CRANBURY, N.J., Feb. 02, 2021 (GLOBE NEWSWIRE) -- 1ST Constitution Bancorp (NASDAQ: FCCY), the holding company for 1ST Constitution Bank, today reported net income of $6.1 million and diluted earnings per share of $0.59 for the three months ended December 31, 2020 compared to net income of $3.2 million and diluted earnings per share of $0.34 for the three months ended December 31, 2019. Net income increased 87.0% and diluted earnings per share increased 73.5% for the fourth quarter of 2020 compared to the fourth quarter of 2019. Net income for the three months ended December 31, 2019 included $880,000 of after tax merger expenses related to the merger of Shore Community Bank (“Shore”) with and into the Bank in November 2019.
For the year ended December 31, 2020, net income was $18.1 million and diluted earnings per share was $1.76 compared to net income of $13.6 million and diluted earnings per share of $1.53 for the year ended December 31, 2019. Net income for the years ended December 31, 2020 and 2019 included $45,000 and $1.3 million, respectively, of after tax merger expenses related to the merger of Shore.
The Board of Directors declared a quarterly cash dividend of $0.09 per share of common stock that will be payable on February 26, 2021 to shareholders of record on February 12, 2021.
Robert F. Mangano, President and Chief Executive Officer, stated, “We reported record earnings for the fourth quarter and the full year of 2020 despite the unprecedented challenges presented by the pandemic. The Company’s diversified lending platforms contributed significantly to the increase in revenue and net income during the fourth quarter and throughout the year as the Company’s residential mortgage banking and mortgage warehouse lending operations benefited from the low interest rate environment.”
Mr. Mangano added, “We addressed the economic uncertainty by providing access to additional credit and forbearance on loan interest and or principal payments to customers, significantly enhancing the frequency and level of critical review of the loan portfolio and recording an annual provision for loan losses of $6.7 million, which increased the allowance for loan losses by 68.7% to $15.6 million at December 31, 2020.”
Mr. Mangano continued, “I could not be prouder of the dedication, hard work and resiliency of our employees during this extremely difficult period. They worked tirelessly to serve and assist our customers and maintain the operations of the Company. Our financial success is a reflection of their commitment. Recently, Newsweek Magazine named 1st Constitution Bank the “2021 Best Small Bank in New Jersey.”
FOURTH QUARTER 2020 HIGHLIGHTS
- Return on average total assets and return on average shareholders' equity were 1.31% and 13.13%, respectively.
- Net interest income was $16.4 million and the net interest margin was 3.81% on a tax equivalent basis.
- A provision for loan losses of $1.4 million was recorded and net charge-offs were $168,000.
- Total loans were $1.4 billion at December 31, 2020 and increased $217.7 million from December 31, 2019. Mortgage warehouse lines increased $151.7 million, commercial real estate loans increased $51.3 million and commercial business loans increased $49.5 million, which included $58.8 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.
- Mortgage warehouse lines totaled $388.4 million at December 31, 2020 and $1.8 billion of residential mortgage loans were financed during the fourth quarter of 2020.
- Residential mortgage banking operations originated $117.4 million of residential mortgages, sold $113.6 million in residential mortgages and recorded a $3.2 million gain on sales of loans.
- Total deposits were $1.6 billion at December 31, 2020 and increased $285.5 million, with non-interest demand deposits increasing $137.7 million from December 31, 2019.
- Non-performing assets were $17.3 million, or 0.96% of total assets at December 31, 2020, representing an increase of $12.3 million from December 31, 2019 and included $92,000 of other real estate owned (“OREO”).
COVID-19 Impact and Response
The Company in its previous earnings press releases during 2020 reported the actions that it took in response to the sudden emergence of the COVID-19 global pandemic.
As the Company conducts its daily operations, the health and safety of our employees and customers remains our primary concern and we continue to maintain the same measures and protective procedures that we implemented in the first quarter of 2020. The Company re-opened interior access to all of our branch offices to customers in June 2020 and the offices continue to be open for customers. Where feasible, the Company is allowing its staff to work remotely. The Company rewarded all its staff with a bonus payment in the fourth quarter of 2020 for their dedication during this pandemic. In addition, the Company is providing paid time off to employees to obtain COVID-19 vaccinations.
During the fourth quarter of 2020, the Company continued working with customers impacted by the economic disruption. In addition, management significantly increased the provision for loan losses in response to the higher estimated incurred losses in the loan portfolio. Management may further adjust the provision and allowance for loan losses in response to changes in economic conditions and the performance of the loan portfolio in future periods.
To support our loan and deposit customers and the communities we serve:
- We continue to provide access to additional credit and forbearance on loan interest and or principal payments for up to 90 days where management has determined that it is warranted. During 2020, $149.3 million of loans ($140.9 million of commercial loans and $8.4 million of consumer loans) were modified to provide deferral of interest and or principal by borrowers for up to 90 days. As of December 31, 2020, all loans that had previously received deferrals were no longer deferred, except one commercial real estate loan with a balance of $6.0 million received an additional deferral of principal payments up to 90 days and two commercial real estate loans totaling $4.6 million were placed on non-accrual status in the third quarter of 2020.
- As a long-standing SBA preferred lender, we actively participated in the SBA’s PPP lending program established under the CARES Act. As of December 31, 2020, we funded 467 SBA PPP loans totaling $75.6 million of which $15.8 million of PPP loans were forgiven by the SBA in the fourth quarter of 2020.
- The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act (“Economic Aid Act”) was enacted in December 2020 in further response to the coronavirus pandemic. Among other things, the Economic Aid Act provides relief to borrowers to access additional credit through the SBA's PPP program. We are actively participating in the new program and have accepted 120 applications for PPP loans totaling $22.1 million. The SBA has approved 62 applications for $8.6 million of PPP loans. Of the total approved, we have funded $8.7 million of PPP loans as of January 29, 2021.
- We are participating in the Federal Reserve's PPP loan funding program and may pledge the PPP loans to collateralize a like amount of borrowings from the Federal Reserve at a favorable interest rate of 0.35% up to a two-year term.
Modification of Loans and Deferral of Payments
Through December 31, 2020, $140.9 million of commercial business and commercial real estate loans and $8.4 million of consumer loans had been modified to provide deferral of interest and or principal by borrowers for up to 90 days. As of December 31, 2020, all commercial business, commercial real estate and consumer loans that had previously received deferrals were no longer deferred and had made the contractually due payments, except for three loans. During the fourth quarter of 2020, one commercial real estate loan with a balance of $6.0 million received an additional deferral of principal payments up to 90 days. Two commercial real estate loans for hotels totaling $4.6 million that had received a modification in the second quarter of 2020 were placed on non-accrual during the third quarter of 2020.
Allowance for Loan Losses
Management reviewed the loan portfolio at December 31, 2020 in connection with the evaluation of the adequacy of the allowance for loan losses. Loans with balances of less than $250,000 were generally excluded from management’s review. As a result of management’s review of the loan portfolio at December 31, 2020, a provision for loan losses of $1.4 million was recorded for the fourth quarter of 2020 and the allowance for loan losses was increased to $15.6 million at December 31, 2020.
Management reviewed over 90% of the $140.9 million of commercial business and commercial real estate loans that had been modified to defer interest and or principal for up to 90 days.
At December 31, 2020, the allowance for loan losses included $618,000 for loans that were rated Pass-Watch and had received a deferral. This reflects management’s previously reported determination that “Pass-Watch” credit rated loans with modifications or deferrals suggest a weaker financial strength of the borrower than “Pass” credit rated loans, thereby warranting additional reserves for loan losses than would ordinarily be reserved for “Pass-Watch” credit rated loans.
Management previously identified the hotel and restaurant-food service industries as most likely to be adversely impacted in the near-term by the economic disruption caused by the COVID-19 pandemic. At December 31, 2020 loans to hotel and restaurant-food service industries were $67.8 million and $64.0 million, respectively. Management reviewed over 99% of the hotel loans and over 96% of the restaurant-food service loans.
All construction loans are closely monitored on a quarterly basis and are reviewed to assess the progress of construction relative to the plan and budget and lease-up or sales of units.
Management also reviewed loans to schools that are private educational institutions that are generally sponsored or affiliated with religious organizations. The loans totaled $26.4 million at December 31, 2020, and 97% of these loans were reviewed.
The expanded review also included $6.0 million, or over 31%, of commercial loans made under the SBA 7(a) loan program, totaling $19.3 million at December 31, 2020.
As a result of this fourth quarter of 2020 review, loans totaling $3.9 million and $500,000 were down-graded to “Special Mention” and “Substandard,” respectively.
Discussion of Financial Results
On November 8, 2019, the Company completed the merger of Shore with and into the Bank (the "Shore Merger").
Net income was $6.1 million, or $0.59 per diluted share, for the fourth quarter of 2020 compared to net income of $3.2 million, or $0.34 per diluted share, for the fourth quarter of 2019. For the three months ended December 31, 2020, net interest income increased $3.2 million compared to the three months ended December 31, 2019 driven primarily by the increase in the average balance of loans since December 31, 2019. Gain on sales of loans for the fourth quarter of 2020 increased $1.9 million compared to the fourth quarter of 2019 due primarily to the higher volume of residential mortgage loans sold. The provision for loan losses was $1.4 million for the fourth quarter of 2020 compared to $300,000 for the fourth quarter of 2019. This increase reflected management’s current estimate of loan losses that were incurred due to the economic disruption caused by the COVID-19 pandemic. Non-interest expenses were $11.2 million for the fourth quarter of 2020, representing an increase of $710,000, compared to $10.5 million for the fourth quarter of 2019, which included $1.2 million of Shore merger-related expenses.
Net interest income was $16.4 million for the fourth quarter of 2020 and increased $3.2 million compared to net interest income of $13.2 million for the fourth quarter of 2019. Total interest income was $18.3 million for the three months ended December 31, 2020 compared to $16.7 million for the three months ended December 31, 2019. The increase in total interest income was primarily due to a net increase of $330.5 million in average loans, reflecting growth in all segments of the loan portfolio except construction loans and loans to individuals, and included $69.9 million in average SBA PPP loans. Average interest-earning assets were $1.7 billion, with a tax-equivalent yield of 4.27%, for the fourth quarter of 2020 compared to average interest-earning assets of $1.4 billion, with a tax-equivalent yield of 4.92%, for the fourth quarter of 2019. The tax-equivalent yield on average interest-earning assets for the fourth quarter of 2020 declined 65 basis points to 4.27%, due primarily to the decline in market interest rates beginning in the third quarter of 2019 and continuing throughout 2020. The Federal Reserve reduced the targeted federal funds rate 50 basis points in the third quarter of 2019, 25 basis points in the fourth quarter of 2019 and, in response to the COVID-19 pandemic, further reduced the targeted federal funds rate by 150 basis points in March 2020. The prime rate was 5.00% at September 30, 2019. As a result of the reductions in the targeted federal funds rate in 2019, the prime rate declined to 4.75% in October 2019 and declined further to 3.25% in March 2020. The Bank had approximately $570.5 million of loans with an interest rate tied to the prime rate and approximately $47.5 million of loans with an interest rate tied to either 1- or 3-month LIBOR at December 31, 2020.
Interest expense on average interest-bearing liabilities was $2.0 million, with an interest cost of 0.65%, for the fourth quarter of 2020, compared to $2.4 million, with an interest cost of 0.79%, for the third quarter of 2020 and $3.6 million, with an interest cost of 1.39%, for the fourth quarter of 2019. Despite an increase of $175.3 million in average interest-bearing liabilities for the fourth quarter of 2020 compared to the fourth quarter of 2019, interest expense declined $1.6 million largely due to the decline in interest rates paid on deposits, borrowings and the redeemable subordinated debentures as a direct result of the falling interest rate environment. The average cost of interest-bearing deposits was 0.64% for the fourth quarter of 2020, 0.81% for the third quarter of 2020 and 1.32% for the fourth quarter of 2019. The lower interest cost of interest-bearing deposits for the fourth quarter of 2020 compared to the fourth quarter of 2019 primarily reflected a steep decline in market interest rates beginning in the third quarter of 2019 and continuing through 2020. The interest rates paid on deposits generally do not adjust quickly to rapid changes in market interest rates and decline over time in a falling interest rate environment. Of the total increase in average interest-bearing liabilities, certificates of deposit which generally have a higher interest cost than other types of interest-bearing deposits, increased $48.2 million for the fourth quarter of 2020. At December 31, 2020, there were $94.7 million of certificates of deposits with an average interest cost of 1.46% that mature within the following six months. Management will continue to monitor and adjust the interest rates paid on deposits to reflect the then current interest rate environment and competitive factors.
The net interest margin on a tax-equivalent basis was 3.81% for the fourth quarter of 2020 compared to 3.87% for the fourth quarter of 2019, representing a decline of 6 basis points due primarily to the lower interest rate environment beginning in the third quarter of 2019. Interest income for the fourth quarter of 2020 included $339,000 of fee income related to PPP loans that were forgiven and paid-off by the SBA and $224,000 of interest income collected on non-performing loans that were fully paid-off.
The Company recorded a provision for loan losses of $1.4 million for the fourth quarter of 2020 compared to a provision for loan losses of $300,000 for the fourth quarter of 2019. The significant increase in the provision for loan losses in the fourth quarter of 2020 included an additional provision of approximately $500,000 to increase specific reserves on impaired loans, $208,000 to increase the qualitative risk factors for local economic conditions and $580,000 to increase the qualitative risk factors for hotel and restaurant loans. This provision also reflected changes in loan ratings and the growth and change in mix of the loan portfolio in the fourth quarter of 2020. At December 31, 2020, total loans were $1.4 billion and the allowance for loan losses was $15.6 million, or 1.09% of total loans, compared to total loans of $1.2 billion and an allowance for loan losses of $9.3 million, or 0.76% of total loans, at December 31, 2019. The allowance for loan losses, excluding the allocated reserve for mortgage warehouse lines, was $13.8 million, or 1.32% of total loans excluding mortgage warehouse lines. Acquisition accounting for the Shore merger in 2019 and the New Jersey Community Bank (“NJCB”) merger in 2018 resulted in the Shore and NJCB loans being recorded at their fair value and no allowance for loan losses as of the effective time of the respective mergers. The unaccreted general credit fair value discounts related to the former Shore and NJCB loans were approximately $1.6 million and $0.5 million at December 31, 2020, respectively. In addition, at December 31, 2020, there were $58.8 million of SBA PPP loans which are 100% guaranteed by the SBA and, accordingly, no reserve was provided.
Non-interest income was $4.4 million for the fourth quarter of 2020, representing an increase of $2.4 million, or 118.1%, compared to $2.0 million for the fourth quarter of 2019. The significant increase in non-interest income was driven primarily by a $1.9 million increase in gain on sales of loans. In the fourth quarter of 2020, residential mortgage banking operations originated approximately $117.4 million of residential mortgages, sold $113.6 million of residential mortgages and recorded $3.2 million of gain on sales of loans compared to $40.9 million of residential mortgages originated, $45.5 million of residential mortgage loans sold and $1.2 million of gain on sales of loans recorded in the fourth quarter of 2019. The residential mortgage loan pipeline was $42.5 million at December 31, 2020. Management believes that the increase in residential mortgage loans originated and sold was due primarily to increased residential mortgage refinancing activity as a result of significantly lower mortgage interest rates in the 2020 period compared to the 2019 period. In the fourth quarter of 2020, $705,000 of SBA loans were sold and gains of $59,000 was recorded compared to $1.5 million of SBA loans sold and gains of $112,000 recorded in the fourth quarter of 2019. For the fourth quarter of 2020 compared to the fourth quarter of 2019, service charges on deposit accounts decreased $43,000, due primarily to lower overdraft fees. Other income increased $494,000 in the fourth quarter of 2020 compared to the fourth quarter of 2019, which included a $238,000 loss on sale of OREO. Excluding the loss on sale of OREO, other income increased $256,000 primarily due to a $57,000 increase in debit card interchange fees, an interest rate swap fee collected of $29,000, $54,000 of fees and reimbursed expenses related to the resolution of non-performing loans, a recovery of $44,000 of principal on a previously impaired investment security and general increases in other income components.
Non-interest expenses were $11.2 million for the fourth quarter of 2020 and increased $710,000, or 6.8%, compared to $10.5 million for the fourth quarter of 2019, which included $1.2 million of expenses related to the Shore merger. Salaries and employee benefits expense increased $1.6 million, or 27.0%, for the fourth quarter of 2020 compared to the fourth quarter of 2019 due primarily to a $945,000 increase in mortgage commissions resulting from significantly higher residential mortgage lending activity, $150,000 in temporary staffing costs, $107,000 in special bonus compensation paid to all employees, merit increases and increases in employee benefit expenses, which amounts were partially offset by higher deferred loan origination expenses of approximately $95,000. FDIC insurance expense increased $291,000 due to the growth of assets, a credit of $106,000 from the FDIC related to the third quarter of 2019 assessment and an increase in the FDIC assessment rate in 2020. Other operating expenses decreased $73,000, or 4.0% for the fourth quarter of 2020 compared to the fourth quarter of 2019, resulting primarily from net decreases in various components of other operating expenses.
Income tax expense was $2.1 million for the fourth quarter of 2020, resulting in an effective tax rate of 26.0%, compared to income tax expense of $1.1 million, which resulted in an effective tax rate of 26.3% for the fourth quarter of 2019. The $1.0 million increase in income tax expense was due to an increase of $3.8 million in pre-tax income in the fourth quarter of 2020 compared to the fourth quarter of 2019.
Total assets increased $220.6 million to $1.81 billion at December 31, 2020 from $1.59 billion at December 31, 2019, due primarily to a $217.7 million increase in total loans, a $23.9 million increase in loans held for sale and a $7.2 million increase in total cash and cash equivalents which were partially offset by a $14.7 million decrease in total investment securities. The increase in total assets was funded primarily by a $285.5 million increase in deposits. Total portfolio loans at December 31, 2020 were $1.43 billion, compared to $1.22 billion at December 31, 2019. The $217.7 million increase in loans was due primarily to an increase of $151.7 million in mortgage warehouse lines, an increase of $51.3 million in commercial real estate loans and an increase of $49.5 million in commercial business loans which included $58.8 million of SBA PPP loans, and was partially offset by decreases in other components of the loan portfolio. Total investment securities were $217.7 million at December 31, 2020, representing a decrease of $14.7 million from $232.4 million at December 31, 2019. Investment securities available for sale decreased $30.6 million and investment securities held to maturity increased $15.9 million at December 31, 2020 from December 31, 2019.
Total deposits increased $285.5 million to $1.56 billion at December 31, 2020 from $1.28 billion at December 31, 2019. The increase in deposits was due primarily to a $137.7 million increase in non-interest-bearing demand deposits, a $48.4 million increase in interest-bearing demand deposits, a $75.2 million increase in savings deposits and $24.2 million increase in certificates of deposit. Short-term borrowings decreased $82.2 million to $9.8 million at December 31, 2020, compared to $92.0 million at December 31, 2019 as a result of the increase in total deposits.
Regulatory capital ratios for the Company and the Bank continue to reflect a strong capital position. Under applicable regulatory capital standards, the Company’s estimated common equity Tier 1 to risk-based assets (“CET1”), total risk-based capital, Tier I capital, and leverage ratios were 9.92%, 12.16%, 11.12% and 9.41%, respectively, at December 31, 2020. The Bank’s estimated CET1, total risk-based capital, Tier 1 capital and leverage ratios were 11.11%, 12.15%, 11.11% and 9.40%, respectively, at December 31, 2020. The Company and the Bank are considered “well capitalized” under these capital standards.
Asset Quality
Non-accrual loans were $16.4 million at December 31, 2020 compared to $4.5 million at December 31, 2019. During the year ended December 31, 2020, $14.5 million of loans were placed on non-accrual status and consisted of a participation in a construction loan with a balance of $7.5 million, $6.8 million of commercial real estate loans, a $156,000 residential loan and a $84,000 commercial business loan. During the year, $2.7 million of non-performing loans and $1.8 million of purchased credit impaired loans were repaid.
Non-performing loans represented 1.20% of total loans and non-performing assets represented 0.96% of total assets at December 31, 2020 compared to 0.37% and 0.32% at December 31, 2019, respectively.
OREO at December 31, 2020 was $92,000 and consisted of one parcel of land that was acquired in the Shore merger. During 2020, $479,000 of OREO was sold and a gain on sale of OREO of $75,000 was recorded.
About 1ST Constitution Bancorp
1ST Constitution Bancorp, through its primary subsidiary, 1ST Constitution Bank, operates 25 branch banking offices in Asbury Park, Cranbury (2), Fair Haven, Fort Lee, Freehold, Hamilton, Hightstown, Hillsborough, Hopewell, Jackson, Jamesburg, Lawrenceville, Little Silver, Long Branch, Manahawkin, Neptune City, Perth Amboy, Plainsboro, Princeton, Rocky Hill, Rumson, Shrewsbury and Toms River (2), New Jersey.
1ST Constitution Bancorp is traded on the Nasdaq Global Market under the trading symbol “FCCY” and information about the Company can be accessed through the Internet at www.1STCONSTITUTION.com.
