U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(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, 2003
|_| Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from ___________________ to ___________________
Commission file number 000-26587
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 Identification No.)
incorporation or organization)
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.).
Yes |_| No |X|
Common Stock, No Par Value 3,385,490 shares outstanding as of November 14, 2003
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002 3
Consolidated Condensed Statements of Income for the three and nine
months ended September 30, 2003 and 2002 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity at September 30, 2003 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements (Unaudited) 7 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Exhibit 31.1 - Section302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32 - Section 906 Certification
SIGNATURES 29
2
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
2003 December 31,
(Unaudited) 2002
------------- ---------
ASSETS (Dollars in thousands)
Cash and due from banks ............................................................ $ 9,981 $ 9,424
Investment securities available-for-sale ........................................... 210,622 131,676
Loans receivable ................................................................... 199,419 182,967
Allowance for loan loss ............................................................ (2,619) (2,406)
- ------------------------------------------------------------------------------------ --------- ---------
Net loans receivable 196,800 180,561
- ------------------------------------------------------------------------------------ --------- ---------
Premises and equipment, net ........................................................ 6,508 6,280
Accrued interest receivable ........................................................ 1,601 2,193
Other assets ....................................................................... 7,452 2,085
- ------------------------------------------------------------------------------------ --------- ---------
Total Assets $ 432,964 $ 332,219
- ------------------------------------------------------------------------------------ ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand ...................................................... $ 65,284 $ 51,971
Interest bearing - NOW ........................................................... 30,029 23,455
Savings and money market ......................................................... 134,117 100,784
Certificates of deposit, under $100,000 .......................................... 70,063 76,815
Certificates of deposit, $100,000 and over ....................................... 36,522 38,604
- ------------------------------------------------------------------------------------ --------- ---------
Total deposits 336,015 291,629
- ------------------------------------------------------------------------------------ --------- ---------
Short-term borrowings .............................................................. 66,600 11,500
Accrued interest payable ........................................................... 82 38
Other liabilities .................................................................. 484 454
Guaranteed preferred beneficial interest in the Company's
subordinated debt ................................................................ 5,000 5,000
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 408,181 308,621
- ------------------------------------------------------------------------------------ --------- ---------
Stockholders' equity
Common stock - authorized 10,000,000 shares of
no par value; issued and outstanding, net of treasury
shares, 3,385,490 at September 30, 2003 and 3,172,945
at December 31, 2002 .......................................................... 29,420 25,512
Accumulated deficit ............................................................. (3,672) (2,239)
Accumulated other comprehensive income .......................................... (602) 688
Treasury stock, 22,357 shares, at cost .......................................... (363) (363)
- ------------------------------------------------------------------------------------ --------- ---------
Total stockholders' equity 24,783 23,598
- ------------------------------------------------------------------------------------ --------- ---------
Total Liabilities and Stockholder's Equity $ 432,964 $ 332,219
- ------------------------------------------------------------------------------------ ========= =========
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,
------------------- ---------------------
2003 2002 2003 2002
------------------- ---------------------
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees .......................... $ 3,214 $ 3,156 $ 9,557 $ 8,837
Federal funds sold ............................. 3 7 12 12
Investment securities .......................... 1,247 946 3,537 2,871
- --------------------------------------------------- ------- ------- ------- -------
Total interest income 4,464 4,109 13,106 11,720
- --------------------------------------------------- ------- ------- ------- -------
INTEREST EXPENSE
Interest bearing - NOW ......................... 54 60 168 152
Savings and money market ....................... 449 479 1,385 1,320
Certificates of deposit ........................ 671 751 2,350 2,266
Short-term borrowings .......................... 199 35 270 94
Long-term borrowings ........................... 59 -- 181 --
- --------------------------------------------------- ------- ------- ------- -------
Total interest expense 1,432 1,325 4,354 3,832
- --------------------------------------------------- ------- ------- ------- -------
Net interest income 3,032 2,784 8,752 7,888
Provision for loan losses ......................... 41 155 214 840
- --------------------------------------------------- ------- ------- ------- -------
Net interest income after provision
for loan losses 2,991 2,629 8,538 7,048
- --------------------------------------------------- ------- ------- ------- -------
Non-interest income:
Service fees on deposit accounts ............... 164 117 436 322
Service fees on loans .......................... 110 63 291 295
Gains on sales of investment securities ........ 34 554 408 554
Other fees and commissions ..................... 163 112 431 370
- --------------------------------------------------- ------- ------- ------- -------
Total non-interest income 471 846 1,566 1,541
- --------------------------------------------------- ------- ------- ------- -------
Non-interest expense:
Salaries and wages ............................. 976 946 2,905 2,578
Employee benefits .............................. 158 132 497 415
Occupancy expense .............................. 212 208 664 552
Depreciation - occupancy, furniture & equipment 243 216 715 653
Other .......................................... 817 800 2,351 2,138
- --------------------------------------------------- ------- ------- ------- -------
Total non-interest expense 2,406 2,302 7,132 6,336
- --------------------------------------------------- ------- ------- ------- -------
Income before income taxes 1,056 1,173 2,972 2,253
Income tax expense ................................ 363 445 1,062 821
- --------------------------------------------------- ------- ------- ------- -------
Net Income $ 693 $ 728 $ 1,910 $ 1,432
- --------------------------------------------------- ======= ======= ======= =======
Net income per common share:
Basic .......................................... $ 0.21 $ 0.22 $ 0.57 $ 0.43
Diluted ........................................ $ 0.19 $ 0.21 $ 0.54 $ 0.41
Weighted average shares outstanding (in thousands):
Basic .......................................... 3,381 3,332 3,351 3,332
Diluted ........................................ 3,601 3,479 3,550 3,481
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 (Loss) Income Equity
-------- -------- ------------ ------------- -------------- -------------
(Dollars in thousands)
Balance December 31, 2002.....................$ 25,512 $ (363) $ (2,239) $ 688 $ 23,598
5% stock dividend (158,560 shares)............ 3,338 -- (3,338) -- --
Cash in lieu of fractional shares............. -- -- (5) -- (5)
Options exercised............................. 446 -- -- -- 446
Tax benefit from exercised non-qualified
stock options........................... 124 -- -- -- 124
Comprehensive income (loss):
Net income.............................. -- -- $ 1,910 -- $ 1,910 1,910
Change in unrealized gains/
losses on securities, net........... -- -- (1,290) (1,290) (1,290)
-------------- -------------
Total comprehensive income.................... -- -- -- -- $ 620
-------- -------- ------------ ------------- --------------
Balance, September 30, 2003
(unaudited).............................$ 29,420 $ (363) $ (3,672) $ (602) $ 24,783
======== ======== ============ ============= =============
(1) Includes accumulated charges for stock dividends of $9,168 and $5,825 at
September 30, 2003 and December 31, 2002, respectively.
5
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
--------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income ................................................ $ 1,910 $ 1,432
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 715 653
Provision for loan losses ........................ 214 840
Accretion of investment discount ................. (13) (19)
Amortization of investment premium ............... 691 166
Gain on sale of investment securities ............ (408) (554)
Decrease (increase) in accrued interest receivable 592 (547)
Decrease in other assets ......................... 676 97
Increase (decrease) in accrued interest payable .. 44 (1,247)
Increase in other liabilities .................... 30 543
- ----------------------------------------------------------------- --------- ---------
Net cash provided by operating activities 4,451 1,364
- ----------------------------------------------------------------- --------- ---------
Cash flows from investing activities:
Purchases of investment securities available-for-sale ..... (348,332) (116,196)
Proceeds from sales of investment securities .............. 84,355 15,704
Proceeds from maturities and calls of investment securities 181,552 78,075
Net increase in loans ..................................... (16,453) (33,502)
Purchase of bank owned life insurance ..................... (4,000) --
Purchases of premises and equipment ....................... (943) (564)
- ----------------------------------------------------------------- --------- ---------
Net cash used in investing activities (103,821) (56,483)
- ----------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ...... 53,220 35,794
Net increase (decrease) in certificates of deposit ........ (8,834) 11,091
Proceeds from exercise of stock options ................... 446 --
Stock dividend - cash paid in lieu of fractional shares ... (5) (8)
Net Increase in short-term borrowings .............. 55,100 11,650
- ----------------------------------------------------------------- --------- ---------
Net cash provided by financing activities 99,927 58,527
- ----------------------------------------------------------------- --------- ---------
Net increase in cash and cash equivalents 557 3,408
Cash and cash equivalents as of beginning of year 9,424 9,342
- ----------------------------------------------------------------- --------- ---------
Cash and cash equivalents as of end of period $ 9,981 $ 12,750
- ----------------------------------------------------------------- ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .................. $ 4,310 $ 5,079
Cash paid during the period for income taxes .............. $ 1,183 $ 914
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, 2002. The results for the three months and
nine months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003.
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. 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 16, 2003 the Company's Board of Directors approved a 5% stock dividend
payable May 15, 2003 to shareholders of record as of April 28, 2003. Weighted
average shares outstanding and earnings per share were retroactively adjusted to
reflect the stock dividend.
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
Off Balance Sheet Guarantees
The Company adopted FASB Interpretation 45 (FIN 45) Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certainnon-financial contractual obligations.
The Company previously did not record an initial liability, other than the fees
received for these letters of credit, when guaranteeing obligations unless it
became probable that the Company would have to perform under the guarantee. FIN
45 applies prospectively to letters of credit the Company issues or modifies
subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit as the fee
received from the customer. The maximum potential undiscounted amount of future
payments of these letters of credit as of September 30, 2003 is $4.8 million and
they expire through March 2005. Amounts due under these letters of credit would
be reduced by any proceeds that the Company would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
7
Variable Interest Entities
In January, 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both.
The Company has also evaluated the impact of FIN 46 on variable interest
entities consolidated by the Company prior to the issuance of FIN 46. Management
has determined that CBNJ Capital Trust I qualifies as a variable interest entity
under FIN 46. CBNJ Capital Trust I issued mandatorily redeemable preferred stock
to investors and loaned the proceeds to the Company. CBNJ Capital Trust I holds,
as its sole asset, subordinated debentures issued by the Company in 2002. The
timing and amount of payments on the subordinated debentures are the same as the
timing and amount of payments by CBNJ Capital Trust I on the mandatorily
redeemable preferred stock. CBNJ Capital Trust I is currently included in the
Company's consolidated balance sheet and statements of income. Management
believes that CBNJ Capital Trust I should continue to be included in the
Company's consolidated financial statements after the effective date of FIN 46.
However, as additional interpretations related to entities similar to CBNJ
Capital Trust I become available, management will reevaluate its conclusion that
CBNJ Capital Trust I should be included in the consolidated financial statements
and its potential impact to its Tier I capital calculation under such
interpretations. The Company has no other variable interest entities, therefore
the adoption of FIN 46 did not have a material impact on the Company's financial
position or results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt
Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the evidence
of deterioration of credit quality since origination acquired by completion of a
transfer for which it is probable at acquisition, that the Company will be
unable to collect all contractually required payments receivable. SOP 03-3
requires that the Company recognize the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. Management is
currently evaluating the provisions of SOP 03-3.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents and includes the conclusions
reached by the FASB on certain FASB Staff Implementation Issues. Statement 149
also amends SFAS No. 133 to require a lender to account for loan commitments
related to mortgage loans that will be held for sale as derivatives. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. The adoption of SFAS No. 149 did not have a
material impact on the Company's financial position or results of operations.
8
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debt as a liability. As a result, the adoption of SFAS
No. 150 did not have a material impact on the Company's financial position or
results of operations.
9
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, 2003 and December 31, 2002 (Dollars in thousands).
September 30, 2003 (Unaudited)
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available-for-sale:
U.S. Government and agency securities ... $204,110 $ -- $ 963 $203,147
Other securities ........................ 7,475 -- -- 7,475
-------- ---- -------- --------
$211,585 $ -- $ 963 $210,622
======== ==== ======== ========
December 31, 2002
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available-for-sale:
U.S. Government and agency securities ... $128,937 $1,109 $ -- $130,046
Other securities ........................ 1,630 -- -- 1,630
-------- ------ -------- --------
$130,567 $1,109 $ -- $131,676
======== ====== ======== ========
The following table sets forth as of September 30, 2003 the maturity
distribution of the Company's investment portfolio (Dollars in thousands).
Available-for-sale
--------------------------
Amortized Fair
Cost Value
--------- --------
Due in one year or less ................ $ -- $ --
Due after one year through five years .. 200,409 199,461
Due after five years through ten years . 5,201 5,186
Due after ten years .................... 5,975 5,975
-------- --------
$211,585 $210,622
======== ========
10
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, 2003 and December 31, 2002 (Dollars in thousands).
Loan Portfolio By Type of Loan
--------------------------------------------------------------
September 30, 2003
(Unaudited) December 31, 2002
-------------------------- --------------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and industrial loans .. $ 43,144 21.64% $ 46,998 25.69%
Commercial mortgage loans ........ 99,747 50.02% 94,067 51.41%
Residential mortgages ............ 2,194 1.10% 5,829 3.19%
Construction loans ............... 30,095 15.09% 13,295 7.26%
Consumer loans ................... 24,210 12.14% 22,193 12.13%
Other loans ...................... 29 0.01% 585 0.32%
-------- ------ -------- ------
$199,419 100.00% $182,967 100.00%
======== ====== ======== ======
The following table represents the activity in the allowance for loan losses for
the nine month periods ended September 30, 2003 and 2002 and the year ended
December 31, 2002 (Dollars in thousands).
Allowance For Loan Losses
---------------------------------------
Nine Months Ended
September 30,
(Unaudited) Year Ended
-------------------- December 31,
2003 2002 2002
------- ------- -------
Balance - beginning of period ........... $ 2,406 $ 1,964 $ 1,964
Recoveries .............................. 1 1 1
Charge-offs ............................. (2) (450) (452)
Provision for loan losses ............... 214 840 893
------- ------- -------
Balance - end of period ................. $ 2,619 $ 2,355 $ 2,406
======= ======= =======
Balance of Allowance at period-end as a %
of loans at period-end .............. 1.31% 1.30% 1.31%
======= ======= =======
11
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE G - STOCK-BASED COMPENSATION
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue
accounting for employee stock options and similar equity instruments under APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that continue
to account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair-value
based method of accounting defined in SFAS No. 123 had been applied.
At September 30, 2003, the Company had six stock-based compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Stock-based employee compensation costs are not
reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, to stock-based employee compensation (in thousands, except per share
amounts).
Nine Months Ended
September 30,
(unaudited)
------------------------------
2003 2002
---------- ------------
Net income, as reported $ 1,910 $ 1,432
Less stock-based compensation costs
determined under fair value
based method for all awards 94 135
---------- ------------
Net income, pro forma $ 1,816 $ 1,297
Earnings per share - basic as reported $ 0.57 $ 0.43
Earnings per share - basic proforma 0.54 0.39
Earnings per share - diluted as reported $ 0.54 $ 0.41
Earnings per share - diluted proforma 0.51 $ 0.37
12
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 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
13
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, 2003 increased by $100.7 million, or 30.3%, to
$433.0 million compared to $332.2 million at December 31, 2002. Total assets
averaged $379.1 million in the first nine months of 2003, a $99.2 million, or
35.4%, increase from the 2002 full year average of $279.9 million. Average loans
increased $25.0 million, or14.8 %, to $194.3 million in the first nine months of
2003, from the 2002 full year average of $169.3 million. Average investment
securities increased by $70.3 million, or 74.9%, to $164.2 million; average
Federal funds sold increased by $1.0 million, or173.4 %, to $1.6 million; the
average of all other assets increased by $3.0 million, or 16.6 %, to $21.5
million; and the loan loss reserve average increased $274 thousand, or 12.2%, to
$2.5 million during the first nine months of 2003 compared to the full year 2002
averages.
These increases in average assets were funded primarily by a $71.1 million, or
28.7%, increase in average deposits, as average deposits for the first nine
months of 2003 increased to $318.5 million from the full year 2002 average of
$247.4 million. Increases in average assets were further funded by average
short-term borrowings, which increased $21.9 million, or 242.4%, to $30.9
million for the first nine months of 2003 from the full year 2002 average of
$9.0 million, and by Trust preferred securities, which increased $4.8 million as
a result of the $5.0 million Trust preferred offering in December 2002.
During the third quarter of 2003, the Company implemented a leveraging strategy
to take advantage of current low interest rates and enhance income from
investment securities. During the quarter we purchased $137.4 million in
investment securities all of which were classified as available for sale, using
deposit inflows in excess of loan demand, short term FHLB borrowings and funds
from securities maturities, prepayments and calls.
Lending Activity
Total loans at September 30, 2003 were $199.4 million, a 9.0%, or $16.5 million
increase from December 31, 2002. The loan portfolio consists primarily of loans
secured by real estate, and, to a lesser extent, commercial, construction and
consumer loans. Changes in the composition of the loan portfolio during the
comparative periods included increases of $5.7 million in commercial mortgage
loans, $16.8 million in construction loans, and $2.0 million in consumer loans
and were offset by reductions of $3.9 million in commercial and industrial
loans, $3.6 million in residential mortgage loans and $556 thousand in other
loans.
The 9.0% increase in loans at September 30, 2003 compared to December 31, 2002
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.
14
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
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
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 1.31% of total loans, at
September 30, 2003 compared to $2.4 million, or 1.31% of total loans, at
December 31, 2002. At September 30, 2003 and December 31, 2002 we had no
non-accrual loans. The increase in the balance of the allowance for loan losses
is the result of our review of several factors, including our assessment of
economic conditions, credit quality, and other loss factors that may be inherent
in the existing loan portfolio and the continued growth of our loan portfolio.
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 continual 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. The allowance is
increased by provisions charged to expense and is reduced by net charge-offs.
Net charge-offs represent 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 $78.9 million, or 60.0%, to $210.6 million at
September 30, 2003 compared to $131.7 million at December 31, 2002. During the
first nine months of 2003, we utilized our liquidity in excess of loan demand to
fund additional purchases of investment securities available-for-sale. In
addition, during the third quarter of 2003, the Company engaged in a leveraging
strategy pursuant to which $47.2 million in FHLB advances were used to purchase
investment securities. This strategy resulted from Asset/Liability management
considerations arising from our analysis of several economic scenarios including
reduced loan growth and deposit repricing opportunities. During the first nine
months of 2003, maturities and
15
calls of $181.6 million in investment securities and proceeds from sales of
investment securities amounting to $84.4 million were used to fund loan growth
of $16.5 million. We utilized excess liquidity to fund additional purchases of
investment securities of $348.3 million as we changed the maturity distribution
of the investment securities portfolio.
At September 30, 2003, 100% of the total investment securities portfolio, was
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 stated maturities of
under five years 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 $44.4
million, or 15.2%, to $336.0 million at September 30, 2003 compared to $291.6
million at December 31, 2002. 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 $53.2 million, while higher
costing certificates of deposit decreased by $8.8 million.
Average total deposits increased by $71.1 million, or 28.7%, to $318.5 million
for the nine months ended September 30, 2003 compared to the 2002 full year
average of $247.4 million. Changes in the deposit mix averages for the nine
months ended September 30, 2003 compared to the 2002 full year averages include
a $25.8 million, or 31.3%, increase in savings deposits; a $3.6 million, or
17.1%, increase in NOW account deposits; a $26.3 million, or 29.0%, increase in
time deposits; a $2.8 million, or 38.5%, increase in money market deposits; and
a $12.5 million, or 27.2%, 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 and money market
deposits, which amounted to $134.1 million at September 30, 2003, 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 depositors 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
16
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 2.3% and 2.8% of our total
assets at September 30, 2003 and December 31, 2002, respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, our primary
sources of funds at September 30, 2003 were increased targeted deposit products,
proceeds from maturities, calls and sales of investment securities, and
short-term borrowed funds. Deposit increases amounted to $44.4 million for the
nine months ended September 30, 2003 and proceeds from maturities, calls and
sales of investment securities amounted to $265.9 million. These sources of
funds were augmented with an increase of $55.1 million in short-term borrowings
as of September 30, 2003. During the first nine months of 2003, we utilized
deposit growth, matured investment securities, and short-term borrowings as
funding sources for increased loans made to customers amounting to $16.5 million
and securities purchases amounting to $348.3 million.
We also have several additional sources of liquidity, including the
available-for-sale investment securities portfolio, which at September 30, 2003
amounted to $210.6 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 and term line of
$36.6 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, 2003, we had $66.6 million in short-term borrowings
with a weighted average interest rate of 1.12% and maturities of less than
thirty days.
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.
Contractual Obligations and Other Commitments
During 2003, the only significant change in the Company's contractual
obligations and other commitments from that reported in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Contractual
Obligations and Other Commitments" in the Company's Form 10-KSB for the year
ended December 31, 2002 is an increase in short term borrowings to $66.6 million
at September 30, 2003.
Capital Resources
Stockholder's equity increased by $1.2 million at September 30, 2003 compared to
December 31, 2002. The changes in stockholders' equity during the nine months
ended September 30, 2003 were comprised of the following increases: net income
of $1.9 million, $446 thousand from
17
exercised stock options and $124 thousand in tax benefits from exercised
non-qualified stock options. These increases were partially offset by a change
of $1.3 million in unrealized gains/losses, net of taxes, in the
available-for-sale investment securities portfolio from a net unrealized gain of
$688 thousand to a net unrealized loss of $602 thousand.
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, 2003 as well as the regulatory
required minimum and "well capitalized" capital ratios:
September 30, 2003 Regulatory Requirement
----------------------- ------------------------------
Company Bank Minimum "Well Capitalized"
------- ------ ------- ------------------
Risk-based Capital:
Tier I capital ratio ..... 11.67% 9.53% 4.00% 6.00%
Total capital ratio ...... 12.68% 10.54% 8.00% 10.00%
Leverage ratio ........... 7.06% 5.76% 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, 2003 compared to
the nine months ended September 30, 2002
Net Income
For the nine months ended September 30, 2003, we earned $1.9 million compared to
$1.4 million in net income for the same period last year. Basic and diluted net
income per share for the nine months ended September 30, 2003 was $0.57 and
$0.54, respectively, compared to basic and diluted net income per share of $0.43
and $0.41, respectively, for the same prior year period. The increase in net
income was primarily due to a $865 thousand, or 11.0%, increase in net interest
income and a decrease in the loan loss provision of $626 thousand. These
increases in net income were partially offset by an increase in non-interest
expense of $797 thousand, or 12.6%, and increased income tax expense of $241
thousand, or 29.4%.
18
Net Interest Income
Net interest income increased $864 thousand, or 11.0%, to $8.8 million for the
nine months ended September 30, 2003 from $7.9 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $2.4 million as average interest earning assets, net of
average interest bearing liabilities, increased by $12.6 million, or 24.3%, for
the first nine months of 2003 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 $1.5 million.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the nine months ended September 30, 2003 decreased
to 3.25% compared to 4.20% for the same prior year period. The decrease in net
interest margin of 95 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased $78.3
million to $164.2 million from $85.9 million. The increase in average investment
securities reflects both the deployment of liquidity in excess of loan demand
into short term investment securities and implementation of our leverage
strategy during the third quarter of 2003. 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 1.00% in June 2003.
Interest income increased $1.4 million, or 11.8%, to $13.1 million for the nine
months ended September 30, 2003 compared to $11.7 million for the same period in
2002. The improvement in interest income was primarily due to volume related
increases in income from the loan portfolio of $1.6 million and volume related
increases in income of $2.6 million in investment securities, as our growth
resulted in an increase in average earning assets of $109.2 million, or 43.5%,
to $360.1 million for the nine months ended September 30, 2003 compared to
$250.9 million for the same period in 2002.
Partially offsetting the volume related net increase of $4.2 million in total
interest income was a rate related decrease of $2.9 million as interest rates on
earning assets repriced to current lower yields compared to yields in the same
period in 2002.
Interest expense for the first nine months of 2003 increased $522 thousand, or
13.6%, compared to the same prior year period. The increase in interest expense
was due primarily to volume related increases in interest bearing liabilities of
$1.8 million, partially offset by rate related decreases of $1.3 million.
Interest bearing deposits accounted for $1.2 million of the rate related expense
decrease. The volume related increases in interest bearing liabilities and the
rate related decreases in interest bearing liabilities 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, 2003 compared
to the quarter ended September 30, 2002 and the nine months ended September 30,
2003 compared to the same prior year period.
19
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
----------------------------------- ----------------------------------
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 ............................. $ 1,495 $ 3 0.80% $ 1,209 $ 7 2.30%
Investment Securities .......................... 205,970 1,247 2.42% 94,586 946 4.00%
Loans (net of unearned income) (1) (2) ......... 200,055 3,214 6.37% 175,685 3,156 7.13%
--------- -------- --------- --------
Total Interest Earning Assets ........ 407,520 4,464 4.35% 271,480 4,109 6.00%
--------- -------- --------- --------
Non-Interest Earning Assets:
Loan Loss Reserve .............................. (2,600) (2,514)
All Other Assets ............................... 25,180 18,406
--------- ---------
Total Assets ......................... $ 430,100 $ 287,372
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ................................... $ 26,370 54 0.81% $ 22,584 60 1.05%
Savings Deposits ............................... 117,997 413 1.39% 87,104 436 1.99%
Money Market Deposits .......................... 10,411 36 1.37% 7,777 43 2.19%
Time Deposits .................................. 109,813 671 2.42% 93,036 751 3.20%
Trust preferred securities ..................... 5,000 59 4.68% -- -- 0.00%
Short-term Borrowings .......................... 70,399 199 1.12% 7,370 35 1.88%
--------- -------- --------- --------
Total Interest Bearing Liabilities ... 339,990 1,432 1.67% 217,871 1,325 2.41%
--------- -------- --------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ................................ 65,852 46,432
Other Liabilities .............................. 361 521
--------- ---------
Total Non-Interest Bearing Liabilities 66,213 46,953
--------- ---------
Stockholders' Equity ................................... 23,897 22,548
--------- ---------
Total Liabilities and Stockholders'
Equity ............................... $ 430,100 $ 287,372
========= =========
NET INTEREST INCOME .................................... $ 3,032 $ 2,784
======== ========
NET INTEREST SPREAD (3) ................................ 2.68% 3.59%
====== ======
NET INTEREST MARGIN (4) ................................ 2.95% 4.07%
====== ======
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average interest earning assets.
20
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
---------------------------------- ---------------------------------
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 ................................ $ 1,643 $ 12 0.98% $ 804 $ 12 2.00%
Investment Securities ............................. 164,190 3,537 2.87% 85,856 2,871 4.46%
Loans (net of unearned income) (1) (2) ............ 194,301 9,557 6.58% 164,284 8,837 7.19%
--------- --------- --------- --------
Total Interest Earning Assets ........... 360,134 13,106 4.87% 250,944 11,720 6.24%
--------- --------- --------- --------
Non-Interest Earning Assets:
Loan Loss Reserve ................................. (2,522) (2,200)
All Other Assets .................................. 21,451 18,039
--------- ---------
Total Assets ............................ $ 379,063 $ 266,783
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ...................................... $ 24,615 168 0.91% $ 20,056 152 1.01%
Savings Deposits .................................. 108,133 1,255 1.55% 79,298 1,198 2.02%
Money Market Deposits ............................. 10,082 130 1.72% 7,320 122 2.23%
Time Deposits ..................................... 117,067 2,350 2.68% 85,869 2,266 3.53%
Trust preferred securities ........................ 5,000 181 4.84% -- -- 0.00%
Short-term Borrowings ............................. 30,870 270 1.17% 6,625 94 1.90%
--------- --------- --------- --------
Total Interest Bearing Liabilities ...... 295,767 4,354 1.97% 199,168 3,832 2.57%
--------- --------- --------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ................................... 58,584 44,529
Other Liabilities ................................. 501 1,106
--------- ---------
Total Non-Interest Bearing Liabilities... 59,085 45,635
--------- ---------
Stockholders' Equity ...................................... 24,211 21,980
--------- ---------
Total Liabilities and Stockholders'
Equity .................................. $ 379,063 $ 266,783
========= =========
NET INTEREST INCOME ....................................... $ 8,752 $ 7,888
========= =========
NET INTEREST SPREAD (3) ................................... 2.90% 3.67%
======= ======
NET INTEREST MARGIN (4) ................................... 3.25% 4.20%
======= ======
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average interest earning assets.
21
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 2002 September 30, 2002
------------------------------------- ----------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ------- ----- ------ ------- ------
(In thousands) (In thousands)
Interest Earned On:
Federal Funds Sold ....................... $ 2 $ (6) $ (4) $ 13 $ (13) $ --
Investment Securities .................... 1,114 (813) 301 2,619 (1,953) 666
Loans (net of unearned income) ........... 438 (380) 58 1,615 (895) 720
------ ------- ----- ------ ------- ------
Total Interest Income .......... 1,554 (1,199) 355 4,247 (2,861) 1,386
------ ------- ----- ------ ------- ------
Interest Paid On:
NOW Deposits ............................. 10 (16) (6) 35 (19) 16
Savings Deposits ......................... 155 (178) (23) 436 (379) 57
Money Market Deposits .................... 15 (22) (7) 46 (38) 8
Time Deposits ............................ 135 (215) (80) 823 (739) 84
Trust preferred securities ............... 63 -- 59 122 -- 181
Short-term Borrowings .................... 299 (135) 164 344 (168) 176
------ ------- ----- ------ ------- ------
Total Interest Expense ......... 677 (566) 107 1,806 (1,343) 522
------ ------- ----- ------ ------- ------
Net Interest Income ............ $ 877 $ (633) $ 248 $2,441 $(1,518) $ 864
====== ======= ===== ====== ======= ======
22
Provision for Loan Losses
The provision for loan losses was $214 thousand for the first nine months of
2003 compared to a provision of $840 thousand for the same period in 2002. 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. The
allowance for loan losses totaled $2.4 million, or 1.30% of total loans, at
September 30, 2002. The allowance for loan losses totaled $2.6 million, or 1.31%
of total loans, at September 30, 2003 and we had no non-accrual loans.
Non-Interest Income
Total non-interest income was $1.6 million for the first nine months of 2003
compared to $1.5 million for the first nine months of 2002, an increase of $25
thousand, or 1.6%. The increase was attributable to increases in service fees on
deposit accounts of $114 thousand, or 35.4% and in other fees and commissions of
$61 thousand, or 16.5% during the first nine months of 2003 compared to the same
prior year period. These increases in non interest income were substantially
offset by a reduction in gains on sales of investment securities of $146
thousand, or 26.4%, from $554 thousand during the nine month period ending
September 30, 2002 to $408 thousand during the first nine months of 2003. The
security gains were realized as a result of our Asset/Liability Committee
recommendation to shorten the duration of our investment security portfolio.
Non-Interest Expense
Total non-interest expense amounted to $7.1 million for the nine months ended
September 30, 2003, an increase of $796 thousand, or 12.6%, over the same prior
year period. The increase was due primarily to increases in employment expenses
as well as increases in occupancy and depreciation expenses and other expenses
generally attributable to our growth. Of this increase, employment costs
increased $409 thousand, or 13.7%, and reflected increases in the number of
employees from 96 full-time equivalents for the period ended September 30, 2002
to 101 full-time equivalents for the period ended September 30, 2003. The
increase in personnel is primarily attributable to the acquisition of additional
management level personnel required due to the Company's growth and the opening
of our Millhurst, New Jersey branch.
Occupancy and depreciation expenses increased $174 thousand, or 14.4%, for the
first nine months of 2003 compared to the same period in 2002. 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 $213 thousand, or 10.0%, for the first nine months of
2003 compared to the first nine months of 2002. The increase was attributable to
increased other expenses resulting from our continued growth.
Income Tax Expense
For the nine months ended September 30, 2003, we recognized $1.1 million in
income tax expense compared to $821 thousand in income tax expense during the
first nine months of 2002. The effective tax rate for the first nine months of
2003 was 35.7% compared to 36.4% for the same period during 2002.
23
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 2003, our ROA was 0.67% compared to 0.72% for the year ended December
31, 2002. 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 10.52% for the nine months ended September 30, 2003, compared to
9.06% for the year ended December 31, 2002.
RESULTS OF OPERATIONS for the three months ended September 30, 2003 compared to
the three months ended September 30, 2002
Net Income
For the three months ended September 30, 2003, we earned $693 thousand compared
to $728 thousand in net income for the same period last year. Basic and diluted
net income per share for the three months ended September 30, 2003 was $0.21 and
$0.19, respectively, compared to basic and diluted net income per share of $0.22
and $0.21, respectively, for the same prior year period. The decrease in net
income was primarily due to a $520 thousand, or 93.9% reduction in gains on
sales of investment securities and an increase in non-interest expense of $104
thousand, or 4.5% and was partially offset by a $248 thousand, or an 8.9%,
increase in net interest income.
Net Interest Income
Net interest income increased $248 thousand, or 8.9%, to $3.0 million for the
three months ended September 30, 2003 from $2.8 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $877 thousand as average interest earning assets, net of
average interest bearing liabilities, increased by $13.9 million, or 26.0%, for
the third quarter of 2003 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 $633 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the three months ended September 30, 2003 decreased
to 2.95% compared to 4.07% for the same prior year period. The decrease in net
interest margin of 112 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 117.8% to
$206.0 million from $94.6 million. Excess liquidity was utilized in lower
yielding short-term investment securities as an alternative due to lower loan
funding needs and our leverage strategy contributed to the increase in
investment securities. 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 1.00% in June 2003.
Interest income increased $355 thousand, or 8.6%, to $4.5 million for the three
months ended September 30, 2003 compared to $4.1 million for the same period in
2002. The improvement in interest income was primarily due to volume related
increases of $1.6 million, consisting of increases in income from the loan
portfolio of $438 thousand and income of $1.1 million in investment securities
as our growth resulted in an increase in average earning assets of $136.0
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million, or 50.1%, to $407.5 million for the three months ended September 30,
2003 compared to $271.5 million for the same period in 2002.
Partially offsetting the volume related increases were total interest income
from rate related decreases of $1.2 million as interest rates on earning assets
repriced to current lower yields compared to yields in the same period in 2002.
Interest expense for the third quarter of 2003 increased $107 thousand, or 8.1%,
compared to the same prior year period. The increase in interest expense was due
primarily to net volume related increases of $677 thousand and was offset by net
rate related decreases in interest bearing liabilities of $566 thousand. 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 was $41 thousand for the third quarter of 2003
compared to a provision of $155 thousand for the same period in 2002. 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. The
allowance for loan losses totaled $2.4 million, or 1.30% of total loans, at
September 30, 2002. The allowance for loan losses totaled $2.6 million, or 1.31%
of total loans, at September 30, 2003 and we had no non-accrual loans.
Non-Interest Income
Total non-interest income was $471 thousand for the third quarter of 2003
compared to $846 thousand for the same period of 2002, a decrease of $375
thousand, or 44.3%. The decrease was attributable to a reduction in gain on sale
of investment securities of $520 thousand, or 93.9% from $554 thousand during
the third quarter of 2002 to $34 thousand during the third quarter of 2003.
Partially offsetting this reduction to non-interest income during the third
quarter of 2003 were increases in service fees on deposits of $47 thousand,
increases in service fees on loans of $47 thousand and increases in other fees
and commissions of $51 thousand compared to the third quarter of 2002, resulting
from the continued growth of the Company.
Non-Interest Expense
Total non-interest expense amounted to $2.4 million for the three months ended
September 30, 2003, an increase of $104 thousand, or 4.5%, 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 $56 thousand, or 5.2%, and reflected increases in the number of
employees from 96 full-time equivalents for the period ended September 30, 2002
to 101 full-time equivalents for the period ended September 30, 2003. The
increase in personnel is primarily attributable to the acquisition of additional
management level personnel required due to the Company's growth and the opening
of our Millhurst, New Jersey branch.
Occupancy and depreciation expenses increased $31 thousand, or 7.3%, for the
third quarter of 2003 compared to the same period in 2002. 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.
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Income Tax Expense
For the three months ended September 30, 2003, we recognized $363 thousand in
income tax expense compared to $445 thousand in income tax expense during the
third quarter of 2002. The effective tax rate for the second three months of
2003 was 34.4% compared to 37.9% for the same period during 2002.
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, 2003, our ROA was 0.67% compared to 0.72% for the year ended
December 31, 2002. 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 9.97% for the three months ended September 30, 2003, compared
to 9.06% for the year ended December 31, 2002.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its lending and deposit taking
activities. Thus, management actively monitors and manages its
interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase in interest rates may
adversely impact the Company's earnings to the extent that the
interest rates borne by assets and liabilities do not change at the
same speed, to the same extent, or on the same basis. The Company
monitors the impact of changing interest rates on its net interest
income using several tools. One measure of the Company's exposure to
differential changes in interest rates between assets and
liabilities is shown in the Company's "Cumulative Rate Sensitive
Balance Sheet" under the "Interest Rate Sensitivity Analysis"
caption in the Company's Form 10-KSB for the year ended December 31,
2002.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the
Company's asset-liability structure to obtain the maximum yield-cost
spread on that structure. The Company relies primarily on its
asset-liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities. Management believes that hedging instruments
currently available are not cost-effective, and therefore, has
focused its efforts on increasing the Company's yield-cost spread
through retail growth opportunities.
During 2003, there have been no significant changes in the Company's
assessment of its market risk or interest rate risk, from that
reported under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Interest Rate Risk
Management" in the Company's Form 10-KSB for the year ended December
31, 2002.
Item 4. 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, 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 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.
27
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) Exhibit 31.1 - Section 302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32 - Section 906 Certification
(b) Reports on form 8-K
On August 18, 2003, the Registrant issued a press release
announcing the resignation of its Chief Financial Officer.
28
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 14, 2003 By: Robert D. O'Donnell
---------------------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: Marie P. Mueller
---------------------------------
MARIE P. MUELLER
Vice President and Chief Financial Officer
29