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 March 31, 2002
___ 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 April 23, 2002.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
New Commerce BanCorp
Consolidated Balance Sheets
March 31, December 31,
2002 2001
(Unaudited) (Audited)
---------- ------------
Assets
Cash and due from banks $ 1,227,761 $ 997,887
Federal funds sold 884 1,026,449
Investment securities, available for sale 14,484,929 14,969,033
Investment securities, held to maturity 895,089 720,512
Federal Reserve Bank stock 237,250 237,250
Federal Home Loan Bank stock 71,000 65,400
Loans - net 29,307,663 28,542,163
Property and equipment - at cost, less accumulated
depreciation 4,332,244 4,367,879
Accrued interest receivable 281,787 302,131
Other assets $ 536,320 401,853
------------ -------------
Total assets $ 51,374,927 $ 51,630,557
============ =============
Liabilities and Shareholders' Equity
Deposits $ 35,575,254 $ 37,715,085
Federal funds purchased 2,115,000 --
Securities sold under agreements to repurchase 4,790,000 4,854,000
Accrued expenses and other liabilities 253,440 303,280
------------ -------------
Total liabilities 42,733,694 42,872,365
------------ -------------
Shareholders' Equity
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,000,000 shares
issued
at March 31, 2002 and December 31, 2001 10,000 10,000
Additional paid-in capital 9,741,658 9,741,658
Retained deficit (1,236,454) (1,240,960)
Accumulated other comprehensive income 126,029 247,494
------------ -------------
Total shareholders' equity 8,641,233 8,758,192
------------ -------------
Total liabilities and shareholders' equity $ 51,374,927 $ 51,630,557
============ =============
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
2
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31
2002 2001
---- ----
INTEREST INCOME
Loans (including fees) $ 470,234 $ 472,996
Investment securities 231,286 267,506
Federal funds sold 141 9,174
---------- ----------
Total interest income 701,661 749,676
---------- ----------
INTEREST EXPENSE
Deposits 206,425 365,048
Securities sold under agreements to repurchase 28,782 --
Federal funds purchased 4,127 2,421
---------- ----------
Total interest expense 239,334 367,469
---------- ----------
NET INTEREST INCOME 462,327 382,207
Provision for possible loan losses 9,325 24,896
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 453,002 357,311
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 23,755 15,265
Brokered loan fees 16,730 33,000
Other 15,051 12,146
---------- ----------
Total noninterest income 55,536 60,411
---------- ----------
TOTAL INCOME 508,538 417,722
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 284,039 280,768
Occupancy, office and equipment 74,210 70,375
Data processing 48,396 42,969
Postage, supplies and printing 9,440 14,333
Marketing 14,697 21,567
Insurance 3,377 9,552
Telephone 10,835 8,525
Legal 5,312 674
Contract services and courier 10,707 8,933
Audit and accounting 7,077 4,929
Other 32,576 34,263
---------- -----------
Total noninterest expense 500,666 496,888
---------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 7,872 (79,166)
INCOME TAX EXPENSE (BENEFIT) 3,366 (38,533)
NET INCOME (LOSS) $ 4,506 $ (40,633)
========== ===========
Basic net income (loss) per common share $ .00 $ (.04)
========== ===========
Weighted average number of common shares
outstanding 1,000,000 1,000,000
========== ===========
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
3
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Shareholders' Equity
For the Three Months Ended March 31, 2002 and 2001
(Unaudited)
Accumulated
Other Total
Common Stock Additional Retained Comprehensive Shareholders'
---------------------- Paid-in Capital Deficit Income (Loss) Equity
Shares Amount --------------- -------- -------------- ------
------ ------
Balance, December 31, 2000 1,000,000 $ 10,000 $ 9,741,658 $(1,053,003) $ 109,160 $ 8,807,815
Net loss -- -- -- (40,633) -- (40,633)
Other comprehensive income,
net of tax effect of $54,973:
Unrealized holding gain
on securities available for -- -- -- -- 106,718 106,718
--------- --------- ----------- ------------ ---------- -----------
Comprehensive income -- -- -- -- -- 66,085
--------- --------- ----------- ------------ ---------- -----------
Balance, March 31, 2001 1,000,000 $ 10,000 $ 9,741,658 $ (1,093,636) $ 215,878 $ 8,873,900
--------- --------- ----------- ------------- ---------- -----------
Balance, December 31, 2001 1,000,000 $ 10,000 $ 9,741,658 $ (1,240,960) $ 247,494 $ 8,758,192
Net income -- 4,506 -- 4,506
Other comprehensive loss,
net of tax effect of $62,573:
Unrealized holding loss
on securities
available for sale -- -- -- -- (121,465) (121,465)
Comprehensive loss --------- --------- ----------- ------------- ---------- -----------
-- -- -- -- -- (116,959)
--------- --------- ----------- ------------- ---------- -----------
Balance, March 31, 2002 1,000,000 $ 10,000 $ 9,741,658 $ (1,236,454) $ 126,029 $ 8,641,233
--------- --------- ----------- ------------- ---------- -----------
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
4
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
New Commerce BanCorp
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(Unaudited)
2002 2001
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 4,506 $ (40,633)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation and amortization 26,974
34,818
Provision for possible loan losses 9,325 24,896
Deferred income tax provision (benefit) 3,366 (38,533)
Increase in accrued interest receivable 20,344 49,754
(Increase) decrease in other assets (75,260) 49,053
Increase (decrease) in accrued expenses and other liabilities (49,840) (8,175)
----------- ----------
Net cash provided by (used for) operating activities (60,585) 71,180
----------- ----------
INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold 1,025,565 (403,906)
Purchase of investment securities available for sale (501,052) (3,068,661)
Purchase of investment securities held to maturity (198,688) --
Proceeds from bonds called or sold -- 2,500,000
Principal paydowns on investment securities 835,323 170,736
Net increase in loans (774,825) (1,659,758)
Capital expenditures for property (1,433) (8,216)
Increase in Federal Home Loan Bank capital stock (5,600) (27,200)
----------- ----------
Net cash provided by (used for) investing activities 379,290 (2,497,005)
----------- ----------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (2,139,831) 1,714,950
Decrease in securities sold under agreements to repurchase (64,000) --
Increase (decrease) in federal funds purchased 2,115,000 (100,000)
----------- ----------
Net cash (used for) provided by financing activities (88,831) 1,614,950
----------- ----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 229,874 (810,875)
Cash and due from banks, beginning of period 997,887 2,018,365
----------- ----------
Cash and due from banks, end of period $ 1,227,761 $ 1,207,490
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 458,002 $ 361,353
============ ============
Income taxes $ -- $ --
============ ============
Change in unrealized (loss) gain on investment securities available for sale,
net of deferred income taxes $ (121,465) $ 106,718
============ ============
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
5
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 (the "Company") 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 (the "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. We commenced business on May 17, 1999 and we are
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. We opened our permanent headquarters
facility in May 2000 and our 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 three months ended March 31, 2002 are not necessarily
indicative of the results for the year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Form 10-KSB for the period ended December 31, 2001
(Registration Number 333-70589) as filed with the Securities and Exchange
Commission.
Note 2 - Net Income (Loss) Per Common Share
SFAS No. 128, "Earnings Per Share" requires that we present basic and diluted
net income (loss) per share. Net income (loss) per common share is calculated by
dividing net income (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 income (loss) per common share was 1,000,000
for the three months ended March 31, 2002 and 2001. Stock options outstanding
were anti-dilutive or had no material effect on the computation of weighted
average shares outstanding.
6
Note 3 - Stock Options
The following is an analysis of stock option activity for the three months ended
March 31, 2002 and 2001:
2002 2001
---------------------------- --------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
----------- --------------- --------- ---------------
Outstanding at beginning of period 113,000 $ 8.35 133,000 $ 9.80
Granted 20,000 7.94 2,500 6.88
Forfeitures (14,000) 9.14 (8,500) 10.00
---------- ---------
Outstanding at end of period 119,000 8.19 127,000 9.72
========== =========
Options exercisable
19,200 9.83 21,700 10.00
========== =========
Shares available for grant 31,000 23,000
========== =========
Upon completion of the 1999 stock offering, each of the Company's organizers
received warrants to purchase 7,500 shares of common stock or a total of 90,000
shares at $10.00 per share. The warrants vested immediately and are exercisable
through January 12, 2009.
7
PART I - FINANCIAL INFORMATION (continued)
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.
Results of Operations for the quarter ended March 31, 2002 compared to the
quarter ended March 31, 2001:
Our consolidated net income for the quarter ended March 31, 2002 was $4,506, or
$.00 per share, compared to a net loss of $40,633, or $.04 per share, for the
quarter ended March 31, 2001. This improvement reflects continued growth in
earning assets since we commenced operations in May 1999. Following is a
discussion of the more significant components of our net income.
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 weighted-average rate of interest paid on deposits and
borrowings and subtracting them from the weighted-average yield on earning
assets. Net interest income for the quarter ended March 31, 2002 was $462,327
compared to $382,207 for the same period last year, an increase of 21%. This
increase was related, in part, to the increase in average earning assets,
specifically the increase in our loan portfolio.
For the quarter ended March 31, 2002, average earning assets totaled $44.0
million with an annualized average yield of 6.36%. Average earning assets and
annualized average yield were $34.4 million and 8.77%, respectively for the
quarter ended March 31, 2001. Although volume of earning assets has increased,
the positive effect this increase had on interest income was partially offset by
the decreased average yield. The average yield was negatively impacted by the
significant drop in the prime rate. The decrease in the prime rate negatively
impacted the variable rate portion of our loan portfolio, which comprises
approximately 65% 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 largest component of total
earning assets. Loans comprised approximately 66% and 59% of average earning
assets for the first quarter of 2002 and 2001, respectively. Loan interest
income for the three-month period ended March 31, 2002 totaled $470,234,
compared to $472,996 for the same period in 2001. The annualized average yield
on loans was 6.61% for the quarter ended March 31, 2002 compared to 9.48% for
the same period in 2001. 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 $15.1 million, or 34%, of average earning assets
for the first quarter of 2002 compared to $13.4 million or 39% of average
earning assets for the same period in 2001. Interest earned on investment
securities amounted to $231,286 for the three months ended March 31, 2002,
compared to $267,506 for the three months ended March 31, 2001. Investment
securities yielded 5.91% during the first quarter of 2002, compared to 7.84%
during the same period last year. This difference in yield resulted from the
effect of higher yielding callable bonds held in the portfolio during the period
ended March 31, 2001 being called prior to the quarter ended March 31, 2002.
8
Interest expense for the quarter ended March 31, 2002 was $239,334 compared to
$367,469 for the same period last year. Interest expense is comprised
principally of interest paid and accrued on deposit accounts. Although the
average balance of deposits increased to $35.7 million during the quarter ended
March 31, 2002 from $33.0 million during the quarter ended March 31, 2002, the
amount of interest expense for the current year quarter decreased by $158,623,
due to market rates declining throughout 2001. Other components of interest
expense for the quarter ended March 31, 2002 were interest of $4,127 on federal
funds purchased and $28,782 on a reverse repurchase agreement. We entered into
the repurchase agreement of $4,790,000 after March 31, 2001, and it remained
outstanding at March 31, 2002. The average rate on interest-bearing liabilities
was 2.35% for the quarter ended March 31, 2002 compared to 4.65% for the same
period in 2001.
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 that 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 March 31, 2002, the
Company was liability-sensitive over the twelve-month timeframe. However, this
gap analysis presents only a static view of the timing of maturities and
repricing opportunities and does not consider the impact that changes in
interest rates will have on individual assets and liabilities.
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 March 31, 2002, the provision for possible
loan losses was $9,325 compared to $24,896 for the same period last year. See
the section of this discussion entitled "Balance Sheet Review - Loan Portfolio
and Allowance for Loan Losses."
Non-Interest Income
Non-interest income for the quarter ended March 31, 2002 was $55,536 compared to
$60,411 for the same period in 2001 for a decrease of 8%. Deposit account
service charges represented $23,755 for the quarter ended March 31, 2002
compared to $15,265 for the comparable period in 2001. This increase is due to
the growth in deposit accounts experienced during the comparable periods.
Brokered loan fees totaled $16,730
9
and $33,000 for the quarters ended March 31, 2002 and 2001, respectively, the
decrease being attributed to lower mortgage refinancing activity during the
quarter ended March 31, 2002 as compared to the comparable period in 2001.
Non-Interest Expense
Non-interest expense for the quarter ended March 31, 2002 was $500,666 compared
to $496,888 for the same period in 2001. Salaries and employee benefits are the
largest component of non-interest expense. This category increased by $3,271
from $280,768 for the three months ended March 31, 2001 to $284,039 for the
three-month period ended March 31, 2002 and is a result of annual raises and
additional staff necessary to support our growth environment. Occupancy, office
and equipment expense totaled $74,210 for the second quarter of 2002, compared
to $70,375 for the same period last year.
Data processing expense totaled $48,396 for the three-month period ended March
31, 2002 compared to $42,969 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.
Balance Sheet Review
Total consolidated assets decreased $0.2 million from $51.6 million at December
31, 2001 to $51.4 at March 31, 2002. This negligible decrease in assets was
primarily caused by a $1.0 million decrease in federal funds sold and a $0.5
million decrease in investment securities, partially offset by a $0.8 million
increase in net loans, a $0.2 million increase in cash and due from banks and a
$0.2 million increase in other assets.
Similarly, there was a $2.1 million (or 6%) decline in deposits, which totaled
$35.6 million at March 31, 2002. The decline in deposits was caused by general
declines in commercial account balances and fluctuations in commercial sweep
accounts. To fund the net loan growth and the deposit outflow, we utilized
available federal funds lines of credit. Investment securities decreased due to
principal paydowns on mortgage-backed securities and the decline in market value
of the available for sale investment securities.
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.
10
Loan Portfolio and Allowance for Loan Losses
Net outstanding loans represented the largest component of earning assets as of
March 31, 2002 at $29.3 million or 66% of total earning assets, compared to 63%
at December 31, 2001. Net loans have increased 3% since December 31, 2001.
Balances within the major loan categories were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Commercial $6,732,728 $ 7,545,371
Real Estate - 1-4 Family 2,535,757 2,657,284
1-4 Family Equity Lines 2,183,485 2,003,867
Real Estate - Commercial, construction 16,133,687 14,781,487
Consumer and installment loans 2,136,331 1,959,154
--------- ---------
$ 29,721,988 $ 28,947,163
========== ==========
Allowance for loan loss, December 31, 2001 $ 405,000
Provision 9,325
(Charge-offs) recoveries
--
Allowance for loan loss, March 31, 2002 $ 414,325
---------
Allowance for loan losses to loans outstanding, December 31, 2001 1.40 %
------
Allowance for loan losses to loans outstanding, March 31, 2002 1.39 %
------
The loan portfolio is periodically reviewed to evaluate the outstanding loans,
to measure both the performance of the portfolio and the adequacy of the
allowance for loan losses, and to provide for probable losses inherent in the
loan portfolio.
This analysis and determination of the level of the allowance includes 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. Our
judgment as to the adequacy of the allowance is based upon a number of
assumptions about future events, which we believe to be reasonable, but which
may or may not be accurate. Because of the inherent uncertainty of assumptions
made during the evaluation process, there can be no assurance that loan losses
in future periods will not exceed the allowance for loan losses or that
additional allocations will not be required.
The allowance for loan losses was $414,325 at March 31, 2002, or 1.39% of gross
loans compared to $405,000 at December 31, 2001, or 1.40% 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 March 31, 2002 and December 31, 2001.
Investment Portfolio
Investment securities represented 34% and 35% of earning assets at March 31,
2002 and December 31, 2001, respectively. Investment securities decreased 2%
from December 31, 2001, due to $0.8 million in principal paydowns and a $0.3
million decrease in the unrealized gain, partially offset by $0.7 million in
purchases. 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.
11
The following is a table of investment securities by category at March 31, 2002
and December 31, 2001:
March 31, 2002 December 31, 2001
-------------- -----------------
U. S. Government agencies and U. S.
Government sponsored agencies $ 6,895,227 $ 6,776,200
Agency mortgage-backed securities 3,045,950 3,090,100
Agency collateralized mortgage obligations 2,102,791 2,445,845
Corporate bonds 3,336,050 3,377,400
FRB stock 237,250 237,250
FHLB stock 71,000 65,400
------ ------
Total $ 15,688,268 $15,992,195
============ ===========
Deposits
Balances within the major deposit categories as of March 31, 2002 and December
31, 2001 were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Non-interest bearing demand deposits $ 5,299,851 $ 6,539,607
Interest-bearing checking 3,102,143 3,367,344
Savings deposits 467,310 452,123
Money market accounts 9,503,650 10,847,650
Time deposits less than $100,000 8,286,807 7,442,601
Time deposits of $100,000 or more 8,915,493 9,065,760
--------- ---------
$ 35,575,254 $37,715,085
========== ==========
Other Borrowings
In November 2001, we entered into a reverse repurchase agreement with a
correspondent bank whereby we borrowed $4.9 million at 2.50% and purchased an
agency bond at $4.9 million, yielding 4.25%, with the proceeds. We
simultaneously sold the bond to the correspondent bank, with an option to
repurchase at a specified future date. The bond and corresponding repurchase
agreement have quarterly call and renewal dates, respectively. On February 13,
2002, the first call date, the bond was not called and the repurchase agreement
was renewed for $4.8 million at 2.25%, resulting in a 188 basis point weighted
average spread on this transaction during the first quarter 2002.
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.
12
At March 31, 2002, our liquid assets, consisting of cash and due from banks and
federal funds sold amounted to $1.2 million and represented 2.39% of total
assets. Investment securities totaled $15.7 million, and represented 30.5% 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. 54% of our investment portfolio was unpledged at March 31, 2002.
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 March 31,
2002 was 83.4% and 76.8% at December 31, 2001. We plan to meet our future cash
needs through the liquidation of temporary investments, 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, lines of credit with the
Federal Reserve Bank, and we are members of the Federal Home Loan Bank, from
which application for borrowings can be made for leverage purposes. At March 31,
2002, 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 and we are not aware of any events which may result in
a significant adverse impact on liquidity.
We have a five-year contract for data processing services through April 2004.
Costs under this contract are approximately $10,500 per month.
Capital Adequacy
Shareholders' equity at March 31, 2002 was $8.6 million compared to $8.8 million
at December 30, 2001. Although we had net income through March 31, 2002,
shareholders' equity decreased during the period due to a decrease 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, our
holding company is 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 March 31, 2002.
Below is a table that reflects the leverage and risk-based regulatory capital
ratios of the Bank at March 31, 2002.
Required amount Required Actual amount Actual
--------------- Percent ------------- Percent
(in $000's) -------- (in $000's) -------
Tier 1 capital $1,672 4.0 % $7,076 17.30%
Total capital 3,344 8.0 7,490 18.31
Tier 1 leverage ratio 1,959 4.0 7,076 14.45
13
Off-Balance Sheet Risk
Through the operations of our bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At March 31, 2002,
we had issued commitments to extend credit of $4.2 million through various types
of lending arrangements, of which $0.1 million was at fixed rates and $4.1
million was at variable rates. Of these commitments, $1.6 million consisted of
unused amounts of approved home equity lines of credit which extend up to 10
years. The remaining $2.6 million principally consisted of approved but unused
commercial lines of credit which extend up to 1 year. We evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by us upon extension of credit, is based on our
credit evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements at December 31, 2001
as filed on our annual report on Form 10-KSB.
Certain accounting policies involve significant judgments and assumptions by us,
which have a material impact on the carrying value of certain assets and
liabilities. We consider these accounting policies to be critical accounting
policies. The judgments and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions we make,
actual results could differ from these judgments and estimates which could have
a material impact on our carrying values of assets and liabilities and our
results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portion of this discussion that
addresses our allowance for loan losses for a description of our processes and
methodology for determining our allowance for loan losses.
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.
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.
14
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 with the Securities and
Exchange Commission, including the "Risk Factors" section in our Registration
Statement of Form SB-2 (Registration Number 333-70589) as filed with and
declared effective by the Securities and Exchange Commission.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we or any of our
subsidiaries are party of or 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 three
months ended March 31, 2002.
Item 5. Other Information
Paula S. King, senior vice president and chief financial officer resigned
effective March 15, 2002. We expect to hire a new chief financial officer prior
to the end of the second quarter of 2002.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibit List: None.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
March 31, 2002.
16
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: May 9, 2002 By: /s/ Frank W. Wingate
------------------------------------
Frank W. Wingate
President and Chief Executive Officer
Principal Accounting Officer
17