Notes to Financial Statements
December 31, 2013 and 2012
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1.
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Description of the Plan
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The following description of the 1st Constitution Bank 401(k) Retirement Savings Plan (the “Plan”) provides only general information. Participants should refer to the plan document for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan covering all eligible employees of 1st Constitution Bank (the “Company” or “Sponsoring Employer”) who have completed 6 months of service and are age twenty-one or older. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
During 2013 the Plan was amended to allow for two participant loans to be outstanding at one time.
Contributions
Each year, participants may contribute up to 100% of pretax annual compensation, as defined by the Plan up to the maximum limits of the Internal Revenue Code (“IRC”). Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. Participant contributions to the Plan are recorded in the period that payroll deductions are made from participants. The Company contributes a matching contribution of 3% of eligible participant compensation, as defined by the Plan. Matching Company contributions are recorded in the same period. Participants direct the investment of all contributions into various investment options offered by the Plan. Contributions are subject to certain limitations.
Participant Accounts
Each participant’s account is credited with the participant’s contribution and allocations of (a) the Company’s contribution and (b) Plan earnings, and charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
Vesting
Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company’s contribution is based on years of continuous service. Participants are fully vested after three years of credited service, as follows:
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1 year
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0%
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2 years
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50%
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3 years
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100%
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A year of service for vesting will be determined on the basis of the hours of service method. The participant is credited with a year of service for vesting purposes upon completion of 1,000 hours of service during the Plan year.
1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
Notes Receivable from Participants
Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Borrowings are secured by the balance in the participant's account and bear interest rates ranging from 3.25% to 4.25% at December 31, 2013. Principal and interest is paid ratably through bi-weekly payroll deductions. Terms range from one to five years or greater for the purchase of a primary residence. The number of outstanding loans that a participant can have at one time is two loans.
Payment of Benefits
On termination of service, a participant may elect to receive an amount equal to the value of the participant’s vested interest in his or her account in a lump sum. If the balance is equal to or greater than $5,000, the participant may elect to defer payment. In addition, the Plan allows for hardship distributions if certain criteria are met.
Forfeited Accounts
At December 31, 2013 and 2012, forfeited non-vested accounts totaled $-0- and $9,219, respectfully. The forfeiture account is used to offset Plan expenses or future Company contributions. During 2013, $12,088 was used to reduce Plan expenses and Company contributions.
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2.
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Summary of Significant Accounting Policies
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Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of accounting.
Investment contracts held by a defined contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The Plan invests in an investment contract through a common collective trust fund. The Statement of Net Assets Available for Benefits presents the fair value of the investment contract held in the common collective trust fund as well as the adjustment of the fully benefit-responsive contract from fair value to contract value. The Statement of Changes in Net Assets Available for Benefits is prepared on a contract value basis.
1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires Plan management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3 for a discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan's gains and losses on investments bought and sold as well as held during the year.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent notes receivable are recorded as distributions based upon the terms of the plan document.
Administration of Plan Assets
The Plan’s assets were administered under a contract with Northeast Retirement Services (“NRS”) as the record keeper until September 30, 2013 at which time it entered a contract with Daily Access Corporation (DAC) as the new record keeper. MG Trust remained as the custodian and trustee of the Plan. The custodian invests funds received from contributions, investment sales, interest, and dividend income and makes distribution payments to participants. Certain administrative expenses of maintaining the Plan are paid by the Company.
Payment of Benefits
Benefits are recorded when paid.
1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
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3.
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Fair Value Measurements
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The Plan measures its investments at fair value on a recurring basis in accordance with U.S. GAAP. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework that the authoritative guidance establishes for measuring fair value includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Plan for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in inactive markets for identical or similar assets, and other observable inputs.
Level 3 - Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and similar techniques
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012. There were no transfers of investments between Level 1 and Level 2 during the years ended December 31, 2013 and 2012. The Plan held no Level 3 Investments during 2013 or 2012.
Shares of registered investment companies are valued at the quoted net asset value (“NAV”) of shares held by the Plan at year end.
The common collective trust fund is valued based upon the units of the common collective trust fund held by the Plan at year end times the respective unit value. The unit value of the common collective trust fund is based upon significant observable inputs, although is not based upon quoted market prices in an active market. The common collective trust fund’s investment objective is designed to provide a high level of return, to seek the preservation of capital and to provide a competitive level of income over time that is consistent with the preservation of capital. To achieve its investment objective, the common collective trust fund is invested in a Guaranteed Interest Contract whose assets are invested in the Wells Fargo Stable Value Fund and enters into “wrapper” contracts issued by third-parties and invests in cash equivalents represented by shares in a money market fund. The characteristics of this contract allow for their principal value to remain stable regardless of the volatility of the bond market. The contract is typically issued by life insurance companies, banks or other financial institutions. The underlying investments of the common collective trust fund consist primarily of Level 2 inputs, consisting of inputs either directly or indirectly observable for substantially the full term of the asset through corroboration with observable market data. The Plan’s investment in the common collective trust fund is not subject to any withdrawal or redemption restrictions. The Plan has no unfunded commitments relating to the common collective trust fund at December 31, 2013 and 2012.
1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
1st Constitution Bank Unitized Stock Fund is a fund available to the participants to direct their contributions into. The 1st Constitution Bank Unitized Stock Fund is a unitized fund that fluctuates directly with the value of the securities held in the fund, primarily consisting of 1st Constitution Bancorp stock. The NAV per unit is primarily derived from the Company’s close prices as reported on a national securities exchange on the last business day of the Plan year based on the unit equivalent number of shares. In addition, the fund can include short-term investment of cash in a money market account.
The preceding methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2013:
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Assets at Fair Value as of December 31, 2013
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Registered investment
companies:
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Target funds
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$ |
932,020 |
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$ |
- |
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$ |
- |
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$ |
932,020 |
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Equity funds
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3,009,181 |
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- |
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- |
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3,009,181 |
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Balanced fund
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482,828 |
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- |
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- |
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482,828 |
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Bond funds
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398,525 |
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- |
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- |
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398,525 |
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1st Constitution Bank Unitized
Stock Fund
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- |
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1,886,839 |
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- |
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1,886,839 |
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Common collective trust fund,
Wells Fargo Stable Value
Fund
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- |
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155,463 |
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- |
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155,463 |
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Total
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$ |
4,822,554 |
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$ |
2,042,302 |
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$ |
- |
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$ |
6,864,856 |
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The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2012:
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Assets at Fair Value as of December 31, 2012
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Registered investment
companies:
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Target funds
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$ |
630,846 |
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$ |
- |
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$ |
- |
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$ |
630,846 |
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Equity funds
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2,345,412 |
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- |
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- |
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2,345,412 |
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Balanced fund
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301,948 |
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- |
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- |
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301,948 |
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Bond funds
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439,371 |
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- |
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- |
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439,371 |
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1st Constitution Bank Unitized
Stock Fund
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- |
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1,184,765 |
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- |
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1,184,765 |
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Common collective trust fund,
Wells Fargo Stable Value
Fund
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- |
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128,708 |
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- |
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128,708 |
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Total
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$ |
3,717,577 |
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$ |
1,313,473 |
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$ |
- |
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$ |
5,031,050 |
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1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
The following presents investments that represent 5% or more of the Plan’s net assets available for benefits at December 31, 2013 and 2012.
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1st Constitution Bank Unitized Stock Fund
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$ |
1,886,839 |
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$ |
1,184,765 |
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JP Morgan Equity Index
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798,460 |
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* |
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American Funds American Balanced
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482,827 |
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301,948 |
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Columbia Acorn USA Fund
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386,251 |
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274,160 |
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Davis New York Venture
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* |
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396,721 |
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Oppenheimer Developing Markets
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* |
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299,305 |
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Pimco Total Return
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* |
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358,333 |
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T Rowe Price Mid-Cap Value
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* |
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369,093 |
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* Investment did not represent 5% or more of the Plan’s net assets.
During 2013, the Plan’s investments (including gains and losses on investments bought, sold, as well as held) during the year appreciated in fair value as follows:
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Registered investment companies
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$ |
642,680 |
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1st Constitution Bank Unitized Stock Fund
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367,579 |
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Common collective trust fund
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993 |
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Total
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$ |
1,011,252 |
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5.
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Related Party Transactions/Party-in-Interest
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The Plan issues loans to participants, which are secured by the participant’s account balances. These transactions qualify as party-in-interest transactions. NRS and DAC, as the record keepers, are the administrator of these transactions.
Certain administrative functions of the Plan are performed by officers or employees of the Company. No such officer or employee receives compensation from the Plan.
At December 31, 2013 and 2012, the Plan held 352,736 units and 289,292 units, respectively, of 1st Constitution Bancorp common stock with a cost basis of $1,329,605 and $1,094,947, respectively, and a fair value of $1,886,839 and $1,184,765, respectively.
Although it has not expressed any intent to do so, the Company has the right to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of plan termination, participants will become 100 percent vested in their Company contributions.
1st Constitution Bank 401(k) Retirement Savings Plan
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Notes to Financial Statements
December 31, 2013 and 2012
The Internal Revenue Service (“IRS”) has determined and informed the Company by a letter dated March 31, 2008, that the Plan and related trust are designed in accordance with applicable sections of the IRC. The Plan has been amended since receiving the determination letter. However, the Plan administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC as of December 31, 2013 and 2012.
U.S. GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan and has concluded that as of December 31, 2013, there are no uncertain positions taken, or expected to be taken, that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to 2010.
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8.
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Risks and Uncertainties
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The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statement of Net Assets Available for Benefits.
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9.
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Delinquent Participant Contributions
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For the year ended December 31, 2013, the Company did not remit one remittance of participant contributions to the Plan on a timely basis as defined by the Department of Labor’s Rules and Regulations for Reporting and Delinquent Participant Contributions Disclosure under ERISA. Such contributions totaled $38,529 for the year ended December 31, 2013, which are summarized on the Schedule for Delinquent Participant Contributions and were self corrected in 2013. The Company paid the lost earnings of $38 in 2013 relating to late remittances of contributions for the year ended December 31, 2013.