U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
(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, 1999
-------------
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 22-3495579
---------- ----------
(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 [ ]
Common Stock, No Par Value - 1,827,707 shares outstanding as of August 11, 1999
<PAGE>
INDEX
COMMUNITY BANCORP OF NEW JERSEY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at June 30, 1999
(Unaudited) and December 31, 1998
Consolidated Condensed Statements of Income for the three
and six months ended June 30, 1999 and 1998 (Unaudited)
Consolidated Condensed Statement of Changes in Stockholders'
Equity at June 30, 1999 (Unaudited)
Consolidated Condensed Statements of Cash Flows for the three
and six months ended June 30, 1999 and 1998 (Unaudited)
Notes to Consolidated Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
11 - 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
26
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,
1999 December 31,
(Unaudited) 1998
--------- ---------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks ............................ $ 5,018 $ 2,541
Federal funds sold ................................. 22,470 26,025
--------- ---------
Total cash and cash equivalents .......... 27,488 28,566
--------- ---------
Investment securities held-to-maturity (fair value $9,387
at June 30, 1999 and $6,004 at December 31, 1998) .. 9,520 6,025
Loans receivable .......................................... 63,222 45,629
Allowance for loan loss ................................... (1,134) (914)
--------- ---------
Net loans receivable ..................... 62,088 44,715
--------- ---------
Premises and equipment, net ............................... 3,936 3,068
Accrued interest receivable ............................... 361 224
Other assets .............................................. 265 153
--------- ---------
Total Assets ............................. $ 103,658 $ 82,751
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand ........................ $ 16,257 $ 13,530
Interest bearing - NOW ............................. 15,676 14,397
Savings and money market ........................... 37,215 32,138
Certificates of deposit, under $100,000 ............ 9,020 3,511
Certificates of deposit, $100,000 and over ......... 3,411 1,463
--------- ---------
Total deposits ........................... 81,579 65,039
--------- ---------
Short-term borrowings ..................................... 3,000 --
Accrued interest payable .................................. 139 114
Other liabilities ......................................... 334 209
--------- ---------
Total liabilities ........................ 85,052 65,362
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
June 30,
1999 December 31,
(Unaudited) 1998
--------- ---------
ASSETS (Dollars in thousands)
<S> <C> <C>
Stockholders' equity
Common stock - authorized 5,000,000 shares of
no par value; issued and outstanding
1,796,917 at June 30, 1999 and 1,730,917
at December 31, 1998 ......................... 20,008 18,994
Accumulated deficit ................................ (1,402) (1,605)
--------- ---------
Total stockholders' equity ............... 18,606 17,389
--------- ---------
Total Liabilities and Stockholder's Equity $ 103,658 $ 82,751
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------
1999 1998 1999 1998
------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Loans .......................................................... $ 1,211 $ 540 $ 2,184 $ 924
Fees on loans .................................................. 58 12 136 28
Federal funds sold ............................................. 180 135 318 231
Investment securities - taxable ................................ 144 47 337 163
------- ------- ------- -------
Total interest income ........................ 1,593 734 2,975 1,346
------- ------- ------- -------
Interest bearing - NOW ......................................... 54 36 105 68
Savings and money market ....................................... 379 203 710 364
Certificates of deposit ........................................ 111 31 184 52
Short-term borrowings .......................................... 1 -- 1 --
------- ------- ------- -------
Total interest expense ....................... 545 270 1,000 484
------- ------- ------- -------
Net interest income .......................... 1,048 464 1,975 862
111 197 222 332
------- ------- ------- -------
Net interest income after provision
for loan losses ..................... 937 267 1,753 530
------- ------- ------- -------
Service fees on deposit accounts ............................... 51 27 98 43
Other fees and commissions ..................................... 22 5 33 9
------- ------- ------- -------
Total non-interest income .................... 73 32 131 52
------- ------- ------- -------
Salaries and wages ............................................. 347 297 658 499
Employee benefits .............................................. 58 48 116 91
Occupancy expense .............................................. 61 26 108 52
Depreciation - occupancy, furniture & equipment ................ 92 40 168 80
Other .......................................................... 313 225 630 403
------- ------- ------- -------
Total non-interest expense ................... 871 636 1,680 1,125
------- ------- ------- -------
Net Income (loss) ............................ $ 139 $ (337) $ 204 $ (543)
------- ======= ======= =======
Net income (loss) - basic ...................................... $ 0.08 $ (0.25) $ 0.11 $ (0.41)
Net income (loss) - diluted .................................... $ 0.08 $ (0.25) $ 0.11 $ (0.41)
Basic .......................................................... 1,833 1,330 1,838 1,330
Diluted......................................................... 1,862 1,330 1,868 1,330
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Accumulated Stockholders'
Stock Deficit Equity
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance December 31, 1998 .............. $18,994 $(1,605) $17,389
Issuance of common stock, net of
offering expenses ........... 1,014 -- 1,014
Net Income ............................. -- 204 204
------- ------- -------
Balance, June 30, 1999 (Unaudited) ..... $20,008 $(1,402) $18,606
======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 204 $ (543)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................... 168 80
Provision for loan losses ................................... 222 332
Accretion of investment discount ............................ (1) --
Increase in accrued interest receivable ..................... (137) (34)
Increase in other assets .................................... (112) (96)
Increase in accrued interest payable ........................ 25 21
Increase in other liabilities ............................... 125 149
-------- --------
Net cash provided by (used in) operating activities 494 (91)
-------- --------
Cash flows from investing activities:
Purchases of investment securities held-to-maturity .......................... (9,995) --
Proceeds from maturities and calls of investment securities .................. 6,500 5,500
Net increase in loans made to customers ...................................... (17,595) (13,843)
Purchases of premises and equipment .......................................... (1,036) (385)
-------- --------
Net cash used in investing activities ............. (22,126) (8,728)
-------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts ......................... 9,083 15,344
Net increase in certificates of deposit ...................................... 7,457 965
Net increase in short-term borrowings ........................................ 3,000 --
Net proceeds from common stock issued ........................................ 1,014 --
-------- --------
Net cash provided by financing activities ......... 20,554 16,309
-------- --------
Net (decrease) increase in cash and cash equivalents .................................... (1,078) 7,490
Cash and cash equivalents as of beginning of year ....................................... 28,566 9,076
-------- --------
Cash and cash equivalents as of end of period ........................................... $ 27,488 $ 16,566
-------- ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ..................................... $ 975 $ 463
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed financial statements 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, 1998.
The results for the three months and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
The consolidated condensed financial statements include the accounts of the
Company and Community Bank of New Jersey. All significant inter-company accounts
and transactions have been eliminated.
NOTE B - INVESTMENT SECURITIES
The Company classifies its investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("SFAS 115"). SFAS 115 requires that an enterprise classify
its investments in debt securities as either securities held to maturity
(carrying amount equals amortized cost), securities available for sale (carrying
amount equals estimated fair value; unrealized gains and losses recorded in a
separate component of stockholder's equity, net of taxes) or trading securities
(carrying amount equals estimated fair value; unrealized gains and losses
included in the determination of net income).
Any security which is a U.S. Government security, U.S. Government agency
security, an agency mortgage-backed security, or an obligation of a state or
political subdivision may be placed in the held-to-maturity category if acquired
with the intent and ability to maintain the security in the portfolio until
maturity. Premiums and discounts on these securities are amortized or accreted
on a basis that approximates the effective yield method. Realized gains and
losses from the sale of securities available for sale are determined on a
specific identification cost basis.
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Continued
Management determines the appropriate classification of securities at the time
of purchase. At June 30, 1999 and December 31, 1998, all of the Company's
investment securities were classified as held to maturity. At June 30, 1999 and
December 31, 1998, no investment securities were classified as available for
sale or trading 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,
1999 and December 31, 1998 (Dollars in thousands).
<TABLE>
<CAPTION>
June 30, 1999 (Unaudited)
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government and agency securities ...... $ 8,995 $ -- $ (133) $ 8,862
Other securities ........................... 525 -- -- 525
------- ------- ------- -------
$ 9,520 $ -- $ (133) $ 9,387
======= ======= ======= =======
<CAPTION>
December 31, 1998
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government and agency securities ...... $ 5,500 $ -- $ (21) $ 5,479
Other securities ........................... 525 -- -- 525
------- ------- ------- -------
$ 6,025 $ -- $ (21) $ 6,004
======= ======= ======= =======
</TABLE>
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Continued
The following table sets forth as of June 30, 1999 and December 31, 1998 the
maturity distribution of the Company's investment portfolio (Dollars in
thousands).
<TABLE>
<CAPTION>
Investment Securities Held-To-Maturity
-----------------------------------------------------------
June 30, 1999
(Unaudited) December 31, 1998
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------ ------
<S> <C> <C> <C> <C>
Due in one year or less ................... $ -- $ -- $ -- $ --
Due after one year through five years ..... 8,995 8,862 5,500 5,479
Due after five years through ten years .... 500 500 500 500
Due after ten years ....................... 25 25 25 25
------ ------ ------ ------
$9,520 $9,387 $6,025 $6,004
====== ====== ====== ======
</TABLE>
Securities with a carrying value of $1,300,000 at June 30, 1999 and
$500,000 at December 31, 1998 were pledged to secure public funds on
deposit and for other purposes as required or permitted by law.
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Continued
NOTE C - LOANS RECEIVABLE and ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of June
30, 1999 and December 31, 1998 (Dollars in thousands).
<TABLE>
<CAPTION>
Loan Portfolio By Type of Loan
-----------------------------------------------------
June 30, 1999
(Unaudited) December 31, 1998
Amount Percent Amount Percent
------- ------ ------- ------
<S> <C> <C> <C> <C>
Commercial and industrial loans $11,741 18.57% $ 8,514 18.66%
Commercial mortgage loans ..... 29,103 46.03% 19,413 42.55%
Residential mortgages ......... 7,028 11.12% 6,941 15.21%
Construction loans ............ 6,779 10.72% 3,582 7.85%
Consumer loans ................ 8,347 13.20% 6,376 13.97%
Other loans ................... 224 0.36% 803 1.76%
------- ------ ------- ------
$63,222 100.00% $45,629 100.00%
======= ====== ======= ======
</TABLE>
The following table represents the activity in the allowance for loan losses for
the six month periods ended June 30, 1999 and 1998 and the year ended December
31, 1998 (Dollars in thousands).
<TABLE>
<CAPTION>
Allowance For Loan Losses
-------------------------------------
Six Months Ended
June 30, Year Ended
(Unaudited) December 31,
--------------------- ------------
1999 1998 1998
------- ------- -------
<S> <C> <C> <C>
Balance - beginning of period ........... $ 914 $ 250 $ 250
Charge-offs ............................. (2) -- --
Recoveries .............................. -- -- --
------- ------- -------
Net (charge-offs) recoveries ............ (2) -- --
Provision for loan losses ............... 222 332 664
------- ------- -------
Balance - end of period ................. $ 1,134 $ 582 $ 914
======= ======= =======
Balance of Allowance at period-end as a %
of loans at period-end .............. 1.79% 2.00% 2.00%
======= ======= =======
</TABLE>
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Continued
NOTE D - RECLASSIFICATIONS
Certain amounts in the financial statements presented for prior periods have
been reclassified to conform with the 1999 presentation.
NOTE E - EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common shares and common share equivalents (when dilutive)
outstanding during each period after giving retroactive effect to stock
dividends declared. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. The common share
equivalents of options in the computation of diluted earnings per share is
computed utilizing the Treasury Stock method. For purposes of this computation,
the average market price of common stock during each three-month quarter
included in the period being reported upon, is used, when dilutive.
NOTE F - SUBSEQUENT EVENTS
Effective July 1, 1999 the Community Bancorp of New Jersey completed its
reorganization as the holding company for the Community Bank of New Jersey. The
Holding Company completed a share for share exchange of its no par value common
stock for the Bank's $5.00 par value common stock, by which the Bank became a
wholly owned subsidiary of the Holding Company. Accordingly, the consolidated
financial information of the Holding Company is presented herwith, and prior
periods have been restated to reflect this reorganization.
On July 9, 1999 the Company announced that its Board of Directors approved a 3%
stock dividend payable August 2, 1999 to shareholders of record as of July 19,
1999. Weighted average shares outstanding and earnings per share have been
retroactively adjusted to reflect the stock dividend.
On April 22, 1999 the shareholders of Community Bank of New Jersey approved the
Plan of Acquisition, pursuant to which the Bank was acquired by Community
Bancorp of New Jersey effective July 1, 1999. In connection with this
transaction, a shareholder elected to exercise its dissenters rights of
appraisal. On August 6, 1999 the Bank and this shareholder negotiated a
settlement pursuant to which the shareholder relinquished all beneficially owned
equity instruments, consisting of 22,416 common shares and 38,700 exercisable
options, for fair value of $673,860. Weighted average shares outstanding were
adjusted as of the effective date of dissent (April 22, 1999). Capital and
outstanding shares were reduced on the closing date of the transaction (August
6, 1999).
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activity In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activity". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Continued
conditions are met, a derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative (gains and losses)
depends on the intended use of the derivative and resulting designation. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Earlier application is permitted only as of the beginning of any
fiscal quarter. Subsequent to SFAS No. 133, the FASB issued SFAS No. 137, which
amended the effective date of SFAS No. 133 to be all fiscal quarters of all
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not
anticipated to have a material impact on the Company's consolidated financial
position or results of operations.
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, 1999 increased by $20.9 million, or 25.2%, to $103.7
million compared to $82.8 million at December 31, 1998. Total assets averaged
$87.2 million in the first six months of 1999, a $35.1 million, or 67.4%,
increase from the 1998 full year average of $52.1 million. Average loans
increased $24.6 million, or 81.7%, to $54.7 million in the first six months of
1999, from the 1998 full year average of $30.1 million. Average investment
securities increased by $6.9 million, or 130.2%, to $12.2 million; average
Federal funds sold decreased by $1.4 million, or 11.5%, to $13.6 million; the
average of all other assets increased by $2.9 million, or 59.2%, to $7.8
million; and the loan loss reserve average increased $453 thousand, or 81.0%, to
$1.0 million during the first six months of 1999 compared to the full year 1998
averages.
These increases in average assets were funded primarily by a $27.8 million, or
68.8%, increase in average deposits, as the first half of 1999 average deposits
increased to $68.2 million from the full year 1998 average of $40.4 million. The
increases in average assets were further funded by an increase in average
stockholders' equity of $7.4 million, or 67.3%, as the first half of 1999
average stockholders' equity increased to $18.4 million from the full year 1998
average of $11.0 million. The increase in average stockholders' equity resulted
from net proceeds received from the Bank's secondary public offering of $6.6
million on December 14, 1998 and $1.0 million on January 11, 1999 and was
further effected by a net operating loss amounting to $610 thousand during 1998
and net operating income of $204 thousand during the first six months of 1999.
Lending Activity
- ----------------
Total loans at June 30, 1999 were $63.2 million, a 38.6%, or $17.6 million
increase from December 31, 1998. 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 $9.7 million in commercial mortgage
loans, $3.2 million in commercial and industrial loans, $3.2 million in
construction loans, and $2.0 million in consumer loans, partially off-set by a
reduction of $492 thousand in residential mortgages and other loans.
The 38.6% increase in loans at June 30, 1999 compared to December 31, 1998 is
partially attributable to greater penetration of the Company's marketplace and
an improvement in the general economic environment in New Jersey. The Company
opened its second office in downtown Freehold, New Jersey, in September 1997,
its third office in Howell, New Jersey, in November 1998 and its fourth office
<PAGE>
in Matawan, New Jersey, in February 1999. In addition, the Company anticipates
opening its newest branch in Manalapan, New Jersey, during the fourth quarter of
1999. Management believes that the maturation of these branch locations will
continue to provide the Company with lending opportunities as well as funding
sources for the loans.
The Company's loans are primarily to businesses and individuals located in
Monmouth, Middlesex, and Ocean Counties, New Jersey. Management believes that
its strategy of customer service, competitive rate structures, and selective
marketing will continue to enable the Company to gain market entry to local
loans. Bank mergers have also contributed to the Company's efforts to attract
borrowers. Management intends to continue to pursue quality loans in all lending
categories within the Company's market area.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses was $1.1 million, or 1.79% of total loans, at June
30, 1999 compared to $914 thousand, or 2.00% of total loans, at December 31,
1998. At June 30, 1999 and December 31, 1998 the Company had no non-performing
loans and no past due loans at December 31, 1998.
Management attempts 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
management feels 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
management attempts 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 the
Company's allowance for loan losses. These agencies may require management 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 $3.5 million, or 58.0%, at June 30, 1999
compared to December 31, 1998. During the period ended June 30, 1999 the Company
utilized its liquidity in excess of loan demand to fund additional purchases of
investment securities held-to-maturity amounting to $10.0 million, which was
partially off-set by maturities and calls amounting to $6.5 million.
<PAGE>
Management determines the appropriate classification of securities at the time
of purchase. At June 30, 1999 all investment securities were classified as
held-to-maturity. The Company had no investment securities classified as
available-for-sale or as trading securities. The investment portfolio is
comprised primarily of U.S. Government and agency securities with maturities of
three years or less and with call features of one year or less. Management
currently maintains 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 the Company's primary source of funds. Total deposits increased by
$16.6 million, or 25.5%, to $81.6 million at June 30, 1999 compared to $65.0
million at December 31, 1998. The increase in deposits during this period was
primarily due to the Company's greater penetration of its marketplace. In late
1998 and early 1999, the Company opened two new offices, which have contributed
to its deposit growth.
Average total deposits increased by $27.8 million, or 68.8%, to $68.2 million
for the six months ended June 30,1999 compared to the 1998 full year average of
$40.4 million. Changes in the deposit mix for the six months ended June 30, 1999
compared to the 1998 full year average include a $11.9 million, or 59.9%,
increase in savings deposits; a $4.6 million, or 58.6%, increase in NOW account
deposits; a $4.1 million, or 132.7%, increase in time deposits; a $1.1 million,
or 75.8%, increase in money market deposits; and a $6.1 million, or 75.2%,
increase in non-interest bearing demand deposits.
The Company does not actively solicit short-term certificates of deposits of
$100 thousand or more because of the liquidity risks posed by such deposits. At
June 30, 1999 certificates of deposit of $100 thousand or more amounted to $3.4
million.
The Company emphasizes relationships with commercial customers and seeks to
obtain transactional accounts, which are frequently kept in non-interest bearing
deposits. The Company also emphasizes the origination of savings deposits, which
amounted to $35.0 million at June 30, 1999, by offering rates higher than our
peer group institutions. The 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. Management may modify the interest rate paid without
notice, and the depositor may withdraw their funds on demand. The Company
markets this product as an alternative to time deposits and management believes
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 which the Company serves. As of June 30, 1999 the Company did not have any
brokered deposits and neither solicited nor offered premiums for such deposits.
Liquidity
- ---------
Liquidity is a measurement of the Company's ability to meet present and future
funding obligations and commitments. The Company adjusts its liquidity levels in
order to meet funding needs for deposit outflows, repayment of borrowings, when
applicable, and the funding of loan commitments. The Company also adjusts its
<PAGE>
liquidity level as appropriate to meet its 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, net interest
income and fee income. Liquid assets (consisting of cash and Federal funds sold)
comprised 26.5% and 34.5% of the Company's total assets at June 30, 1999 and
December 31, 1998, respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, the Company's
primary source of funds at June 30, 1999 was increased deposits, and to a lesser
extent net proceeds from common stock issued, proceeds from maturities and calls
of investment securities, and short-term borrowings. Deposit increases amounted
to $16.5 million for the six months ended June 30, 1999 while net proceeds from
common stock issued amounted to $1.0 million and proceeds from maturities and
calls of investment securities amounted to $6.5 million. Short-term borrowings
of $3.0 million at June 30, 1999 matured and were paid off subsequent to June
30, 1999. During 1999, the Company utilized deposit growth and its liquid assets
as funding sources for increased loans made to customers amounting to $17.6
million, securities purchases amounting to $10.0 million and purchases of
premises and equipment used primarily for branch expansion, amounting to $1.0
million as well as for asset/liability management purposes.
The Company also has several secondary sources of liquidity. Many of the
Company's 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, the Company has lines of credit in the amount of $4.0 million for the
purchase of Federal funds with another financial institution. At June 30, 1999
the Company utilized $3.0 million of the lines of credit for asset/liability
management purposes.
The Company believes that its liquidity position is sufficient to provide funds
to meet future loan demand or the possible outflow of deposits, in addition to
being able to adapt to changing interest rate conditions.
Capital Resources
- -----------------
Stockholder's equity increased by $1.2 million at June 30, 1999 compared to
December 31, 1998. The changes in stockholders' equity during the six months
ended June 30, 1999 were comprised of an increase from net income of $204
thousand and an increase of $1.0 million in net proceeds from common stock
issued.
The Company's regulators, the Board of Governors of the Federal Reserve System
(which regulates bank holding companies), and the Bank's Federal Regulator, the
Federal Deposit Insurance Corporation, have issued guidelines classifying and
defining capital into the following components: (1) Tier I Capital, which
includes tangible stockholders' equity for common stock and certain qualifying
preferred stock, and excludes net unrealized gains or losses on
available-for-sale securities and deferred tax assets that are dependent on
projected taxable income greater than one year in the future, and (2) Tier II
Capital (Total Capital), which includes a portion of the allowance for loan
losses and certain qualifying long-term debt and preferred stock that does not
qualify for Tier I Capital. The risk-based capital guidelines require financial
<PAGE>
institutions to apply certain risk factors ranging from 0% to 100%, against
assets to determine total risk-based assets. The minimum Tier I and the combined
Tier I and Tier II capital to risk-weighted assets ratios are 4.0% and 8.0%,
respectively. The Federal Deposit Insurance Corporation also has adopted
regulations which supplement the risk-based capital guidelines to include a
minimum leverage ratio of Tier I Capital to total assets of 3.0%. For those
institutions with higher levels of risk or that are experiencing or anticipating
significant growth, the minimum leverage ratio will be proportionately increased
by 100 to 200 basis points.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at June 30, 1999, as well as the regulatory required
minimum and "well capitalized" capital ratios:
<TABLE>
<CAPTION>
June 30, 1999 Regulatory Requirement
--------------------- ---------------------------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
<S> <C> <C> <C> <C>
Risk-based Capital:
Tier I capital ratio........... 27.06% 27.06% 4.00% 6.00%
Total capital ratio........... 28.32% 28.32% 8.00% 10.00%
Leverage ratio.................. 20.04% 20.04% 3.00%-5.00% 5.00% or greater
</TABLE>
In addition, pursuant to the order of the New Jersey Department of Banking and
Insurance approving the Bank's charter, for its first five years of operation,
the Bank is required to maintain a ratio of equity to total assets of at least
10.00%. As of June 30, 1999 the Bank's ratio of equity capital to total assets
was 17.95%.
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
- ---------------------------------------
The Company's 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 the Company's operations. Unlike
most industrial companies, nearly all of the Company's assets and liabilities
are monetary. As a result, interest rates have a greater impact on the Company's
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.
<PAGE>
Year 2000
- ---------
Rapid and accurate data processing is essential to the Company's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programing practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency, and other data. The Company has been
evaluating both information technology (computer systems) and non-information
technology systems (e.g., vault timer, electronic door lock, and heating,
ventilation, and air conditioning control). The Company has examined all of its
non-information technology systems and has either received certifications of
Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. The Company
expects to further test the systems it controls and receive third party
certifications, when appropriate, that these systems will continue to function.
The Company does not expect any material costs to address its non-information
technology systems and has not had any material costs to date. With regard to
the Company's information technology systems, the Company also does not expect
any future material costs and has not had any material costs to date. The
Company's data processing is provided by a single service bureau, NCR. Although
NCR is not Year 2000 compliant, it has advised the Company that it expects to be
compliant before the year 2000. The Company is monitoring NCR to evaluate
whether the Company's data processing system will fail. The Company is being
provided with periodic updates on the status of testing and upgrades being made
by NCR. If this problem is not solved by the year 2000, the Company would likely
experience significant delays, mistakes, or failures. These delays, mistakes, or
failures could have a significant impact on the Company'ss financial condition
and results of operations.
<PAGE>
RESULTS OF OPERATIONS for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998
Net Income
- ----------
The Company earned $204 thousand, or $0.11 net income per share on a basic and
diluted basis, for the six months ended June 30, 1999, compared to a net loss of
$543 thousand, or $0.41 for both basic and diluted net loss per share, for the
six months ended June 30, 1998. The increase in net income was primarily due to
a $1.1 million, or 129.1%, increase in net interest income, a $79 thousand, or
151.9%, increase in non-interest income and a $110 thousand, or 33.1%, decrease
in the provision for loan losses; these items were partially offset by a $555
thousand, or 49.3%, increase in non-interest expenses. In addition, the
Company's net income for the six months ended June 30, 1999 was benefitted by
the application of net operating loss carryforwards to eliminate tax
liabilities.
Net Interest Income
- -------------------
Net interest income increased $1.1 million, or 129.1%, to $2.0 million for the
six months ended June 30, 1999 from $862 thousand for the same prior year
period. The increase in net interest income was due primarily to volume
increases as average interest earning assets, net of average interest bearing
liabilities, increased by $12.6 million, or 91.1%, for the first six months of
1999 compared to the same prior year period. Also contributing to the increase
in net interest income was the decrease in the average cost of interest bearing
liabilities to 3.73% during the first half of 1999 compared to 4.29% during the
same prior year quarter. The reduction in the average rate paid on deposits
resulted from management's adjustment of the Company's rate structure to more
closely reflect the current economic environment and competition. The Company
held no tax-exempt investments during these comparable periods.
The Company's net interest margin (annualized net interest income divided by
average interest earning assets) for the six months ended June 30, 1999 improved
to 4.95% from 4.74% for the same prior year quarter. The improvement in the net
interest margin resulted primarily from the decrease in the rates paid on
deposits, as the yield earned on interest earning assets remained consistent at
7.46% for the first half of 1999 compared to 7.40% for the first half of 1998,
despite falling market rates of interest.
Interest income increased $1.6 million, or 121.0%, to $3.0 million for the six
months ended June 30, 1999 compared to $1.3 million for the same period in 1998.
The improvement in interest income was primarily due to volume increases in
income from the loan portfolio of $1.3 million, volume related increases in
income of $218 thousand in the investment securities portfolio, and volume
related increases in income of $140 thousand in Federal funds sold as the
Company's growth resulted in an increase in average earning assets of $44.0
million, or 121.0%, to $80.4 million for the six months ended June 30, 1999
compared to $36.4 million for the same period in 1998.
The $1.7 million volume related increase in total interest income was reduced by
$52 thousand from rate related reductions as interest rates on new investment
securities purchases and investments in Federal funds sold repriced to lower
current yields.
<PAGE>
Interest expense for the first six months of 1999 increased $516 thousand, or
106.6%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume increases in interest bearing deposits which
accounted for $668 thousand of the expense increase and was offset by a decrease
of $152 thousand attributable to net rate related decreases. 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 the
need for cost effective sources of funds, primarily to provide for loan growth.
These decisions resulted in the reduction in the cost of interest bearing
liabilities to 3.73% for the six months ended June 30, 1999 compared to 4.29%
for the six months ended June 30, 1998.
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, 1999 compared to
the quarter ended June 30, 1998 and the six months ended June 30, 1999 compared
to the same prior year period.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Three Months Ended
June 30, 1999
---------------------------------------
Average Interest Average
Balance Income/Expense Rate
------- -------------- ----
<S> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal Funds Sold .................................. $ 15,214 $ 180 4.75%
Investment Securities ............................... 10,389 144 5.48%
Loans (net of unearned income) (1) (2) .............. 60,049 1,269 8.48%
-------- --------
Total Interest Earning Assets ........ 85,652 1,593 7.46%
-------- --------
Non-Interest Earning Assets:
Loan Loss Reserve ................................... (1,066)
All Other Assets .................................... 8,239
--------
Total Assets ......................... $ 92,825
========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ........................................ $ 13,094 54 1.65%
Savings Deposits .................................... 33,943 354 4.18%
Money Market Deposits ............................... 2,707 26 3.79%
Time Deposits ....................................... 8,820 111 5.05%
Short-term Borrowings ............................... 34 1 5.93%
-------- --------
Total Interest Bearing Liabilities ... 58,598 545 3.73%
-------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ..................................... 15,266
Other Liabilities ................................... 558
--------
Total Non-Interest Bearing Liabilities 15,824
--------
Stockholders' Equity ............................................ 18,403
--------
Total Liabilities and Stockholders'
Equity ............................... $ 92,825
========
NET INTEREST INCOME ............................................. $ 1,048
========
NET INTEREST SPREAD (3) ......................................... 3.73%
NET INTEREST MARGIN (4) ......................................... 4.91%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
-----------------------------------
Average Interest Average
Balance Income/Expense Rate
------- -------------- ----
<S> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal Funds Sold .................................. $ 9,750 $ 135 5.54%
Investment Securities ............................... 3,199 47 5.88%
Loans (net of unearned income) (1) (2) .............. 26,707 552 8.27%
-------- --------
Total Interest Earning Assets ........ 39,656 734 7.40%
-------- --------
Non-Interest Earning Assets:
Loan Loss Reserve ................................... (433)
All Other Assets .................................... 4,448
--------
Total Assets ......................... $ 43,671
========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ........................................ $ 6,161 36 2.34%
Savings Deposits .................................... 16,119 198 4.91%
Money Market Deposits ............................... 637 5 3.14%
Time Deposits ....................................... 2,233 31 5.55%
Short-term Borrowings ............................... -- -- 0.00%
-------- --------
Total Interest Bearing Liabilities ... 25,150 270 4.29%
-------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ..................................... 7,125
Other Liabilities ................................... 312
--------
Total Non-Interest Bearing Liabilities 7,437
--------
Stockholders' Equity ............................................ 11,084
--------
Total Liabilities and Stockholders'
Equity ............................... $ 43,671
========
NET INTEREST INCOME ............................................. $ 464
========
NET INTEREST SPREAD (3) ......................................... 3.11%
NET INTEREST MARGIN (4) ......................................... 4.68%
</TABLE>
(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.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS
With Resultant Interest And Average Rates
Six Months Ended
June 30, 1999
---------------------------------------
Average Interest Average
Balance Income/Expense Rate
------- -------------- ----
(In thousands, except percentages)
<S> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal Funds Sold .................................. $ 13,555 $ 318 4.73%
Investment Securities ............................... 12,175 337 5.51%
Loans (net of unearned income) (1) (2) .............. 54,665 2,320 8.56%
-------- --------
Total Interest Earning Assets ........ 80,395 2,975 7.46%
-------- --------
Non-Interest Earning Assets:
Loan Loss Reserve ................................... (1,012)
All Other Assets .................................... 7,798
--------
Total Assets ......................... $ 87,181
========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ........................................ $ 12,453 105 1.70%
Savings Deposits .................................... 31,780 660 4.19%
Money Market Deposits ............................... 2,672 50 3.81%
Time Deposits ....................................... 7,110 184 5.22%
Short-term Borrowings ............................... 17 1 5.93%
-------- --------
Total Interest Bearing Liabilities ... 54,032 1,000 3.73%
-------- --------
Non-Interest Bearing Liabilities:
Demand Deposits ..................................... 14,213
Other Liabilities ................................... 540
--------
Total Non-Interest Bearing Liabilities 14,753
--------
Stockholders' Equity ............................................ 18,396
--------
Total Liabilities and Stockholders'
Equity ............................... $ 87,181
========
NET INTEREST INCOME ............................................. $ 1,975
========
NET INTEREST SPREAD (3) ......................................... 3.73%
NET INTEREST MARGIN (4) ......................................... 4.95%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
-----------------------------------
Average Interest Average
Balance Income/Expense Rate
------- -------------- ----
<S> <C> <C> <C>
ASSETS
Interest Earning Assets:
Federal Funds Sold .................................. $ 8,418 $ 231 5.49%
Investment Securities ............................... 5,190 163 6.29%
Loans (net of unearned income) (1) (2) .............. 22,766 952 8.36%
-------- --------
Total Interest Earning Assets ........ 36,374 1,346 7.40%
-------- --------
Non-Interest Earning Assets:
Loan Loss Reserve ................................... (365)
All Other Assets .................................... 4,034
--------
Total Assets ......................... $ 40,043
========
LIABILITIES & STOCKHOLDERS' EQUITY Interest-Bearing Liabilities:
NOW Deposits ........................................ $ 5,519 68 2.45%
Savings Deposits .................................... 14,548 356 4.90%
Money Market Deposits ............................... 565 8 2.80%
Time Deposits ....................................... 1,946 52 5.33%
Short-term Borrowings ............................... -- -- 0.00%
-------- -------
Total Interest Bearing Liabilities ... 22,578 484 4.29%
-------- -------
Non-Interest Bearing Liabilities:
Demand Deposits ..................................... 4,979
Other Liabilities ................................... 271
--------
Total Non-Interest Bearing Liabilities 5,250
--------
Stockholders' Equity ............................................ 11,316
--------
Total Liabilities and Stockholders'
Equity ............................... $ 39,144
========
NET INTEREST INCOME ............................................. $ 862
=======
NET INTEREST SPREAD (3) ......................................... 3.11%
NET INTEREST MARGIN (4) ......................................... 4.74%
</TABLE>
(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.
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
Compared to Three Months Ended Compared to Six Months Ended
June 30, 1998 June 30, 1998
-------------------------------- -------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands) (In thousands)
Interest Earned On:
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold .................. $ 75 $ (30) $ 45 $ 140 $ (53) $ 87
Investment Securities ............... 105 (8) 97 218 (44) 174
Loans (net of unearned income) ...... 687 30 717 1,323 45 1,368
------ ------ ------ ------ ------ ------
Total Interest Income 867 (8) 859 1,681 (52) 1,629
------ ------ ------ ------ ------ ------
Interest Paid On:
NOW Deposits ........................ 40 (22) 18 84 (47) 37
Savings Deposits .................... 218 (62) 156 419 (115) 304
Money Market Deposits ............... 17 4 21 29 14 43
Time Deposits ....................... 91 (11) 80 136 (4) 132
Short-term Borrowings ............... 1 -- 1 1 -- 1
------ ------ ------ ------ ------ ------
Total Interest Expense 367 (91) 275 669 (152) 516
------ ------ ------ ------ ------ ------
Net Interest Income .. $ 500 $ 83 $ 584 $1,013 $ 100 $1,113
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses decreased to $222 thousand for the first six
months of 1999 compared to a provision of $332 thousand for the same period in
1998. The provision is the result of management's review of several factors,
including increased loan balances and management's assessment of economic
conditions, credit quality and other factors that may have an impact on future
possible losses in the loan portfolio. Although the Company had no non-accrual
loans and no past due loans at June 30, 1999, management established provisions
for loan losses to create an adequate allowance based on management's analysis
of the loan portfolio and growth experienced over the periods. The allowance for
loan losses totaled $1.1 million, or 1.79% of total loans, at June 30, 1999.
Non-Interest Income
- -------------------
Total non-interest income was $131 thousand for the first six months of 1999
compared to $52 thousand for the first six months of 1998, an increase of $79
thousand, or 151.9%. The increase was attributable to an increase in first half
1999 service fees on deposits of $55 thousand and an increase in other fees and
commissions of $24 thousand. The growth in non-interest income reflects the
growth in deposits, which increased to $81.6 million at June 30, 1999, from 39.6
million at June 30, 1998.
Non-Interest Expense
- --------------------
Total non-interest expenses amounted to $1.7 million for the six months ended
June 30, 1999, an increase of $555 thousand, or 49.3%, 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 the Company's growth. Of this increase, employment
costs increased $184 thousand, or 31.2%, and reflected increases in the number
of employees from 21 full-time equivalents at June 30, 1998 to 46 full-time
equivalents at June 30, 1999. The increase in personnel is primarily
attributable to the opening of the Howell, New Jersey office in November 1998
and the Matawan, New Jersey office in February, 1999 in addition to the
acquisition of additional support personnel required due to the Company's
growth.
Occupancy expenses increased $56 thousand, or 107.7%, for the first six months
of 1999 compared to the same period in 1998. The increase was attributable
primarily to increased lease expense and increased maintenance costs due to the
additional branch offices.
Depreciation expenses on leasehold improvements, furniture, and equipment
increased $88 thousand, or 110.0%, for the first half of 1999 compared to the
first half of 1998 due primarily to depreciation costs associated with the new
facilities and on purchases of enhanced computer processing equipment.
Other expenses increased $227 thousand, or 56.3%, for the first six months of
1999 compared to the first six months of 1998. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of data processing services paid to the Company's third party processors
<PAGE>
amounted to $163 thousand, an increase of $56 thousand; professional fees
amounted to $94 thousand, an increase of $23 thousand; marketing and advertising
costs amounted to $67 thousand, an increase of $28 thousand; stationery,
supplies and printing costs amounted to $104 thousand, an increase of $38
thousand; stockholder costs amounted to $54 thousand, an increase of $42
thousand; and all other expenses amounted to $148 thousand, an increase of $40
thousand.
Income Tax Expense
- ------------------
The Company did not record an income tax provision for the six months ended June
30, 1999. The results for the first half of 1999 were positively affected by the
application of net operating loss carry-forwards to reduce the Company's tax
liabilities. At June 30, 1999, the Company had approximately $300 thousand in
remaining net operating loss carry-forwards to offset future tax liabilities.
These carry-forwards will expire through 2018. Additionally, in view of the
Company's operating loss history and risks associated with its ability to
generate taxable income in the future, management has provided a full valuation
allowance on its net deferred tax assets as of June 30, 1999.
<PAGE>
RESULTS OF OPERATIONS for the three months ended June 30, 1999 compared to the
three months ended June 30, 1998
Net Income
- ----------
The Company earned $139 thousand, or $0.08 net income per share on a basic and
diluted basis, for the three months ended June 30, 1999, compared to a net loss
of $337 thousand, or $0.25 for both basic and diluted net loss per share, for
the three months ended June 30, 1998. The increase in net income was primarily
due to a $584 thousand, or 125.9%, increase in net interest income, a $41
thousand, or 128.1%, increase in non-interest income and a $86 thousand, or
43.7%, decrease in the provision for loan losses; these items were partially
offset by a $235 thousand, or 36.9%, increase in non-interest expenses.
Net Interest Income
- -------------------
Net interest income for the second quarter of 1999 increased $584 thousand, or
125.9%, to $1.0 million, compared to the second quarter of 1998. This
improvement in net interest income resulted primarily from a higher level of
earning assets as average interest earning assets, net of average interest
bearing liabilities, increased by $12.5 million, or 86.5%, for the second
quarter of 1999 compared to the same prior year period. Also contributing to the
increase in net interest income was the decrease in the average cost of interest
bearing liabilities to 3.73% during the second quarter of 1999 compared to 4.29%
during the same prior year quarter. The reduction in the average rate paid on
deposits resulted from management's adjustment of the Company's rate structure
to more closely reflect the current economic environment and competition. The
Company held no tax-exempt investments during these comparable periods.
The Company's net interest margin (annualized net interest income divided by
average interest earning assets) for the three months ended June 30, 1999
improved to 4.91% from 4.68% for the same prior year quarter. The improvement in
the net interest margin resulted primarily from the decrease in the rates paid
on deposits, as the yield earned on interest earning assets remained consistent
at 7.46% for the second quarter of 1999 compared to 7.40% for the second quarter
of 1998.
Interest income increased $859 thousand, or 117.0%, to $1.6 million for the
three months ended June 30, 1999 compared to $734 thousand for the same period
in 1998. The improvement in interest income was primarily due to volume
increases in income from the loan portfolio of $687 thousand, volume related
increases in income of $105 thousand in the investment securities portfolio, and
volume related increases in income of $75 thousand in Federal funds sold as the
Company's growth resulted in an increase in average earning assets of $46.0
million, or 116.0%, to $85.7 million for the three months ended June 30, 1999
compared to $39.7 million for the same period in 1998.
The $867 thousand volume related increase in total interest income was reduced
by $8 thousand from rate related reductions as interest rates on new investment
securities purchases and investments in Federal funds sold repriced to lower
current yields.
<PAGE>
Interest expense for the second quarter of 1999 increased $275 thousand, or
101.9%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume increases in interest bearing deposits which
accounted for $367 thousand of the expense increase and was offset by a decrease
of $91 thousand attributable to net rate related decreases. 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 the
need for cost effective sources of funds, primarily to provide for loan growth.
These decisions resulted in the reduction in the cost of interest bearing
liabilities to 3.73% for the quarter ended June 30, 1999 compared to 4.29% for
the quarter ended June 30, 1998.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $111 thousand for the second quarter of 1999
compared to a provision of $197 thousand for the same period in 1998. The
provision is the result of management's review of several factors, including
increased loan balances and management's assessment of economic conditions,
credit quality and other factors that may have an impact on future possible
losses in the loan portfolio. Although the Company had no non-accrual loans and
no past due loans at June 30, 1999, management established provisions for loan
losses to create an adequate allowance based on management's analysis of the
loan portfolio and growth experienced over the periods. The allowance for loan
losses totaled $1.1 million, or 1.79% of total loans, at June 30, 1999.
Non-Interest Income
- -------------------
Total non-interest income was $73 thousand for the second quarter of 1999
compared to $32 thousand for the second quarter of 1998, an increase of $41
thousand, or 128.1%. The increase was attributable to an increase in second
quarter 1999 service fees on deposits of $24 thousand and an increase in other
fees and commissions of $17 thousand. The growth in non-interest income reflects
the growth in deposits, which increased to $81.6 million at June 30, 1999, from
39.6 million at June 30, 1998.
Non-Interest Expense
- --------------------
Total non-interest expenses amounted to $871 thousand for the three months ended
June 30, 1999, an increase of $235 thousand, or 36.9%, 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 the Company's growth. Of this increase, employment
costs increased $60 thousand, or 17.4%, and reflected increases in the number of
employees from 21 full-time equivalents at June 30, 1998 to 46 full-time
equivalents at June 30, 1999. The increase in personnel is primarily
attributable to the opening of the Howell, New Jersey office in November 1998
and the Matawan, New Jersey office in February, 1999 in addition to the
acquisition of additional support personnel required due to the Company's
growth.
<PAGE>
Occupancy expenses increased $35 thousand, or 134.6%, for the second quarter of
1999 compared to the same period in 1998. The increase was attributable
primarily to increased lease expense and increased maintenance costs due to the
additional branch offices.
Depreciation expenses on leasehold improvements, furniture, and equipment
increased $52 thousand, or 130.0%, for the second quarter of 1999 compared to
the second quarter of 1998 due primarily to depreciation costs associated with
the new facilities and on purchases of enhanced computer processing equipment.
Other expenses increased $88 thousand, or 39.1%, for the second quarter of 1999
compared to the second quarter of 1998. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of data processing services, professional fees, marketing and advertising
costs, supplies and printing costs, stockholder costs, and miscellaneous other
expenses increased.
Income Tax Expense
- ------------------
The Company did not record an income tax provision for the three months ended
June 30, 1999 and the three months ended June 30, 1998. The results for the
first half of 1999 were positively affected by the application of net operating
loss carry-forwards to reduce the Company's tax liabilities. At June 30, 1999,
the Company had approximately $300 thousand in remaining net operating loss
carry-forwards to offset future tax liabilities. These carry-forwards will
expire through 2018. Additionally, in view of the Company's operating loss
history and risks associated with its ability to generate taxable income in the
future, management has provided a full valuation allowance on its net deferred
tax assets as of June 30, 1999.
<PAGE>
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
---------------------
Not Applicable.
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) Exhibits - None
(b) Reports on Form 8-K
The Registrant filed a Current
Report on Form 8-K dated July 1,
1999 announcing that effective July
1, 1999, the Registrant acquired the
Community Bank of New Jersey (the
"Bank") in a share-for-share
exchange pursuant to which the Bank
became a wholly owned subsidiary of
the Registrant.
The Registrant filed a Current
Report on Form 8-K dated July 9,
1999 announcing a 3% stock dividend.
The Registrant filed a Current
Report on Form 8-K dated July 9,
1999 announcing its second quarter
1999 results of operations.
<PAGE>
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 BANK OF NEW JERSEY
(Issuer)
Date: August 11, 1999 By: /s/ ROBERT D. O'DONNELL
--------------- ------------------------
ROBERT D. O'DONNELL
President and Chief Executive Officer
By: /s/ MICHAEL BISS
-----------------
MICHAEL BISS
Controller and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT JUEN 30, 1999 (UNAUDITED), CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
AND THE NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,018
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,470
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,520
<INVESTMENTS-MARKET> 9,387
<LOANS> 63,222
<ALLOWANCE> 1,134
<TOTAL-ASSETS> 103,658
<DEPOSITS> 81,579
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 473
<LONG-TERM> 0
0
0
<COMMON> 20,008
<OTHER-SE> (1,402)
<TOTAL-LIABILITIES-AND-EQUITY> 103,658
<INTEREST-LOAN> 2,320
<INTEREST-INVEST> 337
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<INTEREST-TOTAL> 2,975
<INTEREST-DEPOSIT> 999
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<INCOME-PRETAX> 204
<INCOME-PRE-EXTRAORDINARY> 204
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<NET-INCOME> 204
<EPS-BASIC> 0.11
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<YIELD-ACTUAL> 0.07
<LOANS-NON> 0
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