UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File Number 0-13440
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B.M.J. FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2474875
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
243 ROUTE 130, BORDENTOWN, NJ 08505
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(609) 298-5500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 7,571,980 shares of common
stock, $1.00 par value, outstanding on May 1, 1996.
INDEX
PART 1. FINANCIAL INFORMATION
Consolidated Balance Sheet -
March 31, 1996 (Unaudited) and December 31, 1995
Consolidated Statement of Operations -
Three months ended March 31, 1996 and 1995 (Unaudited)
Consolidated Statement of Cash Flows -
Three months ended March 31, 1996 and 1995 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART 11. OTHER INFORMATION
SIGNATURES
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet
(unaudited) March 31, December 31,
(in thousands, except share data) 1996 1995
--------- ---------
Cash and cash equivalents:
Cash and due from banks ............................. $ 21,848 $ 19,905
Money market investments ............................ 11,263 5,664
--------- ---------
Total cash and cash equivalents .................. 33,111 25,569
Securities available for sale (amortized cost of
$90,063 in 1996 and $64,025 in 1995) ............. 89,018 64,608
Securities held to maturity (fair value of $79,303
in 1996 and $83,001 in 1995) .................... 79,668 82,515
Loans, net of unearned income and less reserve for
loan losses of $10,009 (1996) and $10,099 (1995) 391,730 389,265
Premises and equipment, net ........................... 5,991 6,060
Other real estate, net ................................ 1,416 1,686
Other assets .......................................... 19,020 19,007
--------- ---------
Total assets ..................................... $ 619,954 $ 588,710
========= =========
Liabilities:
Deposits:
Demand deposits (noninterest-bearing) ............. $ 78,614 $ 81,156
Savings and interest checking ..................... 253,103 255,487
Certificates of deposit of $100,000 or more ....... 23,936 13,874
Other time deposits ............................... 155,788 134,494
--------- ---------
Total deposits ................................. 511,441 485,011
--------- ---------
Securities sold under agreements to repurchase ...... 17,575 12,569
Federal funds purchased and other borrowed funds .... 5,000 7,400
Other liabilities ................................... 10,810 9,422
Capital notes and long term debt .................... 9,464 8,686
--------- ---------
Total liabilities .............................. 554,290 523,088
--------- ---------
(Continued)
B.M.J. Financial Corp. and Subsidiaries
Consolidated Balance Sheet -- Continued
(unaudited) March 31, December 31,
(in thousands, except share data) 1996 1995
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share ................
Authorized 25,000,000 shares;
issued 7,646,249 shares in 1996
and 7,614,281 shares in 1995 ....................... 7,646 7,614
Surplus ............................................. 36,828 36,520
Retained earnings ................................... 22,666 21,104
Unrealized gains (losses) on securities available
for sale, net of tax ........................... (690) 384
Treasury stock (60,000 shares) at cost .............. (786) --
--------- ---------
Total shareholders' equity ....................... 65,664 65,622
--------- ---------
Total liabilities and shareholders' equity ....... $ 619,954 $ 588,710
========= =========
See notes to consolidated financial statements
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts) Three months ended March 31,
-----------------------------
1996 1995
---------- ----------
INTEREST INCOME
Interest and fees on loans ............................... $ 8,866 $ 7,773
Interest on money market investments:
Time deposits with other banks ....................... -- 48
Interest bearing deposits with other banks ........... 6 8
Federal funds sold and repurchase agreements ......... 109 54
Other short term investments ......................... 97 136
Interest on securities available for sale:
U.S. Treasury securities ............................. 46 33
U.S. government agencies and corporations ............ 914 --
States and political subdivisions (tax-exempt) ....... 112 3
Interest on securities held to maturity:
U.S. Treasury securities ............................. 85 288
U.S. government agencies and corporations ............ 1,057 1,244
States and political subdivisions (tax-exempt) ....... 32 60
Other securities ..................................... 44 12
---------- ----------
Total interest income ............................. 11,368 9,659
---------- ----------
INTEREST EXPENSE
Savings and interest checking deposits ................... 1,371 1,318
Certificates of deposit of $100,000 or more .............. 235 48
Other time deposits ...................................... 1,919 1,132
Other debt ............................................... 404 214
---------- ----------
Total interest expense ............................ 3,929 2,712
---------- ----------
Net interest income ...................................... 7,439 6,947
Provision for loan losses ................................ 25 --
---------- ----------
Net interest income after provision for loan losses 7,414 6,947
---------- ----------
NONINTEREST INCOME
Service charges, commissions, and fees ................... 904 939
Trust income ............................................. 120 120
Gain on sale of other real estate ........................ 280 38
---------- ----------
Total noninterest income .......................... 1,304 1,097
---------- ----------
(Continued)
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Operations -- Continued
(Unaudited)
(In thousands, except per share amounts) Three months ended March 31,
-----------------------------
1996 1995
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits ........................... 2,353 2,508
Net occupancy ............................................ 696 731
Other real estate expense ................................ 69 180
Other .................................................... 2,178 2,377
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Total noninterest expense ......................... 5,296 5,796
---------- ----------
Income before income tax expense ......................... 3,422 2,248
Income tax expense ....................................... 1,254 814
---------- ----------
NET INCOME ............................................... $ 2,168 $ 1,434
========== ==========
Net income per share (primary and fully diluted) ......... $ 0.28 $ 0.19
========== ==========
Weighted average shares outstanding ...................... 7,685,116 7,900,260
========== ==========
See notes to consolidated financial statements.
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows
(unaudited)
(in thousands) Three months ended March 31,
----------------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income ............................................................... $ 2,168 $ 1,434
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of premises and equipment ................................. 189 213
Provision for loan losses .............................................. 25 --
Amortization of intangibles ............................................ 28 28
Net (accretion) amortization of securities available for sale .......... (26) 2
Net amortization of securities held to maturity ........................ 7 18
Net (increase) decrease in other real estate owned ..................... (208) 67
Decrease in other assets ............................................... 513 710
Increase in other liabilities .......................................... 1,388 1,569
-------- --------
Net cash provided by operating activities .................................. 4,084 4,041
-------- --------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale .............. 19,028 --
Purchase of securities available for sale .............................. (45,040) (1,706)
Proceeds from maturities of securities held to maturity ................ 5,276 6,306
Purchase of securities held to maturity ................................ (2,436) (2,346)
Net increase in loans .................................................. (2,702) (13,954)
Proceeds from sale of other real estate ................................ 690 1,270
Property and equipment expenditures .................................... (120) (107)
-------- --------
Net cash used in investing activities ...................................... (25,304) (10,537)
-------- --------
(Continued)
B.M.J. Financial Corp. and Subsidiaries
Consolidated Statement of Cash Flows -- Continued
(unaudited)
(in thousands) Three months ended March 31,
----------------------------
1996 1995
-------- --------
Cash flows from financing activities:
Net decrease in demand deposits, savings and interest checking accounts .. (4,926) (22,226)
Net increase in certificates of deposit .................................. 31,356 4,133
Repayments of capital notes/long term debt ............................... (2,722) --
Net decrease in other borrowed funds ..................................... (2,400) --
Net increase in securities sold under agreements to repurchase .......... 5,006 5,034
Proceeds from issuance of debt ........................................... 3,500 --
Dividends declared ....................................................... (573) (380)
Proceeds from issuance of stock .......................................... 307 12
Purchase of treasury stock ............................................... (786) --
-------- --------
Net cash provided by (used in) financing activities ........................ 28,762 (13,427)
-------- --------
Net change in cash and cash equivalents .................................... 7,542 (19,923)
Cash and cash equivalents at beginning of period ........................... 25,569 44,779
-------- --------
Cash and cash equivalents at end of period ................................. $ 33,111 $ 24,856
======== ========
Cash paid during the period for:
Interest ................................................................. $ 3,375 $ 2,709
======== ========
Income taxes ............................................................. $ 32 --
======== ========
Noncash investing activities:
Transfer of loans to other real estate, net .............................. $ 212 $ 1,408
======== ========
Transfer of insubstance foreclosures to loans upon adoption of FASB 114 .. -- $ 2,935
======== ========
See notes to consolidated financial statements.
B.M.J. FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis For Financial Statement Presentation
The information in this report is unaudited, is subject to year-end
adjustments and audit, and is prepared in accordance with generally accepted
accounting principles and prevailing practices within the banking industry.
However, in the opinion of management, the information reflects all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the consolidated financial data as of and for the three-month periods ended
March 31, 1996 and 1995. The results of operations for the three-month period
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1996.
The accompanying consolidated financial statements include the accounts
of B.M.J. Financial Corp. in addition to those of The Bank of Mid-Jersey
("Mid-Jersey"), a wholly-owned subsidiary of B.M.J. Financial Corp. Unless the
context otherwise indicates, the term "BMJ" as used herein refers to the
consolidated B.M.J. Financial Corp. and The Bank of Mid- Jersey entity. All
significant intercompany accounts and transactions have been eliminated. In
preparing the 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' judgments about information available to them
at the time of their examination.
These statements should be read in conjunction with the notes to the
consolidated financial statements contained in B.M.J. Financial Corp.'s Annual
Report on Form 10-K to the Securities and Exchange Commission for the year ended
December 31, 1995, to which reference is hereby made.
2. Securities
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 market
value are recognized as security losses when a decline in value is assessed as
being other than temporary.
3. 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.
4. 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.
5. 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.
6. 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 as other real estate certain loans
meeting the insubstance foreclosure criteria. Upon the adoption of FAS 114, BMJ
reclassified to loans insubstance foreclosed assets that were not in its
possession. Prior periods have been reclassified for comparative purposes.
7. 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.
B.M.J. Financial Corp. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis addresses material changes in BMJ's
financial condition between December 31, 1995 and March 31, 1996 and material
changes in its results of operations with respect to the three-month periods
ended March 31, 1996 and 1995.
Results of Operations
Earnings Performance
BMJ reported net income for the first quarter ended March 31, 1996 of
$2.2 million, compared to net income of $1.4 million for the 1995 first quarter.
On a per share basis, earnings for the first quarter of 1996 were
$0.28, compared to earnings of $0.19 for the first quarter of 1995.
Net interest income totaled $7.4 million for the first quarter ended
March 31, 1996 compared to $6.9 million for the first quarter of 1995. BMJ's
taxable equivalent net interest margin remained strong at 5.39% for the quarter
ended March 31, 1996.
BMJ continued to pursue its program to reduce the level of total
noninterest expenses while increasing operating efficiency. As a result, total
noninterest expenses for the first quarter of 1996 amounted to $5.3 million, a
reduction of 9% from total noninterest expenses of $5.8 million for the 1995
first quarter. For the three-month period ended March 31, 1996, BMJ's efficiency
ratio improved to 59.36% compared to 70.14% for the three-month period ended
March 31, 1995.
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 $7.4 million for the first quarter ended
March 31, 1996 compared to $6.9 million for the first quarter of 1995. The
financial summary in Table 1 details yields and rates of major interest-earning
assets and interest-bearing liabilities for the three-month periods ended March
31, 1996 and 1995. Among other things, Table 1 shows that the net interest
margin between yields on average interest-earning assets and costs of average
funding sources was 5.39% for the three-month period ended March 31, 1996 and
5.76% for the comparable 1995 period. The decrease of 37 basis points in BMJ's
net interest margin is primarily due to the increase in cost of interest-bearing
liabilities outpacing the increase in yields on interest-earning assets
reflecting an increasingly competitive market for customer deposits. The impact
of the narrower margin in 1996 was somewhat offset by a $68.5 million increase
in BMJ's average interest-earning assets from $497.5 million to $566.0 million.
The improvement in net interest income in the first quarter of 1996 compared
with the first quarter of 1995 is also partly attributable to the continuing
reduction in BMJ's level of nonperforming assets whereby the proceeds from sales
or properties are invested in interest-earning assets. Total nonperforming
assets at March 31, 1995 totaled $6.3 million, down from $7.7 million at
December 31, 1995.
Noninterest Income
BMJ's revenues include noninterest income, which consists primarily of
service charges on deposit accounts and trust services income. Noninterest
income was $1.3 million for the first quarter of 1996 compared to $1.1 million
for the first quarter of 1995.
Service charges, commissions and fees amounted to $904 thousand for the
first quarter of 1996 compared to $939 thousand for the first quarter of 1995.
The decrease for the first quarter of 1996 versus the first quarter of 1995 is
primarily due to the lower level of total deposit accounts subject to service
charges and other fees.
Also included in noninterest income is the gain or loss on sales of
other real estate properties. Net gains on the sales of other real estate
properties of $280 thousand were realized during the first quarter of 1996
versus net gains of $38 thousand for the first quarter of 1995.
Noninterest Expense
Noninterest expense for the quarter ended March 31, 1996 was $5.3
million, a reduction of 8.6% from total noninterest expense for the 1995 first
quarter as BMJ continued to pursue its program to reduce the level of total
overhead expenses while increasing operating efficiency. For the quarter ended
March 31, 1996, BMJ's efficiency ratio improved to 59.36% from 70.14% for the
quarter ended March 31, 1995.
Salaries and employee benefits amounted to $2.4 million for the quarter
ended March 31, 1996 compared to $2.5 million for the quarter ended March 31,
1995. BMJ has reduced the number of full-time equivalent employees at March 31,
1996 to 257 employees, a reduction of 9% from 281 full-time equivalent employees
at March 31, 1995.
Other real estate expense amounted to $69 thousand for the quarter
ended March 31, 1996, a 62% reduction from the $180 thousand reported at March
31, 1995. Other real estate expense includes the costs to maintain repossessed
properties such as real estate taxes, insurance and general maintenance
expenses. During the three-month period ended March 31, 1996, BMJ was able to
reduce the net balance of its other real estate primarily through the sale of
properties to a balance of $1.4 million at March 31, 1996 compared to the net
balance of $4.4 million at March 31, 1995. As a result, BMJ was able to achieve
corresponding reductions in other real estate expense for the three-month period
ended March 31, 1996 when compared with the three-month period ended March 31,
1995.
The other (or miscellaneous) noninterest expense category totaled $2.2
million for the quarter ended March 31, 1996 versus $2.4 million for the 1995
first quarter. Included in this decrease in the noninterest expense category are
the current year reductions in the FDIC insurance assessment and legal fees.
In August 1995, the Federal Deposit Insurance Corporation ("FDIC")
approved a reduction in the premium banks pay for deposit insurance. For
well-capitalized institutions, the premium was reduced 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. Following the FDIC's
confirmation that the Bank Insurance Fund had met its designated level of $1.25
per every $100 of insured deposits, it was announced that no premiums would be
assessed during 1996. As a result, BMJ's first quarter 1996 other noninterest
expenses include no FDIC insurance premium expenses compared to $263 thousand
for the first quarter of 1995.
BMJ's first quarter 1996 expense for legal fees of $115 thousand
represents a 54% reduction from the corresponding 1995 period. This reduction is
attributable to a lower level of nonperforming assets in 1996, thereby
decreasing litigation costs in pursuing collection of delinquent loans and in
obtaining title to properties through the foreclosure process.
Balance Sheet Analysis
Total assets of BMJ amounted to $620.0 million at March 31, 1996,
increasing from $588.7 million at December 31, 1995. This increase is primarily
attributable to an increased level of total deposits at March 31, 1996 versus
December 31, 1995. Total deposits of $511.4 million at March 31, 1996 represents
a 5.4% increase from the $485.0 of total deposits at December 31, 1995. Through
renewed marketing programs and competitively priced deposit products, it is
BMJ's intention to increase its share of the retail deposits market.
During 1996, BMJ continued to maintain its strong capital ratios and
balance sheet condition. Shareholders' equity amounted to $65.7 million at March
31, 1996 compared to $65.6 million at December 31, 1995.
In addition, asset quality continued to improve as total nonperforming
assets at March 31, 1996 amounted to $6.3 million compared to $7.7 million at
December 31, 1995.
The following discussion deals with the major components of the balance
sheet.
Securities Available for Sale
Securities which may be sold in response to changing market and
interest rate conditions or as part of BMJ's asset/liability management strategy
have been classified as securities available for sale. The securities available
for sale portfolio amounted to $89.0 million at March 31, 1996 compared to $64.6
million at December 31, 1995. The securities available for sale portfolio is
carried at fair market value at March 31, 1996 and December 31, 1995.
Table 1 details the composition of the securities available for sale
portfolio. In addition, Table 1 provides information concerning average yields
and balances of the securities available for sale portfolio for the three-month
periods ended March 31, 1996 and 1995.
Securities Held to Maturity
Securities held to maturity are comprised of securities that BMJ has
the positive intent and ability to hold to maturity. These securities are
carried at cost, adjusted for amortization of premium or accretion of discount.
The premium or discount adjustments are recognized as adjustments to interest
income, on a level yield basis. Gains or losses on disposition are computed by
the specific identification method and are included in noninterest income.
Unrealized losses due to fluctuations in market value are recognized as security
losses when a decline in value is assessed as being other than temporary.
The securities held to maturity portfolio amounted to $79.7 million at
March 31, 1996 compared to $82.5 million at December 31, 1995. Table 1 provides
information concerning average yields and balances of the securities available
for sale portfolio for the three-month periods ended March 31, 1996 and 1995.
Table 1 -- Financial Summary
Averages Balances, Rates Paid and Yields (yields on a tax-equivalent basis)
(in thousands) Three months ended March 31, 1996 Three months ended March 31, 1995
-------------------------------------- ------------------------------------
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 $ - -% $ - $ 3,318 5.87% $ 48
Interest bearing deposits with other banks 462 5.21 6 627 5.17 8
Federal funds sold and repurchase agreements 8,258 5.29 109 3,734 5.87 54
Other short term investments 7,234 5.38 97 9,167 6.02 136
--------- ---- --------- --------- ---- -------
Total money market investments 15,954 5.33 212 16,846 5.92 246
Securities available for sale:
U.S. Treasury securities 3,494 5.28 46 2,929 4.57 33
U.S. government agencies and corporations 54,851 6.68 914 - - -
States and political subdivisions 11,136 6.12 170 288 5.63 4
Other securities - - - - - -
--------- ----- --------- ---------- ------ -------
Total securities available for sale 69,481 6.52 1,130 3,217 4.66 37
Securities held to maturity:
U.S. Treasury securities 5,105 6.68 85 21,299 5.48 288
U.S. government agencies and corporations 71,224 5.95 1,057 89,817 5.62 1,244
States and political subdivisions 2,361 8.15 48 4,268 8.65 91
Other securities 2,854 6.18 44 781 6.23 12
--------- ---- --------- --------- ---- --------
Total securities held to maturity 81,544 6.07 1,234 116,165 5.71 1,635
Loans, net of unearned income 399,080 8.99 8,949 361,309 8.82 7,862
--------- ---- --------- --------- ---- --------
Total interest-earning assets $ 566,059 8.17% $ 11,525 $ 497,537 7.97% $ 9,780
========= ===== ========= ========= ===== ========
FUNDING SOURCES
Deposits:
Savings and interest checking $ 252,188 2.18% $ 1,371 $ 260,442 2.05% $ 1,318
Certificates of deposit of $100,000 or more 17,370 5.43 235 4,488 4.34 48
Other time deposits 148,537 5.18 1,919 110,363 4.16 1.132
--------- ---- --------- --------- ---- --------
Total interest-bearing deposits 418,095 3.38 3,525 375,293 2.70 2,498
Securities sold under agreements to repurchase 15,921 4.33 172 13,567 4.69 157
Other borrowed funds 5,131 5.63 72 505 4.82 6
Other debt 9,564 6.71 160 2,700 7.66 51
--------- ---- --------- --------- ---- ----------
Total interest-bearing liabilities 448,711 3.51 3,929 392,065 2.81 2,712
Portion of noninterest-bearing funding sources 117,348 - - 105,472 - -
---------- ----- --------- --------- ----- ----------
Total funding sources $ 566,059 2.78% $ 3,929 $ 497,537 2.21% $ 2,712
========= ===== ========= ========= ===== ========
Net interest margin and net interest income 5.39% $ 7,596 5.76% $ 7,068
===== ========= ===== ========
Loan Portfolio
BMJ's loan portfolio amounted to $401.7 million at March 31, 1996
increasing from $399.4 million at December 31, 1995.
The following table provides a comparative analysis of the loan
portfolio composition:
(in thousands) March 31, December 31,
1996 1995
--------- ---------
Commercial, financial and agricultural $ 28,819 $ 24,869
Real estate - mortgage 294,748 295,535
Real estate - construction 29,792 32,439
Consumer 48,380 46,521
--------- ---------
$401,739 $399,364
======== ========
Substantially all of BMJ's lending activity is to customers, or
collateralized by property, located within Mercer, Burlington and Ocean counties
in New Jersey. Of the portfolio as a whole, at March 31, 1996, approximately
80.8% of BMJ's loans are collateralized by real estate and approximately 29% are
residential loans.
Nonperforming Assets
Nonperforming assets, as summarized in the table below, consist of
nonperforming loans, impaired loans and net other real estate owned.
(in thousands)
March 31, 1996 December 31, 1995
-------------- -----------------
Nonperforming Loans:
Loans past due 90 days or
more and accruing $ 344 $ 1,264
Nonaccrual loans 4,570 5,769
-------- --------
Total nonperforming loans 4,914 7,033
-------- --------
Other Real Estate:
Other real estate 1,676 1,963
Loss reserve (260) (277)
---------- ---------
Total other real estate, net 1,416 1,686
-------- ---------
Total Nonperforming Assets $ 6,330 $ 7,727
======== ========
Nonperforming loans include nonaccrual loans, impaired loans, and loans
90 days or greater past due and still accruing. Loans are generally reported as
nonaccrual if they are past due as to maturity or payment of principal or
interest for a period of more than 90 days, unless such loans are well secured
and in the process of collection. If a loan or a portion of a loan is partially
charged off, the loan is classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is determined to be
in jeopardy. Loans, with the exception of partially charged off loans or loans
with any portion classified as doubtful, may be placed back on accrual status
when they become current as to both principal and interest and when concern as
to future collectibility in full no longer exists. The remaining recorded
balance of a partially charged off loan, however, may be returned to accrual
status if the entire contractual loan balance, together with all unpaid
contractual interest, is determined to be fully collectible. Nonperforming loans
as a percentage of total loans were 1.2% as of March 31, 1996 and 1.5% as of
December 31, 1995. The decline in nonaccrual loans is attributable to increased
collections, transfers to other real estate and charge-offs.
Potential problem loans consist of loans which are included in
performing loans at March 31, 1996, 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 March 31, 1996, such
potential problem loans amounted to approximately $2.7 million. Depending on the
state of the economy and the impact thereof on BMJ's borrowers, as well as other
future events, these loans and others not currently so identified could be
classified as nonperforming loans in the future.
On January 1, 1995, BMJ adopted FAS No. 114, "Accounting be 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 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 a
provision for loan losses, depending on the adequacy of the reserve for loan
losses.
At March 31, 1996, BMJ's recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 amounted to $6.8
million. The reserve for loan losses of $10.0 million at March 31, 1996 includes
reserves of $1.1 million applicable to such impaired loans. All of these loans
were valued using the fair value of collateral method. The remaining reserve for
loan losses, totalling $8.9 million at March 31, 1996, is available to absorb
losses in BMJ's entire loan portfolio. During the quarter ended March 31, 1996,
the average recorded investment in impaired loans was approximately $7.2
million. Interest income recognized on total impaired loans during the quarter
ended March 31, 1996 was approximately $72 thousand.
Other real estate consists of properties acquired through foreclosure
or deed in lieu of foreclosure. A reserve for other real estate has been
established to maintain the portfolio at the lower of cost or fair value less
estimated disposition costs.
Reserve for Loan Losses
At March 31, 1996, the reserve for loan losses totaled $10.0 million
compared to $10.1 million at December 31, 1995. The ratio of the reserve for
loan losses to total loans at March 31, 1996 was 2.49% versus 2.53% at December
31, 1995. The table below provides a summary of the activity in the loan loss
reserve plus additional key ratios for assessing the adequacy of the reserve for
loan losses at March 31, 1996.
Three months Ended
(in thousands) March 31,1996
------------------
Reserve balance, beginning of year ............................. $ 10,099
Gross charge-offs ........................................... (312)
Less: recoveries ............................................ 197
---------
Net charge-offs ................................................ (115)
Provision charged to operations ................................ 25
---------
Reserve, at end of period ...................................... $ 10,009
=========
Loans, end of period ........................................... $ 401,739
Average loans outstanding ...................................... $ 399,080
Ratio of net charge-offs to average loans outstanding .......... .03%
Ratio of reserve for loan losses to nonperforming loans ........ 203.68%
Ratio of reserve for loan losses to loans, end of period ....... 2.49%
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.
BMJ's gross charge-offs during the first quarter of 1996 totaled $312
thousand. Subsequent to the charge-off of a loan, it is BMJ's policy to continue
to vigorously pursue the collection of principal outstanding as well as past due
interest. Collection efforts resulted in recoveries of $197 thousand on
previously charged-off loans during the first quarter of 1996.
The distribution of the reserve for loan losses and the percentage of
loans in each category to total loans at March 31, 1996 is illustrated in the
following table. The allocated 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".
Allocation of the Reserve for Loan Losses
March 31, 1996
(in thousands) % of Loans
Reserve in Each Category
Amount to Total Loans
------- ----------------
Domestic:
Commercial, financial and agricultural $ 888 7.17%
Real estate - mortgage 6,713 73.37
Real estate - construction 1,345 7.42
Consumer 374 12.04
Unallocated 689 --
------- ------
$10,009 100.00%
======= ======
Note: This distribution is made for analytical purposes only. The total
allowance is available to absorb losses from any segment of the portfolio.
Deposits
BMJ's deposit base is the principal source of funds supporting
interest-earning assets. Maintaining a strong core deposit base is key to the
development of long-term customer relationships which, in turn, present
opportunities for BMJ to cross-sell its services. To meet the requirements of
its diverse customer base, BMJ offers a full range of deposit products,
including interest-bearing and noninterest-bearing demand deposits, savings
deposits, insured retail money market accounts and certificates of deposit.
BMJ's total deposits increased to $511.4 million at March 31, 1996
compared to $485.0 million at December 31, 1995.
Table 1 provides information concerning average rates and balances of
BMJ's interest-bearing deposits for the three-month periods ended March 31, 1996
and 1995. Among other things, Table 1 shows that as a result of the increasing
interest rate environment which existed during early 1996, the average rate paid
on BMJ's average interest-bearing deposit balances increased to 3.38 % for the
three-month period ended March 31, 1996 from 2.70% for the comparable 1995
period.
Capital
BMJ's capital management objectives are to maintain a strong capital
base while also maximizing shareholder value. The Board of Directors recently
authorized certain actions to enhance shareholder value by returning excess
capital to shareholders through both increased cash dividends and the repurchase
of BMJ's common stock. The following table provides selected shareholders'
equity ratios at March 31, 1996 and December 31, 1995.
(in thousands) March 31, December 31,
1996 1995
---------- ----------
Shareholders' equity ......................... $ 65,664 $ 65,622
Shareholders' equity to assets ratio ......... 10.70% 11.15%
Book value per share ......................... $ 8.66 $ 8.62
The decrease in BMJ's equity ratio from December 31, 1995 resulted from
the repurchase of common stock, payment of cash dividends as well as asset
growth. In January 1996, the Board of Directors authorized the repurchase of up
to 5% of BMJ's common stock at management's discretion, either on a privately
negotiated basis or on the open market. As of March 31, 1996, BMJ had
repurchased 60,000 shares under this authorization and expects to repurchase the
remaining shares under this authorization by December 31, 1996.
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:
March 31, 1996 December 31,1995
-------------- ----------------
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. 15.53% 14.26% 16.05% 14.19%
The Bank of Mid-Jersey 14.23% 12.97% 14.17% 12.90%
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
March 31, 1996 December 31,1995
-------------- ----------------
B.M.J.Financial Corp. 10.51% 10.87%
The Bank of Mid-Jersey 9.96% 10.18%
Failure to satisfy any minimum capital requirement applicable to BMJ or
Mid-Jersey could subject BMJ or Mid- Jersey, as the case may be, to regulatory
actions by the FRB.
As a result of BMJ's strong 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. On April 18, BMJ announced a quarterly cash dividend of $.10 per
share, payable July 1, 1996 to shareholders of record June 15, 1996.
The primary source of founds 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 a cash flow adequate to
fund operations and meet obligations on a timely and cost effective basis. Asset
liquidity is represented by the ease with which assets can be converted into
cash. BMJ continually evaluates its funding needs and manages its liquidity
position by maintaining adequate levels of liquid assets, such as cash and cash
equivalents and securities available for sale. BMJ's funding needs change as
loans grow, deposits mature and payments on obligations are made. Because the
characteristics of BMJ's assets and liabilities change, liquidity management is
a dynamic process. Among those factors affecting liquidity management are
pricing and maturity of loans, deposits and other assets and liabilities. In
addition, liquidity management is affected by changes in the relationship
between short-term and long-term interest rates.
At March 31, 1996, BMJ had a total of $122.1 million or 19.7% of total
assets in cash and cash equivalents, and securities available for sale,
representing its primary sources of liquidity, as compared to $90.2 million or
15.3% of assets at December 31, 1995. 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 7.5% of total liabilities at March 31, 1996 and 5.1% of
total liabilities at December 31, 1995. 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 March
31, 1996, approximately $14.5 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 increased by $7.5 million to $33.1 million at March 31, 1996. This
increase reflected net cash of $4.1 million provided by operating activities and
$28.8 million of net cash provided by financing activities offset by $25.3
million of net cash used in investing activities. Cash generated by operating
activities reflected BMJ's net income of $2.2 million adjusted for noncash
charges and credits. Cash provided by financing activities primarily reflected
the net increases in certificates of deposit 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
maturities of securities available for sale and the proceeds from maturities of
securities held to maturity.
At March 31, 1996, B.M.J. Financial Corp., the parent company, had a
total of $2.9 million in cash and cash equivalents and $4.6 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. B.M.J. Financial Corp. 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.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ------------------------------------
Not Applicable
Item 2. Changes in Securities
- ---------------------------------------
Not Applicable
Item 3. Defaults Upon Senior Securities.
- --------------------------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- ----------------------------------------------------------------------
Not Applicable
Item 5. Other Information.
- ------------------------------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11. Statement Regarding Computation of
Per Share Earnings
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 05/10/96 /s/ E. Jack Elias
-------------- ------------------------------------------
E. Jack Elias, President
Date 05/10/96 /s/ Joseph M. Reardon
-------------- ------------------------------------------
Joseph M. Reardon, Chief Financial Officer