U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X _______ Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 2001
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to ________________
Commission File No. 333-70589
NEW COMMERCE BANCORP
-------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
South Carolina 58-2403844
-------------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
501 New Commerce Court, Greenville, South Carolina 29607
--------------------------------------------------------
(Address of Principal Executive Offices)
(864) 297-6333
-------------
(Issuer's Telephone Number, Including Area Code)
Not Applicable
-----------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
-- --
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,000,000 shares of common
stock, par value $.01 per share, outstanding as of November 3, 2001.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
New Commerce BanCorp
Consolidated Balance Sheets
September 30, December 31,
2001 2000
(Unaudited) (Audited)
--------------- -------------
Assets
Cash and due from banks $ 2,198,519 $ 2,018,365
Federal funds sold 100,000 --
Investment securities, available for sale 16,517,918 12,780,655
Investment securities, held to maturity 737,771 838,837
Federal Reserve Bank stock 237,250 237,250
Federal Home Loan Bank stock 65,400 38,200
Loans - net 27,607,060 19,192,839
Property and equipment - at cost, less accumulated
depreciation 4,412,256 4,473,352
Accrued interest receivable 413,335 301,916
Other assets 396,712 396,804
------------- -------------
Total assets $ 52,686,221 $ 40,278,218
============= =============
Liabilities and Shareholders' Equity
Deposits $ 36,880,591 $ 31,167,758
Federal funds purchased 1,595,108 100,000
Securities sold under agreements to repurchase 5,000,000 --
Accrued expenses and other liabilities 283,300 202,645
------------- --------------
Total liabilities 43,758,999 31,470,403
------------- --------------
Shareholders' Equity
Common stock, $.01par value, 10,000,000 shares
authorized, 1,000,000 shares
issued
at September 30, 2001 and December 31, 2000 10,000 10,000
Additional paid-in capital 9,741,658 9,741,658
Retained deficit (1,157,967) (1,053,003)
Accumulated other comprehensive income 333,531 109,160
------------- --------------
Total shareholders' equity 8,927,222 8,807,815
------------- --------------
Total liabilities and shareholders' equity $ 52,686,221 $ 40,278,218
============= ==============
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Operations
(Unaudited)
For the three For the three For the nine For the three
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---------------- --------------- ------------ --------------
INTEREST INCOME
Loans (including fees) $ 521,436 $ 422,055 $1,469,751 $1,081,594
Investment securities 295,817 161,995 867,998 411,758
Federal funds sold 1,751 23,459 18,372 112,399
----------- ----------- ---------- -----------
Total interest income 819,004 607,509 2,356,121 1,605,751
----------- ----------- ---------- -----------
INTEREST EXPENSE
Deposits 318,240 287,269 1,036,174 714,969
Securities sold under agreements to repurchase 53,181 -- 94,269 --
Federal funds purchased 11,629 -- 18,704 --
----------- ----------- ---------- -----------
Total interest expense 383,050 287,269 1,149,147 714,969
----------- ----------- ---------- -----------
NET INTEREST INCOME 435,954 320,240 1,206,974 890,782
Provision for Possible Loan Losses 33,776 34,680 95,572 89,850
----------- ----------- ---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 402,178 285,560 1,111,402 800,932
NONINTEREST INCOME
Service charges on deposit accounts 18,014 10,438 46,456 29,878
Brokered loan fees 19,999 16,555 72,672 25,617
Other 8,127 10,181 35,903 32,510
----------- ----------- ---------- -----------
Total noninterest income 46,140 37,174 155,031 88,005
----------- ----------- ---------- -----------
TOTAL INCOME 448,318 322,734 1,266,433 888,937
NONINTEREST EXPENSES
Salaries and employee benefits 263,147 246,483 807,013 659,918
Occupancy, office and equipment 70,815 67,437 198,102 174,671
Data processing 36,641 32,641 124,987 110,193
Postage, supplies and printing 16,933 13,105 48,884 47,741
Marketing 18,362 18,229 61,952 91,013
Insurance 8,197 5,912 26,539 10,457
Telephone 12,079 7,054 33,790 11,410
Legal 2,734 3,077 11,804 23,472
Contract services and courier 7,683 15,378 25,512 45,510
Audit and accounting 6,079 7,672 17,707 11,674
Other 37,587 8,179 109,913 45,712
----------- ----------- ---------- -----------
Total noninterest expense 480,257 425,167 1,466,203 1,231,771
----------- ----------- ---------- -----------
(31,939) (102,433) (199,770) (342,834)
LOSS BEFORE INCOME TAX BENEFIT
(6,874) (24,391) (94,806) (91,074)
----------- ----------- ---------- -----------
INCOME TAX BENEFIT
NET LOSS $ (25,065) $ (78,042) $ (104,964) $ (251,760)
=========== =========== ========== ============
Basic Net loss Per Common Share $ (.03) $ (.08) $ (.10) $ (.25)
=========== =========== ========== ============
Weighted average number of common shares
outstanding 1,000,000 1,000,000 1,000,000 1,000,000
=========== =========== ========== ============
See Notes to Consolidated Financial Statements which are an
integral part of these statements.
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Shareholders' Equity
For the nine month period ended September 30, 2001
(Unaudited)
Accumulated
Common Stock Additional Other Total
--------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital (Deficit) Income (loss) Equity
------ ------ ---------- --------- --------------- ------------
Balance, December 31, 1999 1,000,000 $ 10,000 $ 9,741,658 $ (714,544) $ (25,015) $ 9,012,099
Net loss -- -- -- (251,760) -- (251,760)
Other comprehensive income (loss), net of tax:
Unrealized holding losses
On securities available for sale -- -- -- -- 16,899 16,899
---------- ---------- ------------- ------------- ---------- ------------
Comprehensive income (loss) -- -- -- -- -- (234,861)
---------- ---------- ------------- ------------- ---------- ------------
Balance, September 30, 2000 1,000,000 $ 10,000 $ 9,741,658 $ (966,304) $ (8,116) $ 8,777,238
---------- ---------- ------------- ------------- ---------- ------------
Balance, December 31, 2000 1,000,000 $ 10,000 $ 9,741,658 $ (1,053,003) $ 109,160 $ 8,807,815
Net loss -- -- -- (104,964) -- (104,964)
Other comprehensive income (loss),
net of tax:
Unrealized holding gains
on securities available for sale -- -- -- -- 224,371 224,371
---------- ---------- ------------- ------------- ---------- ------------
Comprehensive income (loss) -- -- -- -- -- 119,407
---------- ---------- ------------- ------------- ---------- ------------
Balance, September 30, 2001 1,000,000 $ 10,000 $ 9,741,658 $ (1,157,967)$ 333,531 $ 8,927,222
---------- ---------- ------------- ------------- ---------- ------------
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Cash Flows
For the nine months ended September 30
(Unaudited)
2001 2000
---- ----
OPERATING ACTIVITIES
Net loss $ (104,964) $ (251,760)
Adjustments to reconcile net loss to net cash
used for operating activities
Depreciation and amortization 116,212 70,067
Gain on sale of fixed assets (1,077) --
Provision for possible loan losses 95,572 89,850
Deferred income tax benefit (94,806) ( 91,074)
Increase in accrued interest receivable (111,419) (109,315)
(Increase) decrease in other assets 94,898 (85,152)
Increase in accrued expenses and other liabilities 80,655 87,163
------------- --------------
Net cash provided by (used) for operating activities 75,071 (290,221)
------------- --------------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (100,000) 4,206,855
Purchase of investment securities available for sale (8,495,913) (6,673,884)
Proceeds from bonds called or sold 3,374,400 --
Pincipal paydowns on investment securities 1,709,687 --
Net increase in loans (8,509,793) (4,705,750)
Capital expenditures for property (54,039) (1,973,067)
Increase in Federal Home Loan Bank capital stock (27,200) --
------------- --------------
Net cash used for investing activities (12,102,858) (9,145,846)
------------- --------------
FINANCING ACTIVITIES
Net increase in deposits 5,712,833 9,442,706
Increase in securities sold under agreements to repurchase 5,000,000 --
Increase in federal funds purchased 1,495,108 --
------------- --------------
Net cash provided by financing activities 12,207,941 9,442,706
------------- --------------
NET INCREASE IN CASH AND DUE FROM BANKS 180,154 6,639
Cash and Due From Banks, Beginning of Period 2,018,365 1,608,350
------------- --------------
Cash and Due From Banks, End of Period $ 2,198,519 $ 1,614,989
============= ==============
CASH PAID FOR
Interest $ 1,108,503 $ 697,784
============= ==============
Income Taxes $ -- $ --
============= ==============
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Notes to Financial Statements
(Unaudited)
Note 1 - Organization and Basis of Presentation
Business activity and organization
New Commerce Bancorp was incorporated in South Carolina on July 22, 1998 to
operate as a bank holding company pursuant to the Federal Bank Holding Company
Act of 1956 and the South Carolina Bank Holding Company Act, and to own and
control all of the capital stock of New Commerce Bank, an association organized
under the laws of the United States, to conduct a general banking business in
Mauldin, South Carolina.
We sold 1,000,000 shares of common stock at an offering price of $10 per share.
Net of selling expenses, we raised $9,751,658 in the offering. We capitalized
the bank with $8,250,000 of the net proceeds of the offering and the sale of
shares to the organizers. The remaining net offering proceeds were used to pay
our organization expenses and to provide general working capital, including
additional future capital for investment in the bank, if needed. On February 11,
1999, the Office of the Comptroller of the Currency issued preliminary approval
of the Bank to become a federally chartered bank, and on March 10, 1999, the
Federal Deposit Insurance Corporation approved our application for deposit
insurance for the bank. The bank commenced business on May 17, 1999 and is
primarily engaged in the business of accepting demand deposits and savings
insured by the Federal Deposit Insurance Corporation, and providing commercial
and consumer loans to the general public. The bank opened its permanent
headquarters facility in May 2000 and its first permanent branch in June 2000.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in our Form 10-KSB for the period ended December 31,
2000 (Registration Number 333-70589) as filed with the Securities and Exchange
Commission.
Note 2 - Net Loss Per Common Share
SFAS No. 128, "Earnings Per Share" requires that we present basic and diluted
net income per share. Net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding for each period
presented. The weighted average number of common shares outstanding for basic
net loss per common share was 1,000,000 for the nine months ended September 30,
2001 and 2000. We did not have any common stock equivalents during the nine
months ended September 30, 2001 and 2000. Stock options outstanding were
anti-dilutive and had no effect on the computation of weighted average shares
outstanding.
Part 1 - Financial Information
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of New Commerce BanCorp and
subsidiary. This commentary should be read in conjunction with the financial
statements and the related notes and other statistical information included in
this report and should be read with an understanding of our short operating
history.
We are pleased to announce that during the reporting period, we hired Frank W.
Wingate as our president and CEO of the company and the bank. Mr. Wingate has
also been appointed to the board of directors of both the company and the bank.
Mr. Wingate has served in senior capacities at financial institutions in both
South Carolina and Georgia and was formerly president and chief executive
officer of The Community Bank of Greenville prior to the merger with Regions
Bank.
Results of Operations for the quarter ended September 30, 2001 compared to the
quarter ended September 30, 2000:
Our consolidated net loss for the quarter ended September 30, 2001 was $25,065,
or $.03 per share, compared to a net loss of $78,042, or $.08 per share, for the
quarter ended September 30, 2000. This 68% improvement reflects continued growth
in earning assets since the Bank commenced operations in May 1999. Following is
a discussion of the more significant components of our net loss.
Net Interest Income
The largest component of net income is net interest income, the difference
between the income earned on assets and the interest accrued or paid on deposits
and borrowings used to support such assets. The volume and mix of assets and
liabilities and their sensitivity to interest rate movement determine changes in
net interest income. Net interest margin is determined by dividing annualized
net interest income by average earning assets. Net interest spread is derived
from determining the rates and mix of interest paid on deposits and borrowings
and subtracting them from the yields on and mix of earning assets. Net interest
income for the quarter ended September 30, 2001 was $435,954 compared to
$320,240 for the same period last year, an increase of 36%. This increase was
related, in part, to the increase in average earning assets, specifically loan
volume. The annualized net interest margin was 3.84% for the quarter ended
September 30, 2001 compared to an annualized net interest margin of 4.51% for
the quarter ended September 30, 2000. The decrease in net interest margin during
the period reflects the declining interest rate environment in 2001. During the
first nine months of 2001, prime rate decreased 350 basis points. Partially
offsetting this negative impact, has been the general drop in cost of funds as
well as the repricing of a portion of our 7% CD promotion discussed below.
For the quarter ended September 30, 2001, average earning assets totaled $44.4
million with an annualized average yield of 7.39%. Average earning assets and
annualized average yield were $28.1 million and 8.58%, respectively for the
quarter ended September 30, 2000. Although volume of earning assets has
increased, the significant drop in prime rate has impacted the variable rate
portion of our loan portfolio, which comprises approximately 50% of our total
portfolio.
Since loans often provide a higher yield than other types of earning assets, one
of our goals is to maintain our loan portfolio as the highest percentage of
total earning assets. Loans comprised approximately 60% and 62% of average
earning assets for the third quarter of 2001 and 2000, respectively. Loan
interest income for the three-month period ended September 30, 2001 totaled
$521,436, compared to $422,055 for the same period in 2000. The annualized
average yield on loans was 7.72% for the quarter ended September 30, 2001
compared to 9.64% for the same period in 2000. As discussed above, the yield
decrease resulted from the declining rate environment and its immediate impact
on our variable rate loan portfolio.
Investment securities averaged $17.6 million, or 39%, of average earning assets
for the third quarter of 2001 compared to $9.1 million, or 33%, of average
earning assets for the same period in 2000. Interest earned on investment
securities amounted to $295,817 for the three months ended September 30, 2001,
compared to $161,995 for the three months ended September 30, 2000. Investment
securities yielded 6.79% during the third quarter of 2001, compared to 7.06%
during the same period last year. This difference resulted from the effect of
higher yielding bonds called prior to the third quarter in 2001.
Interest expense for the quarter ended September 30, 2001 was $383,050 compared
to $287,269 for the same period last year. Interest expense for the quarter
ended September 30, 2001 included interest of $11,629 on federal funds purchased
and $53,181 on a reverse repurchase agreement. The funds borrowed under this
agreement were used to invest in an agency bond yielding 6.59%. The borrowing
interest rate was repriced on July 26, 2001 to 3.90%. Therefore, during most of
the quarter ended September 30, 2001, the spread on this transaction was 2.69%.
The average rate on interest-bearing liabilities was 4.16% for the quarter ended
September 30, 2001 compared to 5.36% for the same period in 2000.
Interest Rate Sensitivity
Asset/liability management is the process by which we monitor and control the
mix, maturities and interest sensitivity of our assets and liabilities.
Asset/liability management seeks to ensure adequate liquidity and to maintain an
appropriate balance between interest-sensitive assets and liabilities to
minimize potentially adverse impacts on earnings from changes in market interest
rates. Interest rate risk management becomes increasingly important in an
interest rate environment and economy such as the one, which we are currently
experiencing.
The principal interest rate sensitivity monitoring technique employed by us is
the measurement of our interest sensitivity "gap", which is the positive or
negative dollar difference between assets and liabilities that are subject to
interest rate repricing within a given time period. Interest rate sensitivity
can be managed by repricing assets or liabilities, selling securities
available-for-sale, replacing an asset or liability at maturity, or adjusting
the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in the same time
interval helps to minimize interest rate risk and manage net interest income in
changing interest rate environments. Our net interest income generally would
benefit from rising interest rates when we have an asset-sensitive gap position.
Conversely, net interest income generally would benefit from decreasing interest
rates when we have a liability-sensitive gap position. At September 30, 2001,
the Company was liability-sensitive over the twelve month timeframe.
Provision for Loan Losses
The provision for loan losses is the charge to operating earnings that our
management believes is necessary to maintain the allowance for possible loan
losses at an adequate level. The amount charged to the provision is based on a
review of past-due loans and delinquency trends, actual losses, ___ classified
and criticized loans, loan portfolio growth, concentrations of credit, economic
conditions, historical charge-off activity and internal credit risk ratings.
Loan charge-offs and recoveries are charged or credited directly to the
allowance. For the three months ended September 30, 2001, the provision for loan
losses was $33,776 compared to $34,680 for the same period last year.
Non-Interest Income
Non-interest income for the three-month period ended September 30, 2001 was
$46,140 compared to $37,174 for the same period in 2000, for an increase of 24%.
Deposit account service charges represented $18,014 for the quarter ended
September 30, 2001 compared to $10,438 for the comparable period in 2000. This
increase is due to the growth in deposit accounts experienced during the
comparable periods. Brokered loan fees totaled $19,999 and $16,555 for the
quarters ended September 30, 2001 and 2000, respectively.
Non-Interest Expense
Non-interest expense for the quarter ended September 30, 2001 was $480,257
compared to $425,167 for the same period in 2000. Salaries and employee benefits
are the largest component of non-interest expense. This category increased by
$16,664 from $246,483 for the three months ended September 30, 2000 to $263,147
for the three-month period ended September 30, 2001 and is a result of annual
raises and additional staff necessary to support our growth environment.
Occupancy, office and equipment expense totaled $70,815 for the second quarter
of 2001, compared to $67,437 for the same period last year.
Data processing expense totaled $36,641 for the three-month period ended
September 30, 2001 compared to $32,641 for the same period last year. The
majority of this expense represented the cost of our third-party data processing
provider. Included in "other" expenses are OCC assessments, training costs,
memberships, correspondent bank fees and ancillary loan processing expenses.
Results of Operations for the nine months ended September 30, 2001 compared to
the nine months ended September 30, 2000:
For the nine months ended September 30, 2001, our net loss was $104,964, or $.10
per share, compared to $251,760, or $.25 per share, for the same period last
year. Following is a discussion of the more significant components of our net
loss.
Net Interest Income
For the nine months ended September 30, 2001, net interest income was
$1,206,974, an increase of 35% from $890,782 for the same period in 2000. The
annualized net interest margin was 4.03% for the nine months ended September 30,
2001 compared to an annualized net interest margin of 4.67% for the nine months
ended September 30, 2000. As stated previously, the significant drop in prime
rate had a negative impact on our loan yield. However, for the nine-month
comparison period, the negative impact was offset, not only by the drop in cost
of funds, but also in an improved investment securities yield resulting from
accelerated accretion on bonds called in 2001.
For the nine months ended September 30, 2001, average earning assets totaled $40
million with an annualized average yield of 7.87%. Average earning assets and
annualized average yield were $25.6 million and 8.41%, respectively, for the
nine months ended September 30, 2000.
Loans comprised approximately 58% and 60% of average earning assets for the nine
months ended September 30, 2001 and 2000, respectively. Loan interest income for
the nine months ended September 30, 2001 totaled $1,469,751, compared to
$1,081,594 for the same period in 2000. The annualized average yield on loans
was 8.41% through September 30, 2001, compared to 9.46% during the same period
last year. Although prime rate reduction negatively affected loan yield, the
volume increase in outstanding loans partially offset this impact.
Investment securities averaged $16.1 million, or 40% of average earning assets,
during the period ended September 30, 2001 compared to $7.9 million, or 31%, for
the same period in 2000. Interest earned on investment securities increased
$456,240 to $867,998 and included $41,100 in accelerated accretion on bonds
called in the first nine months of 2001. The resulting annualized yield on the
investment portfolio for the nine months ended September 30, 2001 was 7.22%
compared to 6.99% during the same period last year.
Interest expense for the nine months ended September 30, 2001 was $1,149,147
compared to $714,969 for the same period last year. The increase of $434,178 was
attributed to deposit growth of 33% over the period and included a 12-month
certificate of deposit promotion offered from July to October 2000. This CD
promotion added approximately $6 million in deposits at 7% yields during the
period. These CD's
repriced at yields from 3.10% to 4.75% in the third quarter of 2001, and the
repricing will have a significant favorable impact on cost of funds and
resulting net interest margin over the remainder of 2001. The average rate on
interest-bearing liabilities was 4.64% for the nine months ended September 30,
2001, compared to 5.12% for the nine months ended September 30, 2000.
Provision for Loan Losses
For the nine months ended September 30, 2001, the provision for loan losses was
$95,572 compared to $89,850 for the nine months ended September 30, 2000. The
loan loss reserve was $387,849 at September 30, 2001, or 1.39% of gross loans,
compared to $292,277 at December 31, 2000, or 1.50% of gross loans. There were
no charge-offs or nonaccrual loans during the nine-month period ended September
30, 2001.
Non-Interest Income
Non-interest income totaled $155,031 for the nine months ended September 30,
2001 compared to $88,005 for the same period last year. This 76% increase in
non-interest income was primarily attributed to strong growth in brokered loan
fees and deposit service charges. Brokered loan fees increased $47,055 to
$72,672 during the nine months ended September 30, 2001. This increase resulted
from the growth in refinancings and purchase money activity associated with the
declining interest rate environment. Service charges on deposit accounts totaled
$46,456 through September 30, 2001, compared to $29,878 for the same period in
2000. This 55% increase was attributed to growth in deposit accounts during the
period.
Non-Interest Expense
For the first nine months of 2001, noninterest expense amounted to $1,466,203
compared to $1,231,771 for the same period last year, an increase of 19%.
Salaries and employee benefits increased $147,095 to $807,013. This increase was
primarily a result of staffing requirements for two permanent branch locations
opened during the period. Occupancy, office and equipment expense totaled
$198,102 for the nine months ended September 30, 2001, compared to $174,671 for
the same period last year. This 13% increase is primarily due to the opening of
our two facilities in May and June 2000 and the associated increase in expenses
such as depreciation and utilities.
Likewise, data processing expense increased from $110,193 for the first nine
months of 2000 to $124,987 for the nine months ended September 30, 2001. This
increase resulted from noncapitalized costs associated with two permanent
facilities as well as an increase in the monthly charge from our data processing
provider. This monthly charge adjusts based on deposit account volume. "Other"
expenses included OCC assessment fees, correspondent bank charges, training
costs, memberships and loan processing expenses.
Balance Sheet Review
Total consolidated assets increased $12.4 million from $40.3 million at December
31, 2000 to $52.7 at September 30, 2001. This 31% increase in assets was
primarily funded by growth of $5.7 million in deposits, which totaled $36.9
million at September 30, 2001. Other funding sources included federal funds
purchased and a repurchase agreement, totaling $6.6 million at September 30,
2001. Net loans grew $8.4 million from $19.2 million at December 31, 2000 to
$27.6 million at September 30, 2001. Investment securities increased $3.7
million, from $13.9 million at December 31, 2000 to $17.6 million at September
30, 2001.
We closely monitor and seek to maintain appropriate levels of interest earning
assets and interest bearing liabilities so that maturities of assets are such
that adequate funds are provided to meet customer withdrawals and demand. We
expect asset and liability growth to continue during the coming months, with
the growth tapering off to a more deliberate and controllable pace over the
longer term, and we believe capital should continue to be adequate for the next
12 months.
Loan Portfolio and Allowance for Loan Losses
Net outstanding loans represented the largest component of earning assets as of
September 30, 2001 at $27.6 million, or 61% of total earning assets, compared to
58% at December 31, 2000. Net loans have increased 44% since December 31, 2000.
Balances within the major loan categories were as follows:
September 30, December 31, 2000
-------------- -----------------
2001
Commercial $ 8,129,151 $ 7,198,928
Real Estate - 1-4 Family 2,718,082 2,744,101
1-4 Family Equity Lines 1,635,479 992,999
Real Estate - Commercial, construction 13,626,420 7,217,926
Consumer and installment loans 1,885,777 1,331,162
--------- ---------
$ 27,994,909 $ 19,485,116
========== ==========
Allowance for loan loss, December 31, 2000 $ 292,277
Provision 95,572
(Charge-offs) recoveries
--
Allowance for loan loss, September 30, 2001 $ 387,849
---------
Allowance for loan losses to loans outstanding, December 31, 2000 1.50 %
------
Allowance for loan losses to loans outstanding, September 30, 2001 1.39 %
------
There are risks inherent in making all loans, including risks with
respect to the period of time over which loans may be repaid, risks resulting
from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral. To address these
risks, we have developed policies and procedures to evaluate the overall quality
of our credit portfolio and the timely identification of potential problem
loans. We maintain an allowance for possible loan losses which we establish
through charges in the form of a provision for loan losses. We charge loan
losses and credit recoveries directly to this allowance.
We attempt to maintain the allowance at a level that will be adequate
to provide for potential losses in our loan portfolio. To maintain the allowance
at an adequate level, we periodically make additions to the allowance by
charging an expense to the provision for loan losses on our statement of
operations. We evaluate the allowance for loan losses on an overall portfolio
basis, as well as allocating the allowance to loan categories. We consider a
number of factors in determining the level of this allowance, including our
total amount of outstanding loans, our amount of past due loans, our historic
loan loss experience, general economic conditions, and our assessment of
potential losses, classified and criticized loans, concentrations of credit and
internal credit risk ratings. Our evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Our losses will
undoubtedly vary from our estimates, and there is a possibility that charge-offs
in future periods will exceed the allowance for loan losses as estimated at any
point in time.
The loan loss reserve was $387,849 at September 30, 2001, or 1.39% of gross
loans, compared to $292,277 at December 31, 2000, or 1.50% of gross loans.
Nonperforming assets consist of nonaccrual loans, other real estate owned and
repossessed collateral. Generally, loans are placed on nonaccrual status when
they become 90 days past due, or when management
believes that the borrower's financial condition is such that collection of the
loan is doubtful. Interest stops accruing when a loan is placed on nonaccrual
status. Payments of interest on these loans are recognized when received. There
were no non-performing loans or loans delinquent more than 90 days at September
30, 2001 and December 31, 2000.
Investment Portfolio
Investment securities represented 38% and 42% of earning assets at September 30,
2001 and December 31, 2000, respectively. Investment securities increased 26%
from December 31, 2000. From December 31, 2000 to September 30, 2001, $3 million
in bonds were called. On October 16, 2001, $1 million in agency bonds were
called. We primarily invest in U. S. Government agencies or government-sponsored
agencies, mortgage-backed securities, collateralized mortgage obligations and
credit quality corporate bonds. We also own stock in the Federal Reserve Bank
and the Federal Home Loan Bank.
The following is a table of investment securities by category at September 30,
2001 and December 31, 2000:
September 30, December 31, 2000
-------------- -----------------
2001
U. S. Government agencies and U. S.
Government sponsored agencies $ 7,844,905 $ 4,745,335
Agency mortgage-backed securities 2,902,572 3,595,576
Agency collateralized mortgage obligations 3,105,281 3,472,931
Corporate bonds 3,402,931 1,805,650
FRB stock 237,250 237,250
FHLB stock 65,400 38,200
------ ------
Total $ 17,558,339 $13,894,942
============ ===========
Deposits
Balances within the major deposit categories as of September 30, 2001 and
December 31, 2000 were as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Non-interest bearing demand deposits $ 5,954,011 $ 4,307,660
Interest-bearing checking 3,936,746 3,849,582
Savings deposits 347,291 359,085
Money market accounts 9,664,914 10,468,966
Time deposits less than $100,000 7,442,500 6,332,973
Time deposits of $100,000 or more 9,535,129 5,849,492
------------ -----------
$ 36,880,591 $31,167,758
============ ===========
From July to October 2001, we had approximately $6 million in 7% certificates of
deposit repricing at yields from 3.10% to 4.75%. Through September 30, 2001,
approximately 40% of these CD's totaling $2.4 million renewed at the lower
rates.
Other Borrowings
On April 26, 2001, we entered into a reverse repurchase agreement with a
correspondent bank whereby we borrowed $5 million at 4.85%, purchased an agency
bond at $5 million, yielding 6.59% with the proceeds, and simultaneously sold
the bond to the correspondent bank, with an option to repurchase at a specified
future date. The bond and corresponding repurchase agreement had quarterly call
and renewal dates, respectively. On July 26, 2001, the first call date, the bond
was not called and the repurchase agreement was renewed for $5 million at 3.90%,
resulting in a 269 basis point spread on this transaction during the third
quarter 2001. The bond and corresponding borrowing described above were
subsequently called on October 26, 2001. We plan to enter into another reverse
repurchase agreement in November 2001. The borrowing will be at a rate of 2.50%
and the corresponding agency bond at a yield of 4.25%, for a 175 basis point
spread. On September 30, 2001, we purchased federal funds of $1.6 million, and
on October 1, 2001 we had no federal funds purchased.
Liquidity Management
Liquidity management involves monitoring our sources and uses of funds in order
to meet our day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management is made more complicated because
different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of the investment portfolio is
fairly predictable and subject to a high degree of control at the time
investment decisions are made. However, net deposit inflows and outflows are far
less predictable and are not subject to nearly the same degree of control. We
must maintain adequate liquidity to respond to short-term deposit withdrawals,
maturities of short-term borrowings, loan demand and payment of operating
expenses.
At September 30, 2001, our liquid assets, consisting of cash and due from banks
and federal funds sold, amounted to $2.3 million and represented 4.36% of total
assets. Investment securities totaled $17.6 million and represented 33.3% of
total assets. Unpledged investment securities, classified as available-for sale,
provide a secondary source of liquidity since they can be converted to cash in a
timely manner. 60% of our investment portfolio was unpledged at September 30,
2001. Our ability to maintain and expand our deposit base and borrowing
capabilities also serves as a source of liquidity. Our loan to deposit ratio at
September 30, 2001 was 75.9% and 62.5% at December 31, 2000. We plan to meet our
future cash needs through maturities of loans, maturities and cash flows from
investment securities, and generation of deposits. In addition, we maintain
federal funds lines of credit with correspondent banks in the amount of
$4,000,000 and lines of credit with the Federal Reserve Bank. We are also
members of the Federal Home Loan Bank, from which application for borrowings can
be made for leverage purposes. At September 30, 2001, we had approximately $5
million in available credit under our FHLB facility. We believe that our
existing stable base of core deposits and other funding sources, along with
continued growth in our deposit base, are adequate to meet our operating needs
for the next twelve months.
From January 2001 to September 2001, we had $3 million in bonds called by the
issuers. In October 2001, bonds totaling $1million were called.
The Bank has a five-year contract for data processing services through April
2004. Costs under this contract are approximately $9,500 per month. At September
30, 2001, unfunded commitments to extend credit were $3.9 million and
outstanding letters of credit were $54,000.
Capital Adequacy
Shareholders' equity at September 30, 2001 was $8.9 million compared to $8.8
million at December 30, 2000. Although we incurred a net loss through September
30, 2001, shareholders' equity increased during the period due to an increase in
unrealized gain on available for sale investment securities. The Federal Reserve
Board and bank regulatory agencies require bank holding companies and financial
institutions to maintain capital at adequate levels based on a percentage of
assets and off-balance sheet exposures, adjusted for risk weights ranging from
0% to 100%.
The Federal Reserve guidelines also contain an exemption from the capital
requirements for bank holding companies with less than $150 million in
consolidated assets. Because we have less than $150 million in assets, we are
not currently subject to these guidelines. However, the Bank falls under these
rules as set by bank regulatory agencies.
Under the capital adequacy guidelines, capital is classified into two tiers.
Tier 1 capital consists of common stockholders' equity, excluding the unrealized
gain or loss on securities available for sale, minus certain intangible assets.
Tier 2 capital consists of the general reserve for loan losses subject to
certain limitations. The qualifying capital base for purposes of the risk-based
capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The Bank is
also required to maintain capital at a minimum level based on total average
assets, which is known as the Tier 1 leverage ratio. The Bank exceeded the
minimum capital requirements set by the regulatory agencies at September 30,
2001. Below is a table that reflects the leverage and risk-based regulatory
capital ratios of the Bank at September 30, 2001.
Required amount Required Actual amount Actual
--------------- Percent ------------- Percent
(in $000's) ------- (in $000's) -------
Tier 1 capital $ 1,518 4.0 % $ 7,168 18.89%
Total capital 3,036 8.0 7,556 19.91
Tier 1 leverage ratio 1,990 4.0 7,168 14.41
IMPACT OF INFLATION
The assets and liabilities of financial institutions such as ours are primarily
monetary in nature. Therefore, interest rates have a more significant effect on
our performance than do the effects of changes in the general rate of inflation
and changing prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the relationships between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those, which may result from inflation.
The terrorist attacks that occurred in New York City and Washington, D.C. on
September 11, 2001, and the United States' subsequent response to these events
have resulted in a general economic slowdown that may adversely affect our
banking business. Economic slowdowns or recessions in our primary market area
may be accompanied by reduced demand for credit, decreasing interest margins and
declining real estate values, which may in turn result in a decrease in net
earnings and an increased possibility of potential loan losses in the event of
default. Any sustained period of decreased economic activity, increased
delinquencies, foreclosures or losses could limit our growth and negatively
affect our results of operations. We cannot predict the extent or duration of
these events or their effect upon our business and operations. We will, however,
closely monitor the effect of these events upon our business, and make
adjustments to our business strategy as we deem necessary.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, such as statements relating to
financial results and plans for future business development activities, and thus
is prospective. The words "may", "would", "could", "will", "expect",
"anticipate', "should", "believe", "intend", "plan", and "estimate", as well as
similar expressions, are meant to identify such forward-looking statements. Such
forward-looking statements are subject to risks, uncertainties, and other
factors, which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements.
These statements appear in a number of places in this report and include all
statements that are not statements of historical fact regarding our intent,
belief, or expectations. These forward-looking statements are not guarantees of
future performance and actual results may differ materially from those projected
in the
forward-looking statements. Potential risks and uncertainties include,
but are not limited to, our brief operating history, our ability to manage rapid
growth, general economic conditions, competition, interest rate sensitivity, and
exposure to regulatory and legislative changes.
Additional risks are discussed in detail in our filings from time to time with
the Securities and Exchange Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No. 102 - Selected
Loan Loss Allowance Methodology and Documentation Issues. This staff accounting
bulletin clearly defines the required development, documentation, and
application of a systematic methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting principles. We
believe that we are in compliance with SAB 102. Accounting standards that have
been issued or proposed by the Financial Accounting Standards Board that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we or any of our
subsidiaries is party or of which any of their property is the subject.
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
There were no matters submitted to a vote of security holders during the quarter
ended September 30, 2001.
Item 5. Other Information
Our board of directors accepted the resignation of James D. Stewart as our
president and chief executive officer and director effective September 5, 2001.
We have attached Mr. Stewart's separation agreement as exhibit 10.1. Paula S.
King, our senior vice president and chief financial officer, served as our
president and chief executive officer on an interim basis following Mr.
Stewart's resignation. On October 1, 2001, we hired Frank W. Wingate as
president and chief executive officer of our company and our bank, and Ms. King
resumed her role as our senior vice president and chief financial officer. Mr.
Wingate has also been appointed to the board of directors of both the company
and the bank. We anticipate entering into an employment agreement with Mr.
Wingate, but as of the date of this filing, Mr. Wingate's contract has not been
finalized.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
10.1 Separation Agreement of James D. Stewart dated October 9, 2001.
(b) Reports on Form 8-K.
The following exhibits were filed on Form 8-K during the quarter ended
September 30, 2001.
99.1 Form 8-K referenced in Exhibit 99.1 dated September 15, 2001 to
announce Mr. Stewart's resignation.
99.2 Form 8-K referenced in Exhibit 99.2 dated October 1, 2001 to announce
Mr. Wingate's position as President, Chief Executive Officer, and
Director of the Company and the Bank.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW COMMERCE BANCORP
(Registrant)
Date: November 3, 2001 By: /s/ Frank W. Wingate
--------------------------------------
Frank W. Wingate
President and Chief
Executive Officer
By: /s/ Paula S. King
---------------------------------
Paula S. King
Senior Vice President and
Chief Financial Officer