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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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)
(732) 863-9000
(Issuer's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value
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-K is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. |_| We have a late filer. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of voting and non-voting equity held by
non-affiliates was $73,255,828.
As of March 4, 2004, there were 3,389,719 shares of common stock, no par value
per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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 seven branch offices located in Colts Neck,
Freehold, Howell, Matawan, Manalapan (2) and Shrewsbury, 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.
On February 16, 2004 we entered into an Agreement and Plan of Merger (the
"Agreement") with Sun Bancorp, Inc., a Vineland, New Jersey based bank holding
company ("Sun"). Under the Agreement, Sun will acquire Community, and the bank,
in a stock-for-stock exchange merger valued at approximately $83.2 million. The
Agreement provides that our shareholders will receive .8715 shares of Sun common
stock for each issued and outstanding share of Community common stock, as
adjusted to reflect Sun's recently announced 5% stock dividend. We will also be
permitted under the Agreement to pay a one-time special cash dividend in the
amount of $.75 per share to its shareholders prior to the consummation of the
proposed merger with Sun. The proposed merger is subject to certain customary
conditions for transactions of this type including, among others, approval by
our shareholders and by Sun's and regulatory approval. The merger is expected to
be consummated either late in the second quarter or early in the third quarter
of this year.
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.
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 Colts Neck, Freehold Borough, Howell, Manalapan (2), Matawan and
Shrewsbury, 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.
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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.
Employees
At December 31, 2003, the Bank employed 92 full-time employees and 24
part-time employees. None of these employees is 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 on 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 Board of Governors of the Federal Reserve System (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.
In addition, the BHCA was amended through the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (the GLBA). Under the terms of the GLBA, bank holding
companies whose subsidiary banks meet certain capital, management and Community
Reinvestment Act standards are permitted to engage in a substantially broader
range of non-banking activities than is permissible for bank holding companies
under the BHCA. These activities include certain insurance, securities and
merchant banking activities. In addition, the GLBA amendments to the BHCA remove
the requirement for advance regulatory approval for a variety of activities and
acquisitions by financial holding companies. As our business is currently
limited to banking activities, we have not elected to become a financial holding
company.
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.
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.
3
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 consolidated basis to bank holding
companies with consolidated assets of $150 million or more. 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 I", consisting of common stockholders' equity,
certain preferred stock and certain hybrid instruments, 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) non-qualifying hybrid capital
instruments, (d) debt, (e) mandatory convertible securities, and (f) qualifying
subordinated debt. Certain hybrid capital instruments, including specifically
trust preferred securities, may be included in Tier I capital up to a maximum of
25% of Tier I capital. In December 2002, the Company issued $5.0 million through
an offering of trust-preferred securities, all of which is counted as Tier I
Capital. Total capital is the sum of Tier I and Tier II 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 cancelable 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
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.
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
4
fund a portion of the thrift bailout. This assessment is currently set at an
annual rate of 1.54 basis points of assessed deposits at the end of each
quarter.
Website Access to Company Information
The Company's internet address is www.cbnj.com. Services and product
descriptions are available on this website. Access to our annual report on Form
10-KSB, quarterly reports on Form 10-QSB and current reports on Form 8-K is
available through a link on our website to a third-party provider, or from the
NASDAQ and SEC website free of charge as soon as reasonably practicable after
these material are electronically filed with the Securities and Exchange
Commission.
ITEM 2. -- DESCRIPTION OF PROPERTY
The Bank conducts its business through its main office located at 3535
Highway 9 North, Freehold, New Jersey, and its seven branch offices and its
operations center. The following table set forth certain information regarding
the Bank's properties as of December 31, 2003.
Date of lease
Location Leased or owned expiration
------------------------------------------------ --------------- -----------------
24 Route 34 South, Colts Neck, NJ Leased May 2021
3535 Highway 9 North, Freehold, NJ Owned N/A
31 East Main Street, Freehold, NJ Leased August 2007
4502 Highway 9 South, Howell, NJ Leased August 2013
267 Main Street, Matawan, NJ Leased February 2019
191 Route Nine South, Manalapan, NJ Owned N/A
120 Route 33, Manalapan, NJ Leased July 2007
541 Sycamore Avenue, Shrewsbury, NJ Leased June 2011
3499 Route 9 North, Freehold, NJ Leased March 2004
34 East Main Street, Freehold, NJ (Drive-up) Leased December 2012
South Laurel Avenue & Middle Road, Holmdel, NJ Leased December 2022
Jake Brown Road at County Road 516, Old Bridge, NJ Leased May 2019
2440 Highway 34, Wall Township, NJ Leased July 2024
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 2003.
5
PART II
ITEM 5. -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ SmallCap market under the symbol
CBNJ. The following table shows the high and low bid prices for the common stock
as reported on the Nasdaq SmallCap market for 2003 and 2002. 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 5% stock dividends paid in 2003 and 2002 and the 3-for-2 stock split
effective in 2002.
2003
------------------
High Low
------ ------
1st Quarter ............................. $20.58 $16.50
2nd Quarter .............................. 22.00 18.73
3rd Quarter .............................. 21.86 19.29
4th Quarter .............................. 23.78 20.85
2002
------------------
High Low
------ ------
1st Quarter ............................. $15.11 $ 9.77
2nd Quarter .............................. 15.88 11.90
3rd Quarter .............................. 13.91 10.67
4th Quarter .............................. 17.37 13.59
We have not paid cash dividends and do not anticipate paying regular cash
dividends in the foreseeable future as we use our retained earnings to augment
our capital and fund our future growth.
In both 2003 and 2002, our Board of Directors declared a 5% stock dividend
on our common stock. In 2002, our Board declared a 3-for-2 stock split. 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, 2003, we had 368shareholders of record.
ITEM 6. -- SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE YEAR ENDING DECEMBER 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Income Statement Data
Net interest income $ 11,652 $ 10,653 $ 8,574 $ 6,334 $ 4,207
Provision for loan losses 214 893 386 348 325
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 11,438 9,760 8,188 5,986 3,882
Non-interest income 1,590 1,320 1,428 909 573
Gains on sales of investment securities 408 554 -- -- --
Non-interest expense 9,718 8,454 7,261 5,690 3,948
-------- -------- -------- -------- --------
Income before income taxes 3,718 3,180 2,355 1,205 507
Income tax expense 1,316 1,160 844 53 --
-------- -------- -------- -------- --------
Net income $ 2,402 $ 2,020 $ 1,511 $ 1,152 $ 507
======== ======== ======== ======== ========
Per Share Data (1)
Net income - basic $ 0.71 $ 0.61 $ 0.46 $ 0.34 $ 0.15
- diluted 0.67 0.58 0.45 0.34 0.15
Balance Sheet Data
Total assets $427,825 $332,219 $245,638 $182,052 $132,811
Guaranteed preferred beneficial interest in the
Company's subordinated debt 5,000 5,000 -- -- --
(1) Per share data has been retroactively adjusted to reflect all stock
dividends and the 2002 stock split
ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 2003
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. Since it commenced operations in 1997, the
Company has increased its asset base at a rapid pace. Our assets have grown from
$34.8 million at December 31, 1997 to $427.8 million at December 31, 2003, a
compound annual growth rate of 51.9%. This growth has come both through our
success in penetrating our original market in the Freehold, New Jersey area, and
through expansion into other market areas in New Jersey. We opened our second
office in downtown Freehold, New Jersey, in September 1997, our third office in
Howell, New Jersey, in November 1998, our fourth office in Matawan, New Jersey
in February 1999, our fifth office in Manalapan, New Jersey in November 1999,
our sixth office in Colts Neck, New Jersey in July 2001, our seventh office in
Shrewsbury, New Jersey in October 2001 and our eighth office in Millhurst, New
Jersey in November 2002.
6
During 2003, in order to capitalize on the stable, low interest rate
environment in effect, we undertook a leveraging strategy under which short term
borrowings, primarily short term advances from the Federal Home Loan Bank of New
York, were used to purchase investment securities, primarily U.S. Government and
agency securities. Although this strategy contributed to earnings in 2003,
management has elected to discontinue the strategy and reduce its borrowings and
securities holdings in 2004.
This financial review presents management's discussion and analysis of
financial condition and results of operations. It should be read in conjunction
with the consolidated condensed financial statements and the accompanying notes
included elsewhere herein.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (US GAAP) and
predominant practices within the banking industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
The allowance for loan loss is maintained at an amount management deems
adequate to cover estimated losses. In determining the level to be maintained,
management evaluates many factors, including current economic trends, industry
experience, historical loss experience, industry loan concentrations, the
borrowers' ability to repay and repayment performance, and estimated collateral
values. In the opinion of management, the present allowance is adequate to
absorb reasonable, foreseeable loan losses. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions or any of the other factors
used in management's determination. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for losses on loans. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination. Future increases to our
allowance for possible loan losses, whether due to unexpected changes in
economic conditions or otherwise, would adversely affect our future results of
operations.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. In the event
management determines the inability to realize all or part of net deferred tax
assets in the future, a direct charge to income tax expense may be required to
reduce the recorded value of the net deferred tax asset to the expected
realizable amount.
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 and borrowed funds used to support our interest-earning assets. In
addition, the Bank earns fee income, primarily through service fees on deposit
accounts and non-interest related service fees on loans. 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.
7
Net Income
For the year ended December 31, 2003, net income increased to $2.4 million
or $0.71 per share for basic and $0.67 per share for diluted earnings, compared
to net income of $2.0 million or $0.61 per share for basic and $0.58 per share
for diluted shares for the same period in 2002.
The increase in net income was primarily due to a $1.0 million, or 9.4%
increase in net interest income and a 20.5% increase in non-interest income,
excluding gain on sale of securities, partially offset by higher non-interest
expense and higher income tax expense. The improvement in net income is
attributable to our continued growth. The results for the year ended December
31, 2003 were also positively affected by a reduced provision for loan losses
during the year ended December 31, 2003 compared to the year ended December 31,
2002.
Net Interest Income
For the year ended December 31, 2003, we recognized net interest income of
$11.7 million as compared to $10.7 million for the year ended December 31, 2002.
The increase in net interest income was largely due to an increase in the
average balance of interest earning assets, which increased $107.9 million, or
40.9%, to $371.6 million from $263.7 million. The increase reflects an increase
in average investment securities of $80.9 million, or 86.1% as a result of our
leveraging strategy and an increase in average loans outstanding of $26.3
million, or 15.5% over the 2002 period.
Primarily as a result of the increase in the average balance of
interest-earning assets, our interest income increased to $17.4 million for the
year ended December 31, 2003, from $15.9 million for the year ended December 31,
2002. The improvement in interest income was primarily due to volume-related
increases in income from the investment securities portfolio of $3.2 million and
volume-related increases in income of $1.9 million in the loan portfolio,
partially offset by rate-related decreases in income of $2.3 million from the
investment securities portfolio and rate-related decreases in income of $1.3
million from the loan portfolio. The average yield on our interest-earning
assets decreased to 4.68% for the year ended December 31, 2003 from 6.02% for
the year ended December 31, 2002.
Total interest expense increased 10.0% to $5.8 million for the 2003 period
from $5.2 million for the 2002 period. This increase in interest expense is
primarily related to an increase of $97.4 million or 46.2% in the average
balance of interest-bearing liabilities from $210.6 for the 2002 period to
$307.9 million for the 2003 and is partially offset by a decrease in the average
rate paid on interest-bearing liabilities from 2.48% during 2002 to 1.87% in
2003. The volume related increases in interest-bearing liabilities reflect the
results of our leveraging strategy, as we increased short term borrowings and
used the proceeds to purchase investment securities. In addition, other
increases in interest bearing liabilities and expense-rate reductions 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 and
investment securities purchases. Our ALCO Committee implemented these strategies
as the Federal Reserve Bank reduced the target funds rate to 1% during 2003.
The net interest margin was 3.14% in 2003 compared to 4.04% in 2002. The
decline resulted primarily from the Federal Reserve Bank's easing of its target
federal funds rate to a historically low level of 1.00% in June 2003, which
reduced the general level of interest rates in the market.
8
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.
Year ended December 31,
-------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Average Average Average
Interest rates Interest rates Interest rates
Average income/ earned/ Average income/ earned/ Average income/ earned/
balance expense paid balance expense paid balance expense paid
--------- -------- ------- --------- -------- ------- --------- -------- -------
(In thousands, except percentage)
Assets
Interest-earning assets
Loans (net of unearned
income) (1) $ 195,570 $ 12,695 6.49% $ 169,260 $ 12,098 7.15% $ 138,522 $ 11,388 8.22%
Investment securities 174,739 4,695 2.69 93,885 3,768 4.01 41,000 2,278 5.56
Federal funds sold 1,260 12 0.96 601 12 2.00 10,717 499 4.66
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total interest-earning assets 371,569 17,402 4.68 263,746 15,878 6.02 190,239 14,165 7.45
-------- --------
Non-interest-earning assets 22,866 18,404 14,775
Allowance for possible loan losses (2,546) (2,248) (1,799)
--------- --------- ---------
Total assets $ 391,889 $ 279,902 $ 203,215
========= ========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities
NOW deposits $ 25,463 $ 225 0.88 $ 21,020 $ 214 1.02% $ 19,578 $ 260 1.33%
Savings deposits 111,850 1,694 1.51 82,329 1,610 1.96 50,972 1,461 2.87
Money market deposits 10,334 166 1.61 7,278 158 2.17 6,482 217 3.35
Time deposits 114,011 2,952 2.59 90,738 3,075 3.39 66,425 3,623 5.45
Trust preferred securities 5,000 240 4.80 178 8 4.76 -- -- --
Borrowed funds 41,263 473 1.15 9,015 160 1.77 1,063 30 2.82
--------- -------- --------- -------- --------- --------
Total interest-bearing liabilities 307,921 5,750 1.87 210,558 5,225 2.48 144,520 5,591 3.87
--------- -------- --------- -------- --------- --------
Non-interest bearing liabilities
Demand deposits 59,386 46,050 36,296
Other liabilities 528 1,000 2,118
--------- --------- ---------
Total non-interest bearing
liabilities 59,914 47,050 38,414
Stockholders' equity 24,054 22,294 20,281
--------- --------- ---------
Total liabilities and
stockholders' equity $ 391,889 $ 279,902 $ 203,215
========= ========= =========
Net interest spread (2) 2.82 3.54 3.58
Net interest margin (3) 3.14 4.04 4.51
Net interest income $ 11,652 $ 10,653 $ 8,574
======== ======== ========
(1) Included in interest income on loans are 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.
9
The following table presents by category the major factors that
contributed to the changes in net interest income for the periods indicated
below. Amounts have been computed on a fully tax-equivalent basis.
Year ended December 31, 2003 Year ended December 31, 2002
vs. December 31, 2002 vs. December 31, 2001
------------------------------ -------------------------------
Increase (decrease) due to change in
------------------------------------------------------------------
Average Average Average Average
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
Interest income
Loans $ 1,881 $(1,284) $ 597 $ 2,527 $(1,817) $ 710
Investment securities 3,245 (2,318) 927 2,938 (1,448) 1,490
Federal funds sold 13 (13) -- (471) (16) (487)
------- ------- ------- ------- ------- -------
Total interest income 5,139 (3,615) 1,524 4,994 (3,281) 1,713
------- ------- ------- ------- ------- -------
Interest expense
NOW deposits 45 (34) 11 19 (65) (46)
Savings deposits 577 (493) 84 899 (750) 149
Money market 66 (58) 8 27 (86) (59)
Time deposits 789 (912) (123) 1,326 (1,874) (548)
Trust preferred securities 230 2 232 -- 8 8
Borrowed funds 572 (259) 313 141 (11) 130
------- ------- ------- ------- ------- -------
Total interest expense 2,279 (1,754) 525 2,412 (2,778) (366)
------- ------- ------- ------- ------- -------
Net interest income $ 2,860 $(1,861) $ 999 $ 2,582 $ (503) $ 2,079
======= ======= ======= ======= ======= =======
Provision for Loan Losses
The provision we recorded for the year ended December 31, 2003 was $214
thousand compared to $893 thousand for the year ended December 31, 2002. The
provision is the result of our review of several factors, including net loan
charge-offs of $2 thousand during the period ended December 31, 2003 compared to
$451 thousand for the same prior year period. In addition, the provision
reflects management's assessment of economic conditions, credit quality and
other risk factors inherent in the loan portfolio. We had no non-performing
assets at the end of each of 2003 and 2002. The allowance for loan losses
totaled $2.6 million, or 1.30% of total loans at December 31, 2003, compared to
$2.4 million, or 1.31% of total loans, at December 31, 2002.
Non-Interest Income
Non-interest income amounted to $2.0 million for the year ended December
31, 2003, compared to $1.9 million for the year ended December 31, 2002, an
increase of $124 thousand, or 6.6%. The increase was primarily attributable to
an increase in service fees on deposits of $161 thousand or 37% from $435
thousand during 2002 to $596 thousand during 2003. The increase was partially
offset by a reduction of $146 thousand in gains on sales of securities during
2003 compared to the gains in 2002. The growth in service fees on deposits
reflects the growth in transaction account deposits and activity. The gains on
sales of investment securities resulted from the implementation of
asset/liability management strategies intended to shorten the duration of our
investment securities portfolio.
10
Non-Interest Expense
Non-interest expense amounted to $9.7 million for the year ended December
31, 2003, compared to $8.5 million for the year ended December 31, 2002, an
increase of $1.3 million, or 15.0%. The increase was due primarily to increases
in employment expenses, occupancy expenses, equipment expenses and other costs
generally attributable to our growth.
Employment costs increased $552 thousand, or 13.8%, from $4.0 million
during 2002 to $4.6 million in 2003. The increase resulted from higher salary
costs and increases in insurance costs during 2003.
Occupancy expenses increased $222 thousand, or 13.6% from $1.6 million in
2002 to $1.9 million during 2003. These increases resulted from increased lease
expense and increased maintenance costs during 2003 compared to 2002.
Other operating expenses increased $490 thousand, or 17.4% to $3.3 million
for the year ended December 31, 2003 from $2.8 million for the year ended
December 31, 2002. The increase was attributable to increased other expenses
resulting from our continued growth, as costs of data processing services
amounted to $1.1 million, an increase of $195 thousand, or 21.6%; directors'
fees amounted to $175 thousand, an increase of $98 thousand, or 127.3%;
professional fees amounted to $516 thousand, an increase of $68 thousand, or
15.2%.
Income Tax Expenses
We recognized $1.3 million and $1.2 million in income tax expense for the
years ended December 31, 2003 and 2002, respectively. The effective tax rate for
the year ended December 31, 2003 was 35.4% compared to 36.5% for the year ended
December 31, 2002.
Financial Condition
At December 31, 2003, our total assets were $427.8 million, an increase of
$95.6 million, or 28.8% over total 2002 year end assets of $332.2 million. At
December 31, 2003, our net loans were $199.4 million, an increase of $18.9
million, or 10.4% from the $180.6 million reported at December 31, 2002.
Investment securities increased to $200.0 million at December 31, 2003, from
$131.7 million at December 31, 2002, an increase of $68.3 million or 51.9%. At
December 31, 2003 and December 31, 2002, we had no Federal Funds sold.
Loan Portfolio
At December 31, 2003 our total loans were $202.0 million, an increase of
$19.1 million, or 10.4% over our total loans of $183.0 million at December 31,
2002. Our loan portfolio consists primarily of loans secured by real estate,
and, to a lesser extent, commercial, construction, and consumer loans.
Our loans are granted primarily to businesses and individuals located in
Monmouth, Middlesex, and Ocean Counties, New Jersey. We have not made loans to
borrowers outside of the United States of America. We believe that our strategy
of customer service, competitive rate structures, and selective marketing have
enabled us to gain market entry to local loans.
Within the portfolio, commercial mortgage loans remained the largest
component, constituting 49.4% of the total portfolio. These loans increased by
$5.7 million, or 6.0%. Our commercial and industrial loans remained the second
largest component despite a decline during 2003, with year-end balances
declining by $7.2 million to $39.8 million, or 19.7% of our total portfolio,
from $47.0 million or 25.7% or our total portfolio.
11
The following table sets forth the classification of our loans by major
category, net of unearned discounts and deferred loan fees for the periods
indicated below.
December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ------------------ ------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(In thousands, except for percentages)
Commercial and industrial $ 39,791 19.7% $ 46,998 25.7% $ 25,736 17.4% $ 24,865 20.4% $15,137 18.3%
Real estate - non-residential
properties 99,758 49.4 94,067 51.4 74,258 50.3 56,849 46.6 38,814 47.0
Residential properties 3,317 1.6 5,829 3.2 6,970 4.7 7,867 6.4 7,254 8.8
Construction 34,694 17.2 13,295 7.3 21,962 14.9 17,046 14.0 8,895 10.7
Consumer 24,161 11.9 22,193 12.1 18,559 12.6 14,275 11.7 12,476 15.1
Other 323 0.2 585 0.3 118 0.1 1,064 0.9 56 0.1
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total loans $202,044 100.0% $182,967 100.0% $147,603 100.0% $121,966 100.0% $82,632 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======= =====
The following table sets forth the aggregate maturities of loans net of
unearned discounts and deferred loan fees, in specified categories and the
amount of such loans, which have fixed and variable rates at December 31, 2003.
Within 1 1 to 5 After 5
year years years Total
-------- -------- -------- --------
Commercial and industrial $ 22,851 $ 11,426 $ 5,514 $ 39,791
Construction 23,607 3,766 7,321 34,694
-------- -------- -------- --------
Total $ 46,458 $ 15,192 $ 12,835 $ 74,485
======== ======== ======== ========
Fixed rate loans $ 2,374 $ 7,537 $ 4,312 $ 14,223
Variable rate loans 44,084 7,655 8,523 60,262
-------- -------- -------- --------
Total $ 46,458 $ 15,192 $ 12,835 $ 74,485
======== ======== ======== ========
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.
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. We had no loans past due
90 days or more at any of the year ends December 31, 1998 through 2003, although
during the years 2003 and 2002, we charged off $3 thousand and $452 thousand,
respectively, in non-performing loans. 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.
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 ten categories ranging from #1-Excellent to #10-Loss. Definitions for
categories #6-Special Mention Loans, #7-Substandard, #8-Doubtful, #9-Specific
Reserve, and #10-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 outsourced loan
review function tests these ratings in its normal course and resolves 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.
12
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 as 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, 2003, $839 thousand in loans were classified as
substandard, $96 thousand in loans were classified as doubtful, and no loans
were classified as loss. As of December 31, 2002, $356 thousand in loans were
classified as substandard, $82 thousand in loans were classified as doubtful,
and no loans were classified as loss. As of December 31, 2001, 2000 and 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
appropriate reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current 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
monthly, and, as adjustments become necessary, they are realized in the periods
in which they become known. During 2003 and 2002, $3 thousand and $452 thousand,
respectively, in loans were charged directly to the allowance when the loss was
identified. 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 loan losses totaled $2.6 million at December 31, 2003,
or 1.30% of total loans outstanding. We had no non-performing loans or loans
past due 90 days or more at December 31, 2003 and 2002.
13
The following is a summary of the reconciliation of the allowance for loan
losses for the periods indicated.
Year ended December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(In thousands, except percentages)
Balance at beginning of period $ 2,406 $ 1,964 $ 1,584 $ 1,237 $ 914
Charge-offs - commercial -- (444) -- --
Charge-offs - consumer (3) (8) (6) (1) (2)
Recoveries - consumer 1 1 -- -- --
------- ------- ------- ------- -------
Net charge-offs (2) (451) (6) (1) (2)
Provision charged to expense 214 893 386 348 325
------- ------- ------- ------- -------
Balance of allowance at end of period $ 2,618 $ 2,406 $ 1,964 $ 1,584 $ 1,237
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans outstanding --% 0.27% --% --% --%
======= ======= ======= ======= =======
Balance of allowance at period-end as a percent of loans
at period end 1.30% 1.31% 1.33% 1.30% 1.50%
======= ======= ======= ======= =======
The following table sets forth, for each of the Bank's major lending
areas, the amount 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. The allocation of the allowance for loan losses to the
respective loan classifications is not necessarily indicative of future losses
or future allocations.
December 31,
------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- -------------------- -------------------- -------------------- --------------------
Allocation % of all Allocation % of all Allocation % of all Allocation % of all Allocation % of all
amount loans amount loans amount loans amount loans amount loans
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(In thousands, except percentages)
Balance applicable to
Commercial loans $ 616 19.7% $ 548 25.7% $ 346 17.4% $ 281 20.4% $ 185 18.3%
Real estate non-
residential
properties 1,198 49.4 1,128 51.4 996 50.3 641 46.6 628 47.0
Residential
properties 21 1.6 31 3.2 65 4.7 39 6.4 36 8.8
Construction 458 17.2 344 7.3 295 14.9 377 14.0 178 10.7
Consumer loans 325 11.9 296 12.1 234 12.6 128 11.7 113 15.1
Other -- 0.2 3 0.3 2 0.1 27 0.9 14 0.1
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Subtotal 2,618 100.0 2,350 100.0 1,938 100.0 1,493 100.0 1,154 100.0
Unallocated reserves -- -- 56 -- 26 -- 91 -- 83 --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $ 2,618 100.0% $ 2,406 100.0% $ 1,964 100.0% $ 1,584 100.0% $ 1,237 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
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 obligations of U.S. Government and
agencies, government sponsored entities, and a limited amount of corporate debt
securities.
14
We follow Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No.
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.
Management determines the appropriate classification at the time of
purchase. At December 31, 2003 we classified our investment portfolio as
available-for-sale. These available-for-sale securities had a cost basis of
$203.2 million. The fair value adjustment at December 31, 2003 required us to
reduce the carrying value of these investment securities by $3.2 million,
increase the deferred tax benefit by $1.2 million, and reduce stockholders'
equity by $2.0 million. Securities with a cost of $349.2 million were purchased
for the available-for-sale account during 2003.
Total investment securities at December 31, 2003 were $200.0 million, an
increase of $68.3 million, or 51.9% over total investment securities of $131.7
million at December 31, 2002. The increase during 2003 resulted as we utilized
our liquidity in excess of loan demand to fund additional purchases of
investment securities. In addition, during the middle of 2003, the company
engaged in a leveraging strategy pursuant to which $47.2 million in FHLB
advances were used to purchase investment securities. This strategy resulted
from the Asset/Liability management considerations arising from our analysis of
several economic scenarios, including reduced loan growth and deposit repricing
opportunities. We maintain an investment portfolio of short duration in order to
fund projected increased loan volume and to provide for other liquidity uses as
needed, and secondarily as an additional source of interest income.
The amortized cost and fair value of our investment securities are as
follows (in thousands):
December 31, 2003 December 31, 2002 December 31, 2001
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost value cost value cost value
--------- --------- --------- --------- --------- ---------
Investment securities available-for-sale
U.S. Government and agency
securities $ 198,011 $ 194,880 $ 128,937 $ 130,046 $ 64,569 $ 64,959
Corporate debt securities and other 5,145 5,145 1,630 1,630 480 480
--------- --------- --------- --------- --------- ---------
$ 203,156 $ 200,025 $ 130,567 $ 131,676 $ 65,049 65,439
========= ========= ========= ========= ========= =========
Investment securities held-to-maturity
U.S. Government and agency
securities $ -- $ -- $ -- $ -- $ 14,275 $ 14,136
Corporate debt securities and other -- -- -- -- 1,035 1,081
--------- --------- --------- --------- --------- ---------
$ -- $ -- $ -- $ -- $ 15,310 $ 15,271
========= ========= ========= ========= ========= =========
The amortized cost and fair value of our investment securities at December 31,
2003, 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).
Available-for-sale
------------------
Amortized Fair Average
Cost Value Yield
---- ----- -----
Due in one year or less $ $ --
Due after one year through five years 197,011 198,896 2.29%
Due after five years through ten years 2,500 2,484 4.20
Due after ten years 3,645 3,645 0.36
--------- ---------
$ 203,156 $ 200,025 2.27
========= ========= ====
15
Other Assets
Other Assets are comprised primarily of bank owned life isurance, which
increased to $5.8 million at December 31, 2003 from $1.6 million at December 31,
2002.
Deposits
Our total deposits at December 31, 2003, were $326.0 million, an increase
of $34.4 million, or 11.8% over total deposits of $291.6 million at December 31,
2002. Deposits are our primary source of funds. The growth in deposits during
this period was primarily due to greater penetration of our marketplace and the
continued growth of our new locations. As we adjusted the mix of our deposit
base through marketing and pricing initiatives, lower costing demand deposits,
savings accounts, money market and NOW accounts increased by $46.1 million,
while higher costing certificates of deposit decreased by $11.7 million.
Average total deposits increased by $73.6 million, or 29.8% to $321.0
million for the year ended December 31, 2003 compared to $247.4 million for
2002. Changes in the deposit mix averages for 2003 compared to 2002 include a
$29.5 million, or 35.9% increase in savings deposits; a $23.3 million, or 25.6%
increase in time deposits; a $13.3 million or 29.0% increase in demand deposits;
a $4.4 million, or 21.1% increase in NOW accounts and a $3.1 million, or 42.0%
increase in money market deposits.
We emphasize relationships with commercial customers and seek to obtain
transactional accounts, which are frequently kept in non-interest bearing
deposits. We also emphasize the origination of savings and money market
deposits, which amounted to $135.7 million at December by offering rates higher
than our peer group institutions. Our primary savings product is the stepped
rate savings account. The interest rate is based upon the amount on deposit, and
the deposit amount can be changed. We may modify the interest rate 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. Deposits are obtained primarily from the market areas that we
serve.
16
The following table sets forth the average amounts of various types of
deposits at the periods indicated.
Year ended December 31,
-----------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Cost Balance Cost Balance Cost
-------- ------- -------- ------- -------- -------
(In thousands, except percentages)
Non-interest-bearing demand $ 59,386 --% $ 46,050 --% $ 36,296 --%
Interest-bearing demand (NOW) 25,463 0.88 21,020 1.02 19,578 1.33
Savings deposits 111,850 1.51 82,329 1.96 50,972 2.87
Money market deposits 10,334 1.61 7,278 2.17 6,482 3.35
Time deposits 114,011 2.59 90,738 3.39 66,425 5.45
-------- -------- --------
Total $321,044 1.57% $247,415 2.04% $179,753 3.09%
======== ======== ========
The following table summarizes the maturity distribution of certificates
of deposits as of December 31, 2003.
Time CD's
$100,000 and over
Amount Percent
-------- --------
(In thousands, except percentages)
Due in three months or less $ 15,667 47.7%
Due over three months through six months 5,093 15.5
Due over six months through twelve months 11,899 36.2
Due over one year through three years 204 0.6
-------- -----
Total certificates of deposit $ 32,863 100.0%
======== =====
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, we seek to
manage, to the extent possible, the repricing characteristics of our 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 our
interest rate risk policy, which includes limits on the impact to earnings from
shifts in interest rates.
17
To manage our 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.
Interest Sensitivity Gap at December 31, 2003
------------------------------------------------------------
Mature or repricing in (1)
------------------------------------------------ Non-
3 months 3 through 1 through Over interest
or less 12 months 3 years 3 years bearing Total
--------- --------- --------- --------- --------- ---------
Assets
Investment securities
available-for-sale (2) $ 15,037 $ 2,675 $ 172,852 $ 9,461 $ -- $ 200,025
Loans 78,748 6,001 28,158 89,050 -- 201,957
Valuation reserves (2) -- -- -- -- (6,006) (6,006)
Non-interest earning assets -- -- -- -- 31,849 31,849
--------- --------- --------- --------- --------- ---------
Total assets $ 93,785 $ 8,676 $ 201,010 $ 98,511 $ 25,843 $ 427,825
========= ========= ========= ========= ========= =========
Liabilities and stockholders'
equity
NOW accounts $ 7,213 $ -- $ 21,640 $ -- $ -- $ 28,853
Money market accounts 6,529 -- 6,528 -- -- 13,057
Savings deposits 61,303 -- 61,303 -- -- 122,606
CD's $100,000 and over 15,667 16,992 204 -- -- 32,863
CD's under $100,000 16,693 52,646 1,525 -- -- 70,864
Short-term borrowings 72,400 -- -- -- -- 72,400
Trust preferred 5,000 -- -- -- -- 5,000
Non-interest bearing
deposits -- -- -- -- 57,766 57,766
Other liabilities -- -- -- -- 496 496
Stockholders' equity -- -- -- -- 23,920 23,920
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 184,805 $ 69,638 $ 91,200 $ -- $ 82,182 $ 427,825
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ (91,020) $ (60,962) $ 109,810 $ 98,511 $ (56,339)
Cumulative gap $ (91,020) $(151,982) $ (42,172) $ 56,339 $ --
Cumulative gap to total assets -21.28% -35.52% -9.86% 13.17%
(1) The following are the assumptions that were used to prepare the gap
analysis:
a. Investment securities are included at amortized cost in the period
in which they mature at stated maturity, except for government
agency securities with coupon rates of 3.00% and above and with call
provisions of one year or less, which are stated as maturing at the
call date.
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 change 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.
d. Certificates of deposits are spread through the maturity buckets
based on their actual maturity date.
(2) Valuation reserves include allowance for loan losses, FASB No. 91 deferred
fees and the investment securities available-for-sale mark-to-market
adjustment.
18
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, loan prepayments and callable investment securities 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 49.4% and 42.5% of our
total assets at December 31, 2003 and 2002, respectively.
Should liquidity needs arise to fund new loan demand, we have the
capability to sell our available-for-sale securities, and to purchase federal
funds as alternative sources of liquidity. We have established credit lines with
other financial institutions to purchase up to $5.0 million in federal funds and
may borrow funds at the Federal Reserve discount window, subject to our ability
to supply collateral. During 2000, we became a member of the Federal Home Loan
Bank of New York and have a combined overnight borrowing line and term line of
$38.9 million. In addition, subject to certain Federal Home Loan Bank
requirements, we may also obtain longer-term advances of up to 30% of our
assets. As of December 31, 2003, we have $12.4 million in overnight borrowings.
We believe that our liquidity position is sufficient to provide funds to
meet future loan demand or the possible outflow of deposits, in addition to
enabling us to adapt to changing interest rate conditions.
Short-Term Borrowings
Short-term borrowings consist of overnight federal funds purchased and
short-term advances from the Federal Home Loan Bank of New York, which generally
have maturities of less than one month. The details of these categories are
presented below:
Year ended December 31,
-----------------------
2003 2002
-------- --------
Federal funds purchased and short-term advances
Balance at year-end $ 72,400 $ 11,500
Average during the year 41,263 9,015
Maximum month-end balance 110,200 15,700
Weighted average rate during the year 1.15% 1.77%
Rate at December 31 1.11% 1.35%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
The Company issued $5.0 million of trust preferred securities to a pooled
investment vehicle sponsored by Bear, Stearns & Co., Inc. on December 20, 2002.
These securities have a floating interest rate equal to three month LIBOR plus
335 basis points, which resets quarterly. The average interest rate paid during
2003 was 4.80%. The variable interest rate is capped at 12.5% though January 7,
2008. The securities mature on January 7, 2033, and may be called at par by the
Company any time after January 7, 2008. The securities were placed in a private
transaction exempted from registration under the Securities Act of 1933, as
amended.
Although the subordinated debentures are treated as debt of the Company,
they currently qualify as Tier I Capital investments, subject to the 25%
limitation under risk-based capital guidelines of the Federal Reserve. The
portion of the Trust Preferred Securities that exceeds this limitation qualifies
as Tier II capital of the Company. At December 31, 2003 the $5.0 million of the
Trust Preferred Securities qualified for treatment as Tier I capital.
19
Off-Balance Sheet Arrangements and Contractual Obligations and Other Commitments
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of December 31,
2003:
One to Four to After
Less than three five five
Total one year years years years
--------- --------- --------- --------- ---------
(dollars in thousands)
Minimum annual rentals on noncancellable
operating leases $ 7,450 $ 412 $ 983 $ 976 $ 5,079
Remaining contractual maturities of time
deposits 103,727 101,998 1,729 -- --
Loan commitments 82,470 52,805 8,964 117 20,584
Short-term borrowed funds 72,400 72,400 -- -- --
Guaranteed preferred beneficial interests in
Company's subordinated debentures 5,000 -- -- -- 5,000
Standby letters of credit 4,480 3,109 1,371 -- --
--------- --------- --------- --------- ---------
Total $ 275,527 $ 230,724 $ 13,047 $ 1,093 $ 30,663
========= ========= ========= ========= =========
The Company had no capital leases at December 31, 2003.
The Company's financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These
off-balance sheet arrangements consist of unfunded loans and letters of
credit made under the same standards as on-balance sheet instruments.
These unused commitments, at December 31, 2003 totaled $86,950,000. This
consisted of unfunded loan commitments, unused lines of credit and letters
of credit. These instruments have fixed maturity dates, and because many
of them will expire without being drawn upon, they do not generally
present any significant liquidity risk the Company.
Management believes that any amounts actually drawn upon can be funded in
the normal course of operations. The Company has no investment in or
financial relationship with any unconsolidated entities that are
reasonably likely to have a material effect on liquidity or the
availability of capital resources.
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,
qualifying preferred stock, and certain hybrid capital instruments, such as
trust preferred securities, and (2) Tier II capital, which includes a portion of
the allowance for possible loan losses, certain qualifying long-term debt and
preferred stock and hybrid capital instruments which do 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 3.0%. For those institutions with higher
levels of risk or that are experiencing or anticipating significant growth, the
minimum leverage ratio will be proportionately increased by 100 to 200 basis
points. Minimum leverage ratios for the Company are evaluated through the
ongoing regulatory examination process.
20
The following table sets forth certain capital performance ratios for the
Company.
2003 2002 2001
------ ------ ------
Capital performance
Return on average assets 0.61% 0.72% 0.74%
Return on average equity 9.99% 9.06% 7.45%
The following table summarizes our risk-based and leverage ratios at
December 31, 2003, as well as the required minimum regulatory capital ratios.
To be well-
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- --------
As of December 31, 2003
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $ 33,495 12.72% $ 21,065 >= 8.00% N/A N/A
Community Bank of New Jersey 28,207 10.70 21,082 >= 8.00 $ 26,353 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 30,867 11.72 10,532 >= 4.00 N/A N/A
Community Bank of New Jersey 25,589 9.71 10,541 >= 4.00 15,812 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 30,867 7.19 12,878 >= 3.00 N/A N/A
Community Bank of New Jersey 25,589 5.96 12,878 >= 3.00 21,463 >= 5.00
As of December 31, 2002
Total capital (to risk-weighted assets)
Community Bancorp of New Jersey $ 30,316 13.68% $ 17,605 >= 8.00% N/A N/A
Community Bank of New Jersey 25,322 11.51 17,593 >= 8.00 21,991 >= 10.00%
Tier I capital (to risk-weighted assets)
Community Bancorp of New Jersey 27,910 12.68 8,803 >= 4.00 N/A N/A
Community Bank of New Jersey 22,916 10.42 8,796 >= 4.00 13,195 >= 6.00
Tier I capital (to average assets)
Community Bancorp of New Jersey 27,910 8.75 9,564 >= 3.00 N/A N/A
Community Bank of New Jersey 22,916 7.19 9,564 >= 4.00 15,941 >= 5.00
Impact of Inflation and Changing Prices
Our financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with accounting principles generally accepted
in the United States of America, 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.
21
Recent Accounting Pronouncements
Off Balance Sheet Guarantees
The Company adopted FASB Interpretation 45 (FIN 45) Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain non-financial contractual obligations.
The Company previously did not record an initial liability, other than the fees
received for these letters of credit, when guaranteeing obligations unless it
became probable that the Company would have to perform under the guarantee. FIN
45 applies prospectively to letters of credit the Company issues or modifies
subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit as
the fee received from the customer. The maximum potential undiscounted amount of
future payments of these letters of credit as of December 31, 2003 is $4.5
million and they expire through April 2005. Amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for the loans, which varies depending on the
customer.
Variable Interest Entities
In January, 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both.
Management has determined that CBNJ Capital Trust I qualifies as a
variable interest entity under FIN 46. CBNJ Capital Trust I issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company.
CBNJ Capital Trust I holds, as its sole asset, subordinated debentures issued by
the Company in 2002. CBNJ Capital Trust I is currently included in the Company's
consolidated balance sheets and statements of income. The Company has evaluated
the impact of FIN 46 and concluded it should continue to consolidate CBNJ
Capital Trust I as of December 31, 2003, in part due to its ability to call the
preferred stock prior to the mandatory redemption date and thereby benefit from
a decline in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004. FIN
46(R) will require Community Bancorp of New Jersey, Inc. to deconsolidate CBNJ
Capital Trust I as of March 31, 2004. FIN 46(R) precludes consideration of the
call option embedded in the preferred stock when determining if the Company has
the right to a majority of CBNJ Capital Trust I's expected residual returns.
Accordingly, the Company will deconsolidate CBNJ Capital Trust I at the end of
the first quarter, which will result in an increase in the outstanding debt by
$155,000. The banking regulatory agencies have not issued any guidance that
would change the regulatory capital treatment for the trust preferred securities
issued by CBNJ Capital Trust I based on the adoption of FIN 46(R). However, as
additional interpretations from the banking regulators related to entities such
as CBNJ Capital Trust I become available, management will reevaluate its
potential impact to its Tier I capital calculation under such interpretations.
Amendment to SFAS 133 on Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents and includes the conclusions
reached by the FASB on
22
certain FASB Staff Implementation Issues. Statement 149 also amends SFAS No. 133
to require a lender to account for loan commitments related to mortgage loans
that will be held for sale as derivatives. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The Company periodically
enters into commitments with its customers, which it intends to sell in the
future. Management does not anticipate the adoption of SFAS No. 149 to have a
material impact on the Company's financial position or results of operations.
Financial Instruments with Characteristics of Both Liabilities and Equity
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No.
150 changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debt as a liability. As a result, management does not
anticipate the adoption of SFAS No. 150 to have a material impact on the
Company's financial position or results of operations.
Transfers of Loans
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with evidence
of deterioration of credit quality since origination acquired by completion of a
transfer for which it is probable at acquisition, that the Company will be
unable to collect all contractually required payments receivable. SOP 03-3
requires that the Company recognize the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. Management is
currently evaluating the provisions of SOP 03-3.
Other than Temporary Impairment
The Company adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and its Application to Certain Investments, as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under SFAS 115, Accounting
for Certain Investments in Debt and Equity Securities, that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.
ITEM 7A --QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included with Item 7 Management's Discussion and
Analysis of Financial Conditon and Results of Operations.
ITEM 8. -- FINANCIAL STATEMENTS
The information required by this item is filed herewith.
ITEM 9. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. -- CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer, Chief Lending Officer, Chief Information Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14(c). Based upon that evaluation, the Chief Executive Officer, Chief
Lending Officer, Chief Information Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective, as of the
end of the period reported on in this report, in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's SEC filings.
Since the date of the most recent evaluation of the Company's internal
controls, there have been no significant changes in such internal controls or in
other factors that could significantly affect such internal controls.
23
PART III
ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(a)
The By-Laws of the Company provide that the number of directors shall not
be less than 5 nor more than 25 and permit the exact number to be determined
from time to time by the Board of Directors. The Board currently consists of 10
members.
Mr. James Kinghorn was appointed to the Board in early 2003. Pursuant to
our Certificate of Incorporation, our three classes of directors are to be
balanced, if possible. Therefore, Mr. Kinghorn has been elected to serve a
one-year term, and thereafter until his/her successor shall have been duly
elected and shall have qualified. The names of the directors and certain
information about them are set forth in the following table:
Name, Age and Principal Occupations Director Term
Position with the Bank During Past Five Years Since Expires
---------------------- ---------------------- ----- -------
Morris Kaplan, 49 President, Kaplan Companies
(building and real estate development) 1997 2006
Eli Kramer, 49 Real Estate Developer 1997 2006
Vice Chairman of the Board
Lewis Wetstein, M.D., 56 Cardiothoracic Surgeon 1997 2006
James Kinghorn, 55 Executive Vice President of the Company
and the Bank; formerly Senior Vice President
of Tinton Falls State Bank over five (5) years 2003 2004
Arnold Silverman, 59 President, Pavillion Residential LTD 1997 2004
(real estate development)
Howard Schoor, 65 Vice Chairman, D.R. Horton, Inc. 1997 2004
Chairman of the Board New Jersey (custom home builder)
Charles P. Kaempffer, CPA, 66 Certified Public Accountant 1997 2005
Vice Chairman of the Board
William J. Mehr, Esq., 63 Senior Partner, Mehr, LaFrance 1997 2005
& Basen, Esq.(attorneys)
Robert D. O'Donnell, 57 President and Chief Executive Officer of the 1998 2005
President and Chief Executive Officer Company and the Bank
No director of the Company is also a director of a company having a class
of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended, or subject to the requirements of Section 15(d) of such Act or
any company registered as an investment company under the Investment Bank Act of
1940, other than Mr. Charles P. Kaempffer, who is a director of Monmouth Capital
Corporation, Monmouth Real Estate Investment Corporation and United Mobile
Homes, Inc., all reporting companies under Section 12 of the Securities Exchange
Act of 1934.
24
Audit Committee Financial Expert
The Audit Committee consists of Charles P. Kaempffer, Morris Kaplan, Eli
Kramer, Arnold Silverman and Lewis Wetstein. Mr. Kaempffer has been determined
by the Board to be the Audit Committee financial expert, as such term is defined
by the SEC Regulation S-K Item 401(h)(2).
Code of Ethics
The board of directors has adopted a code of ethics governing the
company's Chief Executive Officer and senior financial officers, as well as the
board and other senior members of management, as required by the Sarbanes-Oxley
Act, SEC regulations and the Nasdaq listing standards. Our code of ethics
governs such matters as conflicts of interest, use of corporate opportunity,
confidentiality, compliance with law and the like. A copy of our code of ethics
has been filed as an exhibit to this annual report on Form 10-KSB.
COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten percent stockholders are
required by regulation of the Securities and Exchange Commission to furnish the
Company with copies of all Section 16(a) forms they file.
The Securities and Exchange commission rules governing the filing of
reports under Section 16(a) of the Securities Exchange Act of 1934 have been
revised to substantially accelerate the filing deadlines for these reports, and
to require electronic filing. During the transition period to these new
requirements, one of our insiders, Lewis Wetstein, filed a total of one required
report after the required deadline.
25
ITEM 11. -- EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth a summary of the cash and non-cash
compensation awarded to, earned by, or paid to, the Chief Executive Officer of
the Company for each of the last three fiscal years and the other executive
officers of the Company whose cash remuneration exceeds $100,000.
SUMMARY COMPENSATION TABLE
Cash and Cash Equivalent
Forms of Remuneration
Long Term
Compensation
Other Securities
Annual Annual Annual Underlying All Other
Name and Principal Position Year Salary Bonus(2) Compensation Options (3) Compensation
- ---------------------------- ---- ------ -------- ------------ ------------- ------------
Robert D. O'Donnell, 2003 $247,500 $120,000 (1) 1,500 --
President and Chief 2002 $219,224 $101,000 (1) 1,500 --
Executive Officer 2001 $193,266 $ 75,570 (1) 1,500 --
James Kinghorn, 2003 $150,000 $ 50,000 (1) 10,000 --
Executive Vice President 2002 $136,554 $ 50,000 (1) 1,500 --
and Senior Lending Officer 2001 $120,970 $ 35,000 (1) 1,500 --
(1) Other annual compensation includes expenses incurred for the use of an
automobile. The Company believes the value of the personal use of such
vehicle was less than 10% of the salary and bonus of each respective
officer.
(2) Bonuses were earned in the years disclosed, although they may have been
paid in subsequent years.
(3) Options have not been retroactively adjusted for stock dividends or stock
split.
On May 8, 1998, the Company retained Mr. Robert D. O'Donnell as President
and Chief Executive Officer at an original base salary of $151,000. Mr.
O'Donnell is entitled to receive an annual increase of at least 10%, provided
that the Company has met certain performance targets. Mr. O'Donnell is also
entitled to an annual cash bonus in an amount equal to 5% of the Company's after
tax net profit. If Mr. O'Donnell is terminated for any reason other than for
"cause", he is entitled to continue to receive his then current base salary and
bonus for the next twenty-four (24) months. In the event of a change in control
of the Company, Mr. O'Donnell is entitled to twice his then current base salary
and bonus, payable at the option of Mr. O'Donnell either in a lump sum, or over
a period of twenty-four (24) months. Consummation of the transaction proposed
with Sun would constitute a change in control under Mr. O'Donnell's agreement.
On July 11, 2002, the Company entered into a change of control agreement
with Mr. Kinghorn. Under this agreement, in the event of a change in control, as
defined by the Agreement, Mr. Kinghorn is to be employed for a three-year period
(unless he attains age 65 sooner, in which case his term of employment would end
then). During this employment period, Mr. Kinghorn is to receive base
compensation equal to the annual compensation, including salary and bonus, as
was paid to or accrued for him during the twelve months immediately prior to the
change in control. He is also to receive an annual increase to reflect the
impact of
26
inflation, Mr. Kinghorn's performance and the performance of the Company. The
minimum increase must equal the annual percentage increase in the consumer price
index for urban wage earners and clerical workers for the New York and Northern
New Jersey area during the preceding twelve months. After a change in control,
Mr. Kinghorn may be terminated by the Company or its successor for "cause", as
defined in the agreement. However, in the event he is terminated without cause,
or in the event he resigns his position for "good reason", he will be entitled
to a lump sum payment equal to two times the highest annual compensation,
including salary and cash bonus, paid to him during any of the three calendar
years immediately prior to the change in control. The payments due to Mr.
Kinghorn may be reduced if the payment would not be deductible by the Company or
its successor for federal income tax purposes due to Section 280G of the
Internal Revenue Code of 1986. Mr. Kinghorn's agreement does not become
effective, and does not govern the terms of his employment, until a change in
control takes place. The agreement has a term of three years, and renews
annually unless the Company, by a majority vote of the directors then in office,
decide not to extend the term of the Agreement. If a change in control were to
have happened at December 31, 2003 and Mr. Kinghorn were to be terminated
without cause or to resign for good cause, he would have been entitled to a
payment equal to $ 400,000.
During early 2004, the Company also entered into a change in control bonus
agreement with Mr. Kinghorn. Under this agreement, in the event of a change in
control of the Company, as defined under the agreement, Mr. Kinghorn will be
entitled to a lump sum payment equal to $250,000 provided that he remains
employed by the Company through completion of the change in control, The payment
due to Mr. Kinghorn may be reduced if the payment would not be deductible by the
Company or its successor for federal income tax purposes due to Section 280G of
the Internal Revenue Code of 1986.
Consummation of the transaction proposed with Sun would constitute a
change in control under Mr. Kinghorn's agreements.
STOCK OPTION PLANS
In the following discussion, options authorized for grant under each option plan
have been adjusted to reflect stock dividends and stock splits.
During 1997, the Bank's Board of Directors approved the 1997 Stock Option
Plan, the 1997 Employee Stock Option Plan and the 1997 Option Plan for
Non-Employee Directors. Under the 1997 Stock Option Plan, directors of the Bank,
including employees who are directors of the Bank, may be granted non-qualified
or incentive stock options. The 1997 Stock Option Plan provides for the grant of
options to purchase up to 109,278 shares of common stock. Pursuant to the terms
of the 1997 Stock Option Plan, options which qualify as incentive stock options
under the Internal Revenue Code of 1986 must be granted at an exercise price of
no less than 100% of the then current fair market value of the common stock, and
options which are non-qualified options may be granted at an exercise price to
be determined by the Board of Directors at the time of grant, but no less than
85% of the then fair market value of the common stock.
The 1997 Employee Stock Option Plan permits grants of options to purchase
up to 93,897 shares of common stock. Under the 1997 Employee Stock Option Plan,
grants may either be incentive stock options or non-qualified options. The 1997
Employee Stock Option Plan is administered by the Board of Directors, which has
the authority to determine the officers and employees of the Bank who will
receive options, whether the options will be incentive stock options or
non-qualified options and, subject to the terms of the Plan, the exercise price