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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 March 31, 2004
|_| 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
incorporation or organization) Identification No.)
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 3,389,719 shares outstanding as of May 13, 2004
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at March 31, 2004
(Unaudited) and December 31, 2003 3
Consolidated Condensed Statements of Income for the three
months ended March 31, 2004 and 2003 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity at March 31, 2004 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 (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 - 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II.OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchase
of Equity Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Exhibit 31.1 - Section302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32 - Section 906 Certification
SIGNATURES 23
2
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
ASSETS 2004 2003
----------- ------------
Cash and due from banks $ 11,009 $ 11,465
Federal funds sold 16,200 --
----------- -----------
Total cash and cash equivalents 27,209 11,465
----------- -----------
Investment securities available-for-sale 117,802 200,025
Loans receivable 213,952 202,044
Allowance for loan loss (2,674) (2,618)
----------- -----------
Net loans receivable 211,278 199,426
----------- -----------
Premises and equipment, net 6,901 6,832
Accrued interest receivable 1,234 1,868
Other assets 7,269 8,209
----------- -----------
Total Assets $ 371,693 $ 427,825
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $ 67,259 $ 57,766
Interest bearing - NOW 30,460 28,853
Savings and money market 147,088 135,663
Certificates of deposit, under $100,000 66,252 70,864
Certificates of deposit, $100,000 and over 28,863 32,863
----------- -----------
Total deposits 339,922 326,009
----------- -----------
Short-term borrowings -- 72,400
Accrued interest payable 74 78
Other liabilities 316 418
Subordinated debt 5,155 --
Guaranteed preferred beneficial interest in the Company's
subordinated debt -- 5,000
----------- -----------
Total liabilities 345,467 403,905
----------- -----------
Stockholders' equity
Common stock - authorized 10,000,000 shares of
no par value; issued and outstanding, net of treasury
shares, 3,389,719 at March 31, 2004 and 3,385,490
at December 31, 2003 29,462 29,420
Accumulated deficit (2,770) (3,180)
Accumulated other comprehensive income (loss) (103) (1,957)
Treasury stock, 22,357 shares, at cost (363) (363)
----------- -----------
Total stockholders' equity 26,226 23,920
----------- -----------
Total Liabilities and Stockholder's Equity $ 371,693 $ 427,825
----------- -----------
See accompanying notes to consolidated condensed financial statements.
3
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands except per share data)
Three Months Ended
March 31,
2004 2003
-------- --------
INTEREST INCOME
Loans, including fees $ 3,131 $ 3,125
Investment securities 896 1,053
Federal funds sold 2 7
Interest earning deposits 6 --
-------- --------
Total interest income 4,035 4,185
-------- --------
INTEREST EXPENSE
Interest bearing - NOW 55 54
Savings and money market 502 452
Certificates of deposit 532 862
Short-term borrowings 116 25
Long-term borrowings 58 59
-------- --------
Total interest expense 1,263 1,452
-------- --------
Net Interest income 2,772 2,733
PROVISION FOR LOAN LOSSES 54 113
-------- --------
Net interest income after provision for loan losses 2,718 2,620
-------- --------
NON-INTEREST INCOME
Service fees on deposit accounts 173 118
Service fees on loans 87 66
Gains on sales of investment securities -- 372
Other fees and commissions 186 148
-------- --------
Total non-interest income 446 704
-------- --------
NON-INTEREST EXPENSE
Salaries and wages 992 974
Employee benefits 191 161
Occupancy expense 267 242
Depreciation - occupancy, furniture & equipment 263 233
Other 823 755
-------- --------
Total non-interest expense 2,536 2,365
-------- --------
Income before income taxes 628 959
Income tax expense 218 353
-------- --------
Net Income $ 410 $ 606
======== ========
Net income per common share:
Basic $ 0.12 $ 0.17
Diluted $ 0.11 $ 0.16
Weighted average shares outstanding (in thousands):
Basic 3,387 3,499
Diluted 3,614 3,733
See accompanying notes to consolidated condensed financial statements.
4
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)
Accumulated
(1) Other Total
Common Accumulated Comprehensive Comprehensive Treasury Stockholders'
Stock Deficit Income (Loss) Income Stock Equity
----- ------- ------------- ------ ----- ------
Balance December 31, 2003 $ 29,420 $ (3,180) $ (1,957) $ (363) $ 23,920
Options exercised (4,229 shares) 42 -- -- -- 42
Comprehensive income:
Net income -- 410 -- $ 410 -- 410
Change in unrealized gains
losses on securities, net -- -- 1,854 1,854 -- 1,854
----------
Total comprehensive income -- -- -- $ 2,264 -- --
--------- --------- --------- ========== --------- ---------
Balance, March 31, 2004 (unaudited) $ 29,462 $ (2,770) $ (103) $ (363) $ 26,226
========= ========= ========= ========= =========
(1) Includes accumulated charges for stock dividends of $9,168 at March 31,
2004 and December 31, 2003.
See accompanying notes to consolidated financial statements.
5
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
Year Ended March 31,
---------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 410 $ 606
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 263 233
Provision for loan losses 54 113
Accretion of investment discount (3) --
Amortization of investment premium 32 401
Gain on sale of investment securities -- (372)
Decrease in accrued interest receivable 634 194
(Decrease) increase in other assets (18) 4
Decrease in accrued interest payable (4) (7)
(Decrease) increase in other liabilities (102) 125
---------- ----------
Net cash provided by operating activities 1,266 1,297
---------- ----------
Cash flows from investing activities:
Purchases of investment securities available-for-sale (14,645) (112,508)
Proceeds from sales of investment securities available-for-sale 47,210 55,485
Proceeds from maturities and calls of investment securities 52,596 35,914
Net increase in loans (11,906) (11,495)
Purchases of premises and equipment (332) (143)
---------- ----------
Net cash provided by (used in) investing activities 72,923 (32,747)
---------- ----------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts 22,525 17,518
Net (decrease) increase in certificates of deposit (8,612) 8,033
Proceeds from exercise of stock options 42 3
Net (decrease) increase in short-term borrowings (72,400) 9,200
---------- ----------
Net cash (used in) provided by financing activities (58,445) 34,754
---------- ----------
Net increase in cash and cash equivalents 15,744 3,304
Cash and cash equivalents as of beginning of year 11,465 9,424
---------- ----------
Cash and cash equivalents as of end of period $ 27,209 $ 12,728
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,267 $ 1,459
Cash paid during the period for income taxes $ 120 $ 84
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, 2003. The results for the three months ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004.
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
Loan Commitments
The SEC recently released Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments. SAB 105 provides guidance about the
measurement of loan commitments recognized at fair value under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105
also requires companies to disclose their accounting policy for those loan
commitments including methods and assumptions used to estimate fair value and
associated hedging strategies. SAB 105 is effective for all loan commitments
accounted for as derivatives that are entered into after March 31, 2004. The
adoption of SAB 105 is not expected to have a material effect on our
consolidated financial statements.
7
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
Variable Interest Entities
Management has determined that CBNJ Capital Trust I qualifies as a variable
interest entity under FIN 46, as revised. CBNJ Capital Trust issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company.
CBNJ Capital Trust I is included in the Company's consolidated balance sheet and
statements of income as of and for the year ended December 31, 2003. Subsequent
to the issuance of FIN 46 in January 2003, the FASB issued a revised
interpretation, FIN 46(R) Consolidation of Variable Interest Entities, the
provisions of which must be applied to certain variable interest entities by
March 31, 2004.
The Company adopted the provisions under the revised interpretation in the first
quarter of 2004. Accordingly, the Company no longer consolidates CBNJ Capital
Trust I as of March 31, 2004. FIN 46(R) precludes consideration of the call
option embedded in the preferred stock when determining if the Company has the
right to a majority of CBNJ Capital Trust I's expected residual returns. The
deconsolidiation results in the investment in the common stock of CBNJ Capital
Trust I entity to be included in other assets as of March 31, 2004 and the
corresponding increase in outstanding debt of $155 thousand. In addition, the
income received on the Company's common stock investment is included in other
income. The adoption of FIN 46R did not have a material impact on the financial
position or results of operations. The banking regulatory agencies have not
issued any guidance that would change the regulatory capital treatment for the
trust-preferred securities issued by CBNJ Capital Trust I based on the adoption
of FIN 46(R). However, as additional interpretations from the banking regulators
related to entities such as CBNJ Capital Trust I become available, management
will reevaluate its potential impact to its Tier I capital calculation under
such interpretations.
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 March
31, 2004 and December 31, 2003. (Dollars in thousands.)
March 31, 2004 (Unaudited)
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities available-for-sale
U.S. Government and agency securities $ 112,233 $ 34 $ (245) $ 112,022
Mortgage-backed securities 3,831 47 -- 3,878
Corporate debt securities and other 1,902 -- -- 1,902
---------- ---------- ---------- ----------
$ 117,966 $ 81 $ (245) $ 117,802
========== ========== ========== ==========
December 31, 2003
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities available-for-sale:
U.S. Government and agency securities $ 193,705 $ -- $ (3,142) $ 190,563
Mortgage-backed securities 4,306 11 -- 4,317
Corporate debt securities and other 5,145 -- -- 5,145
---------- ---------- ---------- ----------
$ 203,156 $ 11 $ (3,142) $ 200,025
========== ========== ========== ==========
The following table sets forth as of March 31, 2004 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 117,565 117,401
Due after five years through ten years -- --
Due after ten years 401 401
---------- ----------
$ 117,966 $ 117,802
========== ==========
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 March
31, 2004 and December 31, 2003. (Dollars in thousands.)
Loan Portfolio By Type of Loan
-----------------------------------------------------------
March 31, 2004
(Unaudited) December 31, 2003
--------------------------- ---------------------------
Amount Percent Amount Percent
--------- -------- --------- --------
Commercial and industrial loans $ 43,509 20.34% $ 39,791 19.67%
Commercial mortgage loans 108,502 50.71% 100,008 49.44%
Residential mortgages 1,847 0.86% 3,324 1.64%
Construction loans 35,250 16.48% 34,694 17.15%
Consumer loans 24,825 11.60% 24,161 11.94%
Other loans 19 0.01% 323 0.16%
--------- ------ --------- ------
$ 213,952 100.00% $ 202,301 100.00%
========= ====== ========= ======
The following table represents the activity in the allowance for loan losses for
the three month periods ended March 31, 2004 and 2003 and the year ended
December 31, 2003 (Dollars in thousands).
Allowance For Loan Losses
--------------------------------------------
Three Months Ended Year
March 31, Ended
(Unaudited) December 31,
--------------------------- -----------
2004 2003 2003
---------- ---------- ----------
Balance - beginning of period $ 2,618 $ 2,406 $ 2,406
Recoveries 2 -- 1
Charge-offs -- -- (3)
Provision for loan losses 54 113 214
---------- ---------- ----------
Balance - end of period $ 2,674 $ 2,519 $ 2,618
---------- ---------- ----------
Balance of allowance at period-end as a %
of loans at period-end $ 1.25% 1.30% 1.29%
---------- ---------- ----------
10
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Continued
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 March 31, 2004, 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).
March 31,
---------
2004 2003
---- ----
Net income, as reported $ 410 $ 606
Less stock-based compensation costs
determined under fair value
based method for all awards 11 43
--------- ---------
Net income, pro forma $ 399 $ 563
Earnings per share - basic as reported $ 0.12 $ 0.17
Earnings per share - basic proforma 0.12 0.16
Earnings per share - diluted as reported $ 0.11 $ 0.16
Earnings per share - diluted proforma 0.11 0.15
NOTE H - PENDING MERGER
On February 16, 2004, the Company and Sun Bancorp, Inc ("Sun Bancorp") entered
into an Agreement and Plan of Merger (the "Agreement") which provides for, among
other things, the acquisition of the Company by Sun Bancorp. Contemporaneous
with the completion of the acquisition, Community Bank of New Jersey, a
wholly-owned subsidiary of the Company, will merge with and into Sun National
Bank, a wholly-owned subsidiary of Sun Bancorp. The Agreement provides that
shareholders of the Company will receive 0.8715 shares of Sun Bancorp common
stock for each share of the Company's common stock as adjusted to reflect Sun
Bancorp's recently announced stock dividend. The Boards of Directors of the
Company and Sun Bancorp expect the transaction to close in mid-2004. The merger
is subject to a number of conditions including the approval of the Company's
shareholders.
11
COMMUNITY BANCORP OF NEW JERSEY
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies, Judgments 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.
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 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.
12
FINANCIAL CONDITION
Total assets at March 31, 2004 decreased $56.1 million, or 13.1%, to $371.7
million compared to $427.8 million at December 31, 2003, reflecting termination
of our leverage strategy used in 2003 and a reduction in our investment
securities. Total assets averaged $397.9 million in the first three months of
2004, a $6.1 million, or 1.5%, increase from the 2003 full year average of
$391.9 million. Average loans increased $10.5 million, or 5.4 %, to $206.1
million in the first three months of 2004, from the 2003 full year average of
$195.6 million. Average investment securities decreased by $9.9 million, or
5.7%, to $164.8 million; average interest bearing deposits increased $5.4
million; the average of all other assets increased $2.6 million, or 11.6 %, to
$25.5 million during the first three months of 2004 compared to the full year
2003 averages.
The net increases in average total assets were funded primarily by a $5.3
million, or 2.0%, increase in average deposits, as average deposits for the
first three months of 2004 increased to $267.0 million from the full year 2003
average of $261.7 million.
Lending Activity
Total loans at March 31, 2004 were $214.0 million, a 5.9%, or $11.9 million
increase from December 31, 2003. 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 $8.5 million in commercial mortgage
loans and $3.7 million in commercial and industrial loans and were partially
offset by reductions of $1.5 million in residential mortgage loans.
The 5.9% increase in loans at March 31, 2004 compared to December 31, 2003 is
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
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 structures, and selective marketing will
continue to enable us to gain market entry to local loans and deposits. 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 $2.7 million, or 1.25% of total loans, at
March 31, 2004 compared to $2.6 million, or 1.29% of total loans, at December
31, 2003. At March 31, 2004 non accrual loans totaled $302 thousand and at
December 31, 2003 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 continual 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
13
which they become known. The allowance is increased by provisions charged to
expense and is reduced by net charge-offs. Net charge-offs represent 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 judgments about information available to
them at the time of their examination.
Investment Securities Activity
Investment securities decreased by $82.2 million, or 41.1%, to $117.8 million at
March 31, 2004 compared to $200.0 million at December 31, 2003. During the first
three months of 2004, approximately $52.6 million of securities matured or were
called and an additional $47.2 million were sold. During 2003, the Company
employed a leverage strategy to take advantage of the stable low interest rate
environment during the year. That strategy has now been terminated, reducing the
Company's investment portfolio and debt.
At March 31, 2004, 100% of the total investment securities portfolio was
classified as available-for-sale. We had no investment securities 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
less than 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 $13.9
million, or 4.3%, to $339.9 million at March 31, 2004 compared to $326.0 million
at December 31, 2003. The increase in deposits during this period was due to
greater penetration of our marketplace and the continued growth of our newer
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 $22.5 million, while higher costing
certificates of deposit decreased by $8.6 million.
Average total deposits increased by $5.8 million, or 1.8%, to $326.8 million for
the three months ended March 31, 2004 compared to the 2003 full year average of
$321.0 million. Changes in the deposit mix averages for the three months ended
March 31, 2004 compared to the 2003 full year averages include a $19.6 million,
or 17.5%, increase in savings deposits; a $2.3 million, or 9.1%, increase in NOW
account deposits; a $15.3 million, or 13.4%, decrease in time deposits; and a
$1.3 million, or 12.5%, decrease in money market deposits. 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 $147.1 million at March 31, 2004, 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 depositors 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.
14
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
7.3% and 2.7% of our total assets at March 31, 2004 and December 31, 2003,
respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, our primary
sources of funds at March 31, 2004 were increased targeted deposit products and
proceeds from maturities, calls and sales of investment securities. Deposit
increases amounted to $13.9 million for the three months ended March 31, 20004
and proceeds from maturities, calls and sales of investment securities amounted
to $99.8 million. A portion of these funds was used to repay $72.4 million in
short-term borrowings as of March 31, 2004. Additionally, during the first three
months of 2004, we utilized deposit growth and matured investment securities as
funding sources for increased loans made to customers amounting to $11.9 million
and securities purchases amounting to $14.6 million.
We also have several additional sources of liquidity, including the
available-for-sale investment securities portfolio, which at March 31, 2004
amounted to $117.8 million. Many of our loans are also 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 $5.0 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 $38.9
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 March 31,
2004, we had no 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
The following table sets forth contractual obligations and other commitments
representing required and potential cash outflows as of March 31, 2004:
Four to After
Less than One to three Five Five
Total One year Years Years Years
----- -------- ----- ----- -----
(dollars in thousands)
Minimum annual rentals on noncancellable
operating leases $ 7,350 $ 427 $ 995 $ 948 $ 4,980
Remaining contractual maturities of time
deposits 95,115 93,714 1,401 -- --
Loan commitments 85,074 56,291 7,205 76 21,502
Short-term borrowed funds -- -- -- -- --
Subordinated debt 5,155 -- -- -- 5,155
Standby letters of credit 4,214 3,752 462 -- --
--------- --------- --------- --------- ---------
Total $ 196,908 $ 154,184 $ 10,063 $ 1,024 $ 31,637
========= ========= ========= ========= =========
15
Capital Resources
Stockholders' equity increased by $2.3 million at March 31, 2004 compared to
December 31, 2003. The changes in stockholders' equity during the three months
ended March 31, 2004 were comprised of the following increases: a reduction of
$1.9 million in unrealized losses, net of taxes, in the available-for-sale
investment securities portfolio from a net unrealized loss of $2.0 million to a
net unrealized loss of $103 thousand, net income of $410 thousand and $42
thousand from exercised stock options.
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.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at March 31, 2004 as well as the regulatory required
minimum and "well capitalized" capital ratios:
March 31, 2004 Regulatory Requirement
---------------------- -------------------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
Risk-based Capital:
Tier I capital ratio 11.93% 9.91% 4.00% 6.00%
Total capital ratio 13.01% 10.93% 8.00% 10.00%
Leverage ratio 7.87% 6.54% 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 condensed consolidated 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.
16
RESULTS OF OPERATIONS for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003.
Net Income
For the three months ended March 31, 2004, we earned $410 thousand compared to
$606 thousand in net income for the same period last year. Basic and diluted net
income per share for the three months ended March 31, 2004 was $0.12 and $0.11,
respectively, compared to basic and diluted net income per share of $0.17 and
$0.16, respectively, for the same prior year period. The decrease in net income
was primarily due to $372 thousand in gains on sales of investment securities
recognized in the first three months of 2003 while there were no such gains
recorded during the first quarter of 2004.
Net Interest Income
Net interest income increased $39 thousand, or 1.4%, to $2.8 million for the
three months ended March 31, 2004 from $2.7 million for the same prior year
period. The increase in net interest income was due primarily to volume related
increases amounting to $488 thousand as average interest earning assets, net of
average interest bearing liabilities, increased by $2.1 million, or 3.6%, for
the first quarter of 2004 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 $449 thousand.
Our net interest margin (annualized net interest income divided by average
interest earning assets) for the three months ended March 31, 2004 decreased to
2.96% compared to 3.43% for the same prior year period. The decrease in net
interest margin of 47 basis points resulted from a change in the mix of average
interest earning assets, as average investment securities increased by 23.3% to
$164.8 million from $133.6 million while the average yield on investment
securities declined by 98 basis points. Excess liquidity was utilized in lower
yielding relatively short-term investment securities as an alternative due to
lower loan funding needs and our leverage strategy contributed to the increase
in investment securities. 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% in June 2003.
Interest income decreased $150 thousand, or 3.6%, to $4.0 million for the three
months ended March 31, 2004 compared to $4.2 million for the same period in
2003. The decline in interest income was primarily due to rate related decreases
of $753 thousand, consisting of rate related decreases in income from investment
securities of $403 thousand and from the loan portfolio of $349 thousand.
Partially offsetting these rate related decreases in interest earning assets
were volume related increases of $355 thousand and $246 thousand in loans and
investment securities, respectively.
Interest expense for the first quarter of 2004 decreased $189 thousand, or
13.0%, compared to the same prior year period. The decrease in interest expense
was due primarily to rate related decreases of $304 thousand and was partially
offset by net volume related increases in average interest bearing liabilities
of $115 thousand. The volume related increases in interest bearing liabilities
and expense rate decreases are the result of marketing and pricing decisions
made by management in response to 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 March 31, 2004 compared to
the quarter ended March 31, 2003.
17
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
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 $ 1,023 $ 2 0.77% $ 2,868 $ 7 0.99%
Interest earning deposits 3,105 6 0.78% -- -- N/A
Investment securities 164,835 896 2.17% 133,639 1,053 3.15%
Loans (net of unearned income)(1)(2) 206,090 3,131 6.11% 186,618 3,125 6.79%
------- ----- ------- -----
Total Interest Earning Assets 375,053 4,035 4.33% 323,125 4,185 5.25%
------- ----- ------- -----
Non-Interest Earning Assets:
Loan loss reserves (2,619) (2,424)
All other assets 25,509 19,193
--------- ---------
Total Assets $ 397,943 $ 339,894
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW deposits $ 27,783 55 0.80% $ 22,604 54 0.97%
Savings deposits 131,426 472 1.44% 97,591 403 1.67%
Money market deposits 9,044 30 1.33% 10,692 49 1.86%
Time deposits 98,757 532 2.17% 119,459 862 2.93%
Subordinated debt 5,155 58 4.53% 5,000 59 4.79%
Short-term borrowings 40,592 116 1.15% 7,630 25 1.33%
------- ----- ------- -----
Total Interest Bearing Liabilities 312,757 1,263 1.62% 262,976 1,452 2.24%
------- ----- ------- -----
Non-Interest Bearing Liabilities:
Demand Deposits 59,799 52,509
Other liabilities 518 686
--------- ---------
Total Non-Interest Bearing Liabilities 60,317 53,195
--------- ---------
Stockholders' Equity 24,869 23,723
--------- ---------
Total Liabilities and Stockholders'
Equity $ 397,943 $ 339,894
========= =========
NET INTEREST INCOME $ 2,772 $ 2,733
========= =========
NET INTEREST SPREAD(3) 2.71% 3.01%
==== ====
NET INTEREST MARGIN(4) 2.96% 3.43%
==== ====
(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.
18
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months ended March 31, 2004
Compared to Three Months Ended
March 31, 2003
-----------------------------------
Increase (Decrease) Due To
-----------------------------------
Volume Rate Net
------ ---- ---
(In thousands)
Interest income from:
Federal funds sold $ (4) $ (1) $ (5)
Interest earning deposits 6 -- 6
Investment securities 246 (403) (157)
Loans (net of unearned income) 355 (349) 6
------- ------- -------
Total Interest Income 603 (753) (150)
------- ------- -------
Interest expense on:
NOW deposits 13 (12) 1
Savings deposits 144 (75) 69
Money market deposits (7) (12) (19)
Time deposits (143) (187) (330)
Subordinated debt (1) -- (1)
Short-term borrowings 109 (18) 91
------- ------- -------
Total Interest Expense 115 (304) (189)
------- ------- -------
Net Interest Income $ 488 $ (449) $ 39
======= ======= =======
19
Provision for Loan Losses
The provision for loan losses was $54 thousand for the first quarter of 2004
compared to a provision of $113 thousand for the same period in 2003. 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. The
allowance for loan losses totaled $2.7 million, or 1.25% of total loans, at
March 31, 2004.
Non-Interest Income
Total non-interest income was $446 thousand for the first quarter of 2004
compared to $704 thousand for the same period of 2003, a decrease of $258
thousand, or 36.6%. The decrease was attributable to a gain on sale of
investment securities of $372 thousand recognized during the first quarter of
2003. There were no such gains recognized during the first quarter of 2004.
Partially offsetting this reduction to non-interest income during the first
quarter of 2004 were increases in service fees on deposits of $55 thousand,
increases in other fees and commissions of $38 thousand and increases in service
fees on loans of $21 thousand compared to the first quarter of 2003, resulting
from the continued growth of the Company.
Non-Interest Expense
Total non-interest expense amounted to $2.5 million for the three months ended
March 31, 2004, an increase of $171 thousand, or 7.2%, over the same prior year
period. The increase was due primarily to increases in employment expenses as
well as increases in occupancy expenses, equipment expenses and other expenses
generally attributable to our growth. Of this increase, employment costs
increased $48 thousand, or 4.2%, and reflected increases in salaries and
insurance benefits.
Occupancy and depreciation expenses increased $55 thousand, or 11.6%, for the
first quarter of 2004 compared to the same period in 2003. The increase was
attributable primarily to increased lease expense and increased common area
maintenance costs in addition to increased depreciation costs associated with
deposit services facilities and on purchases of enhanced computer processing
equipment.
Income Tax Expense
For the three months ended March 31, 2004, we recognized $218 thousand in income
tax expense compared to $353 thousand in income tax expense during the first
quarter of 2003. The effective tax rate for the first three months of 2004 was
34.7% compared to 36.8% for the same period during 2003.
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
March 31, 2004, our ROA was 0.41% compared to 0.61% for the year ended December
31, 2003. Return on average equity ("ROE") is determined by dividing annualized
net income by average stockholders' equity and indicates how effectively a
company can generate net income on the capital invested by its stockholders. ROE
decreased to 6.59% for the three months ended March 31, 2004, compared to 9.99%
for the year ended December 31, 2003.
20
Item 3. Quantitative 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 in the Company's Form 10-K for the year ended December 31,
2003.
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 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 2004, there have been no significant changes in the Company's
assessment of its market risk or 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-K for the year ended December
31, 2003.
Item 4. Controls and Procedures
(a) The Company carried out an evaluation, under the supervision and
with the participation of the Company's management, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 as of the end of the period reported on herein. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
filings.
(b) Changes in internal controls.
Not applicable.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is periodically involved in various legal proceedings as a
normal incident to its business. In the opinion of management, no
material loss is expected from any such pending lawsuit.
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchase of
Equity Securities
Not applicable. The Registrant has not repurchased any equity
securities.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 - Section 302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32 - Section 906 Certification
(b) Reports on form 8-K
On April 28, 2004 the Registrant issued a press
release announcing the Registrant's earnings for the
first quarter of 2004.
On February 18, 2004 the Registrant issued a press release
announcing the execution of an Agreement and Plan of Merger pursuant
to which the Registrant will merge with and into Sun Bancorp, Inc.
On January 21, 2004 the Registrant issued a press release announcing
the Registrant's earnings for the fourth quarter of 2003.
22
SIGNATURES
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: May 13, 2004 By: Robert D. O'Donnell
------------- -------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: Marie P. Mueller
----------------
MARIE P. MUELLER
Vice President and Chief Financial Officer
23