U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 30, 2002
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[ ] Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 000-26587
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COMMUNITY BANCORP OF NEW JERSEY
-------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3666589
-------------------------------------- ------------------------------------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3535 Highway 9 North, Freehold, New Jersey 07728
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(Address of principal executive offices)
(732) 863-9000
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(Issuer's telephone number, including area code)
Not Applicable
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(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, No Par Value-2,115,237 shares outstanding as of August 9, 2002
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INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at June 30, 2002
(Unaudited) and December 31, 2001 3
Consolidated Condensed Statements of Income for the three and six
months ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders' 5
Equity at June 30, 2002 (Unaudited)
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - CERTIFICATION 25
b. Reports on Form 8-K - None 24
SIGNATURES 26
2
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,
2002 December 31,
(Unaudited) 2001
----------- ----
ASSETS (Dollars in thousands)
Cash and cash equivalents:
Cash and due from banks ................................................. $ .13,343 $ 9,342
Federal funds sold ...................................................... -- --
--------- ---------
Total cash and cash equivalents 13,343 9,342
--------- ---------
Investment securities available-for-sale ...................................... 77,324. 65,439
Investment securities held-to-maturity (fair value of $9,646 at
June 30, 2002 and $15,217 at December 31, 2001) ......................... 9,535 15,310
Loans receivable .............................................................. 171,819 147,603
Allowance for loan loss ....................................................... (2,648) (1,964)
--------- ---------
Net loans receivable 169,171 145,639
--------- ---------
Premises and equipment, net ................................................... 6,277 6,335
Accrued interest receivable ................................................... 1,603 1,457
Other assets .................................................................. 2,215 2,116
--------- ---------
Total Assets $ 279,468 $ 245,638
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand ............................................. $ 44,978 $ 43,539
Interest bearing - NOW .................................................. 27,149 24,741
Savings and money market ................................................ 91,093 66,466
Certificates of deposit, under $100,000 ................................. 50,334 47,894
Certificates of deposit, $100,000 and over .............................. 28,958 38,488
--------- ---------
Total deposits 242,512 221,128
--------- ---------
Short-term borrowings ......................................................... 14,300 1,600
Accrued interest payable ...................................................... 274 1,334
Other liabilities ............................................................. 268 433
--------- ---------
Total liabilities 257,354 224,495
--------- ---------
Stockholders' equity
Commonstock - authorized 10,000,000 shares of no par value; issued and
outstanding, net of treasury shares, 2,115,237 at June 30, 2002 and
December
31, 2001 .......................................................... 25,509 23,147
Accumulated deficit ..................................................... (3,552 (1,889)
Accumulated other comprehensive income .................................. 520 248
Treasury stock, 22,357 shares, at cost .................................. (363) (363)
Total stockholders' equity 22,114 21,143
--------- ---------
Total Liabilities and Stockholder's Equity $ 279,468 $ 245,638
========= =========
See accompanying notes to consolidated condensed financial statements.
3
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including Fees .......................................... $2,889 $2,847 $5,681 $5,573
Federal funds sold ............................................. 3 262 5 462
Investment securities .......................................... 963 296 1,925 839
------ ------ ------ ------
Total interest income 3,855 3,405 7,611 6,874
------ ------ ------ ------
INTEREST EXPENSE
Interest bearing - NOW ....................................... 50 68 92 130
Savings and money market ..................................... 443 410 841 944
Certificates of deposit ...................................... 704 893 1,515 1,829
Short-term borrowings ........................................ 30 -- 59 --
------ ------ ------ ------
Total interest expense ............................. 1,227 1,371 2,507 2,903
------ ------ ------ ------
Net interest income ................................ 2,628 2,034 5,104 3,971
Provision for loan losses....................................... 595 100 685 246
------ ------ ------ ------
Net interest income after provision
for loan losses 2,033 1,934 4,419 3,725
------ ------ ------ ------
Non-interest income:
Service fees on deposit accounts ............................. 109 94 205 196
Service fees on loans ........................................ 96 215 232 401
Other fees and commissions ................................... 104 67 258 137
------ ------ ------ ------
Total non-interest income 309 376 695 734
------ ------ ------ ------
Non interest expense:
Salaries and wages ........................................... 837 729 1,632 1,378
Employee benefits ............................................ 149 113 283 216
Occupancy expense ............................................ 184 122 344 244
Depreciation - occupancy, furniture & equipment .............. 220 146 437 292
Other ........................................................ 717 658 1,338 1,261
------ ------ ------ ------
Total non-interest expense 2,107 1,768 4,034 3,391
------ ------ ------ ------
Income before income taxes ......................... 235 542 1,080 1,068
Income tax expense.............................................. 84 195 376 387
------ ------ ------ ------
Net Income $ 151 $ 347 $ 704 $ 681
====== ====== ====== ======
Per Common Share
Net income - basic ........................................... $ 0.07 .$0.16 $ 0.33 $ 0.32
Net income - diluted ......................................... $ 0.07 $0.16 $ 0.32 $ 0.32
Weighted average shares outstanding (in thousands)
Basic ........................................................ 2,115 2,115 2,115 2,115
Diluted ...................................................... 2,228 2,163 2,210 2,153
See accompanying notes to consolidated condensed financial statements.
4
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
(1) Other Total
Common Treasury Accumulated Comprehensive Comprehensive Stockholders'
Stock Stock Deficit Income Income Equity
---------- ---------- ------------ ------------- -------------- -------------
(Dollars in thousands)
Balance December 31, 2001 ................ $ 23,147 $ (363) $ (1,889) $ 248 $ 21,143
5% stock dividend (100,508 shares) ....... 2,362 -- (2,362) -- --
Cash in lieu of fractional shares ........ -- -- (5) -- (5)
Comprehensive Income:
Net Income ......................... -- -- 704 -- $ 704 704
Increase in unrealized holding
gains on securities, net ....... -- -- -- 272 272 272
-------- --------
Total Comprehensive Income ............... -- -- -- -- $ 976
-------- -------- -------- -------- -------- ========
Balance, June 30, 2002 (Unaudited) ....... $ 25,509 $ (363) $ (3,552) $ 520 $ 22,114
======== ======== ======== ======== ========
(1) Includes accumulated charges for stock dividends of $5,822 and $3,455 at
June 30, 2002 and December 31, 2001, respectively.
See accompanying notes to consolidated condensed financial statements.
5
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
-------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income ................................................ $ 704 $ 681
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 437 292
Provision for loan losses ........................ 685 246
Accretion of investment discount ................. (11) (71)
Amortization of investment premium ............... 6 13
(Increase) decrease in accrued interest receivable (146) 506
(Increase) decrease other assets ................. (253) 207
(Decrease) increase in accrued interest payable .. (1,060) 394
(Decrease) increase in other liabilities ......... (165) 294
- ------------------------------------------------------------------- -------- --------
Net cash provided by operating activities .. 197 2,562
- ------------------------------------------------------------------- -------- --------
Cash flows from investing activities:
Purchases of investment securities available-for-sale ..... (30,208) (29,288)
Proceeds from maturities and calls of investment securities 24,529 38,980
Net increase in loans made to customers ................... (24,217) (18,200)
Purchases of premises and equipment ....................... (379) (1,296)
- ------------------------------------------------------------------- -------- --------
Net cash used in investing activities ...... (30,275) (9,804)
- ------------------------------------------------------------------- -------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ...... 28,474 21,938
Net (decrease) increase in certificates of deposit ........ (7,090) 8,751
Stock dividend - cash paid in lieu of fractional shares ... (5) (3)
Increase in short-term borrowings ......................... 12,700 --
- ------------------------------------------------------------------- -------- --------
Net cash provided by financing activities .. 34,079 30,686
- ------------------------------------------------------------------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. 4,001 23,444
Cash and cash equivalents as of beginning of year ................. 9,342 9,624
- ------------------------------------------------------------------- -------- --------
Cash and cash equivalents as of end of period ..................... $ 13,343 $ 33,068
- ------------------------------------------------------------------- ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .................. $ 3,567 $ 2,509
Cash paid during the period for income taxes .............. $ 694 $ 545
See accompanying notes to consolidated condensed financial statements.
6
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed financial statements of Community Bancorp of New
Jersey (the Company) included herein have been prepared without audit pursuant
to the rules and regulations of 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, 2001. The results for the three months and
six months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002.
The consolidated condensed financial statements include the accounts of the
Company and its wholly owned subsidiary, the Community Bank of New Jersey. All
significant inter-company accounts and transactions have been eliminated.
NOTE B - EARNINGS PER SHARE
The Company follows 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.
7
NOTE C - STOCK DIVIDEND
On April 9, 2002 the Company's Board of Directors approved a 5% stock dividend
payable May 15, 2002 to shareholders of record as of April 23, 2002. Weighted
average shares outstanding and earnings per share were retroactively adjusted to
reflect the stock dividend.
8
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE D - INVESTMENT SECURITIES
The following tables present the book values, fair values and gross unrealized
gains and losses of the Company's investment securities portfolio as of June 30,
2002 and December 31, 2001 (Dollars in thousands).
June 30, 2002 (Unaudited)
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
Securities available-for-sale:
U.S. Government and agency securities... $75,698 $ 816 $ -- $76,514
Other securities ....................... 810 -- -- 810
------- ------- ------- -------
$76,508 $ 816 $ -- $77,324
======= ======= ======= =======
Securities held-to-maturity:
U.S. Government and agency securities .. $ 8,500 $ 60 $ -- $ 8,560
Other securities ....................... 1,035 51 -- 1,086
------- ------- ------- -------
$ 9,535 $ 111 $ -- $ 9,646
======= ======= ======= =======
December 31, 2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
Securities available-for-sale:
U.S. Government and agency securitiesvvv $ 64,569 $ 510 $ (120) $ 64,959
Other securities ....................... 480 -- -- 480
-------- -------- -------- --------
$ 65,049 $ 510 $ (120) $ 65,439
======== ======== ======== ========
Securities held-to-maturity:
U.S. Government and agency securities .. $ 14,275 $ 6 $ (145) $ 14,136
Other securities ....................... 1,035 46 -- 1,081
-------- -------- -------- --------
$ 15,310 $ 52 $ (145) $ 15,217
======== ======== ======== ========
The following table sets forth as of June 30, 2002 the maturity distribution of
the Company's investment portfolio (Dollars in thousands).
Available-for-sale Held-to-maturity
----------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
Due in one year or less ................. $ -- $ -- $ 535 $ 535
Due after one year through five years.... 75,698 76,514 8,500 8,560
Due after five years through ten years .. -- -- 500 551
Due after ten years ..................... 810 810 -- --
------- ------- ------- -------
$76,508 $77,324 $ 9,535 $ 9,646
======= ======= ======= =======
9
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE E - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of June
30, 2002 and December 31, 2001 (Dollars in thousands).
Loan Portfolio By Type of Loan
---------------------------------------------------
June 30, 2002
(Unaudited) December 31, 2001
-------------------- -------------------------
Amount Percent Amount Percent
------- ------- ------- -------
Commercial and industrial loans..... $31,240 18.18% $25,736 17.44%
Commercial mortgage loans .......... 84,367 49.10% 74,258 50.31%
Residential mortgages .............. 7,161 4.17% 6,970 4.72%
Construction loans ................. 28,869 16.80% 21,962 14.88%
Consumer loans ..................... 20,137 11.72% 18,559 12.57%
Other loans ........................ 45 0.03% 118 0.08%
-------- ------ -------- ------
$171,819 100.00% $147,603 100.00%
======== ====== ======== ======
The following table represents the activity in the allowance for loan losses for
the six month periods ended June 30, 2002 and 2001 and the year ended December
31, 2001 (Dollars in thousands).
Allowance For Loan Losses
-----------------------------------------------
Six Months Ended
June 30,
(Unaudited) Year Ended
------------------------- December 31,
2002 2001 2001
------- ------- -------
Balance - beginning of period .............. $ 1,964 $ 1,584 $ 1,584
Charge-offs ................................ (1) (3) (6)
Provision for loan losses .................. 685 246 386
------- ------- -------
Balance - end of period .................... $ 2,648 $ 1,827 $ 1,964
======= ======= =======
Balance of Allowance at period-end as a %
of loans at period-end ................. 1.54% 1.30% 1.33%
======= ======= =======
10
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (US GAAP) and
predominant practices within the banking industry. The accompanying consolidated
financial statements include the accounts of the Company, and all its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated.
The principal estimate that is particularly susceptible to significant change in
the near term relates to the allowance for loan losses. 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.
The allowance for loan loss 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 Company's
allowance for losses on loans. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
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 Company accounts for its impaired loans in accordance with SFAS No. 114.
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
rat, 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 Company recognizes deferred tax assets and liabilities for the future tax
effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. In the event
management determines the inability to realize all or part of net deferred tax
assets in the future, a direct charge to income tax expense may be required to
reduce the recorded value of the net deferred tax asset to the expected
realizable amount.
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 June 30, 2002 increased by $33.8 million, or 13.8%, to $279.5
million compared to $245.6 million at December 31, 2001. Total assets averaged
$256.3 million in the first six months of 2002, a $53.1 million, or 26.1%,
increase from the 2001 full year average of $203.2 million. Average loans
increased $20.0 million, or 14.4%, to $158.5 million in the first six months of
2002, from the 2001 full year average of $138.5 million. Average investment
securities increased by $40.4 million, or 98.5%, to $81.4 million; average
Federal funds sold decreased by $10.1 million, or 94.4%, to $600 thousand; the
average of all other assets increased by $3.1 million, or 20.9%, to $17.9
million; and the loan loss reserve average increased $242 thousand, or 11.1%, to
$2.0 million during the first six months of 2002 compared to the full year 2001
averages.
These increases in average assets were funded primarily by a $47.2 million, or
26.3%, increase in average deposits, as average deposits for the first six
months of 2002 increased to $227.0 million from the full year 2001 average of
$179.8 million. Increases in average assets were further funded by a $5.1
million, or 463.6%, increase in average short-term borrowings, as average
short-term borrowings for the first six months of 2002 increased to $6.2 million
from the full year 2001 average of $1.1 million.
Lending Activity
- ----------------
Total loans at June 30, 2002 were $171.8 million, a 16.4%, or $24.2 million
increase from December 31, 2001. 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 $10.1 million in commercial mortgage
loans, $6.9 million in construction loans, $5.5 million in commercial and
industrial loans, $1.5 million in consumer and other loans and $191 thousand in
residential mortgage loans.
The 16.4% increase in loans at June 30, 2002 compared to December 31, 2001 is
partially attributable to greater penetration of our marketplace and continued
loan demand within our market area and targeted customer base. Since September
1997, we have opened six new offices. Management believes that the maturation of
these branch locations will continue to provide us with lending opportunities as
well as funding sources for the loans. Further enhancing loan growth has been
our desire to provide quality customer service. Our focus is on the continued
origination, retention and service of a high quality loan portfolio.
Our loans are primarily to businesses and individuals located in Monmouth,
Middlesex, and Ocean Counties, New Jersey. We believe that our strategy of
customer service, competitive rate structures, and selective marketing will
continue to enable us to gain market entry to local loans
11
and deposits. Bank mergers and consolidations have also contributed to our
efforts to attract borrowers and depositors. We intend to continue to pursue
quality loans in all lending categories within our market area.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses was $2.6 million, or 1.54% of total loans, at June
30, 2002 compared to $2.0 million, or 1.33% of total loans, at December 31,
2001. At June 30, 2002 we had $2.4 million in non-accrual loans compared to no
non-accrual loans at December 31, 2001. The increase in the balance of the
allowance for loan losses is the result of our review of several factors,
including the continued growth of our loan portfolio and our assessment of
economic conditions, credit quality, and other loss factors that may be inherent
in the existing loan portfolio. During the second quarter, the Company placed
$2.4 million of commercial loans issued to this borrower on non-accrual, and has
subsequently been negotiating a settlement of these problem loans. Although no
settlement has yet been finalized, based upon the current facts and
circumstances regarding these loans, the Company added $480,000 to its loan loss
reserve to fully cover anticipated losses on these credits. We also added
$480,000 to our loan loss reserve at June 30, 2002 to fully cover anticipated
losses associated with a series of credit facilities to a single borrower, an
insurance premium financer.
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
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
we feel 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 we attempt 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 judgements
about information available to them at the time of their examination.
Investment Securities Activity
- ------------------------------
Investment securities increased by $6.2 million, or 7.7%, to $86.9 million at
June 30, 2002 compared to $80.7 million at December 31, 2001. During the last
three quarters of 2001 and first two quarters of 2002, we utilized our liquidity
in excess of loan demand to fund additional purchases of investment securities
available-for-sale. This strategy resulted from Asset/Liability management
considerations arising from our analysis of several economic scenarios including
reduced loan growth and deposit repricing opportunities starting within the
second quarter of 2001. During the first six months of 2002, forecasted
maturities and calls of $24.5 million in investment securities were used to fund
loan growth amounting to $24.2 million as loan demand increased and we utilized
excess liquidity with additional purchases of investment securities of $30.2
million.
12
Management determines the appropriate classification of securities at the time
of purchase. At June 30, 2002, investment securities of $77.3 million, or 89.0%
of the total investment securities portfolio, were classified as
available-for-sale and investment securities of $9.5 million, or 11.0% of the
total investment securities portfolio, were classified as held-to-maturity. We
had no investment securities classified as trading securities. The investment
portfolio is comprised primarily of U.S. Government and agency securities with
maturities of four years or less and with call features of two years or less. We
currently maintain 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 our primary source of funds. Total deposits increased by $21.4
million, or 9.7%, to $242.5 million at June 30, 2002 compared to $221.1 million
at December 31, 2001. The increase in deposits during this period was primarily
due to greater penetration of our marketplace and the continued growth of our
new locations. As we adjusted the mix of our deposit base through marketing and
pricing initiatives, lower costing demand deposits and savings accounts
increased by $28.5 million, while higher costing certificates of deposit
decreased by $7.1 million.
Average total deposits increased by $47.2 million, or 26.3%, to $227.0 million
for the six months ended June 30, 2002 compared to the 2001 full year average of
$179.8 million. Changes in the deposit mix averages for the six months ended
June 30, 2002 compared to the 2001 full year averages include a $24.4 million,
or 47.8%, increase in savings deposits; a $807 thousand, or 4.1%, decrease in
NOW account deposits; a $15.8 million, or 23.8%, increase in time deposits; a
$605 thousand, or 9.2%, increase in money market deposits; and a $7.3 million,
or 20.1%, increase in non-interest bearing demand deposits. Short duration
certificate of deposit promotions, targeted to retain maturing deposits and to
gain market penetration, have contributed to deposit growth. Management intends
to continue to promote targeted deposit products as funding needs and other
balance sheet management considerations arise.
We emphasize relationships with commercial customers and seek to obtain
transactional accounts, which are frequently kept in non-interest bearing
deposits. We also emphasize the origination of savings deposits, which amounted
to $83.7 million at June 30, 2002, 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 paid without notice, and the
depositor may withdraw their funds on demand. We market this product as an
alternative to time deposits and we believe 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 that we serve.
Liquidity
- ---------
Liquidity is a measurement of our ability to meet present and future funding
obligations and commitments. We adjust our liquidity levels in order to meet
funding needs for deposit outflows, repayment of borrowings, when applicable,
and the funding of loan commitments. We also adjust our liquidity level as
appropriate to meet our 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, and net interest income and
fee income. Liquid assets (consisting of cash and Federal funds sold) comprised
4.8% and 3.8% of our total assets at June 30, 2002 and December 31, 2001,
respectively.
13
As shown in the Consolidated Condensed Statements of Cash Flows, our primary
source of funds at June 30, 2002 was increased targeted deposit products,
proceeds from maturities and calls of investment securities, and to a lesser
extent, short-term borrowed funds. Deposit increases amounted to $21.4 million
for the six months ended June 30, 2002 and proceeds from maturities and calls of
investment securities amounted to $24.5 million. These sources of funds were
augmented with an increase of $12.7 million in short-term borrowings as of June
30, 2002. During the first six months of 2002, we utilized deposit growth,
matured investment securities, and to a lesser extent, short-term borrowings as
funding sources for increased loans made to customers amounting to $24.2 million
and securities purchases amounting to $30.2 million.
We also have several additional sources of liquidity, including the
available-for-sale investment securities portfolio, which at June 30, 2002
amounted to $77.3 million. Also, many of our 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, we have established lines of credit with
other financial institutions to purchase up to $11.0 million in Federal funds
and may borrow funds at the Federal Reserve discount window, subject to our
ability to supply collateral. We are also a member of the Federal Home Loan Bank
of New York and have an additional combined overnight borrowing line term line
of $21.4 million. In addition, subject to certain Federal Home Loan Bank
requirements, we may also obtain longer-term advances of up to 30% of our
assets. As of June 30, 2002, we had $14.3 million in short-term borrowings.
We believe that our liquidity position is sufficient to provide funds to meet
future loan demand or the possible outflow of deposits, in addition to enabling
us to adapt to changing interest rate conditions.
Capital Resources
- -----------------
Stockholder's equity increased by $1.0 million at June 30, 2002 compared to
December 31, 2001. The changes in stockholders' equity during the six months
ended June 30, 2002 were comprised of an increase from net income of $704
thousand and an increase of $272 thousand in the unrealized gains, net of taxes,
in the available-for-sale investment securities portfolio. These increases were
partially off-set by a payment of $5 thousand of cash in lieu of fractional
shares associated with our second quarter 5% stock dividend.
Our regulators, the Board of Governors of the Federal Reserve System (which
regulates bank holding companies), and the Federal Deposit Insurance
Corporation, have issued guidelines classifying and defining capital.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at June 30, 2002 as well as the regulatory required
minimum and "well capitalized" capital ratios:
June 30, 2002 Regulatory Requirement
------------------- --------------------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
Risk-based Capital:
Tier I capital ratio........... 10.98% 10.99% 4.00% 6.00%
Total capital ratio............ 12.23% 12.24% 8.00% 10.00%
Leverage ratio.................. 8.22% 8.23% 3.00%-5.00% 5.00% or greater
14
As noted in the above table, the Company's and the Bank's capital ratios exceed
the minimum regulatory and "well capitalized" requirements.
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 our operations. Unlike most industrial
companies, nearly all of 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.
RESULTS OF OPERATIONS for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001
Net Income
- ----------
For the six months ended June 30, 2002, we earned $704 thousand compared to $681
thousand in net income for the same period last year. Basic and diluted net
income per share for the six months ended June 30, 2002 was $0.33 and $0.32,
respectively, compared to basic and diluted net income per share of $0.32 for
the same prior year period. The marginal increase in net income was primarily
due to a $1.1 million, or 28.5%, increase in net interest income, an $11
thousand, or 2.8% reduction in income tax expense, and was partially offset by
an increase in loan loss provision of $439 thousand, or 178.5%, a reduction in
non-interest income of $39 thousand, or 5.3%, and increased non-interest
expenses of $643 thousand, or 19.0%.
Net Interest Income
- -------------------
Net interest income increased $1.1 million, or 28.5%, to $5.1 million for the
six months ended June 30, 2002 from $4.0 million for the same prior year period.
The increase in net interest income was due primarily to volume related
increases amounting to $1.3 million as average interest earning assets, net of
average interest bearing liabilities, increased by $6.8 million, or 15.5%, for
the first six months of 2002 compared to the same prior year period. The volume
related increases in net interest income were partially offset by rate related
decreases in net interest income amounting to $151 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the six months ended June 30, 2002 decreased to
4.28% compared to 4.53% for the same prior year period. The decrease in net
interest margin of 25 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 211.8% to
$81.4 million from $26.1 million. The relatively consistent net interest margin
resulted primarily from timely implementation of asset/liability management
strategies as the Federal Reserve Bank reduced the target funds rate to 1.75%.
15
Interest income increased $737 thousand, or 10.7%, to $7.6 million for the six
months ended June 30, 2002 compared to $6.9 million for the same period in 2001.
The improvement in interest income was primarily due to volume related increases
in income from the loan portfolio of $1.8 million and volume related increases
in income of $1.777 million in investment securities and was offset by a
reduction in Federal funds sold income of $448 thousand, as our growth resulted
in an increase in average earning assets of $63.9 million, or 36.2%, to $240.5
million for the six months ended June 30, 2002 compared to $176.6 million for
the same period in 2001.
In addition to the volume related net increase amounting to $2.5 million,
total interest income decreased by $1.8 million from rate related decreases as
interest rates on earning assets repriced to current lower yields compared to
yields in the same period in 2001.
Interest expense for the first six months of 2002 decreased $396 thousand, or
13.6%, compared to the same prior year period. The decrease in interest expense
was due primarily to net rate related decreases in interest bearing deposits,
which accounted for $1.6 million of the expense decrease, and was partially
offset by $1.2 million attributable to net volume related increases. The volume
related increases in interest bearing liabilities and net expense rate decreases
are the result of marketing and pricing decisions made by management in response
to changing market rates and the need to provide cost effective sources of
funds.
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 June 30, 2002 compared to
the quarter ended June 30, 2001 and the six months ended June 30, 2002 compared
to the same prior year period.
16
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------------- -----------------------------------
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 ............................. $ 738 $ 3 1.63% $ 23,694 $ 262 4.44%
Investment Securities .......................... 81,789 963 4.71% 19,589 296 6.04%
Loans (net of unearned income) (1) (2) ......... 164,194 2,889 7.06% 135,481 2,847 8.43%
--------- --------- --------- ---------
Total Interest Earning Assets ........ 246,721 3,855 6.27% 178,764 3,405 7.64%
--------- --------- --------- ---------
Non-Interest Earning Assets:
Loan Loss Reserve .............................. (2,103) (1,772)
All Other Assets ............................... 17,994 13,526
---------
Total Assets ......................... $ 262,612 $ 190,518
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ................................... $ 19,107 50 1.05% $ 19,307 68 1.41%
Savings Deposits ............................... 79,897 402 2.02% 48,113 356 2.97%
Money Market Deposits .......................... 7,279 41 2.26% 6,829 54 3.17%
Time Deposits .................................. 81,220 704 3.48% 59,201 893 6.05%
Short-term Borrowings .......................... 6,291 30 1.91% -- -- 0.00%
--------- --------- --------- ---------
Total Interest Bearing Liabilities ... 193,794 1,227 2.54% 133,450 1,371 4.12%
--------- --------- --------- ---------
Non-Interest Bearing Liabilities:
Demand Deposits ................................ 45,961 34,466
Other Liabilities .............................. 953 2,576
--------- ---------
Total Non-Interest Bearing Liabilities 46,914 37,042
--------- ---------
Stockholders' Equity ................................... 21,904 20,026
--------- ---------
Total Liabilities and Stockholders'
Equity ............................... $ 262,612 $ 190,518
========= =========
NET INTEREST INCOME .................................... $ 2,628 $ 2,034
========= =========
NET INTEREST SPREAD (3) ................................ 3.73% 3.52%
NET INTEREST MARGIN (4) ................................ 4.27% 4.56%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans. Average non-accrual loans for the periods
presented amounted to $2.38 million for the quarter ended June 30, 2002.
(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.
17
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
-------------------------------------- -----------------------------------
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 ............................. $ 598 $ 5 1.69% $ 19,436 $ 462 4.79%
Investment Securities .......................... 81,418 1,925 4.73% 26,113 839 6.43%
Loans (net of unearned income) (1) (2) ......... 158,488 5,681 7.23% 131,036 5,573 8.58%
--------- --------- --------- ---------
Total Interest Earning Assets ........ 240,504 7,611 6.38% 176,585 6,874 7.85%
--------- --------- --------- ---------
Non-Interest Earning Assets:
Loan Loss Reserve .............................. (2,041) (1,700)
All Other Assets ............................... 17,855 12,992
--------- ---------
Total Assets ......................... $ 256,318 $ 187,877
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ................................... $ 18,771 92 0.99% $ 17,284 130 1.52%
Savings Deposits ............................... 75,330 762 2.04% 47,600 788 3.34%
Money Market Deposits .......................... 7,087 79 2.25% 8,372 156 3.76%
Time Deposits .................................. 82,227 1,515 3.72% 59,286 1,829 6.22%
Short-term Borrowings .......................... 6,246 59 1.90% -- -- 0.00%
--------- --------- --------- ---------
Total Interest Bearing Liabilities ... 189,661 2,507 2.67% 132,542 2,903 4.42%
--------- --------- --------- ---------
Non-Interest Bearing Liabilities:
Demand Deposits ................................ 43,562 33,114
Other Liabilities .............................. 1,405 2,381
--------- ---------
Total Non-Interest Bearing Liabilities 44,967 35,495
--------- ---------
Stockholders' Equity ................................... 21,690 19,840
--------- ---------
Total Liabilities and Stockholders'
Equity ............................... $ 256,318 $ 187,877
========= =========
NET INTEREST INCOME .................................... $ 5,104 $ 3,971
========= =========
NET INTEREST SPREAD (3) ................................ 3.72% 3.43%
NET INTEREST MARGIN (4) ................................ 4.28% 4.53%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans. Average non-accrual loans for the periods
presented amounted to $1.19 million for the six months ended June 30, 2002.
(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.
18
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
Compared to Three Months Ended Compared to Six Months Ended
June 30, 2001 June 30, 2001
------------------------------- --------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands) (In thousands)
Interest Earned On:
Federal Funds Sold ............. $ (254) $ (5) $ (259) $ (448) $ (9) $ (457)
Investment Securities .......... 940 (273) 667 1,777 (691) 1,086
Loans (net of unearned income) . 603 (561) 42 1,168 (1,060) 108
------- ------- ------- ------- ------- -------
Total Interest Income 1,289 (839) 450 2,497 (1,760) 737
------- ------- ------- ------- ------- -------
Interest Paid On:
NOW Deposits ................... (1) (17) (18) 11 (49) (38)
Savings Deposits ............... 235 (189) 46 459 (485) (26)
Money Market Deposits .......... 4 (17) (13) (24) (53) (77)
Time Deposits .................. 332 (521) (189) 708 (1,022) (314)
Short-term Borrowings .......... 30 -- 30 59 -- 59
------- ------- ------- ------- ------- -------
Total Interest Expense 600 (744) (144) 1,213 (1,609) (396)
------- ------- ------- ------- ------- -------
Net Interest Income .. $ 689 $ (95) $ 594 $ 1,284 $ (151) $ 1,133
======= ======= ======= ======= ======= =======
19
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $685 thousand for the first six
months of 2002 compared to a provision of $246 thousand for the same period in
2001. The provision is the result of our review of several factors, including
increased loan balances and our assessment of economic conditions, credit
quality and other loss factors that may be inherent in the existing loan
portfolio. We had $2.4 million of non-accrual loans at June 30, 2002, and
established $480 thousand in provisions for loan losses to cover anticipated
losses associated with these loans. The allowance for loan losses totaled $2.6
million, or 1.54% of total loans, at June 30, 2002.
Non-Interest Income
- -------------------
Total non-interest income was $695 thousand for the first six months of 2002
compared to $734 thousand for the first six months of 2001, a decrease of $39
thousand, or 5.3%. The decrease was attributable primarily to a decrease in
non-interest service fees on loans, which amounted to $232 thousand for the six
months ended June 30, 2002 compared to $401 thousand earned for the same prior
year period, a decrease of $169 thousand, or 42.1%. This decrease in
non-interest service fees on loans resulted primarily from reduced activity in
loan participations. All other non-interest income increased by $130 thousand,
or 39.0%, to $463 thousand, and resulted from the continued growth of the
Company.
Non-Interest Expense
- --------------------
Total non-interest expense amounted to $4.0 million for the six months ended
June 30, 2002, an increase of $643 thousand, or 19.0%, over the same prior year
period. 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 our growth. Of this increase, employment costs
increased $321 thousand, or 20.1%, and reflected increases in the number of
employees from 87 full-time equivalents for the period ended June 30, 2001 to 96
full-time equivalents for the period ended June 30, 2002. The increase in
personnel is primarily attributable to the acquisition of additional support
personnel required due to the Company's growth, including the transfer of
deposit services processing from a service bureau environment to an "in-house"
environment and the opening of our Colts Neck, New Jersey and Shrewsbury, New
Jersey branches.
Occupancy and depreciation expenses increased $245 thousand, or 45.7%, for the
first six months of 2002 compared to the same period in 2001. The increase was
attributable primarily to increased lease expense and increased common area
maintenance costs due on new branch offices, in addition to increased
depreciation costs associated with new deposit services facilities and on
purchases of enhanced computer processing equipment.
Other expenses increased $77 thousand, or 6.1%, for the first six months of 2002
compared to the first six months of 2001. The increase was attributable to
increased other expenses resulting from our continued growth. In addition, 2001
expenses were increased by $130 thousand due to systems related conversion costs
as we prepared for a bank-wide operating systems conversion which was
successfully completed during July, 2001.
20
Income Tax Expense
- ------------------
For the six months ended June 30, 2002, we recognized $376 thousand in income
tax expense compared to $387 thousand in income tax expense during the first six
months of 2001. The effective tax rate for the first six months of 2002 was
34.8% compared to 36.2% for the same period during 2001.
Return on Average Assets and Average Equity
- --------------------------------------------
Two industry measures of performance by a banking institution are its return on
average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. For the six months ended
June 30, 2002, our ROA was 0.55% compared to 0.74% for the year ended December
31, 2001. Return on average equity ("ROE") is determined by dividing annual net
income by average stockholders' equity and indicates how effectively a company
can generate net income on the capital invested by its stockholders. ROE
decreased to 6.55% for the six months ended June 30, 2002, compared to 7.45% for
the year ended December 31, 2001. The decrease in both performance measures
resulted from the addition of $480 thousand to our loan loss reserve at June 30,
2002 to fully cover anticipated losses associated with a series of credit
facilities to a single borrower.
RESULTS OF OPERATIONS for the three months ended June 30, 2002 compared to the
three months ended June 30, 2001
Net Income
- ----------
For the three months ended June 30, 2002, we earned $151 thousand compared to
$347 thousand in net income for the same period last year, a decrease of $196
thousand, or 56.5%. Basic and diluted net income per share for the three months
ended June 30, 2002 was $0.07, compared to basic and diluted net income per
share of $0.16 for the same prior year quarter. The decrease in net income was
primarily due to a $594 thousand, or 29.2%, increase in net interest income, a
$111 thousand, or 56.9% reduction in income tax expense, and was further
effected by an increase in loan loss provision of $495 thousand, or 495.0%, a
reduction in non-interest income of $67 thousand, or 17.8%, and increased
non-interest expenses of $339 thousand, or 19.2%.
Net Interest Income
- -------------------
Net interest income increased $594 thousand, or 29.2%, to $2.6 million for the
three months ended June 30, 2002 from $2.0 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $689 thousand as average interest earning assets, net of
average interest bearing liabilities, increased by $7.6 million, or 16.8%, for
the second quarter of 2002 compared to the same prior year period. The volume
related increases in net interest income were partially offset by rate related
decreases in net interest income amounting to $95 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the three months ended June 30, 2002 decreased to
4.27% compared to 4.56% for the same prior year period. The decrease in net
interest margin of 29 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 317.5% to
$81.8 million from $19.6 million. The relatively consistent net interest margin
21
resulted primarily from timely implementation of asset/liability management
strategies as the Federal Reserve Bank reduced the target funds rate to 1.75%.
Interest income increased $450 thousand, or 13.2%, to $3.9 million for the three
months ended June 30, 2002 compared to $3.4 million for the same period in 2001.
The improvement in interest income was primarily due to volume related increases
in income from the loan portfolio of $603 thousand and volume related increases
in income of $940 thousand in investment securities and was offset by a
reduction in Federal funds sold income of $254 thousand, as our growth resulted
in an increase in average earning assets of $67.9 million, or 38.0%, to $246.7
million for the quarter ended June 30, 2002 compared to $178.8 million for the
same period in 2001.
In addition to the volume related net increase amounting to $1.3 million, total
interest income decreased by $839 thousand from rate related decreases as
interest rates on earning assets repriced to current lower yields compared to
yields in the same period in 2001.
Interest expense for the second quarter of 2002 decreased $144 thousand, or
10.5%, compared to the same prior year period. The decrease in interest expense
was due primarily to net rate related decreases in interest bearing deposits,
which accounted for $744 thousand of the expense decrease, and was partially
offset by $600 thousand attributable to net volume related increases. The volume
related increases in interest bearing liabilities and net expense rate decreases
are the result of marketing and pricing decisions made by management in response
to changing market rates and the need to provide cost effective sources of
funds.
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $595 thousand for the second quarter
of 2002 compared to a provision of $100 thousand for the same period in 2001.
The provision is the result of our review of several factors, including
increased loan balances and our assessment of economic conditions, credit
quality and other loss factors that may be inherent in the existing loan
portfolio. We had $2.4 million of non-accrual loans at June 30, 2002, and
established $480 thousand in provisions for loan losses to cover
anticipated losses associated with these loans. The allowance for loan losses
totaled $2.6 million, or 1.54% of total loans, at June 30, 2002.
Non-Interest Income
- -------------------
Total non-interest income was $309 thousand for the second quarter of 2002
compared to $376 thousand for the second quarter of 2001, a decrease of $67
thousand, or 17.8%. The decrease was attributable primarily to a decrease in
non-interest service fees on loans, which amounted to $96 thousand for the three
months ended June 30, 2002 compared to $215 thousand earned for the same prior
year period, a decrease of $119 thousand, or 55.3%. This decrease in
non-interest service fees on loans resulted primarily from reduced activity in
loan participations. All other non-interest income increased by $52 thousand, or
32.3%, to $213 thousand, and resulted from the continued growth of the Company.
Non-Interest Expense
- --------------------
Total non-interest expense amounted to $2.1 million for the quarter ended June
30, 2002, an increase of $339 thousand, or 19.2%, over the same prior year
period. The increase was due primarily to increases in employment expenses as
well as increases in occupancy expenses,
22
equipment expenses and other expenses generally attributable to our growth. Of
this increase, employment costs increased $144 thousand, or 17.1%, and reflected
increases in the number of employees from 87 full-time equivalents for the
period ended June 30, 2001 to 96 full-time equivalents for the period ended June
30, 2002. The increase in personnel is primarily attributable to the acquisition
of additional support personnel required due to the Company's growth, including
the transfer of deposit services processing from a service bureau environment to
an "in-house" environment and the opening of our Colts Neck, New Jersey and
Shrewsbury, New Jersey branches.
Occupancy and depreciation expenses increased $136 thousand, or 50.7%, for the
second quarter of 2002 compared to the same period in 2001. The increase was
attributable primarily to increased lease expense and increased common area
maintenance costs due on new branch offices, in addition to increased
depreciation costs associated with new deposit services facilities and on
purchases of enhanced computer processing equipment.
Other expenses increased $59 thousand, or 9.0%, for the second three quarter of
2002 compared to the second quarter of 2001. The increase was attributable to
increased other expenses resulting from our continued growth. In addition, 2001
expenses were increased by $60 thousand due to systems related conversion costs
as we prepared for a bank-wide operating systems conversion which was
successfully completed during July, 2001.
Income Tax Expense
- ------------------
For the three months ended June 30, 2002, we recognized $84 thousand in income
tax expense compared to $195 thousand in income tax expense during the second
quarter of 2001. The effective tax rate for the second quarter of 2002 was 35.7%
compared to 36.0% for the same period during 2001.
Return on Average Assets and Average Equity
- --------------------------------------------
Two industry measures of performance by a banking institution are its return on
average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. For the three months ended
June 30, 2002, our ROA was 0.23% compared to 0.74% for the year ended December
31, 2001. Return on average equity ("ROE") is determined by dividing annual net
income by average stockholders' equity and indicates how effectively a company
can generate net income on the capital invested by its stockholders. ROE
decreased to 2.76% for the quarter ended June 30, 2002, compared to 7.45% for
the year ended December 31, 2001. The decrease in both performance measures
resulted from the addition of $480 thousand to our loan loss reserve at June 30,
2002 to fully cover anticipated losses associated with a series of credit
facilities to a single borrower.
23
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 Bancorp of New Jersey
was held on April 18, 2002. The following were the results of voting
on the one proposal presented:
Note: Shares Outstanding were..................... 2,014,729
Shares Voted were............................ 1,658,757
Proposal No. 1 - The re-election of three nominees to the Board of
Directors for a three year term.
Note: Each Director received at least 97% of the shares voted, in
favor of their appointment.
Elected Director Votes For Votes Withheld %
------------------------- ------------- ---------------- ---------
Charles Kaempffer 1,656,165 2,592 99.8%
William Mehr 1,655,598 3,159 99.8%
Robert O'Donnell 1,623,719 35,159 97.9%
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - CERTIFICATION (page 25)
(b) Reports on Form 8-K
The Registrant filed no Form 8-K's during the second
quarter 2002.
24
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Robert D. O'Donnell and Michael Bis hereby jointly certify,
Pursuant to U.S. C. Section 1350,as adopted to Section 906 of the Sarbanes-Oxley
Act of 2002 as follows:
(a) They are the Chief Executive Officer and the Chief Financial Officer,
respectively, of Community Bancorp of New Jersey (the "Company");
(b) To the best of their knowledge, the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2002 (the "Report") complies in
all material respects with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(c) To the best of their knowledge, based upon a review of the Report, the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Robert D. O'Donnell
-------------------------
Robert D. O'Donnell
President and Chief Executive Officer
-------------------------------------
Title
August 13, 2002
---------------
Date
/s/ Michael Bis
---------------------------
Michael Bis
Sr. Vice President and Chief Financial Officer
----------------------------------------------
Title
August 13, 2002
---------------
Date
25
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 BANCORP OF NEW JERSEY
-------------------------------
(Issuer)
Date: August 13, 2002 By: /s/ Robert D. O'Donnell
--------------- -------------------------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: /s/ Michael Bis
----------------------------------------------
MICHAEL BIS
Sr. Vice President and Chief Financial Officer
26