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, 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)
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 8, 2002.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
----------------- ------------------
Assets:
Cash and due from banks $ 1,382,186 $ 997,887
Federal funds sold 2,969,662 1,026,449
Investment securities, available for sale 13,828,695 14,969,033
Investment securities, held to maturity 1,318,415 720,512
Federal Reserve Bank stock 237,250 237,250
Federal Home Loan Bank of Atlanta stock 250,000 65,400
Loans, net 34,896,821 28,542,163
Property and equipment, net 4,259,642 4,367,879
Accrued interest receivable 238,631 302,131
Other assets 337,342 401,853
------------ ------------
Total assets $ 59,718,644 $ 51,630,557
============ ============
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $ 45,569,134 $ 37,715,085
Advances from Federal Home Loan Bank of Atlanta 5,000,000 -
Securities sold under agreements to repurchase - 4,854,000
Other liabilities 248,696 303,280
------------ ------------
Total liabilities 50,817,830 42,872,365
------------ ------------
Shareholders Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued - -
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,000,000 issued and outstanding 10,000 10,000
Additional paid-in capital 9,741,658 9,741,658
Retained deficit (1,208,687) (1,240,960)
Accumulated other comprehensive income 357,843 247,494
------------ ------------
Total shareholders' equity 8,900,814 8,758,192
------------ ------------
Total liabilities and shareholders' equity $ 59,718,644 $ 51,630,557
============ ============
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
2
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest Income:
Interest and fees on loans $ 541,604 $ 521,436 $ 1,509,100 $ 1,469,751
Investment securities 215,294 295,817 673,958 867,998
Federal funds sold 1,746 1,751 2,360 18,372
----------- ----------- ----------- -----------
Total interest income 758,644 819,004 2,185,418 2,356,121
----------- ----------- ----------- -----------
Interest Expense:
Deposits 220,457 318,240 632,235 1,036,174
Securities sold under agreement to repurchase 14,204 53,181 69,928 94,269
Advances from FHLB of Atlanta 17,550 - 17,550 -
Federal funds purchased 1,392 11,629 12,502 18,704
----------- ----------- ----------- -----------
Total interest expense 253,603 383,050 732,215 1,149,147
----------- ----------- ----------- -----------
Net Interest Income 505,041 435,954 1,453,203 1,206,974
Provision for Loan Losses 38,470 33,776 68,470 95,572
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan
Losses 466,571 402,178 1,384,733 1,111,402
----------- ----------- ----------- -----------
Non-Interest Income:
Service fees on deposit accounts 32,745 18,014 84,173 46,456
Mortgage brokerage income 57,381 19,999 93,963 72,672
Gain on sale of investment securities 47,008 - 47,008 -
Other 16,244 8,127 46,112 35,903
----------- ----------- ----------- -----------
Total non-interest income 153,378 46,140 271,256 155,031
----------- ----------- ----------- -----------
Total Income 619,949 448,318 1,655,989 1,266,433
----------- ----------- ----------- -----------
Non-Interest Expense:
Salaries and benefits 337,100 263,147 892,535 807,013
Occupancy, furniture and equipment 82,387 70,815 229,044 198,102
Data processing 46,171 36,641 137,670 124,987
Marketing 19,340 18,362 64,846 48,884
Printing, supplies and postage 16,597 16,933 43,454 61,952
Other 80,812 74,359 234,751 225,265
----------- ----------- ----------- -----------
Total non-interest expenses 582,407 480,257 1,602,300 1,466,203
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 37,542 (31,939) 53,689 (199,770)
Income Tax Provision (Benefit) 16,200 (6,874) 21,416 (94,806)
----------- ----------- ----------- -----------
Net Income (Loss) $ 21,342 $ (25,065) $ 32,273 $ (104,964)
=========== =========== =========== ===========
Basic and Diluted Earnings (Loss) per Share $ 0.02 $ (0.03) $ 0.03 $ (0.10)
Weighted Average Shares Outstanding - Basic 1,000,000 1,000,000 1,000,000 1,000,000
Weighted Average Shares Outstanding - Diluted 1,019,013 1,000,000 1,013,228 1,000,000
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
3
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Accumulated Total
Common Stock Additional Other Share-
------------------ Paid-in Retained Comprehensive holders'
Shares Amount Capital (Deficit) Income (Loss) Equity
--------- --------- ---------- ----------- ------------- -----------
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, net of
tax effect of $54,072:
Unrealized holding gain on
securities available for sale - - - - 224,371 224,371
----------
Comprehensive income - - - - - 119,407
--------- -------- ---------- ----------- ----------- ----------
Balance, September 30, 2001 1,000,000 $ 10,000 $9,741,658 $(1,157,967) $ 333,531 $8,927,222
========= ======== ========== =========== =========== ==========
Balance, December 31, 2001 1,000,000 $ 10,000 $9,741,658 $(1,240,960) $ 247,494 $8,758,192
Net income - - - 32,273 - 32,273
Other comprehensive income, net of
tax effect of $72,821:
Unrealized holding gain on
securities available for sale - - - - 141,374 141,374
Reclassification of net gain on
securities available for sale
included in net income, net of
tax effect of $15,983 - - - - (31,025) (31,025)
----------
Comprehensive income - - - - - 142,622
--------- -------- ---------- ----------- ----------- ----------
Balance, September 30, 2002 1,000,000 $ 10,000 $9,741,658 $(1,208,687) $ 357,843 $8,900,814
========= ======== ========== =========== =========== ==========
See Notes to Consolidated Financial Statements, which are an integral part of
these statements
4
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------
2002 2001
--------------- ---------------
Operating Activities:
Net income (loss) $ 32,273 $ (104,964)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for loan losses 68,470 95,572
Depreciation and amortization 89,979 116,212
Gain on sale of investment securities (47,008) -
Gain on sale of property and equipment - (1,077)
Decrease (increase) in accrued interest receivable 63,500 (111,419)
Decrease in other assets 7,673 92
(Decrease) increase in other liabilities (54,584) 80,655
------------- -------------
Net cash provided by operating activities 160,303 75,071
------------- -------------
Investing Activities:
Increase in loans, net (6,423,128) (8,509,793)
Purchase of investment securities available for sale (6,108,978) (8,495,913)
Purchase of investment securities held to maturity (698,688) -
Purchase of Federal Home Loan Bank stock (184,600) (27,200)
Proceeds from principal payments on investment securities available
for sale 1,513,953 1,670,642
Proceeds from principal payments on investment securities held to
maturity 107,290 39,045
Proceeds from sale or call of investment securities available for 5,973,457 3,374,400
sale
Purchase of property and equipment (12,146) (54,039)
------------- -------------
Net cash used for investing activities (5,832,840) (12,002,858)
------------- -------------
Financing Activities:
Increase in deposits, net 7,854,049 5,712,833
Advances from Federal Home Loan Bank of Atlanta 5,000,000 -
Net (decrease) increase in securities sold under agreement to
repurchase (4,854,000) 5,000,000
Increase in federal funds purchased - 1,495,108
------------- -------------
Net cash provided by financing activities 8,000,049 12,207,941
------------- -------------
Net Increase in Cash and Cash Equivalents 2,327,512 280,154
Cash and Cash Equivalents, Beginning of Period 2,024,336 2,018,365
------------- -------------
Cash and Cash Equivalents, End of Period $ 4,351,848 $ 2,298,519
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 751,773 $ 1,108,503
============= =============
Income Taxes $ - $ -
============= =============
Change in unrealized gain on investment securities available for
sale net of deferred income taxes $ 110,349 $ 224,371
============= =============
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
5
NEW COMMERCE BANCORP AND SUBSIDIARY
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 three months ended September 30, 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.
6
Note 2 - Earnings (Loss) Per Share
- ----------------------------------
The following schedule reconciles the numerators and denominators of the basic
and diluted earnings (loss) per share ("EPS") computations for the three- and
nine-month periods ended September 30, 2002 and 2001. Diluted common shares
arise from the potentially dilutive effect of the stock options and warrants
outstanding.
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Basic EPS:
Net income (loss) $ 21,342 $ (25,065) $ 32,273 $ (104,964)
Average common shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.02 $ (0.03) $ 0.03 $ (0.10)
=========== =========== =========== ===========
Diluted EPS:
Net income (loss) $ 21,342 $ (25,065) $ 32,273 $ (104,964)
----------- ----------- ----------- -----------
Average common shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000
Dilutive effect of stock options and
warrants 19,013 - 13,228 -
----------- ----------- ----------- -----------
Average dilutive shares outstanding 1,019,013 1,000,000 1,013,228 1,000,000
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.02 $ (0.03) $ 0.03 $ (0.10)
=========== =========== =========== ===========
Note 3 - Stock Options and Warrants
- -----------------------------------
The following is an analysis of stock option activity for the nine months ended
September 30, 2002 and 2001:
2002 2001
----------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- -------------- ------------- -------------
Outstanding at beginning of period 113,000 $ 8.35 133,000 $ 9.79
Granted 33,500 8.40 2,500 6.88
Forfeitures (18,500) 9.35 (72,500) 9.74
----------- -----------
Outstanding at end of period 128,000 8.21 63,000 9.73
=========== ===========
Options exercisable 26,300 9.87 20,700 10.00
=========== ===========
Shares available for grant 22,000 87,000
=========== ===========
Upon completion of the 1999 stock offering, each of our 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
Note 4 - Advances from Federal Home Loan Bank of Atlanta
- --------------------------------------------------------
Advances from Federal Home Loan Bank of Atlanta ("FHLB") consisted of the
following at September 30, 2002:
2002
-----------------------------
Weighted
Average
Maturing Within: Amount Rate
----------- ------------
1 year $ 1,250,000 2.01%
2 years 1,250,000 2.65
3 years 1,250,000 3.24
4 years 1,250,000 3.78
-----------
Outstanding at end of period $ 5,000,000 2.92
===========
At September 30, 2002, all FHLB advances were at fixed rates with original
maturities ranging from 3 months to 4 years and the Bank had pledged
mortgage-backed securities with a market value and cost of approximately $5.6
million as collateral on the advances. At September 30, 2002, the Bank had an
approved credit limit of approximately $11.9 million. There were no FHLB
advances outstanding at December 31, 2001.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
The following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, New Commerce Bank, during the periods included in the accompanying
consolidated financial statements. This commentary should be read in
conjunction with the financial statements and the related notes and the other
statistical information included in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management for
future operations, and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. The words "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate,"
"continue," "may," and "intend," as well as other similar words and expressions
of the future, are intended to identify forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including, without limitation:
o the effects of future economic conditions;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o changes in interest rates and their effect on the level and composition
of deposits, loan demand, and the values of loan collateral, securities
and other interest-sensitive assets and liabilities;
o our ability to control costs, expenses, and loan delinquency rates; and
o the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other
mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally,
nationally, and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and
the Internet.
Results of Operations for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001:
Consolidated net income for our third quarter of 2002, which ended September 30,
2002, was $21,342, or $.02 per share, compared to a net loss of $25,065, or $.03
per share, for the third quarter of 2001, which ended September 30, 2001. This
improvement reflects increased earnings from continued growth in earning assets
since the bank commenced operations in May 1999 as well as an increase in
non-interest income. Following is a discussion of the more significant
components of our net income.
Net Interest Income
- -------------------
The largest component of total 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 September 30, 2002 was
$505,041, compared to $435,954 for the same period last year, an increase of
16%. This increase was the result of increased balances of earning assets, the
impact of lower interest rates on our interest-bearing liabilities, offset
partially by the effect of lower interest rates on earning assets.
For the quarter ended September 30, 2002, average earning assets totaled $48.1
million with an annualized average yield of 6.3%. Average earning assets and
annualized average yield were $42.7 million and 7.7%, respectively, for the
quarter ended September 30, 2001.
9
Because 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 68% and 59% of average
earning assets for the third quarter of 2002 and 2001, respectively. Loan
interest income for the three-month period ended September 30, 2002 totaled
$541,604, compared to $521,436 for the same period in 2001. The annualized
average yield on loans was 6.7% for the quarter ended September 30, 2002,
compared to 8.3% for the same period in 2001. The yield decreased as a result of
the declining interest rate environment and its immediate impact on our variable
rate loan portfolio (which is about 72% of our loans). Average balances of loans
increased by $7.4 million to $32.5 million during the quarter ended September
30, 2002. The increase in average balances offset the impact of the decrease in
yield on interest income.
Investment securities averaged $15.1 million, or 31% of average earning assets,
for the third quarter of 2002, compared to $17.2 million, or 40% of average
earning assets, for the same period in 2001. Interest earned on investment
securities amounted to $215,294 for the three months ended September 30, 2002,
compared to $295,817 for the three months ended September 30, 2001. Investment
securities yielded 5.7% during the third quarter of 2002, compared to 6.9%
during the same period last year. This difference resulted from the effect of
higher yielding callable bonds held in the portfolio during the period ended
September 30, 2001 being called prior to the quarter ended September 30, 2002.
Interest expense for the quarter ended September 30, 2002 was $253,603 compared
to $383,050 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 $39.7 million during the quarter ended
September 30, 2002 from $34.8 million during the quarter ended September 30,
2001, the amount of related interest expense for the current year quarter
decreased by $97,783. The decrease was due to market interest rates declining
throughout 2002 which has impacted the rates we offer to our depositors.
Interest on other interest-bearing liabilities for the quarter ended September
30, 2002 was $33,146, compared to $64,810 reported during the same period in
2001. The decrease was the result of a combination of lower average balances and
lower interest rates. The overall cost of funds was 2.26% for the quarter ended
September 30, 2002, compared to 3.86% for the same period in 2001.
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 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, 2002, the provision for loan losses was
$38,470, compared to $33,776 for the same period last year. See Balance Sheet
Review - Loan Portfolio and Allowance for Loan Losses.
Non-Interest Income
- -------------------
Non-interest income for the quarter ended September 30, 2002 was $153,378,
compared to $46,140 for the same period in 2001, an increase of $107,238. The
largest component of the increase was attributable to a gain of $47,008 on the
sale of investment securities. Since the principal purpose of our investment
portfolio is liquidity management and not to derive income from trading
activity, we consider this gain a nonrecurring item. Currently, we have no plans
to sell additional securities. Mortgage brokerage income was $57,381, compared
to $19,999 for the same period in 2001, an increase of $37,382. Mortgage loan
originations in recent months have increased due to refinancing activity related
to the current low mortgage loan interest rate environment. Other fees and
charges increased due to the growth in account relationships experienced during
the current period, particularly checking accounts.
10
Non-Interest Expense
- --------------------
Non-interest expense for the quarter ended September 30, 2002 was $582,407,
compared to $480,257 for the same period in 2001. The principal component of
this increase was in salaries and benefits, the largest component of
non-interest expense, which increased by $73,953 to $337,100 for the three
months ended September 30, 2002 from $263,147 for the three-month period ended
September 30, 2001. This increase is the result of annual raises and the hiring
of additional staff since the prior year quarter, particularly an additional
commercial lender and a retail banking manager. Additionally, commissions paid
on mortgage loan originations increased during the current quarter due to the
increase in mortgage origination income as previously discussed. We expect
salaries and benefits to continue to increase as we continue to grow and add
personnel to support the growth.
Results of Operations for the nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001:
Consolidated net income for our first nine months of 2002, which ended September
30, 2002, was $32,273, or $.03 per share, compared to a net loss of $104,964, or
$.10 per share, for the same period last year. Following is a discussion of the
more significant components of our net income.
Net Interest Income
- -------------------
Net interest income for the nine months ended September 30, 2002 was $1,453,203,
compared to $1,206,974 for the same period last year, an increase of 20%. This
increase is attributable to the same factors previously cited in the discussion
of the quarterly results.
For the nine months ended September 30, 2002, average earning assets totaled
$46.9 million with an annualized average yield of 6.2%. Average earning assets
and annualized average yield were $40.5 million and 7.8%, respectively, for the
nine months ended September 30, 2001. As discussed earlier, the amount of
earning assets has increased, but due to the significant drop in prevailing
interest rates, the yield earned on our assets decreased and had a greater
impact on total interest income than did the increased balances. This is
reflected in the fact that total interest income decreased to $2,185,418 from
$2,356,121 for the nine months ended September 30, 2002 and 2001, respectively.
Loans comprised approximately 67% and 58% of average earning assets for the
first nine months of 2002 and 2001, respectively. Loan interest income for the
nine-month period ended September 30, 2002 totaled $1,509,100, compared to
$1,469,751 for the same period in 2001. The annualized average yield on loans
was 6.5% for the nine months ended September 30, 2002, compared to 8.4% for the
same period in 2001. As discussed above, the yield decrease resulted from the
declining interest rate environment and its immediate impact on our variable
rate loan portfolio. Average balances of loans increased by $7.8 million to
$31.2 million September 30, 2002 from $23.4 million during the nine months ended
September 30, 2001. The increase in average balances had a greater impact on
loan interest than did the decrease in yield on interest income.
Investment securities averaged $15.4 million, or 33% of average earning assets,
for the first nine months of 2002, compared to $16.6 million, or 41% of average
earning assets, for the same period in 2001. Interest earned on investment
securities amounted to $673,958 for the nine months ended September 30, 2002,
compared to $867,998 for the nine months ended September 30, 2001. Investment
securities yielded 5.8% during the third quarter of 2002, compared to 7.0%
during the same period last year. This difference resulted from the effect of
higher yielding callable bonds held in the portfolio during the period ended
September 30, 2001 being called prior to the quarter ended September 30, 2002.
11
Interest expense for the nine months ended September 30, 2002 was $732,215,
compared to $1,149,147 for the same period last year, a decrease of $416,932,
which was attributable to lower prevailing interest rates during the current
nine-month period. The principal component of the decrease in total interest
expense was a decrease in interest on deposits, which decreased by $403,939. The
average balance of deposits increased to $38.2 million during the nine months
ended September 30, 2002 from $33.9 million during the nine months ended
September 30, 2001, while the average cost of deposits decreased to 2.21% from
4.07% during the same respective periods. Other components of interest expense
for the quarter ended September 30, 2002 were interest of $12,502 on federal
funds purchased, and $69,928 on securities sold under agreement to repurchase,
and $17,550 on advances from FHLB. The overall cost of funds was 2.23% for the
nine months ended September 30, 2002, compared to 4.09% for the same period in
2001.
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 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 nine months ended September 30, 2002, the provision for loan losses was
$68,470, compared to $95,572 for the same period last year. See Balance Sheet
Review - Loan Portfolio and Allowance for Loan Losses.
Non-Interest Income
- -------------------
Non-interest income for the nine months ended September 30, 2002 was $271,256,
compared to $155,031 for the same period in 2001, an increase of $116,225. This
increase is attributable to the same factors previously cited in the discussion
of the quarterly results.
Non-Interest Expense
- --------------------
Non-interest expense for the nine months ended September 30, 2002 was
$1,602,300, compared to $1,466,203 for the same period in 2001. Salaries and
employee benefits are the largest component of non-interest expense. This
category increased by $85,522 to $892,535 for the nine-month period ended
September 30, 2002 from $807,013 for the nine months ended September 30, 2001.
The increase is a result of annual raises and the addition of personnel as
previously cited in the discussion of the quarterly results. Occupancy, office
and equipment expense totaled $229,044 for the first nine months of 2002,
compared to $198,102 for the same period last year, which is largely
attributable to increases in property taxes and maintenance.
Data processing expense totaled $137,670 for the nine-month period ended
September 30, 2002, compared to $124,987 for the same period last year. The
majority of this expense represented the cost of our third-party data processing
provider. The largest components of "other" expenses are insurance, telephone,
legal, and accounting.
Balance Sheet Review at September 30, 2002
General
- -------
Total consolidated assets increased $8.1 million to $59.7 million at September
30, 2002 from $51.6 million at December 31, 2001. This 16% increase in assets
was comprised principally of a $6.4 million increase in net loans. Our loans
have increased in part due to the hiring of an additional commercial loan
officer during the first quarter of the current year and our continued focus on
establishing new client relationships. Cash and federal funds sold increased
$2.3 million from December 31, 2001 to September 30, 2002.
There was a $7.9 million increase in deposits, bringing deposits up to $45.6
million at September 30, 2002. The increase in deposits was principally
attributable to new deposit account relationships established during the period.
Since deposit growth slightly outpaced loan growth, we invested the excess
liquidity in short-term federal funds, in anticipation of the need to fund loan
growth in the short term.
12
For more analysis of the components of the changes in asset and liabilities, see
the following discussion of major balance sheet categories and the Consolidated
Statements of Cash Flows included in "Item 1. Financial Statements."
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 loan demand.
Loan Portfolio and Allowance for Loan Losses
- --------------------------------------------
Outstanding loans represented the largest component of earning assets as of
September 30, 2002 at $35.3 million, or 66% of total earning assets, compared to
63% at December 31, 2001. Loans have increased 22% since December 31, 2001.
Balances within the major loan categories were as follows:
September 30, December 31,
2002 2001
------------- ------------
Commercial $ 6,151,563 $ 7,545,371
Real estate - 1-4 family 3,581,169 2,657,284
1-4 family equity lines 3,535,838 2,003,867
Real estate - commercial, construction 20,133,338 14,781,487
Consumer and installment loans 1,945,290 1,959,154
------------ ------------
Gross loans $ 35,347,198 $ 28,947,163
============ ============
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.
Management's judgment as to the adequacy of the allowance is based upon a number
of assumptions about future events, which it believes 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 following is an analysis
of the allowance for loan losses:
Allowance for loan losses, December 31, 2001 $ 405,000
Provision 68,470
Charge-offs (23,093)
---------
Allowance for loan losses, September 30, 2002 $ 450,377
=========
Allowance for loan losses to loans outstanding:
September 30, 2002 1.27%
=========
December 31, 2001 1.40%
=========
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. Interest income on
these loans is recognized when payments are received. There were neither any
nonaccrual loans nor any loans delinquent more than 90 days at September 30,
2002 and December 31, 2001.
13
Investment Portfolio
- --------------------
Investment securities represented 29% and 35% of earning assets at September 30,
2002 and December 31, 2001, respectively. We primarily invest in government
agency or government-sponsored agency securities, 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 of Atlanta.
The following is a table of investment securities by category at September 30,
2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------- ------------
U. S. Government agencies and U. S.
Government sponsored agencies $ 2,019,660 $ 6,776,200
Agency mortgage-backed securities 8,323,059 3,090,100
Agency collateralized mortgage obligations 1,756,720 2,445,845
Corporate bonds and other debt securities 3,047,671 3,377,400
FRB stock 237,250 237,250
FHLB stock 250,000 65,400
------------- ------------
Total $ 15,634,360 $ 15,992,195
============= ============
Deposits
- --------
Balances within the major deposit categories as of September 30, 2002 and
December 31, 2001 were as follows:
September 30, December 31,
2002 2001
------------- ------------
Non-interest bearing demand deposits $ 8,050,895 $ 6,539,607
Interest bearing checking 2,950,042 3,367,344
Savings deposits 585,918 452,123
Money market accounts 14,257,095 10,847,650
Time deposits less than $100,000 9,700,649 7,442,601
Time deposits of $100,000 or more 10,024,535 9,065,760
------------- ------------
$ 45,569,134 $ 37,715,085
============= ============
Other Borrowings
- ----------------
In November 2001, we purchased through a correspondent bank a U. S. Government
agency bond in the amount of $4.9 million, yielding 4.25%. We simultaneously
sold the bond to the correspondent bank, with an option to repurchase at a
specified future date ("repurchase agreement"). At December 31, 2001, the bond
is included in our investment securities on our balance sheet and the repurchase
agreement is reflected as a liability on the balance sheet. The bond had a
stated maturity date of March 13, 2005, but was callable quarterly at the option
of the issuer. In August 2002, the bond was called and consequently, we did not
renew the repurchase agreement.
Also in August 2002, we obtained advances from the FHLB with maturities of 3
months to 4 years. See Notes to Financial Statements included in "Item 1.
Financial Statements" for details of FHLB advances. The proceeds of the advances
were used to purchase mortgage-backed securities with stated maturities of 10 to
20 years, although average lives will be shorter due to principal repayments.
14
Interest Rate Sensitivity
- -------------------------
Interest rate sensitivity is defined as the exposure to variability in net
interest income resulting from changes in market-based interest rates.
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 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. We believe that interest rate risk management becomes
increasingly important in an interest rate environment and economy such as the
one that we are currently experiencing.
We monitor interest rate sensitivity by measuring our interest sensitivity
through a "gap" analysis, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing
within a given time period. However, since interest rates and yields on various
interest sensitive assets and liabilities do not all adjust in the same degree
when there is a change in prevailing interest rates (such as prime rate), the
traditional gap analysis is only a general indicator of rate sensitivity and net
interest income volatility. Therefore, we also contract with a third-party to
assist in the preparation of a rate sensitivity model which applies rate
sensitivity measures to assets and liabilities that will reprice within one year
at assumed upward and downward shifts in prime rate. From our latest analysis,
we have estimated that net interest income over a one-year timeframe generally
would decrease with a decrease in prime rate and increase with an increase in
prime rate. The estimates, using a 100 basis point shift in prime rate downward
and upward, shows an effect on net interest income of approximately minus
$100,000 and plus $100,000, respectively. These numbers are to be taken as
general indications only, in that they were derived from a methodology that
utilizes numerous assumptions about sensitivities of various assets and
liabilities to changes in interest rates. These estimates are used as a guide by
management, recognizing that model risk is always present whenever assumptions
of the future must be made. Actual results may differ from the estimates, should
there be changes in interest rates.
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, 2002, our liquid assets, consisting of cash and due from banks
and federal funds sold, amounted to $4.4 million and represented 7.3% of total
assets. Investment securities totaled $15.6 million and represented 26.2% of
total assets. Investment securities that have not been pledged as collateral for
deposits in excess of FDIC coverage or for other borrowings (and classified as
available-for sale) provide a secondary source of liquidity since they can be
converted to cash in a timely manner. At September 30, 2002, we had securities
with a market value of $5.2 million classified as available for sale that were
not pledged. 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, 2002 was 77.6%. We plan to meet our future cash needs through the
liquidation of temporary investments, maturities of loans, maturities and cash
flows from investment securities, generation of deposits, and the utilization of
borrowing arrangements with correspondent banks. We maintain federal funds lines
of credit with correspondent banks in the amount of $5,800,000, lines of credit
with the Federal Reserve Bank, and we are a member of the Federal Home Loan
Bank, from which application for borrowings can be made for leverage purposes.
At September 30, 2002, we had approximately $11.9 million in available credit
under our FHLB facility, of which $5.0 million had been utilized. Any advances
under the FHLB facility must be collateralized with qualifying collateral, which
in our case currently would be investment securities. 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.
15
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 September 30,
2002, we had issued commitments to extend credit of $5.5 million through various
types of commercial lending arrangements (principally unfunded lines of credit).
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. We manage the credit risk on these
commitments by subjecting them to normal underwriting and risk management
processes
The bank has 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 September 30, 2002 was $8.9 million, compared to $8.8
million at December 30, 2001. The increase in shareholders' equity during the
period is due to net income of $32,273 and an increase of $110,349 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 shareholders' 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,
2002. Below is a table that reflects the leverage and risk-based regulatory
capital ratios of the bank at September 30, 2002.
Required Actual
amount Required amount Actual
(in $000's) Percent (in $000's) Percent
---------- -------- ----------- --------
Tier 1 capital $1,821 4.0% $7,098 15.6%
Total capital 3,642 8.0 7,548 16.6
Tier 1 leverage ratio 2,133 4.0 7,098 13.3
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.
Recently Issued Accounting Standards
Accounting standards that have been issued or proposed that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
16
Item 3. Controls and Procedures
- -------------------------------
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
There are no material pending legal proceedings to which we or our subsidiary is
party to 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 of Security Holders to a Vote
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during the three
months ended September 30, 2002.
Item 5. Other Information
- -------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the third quarter ended
September 30, 2002.
99.1 The Company filed a Form 8-K on August 9, 2002 to disclose that
the Chief Executive Officer, Frank W. Wingate, and the Chief
Financial Officer, R. Lamar Simpson, each furnished to the SEC
the certification required pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
18
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 12, 2002 By: /s/ Frank W. Wingate
--------------------------------------------
Frank W. Wingate
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ R. Lamar Simpson
--------------------------------------------
R. Lamar Simpson
Senior Vice President and Chief Financial
Officer
19
Certification of Chief Executive Officer
I, Frank W. Wingate, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of New Commerce BanCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ Frank W. Wingate
--------------------------------------------
Frank W. Wingate
President and Chief Executive Officer
20
Certification of Chief Financial Officer
I, R. Lamar Simpson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of New Commerce BanCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ R. Lamar Simpson
--------------------------------------------
R. Lamar Simpson
Senior Vice President and Chief Financial
Officer