EXHIBIT 13(A)
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________________
FDIC File Number _________
COMMUNITY BANK OF NEW JERSEY
(Exact Name of registrant as specified in its charter)
New Jersey 22-3495579
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(State of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3535 Highway 9 North, Freehold, New Jersey 07728
(Address of principal executive offices) (Zip Code)
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(732) 863-9000
(Issuer's telephone number, including area code)
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(Former name, former address and former year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
As of December 31, 1998, there were 1,730,917 shares of common stock, $5.00 par
value per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
10-KSB Item Document Incorporated
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Item 9. Directors and Executive Officers Proxy Statement for 1999 Annual
of the Company; Compliance with Meeting of Shareholders to be
Section 16(a) of the Exchange Act filed no later than April 30, 1999.
Item 10. Executive Compensation Proxy Statement for 1999 Annual
Meeting of Shareholders to be filed
no later than April 30, 1999.
Item 11. Security Ownership of Certain Proxy Statement for 1999 Annual
Beneficial Owners and Management Meeting of Shareholders to be filed
no later than April 30, 1999.
Item 12. Certain Relationships and Related Proxy Statement for 1999 Annual
Transactions Meeting of Shareholders to be filed
no later than April 30, 1999.
2
PART I
ITEM 1. -- DESCRIPTION OF BUSINESS
General
The Community Bank of New Jersey (the Bank) is a commercial bank formed
under the laws of the State of New Jersey in 1996. The Bank operates from its
main office at 3535 Highway 9 North, Freehold, New Jersey 07728, and its two
branch offices located at 31 East Main Street, Freehold, New Jersey, and 4502
Highway 9 South, Howell, New Jersey. In addition, the Bank opened its newest
office in Matawan, New Jersey, on February 6, 1999. This office is located at
the intersection of Main Street and Route 34.
The Bank's deposits are insured by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation (FDIC) up to applicable limits. The
operations of the Bank are subject to the supervision and regulation of the FDIC
and the New Jersey Department of Banking and Insurance (the Department). The
principal executive offices of the Bank are located at 3535 Highway 9 North,
Freehold, New Jersey 07728, and the telephone number is (732) 863-9000.
Business of the Bank
The Bank conducts a traditional commercial banking business and offers
services including personal and business checking accounts and time deposits,
money market accounts and regular savings accounts. The Bank structures its
specific services and charges in a manner designed to attract the business of
(i) small and medium-sized businesses, and the owners and managers of these
entities; (ii) professionals and middle managers of locally-based corporations;
(iii) residential real-estate tract developers; and (iv) individuals residing,
working, and shopping in the Monmouth, Middlesex, and Ocean County, New Jersey,
trade area serviced by the Bank. The Bank engages in a wide range of lending
activities and offers commercial, consumer, residential and non-residential
mortgage and construction loans.
Service Area
The Bank's service area primarily consists of the Monmouth, Middlesex, and
Ocean County, New Jersey, market, although the Bank makes loans throughout New
Jersey. The Bank operates its main office in Freehold Township, New Jersey, and
branch offices in Freehold Borough, Howell, and Matawan, New Jersey.
Competition
The Bank operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts, and other financial
institutions, many of which have greater financial resources than the Bank. Many
large financial institutions compete for business in the Bank's service area.
Certain of these institutions have significantly higher lending limits than the
Bank and provide services to their customers which the Bank does not offer.
Management believes the Bank is able to compete favorably with its
competitors because it provides responsive personalized services through
management's knowledge and awareness of the Bank's service area, customers, and
business.
3
Employees
At December 31, 1998, the Bank employed 28 full-time employees and seven
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Bank believes that its employee relations are good.
Supervision and Regulation
As a New Jersey-chartered commercial bank, we are subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, we are subject to regulation, supervision, and control of the FDIC,
an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all of our activities, including the minimum level
of capital we must maintain, our ability to pay dividends, our ability to expand
through new branches or acquisitions, and various other matters.
Insurance Deposits. Our deposits are insured up to a maximum of
$100,000 per depositor under the BIF of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance
premium rates range from 0-27 basis points of assessed deposits. For
the year ended December 31, 1998, we paid $2,062 in deposit insurance
premiums.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based
capital guidelines which are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks,
to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines,
assets, and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
Bank assets are given risk-weights of 0%, 20%, 50% and 100%. In addition,
certain off-balance sheet items are given similar credit conversion factors to
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. These computations result in the total risk-weighted assets. Most
loans are assigned to the 100% risk category, except for performing first
mortgage loans fully secured by residential property which carry a 50%
risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. Government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes, including general guarantees and standby letters of credit backing
financial obligations, are given a 100% risk-weighting. Transaction related
contingencies such as bid bonds, standby letters of credit backing non-financial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% risk-weighting. Short-term
commercial letters of credit have a 20% risk-weighting, and certain short-term
unconditionally cancellable commitments have a 0% risk-weighting.
4
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be Tier I Capital, consisting of
common stockholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder (Tier II Capital) may
consist of (a) the allowance for loan losses of up to 1.25% or risk-weighted
assets, (b) excess of qualifying preferred stock, (c) hybrid capital
instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f)
qualifying subordinated debt and intermediate-term preferred stock up to 50% of
Tier I Capital. Total capital is the sum of Tier I and Tier II Capital less
reciprocal holdings of other banking organizations' capital instruments,
investments in unconsolidated subsidiaries, and any other deductions as
determined by the FDIC (determined on a case-by-case basis or as a matter of
policy after formal rule-making). At December 31, 1998, our total risk-based
capital ratio was 35.84% and our Tier I risk-based capital ratio was 34.59%.
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier I Capital (leverage) ratio, under which a bank must maintain a
minimum level of Tier I Capital to average total consolidated assets of at least
3% in the case of a bank that has the highest regulatory examination rating and
is not contemplating significant growth or expansion. All other banks are
expected to maintain a leverage ratio of at least 200 basis points above the
stated minimum. At December 31, 1998, our leverage ratio was 24.41%.
In addition to the capital adequacy requirements of the FDIC discussed
above, pursuant to the order of the New Jersey Commissioner of the Department of
Banking and Insurance granting our charter, we are required to maintain a ratio
of equity capital to total assets of at least 10% for our first five (5) years
of operations, unless the Commission consents to a lower ratio. As of December
31, 1998 and 1997, the Bank's ratio of equity capital to total assets was 21.01%
and 32.74%, respectively.
ITEM 2. -- DESCRIPTION OF PROPERTY
The Bank conducts its business through its main office located at 3535
Highway 9 North, Freehold, New Jersey, and its three branch offices. The
following table sets forth certain information regarding the Bank's properties
as of December 31, 1998.
5
Date of lease
Location Leased or owned expiration
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3535 Highway 9 North Owned N/A
Freehold, NJ
31 East Main Street Leased August 2002
Freehold, NJ
4502 Highway 9 South Leased December 2018
Howell, NJ
Matawan, NJ Leased February 2019
ITEM 3. -- LEGAL PROCEEDINGS
The Bank is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to the Bank's business. Management does not believe that
there is any pending or threatened proceeding against the Bank which, if
determined adversely, would have a material effect on the business or financial
position of the Bank.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the registrant's shareholders
during the fourth quarter of fiscal 1998.
6
PART II
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ITEM 5. -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 27, 1998, our common stock has been traded on the NASDAQ
SmallCap market under the symbol CBNJ. Previously, our common stock was traded
on the OTC Bulletin Board under the symbol CBNG. The following table shows the
high and low bid prices for the common stock as reported on the OTC Bulletin
Board or Nasdaq SmallCap market since it began trading on May 19, 1997. These
quotations reflect inter-dealer prices, without retail market, mark-down, or
commission and may not represent actual transactions.
1997
----
High Low
---- ---
2nd Quarter . . . . . . 10 1/4 9
3rd Quarter . . . . . . 13 1/4 10
4th Quarter . . . . . . 13 1/2 12 1/2
1998
----
High Low
---- ---
1st Quarter . . . . . 14 1/4 12 1/2
2nd Quarter . . . . . . 17 14
3rd Quarter . . . . . . 20 1/4 15 1/2
4th Quarter . . . . . . 17 1/2 16
We have not paid cash dividends and do not anticipate paying cash dividends
in the foreseeable future. Pursuant to Department regulatory practice, new banks
like us are generally not permitted to pay cash dividends until we become
profitable and have eliminated any pre-opening deficits. Our accumulated
deficits totaled $1.6 million at December 31, 1998.
As of December 31, 1998, we had 390 shareholders of record.
In the fourth quarter of 1998, the Bank undertook a stock offering that was
underwritten on a firm commitment basis by Ryan, Beck & Co., Inc. The Bank sold
440,000 shares of its common stock at a price of $16.50 per share, or $7,260,000
in gross proceeds. In addition, the Bank granted Ryan, Beck & Co., Inc., an
option to purchase up to an additional 66,000 shares of common stock at $16.50
per share to cover over-allotments.
The $6.6 million of net proceeds of this Offering ($7.6 million when the
over-allotment option was exercised in the first quarter of 1999) will be used
to support the continuing expansion of our franchise through additional
investment and lending activities and the development of additional branches.
The Bank did not register the shares of common stock sold in this offering
in reliance upon the exemption from registration provided by Section 3(a)(2) of
the Securities Act of 1933, as amended.
7
ITEM 6. -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1998
OVERVIEW AND STRATEGY
We commenced operations in 1997 with the goal of providing first class
banking services through a locally headquartered financial institution, offering
customers direct access to senior officers and decision makers. We seek to serve
individuals, professionals, small businesses, and real estate developers in our
Monmouth, Middlesex, and Ocean County, New Jersey, trade area, whom we believe
are not adequately served by larger regional and multi-state financial
institutions. During 1997, our Board of Directors adopted a strategy of
preparing the Bank for future growth by putting in place the infrastructure
necessary to support this growth. The Bank opened its second office in downtown
Freehold, New Jersey, in September 1997, its third office in Howell, New Jersey,
in November 1998 and its fourth office in Matawan, New Jersey, in February 1999.
In addition, we have contracted for the purchase of a site for a new location in
Manalapan, New Jersey, subject to regulatory and land use approvals. Although
these steps taken in 1997 and 1998 may delay the Bank's profitability by several
quarters, management believes that positioning the Bank for future growth is
more important than maximizing the Bank's short-term profitability.
Results of Operations
Our results of operations depend primarily on our net interest income,
which is the difference between the sum of interest we earn on our
interest-earning assets and loan origination fees and the interest we pay on
deposits used to support our interest earning assets. In addition, the Bank
earns fee income, primarily through service fees on deposit accounts. Net
interest spread is the difference between the weighted average rate earned on
interest earning assets and the weighted average rate paid on interest bearing
liabilities. Net interest margin is a function of the difference between the
weighted average rate earned on interest-earning assets and the weighted average
rate paid on interest-bearing liabilities, as well as the average level of
interest-earning assets as compared with that of interest-bearing liabilities.
Net income is also affected by the amount of non-interest income and operating
expenses.
Net Income
For the year ended December 31, 1998, the Bank recorded a net loss of
$610,000 or $0.46 per share, as compared to a net loss of $837,000 or $0.65 per
share for the year ended December 31, 1997. The results for the year ended
December 31, 1997, reflect the results of operations for the period from May 15,
1997, the date of commencement of the Bank's operations, to December 31, 1997,
plus pre-opening expenses for the period up to May 15, 1997. These losses
reflect non-interest expenses and the provision for loan losses exceeding the
Bank's net interest income and non-interest income for the above periods. As a
de novo financial institution, the Bank's first priority has been the
acquisition of interest earning assets while maintaining sufficient liquidity
and flexibility to fund future loan demand. During the year ended December 31,
1997, a large portion of the Bank's interest earning assets consisted of lower
yielding federal funds sold, as the Bank began to develop lending relationships.
During 1998, the Bank accelerated the deployment of its earning assets into
higher yielding loans, reducing the 1998 losses as compared to 1997. For the
fourth quarter of 1998, the Bank earned net income of $38,000.
8
Net Interest Income
For the year ended December 31, 1998, the Bank recognized net interest
income of $2,070,000 as compared to $628,000 for the year ended December 31,
1997. The increase in net interest income for the year ended December 31, 1998,
as compared to the year ended December 31, 1997, was largely due to an increase
in the average balance of interest earning assets, which increased $26.8
million, or 128.2%, to $47.7 million from $20.9 million, primarily as a result
of an increase in average loans outstanding of $24.5 million over the 1997
period. Primarily as a result of the increase in the average balance of interest
earning assets, the Bank's interest income increased to $3.4 million for the
year ended December 31, 1998, from $887,000 for the year ended December 31,
1997. Also contributing to the increase in interest income was an increase in
the average yield on interest earnings assets to 7.19% in the 1998 period from
6.62% in the 1997 period. This increase in the average rate on earning assets
was due to the increase in the average balance of loans previously discussed,
which improved the mix of interest earning assets. Higher yielding loans
increased to 63.3% of interest earning assets during the 1998 period from 27.1%
during the 1997 period. Total interest expense increased 424.7% to $1,359,000
for the 1998 period from $259,000 for the 1997 period. This increase in interest
expense is directly related to the increase in the average balance of
interest-bearing liabilities, which increased $22.9 million to $32.3 million for
the 1998 period compared to $9.4 million for the 1997 period. The Bank's net
interest margin (net interest income divided by average interest earning assets)
for the year ended December 31, 1998, was 4.34% as compared to 4.64% for the
year ended December 31, 1997. The decrease in the margin for the 1998 period as
compared to the 1997 period reflected an increase in the portion of interest
earning assets being funded by interest-bearing liabilities rather than
non-interest-bearing sources of funds such as shareholders' equity.
Approximately 56.4% of interest earning assets in the 1997 period were funded
through stockholders' equity as compared to 23.0% of interest earning assets in
1998 period. This change reflects the growth of the Bank as average
shareholders' equity as a percent of average assets declined from 49.7% in 1997
to 21.1% in 1998. The Bank's net interest spread increased to 2.98% in the 1998
period from 2.23% in the 1997 period, reflecting the increase in the yield on
interest earning assets to 7.19% in 1998 period from 6.62% in the 1997 period.
The following table reflects, for the periods presented, the components of
our net interest income, setting forth: (1) average assets, liabilities, and
stockholders' equity, (2) interest income earned on interest-earning assets and
interest expenses paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earnings assets less the average rate on interest-bearing liabilities)
and (5) our yield on interest-earning assets. Rates are computed on a taxable
equivalent basis.
9
Year Ended December 31, 1998 Year Ended December 31, 1997 (1)
----------------------------------------- -------------------------------------------
Average Interest Average Rates Average Interest Average Rates
Balance Income/Expense Earned/Paid Balance Income/Expense Earned/Paid
------- -------------- ----------- ------- -------------- -----------
(In Thousands, Except Percentages)
Assets
Interest-Earning Assets:
Loans (net of unearned
income) $ 30,187 $ 2,454 8.13% $ 5,663 $ 299 8.45%
Investment Securities 5,299 323 6.10 2,867 114 6.36
Federal Funds Sold 12,209 652 5.34 12,368 452 5.85
-------- ---------- -------- ----------
Total Interest-
Earning Assets (2) 47,695 3,429 7.19 20,898 865 6.62
Non-Interest-Earning Assets 4,946 2,883
Allowance for Possible
Loan Losses (559) ( 68)
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Total Assets $ 52,082 $ 23,713
======== ========
Liabilities and
Stockholders' Equity
Interest-Bearing Liabilities:
NOW Deposits $ 7,851 $ 170 2.17 $ 2,632 $ 44 2.67%
Savings Deposits 19,869 960 4.83 5,534 179 5.18
Money Market Deposits 1,520 59 3.88 359 5 2.23
Time Deposits 3,055 170 5.56 905 31 5.48
--------- --------- ----------- -----------
Total Interest-
Bearing Liabilities 32,295 1,359 4.21 9,430 259 4.39
Non-Interest Bearing
Liabilities:
Demand Deposits 8,114 2,394
Other Liabilities 695 106
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Total Non-Interest
Bearing Liabilities 8,809 2,500
Stockholders' Equity 10,978 11,783
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Total Liabilities and
Stockholders' Equity $ 52,082 $ 23,713
======== ==========
Net Interest Spread (3) 2.98 2.23%
Net Interest Margin (4) 4.34 4.64%
Net Interest Income $ 2,070 $ 606
========= ==========
(1) Average balances and rates have been calculated for the time period from
May 15, 1997 (the date the Bank commenced operation) through December 31,
1997.
(2) Interest income on total interest earning assets for the year ended
December 31, 1997, does not include $22,000 earned on subscription funds
prior to our opening in 1997, since average balances and rates were
calculated for the period we were open.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing net interest income by
average interest earning assets.
10
The following table presents by category the major factors that
contributed to the changes in net interest income for the year ended 1998 as
compared to the year ended 1997. Amounts have been computed on a fully
tax-equivalent basis.
Year Ended December 31, 1998 vs. December 31, 1997
Increase (decrease)
Due to Change In (1)
--------------------------------------------
(In Thousands)
Average Volume Average Rate Net
-------------- ------------ ---
Interest Income
Taxable Loans (net of unearned income) $ 1,993 $ (17) $ 1,976
Investment Securities ................ 149 (8) 141
Federal Funds Sold ................... (9) (62) (71)
------- ------- -------
Total Interest Income ........... 2,133 (87) 2,046
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Interest Expense
NOW Deposits ......................... 115 (16) 99
Savings Deposits ..................... 694 (20) 674
Money Market ......................... 41 10 51
Time Deposits ........................ 120 -- 120
------- ------- -------
Total Interest Expense .......... 970 (26) 944
------- ------- -------
Net Interest Income ............. $ 1,163 $ (61) $ 1,102
======= ======= =======
(1)Average balances and rates for the period ended December 31, 1997, were
calculated for the time period form May 15, 1997, (the date the Bank
commenced operations) through December 31, 1997.
Provision for Loan Losses
The aggregate provision recorded by the Bank for the year ended December
31, 1998, was $664,000, compared to $250,000 for the year ended December 31,
1997. Although we had no non-performing assets during each of these periods, we
have established provisions for loan losses to create an adequate allowance
based on management's analysis of our portfolio and the growth we have
experienced over these periods. During the period from December 31, 1997 through
December 31, 1998, our loan portfolio increased from $15.2 million to $45.6
million.
Non-Interest Expense
Non-interest expense amounted to $2,259,000 for the year ended December 31,
1998, compared to $1,277,000 for the year ended December 31, 1997. The year
ended December 31, 1997, included pre-opening expenses and other expenses
associated with our commencement of operations of approximately $300,000. The
increases in non-interest expense for the 1998 period as compared to the 1997
period reflect the Bank's increased asset size and employment and administrative
expenses required due to our continued growth. During 1998, the Bank incurred
expenses for its Freehold Borough branch, for the entire year, opened its Howell
branch, and prepared to open its Matawan branch.
11
During the year ended December 31, 1998, and for the year ended December
31, 1997, the Bank's non-interest expense consisted of salary and employee
benefit expense of $1,129,000 and $469,000, respectively; occupancy expense of
$305,000 and $126,000, respectively; and other operating expenses of $825,000
and $682,000, respectively. In connection with the resignation of Mr. Stephen S.
Laine as President of the Bank in May 1998, and the subsequent retention of Mr.
Robert D. O'Donnell as President of the Bank in May 1998, the Bank recognized in
1998 $84,000 of non-recurring costs in the form of severance for Mr. Laine and
employment-related expense for Mr. O'Donnell. Occupancy expense for the year
ended December 31, 1998, increased $179,000 or 142% over the year ended December
31, 1997, as the Bank opened one new branch in late 1997, opened one branch in
1998, and prepared to open a new branch in early 1999. Other operating expenses
increased $143,000 or 21% in the year ended December 31, 1998, as compared to
the year end December 31, 1997, due mainly to 1998 results reflecting a full
year operations while 1997 results reflecting seven months of operations.
For the year ended December 31, 1997, the largest component of the Bank's
other operating expenses consisted of pre-opening expenses of $246,000. Other
significant expenses during the year ended December 31, 1997, included $84,000
in stationery and printing costs and $51,000 in organizational costs.
Data processing expense, consisting primarily of fees paid to our
third-party processor, were $137,000 and $56,000 for the years ended December
31, 1998, and December 31, 1997, respectively. The increase in data processing
costs in 1998 over 1997 reflects our increasing size, and particularly our
increasing deposit and loan portfolios. In addition, stationery and printing
costs were $135,000 and $84,000 for the year ended December 31, 1998, and
December 31, 1997, respectively. These costs reflect our spending on promotional
mailings and materials as part of our ongoing efforts to penetrate our target
markets.
The Bank anticipates that the continued expense of its branch system during
the first half of 1999, combined with increased expenses associated with its
expanding lending activities, will continue to increase its non-interest expense
in 1999.
Non-Interest Income
Non-interest income amounted to $243,000 for the year ended December 31,
1998, compared to $62,000 for the year ended December 31, 1997. The increase
consisted primarily of increases in service fee income on deposit accounts,
which accounts for primarily all of our non-interest income.
Income Tax Expenses
Because of the accumulated net operating losses incurred in the year ended
December 31, 1998, as well as for the year ended December 31, 1997, and the
period from December 1, 1995 (inception), through December 31, 1996, we did not
record an income tax provision for 1998 or 1997. We had net operating loss
carry-forwards of $512,000 and $350,000 at December 31, 1998, and December 31,
1997, respectively. These carry-forwards will expire in 2012 through 2018, and
may be available to offset tax liabilities on earnings during future periods.
Additionally, in view of our operating loss history and the risks associated
with our ability to generate taxable income in the future, management has
provided a full valuation allowance on its net deferred tax assets as of
December 31, 1998, and December 31, 1997.
12
Financial Condition
At December 31, 1998, our total assets were $82.8 million, an increase of
$48.0 million, or 137.9% over total 1997 year end assets of $34.8 million. At
December 31, 1998, our net loans were $44.7 million, an increase of $29.7
million, or 198.0% from the $15.0 million reported at December 31, 1997.
Investment securities decreased to $6.0 million at December 31, 1998, from $8.5
million at December 31, 1997. Federal funds sold increased to $26.0 million at
December 31, 1998, from $8.1 million at December 31, 1997, as the Bank sought
liquidity to fund expected future loan demand. The Bank had total deposits of
$65.0 million at December 31, 1998, an increase of $41.7 million, or 179.0%,
from the $23.3 million reported at December 31, 1997.
At December 31, 1998, our total loans were $45.6 million, an increase of
$30.4 million, or 200.0%, over our total loans of $15.2 million at December 31,
1997. Our loan portfolio consists primarily of loans secured by real estate,
and, to a lesser extent, commercial, construction, and consumer loans.
Our loans are primarily to businesses and individuals located in Monmouth,
Middlesex, and Ocean Counties, New Jersey. We have not made loans to borrowers
outside of the United States. We believe that our strategy of customer service,
competitive rate structures, and selective marketing have enabled us to gain
market entry to local loans. Bank mergers have also contributed to our efforts
to attract borrowers.
The following table sets forth the classification of our loans by major
category at December 31, 1998, and December 31, 1997.
December 31, December 31,
1998 1997
------------------------ ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(In Thousands, Except for Percentages)
Commercial and Industrial .............. $ 8,514 18.7% $ 3,413 22.4%
Real Estate - Non-Residential Properties 19,413 42.5 7,561 49.6
Residential Properties ................. 6,941 15.2 1,534 10.1
Construction ........................... 3,582 7.9 809 5.3
Consumer ............................... 6,376 14.0 1,913 12.6
Other .................................. 803 1.7 3 --
------- ----- ------- -----
Total Loans ........................ $45,629 100.0% $15,233 100.0%
======= ===== ======= =====
The following table sets forth the aggregate maturities of loans in
specified categories and the amount of such loans which have fixed and variable
rates at December 31, 1998.
Within 1 Year 1 to 5 Years After 5 years Total
------------- ------------- -------------- -------------
(In Thousands)
Commercial and Industrial $ 5,087 $ 3,427 $ - $ 8,514
Construction Loans 1,517 2,065 - 3,582
--------- --------- ------------- ----------
Total $ 6,604 $ 5,492 $ - $ 12,096
========= ========== ============= ========
Fixed Rate Loans $ 2,557
Variable Rate Loans 9,539
---------
Total $ 12,096
========
13
Asset Quality
As we continue to deploy our capital, our loans will be our principal
earning assets. Inherent in the lending function is the risk of the borrower's
inability to repay its loan under its existing terms. Risk elements in a loan
portfolio include non-accrual loans, past due and restructured loans, potential
problem loans, loan concentrations and other real estate owned, acquired through
foreclosure or a deed in lieu of foreclosure.
Non-performing assets include loans that are not accruing interest
(non-accruing loans) as a result of principal or interest being in default for a
period of 90 days or more and other real estate owned. At December 31, 1998, we
had no loans past due 30 days or more. When a loan is classified as non-accrual,
interest accruals cease and all past due interest, including interest applicable
to prior years, is reversed and charged against current income. Until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of such
payments as interest.
At December 31, 1998, we had no non-performing assets. We maintain a risk
rating system for grading all non-consumer credit facilities. The purposes of
the system is to detect changes in loan quality for individual credits and for
homogenous pools of loans in the portfolio. All such credits are assigned a
numerical rating in accordance with criteria established in eight categories
ranging from #1-Excellent to #8-Loss. Definitions for categories #5-Special
Mention Loans, #6-Substandard, #7-Doubtful, and #8-Loss are consistent with
those established by federal regulatory agencies. The initial rating is assigned
at inception and reviewed annually when financial statements are received and at
other times when deterioration in a relationship is detected. An independent
loan review function will test these ratings in its normal course and resolve
any rating differences. Any loan, including unrated consumer credits, may be
assigned to a watch list of credits, identified by management as credits
warranting special attention for a variety of reasons which might bear on
ultimate collectibility.
In addition to our internal rating system, our federal regulators provide
for the classification of certain loans and other lower quality assets into
substandard, doubtful or loss categories. A loan is classified as substandard
when it is inadequately protected by the current value and paying capacity of
the obligor or of the collateral pledged, if any. Loans so classified have a
well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that we will sustain some
loss if the deficiencies are not corrected.
A loan is classified doubtful when it has all the weaknesses inherent in
one classified as substandard with the added characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
factors, conditions, and values, highly questionable and improbable.
A loan is classified as loss when it is considered uncollectible and of
such little value that the asset's continuance as an asset on the balance sheet
is not warranted.
As of December 31, 1998, no loans were classified as substandard, doubtful,
or loss.
14
Allowance for Loan Losses
We attempt to maintain an allowance for loan losses at a sufficient level
to provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur and any recovery is credited to the
allowance. Risks within the loan portfolio are analyzed on a continuous basis by
our officers, by outside, independent loan review auditors, our Directors Loan
Committee, and the Board of Directors. A risk system, consisting of multiple
grading categories, is utilized as an analytical tool to assess risk and set
appropriate reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current and anticipated
economic conditions and considers such factors as the financial condition of the
borrower, past and expected loss experience, and other factors management feels
deserve recognition in establishing an appropriate reserve. These estimates are
reviewed at least quarterly, and, as adjustments become necessary, they are
realized in the periods in which they become known. Additions to the allowance
are made by provisions charged to expense and the allowance is reduced by net
charge-offs (i.e., loans judged to be uncollectible and charged against the
reserve, less any recoveries on such loans). Although management attempts to
maintain the allowance at a level deemed adequate, future additions to the
allowance may be necessary based upon changes in market conditions. In addition,
various regulatory agencies periodically review our allowance for loan losses.
These agencies may require us to take additional provisions based on their
judgments about information available to them at the time of their examination.
Our allowance for possible loan losses totaled $914,000 at December 31,
1998, or 2.04% of net loans outstanding. We had no non-performing loans or loans
past due 30 days or more at December 31, 1998.
The following is a summary of the reconciliation of the allowance for loan
losses for the periods indicated.
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
(In Thousands, Except Percentages)
Balance at Beginning of Period $ 250 $ -
Charge-Offs: - -
Provision Charged to Expense 664 250
------- -------
Balance of Allowance at End of Period $ 914 $ 250
======= =======
Ratio of Net Charge-Offs to Average
Loans Outstanding N/A N/A
Balance of Allowance at Period-End as
a % of Loans at Period End 2.04% 1.64%
======= =======
15
The following table sets forth, for each of the Bank's major lending
areas, the amount and percentage of the Bank's allowance for loan losses
attributable to such category, and the percentage of total loans represented by
such category, as of the periods indicated.
December 31, 1998 December 31, 1997
----------------------------------- ------------------------------------
Allocation % of % of all Allocation % of % of all
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
(In Thousands, Except Percentages)
Balance applicable to
Commercial and industrial $ 96 10.5% 18.7% $ 18 7.2% 22.4%
Real estate non-residential
properties 309 33.8 42.5 90 36.0 49.6
Residential properties 35 3.8 15.2 8 3.2 10.1
Construction 72 7.9 7.9 12 4.8 5.3
Consumer 55 6.0 14.0 18 7.2 12.6
Other 16 1.8 1.7 1 - -
-------- ------ ------- -------- -------- --------
Subtotal 583 63.8 100% 147 58.4 100%
Unallocated reserves 331 36.2 - 103 41.6 -
-------- ----- --------- ------ ----- --------
Total $ 914 100% 100 % $ 250 100% 100%
======== ===== ====== ====== ===== =====
Investment Securities
We maintain an investment portfolio to fund increased loans or decreased
deposits and other liquidity needs and to provide an additional source of
interest income. The portfolio is composed of U.S. Treasury Securities,
obligations of U.S. Government and agencies, government sponsored entities, and
a limited amount of corporate debt securities.
We follow Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under SFAS
115, securities are classified as securities held to maturity based on
management's intent and our ability to hold them to maturity. Such securities
are stated at cost, adjusted for unamortized purchase premiums and discounts.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities, which are carried at
market value. Realized gains and losses and gains and losses from marking the
portfolio to market value are included in trading revenue. Securities not
classified as securities held to maturity or trading securities are classified
as securities available for sale, and are stated at fair value. Unrealized gains
and losses on securities available for sale are excluded from results of
operations, and are reported as a separate component of stockholders' equity,
net of taxes. Securities classified as available for sale include securities
that may be sold in response to changes in interest rates, changes in prepayment
risks, the need to increase regulatory capital, or other similar requirements.
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1998, all $6.0 million of our investment
securities were classified as held to maturity. We had no securities classified
as available for sale or as trading securities.
16
At December 31, 1998, total investment securities were $6.0 million, a
decrease of $2.5 million, or 29.4% over investment securities of $8.5 million at
December 31, 1997. This decrease is attributable entirely to securities being
called early in a falling interest rate environment. The proceeds of these
securities were used to fund loan originations, rather than being reinvested in
investment securities.
The following table sets forth the carrying value of our securities
portfolio as of the dates indicated.
December 31, 1998
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ------------ ----------- ----------
(In Thousands)
U.S. Government and agency obligations $ 5,500 $ - $ (21) $ 5,479
Corporate debt securities and other 525 - - 525
---------- ------------ ----------- ----------
$ 6,025 $ - $ (21) $ 6,004
========= ============ =========== ==========
December 31, 1997
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ------------ ----------- ----------
(In Thousands)
U.S. Government and agency obligations $ 7,999 $ 2 $ - $ 8,001
Corporate debt securities and other 525 - - 525
---------- ------------ ------------ ----------
$ 8,524 $ 2 $ - $ 8,526
========= =========== ============ =========
At December 31, 1998 and 1997, all of our investment securities were held
to maturity.
The following table sets forth as of December 31, 1998 and 1997, the
maturity distribution of the Bank's investment portfolio.
December 31,
-------------------------------------------------
1998 1997
--------------------- ----------------------
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
(In Thousands)
Within one year ........ $ -- $ -- $ -- $ --
One to five years ...... 5,500 5,479 7,999 8,001
Six to ten years ....... 500 500 500 500
Due after ten years .... 25 25 25 25
------ ------ ------ ------
$6,025 $6,004 $8,524 $8,526
====== ====== ====== ======
17
Securities with a carrying value of $500,000 at December 31, 1998, were
pledged to secure public funds on deposit.
Deposits
Deposits are our primary source of funds. Our total deposits at December
31, 1998, were $65.0 million, an increase of $41.7 million, or 179.0% over total
deposits of $23.3 million at December 31, 1997. Our deposits at December 31,
1998, included $13,530 million in non-interest bearing demand deposits and
$4,974 million in time deposits.
We emphasize relationships with commercial customers and seek to obtain
transactional accounts, which are frequently kept in non-interest bearing
deposits. During our startup phase, we emphasized the origination of savings
deposits, which equaled $32,138 million at December 31, 1998, by offering rates
higher than our peer group institutions. Our primary savings product is the
stepped rate savings account. The interest rate is based upon the amount on
deposit, and the deposit amount can be changed. We may modify the interest rate
amount paid without notice, and the depositor may withdraw their funds on
demand. We market this product as an alternative to time deposits and believe it
has resulted in a higher rate of core deposits and lower cost of funds than our
peer group institutions. As of December 31, 1998, we have no foreign deposits,
nor are there any material concentrations of deposits, and we have not used
brokers to acquire deposits.
The following table sets forth the average amounts of various types of
deposits at the periods indicated.
Year ended December 31,
----------------------------------------------------------------
1998 1997
--------------------------- ------------------------------
Average Average Average Average
Balance Cost Balance (1) Cost (1)
------- ---- ----------- --------
(In Thousands, Except for Percentages)
Non-interest-bearing demand $ 8,114 - % $ 2,394 - %
Interest-bearing demand (NOW) 7,851 2.17 2,632 2.67
Savings deposit 19,869 4.83 5,534 5.18
Money Market Deposits 1,520 3.88 359 2.23
Time deposits 3,055 5.56 905 5.48
--------- ----------
Total $ 40,409 3.36% $ 11,824 3.50%
======== ========
(1) Average balances and rates have been calculated for the period from May 15,
1997 (the date the Bank commenced operation), through December 31, 1997.
We do not actively solicit short-term deposits of $100,000 or more
because of the liquidity risks posed by such deposits. The following
table summarizes the maturity distribution of certificates of deposits
of denominations of $100,000 or more as of December 31, 1998.
Time Deposits ($100,000 and over) (In Thousands)
--------------------------------- --------------
Three months or less $ 615
Over three months through twelve months 848
----------
Total $ 1,463
=========
18
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. Our net income is affected by changes in the level of market
interest rates. In order to maintain consistent earnings performance, the Bank
seeks to manage, to the extent possible, the repricing characteristics of its
assets and liabilities. The ratio between assets and liabilities repricing in
specific time intervals is referred to as an interest rate sensitivity gap.
Interest rate sensitivity gaps can be managed to take advantage of the slope of
the yield curve as well as forecasted changes in the level of interest rate
changes.
One of our major objectives when managing the rate sensitivity of our
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk is the responsibility of the
Asset/Liability Committee (ALCO), which is comprised of senior management and
Board members. We have instituted consistent policies and practices of measuring
and reporting interest rate risk exposure, particularly regarding the treatment
of non-contractual assets and liabilities. In addition, we annually review the
interest rate risk policy, which includes limits on the impact to earnings from
shifts in interest rates.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of our
interest sensitive assets and liabilities that mature or reprice within given
periods. A positive gap (asset sensitive) indicates that more assets reprice
during a given period compared to liabilities, while a negative gap (liability
sensitive) has the opposite effect. We employ computerized net interest income
simulation modeling to assist in quantifying interest rate risk exposure. This
process measures and quantifies the impact on net interest income through
varying interest rate changes and balance sheet compositions. The use of this
model assists the ALCO to gauge the effects of the interest rate changes on
interest sensitive assets and liabilities in order to determine what impact
these rate changes will have upon the net interest spread.
At December 31, 1998, we maintained a one year positive cumulative gap of
32.9% of total assets, or $27.2 million.
Interest Sensitivity Gap at December 31, 1998
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
------- --------- - ----- ------- -----
(In Thousands, Except for Percentage)
Federal Funds Sold .............. $ 26,025 $ -- $ -- $ -- $ 26,025
Investment securities (1) ....... 500 -- 5,000 525 6,025
Loans (1) ....................... 14,725 1,564 3,756 25,658 45,703
-------- -------- -------- -------- --------
Total assets ................ 41,250 1,564 8,756 26,183 $ 77,753
-------- -------- -------- -------- ========
Interest-bearing demand deposits,
savings deposits and money
market deposits ............. 11,209 -- 35,326 -- 46,535
Time ............................ 1,878 2,512 506 78 4,974
-------- -------- -------- -------- --------
Total liabilities ........... 13,087 2,512 35,832 78 $ 51,509
-------- -------- -------- -------- ========
Interest sensitivity gap ........ $ 28,163 $ (948) $(27,076) $ 26,105
======== ======== ======== ========
Cumulative gap .................. $ 28,163 $ 27,215 $ 139 $ 26,244
======== ======== ======== ========
Cumulative gap to total assets .. 34.0% 32.9% 0.2% 31.7%
======== ======== ======== ========
19
(1) Investment and loans are included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which
they are due. In addition, loans were included in the periods in which
they are scheduled to be repaid based on scheduled amortization. Due to
the short length of our operating history, we have little historical
data on annual prepayment rates.
Liquidity
Our liquidity is a measure of our ability to fund loans, withdrawals or
maturities of deposits, and other cash outflows in a cost-effective manner. Our
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, maturities of investment securities, and funds provided by
operations. While scheduled loan payments and maturing investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
Our total deposits equaled $65.0 million at December 31, 1998.
We have been a net seller of federal funds, as our liquidity has exceeded
our need to fund new loan demand. Should the need arise, we would have the
capability to purchase federal funds as an alternative source of liquidity. We
have established a credit line with Summit Bank to purchase up to $2.5 million
in federal funds. As of December 31, 1998, we have never drawn on this line.
Management believes that our current sources of funds provide adequate
liquidity for our current cash flow needs.
Capital
A significant measure of the strength of a financial institution is its
capital base. Our federal regulators have classified and defined capital into
the following components: (1) Tier I capital, which includes common stock and
qualifying preferred stock, and (2) Tier II capital, which includes a portion of
the allowance for possible loan losses, certain qualifying long-term debt and
preferred stock which does not qualify for Tier I capital. Minimum capital
levels are regulated by risk-based capital adequacy guidelines which require a
financial institution to maintain capital as a percent of its assets and certain
off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A financial institution is required to maintain, at a
minimum, Tier I capital as a percentage of risk-adjusted assets of 4.0% and
combined Tier I and Tier II capital as a percentage of risk-adjusted assets of
8.0%.
In addition to the risk-based guidelines, the federal regulators require
that a financial institution which meets the regulators' highest performance and
operation standards maintain a minimum leverage ratio (Tier I capital as a
percentage of tangible assets) of 3%. For those institutions with higher levels
of risk or that are experiencing or anticipating significant growth, the minimum
leverage ratio will be proportionately increased by 100 to 200 basis points.
Minimum leverage ratios for each bank are evaluated through the ongoing
regulatory examination process.
20
The following table summarizes our risk-based and leverage ratios at
December 31, 1998, as well as the required minimum regulatory capital ratios.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
(In Thousands, Except for Percentages)
As of December 31, 1998
Total capital (to risk-
weighted assets) $ 18,021 35.84% $ 4,022 >8.0% $ 5,028 >10.0%
- -
Tier I capital (to risk-
weighted assets) 17,389 34.59 2,011 >4.0 3,017 > 6.0
- -
Tier I capital (to average
assets) 17,389 24.41 2,137 >3.0 3,562 > 5.0
- -
As of December 31, 1997
Total capital (to risk-
weighted assets) $ 11,639 55.97% $ 1,664 >8.0% $ 2,080 >10.0%
- -
Tier I capital (to risk-
weighted assets) 11,389 54.77 832 >4.0 1,248 > 6.0
- -
Tier I capital (to average
assets) 11,389 36.90 926 >3.0 1,543 > 5.0
In addition to the capital adequacy requirements of the FDIC set forth
above, pursuant to the order of the New Jersey Commissioner of the Department of
Banking and Insurance granting our charter, we are required to maintain a ratio
of equity capital to total assets of at least 10% for our first five (5) years
of operations, unless the Commission consents to a lower ratio. As of December
31, 1998 and December 31, 1997, the Bank's ratio of equity capital to total
assets was 21.01% and 32.74%, respectively.
Impact of Inflation and Changing Prices
Our financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all our assets and liabilities are monetary.
As a result, interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
21
Year 2000
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency, and other data. The Bank has been
evaluating both information technology (computer systems) and non-information
technology systems (e.g., vault timer, electronic door lock, and heating,
ventilation, and air conditioning control). The Bank has examined all of is
non-information technology systems and has either received certifications of
Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. The Bank
expects to further test the systems it controls and receive third party
certifications, when appropriate, that these systems will continue to function.
The Bank does not expect any material costs to address its non-information
technology systems and has not had any material costs to date. The Bank has
determined that the information technology systems it currently uses have
substantially more Year 2000 risk than the non-information technology systems
the Bank uses. The Bank has evaluated its information technology systems risk in
three areas: (1) its own computers, (2) computers of others used by its
borrowers, and (3) computers of others who provide the Bank with data
processing.
The Bank's Computers
The Bank has tested all of its internal computer systems and determined
that they are all Year 2000 compliant. As a result, the Bank does not expect to
have any material costs to address this risk area.
Computers of Others Used by Borrowers
The Bank has evaluated most of its borrowers and does not believe that the
Year 2000 problem should, on an aggregate basis, impact their ability to make
payments to the Bank. The Bank believes that most of its individual borrowers
are not dependent on their home computers for income and none of the Bank's
commercial borrowers are so large that a Year 2000 problem would render them
unable to collect revenue or rent and, in turn, continue to make loan payments
to the Bank. The Bank does not expect any material costs to address this risk
area.
Computers of Others Who Provide the Bank With Data Processing
This risk is primarily focused on NCR, our service bureau which provides
virtually all of our data processing. Although NCR is not Year 2000 compliant,
it has advised the Bank that it expects to be compliant before the year 2000. If
this problem is not solved by the year 2000, the Bank would likely experience
significant delays, mistakes, or failures. These delays, mistakes, or failures
could have a significant impact on the Bank's financial condition and results of
operations.
22
Contingency Plan
The Bank is monitoring NCR to evaluate whether the Bank's data processing
system will fail. The Bank is being provided with periodic updates on the status
of testing and upgrades being made by NCR. If NCR fails, the Bank will attempt
to locate an alternative service bureau that is Year 2000 compliant. If the Bank
is unsuccessful in locating an alternative service bureau, the Bank will enter
deposit and loan transactions by hand in its general ledger and computer loan
payments and deposit balances and interests with its existing computer system.
The Bank can do this because of its relatively small number of loan and deposit
accounts and would expand its internal bookkeeping system. The Bank's computer
systems are independently able to generate labels and mailings for all of the
Bank's customers. If this labor intensive approach becomes necessary, management
and the Bank's employees will become much less efficient. However, the Bank
believes that it would be able to operate in this manner indefinitely, until the
Bank's existing service bureau, or their replacement, is able to again provide
data processing services. If very few financial institution services bureaus
were operating in the Year 2000, the Bank's replacement costs, assuming it could
negotiate an agreement, could be material.
Recently Issued Accounting Standards
The Bank adopted FASB Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income. This standard established new standards
for reporting comprehensive income which includes net income, as well as,
certain other items which result in a change to equity during the period. As of
December 31, 1998, the Bank did not have any components of comprehensive income
to be disclosed.
In 1998, the Bank adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about the Bank's operating segments. Management has
determined the Bank operates in one business segment, namely community banking.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the beginning
of any fiscal quarter. The Bank is currently reviewing the provisions of SFAS
No. 133. The adoption of SFAS No 133 is not anticipated to have a material
impact on the Bank's consolidated financial position or results of operations.
23
ITEM 7. -- FINANCIAL STATEMENTS
The financial statements required by this item are filed herewith.
ITEM 8. -- CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A)
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Bank's 1999 Annual Meeting under the captions
"PROPOSAL 1. -- ELECTION OF DIRECTORS" and information concerning compliance
with Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Federal Deposit Insurance Corporation no later than April 30,
1999.
The following table sets forth certain information about each executive
officer of the company who is not also a director.
Principal occupation
during past five
Name, age and position Officer since years
---------------------- ------------- -----
Wayne Courtright, 50 1997 Senior Lending Officer
Senior Vice President and of the Bank; formerly
Senior Lending Officer Senior Lending Officer
of Garden State Bank
ITEM 10. -- EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the definitive
Proxy Statement for the Bank's 1999 Annual Meeting under the captions " PROPOSAL
1 -- EXECUTIVE COMPENSATION AND ALL OTHER COMPENSATION" and "COMPENSATION OF
DIRECTORS", which is incorporated by reference herein. It is expected that such
Proxy Statement will be filed with the Federal Deposit Insurance Corporation no
later than April 30, 1999.
24
ITEM 11. -- SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy statement for the Bank's 1999
Annual Meeting under the caption "PROPOSAL 1 -- SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT", which is incorporated herein by reference. It
is expected that such Proxy statement will be filed with the Federal Deposit
Insurance Corporation no later than April 30, 1999.
ITEM 12. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Bank's 1999 Annual Meeting
under the caption "PROPOSAL 1 -- INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS", which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Federal Deposit Insurance
Corporation no later than April 30, 1999.
ITEM 13. -- EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit number Description of Exhibits
-------------- -----------------------
10 Employment Agreement between Robert D. O'Donnell
21 Subsidiaries of the Registrant
(b) Reports on form 8-K
Date Item
---- ----
December 17 5-- announcing consummation of common stock offering
November 19 5-- announcing commencement of trading on NASDAQ
SmallCap Market.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BANK OF NEW JERSEY
By: /s/Robert D. O'Donnell
----------------------
Robert D. O'Donnell
President and Chief Executive Officer
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/Robert D. O'Donnell
- ----------------------
Robert D. O'Donnell President and Chief Executive Officer
/s/Ralph Cavall
- ---------------
Ralph Cavall Acting Chief Financial Officer
/s/Howard Schoor
- ----------------
Howard Schoor Chairman of the Board
/s/Eli Kramer
- -------------
Eli Kramer Vice Chairman of the Board
/s/Charles P. Kaempffer, CPA
Charles P. Kaempffer, CPA Vice Chairman of the Board
/s/Alan Cohen
Alan Cohen President
/s/Morris Kaplan
Morris Kaplan Director
26
NAME TITLE DATE
---- ----- ----
/sRobert M. Kaye
- ----------------
Robert M. Kaye Director
/s/William J. Mehr, Esq.
- ------------------------
William J. Mehr, Esq . Director
/s/Arnold Silverman
- -------------------
Arnold Silverman Director
/s/Lewis Wetstein, M.D.
- -----------------------
Lewis Wetstein, M.D. Director
27
THE COMMUNITY BANK OF NEW JERSEY
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
-------- --------
Cash and due from banks .................................................... $ 2,541 $ 976
Federal funds sold ......................................................... 26,025 8,100
-------- --------
Total cash and cash equivalents .............................. 28,566 9,076
Investment securities held-to-maturity (fair value of
$6,004 and $8,526 at December 31, 1998 and
1997, respectively) ..................................................... 6,025 8,524
Loans receivable ........................................................... 45,629 15,233
Less allowance for loan losses ............................................. (914) (250)
-------- --------
Net loans receivable ................................................ 44,715 14,983
Premises and equipment, net ................................................ 3,068 1,916
Accrued interest receivable ................................................ 224 129
Other assets ............................................................... 153 155
-------- --------
Total assets ........................................................ $ 82,751 $ 34,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing - demand ........................................... $ 13,530 $ 6,186
Interest bearing - NOW .................................................. 14,397 4,835
Savings and money market ................................................ 32,138 10,913
Certificates of deposit, under $100,000 ................................. 3,511 577
Certificates of deposit, $100,000 and over .............................. 1,463 750
-------- --------
Total deposits ...................................................... 65,039 23,261
Accrued interest payable ................................................... 114 21
Other liabilities .......................................................... 209
-------- --------
112
Total liabilities ................................................... 65,362 23,394
-------- --------
STOCKHOLDERS' EQUITY
Common stock - authorized, 5,000,000 shares of $5.00 par value; issued and
outstanding, 1,730,917 and 1,290,917 shares at
December 1998 and 1997, respectively .................................... 8,654 6,454
Additional paid-in capital ................................................. 10,340 5,930
Accumulated deficit ........................................................ (1,605) (995)
-------- --------
Total stockholders' equity .......................................... 17,389 11,389
-------- --------
Total liabilities and stockholders' equity .......................... $ 82,751 $ 34,783
======== ========
The accompanying notes are an integral part of these statements.
28
THE COMMUNITY BANK OF NEW JERSEY
Consolidated Statements of Operations
Year ended December 31,
(In thousands, except per share data)
1998 1997
------- -------
INTEREST INCOME
Loans, including fees .................... $ 2,454 $ 299
Federal funds sold ....................... 652 452
Investment securities .................... 323 114
Due from banks ........................... -- 22
------- -------
Total interest income ............. 3,429 887
INTEREST EXPENSE
Deposits ................................. 1,359 259
------- -------
Net interest income ............... 2,070 628
PROVISION FOR LOAN LOSSES .................... 664 250
------- -------
Net interest income after
provision for loan losses ..... 1,406 378
------- -------
NON-INTEREST INCOME
Service fees on deposit accounts ......... 113 11
Other income ............................. 130 51
------- -------
Total non-interest income ......... 243 62
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits ........... 1,129 469
Occupancy expense ........................ 305 126
Other operating expenses ................. 825 682
------- -------
Total non-interest expense ........ 2,259 1,277
------- -------
Net loss .......................... $ (610) $ (837)
======= =======
Per share data
Net loss - basic and diluted ............. $ (0.46) $ (0.65)
======= =======
The accompanying notes are an integral part of these statements.
29
THE COMMUNITY BANK OF NEW JERSEY
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 1998 and 1997
(In thousands, except per share data)
Common Stock Additional
Common stock subscriptions paid-in Accumulated
stock subscribed receivable capital deficit Total
----- ---------- ---------- ------- ------- -----
Balance, January 1, 1997 ............. $ -- $ 3,284 $ (3,037) $ -- $ (158) $ 89
Collection of stock subscriptions
receivable ................... -- -- 3,037 -- -- 3,037
Issuance of common stock, net
of offering expenses ......... 6,454 (3,284) -- 5,930 -- 9,100
Net loss ........................ -- -- -- -- (837) (837)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ........... 6,454 -- -- 5,930 (995) 11,389
Issuance of common stock,
net of offering expenses ..... 2,200 -- -- 4,410 -- 6,610
Net loss ........................ -- -- -- -- (610) (610)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 ........... $ 8,654 $ -- $ -- $ 10,340 $ (1,605) $ 17,389
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
30
THE COMMUNITY BANK OF NEW JERSEY
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands, except per share data)
1998 1997
-------- --------
OPERATING ACTIVITIES
Net loss .................................................... $ (610) $ (837)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization ............................ 206 138
Provision for loan losses ................................ 664 250
Increase in accrued interest receivable .................. (95) (129)
(Increase) decrease in other assets ...................... 2 (139)
Increase in accrued interest payable ..................... 93 20
(Decrease) increase in other liabilities ................. 97 (31)
-------- --------
Net cash (used in) provided by operating activities 357 (728)
-------- --------
INVESTING ACTIVITIES
Purchases of investment securities held
to maturity .............................................. (10,000) (10,524)
Net increase in loans receivable ............................ (30,396) (15,233)
Proceeds from maturities and calls of
investment securities .................................... 12,499 2,000
Purchases of premises and equipment ......................... (1,358) (1,541)
-------- --------
Net cash used in investing activities ............. (29,255) (25,298)
-------- --------
FINANCING ACTIVITIES
Net proceeds from common stock issued ....................... 6,610 9,100
Collection of stock subscriptions receivable ................ -- 3,037
Net increase in demand deposits and
savings accounts ......................................... 38,131 21,935
Net increase in certificates of deposits .................... 3,647 1,327
Repayment of loan payable ................................... -- (325)
-------- --------
Net cash provided by financing activities ....................... 48,388 35,074
-------- --------
Net increase in cash and cash equivalents ......... 19,490 9,048
Cash and cash equivalents, beginning of period .................. 9,076 28
-------- --------
Cash and cash equivalents, end of period ........................ $ 28,566 $ 9,076
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest ...................................... $ 1,266 $ 238
======== ========
Cash paid for income taxes .................................. $ 1 $ --
======== ========
The accompanying notes are an integral part of these statements.
31
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE A - ORGANIZATION
The Community Bank of New Jersey (the Bank) is a New Jersey state-chartered
banking institution. The Bank filed an application for a commercial bank
charter with the New Jersey State Commissioner of Banking and Insurance (the
Charter Application) on June 14, 1996, to charter the Bank as a New Jersey
commercial bank. The Charter Application was conditionally approved on
December 6, 1996. On July 11, 1996, the organizers filed an application for
federal insurance with the Federal Deposit Insurance Corporation (FDIC). The
application was approved by the FDIC on March 21, 1997. The Bank commenced
operations on May 15, 1997.
The Bank provides banking services to small and medium-sized businesses,
professionals, and individual consumers in the area of central New Jersey.
Additionally, the Bank competes with other banking and financial
institutions in its market communities, including financial institutions
with resources substantially greater than its own. Commercial banks, credit
unions, and money market funds actively compete for savings and time
deposits and for similar types of loans. Such institutions, as well as
consumer finance and insurance companies, may be considered competitors of
the Bank with respect to one or more of the services it provides.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, they are periodically examined by those regulatory
authorities. As a consequence of the extensive regulation of commercial
banking activities, the Bank's business is susceptible to being affected by
state and federal legislation and regulations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accounting and reporting policies of the Bank conform with generally
accepted accounting principles and predominant practices within the banking
industry. The financial statements include the accounts of the Bank and its
wholly owned subsidiary, Juniper Plaza/Route 9, Inc. All intercompany
balances and transactions have been eliminated in the financial statements.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the balance sheet and the reported amounts of revenues and expenses
during the reporting periods. Therefore, actual results could differ from
those estimates.
The estimate and the evaluation of the adequacy of the allowance for loan
losses includes an analysis of the individual loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of
specific borrowers to pay specific loan obligations, as well as current loan
collateral values. However, actual losses on specific loans, which also are
encompassed in the analysis, may vary from estimated losses.
(Continued)
32
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Bank adopted FASB Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income. This standard established new standards
for reporting comprehensive income which includes net income, as well as,
certain other items which result in a change to equity during the period. As
of December 31, 1998, the Bank did not have any components of comprehensive
income to be disclosed.
In 1998, the Bank adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about the Bank's operating segments. Management has
determined the Bank operates in one business segment, namely community
banking.
2. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold with maturities of three months or less.
3. Investment Securities
The Bank accounts for its investment securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. This
standard requires, among other things, that debt and equity securities
classified as available-for-sale be reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate
component, net of income taxes. The net effect of unrealized gains or
losses, caused by marking an available-for-sale portfolio to market, could
cause fluctuations in the level of undivided profits and equity-related
financial ratios as market interest rates cause the fair value of fixed-rate
securities to fluctuate. The Bank does not have any securities classified as
available-for-sale at December 31, 1998 or 1997.
Investment and mortgage-backed securities, which the Bank has the ability
and intent to hold to maturity, are held for investment purposes and carried
at cost, adjusted for amortization of premium and accretion of discount over
the terms of the maturity in a manner which approximates the interest
method. At the time of purchase, the Bank makes a determination as to
whether or not it will hold the investment securities to maturity based upon
an evaluation of the probability of the occurrence of future events. Gains
or losses on the sales of securities available for sale are recognized upon
realization utilizing the specific identification method.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the
fair value of a derivative (gains and losses) depends on the intended use of
the derivative and resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted only as of the beginning of any fiscal quarter. The
adoption of SFAS No 133 is not anticipated to have a material impact on the
Bank's consolidated financial position or results of operations.
(Continued)
33
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Loans Receivable and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on
loans is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is maintained at an amount
management deems adequate to cover estimated losses. In determining the
level to be maintained, management evaluates many factors, including current
economic trends, industry experience, historical loss experience, industry
loan concentrations, the borrowers' ability to repay and repayment
performance, and estimated collateral values. In the opinion of management,
the present allowance is adequate to absorb reasonable, foreseeable loan
losses. 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 of the other factors used in management's
determination. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank to recognize additions
to the allowance based on their judgments about information available to
them at the time of their examination.
Interest on loans is accrued and credited to operations based upon the
principal amounts outstanding. Loans are placed on non-accrual when a loan
is specifically determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss
is remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
non-accrual loans is recognized only to the extent of interest payments
received. The Bank had no non-accrual loans as of December 31, 1998 or 1997.
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. Regardless
of the measurement method, a creditor must measure impairment based on the
fair value of the collateral when the creditor determines that foreclosure
is probable. The Bank had no loans that would be defined as impaired at
December 31, 1998 or 1997.
5. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Bank accounts for its transfers and servicing financial assets in
accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as amended by SFAS No.
127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
This standard provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities.
(Continued)
34
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to operations on a
straight-line basis over the estimated useful lives of the assets.
7. Other Assets
All organizational costs, included in other assets, have been expensed as of
December 31, 1997. Amortization expense related to organizational costs was
$51,000 for the year ended December 31, 1997. Pre-opening costs were
expensed when incurred.
8. Income Taxes
Under the liability method specified by SFAS No. 109, Accounting for Income
Taxes, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities, as measured by the enacted tax rates, which will be in effect
when these differences reverse. The primary temporary differences are
organizational and start-up costs and net operating loss carryforwards.
9. Earnings Per Share
On January 1, 1997, the Bank adopted the provisions of SFAS No. 128,
Earnings Per Share. SFAS No. 128 eliminates primary and fully diluted
earnings per share (EPS) and requires presentation of basic and diluted EPS
in conjunction with the disclosure of the methodology used in computing such
EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted EPS takes into account the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock. EPS is computed based
on the weighted average number of shares of common stock outstanding.
10. Advertising Costs
The Bank expenses advertising costs as incurred.
11. Reclassification
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
35
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE C - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Bank's investment securities held-to-maturity are as follows (in thousands):
December 31, 1998
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------- -------------- -----------
U.S. Government and agency securities $ 5,500 $ - $ (21) $ 5,479
Corporate debt securities and other 525 - - 525
----------- ------------- -------------- -----------
$ 6,025 $ - $ (21) $ 6,004
=========== ============== ============= ===========
December 31, 1997
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------- -------------- -----------
U.S. Government and agency securities $ 7,999 $ 2 $ - $ 8,001
Corporate debt securities and other 525 - - 525
----------- ------------- -------------- -----------
$ 8,524 $ 2 $ - $ 8,526
=========== ============== ============= ===========
The amortized cost and fair value of the Bank's investment securities
held-to-maturity at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties (in thousands).
Amortized Fair
cost value
---- -----
Due in one year or less .......................... $ -- $ --
Due after one year through five years ............ 5,500 5,479
Due after five years through ten years ........... 500 500
Due after ten years .............................. 25 25
------ ------
$6,025 $6,004
====== ======
A portion of the Bank's U.S. Government and agency securities, totalling
approximately $500,000 at December 31, 1998 and 1997, was pledged as
collateral to secure deposits as required or permitted by law.
36
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE D - LOANS RECEIVABLE
Major loan classifications at December 31 are as follows (in thousands):
1998 1997
-------- --------
Consumer loans ................................. $ 6,376 $ 1,913
Residential mortgages .......................... 6,956 1,535
Commercial and industrial loans ................ 8,532 3,414
Construction loans ............................. 3,582 809
Commercial mortgages ........................... 19,454 7,574
Other .......................................... 803 3
-------- --------
45,703 15,248
Less
Unearned discounts and deferred loan fees .... (74) (15)
Allowance for loan losses .................... (914) (250)
-------- --------
$ 44,715 $ 14,983
======== ========
The Bank had no non-accrual loans as of December 31, 1998 or 1997. The Bank
had no loans that would be defined as impaired at December 31, 1998 or 1997.
The Bank defines non-performing assets to include loans past due 90 days or
more, impaired loans and other real estate owned. The Bank had no
non-performing assets at December 31, 1998 or 1997. There were no loans to
directors, officers, or employees at or during the periods ended December
31, 1998 or 1997.
Changes in the allowance for loan losses is as follows (in thousands):
1998 1997
---------- -----------
Balance, beginning of year $ 250 $ -
Provision charged to expenses 664 250
---------- -----------
Balance, end of period $ 914 $ 250
========== ===========
37
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are as follows (in thousands):
Estimated
useful lives 1998 1997
------------------ ------------ ------------
Land Indefinite $ 176 $ 176
Buildings and leasehold improvements 10 - 39 years 1,846 1,278
Furniture, fixtures and equipment 5 years 460 263
Computer equipment and software 3 - 5 years 452 286
Construction in progress - 427 -
--------- ----------
3,361 2,003
Less accumulated depreciation and
amortization (293) (87)
---------- ---------
$ 3,068 $ 1,916
========== =========
Depreciation and amortization charged to operations amounted $206,000 and
$87,000 for year ended December 31, 1998 and 1997, respectively.
NOTE F - DEPOSIT
At December 31, 1998, the scheduled maturities of certificates of deposit
are summarized as follows (in thousands):
1999 $ 4,390
2000 404
2001 102
2002 78
----------
$ 4,974
Interest expense on deposits is as follows (in thousands):
1998 1997
---------- -----------
Savings $ 960 $ 179
NOW and money market 229 49
Time deposits 170 31
---------- -----------
$ 1,359 $ 259
========== ===========
38
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE G - LOAN PAYABLE
In 1996, the Bank assumed an interest only loan with a bank for an aggregate
amount of $325,000. Interest was charged at a rate of 8.25%. The proceeds
from the loan were used to purchase the unimproved site of the Bank's
headquarters and main office. The Bank capitalized all interest relating to
this loan into construction in progress through December 31, 1997. This loan
was repaid on March 25, 1997.
NOTE H - EQUITY TRANSACTIONS
On December 14, 1998, the Bank completed it secondary common stock offering
of 440,000 shares at $16.50 per share for $7,260,000. Gross proceeds of the
offering were reduced by offering costs of $650,000.
As of January 1, 1997, the Bank had subscriptions to purchase 328,400 shares
of common stock at $10.00 per share. On April 23, 1997, the Bank completed
its initial common stock offering of 1,290,917 shares at $10.00 per share
for $12,909,000. Gross proceeds of the offering were reduced by offering
costs of $525,000.
NOTE I - INCOME TAXES
The Bank did not record an income tax provision for the years ended
December 31, 1998 and 1997, because of its net operating loss.
Net deferred tax assets consist of the following (in thousands):
1998 1997
----- -----
Allowance for loan loss ........................ $ 329 $ 97
Organizational and start-up costs .............. 115 148
Net operating loss carryforwards ............... 200 137
Other .......................................... (19) 5
----- -----
625 387
Less valuation allowance ....................... (625) (387)
----- -----
Net deferred tax asset ...................... $ -- $ --
===== =====
In view of the Bank's operating loss history and the risks associated with
its ability to generate taxable income in the future, management has
provided for the valuation allowance reflected in the schedule above. The
Bank had net operating loss carryovers of approximately $512,000 at December
31, 1998. These carryforwards will expire through 2018.
39
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE J - OTHER EXPENSES
Other expenses consist of the following (in thousands):
1998 1997
---- ----
Office expense ............................... $222 $ 44
Stationery and printing ...................... 135 84
Data processing .............................. 137 56
Professional fees ............................ 103 45
Marketing and advertising .................... 103 57
Insurance expense ............................ 59 40
Organizational costs ......................... -- 51
Pre-opening expense .......................... -- 246
Other ........................................ 66 59
---- ----
$825 $682
==== ====
NOTE K - EARNINGS PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations (in thousands, except per share data):
Year ended December 31, 1998
--------------------------------------
Weighted
average Per share
Loss shares amount
--------- --------- --------
Basic EPS
Net loss available to common stockholders .... $ (610) 1,312,616 $ (0.46)
Effect of dilutive securities
Options ...................................... -- 24,558 --
--------- --------- --------
Diluted EPS
Net loss available to common stockholders plus
Assumed conversion ...................... $ (610) 1,337,174 $ (0.46)
========= ========= ========
Year ended December 31, 1997
--------------------------------------
Weighted
average Per share
Loss shares amount
--------- --------- --------
Basic and diluted EPS
Net loss available to common stockholders $ (837) 1,290,917 $ (0.65)
========= ========= ========
40
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE L - STOCK OPTIONS
In July 1997, the Board of Directors of the Bank adopted three stock option
plans for the members of the board, executive officers, and certain
employees of the Bank. In April 1998, the Bank's shareholders approved all
three stock option plans.
Under the Community Bank of New Jersey 1997 Stock Option Plan for
Non-Employee Directors (the 1997 Stock Option Plan for Non-Employee
Directors), options to purchase 45,000 common stock shares may be issued.
Each of the nine non-employee directors were automatically granted 5,000
common stock options exercisable at $11.50 per share (110% of market value
on date of grant) in July 1997. Upon the adoption of the plan, the options
vest one-third each year. The option may be exercised up to 10 years after
the grant.
Under the Community Bank of New Jersey 1997 Stock Option Plan (the 1997
Stock Option Plan), options to purchase 59,000 common stock shares may be
issued. Options to purchase 44,000 common stock shares were granted to nine
non-employee directors at $11.50 per share (110% of market value on date of
grant) in July 1997, in varying amounts to each non-employee director in
July 1997. Additionally, 15,000 options were granted to the President at
$14.76 per share in May 1998. The options vest one-third each year. The
options may be exercised up to 10 years after the grant.
Under the Community Bank of New Jersey 1997 Employee Stock Option Plan (the
1997 Employee Stock Option Plan), options to purchase 50,000 common stock
shares may be issued. The plan is designed to reserve options for employees
of the Bank. The discretion of the board is very broad in determining to
whom, how many, and at what price options may be issued. These options are
priced at time of grant. They may be priced as low as 85% of market value.
Options to purchase 50,000 shares were granted in May 1998, which include
25,000 options granted to the President. At December 31, 1998, 43,000
options are outstanding and during the year ended December 31, 1998, 7,000
options were cancelled.
The Board of Directors approved in May 1998, the 1998 Stock Options Plan
(the 1998 Stock Option Plan) pursuant to which options to purchase up to
50,000 shares of common stock may be issued to members of management. The
Board adopted this stock option plan in connection with the retention of the
President and Chief Executive Officer of the Bank. Under the terms of the
President's employment, he is entitled to receive options to purchase 75,000
shares of common stock, more than was authorized under the Bank's existing
stock option plans. Under the Plan, employees may be awarded either
incentive stock options, which must have an exercise price of no less than
100% of the fair market value of the common stock on the date of grant, or
non-qualified options, which may have an exercise price to be determined by
the Board of directors at grant, but not less than 85% of the fair market
value of the common stock on the date of grant. Since this stock option plan
is subject to the approval of the Bank's shareholders at its annual meeting
to be held April 22, 1999, the options granted in 1998 were not valued in
accordance with SFAS No. 123.
(Continued)
41
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE L - STOCK OPTIONS - Continued
The Board of Directors has approved and recommended for shareholder approval
the 1999 Employee Stock Purchase Plan (the 1999 Employee Stock Purchase
Plan). Under this plan, employees of the Bank will be permitted to purchase
shares of the common stock at a price equal to 90% of the fair market value
of the common stock. No employee may contribute more than $10,000 through
the plan, and 100,000 shares of the common stock will be reserved for
issuance under the Plan. This stock purchase plan is subject to the approval
of the Bank's shareholders at its annual meeting to be held April 22, 1999.
In 1997, the Bank adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which allows an entity to use a fair value-based method for
valuing stock-based compensation, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the statement permits entities to elect accounting for
employee stock options and similar instruments under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
its related interpretations. Entities that elect to account for stock
options using APB Opinion No. 25 are required to make pro forma disclosures
of net income and EPS, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied. The Bank's stock option plans are
accounted for under APB Opinion No. 25.
Had compensation cost of the above stock option plans been determined based
on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Bank's net income and diluted earnings per share
would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data).
December 31,
1998
------------
Net loss
As reported $ (610)
Pro forma $ (610)
Net loss per share - basic and diluted
As reported $ (0.46)
Pro forma $ (0.46)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998, dividend yield of -0-%; expected
volatility of 25%; risk-free interest rate of 5.5% percent; and expected
lives of 3 to 5 years.
(Continued)
42
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE L - STOCK OPTIONS - Continued
A summary of the status of the Bank's stock option plans as of December 31,
1998, and the change during the year ended is represented below.
December 31, 1998
--------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding, beginning of year - $ -
Granted 169,000 13.23
Cancelled/forfeited (22,000) 11.91
--------
Outstanding, end of year 147,000 12.93
========
Options exercisable at year-end -
========
Weighted average fair value of
Options granted during the year $ 2.12
=========
The following table summarizes information about nonqualified options
outstanding at December 31, 1998:
Options outstanding Options exercisable
------------------------------------------- --------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1998 life price 1998 price
--------------- ---- ---- ----- ---- -----
$ 11.50 - $16.00 147,000 9.3 years $ 12.93 - $ -
======= =======
NOTE M - COMMITMENTS
Lease Commitments
The Bank leases several banking facilities under noncancellable operating
lease agreements expiring through 2018. At the end of the lease terms, the
leases are renewable at the then fair rental value for periods of 5 to 15
years. Rent expense was $24,000 and $8,000 for the year ended December 31,
1998 and 1997, respectively.
(Continued)
43
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE M - COMMITMENTS - Continued
The minimum rental commitments under operating leases at December 31, 1998,
are as follows (in thousands):
1999 $ 48
2000 48
2001 48
2002 52
2003 30
Thereafter 360
--------
$ 586
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
financial statements. The Bank's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Bank had the following approximate off-balance-sheet financial
instruments whose contract amounts represent credit risk (in thousands):
1998 1997
-------- ---------
Commitments to extend credit $ 11,651 $ 9,104
Letters of credit - standby and performance 1,102 215
-------- ---------
$ 12,753 $ 9,319
======== =========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case-basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include guarantees, personal or commercial
real estate, accounts receivable, inventory, and equipment.
(Continued)
44
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Continued
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support contracts entered into by customers. Most
guarantees extend for one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers.
Substantially all of the Bank's loans are secured by real estate in New
Jersey. Loans purchased from other financial institutions or participation
in loans originated by other financial institutions constitute approximately
12% and 27% of the Bank's loans outstanding as of December 31, 1998 and
1997, respectively. Accordingly, the Bank's primary concentration of credit
risk is related to the real estate market in New Jersey, and the ultimate
collectibility of this portion of the Bank's loan portfolio is susceptible
to changes in economic conditions in that area.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the Bank,
as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments. However, many such
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is the Bank's
general practice and intent to hold its financial instruments to maturity
and not to engage in trading or sales activities, except for certain loans.
Therefore, the Bank had to use significant estimations and present value
calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1998 and 1997, are
outlined below.
For cash and cash equivalents, including cash and due from banks and federal
funds sold the recorded book values of $28,566,000 and $9,076,000 as of
December 31, 1998 and 1997, respectively, approximate fair values. The
estimated fair values of investment securities are based on quoted market
prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available.
The net loan portfolio at December 31, 1998 and 1997, has been valued using
a present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
(Continued)
45
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The estimated fair values of demand deposits (i.e., interest- and
noninterest-bearing checking accounts, savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The fair values of
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. Based upon
the current time deposit maturities, the carrying value approximates its
fair value. The carrying amount of accrued interest payable approximates its
fair value.
1998 1997
------------------------ -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Investment securities $ 6,025 $ 6,004 $ 8,524 $ 8,526
Loans receivable 45,629 45,123 15,233 14,780
Certificates of deposits 4,974 4,974 1,327 1,327
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items, which totalled
approximately $ 12,753,000 and $9,319,000 at December 31, 1998 and 1997,
respectively, and primarily comprise unfunded loan commitments, which are
generally priced at market at the time of funding.
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). As of December 31, 1998, management believes
that the Bank meets all capital adequacy requirements to which it is
subject.
As of July 23, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
(Continued)
46
THE COMMUNITY BANK OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE P - REGULATORY MATTERS - Continued
The Bank's actual capital amounts and ratios are also presented in the
following table (in thousands, except percentages).
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998
Total capital (to risk-
weighted assets) $ 18,021 35.84% $ 4,022 =>8.00% $ 5,028 =>10.00%
Tier I capital (to risk-
weighted assets) 17,389 34.59 2,011 >4.00 3,017 > 6.00
- -
Tier I capital (to average
assets) 17,389 24.41 2,137 >3.00 3,562 > 5.00
- -
As of December 31, 1997
Total capital (to risk-
weighted assets) $ 11,639 55.97% $ 1,664 =>8.00% $ 2,080 =>10.00%
Tier I capital (to risk-
weighted assets) 11,389 54.77 832 =>4.00 1,248 => 6.00
Tier I capital (to average
assets) 11,389 36.90 926 =>3.00 1,543 => 5.00
In addition, pursuant to the order of the New Jersey Department of Banking
and Insurance approving the Bank's charter, for its first five years of
operation the Bank is required to maintain a ratio of equity capital to
total assets of at least 10%. As of December 31, 1998 and 1997, the Bank's
ratio of equity capital to total assets was 21.01% and 32.74%, respectively.
NOTE Q - SUBSEQUENT EVENTS
Secondary Public Offering
On January 11, 1999, the Bank completed the sale of the overallotment of
shares associated with its secondary public offering. An additional 66,000
shares were sold at $16.50 per share for $1,089,000. Gross proceeds of the
overallotment were reduced by offering costs of $76,000.
47
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
The Community Bank of New Jersey
We have audited the consolidated balance sheets of The Community Bank
of New Jersey as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Community Bank of New Jersey as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/Grant Thornton LLP
- ---------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 15, 1999
EXHIBIT 13(B)
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
--------------
[ ] Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from to
FDIC File Number __________________
COMMUNITY BANK OF NEW JERSEY
(Exact name of registrant as specified in its charter)
New Jersey 22-3495579
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3535 Highway 9 North, Freehold, New Jersey 07728
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(732) 863-9000
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
Common Stock, $5.00 par value - 1,796,917 shares outstanding as of May 5, 1999
INDEX
COMMUNITY BANK OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. inancial Statements
onsolidated Condensed Balance Sheets at March 31, 1999
Unaudited) and December 31, 1998 3
onsolidated Condensed Statements of Income for the three
onths ended March 31, 1999 and 1998 (Unaudited) 4
onsolidated Condensed Statement of Changes in Stockholders' 5
quity at March 31, 1999 (Unaudited)
onsolidated Condensed Statements of Cash Flows for the three
onths ended March 31, 1999 and 1998 (Unaudited) 6
otes to Consolidated Condensed Financial Statements (Unaudited) 7 - 10
Item 2. anagement's Discussion and Analysis of Financial Condition
nd Results of Operations 11 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23 - 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None 24
b. Reports on Form 8-K 24
SIGNATURES 25
2
COMMUNITY BANK OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31,
1999 December 31,
(Unaudited) 1998
ASSETS (Dollars in thousands)
Cash and cash equivalents:
Cash and due from banks ............................ $ 5,844 $ 2,541
Federal funds sold ................................. 12,805 26,025
-------- --------
Total cash and cash equivalents .......... 18,649 28,566
-------- --------
Investment securities held-to-maturity (fair value $14,491
at March 31, 1999 and $6,004 at December 31, 1998) . 14,525 6,025
Loans receivable ......................................... 54,705 45,629
Allowance for loan loss .................................. (1,025) (914)
-------- --------
Net loans receivable ..................... 53,680 44,715
-------- --------
Premises and equipment, net .............................. 3,932 3,068
Accrued interest receivable .............................. 440 224
Other assets ............................................. 225 153
-------- --------
Total Assets ............................. $ 91,451 $ 82,751
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand ........................ $ 6,113 $ 13,530
Interest bearing - NOW ............................. 15,523 14,397
Savings and money market ........................... 35,099 32,138
Certificates of deposit, under $100,000 ............ 4,577 3,511
Certificates of deposit, $100,000 and over ......... 1,241 1,463
-------- --------
Total deposits ........................... 72,553 65,039
-------- --------
Accrued interest payable ................................. 115 114
Other liabilities ........................................ 315 209
-------- --------
Total liabilities ........................ 72,983 65,362
-------- --------
Stockholders' equity
Common stock - authorized 5,000,000 shares of
$5.00 par value; issued and outstanding
1,796,917 at March 31, 1999 and 1,730,917
at December 31, 1998 ......................... 8,985 8,654
Additional paid-in capital ......................... 11,023 10,340
Accumulated deficit ................................ (1,540) (1,605)
-------- --------
Total stockholders' equity ............... 18,468 17,389
-------- --------
Total Liabilities and Stockholder's Equity $ 91,451 $ 82,751
======== ========
See accompanying notes to consolidated condensed financial statements.
3
COMMUNITY BANK OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
---------------------
1999 1998
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans ................................................. $ 973 $ 384
Fees on loans ......................................... 78 16
Federal funds sold .................................... 138 95
Investment securities - taxable ....................... 193 116
------- -------
Total interest income ..................... 1,382 611
------- -------
INTEREST EXPENSE
Interest bearing - NOW ................................ 51 32
Savings and money market .............................. 331 160
Certificates of deposit ............................... 73 21
------- -------
Total interest expense .................... 455 213
------- -------
Net interest income ....................... 927 398
Provision for loan losses ................................... 111 135
------- -------
Net interest income after provision
for loan losses ..................... 816 263
------- -------
Non-interest income:
Service fees on deposit accounts ...................... 47 16
Other fees and commissions ............................ 11 4
------- -------
Total non-interest income ................. 58 20
------- -------
Non-interest expense:
Salaries and wages .................................... 311 202
Employee benefits ..................................... 58 43
Occupancy expense ..................................... 47 26
Depreciation - occupancy, furniture & equipment ....... 76 40
Other ................................................. 317 178
------- -------
Total non-interest expense ................ 809 489
------- -------
Net Income (loss) ......................... $ 65 $ (206)
======= =======
Per Common Share:
Net income (loss) - basic ............................. $ 0.04 $ (0.16)
Net income (loss) - diluted ........................... $ 0.04 $ (0.16)
Weighted average shares outstanding (in thousands):
Basic ................................................. 1,790 1,291
Diluted ............................................... 1,819 1,291
See accompanying notes to consolidated condensed financial statements.
4
COMMUNITY BANK OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
------- ------- ------- -------
(Dollars in thousands)
Balance December 31, 1998 ......... $ 8,654 $10,340 $(1,605) $17,389
Issuance of common stock, net of
offering expenses ......... 331 683 -- 1,014
Net Income ........................ -- -- 65 65
------- ------- ------- -------
Balance, March 31, 1999 (Unaudited) $ 8,985 $11,023 $(1,540) $18,468
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
5
COMMUNITY BANK OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
---------------------------
1999 1998
-------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) ......................................... $ 65 $ (206)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................... 76 40
Provision for loan losses ....................... 111 135
Increase in accrued interest receivable ......... (216) (44)
(Increase) decrease in other assets ............. (72) 184
Increase in accrued interest payable ............ 1 3
Increase in other liabilities ................... 106 76
-------- --------
Net cash provided by operating activities . 71 188
-------- --------
Cash flows from investing activities:
Purchases of investment securities held-to-maturity ....... (9,000) --
Proceeds from maturities and calls of investment securities 500 4,498
Net increase in loans made to customers ................... (9,076) (7,632)
Purchases of premises and equipment ....................... (940) (211)
-------- --------
Net cash used in investing activities ..... (18,516) (3,345)
-------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ...... 6,670 8,563
Net increase in certificates of deposit ................... 844 888
Net proceeds from common stock issued ..................... 1,014 --
-------- --------
Net cash provided by financing activities . 8,528 9,451
-------- --------
Net (decrease) increase in cash and cash equivalents .............. (9,917) 6,294
Cash and cash equivalents as of beginning of year ................. 28,566 9,076
-------- --------
Cash and cash equivalents as of end of period ..................... $ 18,649 $ 15,370
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .................. $ 454 $ 210
See accompanying notes to consolidated condensed financial statements.
6
COMMUNITY BANK OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Federal
Deposit Insurance Corporation and the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenues and expenses during the reporting
period. Since management's judgment involves making estimates concerning the
likelihood of future events, the actual results could differ from those
estimates which will have a positive or negative effect on future period
results. The accompanying consolidated condensed financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. Such adjustments are
of a normal recurring nature. These consolidated condensed financial statements
should be read in conjunction with the audited financial statements and the
notes thereto as of and for the year ended December 31, 1998. The results for
the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
Earnings per common share are computed by dividing net income by the weighted
average number of common shares and common share equivalents (when dilutive)
outstanding during each period after giving retroactive effect to stock
dividends declared. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders 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 issuance of common
stock that then shared in the earnings of the Bank. The common share equivalents
of options in the computation of diluted earnings per share is computed
utilizing the Treasury Stock method. For purposes of this computation, the
average market price of common stock during each three-month quarter included in
the period being reported upon, is used, when dilutive.
NOTE B - INVESTMENT SECURITIES
The Bank classifies its investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("SFAS 115"). SFAS 115 requires that an enterprise classify
its investments in debt securities as either securities held to maturity
(carrying amount equals amortized cost), securities available for sale (carrying
amount equals estimated fair value; unrealized gains and losses recorded in a
separate component of stockholder's equity, net of taxes) or trading securities
(carrying amount equals estimated fair value; unrealized gains and losses
included in the determination of net income).
Any security which is a U.S. Government security, U.S. Government agency
security, an agency mortgage-backed security, or an obligation of a state or
political subdivision may be placed in the held-to-maturity category if acquired
with the intent and ability to maintain the security in the portfolio until
maturity. Premiums and discounts on these securities are amortized or accreted
on a basis that approximates the effective yield method. Realized gains and
losses from the sale of securities available for sale are determined on a
specific identification cost basis.
7
COMMUNITY BANK OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
Management determines the appropriate classification of securities at the time
of purchase. At March 31, 1999 and December 31, 1998, all of the Bank's
investment securities were classified as held to maturity. If the Bank held
securities classified as available for sale, stockholders' equity would have
been affected by changing interest rates which affect the market price of the
Bank's securities available for sale. At March 31, 1999 and December 31, 1998,
no investment securities were classified as available for sale or trading
securities.
The following tables present the book values, fair values and gross unrealized
gains and losses of the Bank's investment securities portfolio as of March 31,
1999 and December 31, 1998 (Dollars in thousands).
March 31, 1999 (Unaudited)
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Securities held to maturity:
U.S. Government and agency securities $ 14,000 $ -- $ (34) $ 13,966
Other securities .................... 525 -- -- 525
-------- -------- -------- --------
$ 14,525 $ -- $ (34) $ 14,491
======== ======== ======== ========
December 31, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Securities held to maturity:
U.S. Government and agency securities $ 5,500 $ -- $ (21) $ 5,479
Other securities .................... 525 -- -- 525
------- ------- ------- -------
$ 6,025 $ -- $ (21) $ 6,004
======= ======= ======= =======
The following table sets forth as of March 31, 1999 and December 31, 1998 the
maturity distribution of the Bank's investment portfolio (Dollars in thousands).
Investment Securities Held-To-Maturity
---------------------------------------------------
March 31, 1999
(Unaudited) December 31, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Due in one year or less .............. $ 6,000 $ 6,000 $ -- $ --
Due after one year through five years 8,000 7,966 5,500 5,479
Due after five years through ten years 500 500 500 500
Due after ten years .................. 25 25 25 25
------- ------- ------- -------
$14,525 $14,491 $ 6,025 $ 6,004
======= ======= ======= =======
Securities with a carrying value of $1,000,000 at March 31, 1999 and
$500,000 at December 31, 1998 were pledged to secure public funds on
deposit.
8
COMMUNITY BANK OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE C - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of March
31, 1999 and December 31, 1998 (Dollars in thousands).
Loan Portfolio By Type of Loan
--------------------------------------------------------
March 31, 1999
(Unaudited) December 31, 1998
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and industrial loans $10,300 18.83% $ 8,514 18.66%
Commercial mortgage loans ..... 24,510 44.80% 19,413 42.55%
Residential mortgages ......... 6,786 12.40% 6,941 15.21%
Construction loans ............ 5,408 9.89% 3,582 7.85%
Consumer loans ................ 7,647 13.98% 6,376 13.97%
Other loans ................... 54 0.10% 803 1.76%
------- ------ ------- ------
$54,705 100.00% $45,629 100.00%
======= ====== ======= ======
The following table represents the activity in the allowance for loan losses for
the three month periods ended March 31, 1999 and 1998 and the year ended
December 31, 1998 (Dollars in thousands).
Allowance For Loan Losses
-------------------------------------
Three Months Ended
March 31, Year Ended
(Unaudited) December 31,
1999 1998 1998
------ ------ ------
Balance - beginning of period .............. $ 914 $ 250 $ 250
Charge-offs ................................ -- -- --
Recoveries ................................. -- -- --
------ ------ ------
Net (charge-offs) recoveries ............... -- -- --
Provision for loan losses .................. 111 135 664
------ ------ ------
Balance - end of period .................... $1,025 $ 385 $ 914
====== ====== ======
Balance of Allowance at period-end as a %
of loans at period-end ................. 1.87% 1.68% 2.00%
====== ====== ======
NOTE D - RECLASSIFICATIONS
Certain amounts in the financial statements presented for prior periods have
been reclassified to conform with the 1999 presentation.
NOTE E - SUBSEQUENT EVENT
On April 22, 1999 at the annual meeting of shareholders of Community Bank of New
Jersey, a plan of acquisition was approved pursuant to which a holding company
structure would be established and Community Bancorp of New Jersey, a newly
formed New Jersey corporation, will become the owner of the Bank and a one-bank
holding company. The New Jersey Commissioner of Banking and Insurance approved
the plan on March 10, 1999. Consummation of the plan further requires the
non-objection of the Board of Governors of the Federal Reserve System. The
Company filed a notification under the Bank Holding Company Act with the Federal
Reserve Bank of N.Y. on April 26, 1999.
9
COMMUNITY BANK OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE F - RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the beginning
of any fiscal quarter. The Bank is currently reviewing the provisions of SFAS
No. 133. The adoption of SFAS No. 133 is not anticipated to have a material
impact on the Bank's consolidated financial position or results of operations.
10
COMMUNITY BANK OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This financial review presents management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated condensed financial statements and the accompanying notes included
elsewhere herein.
FINANCIAL CONDITION
Total assets at March 31, 1999 increased by $8.7 million, or 10.5%, to $91.5
million compared to $82.8 million at December 31, 1998. Total assets averaged
$81.3 million in the first three months of 1999, a $29.2 million, or 56.0%,
increase from the 1998 full year average of $52.1 million. Average loans
increased $18.9 million, or 62.6%, to $49.1 million in the first three months of
1999, from the 1998 full year average of $30.1 million. Average investment
securities increased by $8.7 million, or 164.2%, to $14.0 million; average
Federal funds sold decreased by $300 thousand to $11.9 million; and the average
of all other assets increased by $2.5 million, or 51.0%, to $4.9 million during
the first three months of 1999 compared to the full year 1998 averages.
These increases in average assets were funded primarily by a $22.2 million, or
55.0%, increase in average deposits, as average deposits increased to $62.6
million for the first quarter of 1999 from the full year 1998 average of $40.4
million. The increases in average assets were further funded with an increase in
average stockholders' equity of $7.2 million, or 65.5%, as the first quarter of
1999 average stockholders' equity increased to $18.2 million from the full year
1998 average of $11.0 million. The increase in average stockholders' equity
resulted from net proceeds received from the Bank's secondary public offering
amounting to $6.6 million on December 14, 1998 and $1.0 million on January 11,
1999 and was further effected by a net operating loss amounting to $610 thousand
during 1998 and net operating income of $65 thousand during the first quarter of
1999.
Lending Activity
Total loans at March 31, 1999 were $54.7 million, a 19.7%, or $9.0 million
increase from December 31, 1998. The loan portfolio consists primarily of loans
secured by real estate, and, to a lesser extent, commercial, construction and
consumer loans. Changes in the composition of the loan portfolio during the
comparative periods included increases of $5.0 million in commercial mortgage
loans, $1.8 million in commercial and industrial loans, $1.8 million in
construction loans and $1.2 million in consumer loans, and was partially off-set
by a reduction of $1.0 million in residential mortgages and other loans.
The 19.7% increase in loans at March 31, 1999 compared to December 31, 1998 is
partially attributable to greater penetration of the Bank's marketplace and an
improvement in the general economic environment in New Jersey. The Bank opened
its second office in downtown Freehold, New Jersey, in September 1997, its third
office in Howell, New Jersey, in November 1998 and its fourth office in Matawan,
New Jersey, in February 1999. In addition, the Bank has contracted for the
purchase of a site for a new location in Manalapan, New Jersey, subject to
11
regulatory and land use approvals. Management believes that the maturation of
these branch locations will continue to provide the Bank with lending
opportunities as well as funding sources for the loans.
The Bank's loans are primarily to businesses and individuals located in
Monmouth, Middlesex, and Ocean Counties, New Jersey. Management believes that
its strategy of customer service, competitive rate structures, and selective
marketing will continue to enable the Bank to gain market entry to local loans.
Bank mergers have also contributed to the Bank's efforts to attract borrowers.
Management intends to continue to pursue quality loans in all lending categories
within the Bank's market area.
Allowance for Loan Losses
The allowance for loan losses was $1.0 million, or 1.87% of total loans, at
March 31, 1999 compared to $0.9 million, or 2.00% of total loans, at December
31, 1998. At March 31, 1999 the Bank had no non-performing loans. Non-performing
loans include non-accrual loans and exclude accruing loans past due 90 days or
more. At March 31, 1999 past due loans consisted of one loan amounting to $2
thousand past due less than 90 days. This compares to no non-performing loans,
excluding accruing loans past due 90 days or more, and no past due loans at
December 31, 1998.
Management attempts to maintain an allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio. Loan losses are
charged directly to the allowance when they occur and any recovery is credited
to the allowance. Risks within the loan portfolio are analyzed on a continuous
basis by our officers, by outside, independent loan review auditors, our
Directors Loan Review Committee and the Board of Directors. A risk system,
consisting of multiple grading categories, is utilized as an analytical tool to
assess risk and set appropriate reserves. Along with the risk system, management
further evaluates risk characteristics of the loan portfolio under current and
anticipated economic conditions and considers such factors as the financial
condition of the borrower, past and expected loss experience, and other factors
management feels deserve recognition in establishing an appropriate reserve.
These estimates are reviewed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known.
Additions to the allowance are made by provisions charged to expense and the
allowance is reduced by net charge-offs (i.e. - loans judged to be uncollectible
and charged against the reserve, less any recoveries on such loans). Although
management attempts to maintain the allowance at a level deemed adequate, future
additions to the allowance may be necessary based upon changes in market
conditions. In addition, various regulatory agencies periodically review the
Bank's allowance for loan losses. These agencies may require management to take
additional provisions based on their judgements about information available to
them at the time of their examination.
Investment Securities Activity
Investment securities increased by $8.5 million, or 141.1%, at March 31, 1999
compared to December 31, 1998. During the quarter ended March 31, 1999 the Bank
utilized its liquidity in excess of loan demand to fund additional purchases of
investment securities held-to-maturity
12
amounting to $9.0 million, which was partially off-set by maturities and calls
amounting to $0.5 million.
Management determines the appropriate classification of securities at the time
of purchase. At March 31, 1999 all investment securities were classified as
held-to-maturity. The Bank had no investment securities classified as
available-for-sale or as trading securities. The investment portfolio is
comprised primarily of U.S. Government and agency securities with maturities of
three years or less and with call features of one year or less. Management
maintains an investment portfolio of short duration in order to fund projected
increased loan volume and to provide for other liquidity uses as needed, and
secondarily as an additional source of interest income.
Deposits
Deposits are the Bank's primary source of funds. Total deposits increased by
$7.6 million, or 11.7%, to $72.6 million at March 31, 1999 compared to $65.0
million at December 31, 1998. The increase in deposits during this period was
primarily due to the Bank's greater penetration of its marketplace. In late 1998
and early 1999, the Bank opened two new offices, which have contributed to its
deposit growth.
Average total deposits increased by $22.2 million, or 55.0%, to $62.6 million
for the three months ended March 31,1999 compared to the 1998 full year average
of $40.4 million. Changes in the deposit mix for the three months ended March
31, 1999 compared to the 1998 full year average include a $9.7 million, or
48.9%, increase in savings deposits; a $4.0 million, or 50.3%, increase in NOW
account deposits; a $2.3 million, or 76.1%, increase in time deposits; a $1.1
million, or 73.5% increase in money market deposits; and a $5.1 million, or
62.1%, increase in non-interest bearing demand deposits.
The Bank does not actively solicit short-term certificates of deposits of $100
thousand or more because of the liquidity risks posed by such deposits. At March
31, 1999 certificates of deposit of $100 thousand or more amounted to $1.2
million.
The Bank emphasizes relationships with commercial customers and seeks to obtain
transactional accounts, which are frequently kept in non-interest bearing
deposits. The Bank also emphasizes the origination of savings deposits, which
amounted to $32.5 million at March 31, 1999, by offering rates higher than our
peer group institutions. The primary savings product is the stepped rate savings
account. The interest rate is based upon the amount on deposit, and the deposit
amount can be changed. Management may modify the interest rate paid without
notice, and the depositor may withdraw their funds on demand. The Bank markets
this product as an alternative to time deposits and management believes it has
resulted in a higher rate of core deposits and lower cost of funds than our peer
group institutions. Deposits are obtained primarily from the market areas which
the Bank serves. As of March 31, 1999 the Bank did not have any brokered
deposits and neither solicited nor offered premiums for such deposits.
13
Liquidity
Liquidity is a measurement of the Bank's ability to meet present and future
funding obligations and commitments. The Bank adjusts its liquidity levels in
order to meet funding needs for deposit outflows, repayment of borrowings, when
applicable, and the funding of loan commitments. The Company also adjusts its
liquidity level as appropriate to meet its asset/liability objectives. Principal
sources of liquidity are deposit generation, access to purchased funds,
including borrowings from other financial institutions, repurchase agreements,
maturities and repayments of loans and investment securities, net interest
income and fee income. Liquid assets (consisting of cash and Federal funds sold)
comprised 20.4% and 34.5% of the Bank's total assets at March 31, 1999 and
December 31, 1998, respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, the Bank's
primary source of funds at March 31, 1999 was from increased deposits, net
proceeds from common stock issued, and to a lesser extent proceeds from
maturities and calls of investment securities. Deposit increases amounted to
$7.5 million for the three months ended March 31, 1999 while net proceeds from
common stock issued amounted to $1.0 million and proceeds from maturities and
calls of investment securities amounted to $0.5 million. During 1999, the Bank
utilized deposit growth and its liquid assets as funding sources for increased
loans made to customers amounting to $9.1 million, securities purchases
amounting to $9.0 million and purchases of premises and equipment used primarily
for branch expansion, amounting to $0.9 million as well as for asset/liability
management purposes.
The Bank also has several secondary sources of liquidity. Many of the Bank's
loans are originated pursuant to underwriting standards which make them readily
marketable to other financial institutions or investors in the secondary market.
In addition, in order to meet liquidity needs on a temporary basis, the Bank has
lines of credit in the amount of $2.5 million for the purchase of Federal funds
with another financial institution.
The Bank believes that its liquidity position is sufficient to provide funds to
meet future loan demand or the possible outflow of deposits, in addition to
being able to adapt to changing interest rate conditions.
Capital Resources
Stockholder's equity increased by $1.1 million at March 31, 1999 compared to
December 31, 1998. The changes in stockholders' equity during the three months
ended March 31, 1999 were comprised of an increase from net income of $65
thousand and an increase of $1.0 million in net proceeds from common stock
issued.
The Bank's federal regulator, the Federal Deposit Insurance Corporation, has
issued guidelines classifying and defining capital into the following
components: (1) Tier I Capital, which includes tangible stockholders' equity for
common stock and certain qualifying preferred stock, and excludes net unrealized
gains or losses on available-for-sale securities and deferred tax assets that
are dependent on projected taxable income greater than one year in the future,
and (2) Tier II Capital (Total Capital), which includes a portion of the
allowance for loan losses and certain qualifying long-term debt and preferred
stock that does not qualify for Tier I Capital. The risk-based capital
guidelines require financial institutions to apply certain risk factors
14
ranging from 0% to 100%, against assets to determine total risk-based assets.
The minimum Tier I and the combined Tier I and Tier II capital to risk-weighted
assets ratios are 4.0% and 8.0%, respectively. The Federal Deposit Insurance
Corporation also has adopted regulations which supplement the risk-based capital
guidelines to include a minimum leverage ratio of Tier I Capital to total assets
of 3.0%. For those institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be proportionately increased by 100 to 200 basis points.
The following table summarizes the risk-based and leverage capital ratios for
the Bank at March 31, 1999, as well as the regulatory required minimum and "well
capitalized" capital ratios:
Regulatory Requirement
------------------------------------------
Actual Minimum "Well Capitalized"
------ ------- ------------------
Risk-based Capital:
Tier I capital ratio ......... 31.02% 4.00% 6.00%
Total capital ratio .......... 32.27% 8.00% 10.00%
Leverage ratio ........................ 22.91% 3.00%-5.00% 5.00% or greater
In addition, pursuant to the order of the New Jersey Department of Banking and
Insurance approving the Bank's charter, for its first five years of operation,
the Bank is required to maintain a ratio of equity to total assets of at least
10.00%. As of March 31, 1999 the Bank's ratio of equity capital to total assets
was 20.19%.
As noted in the above table, the Bank's capital ratios exceed the minimum
regulatory and "well capitalized" requirements.
Impact of Inflation and Changing Prices
The Bank's financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all of the Bank's assets and liabilities are
monetary. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Year 2000
Rapid and accurate data processing is essential to the Bank's operations. Many
computer programs that can only distinguish the final two digits of the year
entered (a common programing practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency, and other data. The Bank has been
evaluating both information technology (computer systems) and non-
15
information technology systems (e.g., vault timer, electronic door lock, and
heating, ventilation, and air conditioning control). The Bank has examined all
of its non-information technology systems and has either received certifications
of Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. The Bank
expects to further test the systems it controls and receive third party
certifications, when appropriate, that these systems will continue to function.
The Bank does not expect any material costs to address its non-information
technology systems and has not had any material costs to date. With regard to
the Bank's information technology systems, the Bank also does not expect any
future material costs and has not had any material costs to date. The Bank's
data processing is provided by a single service bureau, NCR. Although NCR is not
Year 2000 compliant, it has advised the Bank that it expects to be compliant
before the year 2000. The Bank is monitoring NCR to evaluate whether the Bank's
data processing system will fail. The Bank is being provided with periodic
updates on the status of testing and upgrades being made by NCR. If this problem
is not solved by the year 2000, the Bank would likely experience significant
delays, mistakes, or failures. These delays, mistakes, or failures could have a
significant impact on the Bank's financial condition and results of operations.
16
RESULTS OF OPERATIONS for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998
Net Income
The Bank earned $65 thousand, or $0.04 net income per share on a basic and
diluted basis, for the three months ended March 31, 1999, compared to a net loss
of $206 thousand, or $0.16 for both basic and diluted net loss per share, for
the three months ended March 31, 1998. The increase in net income was primarily
due to a $529 thousand, or 132.9%, increase in net interest income, a $38
thousand, or 190.0%, increase in non-interest income and a $24 thousand, or
17.8%, decrease in the provision for loan losses; these items were partially
offset by a $320 thousand, or 65.4%, increase in non-interest expenses.
Net Interest Income
Net interest income increased $529 thousand, or 132.9%, to $927 thousand for the
three months ended March 31, 1999 from $398 thousand for the same prior year
period. The increase in net interest income was due primarily to volume
increases as average interest earning assets, net of average interest bearing
liabilities, increased by $12.4 million, or 95.1%, for the first three months of
1999 compared to the same prior year period. Also contributing to the increase
in net interest income was the decrease in the average cost of interest bearing
liabilities to 3.73% during the first quarter of 1999 compared to 4.27% during
the same prior year quarter. The reduction in the average rate paid on deposits
resulted from management's adjustment of the Bank's rate structure to more
closely reflect the current economic environment and competition. The Bank held
no tax-exempt investments during these comparable periods.
The Bank's net interest margin (annualized net interest income divided by
average interest earning assets) for the three months ended March 31, 1999
improved to 5.02% from 4.82% for the same prior year quarter. The improvement in
the net interest margin resulted primarily from the decrease in the rates paid
on deposits, as the yield earned on interest earning assets remained consistent
at 7.48% for the first quarter of 1999 compared to 7.40% for the first quarter
of 1998, despite falling market rates of interest.
Interest income increased $771 thousand, or 126.2%, to $1.4 million for the
three months ended March 31, 1999 compared to $611 thousand for the same period
in 1998. The improvement in interest income was primarily due to volume
increases in income from the loan portfolio of $645 thousand, volume related
increases in income of $108 thousand in the investment securities portfolio, and
volume related increases in income of $65 thousand in Federal funds sold volume
as the Bank's growth resulted in an increase in average earning assets of $41.9
million, or 126.8%, to $74.9 million for the three months ended March 31, 1999
compared to $33.0 million for the same period in 1998.
The $818 thousand volume related increase in total interest income was reduced
by $47 thousand from rate related reductions as interest rates on new investment
securities purchases and investments in Federal funds sold repriced to lower
current yields.
Interest expense for the first three months of 1999 increased $242 thousand, or
112.6%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume increases in interest bearing deposits which
accounted for $311 thousand of the expense increase and was offset by a decrease
of $69 thousand attributable to net rate related
17
decreases. The volume related increases in interest bearing liabilities and
expense rate decreases are the result of marketing and pricing decisions made by
management in response to the need for cost effective sources of funds,
primarily to provide for loan growth. These decisions resulted in the reduction
in the cost of interest bearing liabilities to 3.73% for the quarter ended March
31, 1999 compared to 4.27% for the quarter ended March 31, 1998.
The following tables titled "Consolidated Average Balance Sheet with Resultant
Interest and Average Rates" and "Analysis of Changes in Consolidated Net
Interest Income" present by category the major factors that contributed to the
changes in net interest income for the quarter ended March 31, 1999 compared to
the quarter ended March 31, 1998.
18
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
--------------------------------- --------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
------- -------------- ---- ---------------------- ----
(In thousands, except percentages)
ASSETS
Interest Earning Assets:
Federal Funds Sold ................................... $ 11,879 $ 138 4.71% $ 7,057 $ 95 5.39%
Investment Securities ................................ 13,980 193 5.52% 7,204 116 6.44%
Loans (net of unearned income) (1) (2) ............... 49,078 1,051 8.68% 18,785 400 8.52%
-------- -------- -------- --------
Total Interest Earning Assets ............. 74,937 1,382 7.48% 33,046 611 7.40%
-------- -------- -------- --------
Non-Interest Earning Assets:
Loan Loss Reserve .................................... (957) (292)
All Other Assets ..................................... 7,351 3,775
-------- --------
Total Assets .............................. $ 81,331 $ 36,529
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ......................................... $ 11,803 51 1.75% $ 4,869 32 2.63%
Savings Deposits ..................................... 29,592 306 4.19% 12,947 157 4.85%
Money Market Deposits ................................ 2,637 25 3.84% 493 3 2.43%
Time Deposits ........................................ 5,381 73 5.50% 1,654 21 5.08%
-------- -------- -------- --------
Total Interest Bearing Liabilities ........ 49,413 455 3.73% 19,963 213 4.27%
-------- -------- -------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ...................................... 13,150 4,979
Other Liabilities .................................... 522 271
-------- --------
Total Non-Interest Bearing Liabilities .... 13,672 5,250
-------- --------
Stockholders' Equity ........................................... 18,246 11,316
-------- --------
Total Liabilities and Stockholders'
Equity .................................... $ 81,331 $ 36,529
======== ========
NET INTEREST INCOME ............................................ $ 927 $ 398
======== ========
NET INTEREST SPREAD (3) ........................................ 3.74% 3.13%
NET INTEREST MARGIN (4) ........................................ 5.02% 4.82%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted
average yield on average interest earning assets and the weighted
average cost of average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net
interest income by average interest earning assets.
19
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended March 31, 1999
Compared to Three Months Ended
March 31, 1998
---------------------------------
Increase (Decrease) Due To
---------------------------------
Volume Rate Net
------ ---- ---
(In thousands)
Interest Earned On:
Federal Funds Sold .................... $ 65 $(22) $ 43
Investment Securities ................. 108 (31) 77
Loans (net of unearned income) ........ 645 6 651
---- ---- ----
Total Interest Income ...... 818 (47) 771
---- ---- ----
Interest Paid On:
NOW Deposits .......................... 46 (27) 19
Savings Deposits ...................... 201 (52) 149
Money Market Deposits ................. 14 8 22
Time Deposits ......................... 50 2 52
---- ---- ----
Total Interest Expense ..... 311 (69) 242
---- ---- ----
Net Interest Income ........ $507 $ 22 $529
==== ==== ====
20
Provision for Loan Losses
The provision for loan losses was $111 thousand for the first three months of
1999 compared to a provision of $135 thousand for the same period in 1998. The
provision is the result of management's review of several factors, including
increased loan balances and management's assessment of economic conditions,
credit quality and other factors that may have an impact on future possible
losses in the loan portfolio. Although the Bank had no non-accrual loans and
past due loans amounting to $2 thousand at March 31, 1999, management
established provisions for loan losses to create an adequate allowance based on
management's analysis of the loan portfolio and growth experienced over the
periods. The allowance for loan losses totaled $1.0 million, or 1.87% of total
loans, at March 31, 1999.
Non-Interest Income
Total non-interest income was $58 thousand for the first three months of 1999
compared to $20 thousand for the first three months of 1998, an increase of $38
thousand, or 190.0%. The increase was attributable to an increase in first
quarter 1999 service fees on deposits of $31 thousand and an increase in other
fees and commissions of $7 thousand. The growth in non-interest income reflects
the growth in deposits, which increased to $72.6 million at March 31, 1999, from
32.9 million at March 31, 1998.
Non-Interest Expense
Total non-interest expenses amounted to $809 thousand for the quarter ended
March 31, 1999, an increase of $320 thousand, or 65.4%, over the same prior year
quarter. The increase was due primarily to increases in employment expenses as
well as increases in occupancy expenses, equipment expenses and other expenses
generally attributable to the Bank's growth. Of this increase, employment costs
increased $124 thousand, or 50.6%, and reflected increases in the number of
employees from 22 full-time equivalents at March 31, 1998 to 44 full-time
equivalents at March 31, 1999. The increase in personnel is primarily
attributable to the opening of the Howell, New Jersey office in November 1998
and the Matawan, New Jersey office in February, 1999 in addition to the
acquisition of additional support personnel required due to the Bank' growth.
Occupancy expenses increased $21 thousand, or 80.8%, for the first three months
of 1999 compared to the same period in 1998. The increase was attributable
primarily to increased lease expense and increased maintenance costs due to the
additional branch offices.
Depreciation expenses on leasehold improvements, furniture, and equipment
increased $36 thousand, or 90.0%, for the first quarter of 1999 compared to the
first quarter of 1998 due primarily to depreciation costs associated with the
new facilities and on purchases of enhanced computer processing equipment.
Other expenses increased $139 thousand, or 78.1%, for the first three months of
1999 compared to the first three months of 1998. The increase was attributable
to increased other expenses resulting from the continued growth of the Bank, as
costs of data processing services paid to the Bank's third party processor
amounted to $66 thousand, an increase of $38 thousand; professional fees
amounted to $54 thousand, an increase of $16 thousand; marketing and advertising
costs amounted to $43 thousand, an increase of $31 thousand; stationery and
supplies amounted to $57 thousand, an increase of $25 thousand; stockholder
costs amounted to $22
21
thousand, an increase of $19 thousand; and all other expenses amounted to $75
thousand, an increase of $10 thousand.
Income Tax Expense
The Bank did not record an income tax provision for the quarter ended March 31,
1999 because of its net operating loss carry-forwards. The Bank had net
operating loss carry-forwards of approximately $512 thousand at December 31,
1998. These carry-forwards will expire through 2018, and may be available to
offset tax liabilities on earnings during future periods. Additionally, in view
of the Bank's operating loss history and risks associated with its ability to
generate taxable income in the future, management has provided a full valuation
allowance on its net deferred tax assets as of March 31, 1999.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is periodically involved in various legal proceedings
as a normal incident to its business.
In the opinion of management, no material loss is expected
from any such pending lawsuit.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Community Bank of New
Jersey was held on April 22, 1999.
The following were the results of voting on the four proposals
presented:
Note: Shares Outstanding were................. 1,796,917
Shares Voted were....................... 1,711,772
Proposal No. 1 - The re-election of 10 Directors to the
Bank's Board of Directors to serve for a
period of one year.
Each Director received at least 98.0% of
the shares voted in favor of their
appointment.
Votes
Elected Director Votes For Withheld
---------------- --------- --------
Alan Cohen 1,681,329 30,443
Charles P. Kaempffer, CPA 1,681,329 30,443
Morris Kaplan 1,678,329 33,443
Robert M. Kaye 1,681,329 30,443
Eli Kramer 1,680,329 31,443
William J. Mehr, Esq. 1,681,329 30,443
Robert D. O'Donnell 1,681,329 30,443
Howard M. Schoor 1,681,329 30,443
Arnold G. Silverman 1,681,329 30,443
Lewis Wetstein, M.D. 1,681,329 30,443
Proposal No. 2 - A Plan of Acquisition pursuant to which a
holding company structure will be
APPROVED established and The Community Bancorp of
New Jersey, a newly formed New Jersey
corporation, will become the owner of the
Bank and a one-bank holding company, and
the shareholders of the Bank will become
the shareholders of The Community Bancorp
of New Jersey through an exchange of one
share of the common stock of The
Community Bank of New Jersey for each
outstanding share of common stock of the
Bank.
Votes %
--------- -----
For Approval...... 1,302,944 72.5%
Against Approval.. 38,216 2.1%
Abstain............ 8,100 0.5%
Non-vote........... 362,512 20.2%
23
Proposal No. 3 - The 1998 Stock Option Plan pursuant to
which options to purchase up to 50,000
APPROVED shares of common stock may be issued to
members of management.
Votes %
--------- -----
For Approval...... 1,274,417 70.9%
Against Approval.. 64,643 3.6%
Abstain........... 10,200 0.6%
Non-vote.......... 362,512 20.2%
Proposal No. 4 - The 1999 Employee Stock Purchase Plan
APPROVED pursuant to which employees of the Bank
will be permitted to purchase shares of
common stock at a price equal to 90% of
the fair value of the common stock. No
employee may contribute more than $10,000
through the plan, and 100,000 shares of
common stock will be reserved for
issuance under the plan.
Votes %
--------- -----
For Approval...... 1,289,267 71.7%
Against Approval.. 52,743 2.9%
Abstain........... 7,250 0.4%
Non-vote.......... 362,512 20.2%
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K
dated April 14, 1999 announcing its first quarter
1999 results of operations.
24
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANK OF NEW JERSEY
----------------------------
(Issuer)
Date: May 12, 1999 By: /s/Robert D. O'Donnell
----------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer