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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
|_| Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from ________________ to ________________
Commission file number 000-26587
COMMUNITY BANCORP OF NEW JERSEY
(Exact name of registrant as specified in its charter)
New Jersey 22-3666589
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3535 Highway 9 North, Freehold, New Jersey 07728
(Address of principal executive offices)
(732) 863-9000
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.).
Yes |_| No |X|
Common Stock, No Par Value-3,378,785 shares outstanding as of August 11, 2003
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at June 30, 2003
(Unaudited) and December 31, 2002 3
Consolidated Condensed Statements of Income for the three and six
months ended June 30, 2003 and 2002 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity at June 30, 2003 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements (Unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Exhibit 31.1 - Section 302 Certification 28
Exhibit 31.2 - Section 302 Certification 29
Exhibit 32 - Section 906 Certification 30
SIGNATURES 31
2
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,
2003 December 31,
(Unaudited) 2002
----------- ------------
(Dollars in thousands)
ASSETS
Cash and due from banks .............................................. $ 15,162 $ 9,424
Investment securities available-for-sale ............................. 166,259 131,676
Loans receivable ..................................................... 198,929 182,967
Allowance for loan loss .............................................. (2,579) (2,406)
- ---------------------------------------------------------------------- --------- ---------
Net loans receivable ................................. 196,350 180,561
- ---------------------------------------------------------------------- --------- ---------
Premises and equipment, net .......................................... 6,219 6,280
Accrued interest receivable .......................................... 1,732 2,193
Other assets ......................................................... 3,794 2,085
- ---------------------------------------------------------------------- --------- ---------
Total Assets ......................................... $ 389,516 $ 332,219
====================================================================== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand .................................... $ 64,943 $ 51,971
Interest bearing - NOW ......................................... 31,151 23,455
Savings and money market ....................................... 123,877 100,784
Certificates of deposit, under $100,000 ........................ 77,460 76,815
Certificates of deposit, $100,000 and over ..................... 41,699 38,604
- ---------------------------------------------------------------------- --------- ---------
Total deposits ....................................... 339,130 291,629
- ---------------------------------------------------------------------- --------- ---------
Short-term borrowings ................................................ 19,400 11,500
Accrued interest payable ............................................. 86 38
Other liabilities .................................................... 862 454
Guaranteed Preferred Beneficial Interest in the Company's
Subordinated Debt .............................................. 5,000 5,000
- ---------------------------------------------------------------------- --------- ---------
Total liabilities .................................... 364,478 308,621
- ---------------------------------------------------------------------- --------- ---------
Stockholders' equity
Common stock - authorized 10,000,000 shares of
no par value; issued and outstanding, net of treasury
shares, 3,375,194 at June 30, 2003 and 3,172,945
at December 31, 2002 ..................................... 29,318 25,512
Accumulated deficit ............................................ (4,365) (2,239)
Accumulated other comprehensive income ......................... 448 688
Treasury stock, 22,357 shares, at cost ......................... (363) (363)
- ---------------------------------------------------------------------- --------- ---------
Total stockholders' equity ........................... 25,038 23,598
- ---------------------------------------------------------------------- --------- ---------
Total Liabilities and Stockholder's Equity ........... $ 389,516 $ 332,219
====================================================================== ========= =========
See accompanying notes to consolidated condensed financial statements.
3
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
------------------ ----------------
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including Fees .............................. $3,218 $2,889 $6,343 $5,681
Federal funds sold ................................. 2 3 9 5
Investment securities .............................. 1,237 963 2,290 1,925
- ---------------------------------------------------------- ------ ------ ------ ------
Total interest income ................. 4,457 3,855 8,642 7,611
- ---------------------------------------------------------- ------ ------ ------ ------
INTEREST EXPENSE
Interest bearing - NOW ............................. 60 50 114 92
Savings and money market ........................... 484 443 936 841
Certificates of deposit ............................ 817 704 1,679 1,515
Short-term borrowings .............................. 46 30 71 59
Long-term borrowings ............................... 63 -- 122 --
- ---------------------------------------------------------- ------ ------ ------ ------
Total interest expense ................ 1,470 1,227 2,922 2,507
- ---------------------------------------------------------- ------ ------ ------ ------
Net interest income ................... 2,987 2,628 5,720 5,104
Provision for loan losses ................................ 60 595 173 685
- ---------------------------------------------------------- ------ ------ ------ ------
Net interest income after provision
for loan losses ................. 2,927 2,033 5,547 4,419
- ---------------------------------------------------------- ------ ------ ------ ------
Non-interest income:
Service fees on deposit accounts ................... 154 109 272 205
Service fees on loans .............................. 115 96 181 232
Gains on sales of investment securities ............ -- -- 372 --
Other fees and commissions ......................... 120 104 268 258
- ---------------------------------------------------------- ------ ------ ------ ------
Total non-interest income ............. 389 309 1,093 695
- ---------------------------------------------------------- ------ ------ ------ ------
Non-interest expense:
Salaries and wages ................................. 955 837 1,929 1,632
Employee benefits .................................. 178 149 339 283
Occupancy expense .................................. 210 184 452 344
Depreciation - occupancy, furniture & equipment .... 239 220 472 437
Other .............................................. 777 717 1,532 1,338
- ---------------------------------------------------------- ------ ------ ------ ------
Total non-interest expense ............ 2,359 2,107 4,724 4,034
- ---------------------------------------------------------- ------ ------ ------ ------
Income before income taxes ............ 957 235 1,916 1,080
Income tax expense ....................................... 346 84 699 376
- ---------------------------------------------------------- ------ ------ ------ ------
Net Income ............................ $ 611 $ 151 $1,217 $ 704
========================================================== ====== ====== ====== ======
Per Common Share:
Net income - basic ................................. $0.18 $0.05 $0.36 $0.21
Net income - diluted ............................... $0.17 $0.04 $0.34 $0.20
Weighted average shares outstanding (in thousands):
Basic .............................................. 3,356 3,331 3,344 3,331
Diluted ............................................ 3,582 3,509 3,568 3,481
See accompanying notes to consolidated condensed financial statements.
4
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
(1) Other Total
Common Treasury Accumulated Comprehensive Comprehensive Stockholders'
Stock Stock Deficit Income Income Equity
------ -------- ----------- ------------- ------------- -------------
(Dollars in thousands)
Balance December 31, 2002 .................. $25,512 $(363) $(2,239) $ 688 $ 23,598
5% stock dividend (158,560 shares) ......... 3,338 -- (3,338) -- --
Cash in lieu of fractional shares .......... -- -- (5) -- (5)
Options exercised .......................... 344 -- -- -- 344
Tax benefit from exercised non-qualified
stock options ........................ 124 -- -- -- 124
Comprehensive Income:
Net Income ........................... -- -- 1,217 -- $ 1,217 1,217
Decrease in unrealized holding
gains on securities, net ........ -- -- -- (240) (240) (240)
------- --------
Total Comprehensive Income ................. -- -- -- -- $ 977
------- ----- ------- ----- =======
Balance, June 30, 2003 (Unaudited) ......... $29,318 $(363) $(4,365) $ 448 $ 25,038
======= ===== ======= ===== ========
(1) Includes accumulated charges for stock dividends of $9,168 and $5,825 at
June 30, 2003 and December 31, 2002, respectively.
See accompanying notes to consolidated condensed financial statements.
5
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
--------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income ........................................................ $ 1,217 $ 704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 472 437
Provision for loan losses .............................. 173 685
Accretion of investment discount ....................... (6) (11)
Amortization of investment premium ..................... 595 6
Gain on sale of investment securities .................. (372) --
Decrease (increase) in accrued interest receivable ..... 461 (146)
Increase in other assets ............................... (672) (253)
Increase (decrease) in accrued interest payable ........ 48 (1,060)
Increase (decrease) in other liabilities ............... 408 (165)
- ---------------------------------------------------------------------------- --------- --------
Net cash provided by operating activities ....... 2,324 197
- ---------------------------------------------------------------------------- --------- --------
Cash flows from investing activities:
Purchases of investment securities available-for-sale ............. (210,932) (30,208)
Proceeds from sales of investment securities ...................... 53,890 --
Proceeds from maturities and calls and of investment securities ... 122,089 24,529
Net increase in loans ............................................. (15,962) (24,217)
Purchase of bank owned life insurance ............................. (1,000) --
Purchases of premises and equipment ............................... (411) (379)
- ---------------------------------------------------------------------------- --------- --------
Net cash used in investing activities ........... (52,326) (30,275)
- ---------------------------------------------------------------------------- --------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts .............. 43,761 28,474
Net increase (decrease) in certificates of deposit ................ 3,740 (7,090)
Proceeds from exercise of stock options ........................... 344 --
Stock dividend - cash paid in lieu of fractional shares ........... (5) (5)
Increase in short-term borrowings ................................. 7,900 12,700
- ---------------------------------------------------------------------------- --------- --------
Net cash provided by financing activities ....... 55,740 34,079
- ---------------------------------------------------------------------------- --------- --------
Net increase in cash and cash equivalents .................................. 5,738 4,001
Cash and cash equivalents as of beginning of year .......................... 9,424 9,342
- ---------------------------------------------------------------------------- --------- --------
Cash and cash equivalents as of end of period .............................. $ 15,162 $ 13,343
============================================================================ ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .......................... $ 2,934 $ 3,567
Cash paid during the period for income taxes ...................... $ 837 $ 694
See accompanying notes to consolidated condensed financial statements.
6
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed financial statements of Community Bancorp of New
Jersey (the Company) included herein have been prepared without audit pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the financial statement date and the
reported amounts of revenues and expenses during the reporting period. Since
management's judgment involves making estimates concerning the likelihood of
future events, the actual results could differ from those estimates which will
have a positive or negative effect on future period results. The accompanying
consolidated condensed financial statements reflect all adjustments which are,
in the opinion of management, necessary to a fair statement of the results for
the interim periods presented. Such adjustments are of a normal recurring
nature. These consolidated condensed financial statements should be read in
conjunction with the audited financial statements and the notes thereto as of
and for the year ended December 31, 2002. The results for the three months and
six months ended June 30, 2003 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003.
The consolidated condensed financial statements include the accounts of the
Company and its wholly owned subsidiary, the Community Bank of New Jersey. All
significant inter-company accounts and transactions have been eliminated.
NOTE B - EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic
EPS excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted EPS takes into account the potential dilution that could occur
if securities or other contracts to issue common stock were exercised and
converted into common stock. EPS is computed based on the weighted average
number of shares of common stock outstanding.
NOTE C - STOCK DIVIDEND
On April 16, 2003 the Company's Board of Directors approved a 5% stock dividend
payable May 15, 2003 to shareholders of record as of April 28, 2003. Weighted
average shares outstanding and earnings per share were retroactively adjusted to
reflect the stock dividend.
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
Off Balance Sheet Guarantees
The Company adopted FASB Interpretation 45 (FIN 45) Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain
7
non-financial contractual obligations. The Company previously did not record an
initial liability, other than the fees received for these letters of credit,
when guaranteeing obligations unless it became probable that the Company would
have to perform under the guarantee. FIN 45 applies prospectively to letters of
credit the Company issues or modifies subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit as the fee
received from the customer. The maximum potential undiscounted amount of future
payments of these letters of credit as of June 30, 2003 are $4.8 million and
they expire through April, 2005. Amounts due under these letters of credit would
be reduced by any proceeds that the Company would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
Variable Interest Entities
In January, 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has not acquired
any variable interest entities after February 1, 2003 through June 30, 2003. The
Company is in process of determining what impact, if any, the adoption of the
provisions of FIN 46 will have on entities held prior to the issuance of FIN 46
on its financial condition or results of operations. The Company does not
anticipate FIN 46 to have a material impact on the consolidated financial
position or results of operations.
The Company has also evaluated the impact of FIN 46 on variable interest
entities consolidated by the Company prior to the issuance of FIN 46. Management
has determined that CBNJ Capital Trust I qualifies as a variable interest entity
under FIN 46. CBNJ Capital Trust I issued mandatorily redeemable preferred stock
to investors and loaned the proceeds to the Company. CBNJ Capital Trust I holds,
as its sole asset, subordinated debentures issued by the Company in 2002. The
timing and amount of payments on the subordinated debentures are the same as the
timing and amount of payments by CBNJ Capital Trust I on the mandatorily
redeemable preferred stock. CBNJ Capital Trust I is currently included in the
Company's consolidated balance sheet and statements of income. Management
believes that CBNJ Capital Trust I should continue to be included in the
Company's consolidated financial statements after the effective date of FIN 46.
However, as additional interpretations related to entities similar to CBNJ
Capital Trust I become available, management will reevaluate its conclusion that
CBNJ Capital Trust I should be included in the consolidated financial statements
and its potential impact to its Tier I capital calculation under such
interpretations.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debt as a liability. As a result, management does not
anticipate the adoption of SFAS No. 150 to have a material impact on the
Company's financial position or results of operations.
8
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE E - INVESTMENT SECURITIES
The following tables present the book values, fair values and gross unrealized
gains and losses of the Company's investment securities portfolio as of June 30,
2003 and December 31, 2002 (Dollars in thousands).
June 30, 2003 (Unaudited)
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available-for-sale:
U.S. Government and agency securities .... $163,047 $ 717 $ -- $163,764
Other securities ......................... 2,495 -- -- 2,495
-------- ------ -------- --------
$165,542 $ 717 $ -- $166,259
======== ====== ======== ========
December 31, 2002
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available-for-sale:
U.S. Government and agency securities .... $128,937 $1,109 $ -- $130,046
Other securities ......................... 1,630 -- -- 1,630
-------- ------ -------- --------
$130,567 $1,109 $ -- $131,676
======== ====== ======== ========
The following table sets forth as of June 30, 2003 the maturity distribution of
the Company's investment portfolio (Dollars in thousands).
Available-for-sale
-----------------------
Amortized Fair
Cost Value
--------- --------
Due in one year or less ................ $ -- $ --
Due after one year through five years .. 157,963 158,594
Due after five years through ten years . 6,584 6,670
Due after ten years .................... 995 995
-------- --------
$165,542 $166,259
======== ========
9
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
NOTE F - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of June
30, 2003 and December 31, 2002 (Dollars in thousands).
Loan Portfolio By Type of Loan
--------------------------------------------------
June 30, 2003
(Unaudited) December 31, 2002
---------------------- ----------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and industrial loans .... $ 39,010 19.61% $ 46,998 25.69%
Commercial mortgage loans .......... 99,823 50.18% 94,067 51.41%
Residential mortgages .............. 2,909 1.46% 5,829 3.19%
Construction loans ................. 32,352 16.26% 13,295 7.26%
Consumer loans ..................... 24,826 12.48% 22,193 12.13%
Other loans ........................ 9 0.01% 585 0.32%
-------- ------ -------- ------
$198,929 100.00% $182,967 100.00%
======== ====== ======== ======
The following table represents the activity in the allowance for loan losses for
the six month periods ended June 30, 2003 and 2002 and the year ended December
31, 2002 (Dollars in thousands).
Allowance For Loan Losses
-------------------------------------
Six Months Ended
June 30,
(Unaudited) Year Ended
-------------------- December 31,
2003 2002 2002
------ ------- ------------
Balance - beginning of period ............... $2,406 $ 1,964 $ 1,964
Recoveries .................................. -- -- 1
Charge-offs ................................. -- (1) (452)
Provision for loan losses ................... 173 685 893
------ ------- -------
Balance - end of period ..................... $2,579 $ 2,648 $ 2,406
====== ======= =======
Balance of Allowance at period-end as a %
of loans at period-end .................. 1.30% 1.54% 1.31%
====== ======= =======
10
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE G - STOCK-BASED COMPENSATION
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue
accounting for employee stock options and similar equity instruments under APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that continue
to account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair-value
based method of accounting defined in SFAS No. 123 had been applied.
At June 30, 2003, the Company had six stock-based compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Stock-based employee compensation costs are not
reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, to stock-based employee compensation (in thousands, except per share
amounts).
June 30
(unaudited)
2003 2002
---- ----
Net income, as reported $1,217 $ 704
Less stock-based compensation costs
determined under fair value
based method for all awards 57 90
------ -----
Net income, pro forma 1160 614
Earnings per share - basic as reported $ 0.36 $0.21
Earnings per share - basic proforma 0.35 0.18
Earnings per share - diluted as reported $ 0.34 $0.20
Earnings per share - diluted proforma 0.33 0.17
11
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies, Judgements and Estimates
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (US GAAP) and
predominant practices within the banking industry. The accompanying consolidated
financial statements include the accounts of the Company, and all its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated.
The principal estimate that is particularly susceptible to significant change in
the near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the individual
loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
The allowance for loan loss is maintained at an amount management deems adequate
to cover estimated losses. In determining the level to be maintained, management
evaluates many factors, including current economic trends, industry experience,
historical loss experience, industry loan concentrations, the borrowers' ability
to repay and repayment performance, and estimated collateral values. In the
opinion of management, the present allowance is adequate to absorb reasonable,
foreseeable loan losses. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions or any of the other factors used in
management's determination. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for losses on loans. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Loans are placed on non-accrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other non-accrual loans is recognized only to the extent of interest payments
received.
The Company accounts for its impaired loans in accordance with SFAS No. 114.
This standard requires that a creditor measures impairment based on the present
value of future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable.
The Company recognizes deferred tax assets and liabilities for the future tax
effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than
12
not. In the event management determines the inability to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
This financial review presents management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated condensed financial statements and the accompanying notes included
elsewhere herein.
FINANCIAL CONDITION
Total assets at June 30, 2003 increased by $57.3 million, or 17.2%, to $389.5
million compared to $332.2 million at December 31, 2002. Total assets averaged
$353.1 million in the first six months of 2003, a $73.2 million, or 26.2%,
increase from the 2002 full year average of $279.9 million. Average loans
increased $22.1 million, or 13.1%, to $191.4 million in the first six months of
2003, from the 2002 full year average of $169.3 million. Average investment
securities increased by $49.1 million, or 52.3%, to $143.0 million; average
Federal funds sold increased by $1.1 million, or 183.3%, to $1.7 million; the
average of all other assets increased by $1.2 million, or 6.5%, to $19.6
million; and the loan loss reserve average increased $0.3 million, or 13.6%, to
$2.5 million during the first six months of 2003 compared to the full year 2002
averages.
These increases in average assets were funded primarily by a $65.1 million, or
26.3%, increase in average deposits, as average deposits for the first six
months of 2003 increased to $312.5 million from the full year 2002 average of
$247.4 million. Increases in average assets were further funded by a $4.8
million increase in average Trust preferred securities funding as a result of
the December 2002 $5.0 million Trust preferred offering, and was further
increased by $1.8 million, or 20.0%, as average short-term borrowings for the
first six months of 2003 increased to $10.8 million from the full year 2002
average of $9.0 million.
Lending Activity
Total loans at June 30, 2003 were $198.9 million, an 8.7%, or $15.9 million
increase from December 31, 2002. The loan portfolio consists primarily of loans
secured by real estate, and, to a lesser extent, commercial, construction and
consumer loans. Changes in the composition of the loan portfolio during the
comparative periods included increases of $5.7 million in commercial mortgage
loans, $19.1 million in construction loans, and $2.6 million in consumer loans
and were offset by reductions of $8.0 million in commercial and industrial
loans, $2.9 million in residential mortgage loans and $0.6 million in other
loans.
The 8.7% increase in loans at June 30, 2003 compared to December 31, 2002 is
partially attributable to greater penetration of our marketplace and continued
loan demand within our market area and targeted customer base. Since September
1997, we have opened six new offices. Management believes that the maturation of
these branch locations will continue to provide us with lending opportunities as
well as funding sources for the loans. Further enhancing loan growth has been
our desire to provide quality customer service. Our focus is on the continued
origination, retention and service of a high quality loan portfolio.
Our loans are primarily to businesses and individuals located in Monmouth,
Middlesex, and Ocean Counties, New Jersey. We believe that our strategy of
customer service, competitive rate
13
structures, and selective marketing will continue to enable us to gain market
entry to local loans and deposits. Bank mergers and consolidations have also
contributed to our efforts to attract borrowers and depositors. We intend to
continue to pursue quality loans in all lending categories within our market
area.
Allowance for Loan Losses
The allowance for loan losses was $2.6 million, or 1.30% of total loans, at June
30, 2003 compared to $2.4 million, or 1.31% of total loans, at December 31,
2002. At June 30, 2003 and December 31, 2002 we had no non-accrual loans. The
increase in the balance of the allowance for loan losses is the result of our
review of several factors, including our assessment of economic conditions,
credit quality, and other loss factors that may be inherent in the existing loan
portfolio and the continued growth of our loan portfolio.
We attempt to maintain an allowance for loan losses at a sufficient level to
provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur and any recovery is credited to the
allowance. Risks within the loan portfolio are analyzed on a continuous basis by
our officers, by outside, independent loan review auditors, our Directors Loan
Review Committee and the Board of Directors. A risk system, consisting of
multiple grading categories, is utilized as an analytical tool to assess risk
and set appropriate reserves. Along with the risk system, management further
evaluates risk characteristics of the loan portfolio under current and
anticipated economic conditions and considers such factors as the financial
condition of the borrower, past and expected loss experience, and other factors
we feel deserve recognition in establishing an appropriate reserve. These
estimates are reviewed at least quarterly, and, as adjustments become necessary,
they are realized in the periods in which they become known. Additions to the
allowance are made by provisions charged to expense and the allowance is reduced
by net charge-offs (i.e. - loans judged to be uncollectible and charged against
the reserve, less any recoveries on such loans). Although we attempt to maintain
the allowance at a level deemed adequate, future additions to the allowance may
be necessary based upon changes in market conditions. In addition, various
regulatory agencies periodically review our allowance for loan losses. These
agencies may require us to take additional provisions based on their judgements
about information available to them at the time of their examination.
Investment Securities Activity
Investment securities increased by $34.6 million, or 26.3%, to $166.3 million at
June 30, 2003 compared to $131.7 million at December 31, 2002. During the first
six months of 2003, we utilized our liquidity in excess of loan demand to fund
additional purchases of investment securities available-for-sale. This strategy
resulted from Asset/Liability management considerations arising from our
analysis of several economic scenarios including reduced loan growth and deposit
repricing opportunities. During the first six months of 2003, maturities and
calls of $122.1 million in investment securities and proceeds from sales of
investment securities amounting to $53.9 million were used to fund loan growth
of $16.0 million. We utilized excess liquidity to fund additional purchases of
investment securities of $210.9 million as we changed the maturity distribution
of the investment securities portfolio.
At June 30, 2003, investment securities of $166.3 million, or 100.0% of the
total investment securities portfolio, were classified as available-for-sale. We
had no investment securities
14
classified as held-to-maturity or as trading securities. The investment
portfolio is comprised primarily of U.S. Government and agency securities with
stated maturities of under five years and with call features of two years or
less. We currently maintain an investment portfolio of short duration in order
to fund projected increased loan volume and to provide for other liquidity uses
as needed, and secondarily as an additional source of interest income.
Deposits
Deposits are our primary source of funds. Total deposits increased by $47.5
million, or 16.3%, to $339.1 million at June 30, 2003 compared to $291.6 million
at December 31, 2002. The increase in deposits during this period was primarily
due to greater penetration of our marketplace and the continued growth of our
new locations. As we adjusted the mix of our deposit base through marketing and
pricing initiatives, lower costing demand deposits, savings accounts, money
market and NOW accounts increased by $43.8 million, while higher costing
certificates of deposit increased by $3.7 million.
Average total deposits increased by $65.1 million, or 26.3%, to $312.5 million
for the six months ended June 30, 2003 compared to the 2002 full year average of
$247.4 million. Changes in the deposit mix averages for the six months ended
June 30, 2003 compared to the 2002 full year averages include a $20.8 million,
or 25.3%, increase in savings deposits; a $2.7 million, or 12.9%, increase in
NOW account deposits; a $30.1 million, or 33.1%, increase in time deposits; a
$2.7 million, or 37.0%, increase in money market deposits; and a $8.8 million,
or 19.1%, increase in non-interest bearing demand deposits. Short duration
certificate of deposit promotions, targeted to retain maturing deposits and to
gain market penetration, have contributed to deposit growth. Management intends
to continue to promote targeted deposit products as funding needs and other
balance sheet management considerations arise.
We emphasize relationships with commercial customers and seek to obtain
transactional accounts, which are frequently kept in non-interest bearing
deposits. We also emphasize the origination of savings and money market
deposits, which amounted to $123.9 million at June 30, 2003, by offering rates
higher than our peer group institutions. Our primary savings product is the
stepped rate savings account. The interest rate is based upon the amount on
deposit, and the deposit amount can be changed. We may modify the interest rate
paid without notice, and the depositor may withdraw their funds on demand. We
market this product as an alternative to time deposits and we believe it has
resulted in a higher rate of core deposits and lower cost of funds than our peer
group institutions. Deposits are obtained primarily from the market areas that
we serve.
Liquidity
Liquidity is a measurement of our ability to meet present and future funding
obligations and commitments. We adjust our liquidity levels in order to meet
funding needs for deposit outflows, repayment of borrowings, when applicable,
and the funding of loan commitments. We also adjust our liquidity level as
appropriate to meet our asset/liability objectives. Principal sources of
liquidity are deposit generation, access to purchased funds, including
borrowings from other financial institutions, repurchase agreements, maturities
and repayments of loans and investment securities, and net interest income and
fee income. Liquid assets (consisting of cash and Federal funds sold) comprised
3.9% and 2.8% of our total assets at June 30, 2003 and December 31, 2002,
respectively.
15
As shown in the Consolidated Condensed Statements of Cash Flows, our primary
source of funds at June 30, 2003 was increased targeted deposit products,
proceeds from maturities, calls and sales of investment securities, and to a
lesser extent, short-term borrowed funds. Deposit increases amounted to $47.5
million for the six months ended June 30, 2003 and proceeds from maturities,
calls and sales of investment securities amounted to $176.0 million. These
sources of funds were augmented with an increase of $7.9 million in short-term
borrowings as of June 30, 2003. During the first six months of 2003, we utilized
deposit growth, matured investment securities, and to a lesser extent,
short-term borrowings as funding sources for increased loans made to customers
amounting to $16.0 million and securities purchases amounting to $210.9 million.
We also have several additional sources of liquidity, including the
available-for-sale investment securities portfolio, which at June 30, 2003
amounted to $166.3 million. Also, many of our loans are originated pursuant to
underwriting standards which make them readily marketable to other financial
institutions or investors in the secondary market. In addition, in order to meet
liquidity needs on a temporary basis, we have established lines of credit with
other financial institutions to purchase up to $11.0 million in Federal funds
and may borrow funds at the Federal Reserve discount window, subject to our
ability to supply collateral. We are also a member of the Federal Home Loan Bank
of New York and have an additional combined overnight borrowing and term line of
$36.6 million. In addition, subject to certain Federal Home Loan Bank
requirements, we may also obtain longer-term advances of up to 30% of our
assets. As of June 30, 2003, we had $19.4 million in short-term borrowings.
We believe that our liquidity position is sufficient to provide funds to meet
future loan demand or the possible outflow of deposits, in addition to enabling
us to adapt to changing interest rate conditions.
Contractual Obligations and Other Commitments
During 2003, there have been no significant changes in the Company's contractual
obligations and other commitments from that reported in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Contractual
Obligations and Other Commitments" in the Company's Form 10-KSB for the year
ended December 31, 2002.
Capital Resources
Stockholder's equity increased by $1.4 million at June 30, 2003 compared to
December 31, 2002. The changes in stockholders' equity during the six months
ended June 30, 2003 were comprised of an increase from net income of $1.2
million and an increase of $344 thousand from exercised stock options, an
increase of $124 thousand in tax benefits from exercised non-qualified stock
options, and was partially offset by a decrease of $240 thousand in the
unrealized gains, net of taxes, in the available-for-sale investment securities
portfolio and $5 thousand cash paid in lieu of fractional shares associated with
our second quarter 5% stock dividend.
Our regulators, the Board of Governors of the Federal Reserve System (which
regulates bank holding companies), and the Federal Deposit Insurance
Corporation, have issued guidelines classifying and defining capital.
16
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at June 30, 2003 as well as the regulatory required
minimum and "well capitalized" capital ratios:
June 30, 2003 Regulatory Requirement
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
Risk-based Capital:
Tier I capital ratio .. 12.01% 9.79% 4.00% 6.00%
Total capital ratio ... 13.05% 10.84% 8.00% 10.00%
Leverage ratio ........ 8.07% 6.58% 3.00%-5.00% 5.00% or greater
As noted in the above table, the Company's and the Bank's capital ratios exceed
the minimum regulatory and "well capitalized" requirements.
Impact of Inflation and Changing Prices
Our financial statements and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most industrial
companies, nearly all of our assets and liabilities are monetary. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
RESULTS OF OPERATIONS for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002
Net Income
For the six months ended June 30, 2003, we earned $1.2 million compared to $704
thousand in net income for the same period last year. Basic and diluted net
income per share for the six months ended June 30, 2003 was $0.36 and $0.34,
respectively, compared to basic and diluted net income per share of $0.21 and
$0.20, respectively, for the same prior year period. The increase in net income
was primarily due to a $616 thousand, or 12.1%, increase in net interest income,
a $398 thousand, or 57.3%, increase in non-interest income, a decrease in the
loan loss provision of $512 thousand, and was partially offset by an increase in
non-interest expense of $690 thousand, or 17.1%, and increased income tax
expense of $323 thousand, or 85.9%.
Net Interest Income
Net interest income increased $616 thousand, or 12.1%, to $5.7 million for the
six months ended June 30, 2003 from $5.1 million for the same prior year period.
The increase in net interest income was due primarily to volume related
increases amounting to $1.4 million as average interest earning assets, net of
average interest bearing liabilities, increased by $11.8 million, or 23.2%, for
the first six months of 2003 compared to the same prior year period. The volume
17
related increases in net interest income were partially offset by rate related
decreases in net interest income amounting to $814 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the six months ended June 30, 2003 decreased to
3.43% compared to 4.28% for the same prior year period. The decrease in net
interest margin of 85 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 75.7% to
$143.0 million from $81.4 million. Excess liquidity was utilized in lower
yielding short-term investment securities as an alternative due to lower loan
funding needs. The changes in net interest margin resulted primarily from
implementation of asset/liability management strategies as the Federal Reserve
Bank reduced the target funds rate to 1.00% as of June 30, 2003.
Interest income increased $1.0 million, or 13.5%, to $8.6 million for the six
months ended June 30, 2003 compared to $7.6 million for the same period in 2002.
The improvement in interest income was primarily due to volume related increases
in income from the loan portfolio of $1.2 million, volume related increases in
income of $1.5 million in investment securities and volume related increases in
income from Federal funds sold of $9 thousand, as our growth resulted in an
increase in average earning assets of $95.5 million, or 39.7%, to $336.0 million
for the six months ended June 30, 2003 compared to $240.5 million for the same
period in 2002.
In addition to the volume related net increase amounting to $2.6 million, total
interest income was reduced by $1.6 million from rate related decreases as
interest rates on earning assets repriced to current lower yields compared to
yields in the same period in 2002.
Interest expense for the first six months of 2003 increased $415 thousand, or
16.6%, compared to the same prior year period. The increase in interest expense
was due primarily to net rate related decreases in interest bearing deposits,
which accounted for $798 thousand of the expense decrease, and was offset by
$1.2 million attributable to net volume related increases. The volume related
increases in interest bearing liabilities and net expense rate decreases are the
result of marketing and pricing decisions made by management in response to
changing market rates and the need to provide cost effective sources of funds.
The following tables titled "Consolidated Average Balance Sheet with Resultant
Interest and Average Rates" and "Analysis of Changes in Consolidated Net
Interest Income" present by category the major factors that contributed to the
changes in net interest income for the quarter ended June 30, 2003 compared to
the quarter ended June 30, 2002 and the six months ended June 30, 2003 compared
to the same prior year period.
18
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
-------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
------- -------------- ------- ------- -------------- -------
(In thousands, except percentages)
ASSETS
Interest Earning Assets:
Federal Funds Sold ...................... $ 582 $ 2 1.38% $ 738 $ 3 1.63%
Investment Securities ................... 152,168 1,237 3.25% 81,789 963 4.71%
Loans (net of unearned income) (1) (2) .. 196,083 3,218 6.58% 164,194 2,889 7.06%
--------- ------ --------- ------
Total Interest Earning Assets ........... 348,833 4,457 5.12% 246,721 3,855 6.27%
--------- ------ --------- ------
Non-Interest Earning Assets:
Loan Loss Reserve ....................... (2,540) (2,103)
All Other Assets ........................ 20,013 17,994
--------- ---------
Total Assets ............................ $ 366,306 $ 262,612
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ................................. $ 24,830 60 0.97% $ 19,107 50 1.05%
Savings Deposits ............................. 108,586 439 1.62% 79,897 402 2.02%
Money Market Deposits ........................ 9,744 45 1.85% 7,279 41 2.26%
Time Deposits ................................ 122,033 817 2.69% 81,220 704 3.48%
Trust preferred securities ................... 5,000 63 5.05% -- -- 0.00%
Short-term Borrowings ........................ 13,891 46 1.33% 6,291 30 1.91%
--------- ------ --------- ------
Total Interest Bearing Liabilities ...... 284,084 1,470 2.08% 193,794 1,227 2.54%
--------- ------ --------- ------
Non-Interest Bearing Liabilities:
Demand Deposits .............................. 57,243 45,961
Other Liabilities ............................ 464 953
--------- ---------
Total Non-Interest Bearing Liabilities .. 57,707 46,914
--------- ---------
Stockholders' Equity ............................. 24,515 21,904
--------- ---------
Total Liabilities and Stockholders'
Equity .................................. $ 366,306 $ 262,612
========= =========
NET INTEREST INCOME .............................. $2,987 $2,628
====== ======
NET INTEREST SPREAD (3) .......................... 3.05% 3.73%
NET INTEREST MARGIN (4) .......................... 3.43% 4.27%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average interest earning assets.
19
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
-------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
------- -------------- ------- ------- -------------- -------
(In thousands, except percentages)
ASSETS
Interest Earning Assets:
Federal Funds Sold ............................ $ 1,718 $ 9 1.06% $ 598 $ 5 1.69%
Investment Securities ......................... 142,954 2,290 3.20% 81,418 1,925 4.73%
Loans (net of unearned income) (1) (2) ........ 191,377 6,343 6.68% 158,488 5,681 7.23%
--------- ------ --------- ------
Total Interest Earning Assets ........... 336,049 8,642 5.19% 240,504 7,611 6.38%
--------- ------ --------- ------
Non-Interest Earning Assets:
Loan Loss Reserve ............................ (2,482) (2,041)
All Other Assets ............................. 19,555 17,855
--------- ---------
Total Assets ............................ $ 353,122 $ 256,318
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW Deposits ................................. $ 23,723 114 0.97% $ 18,771 92 0.99%
Savings Deposits ............................. 103,119 842 1.65% 75,330 762 2.04%
Money Market Deposits ........................ 10,038 94 1.89% 7,087 79 2.25%
Time Deposits ................................ 120,753 1,679 2.80% 82,227 1,515 3.72%
Trust preferred securities ................... 5,000 122 4.92% -- -- 0.00%
Short-term Borrowings ........................ 10,778 71 1.33% 6,246 59 1.90%
--------- ------ --------- ------
Total Interest Bearing Liabilities ...... 273,411 2,922 2.16% 189,661 2,507 2.67%
--------- ------ --------- ------
Non-Interest Bearing Liabilities:
Demand Deposits .............................. 54,889 43,562
Other Liabilities ............................ 574 1,405
--------- ---------
Total Non-Interest Bearing Liabilities .. 55,463 44,967
--------- ---------
Stockholders' Equity ............................. 24,248 21,690
--------- ---------
Total Liabilities and Stockholders'
Equity .................................. $ 353,122 $ 256,318
========= =========
NET INTEREST INCOME .............................. $5,720 $5,104
====== ======
NET INTEREST SPREAD (3) .......................... 3.03% 3.72%
NET INTEREST MARGIN (4) .......................... 3.43% 4.28%
(1) Included in interest income on loans are loan fees.
(2) Includes non-performing loans.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities.
(4) The interest rate margin is calculated by dividing annualized net interest
income by average interest earning assets.
20
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
Compared to Three Months Ended Compared to Six Months Ended
June 30, 2002 June 30, 2002
-------------------------------- ------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------- ----- ----- ------ ------- ------
(In thousands) (In thousands)
Interest Earned On:
Federal Funds Sold ............... $ (1) $ -- $ (1) $ 9 $ (5) $ 4
Investment Securities ............ 829 (555) 274 1,455 (1,090) 365
Loans (net of unearned income) ... 561 (232) 329 1,179 (517) 662
------- ----- ----- ------ ------- ------
Total Interest Income ....... 1,389 (787) 602 2,643 (1,612) 1,031
------- ----- ----- ------ ------- ------
Interest Paid On:
NOW Deposits ..................... 15 (5) 10 24 (2) 22
Savings Deposits ................. 144 (107) 37 281 (201) 80
Money Market Deposits ............ 14 (10) 4 33 (18) 15
Time Deposits .................... 354 (241) 113 710 (546) 164
Trust preferred securities ....... 63 -- 63 122 -- 122
Short-term Borrowings ............ 36 (20) 16 43 (31) 12
------- ----- ----- ------ ------- ------
Total Interest Expense ...... 626 (383) 243 1,213 (798) 415
------- ----- ----- ------ ------- ------
Net Interest Income ......... $ 763 $(404) $ 359 $1,430 $ (814) $ 616
======= ===== ===== ====== ======= ======
21
Provision for Loan Losses
The provision for loan losses was $173 thousand for the first six months of 2003
compared to a provision of $685 thousand for the same period in 2002. The
provision is the result of our review of several factors, including increased
loan balances and our assessment of economic conditions, credit quality and
other loss factors that may be inherent in the existing loan portfolio. At June
30, 2002, we had $2.4 million of non-accrual loans and established $480 thousand
in provisions for loan losses to fully cover anticipated losses associated with
these loans. The allowance for loan losses totaled $2.6 million, or 1.54% of
total loans, at June 30, 2002. The allowance for loan losses totaled $2.6
million, or 1.30% of total loans, at June 30, 2003 and we had no non-accrual
loans.
Non-Interest Income
Total non-interest income was $1.1 million for the first six months of 2003
compared to $695 thousand for the first six months of 2002, an increase of $398
thousand, or 57.3%. The increase was attributable to $372 thousand in realized
gain on sales of investment securities during the first quarter of 2003 compared
to no realized gains as of June 30, 2002. The security gains were realized as a
result of our Asset/Liability Committee recommendation to shorten the duration
of our investment security portfolio. Other non-interest income category changes
include a decrease in non-interest service fees on loans, which amounted to $181
thousand for the six months ended June 30, 2003 compared to $232 thousand earned
for the same prior year period, a decrease of $51 thousand, or 22.0%. This
decrease in non-interest service fees on loans resulted primarily from reduced
activity in loan participations. All other non-interest income increased by $77
thousand, or 16.6%, to $540 thousand, and resulted from the continued growth of
the Company.
Non-Interest Expense
Total non-interest expense amounted to $4.7 million for the six months ended
June 30, 2003, an increase of $690 thousand, or 17.1%, over the same prior year
period. The increase was due primarily to increases in employment expenses as
well as increases in occupancy expenses, equipment expenses and other expenses
generally attributable to our growth. Of this increase, employment costs
increased $353 thousand, or 18.4%, and reflected increases in the number of
employees from 96 full-time equivalents for the period ended June 30, 2002 to
100 full-time equivalents for the period ended June 30, 2003. The increase in
personnel is primarily attributable to the acquisition of additional management
level personnel required due to the Company's growth and the opening of our
Millhurst, New Jersey branch.
Occupancy and depreciation expenses increased $143 thousand, or 18.3%, for the
first six months of 2003 compared to the same period in 2002. The increase was
attributable primarily to increased lease expense and increased common area
maintenance costs due on new branch offices, in addition to increased
depreciation costs associated with new deposit services facilities and on
purchases of enhanced computer processing equipment.
Other expenses increased $194 thousand, or 14.5%, for the first six months of
2003 compared to the first six months of 2002. The increase was attributable to
increased other expenses resulting from our continued growth.
22
Income Tax Expense
For the six months ended June 30, 2003, we recognized $699 thousand in income
tax expense compared to $376 thousand in income tax expense during the first six
months of 2002. The effective tax rate for the first six months of 2003 was
36.5% compared to 34.8% for the same period during 2002.
Return on Average Assets and Average Equity
Two industry measures of performance by a banking institution are its return on
average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. For the six months ended
June, 2003, our ROA was 0.69% compared to 0.72% for the year ended December 31,
2002. Return on average equity ("ROE") is determined by dividing annual net
income by average stockholders' equity and indicates how effectively a company
can generate net income on the capital invested by its stockholders. ROE
increased to 10.04% for the six months ended June 30, 2003, compared to 9.06%
for the year ended December 31, 2002.
RESULTS OF OPERATIONS for the three months ended June 30, 2003 compared to the
three months ended June 30, 2002
Net Income
For the three months ended June 30, 2003, we earned $611 thousand compared to
$151 thousand in net income for the same period last year. Basic and diluted net
income per share for the three months ended June 30, 2003 was $0.18 and $0.17,
respectively, compared to basic and diluted net income per share of $0.05 and
$0.04, respectively, for the same prior year period. The increase in net income
was primarily due to a $359 thousand, or 13.66%, increase in net interest
income, a $80 thousand, or 25.9%, increase in non-interest income, and a
reduction in loan loss provision of $535 thousand, and was partially offset by
an increase in non-interest expense of $252 thousand, or 12.0%, and increased
income tax expense of $262 thousand, or 311.9%.
Net Interest Income
Net interest income increased $359 thousand, or 13.7%, to $3.0 million for the
three months ended June 30, 2003 from $2.6 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $763 thousand as average interest earning assets, net of
average interest bearing liabilities, increased by $11.8 million, or 22.3%, for
the second three months of 2003 compared to the same prior year period. The
volume related increases in net interest income were partially offset by rate
related decreases in net interest income amounting to $404 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the three months ended June 30, 2003 decreased to
3.43% compared to 4.27% for the same prior year period. The decrease in net
interest margin of 84 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 86.1% to
$152.2 million from $81.8 million. Excess liquidity was utilized in lower
yielding short-term investment securities as an alternative due to lower loan
funding needs. The changes in net interest margin resulted primarily from
implementation of asset/liability management
23
strategies as the Federal Reserve Bank reduced the target funds rate to 1.00% as
of June 30, 2003.
Interest income increased $602 thousand, or 15.6%, to $4.5 million for the three
months ended June 30, 2003 compared to $3.9 million for the same period in 2002.
The improvement in interest income was primarily due to volume related increases
in income from the loan portfolio of $561 thousand, volume related increases in
income of $829 thousand in investment securities and was offset by volume
related decreases in income from Federal funds sold of $1 thousand, as our
growth resulted in an increase in average earning assets of $102.1 million, or
41.4%, to $348.8 million for the three months ended June 30, 2003 compared to
$246.7 million for the same period in 2002.
In addition to the volume related net increase amounting to $1.4 million, total
interest income was reduced by $787 thousand from rate related decreases as
interest rates on earning assets repriced to current lower yields compared to
yields in the same period in 2002.
Interest expense for the second three months of 2003 increased $243 thousand, or
19.8%, compared to the same prior year period. The increase in interest expense
was due primarily to net rate related decreases in interest bearing deposits,
which accounted for $383 thousand of the expense decrease, and was offset by
$626 thousand attributable to net volume related increases. The volume related
increases in interest bearing liabilities and net expense rate decreases are the
result of marketing and pricing decisions made by management in response to
changing market rates and the need to provide cost effective sources of funds.
Provision for Loan Losses
The provision for loan losses was $60 thousand for the second three months of
2003 compared to a provision of $595 thousand for the same period in 2002. The
provision is the result of our review of several factors, including increased
loan balances and our assessment of economic conditions, credit quality and
other loss factors that may be inherent in the existing loan portfolio. For the
quarter ended June 30, 2002, we had $2.4 million of non-accrual loans and
established $480 thousand in provisions for loan losses to fully cover
anticipated losses associated with these loans. The allowance for loan losses
totaled $2.6 million, or 1.54% of total loans, at June 30, 2002. The allowance
for loan losses totaled $2.6 million, or 1.30% of total loans, at June 30, 2003
and we had no non-accrual loans.
Non-Interest Income
Total non-interest income was $389 thousand for the second three months of 2003
compared to $309 thousand for the second three months of 2002, an increase of
$80 thousand, or 25.9%. The increase was attributable to deposit service fees
and other fees resulting from the continued growth of the Company.
Non-Interest Expense
Total non-interest expense amounted to $2.4 million for the three months ended
June 30, 2003, an increase of $252 thousand, or 12.0%, over the same prior year
period. The increase was due primarily to increases in employment expenses as
well as increases in occupancy expenses, equipment expenses and other expenses
generally attributable to our growth. Of this increase, employment costs
increased $147 thousand, or 14.9%, and reflected increases in the number of
employees from 96 full-time equivalents for the period ended June 30, 2002 to
100 full-time
24
equivalents for the period ended June 30, 2003. The increase in personnel is
primarily attributable to the acquisition of additional management level
personnel required due to the Company's growth and the opening of our Millhurst,
New Jersey branch.
Occupancy and depreciation expenses increased $45 thousand, or 11.1%, for the
second three months of 2003 compared to the same period in 2002. The increase
was attributable primarily to increased lease expense and increased common area
maintenance costs due on new branch offices, in addition to increased
depreciation costs associated with new deposit services facilities and on
purchases of enhanced computer processing equipment.
Other expenses increased $60 thousand, or 8.4%, for the second three months of
2003 compared to the second three months of 2002. The increase was attributable
to increased other expenses resulting from our continued growth.
Income Tax Expense
For the three months ended June 30, 2003, we recognized $346 thousand in income
tax expense compared to $84 thousand in income tax expense during the second
three months of 2002. The effective tax rate for the second three months of 2003
was 36.2% compared to 35.7% for the same period during 2002.
Return on Average Assets and Average Equity
Two industry measures of performance by a banking institution are its return on
average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. For the three months ended
June 30, 2003, our ROA was 0.67% compared to 0.72% for the year ended December
31, 2002. Return on average equity ("ROE") is determined by dividing annual net
income by average stockholders' equity and indicates how effectively a company
can generate net income on the capital invested by its stockholders. ROE
increased to 9.97% for the three months ended June 30, 2003, compared to 9.06%
for the year ended December 31, 2002.
25
PART I.
Item 3. Quantitive and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market
prices and rates. The company's market risk arises primarily from
interest rate risk inherent in its lending and deposit taking
activities. Thus, management actively monitors and manages its
interest rate risk exposure.
The company's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase in interest rates may
adversely impact the company's earnings to the extent that the
interest rates borne by assets and liabilities do not change at the
same speed, to the same extent, or on the same basis. The company
monitors the impact of changing interest rates on its net interest
income using several tools. One measure of the company's exposure to
differential changes in interest rates between assets and
liabilities is shown in the Company's Cumulative Rate Sensitive
Balance Sheet under the Interest Rate Sensitivity Analysis caption.
The company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the
company's net interest income and capital, while structuring the
company's asset-liability structure to obtain the maximum yield-cost
spread on that structure. The company relies primarily on its
asset-liability structure to control interest rate risk.
The company continually evaluates interest rate risk management
opportunities. Management believes that hedging instruments
currently available are not cost-effective, and therefore, has
focused its efforts on increasing the company's yield-cost spread
through retail growth opportunities.
During 2003, there have been no significant changes in the Company's
assessment of its market risk, interest rate risk, from that
reported under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Interest Rate Risk
Management" in the Company's Form 10-KSB for the year ended December
31, 2002.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's principal executive officer and
principal financial officer have concluded that as of the end of the
period covered by this Quarterly Report on Form 10-Q such disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission roles and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's internal
control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is periodically involved in various legal proceedings as a
normal incident to its business. In the opinion of management, no
material loss is expected from any such pending lawsuit.
26
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
The annual meeting of shareholders of Community Bancorp of New
Jersey was held on April 24, The following were the results of
voting on the one proposal presented:
Note: Shares Outstanding were................... 3,173,224
Shares Voted were......................... 2,869,316
Proposal No. 1 - The re-election of four nominees to the Board of
Directors for the terms as stated in the proxy
statement.
Elected Director Votes For Votes Withheld %
---------------- --------- -------------- -----
Morris Kaplan 2,829,431 39,885 98.6%
Eli Kramer 2,827,345 41,971 98.5%
Lewis Wetstein 2,866,818 2,498 99.9%
James Kinghorn 2,866,808 2,508 99.9%
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 - Section 302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32 - Section 906 Certification
(b) Reports on Form 8-K
The Registrant filed no Form 8-K's during the first quarter
2003.
27
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCORP OF NEW JERSEY
(Issuer)
Date: August 11, 2003 By: Robert D. O'Donnell
-------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: Michael Bis
-----------
MICHAEL BIS
Sr. Vice President and Chief Financial
Officer
28