1ST CONSTITUTION BANCORP - FORM 8-K - EX-99.2 - EXHIBIT 99.2 - March 13, 2020

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Exhibit 99.2

 

1ST Constitution Bancorp

Pro Forma Condensed Combined Balance Sheet

As of September 30, 2019

 

                 Pro Forma 
                 Combined 
   1ST       Pro Forma     1ST 
   Constitution   Shore   Adjustments     Constitution 
   (Dollars in thousands, except shares and per share amounts) 
Assets                  
Cash and cash equivalents  $20,756   $34,505   $(26,418) 1,8  $28,843 
Investment Securities                      
  Available for sale   135,084    11,483    0      146,567 
  Held to maturity   74,909    15,878    349  2   91,136 
Loans held for sale   6,738    0    0      6,738 
Total loans   1,025,031    210,472    (5,562) 2   1,229,941 
Allowance for loan losses   (8,977)   (2,571)   2,571  2   (8,977)
Net loans   1,016,054    207,901    (2,991)     1,220,964 
Goodwill   11,854    0    20,209  7   32,063 
Other  intangibles   311    0    2,810  3   3,121 
Other assets   76,859    15,905    (127) 2,4,8   92,637 
                       
Total Assets  $1,342,565   $285,672   $(6,168)    $1,622,069 
                       
Liabilities and Shareholders' Equity                      
Liabilities                      
Deposits   1,023,059    249,929    0      1,272,988 
Other borrowings   137,800    0    0      137,800 
Redeemable subordinated debentures   18,557    0    0      18,557 
Other liabilities   24,622    2,729    1,766  5   29,117 
Total Liabilities   1,204,038    252,658    1,766      1,458,462 
Total Shareholders' Equity   138,527    33,014    (7,934) 1,6,8   163,607 
                       
Total Liabilities and Shareholders' Equity  $1,342,565   $285,672   $(6,168)    $1,622,069 
                       
Book value  $15.95   $10.57          $16.05 
Tangible book value  $14.55   $10.57          $12.60 
Shares outstanding   8,682,401    3,123,456           10,191,749 

 

  
 

 

Adjustments: Pro Forma Condensed Combined September 30, 2019 Balance Sheet

 

1To adjust for the consideration to be exchanged based on the merger agreement. The outstanding stock options issued by Shore will be cashed out at $16.50 per share.

 

Cash paid to shareholders  $24,235 
Cash paid for options   1,433 
  Total cash paid   25,668 
Common shares issued   25,704 
  Total consideration exchanged  $51,372 

 

2The pro forma adjustments reflect the estimated fair values of the assets. With respect to loans, the fair value adjustment includes a negative $5.6 million credit component based upon 1st Constitution management's review and analysis of a significant portion of the loans.

 

No fair value adjustment to loans for interest rates was made at the time of initial analysis because 1st Constitution management estimated that overall the yield of the loans in the loan portfolio approximated market yields.

 

The allowance for loan losses at September 30, 2019 is eliminated. The estimated fair value of leasehold improvements is $1.0 million lower than the current carrying amount. The carrying value of OREO was reduce by $623,000 to reflect 1st Constitution management's plan to dispose of the OREO assets in an auction, bulk sale or some other manner.

 

Investments -HTM  $349 
Loans   (5,562)
Allowance for loan losses   2,571 
Fixed assets   (1,000)
OREO   (623)
   $(4,265)

 

3The pro forma adjustment reflects the estimate fair value of the identified intangible asset for core deposits.

 

 Core deposit intangible  $2,810 

 

  
 

 

4The pro forma adjust reflects the estimated effect to the net deferred tax asset and liability of the fair value pro forma adjustments. The deferred tax asset or liability was calculated based upon a combined federal and state statutory tax rate of 28.11% to 30.01% depending upon the estimated year of reversal of the book-tax differences.

 

Deferred tax liability-HTM investments  $(98)
Deferred tax asset- loan valuation   841 
Deferred tax asset-fixed assets   281 
Deferred tax asset-OREO   175 
Deferred tax asset-stock option buy-out   430 
Deferred tax asset-employment contracts   530 
Deferred tax liability-AFS investments-OCI   1 
Deferred tax liability- core deposit intangible   (790)
   $1,370 

 

5The pro forma adjustment reflects the estimated employment contract termination liability

 

Accrued expenses  $1,766 

 

6The pro forma adjustment eliminates the shareholders' equity of Shore

 

Common stock  $(27,182)
Retained earnings (loss)   (5,822)
Accumulated other comprehensive income   (4)
   $(33,008)

 

7The estimated fair value of assets acquired and liabilities assumed in the merger are as follows:

 

Assets of Shore    
Cash and cash equivalents  $34,505 
Investment Securities     
  Available for sale   11,483 
  Held to maturity   16,227 
Total loans   204,910 
Other  intangibles   2,810 
Other assets   15,652 
Total assets acquired   285,587 
      
Liabilities of Shore     
Deposits  $249,929 
Other liabilities   4,495 
Total liabilities assumed   254,424 
      
Net assets acquired  $31,163 
Total consideration exchanged   51,372 
Excess of consideration paid over fair value of assets acquired  $20,209 

 

8Record future 1st Constitution and Shore transaction expenses related to completing the merger transaction

 

Retained earnings  $(750)
Deferred tax asset   126 
Net adjustment to retained earnings  $(624)

 

  
 

 

Any changes in the price of 1st Constitution common stock would change the purchase price allocated to goodwill.

 

The following table represents the sensitivity of the purchase price and resulting goodwill to be recorded

based upon the assumed change in the price of 1st Constitution common stock of $18.75, which was the closing price of the stock on September 30, 2019.

 

   Purchase   Estimated 
   Price   Goodwill 
Unaudited, dollars in thousands          
As presented in the pro forma combined condensed balance sheet  $51,372   $20,209 
20% increase in 1st Constitution common stock price  $56,513   $25,350 
20% decrease in 1st Constitution common stock price  $46,231   $15,068 

 

Minimum 1st Constitution common stock price allowed under the merger agreement:

There is no minimum price under the merger agreement, but if 1st Constitution's price is less than $15.02, Shore may terminate the merger agreement, under certain circumstances described in section 8.1 (k) of the merger agreement, unless 1st Constitution agrees to increase the share consideration by increasing the exchange ratio in accordance with section 8.1 (k) of the merger agreement.

 

  
 

 

1ST Constitution Bancorp

Pro Forma Condensed Combined Statement of Income

Combining the Nine Months Ended September 30, 2019

 

                  Pro Forma 
                  Combined 
   1ST       Pro Forma      1ST 
   Constitution   Shore   Adjustments      Constitution 
   (Dollars in thousands, except shares and per share amounts) 
Interest Income                   
Loans, including fees  $38,342   $8,406   $834  1   $47,582 
Securities and other   5,000    955    (417) 2,3    5,538 
Total Interest Income   43,342    9,361    417      53,120 
                        
Interest Expense                       
Deposits   7,892    1,588    0       9,480 
Borrowings   698    0    0       698 
Redeemable subordinated debentures   575    0    0       575 
Total Interest Expense   9,165    1,588    0       10,753 
                        
Net Interest Income   34,177    7,773    417      42,367 
Provision for loan losses   1,050    0    0       1,050 
Net Interest Income After                       
Provision for Loan Losses   33,127    7,773    417      41,317 
                        
Other Income   6,242    492    0       6,734 
Other Expense   25,096    4,922    (707) 4,5,6    29,311 
Income before Income Taxes   14,273    3,343    1,124       18,740 
Provision for income taxes   3,883    1,056    219 7    5,138 
Net Income Available to Common Shareholders  $10,390   $2,287   $905      $13,582 
                        
                        
Earnings Per Share                       
Basic  $1.20   $0.73           $1.34 
Diluted  $1.19   $0.72           $1.33 
                        
Weighted Average Shares Outstanding                       
Basic   8,641,684    3,123,456            10,151,032 
Diluted   8,698,959    3,192,318            10,208,307 

 

  
 

 

Adjustments: Pro Forma Condensed Combined Statement of Income - Nine Months Ended September 30, 2019

 

1The pro forma adjustment to loan interest income includes the negative fair value adjustment, which is being accreted to income over the estimated maturity of the loans of five years on a straight line basis.

Interest income-loans   834 

 

2The pro forma adjustment to securities and other interest income reflects the reduction of cash and the corresponding reduction of interest income

Interest income-securities and other   365

 

3The pro forma adjustment to securities and other interest income reflects the amortization of the fair value adjustment to investment securities over the estimated maturity of five years

Interest income-securities and other   (52)

 

4The pro forma adjustment reduced depreciation expense for the effect of the fair value adjustment to leasehold improvements over the estimated life of 20 years on a straight line basis.

Other expense   (38)

 

5The pro forma adjustment reflects the amortization of the core deposit intangible asset over the estimated life of 10 years using accelerated amortization

Other expense   301 

 

6The pro forma adjustment eliminates the merger expenses incurred through September 30, 2019

Other expense   (582)

 

7The pro forma adjustment reflects the effect on income tax expense of the above pro forma adjustments

Provision for income taxes   219

 

 

 

 

 

 

 

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