PROSPECTUS
720,000 SHARES OF COMMON STOCK
OFFERING PRICE $10.00 PER SHARE
(1ST COLONIAL LOGO)
1st Colonial Bancorp, Inc. is the holding company for 1st Colonial National
Bank, Collingswood, New Jersey, a nationally chartered commercial bank that
opened for business in June 2000.
We are offering for sale 720,000 shares of our common stock in an
underwritten public offering. The offering price is $10.00 per share.
Our common stock is currently traded on the OTC Bulletin Board under the
symbol "FCOB." However, the trading market is not active. The last reported sale
price for our common stock was $10.25 per share on April 14, 2004. As of April
20, 2004, the bid and asked prices for our common stock were $10.25 and $11.25
per share, respectively.
The shares covered by this prospectus have been registered under the
Securities Act of 1933. Concurrently with that registration, we have also
registered, on behalf of selling shareholders, 97,024 shares of common stock
issuable by us upon the exercise of outstanding warrants. We have agreed to bear
all expenses of registration of these shares under federal and state securities
laws. The holders of these warrants have agreed not to sell or otherwise dispose
of, for a period of 180 days from the conclusion of this offering, any shares of
our common stock that they own or acquire. Please also see the Risk Factor
pertaining to these shares on page 10.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. YOU SHOULD CAREFULLY CONSIDER
THE INFORMATION CONTAINED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 7
BEFORE MAKING YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
PER SHARE TOTAL
--------- ----------
Public offering price....................................... $10.00 $7,200,000
Underwriting commissions we will pay........................ $ .69 $ 494,000
Net proceeds to 1st Colonial Bancorp, Inc., before our
expenses.................................................. $ 9.31 $6,706,000
This is a firm commitment underwriting. We will pay underwriting
commissions for the sale of the shares of common stock to the public. The
underwriting commission assumes all shares are sold to the public; however, we
will pay a reduced commission on shares sold to our officers and directors. The
underwriter has been granted a 30-day option to purchase up to an additional
108,000 shares to cover over-allotments, if any. See "Underwriting."
RYAN BECK & CO.
April 20, 2004
(COLONIAL LOGO)
(MAP)
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. In this prospectus, 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 December 31, 2003, we
had $118.1 million in assets, $66.6 million in loans, and $104.3 million in
deposits. These amounts reflect increases of $19.8 million or 20.1%, $12.4
million or 22.8% and $21.4 million or 25.8%, respectively, from our assets,
loans and deposits of $98.3 million, $54.2 million and $82.9 million,
respectively, at December 31, 2002. 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 entitled
"Supervision and Regulation."
Since opening in June 2000, we have accomplished the following:
- Reported 12 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 December 31,
2003;
- 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.
1
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.
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, although we have no definitive arrangements to establish any branches at
this time.
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.
2
THE OFFERING
Common stock offered for
sale.......................... 720,000 shares
Shares of common stock
outstanding after the
offering(1)................... 2,138,540 shares
Offering price................ $10.00 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" and we believe that it will continue to
trade on the OTC Bulletin Board after the
completion of the offering.
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 contribute most of the proceeds to the
bank to enable it to continue to grow its loan
portfolio and deposits while complying with its
regulatory capital requirements. The bank may
use a portion of these proceeds to finance the
establishment of additional branches if we find
locations that we believe will be successful
and will provide growth opportunities for the
bank.
Purchases by directors and
officers...................... Certain officers and directors have indicated
an intent to participate in the offering
through the purchase of approximately 62,600
total shares of common stock. See
"Underwriting."
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."
---------------
(1) Does not include or reflect the following:
- up to 108,000 shares that may be purchased by the underwriter from us to
cover over-allotments;
- 127,638 shares of common stock issuable upon the exercise of outstanding
stock options;
- 369,752 shares of common stock issuable upon the exercise of outstanding
warrants; and
- an aggregate of 75,075 shares of common stock reserved for future
issuance upon the exercise of additional stock options that may be
granted under our stock option plans.
3
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 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 FROM
DECEMBER 31, 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)
====== ====== ====== =====
PER SHARE DATA
FOR THE YEARS ENDED FOR THE PERIOD FROM
DECEMBER 31, JUNE 30, 2000
------------------------------------ (INCEPTION) TO
2003 2002 2001 DECEMBER 31, 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
4
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
PERFORMANCE RATIOS
FOR THE PERIOD FROM
FOR THE YEARS JUNE 30, 2000
ENDED DECEMBER 31, (INCEPTION) TO
------------------------ DECEMBER 31,
2003 2002 2001 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%
Other income as a percentage of total
revenue(5)............................. 7.83% 6.47% 8.07% 2.56%
Other income as a percentage of average
assets................................. 0.28% 0.26% 0.32% 0.12%
Other 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
AT OR FOR THE YEARS ENDED JUNE 30, 2000
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%
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%
5
---------------
(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.
6
RISK FACTORS
You should review and consider carefully the following factors, together
with the other information contained in this prospectus, 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 breaches 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. Notwithstanding our plans, we
currently do not have any definitive arrangements to establish additional
branches.
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
December 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 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.
7
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 anticipate that we will begin to offer Internet banking services to our
customers commencing in the third quarter of 2004. We will incur significant
expense in doing so, and customer acceptance of these services is uncertain.
Therefore, our total other expenses will increase 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.
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
8
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 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 13.
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 needs 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
9
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.
OUR STOCK IS THINLY TRADED, AND FUTURE SALES BY OUR CURRENT SHAREHOLDERS MAY
ADVERSELY AFFECT OUR STOCK PRICE.
As of April 1, 2004, there were warrants outstanding to purchase 369,752
shares of our common stock, including warrants to purchase the 97,024 shares
registered with the Securities and Exchange Commission concurrently with the
shares covered by this prospectus. 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 of this offering 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 60.
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 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 twelve 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;
10
- 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 62.
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 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.
11
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 44.
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 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 44.
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 45.
12
USE OF PROCEEDS
The net proceeds from the sale of the common stock in the offering are
estimated to be approximately $6.3 million, after deducting offering expenses
and assuming that the underwriter does not purchase any additional shares from
us to cover over-allotments. We intend to contribute $5.5 million, or 87.3%, of
these net proceeds to the bank to fund its ongoing expansion. 1st Colonial will
retain the remainder of the proceeds for general corporate purposes.
The ability of any bank to accept deposits and otherwise increase its asset
size is limited by regulatory requirements mandating that the bank maintain
certain minimum amounts and types of capital when compared to the amounts and
types of its assets. The bank will use a portion of the proceeds to enable it to
increase its legal lending limit and to provide the capital necessary, in light
of such regulatory requirements, to support the bank's growth. A portion of the
proceeds also may be used to fund the establishment or acquisition of additional
branches, if we find locations that we believe will be successful and will
provide growth opportunities for the bank. Although we desire to open two
additional branches by the first quarter of 2006, we currently have no
definitive plans or arrangements to establish or acquire any branches.
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 April 20, 2004, the bid price for
the common stock was $10.25, and the asked price was $11.25. 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 (Through 4/20/04)............................ 10.25 10.25
---------------
(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.
13
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. Ryan Beck has advised us that it intends to make a market in the
common stock following the completion of the offering and to encourage other
securities firms to do so, but it has no obligation to do so. 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.
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.
14
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2003,
and as adjusted to give effect to this offering. As adjusted numbers assume net
proceeds of approximately $6.3 million from the sale of the common stock offered
by this prospectus (not including the over allotment option), after deducting
estimated offering expenses.
AT DECEMBER 31, 2003
----------------------
ACTUAL AS ADJUSTED
------- ------------
(DOLLARS IN THOUSANDS)
Shareholders' equity:(1)
Common stock, no par value 5,000,000 shares authorized,
1,414,487 shares issued and 2,134,487 shares issued as
adjusted............................................... $ -- $ --
Preferred stock, 1,000,000 shares authorized; no shares
issued................................................. -- --
Additional paid in capital.................................. 9,238 15,579
Retained earnings........................................... 386 386
Accumulated other comprehensive (loss) income............... (73) (73)
------ -------
Total shareholders' equity................................ $9,551 $15,892
====== =======
Book value per share........................................ $ 6.75 $ 7.45
---------------
(1) Does not include a total of 453,419 shares of common stock reserved for
issuance under options and warrants to purchase common stock outstanding at
December 31, 2003. Does include the shares issuable pursuant to the 5% stock
dividend paid on April 15, 2004 to shareholders of record as of April 1,
2004.
The bank is subject to minimum capital requirements of the OCC, our primary
regulator. See "Supervision and Regulation -- Capital Requirements." The tables
below reflect the capital ratios of the bank at December 31, 2003, and as
adjusted to give effect to the proceeds of the offering and the contribution of
a portion of the proceeds to the bank. The ratios in this table are the capital
ratios of the bank. As long as 1st Colonial's consolidated assets 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.
AT DECEMBER 31, 2003
---------------------------------------
REGULATORY
MINIMUM TO BE
ACTUAL AS ADJUSTED WELL CAPITALIZED
------ ----------- ----------------
Risk based capital:
Total Capital.................................... 14.60% 21.63% 8.00%
Tier 1 capital................................... 13.52% 20.63% 8.00%
Leverage ratio..................................... 8.73% 13.72% 4.00%
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 this offering;
- expectations for continued acceptance and success in the banking and
business communities in our market area;
15
- 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;
- 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 7.
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.
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.
16
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 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 7 and "Special Note Regarding Forward-Looking Statements" beginning on
page 15 in this prospectus.
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.
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.
17
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
YEAR ENDED DECEMBER 31, 2003 VERSUS YEAR ENDED 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.
Non-interest 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.
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.
18
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.
19
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 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 deposits................. 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.
20
(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.
(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
====== ===== ====
21
YEAR ENDED DECEMBER 31, 2002
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
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 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
22
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.
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.
23
- 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 $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, 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,
24
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.
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 December 31, 2003 cash, cash equivalents, securities classified as
securities available for sale, and federal funds sold totaled $44.5 million and
were 37.7% of total assets. However, we have pledged $26.1 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.
25
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 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.
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.
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).
We manage capital ratios to exceed regulatory minimums. The bank's Tier 1
risk-based capital ratio was 13.52% at December 31, 2003. The bank's total
risk-based capital ratio was 14.60% at December 31, 2003. These ratios are in
excess of the mandated minimum requirements of 4.00% and 8.00%, respectively.
The leverage ratio consists of Tier 1 capital divided by quarterly average
assets. At December 31, 2003, the bank's leverage ratio was 8.73%, which
exceeded the required minimum leverage ratio of 4.00%. Management anticipates
these ratios to decline as capital is leveraged in support of deposit and asset
growth.
The following table shows our regulatory capital ratios and shareholders'
equity to total assets as of December 31, 2003:
AT DECEMBER 31, 2003
---------------------
REGULATORY ACTUAL
MINIMUM RATIO
----------- -------
Total risk-based capital ratio.............................. 8.0% 14.60%
Tier 1 risk-based capital ratio............................. 4.0% 13.52%
Tier 1 leverage ratio....................................... 4.0% 8.73%
Shareholders' equity to total assets........................ None 8.09%
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
26
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, 10, 15 and 16 of our Consolidated Financial Statements included in this
prospectus.):
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER
AT DECEMBER 31, 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.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL
OTHER COMMERCIAL COMMITMENTS AMOUNTS LESS THAN 1-3 4-5 AFTER
AT DECEMBER 31, 2003 COMMITTED 1 YEAR YEARS YEARS 5 YEARS
---------------------------- --------- --------- ----- ----- -------
(DOLLARS IN THOUSANDS)
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
Consolidated Financial Statements included in this prospectus.
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 re-price within these specific time periods,
either through maturity or rate adjustment. A "positive gap" for a given period
means that the amount of interest-
27
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.
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 4-12 1-5 OVER
3 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%
======= ======= ======= =======
28
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 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, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).
29
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.
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.
30
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.
31
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 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
32
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, although we have no definitive arrangements to establish any branches at
this time.
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 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.
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
33
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.
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 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.
34
CONSTRUCTION
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.
35
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 OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT 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.
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 pre-determined 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
36
$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 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
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.
37
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.
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.
38
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 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.
39
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
====== ====== ======= =======
40
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.
DUE 1 YEAR DUE DUE 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 predominate 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.
41
The following table sets forth the distribution of average deposits by
major category and the average rate paid in each year as applicable.
DISTRIBUTION OF AVERAGE DEPOSITS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
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.
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
42
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.
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
43
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.
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
44
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.
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 twelve month period following initial publication of any
financial statements that later require restatement;
- a prohibition on insider trading during pension plan black out 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
- 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
45
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 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
46
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.
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.
47
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 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
48
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.
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
49
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 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.
50
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.
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.
51
DIRECTOR
NAME AGE SINCE(1)
---- --- --------
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.
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.
52
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.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
SOLE VOTING SHARED
TOTAL AND VOTING AND
BENEFICIAL INVESTMENT INVESTMENT PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP 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 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. Under
applicable regulations, shares are deemed to be 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.
(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.
53
(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 Mrs. 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 G. 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
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 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 and their affiliates, 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.
54
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 the date of the
2004 annual meeting of shareholders, which we anticipate will be held in May
2004, each nonemployee who is elected as a director of 1st Colonial or the bank
will automatically be granted options to purchase 750 shares of our common
stock. 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.
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.
55
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.
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
OTHER ANNUAL
NAME AND 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 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 and the bank, has an employment agreement with the bank. 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 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.
56
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 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, 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
57
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. Banmiller,
Mr. Strangfeld and Mr. Faix are guaranteed by 1st Colonial.
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 BASE EXPIRATION
NAME GRANTED(1)(2) FISCAL YEAR(3) PRICE(2)(4) DATE
---- ------------- -------------- ---------------- ----------
Gerard M. Banmiller.............. 5,513(5) 50.0% $7.83 1/14/13
President and Chief Executive
Officer
James E. Strangfeld.............. 3,308(5) 30.0% $7.83 1/14/13
Executive Vice President
Robert C. Faix................... 1,103(5) 10.0% $7.83 1/14/13
Senior Vice President and Chief
Financial Officer
---------------
(1) Amounts represent securities underlying incentive stock options granted
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, and the 5% stock dividend paid on April 15, 2004 to shareholders of
record on April 1, 2004.
(3) 1st Colonial 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 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 our Stock Option Plan Committee, in shares of common stock
valued at their fair market value on the date of exercise, or in a
combination thereof.
(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 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 our 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
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aggregate dollar value of in-the-money unexercised options, separately
identifying exercisable and unexercisable options.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
12/31/03(1) 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 to shareholders of record on April 1, 2004.
(2) Based upon the mean between the bid and asked prices of the 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.
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 1(st) 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 1(st) 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,
59
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.
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.
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
60
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
entitle the holders 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. Neither these warrants nor the shares issuable upon
their exercise have been registered under the Securities Act of 1933, and
therefore neither can be sold or offered for sale unless an exemption from such
registration requirements (such as Rule 144) is available.
If, on or before June 29, 2007, we file a registration statement with the
SEC, then the holder of the warrant will have the right to register the shares
issued or issuable upon exercise of the warrant in the registration statement
under the Securities Act of 1933. We are required to deliver to the holder
written notice of our intention to file a registration statement, and the
holders must respond affirmatively within 30 business days after delivery of
such notice. In connection with these registration rights, we are required to
bear all expenses attendant to registering such securities, including the cost
of one counsel for any selling shareholders; provided, however, that we shall
not bear the expense of any underwriting discounts and commissions relating
thereto, which shall be borne by the selling shareholders, except as prohibited
by any state laws. Notwithstanding these rights, if, in the sole reasonable
judgment of the managing underwriter of any public offering by 1st Colonial, the
total amount of securities to be registered pursuant to these registration
rights will be determined to adversely affect the success of the registration of
our securities, then the amount of common stock to be registered on behalf of
the holders of the warrants will be reduced on a pro rata basis, based on the
number of shares that the underwriter reasonably believes will not adversely
affect the success of the registration of our securities, if any. With respect
to the registration statement containing this prospectus that was filed with the
SEC in March 2004, all of the holders of these warrants have exercised their
registration rights with respect to the shares issuable pursuant to the exercise
of these warrants, and these shares have been registered under the Securities
Act of 1933.
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.
Each of the 2002 warrants is evidenced by a certificate indicating the
total number of shares for which the warrant is exercisable. 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 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 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 is
StockTrans, Inc. with offices at 44 West Lancaster Avenue, Ardmore, Pennsylvania
19003.
61
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 nonnegotiated 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.
Following is a description of such provisions and the purpose and possible
effects of such provisions. 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 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.
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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.
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 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
63
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 nonnegotiated 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 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.
64
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 intends 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 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
65
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.
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 twelve 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 nonnegotiated 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 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
66
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 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.
67
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.
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.
68
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement,
Ryan Beck & Co., Inc has agreed to purchase, and the company has agreed to sell
to the underwriter, 720,000 shares of common stock. The shares will be offered
subject to receipt and acceptance by Ryan, Beck and to certain other conditions,
including the right to reject orders in whole or in part.
Under the terms and conditions of the underwriting agreement, the
underwriter is committed to accept and pay for all of the shares if any are
taken. The underwriting agreement provides that the obligations of the
underwriter are subject to approval of certain legal matters by their counsel,
including the authorization and the validity of the common stock and to other
conditions contained in the underwriting agreement, such as the effectiveness
with the SEC of the registration statement that contains this prospectus and the
receipt by the underwriter of certificates from our officers, legal opinions
from our lawyers and a letter from our independent public accountants regarding
our financial statements and the statistical data contained in the prospectus
and in our filings under the Securities Exchange Act of 1934.
The underwriter proposes to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus, and
to certain securities dealers (who may include the underwriter) at this price,
less a concession not in excess of $0.42 per share. The underwriter may allow,
and the selected dealers may reallow, a concession not in excess of $0.25 per
share to certain brokers and dealers. After the shares of common stock are
released for sale to the public, the offering price and other selling terms may
from time to time be changed by the underwriter.
In addition, the company has granted to Ryan Beck an option to purchase,
exercisable for a period of 30 days following the offering, additional shares of
common stock, not to exceed 108,000 shares, on the same terms as other shares of
common stock purchased by Ryan Beck. Ryan Beck may exercise the option to
purchase additional shares of common stock solely for the purpose of covering
over-allotments, if any, made in connection with the distribution of the common
stock.
Ryan Beck has informed us that it does not intend to confirm sales to any
accounts over which it exercises discretionary authority.
All of the executive officers and directors of the company, as well as the
holders of warrants to purchase 97,024 shares of our common stock, have agreed
that, for a period of 180 days after the closing of the offering, they will not,
without Ryan Beck's prior written consent, directly or indirectly, offer for
sale, sell, contract to sell, or grant any option to sell (including, without
limitations, any short sale), pledge, transfer, assign or otherwise dispose of
any shares of common stock or securities exchangeable for or convertible into
shares of common stock of 1st Colonial.
We have agreed to indemnify Ryan Beck and the persons who control it
against certain liabilities, including liabilities under the Securities Exchange
Act of 1934 and the Securities Act of 1933 and liabilities arising from breaches
of the representations, warranties and covenants contained in the underwriting
agreement, and, under certain conditions, to contribute to any payment that the
underwriters may be required to make for those liabilities.
During and after the offering, Ryan Beck may purchase and sell the common
stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the common stock. Ryan Beck also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the common stock sold in the offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or short covering transactions. These activities
may stabilize, maintain or otherwise affect the market price of the common stock
which may be higher than the price that might otherwise prevail in the open
market, and these activities, if commenced, may be discontinued at any time.
These transactions may be effected in the over-the-counter market or otherwise.
69
Certain officers and directors have indicated an intent to participate in
the offering through the purchase of approximately 62,600 total shares of common
stock. Under NASD interpretation IM 2110-1(d), such participation is permitted
where a specific portion of the offering is directed for sale to officers and
directors by the issuer. In addition, pursuant to NASD interpretation IM
2110-1(d), officers and directors who purchase shares of common stock will be
prohibited from the sale, transfer, assignment, pledge or hypothecation of the
common stock for a three month period following the closing date of the public
offering. We are directing 62,600 shares of common stock for purchase by
officers and directors in the offering. Ryan Beck has also agreed to accept a
lower commission on these directed shares.
LEGAL MATTERS
The legality of the shares of common stock being offered pursuant to this
prospectus will be passed upon for us by Stevens & Lee, a Pennsylvania
Professional Corporation, Cherry Hill, New Jersey. Certain legal matters will be
passed upon for the underwriter, Ryan Beck & Co., Inc., by the law firm of
Windels Marx Lane & Mittendorf, LLP, New Brunswick, 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, 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 in Washington,
D.C., a Registration Statement on Form SB-2 under the Securities Act of 1933,
with respect to the shares of common stock being offered by this prospectus.
This prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement. You
should review the Registration Statement and the exhibits thereto for further
information with respect to 1st Colonial. and the shares being offered.
Statements in this prospectus 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, 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
70
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.
71
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 Consolidated Financial Statements.................. F-7
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
========== ========== ==========
Earnings per share:
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
ADDITIONAL RETAINED COMPREHENSIVE TOTAL
COMMON PAID-IN EARNINGS (LOSS) SHAREHOLDERS' COMPREHENSIVE
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 145,482 common shares....... -- 1,122 -- -- 1,122
Stock split effected in the form
of a dividend, 10%............. -- 93 (93) -- --
Net unrealized loss on securities
available for sale, net of
tax............................ -- -- -- (16) (16) $ (16)
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 shares in stock
offering....................... -- 1,931 -- -- 1,931
Exercise of director's options... -- 4 -- -- 4
Net unrealized gain on securities
available for sale, net of
tax............................ -- -- -- 3 3 $ 3
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
available for sale, net of
tax............................ -- -- -- (174) (174) $(174)
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.
(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-7
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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.
F-8
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-9
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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).
BASIC DILUTIVE
EARNINGS EARNINGS
NET PER PER
INCOME 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.
F-10
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
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.
F-11
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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 UNREALIZED UNREALIZED
COST GAINS 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
======= === ==== ======
F-12
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS 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
======= === ==== ======
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 AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
Due in one year or 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.
F-13
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
UNREALIZED
FAIR VALUE 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)
======= ====
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-14
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 costs......................................... 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-15
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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%
==== ======== ===== ==== ======= =====
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.
F-16
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Certificates 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 loans averaged
$35,000 for the year ended December 31, 2003. The Bank borrowed $110,000 for a
period of two days during 2002.
F-17
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
NO. OF SHARES PER-SHARE
NET INCOME OUTSTANDING AMOUNT
---------- ------------- ---------
2003:
Basic earnings per share......................... $500 1,411,529 $ 0.35
Effect of dilutive stock equivalents............. -- 34,805 0
---- --------- ------
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 earnings 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
---- --------- ------
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.
(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.
F-18
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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.
F-19
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 equivalents............... $ 16,516 $ 16,516 $12,161 $12,161
Investments held to maturity............ 5,808 5,796 1,220 1,218
Investments available for sale.......... 27,985 27,985 29,934 29,934
Mortgages 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 deposit................. 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 financial 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 $ --
======== ======== ======= =======
(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)
===== ==== ====
F-20
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)
==== ==== =====
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....................................................... $335 $329 $ (94)
==== ==== =====
F-21
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
==== ===== ====
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.
F-22
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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
F-23
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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
F-24
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 19,915 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
===== =====
F-25
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-26
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 DeNovo 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%.
(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
====== ======
F-27
1ST COLONIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
==== ====
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-28
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-29
------------------------------------------------------
------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS 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 NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF 1ST COLONIAL
HAVE NOT CHANGED SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
Summary............................... 1
Summary Financial and Other Data...... 4
Risk Factors.......................... 7
Use of Proceeds....................... 13
Market for Our Common Stock........... 13
Dividend Policy....................... 14
Capitalization........................ 15
Special Note Regarding Forward-Looking
Statements.......................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 32
Supervision and Regulation............ 44
Management............................ 51
Description of Our Securities......... 60
Underwriting.......................... 69
Legal Matters......................... 70
Experts............................... 70
Where You Can Obtain More
Information......................... 70
Index to Consolidated Financial
Statements.......................... F-1
UNTIL MAY 31, 2004, ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS.
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[1ST COLONIAL LOGO]
720,000 SHARES
OF COMMON STOCK
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PROSPECTUS
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(RYAN BECK & CO.)
APRIL 20, 2004
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