UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
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 0-13440
-------------------------------------
B.M.J. FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2474875
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
243 ROUTE 130, BORDENTOWN, NJ 08505
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(609) 298-5500
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 7,612,615 shares of common
stock, $1.00 par value, outstanding on October 31, 1995.
INDEX
PART 1. FINANCIAL INFORMATION
Consolidated Balance Sheet -
September 30, 1995 (Unaudited) and December 31, 1994
Consolidated Statement of Operations -
Three months and nine months ended September 30,
1995 and 1994 (Unaudited)
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1995 and 1994 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART 11. OTHER INFORMATION
SIGNATURES
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(In thousands)
September 30, December 31,
1995 1994
--------- ---------
ASSETS
Cash and cash equivalents:
Cash and due from banks ...................................................... $ 19,200 $ 21,725
Money market investments ..................................................... 8,498 23,054
--------- ---------
Total cash and cash equivalents ............................................ 27,698 44,779
--------- ---------
Securities available for sale (amortized cost of $37,128 at
September 30, 1995 and $3,006 at December 31, 1994) .......................... 37,139 2,911
Securities held to maturity (market value of $106,759 at
September 30, 1995 and $113,095 at December 31, 1994):
U.S. Treasury securities ..................................................... 16,239 25,308
U.S. government agencies and corporations .................................... 84,831 89,815
States and political subdivisions ............................................ 3,925 3,080
Other securities ............................................................. 2,349 781
--------- ---------
Total securities held to maturity .......................................... 107,344 118,984
--------- ---------
Loans, net of unearned income .................................................. 381,207 354,480
Less reserve for loan losses ................................................... 12,803 12,485
--------- ---------
Net loans .................................................................. 368,404 341,995
--------- ---------
Premises and equipment, net .................................................... 5,889 5,598
Other real estate, net ......................................................... 2,716 7,214
Other assets ................................................................... 16,749 16,951
--------- ---------
Total assets ............................................................... $ 565,939 $ 538,432
========= =========
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet (Continued)
(Unaudited)
(In thousands)
September 30, December 31,
1995 1994
--------- ---------
LIABILITIES
Demand deposits (noninterest-bearing) .......................................... $ 76,439 $ 78,446
Savings and interest checking .................................................. 255,172 271,209
Certificates of deposit of $100,000 or more .................................... 10,933 4,483
Other time deposits ............................................................ 135,698 109,436
--------- ---------
Total deposits ............................................................. 478,242 463,574
--------- ---------
Securities sold under agreements to repurchase ................................. 14,910 8,857
Other liabilities .............................................................. 5,914 4,955
Capital notes / long term debt ................................................. 3,740 2,700
--------- ---------
Total liabilities .......................................................... 502,806 480,086
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share.
Authorized 25,000,000 shares;
issued and outstanding 7,607,943 shares at September 30, 1995
and 7,597,513 at December 31, 1994 ........................................... 7,608 7,597
Surplus ........................................................................ 36,436 36,311
Retained earnings .............................................................. 19,082 14,501
Unrealized gain (loss) on securities available for sale, net of tax ............ 7 (63)
--------- ---------
Total shareholders' equity ................................................. 63,133 58,346
--------- ---------
Total liabilities and shareholders' equity ................................. $ 565,939 $ 538,432
========= =========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited) Three months ended Sept.30, Nine months ended Sept.30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans ................................... $ 8,588 $ 7,507 $ 24,699 $ 22,729
Interest on money market investments:
Time deposits with other banks ............................. -- 129 48 271
Interest bearing deposits with other banks ................. 4 20 22 62
Federal funds sold and repurchase agreements ............... 93 106 273 340
Other short term investments ............................... 99 336 290 853
Interest on securities available for sale:
U.S. Treasury securities ................................... 46 34 113 343
U.S. government agencies and corporations .................. 257 -- 274 75
States and political subdivisions (tax-exempt) ............. 96 -- 151 5
Other securities ........................................... 4
Interest on securities held to maturity:
U.S. Treasury securities ................................... 240 327 790 893
U.S. government agencies and corporations .................. 1,230 1,102 3,723 3,133
States and political subdivisions (tax-exempt) ............. 55 44 184 172
Other securities ........................................... 43 11 67 36
----------- ----------- ----------- -----------
Total interest income .................................... 10,751 9,616 30,634 28,916
----------- ----------- ----------- -----------
INTEREST EXPENSE
Savings and interest checking deposits ....................... 1,499 1,294 4,228 4,273
Certificates of deposit of $100,000 or more ................. 177 38 340 153
Other time deposits .......................................... 1,749 960 4,332 2,857
Other debt ................................................... 261 118 712 356
----------- ----------- ----------- -----------
Total interest expense ................................... 3,686 2,410 9,612 7,639
----------- ----------- ----------- -----------
Net interest income .......................................... 7,065 7,206 21,022 21,277
Provision for loan losses .................................... -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ...... 7,065 7,206 21,022 21,277
----------- ----------- ----------- -----------
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Operations (Continued)
(In Thousands, Except Per Share Amounts)
(Unaudited) Three months ended Sept.30, Nine months ended Sept.30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges, commissions, and fees ....................... 954 1,228 2,754 3,651
Trust income ................................................. 106 129 344 281
Gain on sale of other real estate ............................ 17 38 103 410
Total noninterest income ................................. 1,077 1,395 3,201 4,342
NONINTEREST EXPENSE
Salaries and employee benefits ............................... 2,284 2,607 7,182 8,181
Net occupancy ................................................ 694 766 2,158 2,473
Other real estate expense .................................... 113 226 403 1,154
Other ........................................................ 2,222 2,888 7,105 8,365
----------- ----------- ----------- -----------
Total noninterest expense ................................ 5,313 6,487 16,848 20,173
----------- ----------- ----------- -----------
Income before income tax expense ............................. 2,829 2,114 7,375 5,446
Income tax expense:
Provision for income tax ................................... 8 -- 1,653 7
Reversal of valuation allowance ............................ -- -- -- (3,500)
----------- ----------- ----------- -----------
Income before extraordinary charge ........................... 2,821 2,114 5,722 8,939
Extraordinary charge - early redemption of
convertible notes .......................................... -- (87) -- (87)
----------- ----------- ----------- -----------
NET INCOME ................................................... $ 2,821 $ 2,027 $ 5,722 $ 8,852
=========== =========== =========== ===========
Earnings per share - Primary ................................. $ 0.37 $ 0.26 $ 0.74 $ 1.16
=========== =========== =========== ===========
- Fully diluted ........................... $ 0.36 $ 0.26 $ 0.74 $ 1.14
=========== =========== =========== ===========
Weighted average shares outstanding - Primary ................ 7,722,363 7,665,823 7,699,947 7,607,679
=========== =========== =========== ===========
- Fully diluted .......... 7,918,947 7,898,084 7,911,214 7,862,475
=========== =========== =========== ===========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows
(unaudited)
(in thousands)
Nine months ended September 30,
1995 1994
-------- --------
Cash flows from operating activities:
Net income ............................................................... $ 5,722 $ 8,852
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of premises and equipment .................................. 586 702
Amortization of intangibles ............................................. 86 351
Net accretion of securities available for sale .......................... (138) (145)
Net amortization (accretion) of securities held to maturity ............. 52 (77)
Provision for other real estate ......................................... -- 663
Net (increase) decrease in other real estate owned ...................... 124 (393)
Gain on sale of loans and other real estate ............................. -- (69)
Increase (decrease) in equity from unrealized holding loss
on securities available for sale, net of tax .......................... 69 (47)
Decrease (increase) in other assets ..................................... 117 (5,160)
Increase in other liabilities ........................................... 959 292
-------- --------
Net cash provided by operating activities ................................ 7,577 4,969
-------- --------
Cash flows from investing activities:
Proceeds from maturities and sale of securities available for sale ...... 1,517 25,926
Purchase of securities available for sale ............................... (35,607) (2,749)
Proceeds from maturities of securities held to maturity ................. 15,512 67,782
Purchase of securities held to maturity ................................. (3,924) (71,382)
Net increase in loans ................................................... (26,230) (11,481)
Proceeds from sale of loans ............................................. -- 5,033
Proceeds from other real estate ......................................... 4,194 8,232
Proceeds from sale of bank subsidiary ................................... -- 6,846
Property and equipment expenditures ..................................... (876) (392)
-------- --------
Net cash provided by (used in) investing activities ...................... (45,414) 27,815
-------- --------
Cash flows from financing activities:
Net decrease in demand deposits, savings and interest checking accounts . (18,044) (26,639)
Net increase in certificates of deposit ................................. 32,712 1,419
Repayments of capital notes ............................................. -- (1,611)
Net increase in borrowed funds .......................................... 1,050 --
Net increase in securities sold under agreements to repurchase .......... 6,053 5,107
Dividends paid .......................................................... (1,140) --
Issuance of stock ....................................................... 125 --
-------- --------
Net cash provided by (used in) financing activities ...................... 20,756 (21,724)
-------- --------
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
(unaudited)
(in thousands)
Nine months ended September 30,
1995 1994
-------- --------
Net change in cash and cash equivalents .................................. (17,081) 11,060
Cash and cash equivalents at beginning of period ......................... 44,779 56,251
-------- --------
Cash and cash equivalents at end of period ............................... $ 27,698 $ 67,311
======== ========
Cash paid during the period for:
Interest ................................................................. $ 8,938 $ 7,772
======== ========
Income taxes ............................................................. $ 965 $ 850
======== ========
Noncash investing activities:
Transfer of loans to other real estate, net .............................. $ 2,755 $ 979
======== ========
Transfer of insubstance foreclosures to loans upon adoption of FASB 114 .. $ 2,935 --
======== ========
Transfer of securities available for sale to securities held to maturity . -- $ 28,237
======== ========
Transfer of bank subsidiary held for sale:
Assets ................................................................. -- $ 6,657
======== ========
Liabilities ............................................................ -- $ 62,826
======== ========
Redemption of capital notes through issuance of stock .................... $ 10 $ 502
======== ========
See notes to consolidated financial statements.
B.M.J. FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis For Financial Statement Presentation
The information in this report is unaudited, is subject to year-end
adjustments and audit, and is prepared in accordance with generally accepted
accounting principles. However, in the opinion of management, the information
reflects all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the consolidated financial data as of and
for the three-month and nine-month periods ended September 30, 1995 and 1994.
The results of operations for the nine-month period ended September 30, 1995 are
not necessarily indicative of the results to be expected for the entire year
ending December 31, 1995.
The accompanying consolidated financial statements include the accounts
of B.M.J. Financial Corp. in addition to those of The Bank of Mid-Jersey
("Mid-Jersey"), a wholly-owned subsidiary of B.M.J. Financial Corp. Unless the
context otherwise indicates, the term "BMJ" as used herein refers to the
consolidated B.M.J. Financial Corp. and The Bank of Mid-Jersey entity. All
significant intercompany accounts and transactions have been eliminated. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the reserve for loan
losses and the valuation of other real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the reserves for loan losses and other real estate, management periodically
obtains independent appraisals for significant properties.
Management believes that the reserves for losses on loans and other
real estate are adequate in relation to the risks and uncertainties inherent in
those portfolios. While management uses available information to determine the
appropriate recognition of losses on loans and other real estate, future
additions to the reserves may be necessary based on, among other things, changes
in economic conditions, particularly in New Jersey, and the changing
circumstances of the borrowers. In addition, various regulatory agencies, as an
integral part of their examinations, periodically review BMJ's reserves for loan
losses. Such agencies may request BMJ to consider recognizing additions to the
reserves based on the regulators' judgments about information available to them
at the time of their examination.
These statements should be read in conjunction with the notes to the
consolidated financial statements contained in B.M.J. Financial Corp.'s Annual
Report on Form 10-K to the Securities and Exchange Commission for the year ended
December 31, 1994, to which reference is hereby made.
2. Divestitures and Merger
Effective June 24, 1994, having received the required regulatory and
shareholder approvals, BMJ completed the merger of its Mount Holly State Bank
subsidiary into its lead bank subsidiary, The Bank of Mid-Jersey. This merger
was consistent with the corporate-wide restructuring program initiated in 1993,
with the objectives being to increase operating efficiency and enhance the level
of service provided to customers.
On July 29, 1994, BMJ completed the sale of its Southern Ocean State
Bank subsidiary, located in Tuckerton, New Jersey, to another financial
institution for a total consideration of $6.8 million in cash. At June 30, 1994,
Southern Ocean State Bank had total assets of $69.1 million and had net income
of $591 thousand for the six-month period ended June 30, 1994.
On November 18, 1994, BMJ's Mid-Jersey subsidiary sold the furnishings
and equipment of its Willingboro branch office to another financial institution
which also assumed approximately $6.6 million of deposit liabilities and the
remaining term of the facility lease. This transaction resulted in a net
reduction in BMJ's asset base of $6.3 million and a pre-tax gain of
approximately $104 thousand that is included in 1994 results of operations.
3. Securities
On January 1, 1994, BMJ adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). FAS 115 establishes the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. In accordance with FAS 115, investments
are classified into three categories: (1) held to maturity securities, which are
reported at amortized cost; (2) trading securities, which are reported at fair
value with unrealized gains and losses included in earnings; and (3) available
for sale securities, which are reported at fair value with unrealized gains and
losses reported as a separate component of shareholders' equity and excluded
from earnings. BMJ currently has no securities classified as trading securities.
Securities classified as available for sale may be sold prior to their
contractual maturity in response to changing market and interest rate conditions
or as part of an overall asset/liability strategy. These securities are carried
at their market value with unrealized gains and losses carried, net of tax, as
adjustments to shareholders' equity. Gains and losses on disposition are
included in earnings using the specific identification method.
Securities held to maturity are comprised of securities that BMJ has
the positive intent and ability to hold to maturity. These securities are
carried at cost, adjusted for amortization of premium or accretion of discount.
The premium or discount adjustments are recognized as adjustments to interest
income, on a level yield basis. Unrealized losses due to fluctuations in market
value are recognized as security losses when a decline in value is assessed as
being other than temporary.
On October 18, 1995, The Financial Accounting Standards Board ("FASB")
announced a one-time amnesty on transfers between the portfolios of securities
classified as either (1) held to maturity; (2) trading securities; or (3)
available for sale. The FASB concluded that during an approximately six-week
period ending December 31, 1995, an enterprise may reassess the appropriateness
of the classifications of all securities held at that time and account for any
reclassifications at fair value in accordance with FAS 115. Reclassifications
from the held to maturity portfolio that result from this one- time reassessment
will not call into question the intent of an enterprise to hold other debt
securities to maturity in the future. It is BMJ's intent to reassess the
classification of its securities portfolios during this amnesty period.
4. Reserve For Loan Losses
BMJ maintains a reserve for loan losses that, in management's
judgement, is adequate to absorb future losses inherent in the loan portfolio.
Management has adopted a reserve methodology that requires specific reserve
assessment for all loans including residential real estate mortgages and
consumer loans. This methodology assigns reserves based upon credit risk ratings
for specific loans and general reserves for all other loans. The general
reserves are based on historical charge-off experience but are subject to
certain minimums based upon BMJ's assessment of the current economic
environment.
On January 1, 1995, BMJ adopted FAS No. 114, "Accounting by Creditors
for Impairment of a Loan" and FAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." FAS No. 114 provides
guidelines for measuring impairment losses on loans. A loan is considered to be
impaired when it is probable that BMJ will be unable to collect all principal
and interest amounts due according to the contractual terms of the loan
agreement. Under FAS No. 114, impaired loans subject to the statement are
required to be measured based upon the present value of expected future cash
flows discounted at the loan's initial effective interest rate or at the loan's
market price or fair value of the collateral if the loan is collateral
dependent. If the loan valuation is less than the recorded value of the loan, an
impairment reserve must be established for the difference. The impairment
reserve is established by either an allocation of the reserve for loan losses or
by a provision for loan losses, depending on the adequacy of the reserve for
loan losses. FAS No. 118 permits existing income recognition practices to
continue.
FAS No. 114 also provides for the reclassification of all outstanding
insubstance foreclosure loans ("ISF") from Other Real Estate to the loan
portfolio as nonaccrual loans at their current carrying value. The
reclassification of ISF's to loans has been made upon adoption of FAS No. 114
and this reclassification is reflected in the schedule of BMJ's nonperforming
assets at September 30, 1995 on page 16. BMJ will no longer be required to
identify and isolate future loans that may meet the former criteria for ISF
classification.
At September 30, 1995, all of BMJ's nonperforming loans were considered
to be impaired loans and totaled $6.0 million. Included in these impaired loans
were $3.8 million which has a related impairment reserve of $493 thousand and
$2.2 million that does not have a related reserve as a result of interest
payments applied to reduce principal or losses previously taken on these loans.
Average impaired loans during the third quarter of 1995 were $6.7 million.
During the quarter, BMJ recognized $49 thousand of interest income on impaired
loans, all of which was recognized using the cash basis method of income
recognition.
5. Other Real Estate
Other real estate acquired through foreclosure or deed in lieu of
foreclosure is carried at fair value less estimated costs of disposal. When a
property is acquired, the excess of the loan balance over the estimated fair
value is charged to the reserve for loan losses. A reserve for other real estate
has been established to provide for subsequent write-downs that may be required
to the carrying value of the property or losses on the sales of properties. The
reserve is established through charges to other real estate expense. Operating
results of other real estate owned, including rental income and operating
expenses, are recorded in other real estate expense. Gains and losses realized
from the sales of other real estate are included in noninterest income. Specific
dates of disposal cannot realistically be projected without the existence of
firm contracts for sale. At this time, contracts for sale exist on certain
foreclosed assets representing an insignificant portion of the carrying value on
the balance sheet.
6. Income Taxes
BMJ files a consolidated Federal income tax return, and the amount of
income tax expense or benefit is computed and allocated among subsidiaries on a
separate return basis. BMJ utilizes the asset and liability method of accounting
for income taxes as required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences, which are inherent
in the tax filing process, are expected to be recovered or settled. Under FAS
109, the effect on deferred tax assets and liabilities of a change in the tax
rates is recognized in income in the period that includes the enacted date. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
B.M.J. Financial Corp. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis addresses material changes in BMJ's
financial condition between December 31, 1994 and September 30, 1995 and
material changes in its results of operations with respect to the three-month
and nine-month periods ended September 30, 1995 and 1994.
Results of Operations
Earnings Performance
BMJ reported net income for the third quarter ended September 30, 1995
of $2.8 million, compared to net income for the third quarter of 1994 of $2.0
million. For the nine months ended September 30, 1995, net income was $5.7
million compared to net income of $8.9 million for the nine months ended
September 30, 1994, which included a one-time credit of $3.5 million described
below.
On a per share basis, earnings for the third quarter of 1995 were
$0.36, compared to earnings of $0.26 for the comparable period of 1994. For the
nine-month period ended September 30, 1995, earnings per share were $0.74
compared to earnings of $1.14 for the nine months ended September 30, 1994, of
which $.45 represented the per share effect of the one-time credit.
BMJ's pre-tax income for the third quarter ended September 30, 1995
totaled $2.8 million, an increase of 34% over the pre-tax income of $2.1 million
reported for the third quarter of 1994. For the nine-month period ended
September 30, 1995, pre-tax income amounted to $7.4 million, an increase of 35%
over the pre-tax income of $5.4 million reported for the comparable 1994 period.
Income tax expense for the quarter ended September 30, 1995 amounted to
$8 thousand, compared to no income tax expense for the third quarter of 1994.
Income tax expense for the nine-month period ended September 30, 1995 to $1.7
million compared to $7 thousand for the comparable period of 1994.
Effective January 1, 1993, BMJ adopted Statement of Financial
Accounting Standards No. 109," Accounting for Income Taxes". During 1994,
sufficient positive evidence had accumulated to warrant the reversal of the
valuation allowance originally established upon adoption of the Statement.
Therefore, income tax expense for the nine-month period ended September 30, 1994
was reduced by $3.5 million, representing a reversal of a portion of the
valuation allowance.
As a result of significant tax loss carryback refund claims previously
filed by the Company, BMJ has been under examination by the Internal Revenue
Service ("IRS") for the taxable years 1989 through 1993. During the third
quarter of 1995, BMJ received the Revenue Agent's Report ("RAR") for the years
under audit and has agreed to the examiner's findings. Although the agent's
report and the related refund claims are subject to review by the Joint
Committee on Taxation of the U.S. Congress, BMJ has evaluated its reserves for
income taxes based on acceptance of the RAR. As a result of this review, income
tax expense for the three- month and nine-month periods ended September 30, 1995
has been reduced by $1.0 million, representing the reversal of previously
accrued income taxes. BMJ believes that the remaining income tax reserves are
adequate to cover tax liabilities for all open years.
Net interest income for the third quarter ended September 30, 1995
amounted to $7.1 million compared to $7.2 million for the third quarter of 1994.
For the nine-month period ended September 30, 1995, net interest income amounted
to $21.0 million versus $21.3 million for the nine-month period ended September
30, 1994. BMJ's taxable-equivalent net interest margin remained strong at 5.58%
for the first nine months of 1995 compared to 5.21% for the first nine months of
1994.
The improvement in the net interest margin for the nine-month period
ended September 30, 1995 versus 1994, primarily resulted from a higher-yielding
asset mix as lower yielding money market investments and securities were
replaced with higher-yielding loans. Partially offsetting this improvement was a
higher cost of funds.
BMJ continued to pursue its aggressive program to reduce the level of
total noninterest expenses while increasing operating efficiency. As a result,
total noninterest expenses for the third quarter of 1995 amounted to $5.3
million, a reduction of 18% from total noninterest expenses of $6.5 million for
the 1994 third quarter. For the nine-month period ended September 30, 1995,
total noninterest expenses amounted to $16.8 million, a reduction of 16% from
total noninterest expenses of $20.2 million for the first nine months of 1994.
For the nine-month period ended September 30, 1995, BMJ's core
efficiency ratio (total noninterest expenses exclusive of other real estate
expenses and certain nonrecurring charges as a percent of taxable-equivalent net
interest income plus adjusted noninterest income) improved to 65.8% from 74.2%
for the nine-month period ended September 30, 1994.
Operating results for 1994 include those of BMJ's Southern Ocean State
Bank subsidiary and the Willingboro branch of BMJF's The Bank of Mid-Jersey
subsidiary. Southern Ocean State Bank was sold in July 1994 and the Willingboro
branch was sold in November 1994.
Net Interest Income
Net interest income is interest earned on loans and other
interest-earning assets minus interest paid on deposits and other borrowed
funds. Interest rate fluctuations as well as changes in the volume and mix of
interest-earning assets and interest-bearing liabilities combine to affect net
interest income.
Net interest income was $7.1 million for the third quarter of 1995
compared to $7.2 million for the third quarter of 1994. For the nine months
ended September 30, 1995, net interest income was $21.0 million compared to
$21.3 million for the comparable 1994 period. The financial summary in Table 1
details yields and rates of major interest-earning assets and interest-bearing
liabilities for the nine-month periods ended September 30, 1995 and 1994. Among
other things, Table 1 shows that the cost of interest-bearing deposits increased
to 3.07% for the nine months ending September 30, 1995 compared to 2.17% for the
corresponding period ended September 30, 1994 as BMJ endeavored to increase its
level of total deposits in the competitive retail market. Despite this increase
in the cost of interest-bearing deposits, BMJ's net interest margin which
represents the difference between yields on average interest-earning assets and
costs of average funding sources, was 5.58% for the nine-month period ended
September 30, 1995 compared to 5.21% for the comparable 1994 period.
Noninterest Income
BMJ's revenues include noninterest income, which consists primarily of
service charges on deposit accounts and trust service fees. Noninterest income
was $1.1 million for the third quarter of 1995 compared to $1.4 million for the
third quarter of 1994 and $3.2 million for the nine-month period ended September
30, 1995 compared to $4.3 million for the comparable 1994 period.
Service charges, commissions and fees amounted to $954 thousand for the
third quarter of 1995 compared to $1.2 million for the third quarter of 1994.
Service charges, commissions and fees totaled $2.8 million for the first nine
months of 1995 and $3.7 million for the first nine months of 1994. The current
year decrease in revenues from service charges, commissions and fees when
compared with the prior year is primarily due to the lower level of deposit
accounts subject to service charges and other fees during 1995 as a result of
the sale of BMJ's Southern Ocean State Bank subsidiary on July 29, 1994.
Also included in BMJ's noninterest income is the gain recognized on the
sales of other real estate properties. Net gains on the sales of other real
estate properties of $17 thousand were realized during the third quarter of 1995
versus net gains of $38 thousand for the third quarter of 1994. For the
nine-month period ended September 30, 1995, BMJ realized net gains of $103
thousand compared to net gains of $410 thousand for the comparable 1994 period.
Noninterest Expense
Noninterest expense for the quarter ended September 30, 1995 was $5.3
million, a reduction of 18% from noninterest expense of $6.5 million for the
third quarter of 1994. For the nine-month period ended September 30, 1995, BMJ's
noninterest expense amounted to $16.8 million, a reduction of 16% from the $20.2
million reported for the comparable 1994 period. Two significant initiatives
completed during 1994 which have had an impact on reducing BMJ's level of total
noninterest expense when comparing 1995 results with 1994 results were the
merger of BMJ's two principal subsidiaries, The Bank of Mid-Jersey and Mount
Holly State Bank, and the sale of BMJ's Southern Ocean State Bank subsidiary. As
previously discussed, Southern Ocean State Bank's operating results are included
in BMJ's operating results for 1994.
For the nine-month period ended September 30, 1995, BMJ's core
efficiency ratio (total noninterest expenses exclusive of other real estate
expenses and certain nonrecurring charges as a percent of taxable-equivalent net
interest income plus adjusted noninterest income) improved to 65.8% from 74.2%
for the nine-month period ended September 30, 1994.
Salaries and employee benefits amounted to $2.3 million for the quarter
ended September 30, 1995, a reduction of 12% from the balance of $2.6 million
for the quarter ended September 30, 1994. Salaries and employee benefits for the
nine-month period ended September 30, 1995 amounted to $7.2 million, a reduction
of 12% compared to the $8.2 million for the nine-month period ended September
30, 1994. Salaries expense, which is the largest component of this noninterest
expense category, amounted to $2.0 million for the 1995 third quarter and $6.1
million for the nine-month period ended September 30, 1995 which represent
decreases of 8% and 12%, respectively from salaries expense for the
corresponding periods of 1994. BMJ has reduced the number of full-time
equivalent employees at September 30, 1995 to 280 employees, a reduction of 6%
from 298 full-time equivalent employees at September 30, 1994.
Net occupancy expense decreased to $694 thousand for the quarter ended
September 30, 1995 from $766 thousand for the 1994 third quarter and decreased
to $2.2 million for the nine months ended September 30, 1995 from $2.5 million
for the comparable 1994 period. Net occupancy expenses in 1995 were favorably
affected by lower repairs and maintenance expenses and lower depreciation
expense.
Other real estate expense decreased to $113 thousand for the quarter
ended September 30, 1995, compared to $226 thousand for the 1994 third quarter
and decreased to $403 thousand for the nine-month period ended September 30,
1995 compared to $1.2 million for the 1994 period. Other real estate expense
includes the costs to maintain repossessed properties such as real estate taxes,
insurance and general maintenance expenses. During the nine-month period ended
September 30, 1995, BMJ was able to reduce the net balance of its other real
estate primarily through the sale of properties to a net balance of $2.7 million
at September 30, 1995 compared to the net balance of $6.7 million at September
30, 1994. As a result, BMJ was able to achieve corresponding reductions in other
real estate expense for the three-month and nine- month periods ended September
30, 1995 of 50% and 65% respectively when compared with the three and nine-month
period ended September 30, 1994. Other real estate expense also includes a
provision to increase the valuation reserve used to adjust the carrying value of
foreclosed properties to their fair value. For the nine-month period ended
September 30, 1995, there was no provision necessary to increase this reserve.
For the nine-month period ended September 30, 1994, a provision of $663 thousand
was made to increase this valuation reserve.
The other (or miscellaneous) noninterest expense category totaled $2.2
million for the quarter ended September 30, 1995 compared to $2.9 million for
the second quarter of 1994. For the nine-month period ended September 30, 1995,
other noninterest expense totaled $7.1 million compared to $8.4 million for the
nine-month period ended September 30, 1994. Contributing to the 1995 decreases
in this category are the reductions in BMJ's premium for FDIC insurance and
legal fees.
In August 1995, the Federal Deposit Insurance Corporation ("FDIC")
approved a reduction in the premium banks pay for deposit insurance. For
well-capitalized institutions, the premium is reduced by 83% from $0.23 for
every $100 of deposits to $0.04 for every $100 of deposits. BMJ's The Bank of
Mid-Jersey subsidiary is qualified as a well-capitalized institution. In
addition, the FDIC indicated that refunds will be made to institutions for any
third quarter 1995 prepaid deposit insurance premiums following the FDIC's
confirmation that the Bank Insurance Fund has met its designated level of $1.25
per every $100 of insured deposits. On September 15 , 1995, The Bank of
Mid-Jersey received a refund of $281 thousand from the FDIC. As a result, FDIC
insurance expense for the nine months ended September 30, 1995 was $492
thousand, which reflects a 53% decrease from the amount for the corresponding
1994 period.
Legal expense for the third quarter of 1995 amounted to $332 thousand,
a reduction of 31% from the $478 thousand reported for the 1994 third quarter.
Legal expenses for the first nine months of 1995 totaled $783 thousand, a
reduction of 40% from the legal expenses total of $1.3 million for the first
nine months of 1994. The current year decrease in BMJ's legal expense is
primarily a result of the lower level of nonperforming assets, thereby
decreasing litigation costs in pursuing collection of delinquent loans and in
obtaining title to properties through the foreclosure process.
Income Tax Expense
Income tax expense for the quarter ended September 30, 1995 amounted to
$8 thousand, compared to no income tax expense for the third quarter of 1994.
Income tax expense for the nine-month period ended September 30, 1995 to $1.7
million compared to $7 thousand for the comparable period of 1994.
Effective January 1, 1993, BMJ adopted Statement of Financial
Accounting Standards No. 109," Accounting for Income Taxes". During 1994,
sufficient positive evidence had accumulated to warrant the reversal of the
valuation allowance originally established upon adoption of the Statement.
Therefore, income tax expense for the nine-month period ended September 30, 1994
was reduced by $3.5 million, representing a reversal of a portion of the
valuation allowance.
As a result of significant tax loss carryback refund claims previously
filed by the Company, BMJ has been under examination by the Internal Revenue
Service ("IRS") for the taxable years 1989 through 1993. During the third
quarter of 1995, BMJ received the Revenue Agent's Report ("RAR") for the years
under audit and has agreed to the examiner's findings. Although the agent's
report and the related refund claims are subject to review by the Joint
Committee on Taxation of the U.S. Congress, BMJ has evaluated its reserves for
income taxes based on acceptance of the RAR. As a result of this review, income
tax expense for the three month and nine-month periods ended September 30, 1995
has been reduced by $1.0 million, representing the reversal of previously
accrued income taxes. BMJ believes that the remaining income tax reserves are
adequate to cover tax liabilities for all open years.
Balance Sheet Analysis
Total assets of BMJ amounted to $565.9 million at September 30, 1995,
increasing from $538.4 million at December 31, 1994. This increase is primarily
attributable to an increase in the level of total deposits at September 30, 1995
versus December 31, 1994. Total deposits of $478.2 million at September 30, 1995
represents a 3% increase from the $463.6 of total deposits at December 31, 1994.
This increase was achieved despite the high level of competition that exists
among financial institutions in BMJ's market for retail deposits. Through
renewed marketing programs and competitively priced deposit products, it is
BMJ's intention to increase its share of the retail deposits market.
During 1995, BMJ continued to improve its capital ratios and its
balance sheet condition. Shareholders' equity increased from $58.3 million at
December 31, 1994 to $63.1 million at September 30, 1995. The ratio of
shareholders' equity to total assets at September 30, 1995 remained strong at
11.2% compared to 10.8% at December 31, 1994..
In addition, asset quality continued to improve as total nonperforming
assets at September 30, 1995 were reduced $9.0 million compared to $14.2 million
at December 31, 1994.
The following discussion deals with the major components of the balance
sheet.
Securities Available for Sale
Securities which may be sold in response to changing market and
interest rate conditions or as part of BMJ's asset/liability management strategy
have been classified as securities available for sale. The securities available
for sale portfolio amounted to $37.1 million at September 30, 1995 compared to
$2.9 million at December 31, 1994. The securities available for sale portfolio
is carried at fair market value at September 30, 1995 and December 31, 1994.
Table 1 details the composition of the securities available for sale
portfolio. In addition, Table 1 provides information concerning average yields
and balances of the securities available for sale portfolio for the nine-month
periods ended September 30, 1995 and 1994.
Securities Held to Maturity
Securities held to maturity are comprised of securities that BMJ has
the positive intent and ability to hold to maturity. These securities are
carried at cost, adjusted for amortization of premium or accretion of discount.
The premium or discount adjustments are recognized as adjustments to interest
income, on a level yield basis. Gains or losses on disposition are computed by
the specific identification method and are included in noninterest income.
Unrealized losses due to fluctuations in market value are recognized as security
losses when a decline in value is assessed as being other than temporary.
The securities held to maturity portfolio amounted to $107.3 million at
September 30, 1995 compared to $119.0 million at December 31, 1994. Table 1
provides information concerning average yields and balances of the securities
available for sale portfolio for the nine-month periods ended September 30, 1995
and 1994.
Table 1 -- Financial Summary
Averages Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) Nine months ended Sept. 30, 1995 Nine months ended Sept. 30, 1994
--------------------------------- ---------------------------------
Average Yields Interest Average Yields Interest
Balance or Income/ Balance or Income/
Rates Expense Rates Expense
-------- ---- -------- -------- ---- --------
INTEREST-EARNING ASSETS
Money market investments:
Time deposits with other banks ..................... $ 1,094 5.87% $ 48 $ 9,347 3.88% $ 271
Interest bearing deposits with other banks ......... 545 5.40 22 2,349 3.53 62
Federal funds sold and repurchase agreements ....... 6,150 5.93 273 12,629 3.60 340
Other short term investments ....................... 6,491 5.97 290 27,619 4.13 853
-------- ---- -------- -------- ---- --------
Total money market investments ................. 14,280 5.93 633 51,944 3.93 1,526
Securities available for sale:
U.S. Treasury securities ........................... 3,253 4.64 113 12,765 3.59 343
U.S. government agencies and corporations .......... 5,577 6.57 274 2,449 4.09 75
States and political subdivisions .................. 4,784 6.40 229 154 6.08 7
Other securities ................................... -- -- -- 97 5.51 4
-------- ---- -------- -------- ---- --------
Total securities available for sale ............ 13,614 6.05 616 15,465 3.71 429
Securities held to maturity:
U.S. Treasury securities ........................... 18,584 5.68 790 26,594 4.49 893
U.S. government agencies and corporations .......... 88,760 5.61 3,723 86,146 4.86 3,133
States and political subdivisions .................. 4,372 8.50 278 4,526 7.71 261
Other securities ................................... 1,322 6.78 67 819 5.88 36
-------- ---- -------- -------- ---- --------
Total securities held to maturity .............. 113,038 5.75 4,858 118,085 4.89 4,323
Loans, net of unearned income .......................... 373,512 8.94 24,964 369,170 8.33 22,990
-------- ---- -------- -------- ---- --------
Total interest-earning assets .................. $514,444 8.08% $ 31,071 $554,664 7.05% $ 29,268
======== ==== ======== ======== ==== ========
FUNDING SOURCES
Deposits:
Savings and interest checking ...................... $257,393 2.20% $ 4,228 $328,363 1.74% $ 4,273
Certificates of deposit of $100,000 or more ........ 8,423 5.40 340 5,999 3.41 153
Other time deposits ................................ 121,416 4.77 4,332 115,192 3.32 2,857
-------- ---- -------- -------- ---- --------
Total interest-bearing deposits ................ 387,232 3.07 8,900 449,554 2.17 7,283
Securities sold under agreements to repurchase ......... 15,118 4.86 550 4,470 2.78 93
Other borrowed funds ................................... 176 4.56 6 181 3.69 5
Other debt ............................................. 2,792 7.45 156 4,205 8.20 258
-------- ---- -------- -------- ---- --------
Total interest-bearing liabilities ............. 405,318 3.17 9,612 458,410 2.23 7,639
Portion of noninterest-bearing funding sources ......... 109,126 -- -- 96,254 -- --
-------- ---- -------- -------- ---- --------
Total funding sources .......................... $514,444 2.50% $ 9,612 $554,664 1.84% $ 7,639
======== ==== ======== ======== ==== ========
Net interest margin and net interest income 5.58% $ 21,459 5.21% $ 21,629
==== ======== ==== ========
Loan Portfolio
BMJ's loan portfolio represented 67.4% of total assets at September 30,
1995, compared to 65.8% at December 31, 1994. BMJ's loan portfolio amounted to
$381.2 million at September 30, 1995 increasing from $354.5 million at December
31, 1994 primarily as a result of increased loan demand in BMJ's market.
The following table provides a comparative analysis of the loan portfolio
composition:
(in thousands) September 30, December 31,
1995 1994
-------- --------
Commercial, financial and agricultural ........... $ 21,732 $ 22,822
Real estate - mortgage ........................... 286,133 272,878
Real estate - construction ....................... 29,932 28,420
Consumer ......................................... 43,410 30,360
-------- --------
$381,207 $354,480
======== ========
Substantially all of BMJ's lending activity is to customers, or secured by
property, located within Mercer, Burlington and Ocean counties in New Jersey. Of
the portfolio as a whole, at September 30, 1995, approximately 82.9% of BMJ's
loans are secured by real estate.
Nonperforming Assets
Nonperforming assets, as summarized in the table below, consist of
nonperforming loans plus net other real estate owned.
(in thousands) September 30, December 31,
1995 1994
--------- ---------
Nonperforming Loans:
Loans past due 90 days or
more and accruing ....................... $ -- $ 1,264
Nonaccrual loans ............................. 6,300 5,769
--------- ---------
Total nonperforming loans ................ 6,300 7,033
--------- ---------
Other Real Estate:
Insubstance foreclosure ...................... -- 2,935
Other real estate ............................ 3,006 5,237
Loss reserve ................................. (290) (958)
--------- ---------
Total other real estate, net ............. 2,716 7,214
--------- ---------
Total Nonperforming Assets ................... $ 9,016 $ 14,247
========= =========
Nonperforming loans include nonaccrual loans and loans 90 days or greater
past due and still accruing. Loans are generally reported as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. If a loan or a portion of a loan is partially charged off, the loan
is classified as nonaccrual. Loans that are on a current payment status or past
due less than 90 days may also be classified as nonaccrual if repayment in full
of principal and/or interest is determined to be in jeopardy. Loans, with the
exception of partially charged off loans or loans with any portion classified as
doubtful, may be placed back on accrual status when they become current as to
both principal and interest and when concern as to future collectibility in full
no longer exists. The remaining recorded balance of a partially charged off
loan, however, may be returned to accrual status if the entire contractual loan
balance, together with all unpaid contractual interest, is determined to be
fully collectible. Nonperforming loans as a percentage of total loans were 1.7%
as of September 30, 1995 and 2.0% as of December 31, 1994.
The following table illustrates the activity in BMJ's nonaccrual loans during
the nine-month period ended September 30, 1995.
(in thousands) Nine Months Ended September 30, 1995
-------------------------------------
Nonaccrual
Loans
--------
Balance, January 1, 1995 ............................. $ 5,769
New defaults ......................................... 4,755
Assets foreclosed upon ............................... (2,081)
Payoffs, cures and sales ............................. (1,502)
Chargeoffs and writedowns ............................ (641)
--------
Balance, September 30, 1995 .......................... $ 6,300
========
Potential problem loans consist of loans which are included in performing
loans at September 30, 1995, but for which potential credit problems of the
borrowers have caused management to have concerns as to the ability of such
borrowers to comply with present repayment terms. At September 30, 1995, such
potential problem loans amounted to approximately $3.7 million. Depending on the
state of the economy and the impact thereof on BMJ's borrowers, as well as other
future events, these loans and others not currently so identified could be
classified as nonperforming loans in the future.
The following table illustrates the activity in BMJ's other real estate during
the nine-month period ended September 30, 1995.
Nine Months Ended
(in thousands) September 30, 1995
------------------
Balance, January 1, 1994 ............................. $ 8,172
Additions:
Assets foreclosed upon or designated
as Other Real Estate ............. 2,755
-------
Total additions ............................. 2,755
-------
Deductions:
Sales and other reductions ..................... (4,088)
Transfer of insubstance foreclosures to loans
upon adoption of FAS 114 ................... (2,935)
Writedowns to fair value/Chargeoffs ............ (898)
-------
Total deductions ............................ (7,921)
-------
Subtotal .......................................... 3,006
Less loss reserve ................................. (290)
-------
Balance, September 30, 1995 .......................... $ 2,716
=======
Other real estate consists of properties acquired through foreclosure or deed
in lieu of foreclosure. A reserve for other real estate has been established to
maintain the portfolio at the lower of cost or fair value less estimated
disposition costs.
On January 1, 1995, BMJ adopted FAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and FAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure". See note 4 in the Notes to
Financial Statements for a further discussion of FAS nos. 114 and 118. A loan is
considered impaired when, based upon current information and events, it is
probable that the Corporation will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
At September 30, 1995, BMJ's impaired loans totaled $6.0 million, which was
equal to the nonperforming loans total. Included in these impaired loans were
$3.8 million which has a related impairment reserve of $493 thousand and $2.2
million that does not have a related reserve as a result of interest payments
applied to reduce principal or losses previously taken on these loans. Average
impaired loans during the third quarter of 1995 were $6.7. During the quarter,
BMJ recognized $49 thousand of interest income on impaired loans, all of which
was recognized using the cash basis method of income recognition.
The following table sets forth information concerning the other real estate
loss reserve activity for the nine-month periods ended September 30, 1995 and
1994.
Nine Months Ended September 30,
(in thousands) 1995 1994
------- -------
Balance, beginning of year ....................... $ 958 $ 2,614
Add: provision charged to expense ............. -- 663
------- -------
958 3,277
Less: writedowns .............................. (668) (2,298)
: subsidiary held for sale ................ -- (125)
------- -------
Balance, at end of period ........................ $ 290 $ 854
======= =======
Reserve for Loan Losses
At September 30, 1995, the reserve for loan losses totaled $12.8 million
compared to $12.5 million at December 31, 1994. The ratio of the reserve for
loan losses to total loans at September 30, 1995 was 3.36% versus 3.52% at
December 31, 1994. The table below provides a summary of the activity in the
loan loss reserve plus additional key ratios for assessing the adequacy of the
reserve for loan losses at September 30, 1995 and 1994.
Nine Months Ended September 30,
(in thousands) 1995 1994
---------- ----------
Reserve balance, beginning of year ....... $ 12,485 $ 14,423
Gross charge-offs ..................... (1,142) (1,990)
Less: recoveries ...................... 1,460 1,443
---------- ----------
Net (charge-offs) recoveries ............. 318 (547)
Provision charged to operations .......... --
Subsidiary held for sale ................. -- (415)
---------- ----------
Reserve, at end of period ................ $ 12,803 $ 13,461
========== ==========
Loans, end of period ..................... $ 381,207 $ 348,725
Average loans outstanding ................ $ 373,512 $ 369,170
Ratio of net (charge-offs) recoveries
to average loans outstanding .......... .09% (.15%)
Ratio of reserve for loan losses
to nonperforming loans ................ 203.22% 142.91%
Ratio of reserve for loan losses
to loans, end of period ............... 3.36% 3.86%
Management has adopted a reserve adequacy methodology that requires specific
reserve assessment for all loans including residential real estate mortgages and
consumer loans. This methodology assigns reserves based upon credit risk rating
for specific loans and general reserves for all other loans. The general
reserves are based on historical charge-off experience but are subject to
certain minimums based upon BMJ's assessment of the current economic
environment.
BMJ's gross charge-offs during the first nine months of 1995 totaled $1.1
million compared with $2.0 million for the first nine months of 1994. Subsequent
to the charge-off of a loan, it is BMJ's policy to continue to vigorously pursue
the collection of principal outstanding as well as past due interest. Collection
efforts resulted in recoveries of $1.5 million on previously charged-off loans
during the first nine months of 1995 compared with $1.4 million for the first
nine months of 1994.
The distribution of the reserve for loan losses and the percentage of loans
in each category to total loans at September 30, 1995 is illustrated in the
following table.
Allocation of the Reserve for Loan Losses
September 30, 1995
(in thousands) % of Loans
Reserve in Each Category
Amount to Total Loans
------- ----------------
Domestic:
Commercial, financial and agricultural ....... $ 909 5.70%
Real estate - mortgage ................ 8,462 75.06
Real estate - construction ................. 1,961 7.85
Consumer ..................................... 552 11.39
Unallocated ....................................... 919 --
------- ------
$12,803 100.00%
======= ======
Note: This distribution is made for analytical purposes only. The total
allowance is available to absorb losses from any segment of the portfolio.
Deposits
BMJ's deposit base is the principal source of funds supporting
interest-earning assets. Maintaining a strong core deposit base is key to the
development of long-term customer relationships which, in turn, present
opportunities for BMJ to cross-sell its services. To meet the requirements of
its diverse customer base, BMJ offers a full range of deposit products,
including interest-bearing and noninterest-bearing demand deposits, savings
deposits, insured retail money market accounts and certificates of deposit.
BMJ's total deposits amounted to $478.2 million at September 30, 1995
compared to $463.6 million at December 31, 1994.
Table 1 provides information concerning average rates and balances of BMJ's
interest-bearing deposits for the nine-month periods ended September 30, 1995
and 1994. Among other things, Table 1 shows that as a result of the increasing
interest rate environment which existed during 1994 and mid-1995, the average
rate paid on BMJ's average interest-bearing deposit balances increased to 3.07%
for the nine-month period ended September 30, 1995 from 2.17% for the comparable
1994 period.
Capital
BMJ's level of shareholders' equity continued to improve during the first
nine months of 1995; primarily as the result of profitable operating results.
The following table provides selected shareholders' equity ratios at September
30, 1995 and December 31, 1994.
(in thousands) September 30, December 31,
1995 1994
------------ ------------
Shareholders' equity ........................ $63,133 $58,346
Shareholders' equity to assets ratio ........ 11.15% 10.84%
Book value per share ........................ $ 8.30 $ 7.68
The Federal Reserve Board ("FRB") has issued risk-based capital guidelines
applicable to member banks and bank holding companies and the FDIC has issued
comparable guidelines applicable to state nonmember banks. The guidelines, which
establish a risk adjusted ratio relating to the total amount of assets and
off-balance sheet exposures, (as such assets and off-balance sheet items are
weighted to reflect the risk inherent therein,) require a minimum total
risk-based capital ratio of 8.00%, with at least half of the total capital in
the form of Tier 1 capital. The risk-based capital ratios of BMJ and Mid-Jersey
were as follows on the dates shown:
September 30, 1995 December 31,1994
---------------------------------- -----------------------------------
Total Tier 1 Total Tier 1
Risk-Based Risk-Based Risk-Based Risk-Based
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------- ------------- ------------- -------------
B.M.J.Financial Corp. 17.08% 15.14% 17.03% 15.04%
The Bank of Mid-Jersey 14.97% 13.69% 14.86% 13.58%
The FRB and FDIC have also adopted leverage capital requirements specifying
the minimum acceptable ratios of Tier 1 capital to total assets. Under these
requirements, the most sound, well-run institutions engaged in the least risky
operations are required to maintain minimum ratios of Tier 1 capital to total
assets of 3%. All other institutions, as well as even extremely sound
institutions experiencing or anticipating significant growth, are expected to
operate well above this minimum level. Most banks generally operate at capital
levels ranging from 100 to 200 basis points above the stated minimum. Higher
capital ratios could be required if they are deemed by regulators to be
warranted by the particular circumstances or risk profile of an individual bank.
The leverage ratios of BMJ and Mid-Jersey were as follows on the dates shown:
Leverage Ratio at Leverage Ratio at
September 30, 1995 December 31,1994
------------------ -----------------
B.M.J.Financial Corp. 10.84% 10.58%
The Bank of Mid-Jersey 9.99% 9.49%
Failure to satisfy any minimum capital requirement applicable to BMJ or
Mid-Jersey could subject BMJ or Mid- Jersey, as the case may be, to regulatory
actions by the FRB.
BMJ paid $380 thousand in cash dividends on its common stock during the third
quarter of 1995 and has declared $1,140,000 in cash dividends on its common
stock through the first nine months of 1995. These shareholder dividends
represent the first to be paid by BMJ since dividends were suspended in 1991.
The primary source of funds for payment of dividends by BMJ is dividends
received from Mid-Jersey. The amount of dividends that Mid-Jersey may declare in
any year is subject to certain regulatory limitations. Mid-Jersey may not
declare dividends if such declaration would leave it inadequately capitalized.
Generally, dividends declared by a bank are limited to its net profit, as
defined by the regulatory agencies, for that year combined with its retained net
income from the preceding two years. At January 1, 1995, the amount of retained
earnings of Mid-Jersey available for declaration of dividends to BMJ was $10.7
million.
Liquidity and Asset/Liability Management
Liquidity refers to BMJ's ability to maintain a cash flow adequate to fund
operations and meet obligations on a timely and cost effective basis. Asset
liquidity is represented by the ease with which assets can be converted into
cash. BMJ continually evaluates its funding needs and manages its liquidity
position by maintaining adequate levels of liquid assets, such as cash and cash
equivalents and securities available for sale. BMJ's funding needs change as
loans grow, deposits mature and payments on obligations are made. Because the
characteristics of BMJ's assets and liabilities change, liquidity management is
a dynamic process. Among those factors affecting liquidity management are
pricing and maturity of loans, deposits and other assets and liabilities. In
addition, liquidity management is affected by changes in the relationship
between short-term and long-term interest rates.
At September 30, 1995, BMJ had a total of $64.8 million or 11.5% of total
assets in cash and cash equivalents, short-term money market investments, and
securities available for sale, representing its primary sources of liquidity, as
compared to $47.4 million or 8.9% of assets at December 31, 1994. Another source
of asset liquidity is the cash flows provided by maturities and periodic
repayments of principal of both the securities held to maturity portfolio and
the loan portfolio.
Liabilities also provide a source of liquidity for BMJ. Wholesale
certificates of deposit (none of which were brokered deposits) and repurchase
agreements comprised 5.1% of total liabilities at September 30, 1995 and 2.8% of
total liabilities at December 31, 1994. Management believes there is substantial
room to increase these funding sources if necessary to meet its liquidity needs.
In addition, Mid-Jersey currently has a line of $10.8 million available for
discount window borrowing from the Federal Reserve without further pledging
requirements and a $2.0 million line of credit with a correspondent bank to
cover short term funding needs in the federal funds market. In addition, The
Bank of Mid-Jersey joined the Federal Home Loan Bank system during 1995 and has
established a line of credit of approximately $14.0 million with the Federal
Home Loan Bank of New York to further support and enhance liquidity. At
September 30, 1995, approximately $1.0 million was outstanding against this line
of credit.
As shown in the Consolidated Statement of Cash Flows, cash and cash
equivalents decreased by $17.1 million to $27.7 million at September 30, 1995.
This decrease reflected net cash of $7.6 million provided by operating
activities, $45.4 million of net cash used in investing activities and $20.8
million of net cash provided by financing activities. Cash generated by
operating activities reflected BMJ's net income of $5.7 million adjusted for
noncash charges and credits. Cash used in investing activities primarily
reflected the net increases in the loan portfolio and securities available for
sale portfolio offset in part by the proceeds from maturities of securities held
to maturity. Cash provided by financing activities primarily reflected the net
decrease in demand deposit, savings and interest checking accounts, offset by
the net increase in certificates of deposit and securities sold under agreements
to repurchase.
At September 30, 1995, B.M.J. Financial Corp. (the parent company) had a
total of $2.1 million in cash and cash equivalents, and $8.3 million in
available for sale securities which serve as the parent company's primary
sources of liquidity. The parent company does not maintain lines of credit or
other borrowing arrangements.
Certain limitations of regulatory agencies exist with respect to the ability
of banking subsidiaries to transfer funds as dividends to the parent holding
company. Nevertheless, on January 1, 1995, $10.7 million of retained earnings of
Mid- Jersey was available for declaration of dividends from Mid-Jersey to BMJ
without prior regulatory approval. Moreover, BMJ has the capacity to borrow
funds from the Federal Reserve discount window to meet liquidity needs that are
not funded through subsidiary dividends or income.
BMJ's principal asset/liability management objectives are to manage the
sensitivity of net interest spreads to potential changes in interest rates and
to enhance profitability in ways that should provide sufficient reward for
understood and controlled risk. Specific asset/liability strategies are chosen
to achieve an appropriate trade-off between average spreads and the variability
of spreads. The BMJ Asset/Liability Management Committee meets weekly to monitor
consolidated risk at the corporate level and to monitor compliance with
established liquidity and interest rate sensitivity policy parameters on a
consolidated and individual bank basis. Funding positions are kept within
established policy limits designed to maintain reasonable risk levels and
adequate liquidity.
In order to measure the effect of interest rate fluctuations on BMJ's net
interest margin, management simulates the potential effects of changing interest
rates through computer modeling. These simulations determine the impact on net
interest income of various interest rate scenarios and balance sheet trends and
strategies. These simulations incorporate the dynamics of the balance sheet as
well as the interrelationships between various categories of short-term interest
rates and the impact the yield-curve level has on asset and liability pricing.
Net interest income sensitivity to balance sheet trends and interest rate
movements is quantified and appropriate strategies are developed and
implemented.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board released FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." FAS No. 121 established guidelines for recognition of
impairment losses related to long-lived assets and certain intangibles related
goodwill for both assets to be held and used as well as assets held for
disposition. This statement excludes financial instruments, long-term customer
relationships of financial institutions, mortgage and other servicing rights and
deferred tax assets. This standard becomes effective on January 1, 1996.
Adoption of FAS No. 121 is not expected to result in material changes to BMJ's
financial position or results of operations.
In May 1995, the Financial Accounting Standards Board released FAS No. 122,
"Accounting for Mortgage Servicing Rights." FAS No. 122 requires recognition of
mortgage servicing rights as separate assets, whether those rights are purchased
or relate to loans originated for sale. This standard becomes effective on
January 1, 1996. BMJ estimates that adoption of FAS 122 will not materially
impact BMJ's financial position or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ------------------------------
Not Applicable
Item 2. Changes in Securities
- ---------------------------------
Not Applicable
Item 3. Defaults Upon Senior Securities.
- --------------------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- ----------------------------------------------------------------
Not Applicable
Item 5. Other Information.
- ------------------------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
- ---------------------------------------------
(a) Exhibit 11. Statement Regarding Computation of
Per Share Earnings
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 08/07/95 /s/ Elmer J. Elias
------------------------ -------------------------------------------
Elmer J. Elias, Acting President
Date 08/07/95 /s/ Joseph M. Reardon
------------------------ -------------------------------------------
Joseph M. Reardon, Chief Financial Officer