1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.March 31, 1998.
OR
( ) TRANSIT REPORT PURSUANT TO SECTION 35 OR 15 (d) OF THE
SECURITIES ACT OF 1934.
For the transition period from ____________ to _____________.
Commission File Number: 0-24316
COMMUNITY FINANCIAL HOLDING CORPORATIONCommunity Financial Holding Corporation
(Exact name of registrant as specified in its charter)
NEW JERSEY 52-1712224
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
222 HADDON AVENUE 08108
WESTMONTNew Jersey 52-1712224
State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
222 Haddon Avenue 08108
Westmont NJ (Zip Code)
(Address of Principal
Executive Offices)
(609) 869-7900
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
NUMBER OF SHARES
CLASS OUTSTANDING AS OF NOVEMBER 9, 1997
----- ----------------------------------
Common Stock, $5.00 par value 978,774
Number of Shares
Class Outstanding as of April 30, 1998
Common Stock, $5.00 par value 1,044,236
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INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - September 30, 1997March 31, 1998 and
December 31, 19961997
Consolidated Income Statements - Three Months
ended September 30, 1997March 31, 1998 and 1996; Nine months ended September 30,
1997 and 1996.1997.
Consolidated Statements of Cash Flows -
NineThree months ended September 30,March 31, 1998 and 1997 and 1996
Notes to Consolidated Financial Statements -
September 30, 1997March 31, 1998
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
NoneItem 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
3
PART I. Item 1. - FINANCIAL INFORMATION
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 DECEMBERMarch 31, ------ ------------ -----------December 31,
1998 1997 1996
---- ----
Cash and Due from Banks $ 9,316,76410,970,691 $ 8,282,68310,852,186
Federal Funds Sold 3,252,094 8,050,00012,050,000 7,300,000
Securities Available for Sale
(Amortized Cost of $14,969,688$19,462,853 at
September 30, 1997March 31, 1998 and $14,603,603$15,950,353
at December 30, 1996) 14,955,048 14,590,57131, 1997) 19,441,694 15,950,261
Investment Securities (Market Value
of $21,656,587 September 30, 1997$23,872,025 at March 31, 1998 and
$18,213,864$22,120,512 at December 31, 1996) 21,543,085 18,137,4271997) 23,705,629 21,959,122
Loans Held forFor Sale 967,185 1,304,8402,950,847 1,745,821
Loans 83,124,729 72,387,49087,755,031 86,773,603
Less: Allowance for Loan Losses (840,907) (738,353)
---------- ----------(1,059,911) (973,991)
Net Loans 82,283,822 71,649,13786,695,120 85,799,612
Bank Premises and Equipment, Net 4,833,252 3,120,6434,823,687 4,885,853
Accrued Interest Receivable 982,134 902,0841,073,427 1,172,092
Deferred Tax Assets 71,973 88,320125,790 118,524
Other Assets 876,283 401,614
----------- -----------971,954 887,944
Total Assets $139,081,640 $126,527,319
============ ============$162,808,839 $150,671,415
LIABILITIES
-----------
Demand Deposits $ 85,068,86198,908,005 $ 70,910,84492,184,858
Savings Deposits 18,272,176 17,266,94621,879,302 19,567,902
Time Deposits 22,494,644 23,270,538
----------- -----------27,855,931 25,004,042
Total Deposits 125,835,681 111,448,328148,643,238 136,756,802
Accrued Interest Payable 546,807 584,769681,324 583,858
Securities Sold Under Repurchase
Agreements 931,596 3,280,5861,612,368 1,596,498
Other Liabilities 275,911 267,881
----------- -----------133,523 149,645
Total Liabilities 127,589,995 115,581,564
----------- -----------151,070,453 139,086,803
SHAREHOLDERS' EQUITY
--------------------
Common Stock $5 Par Value
Authorized 3,200,0001,600,000 Shares
Issued 988,974 Sharesand Outstanding: 1,044,236
at March 31, 1998 and 1,027,713
at December 31, 1997 and 1996 4,944,870 4,944,8705,272,180 5,189,565
Additional Paid In Capital 4,899,873 4,899,8735,588,901 5,514,547
Retained Earnings 1,775,408 1,228,4571,008,029 999,422
Less Treasury Stock, at Cost,
10,200 Shares (118,844) (118,844)
Unrealized Loss on Securities
Available for Sale (9,662) (8,601)
---------- -----------Accumulated Comprehensive Income/(Loss) (11,880) (78)
Total Shareholders' Equity 11,491,645 10,945,755
----------- -----------11,738,386 11,584,612
Total Liabilities &
Shareholders'Shareholders Equity $139,081,640 $126,527,319
============ ============$162,808,839 $150,671,415
The accompanying notes are an integral part of these statements.
4
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
1997 1996 1997 1996
---- ---- ---- ----
Interest Income:
Interest and Fees on Loans $5,051,718 $4,525,153 $1,760,311 $1,586,520
Interest on Federal Funds Sold 132,847 244,435 61,956 137,318
Interest and Dividends on Investments 1,604,653 1,537,520 527,404 479,527
--------- --------- --------- ---------
Total Interest Income 6,789,218 6,307,108 2,349,671 2,203,365
--------- --------- --------- ---------
Interest Expense:
Interest on Demand Deposits 885,264 828,342 330,779 290,183
Interest on Savings Deposits 327,993 302,554 112,184 100,786
Interest on Time Deposits 901,134 855,648 298,441 279,958
Interest on Short Term Borrowings 42,236 111,458 15,280 48,328
--------- --------- ------- -------
Total Interest Expense 2,156,627 2,098,002 756,684 719,255
--------- --------- ------- -------
Net Interest Income 4,632,591 4,209,106 1,592,987 1,484,110
Provision for Loan Losses 255,000 265,000 90,000 120,000
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan Losses 4,377,591 3,944,106 1,502,987 1,364,110
--------- --------- --------- ---------
Other Income:
Service Charges on Deposit Accounts 449,440 368,450 170,388 129,433
Other Income, Service Charges and Fees 426,602 299,563 178,435 101,677
------- ------- ------- -------
Total Other Income 876,042 668,013 348,823 231,110
------- ------- ------- -------
Other Expenses:
Salaries, Wages and Employee Benefits 2,353,887 1,789,822 848,874 620,544
Occupancy and Equipment Expenses 784,352 565,316 278,770 189,928
Advertising Expense 129,206 114,000 39,206 36,000
Data Processing Expense 323,219 266,309 110,642 91,367
Other Operating Expenses 979,255 830,842 354,802 310,218
--------- --------- --------- ---------
Total Other Expenses 4,569,919 3,566,289 1,632,294 1,248,057
--------- --------- --------- ---------
Income Before Income Taxes 683,714 1,045,830 219,516 347,163
Income Tax Expense 136,763 331,764 21,000 122,000
--------- --------- ------- -------
Net Income 546,951 714,066 198,516 225,163
========= ========= ======= =======
Net Income Per Share $0.52 $0.69 $0.19 $0.22
For The Three Months Ended March 31, 1998 And 1997
Three Months Ended March 31,
1998 1997
Interest Income:
Interest and Fees on Loans $1,883,389 $1,611,292
Interest on Federal Funds Sold 135,827 33,696
Interest and Dividends on Investments:
Taxable 446,646 455,019
Non-Taxable 142,451 76,879
Total Interest Income 2,608,313 2,176,886
Interest Expense:
Interest on Demand Deposits 374,457 277,421
Interest on Savings Deposits 118,123 102,798
Interest on Time Deposits 350,257 298,668
Interest on Short Term Borrowings 21,399 10,625
Total Interest Expense 864,236 689,512
Net Interest Income 1,744,077 1,487,374
Provision for Loan Losses 105,000 75,000
Net Interest Income After Provision
for Loan Losses 1,639,077 1,412,374
Other Income:
Service Charges on Deposit Accounts 180,615 136,600
Mortgage Banking Activities 225,599 62,435
Other Income, Service Charges and Fees 41,539 14,998
Total Other Income 447,753 214,033
Other Expenses:
Salaries, Wages and Employee Benefits 998,055 727,124
Occupancy and Equipment Expenses 316,227 243,237
Data Processing Expense 125,614 108,240
Other Operating Expenses 437,763 340,597
Total Other Expenses 1,877,659 1,419,198
Income Before Income Taxes 209,171 207,209
Income Tax Expense 43,595 66,513
Net Income 165,576 140,696
Change in Tax Effected Unrealized Loss
On Securities Available For Sale 11,802 184,565
Total Comprehensive Income/(Loss) $ 153,774 $ (43,869)
Net Income Per Share Information:
Basic Earnings Per Share $0.16 $0.14
Diluted Earnings Per Share 0.14 0.13
The accompanying notes are aan integral part of these statements.
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COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,For The Three Months Ended March 31, 1998 and 1997
Three Months Ended March 31,
1998 1997 1996
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $546,951 $714,066
Adjustments To Reconcile Net Income to Net Cash By
Operating Activities:$165,576 $140,696
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED BY
OPERATING ACTIVITIES:
Depreciation and Amortization 262,633 172,535120,738 84,917
Provision For Loan Losses 255,000 265,000105,000 75,000
Accretion (Amortization) of Discount
(Premium) on Securities, Net 6,058 (33,111)
Loss On Sale of Securities Available(846) 800
Deferred Tax Assets (7,266) (78,185)
Cash Disbursed For Sale 0 5,127
Loss On Sale of Other Real Estate 0 14,893Mortgage Banking Activities (10,602,193) (2,492,917)
Cash Disbursed For Mortgage Banking Activities 9,397,167 2,724,490
Decrease (Increase) In Accrued Interest Receivable (80,050) 156,000
Decrease (Increase) In Deferred Tax Assets 16,347 (44,136)98,665 24,402
Increase In Other Assets (474,669) (640,910)(84,010) (271,483)
Increase (Decrease) In Accrued Interest Payable (37,962) 75,856
Increase97,466 31,033
Decrease In Other Liabilities 8,030 71,971
---------- ----------(16,122) (45,770)
Total Adjustments (44,613) 43,225
---------- ----------(891,401) 52,287
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 502,338 757,291(725,825) 192,983
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds From Maturity and Sales Of Securities
Available For Sale (AFS) 3,500,000 12,511,6873,000,000 3,000,000
Proceeds From Maturities and Prepayments
Of Investment Securities 3,503,283 5,262,9733,654,696 45,694
Purchases Of Securities AFS (3,805,038) (7,371,444)Available For Sale (6,504,707) (3,406,521)
Purchases Of Investment Securities (6,975,499) (4,076,182)(5,398,885) (2,303,211)
Loans Made To Customers, Net (10,552,030) (7,897,324)(1,000,508) (487,356)
Premises And Equipment Expenditures (1,975,242) (1,199,309)
---------- ----------(58,572) (627,487)
NET CASH USED BYIN INVESTING ACTIVITIES (16,304,526) (2,769,599)(6,307,976) (3,778,881)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 14,387,353 11,417,35211,886,436 (1,175,191)
Net Increase (Decrease) In Short
Term Borrowings (2,348,990) 2,120,766
Proceeds From Issuance of Common Stock Under Director
and Officer Stock Option Plan 0 29,900
----------- ----------15,870 (2,378,412)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,038,363 13,568,018
----------- ----------11,902,306 (3,553,603)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,763,825) 11,555,7104,868,505 (7,139,501)
CASH AND CASH EQUIVALENTS AS OF BEGINNING OF YEAR 18,152,186 16,332,683 7,023,753
----------- -----------
CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30 $12,568,858 $18,579,463
=========== ===========March 31 $23,020,691 $ 9,193,182
SUPPLEMENTAL DISCLOSURE:
Cash Paid During The Year:
Interest $2,194,589 $1,878,547$766,770 $658,479
Income Taxes 289,912 315,582104,000 90,000
Non-Cash Items:
Net Change In Net Unrealized LossGain/(Loss) From
Securities AFS (1,608) 65,371Available For Sale (11,802) (279,644)
Change In Tax Effect Of Unrealized LossGain/(Loss)
From Securities AFS (4,978) 22,226
Acquisition of Real Estate in Settlement of Loans 108,000 0Available For Sale (7,266) (95,079)
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTENote 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position of Community
Financial Holding Corporation (the Corporation) and its wholly
owned subsidiary Community National Bank of New Jersey (the Bank)
as of September 30,March 31, 1998 and 1997 and 1996 and the results of their operations
for the three and nine months ended September 30, 1997March 31, 1998 and 1996.1997. The
accounting policies and reporting practices of the Corporation
are in accordance with generally accepted accounting principals
and have been followed on a consistent basis.
The accompanying consolidated financial statements have been
prepared in accordance with instructions for Form 10-Q and
accordingly do not include all of the detailed schedules,
information and notes necessary for a fair presentation of
financial condition, results of operations and cash flows in
accordance with generally accepted accounting principals. This
quarterly report should be read in conjunction with Form 10-K
dated December 31, 1996,1997, which contains audited consolidated
financial statements of the Corporation.
The results of operations for the three and nine months ended
September 30,March 31, 1998 and 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2. EARNINGS PER SHARE
EarningsPrincipals of Consolidation
The financial statements consolidate the Holding Company and
its subsidiary, the Bank collectively referred to as the
"Corporation". All significant intercompany balances have been
eliminated.
Use of 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 real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains
independent appraisals for significant properties to the extent
considered practical.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Federal funds generally are
purchased and sold for a one-day period.
Stock Option Plan
The Corporation accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued To Employees,
and related interpretations. As such, compensation expense would
be reported on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. On
January 1, 1996, the Corporation adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share was calculated baseddisclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Corporation has
elected to continue to apply the provisions of APB Opinion No. 25
and provide the annual pro forma disclosure required by SFAS
No. 123.
Accounting for Mortgage Servicing Rights
The Bank, which services mortgage loans for others in return
for a fee, recognizes as an asset the right to service mortgage
loans, regardless of how they were acquired. Additionally, the
Bank assesses the fair value of these assets at each reporting
date to determine impairment. Impairment, if any, is recognized
in the statement of income through a valuation reserve. The
mortgage servicing rights are amortized over the estimated life
of the underlying servicing using the interest rate method.
Comprehensive Income
In September 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income ("SFAS No. 130") SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial
statements. SFAS No. 130 requires that all items that are
required to be recognized as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. SFAS No. 130 does
not require a specific format for the financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Bank has made the appropriate disclosures
in the applicable consolidated financial statements, as required.
Segment Reporting
In September 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 established standards for the way
that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprise report selected information about operating
segments in interim financial reports issued to shareholders in
the second year of its application. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of
this statement on the Bank.
Employers' Disclosures about Pension and Other
Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
("Statement No. 132") which amends the disclosure requirements of
Statements Nos. 87, "Employers' Accounting for Pensions"
("Statement No. 87"), 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pensions Plans and for
Termination Benefits" ("Statement No. 88"), and 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
("Statement No. 106"). Statement No. 132 is applicable to all
entities. This statement standardizes the disclosure
requirements of Statements Nos. 87 and 106 to the extent
practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits.
Statement No. 132 only addresses disclosure and does not change
any of the measurement or recognition provisions provided for in
Statements Nos. 87, 88, or 106. The Statement is effective for
fiscal years beginning after December 15, 1997. Restatement of
comparative period disclosures is required unless the information
is not readily available, in which case the notes to the
financial statements shall include all available information and
a description of the information not available. The impact, if
any, of this Statement on the Corporation would be to require
additional disclosures in the Corporations' financial statements.
Note 2. Earnings Per Share
In February 1997 the FASB issued SFAS No. 128, "Earnings Per
Share". This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities
with publicly-held common stock or potential common stock. This
statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per
Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement of all entities
with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. This
statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim
periods; earlier application is not permitted.
The following table sets forth the computation of basic and
diluted earnings per share for the three months ended March 31,
1998 and 1997:
Three Months Ended March 31,
1998 1997
Numerator:
Net income $165,576 $ 140,696
Denominator:
Denominator for basic earnings per
share - weighted average numbershares 1,044,236 1,027,713
Effect of dilutive securities:
Employee Stock Options and Warrants 135,134 95,246
Denominator for diluted earnings per
share - adjusted weighted average
shares of common stock outstanding for the respective periods.and assumed exercised 1,179,370 1,122,959
Basic earnings per share $0.16 $0.14
Diluted earnings per share $0.14 $0.13
The computation of the September 30, 1997 and 1996 weighted average number of common
shares and all per share data gives retroactive recognition to a
5% stock dividend declared on
November 7, 1996 payablein December 1997.
Warrants issued to shareholdersthe underwriter of record on December 1, 1996. The
weighted average numbersthe Corporation's
1994 public offering of 450,000 shares used in the computation for the three and
nine months ended September 30, 1997 and 1996 was 1,057,871 and 1,028,695,
respectively.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings Per
Share" ("EPS"). This statement, which supersedes APB Opinion No. 15,
simplifies the standards for computing EPS and makes them comparable to
international standards. SFAS No. 128 replaces the current "primary" and
"fully diluted" earnings per share with "basic" and "diluted" earnings per
share. Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted
into common stock, or resulted in the issuanceMarch 1998. Total warrants outstanding to purchase
27,349 shares of common stock, that then sharedeach with a fair value of $24.00,
were exercised at a price of $9.50 per share. Pursuant to a
cashless exchange provision of the warrants, the Corporation
issued and exchanged 16,523 shares of common stock for the total
warrants outstanding.
Note 3. Securities
Applicable securities are classified in three categories
consisting of held-to-maturity (investment), trading and
available for sale. Trading securities are those which are
bought and held principally for the purpose of selling them in
the earnings of the company. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effectivenear term. Held-to-maturity securities are those securities
for financial statements issued for the periods ending December 31, 1997. Early
application is not permitted and prior period restatement is required.
Management does not believe application of this standard will have a material
impact on the Corporations reported EPS.
NOTE 3. SECURITIES
On January 1, 1994,which the Corporation adopted Statement of Financial
Accounting Standards No. 115, (FAS 115) "Accounting for Certain Investmentshas the ability and intent to hold the
security until maturity. All other securities not included in
Debt and Equity Securities", which requires, among other things, that debt and
equity securitiestrading or held to maturity are classified as available for sale besale.
Held-to-maturity securities are reported at fair value
withamortized cost, while
trading securities and available-for-sale securities are reported
losses are included in current earnings. Available-for-sale
securities are accounted for by reporting unrealized gains and
losses excluded from earnings and reported inas a separate component of shareholders'shareholders equity, net of
income taxes. The net
effect of
7
unrealized gains or losses, caused by marking an available for sale portfolio
to market, causes fluctuations in the level of shareholders' equity and related
financial ratios as market interest rates cause the fair value of fixed rate
securities to fluctuate.
The unrealized loss on securities available for sale was $10,000 at
September 30, 1997 as compared to a loss of $9,000 at December 31, 1996. This
increase is primarily due to the current interest rate environment and the
short term nature of portfolio maturities.
NOTEtax.
Note 4. LOANS HELD FOR SALELoans Held For Sale
The Bank originates residential real estate loans and sells
primarily fixed rate loans to various investors such as mortgage
companies and agencies. The Bank has purchase committmentscommitments at par
value for all loans held for sale. The interest income earned
from the loan closing date to the date of the sale is recorded in
Interest and Fees on Loans.
Note 5. Loans
Interest on loans is included in interest income on the
accrual method over the terms of the loans based upon the
principal balances outstanding.
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 Interest And Fees On Loans.
NOTE 5. LOANS
In May 1993, FASB issued SFAS 114, "Accounting by Creditorsnon-accrual
when principal or interest has consistently been in default for
Impairmenta period of 90 days or more or because of a Loan"deterioration in the
financial condition of the borrower such that payment in full of
principal and interest is not expected. Loans past due 90 days or
more and still accruing interest are loans that are generally
well-secured and in October 1994, FASB issued SFAS 118, "Accountingthe process of collection.
Loan origination fees are offset by Creditors for Impairmentcertain direct
origination costs. Net deferred loan fees are amortized over the
life of a Loan - Income Recognition and Disclosures,"the related loans as an amendmentadjustment of SFAS 114. Under SFAS 114 and 118, "impaired"the yield on the
loans.
Impaired loans must beare measured based on the present value of
expected future cash flows discounted at the loans' effective
interest rate or, as a practical expedient, at the loans'loans
observable market price or the fair value of the collateral if
the loan is collateral dependent. BasedFor 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 loans and consumer loans, as well as
commercial, financial and agriculture loans with balance less
than $100,000. For applicable loans, the Bank evaluates the need
for impairment recognition when a loan becomes non-accrual, or
earlier if based on management's analysis,assessment of the adoptionrelevant facts
and circumstances, it is probable that the Bank will be unable to
collect all proceeds due according to the contractual terms of
SFAS 114the loan agreement. The Bank's policy for the recognition of
interest income on impaired loans is the same as for non-accrual
loans discussed previously. Impaired loans are charged off when
the Bank determines that foreclosure is probable and 118,the fair
value of the collateral is less than the recorded investment of
the impaired loan.
Note 6. Allowance for Loan Losses
The allowance for loan losses represents the amount which,
in management's judgment, is effective beginningnecessary to cover estimated loan
losses. Management performs a quarterly assessment of the credit
portfolio in 1995, hasorder to determine the appropriate level of the
allowance. The factors considered in this evaluation include,
but are not hadnecessarily limited to, estimated losses from loan
and off-balance sheet arrangements; general economic conditions;
deterioration in credit concentration or pledged collateral;
historical loss experience; and trends in portfolio volume,
maturity, composition, delinquencies, and non-accruals. While
management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based
on changes in economic conditions or any other factors used in
management's determination. In addition, various regulatory
agencies, as an integral part of their examination process
periodically review the Corporations' allowance for losses on
loans. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgements about
information available to them at the time of their examination.
Accounts are charged directly against the allowance as soon as
probability of loss is established, taking into consideration
such factors as the customer's financial condition, underlying
collateral and guarantees. Recoveries on previously charged off
loans are added to the allowance.
Note 7. Bank Premises and Equipment
Land, buildings and equipment owned by the Corporation are
carried at amortized cost. The Corporation leases certain
facilities under long-term agreements. Leasehold improvements
are capitalized and amortized over the lease term, including
extension options or the estimated useful lives of the
improvements, whichever is shorter. Depreciation of buildings and
equipment is based on the economic useful lives of the assets,
ranging from five to forty years, using the straight line
method. Maintenance and repairs which do not extend the useful
life of the assets are charged to current operating expenses.
Note 8. Income Taxes
The Corporation accounts for income taxes under the asset
and liability method. Deferred income taxes 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. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
have a materialapply to taxable income in the years in which those temporary
differences are expected to be resolved or settled. The effect
on deferred taxes of a change in tax rates is recognizable in
income in the Corporation's consolidated financial
statements.
8
MANAGEMENTSperiod that includes the enactment date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEWOverview
On March 3, 1998, the Corporation, the Bank, HUBCO, Inc.
("HUBCO") and Hudson United Bank entered into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which the
Corporation will be merged with and into HUBCO with HUBCO as the
surviving corporation (the "Merger"). In the Merger, each share
of the common stock of the Corporation will be exchanged for
0.695 shares of HUBCO common stock. Outstanding options to
purchase the common stock of the Corporation issued under the
Corporation's 1994 Employee and Director Stock Option Plan (the
"Option Plan") will be exchanged in the Merger for HUBCO common
stock in accordance with the terms of the Option Plan. The
Merger is expected to be consummated during the third quarter of
1998, subject to the satisfaction of certain conditions,
including among others, approval of the Merger by the
Corporation's shareholders and receipt of required regulatory
approvals. The transaction will be accounted for as a pooling of
interests. The Merger Agreement also provides for the merger of
the Bank with and into Hudson United Bank, a wholly-owned
subsidiary of HUBCO, with Hudson United Bank surviving such
merger.
Concurrently with the execution of the Merger Agreement, the
Corporation entered into a Stock Option Agreement with HUBCO
pursuant to which the Corporation granted HUBCO an option to
purchase up to 252,790 shares of the common stock of the
Corporation at a price of $24.40 per share, exercisable upon the
occurrence of certain events.
The Corporation reported net income for the first ninethree
months of 19971998 of $547,000, a decrease$166,000, an increase of $167,000$25,000, or 23.4%17.7% when
compared to the first ninethree months of 1996.1997. The decreaseincrease in
earnings was due primarily to increases in net interest income
and fee income and a reduction in the level of income tax
expense. These gains were partially offset by an increase in the
provision for loan losses and an increase in operating expenses
associated withwhich was related to four branch locations which were acquired in 1996.
The CorporationThese branches were opened branches in September 1996, February 1997,
May 1997 and September 1997.
The increase in operating expenses was partially
offset by increases in net interest income and fees and service charges.
The Corporation also reported net income of $199,000 for the three
months ended September 30, 1997, a decrease of $27,000 or 11.8% when compared
to the three months ended September 30, 1996. The decrease in earnings was due
primarily to an increase in operating expenses due primarily to additional
branch locations. The increase in operating expenses was partially offset by
increases in net interest income and fees and service charges.
Net interest income for the ninefirst three months ended September 30, 1997of 1998 was
$4.6$1.7 million, an increase of $423,000$257,000 or 9.1%17.3% over the first
ninethree months of 1996.1997. Non-interest income for the first ninethree
months of 19971998 was $876,000,$448,000, an increase of $208,000$234,000 or 31.1%109.2%
over the first ninethree months of 1996. Non-interest
expense was $4.6 million for1997. These increases were due
primarily to the first nine monthsCorporation's expansion of 1997, an increase of $1.0
million or 28.1% over the first nine months of 1996.
Net interest income for the three months ended September 30, 1997 was
$1.6 million, an increase of $109,000 or 7.3% over the three months ended
September 30, 1996.mortgage banking
activities. The provision for loan losses was $90,000 for the first three
months ended September 30, 1997, a decreaseof 1998 was $105,000, an increase of $30,000 or 25.0%40.0% from
the provision of $120,000 for the first three months ended September 30, 1996.
Non-interest income for the three months ended September 30, 1997 was $349,000,
an increase of $118,000 or 50.9% over the three months ended September 30,
1996.1997. Non-interest
expenses for the first three months ended September 30, 1997of 1998 were $1.6$1.9 million, an
increase of $384,000$458,000 or 30.8%32.3% as compared to the first three
months ended September 30, 1996.of 1997. Income tax expense for the first three months of
1998 was $44,000, a decrease of $23,000 from 1997 primarily the
result of an increase in non-taxable interest income.
Expressed on a diluted earnings per share basis (after
giving retroactive effect to the payment of a 5% stock dividend
in 1996)1997), net income for the first ninethree months of 19971998 was $0.52$0.14
per share compared to $0.69$0.13 per share for the first ninethree months
of 1996, a decrease of 24.6%. Net income for the three months ended
September 30, 1997 was $0.19 per share compared to $0.22 per share for the
three months ended September 30, 1996, a decrease of 13.6%.1997. Book value per share as of September 30, 1997March 31, 1998 was $10.86 an increase$11.24 a
decrease of 5.23%$0.03 from book value per share of $10.32$11.27 at
September 30, 1996, on a fully diluted per share basis.December 31, 1997.
The Corporations'Corporation's assets totalled $139.1$162.8 million at
September 30,
1997,March 31, 1998, an increase of $12.5$12.1 million or 9.9% over8.1% from total
assets of $126.5$150.7 million at December 31, 1996.1997. The increase was
due primarily to growth in deposits
which increased $14.4an $11.9 million or 12.9% from December 31, 1996 primarily from
increased market share in the Corporations' primary service area. The increase in total deposits
was partially offset by securities sold under repurchase agreements
which decreased $2.3 million or 71.6%resulting from December 31, 1996.the branch expansion. The increase in deposits
occurred primarily in demand deposits which increased $14.2$6.7
million or 20.0%7.3% as compared to December 31, 1997. In addition,
savings deposits and certificates of deposit grew $5.2 million or
11.6% from $70.9December 31, 1997. Loans were $87.7 million at
March 31, 1998, an increase of $981,000 or 1.1% from $86.8
million at December 31, 1996 to $85.1 million at September 30,
1997.
Loans were $83.1 million at September 30, 1997 compared to $72.4
million at December 31, 1996, an increase of $10.7 million or 14.8%. Cash and cash equivalents,
including federal funds sold, decreased $3.8increased $4.9 million or 23.0%26.8% to
$12.6$23.0 million at September 30, 1997March 31, 1998 from $16.3$18.1 million at
December 31, 1996.1997. The investment portfolio was $36.5$43.1 million at
September 30, 1997,March 31, 1998, an increase of $3.8$5.2 million or 11.5%13.8% from $32.7$37.9
million at December 31, 1996. The
unrealized loss on securities available for sale at September 30, 1997, net of
taxes, was $10,000
9
as compared to the loss of $9,000 at December 31, 1996. The increase in the
amount of loss on securities available for sale is due primarily to the short
term maturities of the available for sale portfolio and the current nature of
the interest rate environment.1997.
Loans held for sale were $967,000$2.9 million at September 30, 1997, a decreaseMarch 31, 1998, an
increase of $338,000$1.2 million or 25.9%69.0% as compared to $1.3$1.7 million at
December 31, 1996.1997. Loans held for sale are residential mortgage loans which
were originated by the Corporations'
subsidary bankBanks' residential mortgage department and
for which commitments for sale at par have been obtained. Bank
premises and equipment at September 30, 1997March 31, 1998 were $4.8 million an increasea
decrease of $1.7 million or 54.9%$62,000 from $3.1$4.9 million at December 31, 1996. The increase in
bank premises and equipment is primarily related to improvements and
renovations at the branches that were purchased in 1996.1997.
Other assets increased $475,000$84,000 or 118.2%9.5% from $402,000$972,000 at
December 31, 1996 to $876,000 at
September 30, 1997. The increase in other assets occurred
primarily as a result of the Banks' purchase of additional
mortgage servicing rights on March 1, 1997.rights. Mortgage servicing rights increased
$247,000$69,000 from $61,000$298,000 at December 31, 19961997 to $308,000$367,000 at
September 30, 1997.
NET INTEREST INCOMEMarch 31, 1998.
Net Interest Income
The principal source of revenue for the Corporation is net
interest income. Net interest income is the difference between
interest income earned on loans and other interest-earning assets
and interest expense paid on deposits and borrowings.deposits. 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 income
was $4.6$1.7 million for the nine months ended September 30, 1997.
This represents a 10.1% increase when compared to net interest income of $4.2
million for the same period in 1996. Net interest income for the three months ended September 30, 1997 was $1.6 million.March 31, 1998. This
represents an 7.3% increase of 17.3% when compared to net interest
income of $1.5 million for the same period in 1996.1997.
Average interest-earning assets for the first ninethree months
of 19971998 were $115.0$141.0 million, an increase of $8.4$29.2 million or
7.9%26.2% as compared to the first ninethree months of 1996.1997. The most
significant increase in average earning assets occurred in the
loan portfolio.portfolio, primarily in residential mortgage loans. The
loan portfolio average balance for the first ninethree months of 19971998
was $76.0$89.1 million, an increase of $10.7$15.5 million or 16.4%21.0% as
compared to the first ninethree months of 1996.1997. This increase occurred
primarily in residential mortgage loans and was
funded primarily from anthe increase in deposits.deposits resulting from the
branch expansion. Average interest-earning assetsdeposits for the first three months ended September
30, 1997of
1998 were $119.8$142.0 million, an increase of $9.2 million$29.8 or 8.3%26.6% as
compared to the three months ended September 30, 1996. The most significant increase$112.1 million in average earning assets occurred in the loan portfolio. The loan portfolio
average balancedeposits for the three
monthsmonth period ended September 30, 1997 was $79.6
million, an increase of $11.3 million or 16.6% as compared to the three months
ended September 30, 1996. This increase also occurred primarily in residential
mortgage loans and was funded primarily from an increase in deposits.March 31, 1997.
The positive impact on net interest income from increased
interest-earning assets was partially offset by the increase in
interest-bearing deposits. Average interest-bearing deposits for
the first ninethree months of 19971998 were $98.3 million, an increase of
$17.9 million or 22.3% as compared to the first ninethree months of
1996 was also enhanced by a decrease in interest-bearing
liabilities. Average interest-bearing liabilities for the first nine months of
1997 were $79.0 million, a decrease of $3.9 million or 4.7% as compared to the
first nine months of 1996. The most significant decrease in interest-bearing
liabilities occurred in time deposits and securities sold under repurchase
agreements. The time deposits average balance for the first nine months of
1997 was $37.0 million, a decrease of $1.1 million or 2.8% from the first nine
months of 1996. The average balance for securities sold under repurchase
agreements for the first nine months of 1997 was $1.1 million, a decrease of
$2.1 million or 64.8% as compared to the first nine months of 1996.
10
The positive impact on net interest income from increased
interest-earning assets for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 was partially offset by
an increase in interest-bearing liabilities. Average interest-bearing
liabilities for the three months ended September 30, 1997 were $87.0 million,
an increase of $4.1 million or 5.0% as compared to the three months ended
September 30, 1996.1997. The most significant increase in interest-bearing liabilitiesdeposits
occurred in interest-bearing demand deposits. The interest-
bearing demand deposit accounts.average balance for the first three months
of 1998 was $50.9 million, an increase of $11.6 million or 29.4%
over the first three months of 1997. The savings deposit average
balance for the first three months of 1998 was $20.5 million, an
increase of $3.0 million or 17.2% as compared to the first three
months of 1997. The average balance for interest-bearing demandcertificates of deposit
accountsincreased $3.3 million or 14.1% from $23.5 million for the three
months ended September 30,March 31, 1997 was $45.0to $26.8 million an increase of $3.8 million or 9.3% as
compared tofor the three months
ended September 30, 1996.March 31, 1998.
Net interest margin is calculated as the tax-equivalent net
interest income divided by the average earning assets and
represents the Corporations' net yield on its earning assets.
The net interest margin increaseddecreased from 5.38%5.53% to 5.55%5.22% for the
ninethree months ended September 30, 1996March 31, 1997 and 1997,1998, respectively. This
increasedecrease is primarily resultant from the interest yield of
interest-earning assets which increased 7 basis points from 8.01% to 8.08% for
the nine months ended September 30, 1996 and 1997, respectively. The most
significant increase in yield occurred in the investment portfolio. The yield
from the investment portfolio increased 37 basis points from 6.17% to 6.54%.
In addition, the yield from federal funds sold increased 20 basis points from
5.30% for the first nine months of 1996 to 5.50% for the first nine months of
1997. These increases in interest yields were partially offset by a decrease in the yield
earned on average interest-earning assets from loans which declined 37 basis points from 9.25%8.05% to 8.88% for
the nine months ended September 30, 1996 and 1997, respectively. Average
interest earning assets7.70% for
the first nine months of 1997 increased $8.4
million or 8.4% from $106.5 million for the first nine months of 1996 also
partially offsetting increases in interest yields.
The increase yield from interest earning assets was also partially
offset by the cost of average interest bearing deposits which increased 16
basis points to 3.65% for the first ninethree months of 1997 as compared to 3.49%
for the first ninethree
months of 1996.1998, a decrease of 35 basis points. The most
significant increase in interest
rates was in the rate paid for time deposit (savings and certificates of
deposit) balances which increased 39 basis points from 4.05% to 4.44% for the
nine months ended September 30, 1996 and 1997, respectively.
The net interest margin for the three months ended September 30, 1997
was 5.52%, an increase of 7 basis points from 5.45% for the three months ended
September 30, 1996. This increase is primarily resultant from an increase in
the interest yield from interest earning assets of 3 basis points from 8.04% to
8.07% for the three months ended September 30, 1996 and 1997, respectively.
The most significant increasedecrease in interest yield was in the securitiesloan portfolio,
which increased 18primarily commercial and installment loans. The average yield
from the commercial loan portfolio dropped 22 basis points from
6.36%9.15% to 6.54%8.93% and the average yield from the installment loan
portfolio decreased 17 basis points from 8.86% to 8.69% for the
three months ended September 30, 1996March 31, 1997 and 1997,1998, respectively. The
average interest yield from federal
funds sold also increased 28 basis points from 5.27% to 5.55% for the three
months ended September 30, 1996 and 1997, respectively. Partially offsetting
the increase in yield from the securities portfolio and federal funds sold was
the loan portfolio for which the yield decreased 37 basis points from 9.24% to
8.87% for the three months ended September 30, 1996 and 1997, respectively.
Average interest-earning assets for the three months ended September 30, 1997
increased $9.2 million or 8.3% from $110.6 for the three months ended September
30, 1996 also partially offsetting increases in interest yields.
The net increased yield from interest earning assets was also
partially offset by a slight increase in the rate paid for interest bearing deposits whichalso
increased 47 basis points from 3.45%3.44% for the first three months ended
September 30, 1996of
1997 to 3.49%3.51 for the first three months ended September 30 1997.of 1998. This increase
wasoccurred primarily resultant fromin the rate paid for interest bearinginterest-bearing demand
deposits which increased 14 basis points from 2.81% for the three months ended
September 30, 1996 to 2.95% for the three months ended September 30, 1997.
11and certificates of deposit.
The table below illustrates the changes in interest rate
margin and interest rate spread based on average amounts
outstanding for the nine and
three months ended September 30,March 31, 1998 and 1997.
Three Months Ended March 31,
1998 1997
and 1996.
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
ASSETS
Securities 6.54% 6.17% 6.54% 6.36%
Fed Funds 5.50% 5.30% 5.55% 5.27%
Loans 8.88% 9.25% 8.87% 9.24%
----- ----- ----- -----
Total Earning Assets 8.08% 8.01% 8.07% 8.04%
===== ===== ===== =====
LIABILITIES
Demand Deposits 2.90% 2.84% 2.95% 2.81%
Savings Deposits 3.20% 2.49% 2.49% 2.45%
Time Deposits 5.16% 5.22% 5.25% 5.15%
Short Term Borrowings 5.06% 4.70% 5.10% 5.11%
----- ----- ----- -----
Total Int Bearing Liabilities 3.65% 3.49% 3.49% 3.45%
===== ===== ===== =====
Net Interest Rate Spread 4.43% 4.52% 4.58% 4.59%
Net Interest Rate Margin 5.55% 5.38% 5.52% 5.45%
ASSETS
Securities 6.39% 6.46%
Fed Funds 5.47% 5.46%
Loans 8.57% 8.88%
Total Earning Assets 7.70% 8.05%
LIABILITIES
Demand Deposits 2.98% 2.86%
Savings Deposits 2.33% 2.38%
Time Deposits 5.30% 5.16%
Repurchase Agreements 5.19% 4.64%
Total Interest Bearing Liabilities 4.05% 3.44%
Net Interest Rate Spread 3.65% 4.61%
Net Interest Rate Margin 5.22% 5.53%
Net interest income is also affected by the mix of interest-earninginterest-
earning assets and interest-bearing and non-interest bearing
liabilities. Average loans, which are the highest yielding
earning assets, for the ninethree months ending September 30, 1997ended March 31, 1998 were
59.5%57.2% of average assets as compared to 56.1%60.1% of average assets
for the ninethree months ending September 30, 1996. Theended March 31, 1997. This decrease was
offset by the decrease in the average balance for certificates of
deposit and repurchase agreements, which are the highest yielding
liabilities, for the ninethree months ending September 30, 1997March 31, 1998, which
were 19.1%18.3% of average assets as compared to 21.5%19.9% of average
assets for the ninethree months ending
September 30, 1996. Averageended March 31, 1997. In addition,
average non-interest bearing deposits for the ninethree months ending September 30, 1997ended
March 31, 1998 were 29.0%28.0% of average assets as compared to 21.7%24.0%
for the ninethree months ended September 30, 1996.March 31, 1997. The average balance
for non-interest bearing deposits was $37.0 million for the nine months ended September 30, 1997
as compared to $25.3 million for the nine months ended September 30, 1996, an
increase of $11.7 million or 46.5%.
Average loans for the three months ended September 30, 1997 were 59.4%
of average assets as compared to 56.4% of average assets for the three months
ended September 30, 1996. The average balance for certificates of deposit and
repurchase agreements for the three months ended September 30, 1997 was 17.9%
of average assets as compared to 21.0% for the three months ended September 30,
1996. Average non-interest demand deposit balances for the three months ended
September 30, 1997 were 26.1% of average assets as compared to 22.4% for the
three months ended September 30, 1996. The average balance for non-interest
demand deposits was $35.1$43.7 million for the three
months ended September 30, 1997March 31, 1998 as compared to $27.1$29.4 million for the
three months ended September 30, 1996,March 31, 1997, an increase of $8.0$14.3 million
or 29.5%48.6%.
NON-INTEREST INCOMENon-Interest Income
Non-interest income was $876,000,$448,000 for the first three months
of 1998, an increase of 31.1%109.2% or $208,000$234,000 compared to $214,000
for the first ninethree months of 1997 compared to $668,000 for the first nine months of
1996.1997. A significantprimary component of non-interestnon-
interest income is fee income generated by the Corporations' Residential Mortgage Department.Bank's residential
mortgage department. This fee income was $361,000$226,000 for the first
ninethree months of 1997,1998 compared to $187,000$62,000 for the first ninethree
months of 1996.1997. Service charges on depositordeposit accounts was $449,000were
$181,000 for the first ninethree months of 19971998, an increase of
22.0%$44,000 or 32.2% from $368,000$137,000 for the first ninethree months of
1996.
Non-interest income1997. This increase was $349,000, an increase of 22.0% or $81,000 forlargely due to the three months ended September 30, 1997 compared to $231,000 for the three
months ended September 30, 1996. Fee incomeincreased deposit
account activity that has resulted from the Residential Mortgage
Department was $166,000 forbranch expansion and
the three months ended September 30, 1997 as
compared to $75,000
12
foraddition of new depositors attracted by the three months ended September 30, 1996. Service charges on depositor
accounts was $170,000 for the three months ended September 30, 1997 an increase
of $41,000 or 31.6% from $129,000 for the three months ended September 30,
1996.
The Corporation had approximately 11,400Bank's program,
implemented in February 1996, that offers demand deposit accounts
at September 30,no charge to the customer. Management believes that these
"free-checking accounts" enable the Bank to have greater access
to new and existing markets. The Corporation had 9,223 demand
deposit accounts at March 31, 1997 and 13,088 demand deposit
accounts at March 31, 1998, an increase of 3,5003,865 accounts or
45.2%41.9%. The Corporation had $31.2 million of non-interest bearing
demand deposits at March 31, 1997 and $48.8 million of non-
interest bearing demand deposits at March 31, 1998, an increase
of $17.7 million or 56.7%. The increase in non-interest bearing
deposits helped lower the average cost of funds 5 basis points
from September 30,
1996.
NON-INTEREST EXPENSES2.46% for the first three months of 1997 to 2.41% for the
first three months of 1998.
Non-Interest Expenses
Non-interest expense increased $1.0 million$458,000 or 28.1%32.3% in the
first ninethree months of 19971998 compared to the first ninethree months of
1996. Non-interest expense
increased $384,000 or 30.8% for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996. Expenditures1997. Expenses related to salariessalary and occupancy and equipment areother costs
associated with the primary componentsopening of non-interest
expensethree new branches in 1997 and
continued expansion of the Mortgage Department represent the
largest portion of the increase. Salaries and benefits increased
31.5%37.3% or $564,000$271,000 in the first ninethree months of 19971998 compared to
the first ninethree months of 1996. Salaries and benefits increased 36.8% or
$228,000 for the three months ended September 30, 1997 as compared to the three
months ended September 30, 1996.1997. These increases were due
primarily to staff additions for the residential mortgage department, the addition of four branch
locations(which increased to 109 full time
equivalent employees at March 31, 1998 from 87 at March 31, 1997)
as well as merit increases in salaries.salaries and increased health care
costs.
Occupancy and equipment expenses increased $219,000$73,000 or 38.7%30.0%
in the first ninethree months of 19971998 compared to the first ninethree
months of 1996. Occupancy
and equipment1997. This increase was primarily due to the branch
expansion.
Data processing expenses increased $89,000$17,000 or 46.8%16.0% for the
three months ended September 30, 1997March 31, 1998 as compared to the three months
ended September 30, 1996.
These increases were primarily due to the branch expansion.
Data Processing expense increased $57,000 or 21.4% for the nine months
ended September 30,March 31, 1997 as compared to the nine months ended September 30,
1996. Data processing expense increased $19,000 or 21.1% for the three months
ended September 30, 1997 as compared to the three months ended September 30,
1996. These increases were primarily the result of increased transaction
processing costs associated with growth of the depositor base.
Advertising expenses increased $15,000 or 13.3% to $129,000 for the
nine months ending September 30, 1997 as compared to $114,000 for the nine
months ending September 30, 1996. Advertising expenses also increased $3,000
or 8.3% to $39,000 for the three months ending September 30, 1997 as compared
to $36,000 for the three months ending September 30, 1996. These increases are
due primarily to increased promotional activities associated withtransaction volume
from the branch
expansion.
A primary componentincrease in deposit accounts.
Primary components in the $148,000$97,000 or 17.9%28.5% increase in other
operating expenses for the first ninethree months of 19971998, as
compared to the first nine months of 1996 is loan processing expenses which for the first ninethree months of 1997, increased $80,000include such expenses
as postage, telephone and other general operating expenses, much
of which is associated with the new branches and the residential
mortgage department expansion. In addition, the Corporation
recognized a net loss of $14,000 in January 1998 from the first nine monthssale of
1996 due to increased
loan activity, amortization of purchased mortgage servicing rights and mortgage
servicing expense. Audit expenses also increased $17,000 with implementation
of an internal audit functionone residential property taken in foreclosure during 1996. Expenses for supplies increased
$38,000, insurance expense increased $15,000, telephone expense increased
$19,000 and postage expense increased $15,000 for the nine months ending
September 30, 1997 as compared to the nine months ending September 30, 1996
primarily as a result of additional branch locations and growth of the Bank.
These increases were partially offset by a reduction in other real estate
expense and losses of $64,000 for the first nine months of 1997 as compared to
the first nine months of 1996.
INCOME TAXES1997.
Income Taxes
Income taxes decreased $195,000to $44,000 from $67,000, or 58.8% to $137,000 from $332,00034.5%, in
the 13
first ninethree months of 1998 and 1997, and 1996, respectively and decreased $101,000 from
$122,000 for the three months ending September 30, 1996 to $21,000 for the
three months ending September 30, 1997.respectively. The
decrease resulted primarily from a
loweran increased level of pre-taxnon-
taxable interest income along with a higher level of non-taxable income.
Non-taxable income, primarily from local municipal Bond Anticipation Notes, was
$281,000 for the first nine months of 1997, an increase of $117,000 from
$165,000 for the first nine months of 1996.bonds. The
effective tax rates for the first ninethree months of 1998 and 1997
were 20.8% and 1996 were 20.0% and 31.7%32.1%, respectively.
PROVISIONS FOR POSSIBLE LOAN LOSSESProvisions for Loan Losses
The Corporation determines the provision for possible loan losses
through a quarterly analysis of the adequacy of the loan loss
reserve. Factors such as economic conditions and trends, the
volume of non-performing loans, concentrations of credit risk,
adverse situations that may affect a borrower's ability to pay,
and prior loss experience within the various categories of the
portfolio are considered when reviewing the risks in the
portfolio. While management believes the allowance for loan
losses is currently adequate, further additions to the allowance
will be predicated upon general economic conditions, and/or the
condition of specific borrowers and overall growth of the loan
portfolio. Provisions for possible loan losses were $255,000$105,000 for the
first ninethree months of 19971998 as compared to a provision of $265,000$75,000
for the first ninethree months of 1996.1997. The higher provision for the
first three months of 1998 was due to overall growth of the loan
portfolio. The allowance for possible loan losses was $841,000$1.1 million at
September 30, 1997March 31, 1998 and $837,000$732,000 at September 30, 1996.March 31, 1997. The Bank had net
charge-offs of $153,000$19,000 and $23,000$81,000 for the ninethree months ended
September 30,March 31, 1998 and 1997, and 1996, respectively.
The following is a summary of the activity in the allowancesallowance
for loan losses for the ninethree months ended September 30,March 31, 1998 and
1997.
Three Months
Ended March 31,
1998 1997
Balance at the beginning of period $ 973,991 $738,353
Provision for loan losses 105,000 75,000
Recoveries 4,971 4,552
Losses charged against the allowance (24,051) (85,427)
Balance at March 31, $1,059,911 $732,478
The increase in the provision for loan losses in the first
three month period of 1998 reflects the increase in the loan
portfolio which grew to $87.8 million at March 31, 1998 from
$72.8 million at March 31, 1997. While the amount of loans past
due more than ninety days and 1996.
1997 1996
---- ----
Balance at the beginning of period $ 738,353 $595,593
Provision for loan losses 255,000 265,000
Recoveries 43,465 42,889
Losses charged against the allowance (195,911) (66,070)
--------- --------
Balance at September 30 $ 840,907 $837,412
========= ========
still accruing and the amount of
non-accrual loans has increased, the increase is the result of
several unrelated loans. Management has, through its most recent
analysis of the adequacy of the allowance for loan losses
completed as of September 30, 1997,March 31, 1998, determined the allowance to be
adequate. Future additions to the allowance for possible loan losses
through provisions charged to operations will be determined as a
result of managements'management's continuing analysis of the adequacy for
the allowance of
possible loan losses.
The following is a summary of the Company's non-performing
assets as of September 30, 1997March 31, 1998 and December 31, 1996.
SEPTEMBER 30 DEC 31
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
Past due 90 days or more and
still accruing $ 141 $ 14
Non-Accrual loans 1,020 528
------ ----
Total non-performing loans 1,161 542
Other Real Estate Owned 108 0
------ ----
Total Non-Performing Assets $1,269 $542
====== ====1997.
March 31, December 31,
(DOLLARS IN THOUSANDS) 1998 1997
Past due 90 days or more and
still accruing $ 154 $ 147
Non-accrual loans 880 657
Total non-performing loans 1,034 804
Other real estate owned 64 108
Total non-performing assets $1,098 $ 912
Non-performing loans as a
percentage of loans 1.40% 0.75%
Non-performing loans as a
percentage of loans and OREO 1.39% 0.75%
Non-performing assets as a
percentage of assets 0.91% 0.43%
14
The amount of non-performing loans has increased as a
percentage of loans and1.18% 0.93%
Non-performing loans as a
percentage of assets. The increase is the resultloan and OREO 1.18% 1.05%
Non-performing assets as a
percentage of several
unrelated loans previously classified by Management and considered in the
reserve for loan loss analysis.assets 0.67% 0.60%
The increase in non-accrualnon-performing loans will
potentially result in increasedfrom December 31, 1997
to March 31, 1998 is not due to any one loan loss provisionsbut several
unrelated loans. All non-performing loans are, in the remainderopinion of
1997.management, either adequately collateralized and in process of
collection, or adequately reserved in the Corporation's allowance
for loan losses. The other real estate owned at March 31, 1998
is one residential property taken in foreclosure. Management
anticipates this property will be sold in 1998.
When loans are placed on non-accrual, accrued income formfrom
the current period is reversed from current earnings. Consumer
loans are charged off when principal or interest is 120 or more
days delinquent, or are placed on non-accrual if the collateral
is sufficient to recover the principal. All non-accrual loans
are, in the opinion of management, either adequately
collateralized, in process of collection, or adequately provided
for in the Corporation's allowance for loan losses.
The Corporation's commercial loan portfolio is largely loans
secured by owner occupied commercial real estate with an average
loan to value ratio under 75%. There is no significant
concentration in the portfolio with any business or industrial
segment. The Corporation's consumer loan portfolio consists of
home equity, automobile, credit cards and personal loans.
Approximately 50% of the consumer portfolio consists of home
equity loans. The average loan to value ratio of these loans is
under 75%. The Corporations'Corporation's lending activity extends to
individuals and small and medium sized businesses primarily
within its primary service area, which is predominantly Camden,
Gloucester and Burlington counties,Counties, New Jersey. The Corporation does not attempt to make
significant loans outside its primary service area. The primary
service area is a diverse economic and employment market with no
significant dependence on any one industry or large employer.
LIQUIDITYImpact of Year 2000
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Corporation's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a continuing assessment, the Corporation has
preliminarily determined that it, or third party vendors with
which the Corporation contracts, will be required to modify or
replace portions of software and hardware so that computer
systems will function properly with respect to dates in the year
2000 and thereafter. The Corporation presently believes that
with modifications or replacements to existing software and
hardware and conversions to new software and hardware, the Year
2000 Issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the
Corporation.
The Corporation is initiating an ongoing program of formal
communications with all of its significant suppliers and large
customers to determine the extent to which the Corporation's
interface systems and its outstanding loans to such customers are
vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. However, there can be no guarantee that the
systems of other companies on which the Corporation's systems
rely or to which the Bank has extended credit will be timely
converted and would not have an adverse effect on the
Corporation's systems or operations.
The Corporation will utilize both internal and external
resources to reprogram, or replace, and test the software and
hardware for Year 2000 modifications. The Corporation
anticipates completing the Year 2000 project prior to any
anticipated impact on its operating systems. Although the
Corporation's assessment is not yet complete, the Corporation
believes that the expenses associated with the Year 2000 project
for 1998 may be material.
The timetable in which the Corporation believes it will
complete the Year 2000 modifications is based on management's
best estimate, which was derived utilizing numerous assumptions
of future events, including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
Although the Corporation believes that the program outlined
above should be adequate to address the Year 2000 Issue, there
can be no assurance to that effect.
Liquidity
Liquidity represents the ability to meet present and future
financial obligations through either the sale or maturity of
existing assets or the acquisition of additional funds through
liability management. Liquid assets include cash, federal funds
sold, securities classified as available for sale, and loans
maturing within one year. As a result of the Corporations'Corporation's
management of liquid assets, and the ability to generate
liquidity through liability funds, management believes that the
Corporation maintains overall liquidity sufficient to satisfy its
deposit requirements and meet its customers' credit needs.
At September 30, 1997,March 31, 1998, cash, securities classified as available
for sale, and federal funds sold were 19.8%26.1% of total assets
compared to 24.4%22.6% of total assets at December 31, 1996.1997. Asset
liquidity is also provided by managing loan and securities
investment maturities. At September 30, 1997,March 31, 1998, approximately $18.8$20.8
million or 22.4%23.7% of loans wouldwill mature within a one year period.
Also, at September 30, 1997At March 31, 1998, approximately $10.7$14.4 million or 29.4%33.3% of
securities wouldwill mature within a one year period. To the extent
possible, loans are funded with deposits or other funding with
coinciding maturity or repricing dates.
CAPITAL RESOURCESCapital 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. The Corporation seeks to maintain a capital
base to support its growth and expansion activities, to provide
stability to current operations and to promote public confidence.
The Corporations'Corporation's capital position continues to exceed
regulatory minimums. The primary indicators relied on by the
Federal Reserve Board 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 stockholdersstockholders'
equity less goodwill. Total Capital consists of Tier 1 Capital,
and a portion of the allowance for possible loan losses. Risk-basedRisk-
based capital ratios are calculated with reference to risk
weighted assets which consists of both on and off balance sheet
risks (such as letters of credit and unused lines of credit).
15
The Corporations'Corporation's Tier 1 Risk Based Capital Ratio was 12.8%11.7%
at September 30, 1997March 31, 1998 compared to 13.9%12.1% at December 31, 1996.1997. The
Corporations'Corporation's Total Risk Based Capital Ratio was 13.7%12.7% at
September 30, 1997March 31, 1998 compared to 16.7%13.1% at December 31, 1996.1997. These
ratios are in excess of the mandated minimum requirements of 4.0%
and 8.0% respectively. The Leverage Ratio consists of Tier 1
capital divided by quarterly average assets. At September 30, 1997,March 31, 1998,
the Corporations'Corporation's Leverage Ratio was 8.6%7.8% which exceeded the
required minimum leverage ratioLeverage Ratio of 4.0%.
16Item 3. Quantitative and Qualitative Disclosures About Market
Risk
A "small business issuer," as defined in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended, is not required to
provide information under this Item. The Corporation is a small
business issuer.
PART II - OTHER INFORMATION
NoneItem 5. Other Information
On April 19, 1998, the Corporation declared a quarterly cash
dividend of $0.14 per common share, payable June 1, 1998 to
shareholders of record on May 18, 1998. This dividend is the
first cash dividend declared by the Corporation since its
formation in 1991.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits to this Form 10-Q are listed in
the Index to Exhibits, which immediately follows the
signature page to this Form 10-Q.
(b) Reports on Form 8-K. The Corporation filed a Report on
Form 8-K with the Securities and Exchange Commission on
March 13, 1998 reporting under Item 5 the execution of
the Agreement and Plan of Merger dated March 2, 1998
among the Corporation, the Bank, HUBCO, Inc. and Hudson
United Bank, and related transactions.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COMMUNITY FINANCIAL HOLDING
CORPORATION
Date: November 12, 1997 By: May 15, 1998 By/s/Gerard M. Banmiller
-------------------
Gerard M. Banmiller
President & Chief Executive
Officer
Date: November 12, 1997 By: May 15, 1998 By/s/Kevin L. Kutcher
----------------
Kevin L. Kutcher
Executive Vice President/Treasurer/Chief Financial
Officer
EXHIBIT INDEX
2.1* Agreement and Plan of Merger, dated as of March 2, 1998,
by and between Community Financial Holding Corporation,
Community National Bank of New Jersey, HUBCO, Inc., and
Hudson United Bank, is incorporated by reference to
Exhibit 99.2 to the Registrant's Current Report on
Form 8-K filed on March 13, 1998.
2.2* Stock Option Agreement, dated as of March 2, 1998, by and
between Community Financial Holding Corporation and HUBCO,
Inc., is incorporated by reference to Exhibit 99.3 to the
Registrant's Current Report on Form 8-K filed on March 13,
1998.
3.1.1* Certificate of Incorporation of the Registrant, as amended
through February 7, 1991, is incorporated herein by
reference to Exhibit 3.1.1 of the Registrant's
Registration Statement on Form S-1, No. 33-78696 filed
with the Securities and Exchange Commission (the
"Registration Statement").
3.1.2* Certificate of Amendment, dated May 18, 1994, to the
Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 3.1.2 of the
Registration Statement.
3.2* By-Laws of the Registrant are incorporated herein by
reference to Exhibit 3.2 of the Registration Statement.
27.1 Financial Data Schedule at and for the three months ended
March 31, 1998.
27.2 Restated Financial Data Schedule at and for the three
months ended March 31, 1997.
* Previously Filed