ 239 $ (90) $ 149
Money market deposits (43) (168) (211)
Savings deposits 22 (11) 11
Time deposits 165 (163) 2
Short-term borrowings 36 (86) (50)
------- ------- -------
Total change in interest expense 419 (518) (99)
------- ------- -------
Total change in net interest income $ 1,222 $ (229) $ 993
======= ======= =======
----------
(1) Tax-exempt yields were adjusted to a tax-equivalent basis using a 34%
rate.
COMPARISON OF RESULTS OF OPERATIONS
THREE-MONTHS ENDED MARCH 31, 2004 VERSUS THREE-MONTHS ENDED MARCH 31, 2003
General. Net income decreased 3.5% to $110,000 for the three months
ended March 31, 2004, as compared to net income of $114,000 for the period ended
March 31, 2003. This decrease was due to a $72,000 increase in other expense,
only partially offset by a $64,000 increase in net interest income. Other income
declined by $2,000 offset by a $2,000 reduction in the provision for loan
losses. Due to lower operating income, income tax expense declined by $4,000.
Basic earnings per share were $0.08 for the three months ended March
31, 2004 and the three months ended March 31, 2003. Diluted earnings per share
declined to $0.07 for the three months ended March 31, 2004 compared to $0.08
per share for the prior period. This decline was due to the fact that the
warrants issued by the Company in December 2002 had a dilutive effect for the
three month period ended March 31, 2004. However, these warrants had an
anti-dilutive effect in the comparable prior period.
29
Net Interest Income. Interest income increased by $68,000 to $1.2
million, primarily due to an increase in interest and fees on loans of $97,000
for the three months ended March 31, 2004. Average loans and loans available for
sale outstanding increased by $11.9 million or 21.4% from the prior period,
which more than offset the decline in the average yield on the loan portfolio.
The average yield on our loan portfolio declined from 6.57% for the three month
period ended March 31, 2003 to 5.95% for the current three month period due to
the declining interest rate environment. Interest on federal funds sold and
interest bearing deposits increased by $8,000 due to an increase of $3.8 million
in average balances, despite lower yields caused by market rate declines. While
the average balance of the investment portfolio increased $2 million from the
prior period, interest and dividends on investments decreased by $37,000 due to
the overall decline in market rates. The average tax-equivalent yield on
investment securities declined to 2.69% in 2004 from 3.29% in 2003.
Total interest expense increased $4,000 from the prior period, due
principally to a $12.5 million increase in average interest bearing liabilities.
The increase in the average balance of deposits was ameliorated by the lower
rates paid on deposit accounts and short-term borrowings, as the cost of
interest-bearing liabilities declined from 1.79% in 2003 to 1.53% in 2004. Our
net interest margin was 3.40% for the three months ended March 31, 2004 as
compared to 3.78% for the prior period ended March 31, 2003, as our
interest-earning assets repriced downward to a greater degree than our
interest-bearing liabilities.
Provision for Loan Losses. The provision for loan losses decreased
to $58,000 for three months ended March 31, 2004 compared to $60,000 for the
prior period. Factors such as changes in the nature and volume of the portfolio,
overall portfolio quality, concentrations of credit risk, review of specific
problem loans, current economic conditions and trends that may affect the
ability of borrowers to pay, and prior loss experience within the various
categories of the portfolio are considered when reviewing the risks in the
portfolio. The allowance for loan losses was $833,000 at March 31, 2004, or
1.21% of total outstanding loans.
Total Other Income. Other income, primarily service charges on
deposit accounts and gains on sale of mortgages held for sale, decreased $2,000
to $59,000 for the three months ended March 31, 2004. Fees from deposit account
holders for the three months ended March 31, 2004 were approximately $36,000
compared to $33,000 in the prior period. This 9.1% increase was principally due
to deposit growth. For the three months ended March 31, 2004, we recorded fees
on the sale of residential mortgage loans held for sale of $9,000 compared to
$20,000 in the prior period. This was primarily due to decreased refinancing
activity due to higher interest rates during the current three month period. In
general, we sell all newly originated fixed-rate residential mortgage loans into
the secondary market on a servicing released basis. The increase in other fees
and charges of $6,000 to $14,000 in 2004 from $8,000 in 2003, was primarily
volume related.
Total Other Expense. Total other expenses for the three months ended
March 31, 2004 increased $72,000 or 11.0% to $729,000 compared to $657,000 in
the prior period. Most of the increases were due to growth related factors:
30
- Employee related expenses were $313,000 for the period
compared to $279,000 for the three months ended March
31, 2003, reflecting additions to our staff as well as
normal compensation increases.
- Occupancy and equipment expenses increased $10,000 to
$92,000 for the three months ended March 31, 2004,
compared to $82,000 in the prior period. Additional
equipment for new staff and normal equipment upgrades
accounted for these increases.
- Due to increased business volume, data processing
expenses increased 21.0% to $75,000 for the three months
ended March 31, 2004 compared to $62,000 for the prior
period.
- Professional services, including audit, loan review, and
legal expenses increased $4,000 to $68,000 during the
three months ended March 31, 2004 compared to $64,000
for the comparable prior period. This increase was
primarily related to our growth.
- Other operating expenses included postage, ATM charges,
telephone expenses, business development costs and other
miscellaneous expenses. Due to growth and increased
activity, other operating expenses increased $34,000 or
25.0% to $170,000 for the three months ended March 31,
2004, compared to $136,000 for the three months ended
March 31, 2003.
The increases above were partially offset by a decrease in
advertising expenses of $23,000 to $11,000 for the three months ended March 31,
2004 compared to $34,000 in the prior period. The prior period contained
activity relating to our Westville opening and other marketing campaigns
designed to increase community awareness of our presence, products and
capabilities.
Income Taxes. Our recorded income tax expense for the three months
ended March 31, 2004 was $73,000 compared to $77,000 in the prior period. The
decrease in income tax expense is due to lower pre-tax income for the three
months ended March 31, 2004 as compared to the prior period. The effective rates
for the three months ended March 31, 2004 and 2003 were 39.9% and 40.3%,
respectively.
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED DECEMBER 31, 2002
General. Net income increased 1.0% to $500,000 for the year ended
December 31, 2003, as compared to net income of $495,000 for the period ended
December 31, 2002. This increase was due to a $697,000 increase in net interest
and total other income, coupled with a $50,000 reduction in the provision for
loan losses, which were only partially offset by a $736,000 increase in total
other expense and a $6,000 increase in income tax expense.
Basic earnings per share decreased to $0.35 for the year ended
December 31, 2003 (basic and diluted) from $0.44 for the year ended December 31,
2002 ($0.43 on a fully diluted basis). This decrease was due to the issuance of
additional shares of common stock in our public offering of units completed in
December 2002, which shares had only a marginal effect on the weighted average
number of shares outstanding for 2002. In the offering, we sold 254,399 units
31
and each unit consisted of one share of common stock and one warrant to purchase
an additional share of common stock. After giving effect to the 5% stock
dividend paid in April 2003 and the 5% stock dividend paid in April 2004, the
total number of shares of common stock issued in the unit offering was 280,475.
Total interest income increased 16.6% to $4.8 million from $4.1
million primarily due to the growth and mix of earning assets. Total other
income increased 48.0% or by $97,000 to $299,000 from $202,000, due to increased
deposit fees, gains on sale of mortgage loans and other fees as partially offset
by an 83.3% decline in gains on sale of investments to $4,000 from $24,000 in
the previous year. Total other expenses increased 36.4% or $736,000 to $2.8
million from $2.0 million due to growth related expenses from staffing
increases, new marketing initiatives, increased regulatory compliance costs and
more customer volume and activity, as well as increased expenses related to the
opening of our new Westville office.
Net Interest Income. Interest income increased by $679,000 to $4.8
million from $4.1 million, primarily due to a $26.2 million increase in average
earning assets. Interest and fees on loans increased by $518,000 for the year
ended December 31, 2003, due to an increase in average loans and loans available
for sale outstanding of $12.8 million or 26.9% from the prior period, which more
than offset the decline in the average yield on the loan portfolio. The average
yield on our loan portfolio declined from 6.85% in 2002 to 6.26% in 2003 due to
the declining interest rate environment. Interest on federal funds sold
decreased by $98,000 due to a decrease of $4.1 million in average balances and
lower yields caused by market rate declines. Interest and dividends on
investments increased by $259,000 for the period due to an increase of $17.5
million in average outstanding balances. The increase was partially offset by an
overall decline in the yield on investment securities caused by a decline in
market interest rates. The average yield on investment securities declined to
2.87% in 2003 from 4.34% in 2002.
Total interest expense increased $79,000 from the prior period, due
principally to a $21.9 million increase in average interest bearing liabilities.
The increase in the average balance of deposits was ameliorated by the lower
rates paid on deposit accounts and short-term borrowings, as the cost of
interest-bearing liabilities declined from 2.10% in 2002 to 1.61% in 2003. Our
net interest margin was 3.55% for the year ended December 31, 2003 as compared
to 3.97% for the prior period ended December 31, 2002, as our interest-earning
assets repriced downward to a greater degree than our interest-bearing
liabilities.
Provision for Loan Losses. The provision for loan losses decreased
to $225,000 for year ended December 31, 2003 compared to $275,000 for the prior
period. Factors such as changes in the nature and volume of the portfolio,
overall portfolio quality, concentrations of credit risk, review of specific
problem loans, current economic conditions and trends that may affect the
ability of borrowers to pay, and prior loss experience within the various
categories of the portfolio are considered when reviewing the risks in the
portfolio. The allowance for loan losses was $768,000 at December 31, 2003, or
1.15% of total outstanding loans. See "Business -- Allowance for Loan Losses"
for more information.
The bank's loan portfolio is relatively unseasoned due to the fact
that we commenced operations in 2000. Therefore, our historical charge-off and
non-performing loan statistics may not be indicative of future trends.
32
Total Other Income. Other income, primarily service charges on
deposit accounts and gains on sale of mortgages held for sale, increased $97,000
to $299,000 for the year ended December 31, 2003. Fees from deposit account
holders for the year ended December 31, 2003 were approximately $139,000
compared to $85,000 in the prior period. This 63.5% increase was principally due
to deposit growth. For the year ended December 31, 2003, we recorded gains on
the sale of residential mortgage loans held for sale of $103,000 compared to
$62,000 in the prior period. This was primarily due to increased refinancing
activity due to lower interest rates during the year. In general, we sell all
newly originated fixed-rate residential mortgage loans into the secondary market
on a servicing released basis. The increase of $22,000 to $53,000 in 2003 from
$31,000 in 2002, in other fees and charges was primarily volume related. Gains
on sale of investments available for sale for the year ended December 31, 2003
declined to $4,000 compared to $24,000 in the year ended December 31, 2002.
Total Other Expense. Total other expenses for the year ended
December 31, 2003 increased $736,000 or 36.4% to $2.8 million compared to $2.0
million in the prior period. Most of the increases were due to growth related
factors:
- Employee related expenses were $1.2 million for the year
compared to $842,000 for the year ended December 31,
2002, reflecting additions to our staff as well as
normal compensation increases.
- Occupancy and equipment expenses increased $117,000 to
$335,000 for the year ended December 31, 2003, compared
to $218,000 in the prior period. The opening of our
Westville branch office in January 2003 accounted for
$72,000 of these increases.
- Advertising expenses increased $70,000 to $145,000 for
the year ended December 31, 2003 compared to $75,000 in
the prior period. This was due to increased activity
relating to our Westville opening and other marketing
campaigns designed to increase community awareness of
our presence, products and capabilities.
- Due to increased business volume, data processing
expenses increased 23.3% to $275,000 for the year ended
December 31, 2003 compared to $223,000 for the year
ended December 31, 2002.
- Professional services, including audit, loan review, and
legal expenses increased $27,000 to $222,000 during the
year ended December 31, 2003 compared to $195,000 for
the comparable prior period. This increase was primarily
related to our growth.
- Other operating expenses included postage, ATM charges,
telephone expenses, business development costs and other
miscellaneous expenses. These expenses also included a
loss of $19,000 on the replacement of equipment during
the year ended December 31, 2003. Due to growth and
increased activity, other operating expenses increased
$137,000 or 29.2% to
33
$607,000 for the year ended December 31, 2003, compared
to $470,000 for the year ended December 31, 2002.
Income Taxes. Our recorded income tax expense for the year ended
December 31, 2003 was $335,000 compared to $329,000 in the prior period. The
increase in income tax expense is due to higher pre-tax income for the year
ended December 31, 2003 as compared to the prior period. The effective rates for
the year ended December 31, 2003 and 2002 were 40.1% and 39.9%, respectively.
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001
General. Net income increased 37.1% to $495,000 for the year ended
December 31, 2002 as compared to net income of $361,000 for the period ended
December 31, 2001. Basic earnings per share increased to $0.44 for the year
ended December 31, 2002 ($0.43 on a diluted basis) from $0.35 (basic and
diluted) for the year ended December 31, 2001. This increase in net income was
due to a $1.0 million increase in net interest and other income, which was
partially offset by a $423,000 increase in income tax expense, a $422,000
increase in total other expense, and a $50,000 increase in the provision for
loan losses.
Total interest income increased 28.1% to $4.1 million from $3.2
million primarily due to the growth and mix of earning assets. Total other
income increased 19.5% or by $33,000 due to increased deposit fees, gains on
sale of residential mortgage loans and other fees, as partially offset by a
63.1% decline in gains on sale of investments to $24,000 from $65,000 in the
previous year. Total other expenses increased $422,000 to $2.0 million from $1.6
million, or 26.4%, due to increased staff, additional occupancy expenses and
volume-related charges.
Net Interest Income. Total interest income increased 28.1% to $4.1
million from $3.2 million primarily due to the growth and mix of earning assets.
Interest and fees on loans increased by $1.3 million for the year ended December
31, 2002, due to an increase in average loans and loans available for sale
outstanding of $22.5 million or 90.3% from the prior period. Interest on federal
funds sold decreased by $242,000 due to lower yields caused by market rate
declines and a decrease of $770,000 in average balances. Interest and dividends
on investments decreased by $169,000 for the period due to a general decline in
market interest rates.
Total interest expense decreased $99,000 from the prior period, due
principally to a decrease in the average rate paid on deposits and short-term
borrowings from 3.26% to 2.10%. Our net interest margin was 3.97% for the year
ended December 31, 2002 as compared to 3.85% for the prior period ended December
31, 2001.
Provision for Loan Losses. Our provision for loan losses for 2002
was $275,000, representing a $50,000, or 22.2%, increase over the $225,000
recorded for 2001. Provisions for loan losses are charged to income to bring the
allowance for loan losses to a level deemed appropriate by management based on
factors discussed under "Business--Allowance for Loan Losses." The increase in
the 2002 provision was principally due to the substantial growth in our loan
portfolio combined with management's view of the appropriate level of reserves
given the state of the economy in 2002. The allowance for loan losses was
$576,000 at December 31,
34
2002, representing 1.06% of total outstanding loans. The allowance for loan
losses at December 31, 2001 was $335,000 or 0.91% of total outstanding loans at
that date.
Total Other Income. We derive a significant portion of our other
income from fees assessed on retail and business deposit account holders. Fees
from deposit account holders for the year ended December 31, 2002 were
approximately $85,000 compared to $47,000 for the year ended December 31, 2001.
This increase is primarily the result of deposit growth. In addition, during
2002 we recorded income from the sale of residential mortgages held-for-sale in
the amount of $62,000 and gains on the sale of available-for-sale securities in
the amount of $24,000. For the year ended December 31, 2001, we recorded gains
on sale of mortgages held-for-sale in the amount of $46,000 and gains on sale of
available-for-sale securities of $65,000.
Total Other Expenses. Total other expenses for the year ended
December 31, 2002 increased 26.4% to $2.0 million as compared to $1.6 million
for the year ended December 31, 2001. Most of the increases were due to the
following growth related factors:
- Salaries, wages and employee benefit expenses were $842,000 for the year
ended December 31, 2002 as compared to $770,000 in the prior period,
reflecting additions to our staff as well as normal compensation increases.
- In the second quarter of 2002, the bank moved its accounting and operations
department to a new location. This coupled with additional equipment for
the added staff resulted in 29.8% increase in occupancy and equipment
expenses to $218,000 from $168,000 in the prior year.
- As the volume of our business increased due to our growth, data processing
expenses for the year ended December 31, 2002 were $223,000, a 54.9%
increase from the previous period.
- Professional services increased $77,000 to $195,000 in 2002 from $118,000
in 2001, as audit and loan review fees increased 75.9% from $58,000 in 2001
to $102,000 in 2002. Legal expenses also increased during the period from
$41,000 in 2001 to $68,000 in 2002.
- Other operating expense increased $127,000 to $470,000 in 2002 from
$343,000 in 2001, as the growth in deposits and assets caused FDIC/OCC
premiums and assessments to increase from $25,000 in 2001 to $45,000 in
2002, an increase of 80.0%. In addition, during 2002 we increased our
dependence on outside couriers used for pick-up and delivery services to
our customers. (The bank's internal courier service did not commence
operations until 2003.) As a result of this and general growth, postage and
courier-related expenses increased to $77,000 in 2002, a 108.1% increase
from the prior period.
Income Taxes. During 2002, we recorded an income tax expense of
$329,000, compared to a net tax benefit of $94,000 for 2001. This net tax
benefit was due to the reversal of the valuation allowance on our deferred tax
assets in the amount of $194,000, which offset our current tax expense of
$125,000. We have deferred tax assets because of differences that arise between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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.
35
LIQUIDITY
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funding through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, securities classified as available-for-sale, and loans maturing within one
year. As a result of our management of liquid assets and the ability to generate
liquidity through additional deposits or borrowings, we are able to maintain
overall liquidity sufficient to satisfy our deposit withdrawal requirements and
meet our customers' borrowing needs.
At March 31, 2004, cash, cash equivalents, securities classified as
securities available for sale, and federal funds sold totaled $44.8 million and
were 37.2% of total assets. However, we have pledged $24.7 million of our
securities available for sale as collateral for uninsured municipal deposits
held by us and uninsured deposits that underlie retail repurchase agreements,
which adversely impacts our liquidity position. Asset liquidity is also provided
by managing loan maturities. At December 31, 2003, approximately $29.6 million
or 44.3% of loans would mature or reprice within a one-year period. To the
extent possible, loans are funded with deposits or other funding with coinciding
maturity or repricing dates.
Net cash provided by operating activities for the three months ended
March 31, 2004 was $447,000 as compared to cash used by operating activities of
$526,000 in the prior period. The change relates primarily to a decrease in the
level of mortgage loans held for sale. Net cash provided by operating activities
for the year ended December 31, 2003 was $721,000 compared to $838,000 for the
previous period. The difference can be attributed to an increase in mortgage
loans available for sale offset by increased accretion of discounts on
securities. An increase in other assets also contributed to the change.
Net cash provided by investing activities for the three months ended
March 31, 2004 was $362,000 compared to $286,000 used in the prior period. The
net change was largely due to a decrease in the amount of cash being invested in
securities. Net cash used in investing activities was $15.8 million for the year
ended December 31, 2003 compared with $30.8 million for the previous year.
Proceeds from prepayments and redemptions of securities in excess of the prior
year, as well as a slower pace of loan growth, accounted for the majority of
this change.
Funds provided by financing activities were $2.0 million for the
period ended March 31, 2004 compared to $2.2 million for the prior period. The
primary reason was slower deposit growth offset by an increase in other borrowed
funds and proceeds from warrant conversions. Borrowed funds increased as a
result of a daily sweep from a large depository account. All collected balances
in excess of a threshold amount are swept into an overnight repurchase
agreement. Cash provided by financing activities was $19.5 million in fiscal
year 2003 compared with $18.2 million in fiscal year 2002. Deposit growth was
partially offset by a decline in short-term borrowings. In addition, in December
2002, we completed a public offering of units of common stock and warrants. 1st
Colonial raised net proceeds of $1.9 million in that offering, and these
proceeds were included in cash provided by financing activities in fiscal year
2002.
36
CAPITAL RESOURCES
The assessment of capital adequacy depends on a number of factors
such as asset quality, liquidity, earnings performance, changing competitive
conditions, economic forces and growth and expansion activities. We seek to
maintain a capital base to support our growth and expansion activities, to
provide stability to current operations and to promote public confidence.
The bank's capital position exceeds regulatory minimums. The primary
indicators relied on by the OCC and other bank regulators in measuring strength
of capital position are the Tier 1 risk-based capital ratio, total risk-based
capital ratio and leverage ratio. Tier 1 capital consists of common and
qualifying preferred shareholders' equity less goodwill. Total capital consists
of Tier 1 capital, qualifying subordinated debt and a portion of the allowance
for possible loan losses. Risk-based capital ratios are calculated with
reference to risk weighted assets, which consist of both on and off balance
sheet risks (such as letters of credit, lines of credit and home equity lines).
The leverage ratio consists of Tier 1 capital divided by quarterly average
assets.
We manage capital ratios to exceed regulatory minimums. The
following table shows our regulatory capital ratios and shareholders' equity to
total assets as of March 31, 2004:
AT MARCH 31, 2004
-----------------------
REGULATORY ACTUAL
MINIMUM RATIO
---------- ------
Total risk-based capital ratio..................................... 8.0% 14.4%
Tier 1 risk-based capital ratio.................................... 4.0% 13.3%
Tier 1 leverage ratio.............................................. 4.0% 8.4%
Shareholders' equity total assets.................................. None 8.2%
Management anticipates these ratios to decline as capital is
leveraged in support of deposit and asset growth. At December 31, 2003, the
bank's total risk-based capital ratio was 14.60%, its Tier 1 risk-based capital
ratio was 13.52% and its leverage ratio was 8.73%.
On April 26, 2004, the Company completed its public offering of
828,000 shares of common stock at a price of $10.00 per share. The offering was
underwritten on a firm-commitment basis by Ryan Beck & Co., Inc. Net of
underwriting discounts and commissions, the Company received proceeds of
approximately $7.7 million from the offering. We will use a portion of the
proceeds to enable the bank to increase its legal lending limit and to provide
the capital necessary, in light of the regulatory capital requirements described
above, to support our growth. A portion of the proceeds also will be used to
fund the establishment or acquisition of additional branches.
CONTRACTUAL OBLIGATIONS
We enter into contractual obligations in the normal course of
business as a source of funds for its asset growth and its asset/liability
management, to fund acquisitions, and to meet required capital needs. These
obligations require us to make cash payments over time as detailed in the table
below (For further information regarding our contractual obligations refer to
Notes 9,
37
10, 15 and 16 of our audited Consolidated Financial Statements included in this
prospectus supplement.):
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS AT DECEMBER 31, LESS THAN 1-3 4-5 AFTER
2003 TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- ------ ----- ----- -------
(DOLLARS IN THOUSANDS)
Borrowings........................... $ 4,087 $ 4,087 $ 0 $ 0 $ 0
Certificates of deposit.............. 26,232 20,577 2,251 3,404 0
Operating leases..................... 363 78 185 100 0
Capital leases....................... 0 0 0 0 0
------- -------- ------ ------ -------
Total contractual cash obligations... $30,682 $ 24,742 $2,436 $3,504 $ 0
======= ======== ====== ====== =======
OFF-BALANCE SHEET INSTRUMENTS
We do not have any off-balance sheet arrangements as that term is
defined in Item 303 of SEC Regulation S-B (such as guarantee contracts, credit
or liquidity support arrangements, derivative instruments or variable interests
in other entities). We are, however, a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit. These financial instruments involve elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of these financial instruments reflect the extent of our
involvement in particular classes of financial instruments.
Our exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. We use the same
credit policies in making commitments and conditional obligations as we do for
on-balance sheet instruments. Unless noted otherwise, we do not require and are
not required to pledge collateral or other security to support financial
instruments with credit risk.
38
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
OTHER COMMERCIAL TOTAL LESS
COMMITMENTS AMOUNTS THAN 1 1-3 4-5 AFTER 5
AT DECEMBER 31, 2003 COMMITTED YEAR YEARS YEARS YEARS
--------- ------ ------- ------ -------
Commitments to extend credit:
Lines of Credit $ 3,666 $3,274 $ 392 $ 0 $ 0
--------- ------ ------- ------ -------
Unfunded residential mortgages 4,653 522 0 0 4,131
--------- ------ ------- ------ -------
Total commercial commitments $ 8,319 $3,796 $ 392 $ 0 $ 4,131
========= ====== ======= ====== =======
For further information regarding our commitments, refer to Note 16
of our audited Consolidated Financial Statements included in this prospectus
supplement.
INTEREST SENSITIVITY
An important element of both earnings performance and the
maintenance of sufficient liquidity is management of the interest sensitivity
gap. The interest sensitivity gap is the difference between interest-rate
sensitive assets and interest-rate sensitive liabilities in a specific time
period. Interest rate "gap analysis" is a common, though imperfect, measure of
interest rate risk, which measures the relative dollar amounts of
interest-earning assets and interest-bearing liabilities which reprice within
these specific time periods, either through maturity or rate adjustment. A
"positive gap" for a given period means that the amount of interest-earning
assets maturing or otherwise repricing within that period exceeds the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in a declining interest rate environment, an institution
with a "positive gap" would generally be expected, absent the effects of other
factors, to experience a decrease in the yield on its assets greater than the
decrease in the cost of its liabilities and its net interest income should be
negatively affected. Conversely, the cost of funds for an institution with a
"positive gap" would generally be expected to increase more slowly than the
yield on its assets in a rising interest rate environment, and such
institution's net interest income generally would be expected to be positively
affected by rising interest rates. If we had a "negative gap" position with
respect to a given time period, it would indicate that more liabilities may
reprice within that time period than assets, with the result that rising rates
may have a negative impact on interest rate spread and therefore on earnings.
The gap can be managed by repricing assets or liabilities, by
selling securities or loans held-for-sale, by replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
time interval contributes to preserving net interest margins and minimizing the
impact on net interest income in periods of rising or falling interest rates. We
evaluate interest sensitivity risk and then formulate guidelines regarding asset
generation and pricing, funding sources and pricing, and off-balance sheet
commitments (such as letters of credit, lines of credit and credit card lines)
in order to manage sensitivity risk. These guidelines are based on management's
outlook regarding future interest rate movements, the state of the regional and
national economy, and other financial and business risk factors.
39
The following table illustrates our interest sensitivity gap
position at December 31, 2003. It summarizes the contractual repayment terms or
nearest repricing dates of our interest-earning assets and interest-bearing
liabilities. This table presents a position that existed at one particular day
(December 31, 2003) and therefore is not necessarily indicative of our position
at any other time.
INTEREST SENSITIVITY ANALYSIS
MATURING OR REPRICING IN:
--------------------------------------------------------------
WITHIN 3 4-12 1-5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Federal funds sold $ 9,735 $ - $ - $ - $ 9,735
Interest bearing deposits 500 - - - 500
Investment securities held to maturity 387 5,421 - - 5,808
Investment securities available-for-sale 8,812 8,169 10,493 511 27,985
Loans and mortgages available for sale 20,579 9,005 36,536 711 66,831
-------- -------- -------- -------- --------
Total interest earning assets $ 40,013 $ 22,595 $ 47,029 $ 1,222 $110,859
======== ======== ======== ======== ========
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 6,612 $ 18,680 $ 9,014 $ 3,005 $ 37,311
Money market 2,646 3,402 9,073 - 15,121
Savings 762 709 2,836 946 5,253
Time deposits $100,000 and over 9,737 5,591 1,556 - 16,884
Time deposits less than $100,000 2,277 2,972 4,099 - 9,348
Other borrowed money 4,087 - - - 4,087
-------- -------- -------- -------- --------
Total interest bearing liabilities $ 26,121 $ 31,354 $ 26,578 $ 3,951 $ 88,004
======== ======== ======== ======== ========
Period gap $ 13,892 $ (8,759) $ 20,451 $ (2,729) $ 22,855
======== ======== ======== ======== ========
Cumulative gap $ 13,892 $ 5,133 $ 25,584 $ 22,855
======== ======== ======== ========
Ratio of cumulative gap to total interest
earning assets 12.53% 4.63% 23.08% 20.62%
======== ======== ======== ========
While securities available-for-sale are presented in the foregoing
table according to the earlier of their stated maturities or call dates, such
investments can, if necessary, be sold at any time in reaction to interest rate
changes or funding demands.
We manage our interest rate sensitivity gap to, among other things,
control the exposure of our net interest margin such that a 200 basis point
increase or decrease in market rates will impact net interest income by no more
than approximately 15% in any one year period. At December 31, 2003, we estimate
that if interest rates increased by 200 basis points, projected net interest
income for 2003 would decrease by 3.4% despite the fact that we had a positive
gap. This is due to the fact that callable agency securities would not be called
and we would not be able to reinvest these funds into higher yielding
investments. Given the current interest rate levels, all interest rates could
not decline 200 basis points. We estimate that a 100 basis point decrease would
cause net interest income to decrease approximately 7.4%. This is due to
40
callable agency securities being called, necessitating reinvestment into lower
yielding investments.
As noted previously, securities available for sale, while presented
in the table at their stated maturities or possible call date whichever is
shorter, can be sold any time and are an active interest sensitivity gap
management tool. Further, the magnitude and timing of changes to deposit rate
changes can be managed to further minimize the exposure of net interest margin.
For example, savings deposits and certain interest-bearing demand deposits,
while recorded at their first possible repricing opportunity, would not likely
react as quickly to a market rate change as their first recorded repricing
opportunity would indicate.
RECENT ACCOUNTING PRONOUNCEMENTS
TECHNICAL CORRECTIONS TO FASB STATEMENTS.
In April 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. This Statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds
FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions.
The provisions of this Statement related to the rescission of
Statement 4 shall be applied in fiscal years beginning after May 15, 2002. Any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in Opinion 30
for classification as an extraordinary item shall be reclassified.
The provisions in paragraphs 8 and 9(c) of this Statement related to
Statement 13 shall be effective for transactions occurring after May 15, 2002,
with early application encouraged. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002, with
early application encouraged.
The adoption of this Statement did not have an impact on 1st
Colonial's earnings, financial condition or equity.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
41
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of this Statement are to be applied prospectively for
exit or disposal activities that are initiated after December 31, 2003, with
early application encouraged. 1st Colonial does not expect the adoption of this
Statement to have an impact on its earnings, financial condition, or equity.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held and used. With some
exceptions, the requirements of Statement No. 147 are effective October 1, 2002.
The adoption of this Statement did not have an impact on 1st Colonial's
earnings, financial condition, or equity.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123. SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002, except for financial reports containing condensed financial statements
for interim periods for which disclosure is effective for periods beginning
after December 15, 2002. Adoption of SFAS No. 148 did not impact 1st Colonial's
earnings, financial condition, or equity. However, 1st Colonial did modify its
disclosures related to the method of accounting for stock-based employee
compensation in accordance with SFAS No. 148.
42
GRANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES
During 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others, was issued. FASB Interpretation No. 45 requires a
guarantor to include disclosure of certain obligations and, if applicable, at
the inception of the guarantee, recognize a liability for the fair value of
other certain obligations undertaken in issuing a guarantee. The recognition
requirement is effective for guarantees issued or modified after December 31,
2003. Adoption of FASB Interpretation No. 45 did not have an impact on 1st
Colonial's earnings, financial condition, or equity.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
During 2002, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, was issued. FASB Interpretation No. 46 clarifies the
application of Accounting Research Bulletin No. 51 and applies immediately to
any variable interest entities created after January 31, 2003 and to variable
interest entities in which an interest is obtained after that date. Adoption of
FASB Interpretation No. 46 did not have an impact on 1st Colonial's earnings,
financial condition, or equity.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. With some exceptions, this Statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of this Statement did
not have an impact on 1st Colonial's earnings, financial condition, or equity.
FINANCIAL INSTRUMENTS WITH DEBT AND EQUITY CHARACTERISTICS
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The adoption of this Statement did
not have an impact on 1st Colonial's earnings, financial condition, or equity.
43
BUSINESS
GENERAL
We are a Pennsylvania business corporation and bank holding company
registered under the Bank Holding Company Act of 1956. 1st Colonial was
incorporated on February 26, 2002 for the purpose of acquiring the bank, thereby
enabling the bank to operate within a holding company structure. On June 30,
2002, 1st Colonial acquired 100% of the outstanding shares of the bank.
The principal activities of 1st Colonial are owning and supervising
the bank. The bank is a community-oriented, full-service commercial bank
providing commercial and consumer financial services to businesses and
individuals in Camden County, New Jersey and surrounding areas. We believe that
we will continue to gain market share in our geographic market. We compete with
the many existing and larger financial institutions in our geographic market by
emphasizing personalized service, responsive decision making and an overall
commitment to excellence.
The bank offers commercial and consumer loans of all types,
including real estate loans, residential mortgage loans, home equity loans and
lines of credit, auto loans and other credit products. The bank's deposit
services include business and individual demand and time deposit accounts, NOW
accounts, money market accounts, Individual Retirement Accounts and holiday
accounts. Our strategy for deposit acquisition and development has been to
attract and retain core deposits, and we traditionally have not priced our
deposits to attract short-term relationships. We do not accept brokered
deposits. The bank is not authorized to offer trust services and does not
presently offer the sale of investment products such as mutual funds to its
customers.
We provide a number of convenience-oriented services and products to
our customers, including direct payroll and social security deposit services,
bank-by-mail services, letters of credit, access to a national automated teller
machine network, safe deposit boxes, night depository facilities, notary
services, courier services and travelers checks. We also offer telephone banking
services that enable our customers to obtain account information, effectuate
transfers between accounts, order new checks and make stop payment requests. In
addition, we intend to begin offering Internet-banking services to our customers
in the third quarter of 2004, using a third-party service provider.
We have outsourced virtually all of our data processing operations
to a third-party service provider with respect to deposit accounts, checking
accounts, loan accounts and other matters, as well as ATM processing services.
We also use third parties to provide certain credit card processing services and
escrow deposit processing services.
As of December 31, 2003, we employed 23 full-time and three
part-time employees.
BUSINESS STRATEGY
Our mission is to become the leading community bank in our market
area by meeting the credit needs of local businesses and residents, providing
relationship banking and customer
44
service that is superior to the larger banks in our market area, and offering
products and services responsive to local needs. We intend to increase our
market share and presence by opening additional branch offices at convenient and
strategic locations and through growth at our existing offices.
We target small and mid-sized businesses as well as professional
practices such as lawyers, medical doctors and accountants in our market area.
In addition, we have had success marketing our deposit account services to local
government entities such as municipalities, school districts and public
authorities. This success is largely due to the experience and reputation of our
management in serving municipal and local government entities in our
marketplace. These deposit relationships are typically operating accounts and
longer-term certificates of deposit, which we believe are a stable source of
funding for us.
We actively pursue business relationships with our targeted
clientele through diligent calling efforts and by capitalizing on our knowledge
of the market and pre-existing business relationships. Our goal is to establish
deposit and lending relationships that are based on service, will result in
long-standing relationships and will lead to referrals from our satisfied
customers.
As an added convenience for our government and business customers,
we began offering courier pick-up and delivery services to these customers in
2003. We also are planning to add up to two full-service branches by the first
quarter of 2006.
An important element of our strategy is to capitalize on the prior
experience of our management team in our market, as well as their pre-existing
business relationships. Prior to organizing the bank, our president, Gerard M.
Banmiller, helped organize Community National Bank of New Jersey located in
Camden County, New Jersey, and served as its president from 1987 until its sale
in 1998. James E. Strangfeld, the bank's executive vice president, directed
various business and consumer banking operations for the southern New Jersey
divisions of two large regional banks from 1986 to 2000. Many of the bank's
customers, including governmental entities and local businesses, were customers
of Mr. Banmiller and Mr. Strangfeld in their prior positions. It is a
fundamental belief of management that having knowledge of our local markets
facilitates a bank's deposit gathering capabilities and its ability to make
sound credit decisions. This extensive knowledge of our local markets has
allowed us to develop and implement a highly focused and disciplined approach to
deposit and lending relationships with the customers in our market area.
We believe that our knowledge of the local banking market and our
emphasis on service, when combined with the application of sound lending
practices, will create value for our shareholders.
CORPORATE HISTORY
REORGANIZATION
1st Colonial was formed on February 26, 2002. On June 30, 2002, we
acquired 1st Colonial National Bank pursuant to its merger with and into Interim
1st Colonial National Bank, our wholly owned subsidiary that we formed for the
sole purpose of acquiring 1st Colonial
45
National Bank. The acquisition was part of the reorganization of 1st Colonial
National Bank from a stand-alone national bank to a bank holding company
structure.
The reorganization was approved by the Office of the Comptroller of
the Currency and by the Federal Reserve Bank of Philadelphia on June 6, 2002.
The shareholders of the bank approved the reorganization at a meeting held on
June 12, 2002. In preparation for that meeting, 1st Colonial and the bank mailed
a proxy statement/prospectus to the bank's shareholders on May 10, 2002.
In the reorganization, each existing shareholder of the bank
received an equal number of shares of 1st Colonial common stock in exchange for
his or her bank common stock. A total of 1,129,607 shares of 1st Colonial common
stock were issued in the reorganization in exchange for an equal number of
shares of the common stock of the bank.
2002 STOCK OFFERING
On September 20, 2002, 1st Colonial commenced a public offering of
600,000 units for an offering price of $8.50 per unit. Each unit consisted of
one share of common stock and one warrant to purchase one share of common stock
at an exercise price of $9.60 per share. This offering was completed on December
16, 2002. In the offering, 1st Colonial sold 254,399 units. After giving effect
to the 5% stock dividends paid by 1st Colonial in April 2003 and April 2004, 1st
Colonial issued in this offering 280,475 shares of common stock and warrants to
acquire 280,475 shares of common stock at an exercise price of $8.71 per share.
The offering raised $2,160,000 before offering expenses of $230,000. These
proceeds were used to fund, among other things, the continued growth of the
bank, including the establishment of the bank's branch in Westville, New Jersey.
2004 STOCK OFFERING
On April 26, 2004, the Company completed its public offering of
828,000 shares of common stock at a price of $10.00 per share. The offering was
underwritten on a firm-commitment basis by Ryan Beck & Co., Inc. Net of
underwriting discounts and commissions, the Company received proceeds of
approximately $7.7 million from the offering. We will use a portion of the
proceeds to enable the bank to increase its legal lending limit and to provide
the capital necessary, in light of the regulatory capital requirements described
above, to support our growth. A portion of the proceeds also will be used to
fund the establishment or acquisition of additional branches.
LOAN PORTFOLIO
The bank is an active lender with a loan portfolio that includes
commercial mortgages, commercial loans, consumer installment loans and home
equity loans. At December 31, 2003, we had loans of $65.8 million (net of a
$768,000 allowance for loan losses and including $121,000 in net deferred
costs), representing 55.7% of total assets, compared to $53.6 million at
December 31, 2002.
46
LENDING POLICY
The bank's lending policies and procedures establish the basic
guidelines governing its lending operations. Generally, the guidelines address
the type of loans we seek, target markets, underwriting and collateral
requirements, terms, interest rate and yield consideration and compliance with
laws and regulations. The policies are reviewed and approved by the Board of the
bank. The bank supplements its own supervision of the loan underwriting and
approval process with quarterly loan audits by independent, outside
professionals experienced in loan review work. All new loans in excess of
$100,000, as well as a representative sample of the portfolio, are reviewed on a
quarterly basis by this independent loan review firm.
The Board maintains a loan committee consisting of at least four
"outside" directors. Outside directors are directors who are not officers of the
bank. Our senior lending officer and other loan officers present loans to the
loan committee for consideration, but are not voting members of the committee.
The loan committee is authorized to consider and approve all loan requests in
excess of the lending authority delegated to the loan officers. Credit review
and analysis on each loan is prepared by the individual loan officers for
presentation to the loan committee. Loan approval requires a majority of the
voting members present.
The bank requires at least two authorized signatures for any loan in
excess of $100,000. The authorized approval level required is a function of the
aggregate amount of credit exposure to the borrower and any related entity. The
senior lending officer, the president/chief executive officer, or the vice
president, loan department, may approve loans up to $100,000. Other loan
officers may approve loans up to an individual lending authority approved by the
Board of Directors.
The president/chief executive officer and the senior lending
officer, or the senior lending officer and the vice president, loan department
may approve loans up to an amount not to exceed $500,000. All loans in excess of
$500,000 up to $1,000,000 are presented to the loan committee for approval, and
all loans in excess of $1,000,000 are presented to the board of directors for
approval.
COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
Our lending activity is concentrated primarily in commercial and
commercial real estate loans. At December 31, 2003, commercial and commercial
real estate loans equaled $44.2 million, or 66.5%, of the loan portfolio. The
commercial and commercial real estate loan portfolio is comprised of $17.0
million of commercial and industrial loans, as well as $27.2 million of loans
secured by commercial and multi-family real estate. These commercial real estate
loans have an average loan to value ratio under 80%. Other than loans to
operators of nonresidential buildings, which amount to $8.2 million or 12.4% of
total loans, there is no material concentration in the commercial and commercial
real estate loan portfolio within any business or industry segment. Our strategy
is to make commercial and commercial real estate loans based on our analysis of
a borrower's ability to repay the loan out of its operating cash flows. With few
exceptions, we also obtain real estate or other collateral for a commercial or
commercial real estate loan, and typically require repayment guarantees by
principals of a borrower. Most of our commercial and commercial real estate
loans are made to a diverse group
47
of businesses of small and medium size. Except for one land loan in the amount
of $1.1 million as of December 31, 2003, we have no land or residential
development loans.
RESIDENTIAL REAL ESTATE/CONSUMER LOANS
Residential real estate and consumer loans together equaled $19.4
million, or 29.2% of the loan portfolio at December 31, 2003. The residential
real estate portfolio consists primarily of home equity loans. The consumer loan
portfolio consists primarily of automobile and personal loans. Approximately
85.3% of the residential real estate/consumer portfolio at December 31, 2003 is
home equity loans. The average loan to value ratio of these loans is
approximately 80%. Substantially all residential first mortgage loans originated
by us are sold in the secondary market on a servicing released basis.
CONSTRUCTION LOANS
Construction loans equaled $2.9 million, or 4.3% of the loan
portfolio at December 31, 2003. This portfolio consists of loans to contractors
for the purpose of constructing or renovating single-family homes and loans to
business owners for the purpose renovating existing facilities. All of these
loans mature within one year. The average loan to value ratio of these loans is
approximately 80%. The bank limits its lending to single-facility projects, and
does not finance any tract developments.
The following table summarizes the bank's loan portfolio by type of
loan on the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
2003 2002 2001 2000
--------------------- -------------------- --------------------- -------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- -------- -------- --------- -------- ------ --------
(DOLLARS IN THOUSANDS)
Type of Loan:
Commercial $ 16,953 25.52% $ 17,565 32.43% $ 13,782 37.64% 6,244 43.70%
Real estate - commercial 27,227 40.99% 18,895 34.88% 12,280 33.53% 3,554 24.88%
Real estate - residential 16,512 24.86% 12,147 22.43% 6,588 17.99% 3,478 24.34%
Construction 2,884 4.34% 3,213 5.93% 2,120 5.79% - -
Consumer 2,853 4.29% 2,348 4.33% 1,850 5.05% 1,012 7.08%
--------- -------- -------- ------- --------- ------- ------- -------
Total gross loans 66,429 100.00% 54,168 100.00% 36,620 100.00% 14,288 100.00%
======== ======= ======= =======
Less allowance for loan
losses (768) (576) (335) (110)
Plus deferred loan costs
(fees) 121 30 (24) 5
--------- -------- --------- -------
Loans, net $ 65,782 $ 53,622 $ 36,261 $14,183
========= ======== ========= =======
The following table sets forth the estimated maturity of the bank's
loan portfolio at December 31, 2003. The table does not include prepayments or
scheduled principal repayments.
48
MATURITY DISTRIBUTION
WITHIN
ONE YEAR ONE-FIVE YEARS OVER FIVE YEARS TOTAL
----------- -------------- --------------- ------------
(DOLLARS IN THOUSANDS)
Commercial $ 9,664 $ 7,048 $ 241 $ 16,953
Construction 2,884 -- -- 2,884
Real estate mortgage (1) 4,050 30,356 9,333 43,739
Consumer 874 1,719 260 2,853
----------- -------------- --------------- ------------
Total $ 17,472 $ 39,123 $ 9,834 $ 66,429
=========== ============== =============== ============
-------------------
(1) Includes all mortgage and home equity loans.
The following table sets forth the dollar amount of all loans due
after December 31, 2003 which have predetermined interest rates and which have
floating or adjustable rates.
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- ---------------
(DOLLARS IN THOUSANDS)
Commercial $ 9,326 $ 7,627 $ 16,953
Real Estate- construction 1,088 1,796 2,884
Real Estate- mortgage (1) 34,821 8,918 43,739
Consumer 2,788 65 2,853
----------- -------------- ---------------
Total $ 48,023 $ 18,406 $ 66,429
=========== ============== ===============
(1) Includes all mortgage and home equity loans.
Loans held for sale are residential mortgage loans that are subject
to purchase commitments from third-party investors such as mortgage companies.
Funds for these sales have not yet been received from the investors. The bank
usually receives funds within one week of the loan closing. The bank receives
interest income from the investor from the date the loan closes to the date
funds are received from the investor. At December 31, 2003, there were $281,000
in loans held for sale compared to $63,000 at December 31, 2002 and $182,000 at
December 31, 2001. Interest earned from loans held for sale totaled $23,000 for
2003 compared to $13,000 for 2002 and $14,000 for 2001, and is included in
interest on loans.
RISK ELEMENTS
Risk elements in the loan portfolio include loans past due,
non-accrual loans, other real estate owned and a concentration of loans to one
type of borrower. We closely monitor the loan portfolio to reduce the risk of
delinquent and problem credits. Strict underwriting criteria, which include loan
to value and debt to income ratios, are followed, which also helps reduce credit
risk in the loan portfolio. The loan review function is performed by an outside
entity that evaluates
49
loan quality, including adherence to underwriting criteria. This outside entity
reports directly to the Audit Committee of the Board of Directors. The OCC, as
the bank's primary regulator, also reviews the loan portfolio as part of its
review process. The bank's lending activity extends to individuals and small and
medium sized businesses located primarily within the greater Cherry Hill, New
Jersey area. Consistent with its focus on providing community-based financial
services, the bank does not attempt to diversify its loan portfolio
geographically by making significant amounts of loans to borrowers outside its
market area. For a description of the bank's market area, see "Business --
Market Area."
ASSET QUALITY
The bank manages asset quality and controls credit risk through
diversification of the loan portfolio and the application of policies designed
to foster sound underwriting and loan monitoring practices. The bank's senior
officers are charged with monitoring asset quality, establishing credit policies
and procedures subject to approval by the Board of Directors, seeking the
consistent application of these policies and procedures across the bank and
adjusting policies as appropriate for changes in market conditions.
Non-performing assets include non-performing loans and foreclosed
real estate held for sale. Non-performing loans consist of loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on non-accrual. Income recognition of interest is discontinued when,
in the opinion of management, the collectibility of such interest becomes
doubtful. A loan is generally classified as non-accrual when principal or
interest has been in default for a period of 90 days or more or because of a
deterioration in the financial condition of the borrower such that payment in
full of principal or interest is not expected. Loans past due 90 days or more
and still accruing interest are loans that are generally well secured and in
process of collection. When loans are placed on non-accrual, accrued income from
the current period will be reversed from current earnings. Consumer loans are to
be charged off when principal or interest is 120 or more days delinquent or will
be placed on non-accrual if the collateral is insufficient to recover the
principal. The bank had no non-performing loans or non-accrual loans at December
31, 2003. As of December 31, 2003, for purposes of accounting and reporting in
accordance with SFAS 15, the bank had no troubled debt restructuring. As of
December 31, 2003, for purposes of accounting and reporting in accordance with
SFAS 114, the bank had no "impaired" loans.
ALLOWANCE FOR LOAN LOSSES
The bank determines the provision for loan losses through a
quarterly analysis of the allowance for loan losses. Factors such as changes in
the nature and volume of the portfolio, overall portfolio quality,
concentrations of credit risk, review of specific problem loans, current
economic conditions and trends that may affect the ability of borrowers to pay,
and prior loss experience within the various categories of the portfolio are
considered when reviewing the risks in the portfolio. All loans greater than
$100,000 and all classified loans are analyzed individually. While management
believes the allowance for loan losses is currently appropriate, future
additions to the allowance may be necessary based on changes in general economic
conditions and/or the condition of specific borrowers. The allowance is reviewed
quarterly by the Board of Directors and senior management of the bank. In
addition, various regulatory
50
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require the bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
In addition to management review, an external service provides a
detailed loan review analysis. In the course of a year, all loans in excess of
$100,000 are reviewed and rated. In addition, other smaller loans are reviewed
on a random basis. At each quarterly review cycle, all classified loans are
assigned a specific reserve allocation based on the guidelines established in
the bank's credit policy which was approved by the Board of Directors. These
could range from 2.5%-10% on special mention loans; 10%-25% on substandard
loans; 50%-75% on loans rated doubtful and 100% on any loan rated loss.
The balance of any rated loan is deducted from the remaining general
portfolio classification. The general category is currently segregated by
commercial real estate loans, commercial and industrial loans, residential real
estate loans, construction loans and other consumer loans. Each category of loan
is then assigned loss factors based on a review of the following areas: (i)
historical losses (due to limited loss experience, we use the loss experience of
peer banks as reported in the Uniform Bank Performance Report); (ii) policies
and procedures; (iii) economic conditions; (iv) nature and volume; (v)
management; (vi) oversight; (vii) concentrations; and (viii) external factors.
The sum of the assigned loss factors is then applied to the outstanding balance
of the respective category.
The bank has no credit exposure to foreign countries or foreign
borrowers or highly leveraged transactions.
51
The following table sets forth the year-end balances of and changes
in the allowance for loan losses, as well as certain related ratios, as of
December 31, 2003, 2002, 2001 and 2000:
DECEMBER 31,
-------------------------------------------------
2003 2002 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Allowance for loan losses,
beginning of period.................. $ 576 $ 335 $ 110 $ 0
Loans charged-off:
Consumer............................... (40) (49) 0 0
Recoveries:
Consumer............................... 7 15 0 0
-------- -------- -------- --------
Net charge-offs......................... (33) (34) 0 0
Provision charged to operations......... 225 275 225 110
-------- -------- -------- --------
Balance, end of year.................... $ 768 $ 576 $ 335 $ 110
======== ======== ======== ========
Average loans, net of deferred
costs(1)............................. $ 60,183 $ 47,430 $ 24,923 $ 6,936
Total gross loans at year end........... $ 66,550 $ 54,198 $ 36,596 $ 14,293
Ratios:
Net charge-offs to:
Average loans, net of deferred costs... 0.05% 0.07% 0.00% 0.00%
Allowance as a percentage
of total gross loans................. 1.15% 1.06% 0.92% 0.77%
----------
(1) Includes average balance of loans held for sale of $382 in 2003 and $156
in 2002. Interest income on loans held for sale was $23 in 2003 and $13 in
2002.
Loans charged off will represent the bank's recognition of losses
previously provided for in the overall allowance for loan losses through the
provisions charged to operations in the respective periods.
The following schedule sets forth the allocation of the allowance
for possible loan losses among various categories. The allocation is based upon
the historical experience of the bank, the historical experience of the bank's
management while at other institutions and management's review of the specific
amount or specific loan category in which future losses may ultimately occur.
However, the entire allowance for possible loan losses is available to absorb
future loan
52
losses in any category. The bank is unable to accurately predict in what
category future charge offs and recoveries may actually occur.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31,
-------------------------------------------------------------------------
2003 2002 2001
------------------ --------------------- ---------------------
AMOUNT PERCENT* AMOUNT PERCENT* AMOUNT PERCENT*
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Commercial........................ $ 275 25.52% $ 235 32.43% $ 150 37.64%
Real estate - commercial.......... 256 40.99% 170 34.88% 107 33.53%
Real estate - residential......... 102 24.86% 75 22.43% 31 17.99%
Construction...................... 27 4.34% 29 5.93% 19 5.79%
Consumer.......................... 108 4.29% 67 4.33% 28 5.05%
----- ----- ------ ------ ------ ------
$ 768 100.00% $ 576 100.00% $ 335 100.00%
===== ====== ====== ====== ====== ======
* Percentages indicate percent of loans in each category to total loans.
SECURITIES
Securities, primarily U.S. treasury and U.S. government agency
securities, totaled $33.9 million or 28.7% of total assets at December 31, 2003.
The bank's securities portfolio serves several purposes. Portions are held to
maturity. The remaining portions are used to assist the bank in liquidity and
asset/liability management. Total amortized cost of securities at December 31,
2003 was $33.9 million or 28.7% of total assets compared to $31.0 million or
31.5% of total assets at December 31, 2002.
Securities are classified as investment securities held-to-maturity
when management has the intent and the bank has the ability at the time of
purchase to hold the securities to maturity. Investment securities
held-to-maturity are carried at cost adjusted for amortization of premiums and
accretion of discounts. Securities to be held for indefinite periods of time are
classified as securities available-for-sale and are carried at fair market
value. Securities available-for-sale include securities that may be sold in
response to changes in market interest rates, changes in the security's
prepayment risk, increases in loan demand, general liquidity needs and other
similar factors. The bank's recent purchases of investment securities have been
U.S. government and agency securities with short- to medium-term maturities and
adjustable rate mortgage backed securities.
Securities available-for-sale are reflected at fair value with
unrealized gains and losses, net of tax, if any, being included in the bank's
accumulated other comprehensive income account. The fair value of the securities
available-for-sale, as of December 31, 2003 was $28.0 million, which resulted in
a tax adjusted unrealized loss on such securities included in accumulated other
comprehensive income, a component of shareholders' equity, of $73,000. The fair
value at December 31, 2002 was $29.9 million, which resulted in a tax-adjusted
unrealized gain on such securities included in shareholders' equity of $101,000
as of December 31, 2002.
53
The following tables summarize the composition of our investment
securities portfolio at December 31, 2003 and 2002.
SECURITIES PORTFOLIO
AT DECEMBER 31, 2003
----------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Municipal securities............................... $ 5,808 $ 5,796 $ - $ -
U.S. government securities......................... - - 18,536 18,479
Mortgage-backed securities......................... - - 9,265 9,200
Equity securities.................................. - - 306 306
--------- ---------- ---------- ----------
Total.............................................. $ 5,808 $ 5,796 $ 28,107 $ 27,985
========= ========== ========== ==========
AT DECEMBER 31, 2002
----------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Municipal securities............................... $ 1,220 $ 1,218 $ - $ -
U.S. government securities......................... - - 19,196 19,317
Mortgage-backed securities......................... - - 10,376 10,413
Equity securities.................................. - - 204 204
--------- ---------- ---------- ----------
Total.............................................. $ 1,220 $ 1,218 $ 29,776 $ 29,934
========= ========== ========== ==========
The amortized cost and weighted average yield of the bank's
investment securities and securities available-for-sale at December 31, 2003, by
contractual maturity, are reflected in the following table. Actual maturities
will differ from contractual maturities because certain borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
54
DUE 1 YEAR DUE DUE IN DUE AFTER
AT DECEMBER 31, 2003 OR LESS 1-5 YEARS 5-10 YEARS 10 YEARS TOTAL
----------------------------------------- ---------- --------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
Investments securities held to maturity:
Municipal Securities:
Amortized cost $ 5,808 $ - $ - $ - $ 5,808
Weighted average yield (1) 1.79% - - - 1.79%
---------- --------- ---------- --------- -----------
Total amortized cost $ 5,808 $ - $ - $ - $ 5,808
========== ========= ========== ========= ===========
Weighted average yield 1.79% - - - 1.79%
Investment securities available for sale:
US government agency securities:
Amortized cost $ - $ 18,536 $ - $ - $ 18,536
Weighted average yield - 2.85% - - 2.85%
Mortgage backed securities:
Amortized cost $ 343 $ 1,385 $ 1,817 $ 5,720 $ 9,265
Weighted average yield 3.81% 3.61% 3.45% 2.99% 3.20%
Equity securities:
Amortized cost - - - $ 306 $ 306
Weighted average yield - - - 5.41% 5.41%
Total amortized cost $ 343 $ 19,921 $ 1,817 $ 6,026 $ 28,107
========== ===========
Total fair value $ 341 $ 19,854 $ 1,804 $ 5,986 $ 27,985
========== ===========
Weighted average yield 3.81% 2.90% 3.45% 3.11% 2.99%
-----------------
(1) Yields on tax-exempt securities were adjusted to a tax - equivalent basis
using a 34% rate.
DEPOSITS
The bank's predominant source of funds is depository accounts. The
bank's deposit base is comprised of demand deposits, savings and money market
accounts and other time deposits.
The following table sets forth the distribution of average deposits
by major category and the average rate paid in each year as applicable.
55
DISTRIBUTION OF AVERAGE DEPOSITS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
2003 2002 2001
----------------------- --------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- -------- --------- -------- -------- -------
Non-interest bearing demand deposits $ 18,320 0.00% $ 14,786 0.00% $ 8,327 0.00%
Interest bearing demand deposits 31,344 1.69% 19,772 2.16% 9,460 2.94%
Money market deposits 15,109 0.64% 12,231 1.57% 13,883 2.90%
Savings deposits 5,293 0.59% 3,873 0.98% 1,807 1.49%
Time deposits 20,296 2.68% 14,342 2.96% 9,667 4.38%
---------- --------- --------
Total/weighted average rate $ 90,362 1.33% $ 65,004 1.66% $ 43,144 2.62%
========== ==== ========= ==== ======== ====
The following table is a summary of time deposits of $100,000 or
more (all of which are certificates of deposit) by remaining maturities as of
December 31, 2003:
MATURITIES OF TIME DEPOSITS OF $100,000 AND OVER
AMOUNT PERCENT
----------- -------
(DOLLARS IN THOUSANDS)
Three months or less $ 9,737 57.67%
Three to six months 3,043 18.02%
Six to twelve months 2,548 15.09%
Over twelve months 1,556 9.22%
----------- ------
$ 16,884 100.00%
Total deposits at December 31, 2003 were $104.3 million compared to
total deposits of $82.9 million at December 31, 2002. Certificates of deposit
totaled $26.2 million and $16.9 million at December 31, 2003 and December 31,
2002, respectively.
As new deposits are generated from the bank's existing branch as
well as any future branches, the bank expects to use these funds, to the extent
that they grow faster than loan growth, for investment securities and other
earning assets. Management expects to manage the growth of deposits in any new
branches as it does in its current operations, by interest rate management and
marketing.
The bank's strategy for deposit acquisition and development has been
to attract and retain core deposits, and the bank has not priced its deposits to
attract short-term relationships. In addition, we have had success marketing our
deposit account services to local government entities such as municipalities,
school districts and public authorities. This success is largely due to the
experience and reputation of our management in handling local government entity
business, which has led to referrals and additional relationships. These
deposits are typically operating accounts and longer term certificates of
deposit, so they are a stable source of funding for us.
56
SHORT-TERM BORROWINGS
The bank has no funding dependence on short-term borrowings.
Typically the short-term borrowings are in the form of securities sold under
repurchase agreements and are an accommodation for significant depositor
relationships that have excess large investable balances for short periods. The
majority of these repurchase agreements mature within 90 days.
The following table summarizes short-term borrowing and weighted
average interest rates paid:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Average daily amount of short-term borrowings outstanding
during the period........................................ $ 5,284 $ 5,217 $ 3,908
Weighted average interest rate on average daily short-term
borrowings.............................................. 0.78% 1.59% 3.40%
Maximum outstanding short-term borrowings outstanding at
any month-end............................................ $ 8,296 $ 7,065 $ 6,071
Short-term borrowings outstanding at period end.............. $ 4,087 $ 6,033 $ 5,460
Weighted average interest rate on short-term borrowings at
period end............................................... 0.49% 1.00% 1.91%
MARKET AREA
We are located in the southwestern part of New Jersey, approximately
five miles east of the City of Philadelphia, Pennsylvania, which is the fifth
largest city in the United States. Our market area consists of the greater
Cherry Hill, New Jersey area and the Borough of Westville, New Jersey. Our
target market includes the towns of Collingswood, Cherry Hill, Haddonfield and
Westville.
PROPERTIES
Our headquarters are located at 1040 Haddon Avenue, Collingswood,
New Jersey. The property, which houses the administrative headquarters and a
full-service banking office, is leased by the bank. The building has two stories
containing approximately 3,800 total square feet of space. The annual base
rental through 2004 is $45,000, not including taxes, utilities and insurance,
which increases to $49,500 for 2005. After 2005, the rent increases annually
based on increases in the consumer price index, with a minimum annual increase
of 3%. The initial term of the lease is through 2009, with options in favor of
the bank to renew the lease for two additional five-year terms. The property is
well maintained and suitable to our present needs and operations.
57
Certain back office and administrative functions are located in
office space leased by the bank at 900 Haddon Avenue, Collingswood, New Jersey.
This lease expires in 2006.
On January 16, 2003 the bank opened a branch office at 321 Broadway,
Westville, New Jersey. The bank purchased this facility from another financial
institution. The bank did not purchase any deposits or loans in this
transaction. In addition to the existing vault, drive-through teller windows and
night depository facility, the facility was expanded to include multiple
customer service representative locations and a drive-up automated teller
machine.
COMPETITION
The banking business in our market area, as well as the balance of
New Jersey and the Philadelphia area, is highly competitive with respect to both
loans and deposits and is dominated by a number of major regional and
super-regional banks and non-depository institutions which have many offices.
Many of these institutions, particularly the larger banking firms that have
enhanced their local presence through mergers in recent years, have
substantially greater resources and offer a wider array of services than we do.
In addition, many of these institutions are permitted to make larger loans than
we can. In addition, the present bank regulatory environment has undergone
significant change. This change affects the banking industry and competition
between banks and non-bank financial institutions. There have been significant
regulatory, statutory and case law changes in the bank merger and acquisition
area, in the products and services banks can offer, and in the non-banking
activities in which bank holding companies can engage. We face competition for
loans and deposits from institutions such as credit unions, mortgage brokers,
mortgage banking companies, mutual funds, money market funds, investment
bankers, insurance companies and others. These non-bank financial institutions
have the power to acquire and own banks that could compete with us. See
"Supervision and Regulation."
We compete with these institutions primarily on the basis of
service, quality and hours of operation. We believe that the local presence of
our senior management and Board of Directors, and their collective familiarity
with our market area, affords us an advantage in service, quality and
understanding the needs of our customer base.
LEGAL PROCEEDINGS
We are periodically parties to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to our business. We do not believe that there is any
pending or threatened proceeding against us which, if determined adversely,
would have a material effect on our business or financial position.
58
SUPERVISION AND REGULATION
GENERAL
We are registered as a bank holding company and are subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System under the Bank Holding Act of 1956, as amended. As a bank holding
company, our activities and those of the bank are limited to the business of
banking and activities closely related or incidental to banking. Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve Board.
The Federal Reserve Board has issued regulations under the Bank
Holding Company Act that require a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. As a result, the
Federal Reserve Board, pursuant to such regulations, may require us to stand
ready to use our resources to provide adequate capital funds to the bank during
periods of financial stress or adversity.
The Bank Holding Company Act prohibits us from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock, or substantially all of the assets of, any bank, or from merging
or consolidating with another bank holding company, without prior approval of
the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits
us from engaging in or from acquiring ownership or control of more than 5% of
the outstanding shares of any class of voting stock of any company engaged in a
non-banking business, unless such business is determined by the Federal Reserve
Board to be so closely related to banking as to be a proper incident thereto.
The types of businesses that are permissible for bank holding companies to own
have been expanded by recent federal legislation; see discussion of
Gramm-Leach-Bliley Act below.
The bank is a national bank chartered under the National Bank Act,
and is subject to regulation, supervision and examination by the OCC and, in
certain respects, by the Federal Reserve Board and the Federal Deposit Insurance
Corporation (the "FDIC"). The FDIC, through the Bank Insurance Fund, insures all
deposits held by the bank up to a maximum of $100,000 for any one customer.
The OCC, which has primary supervisory authority over the bank,
regularly examines banks in such areas as reserves, loans, investments,
management practices, and other aspects of operations. These examinations are
designed for the protection of the bank's depositors rather than the bank's
shareholders. The bank must furnish annual and quarterly Call Reports to the
OCC, which has the authority under the Financial Institutions Supervisory Act to
prevent a national bank from engaging in an unsafe or unsound practice in
conducting its business.
The various laws and regulations administered by the OCC affect
corporate practices, such as the payment of dividends, incurrence of debt and
acquisition of other financial institutions and companies, and affect business
practices, such as the payment of interest on deposits, the charging of interest
on loans, the types of business conducted and the location of offices.
59
SARBANES-OXLEY ACT
On July 30, 2002, the Sarbanes-Oxley Act, or SOX, was enacted. SOX
is not a banking law, but applies to all public companies, including 1st
Colonial. The stated goals of SOX are to increase corporate responsibility, to
provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws. SOX is the
most far-reaching U.S. securities legislation enacted in some time. SOX
generally applies to all companies, both U.S. and non-U.S., that file or are
required to file periodic reports with the Securities and Exchange Commission,
or the SEC, under the Securities Exchange Act of 1934, or the Exchange Act.
Given the extensive SEC role in implementing rules relating to many of SOX' new
requirements, the final scope of these requirements remains to be determined.
SOX includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of specified issues by the SEC and the
Comptroller General. SOX represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees. SOX addresses, among other matters:
- audit committees;
- certification of financial statements by the chief
executive officer and the chief financial officer;
- the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer's
securities by directors and senior officers in the
12-month period following initial publication of any
financial statements that later require restatement;
- a prohibition on insider trading during pension plan
blackout periods;
- disclosure of off-balance sheet transactions;
- a prohibition on personal loans to directors and
officers;
- expedited filing requirements for Form 4 statements of
changes of beneficial ownership of securities required
to be filed by officers, directors and 10% shareholders;
- disclosure of whether or not a company has adopted a
code of ethics;
- "real time" filing of periodic reports;
- auditor independence; and
60
- various increased criminal penalties for violations of
securities laws.
The SEC has been delegated the task of enacting rules to implement
various provisions with respect to, among other matters, disclosure in periodic
filings pursuant to the Exchange Act. To date, the SEC has implemented some of
the provisions of SOX. However, the SEC continues to issue final rules, reports,
and press releases. As the SEC provides new requirements, we will review those
rules and comply as required.
USA PATRIOT ACT
In October 2001, the President signed into law the USA PATRIOT Act.
This Act was in direct response to the terrorist attacks on September 11, 2001,
and strengthens the anti-money laundering provisions of the Bank Secrecy Act.
Most of the new provisions added by this Act apply to accounts at or held by
foreign banks, or accounts of or transactions with foreign entities. The bank
does not have a significant foreign business and does not expect this Act to
materially affect its operations. This Act does, however, require the banking
regulators to consider a bank's record of compliance under the Bank Secrecy Act
in acting on any application filed by a bank. As the bank is subject to the
provisions of the Bank Secrecy Act (i.e., reporting of cash transactions in
excess of $10,000), the bank's record of compliance in this area will be an
additional factor in any applications filed by it in the future. To the bank's
knowledge, its record of compliance in this area is satisfactory and its
processes and procedures to insure compliance with this Act are satisfactory.
GRAMM-LEACH-BLILEY ACT
In November 1999 the Gramm-Leach-Bliley Act (the "GLB Act") became
law. The GLB Act made significant changes in U.S. banking law, principally by
repealing the 1933 Glass-Steagall Act. Under the GLB Act, banks and other
financial companies, such as securities firms and insurance companies, are now
able to combine and be commonly owned. The GLB Act also permits bank holding
companies and banks to engage in a broader range of financially related
activities than was available to them before the passage of the GLB Act,
including insurance and securities underwriting, merchant banking and real
estate development and investment. The GLB Act, however, does not authorize
banks or their affiliates to engage in commercial activities that are not
financial in nature, such as manufacturing.
The GLB Act creates a new category of bank holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the GLB Act, a bank holding company must notify the
Federal Reserve that it elects to be a financial holding company. A bank holding
company can make this election if it, and all its bank subsidiaries, are well
capitalized, well managed, and have at least a satisfactory Community
Reinvestment Act rating, each in accordance with the definitions prescribed by
the Federal Reserve and the regulators of the company's subsidiary banks. Once a
bank holding company makes such an election, and provided that the Federal
Reserve does not object to such election, the financial holding company may
engage in financial activities (i.e., securities underwriting, insurance
underwriting, and certain other activities that are financial in nature as to be
determined by the Federal Reserve) by simply giving a notice to the Federal
Reserve within thirty days after beginning such business or acquiring a company
engaged in such business. This
61
makes the regulatory approval process to engage in financial activities much
more streamlined than it was under prior law. We have no present intention of
electing to become a financial holding company.
The GLB Act also permits certain financial activities to be
undertaken by a subsidiary of a national bank. Generally, for financial
activities that are conducted as a principal, such as a securities underwriter
or dealer holding an inventory, a national bank must be one of the 100 largest
national banks in the United States and have debt that is rated investment
grade. However, smaller national banks may own a securities broker or an
insurance agency, or certain other financial agency entities under the GLB Act.
Under prior law, national banks could only own an insurance agency if it was
located in a town of fewer than 5,000 residents, or under certain other
conditions. Under the GLB Act, there is no longer any restriction on where the
insurance agency subsidiary of a national bank is located or does business.
The GLB Act also contains a number of provisions that affect the
operations of all financial institutions. One of the provisions relates to the
financial privacy of consumers, authorizing the federal banking regulators to
adopt rules that would limit the ability of banks and other financial entities
to disclose non-public information about consumers to entities that are not
affiliates. Under these rules, banks must establish a disclosure policy for
non-public customer information, disclose the policy to their customers, and
give their customers the opportunity to object to non-public information being
disclosed to a third party.
CAPITAL REQUIREMENTS
Under federal regulations, Bank must maintain a minimum ratio of
qualified total capital to risk-weighted assets of 8.0%. Risk-weighted assets
are determined by multiplying the various categories of assets by the
appropriate risk-weighing factor (ranging from 0% to 100%) under applicable
regulations. Certain off-balance sheet items, such as standby letters of credit,
are included in assets for these purposes at a "credit equivalent" value,
determined by multiplying the off-balance sheet item by a credit conversion
factor established by applicable regulations. At least half of the total capital
must be comprised of common equity, retained earnings and a limited amount of
permanent preferred stock, less goodwill ("Tier 1 capital"). The remainder
("Tier 2 capital") may consist of a limited amount of subordinated debt, other
preferred stock, certain other instruments and a limited amount of loan and
lease loss reserves. The sum of Tier 1 capital and Tier 2 capital is "total
risk-based capital." Federal regulations also require a minimum ratio of Tier 1
capital to risk-weighted assets of 4.0%.
In addition, federal regulations have established a minimum leverage
ratio (Tier 1 capital to quarterly average assets less goodwill) of 3.0% for
banks and bank holding companies that meet certain specified criteria, including
that they have the highest regulatory rating. All other banks and bank holding
companies are required to maintain a leverage ratio of 3.0% plus an additional
amount of at least 100 to 200 basis points. The regulations also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
62
Banking regulators continue to indicate their desire to raise
banking organization capital requirements beyond their current levels. However,
management is unable to predict whether higher capital ratios will be imposed
and, if so, at what levels and on what schedule.
Any national bank not in compliance with applicable capital
requirements may be subject to certain growth restrictions, issuance of a
capital directive by the appropriate federal regulator, and various other
possible enforcement actions by the appropriate federal regulators, including a
cease and desist order, civil monetary penalties, and the establishment of
restrictions on operations. In addition, the institution could be subject to
appointment of a receiver or conservator or a forced merger into another
institution.
LIMITS ON DIVIDENDS
The amount of dividends that may be paid by the bank depends upon
the bank's earnings and capital position, and is limited by federal law,
regulations and policies.
As a national bank subject to the regulations of the OCC, the bank
must obtain approval for any dividend if the total of all dividends declared in
any calendar year would exceed the total of its net profits, as defined by
applicable regulations, for that year, combined with its retained net profits
for the preceding two years, less any required transfers to surplus. In
addition, the bank may not pay a dividend in an amount greater than its
undivided profits then on hand after deducting its losses and bad debts. For
this purpose, bad debts are generally defined to include the principal amount of
loans which are in arrears with respect to interest by six months or more unless
such loans are fully secured and in the process of collection. Moreover, for
purposes of this limitation, the bank is not permitted to add the balance in its
allowance for loan loss account to its undivided profits then on hand; however,
it may net the sum of its bad debts as so defined against the balance in its
allowance for loan loss account and deduct from undivided profits only bad debts
as so defined in excess of that amount.
In addition, the OCC is authorized to determine under certain
circumstances relating to the financial condition of a national bank that the
payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The payment of dividends that deplete a bank's capital base
could be deemed to constitute such an unsafe or unsound practice.
LOANS TO ONE BORROWER LIMITATION
Under applicable OCC regulations, a national bank's total
outstanding loans and extensions of credit to one borrower may not exceed 15
percent of the bank's capital and surplus, plus an additional 10 percent of the
bank's capital and surplus if the amount that exceeds the bank's 15 percent
general limit is fully secured by readily marketable collateral, which is
defined to include certain financial instruments and bullion. To qualify for the
additional 10 percent limit, the bank must perfect a security interest in the
collateral under applicable law and the collateral must have a current market
value at all times of at least 100 percent of the amount of the loan or
extension of credit that exceeds the bank's 15 percent general limit. At
December 31, 2003, the Bank's loans to one borrower limitation was $1.4 million.
63
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), 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. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OCC, in connection with its examination of national banks,
to assess the 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 OCC is required to provide a written evaluation of an
institution's CRA performance utilizing a four tiered descriptive rating system,
which rating is disclosed to the public.
The Community Reinvestment Act was amended by the GLB Act to provide
that small banks (those under $250 million in assets) that received an
"outstanding" on their last CRA exam will not have to undergo another CRA exam
for five years, or for four years if their last exam was "satisfactory." In
addition, any CRA agreement entered into between a bank and a community group
must be disclosed, with both the bank and the group receiving any grants from
the bank detailing the amount and use of the funding provided.
PROMPT CORRECTIVE ACTION
The federal banking agencies are required to take "prompt corrective
action" in respect of banks that do not meet minimum capital requirements. There
currently are five capital tiers: "well capitalized," "adequately capitalized,"
"under capitalized," "significantly under capitalized" and "critically under
capitalized." The bank is "well capitalized." The following table sets forth the
minimum capital ratios that a bank must satisfy in order to be considered well
capitalized or adequately capitalized under OCC regulations:
ADEQUATELY WELL
CAPITALIZED CAPITALIZED
----------- -----------
Total risk-based capital ratio 8% 10%
Tier 1 risk-based capital ratio 4% 6%
Leverage ratio 4% 5%
The FDIC's regulations establish specific actions that are permitted
or, in certain cases required, to be taken by regulators with respect to
institutions falling within one of the three undercapitalized categories.
Depending on the level of the institution's capital, the agency's correction
powers can include: requiring a capital restoration plan; placing limits on
asset growth and restrictions on activities; requiring the institution to issue
additional stock (including voting stock) or be acquired by another institution
in a transaction supervised by the FDIC; placing restrictions on transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election for the institution's board of directors;
requiring that certain senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
prohibiting the payment of principal or interest on
64
subordinated debt; and, in the most severe cases, appointing a receiver for the
institution. A bank that is undercapitalized is required to submit a capital
restoration plan. Under certain circumstances, a "well capitalized," "adequately
capitalized" or "undercapitalized" institution may be required to comply with
restrictions applicable to the next lowest capital category.
SAFETY AND SOUNDNESS STANDARDS
The OCC and the other federal banking agencies have adopted
"Interagency Guidelines Establishing Standards for Safety and Soundness"
("Guidelines"). These operational and managerial standards address an
institution's general practices, and are designed to provide a framework for the
federal bank regulators to determine whether those practices are sound in
principle and whether procedures are in place to ensure that they are applied in
the normal course of business. The guidelines cover such areas as internal
controls, loan documentation, credit underwriting, interest rate exposure, asset
growth and compensation. Banks failing to meet these standards are required to
submit compliance plans to their appropriate federal regulators.
The OCC is also required to perform annual on-site bank
examinations, place limits on real estate lending by banks and impose more
stringent auditing requirements.
INSURANCE OF ACCOUNTS AND REGULATIONS BY THE FDIC
The bank is a member of the Bank Insurance Fund, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and such insurance is backed by the full faith and credit of the United
States government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examination of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Bank Insurance Fund.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium, while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a total risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a
semi-annual basis, if it determines that the reserve ratio of the Bank Insurance
Fund will be less than the designated reserve ratio of 1.25% of Bank Insurance
Fund insured deposits. In setting these increased assessments, the FDIC must
seek to restore the reserve ratio to that designated reserve level, or such
higher reserve ratio as established by the FDIC.
65
The current premium schedule for Bank Insurance Fund insured
institutions ranges from 0 to 27 basis points per $100 of deposits. The bank is
in the category of institutions that pay zero in FDIC insurance premiums. In
addition FDIC premiums, all insured institutions are required to pay a Financing
Corporation assessment, in order to find the interest on bonds issued to resolve
thrift failures in the 1980s. The current annual rate for all insured
institutions is 1.54 basis points for each $100 in domestic deposits. These
assessments are revised quarterly and will continue until the bonds mature in
the year 2017.
LEGISLATIVE PROPOSALS AND REFORMS
Legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts and other financial institutions, are
considered from time to time by the executive branch of the federal government,
Congress and various state governments. Certain of these proposals, if adopted,
could significantly change the regulation of banks and the financial services
industry. We cannot predict whether any of these proposals will be adopted or,
if adopted, how these proposals will affect us.
IMPACT OF MONETARY POLICIES
The profitability of the banking business depends in large part on
the difference between the interest rate paid by us on deposits and other
borrowings, and the interest rate received by us on loans extended to customers
and securities held in our portfolio, comprise the major portion of our
earnings. In addition, we attempt to generate revenues by assessing fees on our
services, to the extent the competitive market will allow such fees.
The earnings and growth of the bank and of the banking industry as a
whole is affected not only by general domestic and foreign economic conditions,
but also by the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve Board. The Federal Reserve Board
affects the national economy by its open market operations in United States
government securities, limitations upon savings and time deposit interest rates,
and adjustments to the discount and reserve retention rates applicable to
borrowings by banks which are members of the Federal Reserve System. These
actions of the Federal Reserve Board influence the growth of bank loans,
investments and deposits and affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted but, in any event, may have a material effect on the our
results of operations.
TRANSACTIONS WITH AFFILIATES
National banks must comply with Sections 23A and 23B of the Federal
Reserve Act ("Sections 23A and 23B") and Regulation W under that act relative to
transactions with affiliates in the same manner and to the same extent as if the
bank were a Federal Reserve member bank. A bank holding company, its
subsidiaries and any other company under common control are considered
affiliates of the bank. Generally, Sections 23A and 23B and Regulation W: (i)
limit the extent to which the insured association or its subsidiaries may engage
in certain covered transactions with an affiliate to an amount equal to 10% of
such institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the
66
same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, the purchase of assets, the issuance of a guarantee and similar types
of transactions. Any loan or extension of credit by the bank to an affiliate
must be secured by collateral in accordance with Section 23A and Regulation W.
Exemptions from Section 23A or 23B may be granted only by the Federal Reserve.
The bank has not been significantly affected by the rules regarding transactions
with affiliates.
The bank's authority to extend credit to executive officers,
directors and 10% shareholders, including 1st Colonial, as well as entities
controlled by such persons, is governed by Sections 22(g) and 22(h) of the
Federal Reserve Act, and Regulation O thereunder. Pursuant to these laws and
regulations, any loan made by the bank to an executive officer or director, or
his or her affiliates, (i) was made in the ordinary course of business, (ii) was
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and (iii) did not involve more than the normal risk of
repayment. The bank has not made any loans to a 10% shareholder. Generally,
Regulation O also places individual and aggregate limits on the amount of loans
the bank may make to such persons based, in part, on the bank's capital
position, and requires certain board approval procedures to be followed.
67
MANAGEMENT
The table set forth below contains information concerning our board
of directors, including their principal occupations or employment during the
past five years and their ages.
DIRECTOR
NAME AGE SINCE(1)
---- ------- --------
LINDA M. ROHRER............................................................................... 56 2000
Since 1985, Ms. Rohrer has owned and served as the President of Rohrer and Sayers Real
Estate, a commercial and residential real estate sales company. Ms. Rohrer served as a
director of Community National Bank of New Jersey from October 1988 to May 1996.
GERARD M. BANMILLER........................................................................... 56 2000
Mr. Banmiller has been President and Chief Executive Officer of the bank since its opening
in June 2000. From October 1999 to June 2000, Mr. Banmiller organized the bank on a
full-time basis. He served as a Regional President of Hudson United Bank from August 1998
until September 1999. He served as a director and President of Community National Bank of
New Jersey from its formation in 1987 until its acquisition by Hudson United Bank in August
1998.
MARY R. BURKE................................................................................. 51 2002
Since July 1993, Ms. Burke has owned, and served as the President and Treasurer of,
Standardized Test Scoring Co., Inc., an independent assessment service organization. Since
August 2003, she also has served as the principal of St. Rose of Lima School in Haddon
Heights, New Jersey. From January 2003 to June 2003, she served as principal of Christ the
King Regional School in Haddonfield, New Jersey.
THOMAS A. CLARK, III.......................................................................... 50 2000
Mr. Clark is a practicing attorney. Since 1992, he has been a shareholder, officer and
director of the law firm of Cureton Caplan, P.C.
LETITIA G. COLOMBI ........................................................................... 59 2000
Since May 2001, Ms. Colombi has served as the Mayor of the Borough of Haddonfield, New
Jersey, and since 1985, she has been a Borough Commissioner and the Director of Public
Works for Haddonfield. From August 1998 until April 2000, she served as a member of an
advisory board at Hudson United Bank. Ms. Colombi served as a director of Community
National Bank of New Jersey from October 1988 to August 1998.
68
DIRECTOR
NAME AGE SINCE(1)
---- ------- --------
GERALD J. DEFELICIS .......................................................................... 77 2000
Since 1984, Mr. DeFelicis has been retired, having served from 1945 to 1984 with Sun
Company, Inc., where he held the position of Manager of Systems Policy and Strategic
Facilities. From August 1998 to April 2000, Mr. DeFelicis served as a member of an
advisory board at Hudson United Bank. Mr. DeFelicis served as a director of Community
National Bank of New Jersey from 1987 to August 1998.
JOHN J. DONNELLY IV .......................................................................... 49 2001
Since 1998, Mr. Donnelly has served as President of J.J. Donnelly Inc., a general
contractor in the commercial construction industry. From 1992 to 1998, Mr. Donnelly served
as President of John J. Donnelly Inc.
EDUARDO F. ENRIQUEZ .......................................................................... 46 2000
Since 1994, Dr. Enriquez has been self-employed as a Doctor of Medicine. Since
1997, he has been a member of the Physicians Counsel to the Board of Trustees of
Virtua Health Systems.
MICHAEL C. HAYDINGER.......................................................................... 34 2002
From 1994 to the present, Mr. Haydinger has served as the Controller of First Montgomery
Group, a real estate management and construction firm in Marlton, New Jersey.
HARRISON MELSTEIN............................................................................. 61 2002
Mr. Melstein is retired. From 1985 to 2002, he was a registered pharmacist and
owned and operated Ames Drug Store in Collingswood, New Jersey.
STANLEY H. MOLOTSKY........................................................................... 68 2000
Mr. Molotsky is a counselor in financial matters. Since 1988, Mr. Molotsky has been the
owner and operator of SHM Financial Group, a financial counseling firm.
----------
(1) Includes service as a director of the bank.
EXECUTIVE OFFICERS
Set forth below is certain information concerning our executive
officers.
GERARD M. BANMILLER. Mr. Banmiller is the President and Chief Executive Officer
of 1st Colonial and the bank. He is also a director. Please see "Board of
Directors" above for more information regarding Mr. Banmiller.
69
JAMES E. STRANGFELD. Mr. Strangfeld serves as Executive Vice President of 1st
Colonial and Executive Vice President and Senior Loan Officer the bank. From
1996 until being engaged by the bank in 2000, Mr. Strangfeld served as a
Regional Executive with PNC Bank in Cherry Hill, New Jersey, where he directed
the consumer banking operations for 40 branches in Burlington and Camden
Counties. From 1986 to 1996, he served as Senior Vice President/Manager
Community Lending for Chemical Bank New Jersey, where he directed all functions
of its New Jersey Community Lending Department, which was designed to service
small business customers.
ROBERT C. FAIX. Mr. Faix serves as Senior Vice President and Chief Financial
Officer of 1st Colonial and the bank. From June 2000 until being engaged by the
bank in May 2001, Mr. Faix served as the Senior Vice President and Chief
Financial Officer of Crusader Holding Corp., the holding company for Crusader
Savings Bank. From July 1999 through June 2000, Mr. Faix served as Senior Vice
President and Chief Financial Officer for the Student Finance Corp., a subprime
student lender located in Newark, Delaware. From June 1998 through June 1999,
Mr. Faix served as the Vice President and Controller of Keystone Bank, N.A., a
commercial bank located in Horsham, Pennsylvania. From May 1995 through June
1998, Mr. Faix served as the Senior Vice President and Chief Financial Officer
of American Heritage FCU, a credit union located in Philadelphia, Pennsylvania.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
number of shares of our common stock held as of December 31, 2003, by each
person known by us to be the beneficial owner of more than five percent of our
outstanding common stock (each of whom is a director), each director, each
executive officer, and all directors and executive officers as a group. The
amounts in this table and its footnotes have been adjusted to give effect to the
5% stock dividend paid on April 15, 2004 to shareholders of record as of April
1, 2004.
70
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
Sole Voting Shared
Total and Voting and
Beneficial Investment Investment Percent of
Ownership(1) Power Power Class(2)
------------ ----------- ---------- ----------
Linda M. Rohrer (3)...................... 97,049 97,049 0 6.8%
Gerard M. Banmiller (4).................. 63,937 15,978 47,959 4.5%
Mary R. Burke (5)........................ 8,478 8,478 0 0.6%
Thomas A. Clark III (6).................. 27,876 27,876 0 2.0%
Letitia G. Colombi (7)................... 9,933 3,939 5,994 0.7%
Gerald J. DeFelicis (8).................. 24,826 24,826 0 1.8%
John J. Donnelly, IV (9)................. 30,626 24,011 6,615 2.2%
Eduardo F. Enriquez (10)................. 39,088 29,252 9,836 2.7%
Michael C. Haydinger (11)................ 106,188 12,972 93,216 7.4%
Harrison Melstein (12)................... 39,417 33,421 5,996 2.8%
Stanley H. Molotsky (13)................. 29,089 21,372 7,717 2.1%
James E. Strangfeld (14)................. 10,660 6,029 4,631 0.8%
Robert C. Faix (15)...................... 7,023 6,659 364 0.5%
All nominees, continuing directors and
executive officers as a group
(13 persons)(16)......................... 494,190 311,862 182,328 32.5%
----------
(1) Based on information furnished by the respective individuals as of
December 31, 2003 and our books and records as of such date, as adjusted
to reflect the 5% stock dividend paid on April 15, 2004 to shareholders of
record on April 1, 2004. Under applicable regulations, shares are deemed
beneficially owned by a person if he or she directly or indirectly has or
shares the power to vote or dispose of the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive
power with respect to the shares. Under applicable regulations, a person
is deemed to have beneficial ownership of shares which may be received
upon the exercise of outstanding stock options or warrants if the option
or warrant is exercisable within 60 days. All warrants held by our
executive officers and directors are fully vested, have a three-year term
expiring on December 16, 2005 and have an exercise price of $8.71 per
share.
71
(2) The percentage is calculated on a fully diluted basis (as if such person's
or group's vested options and warrants were exercised).
(3) Includes 4,102 shares that Ms. Rohrer has the right to acquire upon the
exercise of vested stock options, and 12,972 shares that Ms. Rohrer has
the right to acquire upon the exercise of vested warrants.
(4) Includes 44,872 shares jointly owned by Mr. Banmiller with his spouse,
11,443 shares that Mr. Banmiller has the right to acquire upon the
exercise of vested stock options and 3,087 shares that Mr. Banmiller and
his wife have the joint right to acquire upon the exercise of vested
warrants.
(5) Includes 1,655 shares that Ms. Burke has the right to acquire upon the
exercise of vested stock options.
(6) Includes 6,891 shares owned by the Cureton Caplan Hunt Scaramella & Clark
Profit Sharing Plan over which Mr. Clark has control, 3,181 shares that
Mr. Clark has the right to acquire upon the exercise of vested stock
options, and 1,323 shares that Mr. Clark has the right to acquire upon the
exercise of vested warrants.
(7) Includes 4,892 shares owned by Ms. Colombi's spouse, 1,103 shares that Ms.
Colombi's spouse has the right to acquire upon the exercise of vested
warrants, and 3,181 shares that Ms. Colombi has the right to acquire upon
the exercise of vested stock options.
(8) Includes 3,181 shares that Mr. DeFelicis has the right to acquire upon the
exercise of vested stock options and 3,245 shares that Mr. DeFelicis has
the right to acquire upon the exercise of vested warrants.
(9) Includes 3,181 shares that Mr. Donnelly has the right to acquire upon the
exercise of vested stock options, 3,308 shares that Mr. Donnelly has the
right to acquire upon the exercise of vested warrants, 3,308 shares owned
by The Eighdies, LLC, a limited liability company in which Mr. Donnelly
has a 25% membership interest, and 3,308 shares that The Eighdies, LLC has
the right to acquire upon the exercise of vested warrants.
(10) Includes 3,181 shares that Dr. Enriquez has the right to acquire upon the
exercise of vested stock options; 2,594 shares that Dr. Enriquez has the
right to acquire upon the exercise of vested warrants; 4,919 shares
jointly owned by Dr. Enriquez with his spouse; 4,919 shares that Dr.
Enriquez and his spouse have the joint right to acquire upon the exercise
of vested warrants; 2,863 shares owned by the Eduardo F. Enriquez MD LLC
Profit Sharing Plan FBO Eduardo F. Enriquez (the "Enriquez Profit Sharing
Plan"), over which Dr. Enriquez has sole voting and investment control;
and 2,863 shares that the Enriquez Profit Sharing Plan has the right to
acquire upon the exercise of vested warrants.
(11) Includes 1,655 shares that Mr. Haydinger has the right to acquire upon the
exercise of vested stock options, 40,692 shares owned by First Montgomery
Properties, 50,869 shares owned by Marlton Investment Group and 12,972
shares of common stock that Marlton Investment Group has the right to
acquire upon the exercise of warrants. Mr. Haydinger is an executive
officer of First Montgomery Properties and Marlton Investment Group (which
72
are affiliated companies) and through his position exercises voting and
investment power over these shares.
(12) Includes 1,655 shares that Mr. Melstein has the right to acquire upon the
exercise of vested stock options, 2,205 shares that Mr. Melstein has the
right to acquire upon the exercise of vested warrants, and 5,996 shares
that Mr. Melstein owns jointly with his spouse.
(13) Includes 3,181 shares that Mr. Molotsky has the right to acquire upon the
exercise of vested stock options, 3,859 shares owned by Mr. Molotsky's
spouse and 3,859 shares that Mr. Molotsky's spouse has the right to
acquire upon the exercise of vested warrants.
(14) Includes 2,426 shares owned by Mr. Strangfeld's spouse, 1,103 shares
jointly owned by Mr. Strangfeld and his spouse, 1,103 shares that Mr.
Strangfeld and his spouse have the joint right to acquire upon the
exercise of vested warrants, and 5,422 shares that Mr. Strangfeld has the
right to acquire upon the exercise of vested stock options.
(15) Includes 364 shares jointly owned by Mr. Faix with his spouse, 1,147
shares that Mr. Faix has the right to acquire upon the exercise of vested
stock options, and 2,756 shares that Mr. Faix has the right to acquire
upon the exercise of vested warrants.
(16) Includes 46,165 shares that the directors and executive officers, in the
aggregate, have the right to acquire upon the exercise of vested stock
options, and 61,617 shares that the directors and officers, in the
aggregate, have the right to acquire upon the exercise of vested warrants.
DIRECTOR COMPENSATION
The Chairman of the Board receives a quarterly retainer of $1,000
for service on the Board, and each director, other than Mr. Banmiller, receives
a quarterly retainer of $500. Each committee chairman receives an annual
retainer of $500 for chairing such committee. Each director, except for Mr.
Banmiller and each committee chairman (other than the loan committee chairman,
who receives both the retainer and the per meeting fee), receives $50 per
committee meeting attended. An aggregate of $32,750 was paid to directors during
the year ended December 31, 2003, for attendance at Board and committee
meetings.
Options to purchase shares of common stock have been granted to
directors of 1st Colonial and the bank, and directors of 1st Colonial and the
bank will receive additional stock options at each annual shareholders' meeting
and at other times determined by our Stock Option Plan Committee in its
discretion. On January 15, 2003, each non-employee director of the bank was
granted options to purchase 828 shares of 1st Colonial common stock, at an
exercise price of $7.82 per share (amounts are adjusted to reflect the April
2003 and April 2004 5% stock dividends). On April 22, 2003, the date of our
annual meeting of shareholders, each non-employee director of the bank was
granted options to purchase 788 shares of 1st Colonial common stock, at an
exercise price of $8.71 per share. On January 2, 2004, each non-employee
director of the bank was granted options to purchase 1,575 shares of 1st
Colonial common stock, at an exercise price of $10.89 per share. (April 2003 and
January 2004 grant amounts are adjusted to reflect the April 2004 5% stock
dividend). On May 19, 2004, each non-employee
73
director of 1st Colonial or the bank was granted options to purchase 750 shares
of our common stock at an exercise price of $9.88 per share. All of the
directors of 1st Colonial also are directors of the bank.
Options have a term of ten years from the date of grant. Options vest on
the earlier of the date on which (i) the optionee has completed 11 months of
continuous service as a director of 1st Colonial or the bank from the date of
grant or (ii) a change in control of the 1st Colonial or the bank occurs. In the
event of the optionee's retirement from the board of directors, death or
disability, his or her stock options lapse at the earlier of three months from
the date of retirement, death or disability, or the expiration of the term of
the option. If his or her service as a director is terminated for any reason
except retirement, death or disability, all options terminate upon the date
service is terminated, unless the Stock Option Plan Committee permits the
optionee to exercise such options until the earlier of the expiration of the
term of the option or three months after the termination of service.
1st Colonial maintains a directors and officers liability insurance
policy. The policy covers all directors and officers of 1st Colonial and the
bank for certain liability, loss, or damage that they may incur in their
capacities as such. To date, no claims have been filed under this insurance
policy.
AUDIT COMMITTEE
The Audit Committee of our board of directors is composed entirely of
non-management directors, each meeting the independence requirements of the
NASD. The primary duties and responsibilities of the Audit Committee are to:
- Oversee that management maintains the reliability and
integrity of the accounting policies and financial reporting
and disclosure practices of 1st Colonial;
- Oversee that management establishes and maintains processes to
assure that an adequate system of internal controls is
functioning within 1st Colonial; and
- Oversee that management establishes and maintains processes to
assure compliance by 1st Colonial with all applicable laws,
regulations and corporate policy.
In connection with these duties, the Audit Committee is responsible for
the appointment, compensation, oversight and termination of our independent
auditors. The Audit Committee is responsible also for, among other things,
reporting to the our board of directors on the results of the annual audit, and
reviewing the financial statements and related financial and non-financial
disclosures included in our earnings releases, Annual Reports on Form 10-KSB and
Quarterly Reports on Form 10-QSB. The Audit Committee is also responsible for
receiving and responding to complaints and concerns relating to accounting and
auditing matters. The Audit Committee has adopted the written charter outlining
its practices and responsibilities.
74
During the year ended December 31, 2003, the Audit Committee met four
times. At each meeting, the Audit Committee reviewed the results of reviews
performed in the areas of internal audit and compliance. The Audit Committee was
apprised of the status of all audit findings and the resolutions instituted by
management. At the February 18, 2004 meeting, the Audit Committee also reviewed
and approved the Audit Committee Charter and the internal audit program for the
year ending December 31, 2004. Management also updated the Audit Committee on
the status of the independent audit for the year ended December 31, 2003 that
was being performed by KPMG LLP.
The Audit Committee recommended to Bancorp's Board of Directors the
engagement of KPMG LLP for the year ended December 31, 2003.
The Audit Committee has discussed with our independent auditors the
matters required to be discussed by Statement of Auditing Standards 61 and has
received from the independent auditors the written disclosures and letter
required by Independence Standards Board Standard No. 1 addressing all
relationships between the independent auditors and 1st Colonial that might bear
on the auditors' independence. The Audit Committee has reviewed the materials
received from the independent auditors, has discussed with the independent
auditors the independence of such auditors, and has satisfied itself as to the
auditors independence.
The Audit Committee acts only in an oversight capacity, and in doing so
relies on the work and assurances of our management and its independent
auditors.
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REMUNERATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid to our Chief
Executive Officer during the years ended December 31, 2003, 2002 and 2001 and
any executive officer who received cash compensation exceeding $100,000 during
2003:
SUMMARY COMPENSATION TABLE
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
------------------ ---- ------ ----- ----------------
Gerard M. Banmiller 2003 $153,258 $10,000 $ 24,383
President and Chief 2002 137,500 16,000 21,204
Executive Officer 2001 114,423 25,000 17,695
James E. Strangfeld 2003 $127,758 $ 8,500 $ 3,888
Executive Vice 2002 115,000 14,000 3,883
President 2001 98,654 20,000 3,851
Robert C. Faix 2003 $ 97,132 $ 6,500 $ 11,719
Senior Vice President 2002 92,500 3,000 8,079
and Chief Financial
Officer 2001(2) 55,384 5,000 2,625
----------
(1) Consists of an automobile expense allowance, life, health, automobile and
long-term disability insurance annual premiums, and club membership dues.
(2) Mr. Faix commenced his employment in May 2001.
EMPLOYMENT AGREEMENTS
Gerard M. Banmiller, the President, Chief Executive Officer and a director
of 1st Colonial Bancorp and the Bank, has an employment agreement with the Bank.
The Bank's obligations under this agreement are guaranteed by 1st Colonial
Bancorp. This agreement has an initial three-year term and provides for annual
one-year extensions on each anniversary of June 29, 2000, the date the Bank
received regulatory authority to open for business, unless the Bank or Mr.
Banmiller gives prior written notice of nonrenewal to the other party. On and
after January 1, 2002, Mr. Banmiller is entitled to receive an annual base
salary of not less than $100,000. Except for a reduction which is proportionate
to a company-wide reduction in executive pay, the annual base salary paid to Mr.
Banmiller in any period cannot be less than the annual base salary paid to him
in any prior period.
Under his agreement, Mr. Banmiller is entitled to participate in any
incentive compensation and employee benefit plans that the Bank maintains. He
also is entitled to participate in and enjoy any other plans and arrangements
which provide for sick leave, vacation, sabbatical, or personal days, club
memberships and dues, education payment or reimbursement, business-related
seminars, and similar fringe benefits provided to or for the executive officers
of
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the bank from time to time. He also is entitled to be reimbursed for amounts he
pays as lease or loan payments due with respect to the lease or purchase of his
automobile, up to and not to exceed an amount equal to $500.00 per month.
In the event the bank terminates Mr. Banmiller's employment for "Cause" as
defined in his agreement, he will be entitled to receive his accrued but unpaid
base salary and an amount for all accumulated but unused vacation time earned
through the date of his termination.
In the event the bank terminates Mr. Banmiller's employment without Cause,
he will be entitled to receive, during the remaining term of his agreement, an
annual amount equal to the greater of (i) his highest base salary received
during one of the two years immediately preceding the year in which he is
terminated, or (ii) his base salary in effect immediately prior to his
termination. In addition, during the remaining term of his agreement, Mr.
Banmiller will annually be entitled to (i) an amount equal to the higher of the
aggregate bonuses paid to him in one of the two years immediately preceding the
year in which he is terminated and (ii) an amount equal to the sum of the
highest annual contribution made on his behalf (other than his own salary
reduction contributions) to any tax qualified and non-qualified defined
contribution plans maintained by the bank in the year in which he is terminated
or in one of the two years immediately preceding such year. Mr. Banmiller will
also be entitled to certain retirement, health and welfare benefits.
In the event Mr. Banmiller terminates his employment with the Bank for
"Good Reason," as defined in his agreement, he will be entitled to receive the
same annual amounts and benefits he would be entitled to receive if he was
terminated without Cause, but for a period of three years from the date of
termination of employment. In the event Mr. Banmiller terminates his employment
with the bank without Good Reason, he will be entitled to receive his accrued
but unpaid base salary until the date of termination and an amount for all
accumulated but unused vacation time through the date of the termination of his
employment. In the event of Mr. Banmiller's death or disability during the term
of his employment, he and his eligible dependents or his spouse and her eligible
dependents, as the case may be, will be entitled to receive the same annual
amounts and benefits Mr. Banmiller would be entitled to receive if he was
terminated without Cause, but only for a period of one year from the date of
termination of employment. They will also be entitled to certain health and
welfare benefits.
In the event that Mr. Banmiller is required to pay any excise tax imposed
under Section 4999 of the Internal Revenue Code (or any similar tax imposed
under federal, state or local law), as a result of any compensation and benefits
received under his agreement in connection with a change in control, the bank
will pay him an additional amount such that the net amount retained by him,
after the payment of such excise taxes (and any additional income tax resulting
from such payment by the bank), equals the amount he would have received but for
the imposition of such taxes.
The employment agreement further provides that in the event Mr.
Banmiller's employment is terminated for any reason or he voluntarily terminates
his employment, he may not, for a period of 12 months after the date of
termination, without the prior written consent of the bank's Board of Directors,
become an officer, director or a shareholder or equity owner of 4.9% or more of
any entity engaged in the banking, lending, asset management, mutual fund,
77
financial planning or investment security business within the New Jersey
Counties of Camden, Gloucester, Burlington, Salem, Atlantic, Cape May or
Cumberland, or any other county in which the bank has an office. In addition,
during his employment and for a period of 12 months following the termination of
his employment, except following a change in control of the Bank, Mr. Banmiller
may not solicit, endeavor to entice away from the bank, its subsidiaries or
affiliates, or otherwise interfere with the relationship of the bank or its
subsidiaries or affiliates with, any person who is, or was within the then most
recent 12-month period, an employee or associate of the bank or any of its
subsidiaries or affiliates.
The bank also has employment agreements with Mr. Strangfeld, its Executive
Vice President and Senior Loan Officer, and Mr. Faix, its Senior Vice President
and Chief Financial Officer. These agreements are substantially identical to Mr.
Banmiller's employment agreement (including containing the covenant not to
compete described above), except that they provide that (i) the executive is
entitled to receive an annual base salary of at least $90,000; (ii) the
executive is not entitled to be reimbursed for any amounts he pays as lease or
loan payments with respect to his automobile; (iii) in the event the bank
terminates the executive's employment without cause, he will be entitled to his
salary and benefits as determined in the same manner as under Mr. Banmiller's
agreement, but for one year only and (iv) in the event the executive terminates
his employment for "Good Reason," he will be entitled to his salary and benefits
as determined in the same manner, but for a period of (a) 18 months in the event
of a termination prior to a change in control of the bank or (b) two years in
the event of a termination after a change in control of the bank.
The bank's obligations under its employment agreements with Mr. Strangfeld
and Mr. Faix also are guaranteed by 1st Colonial.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of stock
options during the fiscal year ended December 31, 2003 to our named executive
officers.
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO PER SHARE
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED(1)(2) FISCAL YEAR(3) BASE PRICE(2)(4) DATE
---- ------------- -------------- ---------------- ----
Gerard M. Banmiller 5,513 (5) 50.0% $ 7.83 January 14, 2013
President and Chief
Executive Officer
James E. Strangfeld 3,308 (5) 30.0% $ 7.83 January 14, 2013
Executive Vice
President
Robert C. Faix 1,103 (5) 10.0% $ 7.83 January 14, 2013
Senior Vice
President and Chief
Financial Officer
----------
(1) Amounts represent securities underlying incentive stock options under the
Bank's Employee Stock Option Plan. In April 2003, this plan was terminated
and replaced by the 1st Colonial Bancorp, Inc. Employee Stock Option Plan.
The termination of the Bank's plan does not effect any options that were
outstanding at the time of such termination.
(2) Reflects adjustments resulting from the 5% stock dividend paid on April
15, 2003 to shareholders of record on April 1, 2003, and the 5% stock
dividend paid on April 15, 2004 to shareholders of record on April 1,
2004.
(3) 1st Colonial Bancorp, Inc does not have any employees. This percentage
reflects the grant as a percentage of the total options granted to
employees of the Bank, but does not include options to purchase 16,149
shares granted in fiscal year 2003 to directors of 1st Colonial Bancorp
and the Bank who are not employees.
(4) The exercise price per share is equal to the fair market value on the date
the option was granted. The exercise price may be paid in cash, or upon
the approval of the Stock Option Plan Committee, in shares of common stock
valued at their fair market value on the date of exercise, or in a
combination of cash and stock.
(5) Options will vest and become exercisable in five equal annual installments
commencing on the first anniversary of the date of grant and continuing on
each successive anniversary of such date. Notwithstanding the foregoing,
in the event of a "change in control" of the Bank, all outstanding options
become exercisable in three equal annual installments
79
commencing on the first anniversary of the date of grant and continuing on
each successive grant date anniversary. If the optionee's employment
terminates due to retirement, death or disability, the optionee or his
legal representative may exercise the option until the earlier of the
expiration of the term of the option or three months after the termination
of employment. If the optionee's employment is terminated for any reason
except retirement, death or disability, all options terminate on the date
employment is terminated, unless the Stock Option Plan Committee permits
the optionee to exercise the option until the earlier of the expiration of
the term of the option or three months after the termination of
employment.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No options were exercised during the year ended December 31, 2003 by our
named executive officers. The following table sets forth the aggregate options
to purchase shares of common stock held by our named executive officers at
December 31, 2003, separately identifying exercisable and unexercisable options,
and the aggregate dollar value of in-the-money unexercised options, separately
identifying exercisable and unexercisable options.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT 12/31/03 (1) OPTIONS AT 12/31/03 (2)
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Gerard M. Banmiller........... 9,240 15,976 $35,383 $169,824
James E. Strangfeld........... 4,099 8,650 14,986 92,254
Robert C. Faix................ 713 2,712 1,630 29,078
----------
(1) Reflects adjustments resulting from the 10% stock dividend paid on January
15, 2002, the 5% stock dividend paid on April 15, 2003, and the 5% stock
dividend paid on April 15, 2004.
(2) Based upon the mean between the bid and asked prices of our common stock
of $10.89 per share on December 31, 2003 less the exercise price of the
options (in each case, as adjusted to reflect the 5% stock dividend paid
in April 2004).
INDEBTEDNESS OF MANAGEMENT
The bank offers various types of loans to its directors, officers, and
employees. Pursuant to applicable Federal law, any loan made by the bank to a
director, officer, employee or other affiliate is made on substantially the same
terms and conditions available to non-related borrowers (in particular as to
interest rate and collateral). In addition, applicable Federal law requires that
the risk of nonpayment not be greater than the risk of nonpayment on loans to
non-related borrowers, and that the loan must be approved by a majority of the
full Board of Directors, with the loan applicant not voting or influencing the
vote.
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TRANSACTIONS WITH RELATED PERSONS
Certain directors and officers of the bank are customers of the bank
during the year ended December 31, 2003, had banking transactions with the bank
in the ordinary course of business. Similar transactions may be expected to
occur in the future. All loans and commitments to loan were made under
substantially the same terms, including interest rates, collateral, and
repayment terms, as those prevailing at the time for comparable transactions
with other persons and, in the opinion of bank's management, do not involve more
than the normal risk of collection or present other unfavorable features. The
aggregate amount of loans to such related parties was $1,443,000 and $406,000 at
December 31, 2003 and 2002, respectively. During 2003 and 2002, new loans and
credit line advances to such related parties amounted to $1,436,000 and
$517,000, respectively, and repayments amounted to $399,000 and $983,000,
respectively. The aggregate amount of deposits from related parties was
$7,216,000 and $10,515,000 at December 31, 2003 and 2002, respectively.
The bank retained an entity that is affiliated with John J. Donnelly IV, a
director of the bank, to perform certain property inspection services and branch
renovations. The total amount paid by the bank for such services amounted to
fees of $86,000, $110,000 and $1,000 for the years ended December 31, 2003, 2002
and 2001, respectively. Such fees were capitalized as premises and equipment.
Mr. Donnelly's company was selected by the bank pursuant to a competitive
bidding process involving other general contractors.
The bank engages a law firm that is affiliated with Thomas A. Clark III, a
director of the Bank, for certain debt collection services. Total fees for such
services amounted to $9,000, $7,000 and $0 for the years ended December 31,
2003, 2002 and 2001, respectively. The terms of the services provided were
substantially equivalent to that which would have been obtained from
unaffiliated parties.
Any future transactions between 1st Colonial and any of its officers or
directors, or any holder of five percent or more of its outstanding common
stock, will be on terms no less favorable to 1st Colonial than it could obtain
from third parties.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide that we will indemnify our directors and officers to
the maximum extent permitted by Pennsylvania law. Pennsylvania law provides that
a Pennsylvania corporation may indemnify directors, officers, employees and
agents of the corporation against liabilities they may incur in such capacities
for any action taken or failure to act, whether or not the corporation would
have the power to indemnify the person under any provision of law, unless such
action or failure to act is determined by a court to have constituted
recklessness or willful misconduct. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to our directors and
officers pursuant to the foregoing provisions or otherwise, we have been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in that Act, and is
therefore unenforceable.
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DESCRIPTION OF OUR SECURITIES
COMMON STOCK
GENERAL
Our authorized capital consists of 5,000,000 shares of common stock, no
par value. Except as described below, each share of common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock.
Voting Rights. Prior to the issuance of any preferred stock which
possesses voting rights, the holders of the common stock will possess exclusive
voting rights in 1st Colonial. Except for the limitation on the right of a
person or group acting in concert to vote shares with voting power in excess of
10%, each holder of shares of common stock is entitled to one vote for each
share held on matters upon which shareholders have the right to vote.
Shareholders are not entitled to cumulate their votes for the election of
directors. See "Certain Restrictions on Acquisition of 1st Colonial" below.
Dividends. Under the Pennsylvania Business Corporation Law, we may only
pay dividends if solvent and if payment of such dividend would not render us
insolvent. Funds for dividend distribution must initially come from dividends
paid to us by the bank, so that the restrictions on the bank's ability to pay
dividends are indirectly applicable to us. The bank's ability to pay dividends
is restricted by certain regulations. See "Supervision and Regulation -- Limits
on Dividends."
We presently intend to continue our policy of retaining earnings for the
foreseeable future to support our growth. Accordingly, we do not anticipate
paying cash dividends to shareholders for the foreseeable future.
Preemptive Rights; Redemption. Holders of our common stock are not
entitled to preemptive rights with respect to any shares of common stock that
may be issued in the future. The common stock will not be subject to redemption.
Upon receipt by us of the full specified purchase price for the common stock,
such common stock will be fully paid and nonassessable.
Liquidation. In the event of our liquidation, dissolution, or winding up,
after payment of all of our debts and liabilities and payment of any liquidation
preference plus accrued dividends applicable to any outstanding shares of
preferred stock, the holders of common stock would be entitled to receive all
assets available for distribution in cash or in kind.
Transfer. Shares of common stock are freely transferable except for shares
that are held by affiliates. Those shares may be transferred in accordance with
the requirements of Rule 144 of the Securities Act of 1933.
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WARRANTS
GENERAL
The bank issued warrants to purchase its common stock in 2000, and these
warrants have since become warrants to purchase the common stock of 1st
Colonial. In 2002, we issued additional warrants to purchase our common stock as
part of a common stock and warrant offering. In general, any warrant not
exercised on or before its expiration date will expire and will no longer be
exercisable. Further, the holders of these warrants do not have the rights and
privileges of holders of common stock.
Warrants may be exercised in whole or in part, but no fractional shares of
common stock will be issued upon exercise of the warrant. If less than all of
the warrants evidenced by the warrant agreement or certificate are exercised, a
new warrant agreement or certificate will be issued for the remaining number of
warrants. The number of shares purchasable upon exercise and the exercise price
of each warrant will be proportionately adjusted upon the occurrence of certain
events, including stock dividends, stock splits, reclassification and
reorganizations.
WARRANTS ISSUED IN 2000
Warrants were issued to the bank's underwriter in connection with the
bank's initial public offering of common stock in June 2000. These warrants are
held by the selling shareholders, and entitle them to purchase 97,024 shares of
1st Colonial common stock at a purchase price of $9.56 per share. These warrants
are exercisable until June 29, 2005. These warrants are evidenced by written
agreements between the bank and the holders of the warrants.
WARRANTS ISSUED IN 2002
Each outstanding warrant issued in connection with our common stock and
warrant offering in 2002 entitles the holder to purchase one share of common
stock at a purchase price of $8.71 per share until the expiration of the
warrants on December 16, 2005. These warrants have been registered under the
Securities Act of 1933 and are freely tradable without the common stock, and
upon exercise of these warrants, the common stock issued would be freely
tradable as well. Currently, there is no public trading market for these
warrants.
Any warrant not exercised on or before the expiration date shall expire
and thereafter will not be exercisable. Warrant holders do not have the rights
and privileges of holders of common stock.
Each of the 2002 warrants is evidenced by a certificate indicating the
total number of shares for which the warrant is exercisable. The warrant
certificate provides that 1st Colonial and the Warrant Agent may, without the
consent of the warrant holders, make changes in the warrant agreement that are
required by reason of any ambiguity, manifest error or other mistake in the
warrant agreement or warrant certificate, or that do not adversely affect or
change the interest of the holders of the warrants.
Warrant certificates may be exercised or transferred by presenting them at
the office of the warrant agent, StockTrans, Inc. Each warrant may be exercised
by surrendering the warrant
83
certificate, with the form of election to purchase on the reverse side properly
completed and executed, together with payment of the exercise price to the
warrant agent. The warrants may be exercised in whole or in part, but no
fractional shares of common stock will be issued upon exercise of the warrant.
If less than all of the warrants evidenced by the warrant certificate are
exercised, a new warrant certificate will be issued for the remaining number of
warrants. The number of shares purchasable upon exercise and the exercise price
of each warrant will be proportionately adjusted upon the occurrence of certain
events, including stock dividends, stock splits, reclassification and
reorganizations. The warrants are governed by our warrant agreement with the
warrant agent, a copy of which has been filed with the SEC (See "Where You Can
Find Additional Information").
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the common stock and the warrant agent for the
warrants is StockTrans, Inc. with offices at 44 West Lancaster Avenue, Ardmore,
Pennsylvania 19003.
CERTAIN RESTRICTIONS ON ACQUISITION OF 1ST COLONIAL
Our articles of incorporation and bylaws contain numerous provisions that
are intended to encourage potential acquirors to negotiate directly with the
Board of Directors, but which also may deter a non-negotiated tender or exchange
offer for our stock or a proxy contest for control of 1st Colonial. Certain
provisions of Federal and Pennsylvania law may also discourage nonnegotiated
takeover attempts or proxy contests. In addition, the terms of the bank's
employment agreements with our executive officers (see "Management -- Employment
Agreements") may also be viewed as having the effect of discouraging such
efforts. These provisions may also serve to entrench existing management. These
provisions may also deter institutional interest in and ownership of our stock
and, accordingly, may depress the market price for, and liquidity of, our stock.
The following is a description of such provisions and their purpose and
possible effects. The Board of Directors does not presently intend to propose
additional anti-takeover provisions for the Articles of Incorporation or bylaws
in the future. Because of the possible adverse effect such provisions may have
on shareholders, this discussion should be read carefully.
FEDERAL REGULATORY PROVISIONS
Under the Federal Change in Bank Control Act (the "Control Act"), a 60-day
prior written notice must be submitted to the Board of Governors of the Federal
Reserve System (FRB) if any person, or any group acting in concert, seeks to
acquire 10% or more of any class of outstanding voting securities of 1st
Colonial, unless the FRB determines that the acquisition will not result in a
change of control of 1st Colonial. Under the Control Act, the FRB has 60 days
within which to act on such notice, taking into consideration certain factors,
including the financial and managerial resources of the acquiror, the
convenience and needs of the community served by the bank holding company and
its subsidiary banks and the antitrust effects of the acquisition. Under the
Bank Holding Company Act, a company is generally required to obtain prior
approval of the FRB before it may obtain control of a bank holding company.
Control is
84
generally described to mean the beneficial ownership of 25% or more of all
outstanding voting securities of a company.
PENNSYLVANIA FIDUCIARY DUTY PROVISIONS
The Pennsylvania Business Corporation Law provides as follows:
- the Board of Directors can consider, in determining whether a
certain action is in the best interests of the corporation,
(1) the effects of any action upon any or all groups affected
by such action, including shareholders, employees, suppliers,
customers and creditors of the corporation, and upon
communities in which offices or other establishments of the
corporation are located, (2) the short-term and long-term
interests of the corporation, including benefits that may
accrue to the corporation from its long-term plans and the
possibility that these interests may be best served by the
continued independence of the corporation, (3) the resources,
intent and conduct (past, stated and potential) of any person
seeking to acquire control of the corporation, and (4) all
other pertinent factors;
- the Board of Directors need not consider the interests of any
particular group as dominant or controlling;
- directors, in order to satisfy the presumption that they have
acted in the best interests of the corporation, need not
satisfy any greater obligation or higher burden of proof with
respect to actions relating to an acquisition or potential
acquisition of control;
- actions relating to acquisitions of control that are approved
by a majority of "disinterested directors" are presumed to
satisfy the directors' standard unless it is proven by clear
and convincing evidence that the directors did not assent to
such action in good faith after reasonable investigation; and
- the fiduciary duty of directors is solely to the corporation
and may be enforced by the corporation or by a shareholder in
a derivative action, but not by a shareholder directly.
The Pennsylvania Business Corporation Law explicitly provides that the
fiduciary duty of directors shall not be deemed to require directors to act as
the board of directors, a committee of the board or an individual director
solely because of the effect such action might have on an acquisition or
potential or proposed acquisition of control of the corporation or the
consideration that might be offered or paid to shareholders in such an
acquisition. One of the effects of these fiduciary duty provisions may be to
make it more difficult for a shareholder to successfully challenge the actions
of our Board of Directors in a potential change in control context. Pennsylvania
case law appears to provide that the fiduciary duty standard under the
Pennsylvania Business Corporation Law grants directors the statutory authority
to reject or refuse to consider any potential or proposed acquisition of the
corporation.
85
OTHER PROVISIONS OF PENNSYLVANIA LAW.
The Pennsylvania Business Corporation Law also contains provisions
applicable to us that may have the effect of impeding a change in control. These
provisions:
- prohibit for five years, subject to certain exceptions, a
"business combination," which includes a merger or
consolidation or a sale, lease or exchange of assets, with a
shareholder or group of shareholders beneficially owning 20%
or more of a public corporation's voting power;
- prevent a shareholder acquiring different levels of voting
power (20%, 33% and 50%) from voting any shares in excess of
the applicable threshold unless disinterested shareholders
approve such voting rights; and
- require any person or group that publicly announces that it
may acquire control of the corporation, or that acquires or
publicly discloses an intent to acquire 20% or more of the
voting power of the corporation, to disgorge to the
corporation any profits it receives from sales of the
corporation's equity securities purchased over the prior 18
months.
ANTITAKEOVER PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
1. Prohibition of Ownership and Voting of Shares in Excess of 10%. Our
articles of incorporation impose limitations upon the ability of certain
shareholders and groups of shareholders to acquire or vote shares of our stock.
The articles of incorporation prohibit any person (whether an individual,
company or "group acting in concert") from acquiring "voting control." Voting
control is generally defined as the beneficial ownership at any time of shares
with more than 10% of the total voting power of our outstanding capital stock.
These provisions do not apply to the purchase of shares by an underwriter in
connection with a public offering. A "group acting in concert" includes persons
seeking to combine or pool their voting power or other interests in common stock
for a common purpose. Such a group does not include actions by the Board of
Directors acting solely in their capacity as the Board.
Under this provision, shares of common stock, if any, owned in excess of
10% will be treated as "excess shares." In general, all shares of common stock
deemed to be excess shares will not be entitled to vote on any matter or take
other shareholder action. For purposes of determining the voting rights of other
shareholders, excess shares are essentially treated as no longer outstanding. As
a result, where excess shares are present, other shareholders will realize a
proportionate increase in their voting power, but this 10% voting restriction
shall not be applicable to other shareholders if their voting power increases
above 10% as a result of application of this rule to another shareholder.
The potential effect of this voting rights limitation is significant. Any
person or group acting in concert owning more than 10% of the outstanding common
stock will generally be unable to exercise voting rights proportionate to their
equity interest. When operating in conjunction with other provisions in our
Articles of Incorporation, particularly the provision requiring the affirmative
vote of the holders of 80% of the voting power of the corporation on
86
certain matters, the practical effect of the limitation on voting rights may be
to render it virtually impossible for any one shareholder or group acting in
concert to determine the outcome of any such vote.
The 10% voting rights limitation may make it extremely difficult for any
one person or group of affiliated persons to acquire voting control of 1st
Colonial, with the result that it may be extremely difficult to bring about a
change in the Board of Directors or management. This provision may have the
effect of discouraging holders of large amounts of shares from purchasing
additional shares, or would be holders who may desire to acquire enough shares
to exercise control from purchasing any shares. As a result, this may have an
adverse effect on the liquidity and market price of our common stock.
2. "Classified" Board of Directors. Our articles of incorporation provide
for a "classified" Board of Directors of between seven (7) and twenty-five (25)
members, which number is fixed by the Board of Directors, divided into three
classes, serving for terms currently expiring in 2004, 2005, and 2006,
respectively, and after such terms, for successive terms of three years each. In
the event of a Board vacancy, the articles of incorporation provide that the
sole power to fill such vacancy is vested in the Board of Directors, and any
such new director will serve out the full term of the former director. This
provision is designed to assure experience, continuity, and stability in the
Board's leadership and policies. The Board of Directors believes that this can
best be accomplished by electing each director to a three-year term and electing
only approximately one-third of the directors each year.
The election of directors for staggered terms significantly extends the
time required to make any change in control of the Board of Directors and may
tend to discourage any surprise or non-negotiated takeover bid for control of
1st Colonial. Under the articles of incorporation, it would take at least two
annual meetings for holders of a majority of 1st Colonial's voting securities to
make a change in control of the Board of Directors because only a minority
(approximately one-third) of the directors will be elected at each meeting. In
addition, because certain actions require more than majority approval of the
Board, it may take as many as three annual meetings for a controlling block of
shareholders to obtain complete control of the Board.
This provision may tend to perpetuate present management because of the
additional time required to change control of the Board. Because the provision
will increase the amount of time required for a takeover bidder to obtain
control without the cooperation of the Board even if the takeover bidder were to
acquire a majority of our outstanding stock, it may tend to discourage certain
tender offers, perhaps including some tender offers that the shareholders may
believe would be in their best interests. The classified Board provision applies
to all elections of directors and, accordingly, makes it more difficult for
shareholders to change the composition of the Board if the shareholders believe
such a change is desirable, even in the absence of any third party's acquisition
of voting control. This is especially true in light of the denial of cumulative
voting described below.
3. No Cumulative Voting. Cumulative voting entitles a shareholder to
multiply the number of votes to which the shareholder is entitled by the number
of directors to be elected, with the shareholder being able to cast all such
votes for a single nominee or distribute them among the nominees as such
shareholder sees fit. The Pennsylvania Business Corporation Law
87
provides that shareholders are entitled to cumulate their votes for the election
of directors, unless a corporation's articles of incorporation provide
otherwise.
Cumulative voting is specifically prohibited in the articles of
incorporation because we believe that each director should represent and act in
the interest of all shareholders and not any special shareholder or group of
shareholders. In light of current acquisition techniques and activity, minority
representation could be disruptive and could impair efficient management of our
company. In addition, the absence of cumulative voting will also tend to deter
"greenmail," in which a substantial minority shareholder uses his holdings as
leverage to demand that a corporation purchase such shareholder's shares at a
significant premium over the market value of such stock to prevent such
shareholder from obtaining or attempting to obtain a seat on the Board of
Directors. In the absence of cumulative voting, a majority of the votes cast in
any election of directors can elect all of the directors of the class in any
given year.
The absence of cumulative voting, coupled with a classified Board of
Directors, may also deter a proxy contest designed either to win representation
on the Board of Directors or to remove management because a group or entity
owning less than a majority of the voting stock may be unable to elect a single
director. Although this may tend to make removal of incumbent management more
difficult, the Board of Directors believes that deterring proxy contests will
avoid the significant cost, in terms of money and management's time, incurred in
opposing such actions.
4. Preferred Stock. Our articles of incorporation authorize the issuance
of up to 1,000,000 shares of preferred stock and empower the Board of Directors
to issue such shares as a class or in one or more series, with such voting,
dividend, redemption, sinking fund, conversion, exchange, liquidation and other
rights as shall be determined by the Board of Directors, without shareholder
approval.
We have no agreements, commitments or plans for the sale or other use of
the shares of preferred stock. We believe that having preferred stock authorized
provides flexibility in enabling us to respond promptly should opportunities
arise involving the raising of capital, acquisitions, stock distributions, and
other proper corporate purposes.
Although we presently intend to use the preferred stock for the purposes
set forth above, if there is a merger, proposal, tender offer or other attempt
to gain control of 1st Colonial that our Board of Directors does not approve, it
would be possible for the Board of Directors to authorize the issuance of a
series of preferred stock with rights and preferences that would impede
completion of the proposed transaction. This would tend to perpetuate incumbent
management. Therefore, a possible effect of the provision would be to deter a
future takeover attempt that the Board of Directors considers contrary to the
best interests of all shareholders, but which some, or even a majority, of the
shareholders might deem to be in their best interests.
5. Nominations for Directors and Shareholder Proposals. Our bylaws require
that nominations for the election of directors made by shareholders (as opposed
to those made by the Board of Directors) and any shareholder proposals for the
agenda at any annual meeting generally must be made by written notice delivered
or mailed to the Secretary not less than 90 days (and in the case of proposals
not more than 150 days) prior to the meeting of shareholders at
88
which directors are to be elected or the proposal is to be considered. In the
case of director nominations, such notice must set forth, among other things,
the name, age, address, principal occupation or employment of each such nominee,
the number of shares of common stock that are owned by such nominee and the
length of time such nominee has been a shareholder. In the case of shareholder
proposals, such notice must set forth a brief description of the business
desired to be brought before the annual meeting. Nominations and proposals not
made in accordance with this procedure will be disregarded.
We believe that this procedure assures that shareholders will have an
adequate opportunity to consider the qualifications of all nominees for
directors and permit the shareholders' meetings to be conducted in an orderly
manner. It may have the effect, however, of deterring nominations other than
those made by the Board of Directors.
6. Mergers, Sale of Assets, Liquidation Approval. Our articles of
incorporation provide that any merger, consolidation, sale of assets or similar
transaction involving 1st Colonial requires the affirmative vote of shareholders
entitled to cast at least 80% of the votes which all shareholders are entitled
to cast, unless the transaction is approved in advance by 66 2/3% of the members
of the Board of Directors. If the transaction is approved in advance by 66 2/3%
of the members of the Board of Directors, approval by the affirmative vote of a
majority of the votes cast by holders of outstanding voting stock at a meeting
at which a quorum was present is required. The Articles of Incorporation also
provide that liquidation or dissolution of 1st Colonial requires the affirmative
vote of shareholders entitled to cast at least 80% of the votes that all
shareholders are entitled to cast, unless such transaction is approved by
66 2/3% of the members of the Board of Directors.
We believe that in a merger or other business combination, the effects on
our employees and the customers and communities we serve might not be considered
by the tender offeror when merging us into an entity controlled by such offeror
as the second part of a two-step acquisition. By requiring approval of a merger
or similar transaction by the affirmative vote of shareholders holding 80% or
more of the combined voting power of our outstanding stock in cases in which the
transaction is not approved in advance by 66 2/3% of the members of the Board of
Directors, it will be extremely difficult for a group or person owning a
substantial block of our stock, after a successful tender or exchange offer, to
accomplish a merger or similar transaction without negotiating an agreement
acceptable to the Board of Directors. Accordingly, the Board of Directors will
be able to protect the interests of the remaining shareholders as well as our
employees and the customers and communities that we serve. If Board approval is
not obtained, the proposed transaction must be on terms sufficiently attractive
to obtain approval by a vote of shareholders holding 80% or more of the combined
voting power of our outstanding capital stock.
The 80% approval requirement, applicable when 66 2/3% of the members of
the Board of Directors have not approved the transaction in advance, could
result in the Board and management being able to exercise a stronger influence
over any proposed takeover by refusing to approve the proposed business
combination and obtaining sufficient votes, including votes controlled directly
or indirectly by management, to preclude the 80% approval requirement.
89
Because this provision tends to discourage certain nonnegotiated takeover
bids and encourages other takeover bidders to negotiate with the Board, it also
tends to assist the Board and, therefore, management in retaining their present
positions. In addition, if the Board does not grant its prior approval, a
takeover bidder may still proceed with a tender offer or other purchases of our
stock, although any resulting acquisition of 1st Colonial may be more difficult
and more expensive. Because of the increased expense and the tendency of this
provision to discourage competitive bidders, any price offered to shareholders
may be lower than if this provision were not present in the Articles of
Incorporation.
7. Qualifications for Directors. Our articles of incorporation provide
that, unless waived by the Board of Directors, a person must be a shareholder of
1st Colonial or the bank for at least three years before he or she can be
elected to the Board of Directors. This provision is designed to discourage
non-shareholders who are interested in buying a controlling interest in 1st
Colonial for the purpose of having themselves elected to the Board, by requiring
them to wait at least three years before being eligible for election. Our bylaws
also provide that, unless waived by a majority of the Board of Directors,
officers, directors, employees, agents and persons who own 5% or more of the
voting securities of any other corporation or other entity that owns 66 2/3% or
more of our outstanding voting stock cannot constitute a majority of the members
of the Board of Directors. The effect of this provision is to prevent a
corporation or other entity that has acquired 66 2/3% or more of our voting
stock from electing a Board of Directors in which its representatives constitute
a majority of the directors.
8. Mandatory Tender Offer by 25% Shareholder. Our articles of
incorporation require any person or entity that has acquired shares of our stock
having a combined voting power of 25% or more of the total voting power of our
outstanding capital stock, to offer to purchase, for cash, all outstanding
shares of our voting stock at a price equal to the highest price paid within the
preceding twelve months by such person or entity for shares of the same class or
series of stock. In the event such person or entity did not purchase any shares
of a particular class or series of stock within the preceding 12 months, the
price per share for such class or series of stock would be the fair market value
of such class or series of stock as of the date on which such person acquired
25% or more of the combined voting power of our outstanding stock. The
provisions would not apply if 80% or more of the members of the Board of
Directors approved in advance an acquisition of our stock with combined voting
power of 25% or more.
The Pennsylvania Business Corporation Law provides that, following any
acquisition by a person or group of more than 20% of a publicly-held
corporation's voting stock, the remaining shareholders have the right to receive
payment, in cash, for their shares from the acquiror of an amount equal to the
fair value of their shares, including a proportionate amount for any control
premium. Our articles of incorporation provide that if provisions of the
respective articles and the Pennsylvania Business Corporation Law both apply in
a given instance, the price per share to be paid will be the higher of the price
per share determined under the provision in the articles or under the
Pennsylvania Business Corporation Law.
Our Board of Directors believes that any person or entity who acquires
control of 1st Colonial in a non-negotiated manner should be required to offer
to purchase all shares of voting stock remaining outstanding after the
assumption of control, at a price not less than the amount paid to acquire the
control position. Under Federal law, a person or entity is deemed to
90
have acquired "control" of a bank or bank holding company when such person or
entity owns 25% or more of the voting stock of such bank or bank holding
company.
A number of companies have been the subject of tender offers for, or other
acquisitions of, 25% or more of their outstanding shares of common stock. In
many cases, such purchases have been followed by mergers in which the tender
offeror or other purchaser has paid a lower price for the remaining outstanding
shares than the price it paid in acquiring its original interest in the company
and has paid in a potentially less desirable form (often securities of the
purchaser that do not have an established trading market at the time of
issuance). The statutory right of the remaining shareholders of a company to
dissent in connection with certain mergers and receive the "fair value" of their
shares in cash may involve significant expense and uncertainty to dissenting
shareholders and may not be meaningful because the appraisal standard to be
applied under Pennsylvania law does not take into account any appreciation in
the stock price due to the merger. This provision in the articles of
incorporation is intended to prevent these potential inequities.
In many situations, the provision would require that a purchaser pay
shareholders a higher price for their shares and/or structure the transaction
differently than might be the case without the provision. Accordingly, we
believe that, to the extent a merger were involved as part of a plan to acquire
control of 1st Colonial, adoption of the provision would increase the likelihood
that a purchaser would negotiate directly with the Board. We further believe
that we are in a better position than the individual shareholders to negotiate
effectively on behalf of all shareholders and that the Board of Directors is
likely to be more knowledgeable than any individual shareholder in assessing the
business and prospects of 1st Colonial. Accordingly, we are of the view that
negotiations between the Board and a would-be purchaser will increase the
likelihood that shareholders, as a whole, will receive a higher average price
for their shares.
The provision will tend to discourage any purchaser whose objective is to
seek control of 1st Colonial at a relatively low price by offering a lesser
value for shares in a subsequent merger than it paid for shares acquired in a
tender or exchange offer. The provision also should discourage the accumulation
of large blocks of shares of our voting stock, which we believe to be disruptive
to the stability of our vitally important relationships with our employees,
customers and communities which we serve, and which could precipitate a change
of control of 1st Colonial on terms unfavorable to the other shareholders.
Tender offers or other private acquisitions of stock are usually made at
prices above the prevailing market price of a company's stock. In addition,
acquisitions of stock by persons attempting to acquire control through market
purchases may cause the market price of the stock to reach levels which are
higher than otherwise would be the case. The provision may discourage any
purchases of less than all of the outstanding shares of our voting stock and may
thereby deprive shareholders of an opportunity to sell their stock at a higher
market price. Because of having to pay a higher price to other shareholders in a
merger, it may become more costly for a purchaser to acquire control of 1st
Colonial. Open market acquisitions of stock may be discouraged by the
requirement that any premium price paid in connection with such acquisitions
would increase the price that must be paid in a subsequent merger. The provision
may therefore decrease the likelihood that a tender offer will be made for less
than all of our
91
outstanding voting stock and, as a result, may adversely affect those
shareholders who would desire to participate in such a tender offer.
9. Prohibition of Shareholders' Action Without a Meeting and of
Shareholders' Right To Call a Special Meeting. Our articles of incorporation
prohibit shareholder action without a meeting (i.e., the written consent
procedure is prohibited) and prohibit shareholders from calling a special
meeting. Therefore, in order for shareholders to take any action, it will
require prior notice, a shareholders' meeting and a vote of shareholders.
Special meetings of shareholders can only be called by the Board of Directors.
Therefore, without the cooperation of the Board, any shareholder will have to
wait until the annual meeting of shareholders to have a proposal submitted to
the shareholders for a vote.
These provisions are intended to provide the Board of Directors and
nonconsenting shareholders with the opportunity to review any proposed action,
express their views and take any necessary action to protect the interests of
such shareholders and 1st Colonial before the action is taken, and to avoid the
costs of holding multiple shareholder meetings each year to consider proposals
of shareholders. These provisions also will preclude a takeover bidder who
acquires a majority of our outstanding stock from completing a merger or other
business combination of 1st Colonial without granting the Board of Directors and
the remaining shareholders an opportunity to make their views known and vote at
an annual shareholders' meeting. The delay caused by the necessity for an annual
shareholders' meeting would allow management to take preventive actions, even if
such actions are not believed by shareholders to be in their best interests.
10. Amendment of Articles of Incorporation. The Pennsylvania Business
Corporation Law provides that the articles of incorporation of a Pennsylvania
business corporation (such as the 1st Colonial) may be amended by the
affirmative vote of a majority of the votes cast by all shareholders entitled to
vote thereon, except as otherwise provided by such corporation's articles of
incorporation. Our articles of incorporation provide that the following
provisions of the articles can only be amended by an affirmative vote of
shareholders entitled to cast at least 80% of all votes which shareholders are
entitled to cast, or by an affirmative vote of 80% of the directors and of
shareholders entitled to cast at least a majority of all votes which
shareholders are entitled to cast:
(1) the provisions requiring 80% shareholder approval of certain
actions;
(2) the provisions establishing a classified board of directors;
(3) the elimination of cumulative voting for directors;
(4) the prohibition on acquiring or voting of more than 10% of the
voting stock;
(5) the prohibition on shareholder action without a meeting;
(6) the prohibition on shareholders calling special meetings;
(7) the requirement that a 25% shareholder purchase of all remaining
shareholders' stock; and
(8) the provisions that no shareholder shall have preemptive rights.
92
On other matters, the articles of incorporation can be amended by an
affirmative vote of a majority of the votes cast by all shareholders entitled to
vote thereon at a meeting at which a quorum is present.
11. Amendment of Bylaws. Generally, our articles of incorporation vest
authority to make and amend the bylaws in the Board of Directors, acting by a
vote of a majority of the entire Board. In addition, except as described below,
shareholders may amend the bylaws by an affirmative vote of the holders 66 2/3%
of the outstanding voting stock. However, the provision of the bylaws concerning
directors' liabilities and indemnification of directors, officers and others may
not be amended to increase the exposure of directors to liability or decrease
the degree of indemnification except by the two-thirds vote of the entire Board
of Directors or 80% of all votes of shareholders entitled to be cast.
This provision is intended to provide for additional continuity and
stability in our policies and governance so as to enable management to carry out
its long range plans for the company. The provision is also intended to
discourage certain nonnegotiated efforts to acquire 1st Colonial, since a
greater percentage of outstanding voting stock will be needed before effective
control over its affairs could be exercised. The Board of Directors will have
relatively greater control over the bylaws than the shareholders because, except
with respect to the director liability and indemnification provisions, the Board
could adopt, alter, amend or repeal the bylaws upon a majority vote by the
directors.
LEGAL MATTERS
The validity of the issuance of the common stock being offered hereby has
been passed upon by Stevens & Lee, Cherry Hill, New Jersey.
EXPERTS
The consolidated statements of financial condition as of December 31, 2003
and 2002, and the consolidated statements of operations, shareholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2003, included in this prospectus supplement, have
been included herein in reliance on the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of that firm as
experts in accounting and auditing.
WHERE YOU CAN OBTAIN MORE INFORMATION
We have filed with the Securities and Exchange Commission Registration
Statement No. 333-92310, as amended, on Form SB-2 under the Securities Act of
1933, with respect to the shares of common stock being offered by this
prospectus supplement. This prospectus supplement, which constitutes a part of
that registration statement, does not contain all the information set forth in
that registration statement. You should review that registration statement and
the exhibits thereto for further information with respect to 1st Colonial and
the shares being offered. Statements in this prospectus supplement about the
contents of any contract or other document are not necessarily complete, and
those statements are qualified in all respects by such reference. The
registration statement, together with exhibits, may be inspected without charge,
93
and copied at prescribed rates at the principal or regional offices of the
Commission at the addresses indicated above. Copies also may be obtained at
prescribed rates from the public reference facilities maintained by the
Commission, at 450 Fifth Street, N.W., Washington, D.C. and can be inspected
without charge and copied at prescribed rates at the Commission's regional
office at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Electronic copies of the Registration Statement can be
viewed at the Commission's Website at http://www.sec.gov.
1st Colonial is subject to the informational requirements of Section 15(d)
of the Securities Exchange Act of 1934, and in accordance therewith, files
reports and other information with the Commission. Such reports and other
information can be inspected without charge and copied at prescribed rates at
the public reference facilities maintained by the Commission at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and at its
regional office located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661. Copies of such material can also be obtained at
prescribed rates from the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, DC 20549 and its public reference facilities in
Chicago, Illinois. Electronic copies can be viewed at the Commission's website
at http://www.sec.gov.
The bank is a wholly owned subsidiary of 1st Colonial. Prior to 1st
Colonial's acquisition of the bank on June 30, 2002, the bank filed periodic and
current reports on Forms 10-KSB, 10-QSB and 8-K with the Office of the
Comptroller of the Currency under Section 13 of the Securities Exchange Act.
Copies of such reports may be obtained promptly and without charge from the bank
by contacting Gerard M. Banmiller, President and Chief Executive Officer, 1st
Colonial National Bank, 1040 Haddon Avenue, Collingswood, New Jersey 08108.
Copies of such documents are also available for inspection or copying at
prescribed rates at the offices of the Comptroller of the Currency, 250 E
Street, S.W., Washington, D.C. 20219.
94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................ F-2
Consolidated Statements of Financial Condition as of December 31, 2003 and 2002........................... F-3
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001................ F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31,
2003, 2002 and 2001................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001................ F-6
Notes to Audited Consolidated Financial Statements........................................................ F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of March 31, 2004 and December 31, 2003 ................ F-36
Consolidated Statements of Operations for the three-months ended March 31, 2004 and 2003.................. F-37
Consolidated Statements of Cash Flows for the three-months ended March 31, 2004 and 2003.................. F-38
Notes to Unaudited Interim Consolidated Financial Statements.............................................. F-39
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
1st Colonial Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of 1st Colonial Bancorp, Inc. and subsidiary (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 the Company
as of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Philadelphia, PA
February 6, 2004
F-2
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks............................................................ $ 6,281 $ 6,156
Federal funds sold................................................................. 9,735 6,005
Interest-bearing deposits.......................................................... 500 --
-------- -------
Cash and cash equivalents.................................................. 16,516 12,161
-------- -------
Investments held to maturity (fair value of $5,796 at December 31, 2003 and
$1,218 at December 31, 2002).................................................... 5,808 1,220
Securities available for sale (amortized cost of $28,107 at December 31, 2003 and
$29,776 at December 31, 2002)................................................. 27,985 29,934
Mortgage loans held for sale....................................................... 281 63
Loans.............................................................................. 66,550 54,198
Less allowance for loan losses................................................ (768) (576)
-------- --------
Net loans.................................................................. 65,782 53,622
Premises and equipment, net........................................................ 935 763
Accrued interest receivable........................................................ 373 341
Deferred tax assets................................................................ 301 181
Other assets....................................................................... 91 35
Total assets....................................................................... $118,072 $98,320
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits........................................................................ $104,323 $82,948
Short-term borrowings........................................................... 4,087 6,033
Accrued interest payable........................................................ 8 10
Income taxes payable............................................................ 48 51
Other liabilities............................................................... 55 76
-------- -------
Total liabilities.......................................................... 108,521 89,118
-------- -------
Shareholders' equity:
Common stock, $0 par value; authorized 5,000,000 shares; issued and
outstanding 1,414,487 shares at December 31, 2003 and 1,410,770 shares at
December 31, 2002............................................................ -- --
Preferred stock, 1,000,000 shares authorized, no shares issued.................. -- --
Additional paid-in capital...................................................... 9,238 8,935
Retained earnings............................................................... 386 166
Accumulated other comprehensive (loss) income................................... (73) 101
-------- -------
Total shareholders' equity................................................. 9,551 9,202
-------- -------
Total liabilities and shareholders' equity......................................... $118,072 $98,320
======== =======
See accompanying notes to consolidated financial statements.
F-3
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest income:
Loans $ 3,769 $ 3,251 $ 1,943
Federal funds sold and interest-bearing deposits 78 176 418
Investments:
Taxable 870 647 810
Nontaxable 47 11 17
---------- ---------- ----------
Total interest income 4,764 4,085 3,188
---------- ---------- ----------
Interest expense:
Deposits 1,203 1,082 1,131
Short-term borrowings 41 83 133
---------- ---------- ----------
Total interest expense 1,244 1,165 1,264
---------- ---------- ----------
Net interest income 3,520 2,920 1,924
Provision for loan losses 225 275 225
---------- ---------- ----------
Net interest income after provision for loan losses 3,295 2,645 1,699
---------- ---------- ----------
Other income:
Service charges on deposit accounts 139 85 47
Gain on sales of mortgage loans held for sale 103 62 46
Other income, service charges, and fees 53 31 11
Gain on sales of securities available for sale 4 24 65
---------- ---------- ----------
Total other income 299 202 169
---------- ---------- ----------
Other expenses:
Compensation and employee benefits 1,175 842 770
Occupancy and equipment expenses 335 218 168
Advertising expense 145 75 58
Data processing expense 275 223 144
Professional services 222 195 118
Other operating expenses 607 470 343
---------- ---------- ----------
Total other expenses 2,759 2,023 1,601
---------- ---------- ----------
Income before income taxes 835 824 267
Income tax expense (benefit) 335 329 (94)
---------- ---------- ----------
Net income $ 500 $ 495 $ 361
========== ========== ==========
Basic earnings per share $ 0.35 $ 0.44 $ 0.35
Diluted earnings per share 0.35 0.43 0.35
Weighted average number of shares outstanding:
Basic earnings per share 1,411,529 1,139,076 1,030,334
Diluted earnings per share 1,446,334 1,143,212 1,033,484
See accompanying notes to consolidated financial statements.
F-4
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
ACCUMULATED
OTHER
COMPRE- TOTAL
ADDITIONAL RETAINED HENSIVE SHARE- COMPRE-
COMMON PAID-IN EARNINGS (LOSS) HOLDER'S HENSIVE
STOCK CAPITAL (DEFICIT) INCOME EQUITY INCOME
------ ------- --------- ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at December 31, 2000......... $ -- $ 5,785 $ (597) $ 114 $ 5,302
Proceeds from private placement of -- 1,122 -- -- 1,122
145,482 common shares...........
Stock split effected in the form of -- 93 (93) -- --
a dividend, 10%.................
Net unrealized loss on securities -- -- -- (16) (16) $ (16)
available for sale, net of tax..
Net income........................... -- -- 361 -- 361 361
-------
Total comprehensive income........... $ 345
------ ---------- --------- ------- -------- =======
Balance at December 31, 2001......... -- 7,000 (329) 98 6,769
Proceeds from sale of 280,475 common -- 1,931 -- -- 1,931
shares in stock offering........
Exercise of director's options....... -- 4 -- -- 4
Net unrealized gain on securities -- -- -- 3 3 $ 3
available for sale, net of tax..
Net income........................... -- -- 495 -- 495 495
-------
Total comprehensive income........... $ 498
------ ---------- --------- ------- -------- =======
Balance at December 31, 2002......... -- 8,935 166 101 9,202
Stock issuance expenses.............. -- (9) -- -- (9)
Exercise of warrants................. -- 32 -- -- 32
Stock dividend....................... -- 280 (280) -- --
Net unrealized loss on securities -- -- -- (174) (174) $ (174)
available for sale, net of tax..
Net income........................... -- -- 500 -- 500 500
-------
Total comprehensive income........... $ 326
------ ---------- --------- ------- -------- =======
Balance at December 31, 2003......... $ -- $ 9,238 $ 386 $ (73) $ 9,551
====== ========== ========= ======= ========
See accompanying notes to consolidated financial statements.
F-5
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income $ 500 $ 495 $ 361
------- -------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 113 90 74
Amortization (accretion) of premium (discount) on securities, net 173 19 (32)
Amortization of deferred fees/cost, net 41 10 7
Gain on sales of mortgage loans held for sale (103) (62) (46)
Gain on sales of securities available for sale (4) (24) (65)
Loss on fixed asset retirements 19 -- --
Provision for loan losses 225 275 225
Cash disbursed for mortgage banking activities (21,771) (12,784) (9,840)
Cash received for mortgage banking activities 21,656 12,965 9,704
Increase in accrued interest receivable (32) (11) (84)
Deferred income tax benefit (14) (19) (219)
(Increase) decrease in other assets (56) 26 (17)
(Decrease) increase in accrued interest payable (2) (20) 21
(Decrease) increase in income taxes payable (3) (74) 125
Decrease in other liabilities (21) (48) (6)
------- -------- -------
Total adjustments 221 343 (153)
------- -------- -------
Net cash provided by operating activities 721 838 208
------- -------- -------
Cash flows from investing activities:
Proceeds from maturities and sales of securities available for sale 28,129 21,714 9,525
Proceeds from maturities of securities held to maturity 1,220 931 --
Purchases of securities held to maturity (5,808) (935) (1,216)
Purchases of securities available for sale (31,665) (35,344) (17,180)
Repayment of principal of securities available for sale 5,036 893 568
Increase in loans receivable, net (12,426) (17,646) (22,310)
Capital expenditures (304) (411) (80)
------- -------- -------
Net cash used in investing activities (15,818) (30,798) (30,693)
------- -------- -------
Cash flows from financing activities:
Net increase in deposits 21,375 15,683 43,971
Net (decrease) increase in short-term borrowings (1,946) 573 3,467
Issuance of common stock, net 23 1,935 1,122
------- -------- -------
Net cash provided by financing activities 19,452 18,191 48,560
------- ------ -------
Net increase (decrease) in cash and cash equivalents 4,355 (11,769) 18,075
Cash and cash equivalents at beginning of year 12,161 23,930 5,855
------- -------- -------
Cash and cash equivalents at end of year $16,516 $ 12,161 $23,930
======= ======== =======
Supplemental disclosures:
Cash paid during the year for:
Interest $ 1,242 $ 1,185 $ 1,243
Income taxes 350 346 219
Noncash items:
Net change in unrealized gains on available for sale securities, net
of taxes of $106 for 2003, $8 for 2002 and ($65) for 2001 (174) 3 (16)
Issuance of stock dividend 280 -- 93
See accompanying notes to consolidated financial statements.
F-6
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(1) NATURE OF OPERATIONS
1st Colonial Bancorp, Inc. (the Company) is a Pennsylvania corporation
headquartered in Collingswood, New Jersey, and the parent company of 1st
Colonial National Bank (the Bank). The Bank opened for business on June 30,
2000, and provides a wide range of business and consumer financial services
through its two New Jersey branch offices located in Collingswood and Westville.
The Company was organized as the holding company for the Bank, in
connection with the reorganization approved by the Bank's shareholders at the
annual meeting on June 12, 2002. As a bank holding company registered under the
Bank Holding Company Act of 1956, the Company is subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System (the FRB).
The Bank is a national bank whose deposits are insured by the Bank Insurance
Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). The Company's
operations and those of the Bank are subject to supervision and regulation by
FRB, the FDIC, and the Office of the Comptroller of the Currency (OCC). The
principal activity of the Bank is to provide its local communities with general
commercial and retail banking services. The Bank is managed as one business
segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent
company, 1st Colonial Bancorp, Inc., and its wholly owned subsidiary, 1st
Colonial National Bank.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 income and expenses during the reporting period. Actual results
could differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, interest-bearing deposits (including
certificates of deposit with original terms of three months or less), and
federal funds sold. Generally, federal funds sold are repurchased the
following day.
F-8
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(d) INVESTMENTS HELD TO MATURITY
Debt securities that management has the positive intent and ability
to hold until maturity are classified as held to maturity and are carried
at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted
using a method that produces results that approximate level yield over the
estimated remaining term of the underlying security.
(e) SECURITIES AVAILABLE FOR SALE
Securities not classified as held to maturity are classified as
available for sale and are stated at fair value. Unrealized gains and
losses are excluded from earnings and are reported as accumulated other
comprehensive (loss) income, net of tax, a separate component of
shareholders' equity, until realized. Gains and losses are determined
using the specific-identification method and are accounted for on a
trade-date basis.
(f) MORTGAGE LOANS HELD FOR SALE
The Bank originates and sells residential mortgage loans (without
recourse) servicing released to the secondary market. This activity enables
the Bank to fulfill the credit needs of the community while reducing its
overall exposure to interest rate and credit risk. These loans are reported
at the lower of their cost or fair market value.
(g) LOANS
Loans are stated at the principal amount outstanding, net of
deferred loan fees and costs. Interest income is accrued on the principal
amount outstanding. Loan origination fees and related direct costs are
deferred and amortized to interest income over the term of the respective
loan as a yield adjustment.
Loans are reported as nonaccrual if they are past due as to
principal or interest payments for a period of 90 days or more. Exceptions
may be made if a loan is deemed by management to be well collateralized and
in the process of collection. Loans that are on a current payment status may
also be classified as nonaccrual if there is serious doubt as to the
borrower's ability to continue interest or principal payments. When a loan
is placed in the nonaccrual category, interest accruals cease and
uncollected accrued interest receivable is reversed and charged against
current interest income. Nonaccrual loans are generally not returned to
accruing status until principal and interest payments have been brought
current and full collectibility is reasonably assured. Impaired loans are
measured based on the present value of expected future discounted cash
flows, the market price of the loan, or the fair value of the underlying
collateral if the loan is collateral dependent. For purposes of applying the
measurement criteria for impaired loans, the Bank excludes large groups of
smaller balance homogeneous loans, primarily
F-9
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
consisting of residential real estate and consumer loans, as well as
commercial loans with balances of less than $100,000. The recognition of
interest income on impaired loans is the same as for nonaccrual loans
discussed above.
(h) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflects management's best estimate of
losses, both known and inherent, in the existing loan portfolio. Management
uses significant estimates to determine the allowance for loan losses.
Management's estimates consider such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
borrowers' ability to pay. The provision for loan losses charged to
operating expenses represents the amount necessary to maintain an
appropriate allowance. Loan losses are charged directly against the
allowance for loan losses when loans are determined to be uncollectible.
Recoveries on previously charged-off loans are added to the allowance when
received.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They may
require additions to the allowance based upon their judgments about
information available to them at the time of examination.
(i) PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the expected useful lives of the assets. Amortization of leasehold
improvements is computed using the straight-line method over the shorter
of the useful lives or the remaining lease term. Software costs,
furniture, and equipment have depreciable lives of 3 to 10 years. Building
and improvements have estimated useful lives of 30 years. The costs of
maintenance and repairs are expensed as they are incurred, and renewals
and betterments are capitalized.
(j) OTHER REAL ESTATE OWNED
Other real estate owned would be comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Other real estate owned is recorded at the lower of the carrying value of
the loan or the fair value of the property, net of estimated selling
costs. Costs relating to the development or improvement of properties are
capitalized, while expenses related to the operation and maintenance of
properties are expensed as incurred. Gains or losses upon dispositions are
reflected in earnings as realized. The Bank had no real estate owned at
December 31, 2003 and 2002.
F-10
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(k) EARNINGS PER SHARE
Basic earnings per share is calculated as net income divided by the
weighted average number of shares outstanding. Dilutive earnings per share
includes dilutive common stock equivalents as computed under the treasury
stock method using average common stock prices. Share and per-share data
for all periods presented have been restated to reflect the 10% stock
dividend paid on January 15, 2002 and the 5% stock dividend paid on April
15, 2003 and 5% stock dividend paid on April 15, 2004 to shareholders of
record on April 1, 2004.
(l) INCOME TAXES
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, as well as operating loss carryforwards. 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. A valuation allowance is established
against deferred tax assets when, in the judgment of management, it is
more likely than not that such deferred tax assets will not become
available.
(m) STOCK OPTIONS
As of December 31, 2003, the Company had four stock-based compensation
plans, which are described more fully in note 19. The Company accounts for
those plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation (dollars in thousands,
except per-share amounts).
F-11
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
DILUTIVE
BASIC EARNINGS EARNINGS PER
NET INCOME PER SHARE SHARE
---------- --------- -----
2003:
As reported.............................. $ 500 0.35 0.35
Compensation expense (102) (0.07) (0.07)
---------- ----- -----
Pro forma $ 398 0.28 0.28
========== ===== =====
2002:
As reported.............................. $ 495 0.44 0.43
Compensation expense..................... (44) (0.04) (0.04)
---------- ----- -----
Pro forma................................ $ 451 0.40 0.39
========== ===== =====
2001:
As reported.............................. $ 361 0.35 0.35
Compensation expense..................... (29) (0.03) (0.03)
---------- ----- -----
Pro forma................................ $ 332 0.32 0.32
========== ===== =====
(n) RECENT ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring).
The provisions of SFAS No. 146 are to be applied prospectively for
exit or disposal activities that are initiated after December 31, 2003, with
early application encouraged. The adoption of SFAS No. 146 did not have an
impact on the Company's earnings, financial condition, or equity.
Guarantor's Accounting and Disclosure Requirements for Guarantees
During 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others, was issued. Interpretation No. 45 requires a guarantor
to include disclosure of certain obligations, and if applicable, at the
inception of the guarantee, recognize a liability for the fair value of other
certain obligations undertaken in issuing a guarantee. The recognition
requirement is effective for guarantees issued or modified after December 31,
2003. Adoption of Interpretation No. 45 did not have an impact on the Company's
earnings, financial condition, or equity.
F-12
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Consolidation of Variable Interest Entities
In December 2003, the Financial Accounting Standards Board (FASB)
issued a revised FASB Interpretation No. 46, Consolidated of Variable Interest
Entities (FIN 46R). This interpretation addresses how a business should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. FIN 46R
replaced FASB interpretation No. 46, Consolidated of Variable Interest Entities,
which was originally issued in January 2003. FIN 46R will be applied to variable
interest entities created after December 13, 2003.
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. With some
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the
Company's earnings, financial condition, or equity.
Financial Instruments with Debt and Equity Characteristics
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of SFAS No. 150 did not have an impact on the
Company's earnings, financial condition, or equity.
Accounting for Temporary Impairment and Its Application to Certain
Investments
In November 2003, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary and Its Application to
Certain Investments. The requirements apply to investments in debt and
marketable equity securities that are accounted under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and to investments by
not-for-profit entities accounted for under SFAS No. 124, Accounting for Certain
Investments Held by Not-for-Profit Organizations, and the requirements apply
only to annual
F-13
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
financial statements. The additional disclosures required by EITF Issue No. 03-1
include the following items: the amount of unrealized losses and related fair
market values of investment securities, the nature of the investment securities,
the number of investment securities that are in an unrealized position, the
severity and during of the impairments, the cause of impairments, and a
conclusion as to whether any of the unrealized losses represent an
other-than-temporary impairment. As a result of the implementation of EITF Issue
No. 03-1, the Company's disclosures related to investment securities have been
modified.
(3) COMMON STOCK OFFERING
On December 20, 2002, the Company completed its public offering of units
of common stock and warrants. In the offering, the Company sold 254,399 units at
an offering price of $8.50 per unit. Each unit consisted of one share of common
stock and a warrant to purchase an additional share of common stock during the
next three years at a purchase price of $9.60 per share. After giving effect to
the 5% stock dividend paid in April 2003 and the 5% stock dividend paid in April
2004, the Company issued in this offering 280,475 shares of common stock and
warrants to acquire 280,475 shares of common stock at an exercise price of $8.71
per share. The Company raised net proceeds of $1.93 million in the offering.
These proceeds are being used to fund, among other things, the continued growth
of the Bank, including the establishment of additional branches.
(4) COMMON STOCK DIVIDENDS
On November 19, 2003, the Company declared a 5% stock dividend to all
shareholders of record as of April 1, 2004 payable on April 15, 2004.
On April 15, 2003, the Company paid a 5% stock dividend to all
shareholders of record as of April 1, 2003. On January 15, 2002 the Company paid
a 10% stock dividend to all shareholders of record as of January 2, 2002. The
number of shares and earnings per share amounts were restated to reflect the
stock dividends paid on January 15, 2002, April 15, 2003 and April 15, 2004 as
of the earliest date presented herein.
(5) CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily average reserve balances in
accordance with FRB requirements. At December 31, 2003 and 2002, the FRB reserve
requirement was $1,444,000 and $533,000, respectively.
In addition, the Bank was required to maintain $200,000 in cash reserves
at its correspondent banks at both December 31, 2003 and 2002.
F-14
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(6) INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity and securities available for sale at December 31,
2003 and 2002 is as follows (in thousands):
2003
--------------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
-------------- ---------------- ----------------- ----------
Investments held to maturity:
Municipal securities............... $ 5,808 -- (12) 5,796
---------- -- ---- ------
Total $ 5,808 -- (12) 5,796
========== == ==== ======
Securities available for sale:
U.S. government securities......... $ 18,536 54 (111) 18,479
Mortgage-backed securities 9,265 13 (78) 9,200
Equity securities 306 -- -- 306
---------- -- ---- ------
Total................................... $ 28,107 67 (189) 27,985
========== == ==== ======
2002
--------------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
-------------- ---------------- ----------------- ----------
Investments held to maturity:
Municipal securities............... $ 1,220 -- (2) 1,218
---------- --- --- ------
Total $ 1,220 -- (2) 1,218
========== === === ======
Securities available for sale:
U.S. government securities......... $ 19,196 121 -- 19,317
Mortgage-backed securities 10,376 44 (7) 10,413
Equity securities 204 -- -- 204
---------- --- --- ------
Total................................... $ 29,776 165 (7) 29,934
========== === === ======
F-15
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The scheduled maturities of investments held to maturity and securities
available for sale at December 31, 2003 is as follows (in thousands):
INVESTMENTS HELD SECURITIES AVAILABLE
TO MATURITY FOR SALE
----------- --------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ---------- -------------- ----------
Due in one year of less................. $ 5,808 5,796 -- --
Due after one year up to five years..... -- -- 18,657 18,603
Due after five years up to ten years.... -- -- 1,738 1,736
Due after ten years..................... -- -- 7,406 7,340
Equity securities....................... -- -- 306 306
---------- ----- ------ ------
Total................................... $ 5,808 5,796 28,107 27,985
========== ===== ====== ======
Proceeds from sales of securities available for sale totaled $2,203,000
and $2,019,000 during 2003 and 2002, respectively. Gross gains realized from the
sale of securities available for sale totaled $4,000 and $24,000 for the year
ended December 31, 2003 and 2002, respectively. There were no losses realized on
sales of securities in 2003 and 2002.
At December 31, 2003, the Company pledged $26,062,000 in investment
securities as collateral for uninsured municipal deposits and uninsured deposits
underlying retail repurchase agreements.
The Bank is required to maintain an investment in Federal Reserve Bank
stock. The amount of this stock requirement is based on Bank capital. The Bank
had $266,000 and $204,000 in Federal Reserve Bank stock at December 31, 2003 and
2002, respectively.
The following table presents investments with unrealized losses at
December 31, 2003. All of these investments have been in an unrealized loss
position for less than 12 months.
FAIR VALUE UNREALIZED LOSSES
---------- -----------------
Investments held to maturity:
Municipal securities.................... $ 5,126 (12)
---------- ----
Total............................. 5,126 (12)
---------- ----
Securities available for sale:
U.S. government securities.............. 9,911 (111)
Mortgage-backed securities.............. 8,399 (78)
---------- ----
Total............................. 18,310 (189)
---------- ----
Total temporarily impaired
investments............................. $ 23,436 (201)
========== ====
F-16
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
There are eleven fixed-rate municipal securities with an aggregate
unrealized loss position of $12,000 at December 31, 2003. These securities were
issued by local New Jersey municipalities and mature within 12 months. Repayment
of municipal securities is expected from tax revenues.
There are seven fixed-rate U.S. government agency securities with an
aggregate unrealized loss position of $111,000 at December 31, 2003. These
securities mature within five years. The repayment of these securities, if held
to maturity, is guaranteed by the issuing U.S. government agency.
There are six mortgage-backed securities with an aggregate unrealized loss
position of $78,000 at December 31, 2003. The weighted average life of these
mortgage backed securities is 4.2 years. Approximately $68,000 of the unrealized
loss on mortgage backed securities relates to four GNMA securities with an
aggregate fair value of $5,859,000. The repayment of mortgage-backed securities,
if held to maturity, is guaranteed by the U.S. government in the case of GNMA
securities, and issuing U.S. government agencies.
The temporary impairment of the aforementioned investments relates to the
difference between the yield on the securities and the current market rate for
similar securities. Fixed-rate securities are generally exposed to greater
market value adjustment than their variable-rate counterparts. The fair value
and unrealized loss for fixed-rate investments was $16,773,000 and $124,000,
respectively, at December 31, 2003. The temporary impairment of fixed-rate
investments is likely to continue in a rising interest rate environment.
All temporarily impaired investments are bank qualified investments. There
has been no significant change in the credit quality of issuers since the
securities were purchased.
F-17
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(7) LOANS RECEIVABLE
Loans receivable consist of the following at December 31, 2003 and 2002
(in thousands):
2003 2002
---- ----
Commercial.............................. $ 16,953 $ 17,565
Real estate - commercial................ 27,227 18,895
Real estate - residential............... 16,512 12,147
Construction............................ 2,884 3,213
Consumer....................... 2,853 2,348
---------- ---------
66,429 54,168
Less allowance for loan losses.......... (768) (576)
Deferred loan cost...................... 121 30
---------- ---------
Loans receivable, net................... $ 65,782 $ 53,622
========== =========
The Bank is subject to a loans-to-one-borrower limitation of 15% of
capital funds. At December 31, 2003, the loans-to-one-borrower limitation was
$1,444,000; this excludes an additional 10% of adjusted capital funds or
$962,000, which may be loaned if collateralized by readily marketable securities
as defined by regulations. At December 31, 2003, there are no loans outstanding
or committed to any one borrower that individually or in the aggregate exceed
that limit.
The Bank lends primarily to customers in its local market area. Most loans
are mortgage loans. Mortgage loans include loans secured by commercial and
residential real estate and construction loans. Accordingly, lending activities
could be affected by changes in the general economy, the regional economy, or
real estate values. At December 31, 2003 and 2002, mortgage loans totaled
$46,623,000 and $34,255,000, respectively. Mortgage loans represent 70.1% and
63.2% of total gross loans at December 31, 2003 and 2002, respectively.
The Bank did not have any nonaccrual or impaired loans at or during the
year ended December 31, 2003 and 2002.
The following is a summary of the activity of the allowance for loan
losses (in thousands):
2003 2002 2001
---- ---- ----
Balance, beginning of year............. $ 576 $ 335 $ 110
Provision for loan losses.............. 225 275 225
Charge-offs, net....................... (33) (34) --
---------- --------- -------
Balance, end of year................... $ 768 $ 576 $ 335
========== ========= =======
F-18
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(8) PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, 2003 and 2002 are summarized as
follows (in thousands):
2003 2002
---- ----
Furniture and equipment................................... $ 505 $ 317
Building and land......................................... 374 --
Construction in progress.................................. -- 312
Leasehold improvements.................................... 335 332
--------- -------
1,214 961
Accumulated depreciation and amortization................. (279) (198)
--------- -------
Premises and equipment, net............................... $ 935 $ 763
========= =======
Depreciation expense was $113,000, $90,000, and $74,000 for the years
ended December 31, 2003, 2002, and 2001, respectively.
The Company leases its main office and operations center, both of which
are located in Collingswood, New Jersey. The Company owns its branch located in
Westville, New Jersey. The Westville branch opened in January 2003.
(9) DEPOSITS
Deposits consist of the following major classifications at December 31,
2003 and 2002 (dollars in thousands):
2003 2002
------------------------------ ------------------------------
WEIGHTED % OF WEIGHTED % OF
AVERAGE TOTAL AVERAGE TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- -------- -------- --------- ------- --------
Interest checking............ 1.70% $ 37,311 35.8% 2.24% $29,722 35.8%
Noninterest checking......... -- 20,406 19.6 -- 16,649 20.1
Money Market................. 0.50 15,121 14.5 1.43 15,268 18.4
Savings...................... 0.38 5,253 5.0 1.00 4,403 5.3
Certificates of deposit...... 2.35 26,232 25.1 3.14 16,906 20.4
---- -------- ----- ---- ------- -----
Total........................ 1.29% $104,323 100.0% 1.76% $82,948 100.0%
==== ======== ===== ==== ======= =====
F-19
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The Bank has a concentration of deposits from local municipalities.
Municipal deposits, which are mostly interest checking accounts, were
$29,453,000 or 28.2% of total deposits at December 31, 2003 and $18,750,000 or
22.6% of total deposits at December 31, 2002. Municipal deposit accounts in
excess of $100,000 are collateralized by investment securities with a carrying
value of $18,810,000 at December 31, 2003.
Certificates of deposit accounts of $100,000 and over totaled $16,884,000
and $10,498,000 at December 31, 2003 and 2002, respectively.
Interest expense on deposits consisted of the following for the year ended
December 31, 2003, 2002, and 2001 (dollars in thousands):
2003 2002 2001
---- ---- ----
Interest checking...................... $ 531 $ 427 $ 278
Money Market........................... 97 192 403
Savings................................ 31 38 27
Certificate of deposit................. 544 425 423
------ ------ ------
Interest expense on deposits........... $1,203 $1,082 $1,131
====== ====== ======
The following is a schedule of certificates of deposit by maturities as of
December 31, 2003 (in thousands):
Year ended December 31:
2004................................................ $ 20,577
2005................................................ 1,532
2006................................................ 719
2007................................................ 3,336
2008................................................ 68
---------
Total............................................... $ 26,232
=========
(10) BORROWING AVAILABILITY
At December 31, 2003, the Bank had a secured line of credit with First
Tennessee Bank in the aggregate amount of $1.8 million, and an unsecured line of
credit with Atlantic Central Bankers Bank in the aggregate amount of $4 million.
At December 31, 2003, the Bank had no balances outstanding against its lines of
credit. The Bank had borrowed funds outstanding for 12 days in 2003. The amounts
outstanding ranged from $140,000 to $2,823,000. Total outstanding
F-20
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
loans averaged $35,000 for the year ended December 31, 2003. The Bank borrowed
$110,000 for a period of two days during 2002.
(11) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share calculation for the years ended
December 31, 2003, 2002, and 2001 (dollars in thousands, except per-share data):
WEIGHTED AVG.
NET NO. OF SHARES PER-SHARE
INCOME OUTSTANDING AMOUNT
------ ------------ ---------
2003:
Basic earnings per share .................... $ 500 1,411,529 $ 0.35
Effect of dilutive stock equivalents ........ -- 34,805 0.00
------ --------- ---------
Diluted earnings per share .................. $ 500 1,446,334 $ 0.35
====== ========= =========
2002:
Basic earnings per share .................... $ 495 1,139,076 $ 0.44
Effect of dilutive stock equivalents......... -- 4,136 (0.01)
------ --------- ---------
Diluted earning per share ................... $ 495 1,143,212 $ 0.43
====== ========= =========
2001:
Basic earnings per share .................... $ 361 1,030,334 $ 0.35
Effect of dilutive stock equivalents ........ -- 3,150 0.00
------ --------- ---------
Diluted earnings per share................... $ 361 1,033,484 $ 0.35
====== ========= =========
Earnings per share is calculated on the basis of weighted average number
of shares outstanding. Options to purchase 79,614, 52,440, and 34,050 shares of
common stock were outstanding at December 31, 2003, 2002, and 2001,
respectively. Warrants to purchase 373,805, 377,499, and 97,024 shares of common
stock were outstanding at December 31, 2003, 2002, and 2001, respectively.
Options and warrants, to the extent dilutive, were included in the denominator
in the computation of earnings per diluted share. Options to purchase 0, 30,602,
and 10,687 shares were antidilutive for 2003, 2002, and 2001, respectively, and,
therefore, excluded from the calculation of earnings per diluted common share.
Warrants to purchase 97,024, 377,499, and 97,024 shares were antidilutive for
2003, 2002, and 2001, respectively.
F-21
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following required disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The methods and assumptions used to estimate the fair values of each class
of financial instrument are as follows:
(a) CASH AND CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE, AND ACCRUED
INTEREST PAYABLE
The items are generally short term in nature, and accordingly, the
carrying amounts reported in the statements of financial condition are
reasonable approximations of their fair values.
(b) INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices,
if available. If quoted market prices are not available, then fair values are
based on quoted market prices of comparable instruments.
(c) LOANS AND MORTGAGE LOANS HELD FOR SALE
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is based on carrying value. The fair value for
other loans receivable was estimated using a discounted cash flow analysis,
which uses interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. Consideration was given to prepayment
speeds, economic conditions, risk characteristics, and other factors considered
appropriate.
(d) DEPOSITS
The fair values of deposits subject to immediate withdrawal, such as
interest and noninterest checking, statement savings, and money market demand
deposit accounts, are equal to their carrying amounts in the accompanying
statements of financial condition. Fair values for certificates of deposit are
estimated by discounting future cash flows using interest rates currently
offered on certificates of deposit with similar remaining maturities.
F-22
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(e) OFF-BALANCE-SHEET INSTRUMENTS
Off-balance-sheet instruments are primarily comprised of loan commitments
and unfunded lines of credit that are generally priced at market rate at the
time of funding. Therefore, these instruments have nominal value prior to
funding. The estimated fair value of the Company's financial instruments at
December 31, 2003 and 2002 was as follows (in thousands):
2003 2002
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- -------- ----------
Financial assets:
Cash and cash equivalent.............. $ 16,516 $ 16,516 $ 12,161 $ 12,161
Investments held to maturity.......... 5,808 5,796 1,220 1,218
Investment available for sale......... 27,985 27,985 29,934 29,934
Mortgage held for sale................ 281 281 63 63
Loans receivable, net................. 65,782 65,638 53,622 54,798
Accrued interest receivable........... 373 373 341 341
--------- ---------- -------- ----------
Total financial assets................... $ 116,745 $ 116,589 $ 97,341 $ 98,515
========= ========== ======== ==========
Financial liabilities:
Demand deposits....................... $ 57,717 $ 57,717 $ 46,371 $ 46,371
Money market deposits................. 15,121 15,121 15,268 15,268
Savings deposits...................... 5,253 5,253 4,403 4,403
Certificates of deposits.............. 26,232 26,609 16,906 17,164
Short-term borrowings................. 4,087 4,087 6,033 6,033
Accrued interest payable.............. 8 8 10 10
--------- ---------- -------- ----------
Total financing liabilities.............. $ 108,418 $ 108,795 $ 88,991 $ 89,249
========= ========== ======== ==========
Notional Notional
Amount Amount
--------- --------
Off-balance sheet instruments:
Commitments to extend credit.......... $ 8,319 $ -- $ 7,202 $ --
========= ========== ======== ==========
F-23
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(13) INCOME TAXES
Total income tax expense (benefit) was allocated for the years ended
December 31, 2003, 2002, and 2001, as follows (in thousands):
2003 2002 2001
------ ------ -------
Income before income taxes................................. $ 335 $ 329 $ (94)
Shareholders' equity for unrealized gain
(loss)on securities available for sale.................. (106) (8) 65
------ ------ -------
$ 229 $ 321 $ (29)
====== ====== =======
Income tax expense (benefit) consisted of the following for the years
ended December 31, 2003, 2002, and 2001 (in thousands):
2003 2002 2001
------ ------ -------
Federal:
Current.......................................... $ 267 $ 268 $ 105
Deferred......................................... (13) (16) (220)
------ ------ -------
254 252 (115)
------ ------ -------
State:
Current.......................................... 83 80 20
Deferred......................................... (2) (3) 1
------ ------ -------
81 77 21
Total................................................. $ 335 $ 329 $ (94)
====== ====== =======
F-24
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following is a reconciliation between expected tax expense (benefit)
at the statutory rate of 34% and actual tax expense (in thousands):
2003 2002 2001
-------- -------- --------
At federal statutory rate.................... $ 284 $ 280 $ 91
Adjustments resulting from:
State tax, net of federal benefit......... 55 52 14
Tax-exempt interest income................ (13) (3) (5)
Decrease in valuation allowance........... -- -- (194)
Other..................................... 9 -- --
-------- -------- --------
Total........................................ $ 355 $ 329 $ (94)
======== ======== ========
Significant deferred tax assets and liabilities of the Bank at December
31, 2003 and 2002 are as follows (dollars in thousands):
2003 2002 2001
-------- -------- --------
Deferred tax assets:
Depreciation.............................. $ -- $ -- $ 2
Organization costs........................ 42 70 93
Book bad debt reserves - loans............ 296 223 134
Unrealized losses on securities
available for sale........................ 49 -- --
-------- -------- --------
Total gross deferred tax assets....... 387 293 229
Less valuation allowance.................. -- -- --
-------- -------- --------
Net deferred tax assets............... 387 293 229
======== ======== ========
Deferred tax liabilities:
Depreciation.............................. (4) (4) --
Deferred loan costs....................... (77) (45) (1)
Unrealized gains on securities
available for sale........................ -- (57) (65)
Prepaid expenses.......................... (5) (6) (9)
Total gross deferred tax
liabilities........................... (86) (112) (75)
-------- -------- --------
Net deferred tax asset....................... $ 301 $ 181 $ 154
======== ======== ========
F-25
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The realizability of deferred tax assets is dependent upon various
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities, and tax
planning strategies. Based upon these and other factors, management determined
during the fourth quarter of 2001 that it is more likely than not that the Bank
will realize the benefits of these deferred tax assets and, as a result,
reversed the valuation allowance.
Management has determined that it is more likely than not that the Bank
will realize the benefits of deferred tax assets that exist at December 31,
2003.
(14) PROPERTIES
The Bank operates from its main office in Collingswood, New Jersey, and
its Westville, New Jersey branch office. In addition, the Bank maintains an
operations center in Collingswood, New Jersey.
The Westville branch location was purchased on August 30, 2002. Subsequent
to regulatory approval and renovation, this new branch opened in January 2003.
The main office and operations center are leased.
The main office lease expires in December 2009 with options to renew for
two additional five-year terms. The operations center lease expires in January
2006.
Future minimum payments under leases are summarized as follows (dollars in
thousands):
2004........................................................ $ 78
2005........................................................ 83
2006........................................................ 52
2007........................................................ 50
2008........................................................ 50
Thereafter.................................................. 50
-----
$ 363
=====
Total rent expense was $76,000, $62,000, and $45,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.
(15) CAPITAL LEASES
At December 31, 2002, the Bank was obligated, under noncancelable capital
leases, for a portion of its computer equipment. The Bank repaid these leases in
full in July 2003.
F-26
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(16) COMMITMENTS AND CONTINGENCIES
(a) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit to meet the financing needs of its customers. Such
commitments have been made in the normal course of business and at current
prevailing market terms. The commitments, once funded, are principally to
originate commercial loans and other loans secured by real estate. The Bank uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Commitments issued to potential borrowers of the Bank at December 31, 2003
and 2002 were as follows (dollars in thousands):
2003 2002
------ --------
Fixed-rate commitments.............................. $ 444 $ 1,216
Variable/adjustable-rate commitments................ 7,875 5,986
------ --------
Total............................................... $8,319 $ 7,202
====== ========
(b) LEGAL PROCEEDINGS
At December 31, 2003, the Company was neither engaged in any existing nor
aware of any pending legal proceedings. From time to time, the Bank is a party
to legal proceedings within the normal course of business wherein it enforces
its security interest in loans made by it, and other matters of a similar
nature.
(17) RELATED-PARTY TRANSACTIONS
The Bank routinely enters into transactions with its directors and
officers. Such transactions are made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and do not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans to such related parties was $1,443,000 and $406,000 at December
31, 2003 and 2002, respectively. During 2003 and 2002, new loans and credit line
advances to such related parties amounted to $1,436,000 and $517,000,
respectively, and repayments amounted to $399,000 and $983,000, respectively.
The aggregate amount of deposits from related parties was $7,216,000 and
$10,515,000 at December 31, 2003 and 2002, respectively.
F-27
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The Bank engaged in certain property inspection services and branch
renovations with an entity that is affiliated with a director of the Bank. Such
aggregate services amounted to fees of $86,000, $110,000, and $1,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. Such fees were
capitalized as premises and equipment. The Bank engages a law firm that is
affiliated with a director of the Bank for certain debt collection services.
Total fees for such services amounted to $9,000, $7,000, and $0 for the years
ended December 31, 2003, 2002, and 2001, respectively. In management's opinion,
the terms of the services provided were substantially equivalent to that which
would have been obtained from unaffiliated parties.
(18) DIVIDEND POLICY
(a) COMPANY
The Company has not paid a cash dividend since its inception in June 2000.
Any payment of cash dividends to our shareholders would be dependent on the
payment of a cash dividend from the Bank to the Company. The payment of cash
dividends by the Bank to the Company is limited under federal banking law. The
Company's future dividend policy is subject to the discretion of its board of
directors and will depend upon a number of factors, including future earnings,
financial conditions, cash needs, and general business conditions. Holders of
common stock will be entitled to receive dividends as and when declared by the
board of directors out of funds legally available for that purpose.
(b) BANK
The amount of dividends that may be paid by the Bank depends upon the
Bank's earnings and capital position, and is limited by federal law,
regulations, and policies. As a national bank subject to the regulations of the
OCC, the Bank must obtain approval for any dividend if the total of all
dividends declared in any calendar year would exceed the total of its net
profits, as defined by applicable regulations, for that year, combined with its
retained net profits for the preceding two years, less any required transfers to
surplus. In addition, the Bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its losses and bad debts.
In addition, the OCC is authorized to determine under certain
circumstances relating to the financial condition of a national bank that the
payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The payment of dividends that deplete a bank's capital base
could be deemed to constitute such an unsafe or unsound practice.
(19) STOCK OPTION PLANS AND STOCK WARRANTS
Common stock options and warrants for all periods presented herein were
adjusted to reflect the 10% stock dividend paid on January 15, 2002 and the 5%
stock dividend paid on April
F-28
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
15, 2003 and the 5% stock dividend paid on April 15, 2004 to shareholders of
record as of April 1, 2004.
(a) STOCK OPTIONS
Two new stock option programs were adopted in April 2003.
The 2003 Employee Stock Option Plan provides up to 78,750 options for key
employees. The exercise price of options granted under this program will be
equal to at least the fair market value of common stock as of the grant date.
Options vest over a period of time no less than 12 months as designated by the
board of directors. Options expire 10 years from the grant date. There were no
options granted under this plan during 2003.
The 2003 Outside Director Plan provides up to 52,500 options for
nonemployee directors. The exercise price of options granted under this program
will be equal to at least the fair market value of common stock as of the grant
date. Options become fully vested 11 months after the grant date. Options expire
10 years from the grant date. In April 2003, 7,875 options were granted at an
exercise price of $8.71 per share.
The Company adopted the Bank's Employee and Outside Director Stock Option
Plans as part of the reorganization and formation of the holding company in
2002. The discussion that follows refers to these two stock option plans as the
Original Employee Stock Option Plan and the Original Outside Director Stock
Option Plan.
A total of 49,117 options were granted under the Original Employee Stock
Option Plan. In February 2002, 11,026 options were granted at an exercise price
of $9.30 per share. In January 2003, 11,025 options were granted at an exercise
price of $7.82 per share. The exercise price of all options granted under the
Original Employee Plan was equal to the fair market value of the common stock at
grant date. Options vest in five equal annual installments commencing on the
first anniversary of the grant and expire 10 years after the grant date. No
options are available for future grants under the Original Employee Stock Option
Plan. At December 31, 2003, 43,589 options were outstanding under this plan.
A total of 29,676 options were granted under the Original Outside Director
Stock Option Plan. In June 2002, 8,889 options were granted at an exercise price
of $8.69 per share. In January 2003, 8,274 options were granted at an exercise
price of $7.82 per share. The exercise price of all options granted under the
Original Outside Director Plan was equal to the fair market value of the common
stock at grant date. All options outstanding under the Original Outside Director
Plan are fully vested. Options expire 10 years after the grant date. No options
are available for future grants under the Original Outside Director Stock Option
Plan. At December 31, 2003, 28,151 options were outstanding under this plan.
F-29
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
A summary status of the Company's stock option plans as of December 31,
2003 and 2002, and the changes during the years then ended, is as follows:
2003 2002
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- ------ --------------
Outstanding, beginning of year............. 52,440 $ 7.86 34,051 $ 7.16
Granted................................... 27,174 8.09 9,915 9.03
Exercised and forfeited................... -- -- (1,526) 7.58
------ -------------- ------ --------------
Outstanding, end of year.................. 79,614 $ 7.93 52,440 $ 7.86
====== ============== ====== ==============
Options exercisable at December 31......... 42,416 18,730
====== ======
Weighted average fair value of
options granted during the year........ $ 4.81 $ 6.41
============== ==============
The following table summarizes all stock options outstanding and
exercisable for option plans as of December 31, 2003 segmented by range of
exercise prices:
OUTSTANDING EXERCISABLE
-------------------------------- -----------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
NUMBER PRICE LIFE NUMBER PRICE
------ ------- ----------- ------ --------
Stock options:
$6.19 - $7.62................... 21,838 $ 6.60 6.5 years 14,949 $ 6.60
$7.63 - $8.57................... 29,986 7.97 8.4 years 16,373 8.03
$8.58 - $9.52................... 27,790 8.93 8.5 years 11,094 8.81
------ -------- --------- ------ --------
Total................................ 79,614 $ 7.93 7.9 years 42,416 $ 7.73
====== ======== ========= ====== ========
The following table summarizes the fair value of each option grant in 2003
and 2002 using the Black-Scholes pricing model and the significant assumptions
used therein.
F-30
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
GRANT OPTION EXERCISE FAIR VALUE RISK-FREE CASH EXPECTED EXPECTED
DATE PLAN PRICE PER OPTION RATE DIVIDENDS LIFE VOLATILITY
-------- ------- -------- ---------- --------- --------- -------- ----------
Apr 2003 Director $ 8.71 $ 5.36 4.01% none 10 years 45
Jan 2003 Employee 7.82 4.59 4.15 none 10 years 41
Jan 2003 Director 7.82 4.59 4.15 none 10 years 41
Jun 2002 Director 8.69 6.22 4.98 none 10 years 57
Feb 2002 Employee 9.30 6.56 4.98 none 10 years 55
(b) STOCK WARRANTS
Stock warrants were issued on two separate occasions.
In connection with the Bank's initial stock offering in 2000, the Bank
issued warrants to purchase 97,024 shares of the Bank's common stock at $9.56
per share. These warrants expire in June 2005. All 97,024 of these warrants are
outstanding at December 31, 2003.
In connection with the Company's public stock offering in December 2002,
the Company issued 254,399 units. Each unit consisted of one share of common
stock, no par value, and one warrant to purchase one share of common stock at an
exercise price of $9.60. After giving effect to the 5% stock dividend paid in
April 2003 and the 5% stock dividend paid in April 2004, the total number of
shares of common stock issuable upon exercise of the warrants issued in that
offering was 280,475. The warrants expire in December 2005. During 2003, 3,694
of these warrants were exercised. The remaining 276,781 warrants are outstanding
at December 31, 2003.
(20) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal 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
classification 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 (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2003 and 2002, the
Bank meets all capital adequacy requirements to which it is subject.
F-31
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
As of December 31, 2003, the most recent notification from the FDIC
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-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 institution's category.
The Bank's actual capital amounts and ratios at December 31, 2003 and 2002
are presented in the following table (dollars in thousands):
TO BE
WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------ -------- ----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------ ----- ------ ------
At December 31, 2003:
Total capital (to risk-weighted assets).... $ 10,332 14.60% $5,660 8% $7,075 10%
Tier I capital (to risk-weighted assets)... 9,564 13.52 2,830 4 4,245 6
Tier I capital (to average assets)......... 9,564 8.73 4,383 4 5,479 5
At December 31, 2002:
Total capital (to risk-weighted assets).... $ 9,623 16.38% $4,693 8% $5,866 10%
Tier I capital (to risk-weighted assets)... 9,047 15.40 2,346 4 3,520 6
Tier I capital (to average assets)......... 9,047 10.18 3,555 4 4,444 5
As a de novo bank, the OCC requires the Bank to maintain a level of equity
capital equal to at least 8% of total assets for the first three years of
operation. As of July 1, 2003, this restriction was lifted. The Bank's required
leverage ratio is currently 4%.
F-32
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(21) PARENT COMPANY FINANCIAL INFORMATION
A summary of the balance sheets at December 31, 2003 and 2002 follows
(dollars in thousands):
2003 2002
------- -------
ASSETS
Cash in subsidiary .......................... $ 43 $ 50
Investment in subsidiary .................... 9,490 9,148
Deferred tax asset .......................... 14 4
Other assets ................................ 5 --
------- -------
Total assets ................................ $ 9,552 $ 9,202
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Payable to subsidiary ....................... $ 1 --
Shareholders' equity ........................ 9,551 9,202
------- -------
Total liabilities and stockholders' equity... $ 9,552 $ 9,202
======= =======
A summary of the statements of operations for the year ended December 31,
2003 and the period from June 30, 2002 (inception) to December 31, 2002 follows
(dollars in thousands):
2003 2002
------- -------
Equity income from subsidiary ............ $ 515 $ 256
------- -------
Other expenses:
Organizing expense ................... -- 9
Other operating expenses ............. 24 3
------- -------
Total other expenses ............. 24 12
------- -------
Income before income tax benefit . 491 244
Income tax benefit ....................... (9) (4)
------- -------
Net income ............................... $ 500 $ 248
======= =======
F-33
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
A summary of the statements of cash flows for the year ended December 31,
2003 and the period from June 30, 2002 (inception) to December 31, 2002 follows
(dollars in thousands):
2003 2002
------- -------
Cash flows from operating activities:
Net income ........................................... $ 500 $ 248
------- -------
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in income from subsidiary ............... (516) (256)
Increase in deferred tax assets ................ (10) (4)
Increase in payable to subsidiary .............. 1 --
Increase in other assets ....................... (5) --
Total adjustments ............................ (530) (260)
------- -------
Net cash used in operating activities ........ (30) (12)
------- -------
Cash flows from investing activities:
Investment in subsidiary ............................. -- (1,873)
------- -------
Net cash used in investing activities ........ -- (1,873)
------- -------
Cash flows from financing activities:
Issuance of common stock, net ........................ 23 1,935
------- -------
Net cash provided by financing activities .... 23 1,935
------- -------
Net (decrease) increase in cash and cash
equivalents ............................... (7) 50
Cash and cash equivalents at beginning of period ....... 50 --
------- -------
Cash and cash equivalents at end of period ............. $ 43 $ 50
======= =======
Noncash items:
Net change in unrealized gains on available
for sale securities, net of taxes of $106 for
2003 and $8 for 2002 ........................... $ (174) $ 3
Issuance of stock dividend ......................... 280 --
F-34
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(22) OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related tax benefits are
as follows for the years ended December 31, 2003, 2002, and 2001 (in thousands):
2003
---------------------------------------
BEFORE-TAX TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
------ ------- ------
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the year ......... $(276) $ 104 $(172)
Less reclassification adjustment for gains included
in net income ........................................... (4) 2 (2)
----- ----- -----
Other comprehensive loss ...................................... $(280) $ 106 $(174)
===== ===== =====
2002
---------------------------------------
BEFORE-TAX TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
------ ------- ------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year .......... $ 19 $ (2) $ 17
Less reclassification adjustment for gains included
in net income ........................................... (24) 10 (14)
----- ----- -----
Other comprehensive income .................................... $ (5) $ 8 $ 3
===== ===== =====
2001
---------------------------------------
BEFORE-TAX TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
------ ------- ------
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the year .......... $ 114 $ (91) $ 23
Less reclassification adjustment for gains included
in net income ............................................ (65) 26 (39)
----- ----- -----
Other comprehensive income ..................................... $ 49 $ (65) $ (16)
===== ===== =====
F-35
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
(Dollars in thousands)
March 31, December 31,
2004 2003
----------- ------------
(unaudited)
ASSETS:
Cash and due from banks $ 2,557 $ 6,281
Federal funds sold 16,307 9,735
Interest bearing deposits 500 500
Investments held to maturity 5,806 5,808
Securities available for sale (amortized
cost of $25,382 at March 31, 2004 and
$28,107 at December 31, 2003) 25,472 27,985
Mortgages loans available for sale 84 281
Loans 68,849 66,550
Less: Allowance for loan losses (833) (768)
--------- ---------
Net loans 68,016 65,782
Bank premises and equipment, net 933 935
Accrued interest receivable 407 373
Deferred tax assets 220 301
Other assets 144 91
--------- ---------
Total Assets $ 120,446 $ 118,072
========= =========
LIABILITIES:
Demand deposits $ 53,843 $ 57,717
Savings deposits 22,591 20,374
Other time deposits 29,444 26,232
--------- ---------
Total deposits 105,878 104,323
Short-term borrowings 4,536 4,087
Accrued interest payable 5 8
Taxes payable 124 48
Other liabilities 80 55
--------- ---------
Total liabilities $ 110,623 $ 108,521
========= =========
SHAREHOLDERS' EQUITY:
Common stock (no par value)
Authorized: 5,000,000 shares, issued
and outstanding: 1,418,731 shares at
March 31, 2004 and 1,414,487 shares
at December 31, 2003 -- --
Preferred stock, 1,000,000 shares authorized,
no shares issued -- --
Additional paid in capital 9,273 9,238
Retained earnings 496 386
Accumulated other comprehensive income, net 54 (73)
--------- ---------
Total shareholders' equity 9,823 9,551
--------- ---------
Total liabilities & shareholders' equity $ 120,446 $ 118,072
========= =========
The accompanying notes are an integral part of these statements.
F-36
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
(Dollars in thousands, except per share data)
For the Three Months Ended
March 31,
--------------------------
2004 2003
---- ----
Interest income:
Interest and fees on loans $ 996 $ 899
Interest on federal funds sold 21 13
Interest and dividends on investments:
Taxable 196 245
Nontaxable 17 5
------- -------
Total interest income 1,230 1,162
------- -------
Interest expense:
Interest on demand deposits 139 120
Interest on savings deposits 19 43
Interest on time deposits 156 140
Interest on short-term borrowings 5 12
------- -------
Total interest expense 319 315
------- -------
Net interest income 911 847
Provision for loan losses 57 60
------- -------
Net interest income after provision
for loan losses 853 787
Other income:
Service charges on deposit accounts 36 33
Gain on sale of mortgage loans 9 20
Other income, service charges and fees 14 8
------- -------
Total other income 59 61
Other expenses:
Salaries, wages and employee benefits 313 279
Occupancy and equipment expenses 92 82
Advertising expense 11 34
Data processing expense 75 62
Professional services 68 64
Other operating expenses 170 136
------- -------
Total other expenses 729 657
Income before income taxes 183 191
Income tax expense 73 77
------- -------
Net income $ 110 $ 114
Other comprehensive income(loss), net 127 (39)
------- -------
Total comprehensive income $ 237 $ 75
======= =======
Net income per share information:
Basic earnings per share $ 0.08 $ 0.08
Diluted earnings per share $ 0.07 $ 0.08
The accompanying notes are an integral part of these statements.
F-37
1ST COLONIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
(Dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2004 2003
----------- ----------
Net income $ 110 $ 114
Adjustments to reconcile net income to net
cash provided/(used) by operating activities:
Depreciation and amortization 33 25
Amortization of premium (discount)on securities, net 23 45
Amortization of deferred loan fees/cost, net 17 10
Deferred taxes (4) -
Gains on sale of mortgage loans available for sale (9) (20)
Loss on retirement of fixed assets 2 -
Provision for loan losses 58 60
Cash disbursed for mortgage banking activities (1,605) (5,359)
Cash received for mortgage banking activities 1,811 4,547
(Increase)decrease in accrued interest receivable (34) 7
Increase in other assets (53) (31)
(Decrease)increase in accrued interest payable (3) 3
Increase in income taxes payable 76 31
Increase in other liabilities 25 42
-------- -------
Total Adjustments 337 (640)
-------- -------
Net cash provided/(used)by operating activities 447 (526)
Cash flows used in investing activities:
Proceeds from maturity and sale of securities
available-for-sale 5,200 12,601
Proceeds from maturity of securities held
to maturity 365 95
Purchases of securities available-for-sale (3,200) (11,809)
Purchases of securities held to maturity (363) (140)
Repayment of principal of securities
available-for-sale 702 894
Increase in loans receivable, net (2,309) (1,725)
Capital expenditures (33) (202)
-------- -------
Net cash provided/(used) in investing activities 362 (286)
Cash flows from financing activities:
Net increase in deposits 1,555 2,781
Net increase(decrease) in short-term
borrowings 449 (610)
Exercise of warrants 35 2
Expenses for issuance of common stock -- (7)
-------- -------
Net cash provided by financing activities 2,039 2,166
Net increase in cash and cash equivalents 2,848 1,354
Cash and cash equivalents as of beginning of period 16,516 12,161
-------- -------
Cash and cash equivalents as of March 31, $ 19,364 $13,515
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 322 $ 312
Income taxes -- 46
Noncash items:
Change in unrealized gains for securities
available-for-sale, net of taxes of ($85) for
2004 and $24 for 2003 127 (39)
The accompanying notes are an integral part of these statements.
F-38
1ST COLONIAL BANCORP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, 1st Colonial National Bank. Any material
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial
statements contain adjustments consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position of the Company
as of March 31, 2004 and December 31, 2003 and the consolidated results of
operations for the three month periods ended March 31, 2004 and 2003. The
accounting policies and reporting practices of the Company are in accordance
with accounting principles generally accepted in the United States of America
and have been followed on a consistent basis.
The accompanying unaudited financial statements do not include all of the
detailed schedules, information and notes necessary for a fair presentation of
financial condition, results of operations and cash flows in accordance with
accounting principles generally accepted in the United States of America.
The results of operations for the three months ended March 31, 2004 are
not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 income and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses and the valuation of the deferred tax assets.
NOTE 2. EARNINGS PER SHARE
Basic earnings per common share is calculated on the basis of the weighted
average number of common shares outstanding. Diluted earnings per common share
includes dilutive common stock equivalents as computed under the treasury stock
method using average common stock prices for the respective period. All
calculations have been adjusted to account for the 5% stock dividend payable on
April 15, 2004. Options and warrants to purchase 497,429 and 440,740 shares of
common stock were outstanding at March 31, 2004 and 2003, respectively, and to
the extent dilutive, were included in the computation of earnings per diluted
common share.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per common share calculations.
F-39
1ST COLONIAL BANCORP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(Dollars are in thousands, except per share data)
Three months ended
March 31,
------------------
2004 2003
---- ----
Numerator:
Net Income $ 110 $ 114
Denominator for basic earnings per share-
weighted average shares 1,417 1,411
Effect of dilutive securities:
Director and employee stock options 18 8
Warrants 62 0
Denominator for diluted earnings per
share- adjusted weighted average
shares and assumed exercised 1,497 1,419
Basic earnings per share $ 0.08 $ 0.08
Diluted earnings per share $ 0.07 $ 0.08
F-40
1ST COLONIAL BANCORP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following warrants and options were issued by the Bank with respect to
Bank common stock. Pursuant to the Agreement and Plan of Reorganization and
Merger dated as of March 5, 2002 among the Company, the Bank and Interim, as of
June 30, 2002, these outstanding warrants and stock options became warrants and
stock options to purchase the common stock of the Company.
Warrants were issued to the Bank's underwriter in connection with its
initial public offering of common stock in June 2000. Total warrants outstanding
at March 31, 2004 entitled the holders to purchase 97,024 shares of common stock
at a purchase price of $9.56 per share. These warrants are exercisable until
June 29, 2005.
On June 29, 2000, the Bank issued stock options to the Bank's employees
entitling them to purchase a total of 17,224 shares of Bank common stock. These
options will vest and become exercisable in five equal annual installments
commencing on the first anniversary of the date of grant and continuing on each
successive anniversary of such date. These options are exercisable at $6.60 per
share for a period of ten years after the grant date. At March 31, 2004, all of
these options were still outstanding.
On June 29, 2000, the Bank also issued stock options to the Bank's
directors entitling them to purchase a total of 5,230 shares of Bank common
stock. These options are exercisable at $6.60 per share for a period of ten
years after the date of the grant. These options have fully vested. At March 31,
2004, options to purchase 4,619 shares of the Company's common stock were still
outstanding.
In April 2001, options to purchase a total of 7,277 shares of Bank common
stock were granted to the Bank's directors at an exercise price of $8.25 per
share. These options are fully vested and expire ten years from the date of the
grant. As of March 31, 2004, options to purchase 6,384 shares of the Company's
common stock were still outstanding.
In June 2001, options to purchase a total of 4,315 shares of Bank common
stock were granted to certain Bank employees at an exercise price of $8.25 per
share, of which 20% become vested on each anniversary of the grant date. These
options expire ten years from the date of the grant. At March 31, 2004, all of
these options were still outstanding.
On February 20, 2002, options to purchase a total of 11,030 shares of
common stock were granted to certain Bank employees at an exercise price of
$9.30 per share, of which 20% become vested on each anniversary of the grant
date. These options expire ten years from the date of the grant. At March 31,
2004, 10,753 of these options were still outstanding.
On June 12, 2002, options to purchase a total of 8,895 shares of common
stock were granted to the Bank's directors at an exercise price of $8.69 per
share. These options are fully vested and expire ten years from the date of the
grant. At March 31, 2004, all of these options were still outstanding.
F-41
1ST COLONIAL BANCORP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Warrants were issued to purchasers of the Company's common stock in an
offering that closed on December 16, 2002. Warrants were issued for 280,475
shares of the Company's common stock at a price of $8.71 per share. These
warrants are immediately exercisable and expire three years from issue date. At
March 31, 2004, 272,728 of these warrants were still outstanding.
On January 15, 2003, options to purchase a total of 11,028 shares of
common stock were granted to certain Bank employees at an exercise price of
$7.82 per share, of which 20% become vested on each anniversary of the grant
date. These options expire ten years from the date of the grant. At March 31,
2004, all of these options were still outstanding.
On January 15, 2003, options to purchase a total of 8,280 shares of common
stock were granted to the Bank's directors at an exercise price of $7.82 per
share. These options are fully vested and expire ten years from the date of the
grant. At March 31, 2004, all of these options were still outstanding.
On April 22, 2003, options to purchase a total of 7,880 shares of common
stock were granted to the Bank's directors at an exercise price of $8.71 per
share. These options are fully vested and expire ten years from the date of the
grant. At March 31, 2004, all of these options were still outstanding.
On January 2, 2004, options to purchase a total of 32,550 shares of common
stock were granted to certain Bank employees at an exercise price of $10.89 per
share. These options become fully vested one year from the date of the grant and
expire ten years from the date of the grant. At March 31, 2004, all of these
options were still outstanding.
On January 2, 2004, options to purchase a total of 15,750 shares of common
stock were granted to the Bank's directors at an exercise price of $10.89 per
share. These options become fully vested eleven months from the date of the
grant and expire ten years from the date of the grant. At March 31, 2004, all of
these options were still outstanding.
NOTE 3. STOCK OPTIONS
At March 31, 2004, the Company has two stock-based compensation plans,
which are described more fully in note 3. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all option
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the company had applied the
fair value recognition provision of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
F-42
1ST COLONIAL BANCORP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Three Months Ended
--------------------------------------------------------------------------
March 31, 2004 March 31, 2003
----------------------------------- -----------------------------------
Compensation Compensation
As reported expense Pro forma As reported expense Pro forma
----------- ------- --------- ----------- ------- ---------
Net income $ 110 68 42 114 24 90
Basic earnings
per share 0.08 0.05 0.03 0.08 0.02 0.06
Dilutive earnings
per share 0.07 0.04 0.03 0.08 0.02 0.06
F-43