U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
---- Exchange Act of 1934
For the quarterly period ended September 30, 1999
------------------
---- Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from to
--------------- -----------------
Commission file number 000-26587
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COMMUNITY BANCORP OF NEW JERSEY
(Exact name of registrant as specified in its charter)
New Jersey 22-3495579
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3535 Highway 9 North, Freehold, New Jersey 07728
------------------------------------------------
(Address of principal executive offices)
(732) 863-9000
--------------
(Issuer's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Common Stock, No Par Value -1,827,707 shares outstanding as of November 5, 1999
-------------------------------------------------------------------------------
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 30, 1999
(Unaudited) and December 31, 1998 3
Consolidated Condensed Statements of Income for the three and
nine months ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders' 5
Equity at September 30, 1999 (Unaudited)
Consolidated Condensed Statements of Cash Flows for the three
and nine months ended September 30, 1999 and 1998 (Unaudited)
6
Notes to Consolidated Condensed Financial Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None 27
b. Reports on Form 8-K 27
SIGNATURES 28
2
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
1999 December 31,
(Unaudited) 1998
ASSETS (Dollars in thousands)
Cash and cash equivalents:
Cash and due from banks .............................. $ 5,614 $ 2,541
Federal funds sold ................................... 14,625 26,025
--------- ---------
Total cash and cash equivalents 20,239 28,566
Investment securities held-to-maturity (fair value $11,714
at September 30, 1999 and $6,004 at December 31, 1998) 11,826 6,025
Loans receivable ........................................... 71,709 45,629
Allowance for loan loss .................................... (1,179) (914)
--------- ---------
Net loans receivable ....................... 70,530 44,715
--------- ---------
Premises and equipment, net ................................ 4,271 3,068
Accrued interest receivable ................................ 526 224
Other assets ............................................... 359 153
--------- ---------
Total Assets $ 107,751 $ 82,751
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand .......................... $ 19,016 $ 13,530
Interest bearing - NOW ............................... 16,821 14,397
Savings and money market ............................. 40,075 32,138
Certificates of deposit, under $100,000 .............. 10,167 3,511
Certificates of deposit, $100,000 and over ........... 2,255 1,463
--------- ---------
Total deposits ............................. 88,334 65,039
--------- ---------
Accrued interest payable ................................... 162 114
Other liabilities .......................................... 1,162 209
--------- ---------
Total liabilities 89,658 65,362
--------- ---------
Stockholders' equity
Common stock - authorized 5,000,000 shares of
no par value; issued and outstanding
1,850,123 less 22,416 Treasury shares at
September 30, 1999 and 1,730,917 at
December 31, 1998 .............................. 20,523 18,994
Treasury stock, at cost - 22,416 shares .............. (364) --
Accumulated deficit .................................. (2,066) (1,605)
--------- ---------
Total stockholders' equity 18,093 17,389
--------- ---------
Total Liabilities and Stockholder's Equity $ 107,751 $ 82,751
========= =========
See accompanying notes to consolidated condensed financial statements
3
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including Fees ........................... $ 1,404 $ 672 $ 3,617 $ 1,623
Federal funds sold .............................. 198 219 516 450
Investment securities - taxable ................. 142 41 479 204
------- ------- ------- -------
Total interest income ............. 1,744 932 4,612 2,277
------- ------- ------- -------
INTEREST EXPENSE
Interest bearing - NOW .......................... 57 48 162 116
Savings and money market ........................ 402 301 1,112 664
Certificates of deposit ......................... 169 48 353 100
Short-term borrowings ........................... -- -- 1 --
Total interest expense ............ 628 397 1,628 880
------- ------- ------- -------
Net interest income ............... 1,116 535 2,984 1,397
Provision for loan losses ............................. 45 198 267 530
------- ------- ------- -------
Net interest income after provision
for loan losses ............ 1,071 337 2,717 867
------- ------- ------- -------
Non-interest income:
Service fees on deposit accounts ................ 67 32 165 75
Other fees and commissions ...................... 102 60 242 69
------- ------- ------- -------
Total non-interest income ......... 169 92 407 144
------- ------- ------- -------
Non-interest expense:
Salaries and wages .............................. 404 225 1,062 724
Employee benefits ............................... 60 26 176 117
Occupancy expense ............................... 81 39 189 91
Depreciation - occupancy, furniture & equipment . 91 67 259 147
Other ........................................... 444 177 1,074 580
------- ------- ------- -------
Total non-interest expense ........ 1,080 534 2,760 1,659
======= ======= ======= =======
Net Income (loss) ................. $ 160 $ (105) $ 364 $ (648)
======= ======= ======= =======
Per Common Share:
Net income (loss) - basic ....................... $ 009 $ (008) $ 020 $ (049)
Net income (loss) - diluted ..................... $ 009 $ (008) $ 020 $ (049)
Weighted average shares outstanding (in thousands):
Basic ........................................... 1,828 1,330 1,834 1,330
Diluted ......................................... 1,858 1,330 1,864 1,330
See accompanying notes to consolidated condensed financial statements
4
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Total
Common Treasury Accumulated Stockholders'
Stock Stock Deficit Equity
-------- -------- -------- --------
(Dollars in thousands)
Balance December 31, 1998 ........................ $ 18,994 $ (1,605) $ 17,389
3% stock dividend issued (53, 206 shares) ........ 825 (825) --
Issuance of common stock, net of offering expenses 1,014 -- 1,014
Purchase and retire stock options ................ (310) (310)
Purchase treasury stock - 22,416 shares .......... (364) (364)
Net Income ....................................... -- -- 364 364
-------- -------- -------- --------
Balance, September 30, 1999 (Unaudited) .......... $ 20,523 $ (364) $ (2,066) $ 18,093
======== ========= ======== ========
See accompanying notes to consolidated condensed financial statements.
5
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) .............................................. $ 364 $ (648)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 259 140
Provision for loan losses ........................ 267 530
Accretion of investment discount ................. (1) --
Amortization of investment premium ............... 2 --
Increase in accrued interest receivable .......... (302) (71)
Increase in other assets ......................... (206) (50)
Increase in accrued interest payable ............. 48 44
Increase in other liabilities .................... 953 95
-------- --------
Net cash provided by operating activities 1,384 40
-------- --------
Cash flows from investing activities:
Purchases of investment securities held-to-maturity ............ (12,302) (4,998)
Proceeds from maturities and calls of investment securities .... 6,500 6,500
Net increase in loans made to customers ........................ (26,082) (21,488)
Purchases of premises and equipment ............................ (1,462) (693)
-------- --------
Net cash used in investing activities .... (33,346) (20,679)
-------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ........... 15,847 26,599
Net increase in certificates of deposit ........................ 7,448 2,855
Net proceeds from common stock issued .......................... 1,014 --
Purchase of common stock for treasury and options for retirement (674) --
-------- --------
Net cash provided by financing activities 23,635 29,454
-------- --------
Net (decrease) increase in cash and cash equivalents ..................... (8,327) 8,815
Cash and cash equivalents as of beginning of year ........................ 28,566 9,076
-------- --------
Cash and cash equivalents as of end of period ............................ $ 20,239 $ 17,891
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ....................... $ 1,580 $ 836
-------- --------
Cash paid during the period for income taxes ................... $ -- $ 1
See accompanying notes to consolidated condensed financial statements
6
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This financial review presents management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated condensed financial statements and the accompanying notes included
elsewhere herein.
FINANCIAL CONDITION
Total assets at September 30, 1999 increased by $25.0 million, or 30.2%, to
$107.8 million compared to $82.8 million at December 31, 1998. Total assets
averaged $92.0 million in the first nine months of 1999, a $39.9 million, or
76.6%, increase from the 1998 full year average of $52.1 million. Average loans
increased $29.0 million, or 96.0%, to $59.2 million in the first nine months of
1999, from the 1998 full year average of $30.2 million. Average investment
securities increased by $6.2 million, or 117.0%, to $11.5 million; average
Federal funds sold increased by $2.0 million, or 16.4%, to $14.2 million; the
average of all other assets increased by $3.2 million, or 65.3%, to $8.1
million; and the loan loss reserve average increased $500 thousand, or 89.4%, to
$1.1 million during the first nine months of 1999 compared to the full year 1998
averages.
These increases in average assets were funded primarily by a $32.6 million, or
80.7%, increase in average deposits, as the first nine months of 1999 average
deposits increased to $73.0 million from the full year 1998 average of $40.4
million. The increases in average assets were further funded by an increase in
average stockholders' equity of $7.4 million, or 67.3%, as the first nine months
of 1999 average stockholders' equity increased to $18.4 million from the full
year 1998 average of $11.0 million. The increase in average stockholders' equity
resulted from net proceeds received from the Bank's secondary public offering of
$6.6 million on December 14, 1998 and $1.0 million on January 11, 1999 and was
further effected by a net operating loss amounting to $610 thousand during 1998
and net operating income of $364 thousand during the first nine months of 1999.
Stockholders' equity was further reduced during the third quarter of 1999 by
$364 thousand resulting from the purchase of treasury stock and $310 thousand
for the purchase and retirement of a stock option, both in connection with a
settlement with a shareholder which dissented from the holding company
reorganization.
Lending Activity
- ----------------
Total loans at September 30, 1999 were $71.7 million, a 57.2%, or $26.1 million
increase from December 31, 1998. The loan portfolio consists primarily of loans
secured by real estate, and, to a lesser extent, commercial, construction and
consumer loans. Changes in the composition of the loan portfolio during the
comparative periods included increases of $12.5 million in commercial mortgage
loans, $5.2 million in commercial and industrial loans, $4.9 million in
construction loans and $3.5 million in consumer loans. These increases were
partially off-set by a reduction of $66 thousand in residential mortgages and
other loans.
The 57.2% increase in loans at September 30, 1999 compared to December 31, 1998
is partially attributable to greater penetration of the Company's marketplace
and an improvement in the
7
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
The following tables present the book values, fair values and gross unrealized
gains and losses of the Company's investment securities portfolio as of
September 30, 1999 and December 31, 1998 (Dollars in thousands).
September 30, 1999 (Unaudited)
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Securities held to maturity:
US Government and agency securities $ 11,301 $ 2 $ (114) $ 11,189
Other securities .................. 525 -- -- 525
-------- -------- -------- --------
$ 11,826 $ 2 $ (114) $ 11,714
======== ======== ======== ========
(continued)
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- -------
Securities held to maturity:
US Government and agency securities $ 5,500 $ -- $ (21) $ 5,479
Other securities .................. 525 -- -- 525
------- ------- ------- -------
$ 6,025 $ -- $ (21) $ 6,004
======= ======= ======= =======
The following table sets forth as of September 30, 1999 and December 31, 1998
the maturity distribution of the Company's investment portfolio (Dollars in
thousands).
Investment Securities Held-To-Maturity
-------------------------------------------
September 30, 1999
(Unaudited) December 31, 1998
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
Due in one year or less .............. $ 1,306 $ 1,307 $ -- $ --
Due after one year through five years 9,995 9,882 5,500 5,479
Due after five years through ten years 500 500 500 500
Due after ten years .................. 25 25 25 25
------- ------- ------- -------
$11,826 $11,714 $ 6,025 $ 6,004
======= ======= ======= =======
Securities with a carrying value of $1,300,000 at September 30, 1999 and
$500,000 at December 31, 1998 were pledged to secure public funds on deposit and
for other purposes as required or permitted by law.
8
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE C - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of
September 30, 1999 and December 31, 1998 (Dollars in thousands).
Loan Portfolio By Type of Loan
------------------------------------------
September 30, 1999
(Unaudited) December 31, 1998
Amount Percent Amount Percent
------- ------ ------- ------
Commercial and industrial loans $13,687 19.09% $ 8,514 18.66%
Commercial mortgage loans ..... 31,945 44.55% 19,413 42.55%
Residential mortgages ......... 7,200 10.04% 6,941 15.21%
Construction loans ............ 8,529 11.89% 3,582 7.85%
Consumer loans ................ 9,870 13.76% 6,376 13.97%
Other loans ................... 478 0.67% 803 1.76%
------- ------ ------- ------
$71,709 100.00% $45,629 100.00%
======= ====== ======= ======
(continued)
The following table represents the activity in the allowance for loan losses for
the nine month periods ended September 30, 1999 and 1998 and the year ended
December 31, 1998 (Dollars in thousands).
Allowance For Loan Losses
---------------------------------------------
Nine Months Ended
September 30,
(Unaudited) Year Ended
--------------------------- December 31,
1999 1998 1998
------------ ----------- -----------
Balance - beginning of period ........... $ 914 $ 250 $ 250
Charge-offs ............................. (2) -- --
Recoveries .............................. -- -- --
------------ ----------- -----------
Net (charge-offs) recoveries ............ (2) -- --
Provision for loan losses ............... 267 530 664
------------ ----------- -----------
Balance - end of period ................. $ 1,179 $ 780 $ 914
============ =========== ===========
Balance of Allowance at period-end as a %
of loans at period-end .............. 1.64% 2.12% 2.00%
============ =========== ===========
NOTE D - EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common shares and common share equivalents (when dilutive)
outstanding during each period after giving retroactive effect to stock
dividends declared. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. The common share
equivalents of options in the computation of diluted earnings per share is
computed utilizing the Treasury Stock method.For purposes of this computation,
the average market price of common stock during each three-month quarter
included in the period being reported upon, is used, when dilutive.
9
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE E - RECLASSIFICATIONS
Certain amounts in the financial statements presented for prior periods have
been reclassified to conform with the 1999 presentation.
NOTE F - SUBSEQUENT EVENTS
Effective July 1, 1999 the Community Bancorp of New Jersey completed its
reorganization as the holding company for the Community Bank of New Jersey. The
Holding Company completed a share for share exchange of its no par value common
stock for the Bank's $5.00 par value common stock, by which the Bank became a
wholly owned subsidiary of the Holding Company. Accordingly, the consolidated
financial information of the Holding Company is presented herewith, and prior
periods have been restated to reflect this reorganization.
On July 9, 1999 the Company announced that its Board of Directors approved a 3%
stock dividend payable August 2, 1999 to shareholders of record as of July 19,
1999. Weighted average shares outstanding and earnings per share have been
retroactively adjusted to reflect the stock dividend.
On April 22, 1999 the shareholders of Community Bank of New Jersey approved the
Plan of Acquisition, pursuant to which the Bank was acquired by Community
Bancorp of New Jersey effective July 1, 1999. In connection with this
transaction, a shareholder elected to exercise its dissenter's rights of
appraisal. On August 6, 1999 the Bank and this shareholder negotiated a
settlement pursuant to which the dissenting shareholder relinquished all
beneficially owned equity instruments, consisting of 22,416 common shares and
38,700 exercisable options, for fair value of $673,860. Weighted average shares
outstanding were adjusted as of the effective date of dissent (April 22, 1999).
Capital and outstanding shares were reduced on the closing date of the
transaction (August 6, 1999).
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the beginning
of any fiscal quarter. Subsequent to SFAS No. 133, the FASB issued SFAS No. 137,
which amended the effective date of SFAS No. 133 to be all fiscal quarters of
all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is
not anticipated to have a material impact on the Company's consolidated
financial position or results of operations.
10
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This financial review presents management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated condensed financial statements and the accompanying notes included
elsewhere herein.
FINANCIAL CONDITION
Total assets at September 30, 1999 increased by $25.0 million, or 30.2%, to
$107.8 million compared to $82.8 million at December 31, 1998. Total assets
averaged $92.0 million in the first nine months of 1999, a $39.9 million, or
76.6%, increase from the 1998 full year average of $52.1 million. Average loans
increased $29.0 million, or 96.0%, to $59.2 million in the first nine months of
1999, from the 1998 full year average of $30.2 million. Average investment
securities increased by $6.2 million, or 117.0%, to $11.5 million; average
Federal funds sold increased by $2.0 million, or 16.4%, to $14.2 million; the
average of all other assets increased by $3.2 million, or 65.3%, to $8.1
million; and the loan loss reserve average increased $500 thousand, or 89.4%, to
$1.1 million during the first nine months of 1999 compared to the full year 1998
averages.
These increases in average assets were funded primarily by a $32.6 million, or
80.7%, increase in average deposits, as the first nine months of 1999 average
deposits increased to $73.0 million from the full year 1998 average of $40.4
million. The increases in average assets were further funded by an increase in
average stockholders' equity of $7.4 million, or 67.3%, as the first nine months
of 1999 average stockholders' equity increased to $18.4 million from the full
year 1998 average of $11.0 million. The increase in average stockholders' equity
resulted from net proceeds received from the Bank's secondary public offering of
$6.6 million on December 14, 1998 and $1.0 million on January 11, 1999 and was
further effected by a net operating loss amounting to $610 thousand during 1998
and net operating income of $364 thousand during the first nine months of 1999.
Stockholders' equity was further reduced during the third quarter of 1999 by
$364 thousand resulting from the purchase of treasury stock and $310 thousand
for the purchase and retirement of a stock option, both in connection with a
settlement with a shareholder which dissented from the holding company
reorganization.
Lending Activity
- ----------------
Total loans at September 30, 1999 were $71.7 million, a 57.2%, or $26.1 million
increase from December 31, 1998. The loan portfolio consists primarily of loans
secured by real estate, and, to a lesser extent, commercial, construction and
consumer loans. Changes in the composition of the loan portfolio during the
comparative periods included increases of $12.5 million in commercial mortgage
loans, $5.2 million in commercial and industrial loans, $4.9 million in
construction loans and $3.5 million in consumer loans. These increases were
partially off-set by a reduction of $66 thousand in residential mortgages and
other loans.
The 57.2% increase in loans at September 30, 1999 compared to December 31, 1998
is partially attributable to greater penetration of the Company's marketplace
and an improvement in the
11
general economic environment in New Jersey. The Company opened its second office
in downtown Freehold, New Jersey, in September 1997, its third office in Howell,
New Jersey, in November 1998 and its fourth office in Matawan, New Jersey, in
February 1999. In addition, the Company anticipates opening its newest branch in
Manalapan, New Jersey, during November, 1999. Management believes that the
maturation of these branch locations will continue to provide the Company with
lending opportunities as well as funding sources for the loans.
The Company's loans are primarily to businesses and individuals located in
Monmouth, Middlesex, and Ocean Counties, New Jersey. Management believes that
its strategy of customer service, competitive rate structures, and selective
marketing will continue to enable the Company to gain market entry to local
loans. Bank mergers have also contributed to the Company's efforts to attract
borrowers. Management intends to continue to pursue quality loans in all lending
categories within the Company's market area.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses was $1.2 million, or 1.64% of total loans, at
September 30, 1999 compared to $914 thousand, or 2.00% of total loans, at
December 31, 1998. At September 30, 1999 the Company had no non-performing loans
and $247 thousand in loans past due 90 days or more and still accruing compared
to no non-performing loans and no past due loans at December 31, 1998. The $247
thousand past due loan at September 30, 1999 represented a matured note which
was renewed during the subsequent quarter and which is performing in accordance
with its terms.
Management attempts to maintain an allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio. Loan losses are
charged directly to the allowance when they occur and any recovery is credited
to the allowance. Risks within the loan portfolio are analyzed on a continuous
basis by our officers, by outside, independent loan review auditors, our
Directors Loan Review Committee and the Board of Directors. A risk system,
consisting of multiple grading categories, is utilized as an analytical tool to
assess risk and set appropriate reserves. Along with the risk system, management
further evaluates risk characteristics of the loan portfolio under current and
anticipated economic conditions and considers such factors as the financial
condition of the borrower, past and expected loss experience, and other factors
management feels deserve recognition in establishing an appropriate reserve.
These estimates are reviewed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known.
Additions to the allowance are made by provisions charged to expense and the
allowance is reduced by net charge-offs (i.e. - loans judged to be uncollectible
and charged against the reserve, less any recoveries on such loans). Although
management attempts to maintain the allowance at a level deemed adequate, future
additions to the allowance may be necessary based upon changes in market
conditions. In addition, various regulatory agencies periodically review the
Company's allowance for loan losses. These agencies may require management to
take additional provisions based on their judgements about information available
to them at the time of their examination.
12
Investment Securities Activity
- ------------------------------
Investment securities increased by $5.8 million, or 96.7%, at September 30, 1999
compared to December 31, 1998. During the period ended September 30, 1999 the
Company utilized its liquidity in excess of loan demand to fund additional
purchases of investment securities held-to-maturity amounting to $12.3 million,
which was partially off-set by maturities and calls amounting to $6.5 million.
Management determines the appropriate classification of securities at the time
of purchase. At September 30, 1999 all investment securities were classified as
held-to-maturity. The Company had no investment securities classified as
available-for-sale or as trading securities. The investment portfolio is
comprised primarily of U.S. Government and agency securities with maturities of
three years or less and with call features of one year or less. Management
currently maintains an investment portfolio of short duration in order to fund
projected increased loan volume and to provide for other liquidity uses as
needed, and secondarily as an additional source of interest income.
Deposits
- --------
Deposits are the Company's primary source of funds. Total deposits increased by
$23.3 million, or 35.8%, to $88.3 million at September 30, 1999 compared to
$65.0 million at December 31, 1998. The increase in deposits during this period
was primarily due to the Company's greater penetration of its marketplace. In
late 1998 and early 1999, the Company opened two new offices, which have
contributed to its deposit growth.
Average total deposits increased by $32.6 million, or 80.7%, to $73.0 million
for the nine months ended September 30,1999 compared to the 1998 full year
average of $40.4 million. Changes in the deposit mix for the nine months ended
September 30, 1999 compared to the 1998 full year average include a $13.5
million, or 67.9%, increase in savings deposits; a $5.0 million, or 64.2%,
increase in NOW account deposits; a $6.1 million, or 198.1%, increase in time
deposits; a $1.1 million, or 72.4%, increase in money market deposits; and a
$6.9 million, or 84.7%, increase in non-interest bearing demand deposits.
The Company does not actively solicit short-term certificates of deposits of
$100 thousand or more because of the liquidity risks posed by such deposits. At
September 30, 1999 certificates of deposit of $100 thousand or more amounted to
$2.3 million.
The Company emphasizes relationships with commercial customers and seeks to
obtain transactional accounts, which are frequently kept in non-interest bearing
deposits. The Company also emphasizes the origination of savings deposits, which
amounted to $37.1 million at September 30, 1999, by offering rates higher than
our peer group institutions. The primary savings product is the stepped rate
savings account. The interest rate is based upon the amount on deposit, and the
deposit amount can be changed. Management may modify the interest rate paid
without notice, and the depositor may withdraw their funds on demand. The
Company markets this product as an alternative to time deposits and management
believes it has resulted in a higher rate of core deposits and lower cost of
funds than our peer group institutions. Deposits are obtained primarily from the
market areas which the Company serves. As of September 30,
13
1999 the Company did not have any brokered deposits and neither solicited nor
offered premiums for such deposits.
Liquidity
- ---------
Liquidity is a measurement of the Company's ability to meet present and future
funding obligations and commitments. The Company adjusts its liquidity levels in
order to meet funding needs for deposit outflows, repayment of borrowings, when
applicable, and the funding of loan commitments. The Company also adjusts its
liquidity level as appropriate to meet its asset/liability objectives. Principal
sources of liquidity are deposit generation, access to purchased funds,
including borrowings from other financial institutions, repurchase agreements,
maturities and repayments of loans and investment securities, net interest
income and fee income. Liquid assets (consisting of cash and Federal funds sold)
comprised 18.8% and 34.5% of the Company's total assets at September 30, 1999
and December 31, 1998, respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, the Company's
primary source of funds at September 30, 1999 was increased deposits, and to a
lesser extent proceeds from maturities and calls of investment securities and
net proceeds from common stock issued. Deposit increases amounted to $23.3
million for the nine months ended September 30, 1999 while proceeds from
maturities and calls of investment securities amounted to $6.5 million and net
proceeds from common stock issued amounted to $1.0 million. During 1999, the
Company utilized deposit growth and its liquid assets as funding sources for
increased loans made to customers amounting to $26.1 million, securities
purchases amounting to $12.3 million and purchases of premises and equipment
used primarily for branch expansion, amounting to $1.5 million. In addition, the
Company utilized $674 thousand for the purchase of common stock for treasury and
options for retirement.
The Company also has several secondary sources of liquidity. Many of the
Company's loans are originated pursuant to underwriting standards which make
them readily marketable to other financial institutions or investors in the
secondary market. In addition, in order to meet liquidity needs on a temporary
basis, the Company has a line of credit in the amount of $4.0 million for the
purchase of Federal funds with another financial institution.
The Company believes that its liquidity position is sufficient to provide funds
to meet future loan demand or the possible outflow of deposits, in addition to
being able to adapt to changing interest rate conditions.
Capital Resources
- -----------------
Stockholder's equity increased by $704 thousand at September 30, 1999 compared
to December 31, 1998. The changes in stockholders' equity during the nine months
ended September 30, 1999 were comprised of increases from net income of $364
thousand, and $1.0 million in net proceeds from common stock issued, reduced by
$674 thousand used for the purchase of common stock for treasury and options
designated for retirement.
14
The Company's regulators, the Board of Governors of the Federal Reserve System
(which regulates bank holding companies), and the Bank's Federal regulator, the
Federal Deposit Insurance Corporation, have issued guidelines classifying and
defining capital into the following components: (1) Tier I Capital, which
includes tangible stockholders' equity for common stock and certain qualifying
preferred stock, and excludes net unrealized gains or losses on
available-for-sale securities and deferred tax assets that are dependent on
projected taxable income greater than one year in the future, and (2) Tier II
Capital (Total Capital), which includes a portion of the allowance for loan
losses and certain qualifying long-term debt and preferred stock that does not
qualify for Tier I Capital. The risk-based capital guidelines require financial
institutions to apply certain risk factors ranging from 0% to 100%, against
assets to determine total risk-based assets. The minimum Tier I and the combined
Tier I and Tier II capital to risk-weighted assets ratios are 4.0% and 8.0%,
respectively. The Federal Deposit Insurance Corporation also has adopted
regulations which supplement the risk-based capital guidelines to include a
minimum leverage ratio of Tier I Capital to total assets of 3.0%. For those
institutions with higher levels of risk or that are experiencing or anticipating
significant growth, the minimum leverage ratio will be proportionately increased
by 100 to 200 basis points.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at September 30, 1999, as well as the regulatory
required minimum and "well capitalized" capital ratios:
September 30, 1999 Regulatory Requirement
------------------ ------------------------------
Company Bank Minimum "Well Capitalized"
------- ---- --------- ------------------
Risk-based Capital:
Tier I capital ratio...........23.69% 23.69% 4.00% 6.00%
Total capital ratio............24.94% 24.94% 8.00% 10.00%
Leverage ratio.................17.85% 17.85% 3.00%-5.00% 5.00% or greater
In addition, pursuant to the order of the New Jersey Department of Banking and
Insurance approving the Bank's charter, for its first five years of operation,
the Bank is required to maintain a ratio of equity to total assets of at least
10.00%. As of September 30, 1999 the Bank's ratio of equity capital to total
assets was 16.79%.
As noted in the above table, the Company's and the Bank's capital ratios exceed
the minimum regulatory and "well capitalized" requirements.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Company's financial statements and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all of the Company's assets and liabilities
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of
15
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Year 2000
- ---------
Rapid and accurate data processing is essential to the Company's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programing practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency, and other data. The Company has been
evaluating both information technology (computer systems) and non-information
technology systems (e.g., vault timer, electronic door lock, and heating,
ventilation, and air conditioning control). The Company has examined all of its
non-information technology systems and has either received certifications of
Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. The Company
does not expect any material costs to address its non-information technology
systems and has not had any material costs to date. With regard to the Company's
information technology systems, the Company also does not expect any future
material costs and has not had any material costs to date. The Company's data
processing is provided by a single service bureau, NCR. The Company has been
advised by NCR that it is Year 2000 compliant. If NCR were to experience year
2000 processing problems, the Company would likely experience significant
delays, mistakes, or failures. These delays, mistakes, or failures could have a
significant impact on the Company's financial condition and results of
operations.
16
RESULTS OF OPERATIONS for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998
Net Income
- ----------
The Company earned $364 thousand, or $0.20 net income per share on a basic and
diluted basis, for the nine months ended September 30, 1999, compared to a net
loss of $648 thousand, or $0.49 for both basic and diluted net loss per share,
for the nine months ended September 30, 1998. The increase in net income was
primarily due to a $1.6 million, or 113.6%, increase in net interest income, a
$263 thousand, or 182.6%, increase in non-interest income and a $263 thousand,
or 49.6%, decrease in the provision for loan losses; these items were partially
offset by a $1.1 million, or 66.4%, increase in non-interest expenses. In
addition, the Company's net income for the nine months ended September 30, 1999
was benefited by the application of net operating loss carryforwards to
eliminate tax liabilities.
Net Interest Income
- -------------------
Net interest income increased $1.6 million, or 113.6%, to $3.0 million for the
nine months ended September 30, 1999 from $1.4 million for the same prior year
period. The increase in net interest income was due primarily to volume
increases as average interest earning assets, net of average interest bearing
liabilities, increased by $12.7 million, or 89.4%, for the first nine months of
1999 compared to the same prior year period. Also contributing to the increase
in net interest income was the decrease in the average cost of interest bearing
liabilities to 3.75% during the first nine months of 1999 compared to 4.29%
during the same prior year period. The reduction in the average rate paid on
deposits resulted from management's adjustment of the Company's rate structure
to more closely reflect the current economic environment and competition. The
Company held no tax-exempt investments during these comparable periods.
The Company's net interest margin (annualized net interest income divided by
average interest earning assets) for the nine months ended September 30, 1999
improved to 4.70% from 4.48% for the same prior year period. The improvement in
the net interest margin resulted primarily from the decrease in the rates paid
on deposits, as the yield earned on interest earning assets remained consistent
at 7.26% for the first nine months of 1999 compared to 7.30% for the first nine
months of 1998.
Interest income increased $2.3 million, or 102.5%, to $4.6 million for the nine
months ended September 30, 1999 compared to $2.3 million for the same period in
1998. The improvement in interest income was primarily due to volume related
increases in income from the loan portfolio of $2.0 million, volume related
increases in income of $340 thousand in the investment securities portfolio, and
volume related increases in income of $138 thousand in Federal funds sold as the
Company's growth resulted in an increase in average earning assets of $43.3
million, or 104.1%, to $84.9 million for the nine months ended September 30,
1999 compared to $41.6 million for the same period in 1998.
The $2.5 million volume related increase in total interest income was reduced by
$152 thousand from rate related reductions as interest rates on new investment
securities purchases and investments in Federal funds sold repriced to lower
current yields.
Interest expense for the first nine months of 1999 increased $748 thousand, or
85.0%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume
17
increases in interest bearing deposits which accounted for $1.0 million of the
expense increase and was offset by a decrease of $274 thousand attributable to
net rate related decreases. The volume related increases in interest bearing
liabilities and expense rate decreases are the result of marketing and pricing
decisions made by management in response to the need for cost effective sources
of funds, primarily to provide for loan growth. These decisions resulted in the
reduction in the cost of interest bearing liabilities to 3.75% for the nine
months ended September 30, 1999 compared to 4.29% for the nine months ended
September 30, 1998.
The following tables titled "Consolidated Average Balance Sheet with Resultant
Interest and Average Rates" and "Analysis of Changes in Consolidated Net
Interest Income" present by category the major factors that contributed to the
changes in net interest income for the quarter ended September 30, 1999 compared
to the quarter ended September 30, 1998 and the nine months ended September 30,
1999 compared to the same prior year period.
18
ONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
-------------------------------- ---------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
--------- -------------- ------- -------- -------------- --------
(In thousands, except percentages)
ASSETS
Interest Earning Assets:
Federal Funds Sold ................................... $ 15,374 $ 198 5.11% $ 15,643 $ 219 5.60%
Investment Securities ................................ 10,274 142 5.53% 2,588 41 6.34%
Loans (net of unearned income) (1) (2) ............... 68,091 1,404 8.18% 33,597 672 8.00%
--------- --------- --------- ---------
Total Interest Earning Assets ........... 93,739 1,744 7.38% 51,828 932 7.19%
--------- --------- --------- ---------
Non-Interest Earning Assets:
Loan Loss Reserve .................................... (1,154) (674)
All Other Assets ..................................... 8,793 5,523
--------- ---------
Total Assets ............................ $ 101,378 $ 56,677
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ......................................... $ 13,698 57 1.65% $ 9,294 48 2.07%
Savings Deposits ..................................... 36,469 379 4.12% 22,238 282 5.07%
Money Market Deposits ................................ 2,585 23 3.53% 1,848 19 4.11%
Time Deposits ........................................ 13,038 169 5.14% 3,441 48 5.58%
Short-term Borrowings ................................ -- -- 0.00% -- -- 0.00%
--------- --------- --------- ---------
Total Interest Bearing Liabilities ...... 65,790 628 3.79% 36,821 397 4.31%
--------- --------- --------- ---------
Non-Interest Bearing Liabilities:
Demand Deposits ...................................... 16,513 8,590
Other Liabilities .................................... 723 463
--------- ---------
Total Non-Interest Bearing Liabilities .. 17,236 9,053
--------- ---------
Stockholders' Equity ........................................... 18,352 10,803
--------- ---------
Total Liabilities and Stockholders'
Equity .................................. $ 101,378 $ 56,677
========= =========
NET INTEREST INCOME ............................................ $ 1,116 $ 535
========= =========
NET INTEREST SPREAD (3) ........................................ 3.59% 2.88%
NET INTEREST MARGIN (4) ........................................ 4.72% 4.13%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average interest earning assets.
19
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------- ----------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
------- -------------- ------- ---------- -------------- --------
(In thousands, except percentages)
ASSETS
Interest Earning Assets:
Federal Funds Sold ................................... 14,168 $ 516 4.87% $ 10,845 $ 450 5.53%
Investment Securities ................................ 11,535 479 5.54% 4,314 204 6.30%
Loans (net of unearned income) (1) (2) ............... 59,185 3,617 8.17% 26,407 1,623 8.19%
------- -------- -------- --------
Total Interest Earning Assets ........... 84,888 4,612 7.26% 41,566 2,277 7.30%
------- -------- -------- --------
Non-Interest Earning Assets:
Loan Loss Reserve .................................... (1,059) (468)
All Other Assets ..................................... 8,132 4,532
------- --------
Total Assets ............................ 91,961 $ 45,630
======= ========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ......................................... 12,895 162 1.68% $ 6,787 116 2.28%
Savings Deposits ..................................... 33,360 1,039 4.16% 17,136 637 4.96%
Money Market Deposits ................................ 2,620 73 3.75% 994 27 3.62%
Time Deposits ........................................ 9,108 353 5.19% 2,447 100 5.45%
Short-term Borrowings ................................ 11 1 5.94% -- -- 0.00%
------- -------- -------- --------
Total Interest Bearing Liabilities ...... 57,994 1,628 3.75% 27,364 880 4.29%
------- -------- -------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ...................................... 14,989 6,910
Other Liabilities .................................... 602 348
------- --------
Total Non-Interest Bearing Liabilities .. 15,591 7,258
------- --------
Stockholders' Equity ........................................... 18,376 11,008
------- --------
Total Liabilities and Stockholders'
Equity .................................. 91,961 $ 45,630
======= ========
NET INTEREST INCOME ............................................ $ 2,984 $ 1,397
======== ========
NET INTEREST SPREAD (3) ........................................ 3.51% 3.01%
NET INTEREST MARGIN (4) ........................................ 4.70% 4.48%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average intere st earning assets.
20
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 1998 September 30, 1998
------------------------------ -----------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------ -----------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
(In thousands) (In thousands)
Interest Earned On:
Federal Funds Sold ................ $ (4) $ (17) $ (21) $ 138 $ (72) $ 66
Investment Securities ............. 123 (22) 101 340 (65) 275
Loans (net of unearned income) .... 696 36 732 2,009 (15) 1,994
------ ------ ------ ------ ------ ------
Total Interest Income 815 (3) 812 2,487 (152) 2,335
------ ------ ------ ------ ------ ------
Interest Paid On:
NOW Deposits ...................... 23 (14) 9 104 (58) 46
Savings Deposits .................. 182 (85) 97 601 (199) 402
Money Market Deposits ............. 8 (4) 4 44 2 46
Time Deposits ..................... 135 (14) 121 272 (19) 253
Short-term Borrowings ............. -- -- -- 1 -- 1
------ ------ ------ ------ ------ ------
Total Interest Expense 348 (117) 231 1,022 (274) 748
------ ------ ------ ------ ------ ------
Net Interest Income .. $ 467 $ 114 $ 581 $1,465 $ 122 $1,587
====== ====== ====== ====== ====== ======
21
Provision for Loan Losses
- -------------------------
The provision for loan losses decreased to $267 thousand for the first nine
months of 1999 compared to a provision of $530 thousand for the same period in
1998. The provision is the result of management's review of several factors,
including increased loan balances and management's assessment of economic
conditions, credit quality and other loss factors that may be inherent in the
existing loan portfolio. Although the Company had no non-accrual loans and past
due loans of only $247 thousand at September 30, 1999, management established
provisions for loan losses to create an adequate allowance based on management's
analysis of the loan portfolio and growth experienced over the periods. The
allowance for loan losses totaled $1.2 million, or 1.64% of total loans, at
September 30, 1999.
Non-Interest Income
- -------------------
Total non-interest income was $407 thousand for the first nine months of 1999
compared to $144 thousand for the first nine months of 1998, an increase of $263
thousand, or 182.6%. The increase was attributable to an increase in service
fees on deposits of $90 thousand, or 120.0%, and an increase in other fees and
commissions of $173 thousand, or 250.7%. The growth in service fees on deposits
reflects the growth in transaction account average deposits, which increased to
$27.9 million from $13.7 million, or an increase of 103.7% for the nine months
ended September 30, 1999 compared to the same prior year period. The growth in
other fees and commissions is primarily due to higher non-yield related fee
income on loans which increased to $190 thousand at September 30, 1999 compared
to $52 thousand for the same prior year period. The increase in non-yield
related fee income on loans is primarily attributable to an increase in loan
participations and the fees and commissions generated on these transactions.
Non-Interest Expense
- --------------------
Total non-interest expense amounted to $2.8 million for the nine months ended
September 30, 1999, an increase of $1.1 million, or 66.4%, over the same prior
year period. The increase was due primarily to increases in employment expenses
as well as increases in occupancy expenses, equipment expenses and other
expenses generally attributable to the Company's growth. Of this increase,
employment costs increased $397 thousand, or 47.2%, and reflected increases in
the average number of employees from 21 full-time equivalents for the period
ended September 30, 1998 to 43 full-time equivalents for the period ended
September 30, 1999. The increase in personnel is primarily attributable to the
opening of the Howell, New Jersey office in November 1998 and the Matawan, New
Jersey office in February, 1999 in addition to the acquisition of additional
support personnel required due to the Company's growth.
Occupancy expenses increased $98 thousand, or 107.7%, for the first nine months
of 1999 compared to the same period in 1998. The increase was attributable
primarily to increased lease expense and increased maintenance costs due to the
additional branch offices.
Depreciation expenses on leasehold improvements, furniture, and equipment
increased $112 thousand, or 76.2%, for the first nine months of 1999 compared to
the first nine months of 1998 due primarily to depreciation costs associated
with the new facilities and on purchases of enhanced computer processing
equipment. Average depreciable assets amounted to $3.3 million during the nine
months ended September 30, 1999 compared to $2.0 million for the same prior year
period, an increase of 65.0%.
22
Other expenses increased $494 thousand, or 85.2%, for the first nine months of
1999 compared to the first nine months of 1998. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of data processing services paid to the Company's third party processors
amounted to $258 thousand, an increase of $169 thousand; professional fees
amounted to $161 thousand, an increase of $47 thousand; marketing and
advertising costs amounted to $145 thousand, an increase of $85 thousand;
stationery, supplies and printing costs amounted to $153 thousand, an increase
of $60 thousand; stockholder costs amounted to $70 thousand, an increase of $51
thousand; and all other expenses amounted to $287 thousand, an increase of $82
thousand.
Income Tax Expense
- ------------------
The Company did not record an income tax provision for the nine months ended
September 30, 1999. The results for the first nine months of 1999 were
positively affected by the application of net operating loss carry-forwards to
reduce the Company's tax liabilities. At September 30, 1999, the Company had
approximately $162 thousand in remaining net operating loss carry-forwards to
offset future taxes payable. These carry-forwards will expire through 2018.
Additionally, in view of the Company's operating loss history and risks
associated with its ability to generate taxable income in the future, management
has provided a full valuation allowance on its net deferred tax assets. Net
operating loss carry-forwards for book purposes amounted to $1.2 million at
September 30, 1999.
RESULTS OF OPERATIONS for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998
Net Income
- ----------
The Company earned $160 thousand, or $0.09 net income per share on a basic and
diluted basis, for the three months ended September 30, 1999, compared to a net
loss of $105 thousand, or $0.08 for both basic and diluted net loss per share,
for the three months ended September 30, 1998. The increase in net income was
primarily due to a $581 thousand, or 108.6%, increase in net interest income, a
$77 thousand, or 83.7%, increase in non-interest income and a $153 thousand, or
77.3%, decrease in the provision for loan losses; these items were partially
offset by a $546 thousand, or 102.2%, increase in non-interest expenses.
Net Interest Income
- -------------------
Net interest income for the third quarter of 1999 increased $581 thousand, or
108.6%, to $1.1 million, compared to the third quarter of 1998. This improvement
in net interest income resulted primarily from a higher level of earning assets
as average interest earning assets, net of average interest bearing liabilities,
increased by $12.9 million, or 86.2%, for the third quarter of 1999 compared to
the same prior year period. Also contributing to the increase in net interest
income was a decrease in the average rate paid on deposits to 3.79% during the
third quarter of 1999 compared to 4.31% during the same prior year quarter as
management adjusted the Company's
23
rate structure to more closely reflect the current economic environment and
competition. The average rate earned on interest earning assets increased to
7.38% during the third quarter of 1999 compared to 7.19% during the third
quarter of 1998 due to a greater proportion of higher yielding loans. Average
loans comprised 72.6% of average interest earning assets for the third quarter
of 1999 compared to 64.8% for the same prior year quarter. The The Company held
no tax-exempt investments during these comparable periods.
The Company's net interest margin (annualized net interest income divided by
average interest earning assets) for the three months ended September 30, 1999
improved to 4.72% from 4.13% for the same prior year quarter. The improvement in
the net interest margin resulted primarily from the decrease in the rates paid
on deposits and a change in the mix of earning assets. The average rate earned
on interest earning assets increased to 7.38% during the third quarter of 1999
compared to 7.19% during the third quarter of 1998 due to a greater proportion
of higher yielding loans. Average loans comprised 72.6% of average interest
earning assets for the third quarter of 1999 compared to 64.8% for the same
prior year quarter. The effects of two 25 basis point increases in market rates
during the third quarter of 1999 also contributed to the increase in net
interest margin as rate sensitive assets adjusted up while deposit rates lagged
behind. The Company held no tax-exempt investments during these comparable
periods.
Interest income increased $812 thousand, or 87.1%, to $1.7 million for the three
months ended September 30, 1999 compared to $932 thousand for the same period in
1998. The improvement in interest income was primarily due to volume increases
in income from the loan portfolio of $696 thousand, and $123 thousand in the
investment securities portfolio, offset by volume related decreases in income of
$4 thousand in Federal funds sold as the Company's growth resulted in an
increase in average earning assets of $41.9 million, or 80.9%, to $93.7 million
for the three months ended September 30, 1999 compared to $51.8 million for the
same period in 1998.
The $815 thousand volume related increase in total interest income was reduced
by $3 thousand from rate related reductions as interest rates on new investment
securities purchases and investments in Federal funds sold repriced to lower
current yields while loan rates increased due to the two 25 basis point
increases in market rates during the current quarter.
Interest expense for the third quarter of 1999 increased $231 thousand, or
58.2%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume increases in interest bearing deposits which
accounted for $348 thousand of the expense increase and was offset by a decrease
of $117 thousand attributable to net rate related decreases. The volume related
increases in interest bearing liabilities and expense rate decreases are the
result of marketing and pricing decisions made by management in response to the
need for cost effective sources of funds, primarily to provide for loan growth.
These decisions resulted in the reduction in the cost of interest bearing
liabilities to 3.79% for the quarter ended September 30, 1999 compared to 4.31%
for the quarter ended September 30, 1998.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $45 thousand for the third quarter of 1999
compared to a provision of $198 thousand for the same period in 1998. The
provision is the result of management's review of several factors, including
increased loan balances and management's assessment of economic conditions,
credit quality and other loss factors that may be inherent in
24
the existing loan portfolio. Although the Company had no non-performing loans at
September 30, 1999, management established provisions for loan losses to create
an adequate allowance based on management's analysis of the loan portfolio and
growth experienced over the periods. The allowance for loan losses totaled $1.2
million, or 1.64% of total loans, at September 30, 1999.
Non-Interest Income
- -------------------
Total non-interest income was $169 thousand for the third quarter of 1999
compared to $92 thousand for the third quarter of 1998, an increase of $77
thousand, or 83.7%. The increase was attributable to an increase in third
quarter 1999 service fees on deposits of $35 thousand, or 109.4%, and an
increase in other fees and commissions of $42 thousand, or 70.0%. The growth in
service fees on deposits reflects the growth in transaction account average
deposits, which increased to $30.2 million for the quarter ended September 30,
1999, compared to $17.9 million at September 30, 1998, an increase of $12.3
million, or 68.7%. The growth in other fees and commissions is primarily due to
higher non-yield related fee income on loans.
Non-Interest Expense
- --------------------
Total non-interest expenses amounted to $1.1 million for the three months ended
September 30, 1999, an increase of $546 thousand, or 102.2%, over the same prior
year period. The increase was due primarily to increases in employment expenses
as well as increases in occupancy expenses, equipment expenses and other
expenses generally attributable to the Company's growth. Of this increase,
employment costs increased $213 thousand, or 84.9%, and reflected increases in
the average number of employees from 22 full-time equivalents for the quarter
ended September 30, 1998 to 47 full-time equivalents for the quarter ended
September 30, 1999. The increase in personnel is primarily attributable to the
opening of the Howell, New Jersey office in November 1998 and the Matawan, New
Jersey office in February, 1999 in addition to the acquisition of additional
support personnel required due to the Company's growth.
Occupancy expenses increased $42 thousand, or 107.7%, for the third quarter of
1999 compared to the same period in 1998. The increase was attributable
primarily to increased lease expense and increased maintenance costs due to the
additional branch offices.
Depreciation expenses on leasehold improvements, furniture, and equipment
increased $24 thousand, or 35.8%, for the third quarter of 1999 compared to the
third quarter of 1998 due primarily to depreciation costs associated with the
new facilities and on purchases of enhanced computer processing equipment.
Other expenses increased $267 thousand, or 150.8%, for the third quarter of 1999
compared to the third quarter of 1998. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of data processing services, professional fees, marketing and advertising
costs, supplies and printing costs, stockholder costs, and miscellaneous other
expenses increased.
25
Income Tax Expense
- ------------------
The Company did not record an income tax provision for the three months ended
September 30, 1999 and the three months ended September 30, 1998. The results
for the first nine months of 1999 were positively affected by the application of
net operating loss carry-forwards to reduce the Company's tax liabilities. At
September 30, 1999, the Company had approximately $162 thousand in remaining net
operating loss carry-forwards to offset future taxes payable. These
carry-forwards will expire through 2018. Additionally, in view of the Company's
operating loss history and risks associated with its ability to generate taxable
income in the future, management has provided a full valuation allowance on its
net deferred tax assets. Net operating loss carry-forwards for book purposes
amounted to $1.2 million at September 30, 1999.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Bank is periodically involved in various legal
proceedings as a normal incident to its business. In
the opinion of management, no material loss is expected
from any such pending lawsuit.
Item 2. Changes in Securities
---------------------
Not Applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
(b) Reports on Form 8-K - None
27
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANK OF NEW JERSEY
----------------------------
(Issuer)
Date: November 5, 1999 By: Robert D. O'Donnell
---------------- ---------------------------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: Michael Bis
---------------------------------------
MICHAEL BIS
Controller and Chief Accounting Officer
28