FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of incorporation) (I.R.S. Employer Identification No.)
Registrant's telephone number including area code: (609) 298-5500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00
(Title of class)
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 report s), 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 (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant'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. [ ]
Item 1. Business.
General
BMJ
B.M.J. Financial Corp. ("BMJ") is a bank holding company incorporated
in New Jersey and registered under the Bank Holding Company Act of 1956, as
amended. As of December 31, 1995, BMJ, on a consolidated basis, had total assets
of $588.7 million, total deposits of $485.0 million and total shareholders'
equity of $65.6 million. BMJ commenced business in 1984 when it acquired The
Bank of Mid-Jersey ("Mid-Jersey"), a New Jersey banking corporation organized in
1851. BMJ acquired Mount Holly State Bank ("Mount Holly") in 1984 and Southern
Ocean State Bank ("Southern Ocean") in 1988. On July 29, 1994, BMJ sold
substantially all of the assets and liabilities of Southern Ocean to Sun
National Bank of Medford, New Jersey ("Sun"). On June 23, 1994, BMJ merged Mount
Holly into Mid-Jersey with Mid-Jersey as the surviving institution. Unless
specified otherwise, the term "BMJ" as used herein refers to the consolidated
B.M.J. Financial Corp. and The Bank of Mid- Jersey entity. BMJ's principal
business offices are located at 243 Route 130, Bordentown, New Jersey and its
telephone number is (609) 298-5500.
BMJ conducts its operations through 20 banking offices located in the
central and southern New Jersey counties of Burlington, Mercer and Ocean.
Mid-Jersey is a full service commercial bank offering individual and commercial
banking services and trust services. As of December 31, 1995, BMJ employed 329
part-time and full-time employees.
Mid-Jersey
Mid-Jersey is a New Jersey banking corporation. It was organized in
1851 as the Bordentown Banking Company and began operations in the same year. In
1964, Mid-Jersey merged with First National Bank and Trust Company of Roebling,
New Jersey and in 1970 it merged with First National Bank of New Egypt, New
Jersey and changed its name to "The Bank of Mid-Jersey." In 1978, Mid-Jersey
acquired the assets and assumed the liabilities of Hamilton Bank, which then
operated in Mercer County, New Jersey. In July 1989, Mid-Jersey acquired the
Hamilton Township, Mercer County, New Jersey branch of Howard Savings Bank. On
June 23, 1994, BMJ merged Mount Holly into Mid-Jersey with Mid-Jersey as the
surviving institution.
Mid-Jersey conducts a general banking and trust business embracing the
customary deposit, lending and trust functions of a commercial bank in the State
of New Jersey. Commercial banking involves accepting demand, time and savings
deposits and making business, consumer, personal, construction and permanent
mortgage loans. Through its trust department, Mid-Jersey renders services as
trustee, executor, administrator, guardian, managing agent, custodian and
investment advisor and it engages in other personal and corporate fiduciary
activities authorized by law. As of December 31, 1995, Mid-Jersey had total
consolidated assets of $576.3 million, including net loans of $389.3 million,
total deposits of $485.1 million and total consolidated shareholders' equity of
$58.0 million.
Subsidiaries
Mid-Jersey has a wholly-owned subsidiary, Hopkinson Corp., a New Jersey
corporation, which was formed for the purpose of holding and marketing
repossessed properties. This corporation had total assets of $16 thousand as of
December 31, 1995.
Market Area
Mid-Jersey maintains its principal executive office at 243 Route 130 in
Bordentown, New Jersey, and operates 20 banking offices in Burlington, Ocean and
Mercer Counties, New Jersey.
Capital
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. See "Regulation and Supervision - Risk-Weighted
Capital Requirements."
The risk-based capital ratios of BMJ and Mid-Jersey were as follows on
the dates shown:
December 31, 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. 16.05% 14.19% 17.03% 15.04%
The Bank of Mid-Jersey 14.17% 12.90% 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 are required to maintain higher
levels of capital depending on their condition. The leverage ratios of BMJ and
Mid-Jersey were as follows on the dates shown:
Leverage Ratio at Leverage Ratio at
December 31, 1995 December 31, 1994
----------------- -----------------
B.M.J. Financial Corp. 10.87% 10.58%
The Bank of Mid-Jersey 10.18% 9.49%
Failure to satisfy any minimum capital requirements applicable to BMJ
or Mid-Jersey could subject BMJ or Mid-Jersey, as the case may be, to further
regulatory actions by the FRB.
Regulation and Supervision
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to those particular statutory and regulatory provisions. Any change in
applicable law or regulation may have a material effect on the business and
prospects of BMJ and Mid-Jersey.
The Bank of Mid-Jersey
Mid-Jersey's operations are subject to state and federal laws
applicable to banks chartered by the State of New Jersey, to members of the
Federal Reserve System, and to banks insured by the FDIC. The FRB is Mid-
Jersey's primary federal supervisory authority; the FDIC is Mid-Jersey's
secondary federal supervisory authority.
The New Jersey Commissioner is Mid-Jersey's state supervisory authority.
Mid-Jersey may not enter into certain transactions (such as the
establishment or relocation of an office at which banking business is conducted,
or a merger or consolidation with another bank) unless certain regulatory
criteria are satisfied and the transactions are met and the transactions are
approved by the appropriate bank regulatory authorities. These authorities
regularly examine Mid-Jersey's loans, investments, management practices and
other aspects of its operations. These examinations are for the protection of
depositors and not for the protection of BMJ, Mid-Jersey or their shareholders
or other creditors. In addition to these regular examinations, Mid-Jersey must
furnish periodic reports to its supervisory authorities.
Risk-Weighted Capital Requirements
The FRB has issued regulations that require banking organizations such
as BMJ and Mid-Jersey to maintain minimum levels of capital. 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 action by appropriate
supervisory authorities.
Banking organizations are required to meet a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least 4% must be in the
form of Tier 1 Capital. A banking organization's qualifying total capital
consists of two components: Tier 1 Capital (core capital) and Tier 2 Capital
(supplementary capital). Tier 1 Capital is an amount equal to the sum of: (i)
common shareholders' equity (including adjustments for any surplus or deficit);
(ii) qualifying noncumulative perpetual preferred stock (plus, for bank holding
companies, qualifying cumulative perpetual preferred stock in an amount up to
25% of Tier 1 Capital); and (iii) the company's minority interests in the equity
accounts of consolidated subsidiaries. At least 50% of the banking
organization's total regulatory capital must consist of Tier 1 Capital.
Tier 2 Capital is an amount equal to the sum of (i) the allowance for
possible loan and lease losses in an amount up to 1.25% of risk-weighted assets;
(ii) cumulative perpetual preferred stock and long-term preferred stock (which
for bank holding companies must have an original maturity of 20 years or more)
and related surplus; (iii) hybrid instruments (instruments with characteristics
of both debt and equity), perpetual debt and mandatory convertible debt
securities; and (iv) eligible term subordinated debt and intermediate-term
preferred stock with an original maturity of five years or more, including
related surplus, in an amount up to 50% of Tier 1 Capital. The inclusion of the
foregoing elements of Tier 2 Capital are subject to certain further requirements
and limitations of the federal bank regulatory agencies.
Investments in unconsolidated banking and finance subsidiaries,
investments in securities subsidiaries and reciprocal holdings of capital
instruments must be deducted from capital. The federal banking regulators may
require other deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheet assets and
certain off-balance sheet items, such as standby letters of credit, are assigned
to one of four risk weight categories (0%, 20%, 50%, or 100%) according to the
nature of the asset and its collateral or the identity of any obligor or
guarantor. For example, cash is assigned to the 0% risk category, while loans
secured by one-to-four family residences are assigned to the 50% risk category.
The aggregate amount of such assets and off-balance sheet items in each risk
category is adjusted by the risk weight assigned to that category to determine
weighted values, which are added together to determine the total risk-weighted
assets for the banking organization. Accordingly, an asset such as a commercial
loan, which is assigned to a 100% risk category, is included in risk-weighted
assets at its nominal face value, whereas a loan secured by a single-family home
mortgage is included at only 50% of its nominal face value. The applicable
ratios reflect capital, as determined, divided by risk-weighted assets, as
determined.
Capital Ratios
The information presented in "Business - Capital" sets forth the
regulatory capital ratios of BMJ and Mid-Jersey as of December 31, 1995, as
compared to the required minimum levels established in regulations promulgated
by the FRB under its risk-based capital guidelines. 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 FRBP.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created five capital- based supervisory categories for banks and
required the federal bank regulatory agencies to broaden the scope of regulatory
corrective action taken with respect to depository institutions that do not meet
minimum capital and related requirements, as well as to take actions promptly in
order to minimize any losses to the FDIC. These five capital categories are:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
The federal bank regulatory agencies, including the FRB, have adopted
regulations establishing capital measures and relevant capital levels pursuant
to FDICIA for each of the five capital categories. The relevant capital measures
are the total risk-based capital ratio, Tier 1 risk-based capital ratio, and the
leverage ratio. Under the regulations, a bank is (i) well capitalized if it has
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not
subject to any order, written agreement, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure; (ii) adequately capitalized if it has a total risk-based ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater, a leverage ratio of
4% or greater (3% or greater if the bank is rated composite 1 in its most recent
report of examination and is not experiencing or anticipating significant
growth), and does not meet the definition of a well capitalized bank; (iii)
undercapitalized if it has a total risk- based capital ratio of less than 8%, a
Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of less than
4% (or a leverage ratio of less than 3% if the institution is rated composite 1
in its most recent report of examination and is not experiencing or anticipating
significant growth); (iv) significantly undercapitalized if it has a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of
less than 3% or a leverage ratio of less than 3%; and (v) critically
undercapitalized if the bank has a ratio of tangible equity to total assets that
is equal to or less than 2%.
As of December 31, 1995, Mid-Jersey was considered well capitalized
under the FRB's regulations.
Dividend Restrictions
Certain bank regulatory limitations exist on the availability of a
subsidiary bank's undistributed net assets for the payment of dividends to the
parent company without the prior approval of the bank regulatory authorities.
The Federal Reserve Act restricts the payment of dividends in any
calendar year to the net profit of the current year combined with retained net
profits of the preceding two years. Mid-Jersey may declare a dividend to the
parent company only if, after payment thereof, its capital would be unimpaired
and its remaining surplus would equal 50 percent of its capital. At January 1,
1996, Mid-Jersey had $19.0 million of undistributed net assets available for the
payment of dividends to BMJ.
Recent Legislative and Regulatory Developments
Interstate Banking and Branching Act
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act"), enacted on September 23, 1994, permits bank holding
companies, effective September 23, 1995, to acquire banks located in any state
without regard to whether the transaction is prohibited under any state law
(except that states may establish the minimum age of their local banks, up to a
maximum of 5 years, subject to interstate acquisition by out-of-state bank
holding companies). Another provision of the Interstate Act allows interstate
merger transactions beginning June 1, 1997. States are permitted, however, to
adopt legislation providing for either earlier approval of mergers with
out-of-state banks, or opting-out of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Interstate Act provides that such interstate merger transactions will
thereafter become the exclusive means for bank holding companies to obtain
interstate branches.
The Interstate Act permits banks to establish and operate a de novo
branch in any state that elects to permit de novo branching. Interstate banks
proposing to close any branch in low- or moderate-income areas are now required
to provide notice to customers of the proposed closing. The Interstate Act also
requires each federal bank regulatory agency to prescribe uniform regulations
including guidelines ensuring that interstate branches operated by out-of-state
banks are reasonable, helping to meet the credit needs of communities where they
operate. These agencies are required to conduct evaluations of Community
Reinvestment Act performance of institutions with interstate branches.
Insurance Premiums
FDICIA mandated that the FDIC set semi-annual assessment rates for Bank
Insurance Fund ("BIF") members sufficient to increase the BIF's reserve ratio to
a designated level within a prescribed period of time. In addition, FDICIA
directed the FDIC to develop and implement a system of risk-based premiums for
federal deposit insurance pursuant to which the semi-annual rates will be
assessed on a depository institution based on the probability that the
appropriate depository institution fund will incur a loss with respect to the
institution.
Pursuant to FDICIA, the FDIC has developed and implemented a risk-based
insurance premium system, under which an insured depository institution's
deposit insurance assessment rate varies according to the level of risk incurred
in its activities. An institution's risk category is based upon whether the
institution is well capitalized, adequately capitalized or undercapitalized, as
defined by the FDIC. A well capitalized institution is one with a total
risk-based ratio of 10.0% or greater, a Tier 1 risk-based ratio of 6.0% or
greater, and a Tier 1 leverage ratio of 5.0% or greater. An adequately
capitalized institution is one that does not meet the standards of a well
capitalized institution, but has a total risk-based ratio of 8% or greater, a
Tier 1 risk-based ratio of 4% or greater, and a Tier 1 leverage ratio of 4% or
greater. An undercapitalized institution is one that does not meet the
requirements of a well capitalized or adequately capitalized institution.
Classification depends on an institution's capital ratios as determined by the
institution's Report of Income and Condition as of a date determined by the FDIC
with respect to each semi-annual assessment period.
On August 16, 1995, the FDIC adopted a rate schedule for its risk-based
insurance premium system that reduces deposit insurance rates for well-managed
and well-capitalized banks. Under the new rate schedule, each BIF member
institution is assigned, based on its capital and supervisory subgroups, an
annual FDIC assessment rate varying from 4 cents (for well capitalized Subgroup
A institutions) to 31 cents (for undercapitalized Subgroup C institutions) per
$100 of domestic deposits.
Separately, FDICIA also authorized one or more "special assessments,"
if necessary, (i) to repay funds borrowed from the Secretary of the Treasury
pursuant to Section 14(a) of the Federal Deposit Insurance Act, (ii) to repay
obligations issued to or borrowed from the BIF or (iii) for any other purpose
the FDIC deems necessary. An additional special assessment could have an adverse
impact on the financial condition of BMJ and Mid-Jersey.
Capital Effect of Interest Rate Risk
On August 2, 1995, the FRB adopted regulations that permit it to take
into account in determining an institution's capital adequacy the institution's
levels of interest rate. Under the regulation, a finding that an insured
institution has significant levels of such risk could result in the FRB
requiring that the institution maintain its capital ratios at levels above the
minimum otherwise prescribed by the FRB. Such a finding with respect to BMJ or
Mid-Jersey could result in a requirement that BMJ or Mid-Jersey raise their
levels of capital.
Safety and Soundness Standards
FDICIA required that each of the federal bank regulatory agencies
prescribe by regulation depository institution and depository institution
holding company standards relating to operations and management, as well as
specific quantitative standards for ratios of asset quality, earnings, and stock
valuation. FDICIA mandated that a holding company or institution failing to
comply with such standards would be required to submit a plan designed to
achieve such compliance.
Subsequently, CDRIA made several significant changes to FDICIA's safety
and soundness provisions. Specifically, CDRIA allows the federal bank regulatory
agencies the option to prescribe the standards as guidelines rather than as
regulations. The procedures for submitting compliance plans must still be
prescribed by regulation, but the actual submission of a plan no longer is
mandatory; rather, the submission of a plan now is at the agency's option. In
addition, CDRIA also excluded holding companies from the scope of the safety and
soundness standards. Moreover, CDRIA provided that the standards for asset
quality, earnings and stock valuation must be qualitative as opposed to
quantitative. On July 10, 1995, the FRB adopted final regulations implementing
FDICIA's safety and soundness standards, as amended by CDRIA.
The FRB also has adopted guidelines setting out the safety and
soundness standards that the FRB will use to identify and address problems at
insured institutions before capital becomes impaired. The guidelines are general
in nature and focus on the objectives to be achieved by management, while
leaving the precise methods for achieving those objectives to each institution.
The FRB also adopted a final rule establishing deadlines for submission and
review of safety and soundness compliance plans.
Community Reinvestment Act
On May 4, 1995, the FRB and the other federal bank regulatory agencies
adopted new regulations pursuant to the Community Reinvestment Act ("CRA").
The new regulations eliminate the agencies' former system of 12
assessment factors for evaluating CRA performance and instead adopt a new system
based on performance measures. For larger institutions (generally those over
$250 million in assets), the regulations utilize three tests as measures of
performance -- a Lending Test, an Investment Test, and a Service Test.
Alternative methods of CRA evaluation are available for institutions that elect
to use a CRA strategic plan, as well as for wholesale and limited-purpose banks,
and for small banks. The new regulations also require all large institutions to
collect and report data by geographic area for three categories of loans to be
considered in connection with the Lending Test. The new CRA evaluation approach
is effective for examinations commencing on or after July 1, 1997; the new loan
data collection requirements took effect on January 1, 1996.
Proposed Legislation
Certain proposals affecting the banking industry have been discussed
from time to time. Such proposals include: consolidation of some or all of the
federal agencies regulating insured depository institutions; relaxation of the
prohibitions on affiliation of entities engaged in commercial banking and
investment banking; permitting the affiliation of insurance companies and banks;
enhancement of banks' ability to underwrite debt instruments and securitize
assets; restrictions on the ability of bank holding companies and their
subsidiaries to invest in derivative instruments; and limitation of the
applicability of certain provisions of the Community Reinvestment Act to small
banks. It is uncertain which, if any, of the above proposals may become law and
what effect they would have on BMJ and Mid-Jersey.
Competition
Mid-Jersey's principal market is within Burlington, Ocean and Mercer
Counties, New Jersey, the three counties in which Mid-Jersey's offices are
located.
All phases of Mid-Jersey's businesses are highly competitive.
Mid-Jersey competes primarily with other commercial banks, saving and loan
associations, savings banks and credit unions, many of which are larger than
Mid-Jersey. Mid-Jersey is generally competitive with financial institutions in
its respective service area with respect to interest rates paid on time and
savings deposits, service charges on deposit accounts and interest rates charged
on loans.
Competition in the banking industry has experienced and will continue
to experience rapid changes. Banks are now faced with competition from large
business corporations which previously concentrated in stock brokerage, life
insurance and other non-banking activities.
Item 2. Properties.
The principal properties of BMJ and its subsidiaries are those owned or
leased by Mid-Jersey.
BMJ does not own any properties in its name at this time. BMJ leases
its Operations Center located on Route 206 in Columbus, New Jersey. The lease is
a five-year lease with 206 Commerce Center, a partnership in which Mr. William
C. Gray, a director of BMJ, is a partner, for 24,000 square feet of space used
by it as its Operations Center. The lease will terminate in November 1999 unless
BMJ exercises its option to extend the term of the lease for an additional
five-year period. The rental during 1994 was $12.00 per square foot. In future
years, the rental will be adjusted based on increases or decreases (subject to
certain limitations) in the Consumer Price Index. BMJ believes that the lease is
on terms no more favorable to the lessor than would be the case for a lease
between unrelated parties.
Mid-Jersey owns the building in which its main banking, trust
department and administrative offices are located, at 243 Route 130, Bordentown,
New Jersey.
Mid-Jersey operates 19 additional branch offices at the following
locations in New Jersey: the corner of Farnsworth Avenue and Walnut Street,
Bordentown; 5th Avenue and Main Street, Roebling; 73 Main Street, New Egypt; 10
Browns Mills/Juliustown Road, Browns Mills; 10 Homestead Plaza, Columbus; 1981
N. Olden Avenue, Ewing Township; 450 Route 33, Mercerville; South Broad Street
and Sunnybrae Boulevard, Yardville; South Broad Street, Hamilton; Route 528,
Chesterfield; 3800 Quakerbridge Road, Mercerville Township; 160
Lawrenceville-Pennington Road, Lawrenceville; Church Street and Academy Drive,
Mount Laurel; Route 38 and Ark Road, Mount Laurel; 239 Taunton Boulevard,
Medford; Burlington Center Mall, Burlington Township; 10 Rancocas Road, Mount
Holly; 1225 Route 33, Hamilton Square; and 2555 Pennington Road, Pennington.
Mid- Jersey owns the buildings in which, and the land on which, all of its
branches are located except that the land and buildings for the Yardville,
Quakerbridge Road, Hamilton Township, Lawrenceville, Ark Road, Burlington
Center, Hamilton Square and Pennington branches are leased and the land for the
Columbus and the N. Olden Avenue, Ewing Township branches are leased. Mid-Jersey
owns a lot located at the intersection of Route 541 and the Route 541 Bypass in
Lumberton, New Jersey but has indefinitely deferred the establishment of a
branch facility at that location. Mid-Jersey also owns undeveloped land on Route
541 in Burlington Township, New Jersey which was originally purchased as a
future branch location but which it has been attempting to sell for some time.
In the opinion of management, all properties are well maintained and
suitable to their respective present needs and operations.
Item 3. Legal Proceedings.
The nature of BMJ's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. However, BMJ
believes that there are no proceedings pending to which BMJ or Mid-Jersey is a
party or to which any of their property is subject which, if determined
adversely to them, would be material in relation to their net worth or financial
condition, nor are there any proceedings pending other than ordinary routine
litigation incident to their business. No material proceedings are pending, or
known to be threatened or contemplated, against BMJ or Mid-Jersey by the
governmental authorities or others.
BMJ is not a party to any pending material litigation, and to its
knowledge, is not the subject of any threatened material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Common Stock" for market and dividend information with
respect to BMJ's Common Stock.
Item 6. Selected Financial Data
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Earnings Performance - Table 1."
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Overview
B.M.J. Financial Corp. ("BMJ") is a bank holding company incorporated
in New Jersey and registered under the Bank Holding Company Act of 1956, as
amended. As of December 31, 1995, BMJ, on a consolidated basis, had total assets
of $588.7 million, total deposits of $485.0 million and total shareholders'
equity of $65.6 million. BMJ commenced business in 1984 when it acquired The
Bank of Mid-Jersey ("Mid- Jersey"), a New Jersey banking corporation organized
in 1851. BMJ acquired Mount Holly State Bank ("Mount Holly") in 1984 and
Southern Ocean State Bank ("Southern Ocean") in 1988. On July 29, 1994, BMJ sold
substantially all of the assets and liabilities of Southern Ocean to Sun
National Bank of Medford, New Jersey ("Sun"). On June 23, 1994, BMJ merged Mount
Holly into Mid-Jersey with Mid-Jersey as the surviving institution. Unless
specified otherwise, the term "BMJ" as used herein refers to the consolidated
B.M.J. Financial Corp. and The Bank of Mid-Jersey entity. BMJ's principal
business offices are located at 243 Route 130, Bordentown, New Jersey and its
telephone number is (609) 298-5500.
BMJ conducts its operations through 20 banking offices located in the
central and southern New Jersey counties of Burlington, Mercer and Ocean.
Mid-Jersey is a full service commercial bank offering individual and commercial
banking services and trust services. As of December 31, 1995, BMJ employed 329
part-time and full-time employees.
Earnings Performance
B.M.J. Financial Corp. reported net income of $8.3 million for the year
ended December 31, 1995 compared to net income of $12.5 million for the year
ended December 31, 1994, which included a credit of $4.9 million described
below. For the year ended December 31, 1993, BMJ reported a net loss of $890
thousand, which included a net charge of $1.5 million due to a change in
accounting principle.
On a fully diluted per share basis, earnings for the year ended
December 31, 1995 were $1.07, compared to per share earnings of $1.60 for 1994,
of which $0.62 represented the effect of the credit. For the year ended December
31, 1993, the net loss was $0.13 per share.
BMJ reported pre-tax income of $11.5 million for the year ended
December 31, 1995 which represented a 48% increase compared to pre-tax income of
$7.7 million for the year ended December 31, 1994. Pre-tax income for the year
ended December 31, 1993 was $670 thousand.
Effective January 1, 1993, BMJ adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") and
recorded, as the cumulative effect of a change in accounting principle, a charge
to 1993 operating results of $1.5 million.
During 1994, management considered the positive and negative evidence
in evaluating the need for the deferred tax asset valuation allowance
established upon adoption of FAS 109 and concluded that it was no longer
necessary. Accordingly, operating results for the year ended December 31, 1994
include a $4.9 million credit to income representing the reversal of the
previously established valuation allowance plus recognition of state deferred
tax assets and alternative minimum tax credits.
Net income for 1995 was negatively affected by income tax expense of
$3.1 million. As of December 31, 1994, BMJ had fully recognized all of its
available tax credits. Therefore, income tax expense for the year ended December
31, 1995 represents the tax provision associated with BMJ's results of
operations for 1995.
BMJ recorded a negative provision for loan losses of $2.0 million in
1995. No provision for loan losses was recorded in 1994 and a provision of
$840,000 was recorded in 1993.
The negative provision of $2.0 million recorded in 1995 was driven by
the continuing improvement of BMJ's asset quality, including reduced levels of
nonperforming assets and net loan charge-offs. Specifically, since December 31,
1992, nonperforming loans declined from $31.4 million to $6.0 million at
December 31, 1995, and net charge-offs declined from $6.7 million during 1993 to
$1.5 million during 1994 and $386 thousand during 1995. In addition, BMJ has
adhered to a procedural discipline in determining both the necessary provision
for loan losses to be taken from earnings and the adequacy of the allowance for
loan losses. Based upon management's judgement and evaluation of this
methodology, BMJ has recorded no quarterly provision for loan losses since the
second quarter of 1993. As a result of BMJ's increasingly diversified loan mix,
stabilized and improving regional economies, and the continuing adequacy of the
reserve for loan losses subsequent to the non-recurring negative provision, it
was management's and the Board of Director's judgement that the interest of
BMJ's shareholders was best served by this immediate, one-time negative
provision.
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 year ended December 31, 1995 amounted to
$23.1 million, a reduction of 11.7% from total noninterest expenses of $26.1
million for the year ended December 31, 1994. Total noninterest expenses for
1994 represented a reduction of 20.9% from 1993.
For the year ended December 31, 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 65.7% from 72.6% and 84.8% for the
years ended December 31, 1994 and 1993, respectively.
Operating results for 1994 and 1993 include those of BMJ's Southern
Ocean State Bank subsidiary and the Willingboro branch of The Bank of
Mid-Jersey. Southern Ocean State Bank was sold in July 1994, and the Willingboro
branch was sold in November 1994.
Table 1
Five Year Summary of Selected Financial Data
Year ended December 31,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS
(in thousands)
Interest income .............................................. $ 41,603 $ 38,444 $ 41,389 $ 52,579 $ 70,556
Interest expense ............................................. 13,368 10,222 13,540 22,101 40,642
--------- --------- --------- --------- ---------
Net interest income .......................................... 28,235 28,222 27,849 30,478 29,914
Provision (credit) for loan losses ........................... (2,000) -- 840 12,217 18,596
Securities gains ............................................. -- -- 690 3,155 1,084
Other noninterest income ..................................... 4,319 5,651 6,009 5,772 4,774
Noninterest expense .......................................... 23,095 26,147 33,038 34,129 26,497
--------- --------- --------- --------- ---------
Income (loss) before income tax expense (benefit),
extraordinary charge and cumulative
effect of change in accounting principle ................ 11,459 7,726 670 (6,941) (9,321)
Income tax expense (benefit) ................................. 3,145 7 60 22 (2,604)
Reversal of valuation allowance .............................. -- (4,875) -- -- --
Extraordinary charge ......................................... -- (87) -- -- --
Cumulative effect of change in
accounting principle .................................... -- -- (1,500) -- --
--------- --------- --------- --------- ---------
Net income (loss) ............................................ $ 8,314 $ 12,507 $ (890) $ (6,963) $ (6,717)
========= ========= ========= ========= =========
BALANCE SHEET
(in thousands)
Assets ....................................................... $ 588,710 $ 538,432 $ 625,302 $ 653,556 $ 778,126
Deposits ..................................................... $ 485,011 $ 463,574 $ 566,875 $ 606,043 $ 725,282
Loans, net of unearned income ................................ $ 399,364 $ 357,415 $ 386,478 $ 420,152 $ 542,596
Shareholders' equity ......................................... $ 65,622 $ 58,346 $ 45,398 $ 32,500 $ 38,688
Capital notes/long term debt ................................. $ 8,686 $ 2,700 $ 4,813 $ 4,880 $ 4,880
Reserve for loan losses ...................................... $ 10,099 $ 12,485 $ 14,423 $ 20,267 $ 20,407
PER SHARE DATA
Net income (loss) - fully diluted ............................ $ 1.07 $ 1.60 ($ 0.13) ($ 1.63) ($ 1.60)
Cash dividends ............................................... $ 0.225 -- -- -- $ 0.30
Shareholders' equity (at year-end) ........................... $ 8.62 $ 7.68 $ 6.01 $ 7.45 $ 9.15
KEY RATIOS AND STATISTICS
Return on average assets ..................................... 1.50% 2.15% (0.14%) (0.92%) (0.81%)
Return on average shareholders' equity ....................... 13.60% 24.59% (2.12%) (18.71%) (15.91%)
Equity to assets ratio (1) ................................... 11.04% 8.73% 6.44% 4.94% 5.09%
Net interest margin (FTE) (2) ................................ 5.53% 5.28% 4.71% 4.60% 4.03%
Expense ratio (3) ............................................ 3.60% 3.77% 4.48% 4.35% 2.80%
Dividend payout ratio ........................................ 20.83% -- -- -- N/M
Leverage ratio (4) ........................................... 10.87% 10.58% 6.96% 4.60% 4.57%
Tier 1 capital as a percentage of risk-weighted assets ....... 14.19% 15.04% 11.06% 7.33% 7.02%
Tier 1 and Tier 2 capital as a percentage
of risk-weighted assets ................................. 16.05% 17.03% 13.57% 9.81% 9.47%
Reserve for loan losses to total loans (period end) .......... 2.53% 3.49% 3.73% 4.82% 3.76%
Reserve for loan losses to nonperforming loans (5) ........... 167.17% 125.25% 78.55% 64.50% 48.57%
N/M Not Meaningful.
(1) Average equity divided by average total assets.
(2) Tax equivalent based on a 34% federal tax rate for all periods represented
(FTE=federal tax-equivalent basis).
(3) Noninterest expense minus noninterest income to average earning assets.
(4) Leverage ratio is Tier 1 capital to period end total assets less intangible
assets.
(5) Nonperforming loans include nonaccrual loans, impaired loans, loans 90 days
past due or greater and still accruing, and restructured loans.
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.
BMJ's net interest income was $28.2 million in 1995, matching the $28.2
million reported in 1994. Net interest income in 1994 increased marginally from
the $27.8 million reported in 1993.
The financial summary presented in Table 3 details yields and rates of
major interest-earning assets and interest-bearing liabilities over the past
five years. Among other things, Table 3 shows that the net interest margin
between yields on average interest-earning assets and costs of average funding
sources was 5.53% in 1995 versus 5.28% in 1994 and 4.71% in 1993. The increase
in BMJ's net interest margin is primarily the combined result of (a) growth in
the loan portfolio; (b) a greater percentage of earning assets being funded by
noninterest-bearing funding sources; and (c) a reduced level of nonperforming
assets. The average balance of BMJ's loan portfolio increased to 72.3% of total
interest-earning assets for 1995 compared to 67.1% for 1994 and 64.6% for 1993.
For 1995, 21.3% of total interest-earning assets were funded by
noninterest-bearing funding sources versus 18.1% for 1994 and 13.4% for 1993. In
addition, total nonperforming assets at December 31, 1995 were reduced to $7.7
million compared to $14.2 million and $27.8 million at December 31, 1994 and
1993, respectively.
BMJ's nonaccrual loans decreased to $6.0 million at December 31, 1995
compared to $8.7 million at December 31, 1994. Had year-end nonaccrual loans
been paid in the manner and at the rate and time contracted at the time the
loans were made, BMJ would have recognized additional interest income of $643
thousand in 1995, $845 thousand in 1994 and $1.4 million in 1993. Moreover,
BMJ's net interest margin would have been .12% higher in 1995, .11% higher in
1994 and .14% higher in 1993.
Net interest income also may be analyzed by segregating the volume and
rate components of interest income and interest expense. Table 2 demonstrates
the impact on net interest income of changes in the volume of interest-earning
assets and interest-bearing liabilities and changes in interest rates earned and
paid.
The interest-earning assets averages used in the calculation of the
changes in Table 2 include nonaccrual loans and, therefore, their impact on net
interest income is reflected in the change due to rate and not the change due to
volume. Table 2 indicates that the modest increases in taxable equivalent net
interest income for 1995 and 1994 resulted from the positive impact of changes
in rate which were, to varying degrees, tempered by the negative impact of
changes in volume.
Most of BMJ's assets and liabilities do not reprice instantaneously
with changes in market rates. During 1995, rates on every major category of
interest-earning assets and interest-bearing liabilities increased from the
prior year, reflecting increases in market interest rates. Table 14 illustrates
BMJ's periodic and cumulative interest rate sensitivity positions as of December
31, 1995. BMJ is liability sensitive in the three month and six month periods
whereas BMJ is asset sensitive in the one year, five year and after five year
periods. A similar position existed throughout most of 1994.
For several years, BMJ has had a greater level of interest-earning
assets than interest-bearing liabilities, with a difference of $80.7 million in
1993, $98.3 million in 1994, and $111.1 million in 1995. The ratio of average
interest-bearing liabilities to average interest-earning assets has decreased
from 86.6% in 1993 to 81.9% in 1994 and 78.7% in 1995. As noted above, decreases
in this ratio result in a growing net interest margin as a result of a larger
portion of interest-earning assets being funded by noninterest-bearing funding
sources.
Table 2
Rate/Volume Analysis
(in thousands) 1995-1994 1994-1993
----------------------------------- -----------------------------------
Change in Rate Volume Change in Rate Volume
Income/ Effect Effect Income/ Effect Effect
Expense Expense
INTEREST-EARNING ASSETS
Loans ................................................ $ 3,258 $ 2,193 $ 1,065 ($2,957) ($ 804) ($2,153)
Money market investments:
Time deposits with other banks .................... (479) 262 (741) 253 123 130
Interest-bearing deposits with other banks ........ (45) 76 (121) 72 -- 72
Federal funds sold and
repurchase agreements .......................... (39) (154) 115 (110) 243 (353)
Other short term investments ...................... (685) 732 (1,417) 1,010 -- 1,010
------- ------- ------- ------- ------- -------
Total money market investments ................. (1,248) 916 (2,164) 1,225 366 859
------- ------- ------- ------- ------- -------
Securities available for sale:
U.S. Treasury securities .......................... (199) 188 (387) (2,772) 21 (2,793)
U.S. government agencies and
corporations ................................... 740 73 667 (1,455) (82) (1,373)
States and political subdivisions ................. 400 (1) 401 (348) 17 (365)
Other securities .................................. (4) (2) (2) (89) (25) (64)
------- ------- ------- ------- ------- -------
Total securities available for sale ............ 937 258 679 (4,664) (69) (4,595)
------- ------- ------- ------- ------- -------
Securities held to maturity:
U.S. Treasury securities .......................... (248) 474 (722) 695 151 544
U.S. government agencies and
corporations ................................... 532 549 (17) 2,530 356 2,174
States and political subdivisions ................. 9 22 (13) 164 (6) 170
Other securities .................................. 57 7 50 31 -- 31
------- ------- ------- ------- ------- -------
Total securities held to maturity .............. 350 1,052 (702) 3,420 501 2,919
------- ------- ------- ------- ------- -------
Total interest-earning assets .................. $ 3,297 $ 4,419 ($1,122) ($2,976) ($ 6) ($2,970)
======= ======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES
Deposits:
Savings and interest checking ..................... $ 111 $ 420 ($ 309) ($1,688) ($ 833) ($ 855)
Certificates of deposit of
$100,000 or more ............................... 316 144 172 (186) (69) (117)
Other time deposits ............................... 2,198 1,789 409 (1,448) (435) (1,013)
------- ------- ------- ------- ------- -------
Total deposits ................................. 2,625 2,353 272 (3,322) (1,337) (1,985)
Other debt ........................................... 521 7 514 4 (19) 23
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ............. $ 3,146 $ 2,360 $ 786 ($3,318) ($1,356) ($1,962)
======= ======= ======= ======= ======= =======
Net interest income .................................. $ 151 $ 2,059 ($1,908) $ 342 $ 1,350 ($1,008)
======= ======= ======= ======= ======= =======
Note: Interest income on tax-exempt loans and investments was computed by
dividing the tax-exempt income by one minus the federal corporate
income tax rate to reflect the tax equivalent income. Variances which
were not specifically attributable to volume or rate were allocated
proportionately between each, based on the overall effect on interest
income and interest expense.
Table 3
Financial Summary
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1995 December 31, 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 ..................... $ 818 5.87% $ 48 $ 11,947 4.41% $ 527
Interest-bearing deposits with other banks ......... 501 5.39 27 1,964 3.67 72
Federal funds sold and repurchase agreements ....... 6,069 5.90 358 10,535 3.77 397
Other short term investments ....................... 5,458 5.95 325 23,720 4.26 1,010
--------- ---- --------- --------- ---- ---------
Total money market investments .................. 12,846 5.90 758 48,166 4.16 2,006
Securities available for sale:
U.S. Treasury securities ........................... 3,693 4.79 177 10,286 3.66 376
U.S. government agencies and corporations .......... 12,247 6.65 815 1,832 4.09 75
States and political subdivisions .................. 6,501 6.28 408 116 6.90 8
Other securities ................................... -- -- -- 72 5.56 4
--------- ---- --------- --------- ---- ---------
Total securities available for sale ............. 22,441 6.24 1,400 12,306 3.76 463
Securities held to maturity:
U.S. Treasury securities ........................... 17,017 5.74 976 26,275 4.66 1,224
U.S. government agencies and corporations .......... 86,740 5.67 4,914 87,070 5.03 4,382
States and political subdivisions .................. 3,924 8.54 335 4,154 7.85 326
Other securities ................................... 1,581 6.64 105 809 5.93 48
--------- ---- --------- --------- ---- ---------
Total securities held to maturity ............... 109,262 5.79 6,330 118,308 5.05 5,980
Loans, net of unearned income ........................ 377,364 8.94 33,719 364,800 8.35 30,461
--------- ---- --------- --------- ---- ---------
Total interest-earning assets ................... $ 521,913 8.09% $ 42,207 $ 543,580 7.16% $ 38,910
========= ==== ========= ========= ==== =========
FUNDING SOURCES
Deposits:
Savings and interest checking ...................... $ 257,461 2.23% $ 5,747 $ 316,582 1.78% $ 5,636
Certificates of deposit of $100,000 or more ........ 9,378 5.44 510 5,599 3.46 194
Other time deposits ................................ 124,856 4.89 6,105 113,796 3.43 3,907
--------- ---- --------- --------- ---- ---------
Total interest-bearing deposits ................. 391,695 3.16 12,362 435,977 2.23 9,737
Securities sold under agreements
to repurchase ...................................... 15,243 4.84 737 5,372 3.20 172
Other borrowed funds ................................. 332 2.71 9 149 3.36 5
Other debt ........................................... 3,508 7.41 260 3,825 8.05 308
--------- ---- --------- --------- ---- ---------
Total interest-bearing liabilities .............. 410,778 3.25 13,368 445,323 2.30 10,222
Portion of noninterest-bearing funding sources ....... 111,135 -- -- 98,257 -- --
--------- ---- --------- --------- ---- ---------
Total funding sources ........................... $ 521,913 2.56% $ 13,368 $ 543,580 1.88% $ 10,222
========= ==== ========= ========= ==== =========
Net interest margin and net interest income .......... 5.53% $ 28,839 5.28% $ 28,688
==== ========= ==== =========
Table 3
Financial Summary -- Continued
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1995 December 31, 1994
---------------------------------- ----------------------------------
Average Yields Interest Average Yields Interest
Balance or Income/ Balance or Income/
Rates Expense Rates Expense
--------- ---- --------- --------- ---- ---------
NONINTEREST-EARNING ASSETS
Cash and due from banks .............................. $ 18,185 $ 22,142
Reserve for loan losses .............................. (12,812) (13,571)
Premises and equipment, net .......................... 5,598 6,510
Bank subsidiary and branch held for sale ............. -- --
Other assets ......................................... 20,763 23,845
--------- ---------
Total noninterest-earning assets ................ $ 31,734 $ 38,926
========= =========
NONINTEREST-BEARING FUNDING SOURCES
Demand deposits ...................................... $ 74,998 $ 80,059
Other liabilities .................................... 6,751 6,261
Shareholders' equity ................................. 61,120 50,863
Bank subsidiary and branch held for sale ............. -- --
Noninterest-bearing funding sources
used to fund earning assets ........................ (111,135) (98,257)
--------- ---------
Total net noninterest-bearing funding sources ... $ 31,734 $ 38,926
========= =========
TOTAL ASSETS ......................................... $ 553,647 $ 582,506
========= =========
Notes:
(1) In the calculation of average loan rates, loan fees have been included in
interest income as follows: $34,062 (or .01%) in 1995; $175,994 (or .05%)
in 1994; $696,037 (or .18%) in 1993; $969,404 (or .20%) in 1992; $662,040
(or .12%) in 1991. Nonaccrual loans have been included in average balances.
(2) Tax equivalent yield - Interest income on tax-exempt loans and securities
was computed by dividing the tax-exempt income by one minus the federal
corporate income tax rate of 34% to reflect the tax equivalent income.
(3) Noninterest-bearing funding sources - Computed by subtracting
interest-bearing liabilities from interest-earning assets.
Table 3
Financial Summary
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1993 December 31, 1992
---------------------------------- ----------------------------------
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 $ 8,553 3.20% $ 274 $ 10,757 3.69% $ 397
Interest-bearing deposits with other banks - - - - -
Federal funds sold and repurchase agreements 16,959 2.99 507 17,060 3.50 597
Other short term investments - - - 3,691 3.58 132
--------- ---- --------- --------- ---- --------
Total money market investments 25,512 3.06 781 31,508 3.57 1,126
Securities available for sale:
U.S. Treasury securities 86,602 3.64 3,148 103,474 5.18 5,355
U.S. government agencies and corporations 35,278 4.34 1,530 52,289 5.44 2,842
States and political subdivisions 5,381 6.62 356 15,403 8.89 1,370
Other securities 1,074 8.66 93 3,016 7.79 235
--------- ---- --------- --------- ---- --------
Total securities available for sale 128,335 4.00 5,127 174,182 5.63 9,802
Securities held to maturity:
U.S. Treasury securities 14,094 3.75 529 - - -
U.S. government agencies and corporations 42,957 4.31 1,852 - - -
States and political subdivisions 1,999 8.10 162 - - -
Other securities 280 6.07 17 - - -
--------- ---- --------- --------- ---- --------
Total securities held to maturity 59,330 4.31 2,560 - - -
Loans, net of unearned income 388,919 8.59 33,418 474,178 8.96 42,467
--------- ---- --------- --------- ---- --------
Total interest-earning assets $ 602,096 6.96% $ 41,886 $ 679,868 7.85% $ 53,395
========= ==== ========= ========= ==== ========
FUNDING SOURCES
Deposits:
Savings and interest checking $ 361,525 2.03% $ 7,324 $ 391,343 2.86% $ 11,210
Certificates of deposit of $100,000 or more 8,674 4.38 380 16,430 5.28 867
Other time deposits 142,487 3.76 5,355 195,823 4.84 9,473
--------- ---- --------- --------- ---- --------
Total interest-bearing deposits 512,686 2.55 13,059 603,596 3.57 21,550
Securities sold under agreements 3,774 1.91 72 5,469 2.56 140
to repurchase
Other borrowed funds 62 3.23 2 67 2.99 2
Other debt 4,855 8.38 407 4,880 8.38 409
--------- ---- --------- --------- ---- --------
Total interest-bearing liabilities 521,377 2.60 13,540 614,012 3.60 22,101
Portion of noninterest-bearing funding sources 80,719 - -
--------- ---- --------- --------- ---- --------
Total funding sources $ 602,096 2.25% $ 13,540 $ 679,868 3.25% $ 22,101
========= ==== ========= ========= ==== ========
Net interest margin and net interest income 4.71% $ 28,346 4.60% $ 31,294
==== ========= ==== ========
Table 3
Financial Summary
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1993 December 31, 1992
---------------------------------- ----------------------------------
Average Yields Interest Average Yields Interest
Balance or Income/ Balance or Income/
Rates Expense Rates Expense
--------- ---- --------- --------- ----- ---------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 26,775 $ 29,557
Reserve for loan losses (18,414) (21,291)
Premises and equipment, net 7,752 9,312
Bank subsidiary and branch held for sale - 16,067
Other assets 34,248 39,428
--------- ---------
Total noninterest-earning assets $ 50,361 $ 73,073
========= =========
NONINTEREST-BEARING FUNDING SOURCES
Demand deposits $ 82,297 $ 82,161
Other liabilities 6,755 6,142
Shareholders' equity 42,028 37,224
Bank subsidiary and branch held for sale - 13,402
Noninterest-bearing funding sources
used to fund earning assets (80,719) (65,856)
--------- ---------
Total net noninterest-bearing funding sources $ 50,361 $ 73,073
========= =========
TOTAL ASSETS $ 652,457 $ 752,941
========= =========
Table 3
Financial Summary
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1991
----------------------------------
Average Yields Interest
Balance or Income/
Rates Expense
--------- ----- ---------
INTEREST-EARNING ASSETS
Money market investments:
Time deposits with other banks $ 9,870 6.24% $ 616
Interest-bearing deposits with other banks - -
Federal funds sold and repurchase agreements 21,399 5.70 1,220
Other short term investments 6,582 6.40 421
--------- ---- ---------
Total money market investments 37,851 5.96 2,257
Securities available for sale:
U.S. Treasury securities 77,671 7.27 5,646
U.S. government agencies and corporations 70,516 7.12 5,022
States and political subdivisions 27,934 10.43 2,914
Other securities 8,709 7.67 668
--------- ---- ---------
Total securities available for sale 184,830 7.71 14,250
Securities held to maturity:
U.S. Treasury securities - - -
U.S. government agencies and corporations - - -
States and political subdivisions - - -
Other securities - - -
--------- ---- ---------
Total securities held to maturity - - -
Loans, net of unearned income 554,224 10.01 55,466
--------- ---- ---------
Total interest-earning assets $ 776,905 9.26% $ 71,973
========= ==== =========
FUNDING SOURCES
Deposits:
Savings and interest checking $ 372,871 4.88% $ 18,179
Certificates of deposit of $100,000 or more 57,243 6.44 3,686
Other time deposits 258,152 6.91 17,837
--------- ---- ---------
Total interest-bearing deposits 688,266 5.77 39,702
Securities sold under agreements 9,490 5.30 503
to repurchase
Other borrowed funds 164 4.88 8
Other debt 5,079 8.45 429
--------- ---- ---------
Total interest-bearing liabilities 702,999 5.78 40,642
Portion of noninterest-bearing funding sources 73,906 - -
--------- ---- ---------
Total funding sources $ 776,905 5.23% $ 40,642
========= ==== ========
Net interest margin and net interest income 4.03% $ 31,331
==== ========
Table 3
Financial Summary
Average Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) December 31, 1991
----------------------------------
Average Yields Interest
Balance or Income/
Rates Expense
--------- ----- ---------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 29,646
Reserve for loan losses (18,246)
Premises and equipment, net 10,740
Bank subsidiary and branch held for sale -
Other assets 30,370
---------
Total noninterest-earning assets $ 52,510
=========
NONINTEREST-BEARING FUNDING SOURCES
Demand deposits $ 76,435
Other liabilities 7,759
Shareholders' equity 42,222
Bank subsidiary and branch held for sale -
Noninterest-bearing funding sources
used to fund earning assets (73,906)
---------
Total net noninterest-bearing funding sources $ 52,510
=========
TOTAL ASSETS $ 829,415
=========
Noninterest Income
BMJ's revenues include noninterest income, which consists primarily of
service charges on deposit accounts and trust services income. In 1995, total
noninterest income was $4.3 million and represented 13.3% of operating income
(net interest income plus noninterest income) compared to $5.7 million, or
16.7%, in 1994 and $6.7 million, or 19.4%, in 1993.
Service charges, commissions and fees for 1995 decreased to $3.9
million from $5.2 million in 1994. Service charges, commissions and fees
amounted to $5.0 million for 1993. The decrease in revenues from service
charges, commissions and fees for the year ended December 31, 1995 compared to
1994 is due to the lower level of deposit accounts subject to service charges
and other fees primarily as a result of the sale of BMJ's former Southern Ocean
State Bank subsidiary on July 29, 1994.
There were no net gains or losses from securities transactions for the
years ended December 31, 1995 and 1994 compared to securities gains of $690
thousand for the year ended December 31, 1993.
Noninterest Expense
Noninterest expense for 1995 was $23.1 million, a decrease of 11.7%
from the $26.1 million reported for 1994. Noninterest expense for 1994 declined
20.9% from the $33.0 million reported for 1993. This decrease in noninterest
expense is a result of the corporate-wide restructuring program begun in 1993,
the objectives of which were to increase operating efficiency, further
consolidate management functions, enhance the level of service provided to
customers and increase shareholder value. Two significant initiatives completed
during 1994 which have had an ongoing positive impact on the level of BMJ's
noninterest expenses consistent with the restructuring program's objectives were
the merger of BMJ's The Bank of Mid-Jersey and Mount Holly State Bank
subsidiaries and the sale of BMJ's former Southern Ocean State Bank subsidiary.
As previously discussed, Southern Ocean State Bank's 1994 operating results
through June 30, 1994 are included in BMJ's operating results for the year ended
December 31, 1994. BMJ's operating results for 1993 include those of Southern
Ocean State Bank.
Salaries and employee benefits amounted to $9.6 million for 1995
compared to $10.7 million for 1994 and $13.3 million for 1993. Salaries expense,
which is the largest component of this noninterest expense category, amounted to
$8.1 million for 1995, decreasing by 9.7% from the $9.0 million for 1994.
Salaries expense for 1993 was $11.2 million. BMJ has reduced the number of
full-time equivalent employees at December 31, 1995 to 277 employees compared to
289 employees and 371 employees, at December 31, 1994 and 1993, respectively.
Salaries and employee benefits as a percentage of average assets decreased to
1.74% for 1995 compared to 1.83% for 1994 and 2.05% for 1993.
Net occupancy expense decreased by 11.5% to $2.9 million for 1995
compared to $3.2 million for 1994. Net occupancy expense for 1993 totaled $3.7
million. This category of noninterest expense has decreased as a percentage of
average assets to .51% for 1995 compared to .55% for 1994 and .57% for 1993.
Other real estate expenses decreased to $641 thousand for 1995 from
$1.5 million for 1994. Other real estate expenses decreased to $1.5 million for
1994 from $3.9 million for 1993. These expenses include the costs to maintain
repossessed properties, such as insurance, property taxes and general
maintenance expenses. The significant decrease in the level of other real estate
expenses for 1995 is a result of BMJ's success in effectively liquidating the
property portfolio. Other real estate expenses also include a provision to
increase the valuation reserve used to adjust the carrying value of foreclosed
properties to their fair value. Provisions of $150 thousand, $863 thousand and
$1.7 million were recorded during 1995, 1994 and 1993, respectively.
The other noninterest expense category totaled $10.0 million for 1995
compared to $10.7 million for 1994 and $12.1 million for 1993. Included among
the components in this noninterest expense category are FDIC insurance premiums
and legal fees. Refer to Note 12 to the Consolidated Financial Statements for
the primary components of this category.
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. On
September 15, 1995, The Bank of Mid-Jersey received a refund of $281 thousand
from the FDIC representing a refund of prepaid deposit insurance premiums. As a
result, FDIC insurance expense for the year ended December 31, 1995 was $539
thousand, which reflects a 60% decrease from the $1.3 million for 1994. FDIC
insurance premiums amounted to $1.8 million for 1993.
Legal fees for 1995 amounted to $1.1 million compared to $1.6 million
for 1994 and $2.0 million for 1993. The current year decrease reflects lower
costs associated with obtaining title to properties through the foreclosure
process and in pursuing collection of delinquent loans.
Income Tax Expense
Income tax expense for the year ended December 31, 1995 amounted to
$3.1 million, increasing from the income tax expense amounts reported for each
of the years ended December 31, 1994 and 1993.
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 year ended December 31, 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.
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 year ended December 31, 1994 was reduced
by $4.9 million, representing a reversal of a portion of the valuation
allowance.
Balance Sheet Analysis
Total assets of BMJ amounted to $588.7 million at December 31, 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 December 31, 1995
versus December 31, 1994. Total deposits of $485.0 million at December 31, 1995
represents a 5% increase from the $463.6 million 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 $65.6 million at December 31, 1995. The ratio of
shareholders' equity to total assets at December 31, 1995 remained strong at
11.1% compared to 10.8% at December 31, 1994.
In addition, asset quality continued to improve as total nonperforming
assets at December 31, 1995 were reduced by $6.5 million to $7.7 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 strategy have been
classified as securities available for sale. The securities available for sale
portfolio amounted to $64.6 million at December 31, 1995 compared to $2.9
million at December 31, 1994. On an average basis, the portfolio represented
4.3% of average interest-earning assets for the year ended December 31, 1995
compared to 2.3% of average interest-earning assets for the year ended December
31, 1994. BMJ's practice had been to classify all securities purchased during
1995 as securities available for sale as management responded to changes in the
interest rate environment and as part of the asset/liability management
strategy. Following an analysis of the securities available for sale portfolio
during 1993, management transferred certain securities for which it was
determined BMJ had the intent and ability to hold to maturity, to the securities
held to maturity portfolio.
Note 3 to the Consolidated Financial Statements details the composition
of the securities available for sale portfolio at December 31, 1995, 1994 and
1993. Table 3 provides information concerning average yields and balances of the
securities available for sale portfolio over the past five years. Table 4
provides the maturities and weighted average yields for the securities available
for sale portfolio at December 31, 1995. Yields on tax-exempt securities are
presented on a fully taxable equivalent basis assuming a 34% federal tax rate.
Table 4
Securities Available for Sale
December 31, 1995
----------------------------------------------
(in thousands) Within one year After one After five After ten Total
but within but within years
five years ten years
U.S. Treasury securities $ 5,010 $ - $ - $ - $ 5,010
U.S. government agencies
and corporations - 24,940 20,380 2,301 47,621
States and political subdivisions 11,870 107 - - 11,977
Other securities - - - - -
------- ------- ------- ------- -------
Total $16,880 $25,047 $20,380 $ 2,301 $64,608
======= ======= ======= ======= =======
Weighted average yield, computed
on a tax equivalent basis 5.85% 6.54% 7.03% 7.59% 6.55%
==== ==== ==== ==== ====
Note: Tax equivalent yield-interest income on tax exempt securities was
computed by dividing the tax exempt income by one minus the federal
corporate income tax rate (34%) to reflect the tax equivalent income.
Securities Held to Maturity
BMJ's securities held to maturity portfolio amounted to $82.5 million
at December 31, 1995 compared to $119.0 million at December 31, 1994. Note 4 to
the Consolidated Financial Statements details the composition of the securities
held to maturity portfolio at December 31, 1995, 1994 and 1993. As previously
stated, BMJ's practice had generally been to classify all securities purchased
during 1995 as securities available for sale as management responded to changes
in the interest rate environment and as part of the asset/liability strategy.
During 1995 BMJ transferred $23.1 million from the securities held to maturity
portfolio to the available for sale portfolio in accordance with the one-time
reassessment opportunity permitted by the Financial Accounting Standards Board
special report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities". Table 3
provides information concerning average yields and balances of the securities
held to maturity portfolio over the past five years. Table 5 provides the
maturities and weighted average yields for the securities held to maturity
portfolio at December 31, 1995. Yields on tax-exempt securities are presented on
a fully taxable equivalent basis assuming a 34% federal tax rate.
Table 5
Securities Held to Maturity
December 31, 1995
-------------------------------------------------------------
(in thousands) Within After one After five After ten Total
one year but within but within years
five years ten years
U.S. Treasury securities $ - $ 5,110 $ - $ - $ 5,110
U.S. government agencies
and corporations - 70,858 2,000 - 72,858
States and political subdivisions 276 563 1,338 - 2,177
Other securities - - - 2,370 2,370
------- ------- -------- -------- --------
Total $ 276 $76,531 $ 3,338 $ 2,370 $ 82,515
======= ======= ======== ======== ========
Weighted average yield, computed
on a tax equivalent basis 8.18% 5.90% 7.39% 6.57% 5.99%
==== ==== ==== ==== ====
Note: Tax equivalent yield-interest income on tax exempt securities was
computed by dividing the tax exempt income by one minus the federal
corporate income tax rate (34%) to reflect the tax equivalent income.
Loan Portfolio
BMJ's loan portfolio totaled $399.4 million at December 31, 1995,
increasing by 11.7% from $357.4 million at December 31, 1994. Total loans
averaged $377.4 million during 1995, an increase of $12.6 million compared to
$364.8 million for 1994. The yield on the total loan portfolio was 8.94% in 1995
compared to 8.35% in 1994. A five-year comparative schedule of the components of
BMJ's loan portfolio is presented in Table 6.
Table 6
Loan Portfolio Composition
December 31,
------------------------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
Commercial, financial
and agricultural $ 24,869 $ 22,822 $ 23,784 $ 53,092 $ 72,200
Real estate - mortgage 295,535 275,813 309,348 318,199 407,952
Real estate - construction 32,439 28,420 33,334 27,670 40,741
Consumer 46,521 30,360 20,012 21,191 21,703
-------- --------- -------- --------- ---------
Total loan portfolio $399,364 $357,415 $386,478 $420,152 $542,596
======== ======== ======== ======== ========
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 December 31, 1995, approximately 82.1% of BMJ's
loans are secured by real estate.
For purposes of monitoring credit exposure and concentration of risk,
BMJ tracks its loans to related individuals and entities of which one person may
be associated as a principal or a common enterprise exists. As of December 31,
1995, BMJ had 8 relationships with outstanding loan balances in excess of $4.5
million, the largest of which was $8.6 million. All of these relationships were
current in meeting scheduled payment terms and were considered performing,
except for one relationship which included a $960 thousand loan which was 30 -
59 days past due.
The real estate mortgage portfolio of $295.5 million at December 31,
1995 represented 74.0% of the total loan portfolio and includes $116.6 million
in residential mortgage loans, $36.2 million in home equity credit-lines, and
$142.7 million in commercial real estate loans. The residential and home equity
credit-line portions of this portfolio represent a core business for BMJ which
management intends to expand.
At December 31, 1995 real estate construction loans totaled $32.4
million, representing 8.1% of the total loan portfolio. These loans are
monitored with advances made generally after work is completed and independently
inspected and verified by qualified professionals. It is BMJ's policy to provide
construction financing to qualified customers within its marketplace only when
commitments for permanent financing are in place.
BMJ's consumer loan portfolio of $46.5 million has experienced minimal
delinquency or credit losses. Management believes that this portion of the loan
portfolio can continue to be profitably expanded without lessening credit
standards. It is management's intention to continue aggressively marketing these
products to the communities which BMJ serves.
The degree of risk inherent in all of BMJ's lending activities is
heavily influenced by the economic conditions of BMJ's primary market areas.
Changes in regional and local real estate values, employment levels, and income
levels are among the factors affecting the risk in the loan portfolio.
Consumer loan portfolio risk is affected by the value of collateral
such as residential property and personal automobiles. This portfolio includes
both traditional installment type lending and traditional residential first and
second mortgages.
Commercial real estate/construction loan risk is influenced by the same
general factors as indicated above but, in addition, risk is influenced by the
specific borrower's financial condition, demand for retail and office space, and
the long-term viability of manufacturing and distribution businesses within
BMJ's marketplace.
At December 31, 1995, BMJ had no loans concentrated to borrowers
engaged in the same or similar industries that exceeded 10% of total loans other
than the loan categories presented in Table 6. There was no leveraged buy-out
("LBO") loan exposure at December 31, 1995. In addition, at December 31, 1995,
BMJ had no cross-border outstandings to borrowers in foreign countries.
Cross-border outstandings are defined as loans, acceptances, interest-bearing
assets with other banks and other interest-bearing investments.
Table 7 provides information concerning the interest rate sensitivity
of BMJ's commercial, financial and agricultural, and real estate-construction
loans at December 31, 1995.
Table 7
Loan Interest Rate Sensitivity
(in thousands) December 31, 1995
---------------------------------------------------------------
Within One After One After Total
Year But Within Five
Five Years Years
Maturities:
Commercial, financial
and agricultural $15,219 $ 9,255 $ 395 $24,869
Real estate - construction 20,335 12,104 - 32,439
------- ------- ------- -------
Total $35,554 $21,359 $ 395 $57,308
======= ======= ======= =======
Type:
Fixed rate loans $ 9,226 $ 6,968 $ - $16,194
Floating rate loans 26,328 14,391 395 41,114
------- ------- ------- -------
Total $35,554 $21,359 $ 395 $57,308
======= ======= ======= =======
Nonperforming Assets
Nonperforming assets consist of nonperforming loans, impaired loans and
other real estate owned. Table 8 sets forth a five-year comparative schedule of
nonperforming assets and risk elements in BMJ's loan portfolio by type for the
periods indicated.
Nonperforming loans include nonaccrual loans, impaired loans, loans 90
days or greater past due and still accruing, and restructured loans. 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 1.5% as of December 31, 1995, and 2.8% as of
December 31, 1994. The decline in nonaccrual loans is attributable to increased
collections, transfers to other real estate, and charge-offs.
Interest recognized as income during 1995 on nonaccrual loans totaled
$75 thousand, compared to $384 thousand in 1994, and $38 thousand in 1993. While
a loan is classified as nonaccrual and the future collectibility of the recorded
loan balance is doubtful, collections of interest and principal are generally
applied as a reduction to principal outstanding. When the future collectibility
of the recorded loan balance is expected, interest income may be recognized on a
cash basis. In the case where a nonaccrual loan had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Additional interest income amounting to approximately $643 thousand for 1995,
$845 thousand in 1994, and $1.4 million in 1993 would have been recognized if
interest on all such loans had been recorded based upon original terms.
Restructured loans are those whose contractual interest rates have been
reduced to below current market rates or other concessions made due to the
borrowers' financial difficulties. Interest on these loans is subject to the
nonaccrual policy. At December 31, 1995 and December 31, 1994, BMJ had no
restructured loans.
The following table illustrates the activity in BMJ's nonaccrual loans
during the year ended December 31, 1995. Payments received on these loans
continue to provide significant reductions in the outstanding balances.
(in thousands)
Balance, January 1, 1995 $ 5,769
New defaults 3,403
Transfer of insubstance foreclosures
upon adoption of FAS 114 2,935
Assets foreclosed upon (2,208)
Payoff, cures and sales (2,703)
Charge-offs and writedowns (1,155)
-------
Balance, December 31, 1995 $ 6,041
=======
Potential problem loans consist of loans which are included in
performing loans at December 31, 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 December 31, 1995 and
1994, such potential problem loans amounted to approximately $3.5 million and
$5.9 million, respectively. 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.
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, based on current information and events, if it is probable that BMJ
will be unable to collect the scheduled payments of principal and interest when
due according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the loan's historical effective interest rate except that
all collateral- dependent loans are measured for impairment based on the fair
value of the collateral. 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.
At December 31, 1995, BMJ's recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 amounted to $7.3
million. The reserve for loan losses at December 31, 1995 includes reserves of
$1.2 million applicable to such impaired loans. All of these loans were valued
using the fair value of collateral method. Based on this method, $1.2 million of
the $10.1 million reserve for loan losses at December 31, 1995 was allocated
against all of the impaired loans. The remaining reserve for loan losses,
totalling $8.9 million at December 31, 1995, is available to absorb losses in
BMJ's entire loan portfolio. During 1995, the average recorded investment in
impaired loans was approximately $7.1 million. Interest income recognized on
total impaired loans during 1995 was approximately $447 thousand.
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 ISFs to loans has been made upon adoption of FAS No. 114 and
this reclassification is reflected in the schedule of BMJ's nonperforming assets
in Table 8. BMJ will no longer be required to identify and isolate future loans
that may meet the former criteria for ISF classification.
The following table illustrates the activity in BMJ's other real estate
during the year ended December 31, 1995.
(in thousands)
Balance, January 1, 1995 $ 8,172
Assets foreclosed upon 2,882
Sales and other reductions (5,037)
Writedowns to fair value/charge-offs (1,119)
Transfer of insubstance foreclosures to
loans upon adoption of FAS 114 (2,935)
--------
Subtotal 1,963
Less loss reserve (277)
--------
Balance, December 31, 1995 $ 1,686
========
Other real estate consists of properties acquired through
foreclosure or acceptance of a 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. At December 31, 1995, the
balance of other real estate, net of the reserve, amounted to $1.7 million, a
reduction of 77% from the combined balance of $7.2 million at December 31, 1994.
Table 8
Nonperforming Assets
(in thousands) December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------- -------- -------- --------
Nonaccrual loans:
Commercial, financial
and agricultural $ 184 $ 159 $ 309 $ 5,061 $ 4,466
Real estate - mortgage 3,145 7,578 15,759 23,096 25,426
Real estate - construction 2,712 967 116 912 8,937
Consumer - - 127 3 72
------ ------- -------- -------- --------
Total 6,041 8,704 16,311 29,072 38,901
------ ------- -------- -------- --------
Loans 90 days or more past due
and still accruing:
Commercial, financial
and agricultural - 151 36 50 364
Real estate - mortgage - 1,109 976 233 800
Real estate - construction - - - - 300
Consumer - 4 54 15 29
------ ------- -------- -------- --------
Total - 1,264 1,066 298 1,493
------ ------- -------- -------- --------
Restructured loans - - 985 2,051 1,624
------ ------- -------- -------- --------
Total nonperforming loans 6,041 9,968 18,362 31,421 42,018
------ ------- -------- -------- --------
Other nonperforming assets:
Other real estate 1,963 5,237 12,014 16,524 4,735
ORE loss reserve (277) (958) (2,614) (2,866) (1,047)
------ ------- -------- -------- --------
Total other
nonperforming assets 1,686 4,279 9,400 13,658 3,688
------ ------- -------- -------- --------
Total nonperforming assets $7,727 $14,247 $ 27,762 $ 45,079 $ 45,706
====== ======= ======== ======== ========
The 45.8% decline in nonperforming assets during 1995 is the result
of workout and collection activity, write-offs in recognition of lesser
collateral value, disposal of other real estate owned and the effects of the
economic recovery.
Reserve For Loan Losses
At December 31, 1995 the reserve for loan losses totaled $10.1 million
compared to $12.5 million at December 31, 1994. The ratio of the reserve for
loan losses to total loans at December 31, 1995 was 2.53% versus 3.52% at
December 31, 1994.
Management has adopted a reserve methodology consistent with the
provisions of FAS 114 for the assessment of 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. Table 9 provides a five year summary of the changes in the
reserve for loan losses and Table 10 provides a five year summary of the
distribution of the loan loss reserve to loan categories.
As with any financial institution, poor economic conditions, high
inflation, high interest rates, or high unemployment may lead to increased
losses in the loan portfolio. Conversely, improvements in economic conditions
tend to reduce the amounts charged off against the reserve. BMJ's gross
charge-offs in 1995 totaled $2.1 million, compared with $3.1 million in 1994 and
$8.1 million in 1993. Loans other than certain consumer loans not secured by
real estate are charged off if management judges the loans to be uncollectible
or the loan has been classified as a loss by either the Federal Reserve, FDIC,
or New Jersey state examiners. Certain closed-end and open-end consumer loans
not secured by real estate are automatically charged off after they are
contractually delinquent 90 days.
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. During 1995, collection efforts resulted in recoveries of $1.7 million
on previously charged-off loans compared with $1.6 million in 1994 and $1.4
million in 1993. Net loan charge-offs in 1995 represented .10% of average loans
outstanding compared to .42% in 1994 and 1.72% in 1993.
The provision for loan losses represents BMJ's assessment of the amount
to be provided to the reserve for loan losses in order to maintain the reserve
at a level considered adequate in relation to the risks and uncertainties
inherent in the loan portfolio. Amounts charged against current income are based
on such factors as past loan loss experience as related to current loan
portfolio mix, evaluation of actual and potential losses in the loan portfolio,
prevailing regional and national economic conditions that might have an impact
on the portfolio, regular reviews and examinations of the loan portfolio by
internal loan reviewers and reviews and examinations by bank regulatory
authorities.
BMJ recorded a negative provision for loan losses of $2.0 million in
1995. No provision for loan losses was recorded in 1994 and a provision of $840
thousand was recorded in 1993.
The negative provision of $2.0 million recorded in 1995 was driven by
the continuing improvements of BMJ's asset quality, including reduced levels of
nonperforming assets and net loan charge-offs. Specifically, since December 31,
1992, nonperforming loans have declined from $31.4 million to $6.0 million at
December 31, 1995, and net charge-offs declined from $6.7 million during 1993 to
$1.5 million during 1994 and $386 thousand during 1995. In addition, BMJ has
adhered to the previously discussed methodology in determining both the
necessary provision for loan losses to be taken from earnings and the adequacy
of the allowance for loan losses. Based upon management's judgement and
evaluation of this methodology, BMJ has recorded no quarterly provision for loan
losses since the second quarter of 1993. As a result of BMJ's increasingly
diversified loan mix, stabilized and improving regional economies, and the
continuing adequacy of the reserve for loan losses subsequent to the
non-recurring negative provision, it was management's and the Board of
Director's judgement that the interest of BMJ's shareholders was best served by
this immediate, one-time negative provision.
Management also determined that the fourth quarter of 1995 was the
appropriate period in which to record the negative provision for loan losses for
the following reasons:
o Trends in BMJ's criticized assets have stabilized over the last
three quarters of 1995;
o Recoveries on previously charged-off loans over the past eight
quarters have been strong and, accordingly, charge-offs have not
reduced the reserve for loan losses as originally anticipated;
o All litigation associated with the loans reserved for during the
period of 1991 through 1994 had essentially been settled by the
third quarter of 1995; and
o The adoption of FAS 114 during 1995 has increased the unallocated
portion of the reserve because "substandard" loans which have been
identified as impaired generally do not require specific reserves
as a result of collateral which supports the recorded investment in
the loan.
Subsequent to the non-recurring negative provision, management believes
BMJ's reserve for loan losses is adequate for losses inherent in the loan
portfolio, and its reserve coverage is generally comparable with BMJ's peer
institutions. The reserve for loan losses at December 31, 1995 was 2.53% of
total loans. According to the most recent Uniform Bank Performance Report issued
by the Federal Reserve Bank, the peer average for banks throughout the country
between $500 million and $1.0 billion in assets is a reserve for loan losses to
total loan portfolio ratio of 1.59%. Consistent with BMJ's practice of
maintaining an adequate reserve for loan losses, the general portion of the loan
loss reserve was $8.9 million, or 88% of the total reserve at December 31, 1995.
There can be no assurance that if asset quality deteriorates in future periods
material additions to the reserve for loan losses will not be required.
Table 9
Reserve For Loan Losses
(in thousands) Year ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
Reserve balance,
Beginning of year $ 12,485 $ 14,423 $ 20,267 $ 20,407 $ 14,976
Charge-offs:
Commercial, financial, and
agriculture (16) (481) (3,546) (2,769) (4,779)
Real estate - mortgage (1,002) (2,529) (3,564) (7,254) (5,030)
Real estate - construction (634) (16) (851) (3,053) (3,181)
Consumer (436) (123) (124) (472) (602)
-------- -------- -------- -------- --------
Total charge-offs (2,088) (3,149) (8,085) (13,548) (13,592)
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial, and
agriculture 371 687 698 761 55
Real estate - mortgage 1,142 676 438 217 76
Real estate - construction 94 147 146 188 128
Consumer 95 116 119 170 168
-------- -------- -------- -------- --------
Total recoveries 1,702 1,626 1,401 1,336 427
-------- -------- -------- -------- --------
Net charge-offs (386) (1,523) (6,684) (12,212) (13,165)
Provision charged (credited) to operations (2,000) - 840 12,217 18,596
Sale of bank subsidiary - (415) - (145) -
-------- -------- -------- -------- --------
Reserve at end of year $ 10,099 $ 12,485 $ 14,423 $ 20,267 $ 20,407
======== ======== ======== ======== ========
Loans, end of year $399,364 $357,415 $386,478 $420,152 $542,596
Average loans outstanding $377,364 $364,800 $388,919 $474,178 $554,224
Ratio of reserve for loan losses
to total loans, end of year 2.53% 3.49% 3.73% 4.82% 3.76%
Ratio of net charge-offs to
average loans outstanding .10% .42% 1.72% 2.58% 2.38%
Ratio of reserve for loan losses to
nonperforming loans, end of year 167.17% 125.25% 78.55% 64.50% 48.57%
Table 10 provides a five-year summary of the distribution of the loan
loss reserve to loan categories. The unallocated reserve includes both the
specific reserve as calculated under FAS 114 and the general reserve as
calculated under Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies".
Table 10
Distribution of the Loan Loss Reserve
(in thousands) December 31, 1995 December 31, 1994 December 31, 1993
-------------------------- -------------------------- -------------------------
Percentage of Percentage of Percentage of
loans in each loans in each loans in each
Reserve category to Reserve category to Reserve category to
Amount total loans Amount total loans Amount total loans
Domestic:
Commercial, financial and
agricultural ........................ $ 722 6.23% $ 1,241 6.39% $ 1,041 6.15%
Real estate - construction ............ 1,515 8.12% 1,569 7.95% 2,099 8.63%
Real estate - mortgage ................ 6,642 74.00% 8,283 77.17% 10,394 80.04%
Consumer .............................. 475 11.65% 420 8.49% 216 5.18%
Unallocated ........................... 745 -- 972 -- 673 --
------- ------ ------- ------ ------- ------
$10,099 100.00% $12,485 100.00% $14,423 100.00%
======= ====== ======= ====== ======= ======
December 31, 1992 December 31, 1991
-------------------------- --------------------------
Percentage of Percentage of
loans in each loans in each
Reserve category to Reserve category to
Amount total loans Amount total loans
Domestic:
Commercial, financial and
agricultural $ 5,330 12.64% $ 5,978 13.31%
Real estate - construction 2,162 6.59% 4,590 7.51%
Real estate - mortgage 11,844 75.73% 8,209 75.18%
Consumer 224 5.04% 800 4.00%
Unallocated 707 -- 830 --
------- ------ ------- ------
$20,267 100.00% $20,407 100.00%
======= ====== ======= ======
Table 11 sets forth information concerning other real estate owned
reserve activity for the periods indicated:
Table 11
Other Real Estate Owned Reserve Activity
(in thousands) Years ended December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
Reserve at beginning of period $ 958 $ 2,614 $ 2,866 $ 1,047 $ 1,368
Provision charged to operations 150 863 1,740 2,627 288
Losses and other write-downs (831) (2,519) (1,992) (808) (609)
----- ------- ------- ------- -------
Reserve at end of period $ 277 $ 958 $ 2,614 $ 2,866 $ 1,047
===== ======= ======= ======= =======
Off-Balance Sheet Risk
In the normal course of business, BMJ enters into various financial
instruments which are properly not recorded in the consolidated financial
statements. BMJ's risk of accounting loss due to the credit risks and market
risks associated with these off-balance sheet instruments varies with the type
of financial instrument. Principal or notional amounts may not necessarily
indicate the degree of exposure involved. Credit risk represents the possibility
of a loss occurring from the failure of another party to perform in accordance
with the terms of the contract. BMJ's maximum exposure to accounting loss, based
upon the credit risk associated with unfunded loan commitments and letters of
credit outstanding, is represented by the contractual amount of these items as
of the dates indicated in the following table:
(in millions) Contractual Amount
------------------
12/31/95 12/31/94
-------- --------
Commitments to extend credit $76.4 $57.0
Performance standby letters of credit
and similar arrangements $ 2.7 $ 3.1
Financial standby letters of credit
and similar arrangements $ 0.9 $ 1.1
Many of such commitments to extend credit may expire without being
drawn upon and, therefore, the total commitment amounts do not necessarily
represent future cash flow requirements. In making the commitments, BMJ applies
the same credit policy standards used in the lending process and periodically
reassesses the customers' creditworthiness through ongoing credit reviews. BMJ
also holds various forms of collateral, including cash deposits and mortgage
liens on real estate, to support those commitments for which collateral is
deemed necessary. Substantially all of BMJ's lending is secured by property
located within Mercer, Burlington and Ocean counties in New Jersey. The risks
associated with making these commitments are also included in BMJ's evaluation
of the overall credit risk in determining the reserve for loan losses.
Financial standby letters of credit and similar arrangements are
commitments issued by BMJ which irrevocably obligate BMJ to pay a third-party
beneficiary when a customer fails to repay an outstanding loan or debt
instrument.
Performance standby letters of credit are commitments issued by BMJ
which irrevocably obligate BMJ to pay a third-party beneficiary when a customer
fails to perform some contractual non-financial obligation.
At December 31, 1995 and 1994, BMJ had identified approximately $745
thousand and $972 thousand, respectively, of the reserve for loan losses as a
general allocation of the reserve for potential losses, including losses due to
off-balance sheet credit risk. No material amount of currently outstanding
commitments are to borrowers having prior outstanding balances which are
classified as nonperforming or potential problem assets.
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.
Total deposits amounted to $485.0 million at year-end 1995 compared to
$463.6 million at the end of 1994. Average total deposits during the year were
$466.7 million compared to $516.0 million during 1994. The sale of BMJ's
Southern Ocean State Bank subsidiary and the sale of Mid-Jersey's Willingboro
branch office during 1994 resulted in a decline in total deposits when comparing
1995 average total deposits with 1994 amounts.
Table 12 details average deposit balances and rates over the past three
years. As indicated in the table, the average total of noninterest-bearing
demand deposits and savings deposits for the year ended December 31, 1995
decreased by 6.3% and 3.1%, respectively, from their 1994 average balances. The
average total of other time deposits for the year ended December 31, 1995
increased by 9.7%, while interest bearing demand deposits decreased by 26.7%
from the 1994 average balances. As a result of this shift in BMJ's deposit mix,
the average rate paid on BMJ's deposit balances for 1995 was 2.65%, a 41.0%
increase from the 1.88% average rate for 1994.
Table 12
Average Deposit Balances and Rates
(in thousands) 1995 1994 1993
----------------------------- ---------------------------- ----------------------------
Balance Rate % of Total Balance Rate % of Total Balance Rate % of Total
Noninterest-bearing
demand deposits ................. $ 74,998 0.00% 16.07% $ 80,059 0.00% 15.51% $ 82,297 0.00% 13.83%
Interest-bearing
demand deposits ................. 153,583 1.92 32.91 209,389 1.59 40.58 253,862 1.81 2.67
Savings deposits ................... 103,878 2.70 22.26 107,193 2.14 20.77 107,663 2.53 18.09
Certificates of deposits
of $100,000 or more ............. 9,378 5.44 2.01 5,599 3.46 1.08 8,674 4.38 1.46
Other time deposits ................ 124,856 4.89 26.75 113,796 3.43 22.06 142,487 3.76 23.95
-------- ---- ------ -------- ---- ------ -------- ---- ------
Total ......................... $466,693 2.65% 100.00% $516,036 1.88% 100.00% $594,983 2.19% 100.00%
======== ==== ====== ======== ==== ====== ======== ==== ======
The balance of certificates of deposit of $100,000 or more increased by
$9.4 million at year-end 1995 compared to year-end 1994. The balance also
increased as a percentage of total deposits from .97% of deposits at year-end
1994 to 2.9% of deposits at year-end 1995. The ratio of time deposits greater
than $100,000 to total assets at year-end 1995 was 2.4%. The higher interest
rate levels during 1995 allowed BMJ to attract and retain deposits in this
product which was more attractive to BMJ's customer base than other investment
vehicles. The maturity characteristics and dollar amount of these deposits are
reflected in Table 13. BMJ does not purchase deposits through wholesale deposit
brokers, preferring to rely on more stable retail deposits to support growth.
Table 13
Certificates of Deposit
$100 Thousand or More
(in thousands) December 31,
1995 1994
------- -------
Maturity range:
Within three months $ 6,237 $ 1,203
After three but within six months 4,231 982
After six but within twelve months 1,962 1,257
After twelve months 1,444 1,041
------- -------
Total $13,874 $ 4,483
======= =======
Capital Adequacy
BMJ's level of shareholders' equity continued to improve during 1995,
primarily as the result of improved operating results and earnings retention.
The following table provides selected shareholders' equity data at December 31,
1995 and 1994.
(in thousands except per share amounts) December 31, December 31,
1995 1994
------- -------
Shareholders' equity $65,622 $58,346
Shareholders' equity to assets ratio 11.15% 10.84%
Book value per share $ 8.62 $ 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:
December 31, 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. 16.05% 14.19% 17.03% 15.04%
The Bank of Mid-Jersey 14.17% 12.90% 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 leverage ratios of at
least 3%; all other institutions are required to maintain higher levels of
capital depending on their condition. The leverage ratios of BMJ and Mid-Jersey
were as follows on the dates shown:
Leverage Ratio at Leverage Ratio at
December 31, 1995 December 31, 1995
----------------- -----------------
B.M.J. Financial Corp. 10.87% 10.58%
The Bank of Mid-Jersey 10.18% 9.49%
Failure to satisfy any minimum capital requirements applicable to BMJ
or Mid-Jersey could subject BMJ or Mid-Jersey, as the case may be, to further
regulatory actions by the FRB.
As a result of BMJ's improved capital ratios and continued earnings
progress, the payment of quarterly dividends to shareholders was resumed during
1995 at the level of $.05 per share. During the fourth quarter of 1995, BMJ
announced a 50% increase in the amount of the quarterly cash dividend to $.075
per share. 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, 1996, the amount
of retained earnings of Mid-Jersey available for declaration of dividends to BMJ
was $19.0 million.
Liquidity and Asset/Liability Management
Liquidity refers to BMJ's ability to maintain 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 December 31, 1995, BMJ had a total of $90.2 million or 15.3% of
total assets in cash and cash equivalents and securities available for sale,
representing its primary sources of liquidity, as compared to $47.7 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 December 31, 1995 and 2.8% at
December 31, 1994. Management believes there is substantial room to increase
these funding sources if necessary to meet its liquidity needs. The Bank of
Mid-Jersey joined the Federal Home Loan Bank system during 1995 and has
established a line of credit of approximately $71.9 million with the Federal
Home Loan Bank of New York to further support and enhance liquidity. At December
31, 1995 approximately $13.4 million was outstanding against this line of
credit. In addition, Mid-Jersey currently has a $2.0 million line of credit with
a correspondent bank to cover short term funding needs in the federal funds
market.
As shown in the Consolidated Statement of Cash Flows, cash and cash
equivalents decreased by $19.2 million to $25.6 million at December 31, 1995.
This decrease reflected net cash of $9.7 million provided by operating
activities and $37.1 million of net cash provided by financing activities offset
by $66.0 million of net cash used in investing activities. Cash generated by
operating activities reflected BMJ's net income of $8.3 million adjusted for
noncash charges and credits. Cash provided by financing activities primarily
reflected the net increases in certificates of deposit and in other borrowed
funds, partly offset by the net decrease in demand deposits, savings and
interest checking accounts. Cash used in investing activities was primarily for
the purchase of the securities available for sale and the net increase in loans,
offset in part by the proceeds from sales of securities available for sale and
the proceeds from maturities of securities held to maturity.
At December 31, 1995, the parent company had a total of $2.2 million in
cash and cash equivalents and $8.5 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. 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 subsidiary bank basis. Funding positions are kept within
established policy limits designed to maintain reasonable risk levels and
adequate liquidity.
Table 14 represents BMJ's interest rate gap position at December 31, 1995.
This is a one-day position which is continually changing and is not necessarily
indicative of BMJ's position at any other time. Additionally, Table 14 indicates
only the contractual or anticipated repricing of assets and liabilities and does
not consider the many factors that accompany interest rate movements. BMJ's
negative period interest rate gap position through six months reflects its
historically strong customer deposit-gathering franchise which provides a
relatively stable core deposit base. These available funds have been deployed in
longer-term interest-earning assets including certain loans and securities.
In order to measure the effects 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.
As a financial institution, BMJ entails a degree of interest rate risk as a
provider of banking services to its customers. BMJ does not use derivative
interest rate contracts, such as interest rate swaps, caps or floors to manage
interest rate risk. In the event BMJ's computer model indicates an unacceptable
level of risk, BMJ could undertake a number of actions that would reduce this
risk, including the sale of a portion of its available for sale securities
portfolio.
Table 14
Rate Sensitive Assets and Liabilities
(in thousands) December 31, 1995
---------------------------------------------------------------------------
Within After three After six After one After five
three months but months year years
months within six but within but within
months one year five years
INTEREST-EARNING ASSETS
Money market investments $ 5,664 $ -- $ -- $ -- $ --
Securities available for sale 10,298 3,172 3,410 25,047 22,681
Securities held to maturity 276 -- - 76,531 4,938
Loans, net of unearned income 162,241 15,755 33,338 154,303 27,242
-------- -------- ------- -------- --------
Total interest-earning assets $178,479 $ 18,927 $36,748 $255,881 $ 54,861
======== ======== ======= ======== ========
FUNDING SOURCES
Portion of noninterest-bearing funding
sources used to fund earning assets $ -- $ -- $ -- $ -- $ --
Savings and interest checking 254,805 -- 682 -- --
Certificates of deposit of $100,000 or 6,237 4,231 1,962 1,444 --
more
Other time deposits 31,772 50,205 22,566 29,951 --
Other borrowed funds 14,689 5,280 $2,690 1,800 $ 4,196
-------- -------- ------- -------- --------
Total funding sources $307,503 $ 59,716 $ 27,900 $ 33,195 $ 4,196
======== ======== ======== ======== ========
(in thousands) December 31, 1995
----------------------------
Noninterest Total
sensitive
INTEREST-EARNING ASSETS
Money market investments $ -- $5,664
Securities available for sale -- 64,608
Securities held to maturity 770 82,515
Loans, net of unearned income 6,485 399,364
------ --------
Total interest-earning assets $7,255 $552,151
====== ========
FUNDING SOURCES
Portion of noninterest-bearing funding
sources used to fund earning assets $119,641 $119,641
Savings and interest checking -- 255,487
Certificates of deposit of $100,000 or -- 13,874
more
Other time deposits -- 134,494
Other borrowed funds -- 28,655
------ --------
Total funding sources $119,641 $552,151
======== ========
Table 14
Rate Sensitive Assets and Liabilities -- Continued
(in thousands) December 31, 1995
---------------------------------------------------------------------------
Within After three After six After one After five
three months but months year years
months within six but within but within
months one year five years
Asset/Liability Sensitivity Gap
Period Gap ($129,024) ($ 40,789) $ 8,848 $222,686 $ 50,665
========= ========= ======== ======== ========
Cumulative Gap ($129,024) ($169,813) ($160,965) $ 61,721 $112,386
========= ========= ========= ======== ========
Quarterly Results of Operations
A summary of the quarterly results of operations for the years ended
December 31, 1995 and 1994 is presented in Table 15. Cumulative data for the
same period is found in the consolidated statement of operations.
Table 15
Condensed Consolidated Statement
of Quarterly Operations
(in thousands, except per share amounts) 1995
(unaudited) Quarter ended
---------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
Interest income $9,659 $10,224 $10,751 $10,969
Interest expense 2,712 3,214 3,686 3,756
------ ------- ------- -------
Net interest income 6,947 7,010 7,065 7,213
Provision (credit) for loan losses - - - (2,000)
------ ------- ------- -------
Net interest income after provision
for loan losses 6,947 7,010 7,065 9,213
------ ------- ------- -------
Noninterest income 1,097 1,027 1,077 1,118
Noninterest expense 5,796 5,739 5,313 6,247
------ ------- ------- -------
Income before income tax expense
and extraordinary charge 2,248 2,298 2,829 4,084
Provision for income taxes 814 831 8 1,492
Reversal of valuation allowance - - - -
------ ------- ------- -------
Income before extraordinary charge 1,434 1,467 2,821 2,592
Extraordinary charge - - - -
------ ------- ------- -------
Net income (loss) $1,434 $1,467 $2,821 $2,592
====== ====== ====== ======
EARNINGS PER SHARE:
Earnings before extraordinary charge $0.19 $0.19 $0.37 $0.33
Extraordinary charge - - - -
------ ------- ------- -------
Earnings per share - Primary $0.19 $0.19 $0.37 $0.33
===== ===== ===== =====
- Fully diluted $0.19 $0.19 $0.36 $0.33
===== ===== ===== =====
Weighted average shares outstanding:
- Primary 7,682 7,697 7,722 7,744
===== ===== ===== =====
- Fully diluted 7,900 7,904 7,919 7,920
===== ===== ===== =====
Table 15
Condensed Consolidated Statement
of Quarterly Operations -- Continued
(in thousands, except per share amounts) 1994
(unaudited) Quarter ended
-----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
Interest income $9,550 $9,750 $9,616 $9,528
Interest expense 2,635 2,594 2,410 2,583
------ ------ ------ ------
Net interest income 6,915 7,156 7,206 6,945
Provision (credit) for loan losses - - - -
------ ------ ------ ------
Net interest income after provision
for loan losses 6,915 7,156 7,206 6,945
------ ------ ------ ------
Noninterest income 1,329 1,618 1,395 1,309
Noninterest expense 6,646 7,040 6,487 5,974
------ ------ ------ ------
Income before income tax expense
and extraordinary charge 1,598 1,734 2,114 2,280
Provision for income taxes 4 3 - -
Reversal of valuation allowance - (3,500) - (1,375)
------ ------ ------ ------
Income before extraordinary charge 1,594 5,231 2,114 3,655
Extraordinary charge - - (87) -
------ ------ ------ ------
Net income (loss) $1,594 $5,231 $2,027 $3,655
====== ====== ====== ======
EARNINGS PER SHARE:
Earnings before extraordinary charge $0.21 $0.69 $0.27 $0.48
Extraordinary charge - - (0.01) -
------ ------ ------ ------
Earnings per share - Primary $0.21 $0.69 $0.26 $0.48
===== ===== ===== =====
- Fully diluted $0.21 $0.66 $0.26 $0.47
===== ===== ===== =====
Weighted average shares outstanding:
- Primary 8,096 7,593 7,666 7,649
===== ===== ===== =====
- Fully diluted 8,096 8,034 7,898 7,909
===== ===== ===== =====
The following discussion addresses those quarter-to-quarter
fluctuations determined by management to be material items requiring additional
disclosure.
Provision for Loan Losses
BMJ's continued improvement in asset quality resulted in a negative
provision for loan losses for the year ended December 31, 1995 of $2.0 million
compared to no provision in 1994. The negative provision of $2.0 million is a
one-time non-recurring event recognized in the fourth quarter of 1995. This
negative provision was driven by the continuing improvement in asset quality
including reduced levels of nonperforming assets and net loan charge-offs.
Specifically, since 1992, BMJ has adhered to a procedural discipline in
determining both the necessary provision for loan losses to be taken from
earnings and the adequacy of the allowance for loan losses. Based upon
management's judgement and evaluation of this methodology, BMJ has recorded no
quarterly provision for loan losses since the second quarter of 1993. As a
result of BMJ's increasingly diversified loan mix, stabilized and improving
regional economies, and the continuing adequacy of the reserve for loan losses,
subsequent to the non-recurring negative provision, it is management's and the
Board of Directors' judgement that the interest of BMJ's shareholders is best
served by this immediate, one-time negative provision.
Management also determined that the fourth quarter of 1995 was the
appropriate period in which to record the negative provision for loan losses for
the following reasons:
o Trends in BMJ's criticized assets have stabilized over the last
three quarters of 1995;
o Recoveries on previously charged-off loans over the past eight
quarters have been strong and, accordingly, charge-offs have not
reduced the reserve for loan losses as originally anticipated;
o All litigation associated with the loans reserved for during the
period of 1991 through 1994 had essentially been settled by the
third quarter of 1995; and
o The adoption of FAS 114 during 1995 has increased the unallocated
portion of the reserve because "substandard" loans which have been
identified as impaired generally do not require specific reserves
as a result of collateral which supports the recorded investment in
the loan.
Management has determined that as a result of the negative loan loss
provision, quarterly provisions will be required during 1996 to maintain an
adequate reserve for loan losses.
Income Tax Expense
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 third quarter of 1995 was 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.
Common Stock
BMJ's common stock is traded over-the-counter and quoted by the
National Association of Securities Dealers through the NASDAQ National Market
System. The NASDAQ symbol for BMJ's common stock is BMJF. During 1995, monthly
trading volume averaged approximately 215,710 shares. As of December 31, 1995,
there were 1,970 registered holders of BMJ's common stock.
Table 16 presents the sale price range and dividends per share for the
eight quarters ended December 31, 1995. These prices reflect actual transactions
and do not include commissions.
Table 16
Common Stock
Price Range
Sale Price
High Low Dividend
1994
First quarter $10.25 $ 8.00 -
Second quarter 11.75 9.25 -
Third quarter 13.00 11.00 -
Fourth quarter 12.25 9.75 -
1995
First quarter $13.50 $10.75 $ .05
Second quarter 13.625 12.25 .05
Third quarter 16.75 13.00 .05
Fourth quarter 16.375 13.75 .075
As a result of BMJ's improved capital ratios and continued earnings
progress, the payment of quarterly dividends to shareholders was resumed during
1995 at the level of $.05 per share. During the fourth quarter of 1995, BMJ
announced a 50% increase in the amount of the quarterly cash dividend to $.075
per share. These shareholder dividends represent the first to be paid by BMJ
since dividends were suspended in 1991.
A dividend reinvestment and stock purchase plan is available for
shareholders who wish to increase their holdings. Under the plan, quarterly
dividends may be reinvested in BMJ common stock at a discount from market value
of between 0% and 10% inclusive (as determined from time to time by BMJ's Board
of Directors). In addition, optional cash investments of not less than $100 nor
more than a specified amount per quarterly investment period (as determined by
BMJ's Board of Directors from time to time) may be made in BMJ common stock at a
discount from market value of between 0% and 10% inclusive without incurring any
commission or fee. BMJ has reserved the right, however, to eliminate and/or
reinstate the optional cash investment feature at any time, which shall be
indicated to shareholders by written notice. At present, BMJ provides no
discount on dividend reinvestments and optional cash investments. BMJ permits
optional cash investments by a participating shareholder of up to $5,000 per
calendar quarter per account.
On January 22, 1996, BMJ announced a stock buy-back program for
calendar year 1996. The program, approved by the Board of Directors, allows for
the repurchase of up to five percent of BMJ stock at management's discretion,
either on a privately negotiated basis or on the open market.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB")
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 to 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. BMJ has determined that adoption of FAS No. 121 will not have a
material impact on its financial position or results of operations and, at this
time, does not plan early adoption.
In May 1995, the FASB 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 has
determined that adoption of FAS No. 122 will not materially impact BMJ's
financial position or results of operations and, at this time, does not plan
early adoption.
In October 1995, the FASB released FAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. FAS No. 123 establishes a fair value-based method of
accounting for stock-based compensation plans which measures compensation cost
as the value of the award at the grant date and recognizes such cost over the
service period. Under Accounting Principles Board Opinion ("APBO") No. 25
"Accounting for Stock Issued to Employees," compensation cost as the excess of
quoted market price at the grant date or other measurement date over the
exercise price. FAS No. 123 allows for either method to be used; however, if a
company elects to continue to account for stock-based compensation under APBO
No. 25, pro forma disclosures of net income and earnings per share must be
presented as if the fair value-based method had been adopted. BMJ has not
determined which method will be used or the effect of adoption of FAS No. 123
and does not plan to elect early adoption of either the accounting or disclosure
requirements.
Item 8. Financial Statements and Supplementary Data.
See Financial Summary, attached hereto.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None
PART III
Pursuant to General Instruction G(3), the information required by Part
III (Items 10, 11, 12 and 13) are incorporated by reference from BMJ's
definitive proxy statement which will be filed pursuant to Regulation 14A not
later than 120 days after the end of BMJ's fiscal year ended December 31, 1995.
PART VI
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a)
1. Financial Statements
Independent Auditor's Report
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All Schedules have been omitted as inapplicable, or not required, or
because the required information is included in the Consolidated Financial
Statements of the Notes thereto.
3. Exhibits
3(a) Certificate of Incorporation of B.M.J. Financial Corp., as
amended, incorporated by reference to Exhibit 3(a) to the
Registrant's Registration Statement on Form S-2, previously
filed with the Securities and Exchange Commission on December
23, 1992, File No. 33-56266.
3(b) Bylaws of B.M.J. Financial Corp., as amended, incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987. previously
filed with the Securities and Exchange Commission, File No.
0-13440.
4(a) Form of Common Stock Certificate of B.M.J. Financial Corp.,
incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-1, previously filed with the
Securities and Exchange Commission on September 4, 1984, File
No. 2-93099.
4(b) Form of Indenture between B.M.J. Financial Corp. and The Bank
of Mid-Jersey, dated as of June 1, 1986, incorporated by
reference to Exhibit 4.2(a) to the Registrant's Registration
Statement on Form S-1, previously filed with the Securities
and Exchange Commission on June 24, 1986, File No. 33-5264.
4(c) Form of Indenture between B.M.J. Financial Corp. and The Bank
of Mid-Jersey, dated as of June 1, 1990, incorporated by
reference to Exhibit 4(b) to Amendment No. 2 to the
Registrant's Registration Statement on Form S-2, previously
filed with the Securities and Exchange Commission on February
9, 1993, File No. 33-56266.
10(a) Lease for The Bank of Mid-Jersey Operations Center,
incorporated by reference to Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1984, previously filed with the Securities and Exchange
Commission, File No. 2-87343.
10(b) Lease for Mount Holly Executive Offices, incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987, previously
filed with the Securities and Exchange Commission, File No.
2-87343.
10(c) Assignment of Lease, dated as of July 24, 1990, between B.M.J.
Financial Corp. and Bank of Delaware Valley, incorporated by
reference to Exhibit 10(c) to the Registrant's Registration
Statement on Form S-2, previously filed with the Securities
and Exchange Commission on December 23, 1992, File No.
33-56266.
10(d) Lease, dated as of November 7, 1988, between the Nickerson
Development Corporation and B.M.J. Financial Corp.,
incorporated by reference to Exhibit 10-4 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989, previously filed with the Securities and Exchange
Commission, File No. 2- 87343.
10(e) Certified resolutions of The Bank of Mid-Jersey describing
guaranty of employment and severance pay in the event of a
merger or sale of Mid-Jersey, incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1984, previously filed with
the Securities and Exchange Commission, File No. 2-87343.
10(f) Certified resolutions of B.M.J. Financial Corp. describing
guaranty of employment and severance pay in the event of a
merger or sale of BMJ, incorporated by reference to Exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1986, previously filed with the
Securities and Exchange Commission, File No. 2-87343.
10(g) B.M.J. Financial Corp. Profit-Sharing and Deferred Savings
Plan (as amended, 1987), incorporated by reference to Exhibit
10.14 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989, previously filed with the
Securities and Exchange Commission, File No. 2-87343.
10(h) B.M.J. Financial Corp. Pension Plan (as amended, 1989),
incorporated by reference to Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989, previously filed with the Securities and Exchange
Commission, File No. 2-87343.
10(i) B.M.J. Financial Corp. Executive Long-Term Incentive Plan,
incorporated by reference to Exhibit 10.16 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1990, previously filed with the Securities and Exchange
Commission, File No. 0-13440.
10(j) B.M.J. Financial Corp. Director Stock Option Plan incorporated
by reference to Exhibit 10.18 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990,
previously filed with the Securities and Exchange Commission,
File No. 0-13440.
10(k) Non-Qualified Option Agreement, dated as of June 15, 1992,
between B.M.J. Financial Corp. and John H. Walther,
incorporated by reference to Exhibit 10(k) to the Registrant's
Registration Statement on Form S-2, previously filed with the
Securities and Exchange Commission on December 23, 1992, File
No. 33-56266.
10(l) Written Agreement, dated as of December 24, 1991, between
B.M.J. Financial Corp. and the Federal Reserve Bank of
Philadelphia, incorporated by reference to Exhibit 28.2 to the
Registrant's Report on Form 8-K, previously filed with the
Securities and Exchange Commission on December 24, 1991, File
No. 0-13440.
10(m) Written Agreement, dated as of December 24, 1991, between The
Bank of Mid- Jersey, the Federal Reserve Bank of Philadelphia,
and the New Jersey State Commissioner of Banking, incorporated
by reference to Exhibit 28.3 to the Registrant's Report on
Form 8-K, previously filed with the Securities and Exchange
Commission on December 24, 1991, File No. 0-13440.
10(n) Facilities Management Data Processing Agreement, dated as of
May 6, 1992, between B.M.J. Financial Corp. and Systematics
Financial Services, Inc., incorporated by reference to Exhibit
28.2 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1992, previously filed with the Securities and
Exchange Commission, File No. 0-13440.
10(o) Amendment to the Memorandum of Understanding, dated as of
January 11, 1989, between B.M.J. Financial Corp. and Robert H.
Deacon, incorporated by reference to Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988, previously filed with the Securities and
Exchange Commission, File No. 2-87343.
10(p) Financial Advisory Agreement with Bear, Stearns & Co., Inc.,
incorporated by reference to Exhibit 10(r) to the Registrant's
Registration Statement on Amendment No. 1 to Form S-2,
previously filed with the Securities and Exchange Commission
on January 25, 1993, File No. 33-56266.
10(q) Agreement, dated February 17, 1993, between John H. Walther
and B.M.J. Financial Corp., incorporated by reference to
Exhibit 10(u) to the Registrant's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31,
1993, File No. 0-13440.
10(r) Agreement and Plan of Merger between Citizens Investments,
Inc. and B.M.J. Financial Corp. joined in by Sun National Bank
and Southern Ocean State Bank, dated as of February 3 , 1994,
incorporated by reference to Exhibit 10(a) to the Registrant's
Current Report on Form 8-K, filed with the Securities and
Exchange Commission on March 9, 1994, File No. 0-13440.
10(s) Short Term Incentive Plan, incorporated by reference to
Exhibit 10 (s) to the Registrant's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31,
1995, File No. 0-13440.
11 Statement Regarding Computation of Per Share Income (Loss).*/
16 Letter regarding change in certifying accountant from KPMG
Peat Marwick to B.M.J. Financial Corp. (March 24, 1993),
incorporated by reference to Exhibit 16 to the Registrant's
Current Report on Form 8-K, filed with the Securities and
Exchange Commission on March 24, 1993, as amended by Amendment
No. 1 on Form 8, filed with the Securities and Exchange
Commission on March 29, 1993, File No. 0-13440.
22 Subsidiaries of the Registrant
Name Jurisdiction of Organization
------------------------------------------ ----------------------------
The Bank of Mid-Jersey New Jersey
B.M.J. Leasing Co., Inc. New Jersey
(subsidiary of The Bank of Mid-Jersey)
Hopkinson Corp. New Jersey
(subsidiary of The Bank of Mid-Jersey)
24.1 Consent of Coopers & Lybrand L.L.P..*/
28(a) Form of Stipulation and Consent to the Issuance of an Order to
Cease and Desist and Order to Cease and Desist in the Matter
of Mount Holly State Bank, Mount Holly, New Jersey,
incorporated by reference to Exhibit 28.1 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 1992,
previously filed with the Securities and Exchange Commission,
File No. 0-13440.
28(b) Form of B.M.J. Dividend Reinvestment and Stock Purchase Plan
incorporated by reference to Exhibit 4.4 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1990, previously filed with the Securities and Exchange
Commission, File No. 0-13440.
*/ Filed herewith.
(b) Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
B.M.J. FINANCIAL CORP.
By: /s/ Edwin W. Townsend
----------------------------------------
Edwin W. Townsend
Chairman of the Board
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Edwin W. Townsend Chairman of the Board March 25, 1996
Edwin W. Townsend
/s/ E. Jack Elias President and March 25, 1996
E. Jack Elias Chief Executive Officer
/s/ Joseph M. Reardon Chief Financial Officer March 25, 1996
Joseph M. Reardon (Principal Financial and
Accounting Officer)
/s/ Thomas P. Butz Director March 25, 1996
Thomas P. Butz
/s/ Harry R. Disbrow Director March 25, 1996
Harry R. Disbrow
/s/ Frank N. Elliott Director March 25, 1996
Frank N. Elliott
/s/ William C. Gray Director March 25, 1996
William C. Gray
/s/ Peter A. Inverso Director March 25, 1996
Peter A. Inverso
/s/ Richard M. Kohn Director March 25, 1996
Richard M. Kohn
/s/ Frank M. Monaghan Director March 25, 1996
Frank M. Monaghan
/s/ Robert B. Murray Director March 25, 1996
Robert B. Murray
/s/ Jerome H. Walther Director March 25, 1996
Jerome H. Walther
Independent Accountant's Report
The Board of Directors and Shareholders
of B.M.J. Financial Corp.:
We have audited the accompanying consolidated balance sheets of B.M.J. Financial
Corp. and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of B.M.J.
Financial Corp. and subsidiaries as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 and Note 13 of notes to consolidated financial
statements, the Company changed its method of accounting for loan loss reserves
effective January 1, 1995, changed its method of accounting for securities
effective January 1, 1994 and changed its method of accounting for income taxes
effective January 1, 1993.
/s/Coopers & Lybrand L.L.P.
New York, New York
January 22, 1996
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet
(in thousands except share data) December 31,
--------------------------
1995 1994
Assets
- ----------------------------------------------------------------------------------------
Cash and cash equivalents:
Cash and due from banks ............................ $ 19,905 $ 21,725
Money market investments ........................... 5,664 23,054
--------- ---------
Total cash and cash equivalents ................. 25,569 44,779
Securities available for sale (amortized cost of
$64,025 in 1995 and $3,006 in 1994) ............. 64,608 2,911
Securities held to maturity (fair value of $83,001
in 1995 and $113,095 in 1994) .................. 82,515 118,984
Loans, net of unearned income and less reserve for
loan losses of $10,099 (1995) and $12,485 (1994) 389,265 344,930
Premises and equipment, net .......................... 6,060 5,598
Other real estate, net ............................... 1,686 4,279
Other assets ......................................... 19,007 16,951
--------- ---------
Total assets .................................... $ 588,710 $ 538,432
========= =========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet -- Continued
(in thousands except share data) December 31,
--------------------------
1995 1994
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand deposits (noninterest-bearing) ............ $ 81,156 $ 78,446
Savings and interest checking .................... 255,487 271,209
Certificates of deposit of $100,000 or more ...... 13,874 4,483
Other time deposits .............................. 134,494 109,436
--------- ---------
Total deposits ................................ 485,011 463,574
--------- ---------
Securities sold under agreements to repurchase ..... 12,569 8,857
Federal funds purchased and other borrowed funds ... 7,400 --
Other liabilities .................................. 9,422 4,955
Capital notes and long term debt ................... 8,686 2,700
--------- ---------
Total liabilities ............................. 523,088 480,086
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share ...............
Authorized 25,000,000 shares;
issued and outstanding 7,614,281 shares in 1995
and 7,597,513 shares in 1994 ...................... 7,614 7,597
Surplus ............................................ 36,520 36,311
Retained earnings .................................. 21,104 14,501
Unrealized gains (losses) on securities available
for sale, net of tax .............................. 384 (63)
--------- ---------
Total shareholders' equity ...................... 65,622 58,346
--------- ---------
Total liabilities and shareholders' equity ...... $ 588,710 $ 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)
Year ended December 31,
------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans ............................. $ 33,368 $ 30,109 $ 33,097
Interest on money market investments:
Time deposits with other banks ..................... 48 527 255
Interest bearing deposits with other banks ......... 27 72 19
Federal funds sold and repurchase agreements ....... 358 397 507
Other short term investments ....................... 325 1,010 --
Interest on securities available for sale:
U.S. Treasury securities ........................... 177 376 3,148
U.S. government agencies and corporations .......... 815 75 1,530
States and political subdivisions (tax-exempt) ..... 269 5 235
Other securities ................................... -- 4 93
Interest on securities held to maturity:
U.S. Treasury securities ........................... 976 1,224 529
U.S. government agencies and corporations .......... 4,914 4,382 1,852
States and political subdivisions (tax-exempt) ..... 221 215 107
Other securities ................................... 105 48 17
-------- -------- --------
Total interest income ........................ 41,603 38,444 41,389
-------- -------- --------
INTEREST EXPENSE
Savings and interest checking deposits ................. 5,747 5,636 7,324
Certificates of deposit of $100,000 or more ............ 510 194 380
Other time deposits .................................... 6,105 3,907 5,355
Other debt ............................................. 1,006 485 481
-------- -------- --------
Total interest expense ....................... 13,368 10,222 13,540
-------- -------- --------
Net interest income .................................... 28,235 28,222 27,849
Provision (credit) for loan losses ..................... (2,000) -- 840
-------- -------- --------
Net interest income after provision
for loan losses .......................... 30,235 28,222 27,009
-------- -------- --------
NONINTEREST INCOME
Service charges, commissions, and fees ................. 3,861 5,175 4,955
Securities gains ....................................... -- -- 690
Gain on sale of bank subsidiary ........................ -- -- 756
Trust income ........................................... 458 476 298
-------- -------- --------
Total noninterest income ..................... 4,319 5,651 6,699
-------- -------- --------
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Operations -- Continued
(in thousands except per share amounts)
Year ended December 31,
------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits ......................... 9,636 10,688 13,343
Net occupancy .......................................... 2,850 3,222 3,726
Other real estate expense .............................. 641 1,525 3,899
Other .................................................. 9,968 10,712 12,070
-------- -------- --------
Total noninterest expense .................... 23,095 26,147 33,038
-------- -------- --------
Income before income tax expense,
extraordinary charge and cumulative
effect of change in accounting principle .......... 11,459 7,726 670
Income tax expense:
Provision for income taxes .......................... 3,145 7 60
Reversal of valuation allowance ..................... -- (4,875) --
-------- -------- --------
Income before extraordinary charge and
cumulative effect of change in accounting principle 8,314 12,594 610
Extraordinary charge - early redemption of
convertible notes .................................. -- (87)
Cumulative effect of change in accounting principle .... -- -- (1,500)
-------- -------- --------
NET INCOME (LOSS) ...................................... $ 8,314 $ 12,507 ($ 890)
======== ======== ========
PER SHARE
Income before extraordinary charge and
cumulative effect of change in accounting principle $ 1.08 $ 1.65 $ 0.09
Extraordinary charge ................................... -- (0.01) --
Cumulative effect of change in accounting principle .... -- -- (0.22)
-------- -------- --------
INCOME (LOSS) PER SHARE - Primary .......... $ 1.08 $ 1.64 ($ 0.13)
======== ======== ========
- Fully diluted .... $ 1.07 $ 1.60 ($ 0.13)
======== ======== ========
Weighted average shares outstanding - Primary .......... 7,711 7,618 6,920
===== ===== =====
- Fully diluted .... 7,910 7,884 6,920
===== ===== =====
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Changes
in Shareholders' Equity
(in thousands except outstanding shares)
Unrealized
Gain (loss) on
Outstanding Common Retained Investment Total
Shares Stock Surplus Earnings Securities, Shareholders'
Net of Tax Equity
Balance December 31, 1992 ............. 4,360,826 $ 4,361 $ 25,255 $ 2,884 -- $ 32,500
--------- --------- --------- --------- ---------
Net loss .............................. -- -- -- (890) -- (890)
Stock issued .......................... 3,190,424 3,190 10,598 -- -- 13,788
--------- --------- --------- --------- --------- ---------
Net change ............................ 3,190,424 3,190 10,598 (890) -- 12,898
--------- --------- --------- --------- --------- ---------
Balance December 31, 1993 ............. 7,551,250 7,551 35,853 1,994 -- 45,398
--------- --------- --------- --------- --------- ---------
Net income ............................ -- -- -- 12,507 -- 12,507
Unrealized loss on investment
securities, net of tax .......... -- -- -- -- (63) (63)
Stock issued .......................... 46,263 46 458 -- -- 504
--------- --------- --------- --------- --------- ---------
Net change ............................ 46,263 46 458 12,507 (63) 12,948
--------- --------- --------- --------- --------- ---------
Balance December 31, 1994 ............. 7,597,513 7,597 36,311 14,501 (63) 58,346
--------- --------- --------- --------- --------- ---------
Net income ............................ -- -- -- 8,314 -- 8,314
Unrealized gain on investment
securities, net of tax .......... -- -- -- -- 447 447
Stock issued .......................... 16,768 17 209 -- -- 226
Cash dividends ........................ -- -- -- (1,711) -- (1,711)
--------- --------- --------- --------- --------- ---------
Net change ............................ 16,768 17 209 6,603 447 7,276
--------- --------- --------- --------- --------- ---------
Balance December 31, 1995 ............. 7,614,281 $ 7,614 $ 36,520 $ 21,104 $ 384 $ 65,622
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands) Year ended December 31,
---------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) ........................................... $ 8,314 $ 12,507 ($ 890)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation of premises and equipment .................... 773 910 1,020
Provision (credit) for loan losses ........................ (2,000) -- 878
Amortization of intangibles ............................... 115 468 497
Net accretion of securities available for sale ............ (40) (216) (1,748)
Net amortization (accretion) of securities held to maturity 47 (54) (341)
Provision for other real estate ........................... 150 863 1,740
Net (increase) decrease in other real estate owned ........ 290 (2,816) (4,645)
(Gain) loss on sale of property and equipment ............. -- -- (2)
Gain on sale of loans ..................................... -- (69) --
Gain on sale of securities available for sale ............. -- -- (690)
Increase (decrease) in other assets ....................... (2,402) (6,691) 2,371
Increase (decrease) in other liabilities .................. 4,467 (651) (815)
--------- --------- ---------
1,400 (8,256) (1,735)
--------- --------- ---------
Net cash provided by operating activities ..................... 9,714 4,251 (2,625)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ...... 23,109 50 75,196
Proceeds from maturities of securities available for sale . 6,327 25,881 308,562
Purchase of securities available for sale ................. (67,306) (2,749) (316,798)
Proceeds from maturities of securities held to maturity ... 17,258 68,025 18,136
Purchase of securities held to maturity ................... (3,945) (71,854) (76,922)
Net (increase) decrease in loans .......................... (45,217) (16,824) 26,627
Proceeds from sale of bank subsidiary and branch .......... -- 6,846 --
Proceeds from sale of loans ............................... -- 5,033 --
Proceeds from sale of other real estate ................... 5,035 8,543 7,487
Proceeds from sale of property and equipment .............. -- -- 59
Property and equipment expenditures ....................... (1,235) (537) (342)
--------- --------- ---------
Net cash provided by (used in) investing activities ........... (65,974) 22,414 42,005
--------- --------- ---------
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows, continued
(in thousands) Year ended December 31,
---------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, savings
and interest checking accounts ........................... (13,012) (43,918) 914
Net increase (decrease) in certificates of deposit .......... 34,449 483 (40,082)
Net increase in other borrowed funds ........................ 7,400 -- --
Repayments of capital notes ................................. (10) (1,609) (67)
Dividends paid .............................................. (1,711) -- --
Net increase (decrease) in securities sold under
agreements to repurchase ................................. 3,712 6,907 (1,101)
Proceeds from issuance of debt .............................. 5,996 -- --
Proceeds from issuance of stock ............................. 226 -- 13,788
--------- --------- ---------
Net cash provided by (used in) financing activities ........... 37,050 (38,137) (26,548)
--------- --------- ---------
Net change in cash and cash equivalents ....................... (19,210) (11,472) 12,832
Cash and cash equivalents at beginning of year ................ 44,779 56,251 43,419
--------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 25,569 $ 44,779 $ 56,251
========= ========= =========
Cash paid during the year for:
Interest .................................................... $ 12,693 $ 10,192 $ 14,132
========= ========= =========
Income taxes ................................................ $ 1,436 $ 1,225 --
========= ========= =========
Noncash investing activities:
Transfer of loans to other real estate, net ................. $ 2,882 $ 1,984 $ 325
========= ========= =========
Transfer of securities available for sale to securities held
to maturity .............................................. -- $ 28,237 --
========= ========= =========
Transfer of securities held to maturity to available for sale $ 23,109 -- --
========= ========= =========
Transfer of investment securities available for sale
prior to adoption of FAS 115 ............................. -- -- $ 54,666
========= ========= =========
Transfer of insubstance foreclosures to loans
upon adoption of FAS 114 ................................ $ 2,935 $ 5,327 $ 11,217
========= ========= =========
Sale of bank subsidiary and branch:
Assets ................................................... -- $ 66,557 --
========= ========= =========
Liabilities .............................................. -- $ 62,826 --
========= ========= =========
Noncash financing activity:
Redemption of capital notes through issuance of stock ....... -- $ 504 --
========= ========= =========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Notes to
Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
The accounting policies of B.M.J. Financial Corp. ("BMJ") and its
wholly-owned subsidiary, The Bank of Mid-Jersey ("Mid-Jersey"), conform with
generally accepted accounting principles and prevailing practices within the
banking industry. 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.
BUSINESS BMJ provides a full range of banking services to individual and
corporate customers through its subsidiary bank in New Jersey. The Bank of
Mid-Jersey is subject to competition from other financial institutions. In
addition, BMJ is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by those regulatory authorities.
BASIS FOR FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of BMJ and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated. In preparing the
consolidated 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 as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting 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, the valuation of other real estate acquired in connection with
foreclosures or in satisfaction of loans, and the valuation of the deferred tax
asset. 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' judgements about information available to them
at the time of their examination.
RECLASSIFICATIONS Certain amounts in the financial statements presented for
prior periods have been reclassified to conform with the 1995 presentation.
Effective January 1, 1995 and for all prior periods presented, BMJ
reclassified insubstance foreclosures ("ISFs") from other real estate ("ORE") to
loans. Charges to other real estate expense to cover writedowns and charge-offs
on ISFs have been reclassified to the provision for loan losses. Such
reclassifications were done to reflect a change in accounting principle;
however, there was no effect on previously recorded net income (see "Income
Recognition on Impaired and Nonaccrual Loans").
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand,
amounts due from banks, and money market investments with an original maturity
of three months or less.
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 (debt securities only); (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 net of taxes 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 fair 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 fair
value are recognized as security losses when a decline in value is assessed as
being other than temporary.
LOANS Loans are reported at their principal outstanding balance net of
charge-offs, deferred loan fees and costs on originated loans, and unearned
income. Interest income is generally recognized when income is earned using the
interest method. Loan origination fees and certain direct loan origination costs
are deferred and the net amounts are amortized as adjustments of the loans'
yields.
RESERVE FOR LOAN LOSSES 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, based on current information and events, if it is
probable that BMJ will be unable to collect the scheduled payments of principal
and interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based upon the present value of
expected future cash flows discounted at the loan's historical effective
interest rate except that all collateral- dependent loans are measured for
impairment based on the fair value of the collateral.
The adequacy of the reserve for loan losses is periodically evaluated
by BMJ in order to maintain the reserve at a level that is sufficient to absorb
probable loan losses. Management's evaluation of the adequacy of the reserve is
based on a review of BMJ's historical loss experience, known and inherent risks
in the loan portfolio, including adverse circumstances that may affect the
ability of the borrower to repay interest and/or principal, the estimated value
of collateral, and an analysis of the levels and trends of delinquencies,
charge-offs, and the risk ratings of the various loan categories. Such factors
as the level and trend of interest rates and the condition of the national and
local economies are also considered.
The reserve for loan losses is established through charges to earnings
in the form of a provision for loan losses. Increases and decreases in the
reserve due to changes in the measurement of the impaired loans are included in
the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the reserve and subsequent
recoveries, if any, are credited to the reserve.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS Loans, including impaired
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 in doubt. 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. While a loan is
classified as nonaccrual and the future collectibility of the recorded loan
balance is doubtful, collections of interest and principal are generally applied
as a reduction to principal outstanding. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
reserve for loan losses until prior charge-offs have been fully recovered.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight line
method. Estimated useful lives range up to 40 years for buildings and 3 - 10
years for furniture and equipment.
OTHER REAL ESTATE Other real estate acquired through foreclosure or acceptance
of a deed in lieu of foreclosure is carried at the lower of the recorded
investment in the loan or the 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.
In prior years, BMJ classified certain loans meeting the insubstance
foreclosure criteria as other real estate. Upon the adoption of FAS 114, BMJ
reclassified insubstance foreclosed assets that were not in its possession to
loans. Prior periods have been reclassified for comparative purposes.
INTANGIBLE ASSETS The portion of the cost allocated to values associated with
the future earnings potential of acquired deposits and the excess of cost over
fair value of net assets acquired resulting from bank and branch acquisitions is
being amortized on a straight line basis over the estimated useful lives of the
assets, which lives range from three to 40 years.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, BMJ
has entered into off-balance sheet financial instruments including commitments
to extend credit, and standby and commercial letters of credit. Amounts due or
payable on such instruments are recorded on the balance sheet.
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.
INCOME PER SHARE Income per share is based on the weighted average number of
shares outstanding during the period after consideration of the dilutive effect
of the convertible subordinated capital notes (see Note 8) and stock options
(see Note 10).
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 Sun National Bank of
Medford, New Jersey 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 Available for Sale
The amortized cost and estimated fair values of securities available for sale
are as follows:
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1995
U.S. Treasury securities $5,005 $8 ($3) $5,010
U.S. government agencies and corporations 47,050 579 (7) 47,622
States and political subdivisions 11,970 7 (1) 11,976
Other securities - - - -
------- ---- ---- -------
Total $64,025 $594 ($11) $64,608
======= ==== ==== =======
December 31, 1994
U.S. Treasury securities $3,006 $ - ($95) $2,911
U.S. government agencies and corporations - - - -
States and political subdivisions - - - -
Other securities - - - -
------- ---- ---- -------
Total $3,006 $ - ($95) $2,911
======= ==== ==== =======
December 31, 1993
U.S. Treasury securities $33,550 $24 ($25) $33,549
U.S. government agencies and corporations 18,821 1 (17) 18,805
States and political subdivisions 1,241 16 - 1,257
Other securities 597 1 - 598
------- ---- ---- -------
Total $54,209 $42 ($42) $54,209
======= ==== ==== =======
There were gross gains of $119,822 and gross losses of $120,042
realized on sales from the securities available for sale portfolio during 1995.
Proceeds from sales of securities available for sale for the years ended
December 31, 1995, 1994 and 1993 were $23,108,876, $50,000 and $75,196,000,
respectively. There were no gross gains or gross losses realized on sales from
the securities available for sale portfolio during 1994. Gross gains of $744,000
and gross losses of $54,000 were recognized for 1993 sales.
At December 31, 1995, $384 thousand of unrealized gains, net of tax, in
the securities available for sale portfolio are included as a separate component
of shareholders' equity.
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(in thousands)
December 31, 1995
------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less ............................ $16,868 $16,880
Due after one year through five years .............. 24,888 25,047
Due after five years through ten years ............. 19,969 20,380
Due after ten years ................................ 2,300 2,301
------- -------
Total .............................. $64,025 $64,608
======= =======
The amortized cost of securities available for sale pledged to secure
public deposits and for other purposes as required by law were $4,001,000,
$1,455,000 and $8,570,000 at December 31, 1995, 1994 and 1993, respectively.
There are no significant concentrations of investments (greater than 10% of
shareholders' equity) in any individual security issuer at December 31, 1995.
4.
Securities Held to Maturity
The amortized cost and estimated fair values of securities held to
maturity are as follows:
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
December 31, 1995
U.S. Treasury securities ................ $ 5,110 $ 145 $ -- $ 5,255
U.S. government agencies and corporations 72,858 637 (404) 73,091
States and political subdivisions ....... 2,177 108 -- 2,285
Other securities ........................ 2,370 -- -- 2,370
-------- -------- -------- --------
Total ............................. $ 82,515 $ 890 ($ 404) $ 83,001
======== ======== ======== ========
December 31, 1994
U.S. Treasury securities ................ $ 25,308 $ -- ($ 616) $ 24,692
U.S. government agencies and corporations 89,815 -- (5,271) 84,544
States and political subdivisions ....... 3,080 7 (9) 3,078
Other securities ........................ 781 -- -- 781
-------- -------- -------- --------
Total ............................. $118,984 $ 7 ($ 5,896) $113,095
======== ======== ======== ========
December 31, 1993
U.S. Treasury securities ................ $ 18,984 $ 29 $ -- $ 19,013
U.S. government agencies and corporations 90,283 84 (180) 90,187
States and political subdivisions ....... 3,970 160 -- 4,130
Other securities ........................ 556 -- -- 556
-------- -------- -------- --------
Total ............................. $113,793 $ 273 ($ 180) $113,886
======== ======== ======== ========
There were no sales from the securities held to maturity portfolio
during 1995. The amortized cost of securities transferred from the held to
maturity portfolio to the available for sale portfolio for the year ended
December 31, 1995 was $23,109,444 which included gross unrealized gains of
$119,822 and gross unrealized losses of $120,042 at the time of transfer. All
transfers from the held to maturity portfolio were performed in accordance with
the one-time reassessment of the held to maturity portfolio as permitted by the
Financial Accounting Standards Board special report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities".
The amortized cost and estimated fair value of securities held to
maturity at December 31, 1995 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1995
-----------------------
Estimated
Amortized Fair
(in thousands) Cost Value
------- -------
Due in one year or less ............................ $ 276 $ 276
Due after one year through five years .............. 76,531 76,940
Due after five years through ten years ............. 3,338 3,415
Due after ten years ................................ 2,370 2,370
------- -------
Total ........................................ $82,515 $83,001
======= =======
The amortized cost of securities held to maturity pledged to secure
public deposits and for other purposes as required by law were $35,993,000,
$42,156,000 and $30,903,000 at December 31, 1995, 1994 and 1993, respectively.
There are no significant concentrations of investments (greater than 10% of
shareholders' equity) in any individual security issuer at December 31, 1995.
5.
Loans, Reserves for Losses on Loans and
Other Real Estate and Nonperforming Assets
The following table provides comparative year-end composition of the
loan portfolio:
(in thousands) December 31,
-------------------------
1995 1994
Commercial, financial and agricultural $ 24,869 $ 22,822
Real estate - mortgage 295,535 275,813
Real estate - construction 32,439 28,420
Consumer 46,521 30,360
-------- --------
Total loans (net of unearned income of
$13 and $15) $399,364 $357,415
======== ========
Changes in the reserve for loan losses were as follows:
(in thousands) Year ended December 31,
-------------------------------------------
1995 1994 1993
Reserve at beginning of year $12,485 $14,423 $20,267
Charge-offs:
Commercial, financial
and agricultural (16) (481) (3,546)
Real estate - mortgage (1,002) (2,529) (3,564)
Real estate - construction (634) (16) (851)
Consumer (436) (123) (124)
------- ------- -------
Total charge-offs (2,088) (3,149) (8,085)
------- ------- -------
Recoveries:
Commercial, financial
and agricultural 371 687 698
Real estate - mortgage 1,142 676 438
Real estate - construction 94 147 146
Consumer 95 116 119
------- ------- -------
Total recoveries 1,702 1,626 1,401
------- ------- -------
Net charge-offs (386) (1,523) ( 6,684)
Provision charged (credited) to operations (2,000) - 840
Sale of bank subsidiary - (415) -
------- ------- -------
Reserve at end of year $10,099 $12,485 $14,423
======= ======= =======
BMJ recorded a negative provision for loan losses of $2.0 million in
1995. No provision for loan losses was recorded in 1994 and a provision of $840
thousand was recorded in 1993.
The negative provision of $2.0 million recorded in 1995 was driven by
the continuing improvements of BMJ's asset quality, including reduced levels of
nonperforming assets and net loan charge-offs. Specifically, since December 31,
1992, nonperforming loans have declined from $31.4 million to $6.0 million at
December 31, 1995, and net charge-offs declined from $6.7 million during 1993 to
$1.5 million during 1994 and $386 thousand during 1995. In addition, BMJ has
adhered to a procedural discipline in determining both the necessary provision
for loan losses to be taken from earnings and the adequacy of the allowance for
loan losses. Based upon management's judgement and evaluation of this
methodology, BMJ has recorded no quarterly provision for loan losses since the
second quarter of 1993. As a result of BMJ's increasingly diversified loan mix,
stabilized and improving regional economies, and the continuing adequacy of the
reserve for loan losses subsequent to the non-recurring negative provision, it
was management's and the Board of Director's judgement that the interest of
BMJ's shareholders was best served by this immediate, one-time negative
provision.
At December 31, 1995, BMJ's recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 amounted to $7.3
million. The reserve for loan losses at December 31, 1995 includes reserves of
$1.2 million applicable to such impaired loans. All of these loans were valued
using the fair value of collateral method. Based on this method, was allocated
against all of the impaired loans. The remaining reserve for loan losses,
totalling $8.9 million at December 31, 1995, is available to absorb losses in
BMJ's entire loan portfolio. During 1995, the average recorded investment in
impaired loans was approximately $7.1 million. Interest income recognized on
total impaired loans during 1995 was approximately $447 thousand.
Nonaccrual loans, which generally includes all impaired loans, are
comprised principally of loans where doubt exists as to the ability of the
borrower to comply with the repayment terms. Loans 90 days past due or greater
are those loans which are still accruing interest at previously negotiated rates
yet are contractually delinquent as to principal or interest. Restructured loans
are those whose contractual interest rates have been reduced to below current
market rates or other concessions made due to borrowers' financial difficulties.
Interest on these loans is subject to the nonaccrual policy.
Interest recognized as income during 1995 on nonaccrual loans totaled
$75 thousand, compared to $384 thousand in 1994 and $38 thousand in 1993.
Additional income before taxes amounting to approximately $643 thousand for
1995, $845 thousand in 1994 and $1.4 million in 1993 would have been recognized
if interest on all such loans had been recorded based upon original terms.
The following table sets forth information concerning other real estate
owned reserve activity for the periods indicated:
Year ended December 31,
---------------------------------------
(in thousands) 1995 1994 1993
Reserve at beginning of period $958 $2,614 $2,866
Provision charged to operations 150 863 1,740
Losses and other write-downs (831) (2,519) (1,992)
---- ------ ------
Reserve at end of period $277 $ 958 $2,614
==== ====== ======
Nonperforming assets were as follows:
December 31,
------------------------
(in thousands) 1995 1994
Nonperforming loans $6,041 $ 9,968
Other real estate, net 1,686 4,279
------ -------
Total nonperforming assets $7,727 $14,247
====== =======
Nonperforming loans were as follows:
December 31,
------------------------
(in thousands) 1995 1994
Nonaccrual loans:
Commercial, financial and agricultural $ 184 $ 159
Real estate - mortgage 3,145 7,578
Real estate - construction 2,712 967
------ ------
Total 6,041 8,704
------ ------
Loans 90 days or more past due and still accruing:
Commercial, financial and agricultural - 151
Real estate - mortgage - 1,109
Consumer - 4
------ ------
Total - 1,264
------ ------
Total nonperforming loans $6,041 $9,968
====== ======
Nonperforming loans as a percentage of total loans were 1.5% at December 31,
1995 and 2.81% at December 31, 1994.
6.
Premises and Equipment
The following table presents comparative data for premises and
equipment:
(in thousands) December 31,
-----------------------
1995 1994
Land ........................................... $ 955 $ 955
Bank premises .................................. 6,082 5,945
Furniture and equipment ........................ 6,745 9,238
------- -------
Total ..................................... 13,782 16,138
Less accumulated depreciation .................. 7,722 10,540
------- -------
Net book value ............................ $ 6,060 $ 5,598
======= =======
Depreciation expense was $.8 million, $.9 million and $1.0 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
7.
Short Term Borrowings
The following table presents comparative data relating to short-term
borrowings of BMJ for the years ending December 31, 1995, 1994 and 1993.
(in thousands) Year ended December 31,
------------------------------------------
1995 1994 1993
Federal funds purchased, securities sold under
agreements to repurchase and other borrowed funds:
Balance at year end $19,969 $8,857 $1,950
Weighted average interest rate at year end 5.02% 4.23% 1.80%
Average amount outstanding during the year $15,575 $5,521 $3,836
Maximum amount outstanding at any month end $19,969 $9,186 $6,381
Weighted average interest rate during the year 4.79% 3.20% 1.93%
There was no balance of Federal funds purchased or Federal Home Loan
Bank advances outstanding at December 31, 1994 or 1993.
Federal funds purchased and securities sold under agreements to
repurchase represent primarily overnight borrowings providing for BMJ's
short-term funding requirements and generally mature within one business day of
the transaction date. The Federal Home Loan Bank advance matures in six months.
The Bank of Mid-Jersey joined the Federal Home Loan Bank system during
1995 and has established a line of credit of approximately $71.9 million with
the Federal Home Loan Bank of New York to further support and enhance liquidity.
At December 31, 1995, approximately $13.4 million was outstanding against this
line of credit consisting of $7.4 million in short term advances and $6.0
million in long term debt (Note 8).
8.
Capital Notes and Long Term Debt
The following is a summary of capital notes and long term debt
outstanding at December 31, 1995 and 1994:
(in thousands) December 31,
-----------------
1995 1994
7.50% Convertible Notes due 1996 (1) ..................... $2,690 $2,700
Federal Home Loan Bank advances due
1998-2016 with fixed rates from 5.92% to 6.64% (2) .... 5,996 --
9.50% Convertible Notes due 2000 (3) ..................... -- --
------ ------
Total .................................................... $8,686 $2,700
====== ======
(1) These notes are in the form of equity commitments and are convertible into
BMJ Common stock at $17.78 per share, subject to adjustment in certain
events, at any time prior to maturity on July 15, 1996. BMJ may redeem these
notes at any time at a redemption price equal to 100% of the principal
amount of the notes. At maturity, BMJ will issue to electing noteholders, in
exchange for the notes, common stock having an aggregate market value equal
to the principal amount of the notes. BMJ has announced its intention to
call these notes for early redemption in March 1996.
(2) The Bank of Mid-Jersey has long term borrowings from the Federal Home Loan
Bank totaling $6.0 million. These borrowings require membership in the
Federal Home Loan Bank of New York and are secured by investment securities
and loans under a blanket collateral agreement.
(3) These notes were in the form of equity contracts and were convertible into
BMJ common stock at $10.92 per share, subject to adjustment in certain
events, at any time prior to maturity on July 15, 2000. BMJ had the option
to redeem these notes starting July 15, 1994 at a redemption price of 105%.
On July 15, 1994, $1.6 million in principal amount of these notes was
redeemed and $500 thousand in principal amount of these notes was converted
into 45,783 shares of BMJ common stock resulting in an extraordinary charge
to operations of $87 thousand.
The aggregate amounts of capital notes and long term debt maturing for
the five years subsequent to 1995 are $2,838,000 for 1996, $161,000 for 1997,
$1,857,000 for 1998, $123,000 for 1999 and $130,000 for 2000.
9.
Common Stock
A Dividend Reinvestment and Stock Purchase Plan is available for
shareholders who wish to increase their holdings of BMJ's common stock. Under
the plan, quarterly dividends may be reinvested in BMJ common stock at a
discount from market value of between 0% and 10% inclusive (as determined from
time to time by BMJ's Board of Directors). In addition, optional cash
investments of not less than $100 nor more than a specified amount per quarterly
investment period (as determined by BMJ's Board of Directors from time to time)
may be made in BMJ common stock at a discount from market value of between 0%
and 10% inclusive without incurring any commission or fee. BMJ has reserved the
right, however, to eliminate and/or reinstate the optional cash investment
feature at any time which shall be indicated to shareholders by written notice.
At present, BMJ provides no discount on dividend reinvestments and optional cash
investments. BMJ permits optional cash investments by a participating
shareholder of up to $5,000 per calendar quarter per account.
During 1995, 16,768 shares of BMJ common stock were issued through the
Plan, providing $225 thousand in new capital. During 1994, no shares were issued
through the Plan. A total of 14,280 shares, providing $101 thousand in new
capital, was raised through the Plan in 1993.
On January 22, 1996, BMJ announced a stock buy-back program for
calendar year 1996. The program, approved by the Board of Directors, allows for
the repurchase of up to five percent of BMJ stock at management's discretion,
either on a privately negotiated basis or on the open market.
10.
Stock Option Plans
Director Stock Option Plan
BMJ has in effect a Director Stock Option Plan (the "Director Plan")
for the benefit of outside directors of BMJ and Mid-Jersey ("Outside
Directors"). The Director Plan is intended to encourage stock ownership in BMJ
by Outside Directors, to make service on the Boards of Directors of BMJ and
Mid-Jersey more attractive, and to link compensation for Outside Directors to
the performance of BMJ's common stock and to the interests of shareholders in
general. BMJ has reserved 50,000 shares of authorized but unissued common stock
under the Director Plan.
Employee Stock Option Plan
BMJ also has in effect the 1994 Employee Stock Option Plan (the
"Employee Plan") for the benefit of certain executives of BMJ and Mid-Jersey.
Like the Director Plan, the Employee Plan is intended to enable BMJ to recruit
and retain executive talent and to link the compensation of participating
executives to the performance of BMJ's common stock and to the interests of
shareholders in general. BMJ has reserved 600,000 shares of authorized but
unissued shares of common stock pursuant to the Employee Plan.
BMJ also granted options during the past two years pursuant to the
Executive Long-Term Incentive Plan (the "Executive Plan"). The Executive Plan
permitted BMJ to grant options exercisable for an aggregate total of 200,000
shares, which limit was reached in 1994.
Changes in options outstanding during the past two years were as
follows:
Price Range
Shares Per share
------- ------------------
Outstanding, December 31, 1993 177,382 $3.625 - $ 8.375
Granted in 1994 167,998 $5.25 - $11.25
Exercised in 1994 480 $3.875 - $ 5.25
Expired or cancelled in 1994 - -
------- ------------------
Outstanding, December 31, 1994 344,900 $3.625 - $11.25
Granted in 1995 63,085 $6.4375 - $13.1875
Exercised in 1995 1,714 $3.625 - $11.125
Expired or cancelled in 1995 5,720 $11.125 - $11.125
------- ------------------
Outstanding, December 31, 1995 400,551 $3.625 - $13.1875
======= =================
BMJ executed a Forebearance Agreement with the estate of former CEO
John H. Walther pursuant to which the estate agreed not to exercise any of the
stock options previously granted to Mr. Walther in exchange for a cash
settlement. At December 31, 1995, the estate of Mr. Walther held options on
140,000 shares of BMJ stock exercisable through April 2, 1996 at prices ranging
from $6.875 to $11.25 per share. All costs associated with this transaction are
included in 1995 operating results.
11.
Employee Benefits
PENSION PLAN BMJ has a non-contributory defined benefit plan covering most
employees. The benefits for this plan are based primarily on years of service
and employees' estimated compensation at retirement. BMJ's policy is to fund
pension costs based on the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974.
Plan assets consist primarily of insurance company group immediate
participation guarantee contracts, U.S. government and corporate debt
obligations and common stock.
The following table presents the components of BMJ's 1995, 1994 and
1993 pension costs:
(in thousands) Year Ended December 31,
---------------------------------------
1995 1994 1993
Service cost - benefits earned
during the period $171 $ 273 $ 328
Interest cost on projected benefit
obligation 290 308 291
Return on assets (272) (331) (317)
Amortization of unrecognized
transition obligation and deferral (33) (16) ( 3)
---- ----- -----
Total pension cost $156 $ 234 $ 299
==== ===== =====
The funded status of the pension plan at December 31, 1995, 1994, and
1993 was as follows:
(in thousands) December 31,
------------------------------------
1995 1994 1993
Actuarial present value of:
Vested benefit obligation .......... ($3,858) ($3,081) ($3,479)
Accrued benefit obligation ......... (976) (712) (1,224)
Projected benefit obligation ......... (4,834) (3,793) (4,703)
Plan assets at fair value ............ 3,860 4,364 4,510
------- ------- -------
Excess of assets over (under)
projected benefit obligation ....... (974) 571 (193)
Unamortized portion of
transition liability ............... 5 7 7
Unrecognized net (gain) loss ......... (144) (1,599) (612)
Unrecognized prior service cost ...... 57 64 76
------- ------- -------
Accrued pension obligation ........... ($1,056) ($ 957) ($ 722)
======= ======= =======
The projected benefit obligation was determined using an assumed
discount rate of 7.0% (8.75% in 1994 and 7.0% in 1993) and an assumed long-term
rate of compensation increase of 4.0%. The assumed long-term rate of return on
plan assets is 7.50%.
DEFERRED SAVINGS PLAN BMJ has a deferred savings plan for eligible employees
which is a deferred arrangement under Section 401(k) of the Internal Revenue
Code. Under the plan, employees can defer from 2% to 10% of annual compensation.
BMJ will match 50% of employees' contributions up to 6% and the matched funds
amount is automatically invested in common stock of B.M.J. Financial Corp. The
1995 limit for 401(k) elective contribution to the plan was $9,240. The
contribution by BMJ was $148 thousand, $153 thousand, and $316 thousand in 1995,
1994 and 1993, respectively.
BENEFITS BMJ's and Mid-Jersey's respective Boards of Directors have each
approved a policy whereby, in the event of a merger or sale of BMJ or
Mid-Jersey, all full-time officers with the title of Vice President or a more
senior officer of the entity to be merged or sold will receive a guarantee of
one year's employment and of severance pay of one month's salary for each year
of service as a Vice President or more senior officer with that entity. Under
BMJ's policy, full-time officers of BMJ will be given credit for past service as
a Vice President or more senior officer with any present or past subsidiary of
BMJ.
12.
Other Noninterest Expense
Other noninterest expense items in excess of 1% of total interest and
other income included the following:
(in thousands) Year Ended December 31,
-----------------------------------------
1995 1994 1993
Professional and other fees $2,673 $ 3,716 $ 3,864
Computer services 2,737 2,463 1,902
F.D.I.C. insurance premium 539 1,341 1,752
Amortization of intangibles 115 468 497
Printing, stationery and supplies - 494 624
Marketing 660 753 -
Accrual of settlement of estate
of former CEO 745 - -
Equipment maintenance - - 803
Restructuring expense - - 685
Insurance premiums - - 538
All other 2,499 1,477 1,405
------ ------- -------
Total $9,968 $10,712 $12,070
====== ======= =======
13.
Income Taxes
Current and deferred income tax expense (benefit) was as follows:
(in thousands)
Year ended December 31,
-----------------------------
1995 1994 1993
Current:
Federal .................................... $ 1,978 $ 850 $ 39
State ...................................... 245 7 21
------- ------- -------
Total current ........................ 2,223 857 60
Deferred ........................................ 922 1,869 --
------- ------- -------
Total current and deferred ........... 3,145 2,726 60
Benefit of reduction in valuation allowance ..... -- (2,719) --
------- ------- -------
Total income tax expense ............. $ 3,145 $ 7 $ 60
======= ======= =======
BMJ adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"), as of January 1, 1993, and the
cumulative effect of this change was reported in the 1993 Consolidated Statement
of Operations. The cumulative effect at January 1, 1993 was a charge of $1.5
million. The net deferred tax asset as of December 31, 1995 and 1994 reflects
the impact of "temporary differences" between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws.
As of December 31, 1993, BMJ had established a valuation allowance to
reduce its net deferred tax asset to the amount expected to be realized as
required under FAS 109. During 1994, management concluded that sufficient
positive evidence had accumulated and that the valuation allowance established
in 1993 was no longer necessary. Such positive evidence included six
consecutive quarters of profitable operations, continued reductions in the level
of nonperforming assets, and continued operating expense reductions.
Accordingly, the book tax provision for the year ended December 31, 1994 of
$2.7 million was offset by a reduction of the deferred tax asset valuation
allowance. In addition, operating results for the year ended December 31, 1994
include a credit to income of $4.9 million, representing the reversal of the
remaining balance of the valuation allowance plus recognition of state deferred
tax assets and alternative minimum tax credits.
Mid-Jersey has net operating loss carryforwards for state income tax
purposes of $6.4 million, which expire as follows: $2.0 million in 1998, $2.0
million in 1999 and $2.4 million in 2000.
The components of the net deferred tax asset as of December 31, 1995
and 1994 are as follows:
(in thousands)
Year ended December 31,
-----------------------
1995 1994
Deferred tax assets:
Loan loss reserve ............................... $ 4,125 $ 4,935
ORE valuation reserve ........................... 459 384
Alternative minimum tax credits ................. 126 737
Net operating loss carryforwards ................ 373 878
Deferred loan origination fees .................. -- 72
Interest on nonaccrual loans .................... 375 --
Accrued pension/profit-sharing .................. 392 --
Amortization of core deposits ................... 310 --
Other ........................................... 273 230
------- -------
6,433 7,236
------- -------
Deferred tax liabilities:
Depreciation of premises and equipment
and amortization of intangible assets ........ (164) (171)
Other ........................................... (128) (2)
------- -------
(292) (173)
------- -------
Deferred tax asset ................................. 6,141 7,063
Valuation allowance ................................ -- --
------- -------
Net deferred tax asset ..................... $ 6,141 $ 7,063
======= =======
The components of income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 that are attributable to income from
operations and the reversal of the deferred tax asset valuation allowance are as
follows:
(in thousands) Year ended December 31,
--------------------------------
1995 1994 1993
Income from operations .................... $ 3,145 $ 7 $ 60
Reversal of the remaining deferred
tax asset valuation allowance ...... -- (4,875) --
------- ------- -------
Total ................... $ 3,145 ($4,868) $ 60
======= ======= =======
The following is a reconciliation of the statutory Federal income tax
expense and rate to the effective income tax expense and rate:
December 31,
------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
Statutory Federal income tax expense
and rate ................................. $ 3,896 34.0% $ 2,627 34.0% $ 228 34.0 %
Increase (decrease) in tax rate resulting from:
Tax exempt interest income ................ (399) (3.5) (307) (3.9) (319) (47.6)
Reduction of valuation allowance .......... -- -- (2,719) (35.6) -- --
Net operating loss carryforward ........... -- -- -- -- 111 16.6
State tax, net of Federal benefit ......... 555 4.8 -- -- -- --
Settlement of IRS examination ............. (1,019) (8.9) -- -- -- --
Other ..................................... 112 1.0 406 5.5 40 6.0
------- ---- ------- ---- ------- ----
Income tax expense and effective rate ......... $ 3,145 27.4% $ 7 -- % $ 60 9.0%
======= ==== ======= ======= ======= ===
Deferred income tax amounts of $6.1 million and $7.1 million are
included in other assets as of December 31, 1995 and 1994, respectively.
BMJ has been under examination by the Internal Revenue Service ("IRS")
for the taxable years 1989 through 1993 as a result of net operating loss
carryback refund claims previously filed by BMJ. During 1995, BMJ received the
Revenue Agent's Report ("RAR") for the years under examination and has accepted
the agent'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 the acceptance of the
RAR. As a result of this review, income tax expense for 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.
14.
Related Party Transactions
Certain of BMJ's officers, directors and their affiliates were loan
customers of BMJ's banking subsidiaries during 1995 and 1994. All loans included
in such transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and none represent more than a normal risk of
collection. Such loans were $10.8 million at December 31, 1995 and $12.5 million
at December 31, 1994. At December 31, 1995, there were no related party loans
classified as nonaccrual.
The following table summarizes activity with respect to such loans:
(in thousands) 1995
-------
Balance at beginning of year $12,479
Additions 1,388
Less amounts collected 3,047
-------
Balance at end of year $10,820
=======
Additionally, BMJ and its subsidiaries made lease payments to
affiliates of directors of approximately $291 thousand during 1995, $287
thousand during 1994 and $282 thousand during 1993.
15.
Lease Commitments
BMJ has lease arrangements primarily for the use of real property.
Total lease rental expense was $.8 million, $.8 million and $1.0 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
BMJ is obligated under a number of non-cancelable operating leases for
premises and equipment with terms ranging from 1 to 20 years. Future minimum
payments under non-cancelable operating leases as of December 31, 1995 are as
follows:
(in thousands)
Year ended December 31,
1996 $ 836
1997 910
1998 830
1999 765
2000 459
Thereafter 4,955
-------
Total minimum lease payments $ 8,755
=======
16.
Commitments and Contingencies
In the normal course of business, BMJ enters into various financial
instruments which are properly not recorded in the consolidated financial
statements. BMJ's risk of accounting loss due to the credit risks and market
risks associated with these off-balance sheet instruments varies with the type
of financial instrument. Principal or notional amounts may not necessarily
indicate the degree of exposure involved. Credit risk represents the possibility
of a loss occurring from the failure of another party to perform in accordance
with the terms of the contract. BMJ's maximum exposure to accounting loss, based
upon the credit risk associated with unfunded loan commitments and letters of
credit outstanding, is represented by the contractual amount of these items as
of the dates indicated in the following table:
(in millions) Contractual Amount
12/31/95 12/31/94
-------- --------
Commitments to extend credit $76.4 $57.0
Performance standby letters of credit
and similar arrangements $ 2.7 $ 3.1
Financial standby letters of credit
and similar arrangements $ 0.9 $ 1.1
Many of such commitments to extend credit may expire without being
drawn upon and, therefore, the total commitment amounts do not necessarily
represent future cash flow requirements. In making the commitments, BMJ applies
the same credit policy standards used in the lending process and periodically
reassesses the customers' creditworthiness through ongoing credit reviews. BMJ
also holds various forms of collateral, including cash deposits and mortgage
liens on real estate, to support those commitments for which collateral is
deemed necessary. Substantially all of BMJ's lending is secured by property
located within Mercer, Burlington and Ocean counties in New Jersey (see note 5
for the composition of the loan portfolio). The risks associated with making
these commitments are also included in BMJ's evaluation of the overall credit
risk in determining the reserve for loan losses.
Financial standby letters of credit and similar arrangements are
commitments issued by BMJ which irrevocably obligate BMJ to pay a third-party
beneficiary when a customer fails to repay an outstanding loan or debt
instrument.
Performance standby letters of credit are commitments issued by BMJ
which irrevocably obligate BMJ to pay a third-party beneficiary when a customer
fails to perform some contractual non-financial obligation.
At December 31, 1995 and 1994, BMJ had identified approximately $745
thousand and $972 thousand, respectively, of the reserve for loan losses as a
general allocation of the reserve for potential losses, including losses due to
off-balance sheet credit risk. During 1995 and 1994, BMJ recorded no charge-offs
in connection with letters of credit. No material amount of currently
outstanding commitments are to borrowers having prior outstanding balances which
are classified as nonperforming or potential problem assets.
BMJ is required to maintain cash balances to meet regulatory reserve
requirements of the Federal Reserve Board. The average required reserve balances
were $9.3 million and $9.5 million for 1995 and 1994, respectively.
BMJ is subject to claims and lawsuits which arise primarily in the
ordinary course of business. Based upon information currently available and
advice received from legal counsel representing BMJ in connection with such
claims and lawsuits, it is the opinion of management that the disposition or
ultimate determination of such claims and lawsuits will not have a material
adverse effect on the consolidated financial statements of BMJ.
17.
Dividend Restrictions
Certain bank regulatory limitations exist on the availability of a
subsidiary bank's undistributed net assets for the payment of dividends to the
parent company without the prior approval of the bank regulatory authorities.
The Federal Reserve Act restricts the payment of dividends in any
calendar year to the net profit of the current year combined with retained net
profits of the preceding two years. Mid-Jersey may declare a dividend to the
parent company only if, after payment thereof, its capital would be unimpaired
and its remaining surplus would equal 50 percent of its capital. At January 1,
1996, Mid-Jersey had $19.0 million of undistributed net assets available for the
payment of dividends to BMJ (parent company).
18.
Disclosures About Fair Value of Financial Instruments
Provided below is the information required by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" ("FAS 107"). These amounts represent estimates of fair values at a
point in time. Significant estimates regarding economic conditions, loss
experience, risk characteristics associated with particular financial
instruments and other factors were used for the purposes of this disclosure.
These estimates are subjective in nature and involve matters of judgement.
Therefore, they cannot be determined with precision. Changes in the assumptions
could have a material impact on the amounts estimated.
While the estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be exchanged in a
current transaction between willing parties, many of BMJ's financial instruments
lack an available trading market as characterized by willing parties engaging in
an exchange transaction. In addition, BMJ does not hold any financial
instruments for trading purposes and it is BMJ's intent to hold most of its
financial instruments to maturity and, therefore, the fair value may not be
realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets
and liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) is
not reflected. The value of this item may be significant.
Because of the wide range of valuation techniques and the numerous
estimates which must be made, it may be difficult to make reasonable comparisons
of BMJ's fair value information to that of other financial institutions. It is
important that the many uncertainties discussed above be considered when using
the estimated fair value disclosures and to realize that because of these
uncertainties, the aggregate fair value amount should in no way be construed as
representative of the underlying value of BMJ.
Cash and due from banks and money market investments. Cash and money market
investments are by definition short-term and do not present any unanticipated
credit issues. Therefore, the carrying amount is a reasonable estimate of fair
value.
Securities. The estimated fair values and carrying amounts of securities at
December 31, 1995 and 1994 are provided in Notes 3 and 4 to the Consolidated
Financial Statements and are based on quoted market prices, when available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans. The carrying amount and estimated fair value of loans outstanding at
December 31, 1995 (net of the reserve for loan losses) are $389.3 million and
$396.8 million, respectively. The corresponding amounts at December 31, 1994 are
$344.9 million and $353.8 million, respectively. In order to determine the fair
values for loans, the loan portfolio was segmented based on loan type, credit
quality and repricing characteristics. For variable rate loans with no
significant credit concerns and frequent repricings, estimated fair values are
based on the carrying values. The fair values of other loans are estimated using
discounted cash flow analyses.
The discount rates used in these analyses are generally based on origination
rates for similar loans of comparable credit quality. However, where
appropriate, adjustments have been made so as to more accurately reflect market
rates. Maturity estimates are based on historical experience with prepayments
and current economic and lending conditions. The fair value of nonaccrual and
impaired loans was based on an analysis of the value of the underlying
collateral.
Other Assets. The financial instrument included in other assets consists of
accrued interest receivable which has a carrying value that approximates fair
value due to its short-term maturity.
Deposits. The carrying amount and estimated fair value of deposits outstanding
at December 31, 1995 are $485.0 million and $485.7 million, respectively. The
corresponding amounts at December 31, 1994 are $463.6 million and $463.1
million, respectively. Under FAS 107, the fair value of deposits with no stated
maturity is equal to the amount payable on demand. Therefore, the fair value
estimates for these products do not reflect the benefits that BMJ receives from
the low-cost, long-term funding they provide. In management's opinion, these
benefits may be significant. The estimated fair values of fixed rate time
deposits are based on discounted cash flow analyses. The discount rates used in
these analyses are based on market rates currently offered for deposits of
similar remaining maturities. Because of the repricing characteristics and the
competitive nature of BMJ's rates offered on variable rate time deposits,
carrying amount is a reasonable estimate of the fair value.
Federal funds purchased, securities sold under agreements to repurchase and
other borrowed funds. Rates currently available to BMJ for such agreements with
similar time and remaining maturities are used to estimate fair value. As a
result, the fair value of these instruments is equal to their carrying value.
Other liabilities. The financial instrument included in other liabilities
consists of accrued interest payable which has a carrying value that
approximates fair value due to its short-term maturity.
Capital notes and long term debt. Rates currently available to BMJ for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt. At December 31, 1995 the capital notes and long term debt had a
carrying value of $8.7 million and a fair value of $8.6 million. The
corresponding amounts at December 31, 1994 are $2.7 million and $2.6 million,
respectively.
Commitments to extend credit and standby letters of credit. The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. The fair value of the
commitments is deemed to be immaterial.
19.
Parent Company Only
On January 1, 1995, B.M.J. Financial Corp. (Parent Company) transferred
a significant portion of its operations to The Bank of Mid-Jersey. This included
the transfer of 84 employees and $349,000 of assets, primarily furniture and
equipment. Beginning January 1, 1996, the operating results of these functions
were recorded in the operating results and financial condition of The Bank of
Mid-Jersey. Condensed financial information of B.M.J. Financial Corp. is as
follows:
Condensed Balance Sheet
(in thousands) December 31,
--------------------------------
1995 1994
Assets
Cash and cash equivalents $ 2,222 $10,394
Securities available for sale 8,486 -
Investments in subsidiaries 59,446 52,332
Loans, net of unearned income - 220
Less reserve for loan losses - (53)
Other assets 299 658
------- -------
Total assets $70,453 $63,551
======= =======
Liabilities and Shareholders' Equity
Other liabilities $ 2,141 $ 2,505
Capital notes 2,690 2,700
------- -------
Total liabilities 4,831 5,205
Shareholders' equity 65,622 58,346
------- -------
Total liabilities and shareholders' equity $70,453 $63,551
======= =======
Condensed Statement of Operations
(in thousands) Year ended December 31,
-----------------------------------------
1995 1994 1993
Income
Dividends from subsidiaries ....................... $ 1,677 $ -- $ 311
Interest income ................................... 526 324 173
Noninterest income ................................ 152 9,496 10,465
-------- -------- --------
Total income ....................... 2,355 9,820 10,949
-------- -------- --------
Expense
Salaries and employee benefits .................... -- 4,100 5,502
Interest .......................................... 202 308 402
Amortization ...................................... 78 431 433
Other ............................................. 737 5,491 5,502
-------- -------- --------
Total expense ...................... 1,017 10,330 11,839
-------- -------- --------
Income (loss) before income before tax (benefit)
cumulative effect of change in accounting
principle, and equity in undistributed income
(loss) of subsidiary ............................ 1,338 (510) (890)
(loss) of
Income tax (benefit) .............................. (167) (672) (573)
Cumulative effect of change in accounting
principle ....................................... -- -- (72)
Extraordinary charge .............................. -- (87) --
Equity in undistributed income (loss) of subsidiary 6,809 12,432 (501)
-------- -------- --------
Net income (loss) .................. $ 8,314 $ 12,507 ($ 890)
======== ======== ========
Condensed Statement of Cash Flows
(in thousands) Year ended December 31,
-----------------------------------------
1995 1994 1993
Cash flows from operating activities:
Net income (loss) ................................... $ 8,314 $ 12,507 ($ 890)
Less equity in undistributed (income) loss of
subsidiaries ...................................... (6,809) (12,432) 501
-------- -------- --------
1,505 75 (389)
-------- -------- --------
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation of premises and equipment .............. 28 182 224
Provision for loan losses ........................... -- 250 (4)
Amortization of intangibles ......................... 78 431 433
Net accretion on securities available for sale ...... (47) -- --
Increase (decrease) in income taxes payable ......... (1,363) 473 (378)
Increase in interest receivable ..................... (144) (56) (1)
(Increase) decrease in other assets ................. 487 (209) (85)
Increase (decrease) in other liabilities ............ 999 (1,059) 567
-------- -------- --------
38 12 756
-------- -------- --------
Net cash provided by operating activities ............. 1,543 87 367
-------- -------- --------
Cash flows from investing activities:
Purchase of securities available for sale ........... (11,798) -- --
Proceeds from sales and maturities of securities
available for sale .............................. 3,413 -- 814
Net decrease in loans ............................... 166 601 50
Property and equipment expenditures ................. -- (117) (54)
Proceeds from sale of equipment ..................... -- -- 33
Capital contributions to subsidiary banks ........... -- -- (10,500)
Proceeds from sale of bank subsidiary ............... -- 6,846 --
-------- -------- --------
Net cash provided by (used in) investing activities ... (8,219) 7,330 (9,657)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of stock ......................... 225 -- 13,788
Repayment of capital notes .......................... (10) (1,596) --
Dividends paid ...................................... (1,711) -- --
-------- -------- --------
Net cash provided by (used in) financing activities ... (1,496) (1,596) 13,788
-------- -------- --------
Net change in cash and cash equivalents ............... (8,172) 5,821 4,498
Cash and cash equivalents at beginning of year ...... 10,394 4,573 75
-------- -------- --------
Cash and cash equivalents at end of year ............ $ 2,222 $ 10,394 $ 4,573
======== ======== ========
Noncash investing activities:
Redemption of capital notes through issuance of stock -- $ 504 --
======== ======== ========
EXHIBITS
Exhibit
11 Statement Regarding Computation of Per Share
Income (loss).
24.1 Consent of Coopers & Lybrand L.L.P.