U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 of 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) (Zip Code)
(Issuer's telephone number, including area code) (732) 863-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
As of December 31, 1999, there were 1,827,766 shares of common stock, no par
value per share outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
10-KSB Item Document Incorporated
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Item 9. Directors and Executive Officers Proxy Statement for 2000 Annual
of the Company; Compliance with Meeting of Shareholders to be filed no
Section 16(a) of the Exchange Act later than April 30, 2000.
Item 10. Executive Compensation Proxy Statement for 2000 Annual
Meeting of Shareholders to be filed no
later than April 30, 2000.
Item 11. Security Ownership of Certain Proxy Statement for 2000 Annual
Beneficial Owners and Management Meeting of Shareholders to be filed no
later than April 30, 2000.
Item 12. Certain Relationships and Related Proxy Statement for 2000 Annual
Transactions Meeting of Shareholders to be filed no
later than April 30, 2000.
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PART I
ITEM 1. -- DESCRIPTION OF BUSINESS
General
The Community Bancorp of New Jersey is a one bank holding company
incorporated under the laws of New Jersey to serve as the holding company for
the Community Bank of New Jersey. We were organized at the direction of the
Board of Directors of the Bank for the purpose of acquiring all of the capital
stock of the bank. We are registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended. Our only significant asset is our
investment in the bank. Our main office is located at 3535 Highway 9 North,
Freehold, New Jersey.
The Bank is a commercial bank formed under the laws of the State of New
Jersey in 1997. The Bank operates from its main office at 3535 Highway 9 North,
Freehold, New Jersey 07728, and its four branch offices located in Freehold,
Howell, Matawan and Manalapan, New Jersey.
Our deposits are insured by the Bank Insurance Fund (BIF) of the Federal
Deposit Insurance Corporation (FDIC) up to applicable limits. The operations of
the bank are subject to the supervision and regulation of the FDIC and the New
Jersey Department of Banking and Insurance (the Department). The principal
executive offices of the Bank are located at 3535 Highway 9 North, Freehold, New
Jersey 07728, and the telephone number is (732) 863-9000.
Business of the Bank
The Bank conducts a traditional commercial banking business and offers
services including personal and business checking accounts and time deposits,
money market accounts and regular savings accounts. The Bank structures its
specific services and charges in a manner designed to attract the business of
(i) small and medium-sized businesses, and the owners and managers of these
entities; (ii) professionals and middle managers of locally-based corporations;
(iii) residential real-estate tract developers; and (iv) individuals residing,
working, and shopping in the Monmouth, Middlesex, and Ocean County, New Jersey
trade area serviced by the Bank. The Bank engages in a wide range of lending
activities and offers commercial, consumer, residential and non-residential
mortgage and construction loans. In addition, we are seeking to enhance our
non-interest income, primarily through strategic partnerships or agreements with
third party service providers. We have recently entered into a Securities
Products Agreement with Salomon, Smith, Barney pursuant to which Salomon, Smith,
Barney may provide investment and annuities products to our customers and their
customers from offices in the Bank, and we will receive fee income from these
sales. We anticipate seeking additional strategic partnerships in the future.
Service Area
Our service area primarily consists of the Monmouth, Middlesex, and Ocean
County, New Jersey market, although we make loans throughout New Jersey. The
Bank operates its main office in Freehold Township, New Jersey, and branch
offices in Freehold Borough, Howell, Manalapan, and Matawan, New Jersey.
Competition
The Bank operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts, and other financial
institutions, many of which have greater financial resources than we do. Many
large financial institutions compete for business in the Bank's service area.
Certain of these institutions have significantly higher lending limits than we
do and provide services to their customers which the Bank does not offer.
Management believes we are able to compete favorably with our competitors
because we provide responsive personalized services through our knowledge and
awareness of the Bank's service area, customers, and business.
3
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Employees
At December 31, 1999, the Bank employed 51 full-time employees and 16
part-time employees. None of these employees are covered by a collective
bargaining agreement and we believe that our employee relations are good.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state laws. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect our business and
prospects.
BANK HOLDING COMPANY REGULATION
General
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended, (the BHCA), we are subject to the regulation and supervision
of the Federal Reserve Bank (FRB). We are required to file with the FRB annual
reports and other information regarding our business operations and those of our
subsidiaries.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of any other bank, (ii) acquire direct or indirect ownership
or control or more than 5% of the outstanding voting stock of any bank (unless
it owns a majority of such bank's voting shares) or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti-competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial resources and future prospects of the companies
and the banks concerned, together with the convenience and needs of the
community to be served, when reviewing acquisitions or mergers.
Additionally, until March 1, 2000, the BHCA prohibited a bank holding
company, with certain limited exceptions, from (i) acquiring or retaining direct
or indirect ownership or control of more than 5% of the outstanding voting stock
of any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly incident thereto. In
making such determinations, the FRB is required to weigh the expected benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. The BHCA was substantially revised in late 1999 to broaden
and enhance bank holding company activities, however. See "Recent Regulatory
Enactments and Proposals" below.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the bank holding company.
4
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Capital Adequacy Guidelines for Bank Holding Companies
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidate basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less that $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding company
is engaged in non-bank activity involving significant leverage; or (b) the
parent company has a significant amount of outstanding debt that is held by the
general public. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of the total capital is required to be "Tier 1",
consisting of common stockholders' equity and certain preferred stock, less
certain goodwill items and other intangible assets. The remainder, Tier II
Capital", may consist of (a) the allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid
capital instruments, (d) debt, (e) mandatory convertible securities, and (f)
qualifying subordinated debt. Total capital is the sum of Tier 1 and Tier 11
capital less reciprocal holdings of other banking organizations' capital
instruments, investments in unconsolidated subsidiaries and any other deductions
as determined by the FRB (determined on a case-by-case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States ) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations are given 100% risk-weighing. Transaction
related contingencies such as bid bonds, standby letters of credit backing
non-financial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% risk-weighing.
Short-term commercial letters of credit have a 20% risk-weighing and certain
short-term unconditionally cancellable commitments have a 0% risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the bank, including the minimum
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level of capital the bank must maintain, the ability of the bank to pay
dividends, the ability of the bank to expand through new branches or
acquisitions and various other matters. The FDIC also imposes a risk based and
leverage capital requirement on the bank. These requirements are substantially
similar to the capital requirements imposed by the FRB.
5
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In addition to the capital adequacy requirements of the FDIC discussed
above, pursuant to the order of the New Jersey Commissioner of the Department of
Banking and Insurance granting the Bank a charter, the Bank is required to
maintain a ratio of equity capital to total assets of at least 10% for our first
five (5) years of operations, unless the Commission consents to a lower ratio.
As of December 31, 1999, the Bank's ratio of equity capital to total assets was
13.72%.
Insurance of Deposits
The Bank's deposits are insured up to a maximum of $100,000 per depositor
under the BIF. The FDIC has established a risk-based insurance premium
assessment system under which the FDIC has developed a matrix that sets the
assessment premium for a particular institution in accordance with its capital
level and overall regulatory rating by the institutions' primary federal
regulator. Under the matrix that is currently in effect, the assessment rate
ranges from 0 to 27 basis points of assessed deposits. In addition to the
deposit insurance premium assessment, under the Deposit Insurance Funds Act of
1996 (the Deposit Act), BIF insured institutions like the Bank are required to
contribute to the debt service and principal repayment on bonds issued by the
Federal Finance Corporation (FICO) in the mid-1980s to fund a portion of the
thrift bailout. This assessment is currently set at 2.08 basis points of
assessed deposits.
Recent Regulatory Enactments and Proposals
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will, among other
things:
o allow bank holding companies meeting management, capital and
Community Reinvestment Act standards to engage in a
substantially broader range of non-banking activities than
currently is permissible, including insurance underwriting and
making merchant banking investments in commercial and
financial companies;
o allow insurers and other financial services companies to
acquire banks or bank holding companies;
o remove various restrictions that currently apply to bank
holding company ownership of securities firms and mutual fund
advisory companies; and
o establish the overall regulatory structure applicable to bank
holding companies that also engage in insurance and securities
operations.
This part of the Modernization Act will become effective on March 11, 2000.
The Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment. The new financial
privacy provisions will generally prohibit financial institutions, including us,
from disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure.
ITEM 2. -- DESCRIPTION OF PROPERTY
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The Bank conducts its business through its main office located at 3535
Highway 9 North, Freehold, New Jersey, and its four branch offices. The
following table set forth certain information regarding the Bank's properties as
of December 31, 1999.
Date of lease
Location Leased or owned expiration
-------- --------------- ----------
3535 Highway 9 North Owned N/A
Freehold, NJ
31 East Main Street Leased August, 2002
Freehold, NJ
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Date of lease
Location Leased or owned expiration
-------- --------------- ----------
4502 Highway 9 South Leased August, 2013
Howell, NJ
267 Main Street Leased February, 2019
Matawan, NJ
191 Route Nine South Owned N/A
Manalapan, NJ
ITEM 3. -- LEGAL PROCEEDINGS
We are periodically a party to or otherwise involved in legal proceedings
arising in the normal course of business, such as claims to enforce liens,
claims involving the making and servicing of real property loans, and other
issues incident to our business. Management does not believe that there is any
pending or threatened proceeding against us which, if determined adversely,
would have a material effect on our business or financial position.
ITEM 4.-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the registrant's shareholders
during the fourth quarter of fiscal 1999.
PART II
ITEM 5.-- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since October 27, 1998, our common stock has been traded on the NASDAQ
SmallCap market under the symbol CBNJ. Previously, our common stock was traded
on the OTC Bulletin Board under the symbol CBNG. The following table shows the
high and low bid prices for the common stock as reported on the OTC Bulletin
Board or Nasdaq SmallCap market since it began trading on May 19, 1997. These
quotations reflect inter-dealer prices, without retail market, mark-down, or
commission and may not represent actual transactions. These prices have been
restated to reflect our 3% stock dividend paid in August, 1999.
High 1998 Low
---- ---- ---
1st Quarter . . . . . . 14-9/16 12-3/8
2nd Quarter . . . . . . 19-7/16 14-1/16
3rd Quarter . . . . . . 22-5/16 15-9/16
4th Quarter . . . . . . 18-1/16 15-9/16
High 1999 Low
---- ---- ---
1st Quarter . . . . .. 17 14-5/16
2nd Quarter . . . . . . 16-1/2 13-1/8
3rd Quarter . . . . . . 16-3/4 15
4th Quarter . . . . . . 15-5/8 12-1/2
We have not paid cash dividends and do not anticipate paying cash dividends
in the foreseeable future as we use our retained earnings to augment our capital
and fund our future growth.
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On July 9, 1999, our Board of Directors declared a 3% stock dividend on our
common stock. Our Board will consider the issuance of future stock dividends
based upon our future financial performance, capital standing and the market
value of our stock.
As of December 31, 1999, we had 506 shareholders of record.
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ITEM 6. -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 1999
OVERVIEW AND STRATEGY
Community Bancorp of New Jersey is a one bank holding company incorporated
under the laws of New Jersey to serve as the holding company for the Community
Bank of New Jersey. The Company acquired all the capital stock of the Bank in
July 1999. The Bank commenced operations in 1997 with the goal of providing
first class banking services through a locally headquartered financial
institution, offering customers direct access to senior officers and decision
makers. We seek to serve individuals, professionals, small businesses, and real
estate developers in our Monmouth, Middlesex, and Ocean County, New Jersey,
trade area, whom we believe are not adequately served by larger regional and
multi-state financial institutions. During 1997, our Board of directors adopted
a strategy of preparing the Company for future growth by putting in place the
infrastructure necessary to support this growth. Since it commenced operations
in 1997, the Company has increased its asset base at a rapid pace. The Company's
assets have grown from $34.8 million at December 31, 1997 to $132.8 million at
December 31, 1999, a compound annual growth rate of 95.3%. This growth has come
both through the Company's success in penetrating its original market in the
Freehold, New Jersey area, and through expansion into other market areas 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, its
fourth office in Matawan, New Jersey in February 1999, and its fifth office in
Manalapan, New Jersey in November 1999. In addition, we have contracted for the
lease of sites for two new locations, subject to regulatory and land use
approvals.
Results of Operations
Our results of operations depend primarily on our net interest income,
which is the difference between the sum of interest we earn on our
interest-earning assets and loan origination fees and the interest we pay on
deposits used to support our interest earning assets. In addition, the Bank
earns fee income, primarily through service fees on deposit accounts. Net
interest spread is the difference between the weighted average rate earned on
interest earning assets and the weighted average rate paid on interest bearing
liabilities. Net interest margin is a function of the difference between the
weighted average rate earned on interest-earning assets and the weighted average
rate paid on interest-bearing liabilities, as well as the average level of
interest-earning assets as compared with that of interest-bearing liabilities.
Net income is also affected by the amount of non-interest income and operating
expenses.
Net Income
For the year ended December 31, 1999, net income increased to $507 thousand
or $0.28 net income per share for basic earnings and $0.27 net income per share
for diluted earnings, compared to a net loss of $610 thousand or a net loss per
share for basic and diluted shares of $0.45 and $0.45, respectively, for the
same period in 1998. The increase in net income was primarily due to a $2.1
million, or 100.0% increase in net interest income, an increase in non-interest
income and a decrease in the provision for loan losses partially offset by
higher non-interest expense. The results for the year ended December 31, 1999
were also positively affected by the application of net operating loss
carryforwards to reduce the Company's tax liability. The improvement in net
income is attributable to the continued rapid growth of the Company.
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Net Interest Income
For the year ended December 31, 1999, the Company recognized net interest
income of $4.2 million as compared to $2.1 million for the year ended December
31, 1998. The increase in net interest income for the year ended December 31,
1999, as compared to the year ended December 31, 1998, was largely due to an
increase in the average balance of interest earning assets, which increased
$43.6 million, or 91.4%, to $91.3 million from $47.7 million. The increase
reflects an increase in average loans outstanding of $33.2 million, or 110.1%
over the 1998 period. Primarily as a result of the increase in the average
balance of interest earning assets, the Company's interest income increased to
$6.7 million for the year ended December 31, 1999, from $3.4 million for the
year ended December 31, 1998. The improvement in interest income was primarily
due to volume related increases in income from the loan portfolio of $2.7
million, volume related increases in income of $432 thousand in the investment
securities portfolio, and volume related increases in income of $173 thousand in
Federal funds sold. In addition to the volume related increases, the average
yield on our interest earning assets increased to 7.30% for the year ended
December 31, 1999 from 7.19% for the prior year.
Total interest expense increased 80.6% to $2.5 million for the 1999 period
from $1.4 million for the 1998 period. This increase in interest expense is
primarily related to the increase in the average balance of interest-bearing
liabilities, which increased $31.1 million to $63.4 million for the 1999 period
compared to $32.3 million for the 1998 period. Volume related increases in
interest expense accounted for $1.4 million of increased expense which was
partially offset by a decrease of $326 thousand attributable to net rate related
decreases. The volume related increases in interest-bearing liabilities and
expense rate decreases were the result of marketing and pricing decisions made
by management in response to the need for cost effective sources of funds,
primarily to fund loan growth. These decisions resulted in the reduction in the
cost of interest-bearing liabilities to 3.87% for the 1999 period from 4.21% for
the 1998 period as the yield on interest-earning assets increased to 7.30% for
the 1999 period compared to 7.19% for the prior year.
The following table reflects, for the periods presented, the components of
our net interest income, setting forth: (1) average assets, liabilities, and
stockholders' equity, (2) interest income earned on interest-earning assets and
interest expenses paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earnings assets less the average rate on interest-bearing liabilities)
and (5) our yield on interest-earning assets. Rates are computed on a taxable
equivalent basis.
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Year ended December 31,
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1999 1998
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Average Interest Average rates Average Interest Average rates
balance income/expense earned/paid balance income/expense earned/paid
(In thousands, except Percentage)
Assets
Interest-earning assets:
Loans (net of unearned
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income) (1) $ 63,427 $ 5,191 8.18% $ 30,187 $ 2,454 8.13%
Investment securities 12,383 693 5.60 5,299 323 6.10
Federal funds sold 15,451 777 5.03 12,209 652 5.34
-------- ---------- -------- ----------
Total interest-
Earning assets 91,261 6,661 7.30 47,695 3,429 7.19
Non-interest-earning assets 8,690 4,946
Allowance for possible
Loan losses (1,094) (559)
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Total assets $ 98,857 $ 52,082
========= =========
Liabilities and
Stockholders' Equity
Interest-bearing liabilities:
NOW deposits $ 13,227 $ 225 1.70 $ 7,851 $ 170 2.17
Savings deposits 34,749 1,441 4.15 19,869 960 4.83
Money market deposits 2,719 99 3.64 1,520 59 3.88
Time deposits 12,720 688 5.41 3,055 170 5.56
Borrowed funds 8 1 5.94 - - -
--------- ---------- ---------- ------------
Total interest-
bearing liabilities 63,423 2,454 3.87 32,295 1,359 4.21
Non-interest bearing
liabilities:
Demand deposits 16,379 8,114
Other liabilities 734 686
--------- ----------
Total non-interest
bearing liabilities 17,113 8,809
Stockholders' equity 18,321 10,978
--------- ----------
Total liabilities and
stockholders' equity $ 98,857 $ 52,082
========= ==========
Net interest spread (2) 3.43 2.98
Net interest margin (3) 4.61 4.34
Net interest income $ 4,207 $ 2,070
========== =========
</TABLE>
(1) Included in interest income on loans is rate related loan fees .
(2) 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.
(3) The interest rate margin is calculated by dividing net interest income by
average interest earning assets.
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The following table presents by category the major factors that contributed
to the changes in net interest income for the year ended 1999 as compared to the
year ended 1998. Amounts have been computed on a fully tax-equivalent basis.
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Year ended December 31, 1999 vs. December 31, 1998
Increase (decrease)
due to change in
(In thousands)
Average volume Average rate Net
-------------- ------------ ---
Interest Income
<S> <C> <C> <C>
Taxable loans (net of income) $ 2,702 $ 35 $ 2,737
Investment securities 432 (62) 370
Federal funds sold 173 (48) 125
---------- ----------- ----------
Total interest income 3,307 (75) 3,232
---------- ----------- ----------
Interest expense
NOW deposits 116 (61) 55
Savings deposits 719 (238) 481
Money market 47 (7) 40
Time deposits 538 (20) 518
Borrowed funds 1 - 1
---------- ----------- ----------
Total interest expense 1,421 (326) 1,095
---------- ----------- ----------
Net interest income $ 1,886 $ 251 $ 2,137
========== =========== ==========
</TABLE>
Provision for Loan Losses
The provision recorded by the Company for the year ended December 31, 1999
was $325 thousand, compared to $664 thousand for the year ended December 31,
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 be inherent in the
existing loan portfolio. Although the Company had no non-performing assets
during each of these periods, we 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
totalled $1.2 million, or 1.50% of total loans, at December 31, 1999. The
decrease in the provision for 1999 reflects management's view of the adequacy of
the allowance.
Non-Interest Income
Non-interest income amounted to $573 thousand for the year ended December
31, 1999, compared to $243 thousand for the year ended December 31, 1998, an
increase of $330 thousand, or 135.8%. The increase was attributable to an
increase in service fees on deposits of $138 thousand, or 122.1%, and an
increase in other fees and commissions of $192 thousand, or 147.7%. The growth
in service fees on deposits reflects the growth in transaction account deposits.
The growth in other fees and commissions was primarily due to higher related fee
income on loans which was attributable to an increase in loan participations and
the fees and commissions generated on those transactions.
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Non-Interest Expense
Non-interest expense amounted to $3.9 million for the year ended December
31, 1999, compared to $2.3 million for the year ended December 31, 1998, an
increase of $1.6 million, or 74.8%. The increase was due primarily to increases
in employment expenses as well as increases in occupancy expenses, equipment
expenses and other costs generally attributable to the Company's growth. Of this
increase, employment costs increased $640 thousand, or 56.7%, and reflected
increases in the number of employees from 34 full-time equivalents at December
31, 1998 to 59 full-time equivalents at December 31, 1999. The increase in
personnel is attributable to the opening of two new branch offices during 1999
in addition to the acquisition of additional support personnel required due to
the Company's growth.
Occupancy expenses increased $317 thousand, or 103.9%, to $622 thousand for
the year ended December 31, 1999. The increase was attributable to the opening
of new branch offices in November 1998, February 1999, and November 1999, which
resulted in increased lease expense and increased maintenance costs in addition
to increased depreciation costs associated with new facilities and on purchases
of enhanced computer processing equipment.
Other operating expenses increased $732 thousand, or 88.7% to $1.6 million
for the year ended December 31, 1999 from $825 thousand for the year ended
December 31, 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 amounted to $383 thousand,
an increase of $246 thousand; professional and other fees amounted to $292
thousand, an increase of $189 thousand; marketing and advertising costs amounted
to $247 thousand, an increase of $144 thousand; stationery, supplies and
printing costs amounted to $228 thousand, an increase of $93 thousand;
stockholder related costs amounted to $116 thousand, an increase of $91
thousand; and all other expenses amounted to $291 thousand, a decrease of $31
thousand.
The Company anticipates that the expense of its expanding bank branch
office system, combined with increased expenses associated with its expanding
lending activities, as well as increased costs associated with our ongoing
efforts to penetrate our target markets, will continue to increase non-interest
expense in year 2000.
Income Tax Expenses
The Company did not record an income tax provision for the years ended
December 31, 1999 and 1998 because of accumulated net operating losses incurred
during prior years. The results for the year ended December 31, 1999 were
positively affected by the application of these accumulated net operating loss
carry-forwards to reduce the Company's tax liability. In view of the Company's
operating loss history and the 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 December 31, 1999. The Company has no net
operating loss carry-forwards remaining for tax return purposes. As we continue
to be profitable, our valuation allowance on our deferred tax asset will be
reduced. As a result of this reduction, our financial statement income tax
expense will be reduced by approximately $1.1 million.
Financial Condition
At December 31, 1999, our total assets were $132.8 million, an increase of
$50.0 million, or 60.5% over total 1998 year end assets of $82.8 million. At
December 31, 1999, our net loans were $81.4 million, an increase of $36.7
million, or 82.0% from the $44.7 million reported at December 31, 1998.
Investment securities increased to $20.7 million at December 31, 1999, from $6.0
million at December 31, 1998. Federal funds sold decreased to $20.3 million at
December 31, 1999, from $26.0 million at December 31, 1998, a decrease of $5.7
million or 21.9%.
12
<PAGE>
Loan Portfolio
At December 31, 1999 our total loans were $82.6 million, an increase of
$37.0 million, or 81.1%, over our total loans of $45.6 million at December 31,
1998. Our loan portfolio consists primarily of loans secured by real estate,
and, to a lesser extent, commercial, construction, and consumer loans.
Our loans are primarily to businesses and individuals located in Monmouth,
Middlesex, and Ocean Countries, New Jersey. We have not made loans to borrowers
outside of the United States. We believe that our strategy of customer service,
competitive rate structures, and selective marketing have enabled us to gain
market entry to local loans. Bank mergers have also contributed to our efforts
to attract borrowers.
The following table sets forth the classification of our loans by major
category at December 31, 1999, and 1998.
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(In thousands, except for
percentages)
<S> <C> <C> <C> <C>
Commercial and industrial $ 15,137 18.3% $ 8,514 18.7%
Real estate - non-residential properties 38,814 47.0 19,413 42.5
Residential properties 7,254 8.8 6,914 15.2
Construction 8,895 10.7 3,582 7.9
Consumer 12,476 15.1 6,376 14.0
Other 56 0.1 803 1.7
--------- ------- --------- --------
Total loans $ 82,632 100.0% $ 45,629 100.0%
======== ===== ========= =====
</TABLE>
The following table sets forth the aggregate maturities of loans in
specified categories and the amount of such loans which have fixed and variable
rates at December 31, 1999.
<TABLE>
<CAPTION>
Within 1 1 to 5 After 5
year years years
-------------- ------------- ---------
Total
<S> <C> <C> <C> <C>
Commercial and industrial $ 11,378 $ 3,380 $ 379 $ 15,137
Construction loans 7,679 1,216 - 8,895
--------- --------- ----------- ---------
Total $ 19,057 $ 4,596 $ 379 $ 24,032
======== ========= ========== ========
Fixed rate loans $ 5,441
Variable rate loans 18,591
--------
Total $ 24,032
========
</TABLE>
<PAGE>
Asset Quality
Our loans are our principal earning assets. Inherent in the lending function is
the risk of the borrower's inability to repay its loan under its existing terms.
Risk elements in a loan portfolio include non-accrual loans, past due and
restructured loans, potential problem loans, loan concentrations and other real
estate owned, acquired through foreclosure or a deed in lieu of foreclosure.
13
<PAGE>
Non-performing assets include loans that are not accruing interest
(non-accruing loans) as a result of principal or interest being in default for a
period of 90 days or more and other real estate owned. At December 31, 1999, we
had no loans past due 30 days. When a loan is classified as non-accrual,
interest accruals cease and all past due interest, including interest applicable
to prior years, is reversed and charged against current income. Until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of such
payments as interest.
At December 31, 1999, we had no non-performing assets. We maintain a risk
rating system for grading all non-consumer credit facilities. The purpose of the
system is to detect changes in loan quality for individual credits and for
homogenous pools of loans in the portfolio. All such credits are assigned a
numerical rating in accordance with criteria established in eight categories
ranging from #1-Excellent to #8-Loss. Definitions for categories #5-Special
Mention Loans, #6-Substandard, #7-Doubtful, and #8-Loss are consistent with
those established by federal regulatory agencies. The initial rating is assigned
at inception and reviewed annually when financial statements are received and at
other times when deterioration in a relationship is detected. An independent
loan review function will test these ratings in its normal course and resolve
any rating differences. Any loan, including unrated consumer credits, may be
assigned to a watch list of credits, identified by management as credits
warranting special attention for a variety of reasons which might bear on
ultimate collectibility.
In addition to our internal rating system, our federal regulators provide
for the classification of certain loans into substandard, doubtful or loss
categories. A loan is classified as substandard when it is inadequately
protected by the current value and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected.
A loan is classified doubtful when it has all the weaknesses inherent in
one classified as substandard with the added characteristics that the weaknesses
make collection or liquidation in full, on the basis of currently existing
factors, conditions, and values, highly questionable and improbable.
A loan is classified as loss when it is considered uncollectible and of
such little value that the asset's continuance as an asset on the balance sheet
is not warranted.
As of December 31, 1999, no loans were classified as substandard, doubtful,
or loss.
Allowance for Loan Losses
We attempt to maintain an allowance for loan losses at a sufficient level
to provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur and any recovery is credited to the
allowance. Risks within the loan portfolio are analyzed on a continuous basis by
our officers, by outside, independent loan review auditors, our Directors Loan
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
<PAGE>
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 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.
Our allowance for possible loan losses totaled $1.2 million at December 31,
1999, or 1.50% of total loans outstanding. We had no non-performing loans or
loans past due 30 days or more at December 31, 1999.
14
<PAGE>
The following is a summary of the reconciliation of the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998
---- ----
(In thousands, except percentages)
<S> <C> <C>
Balance at beginning of period $ 914 $ 250
Charge-offs-consumer (2) -
Provision charged to expense 325 664
---------- ----------
Balance of allowance at end of period $ 1,237 $ 914
========== ==========
Ratio of net charge-offs to average
loans outstanding 0.00% N/A
======= =======
Balance of allowance at period-end as
a % of loans at period end 1.50% 2.00%
======= =======
</TABLE>
The following table sets forth, for each of the Bank's major lending areas,
the amount and percentage of the Bank's allowance for loan losses attributable
to such category, and the percentage of total loans represented by such
category, as of the periods indicated.
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
---- ----
Allocation % of % of all Allocation % of
% of all
amount allowance loans amount allowance loans
---------- --------- ----------- ---------- --------- ---------
(In Thousands, Except Percentages)
Balance applicable to:
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 185 15.0% 18.3% $ 96 10.5% 18.7%
Real estate non-residential
properties 628 50.8 47.0 309 33.8 42.5
Residential properties 36 2.9 8.8 35 3.8 15.2
Construction 178 14.4 10.7 72 7.9 7.9
Consumer 113 9.1 15.1 55 6.0 14.0
Other 14 1.1 0.1 16 1.8 1.7
----------- ------- ------- -------- ----- -------
Subtotal 1,154 93.3 100% 583 63.8 100%
Unallocated reserves 83 6.7 - 331 36.2 -
----------- ------- ------- -------- ----- -------
Total $ 1,237 100% 100 % $ 914 100% 100 %
========= ===== ====== ======== ===== ======
</TABLE>
<PAGE>
Investment Securities
We maintain an investment portfolio to fund increased loans or decreased
deposits and other liquidity needs and to provide an additional source of
interest income. The portfolio is composed of U.S. Treasury Securities,
obligations of U.S. Government and agencies, government sponsored entities, and
a limited amount of corporate debt securities.
We follow Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under SFAS
115, securities are classified as securities held to maturity based on
management's intent and our ability to hold them to maturity. Such securities
are stated at cost, adjusted for unamortized purchase premiums and discounts.
Securities not classified as securities held to maturity or trading securities
are classified as securities available for sale, and are stated at fair value.
Unrealized gains and losses on securities available for sale are excluded from
results of operations, and are reported as a separate component of stockholders'
equity, net of taxes. Securities classified as available for sale include
securities that may be sold in response to changes in interest rates, changes in
prepayment risks, the need to increase regulatory capital, or other similar
requirements. The Bank has no trading securities.
15
<PAGE>
Management determines the appropriate classification at the time of
purchase. At December 31, 1999 the Company classified $11.2 million, or 54.4%,
of its investment portfolio as held-to-maturity based on management's intent and
the Company's ability to hold them to maturity. These securities are stated at
cost, adjusted for unamortized purchase premiums and discounts. As of December
31, 1999 the net unrealized losses on these securities was $152 thousand.
Securities with a cost of $12.3 million were purchased for the held-to-maturity
account during 1999.
At December 31, 1999, the Company classified $9.4 million, or 45.6%, of its
investment portfolio as available-for-sale. These available-for-sale securities
had a cost basis of $9.4 million. The fair value adjustment at December 31, 1999
required the Company to decrease the carrying value of these investment
securities by $19 thousand, increase the deferred tax benefit by $8 thousand,
and decrease stockholders' equity by $11 thousand. Securities with a cost of
$9.4 million were purchased for the available-for-sale accounting during 1999.
Investment securities at December 31, 1999 were $20.7 million, an increase
of $14.7 million, or 243% over investment securities of $6.0 million at December
31, 1998. This increase is attributable to the continued growth of the Company
and the reduction of lower yielding Federal funds sold balances as the Company
purchased higher yielding investment securities and increased its loan
portfolio.
The amortized cost, gross unrealized gains and losses, and fair value of
the Company's investment securities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------
Investment securities available-for-sale
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 9,418 $ -- $ (19) $ 9,399
Corporate debt securities and other 25 -- -- 25
-------- -------- -------- --------
$ 9,443 $ -- $ (19) $ 9,424
======== ======== ======== ========
Investment securities held-to-maturity
U.S. Government and agency securities $ 10,745 $ -- $ (152) $ 10,593
Corporate debt securities and other 500 -- -- 500
-------- -------- -------- --------
$ 11,245 $ -- $ (152) $ 11,093
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity
U.S. Government and agency securities $ 5,500 $ -- $ (21) $ 5,479
Corporate debt securities and other 525 -- -- 525
------- ------- ------- -------
$ 6,025 $ -- $ (21) $ 6,004
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of the Company's investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties (in thousands).
16
<PAGE>
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
cost value cost value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,927 $ 3,921 $ 750 $ 749
Due after one year through five years 5,491 5,478 9,995 9,844
Due after five years through ten years -- -- 500 500
Due after ten years 25 25 -- --
------- ------- ------- -------
$ 9,443 $ 9,424 $11,245 $11,093
======= ======= ======= =======
</TABLE>
Deposits
Deposits are our primary source of funds. Our total deposits at December
31, 1999, were $114.0 million, an increase of $49.0 million, or 75.3% over total
deposits of $65.0 million at December 31, 1998. The growth in deposits during
this period was primarily due to the expansion and maturation of the Company's
branch system, as well as a significant increase in the amount of time deposits
reflecting both promotional activities at our new Manalapan branch and our
decision to competitively seek municipal deposits at December 31, 1999. Time
deposits represented 7.6% of our total deposits last year and they increased to
27.3% of our total deposits at December 31, 1999.
We seek to emphasize relationships with commercial customers and seek to
obtain transactional accounts, which are frequently kept in non-interest bearing
deposits. During our startup phase, we emphasized the origination of savings
deposits, which equaled $43.5 million at December 31, 1999, by offering rates
higher than our peer group institutions. As we have established ourselves within
our trade area, we have reduced our rates to more closely match the market,
resulting in our total cost of deposits declining to 3.08% for 1999 from 3.36%
for 1998. 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 amount paid without notice, and the
depositor may withdraw their funds on demand. We market this product as an
alternative to time deposits and believe it has resulted in a higher rate of
core deposits and lower cost of funds than our peer group institutions. As of
December 31, 1999, we have no foreign deposits, nor are there any material
concentrations of deposits, and we have not used brokers to acquire deposits.
The following table sets forth the average amounts of various types of
deposits at the periods indicated.
<TABLE>
<CAPTION>
<PAGE>
Year ended December 31,
--------------------------------------------
1999 1998
---- ----
Average Average Average Average
Balance Cost Balance Cost
------------------------------------------------------------
(In Thousands, Except for Percentages)
<S> <C> <C> <C> <C>
Non-interest-bearing demand $ 16,379 - % $ 8,114 - %
Interest-bearing demand (NOW) 13,227 1.70 7,851 2.17
Savings deposit 34,749 4.15 19,869 4.83
Money Market Deposits 2,719 3.64 1,520 3.88
Time deposits 12,720 5.41 3,055 5.56
-------- ---------
Total $ 79,794 3.08% $ 40,409 3.36%
======== ========
</TABLE>
17
<PAGE>
The following table summarizes the maturity distribution of certificates of
deposits as of December 31, 1999.
<TABLE>
<CAPTION>
Year ended December 31, 1999
--------------------------------------------------
Time CD's Time CD's
$100,000 and over under $100,000
Amount Percent Amount Percent
-----------------------------------------------------------
(In Thousands, Except for Percentages)
<S> <C> <C> <C> <C>
Due in 90 days or less $ 6,492 56.4% $ 1,083 5.5%
Due between 91 days and 180 days 798 6.9 2,436 12.5
Due between 181 days and one year 3,216 28.0 7,317 37.4
Due after one year 1,003 8.7 8,738 44.6
------- ----- ------- -----
Total certificates of deposit $11,509 100.0% $19,574 100.0%
======= ===== ======= =====
</TABLE>
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. Our net income is affected by changes in the level of market
interest rates. In order to maintain consistent earnings performance, the
Company seeks to manage, to the extent possible, the repricing characteristics
of its assets and liabilities. The ratio between assets and liabilities
repricing in specific time intervals is referred to as an interest rate
sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage
of the slope of the yield curve as well as forecasted changes in the level of
interest rate changes.
One of our major objectives when managing the rate sensitivity of our
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk is the responsibility of the
Asset/Liability Committee (ALCO), which is comprised of senior management and
Board members. We have instituted policies and practices of measuring and
reporting interest rate risk exposure, particularly regarding the treatment of
non-contractual assets and liabilities. In addition, we annually review the
interest rate risk policy, which includes limits on the impact to earnings from
shifts in interest rates.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of our
interest sensitive assets and liabilities that mature or reprice within given
periods. A positive gap (asset sensitive) indicates that more assets reprice
during a given period compared to liabilities, while a negative gap (liability
sensitive) has the opposite effect. We employ computerized net interest income
simulation modeling to assist in quantifying interest rate risk exposure. This
process measures and quantifies the impact on net interest income through
varying interest rate changes and balance sheet compositions. The use of this
model assists the ALCO to gauge the effects of the interest rate changes on
interest sensitive assets and liabilities in order to determine what impact
these rate changes will have upon the net interest spread.
18
<PAGE>
At December 31, 1999, we maintained a one year positive cumulative gap of
12.6% of total assets, or $16.7 million, which was within Board approved
guidelines.
<TABLE>
<CAPTION>
Interest Sensitivity Gap at December 31, 1999
-------------------------------------------------------
Mature or repricing in (1)
-------------------------------------------
3 months 3 through 1 through Over Non-interest
or less 12 months 3 Years 3 Years bearing Total
--------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 20,275$ - $ - $ - $ - $ 20,275
Investment securities
available-for-sale 501 3,420 5,478 25 - 9,424
Investment securities
held-to-maturity - 750 9,995 500 - 11,245
Loans 28,151 15,334 17,065 22,217 - 82,767
Valuation reserves (2) - - - - (1,372) (1,372)
Non-interest earning
assets - - - - 10,472 10,472
-------- -------- -------- -------- -------- ---------
Total assets $ 48,927 $ 19,504 $ 32,538 $ 22,742 $ 9,100 $132,811
======== ======== ======== ======== ======== =========
Liabilities and
Stockholders' Equity
NOW accounts $ 4,944 $ - $ 11,546 $ - $ - $ 16,490
Money market accounts 1,230 - 1,903 - - 3,133
Savings deposits 24,215 - 16,144 - - 40,359
CD's $100,000 and over 6,492 4,014 1,003 - - 11,509
CD's under $100,000 1,083 9,753 8,656 82 - 19,574
Non-interest bearing
Deposits - - - - 22,963 22,963
Other liabilities - - - - 557 557
Stockholders' equity - - - - 18,226 18,226
--------- --------- --------- --------- -------- ---------
Total liabilities
and stockholders'
equity $ 37,964 $ 13,767 $ 39,252 $ 82 $ 41,746 $ 132,811
========= ========= ========= ========= ======== =========
Interest rate sensitivity gap $ 10,963 $ 5,737 $ (6,714) $ 22,660 $(32,646)
Cumulative Gap $ 10,963 $ 16,700 $ 9,986 $ 2,646
Cumulative Gap to total assets 8.25% 12.57% 7.52% 24.58%
</TABLE>
(1) The following are the assumptions that were used to prepare the Gap
analysis:
a. Investment securities are included at carrying value in the period
in which they mature.
b. Loans are spread through the maturity buckets based on the earlier
of their actual maturity date or the date of their first potential
rate adjustment.
c. Non-maturing NOW accounts, Money market accounts and Savings
deposits typically changes rates more slowly than maturing
balances. The rate change speed of these accounts compared to the
economic rate change, has been adjusted based upon the Company's
experience.
<PAGE>
d. Certificates of deposits are spread through the maturity buckets
based on their actual maturity date.
(2) Valuation reserves include allowance for loan losses and deferred loan
fees.
19
<PAGE>
Liquidity
Our liquidity is a measure of our ability to fund loans, withdrawals or
maturities of deposits, and other cash outflows in a cost-effective manner. Our
principal sources of liquidity are deposits, scheduled amortization and
prepayments of loan principal, maturities of investment securities, access to
purchased funds, and funds provided by operations. While scheduled loan payments
and maturing investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Liquid assets (consisting of cash, federal funds sold and investment
securities classified as available-for-sale) comprised 26.1% and 34.5% of the
Company's total assets at December 31, 1999 and 1998, respectively.
We have been a net seller of federal funds, as our liquidity has exceeded
our need to fund new loan demand. Should the need arise, we would have the
capability to sell securities classified as available-for-sale, and to purchase
federal funds as alternative sources of liquidity. We have established a credit
line with another bank to purchase up to $4.0 million in federal funds. As of
December 31, 1999, we have no purchased funds.
Management believes that our current sources of funds provide adequate
liquidity for our current cash flow needs.
Capital
A significant measure of the strength of a financial institution is its
capital base. Our federal regulators have classified and defined capital into
the following components: (1) Tier I capital, which includes common stock and
qualifying preferred stock, and (2) Tier II capital, which includes a portion of
the allowance for possible loan losses, certain qualifying long-term debt and
preferred stock which does not qualify for Tier I capital. Minimum capital
levels are regulated by risk-based capital adequacy guidelines which require a
financial institution to maintain capital as a percent of its assets and certain
off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A financial institution is required to maintain, at a
minimum, Tier I capital as a percentage of risk-adjusted assets of 4.0% and
combined Tier I and Tier II capital as a percentage of risk-adjusted assets of
8.0%.
In addition to the risk-based guidelines, the federal regulators require
that a financial institution which meets the regulators' highest performance and
operation standards maintain a minimum leverage ratio (Tier I capital as a
percentage of tangible assets) of 3%. 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.
Minimum leverage ratios for the Bank are evaluated through the ongoing
regulatory examination process.
The following table summarizes our risk-based and leverage ratios at
December 31, 1999, as well as the required minimum regulatory capital ratios.
<PAGE>
<TABLE>
<CAPTION>
To be well
capitalized under
prompt corrective
Actual adequacy purposes action provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999
Total capital (to risk-
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $ 19,362 21.54% $ 7,189 =>8.00% $ 8,986 =>10.00%
Tier I capital (to risk-
weighted assets) 18,237 20.29% 3,595 =>4.00% 5,393 => 6.00%
Tier I capital (to average
assets) 18,237 15.28% 3,580 =>3.00% 5,967 => 5.00%
</TABLE>
20
<PAGE>
In addition to the capital adequacy requirements of the FDIC set forth
above, pursuant to the order of the New Jersey Commissioner of the Department of
Banking and Insurance granting our charter, we are required to maintain a ratio
of equity capital to total assets of at least 10% for our first five (5) years
of operations, unless the Commissioner consents to a lower ratio. As of December
31, 1999 and December 31, 1998, the Bank's ratio of equity capital to total
assets was 21.01% and 32.74%, respectively.
Impact of Inflation and Changing Prices
Our financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all 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.
Recently Issued Accounting Standards
Accounting For Derivative Instruments and Hedging Activity
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued. Subsequent to this statement, SFAS No. 137 was
issued, which amended the effective date of SFAS No. 133 to be all fiscal
quarters of all fiscal years beginning after June 15, 2000. Based on the
Company's minimal use of derivatives at the current time, management does not
anticipate the adoption of SFAS No. 133 will have a significant impact on
earnings or financial position of the Company. However, the impact from adopting
SFAS No. 133 will depend on the nature and purpose of the derivatives
instruments in use by the Company at that time.
ITEM 7. -- FINANCIAL STATEMENTS
The information require by this item is filed herewith.
ITEM 8. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A)
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Bank's 1999 Annual Meeting under the captions
"PROPOSAL 1. -- ELECTION OF DIRECTORS" and information concerning compliance
with Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Securities and Exchange Commission no later than April 30,
2000.
21
<PAGE>
The following table sets forth certain information about each executive
officer of the company who is not also a director.
Principal occupation
Name, age and position Officer since during past five
---------------------- ------------- ----------------
Robert Babin, 47 1999 Chief Information Officer of
Senior Vice President and the Bank; formerly Vice
Chief Information Officer President Information
Technology at Lockport
Savings Bank and Amboy
National Bank
Michael Bis, 51 1999 Chief Financial Officer of
Vice President and the Bank; formerly Controller
Chief Financial Officer of Carnegie Bank N.A.
ITEM 10. -- EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the definitive
Proxy Statement for the Bank's 2000 Annual Meeting under the captions "PROPOSAL
1 -- EXECUTIVE COMPENSATION AND ALL OTHER COMPENSATION" and "COMPENSATION OF
DIRECTORS", which is incorporated by reference herein. It is expected that such
Proxy Statement will be filed with the Securities and Exchange Commission no
later than April 30, 2000.
ITEM 11. -- SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy statement for the Bank's 2000
Annual Meeting under the caption "PROPOSAL 1 -- SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT", which is incorporated herein by reference. It
is expected that such Proxy statement will be filed with the Securities and
Exchange Commission no later than April 30, 2000.
ITEM 12. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Bank's 2000 Annual Meeting
under the caption "PROPOSAL 1 -- INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS", which is incorporated herein by reference. It is expected that
such Proxy statement will be filed with the Securities and Exchange Commission
no later than April 30, 2000.
ITEM 13. -- EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit number Description of Exhibits
-------------- --------------------------------
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton LLP
27 Financial data schedule
(b) Reports on Form 8-K
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
By:/s/ Robert D.O'Donnell
----------------------
Robert D. O'Donnell
President and Chief Executive
Dated: March 27, 2000 Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Robert D. O'Donnell
- --------------------------
Robert D. O'Donnell President and Chief Executive
Officer March 27, 2000
/s/ Michael Bis
- --------------------------
Michael Bis Chief Financial Officer March 27, 2000
/s/ Howard Schoor
- --------------------------
Howard Schoor Chairman of the Board March 27, 2000
/s/ Eli Kramer
- --------------------------
Eli Kramer Vice Chairman of the Board March 27, 2000
/s/ Charles P. Kaempffer
- -----------------------------
Charles P. Kaempffer, CPA Vice Chairman of the Board March 27, 2000
/s/ Morris Kaplan
- --------------------------
Morris Kaplan Director March 27, 2000
/s/ Robert M. Kaye
- --------------------------
Robert M. Kaye Director March 27, 2000
/s/ William J. Mehr
- --------------------------
William J. Mehr, Esq. Director March 27, 2000
/s/ Arnold Silverman
- --------------------------
Arnold Silverman Director March 27, 2000
/s/ Lewis Wetstein
- --------------------------
Lewis Wetstein, M.D. Director March 27, 2000
</TABLE>
23
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Community Bancorp of New Jersey
We have audited the consolidated balance sheets of Community Bancorp of
New Jersey (formerly, the Community Bank of New Jersey) as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community Bancorp of New Jersey as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
January 14, 2000
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 4,991 $ 2,541
Federal funds sold 20,275 26,025
-------- --------
Total cash and cash equivalents 25,266 28,566
Investment securities available for sale 9,424 -
Investment securities held-to-maturity (fair value of
$11,093 and $6,004 at December 31, 1999 and
1998, respectively) 11,245 6,025
Loans receivable 82,632 45,629
Less allowance for loan losses (1,237) (914)
-------- ---------
Net loans receivable 81,395 44,715
Premises and equipment, net 4,631 3,068
Accrued interest receivable 643 224
Other assets 207 153
-------- ---------
Total assets $132,811 $ 82,751
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing - demand $ 22,963 $ 13,530
Interest bearing - NOW 16,490 14,397
Savings and money market 43,492 32,138
Certificates of deposit, under $100,000 19,574 3,511
Certificates of deposit, $100,000 and over 11,509 1,463
-------- ---------
Total deposits 114,028 65,039
Accrued interest payable 292 114
Other liabilities 265 209
-------- ---------
Total liabilities 114,585 65,362
-------- ---------
STOCKHOLDERS' EQUITY
Common stock - authorized, 5,000,000 shares of no par value; issued and
outstanding, net of treasury shares, 1,827,766 and
1,730,917 shares at December 1999 and 1998, respectively 20,523 18,994
Accumulated deficit (1,923) (1,605)
Accumulated other comprehensive income (loss) (11) -
Treasury stock, 22,357 shares, at cost (363) -
--------- ---------
Total stockholders' equity 18,226 17,389
--------- ---------
Total liabilities and stockholders' equity $132,811 $ 82,751
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)
1999 1998
---------- -----------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $ 5,191 $ 2,454
Federal funds sold 777 652
Investment securities 693 323
------- -------
Total interest income 6,661 3,429
INTEREST EXPENSE
Deposits 2,453 1,359
Short-term borrowings 1 --
------- -------
Total interest expense 2,454 1,359
Net interest income 4,207 2,070
PROVISION FOR LOAN LOSSES 325 664
------- -------
Net interest income after provision for loan losses 3,882 1,406
------- -------
NON-INTEREST INCOME
Service fees on deposit accounts 251 113
Other income 322 130
------- -------
Total non-interest income 573 243
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,769 1,129
Occupancy expense 622 305
Other operating expenses 1,557 825
------- -------
Total non-interest expense 3,948 2,259
------- -------
Net income (loss) $ 507 $ (610)
======= =======
Per share data
Net income (loss) - basic $ 0.28 $ (0.45)
======= =======
Net income (loss) - diluted $ 0.27 $ (0.45)
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 1999 and 1998
(In thousands, except per share data)
Accumulated
Additional other
Common paid-in Comprehensive Treasury Accumulated Comprehensive
stock capital income (loss) stock deficit income Total
----- ------- ------------- ----- ------- ------ -----
Balance at January 1, 1998,
<S> <C> <C> <C> <C> <C> <C> <C>
as previously reported $ 6,454 $ 5,930 $ - $ - $ (995) $ 11,389
Stock conversion 5,930 (5,930) - - - -
-------- -------- ------- --------- ---------- --------
Balance at January 1, 1998, as restated 12,384 - - - (995) 11,389
Issuance of common stock,
net of offering expenses 6,610 - - - - 6,610
Net loss - - - - (610) $ (610) (610)
Accumulated other comprehensive
income (loss), net of reclassification
adjustments and taxes - - - - - - -
--------- --------
Total comprehensive income - - - - - $ (610)
-------- -------- ------- --------- ----------- =========
Balance at December 31, 1998 18,994 - - - (1,605) 17,389
Issuance of common stock, net
of offering expenses 1,014 - - - - 1,014
3% stock dividend (53,206 shares) 825 - - - (825) -
Purchase and retirement of stock options (310) - - - - (310)
Purchase of treasury stock (22,416 shares) - - - (364) - (364)
Stock award to employees (59 shares) - - - 1 - 1
Net income - - - - 507 $ 507 507
Accumulated other comprehensive
income (loss), net of reclassification
adjustments and taxes - - (11) - - (11) (11)
--------- --------
Total comprehensive income - - - - - $ 496
-------- -------- ------- --------- ----------- =========
Balance at December 31, 1999 $ 20,523 $ - $ (11) $ (363) $ (1,923) $ 18,226
======== ======== ======= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANCORP OF NEW JERSEY
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
1999 1998
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 507 $ (610)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 354 206
Provision for loan losses 325 664
Accretion of investment discount (6) --
Amortization of investment premium 6 --
Increase in accrued interest receivable (419) (95)
(Increase) decrease in other assets (45) 2
Increase in accrued interest payable 178 93
Increase in other liabilities 56 97
-------- --------
Net cash provided by operating activities 956 357
-------- --------
INVESTING ACTIVITIES
Purchases of investment securities held
to maturity (12,302) (10,000)
Purchase of investment securities available-for-sale (9,416) --
Net increase in loans receivable (37,005) (30,396)
Proceeds from maturities and calls of
investment securities 7,055 12,499
Purchases of premises and equipment (1,917) (1,358)
-------- --------
Net cash used in investing activities (53,585) (29,255)
-------- --------
FINANCING ACTIVITIES
Net proceeds from common stock issued 1,014 6,610
Purchase of common stock for treasury (364) --
Purchase of options for retirement (310) --
Net increase in demand deposits and
savings accounts 22,880 38,131
Net increase in certificates of deposits 26,109 3,647
-------- --------
Net cash provided by financing activities 49,329 48,388
-------- --------
Net (decrease) increase in cash and cash equivalents (3,300) 19,490
Cash and cash equivalents, beginning of period 28,566 9,076
-------- --------
Cash and cash equivalents, end of period $ 25,266 $ 28,566
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest $ 2,632 $ 1,266
======== ========
Cash paid for income taxes $ -- $ 1
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE A - ORGANIZATION
On July 1, 1999, after obtaining the appropriate stockholder and regulatory
approval, Community Bancorp of New Jersey (the Company) was formed to
operate as a bank holding company. Concurrent with its formation, the
Company issued one share of its common stock in exchange for one share of
common stock of The Community Bank of New Jersey (the Bank). These financial
statements have been retroactively adjusted to reflect this conversion.
The Bank is a New Jersey state-chartered banking institution. The Bank filed
an application for a commercial company charter with the New Jersey State
Commissioner of Banking and Insurance (the Charter Application) on June 14,
1996, to charter the Bank as a New Jersey commercial bank. The Charter
Application was conditionally approved on December 6, 1996. On July 11,
1996, the organizers filed an application for federal insurance with the
Federal Deposit Insurance Corporation (FDIC). The application was approved
by the FDIC on March 21, 1997. The Bank commenced operations on May 15,
1997.
The Bank provides banking services to small and medium-sized businesses,
professionals, and individual consumers in the area of central New Jersey.
Additionally, the Company competes with other banking and financial
institutions in its market communities, including financial institutions
with resources substantially greater than its own. Commercial banks, credit
unions, and money market funds actively compete for savings and time
deposits and for similar types of loans. Such institutions, as well as
consumer finance and insurance companies, may be considered competitors of
the Company with respect to one or more of the services it provides.
The Company and Bank are subject to regulations of certain state and federal
agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Company's and Bank's businesses are
susceptible to being affected by state and federal legislation and
regulations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and predominant practices within the banking
industry. The financial statements include the accounts of the Company and
its wholly owned subsidiary, the Bank. All intercompany balances and
transactions have been eliminated in the financial statements.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the balance sheet and the reported amounts of revenues and expenses
during the reporting periods. Therefore, actual results could differ from
those estimates.
(Continued)
28
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The estimate and 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 Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in 1998. SFAS No. 131 redefines how
operating segments are determined and requires disclosures of certain
financial and descriptive information about the Company's operating
segments. Under current conditions, management has determined the Company
operates in one business segment, community banking.
2. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold with maturities of three months or less.
3. Investment Securities
The Company accounts for its investment securities in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
This standard requires, among other things, that debt and equity securities
classified as available-for-sale be reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate
component, net of income taxes. The net effect of unrealized gains or
losses, caused by marking an available-for-sale portfolio to market, could
cause fluctuations in the level of undivided profits and equity-related
financial ratios as market interest rates cause the fair value of fixed-rate
securities to fluctuate. The Company had no securities classified as
available-for-sale at December 31, 1998.
Investment and mortgage-backed securities, which the Company has the ability
and intent to hold to maturity, are held for investment purposes and carried
at cost, adjusted for amortization of premium and accretion of discount over
the terms of the maturity in a manner which approximates the interest
method. At the time of purchase, the Company makes a determination as to
whether or not it will hold the investment securities to maturity based upon
an evaluation of the probability of the occurrence of future events. Gains
or losses on the sales of securities available for sale are recognized upon
realization utilizing the specific identification method.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued. Subsequent to this statement, SFAS No. 137
was issued, which amended the effective date of SFAS No. 133 to be all
fiscal quarters of all fiscal years beginning after June 15, 2000. Based on
the Company's minimal use of derivatives at the current time, management
does not anticipate the adoption of SFAS No. 133 will have a significant
impact on earnings or financial position of the Company. However, the impact
from adopting SFAS No. 133 will depend on the nature and purpose of the
derivatives instruments in use by the Company at that time.
(Continued)
29
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Loans Receivable and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on
loans is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses 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.
Interest on loans is accrued and credited to operations based upon the
principal amounts outstanding. Loans are placed on non-accrual when a loan
is specifically determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss
is remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
non-accrual loans is recognized only to the extent of interest payments
received. The Company had no non-accrual loans as of December 31, 1999 or
1998.
The Company accounts for its impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. Regardless
of the measurement method, a creditor must measure impairment based on the
fair value of the collateral when the creditor determines that foreclosure
is probable. The Company had no loans that would be defined as impaired at
December 31, 1999 or 1998.
<PAGE>
5. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company accounts for its transfers and servicing financial assets in
accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as amended by SFAS No.
127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
This standard provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities.
(Continued)
30
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to operations on a
straight-line basis over the estimated useful lives of the assets.
7. Income Taxes
Under the liability method specified by SFAS No. 109, Accounting for Income
Taxes, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities, as measured by the enacted tax rates, which will be in effect
when these differences reverse. The primary temporary differences are
organizational and start-up costs and net operating loss carryforwards.
8. Earnings Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS
No. 128 eliminates primary and fully diluted earnings per share (EPS) and
requires presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. 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.
9. Advertising Costs
The Company expenses advertising costs as incurred.
10. Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income on January
1, 1998. This standard requires entities presenting a complete set of
financial statements to include details of comprehensive income or loss.
Comprehensive income consists of net income or loss for the current period
and income, expenses, gains, and losses that bypass the income statement and
are reported directly in a separate component of equity. The Company did not
have any components of comprehensive income at or during the year ended
December 31, 1998.
(Continued)
31
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The income tax effects allocated to comprehensive income (loss) at December
31, are as follows (in thousands):
<TABLE>
<CAPTION>
1999
----
Before Tax Net
tax (expense) of tax
amount benefit amount
---------- ----------- --------
Unrealized gains (losses) on securities
<S> <C> <C> <C>
Unrealized holding losses arising during period $ (19) $ 8 $ (11)
Less reclassification
Adjustment for loss realized in net income -- -- --
------- ------ -------
Other comprehensive income (loss), net $ (19) $ 8 $ (11)
======= ====== =======
</TABLE>
11. Reclassification
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
NOTE C - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Company's investment securities are as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities available-for-sale
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 9,418 $ -- $ (19) $ 9,399
Corporate debt securities and other 25 -- -- 25
-------- -------- -------- --------
$ 9,443 $ -- $ (19) $ 9,424
======== ======== ======== ========
Investment securities held-to-maturity
U.S. Government and agency securities $ 10,745 $ -- $ (152) $ 10,593
Corporate debt securities and other 500 -- -- 500
-------- -------- -------- --------
$ 11,245 $ -- $ (152) $ 11,093
======== ======== ======== ========
</TABLE>
(Continued)
32
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE C - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities held-to-maturity
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 5,500 $ - $ (21) $ 5,479
Corporate debt securities and other 525 - - 525
----------- ------------- -------------- -----------
$ 6,025 $ - $ (21) $ 6,004
========== ============= ============ ==========
</TABLE>
The amortized cost and fair value of the Company's investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties (in thousands).
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Fair Amortized Fair
cost value cost value
--------------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,927 $ 3,921 $ 750 $ 749
Due after one year through five years 5,491 5,478 9,995 9,844
Due after five years through ten years - - 500 500
Due after ten years 25 25 - -
----------- ----------- ------------ ----------
$ 9,443 $ 9,424 $ 11,245 $ 11,093
========= ========= ======== ========
</TABLE>
A portion of the Company's U.S. Government and agency securities, totalling
approximately $1,300,000 and $500,000 at December 31, 1999 and 1998,
respectively, was pledged as collateral to secure deposits as required or
permitted by law.
NOTE D - LOANS RECEIVABLE
<PAGE>
Major loan classifications at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Consumer loans $ 12,479 $ 6,376
Residential mortgages 7,268 6,956
Commercial and industrial loans 15,197 8,532
Construction loans 8,895 3,582
Commercial mortgages 38,872 19,454
Other 56 803
----------- ----------
82,767 45,703
Less
Unearned discounts and deferred loan fees (135) (74)
Allowance for loan losses (1,237) (914)
--------- ----------
$ 81,395 $ 44,715
======== ========
</TABLE>
(Continued)
33
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE D - LOANS RECEIVABLE - Continued
The Company had no non-accrual loans or loans that would be defined as
impaired at December 31, 1999 or 1998.
The Company defines non-performing assets to include loans past due 90 days
or more, impaired loans and other real estate owned. The Company had no
non-performing assets at December 31, 1999 or 1998. There were no loans to
directors, officers, or employees at or during the periods ended December
31, 1999 or 1998.
Changes in the allowance for loan losses is as follows (in thousands):
1999 1998
---- ----
Balance, beginning of year $ 914 $ 250
Provision charged to expenses 325 664
Loans charged-off (2) --
------- -------
Balance, end of period $ 1,237 $ 914
======= =======
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
useful lives 1999 1998
------------------ ------------ ------------
<S> <C> <C> <C>
Land Indefinite $ 443 $ 176
Buildings and leasehold improvements 10 - 39 years 3,306 1,846
Furniture, fixtures and equipment 5 years 782 460
Computer equipment and software 3 - 5 years 741 452
Construction in progress -- 6 427
------- -------
5,278 3,361
Less accumulated depreciation and
amortization (647) (293)
------- -------
$ 4,631 $ 3,068
======= =======
</TABLE>
Depreciation and amortization charged to operations amounted to
approximately $354,000 and $206,000 for year ended December 31, 1999 and
1998, respectively.
34
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE F - DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 21,342
2001 9,659
2002 -
2003 82
-----------
$ 31,083
Interest expense on deposits is as follows (in thousands):
1999 1998
------------ ------------
Savings $ 1,441 $ 960
NOW and money market 324 229
Time deposits 688 170
---------- ----------
$ 2,453 $ 1,359
========= =========
</TABLE>
NOTE G - EQUITY TRANSACTIONS
On April 22, 1999, the shareholders of the Bank 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 dissenter's rights of appraisal. On
August 6, 1999, the Company and this shareholder negotiated a settlement
pursuant to which the dissenting shareholder relinquished all beneficially
owned equity instruments, consisting of 22,416 common shares and 38,700
exercisable options, for fair value of approximately $674,000.
On January 11, 1999, the Company completed the sale of the overallotment of
shares associated with its secondary public offering. An additional 66,000
shares were sold at $16.50 per share for $1,089,000. Gross proceeds of the
overallotment were reduced by offering costs of approximately $75,000.
NOTE H - INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
1999 1998
---- ----
Current
Federal $ 7 $ -
State 4
Deferred (benefit) (11) -
---------- ---------
$ - $ -
========== =========
(Continued)
35
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE H - INCOME TAXES - Continued
The Company did not record an income tax provision for the years ended
December 31, 1999 and 1998, because of its net operating loss carryforwards.
Net deferred tax assets consist of the following (in thousands):
1999 1998
---- ----
Allowance for loan loss $ 368 $ 329
Organizational and start-up costs 73 115
Net operating loss carryforwards -- 200
Other (46) (19)
----- -----
395 625
Less valuation allowance (384) (625)
----- -----
Net deferred tax asset $ 11 $ --
===== =====
In view of the Company's operating loss history and the risks associated
with its ability to generate taxable income in the future, management has
provided for the valuation allowance reflected in the schedule above. The
Company had no net operating loss carryovers remaining at December 31, 1999.
As the Company continues to be profitable, the valuation allowance on the
deferred tax asset will be reduced. As a result of this reduction, income
tax expense in future years will be reduced by approximately $1.1 million.
NOTE I - OTHER EXPENSES
Other expenses consist of the following (in thousands):
1999 1998
---- ----
Office expense $ 178 $ 197
Stationery and printing 228 135
Data processing 383 137
Professional fees 292 103
Marketing and advertising 247 103
Insurance expense 63 59
Stockholder expense 116 25
Other 50 66
------ ------
$1,557 $ 825
====== ======
36
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE J - EARNINGS PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31, 1999
-----------------------------------------------
Weighted Per share
Loss average shares amount
---- -------------- ------
Basic EPS
<S> <C> <C> <C>
Net income available to common stockholders $ 507 1,832,781 $ 0.28
Effect of dilutive securities
Options -- 25,442 (0.01)
--------- --------- --------
Diluted EPS
Net income available to common stockholders plus
Assumed conversion $ 507 1,858,223 $ 0.27
========= ========= ========
</TABLE>
62,985 options to purchase shares of common stock with an exercise prices
ranging from $15.34 to $16.86 per share were not included in the computation
of 1999 diluted EPS because the exercise price was greater than the average
market price of the common stock.
<TABLE>
<CAPTION>
Year ended December 31, 1998
-----------------------------------------------
Weighted Per share
Loss average shares amount
---- -------------- ------
Basic EPS
<S> <C> <C> <C>
Net loss available to common stockholders $ (610) 1,351,994 $ (0.45)
Effect of dilutive securities
Options -- -- --
--------- --------- --------
Diluted EPS
Net loss available to common stockholders plus
Assumed conversion $ (610) 1,377,289 $ (0.45)
========= ========= ========
</TABLE>
187,975 options to purchase shares of common stock with an exercise price
ranging from $11.17 to $16.86 per share were not included in the computation
of 1998 diluted EPS because the Company is in a loss position.
<PAGE>
NOTE K - STOCK OPTIONS
In July 1997, the Board of Directors of the Company adopted three stock
option plans for the members of the board, executive officers, and certain
employees of the Company. In April 1998, the Company's shareholders approved
all three stock option plans.
Under the Company's 1997 Stock Option Plan for Non-Employee Directors (the
1997 Stock Option Plan for Non-Employee Directors), options to purchase
46,350 common stock shares may be issued. Each of the nine non-employee
directors were automatically granted 5,000 common stock options exercisable
at $11.17 per share (110% of market value on date of grant) in July 1997.
The options vest one-third each year. The option may be exercised up to 10
years after the grant. At December 31, 1999, 44,633 options were granted
under this plan.
(Continued)
37
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE K - STOCK OPTIONS - Continued
Under the Company's 1997 Stock Option Plan (the 1997 Stock Option Plan),
options to purchase 60,770 common stock shares may be issued. Options to
purchase 45,320 common stock shares were granted to nine non-employee
directors at $11.17 per share (110% of market value on date of grant) in
July 1997, in varying amounts to each non-employee director in July 1997.
Additionally, 15,450 options were granted to the President at $14.33 per
share in May 1998. The options vest one-third each year. The options may be
exercised up to 10 years after the grant. At December 31, 1999, 59,568
options were granted under this plan.
Under the Company's 1997 Employee Stock Option Plan (the 1997 Employee Stock
Option Plan), options to purchase 51,500 common stock shares may be issued.
The plan is designed to reserve options for employees of the Company. The
discretion of the board is very broad in determining to whom, how many, and
at what price options may be issued. Under the Plan, employees may be
awarded either incentive stock options, which must have an exercise price of
no less than 100% of the fair market value of the common stock on the date
of grant, or non-qualified options, which may have an exercise price to be
determined by the Board of directors at grant, but not less than 85% of the
fair market value of the common stock on the date of grant. They may be
priced as low as 85% of market value. Options to purchase 51,500 shares were
granted in May 1998 at prices ranging from $15.03 to $16.86, which include
25,750 options granted to the President. The options under this plan vest
from 3 to 5 years. At December 31, 1999, all options were granted under this
plan.
The Board of Directors approved in May 1998, the 1998 Stock Option Plan (the
1998 Stock Option Plan) pursuant to which options to purchase up to 51,500
shares of common stock may be issued to members of management. The Board
adopted this stock option plan in connection with the retention of the
President and Chief Executive Officer of the Company. Under the terms of the
President's employment, he is entitled to receive options to purchase 77,250
shares of common stock, more than was previously authorized under the
Company's existing stock option plans. The options under this plan vest from
3 to 5 years. Since this stock option plan is subject to the approval of the
Company's shareholders at its annual meeting to be held April 22, 1999, the
options granted in 1998 were valued in accordance with SFAS No. 123 in 1999.
At December 31, 1999, 42,385 options were granted under this plan.
The Board of Directors approved and will be recommending for shareholder
approval in April 2000 the 2000 Director Stock Option Plan (the 2000
Director Stock Option Plan), pursuant to which options to purchase 85,000
common stock shares may be issued. Options to purchase 85,000 common stock
have been granted to eight non-employee directors at $13.78 per share (110%
of market value on date of grant) in varying amounts to each non-employee
director. The options vest over a two year period. The options may exercised
up to 10 years after the grant.
<PAGE>
The Board of Directors approved and will be recommending for shareholder
approval in April 2000 the 2000 Employee Stock Option Plan (the 2000
Employee Stock Option Plan). Options to purchase 70,000 shares of the common
stock will be reserved for issuance under this Plan. Options to purchase
21,000 common stock shares have been granted to key employees, including
11,000 to the President at prices ranging from $13.13 to $13.78. The options
under this plan vest from 2 to 5 years. The options may be exercised up to
10 years after grant.
(Continued)
38
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE K - STOCK OPTIONS - Continued
The Company follows SFAS No. 123, Accounting for Stock-Based Compensation,
which allows an entity to use a fair value-based method for valuing
stock-based compensation, 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, the
statement permits entities to elect accounting for employee stock options
and similar instruments under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and its related
interpretations. Entities that elect to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
EPS, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. The Company's stock option plans are accounted for under
APB Opinion No. 25.
Had compensation cost of the above stock option plans been determined based
on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Company's net income and diluted earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data).
December 31,
---------------------
1999 1998
---- ----
Net income (loss)
As reported $ 507 $ (610)
Pro forma 168 (809)
Net income (loss) per share - basic
As reported $ 0.28 (0.45)
Pro forma 0.09 (0.63)
Net income (loss) per share - diluted
As reported $ 0.27 (0.45)
Pro forma 0.08 (0.63)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1999 and 1998, dividend yield of 0% in both
years; expected volatility of 25% in both years; risk-free interest rate of
5.79% in 1999 and 5.54% in 1998; and expected lives of 10 years in both
years.
A summary of the status of the Company's stock option plans as of December
31, 1999, and the change during the years then ended is represented below.
<TABLE>
<CAPTION>
<PAGE>
1998 1999
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C>
Outstanding, beginning of year 187,975 $ 13.37 - $ -
Granted 24,875 15.58 210,635 13.17
Cancelled/forfeited (14,764) 14.67 (22,660) 11.56
------- -------
Outstanding, end of year 198,086 13.57 187,975 13.37
======= =======
Weighted average fair value of
Options granted during the year $ 8.20 $ 6.88
======== ========
</TABLE>
(Continued)
39
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE K - STOCK OPTIONS - Continued
The following table summarizes information about nonqualified options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- -----------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1999 life price 1999 price
--------------- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 11.17 - $16.38 162,036 8.07 years $ 12.84 69,353 $ 11.54
$ 16.86 36,050 8.36 years $ 16.86 7,210 $ 16.86
-------- -------
198,086 76,563
======== =======
</TABLE>
NOTE L - COMMITMENTS
Lease Commitments
The Company leases several banking facilities under noncancellable operating
lease agreements expiring through 2019. At the end of the lease terms, the
leases are renewable at the then fair rental value for periods of 5 to 20
years. Rent expense was $89,000 and $24,000 for the year ended December 31,
1999 and 1998, respectively.
The approximate minimum rental commitments under operating leases at
December 31, 1999, are as follows (in thousands):
2000 $ 93
2001 100
2002 96
2003 80
2004 85
Thereafter 1,224
------
$1,678
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
<PAGE>
recognized in the financial statements. The Company's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
(Continued)
40
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Continued
The Company had the following approximate off-balance-sheet financial
instruments whose contract amounts represent credit risk (in thousands):
1999 1998
---- ----
Commitments to extend credit $ 22,558 $ 11,651
Letters of credit - standby and performance 1,298 1,102
--------- --------
$ 23,856 $ 12,753
======== ========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case-basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include guarantees, personal or commercial
real estate, accounts receivable, inventory, and equipment.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support contracts entered into by
customers. Most guarantees extend for one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
Substantially all of the Company's loans are secured by real estate in New
Jersey. Accordingly, the Company's primary concentration of credit risk is
related to the real estate market in New Jersey, and the ultimate
collectibility of this portion of the Company's loan portfolio is
susceptible to changes in economic conditions in that area.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments. However, many such
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is the
Company's general practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities, except for
certain loans. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
(Continued)
41
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1999 and 1998, are
outlined below.
For cash and cash equivalents, including cash and due from banks and federal
funds sold the recorded book values of $25,266,000 and $28,566,000 as of
December 31, 1999 and 1998, respectively, approximate fair values. The
estimated fair values of investment securities are based on quoted market
prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available.
The net loan portfolio at December 31, 1999 and 1998, has been valued using
a present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
The estimated fair values of demand deposits (i.e., interest- and
noninterest-bearing checking accounts, savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The fair values of
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. Based upon
the current time deposit maturities, the carrying value approximates its
fair value. The carrying amount of accrued interest payable approximates its
fair value.
<PAGE>
<TABLE>
<CAPTION>
1998 1999
---- ----
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- -------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities available-for-sale $ 9,424 $ 9,424 $ - $ -
Investment securities held-to-maturity 11,245 11,093 6,025 6,004
Loans receivable 82,632 81,489 45,629 45,123
Certificates of deposits 31,083 31,083 4,974 4,974
</TABLE>
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items, which totalled
approximately $23,856,000 and $12,753,000 at December 31, 1999 and 1998,
respectively, and primarily comprise unfunded loan commitments, which are
generally priced at market at the time of funding.
42
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal companying agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). As of December 31, 1999, management believes
that the Bank meets all capital adequacy requirements to which it is subject
and considers the Bank to be "well capitalized".
As of June 7, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following table (in thousands, except percentages).
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ------------ --------- ------------ -------
As of December 31, 1999
Total capital (to risk-
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $ 19,362 21.54% $ 7,189 =>8.00% $ 8,986 =>10.00%
Tier I capital (to risk-
weighted assets) 18,237 20.29 3,595 =>4.00 5,393 => 6.00
Tier I capital (to average
assets) 18,237 15.28 3,580 =>3.00 5,967 => 5.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1998
Total capital (to risk-
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $ 18,021 35.84% $ 4,022 =>8.00% $ 5,028 =>10.00%
Tier I capital (to risk-
weighted assets) 17,389 34.59 2,011 =>4.00 3,017 => 6.00
Tier I capital (to average
assets) 17,389 24.41 2,137 =>3.00 3,562 => 5.00
</TABLE>
(Continued)
43
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE O - REGULATORY MATTERS - Continued
In addition, pursuant to the order of the New Jersey Commissioner of the
Department of Banking and Insurance granting the Bank a charter, the Bank is
required to maintain a ratio of equity to total assets of at least 10% for
its first five years of operations. As of December 31, 1999 and 1998, the
Bank's ratio of equity capital to total assets was 13.72% and 21.01%,
respectively.
NOTE P - PARENT COMPANY FINANCIAL INFORMATION
Although the consolidated financial statements have been retroactively
adjusted to reflect the formation of the holding company, condensed
financial information for Community Bancorp of New Jersey, parent company
only, has only been presented at and for the year ended December 31, 1999
(in thousands).
BALANCE SHEET
December 31, 1999
ASSETS
Investment in subsidiary $18,225
Other assets 47
-------
Total assets $18,272
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 46
Stockholders' equity 18,226
-------
Total liabilities and stockholders' equity $18,272
=======
STATEMENT OF OPERATIONS
Year ended December 31, 1999
Services fee from subsidiary $ 47
Other operating expenses 47
-------
Income before undistributed income from subsidiary --
Equity in undistributed income of subsidiary 507
-------
Net income $ 507
=======
(Continued)
44
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE P - PARENT COMPANY FINANCIAL INFORMATION - Continued
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
Cash flows from operating activities
<S> <C>
Net income $ 507
Adjustments to reconcile net income to net cash provided by operations
Equity in undistributed (earnings) losses of subsidiary (507)
Net increase in other assets 47
Net increase in other liabilities 46
-------
Net cash used in operating activities (1)
-------
Cash flows from investing activities
Contributions to subsidiary (1,014)
Proceeds to fund treasury stock and option transactions 674
-------
Net cash use in investing activities (340)
-------
Cash flows from financing activities
Effect of treasury stock and option transactions (673)
Issuance of common stock 1,014
-------
Net increase (decrease) in cash and cash equivalents 341
-------
Cash and cash equivalents at beginning of period --
-------
Cash and cash equivalents at end of year $ --
=======
</TABLE>
NOTE Q - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 1999
and 1998, on a quarterly basis, for Community Bancorp of New Jersey (in
thousands except per share data):
<TABLE>
<CAPTION>
1999
----
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $1,942 $1,744 $1,593 $1,382
Interest expense 826 628 545 455
------ ------ ------
Net interest income 1,116 1,116 1,048 927
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Provision for loan losses 58 45 111 111
------ ------ ------
Net interest after provisions for loan losses 1,058 1,071 937 816
Other non-interest income 273 169 73 58
Other non-interest expense 1,188 1,080 871 809
------ ------ ------
Net income $ 143 $ 160 $ 139 $ 65
====== ====== ======
Net income per share
Basic $ 0.08 $ 0.09 $ 0.08 $ 0.03
Diluted $ 0.07 $ 0.09 $ 0.08 $ 0.03
</TABLE>
(Continued)
45
<PAGE>
COMMUNITY BANCORP OF NEW JERSEY
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE Q - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) - Continued
<TABLE>
<CAPTION>
1998
----
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 1,152 $ 932 $ 734 $ 611
Interest expense 479 397 270 213
---------- ---------- ---------- ----------
Net interest income 673 535 464 398
Provision for loan losses 134 198 197 135
---------- ---------- ---------- ----------
Net interest after provisions for loan losses 539 337 267 263
Other non-interest income 99 92 32 20
Other non-interest expense 600 534 636 489
---------- ---------- ---------- ----------
Net income (loss) $ 38 $ (105) $ (337) $ (206)
=========== ========== ========== ==========
Net income (loss) per share
Basic $ 0.03 $ (0.08) $ (0.25) $ (0.15)
Diluted $ 0.03 $ (0.08) $ (0.25) $ (0.15)
</TABLE>
46
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-12-1999
<PERIOD-END> DEC-12-1999
<CASH> 4,991
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,275
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,424
<INVESTMENTS-CARRYING> 11,245
<INVESTMENTS-MARKET> 11,093
<LOANS> 82,632
<ALLOWANCE> 1,237
<TOTAL-ASSETS> 132,811
<DEPOSITS> 114,028
<SHORT-TERM> 0
<LIABILITIES-OTHER> 557
<LONG-TERM> 0
0
0
<COMMON> 20,160
<OTHER-SE> (1,923)
<TOTAL-LIABILITIES-AND-EQUITY> 132,811
<INTEREST-LOAN> 5,191
<INTEREST-INVEST> 693
<INTEREST-OTHER> 777
<INTEREST-TOTAL> 6,661
<INTEREST-DEPOSIT> 2,453
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<INTEREST-INCOME-NET> 4,207
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<EXPENSE-OTHER> 3,948
<INCOME-PRETAX> 507
<INCOME-PRE-EXTRAORDINARY> 507
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 0.073
<LOANS-NON> 0
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<ALLOWANCE-CLOSE> 1,237
<ALLOWANCE-DOMESTIC> 1,154
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 83
</TABLE>
