U.S. SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2002
------------------
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 (I.R.S. Employer
incorporation 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, No Par Value-3,172,666 shares outstanding as of November 9, 2002
- ------------------------------------------------------------------------------
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 30, 2002
(Unaudited) and December 31, 2001 3
Consolidated Condensed Statements of Income for the three and nine
months ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity at September 30, 2002 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 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 - 24
Item 3. CONTROLS AND PROCEDURES 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 26
SECTION 302 CERTIFICATIONS 27 - 28
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
2002 December 31,
(Unaudited) 2001
--------- ---------
ASSETS ...................................................................... (Dollars in thousands)
Cash and cash equivalents:
Cash and due from banks .......................................... $ 12,750 $ 9,342
Federal funds sold ............................................... -- --
- ----------------------------------------------------------------------------- --------- ---------
Total cash and cash equivalents ........................ 12,750 9,342
- ----------------------------------------------------------------------------- --------- ---------
Investment securities available-for-sale ............................... 104,023 65,439
Investment securities held-to-maturity (fair value of $15,217 at
December 31, 2001) ............................................... -- 15,310
Loans receivable ....................................................... 180,656 147,603
Allowance for loan loss ................................................ (2,355) (1,964)
- ----------------------------------------------------------------------------- --------- ---------
Net loans receivable ................................... 178,301 145,639
- ----------------------------------------------------------------------------- --------- ---------
Premises and equipment, net ............................................ 6,246 6,335
Accrued interest receivable ............................................ 2,004 1,457
Other assets ........................................................... 1,842 2,116
- ----------------------------------------------------------------------------- --------- ---------
Total Assets ........................................... $ 305,166 $ 245,638
- ----------------------------------------------------------------------------- ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand ...................................... $ 49,366 $ 43,539
Interest bearing - NOW ........................................... 26,037 24,741
Savings and money market ......................................... 95,137 66,466
Certificates of deposit, under $100,000 .......................... 65,145 47,894
Certificates of deposit, $100,000 and over ....................... 32,328 38,488
- ----------------------------------------------------------------------------- --------- ---------
Total deposits ......................................... 268,013 221,128
- ----------------------------------------------------------------------------- --------- ---------
Short-term borrowings .................................................. 13,250 1,600
Accrued interest payable ............................................... 87 1,334
Other liabilities ...................................................... 976 433
- ----------------------------------------------------------------------------- --------- ---------
Total liabilities ...................................... 282,326 224,495
- ----------------------------------------------------------------------------- --------- ---------
Stockholders' equity
Common stock - authorized 10,000,000 shares of
no par value; issued and outstanding, net of treasury
shares, 3,172,666 at September 30, 2002 and 2,014,729
at December 31, 2001 ....................................... 25,509 23,147
Accumulated deficit .............................................. (2,827) (1,889)
Accumulated other comprehensive income ........................... 521 248
Treasury stock, 22,357 shares, at cost ........................... (363) (363)
- ----------------------------------------------------------------------------- --------- ---------
Total stockholders' equity ............................. 22,840 21,143
- ----------------------------------------------------------------------------- --------- ---------
Total Liabilities and Stockholder's Equity ............. $ 305,166 $ 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 Nine Months Ended
September 30, September 30,
--------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including Fees ...................................... $ 3,156 $ 2,948 $ 8,837 $ 8,521
Federal funds sold ......................................... 7 34 12 496
Investment securities ...................................... 946 651 2,871 1,490
- ------------------------------------------------------------------ ------- ------- ------- -------
Total interest income ............................ 4,109 3,633 11,720 10,507
- ------------------------------------------------------------------ ------- ------- ------- -------
INTEREST EXPENSE
Interest bearing - NOW ..................................... 60 71 152 201
Savings and money market ................................... 479 388 1,320 1,332
Certificates of deposit .................................... 751 894 2,266 2,723
Short-term borrowings ...................................... 35 10 94 10
- ------------------------------------------------------------------ ------- ------- ------- -------
Total interest expense ........................... 1,325 1,363 3,832 4,266
- ------------------------------------------------------------------ ------- ------- ------- -------
Net interest income .............................. 2,784 2,270 7,888 6,241
Provision for loan losses ........................................ 155 95 840 341
- ------------------------------------------------------------------ ------- ------- ------- -------
Net interest income after provision
for loan losses ............................ 2,629 2,175 7,048 5,900
- ------------------------------------------------------------------ ------- ------- ------- -------
Non-interest income:
Service fees on deposit accounts ........................... 117 103 322 299
Service fees on loans ...................................... 63 117 295 518
Gain on sale of investment securities ...................... 554 -- 554 --
Other fees and commissions ................................. 112 69 370 206
- ------------------------------------------------------------------ ------- ------- ------- -------
Total non-interest income ........................ 846 289 1,541 1,023
- ------------------------------------------------------------------ ------- ------- ------- -------
Non-interest expense:
Salaries and wages ......................................... 946 766 2,578 2,144
Employee benefits .......................................... 132 107 415 323
Occupancy expense .......................................... 208 165 552 409
Depreciation - occupancy, furniture & equipment ............ 216 161 653 453
Other ...................................................... 800 677 2,138 1,938
- ------------------------------------------------------------------ ------- ------- ------- -------
Total non-interest expense ....................... 2,302 1,876 6,336 5,267
- ------------------------------------------------------------------ ------- ------- ------- -------
Income before income taxes ....................... 1,173 588 2,253 1,656
Income tax expense................................................ 445 214 821 601
- ------------------------------------------------------------------ ------- ------- ------- -------
Net Income ....................................... $ 728 $ 374 $ 1,432 $ 1,055
- ------------------------------------------------------------------ ======= ======= ======= =======
Per Common Share:
Net income - basic ......................................... $ 0.23 $ 0.12 $ 0.45 $ 0.33
Net income - diluted ....................................... $ 0.22 $ 0.12 $ 0.43 $ 0.33
Weighted average shares outstanding (in thousands):
Basic ...................................................... 3,173 3,173 3,173 3,173
Diluted .................................................... 3,313 3,253 3,315 3,237
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)
Stock split issued - 3 for 2
(1,057,429 shares) ................ -- -- -- -- -- --
Cash in lieu of fractional shares ....... -- -- (3) -- -- (3)
Comprehensive Income:
Net Income ........................ -- -- 1,432 -- $ 1,432 1,432
Increase in unrealized holding
gains on securities, net ...... -- -- -- 273 273 273
-------- --------
Total Comprehensive Income .............. -- -- -- -- $ 1,705
-------- -------- -------- -------- ========
Balance, September 30, 2002 (Unaudited).. $ 25,509 $ (363) $ (2,827) $ 521 $ 22,840
======== ======== ======== ======== ========
(1) Includes accumulated charges for stock dividends of $5,825 and $3,455 at
September 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)
Nine Months Ended September 30,
-------------------------------
2002 2001
--------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income ........................................................... $ 1,432 $ 1,055
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... 653 453
Provision for loan losses ................................... 840 341
Accretion of investment discount ............................ (19) (82)
Amortization of investment premium .......................... 166 23
Gain on sale of investment securities ....................... (554) --
(Increase) decrease in accrued interest receivable .......... (547) 294
Decrease other assets ....................................... 97 308
Decrease in accrued interest payable ........................ (1,247) (66)
Increase (decrease) in other liabilities .................... 543 (313)
- ------------------------------------------------------------------------------ --------- ---------
Net cash provided by operating activities ............. 1,364 2,013
- ------------------------------------------------------------------------------ --------- ---------
Cash flows from investing activities:
Purchases of investment securities available-for-sale ................ (116,196) (75,820)
Proceeds from sales of investment securities ......................... 15,704 --
Proceeds from maturities and calls and of investment securities ...... 78,075 67,310
Net increase in loans made to customers .............................. (33,502) (25,402)
Purchase of bank owned life insurance ................................ -- (1,500)
Purchases of premises and equipment .................................. (564) (1,705)
- ------------------------------------------------------------------------------ --------- ---------
Net cash used in investing activities ................. (56,483) (37,117)
- ------------------------------------------------------------------------------ --------- ---------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ................. 35,794 14,541
Net increase in certificates of deposit .............................. 11,091 17,604
Stock dividend and stock split- cash paid in lieu of fractional shares (8) (4)
Increase in short-term borrowings .................................... 11,650 1,500
- ------------------------------------------------------------------------------ --------- ---------
Net cash provided by financing activities ............. 58,527 33,641
- ------------------------------------------------------------------------------ --------- ---------
Net increase (decrease) in cash and cash equivalents ......................... 3,408 (1,463)
Cash and cash equivalents as of beginning of year ............................ 9,342 9,624
- ------------------------------------------------------------------------------ --------- ---------
Cash and cash equivalents as of end of period ................................ $ 12,750 $ 8,161
- ------------------------------------------------------------------------------ ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................. $ 5,079 $ 4,332
Cash paid during the period for income taxes ......................... $ 914 $ 732
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
nine months ended September 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.
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.
NOTE D - 3 for 2 STOCK SPLIT
On August 28, 2002 the Company's Board of Directors declared a three-for-two
stock split payable September 20, 2002 to shareholders of record as of September
10, 2002. Weighted average shares outstanding and earnings per share were
retroactively adjusted to reflect the stock split.
7
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE E - 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
September 30, 2002 and December 31, 2001 (Dollars in thousands).
September 30, 2002 (Unaudited)
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ---------- ----------
Securities available-for-sale:
U.S. Government and agency securities........... $101,456 $ 840 $ -- $102,296
Other securities................................ 1,727 -- -- 1,727
----------- ------------ ---------- ----------
$103,183 $ 840 $ -- $104,023
=========== ============ ========== ==========
Securities held-to-maturity:
U.S. Government and agency securities............. $ -- $ -- $ -- $ --
Other securities.................................. -- -- -- --
----------- ------------ ---------- ----------
$ -- $ -- $ -- $ --
=========== ============ ========== ==========
December 31, 2001
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Securities available-for-sale:
U.S. Government and agency securities $ 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 September 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 .............. $ -- $ -- $ -- $ --
Due after one year through five years 101,956 102,796 -- --
Due after five years through ten years -- -- -- --
Due after ten years .................. 1,227 1,227 -- --
-------- -------- ------ ------
$103,183 $104,023 $ -- $ --
======== ======== ====== ======
During the third quarter of 2002, all investment securities classified as
Held-to-Maturity were reclassified as Available-for-Sale. At the time of
transfer, the aggregate market value and book value were $9,533,375 and
$9,480,000 respectively. Concurrently, a security with a market value of
$3,053,375 and book value of $3,000,000 was sold and a realized gain on sale of
$53,375 was recorded.
8
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE F - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of
September 30, 2002 and December 31, 2001 (Dollars in thousands).
Loan Portfolio By Type of Loan
---------------------------------------------------
September 30, 2002
(Unaudited) December 31, 2001
--------------------- ----------------------
Amount Percent Amount Percent
------- ------- -------- ------
Commercial and industrial loans...... $ 29,813 16.50% $ 25,736 17.44%
Commercial mortgage loans ........... 90,467 50.08% 74,258 50.31%
Residential mortgages ............... 6,345 3.51% 6,970 4.72%
Construction loans .................. 32,317 17.89% 21,962 14.88%
Consumer loans ...................... 21,679 12.00% 18,559 12.57%
Other loans ......................... 35 0.02% 118 0.08%
-------- ------ -------- ------
$180,656 100.00% $147,603 100.00%
======== ====== ======== ======
The following table represents the activity in the allowance for loan losses for
the nine month periods ended September 30, 2002 and 2001 and the year ended
December 31, 2001 (Dollars in thousands).
Allowance For Loan Losses
--------------------------------------
Nine Months Ended
September 30, Year Ended
(Unaudited) December 31,
---------------------- -----------
2002 2001 2001
------- ------- -------
Balance - beginning of period ........... $ 1,964 $ 1,584 $ 1,584
Recoveries .............................. 1 -- --
Charge-offs ............................. (450) (6) (6)
Provision for loan losses ............... 840 341 386
------- ------- -------
Balance - end of period ................. $ 2,355 $ 1,919 $ 1,964
======= ======= =======
Balance of Allowance at period-end as a %
of loans at period-end .............. 1.30% 1.30% 1.33%
======= ======= =======
9
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE G - SHORT TERM BORROWINGS
Short-term borrowings include federal funds purchased and other short-term
advances from the Federal Home Loan Bank. At September 30, 2002, shor-term
advances amounting to $5,000,000 with an original maturity of one week, at an
interest rate of 1.86%, matured on October 4, 2002.
10
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 measures impairment based on the present
value of 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 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
11
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 September 30, 2002 increased by $59.6 million, or 24.3%, to
$305.2 million compared to $245.6 million at December 31, 2001. Total assets
averaged $266.8 million in the first nine months of 2002, a $63.6 million, or
31.3%, increase from the 2001 full year average of $203.2 million. Average loans
increased $25.8 million, or 18.6%, to $164.3 million in the first nine months of
2002, from the 2001 full year average of $138.5 million. Average investment
securities increased by $44.9 million, or 109.5%, to $85.9 million; average
Federal funds sold decreased by $9.9 million, or 92.5%, to $0.8 million; the
average of all other assets increased by $3.2 million, or 21.6%, to $18.0
million; and the loan loss reserve average increased $0.4 million, or 22.2%, to
$2.2 million during the first nine months of 2002 compared to the full year 2001
averages.
These increases in average assets were funded primarily by a $57.3 million, or
31.9%, increase in average deposits, as average deposits for the first nine
months of 2002 increased to $237.1 million from the full year 2001 average of
$179.8 million. Increases in average assets were further funded by a $5.5
million, or 500.0%, increase in average short-term borrowings, as average
short-term borrowings for the first nine months of 2002 increased to $6.6
million from the full year 2001 average of $1.1 million.
Lending Activity
- ----------------
Total loans at September 30, 2002 were $180.7 million, a 22.4%, or $33.1 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 $16.2 million in commercial mortgage
loans, $10.4 million in construction loans, $4.1 million in commercial and
industrial loans, $3.0 million in consumer and other loans and a reduction of
$0.6 million in residential mortgage loans.
The 22.4% increase in loans at September 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 and deposits. Bank
mergers and consolidations have also contributed to our efforts to attract
12
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 $2.4 million, or 1.30% of total loans, at
September 30, 2002 compared to $2.0 million, or 1.33% of total loans, at
December 31, 2001. At September 30, 2002 and December 31, 2001 we had no
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 a single
borrower, an insurance premium financer, on non-accrual. We subsequently
negotiated a settlement of these problem loans as of August 26, 2002. We added
$480 thousand to our loan loss reserve at June 30, 2002 to fully cover
anticipated losses associated with this loan and charged-off $450 thousand
during the third quarter when the cash settlement was received.
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 $23.3 million, or 28.9%, to $104.0 million at
September 30, 2002 compared to $80.7 million at December 31, 2001. During the
last three quarters of 2001 and first three 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 nine months of
2002, forecasted maturities and calls of $78.1 million in investment securities
13
and proceeds from sales of investment securities amounting to $15.7 million were
used to fund loan growth amounting to $33.5 million as loan demand increased and
we utilized excess liquidity with additional purchases of investment securities
of $116.2 million.
During the third quarter of 2002, all investment securities classified as
Held-to-Maturity were reclassified as Available-for-sale. At the time of
transfer, the aggregate market value and book value were $9.5 million.
Concurrently, a security with a book vale of $3.0 million was sold and a
realized gain on sale of $53 thousand was recorded.
At September 30, 2002, investment securities of $104.0 million, or 100.0% of the
total investment securities portfolio, were classified as available-for-sale. We
had no investment securities classified as held-to-maturity or as trading
securities. The investment portfolio is comprised primarily of U.S. Government
and agency securities with maturities of five 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 $46.9
million, or 21.2%, to $268.0 million at September 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, savings
accounts, money market and NOW accounts increased by $35.8 million, while higher
costing certificates of deposit decreased by $11.1 million.
Average total deposits increased by $57.3 million, or 31.9%, to $237.1 million
for the nine months ended September 30, 2002 compared to the 2001 full year
average of $179.8 million. Changes in the deposit mix averages for the nine
months ended September 30, 2002 compared to the 2001 full year averages include
a $28.3 million, or 55.5%, increase in savings deposits; a $0.5 million, or
2.6%, increase in NOW account deposits; a $19.5 million, or 29.4%, increase in
time deposits; a $0.8 million, or 12.3%, increase in money market deposits; and
a $8.2 million, or 22.6%, 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 $87.4 million at September 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
14
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 4.2% and
3.8% of our total assets at September 30, 2002 and December 31, 2001,
respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, our primary
source of funds at September 30, 2002 was increased targeted deposit products,
proceeds from maturities, calls and sales of investment securities, and to a
lesser extent, short-term borrowed funds. Deposit increases amounted to $46.9
million for the nine months ended September 30, 2002 and proceeds from
maturities, calls and sales of investment securities amounted to $93.8 million.
These sources of funds were augmented with an increase of $11.7 million in
short-term borrowings as of September 30, 2002. During the first nine 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 $33.5 million and securities purchases amounting to
$116.2 million.
We also have several additional sources of liquidity, including the
available-for-sale investment securities portfolio, which at September 30, 2002
amounted to $104.0 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 September 30, 2002, we had $13.3 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 $1.7 million at September 30, 2002 compared to
December 31, 2001. The changes in stockholders' equity during the nine months
ended September 30, 2002 were comprised of an increase from net income of $1.4
million and an increase of $273 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 $8 thousand of cash in lieu of fractional
shares associated with our second quarter 5% stock dividend and our third
quarter 3 for 2 stock split.
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 September 30, 2002 as well as the regulatory
required minimum and "well capitalized" capital ratios:
15
September 30, 2002 Regulatory Requirement
------------------ ----------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
Risk-based Capital:
Tier I capital ratio........... 10.56% 10.57% 4.00% 6.00%
Total capital ratio............ 11.68% 11.69% 8.00% 10.00%
Leverage ratio.................. 7.77% 7.77% 3.00%-5.00% 5.00% or greater
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 nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001
Net Income
- ----------
For the nine months ended September 30, 2002, we earned $1.4 million compared to
$1.1 million in net income for the same period last year. Basic and diluted net
income per share for the nine months ended September 30, 2002 was $0.45 and
$0.43, respectively, compared to basic and diluted net income per share of $0.33
for the same prior year period. The increase in net income was primarily due to
a $1.6 million, or 26.4%, increase in net interest income and a $518 thousand,
or 50.6%, increase in non-interest income, and was partially offset by an
increase in loan loss provision of $499 thousand, or 146.3%, an increase in
non-interest expense of $1.1 million, or 20.3%, and increased income tax expense
of $220 thousand, or 36.6%.
Net Interest Income
- -------------------
Net interest income increased $1.6 million, or 26.4%, to $7.9 million for the
nine months ended September 30, 2002 from $6.2 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $1.8 million as average interest earning assets, net of
average interest bearing liabilities, increased by $6.8 million, or 15.1%, for
the first nine 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 $148 thousand.
16
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the nine months ended September 30, 2002 decreased
to 4.20% compared to 4.57% for the same prior year period. The decrease in net
interest margin of 37 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 158.0% to
$85.9 million from $33.3 million. Excess liquidity was utilized in lower
yielding short-term investment securities as an alternative due to lower loan
funding needs. The changes in net interest margin resulted primarily from
implementation of asset/liability management strategies as the Federal Reserve
Bank reduced the target funds rate to 1.75% as of September 30, 2002 and further
reduced the target funds rate to 1.25% on November 6, 2002.
Interest income increased $1.2 million, or 11.5%, to $11.7 million for the nine
months ended September 30, 2002 compared to $10.5 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 $2.4 million in investment securities and was offset by a
reduction in Federal funds sold income of $468 thousand, as our growth resulted
in an increase in average earning assets of $68.2 million, or 37.3%, to $250.9
million for the nine months ended September 30, 2002 compared to $182.7 million
for the same period in 2001.
In addition to the volume related net increase amounting to $3.7 million, total
interest income decreased by $2.5 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 nine months of 2002 decreased $434 thousand, or
10.2%, 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 $2.3 million of the expense decrease, and was partially
offset by $1.9 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 September 30, 2002 compared
to the quarter ended September 30, 2001 and the nine months ended September 30,
2002 compared to the same prior year period.
17
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
September 30, 2002 September 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 ............................ $ 1,209 $ 7 2.30% $ 3,564 $ 34 3.78%
Investment Securities ......................... 94,586 946 4.00% 47,311 651 5.50%
Loans (net of unearned income) (1) (2) ........ 175,685 3,156 7.13% 143,916 2,948 8.13%
--------- --------- --------- ---------
Total Interest Earning Assets ........ 271,480 4,109 6.00% 194,791 3,633 7.40%
--------- --------- --------- ---------
Non-Interest Earning Assets:
Loan Loss Reserve ............................. (2,514) (1,852)
All Other Assets .............................. 18,406 15,738
--------- ---------
Total Assets ......................... $ 287,372 $ 208,677
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits .................................. $ 22,584 60 1.05% $ 22,089 71 1.28%
Savings Deposits .............................. 87,104 436 1.99% 51,565 354 2.72%
Money Market Deposits ......................... 7,777 43 2.19% 4,505 34 2.99%
Time Deposits ................................. 93,036 751 3.20% 68,533 894 5.18%
Short-term Borrowings ......................... 7,370 35 1.88% 1,145 10 3.46%
--------- --------- --------- ---------
Total Interest Bearing Liabilities ... 217,871 1,325 2.41% 147,837 1,363 3.66%
--------- --------- --------- ---------
Non-Interest Bearing Liabilities:
Demand Deposits ............................... 46,432 38,544
Other Liabilities ............................. 521 1,879
--------- ---------
Total Non-Interest Bearing Liabilities 46,953 40,423
--------- ---------
Stockholders' Equity .................................. 22,548 20,417
--------- ---------
Total Liabilities and Stockholders'
Equity ............................... $ 287,372 $ 208,677
========= =========
NET INTEREST INCOME ................................... $ 2,784 $ 2,270
========= =========
NET INTEREST SPREAD (3) ............................... 3.59% 3.74%
NET INTEREST MARGIN (4) ............................... 4.07% 4.62%
(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 $1.5 million for the quarter ended September 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
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
September 30, 2002 September 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 ............................ $ 804 $ 12 2.00% $ 14,087 $ 496 4.71%
Investment Securities ......................... 85,856 2,871 4.46% 33,257 1,490 5.97%
Loans (net of unearned income) (1) (2) ........ 164,284 8,837 7.19% 135,376 8,521 8.42%
--------- -------- --------- --------- ----
Total Interest Earning Assets ........ 250,944 11,720 6.24% 182,720 10,507 7.69%
--------- -------- --------- --------- ----
Non-Interest Earning Assets:
Loan Loss Reserve ............................. (2,200) (1,751)
All Other Assets .............................. 18,039 13,938
--------- ---------
Total Assets ......................... $ 266,783 $ 194,907
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits .................................. $ 20,056 152 1.01% $ 18,903 201 1.42%
Savings Deposits .............................. 79,298 1,198 2.02% 48,937 1,142 3.12%
Money Market Deposits ......................... 7,320 122 2.23% 7,068 190 3.59%
Time Deposits ................................. 85,869 2,266 3.53% 62,402 2,723 5.83%
Short-term Borrowings ......................... 6,625 94 1.90% 386 10 3.46%
--------- --------- --------- ---------
Total Interest Bearing Liabilities ... 199,168 3,832 2.57% 137,696 4,266 4.14%
--------- --------- --------- ---------
Non-Interest Bearing Liabilities:
Demand Deposits ............................... 44,529 34,973
Other Liabilities ............................. 1,106 2,212
---------
Total Non-Interest Bearing Liabilities 45,635 37,185
---------
Stockholders' Equity .................................. 21,980 20,026
--------- ---------
Total Liabilities and Stockholders'
Equity ............................... $ 266,783 $ 194,907
========= =========
NET INTEREST INCOME ................................... $ 7,888 $ 6,241
========= =========
NET INTEREST SPREAD (3) ............................... 3.67% 3.55%
NET INTEREST MARGIN (4) ............................... 4.20% 4.57%
(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 $716 thousand for the nine months ended September 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.
19
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 2001 September 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 ............ $ (22) $ (5) $ (27) $ (468) $ (16) $ (484)
Investment Securities ......... 651 (356) 295 2,357 (976) 1,381
Loans (net of unearned income) 651 (443) 208 1,820 (1,504) 316
------- ------- ------- ------- ------- -------
Total Interest Income 1,280 (804) 476 3,709 (2,496) 1,213
------- ------- ------- ------- ------- -------
Interest Paid On:
NOW Deposits .................. 2 (13) (11) 12 (61) (49)
Savings Deposits .............. 244 (162) 82 709 (653) 56
Money Market Deposits ......... 25 (16) 9 7 (75) (68)
Time Deposits ................. 320 (463) (143) 1,024 (1,481) (457)
Short-term Borrowings ......... 54 (29) 25 162 (78) 84
------- ------- ------- ------- ------- -------
Total Interest Expense 645 (683) (38) 1,914 (2,348) (434)
------- ------- ------- ------- ------- -------
Net Interest Income .. $ 635 $ (121) $ 514 $ 1,795 $ (148) $ 1,647
======= ======= ======= ======= ======= =======
20
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $840 thousand for the first nine
months of 2002 compared to a provision of $341 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 fully cover
anticipated losses associated with these loans and charged-off $450 thousand
during the third quarter when the cash settlement was received. The allowance
for loan losses totaled $2.4 million, or 1.30% of total loans, at September 30,
2002.
Non-Interest Income
- -------------------
Total non-interest income was $1.5 million for the first nine months of 2002
compared to $1.0 million for the first nine months of 2001, an increase of $518
thousand, or 50.6%. The increase was attributable primarily to $554 thousand in
realized gain on sales of investment securities during the third quarter of 2002
compared to no realized gains as of September 30, 2001. The security gains were
realized as a result of our Asset/Liability Committee recommendation to shorten
the duration of our investment security portfolio. Part of the strategy
implementation required that during the third quarter of 2002, all investment
securities classified as Held-to-Maturity were reclassified as
Available-for-Sale. At the time of transfer, the aggregate market value and book
value were $9.5 million. Concurrently, a security with a book value of $3.0
million was sold and a realized gain on sale of $53 thousand was recorded. Other
non-interest income category changes include a decrease in non-interest service
fees on loans, which amounted to $295 thousand for the nine months ended
September 30, 2002 compared to $518 thousand earned for the same prior year
period, a decrease of $223 thousand, or 43.1%. This decrease in non-interest
service fees on loans resulted primarily from reduced activity in loan
participations. All other non-interest income increased by $187 thousand, or
37.0%, to $692 thousand, and resulted from the continued growth of the Company.
Non-Interest Expense
- --------------------
Total non-interest expense amounted to $6.3 million for the nine months ended
September 30, 2002, an increase of $1.1 million, or 20.3%, 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 $526 thousand, or 21.3%, and reflected increases in the number
of employees from 86 full-time equivalents for the period ended September 30,
2001 to 96 full-time equivalents for the period ended September 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 $343 thousand, or 39.8%, for the
first nine 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 $200 thousand, or 10.3%, for the first nine months of
2002 compared to the first nine 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
21
systems conversion which was successfully completed during July, 2001, and 2002
expenses were increased by $70 thousand due to the disposal of non-useable fixed
assets.
Income Tax Expense
- ------------------
For the nine months ended September 30, 2002, we recognized $821 thousand in
income tax expense compared to $601 thousand in income tax expense during the
first nine months of 2001. The effective tax rate for the first nine months of
2002 was 36.4% compared to 36.3% 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 nine months ended
September 30, 2002, our ROA was 0.72% 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 increased to 8.71% for the nine months ended September 30, 2002, compared to
7.45% for the year ended December 31, 2001. Both performance measures were
effected by non-recurring transactions resulting from the addition of $480
thousand to our loan loss reserve at June 30, 2002 to fully cover losses
associated with a series of credit facilities to a single borrower and from
gains on sale of securities amounting to $554 thousand as the duration of the
investment security portfolio was shortened.
RESULTS OF OPERATIONS for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001
Net Income
- ----------
For the three months ended September 30, 2002, we earned $728 thousand compared
to $374 thousand in net income for the same period last year, an increase of
$354 thousand, or 94.7%. Basic and diluted net income per share for the three
months ended September 30, 2002 was $0.23 and $0.22, respectively, compared to
basic and diluted net income per share of $0.12 for the same prior year quarter.
The increase in net income was primarily due to a $514 thousand, or 22.6%,
increase in net interest income, a $557 thousand, or 192.7% increase in
non-interest income, and was further effected by an increase in loan loss
provision of $60 thousand, or 63.2%, increased non-interest expenses of $426
thousand, or 22.7%, and increased income tax expense of $231 thousand, or
107.9%.
Net Interest Income
- -------------------
Net interest income increased $514 thousand, or 22.6%, to $2.8 million for the
three months ended September 30, 2002 from $2.3 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $635 thousand as average interest earning assets, net of
average interest bearing liabilities, increased by $6.6 million, or 14.0%, for
the third quarter of 2002 compared to the same prior year period. The
22
volume related increases in net interest income were partially offset by rate
related decreases in net interest income amounting to $121 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the three months ended September 30, 2002 decreased
to 4.07% compared to 4.62% for the same prior year period. The decrease in net
interest margin of 55 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 100.0% to
$94.6 million from $47.3 million. The decrease in net interest margin resulted
primarily from implementation of asset/liability management leveraging
strategies in order to increase net income as the Federal Reserve Bank reduced
the target funds rate to 1.75% and quality loan demand lagged deposit growth.
Interest income increased $476 thousand, or 13.1%, to $4.1 million for the three
months ended September 30, 2002 compared to $3.6 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 $651 thousand and volume related
increases in income of $651 thousand in investment securities and was offset by
a reduction in Federal funds sold income of $22 thousand, as our growth resulted
in an increase in average earning assets of $76.7 million, or 39.4%, to $271.5
million for the quarter ended September 30, 2002 compared to $194.8 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 $804 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 third quarter of 2002 decreased $38 thousand, or 2.8%,
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 $683 thousand of the expense decrease, and was partially offset by
$645 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 $155 thousand for the third quarter
of 2002 compared to a provision of $95 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
no non-accrual loans at September 30, 2002. The allowance for loan losses
totaled $2.4 million, or 1.30% of total loans, at September 30, 2002.
Non-Interest Income
- -------------------
Total non-interest income was $846 thousand for the third quarter of 2002
compared to $289 thousand for the third quarter of 2001, an increase of $557
thousand, or 192.7%. The increase was attributable primarily to third quarter
2002 realized gain on sale of investment securities of $554 thousand. These
security gains resulted from implementation of Asset/Liability management
strategies as the Company restructured its portfolio to shorten maturities.
Additionally, non-interest service fees on loans amounted to $63 thousand for
the three months ended September 30, 2002 compared to $117 thousand earned for
the same prior year period, a decrease of $54 thousand, or 46.2%. This decrease
in non-interest service fees on loans resulted primarily from reduced activity
in loan participations. All other non-
23
interest income increased by $57 thousand, or 33.1%, to $229 thousand, and
resulted from the continued growth of the Company.
Non-Interest Expense
- --------------------
Total non-interest expense amounted to $2.3 million for the quarter ended
September 30, 2002, an increase of $426 thousand, or 22.7%, 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 $205 thousand, or 23.5%, and reflected increases in the number
of employees from 86 full-time equivalents for the period ended September 30,
2001 to 96 full-time equivalents for the period ended September 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 $98 thousand, or 30.1%, for the
third 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 $123 thousand, or 18.2%, for the third quarter of 2002
compared to the third quarter of 2001. The increase was attributable to
increased other expenses resulting from our continued growth. In addition, 2002
expenses were increased by $41 thousand due to disposals of non-useable fixed
assets.
Income Tax Expense
- ------------------
For the three months ended September 30, 2002, we recognized $445 thousand in
income tax expense compared to $214 thousand in income tax expense during the
third quarter of 2001. The effective tax rate for the third quarter of 2002 was
37.9% compared to 36.4% 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
September 30, 2002, our ROA was 1.01% 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 increased to 12.91% for the quarter ended September 30, 2002, compared to
7.45% for the year ended December 31, 2001. The increase in both performance
measures resulted primarily from the gains on sales of investment securities
during the third quarter.
24
PART I.
- -------
Item 3. CONTROLS AND PROCEDURES
-----------------------
(a) Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the
Company's Chief Executive Officer, Chief Lending Officer, Chief
Information Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer,
Chief Lending Officer, Chief Information Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
(b) Changes in internal controls
----------------------------
Not Applicable.
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
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - 99 - section 906 Certification
(b) Reports on Form 8-K
The Registrant filed no Form 8-K's during the third
quarter 2002.
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: November 12, 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
CERTIFICATION
I, Robert D. O'Donnell, President & CEO of Community Bancorp of New Jersey,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Community Bancorp
of New Jersey;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Robert D. O'Donnell
----------------- ------------------------------------
Robert D. O'Donnell, President & CEO
27
CERTIFICATION
I, Michael Bis, Vice President & CFO of Community Bancorp of New Jersey, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of Community Bancorp
of New Jersey;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Michael Bis
------------------ --------------------------------------------
Michael Bis, Senior Vice President & CEO
28