U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3535 Highway 9 North, Freehold, New Jersey 07728
(Address of principal executive offices) (Zip Code)
(732) 863-9000
(Issuer's telephone number, including area code)
(Former name, former address and former year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of voting and non-voting equity held by
non-affiliates was $73,255,828.
As of March 4, 2004, there were 3,389,719 shares of common stock, no par value
per share outstanding.
PART I
ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 2003
OVERVIEW AND STRATEGY
Community Bancorp of New Jersey is a one bank holding company incorporated under
the laws of New Jersey to serve as the holding company for the Community Bank of
New Jersey. The Company acquired all the capital stock of the Bank in July 1999.
The Bank commenced operations in 1997 with the goal of providing first class
banking services through a locally headquartered financial institution, offering
customers direct access to senior officers and decision makers. We seek to serve
individuals, professionals, small businesses, and real estate developers in our
Monmouth, Middlesex, and Ocean County, New Jersey, trade area, whom we believe
are not adequately served by larger regional and multi-state financial
institutions. Since it commenced operations in 1997, the Company has increased
its asset base at a rapid pace. Our assets have grown from $34.8 million at
December 31, 1997 to $427.8 million at December 31, 2003, a compound annual
growth rate of 51.9%. This growth has come both through our success in
penetrating our original market in the Freehold, New Jersey area, and through
expansion into other market areas in New Jersey. We opened our second office in
downtown Freehold, New Jersey, in September 1997, our third office in Howell,
New Jersey, in November 1998, our fourth office in Matawan, New Jersey in
February 1999, our fifth office in Manalapan, New Jersey in November 1999, our
sixth office in Colts Neck, New Jersey in July 2001, our seventh office in
Shrewsbury, New Jersey in October 2001 and our eighth office in Millhurst, New
Jersey in November 2002.
During 2003, in order to capitalize on the stable, low interest rate environment
in effect, we undertook a leveraging strategy under which short term borrowings,
primarily short term advances from the Federal Home Loan Bank of New York, were
used to purchase investment securities, primarily U.S. Government and agency
securities. Although this strategy contributed to earnings in 2003, management
has elected to discontinue the strategy and reduce its borrowings and securities
holdings in 2004.
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.
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 preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
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. Future increases to our
allowance for possible loan losses, whether due to unexpected changes in
economic conditions or otherwise, would adversely affect our future results of
operations.
The Company recognizes deferred tax assets and liabilities for the future tax
effects of temporary differences, net operating loss carry forwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. In the event
management determines the inability to realize all or part of net deferred tax
assets in the future, a direct charge to income tax expense may be required to
reduce the recorded value of the net deferred tax asset to the expected
realizable amount.
Results of Operations
Our results of operations depend primarily on our net interest income, which is
the difference between the sum of interest we earn on our interest-earning
assets and loan origination fees and the interest we pay on deposits and
borrowed funds used to support our interest-earning assets. In addition, the
Bank earns fee income, primarily through service fees on deposit accounts and
non-interest related service fees on loans. Net interest spread is the
difference between the weighted average rate earned on interest earning assets
and the weighted average rate paid on interest bearing liabilities. Net interest
margin is a function of the difference between the weighted average rate earned
on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, as well as the average level of interest-earning
assets as compared with that of interest-bearing liabilities. Net income is also
affected by the amount of non-interest income and operating expenses.
2
Net Income
For the year ended December 31, 2003, net income increased to $2.4 million or
$0.71 per share for basic and $0.67 per share for diluted earnings, compared to
net income of $2.0 million or $0.61 per share for basic and $0.58 per share for
diluted shares for the same period in 2002.
The increase in net income from 2002 to 2003 was primarily due to a $1.0
million, or 9.4% increase in net interest income and a 20.5% increase in
non-interest income, excluding gain on sale of securities, partially offset by
higher non-interest expense and higher income tax expense. The improvement in
net income is attributable to our continued growth. The results for the year
ended December 31, 2003 were also positively affected by a reduced provision for
loan losses during the year ended December 31, 2003 compared to the year ended
December 31, 2002.
The increase in net income from 2001 to 2002 was primarily due to a $2.1
million, or 24.4% increase in net interest income and a 35.7% increase in
non-interest income, partially offset by an increase in the provision for loan
losses and higher non-interest expense and higher income tax expense. The
results for the year ended December 31, 2002 were also positively affected by
$554 thousand in realized gains on sales of investment securities compared to no
realized gains during 2001.
Net Interest Income
For the year ended December 31, 2003, we recognized net interest income of $11.7
million as compared to $10.7 million for the year ended December 31, 2002. The
increase in net interest income was largely due to an increase in the average
balance of interest earning assets, which increased $107.9 million, or 40.9%, to
$371.6 million from $263.7 million. The increase reflects an increase in average
investment securities of $80.9 million, or 86.1% as a result of our leveraging
strategy and an increase in average loans outstanding of $26.3 million, or 15.5%
over the 2002 period.
Primarily as a result of the increase in the average balance of interest-earning
assets, our interest income increased to $17.4 million for the year ended
December 31, 2003, from $15.9 million for the year ended December 31, 2002. The
improvement in interest income was primarily due to volume-related increases in
income from the investment securities portfolio of $3.2 million and
volume-related increases in income of $1.9 million in the loan portfolio,
partially offset by rate-related decreases in income of $2.3 million from the
investment securities portfolio and rate-related decreases in income of $1.3
million from the loan portfolio. The average yield on our interest-earning
assets decreased to 4.68% for the year ended December 31, 2003 from 6.02% for
the year ended December 31, 2002.
Total interest expense increased 10.0% to $5.8 million for the 2003 period from
$5.2 million for the 2002 period. This increase in interest expense is primarily
related to an increase of $97.4 million or 46.2% in the average balance of
interest-bearing liabilities from $210.6 for the 2002 period to $307.9 million
for the 2003 and is partially offset by a decrease in the average rate paid on
interest-bearing liabilities from 2.48% during 2002 to 1.87% in 2003. The volume
related increases in interest-bearing liabilities reflect the results of our
leveraging strategy, as we increased short term borrowings and used the proceeds
to purchase investment securities. In addition, other increases in interest
bearing liabilities and expense-rate reductions were the result of marketing and
pricing decisions made by management in response to the need for cost effective
sources of funds, primarily to fund loan growth and investment securities
purchases. Our ALCO Committee implemented these strategies as the Federal
Reserve Bank reduced the target funds rate to 1% during 2003.
The net interest margin was 3.14% in 2003 compared to 4.04% in 2002. The decline
resulted primarily from the Federal Reserve Bank's easing of its target federal
funds rate to a historically low level of 1.00% in June 2003, which reduced the
general level of interest rates in the market.
For the year ended December 31, 2002, we recognized net interest income of $10.7
million as compared to $8.6 million for the year ended December 31, 2001. The
increase in net interest income was largely due to an increase in the average
balance of interest earning assets, which increased $73.5 million, or 38.6%, to
$263.7 million from $190.2 million. The increase reflects an increase in average
loans outstanding of $30.8 million, or 22.2% and an increase in average
investment securities of $52.9 million, or 129.0% over the 2001 period.
Primarily as a result of the increase in the average balance of interest-earning
assets, our interest income increased to $15.9 million for the year ended
December 31, 2002, from $14.2 million for the year ended December 31, 2001. The
improvement in interest income was primarily due to volume-related increases in
income from the loan portfolio of $2.5 million and volume-related increases in
income of $2.9 million in the investment securities portfolio, partially offset
by volume-related decreases income $471 thousand in Federal funds sold. In
addition to the net volume-related increases, rate related decreases amounting
to $3.3 million resulted as the average yield on our interest-earning assets
decreased to 6.02% for the year ended December 31, 2002 from 7.45% for the year
ended December 31, 2001.
Total interest expense decreased 7.1% to $5.2 million for the 2002 period from
$5.6 million for the 2001 period. This decrease in interest expense is primarily
related to a decrease in average yield paid on interest-bearing liabilities of
139 basis points to 2.48% for the 2002 period compared to 3.87% for the 2001
period. The savings from the decline in rates was partially offset by an
increase in the average balance of interest-bearing liabilities, which increased
$66.1 million to $210.6 million for the 2002 period compared to $144.5 million
for the 2001 period. Volume-related increases in interest expense accounted for
$2.4 million of increased expense and were offset by rate reductions amounting
to $2.8 million in reduced expense. The volume related increases in
interest-bearing liabilities and expense-rate reductions were the result of
marketing and pricing decisions made by management in response to the need for
cost effective sources of funds, primarily to fund loan growth and investment
securities purchases. These strategies were implemented by our ALCO Committee as
the Federal Reserve Bank reduced the target funds rate to 1.25% by December 31,
2002.
The net interest margin was 4.04% in 2002 compared to 4.51% in 2001. The decline
resulted primarily from timely implementation of asset/liability management
strategies which leveraged the balance sheet during the 2002 period, resulting
in reduced net interest margin percentage offset by increased net interest
income.
3
The following table reflects, for the periods presented, the components of our
net interest income, setting forth: (1) average assets, liabilities, and
stockholders' equity, (2) interest income earned on interest-earning assets and
interest expenses paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earnings assets less the average rate on interest-bearing liabilities)
and (5) our yield on interest-earning assets. Rates are computed on a taxable
equivalent basis.
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Average Average Average
Interest rates Interest rates Interest rates
Average income/ earned/ Average income/ earned/ Average income/ earned/
balance expense paid balance expense paid balance expense paid
--------- ------- ------- --------- --------- ------- --------- --------- -------
(In thousands, except percentage)
Assets
Interest-earning assets
Loans (net of unearned
income) (1) $ 195,570 $12,695 6.49% $ 169,260 $ 12,098 7.15% $ 138,522 $ 11,388 8.22%
Investment securities 174,739 4,695 2.69 93,885 3,768 4.01 41,000 2,278 5.56
Federal funds sold 1,260 12 0.96 601 12 2.00 10,717 499 4.66
--------- ------- ------- --------- --------- ------- --------- --------- ------
Total interest-earning assets 371,569 17,402 4.68 263,746 15,878 6.02 190,239 14,165 7.45
--------- ------- ------- --------- --------- ------- --------- --------- ------
Non-interest-earning assets 22,866 18,404 14,775
Allowance for possible loan losses (2,546) (2,248) (1,799)
--------- --------- ---------
Total assets $ 391,889 $ 279,902 $ 203,215
========= ========= =========
Liabilities and Stockholders'
Equity
Interest-bearing liabilities
NOW deposits $ 25,463 $ 225 0.88 $ 21,020 $ 214 1.02% $ 19,578 $ 260 1.33%
Savings deposits 111,850 1,694 1.51 82,329 1,610 1.96 50,972 1,461 2.87
Money market deposits 10,334 166 1.61 7,278 158 2.17 6,482 217 3.35
Time deposits 114,011 2,952 2.59 90,738 3,075 3.39 66,425 3,623 5.45
Trust preferred securities 5,000 240 4.80 178 8 4.76 -- -- --
Borrowed funds 41,263 473 1.15 9,015 160 1.77 1,063 30 2.82
--------- ------- ------- --------- --------- ------- --------- --------- ------
Total interest-bearing liabilities 307,921 5,750 1.87 210,558 5,225 2.48 144,520 5,591 3.87
--------- ------- ------- --------- --------- ------- --------- --------- ------
Non-interest bearing liabilities
Demand deposits 59,386 46,050 36,296
Other liabilities 528 1,000 2,118
--------- --------- ---------
Total non-interest bearing
liabilities 59,914 47,050 38,414
Stockholders' equity 24,054 22,294 20,281
--------- --------- ---------
Total liabilities and
stockholders' equity $ 391,889 $ 279,902 $ 203,215
========= ========= =========
Net interest spread (2) 2.82 3.54 3.58
Net interest margin (3) 3.14 4.04 4.51
Net interest income $11,652 $ 10,653 $ 8,574
======= ========= =========
(1) Included in interest income on loans are rate related loan fees.
(2) 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.
(3) The interest rate margin is calculated by dividing net interest income by
average interest-earning assets.
4
The following table presents by category the major factors that contributed to
the changes in net interest income for the periods indicated below. Amounts have
been computed on a fully tax-equivalent basis.
Year ended December 31, 2003 Year ended December 31, 2002
vs. December 31, 2002 vs. December 31, 2001
--------------------- ---------------------
Increase (decrease) due to change in
------------------------------------
Average Average Average Average
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
Interest income
Loans $ 1,881 $(1,284) $ 597 $ 2,527 $(1,817) $ 710
Investment securities 3,245 (2,318) 927 2,938 (1,448) 1,490
Federal funds sold 13 (13) -- (471) (16) (487)
------- ------- ------- ------- ------- -------
Total interest income 5,139 (3,615) 1,524 4,994 (3,281) 1,713
------- ------- ------- ------- ------- -------
Interest expense
NOW deposits 45 (34) 11 19 (65) (46)
Savings deposits 577 (493) 84 899 (750) 149
Money market 66 (58) 8 27 (86) (59)
Time deposits 789 (912) (123) 1,326 (1,874) (548)
Trust preferred securities 230 2 232 -- 8 8
Borrowed funds 572 (259) 313 141 (11) 130
------- ------- ------- ------- ------- -------
Total interest expense 2,279 (1,754) 525 2,412 (2,778) (366)
------- ------- ------- ------- ------- -------
Net interest income $ 2,860 $(1,861) $ 999 $ 2,582 $ (503) $ 2,079
======= ======= ======= ======= ======= =======
Provision for Loan Losses
The provision we recorded for the year ended December 31, 2003 was $214 thousand
compared to $893 thousand for the year ended December 31, 2002. The provision is
the result of our review of several factors, including net loan charge-offs of
$2 thousand during the period ended December 31, 2003 compared to $451 thousand
for the same prior year period. In addition, the provision reflects management's
assessment of economic conditions, credit quality and other risk factors
inherent in the loan portfolio. We had no non-performing assets at the end of
each of 2003 and 2002. The allowance for loan losses totaled $2.6 million, or
1.30% of total loans at December 31, 2003, compared to $2.4 million, or 1.31% of
total loans, at December 31, 2002.
The provision we recorded for the year ended December 31, 2002 was $893 thousand
compared to $386 thousand for the year ended December 31, 2001. The provision is
the result of our review of several factors, including loan charge-offs of $451
thousand during the period ended December 31, 2002 compared to $6 thousand for
the same prior year period. In addition, the increased provision reflects
increased loan balances and management's assessment of economic conditions,
credit quality and other risk factors inherent in the loan portfolio. We had no
non-performing assets at the end of each of 2002 and 2001. The allowance for
loan losses totaled $2.4 million, or 1.31% of total loans at December 31, 2002,
compared to $2.0 million, or 1.33% of total loans, at December 31, 2001.
Non-Interest Income
Non-interest income amounted to $2.0 million for the year ended December 31,
2003, compared to $1.9 million for the year ended December 31, 2002, an increase
of $124 thousand, or 6.6%. The increase was primarily attributable to an
increase in service fees on deposits of $161 thousand or 37% from $435 thousand
during 2002 to $596 thousand during 2003. The increase was partially offset by a
reduction of $146 thousand in gains on sales of securities during 2003 compared
to the gains in 2002. The growth in service fees on deposits reflects the growth
in transaction account deposits and activity. The gains on sales of investment
securities resulted from the implementation of asset/liability management
strategies intended to shorten the duration of our investment securities
portfolio.
Non-interest income amounted to $1.9 million for the year ended December 31,
2002, compared to $1.4 million for the year ended December 31, 2001, an increase
of $446 thousand, or 31.2%. The increase was primarily attributable to gains on
sales of investment securities of $554 thousand compared to no such gains during
the prior year. In addition, the Company also had an increase in service fees on
deposits of $33 thousand, or 8.2%, an increase in other fees and commissions of
$217 thousand, or 78.3%. These increases were partially offset by a decrease in
loan servicing fees of $358 thousand, or 47.8%. The growth in service fees on
deposits and other fees and commissions reflects the growth in transaction
account deposits and activity. The decrease in non-interest fee income on loans
was attributable to a decrease in loan participations and the fees and
commissions generated on those transactions. The gains on sales of investment
securities resulted from the implementation of asset/liability management
strategies intended to shorten the duration of our investment securities
portfolio.
5
Non-Interest Expense
Non-interest expense amounted to $9.7 million for the year ended December 31,
2003, compared to $8.5 million for the year ended December 31, 2002, an increase
of $1.3 million, or 15.0%. The increase was due primarily to increases in
employment expenses, occupancy expenses, equipment expenses and other costs
generally attributable to our growth.
Employment costs increased $552 thousand, or 13.8%, from $4.0 million during
2002 to $4.6 million in 2003. The increase resulted from higher salary costs and
increases in insurance costs during 2003.
Occupancy expenses increased $222 thousand, or 13.6% from $1.6 million in 2002
to $1.9 million during 2003. These increases resulted from increased lease
expense and increased maintenance costs during 2003 compared to 2002.
Other operating expenses increased $490 thousand, or 17.4% to $3.3 million for
the year ended December 31, 2003 from $2.8 million for the year ended December
31, 2002. The increase was attributable to increased other expenses resulting
from our continued growth, as costs of data processing services amounted to $1.1
million, an increase of $195 thousand, or 21.6%; directors' fees amounted to
$175 thousand, an increase of $98 thousand, or 127.3%; professional fees
amounted to $516 thousand, an increase of $68 thousand, or 15.2%.
Non-interest expense amounted to $8.5 million for the year ended December 31,
2002, compared to $7.3 million for the year ended December 31, 2001, an increase
of $1.2 million, or 16.4%. The increase was due primarily to increases in
employment expenses as well as increases in occupancy expenses, equipment
expenses and other costs generally attributable to our growth. Of this increase,
employment costs increased $612 thousand, or 18.0%, and reflected increases in
the number of employees from 95 full-time equivalents at December 31, 2001 to
104 full-time equivalents at December 31, 2002. The increase in personnel is
attributable to the acquisition of additional support personnel required due to
our growth and the opening of one new branch office in 2002 and the full year
expenses associated with the opening of two new offices during the last half of
2001.
Occupancy expenses increased $401 thousand, or 32.6%, to $1.6 million for the
year ended December 31, 2002. The increase was attributable to the opening of
three new branch offices since the second half of 2001, which resulted in
increased lease expense and increased maintenance costs. In addition, the
Company recognized increased depreciation costs associated with new facilities
and purchases of computer processing equipment.
Other operating expenses increased $180 thousand, or 6.8% to $2.8 million for
the year ended December 31, 2002 from $2.6 million for the year ended December
31, 2001. The increase was attributable to increased other expenses resulting
from our continued growth, as costs of data processing services amounted to $904
thousand, an increase of $165 thousand; professional fees amounted to $448
thousand, an increase of $124 thousand; marketing and advertising costs amounted
to $470 thousand, an increase of $53 thousand; stationery, communications and
office costs amounted to $317 thousand, an increase of $50 thousand; and all
other expenses amounted to $460 thousand, an increase of $109 thousand. These
increases were partially offset by a decrease in stationery and printing costs
of $107 thousand to $213 thousand and a decrease in systems conversion costs to
$214 thousand to $3 thousand. These decreases resulted from the successful
systems conversions which were completed during 2001.
Income Tax Expenses
We recognized $1.3 million and $1.2 million in income tax expense for the years
ended December 31, 2003 and 2002, respectively. The effective tax rate for the
year ended December 31, 2003 was 35.4% compared to 36.5% for the year ended
December 31, 2002.
We recognized $1.2 million and $844 thousand in income tax expense for the years
ended December 31, 2002 and 2001, respectively. The effective tax rate for the
year ended December 31, 2002 was 36.5% compared to 35.8% for the year ended
December 31, 2001.
Financial Condition
At December 31, 2003, our total assets were $427.8 million, an increase of $95.6
million, or 28.8% over total 2002 year end assets of $332.2 million. At December
31, 2003, our net loans were $199.4 million, an increase of $18.9 million, or
10.4% from the $180.6 million reported at December 31, 2002. Investment
securities increased to $200.0 million at December 31, 2003, from $131.7 million
at December 31, 2002, an increase of $68.3 million or 51.9%. At December 31,
2003 and December 31, 2002, we had no Federal Funds sold.
Loan Portfolio
At December 31, 2003 our total loans were $202.0 million, an increase of $19.1
million, or 10.4% over our total loans of $183.0 million at December 31, 2002.
Our loan portfolio consists primarily of loans secured by real estate, and, to a
lesser extent, commercial, construction, and consumer loans.
Our loans are granted primarily to businesses and individuals located in
Monmouth, Middlesex, and Ocean Counties, New Jersey. We have not made loans to
borrowers outside of the United States of America. We believe that our strategy
of customer service, competitive rate structures, and selective marketing have
enabled us to gain market entry to local loans.
Within the portfolio, commercial mortgage loans remained the largest component,
constituting 49.4% of the total portfolio. These loans increased by $5.7
million, or 6.0%. Our commercial and industrial loans remained the second
largest component despite a decline during 2003, with year-end balances
declining by $7.2 million to $39.8 million, or 19.7% of our total portfolio,
from $47.0 million or 25.7% or our total portfolio.
6
The following table sets forth the classification of our loans by major
category; net of unearned discounts and deferred loan fees for the periods
indicated below.
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(In thousands, except for percentages)
Commercial and industrial $ 39,791 19.7% $ 46,998 25.7% $ 25,736 17.4% $ 24,865 20.4% $ 15,137 18.3%
Real estate - non-residential
properties 99,758 49.4 94,067 51.4 74,258 50.3 56,849 46.6 38,814 47.0
Residential properties 3,317 1.6 5,829 3.2 6,970 4.7 7,867 6.4 7,254 8.8
Construction 34,694 17.2 13,295 7.3 21,962 14.9 17,046 14.0 8,895 10.7
Consumer 24,161 11.9 22,193 12.1 18,559 12.6 14,275 11.7 12,476 15.1
Other 323 0.2 585 0.3 118 0.1 1,064 0.9 56 0.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans $202,044 100.0% $182,967 100.0% $147,603 100.0% $121,966 100.0% $ 82,632 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The following table sets forth the aggregate maturities of loans net of unearned
discounts and deferred loan fees, in specified categories and the amount of such
loans, which have fixed and variable rates at December 31, 2003.
Within 1 1 to 5 After 5
year years years Total
-------- ------- ------- -------
Commercial and industrial $22,851 $11,426 $ 5,514 $39,791
Construction 23,607 3,766 7,321 34,694
------- ------- ------- -------
Total $46,458 $15,192 $12,835 $74,485
======= ======= ======= =======
Fixed rate loans $ 2,374 $ 7,537 $ 4,312 $14,223
Variable rate loans 44,084 7,655 8,523 60,262
------- ------- ------- -------
Total $46,458 $15,192 $12,835 $74,485
======= ======= ======= =======
Asset Quality
Our loans are our principal earning assets. Inherent in the lending function is
the risk of the borrower's inability to repay its loan under its existing terms.
Risk elements in a loan portfolio include non-accrual loans, past due and
restructured loans, potential problem loans, loan concentrations and other real
estate owned, acquired through foreclosure or a deed in lieu of foreclosure.
Non-performing assets include loans that are not accruing interest (non-accruing
loans) as a result of principal or interest being in default for a period of 90
days or more and other real estate owned. We had no loans past due 90 days or
more at any of the year ends December 31, 1998 through 2003, although during the
years 2003, 2002 and 2001, we charged off $3 thousand, $452 thousand and zero,
respectively, in non-performing loans. When a loan is classified as non-accrual,
interest accruals cease and all past due interest, including interest applicable
to prior years, is reversed and charged against current income. Until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of such
payments as interest.
We maintain a risk rating system for grading all non-consumer credit facilities.
The purpose of the system is to detect changes in loan quality for individual
credits and for homogenous pools of loans in the portfolio. All such credits are
assigned a numerical rating in accordance with criteria established in ten
categories ranging from #1-Excellent to #10-Loss. Definitions for categories
#6-Special Mention Loans, #7-Substandard, #8-Doubtful, #9-Specific Reserve, and
#10-Loss are consistent with those established by federal regulatory agencies.
The initial rating is assigned at inception and reviewed annually when financial
statements are received and at other times when deterioration in a relationship
is detected. An independent outsourced loan review function tests these ratings
in its normal course and resolves any rating differences. Any loan, including
unrated consumer credits, may be assigned to a watch list of credits, identified
by management as credits warranting special attention for a variety of reasons,
which might bear on ultimate collectibility.
In addition to our internal rating system, our federal regulators provide for
the classification of certain loans into substandard, doubtful or loss
categories. A loan is classified as substandard when it is inadequately
protected by the current value and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected.
A loan is classified as doubtful when it has all the weaknesses inherent in one
classified as substandard with the added characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
factors, conditions, and values, highly questionable and improbable.
A loan is classified as loss when it is considered uncollectible and of such
little value that the asset's continuance as an asset on the balance sheet is
not warranted.
As of December 31, 2003, $839 thousand in loans were classified as substandard,
$96 thousand in loans were classified as doubtful, and no loans were classified
as loss. As of December 31, 2002, $356 thousand in loans were classified as
substandard, $82 thousand in loans were classified as doubtful, and no loans
were classified as loss. As of December 31, 2001, 2000 and 1999, no loans were
classified as substandard, doubtful or loss.
7
Allowance for Loan Losses
We attempt to maintain an allowance for loan losses at a sufficient level to
provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur and any recovery is credited to the
allowance. Risks within the loan portfolio are analyzed on a continuous basis by
our officers, by outside independent loan review auditors, our Directors Loan
Committee, and the Board of Directors. A risk system, consisting of multiple
grading categories, is utilized as an analytical tool to assess risk and set
appropriate reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current economic conditions and
considers such factors as the financial condition of the borrower, past and
expected loss experience, and other factors management feels deserve recognition
in establishing an appropriate reserve. These estimates are reviewed at least
monthly, and, as adjustments become necessary, they are realized in the periods
in which they become known. During 2003, 2002 and 2001, $3 thousand 452 thousand
and zero, respectively, in loans were charged directly to the allowance when the
loss was identified. Additions to the allowance are made by provisions charged
to expense and the allowance is reduced by net charge-offs (i.e., loans judged
to be uncollectible and charged against the reserve, less any recoveries on such
loans). Although management attempts to maintain the allowance at a level deemed
adequate, future additions to the allowance may be necessary based upon changes
in market conditions. In addition, various regulatory agencies periodically
review our allowance for loan losses. These agencies may require us to take
additional provisions based on their judgments about information available to
them at the time of their examination.
Our allowance for loan losses totaled $2.6 million at December 31, 2003, or
1.30% of total loans outstanding. We had no non-performing loans or loans past
due 90 days or more at December 31, 2003 and 2002.
The following is a summary of the reconciliation of the allowance for loan
losses for the periods indicated.
Year ended December 31,
-----------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(In thousands, except percentages)
Balance at beginning of period $ 2,406 $ 1,964 $ 1,584 $ 1,237 $ 914
Charge-offs - commercial -- (444) -- --
Charge-offs - consumer (3) (8) (6) (1) (2)
Recoveries - consumer 1 1 -- -- --
------- ------- ------- ------- -------
Net charge-offs (2) (451) (6) (1) (2)
Provision charged to expense 214 893 386 348 325
------- ------- ------- ------- -------
Balance of allowance at end of period $ 2,618 $ 2,406 $ 1,964 $ 1,584 $ 1,237
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans outstanding --% 0.27% --% --% --%
======= ======= ======= ======= =======
Balance of allowance at period-end as a percent of loans
at period end 1.30% 1.31% 1.33% 1.30% 1.50%
======= ======= ======= ======= =======
The following table sets forth, for each of the Bank's major lending areas, the
amount of the Bank's allowance for loan losses attributable to such category,
and the percentage of total loans represented by such category, as of the
periods indicated. The allocation of the allowance for loan losses to the
respective loan classifications is not necessarily indicative of future losses
or future allocations.
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Allocation% of all Allocation% of all Allocation% of all Allocation% of all Allocation% of all
amount loans amount loans amount loans amount loans amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands, except percentages)
Balance applicable to
Commercial loans $ 616 19.7% $ 548 25.7% $ 346 17.4% $ 281 20.4% $ 185 18.3%
Real estate non-
residential
properties 1,198 49.4 1,128 51.4 996 50.3 641 46.6 628 47.0
Residential
properties 21 1.6 31 3.2 65 4.7 39 6.4 36 8.8
Construction 458 17.2 344 7.3 295 14.9 377 14.0 178 10.7
Consumer loans 325 11.9 296 12.1 234 12.6 128 11.7 113 15.1
Other -- 0.2 3 0.3 2 0.1 27 0.9 14 0.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Subtotal 2,618 100.0 2,350 100.0 1,938 100.0 1,493 100.0 1,154 100.0
Unallocated reserves -- -- 56 -- 26 -- 91 -- 83 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,618 100.0% $2,406 100.0% $1,964 100.0% $1,584 100.0% $1,237 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
8
Investment Securities
We maintain an investment portfolio to fund increased loans or decreased
deposits and other liquidity needs and to provide an additional source of
interest income. The portfolio is composed of obligations of U.S. Government and
agencies, government sponsored entities, and a limited amount of corporate debt
securities.
We follow Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities are classified as securities held to maturity based on management's
intent and our ability to hold them to maturity. Such securities are stated at
cost, adjusted for unamortized purchase premiums and discounts. Securities not
classified as securities held to maturity or trading securities are classified
as securities available for sale, and are stated at fair value. Unrealized gains
and losses on securities available for sale are excluded from results of
operations, and are reported as a separate component of stockholders' equity,
net of taxes. Securities classified as available for sale include securities
that may be sold in response to changes in interest rates, changes in prepayment
risks, the need to increase regulatory capital, or other similar requirements.
The Bank has no trading securities.
Management determines the appropriate classification at the time of purchase. At
December 31, 2003 we classified our investment portfolio as available-for-sale.
These available-for-sale securities had a cost basis of $203.2 million. The fair
value adjustment at December 31, 2003 required us to reduce the carrying value
of these investment securities by $3.2 million, increase the deferred tax
benefit by $1.2 million, and reduce stockholders' equity by $2.0 million.
Securities with a cost of $349.2 million were purchased for the
available-for-sale account during 2003.
Total investment securities at December 31, 2003 were $200.0 million, an
increase of $68.3 million, or 51.9% over total investment securities of $131.7
million at December 31, 2002. The increase during 2003 resulted as we utilized
our liquidity in excess of loan demand to fund additional purchases of
investment securities. In addition, during the middle 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 the Asset/Liability management considerations arising from our analysis of
several economic scenarios, including reduced loan growth and deposit repricing
opportunities. We 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.
The amortized cost and fair value of our investment securities are as follows
(in thousands):
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost value cost value cost value
---- ----- ---- ----- ---- -----
Investment securities available-for-sale
U.S. Government and agency
securities $198,011 $194,880 $128,937 $130,046 $ 64,569 $ 64,959
Corporate debt securities and other 5,145 5,145 1,630 1,630 480 480
-------- -------- -------- -------- -------- --------
$203,156 $200,025 $130,567 $131,676 $ 65,049 65,439
======== ======== ======== ======== ======== ========
Investment securities held-to-maturity
U.S. Government and agency
securities $ -- $ -- $ -- $ -- $ 14,275 $ 14,136
Corporate debt securities and other -- -- -- -- 1,035 1,081
-------- -------- -------- -------- -------- --------
$ -- $ -- $ -- $ -- $ 15,310 $ 15,271
======== ======== ======== ======== ======== ========
The amortized cost and fair value of our investment securities at December 31,
2003, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (in thousands).
Available-for-sale
------------------
Amortized Fair Average
Cost Value Yield
---- ----- -----
Due in one year or less $ $ --
Due after one year through five years 197,011 198,896 2.29%
Due after five years through ten years 2,500 2,484 4.20
Due after ten years 3,645 3,645 0.36
-------- -------- ----
$203,156 $200,025 2.27
======== ======== ====
9
Other Assets
Other Assets are comprised primarily of bank owned life insurance, which
increased to $5.8 million at December 31, 2003 from $1.6 million at December 31,
2002.
Deposits
Our total deposits at December 31, 2003, were $326.0 million, an increase of
$34.4 million, or 11.8% over total deposits of $291.6 million at December 31,
2002. Deposits are our primary source of funds. The growth 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 $46.1 million,
while higher costing certificates of deposit decreased by $11.7 million.
Average total deposits increased by $73.6 million, or 29.8% to $321.0 million
for the year ended December 31, 2003 compared to $247.4 million for 2002.
Changes in the deposit mix averages for 2003 compared to 2002 include a $29.5
million, or 35.9% increase in savings deposits; a $23.3 million, or 25.6%
increase in time deposits; a $13.3 million or 29.0% increase in demand deposits;
a $4.4 million, or 21.1% increase in NOW accounts and a $3.1 million, or 42.0%
increase in money market deposits.
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 $135.7 million at December by offering rates higher
than our peer group institutions. Our primary savings product is the stepped
rate savings account. The interest rate is based upon the amount on deposit, and
the deposit amount can be changed. We may modify the interest rate amount paid
without notice, and the depositor may withdraw their funds on demand. We market
this product as an alternative to time deposits and believe it has resulted in a
higher rate of core deposits and lower cost of funds than our peer group
institutions. Deposits are obtained primarily from the market areas that we
serve.
The following table sets forth the average amounts of various types of deposits
at the periods indicated.
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
Balance Cost Balance Cost Balance Cost
------- ---- ------- ---- ------- ----
(In thousands, except percentages)
Non-interest-bearing demand $ 59,386 --% $ 46,050 --% $ 36,296 --%
Interest-bearing demand (NOW) 25,463 0.88 21,020 1.02 19,578 1.33
Savings deposits 111,850 1.51 82,329 1.96 50,972 2.87
Money market deposits 10,334 1.61 7,278 2.17 6,482 3.35
Time deposits 114,011 2.59 90,738 3.39 66,425 5.45
-------- ---- -------- ---- -------- ----
Total $321,044 1.57% $247,415 2.04% $179,753 3.09%
======== ==== ======== ==== ======== ====
The following table summarizes the maturity distribution of certificates of
deposits as of December 31, 2003.
Time CD's
$100,000 and over
Amount Percent
------ -------
(In thousands, except percentages)
Due in three months or less $15,667 47.7%
Due over three months through six months 5,093 15.5
Due over six months through twelve months 11,899 36.2
Due over one year through three years 204 0.6
------- -----
Total certificates of deposit $32,863 100.0%
======= =====
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. Our net income is affected by changes in the level of market
interest rates. In order to maintain consistent earnings performance, we seek to
manage, to the extent possible, the repricing characteristics of our assets and
liabilities. The ratio between assets and liabilities repricing in specific time
intervals is referred to as an interest rate sensitivity gap. Interest rate
sensitivity gaps can be managed to take advantage of the slope of the yield
curve as well as forecasted changes in the level of interest rate changes.
10
One of our major objectives when managing the rate sensitivity of our assets and
liabilities is to stabilize net interest income. The management of and authority
to assume interest rate risk is the responsibility of the Asset/Liability
Committee (ALCO), which is comprised of senior management and Board members. We
have instituted policies and practices of measuring and reporting interest rate
risk exposure, particularly regarding the treatment of non-contractual assets
and liabilities. In addition, we annually review our interest rate risk policy,
which includes limits on the impact to earnings from shifts in interest rates.
To manage our interest sensitivity position, an asset/liability model called
"gap analysis" is used to monitor the difference in the volume of our interest
sensitive assets and liabilities that mature or reprice within given periods. A
positive gap (asset sensitive) indicates that more assets reprice during a given
period compared to liabilities, while a negative gap (liability sensitive) has
the opposite effect. We employ computerized net interest income simulation
modeling to assist in quantifying interest rate risk exposure. This process
measures and quantifies the impact on net interest income through varying
interest rate changes and balance sheet compositions. The use of this model
assists the ALCO to gauge the effects of the interest rate changes on interest
sensitive assets and liabilities in order to determine what impact these rate
changes will have upon the net interest spread.
Interest Sensitivity Gap at December 31, 2003
---------------------------------------------
Mature or repricing in (1)
--------------------------------------------------- Non-
3 months 3 through 1 through Over interest
or less 12 months 3 years 3 years bearing Total
------- --------- ------- ------- ------- -----
Assets
Investment securities
available-for-sale (2) $ 15,037 $ 2,675 $ 172,852 $ 9,461 $ -- $ 200,025
Loans 78,748 6,001 28,158 89,050 -- 201,957
Valuation reserves (2) -- -- -- -- (6,006) (6,006)
Non-interest earning assets -- -- -- -- 31,849 31,849
--------- --------- --------- --------- --------- ---------
Total assets $ 93,785 $ 8,676 $ 201,010 $ 98,511 $ 25,843 $ 427,825
========= ========= ========= ========= ========= =========
Liabilities and stockholders'
equity
NOW accounts $ 7,213 $ -- $ 21,640 $ -- $ -- $ 28,853
Money market accounts 6,529 -- 6,528 -- -- 13,057
Savings deposits 61,303 -- 61,303 -- -- 122,606
CD's $100,000 and over 15,667 16,992 204 -- -- 32,863
CD's under $100,000 16,693 52,646 1,525 -- -- 70,864
Short-term borrowings 72,400 -- -- -- -- 72,400
Trust preferred 5,000 -- -- -- -- 5,000
Non-interest bearing
deposits -- -- -- -- 57,766 57,766
Other liabilities -- -- -- -- 496 496
Stockholders' equity -- -- -- -- 23,920 23,920
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 184,805 $ 69,638 $ 91,200 $ -- $ 82,182 $ 427,825
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ (91,020) $ (60,962) $ 109,810 $ 98,511 $ (56,339)
Cumulative gap $ (91,020) $(151,982) $ (42,172) $ 56,339 $ --
Cumulative gap to total assets -21.28% -35.52% -9.86% 13.17%
(1) The following are the assumptions that were used to prepare the gap
analysis:
a. Investment securities are included at amortized cost in the period
in which they mature at stated maturity, except for government
agency securities with coupon rates of 3.00% and above and with call
provisions of one year or less, which are stated as maturing at the
call date.
b. Loans are spread through the maturity buckets based on the earlier
of their actual maturity date or the date of their first potential
rate adjustment.
c. Non-maturing NOW accounts, money market accounts and savings
deposits typically change rates more slowly than maturing balances.
The rate change speed of these accounts compared to the economic
rate change, has been adjusted based upon the Company's experience.
d. Certificates of deposits are spread through the maturity buckets
based on their actual maturity date.
(2) Valuation reserves include allowance for loan losses, FASB No. 91
deferred fees and the investment securities available-for-sale
market-to-market adjustment.
11
Liquidity
Our liquidity is a measure of our ability to fund loans, withdrawals or
maturities of deposits, and other cash outflows in a cost-effective manner. Our
principal sources of liquidity are deposits, scheduled amortization and
prepayments of loan principal, maturities of investment securities, access to
purchased funds, and funds provided by operations. While scheduled loan payments
and maturing investments are relatively predictable sources of funds, deposit
flows, loan prepayments and callable investment securities are greatly
influenced by general interest rates, economic conditions and competition.
Liquid assets (consisting of cash, federal funds sold and investment securities
classified as available-for-sale) comprised 49.4% and 42.5% of our total assets
at December 31, 2003 and 2002, respectively.
Should liquidity needs arise to fund new loan demand, we have the capability to
sell our available-for-sale securities, and to purchase federal funds as
alternative sources of liquidity. We have established credit lines with other
financial institutions to purchase up to $5.0 million in federal funds and may
borrow funds at the Federal Reserve discount window, subject to our ability to
supply collateral. During 2000, we became a member of the Federal Home Loan Bank
of New York and have a combined overnight borrowing line and term line of $38.9
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 December
31, 2003, we have $12.4 million in overnight 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.
Short-Term Borrowings
Short-term borrowings consist of overnight federal funds purchased and
short-term advances from the Federal Home Loan Bank of New York, which generally
have maturities of less than one month. The details of these categories are
presented below:
Year ended December 31,
-----------------------
2003 2002
-------- --------
Federal funds purchased and short-term advances
Balance at year-end $ 72,400 $ 11,500
Average during the year 41,263 9,015
Maximum month-end balance 110,200 15,700
Weighted average rate during the year 1.15% 1.77%
Rate at December 31 1.11% 1.35%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
The Company issued $5.0 million of trust preferred securities to a pooled
investment vehicle sponsored by Bear, Stearns & Co., Inc. on December 20, 2002.
These securities have a floating interest rate equal to three month LIBOR plus
335 basis points, which resets quarterly. The average interest rate paid during
2003 was 4.80%. The variable interest rate is capped at 12.5% though January 7,
2008. The securities mature on January 7, 2033, and may be called at par by the
Company any time after January 7, 2008. The securities were placed in a private
transaction exempted from registration under the Securities Act of 1933, as
amended.
Although the subordinated debentures are treated as debt of the Company, they
currently qualify as Tier I Capital investments, subject to the 25% limitation
under risk-based capital guidelines of the Federal Reserve. The portion of the
Trust Preferred Securities that exceeds this limitation qualifies as Tier II
capital of the Company. At December 31, 2003 the $5.0 million of the Trust
Preferred Securities qualified for treatment as Tier I capital.
Off-Balance Sheet Arrangements and Contractual Obligations and Other Commitments
The following table sets forth contractual obligations and other commitments
representing required and potential cash outflows as of December 31, 2003:
One to Four to After
Less than three five five
Total one year years years years
----- -------- ----- ----- -----
(dollars in thousands)
Minimum annual rentals on noncancellable
operating leases $ 7,450 $ 412 $ 983 $ 976 $ 5,079
Remaining contractual maturities of time
deposits 103,727 101,998 1,729 -- --
Loan commitments 82,470 52,805 8,964 117 20,584
Short-term borrowed funds 72,400 72,400 -- -- --
Guaranteed preferred beneficial interests in
Company's subordinated debentures 5,000 -- -- -- 5,000
Standby letters of credit 4,480 3,109 1,371 -- --
-------- -------- -------- -------- --------
Total $275,527 $230,724 $ 13,047 $ 1,093 $ 30,663
======== ======== ======== ======== ========
The Company had no capital leases at December 31, 2003.
12
The Company's financial statements do not reflect off-balance sheet arrangements
that are made in the normal course of business. These off-balance sheet
arrangements consist of unfunded loans and letters of credit made under the same
standards as on-balance sheet instruments. These unused commitments, at December
31, 2003 totaled $86,950,000. This consisted of unfunded loan commitments,
unused lines of credit and letters of credit. These instruments have fixed
maturity dates, and because many of them will expire without being drawn upon,
they do not generally present any significant liquidity risk the Company.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Company has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.
Capital
A significant measure of the strength of a financial institution is its capital
base. Our federal regulators have classified and defined capital into the
following components: (1) Tier I capital, which includes common stock,
qualifying preferred stock, and certain hybrid capital instruments, such as
trust preferred securities, and (2) Tier II capital, which includes a portion of
the allowance for possible loan losses, certain qualifying long-term debt and
preferred stock and hybrid capital instruments which do not qualify for Tier I
capital. Minimum capital levels are regulated by risk-based capital adequacy
guidelines which require a financial institution to maintain capital as a
percent of its assets and certain off-balance sheet items adjusted for
predefined credit risk factors (risk-adjusted assets). A financial institution
is required to maintain, at a minimum, Tier I capital as a percentage of
risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a
percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, the federal regulators require that a
financial institution which meets the regulators' highest performance and
operation standards maintain a minimum leverage ratio (Tier I capital as a
percentage of tangible assets) of 3.0%. For those institutions with higher
levels of risk or that are experiencing or anticipating significant growth, the
minimum leverage ratio will be proportionately increased by 100 to 200 basis
points. Minimum leverage ratios for the Company are evaluated through the
ongoing regulatory examination process.
The following table sets forth certain capital performance ratios for the
Company.
2003 2002 2001
---- ---- ----
Capital performance
Return on average assets 0.61% 0.72% 0.74%
Return on average equity 9.99% 9.06% 7.45%
The following table summarizes our risk-based and leverage ratios at December
31, 2003, as well as the required minimum regulatory capital ratios.
To be well-
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $33,495 12.72% $21,065 >= 8.00% N/A N/A
Community Bank of New Jersey 28,207 10.70 21,082 >= 8.00 $26,353 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 30,867 11.72 10,532 >= 4.00 N/A N/A
Community Bank of New Jersey 25,589 9.71 10,541 >= 4.00 15,812 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 30,867 7.19 12,878 >= 3.00 N/A N/A
Community Bank of New Jersey 25,589 5.96 12,878 >= 3.00 21,463 >= 5.00
As of December 31, 2002
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $30,316 13.68% $17,605 >= 8.00% N/A N/A
Community Bank of New Jersey 25,322 11.51 17,593 >= 8.00 21,991 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 27,910 12.68 8,803 >= 4.00 N/A N/A
Community Bank of New Jersey 22,916 10.42 8,796 >= 4.00 13,195 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 27,910 8.75 9,564 >= 3.00 N/A N/A
Community Bank of New Jersey 22,916 7.19 9,564 >= 4.00 15,941 >= 5.00
13
Impact of Inflation and Changing Prices
Our financial statements and notes thereto, presented elsewhere herein, have
been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time and due to inflation.
The impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all our assets and
liabilities are monetary. As a result, interest rates have a greater impact on
our performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
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 certain non-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 December 31, 2003 is $4.5 million and
they expire through April 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.
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.
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. CBNJ Capital Trust I is currently included in the Company's
consolidated balance sheets and statements of income. The Company has evaluated
the impact of FIN 46 and concluded it should continue to consolidate CBNJ
Capital Trust I as of December 31, 2003, in part due to its ability to call the
preferred stock prior to the mandatory redemption date and thereby benefit from
a decline in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation,
FIN 46(R), the provisions of which must be applied to certain variable interest
entities by March 31, 2004. The Company plans to adopt the provisions under the
revised interpretation in the first quarter of 2004. FIN 46(R) will require
Community Bancorp of New Jersey, Inc. to deconsolidate CBNJ Capital Trust I as
of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded
in the preferred stock when determining if the Company has the right to a
majority of CBNJ Capital Trust I's expected residual returns. Accordingly, the
Company will deconsolidate CBNJ Capital Trust I at the end of the first quarter,
which will result in an increase in the outstanding debt by $155,000. The
banking regulatory agencies have not issued any guidance that would change the
regulatory capital treatment for the trust preferred securities issued by CBNJ
Capital Trust I based on the adoption of FIN 46(R). However, as additional
interpretations from the banking regulators related to entities such as CBNJ
Capital Trust I become available, management will reevaluate its potential
impact to its Tier I capital calculation under such interpretations.
Amendment to SFAS 133 on Derivative Instruments and Hedging Activities
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. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
14
Financial Instruments with Characteristics of Both Liabilities and Equity
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, management does not
anticipate the adoption of SFAS No. 150 to have a material impact on the
Company's financial position or results of operations.
Transfers of Loans
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 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.
Other than Temporary Impairment
The Company adopted EITF 03-1, The Meaning of Other than Temporary Impairment
and its Application to Certain Investments, as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, that are impaired at the balance
sheet date, but an other-than-temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for financial statements for years
ending after December 15, 2003 and are included in these financial statements.
ITEM 11. -- EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth a summary of the cash and non-cash compensation
awarded to, earned by, or paid to, the Chief Executive Officer of the Company
for each of the last three fiscal years and the other executive officers of the
Company whose cash remuneration exceeds $100,000.
SUMMARY COMPENSATION TABLE
Cash and Cash Equivalent
Forms of Remuneration
Long Term
Compensation
Other Securities
Annual Annual Annual Underlying All Other
Name and Principal Position Year Salary Bonus(2) Compensation Options (3) Compensation
---- ------ -------- ------------ ------------ ------------
Robert D. O'Donnell, 2003 $247,500 $120,000 (1) 1,500 --
President and Chief 2002 $219,224 $101,000 (1) 1,500 --
Executive Officer 2001 $193,266 $ 75,570 (1) 1,500 --
James Kinghorn, 2003 $150,000 $ 50,000 (1) 10,000 --
Executive Vice President 2002 $136,554 $ 50,000 (1) 1,500 --
and Senior Lending Officer 2001 $120,970 $ 35,000 (1) 1,500 --
(1) Other annual compensation includes expenses incurred for the use of
an automobile. The Company believes the value of the personal use of
such vehicle was less than 10% of the salary and bonus of each
respective officer.
(2) Bonuses were earned in the years disclosed, although they may have
been paid in subsequent years.
(3) Options have not been retroactively adjusted for stock dividends or
stock split.
15
On May 8, 1998, the Company retained Mr. Robert D. O'Donnell as President and
Chief Executive Officer at an original base salary of $151,000. Mr. O'Donnell is
entitled to receive an annual increase of at least 10%, provided that the
Company has met certain performance targets. Mr. O'Donnell is also entitled to
an annual cash bonus in an amount equal to 5% of the Company's after tax net
profit. If Mr. O'Donnell is terminated for any reason other than for "cause", he
is entitled to continue to receive his then current base salary and bonus for
the next twenty-four (24) months. In the event of a change in control of the
Company, Mr. O'Donnell is entitled to twice his then current base salary and
bonus, payable at the option of Mr. O'Donnell either in a lump sum, or over a
period of twenty-four (24) months. Consummation of the transaction proposed with
Sun would constitute a change in control under Mr. O'Donnell's agreement.
On July 11, 2002, the Company entered into a change of control agreement with
Mr. Kinghorn. Under this agreement, in the event of a change in control, as
defined by the Agreement, Mr. Kinghorn is to be employed for a three-year period
(unless he attains age 65 sooner, in which case his term of employment would end
then). During this employment period, Mr. Kinghorn is to receive base
compensation equal to the annual compensation, including salary and bonus, as
was paid to or accrued for him during the twelve months immediately prior to the
change in control. He is also to receive an annual increase to reflect the
impact of inflation, Mr. Kinghorn's performance and the performance of the
Company. The minimum increase must equal the annual percentage increase in the
consumer price index for urban wage earners and clerical workers for the New
York and Northern New Jersey area during the preceding twelve months. After a
change in control, Mr. Kinghorn may be terminated by the Company or its
successor for "cause", as defined in the agreement. However, in the event he is
terminated without cause, or in the event he resigns his position for "good
reason", he will be entitled to a lump sum payment equal to two times the
highest annual compensation, including salary and cash bonus, paid to him during
any of the three calendar years immediately prior to the change in control. The
payments due to Mr. Kinghorn may be reduced if the payment would not be
deductible by the Company or its successor for federal income tax purposes due
to Section 280G of the Internal Revenue Code of 1986. Mr. Kinghorn's agreement
does not become effective, and does not govern the terms of his employment,
until a change in control takes place. The agreement has a term of three years,
and renews annually unless the Company, by a majority vote of the directors then
in office, decide not to extend the term of the Agreement. If a change in
control were to have happened at December 31, 2003 and Mr. Kinghorn were to be
terminated without cause or to resign for good cause, he would have been
entitled to a payment equal to $ 400,000.
During early 2004, the Company also entered into a change in control bonus
agreement with Mr. Kinghorn. Under this agreement, in the event of a change in
control of the Company, as defined under the agreement, Mr. Kinghorn will be
entitled to a lump sum payment equal to $250,000 provided that he remains
employed by the Company through completion of the change in control, The payment
due to Mr. Kinghorn may be reduced if the payment would not be deductible by the
Company or its successor for federal income tax purposes due to Section 280G of
the Internal Revenue Code of 1986.
Consummation of the transaction proposed with Sun would constitute a change in
control under Mr. Kinghorn's agreements.
STOCK OPTION PLANS
In the following discussion, options authorized for grant under each option plan
have been adjusted to reflect stock dividends and stock splits.
During 1997, the Bank's Board of Directors approved the 1997 Stock Option Plan,
the 1997 Employee Stock Option Plan and the 1997 Option Plan for Non-Employee
Directors. Under the 1997 Stock Option Plan, directors of the Bank, including
employees who are directors of the Bank, may be granted non-qualified or
incentive stock options. The 1997 Stock Option Plan provides for the grant of
options to purchase up to 109,278 shares of common stock. Pursuant to the terms
of the 1997 Stock Option Plan, options which qualify as incentive stock options
under the Internal Revenue Code of 1986 must be granted at an exercise price of
no less than 100% of the then current fair market value of the common stock, and
options which are non-qualified options may be granted at an exercise price to
be determined by the Board of Directors at the time of grant, but no less than
85% of the then fair market value of the common stock.
The 1997 Employee Stock Option Plan permits grants of options to purchase up to
93,897 shares of common stock. Under the 1997 Employee Stock Option Plan, grants
may either be incentive stock options or non-qualified options. The 1997
Employee Stock Option Plan is administered by the Board of Directors, which has
the authority to determine the officers and employees of the Bank who will
receive options, whether the options will be incentive stock options or
non-qualified options and, subject to the terms of the Plan, the exercise price
for the options. Under the Plan, incentive stock options must have an exercise
price of no less than 100% of the fair market value of the common stock on the
date of grant, and non-qualified options may have an exercise price to be
determined by the Board of Directors at grant, but no less than 85% of the fair
market value of the common stock on the date of grant.
The 1997 Stock Option Plan for Non-Employee Directors permits grants of options
to purchase up to 84,508 shares of common stock. Under the 1997 Stock Option
Plan for Non-Employee Directors, each director who is not an employee of the
Company, upon the adoption of the Plan or when first appointed or elected a
member of the Board, shall receive a grant of non-qualified options under
Section 422 of the Internal Revenue Code of 1986 to purchase 5,000 shares of the
Company's common stock. The exercise price of the options will be the greater of
$11.00 per share or 100 % of the fair market value of the common stock on the
date of grant, whichever is greater.
In May 1998, the Board of Directors of the Bank adopted the 1998 Stock Option
Plan pursuant to which options may be granted to employees of the Bank. The 1998
Stock Option Plan provides for the granting of options to purchase up to 93,897
shares of common stock. The terms of the 1998 Stock Option Plan are
substantially similar to the terms of the 1997 Employee Stock Option Plan.
In January 2000, the Board of Directors of the Company adopted the 2000 Employee
Stock Option Plan pursuant to which options may be granted to employees of the
Company. The 2000 Employee Stock Option Plan provides for the granting of
options to purchase up to 156,498 shares of common stock. The terms of the 2000
Employee Stock Option Plan are substantially similar to the terms of the 1997
Employee Stock Option Plan.
16
In January, 2000, the Board of Directors of the Company also adopted the 2000
Stock Option Plan for Non-Employee Directors pursuant to which options may be
granted to directors who are not employees of the Company. The 2000 Stock Option
Plan for Non-Employee Directors provides for the granting of options to purchase
up to 127,628 shares of common stock. Under the 2000 Stock Option Plan for
Non-Employee Directors, the exercise price for the purchase of shares under the
options is no less than 105% of the fair market value of the shares on the date
of the grant.
The following table sets forth information regarding stock option grants to the
individuals named in the table above during 2003.
Number of
Securities
Underlying% of Total Exercise or Grant Date
Options/SARS Options/SARS Base Price Expiration Present
Name Granted (#)(1) Granted ($/Share) Date Value $
- ---- -------------- ------- --------- ---- -------
Robert D. O'Donnell,
President and
Chief Executive Officer 1,500 3.70% $19.29 7/1/2013 $ 8,100
James Kinghorn,
Executive Vice President
and Senior Lending Officer 10,000 24.69 19.29 7/1/2013 53,700
(1) As of December 31, 2003, 20% of these options were exercisable. These
options vest ratably over four years, commencing on the date of grant.
(2) The present value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 0%, expected volatility of 25%,
risk free interest rate of 2.87%, and an expected life of five (5) years.
The following table sets forth information concerning the fiscal year-end value
of unexercised options held by the executive officers of the Company named
herein under the caption "Executive Compensation". No stock options were
exercised by such executive officers during 2003.
Value of Unexercised In-the-Money
Number of Securities Underlying Options at FY-End (1)
Unexercised Options at FY-End (#) (based on $23.00 per share)
Exercisable/Unexercisable Exercisable/Unexercisable (1)
------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Robert D. O'Donnell 159,624 7,621 $2,321,507 $ 96,714
James A. Kinghorn 19,019 14,056 268,987 117,638
(1) Market value of the underlying securities at year end (based upon
the closing price on the NASDAQ National Market) minus the exercise
price per share. Options vest and become exercisable over various
periods not exceeding five years and are subject to acceleration in
certain circumstances.
Compensation of the Board of Directors
During 2003, the Directors of the Company were paid meeting fees totaling
$89,600 in connection with their service on the Board of Directors of the
Company. Additionally, the Bank has established a Director Deferred Compensation
Plan pursuant to which the consideration each Director would have received for
service on the Board of Directors of the Bank is paid into a trust and deferred
until the time such Director reaches their stated retirement age from the Board.
Executive Officers of the Bank that also serve as Directors may contribute like
sums from their pre-tax salary into the trust. Upon attaining retirement age,
the deferred Director's fees, and all earnings on such fees, will be paid out to
the Director over a ten-year period. The Director Deferred Compensation Plan was
amended in 2003 so that in the event of a change of control of the Company, if a
Directors service is terminated within three (3) years, the Director will be
treated as if they have contributed ten (10) years worth of Director fees into
the plan and had received earnings on those contributions at a stipulated rate.
Amounts then due under the Directors Deferred Compensation Plan are to be paid
in a lump sum into a trust for distribution to the Plan participants. For the
year ended 2003 each Bank Director who was not a full time employee of the Bank
was credited with $12,000 in fees paid into the plan. Upon consummation, the
proposed transaction with Sun will constitute a change in control under the
Directors Deferred Compensation Plan.
In addition, members of the Board of Directors participate in the 1997 Stock
Option Plan for Non-Employee Directors, the 1997 Stock Option Plan and the 2000
Stock Option Plan. Pursuant to these Plans, members of the Board of Directors
have in the past, received stock options to purchase shares of our common stock.
In addition, during 2002 each non-employee Director was granted 14,150 options
at an exercise price of $15.81 per share.
17
PERFORMANCE GRAPH
Set forth below is a graph and table comparing the yearly percentage
change in the cumulative total shareholder return on the Company's Common Stock
against (1) the cumulative total return on the NASDAQ Bank Index and (2) the
cumulative total return on the NASDAQ Market Index for the period commencing
January 1, 1999, and ending December 31, 2003.
[THE FOLLOWING TABLE DATA WAS REPRESENTED IN A LINE GRAPH]
Relative Relative Relative
Change Change Change
- --------------------------------------------------------------------------------
Date Nasdaq Bank Index Nasdaq CBNJ
================================================================================
1/1/1999 1.00 1.00 1.00
5/21/1999 1.01 1.15 1.00
10/8/1999 0.95 1.32 1.00
2/25/2000 0.78 2.09 0.78
7/14/2000 0.87 1.94 0.84
12/1/2000 0.96 1.21 0.90
4/20/2001 1.03 0.99 1.08
9/7/2001 1.09 0.77 1.16
1/25/2002 1.19 0.88 1.17
6/14/2002 1.27 0.69 1.51
11/1/2002 1.25 0.62 1.60
3/21/2003 1.22 0.65 2.10
8/8/2003 1.36 0.75 2.27
12/26/2003 1.57 0.90 2.52
ASSUMES $100 INVESTED ON JANUARY 1, 1999
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2003
--------------------------------------------------------------------------------------------------------------------
12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
--------------------------------------------------------------------------------------------------------------------
CBNJ 91.47 87.39 109.15 194.76 257.87
--------------------------------------------------------------------------------------------------------------------
State NASDAQ Bank Index 92.02 105.52 116.15 121.40 157.74
--------------------------------------------------------------------------------------------------------------------
NASDAQ Market Index 185.59 112.67 88.95 60.91 91.37
--------------------------------------------------------------------------------------------------------------------
Human Resources Committee Report on Executive Compensation
The Company's compensation package for its executive officers consists of base
salary, an annual bonus, annual discretionary stock option grants and various
broad based employee benefits. The objective of the Company's executive
compensation is to enhance the Company's long-term profitability by providing
compensation that will attract and retain superior talent, reward performance
and align the interests of the executive officers with the long-term interests
of the shareholders of the Company.
Base salary levels for the Company's executive officers are competitively set
relative to companies in peer businesses. The annual financial performance of
the Company is one of the most important factors in reviewing base salaries and
bonuses. In reviewing base salaries, the Human Resources Committee also takes
into account individual experience and performance.
The Company's annual bonuses are intended to provide a direct cash incentive to
executive officers and other key employees to maximize the Company's
profitability. Financial performance is compared against budgets as well as peer
businesses.
Stock options are intended to encourage officers and other key employees to
remain employed by the Company by providing them with a long term interest in
the Company's overall performance as reflected by the performance of the market
of the Company's Common Stock. In granting stock options, the Human
18
Resources Committee takes into account prior stock option grants and consider
the executive's level of compensation and past contributions to the Company.
Robert D. O'Donnell was the President and Chief Executive Officer of the Company
and the Bank for 2003. Mr. O'Donnell's base salary is set competitively relative
to other chief executive officers in financial service companies in the
Company's market area and determined pursuant to the terms of his Employment
Agreement. In determining Mr. O'Donnell's base salary, the Committee reviewed
independent compensation data and the Company's performance as compared against
budgets and peer businesses. The calculation of Mr. O'Donnell's bonus is
determined pursuant to his Employment Agreement. As with the Company's other
executive officers, Mr. O'Donnell's total compensation involves certain
subjective judgments and is not based solely upon any specific objective
criteria or weighting.
James Kinghorn
Morris Kaplan
Robert D. O'Donnell
Howard Schoor
Arnold Silverman
19
PART IV
ITEM 15. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financcial Statements
Consolidated balance sheets of Community Bancorp of New Jersey and its
subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003.
(b) Reports on Form 8-K
(i) None
(c) Exhibits
Exhibit number Description of Exhibits
-----------------------
10.1 Form of Directors Deferred Compensation Plan Agreement*
10.2 Change in Control Agreement*
14 Principal Executive and Senior Financial Officer Code of
Ethics
21 Subsidiaries of the Registrant*
23 Consent of Grant Thornton LLP
31.1 Certification of Robert D. O'Donnell pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Marie P. Mueller pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* previously filed
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANCORP OF NEW JERSEY
By: /s/ Robert D. O'Donnell
---------------------------
Robert D. O'Donnell
Dated: April __, 2004 President and Chief Executive Officer
21
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
------------
2003 2002
---- ----
ASSETS
Cash and due from banks $ 11,465 $ 9,424
Investment securities available-for-sale 200,025 131,676
Loans receivable 202,044 182,967
Less allowance for loan losses (2,618) (2,406)
--------- ---------
Net loans receivable 199,426 180,561
Premises and equipment, net 6,832 6,280
Accrued interest receivable 1,868 2,193
Other assets 8,209 2,085
--------- ---------
Total assets $ 427,825 $ 332,219
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing - demand $ 57,766 $ 51,971
Interest bearing - NOW 28,853 23,455
Savings and money market 135,663 100,784
Certificates of deposit, under $100,000 70,864 76,815
Certificates of deposit, $100,000 and over 32,863 38,604
--------- ---------
Total deposits 326,009 291,629
Short-term borrowings 72,400 11,500
Accrued interest payable 78 38
Other liabilities 418 454
Guaranteed preferred, beneficial interest in the Company's subordinated debt 5,000 5,000
--------- ---------
Total liabilities 403,905 308,621
--------- ---------
STOCKHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares of no par value; issued and
outstanding, net of treasury shares, 3,385,490 and 3,172,945
shares at December 31, 2003 and 2002, respectively 29,420 25,512
Accumulated deficit (3,180) (2,239)
Accumulated other comprehensive (loss) income (1,957) 688
Treasury stock, 22,357 shares, at cost (363) (363)
--------- ---------
Total stockholders' equity 23,920 23,598
--------- ---------
Total liabilities and stockholders' equity $ 427,825 $ 332,219
========= =========
The accompanying notes are an integral part of these statements.
22
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
INTEREST INCOME
Loans, including fees $12,695 $12,098 $11,388
Federal funds sold 12 12 499
Investment securities 4,695 3,768 2,278
------- ------- -------
Total interest income 17,402 15,878 14,165
INTEREST EXPENSE
Deposits 5,037 5,057 5,561
Short-term borrowings 473 160 30
Long-term borrowings 240 8 --
------- ------- -------
Total interest expense 5,750 5,225 5,591
------- ------- -------
Net interest income 11,652 10,653 8,574
PROVISION FOR LOAN LOSSES 214 893 386
------- ------- -------
Net interest income after provision for loan losses 11,438 9,760 8,188
------- ------- -------
NON-INTEREST INCOME
Service charges on deposit accounts 596 435 402
Other loan servicing fees 399 391 749
Gains on sales of investment securities 408 554 --
Other Income 595 494 277
------- ------- -------
Total non-interest income 1,998 1,874 1,428
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,561 4,009 3,397
Occupancy expense 1,852 1,630 1,229
Other operating expenses 3,305 2,815 2,635
------- ------- -------
Total non-interest expense 9,718 8,454 7,261
------- ------- -------
Income before income taxes 3,718 3,180 2,355
Income tax expense 1,316 1,160 844
------- ------- -------
Net income $ 2,402 $ 2,020 $ 1,511
======= ======= =======
Per share data
Net income -basic $ 0.71 $ 0.61 $ 0.45
======= ======= =======
Net income - diluted $ 0.61 $ 0.58 $ 0.44
======= ======= =======
The accompanying notes are an integral part of these statements.
23
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Accumulated
Other
Common Accumulated omprehensive Comprehensive Treasury
Stock Deficit income (Loss) Income (Loss) Stock Total
----- ------- ------------ ------------- ----- -----
Balance at January 1, 2001 $ 21,663 $ (1,913) $ 28 -- $ (363) $ 19,415
5% stock dividend (95,772 shares) 1,484 (1,484) -- -- -- --
Cash in lieu of fractional shares for stock dividends -- (3) -- -- -- (3)
Comprehensive income:
Net income -- 1,511 -- $ 1,511 -- 1,511
Change in unrealized gains (losses) on securities, net -- -- 220 220 -- 220
--------
Total comprehensive income -- -- -- $ 1,731 -- --
-------- -------- -------- ======== -------- --------
Balance at December 31, 2001 $ 23,147 $ (1,889) $ 248 $ (363) $ 21,143
======== ======== ======== ======== ========
5% stock dividend (100,508 shares) 2,362 (2,362) -- -- -- --
Stock split issued - 3 for 2 (1,057,429 shares) -- -- -- -- -- --
Cash in lieu of fractions shares for stock dividends
and stock split -- (8) -- -- -- (8)
Options exercised (279) shares 3 -- -- -- -- 3
Comprehensive income (loss):
Net income -- 2,020 -- $ 2,020 -- 2,020
Change in unrealized gains (losses) on securities, net -- -- 440 440 -- 440
--------
Total comprehensive income -- -- -- $ 2,460 -- --
-------- -------- -------- ======== -------- --------
Balance at December 31, 2002 $ 25,512 $ (2,239) $ 688 $ 363 $ 23,598
======== ======== ======== ======== ========
5% stock dividend (158,560 shares) 3,338 (3,338) -- -- -- --
Cash in lieu of fractional shares for stock dividends (5) -- -- -- (5)
Options exercised (53,985) 570 -- -- -- -- 570
Comprehensive income (loss):
Net income -- 2,402 -- 2,402 -- 2,402
Change in unrealized gains (losses) on securities, net -- -- (2,645) (2,645) -- (2,645)
--------
Total comprehensive income (loss) -- -- -- $ (1,957) -- --
-------- -------- -------- ======== -------- --------
Balance at December 31, 2003 $ 29,420 $ (3,180) $ (1,957) $ (363) $ 23,920
======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
24
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,402 $ 2,020 $ 1,511
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 970 879 656
Provision for loan losses 214 893 386
Accretion of discounts and amortization of premiums on
investment securities, net 713 635 (62)
Gains on sales of investment securities (408) (554) --
Loss on disposal of equipment -- -- 98
Decrease (increase) in accrued interest receivable 325 (736) 40
(Increase) decrease in other assets (405) (120) 201
Increase (decrease) in accrued interest payable 40 (1,296) (157)
(Decrease) increase in other liabilities (36) 21 (198)
--------- --------- ---------
Net cash provided by operating activities 3,815 1,742 2,475
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity -- -- (14,810)
Purchases of investment securities available-for-sale (349,238) (173,296) (102,577)
Proceeds from sales of investment securities available-for-sale 84,335 15,704 --
Proceeds from maturities and calls of investment securities 191,989 107,303 81,650
Net increase in loans receivable (19,079) (35,815) (25,643)
Purchase of bank owned life insurance (4,000) -- (1,500)
Purchases of premises and equipment (1,522) (824) (2,087)
--------- --------- ---------
Net cash used in investing activities (97,495) (86,928) (64,967)
--------- --------- ---------
FINANCING ACTIVITIES
Increase in short-term borrowings 60,900 9,900 1,600
Proceeds from exercise of stock options 446 3 --
Stock dividends - cash paid in lieu of fractional shares (5) (8) (3)
Proceeds from issuance of guaranteed preferred beneficial interest
in the Company's subordinated debt -- 4,872 --
Net increase in demand deposits and savings accounts 46,072 41,464 30,701
Net (decrease) increase in certificates of deposits (11,692) 29,037 29,912
--------- --------- ---------
Net cash provided by financing activities 95,721 85,268 62,210
--------- --------- ---------
Net increase in cash and cash equivalents 2,041 82 (282)
Cash and cash equivalents, beginning of period 9,424 9,342 9,624
--------- --------- ---------
Cash and cash equivalents, end of period $ 11,465 $ 9,424 $ 9,342
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid for interest $ 5,710 $ 6,521 $ 5,748
========= ========= =========
Cash paid for income taxes $ 1,539 $ 1,379 $ 981
========= ========= =========
The accompanying notes are an integral part of these statements.
25
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE A - ORGANIZATION
Community Bancorp of New Jersey (the Company) is a one-bank holding
company incorporated under the laws of New Jersey to serve as the holding
company for the Community Bank of New Jersey (the Bank). The Company is a
registered bank holding company under the Bank Holding Company Act of
1956, as amended. The Bank is a New Jersey state-chartered banking
institution and a member of the Federal Reserve System and Federal Home
Loan Bank of New York.
The Bank provides banking services to small and medium-sized businesses,
professionals, and individual consumers in the area of central New Jersey.
Additionally, the Company competes with other banking and financial
institutions in its market communities, including financial institutions
with resources substantially greater than its own. Commercial banks,
credit unions, and money market funds actively compete for savings and
time deposits and for similar types of loans. Such institutions, as well
as consumer finance and insurance companies, may be considered competitors
of the Company with respect to one or more of the services it provides.
The Company and Bank are subject to regulations of certain state and
federal agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Company's and Bank's businesses are
susceptible to being affected by state and federal legislation and
regulations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and
predominant practices within the banking industry. The financial
statements include the accounts of the Company and its wholly owned
subsidiary, the Bank. All intercompany balances and transactions have been
eliminated in the financial statements.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the balance sheet and the reported amounts of revenues and
expenses during the reporting periods. Therefore, actual results could
differ from those estimates.
The estimate and the evaluation of the adequacy of the allowance for loan
losses includes an analysis of the individual loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of
specific borrowers to pay specific loan obligations, as well as current
loan collateral values. However, actual losses on specific loans, which
also are encompassed in the analysis, may vary from estimated losses.
2. Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, establishes
standards for the way business enterprises report information about
operating segments in annual financial statements. The Bank has one
operating segment, and accordingly, one reportable segment, "Community
Banking". All of the Bank's activities are interrelated, and each activity
is dependent and assessed based on how each of the activities of the Bank
supports the other. For example, commercial lending is dependent upon the
ability of the Bank to fund itself with retail deposits and other
borrowings and to manage interest rate and credit risk. This situation is
also similar for consumer and residential and commercial mortgage lending.
All significant operating decisions are based upon analysis of the Bank as
one operating segment or unit.
3. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
and federal funds sold with maturities of three months or less.
4. Investment Securities
The Company accounts for its investment securities in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
This standard requires, among other things, that debt and equity
securities classified as available-for-sale be reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component, net of income taxes. The net effect of unrealized
gains or losses, caused by marking an available-for-sale portfolio to
market, could cause fluctuations in the level of undivided profits and
equity-related financial ratios as market interest rates cause the fair
value of fixed-rate securities to fluctuate.
Investment and mortgage-backed securities, which the Company has the
ability and intent to hold to maturity, are held for investment purposes
and carried at cost, adjusted for amortization of premium and accretion of
discount over the terms of the maturity in a manner, which approximates
the interest method. At the time of purchase, the Company makes a
determination as to whether or not it will hold the investment securities
to maturity based upon an evaluation of the probability of the occurrence
of future events. Gains or losses on the sales of securities
available-for-sale are recognized upon realization utilizing the specific
identification method.
26
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and its Application to Certain Investments, as of December 31,
2003. EITF 03-1 includes certain disclosures regarding quantitative and
qualitative disclosures for investment securities accounted for under SFAS
115, Accounting for Certain Investments in Debt and Equity Securities,
that are impaired at the balance sheet date, but an other-than-temporary
impairment has not been recognized. The disclosures under EITF 03-1 are
required for financial statements for years ending after December 15, 2003
and are included in these financial statements.
5. Loans Receivable and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans. Interest
on loans is accrued and credited to operations based upon the principal
amounts outstanding. The allowance for loan losses is maintained at an
amount management deems adequate to cover estimated losses. In determining
the level to be maintained, management evaluates many factors, including
current economic trends, industry experience, historical loss experience,
industry loan concentrations, the borrowers' ability to repay and
repayment performance, and estimated collateral values. In the opinion of
management, the present allowance is adequate to absorb reasonable,
foreseeable loan losses. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions or any of the other
factors used in management's determination. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the 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
had no non-accrual loans as of December 31, 2003 or 2002.
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. This standard requires that a creditor
measure impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. The Company had no loans
that would be defined as impaired at December 31, 2003 or 2002.
The Company adopted Financial Accounting Standards Board (FASB)
Interpretation (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. 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
certain non-financial contractual obligations. At December 31, 2003, the
Company was not contingently liable for any financial and performance
letters of credit. It is the Company's practice to generally hold
collateral and/or obtain personal guarantees supporting any outstanding
letter of credit commitments. In the event that the Company is required to
fulfill its contingent liability under a standby letter of credit, it
could liquidate the collateral held, if any, and enforce the personal
guarantee(s) held, if any, to recover all or a portion of the amount paid
under the letter of credit.
The Company adopted SFAS No. 149, "Amendment of Statement No. 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. SFAS No. 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
generally does not enter into commitments with its customers, which it
intends to sell in the future and therefore, the adoption of SFS No. 149
did not have an impact on the Company's financial position or results of
operations.
6. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Bank accounts for its transfers and servicing assets in accordance
with SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which revised the accounting
and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 140 was effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2002.
27
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are charged to operations
on a straight-line basis over the estimated useful lives of the assets.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of
long-lived assets to be held and used or to be disposed of by sale.
However, SFAS No. 144 makes changes to the scope and certain measurement
requirements of existing accounting guidance. SFAS No. 144 also changes
the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. The Company had no long-lived
assets that would be defined as impaired at December 31, 2003 or 2002.
8. Bank Owned Life Insurance
The Company has an investment in bank owned life insurance (BOLI). BOLI
involves the purchasing of life insurance by the Company on a select group
of employees or directors. The Company is the owner and beneficiary of the
policies. Due to tax advantages to the Bank, this pool of insurance is
profitable to the Company. A portion of future benefit cost increases are
offset by this profitability. Bank deposits fund the BOLI and the earnings
from the BOLI are recognized as other income.
9. Other Assets
Financing costs related to the issuance of guaranteed preferred,
beneficial interest in the Company's subordinated debt are being amortized
over the life of the instruments and are included in other assets.
10. Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
basis of assets and liabilities, as measured by the enacted tax rates,
which will be in effect when these differences reverse. The primary
temporary differences are allowance for loan loss recognition and net
unrealized gains (losses) on investment securities available-for-sale.
11. 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. All
weighted average, actual shares or per share information in the financial
statements have been adjusted retroactively for the effect of stock
dividends and splits.
12. Advertising Costs
The Company expenses advertising costs as incurred.
13. Comprehensive Income (Loss)
The Company followed SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income consists of net income or loss for the current period
and income, expenses, gains, and losses that bypass the income statement
and are reported directly in a separate component of equity.
The income tax effects allocated to comprehensive income (loss) for the
years ended are as follows (in thousands):
2003
----
Before Tax Net
Tax (expense) of tax
amount benefit amount
------ ------- ------
Unrealized losses on securities
Unrealized holding losses arising during period $(4,648) $ 1,750 $(2,898)
Less reclassification
Adjustment for gain realized in net income 408 (155) 253
------- ------- -------
Other comprehensive loss, net $(4,240) $ 1,595 $(2,645)
======= ======= =======
28
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2002
---------------------------
Before Tax Net
Tax (expense) of tax
amount benefit amount
------ ------- ------
Unrealized gains on securities
Unrealized holding gains arising during period $1,273 $ (490) $ 783
Less reclassification
Adjustment for gain realized in net income 544 (221) 343
------ ------ ------
Other comprehensive income, net $ 719 $ (279) $ 440
====== ====== ======
2001
---------------------------
Before Tax Net
Tax (expense) of tax
amount benefit amount
------ ------- ------
Unrealized gains on securities
Unrealized holding gains arising during period $ 346 $ (126) $ (220)
Less reclassification
Adjustment for gain realized in net income -- -- --
------ ------ ------
Other comprehensive income, net $ 346 $ (126) $ 220
====== ====== ======
14. 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 December 31, 2003, the Company had six stock-based compensation plans,
which are more fully described in note M. 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).
December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Net income, as reported $ 2,402 $ 2,020 $ 1,511
Less stock-based compensation costs determined under fair value based
method for all awards 169 179 443
--------- --------- ---------
Net income, pro forma 2,223 1,841 1,068
Earnings per share - basic as reported $ 0.71 $ 0.61 $ 0.45
Earnings per share - basic proforma 0.66 0.55 $ 0.32
Earnings per share - diluted as reported $ 0.67 $ 0.58 $ 0.44
Earnings per share - diluted proforma 0.62 0.52 0.31
(Continued)
29
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2003, 2002 and 2001,
dividend yield of 0 % for each year; expected volatility of 25% in each
year; risk-free interest rate of 2.87% in 2003, 3.81% in 2002 and 5.65% in
2001; and expected lives of five years in each year.
15. 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.
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. CBNJ Capital Trust
I is currently included in the Company's consolidated balance sheets and
statements of income. The Company has evaluated the impact of FIN 46 and
concluded it should continue to consolidate CBNJ Capital Trust I as of
December 31, 2003, in part due to its ability to call the preferred stock
prior to the mandatory redemption date and thereby benefit from a decline
in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to
certain variable interest entities by March 31, 2004. The Company plans to
adopt the provisions under the revised interpretation in the first quarter
of 2004. FIN 46(R) will require Community Bancorp of New Jersey, Inc. to
deconsolidate CBNJ Capital Trust I as of March 31, 2004. FIN 46(R)
precludes consideration of the call option embedded in the preferred stock
when determining if the Company has the right to a majority of CBNJ
Capital Trust I's expected residual returns. Accordingly, the Company will
deconsolidate CBNJ Capital Trust I at the end of the first quarter, which
will result in an increase in the outstanding debt by $155,000. The
banking regulatory agencies have not issued any guidance that would change
the regulatory capital treatment for the trust preferred securities issued
by CBNJ Capital Trust I based on the adoption of FIN 46(R). However, as
additional interpretations from the banking regulators related to entities
such as CBNJ Capital Trust I become available, management will reevaluate
its potential impact to its Tier I capital calculation under such
interpretations.
16. Reclassification
Certain reclassifications have been made to the 2002 and 2001 financial
statements to conform to the 2003 presentation.
NOTE C - PENDING MERGER
On February 16, 2004, the Company and Sun Bancorp, Inc ("Sun Bancorp")
entered into an Agreement and Plan of Merger (the "Agreement") which
provides for, among other things, the acquisition of the Company by Sun
Bancorp. Contemporaneous with the completion of the acquisition, Community
Bank of New Jersey, a wholly-owned subsidiary of the Company, will merge
with and into Sun National Bank, a wholly-owned subsidiary of Sun Bancorp.
The Agreement provides that shareholders of the Company will receive
0.8715 shares of Sun Bancorp common stock for each share of the Company's
common stock as adjusted to reflect Sun's recently announced 5% stock
dividend. The Boards of Directors of the Company and Sun Bancorp expect
the transaction to close in mid-2004. The merger is subject to a number of
conditions including the approval of the regulators and the Company's
shareholders.
NOTE D - INVESTMENT SECURITIES
The following tables present the book values, fair values and gross
unrealized gains and losses of the Company's investment securities
portfolio as of December 31, 2003 and 2002 (in thousands):
December 31, 2003
-----------------
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment securities available-for-sale
U.S. Government and agency securities $ 193,705 -- (3,142) 190,563
Mortgage backed securities 4,306 11 -- 4,317
Corporate debt securities and other 5,145 -- -- 5,145
--------- --------- --------- ---------
$ 203,156 $ 11 $ (3,142) $ 200,025
========= ========= ========= =========
30
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2002
-----------------
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment securities available-for-sale
U.S. Government and agency securities $128,937 1,109 -- 130,046
Corporate debt securities and other 1,630 -- -- 1,630
--------- --------- --------- ---------
$130,567 $ 1,109 $ $ 131,676
========= ========= ========= =========
The amortized cost and fair value of the Company's investment securities
at December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties (in thousands).
Available-for-sale
------------------
Amortized Fair
cost value
---- -----
Due in one year or less $ -- $ --
Due after one year through five years 197,011 193,896
Due after five years through ten years 2,500 2,484
Due after ten years 3,645 3,645
-------- --------
$203,156 $200,025
======== ========
A portion of the Company's U.S. Government and agency securities, totaling
approximately $993,000 and $1,300,000 at December 31, 2003 and 2002, was
pledged as collateral to secure deposits as required or permitted by law.
Proceeds from the sales of investment securities during 2003 and 2002 were
approximately $84,355,000 and $15,704,000, respectively. Gross gains
realized on those sales were approximately $408,000 and $554,000 in 2003
and 2002, respectively. There were no sales of investment securities
during 2001.
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2003 (in
thousands):
Description of Number of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Securities Value Losses Value Losses Value Losses
---------- ---------- ----- ------ ----- ------ ----- ------
U.S. government and agency 35 190.563 $(3,142) -- -- $190,563 $(3,142)
securities
Management has considered factors regarding other than temporarily
impaired securities and determined that there are no securities that are
impaired as of December 31, 2003.
31
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE E - LOANS RECEIVABLE
Major loan classifications at December 31 are as follows (in thousands):
2003 2002
---- ----
Consumer loans $ 24,161 $ 22,195
Residential mortgages 3,324 5,832
Commercial and industrial loans 39,791 46,998
Construction loans 34,694 13,295
Commercial mortgages 100,008 94,304
Other 323 585
--------- ---------
202,301 183,209
Less
Unearned discounts and deferred loan fees (257) (242)
Allowance for loan losses (2,618) (2,406)
--------- ---------
$ 199,426 $ 180,561
========= =========
The Company had no non-accrual loans or loans that would be defined as
impaired at December 31, 2003 or 2002.
The Company defines non-performing assets to include loans past due 90
days or more, impaired loans and other real estate owned. The Company had
no non-performing assets at December 31, 2003 or 2002. There were no loans
to directors or executive officers at or during the periods ended December
31, 2003 or 2002.
Changes in the allowance for loan losses is as follows (in thousands):
2003 2002
---- ----
Balance, beginning of year $ 2,406 $ 1,964
Provision charged to expenses 214 893
Loans charged-off, net (2) (451)
------- -------
Balance, end of period $ 2,618 $ 2,406
======= =======
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are as follows (in thousands):
Estimated
useful lives 2003 2002
------------ ---- ----
Land $ 443 $ 443
Buildings and leasehold improvements Indefinite 5,217 4,573
Furniture, fixtures and equipment 10 - 39 years 1,688 1,598
Computer equipment and software 3 - 7 years 2,012 1,754
Construction in progress 3 - 5 years 640 170
- -------- --------
10,000 8,538
Less accumulated depreciation and amortization (3,168) (2,258)
-------- --------
$ 6,832 $ 6,280
======== ========
Depreciation and amortization charged to operations amounted to
approximately $970,000, $879,000 and $656,000 for years ended December 31,
2003, 2002 and 2001 respectively.
32
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE G - DEPOSITS
At December 31, 2003, the scheduled maturities of certificates of deposit
are summarized as follows (in thousands):
2004 $101,998
2005 1,729
--------
$103,727
========
Interest expense on deposits is as follows (in thousands):
2003 2002 2001
---- ---- ----
Savings $1,694 $1,610 $1,461
NOW and money market 391 372 477
Time deposits 2,952 3,075 3,623
------ ------ ------
$5,037 $5,057 $5,561
====== ====== ======
NOTE H - EQUITY TRANSACTIONS
On May 15, 2003 the Company paid a 5% stock dividend to shareholders of
record as of April 28, 2003. On May 15, 2002 the Company paid a 5% stock
dividend to shareholders of record as of April 23, 2002. Weighted average
shares outstanding and earnings per share were retroactively adjusted to
reflect the stock dividends.
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. The Company paid shareholders a 5% stock
dividend in 2002 and 2001. Weighted average shares outstanding and
earnings per share were retroactively adjusted to reflect the stock split
and the stock dividends.
NOTE I - DEBT
1. Short-Term Borrowings
Short-term borrowings consist of overnight federal funds purchased and
short-term advances from the Federal Home Loan Bank of New York, which
generally have maturities of less than one month. The details of these
categories are presented below:
Year ended December 31,
-----------------------
2003 2002
---- ----
(in thousands)
Federal funds purchased and short-term advances
Balance at year-end $ 72,400 $ 11,500
Average during the year 41,263 9,015
Maximum month-end balance 110,200 15,700
Weighted average rate during the year 1.15% 1.77%
Rate at December 31 1.11% 1.35
2. Guaranteed Preferred Beneficial Interest in the Company's Subordinated
Debt
The Company issued $5.0 million of trust preferred securities to a pooled
investment vehicle sponsored by Bear, Stearns & Co., Inc. on December 20,
2002. These securities have a floating interest rate equal to three month
LIBOR plus 335 basis points, which resets quarterly. The average interest
rate paid during 2003 was 4.80%. The variable interest rate is capped at
12.5% through January 7, 2008. The securities mature on January 7, 2033,
and may be called at par by the Company any time after January 7, 2008.
The securities were placed in a private transaction exempted from
registration under the Securities Act of 1933, as amended.
Although the subordinated debentures are treated as debt of the Company,
they currently qualify as Tier I capital investments, subject to the 25%
limitation under risk-based capital guidelines of the Federal Reserve. The
portion of the Trust Preferred Securities that exceeds this limitation
qualifies as Tier II capital of the Company. At December 31, 2003 the $5.0
million of Trust Preferred Securities qualified for treatment as Tier I
capital.
33
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE J - INCOME TAXES
The components of the provision for income taxes (benefit) are as follows
(in thousands):
Current 2003 2002 2001
------- ---- ---- ----
Current
Federal $ 1,276 $ 975 $ 893
State 184 178 70
------- ------- -------
1,460 1,153 963
------- ------- -------
Deferred
Federal provision (benefit) (80) 6 (114)
State provision (benefit) (64) 1 (5)
------- ------- -------
(144) 7 (119)
------- ------- -------
$ 1,316 $ 1,160 $ 844
======= ======= =======
A reconciliation between the reported income tax expense and the amount
computed by multiplying income before income tax by the Federal statutory
income tax rate is as follows (in thousands):
2003 2002 2001
---- ---- ----
Expected statutory income tax expense $ 1,264 $ 1,081 $ 801
Increase (decrease) in taxes resulting from:
State taxes on income 79 117 44
Other net (27) (38) (1)
------- ------- -------
Total income tax provision $ 1,316 $ 1,160 $ 844
======= ======= =======
Net deferred tax assets consist of the following (in thousands):
2003 2002
---- ----
Allowance for loan loss $ 726 $ 648
Unrealized losses (gains) on investment securities 1,174 (421)
available-for-sale
Other 3 63
------ ------
Net deferred tax asset, included in other assets $1,903 $ 164
====== ======
34
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE K - OTHER EXPENSES
Other expenses consist of the following (in thousands):
2003 2002 2001
---- ---- ----
Communications and office expense $ 343 $ 317 $ 267
Stationery and printing 247 213 320
Data processing 1,099 904 739
Professional fees 516 448 324
Marketing and advertising 482 470 417
Stockholder expense 87 50 49
Directors' fees 175 77 58
Other 356 336 461
------ ------ ------
$3,305 $2,815 $2,635
====== ====== ======
NOTE L - EARNINGS PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations (in thousands, except per share
data). Weighted-average shares for 2003 and 2002 have been retroactively
adjusted to reflect the 5% stock dividends in 2003 and 2002 and the
3-for-2 stock split in 2002.
Year ended December 31, 2003
----------------------------
Weighted-
average Per share
Income shares amount
------ ------ ------
Basic EPS
Net income available to common stockholders $2,402 3,364 $0.71
Effect of dilutive securities - options -- 225 (0.04)
------ ------ -----
Diluted EPS
Net income available to common stockholders plus
assumed conversion $2,402 3,589 $0.67
====== ====== =====
18,000 options to purchase shares of common stock with exercise prices
ranging from $20.64 to $21.86 per share were not included in the
computation of 2003 diluted EPS because the exercise price was greater
than the average market price of the common stock.
35
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE L - EARNINGS PER SHARE - Continued
Year ended December 31, 2002
--------------------------------
Weighted-
average Per share
Income shares amount
------ ------ ------
Basic EPS
Net income available to common stockholders $2,020 3,331 $ 0.61
Effect of dilutive securities
Options $ -- 160 (0.03)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus
assumed conversion $2,020 3,491 $ 0.58
====== ====== ======
756 options to purchase shares of common stock with exercise prices of
$16.50 per share were not included in the computation of 2002 diluted EPS
because the exercise price was greater than the average market price of
the common stock.
Year ended December 31, 2001
--------------------------------
Weighted-
average Per share
Income shares amount
------ ------ ------
Basic EPS
Net income available to common stockholders $1,511 3,331 $ 0.45
Effect of dilutive securities
Options $ -- 67 (0.01)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus
assumed conversion $1,511 3,398 $ 0.44
====== ====== ======
NOTE M - STOCK OPTIONS
Under the Company's 1997 Stock Option Plan for Non-Employee Directors (the
1997 Stock Option Plan for Non-Employee Directors), options to purchase
84,508 common stock shares may be issued. Each of the nine non-employee
directors were automatically granted 9,389 common stock options
exercisable at $6.12 per share (110% of market value on date of grant, as
adjusted for subsequent stock dividends and stock splits) in July 1997.
The options vest one-third each year. The option may be exercised up to 10
years after the grant. At December 31, 2003, 71,988 options were
outstanding under this plan.
Under the Company's 1997 Stock Option Plan (the 1997 Stock Option Plan),
options to purchase 109,278 common stock shares may be issued. Options to
purchase 81,691 common stock shares were granted to nine non-employee
directors at $6.12 per share (110% of market value on date of grant, as
adjusted for subsequent stock dividends and stock splits) in July 1997, in
varying amounts to each non-employee director. Additionally, 28,169
options were granted to the President at $7.86 per share in May 1999, as
adjusted for subsequent stock dividends and stock splits. The options vest
one-third each year. The options may be exercised up to 10 years after the
grant. At December 31, 2003,107,669 options were outstanding under this
plan.
Under the Company's 1997 Employee Stock Option Plan (the 1997 Employee
Stock Option Plan), options to purchase 93,897 common stock shares may be
issued. The plan is designed to reserve options for employees of the
Company. The discretion of the board is very broad in determining to whom,
how many, and at what price options may be issued. Under the Plan,
employees may be awarded either incentive stock options, which must have
an exercise price of no less than 100% of the fair market value of the
common stock on the date of grant, or non-qualified options, which may
have an exercise price to be determined by the Board of Directors at
grant, but not less than 85% of the fair market value of the common stock
on the date of grant. The options under this plan vest from 3 to 5 years.
At December 31, 2003, 71,646 options were outstanding under this plan.
36
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE M - STOCK OPTIONS - Continued
Under the 1998 Stock Option Plan (the 1998 Stock Option Plan) options to
purchase up to 93,897 shares of common stock may be issued to members of
management. The Board adopted this stock option plan in connection with
the retention of the President and Chief Executive Officer of the Company.
Under the terms of the President's employment, he is entitled to receive
options to purchase 140,847 shares of common stock. The options under this
plan vest from 3 to 5 years. At December 31, 2003, 64,081 options were
outstanding under this plan.
The Board of Directors approved and received shareholder approval in April
2000 for the 2000 Director Stock Option Plan (the 2000 Director Stock
Option Plan), pursuant to which options to purchase 156,498 common stock
shares may be issued. Options to purchase 133,098 and 23,400 shares of
common stock have been granted to eight non-employee directors at $7.56
and $9.56, respectively, per share (110% of market value on date of grant,
as adjusted for subsequent stock dividends and stock splits) in varying
amounts to each non-employee director. The options vest over a two year
period. The options may be exercised up to ten years after the grant. At
December 31, 2003, 139,679 options were outstanding under this plan.
The Board of Directors approved and received shareholder approval in April
2000 for the 2000 Employee Stock Option Plan (the 2000 Employee Stock
Option Plan). Options to purchase 127,628 shares of the common stock are
authorized under this Plan. Options to purchase 120,908 common stock
shares have been granted to key employees, including 26,398 to the
President, at prices ranging from $7.20 to $21.86. The options under this
plan vest from two to five years. The options may be exercised up to ten
years after grant. At December 31, 2003, 94,751 options were granted under
this plan.
A summary of the status of the Company's stock option plans as of December
31, 2003, and the change during the years then ended is represented below.
A summary of the status of the Company's stock option plans as of December
31, 2003, and the change during the years then ended is represented below.
2003 2002
---- ----
--------------------------------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
------ ----- ------ -----
Outstanding, beginning of year 587,759 $10.19 542,878 $ 8.90
Granted 40,500 20.15 70,481 10.37
Cancelled/forfeited/exercised (78,441) 4.22 (25,600) 9.86
-------- ------ -------- ------
Outstanding, end of year 549,818 12.98 587,759 10.19
======== ====== ======== ======
Weighted-average fair value of
options granted during the year $20.15 $ 4.66
====== ======
37
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE M - STOCK OPTIONS - Continued
The following table summarizes information about nonqualified options
outstanding at December 31, 2003:
Options outstanding Options exercisable
------------------- -------------------
Weighted-
Number average Weighted- Number Weighted-
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 2003 life price 2003 price
--------------- ---- ---- ----- ---- -----
$ 6.12 - $ 9.86 495,464 4.9 years $ 7.55 469,906 $ 7.47
$10.79 - $15.71 13,854 8.6 years $ 11.91 5,542 $ 11.91
$19.29 - $21.86 40,500 9.6 years $ 20.15 8,100 $ 20.15
------- -------
549,818 483,548
======= =======
NOTE N - EMPLOYEE BENEFIT PLANS
Retirement Savings The Company contributes to a Company sponsored 401(k)
plan. All eligible employees can contribute a portion of their annual
salary with the Company matching up to 2% of the employee's gross salary.
The Company's contributions for 2003, 2002 and 2001 totaled $15 thousand,
$9 thousand and $4 thousand, respectively. In 2004, the Company expects to
match up to 2% of the employee's gross salary.
Supplemental Executive Retirement Plan In 2003, the Company purchased a
supplemental executive retirement plan for its Chief Executive Officer and
its Chief Lending Officer. The plan provides annual retirement benefits of
$47,815 a year for the Chief Executive Officer and $56,652 a year for the
Chief Lending Officer, for a ten-year period when either officer reaches
the age of 72. The Company intends to fund its obligations under the
deferred compensation arrangements with the increase in cash surrender
value of bank owned life insurance policies purchased in 2003.
NOTE O - COMMITMENTS
Lease Commitments
The Company leases several banking facilities under noncancelable
operating lease agreements expiring through 2024. At the end of the lease
terms, the leases are renewable at the then fair rental value for periods
of 5 to 20 years. Rent expense was $380 thousand $313 thousand and $193
thousand for the years ended December 31, 2003, 2002 and 2001,
respectively.
The approximate minimum rental commitments under operating leases at
December 31, 2003, are as follows (in thousands):
2004 $412
2005 472
2006 511
2007 517
2008 459
Thereafter 5,079
------
$7,450
------
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the financial statements. The Company's exposure
to credit loss in the event of non-performance by the other party to the
financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
(Continued)
38
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Continued
The Company had the following approximate off-balance-sheet financial
instruments whose contract amounts represent credit risk (in thousands):
2003 2002
---- ----
Commitments to extend credit $82,470 $35,785
Letters of credit - standby and performance 4,480 4,042
------- -------
$86,950 $39,827
======= =======
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case-basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include guarantees, personal or
commercial real estate, accounts receivable, inventory, and equipment.
Commitments include lines of credit with maturities as shown in the
following table (in thousands).
Less than One to Three Four to Five After Five
One Year Years Years Years Total
-------- ----- ----- ----- -----
Lines of credit commitments $19,334 $8,964 $117 $20,584 $48,999
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support contracts entered into by
customers. Most guarantees extend for one year. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The company defines the fair value
of these letters of credit as the fees paid by the customer or similar
fees collected on similar instruments. The company amortizes the fees
collected over the life of the instrument. Management, based upon their
periodic analysis, has determined that an SFAS No. 5, Accounting for
Contingencies, reserve is not necessary at December 31, 2003. The Bank
generally obtains collateral, such as real estate or liens on customer
assets for these types of commitments. The Bank's potential liability
would be reduced by proceeds obtained in liquidation of the collateral
held. The Bank had standby letters of credit for customers aggregating
$4.5 million and $4.0 million at December 31, 2003 and 2002, respectively.
Substantially all of the Company's loans are secured by real estate in New
Jersey. Accordingly, the Company's primary concentration of credit risk is
related to the real estate market in New Jersey, and the ultimate
collectibility of this portion of the Company's loan portfolio is
susceptible to changes in economic conditions in that area.
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments.
For the Company, as for most financial institutions, the majority of its
assets and liabilities are considered financial instruments. However, many
such instruments lack an available trading market, as characterized by a
willing buyer and seller engaging in an exchange transaction. Also, it is
the Company's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities,
except for certain loans. Therefore, the Company had to use significant
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to
the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
(Continued)
39
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated
fair values, and recorded book balances at December 31, 2003 and 2002, are
outlined below.
For cash and cash equivalents, including cash and due from banks and
federal funds sold the recorded book values of $11,465 and $9,424 as of
December 31, 2003 and 2002, respectively, approximate fair values. The
estimated fair values of investment securities are based on quoted market
prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not
available.
The net loan portfolio at December 31, 2003 and 2002, has been valued
using a present value discounted cash flow where market prices were not
available. The discount rate used in these calculations is the estimated
current market rate adjusted for credit risk. The carrying value of
accrued interest approximates fair value.
The estimated fair values of demand deposits (i.e., interest- and
non-interest bearing checking accounts, savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The fair
values of certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. Based
upon the current time deposit maturities, the carrying value approximates
its fair value. The carrying amount of accrued interest payable
approximates its fair value. Fair value of financial instruments with
stated maturities has been estimated using present value cash flow,
discounted at a rate approximating current market for similar assets and
liabilities.
2003 2002
---- ----
---------------------------------------------------
Carrying Estimated Carrying Estimated
Amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Investment securities available-for-sale $200,025 $200,025 $131,676 $131,676
Loans receivable 202,044 201,900 182,967 184,749
Certificates of deposits 103,727 103,727 115,419 115,419
Short-term borrowings 72,400 72,400 11,500 11,500
Guaranteed preferred beneficial interest in the
Company's subordinated debt 5,000 5,000 5,000 5,000
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the
estimated cost to terminate the letters of credit. Fair values of
unrecognized financial instruments including commitments to extend credit
and the fair value of letters of credit are considered immaterial.
NOTE R - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
(Continued)
40
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE R - REGULATORY MATTERS - Continued
Quantitative measures established by regulations to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets, and of Tier I capital
to average assets. Management believes, as of December 31, 2003, that the
Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2003, the Bank met all regulatory requirements for
classification as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank
must maintain minimum total risk-based, core risk-based and core leverage
ratios as set forth in the table. There are no conditions or events that
management believes have changed the institution's category.
The Company and the Bank's actual capital amounts and ratios are also
presented in the following table (in thousands, except percentages).
To be well-
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of December 31, 2003
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $33,495 12.72% $21,065 >= 8.00% N/A N/A
Community Bank of New Jersey 28,207 10.70 21,082 >= 8.00 $26,353 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 30,867 11.72 10,532 >= 4.00 N/A N/A
Community Bank of New Jersey 25,589 9.71 10,541 >= 4.00 15,812 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 30,867 7.19 12,878 >= 3.00 N/A N/A
Community Bank of New Jersey 25,589 5.96 12,878 >= 3.00 21,463 >= 5.00
As of December 31, 2002
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $30,316 13.68% $17,605 >= 8.00% N/A N/A
Community Bank of New Jersey 25,322 11.51 17,593 >= 8.00 21,991 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 27,910 12.68 8,803 >= 4.00 N/A N/A
Community Bank of New Jersey 22,916 10.42 8,796 >= 4.00 13,195 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 27,910 8.75 9,564 >= 3.00 N/A N/A
Community Bank of New Jersey 22,916 7.19 9,564 >= 4.00 15,941 >= 5.00
(Continued)
41
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003 and 2002
NOTE S - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for Community Bancorp of New Jersey,
parent company only, has been presented as follows (in thousands):
BALANCE SHEET
December 31,
------------
2003 2002
---- ----
ASSETS
Cash $ 5,399 $ 4,872
Investment in subsidiary 23,632 23,605
Other assets 124 163
------- -------
Total assets $29,155 $28,640
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interest in the Company's subordinated debt $ 5,000 $ 5,000
Other liabilities 235 42
Stockholders' equity 23,920 23,598
------- -------
Total liabilities and stockholders' equity $29,155 $28,640
======= =======
STATEMENT OF OPERATIONS
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Interest Income $ 87 $ 3 $ --
Services fee from subsidiary -- 193 129
Interest expense on subordinated debt (240) (8) --
Other operating expenses (117) (185) (129)
------- ------- -------
(Loss) income before undistributed income from subsidiary (270) 3 --
Equity in undistributed income of subsidiary 2,672 2,017 1,511
------- ------- -------
Net income $ 2,402 $ 2,020 $ 1,511
======= ======= =======
(Continued)
42
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE S - PARENT COMPANY FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
-------------------------------
Cash flows from operating activities
Net income $ 2,402 $ 2,020 $ 1,511
Adjustments to reconcile net income to net cash provided by operations
Equity in undistributed earnings of subsidiary (2,672) (2,017) (1,511)
Net (increase) decrease in other assets 39 (163) 119
Net increase in other liabilities 317 37 (117)
------- ------- -------
Net cash used in operating activities (38) (123) 2
------- ------- -------
Cash flows from financing activities -- 5,000 --
Proceeds from issuance of long-term debt (5) (8) (3)
Stock dividends and stock-split - cash paid in lieu of fractional shares 446 3 --
------- ------- -------
Effect of stock options transactions
Net cash provided by (used in) financing activities 565 4,995 (3)
Net increase (decrease) in cash and cash equivalents 527 4,872 (1)
------- ------- -------
Cash and cash equivalents at beginning of period 4,872 -- 1
------- ------- -------
Cash and cash equivalents at end of year $ 5,399 $ 4,872 $ --
======= ======= =======
43
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE T - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during
2003, 2002 and 2001, on a quarterly basis, for Community Bancorp of New
Jersey (in thousands except per share data):
2003
-------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $4,296 $4,464 $4,457 $4,185
Interest expense 1,396 1,432 1,470 1,452
------ ------ ------ ------
Net interest income 2,900 3,032 2,987 2,733
Provision for loan losses -- 41 60 113
------ ------ ------ ------
Net interest after provisions for loan losses 2,900 2,991 2,927 2,733
Non-interest income 434 437 389 330
Gain on sales of investment securities -- 34 -- 374
Non-interest expense 2,588 2,406 2,359 2,365
------ ------ ------ ------
Income before income taxes 746 1,056 957 959
Income taxes 254 363 346 353
------ ------ ------ ------
Net income $ 492 $ 693 $ 611 $ 606
====== ====== ====== ======
Net income per share
Basic $ 0.14 $ 0.21 $ 0.18 $ 0.18
Diluted $ 0.14 $ 0.19 $ 0.17 $ 0.17
2002
-------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $4,158 $4,109 $3,855 $3,756
Interest expense 1,393 1,325 1,227 1,280
------ ------ ------ ------
Net interest income 2,765 2,784 2,628 2,476
Provision for loan losses 53 155 595 90
------ ------ ------ ------
Net interest after provisions for loan losses 2,712 2,629 2,033 2,386
Non-interest income 333 292 309 386
Gain on sales of investment securities -- 554 -- --
Non-interest expense 2,188 2,302 2,107 1,927
------ ------ ------ ------
Income before income taxes 927 1,173 235 845
Income taxes 339 445 84 292
------ ------ ------ ------
Net income $ 588 $ 728 $ 151 $ 553
====== ====== ====== ======
Net income per share
Basic $ 0.18 $ 0.22 $ 0.05 $ 0.16
Diluted $ 0.17 $ 0.21 $ 0.04 $ 0.16
44
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 2003, 2002 and 2001
NOTE T - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during
2003, 2002 and 2001, on a quarterly basis, for Community Bancorp of New
Jersey (in thousands except per share data):
2001
-------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $3,658 $3,633 $3,405 $3,469
Interest expense 1,325 1,363 1,371 1,532
------ ------ ------ ------
Net interest income 2,333 2,270 2,034 1,937
Provision for loan losses 45 95 100 146
------ ------ ------ ------
Net interest after provisions for loan losses 2,288 2,175 1,934 1,791
Non-interest income 405 289 376 358
1,994 1,876 1,768 1,623
------ ------ ------ ------
Non-interest expense
Income before income taxes 699 588 542 526
Income taxes 243 214 195 192
------ ------ ------ ------
Net income $ 456 $ 374 $ 347 $ 334
====== ====== ====== ======
Net income per share
Basic $ .14 $ .11 $ .10 $ .10
Diluted $ .14 $ .11 $ .10 $ .09
45
Report of Independent Certified Public Accountants
Board of Directors and Stockholders Community Bancorp of New Jersey
We have audited the consolidated balance sheets of Community Bancorp of New
Jersey and its subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community Bancorp
of New Jersey as of December 31, 2003 and 2002, and the consolidated results of
its consolidated operations and consolidated cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/S/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 12, 2004 (except for Note C, as to which the date is February 16, 2004)
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