U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
--- Act of 1934 For the quarterly period ended March 31, 2003
Transition report under Section 13 or 15(d) of the Exchange Act
--- For the transition period from to
--------------- ----------------
Commission File No. 333-70589
NEW COMMERCE BANCORP
--------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
South Carolina 58-2403844
-------------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
501 New Commerce Court, Greenville, South Carolina 29607
--------------------------------------------------------
(Address of Principal Executive Offices)
(864) 297-6333
--------------
(Issuer's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,000,000 shares of common
stock, par value $.01 per share, outstanding as of May 6, 2003.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
--------- ------------
Assets:
Cash and due from banks $ 2,345,911 $ 3,017,238
Federal funds sold 114,854 3,342,348
Investment securities, available for sale 11,173,257 12,736,310
Investment securities, held to maturity 1,215,851 1,286,650
Federal Reserve Bank stock 237,250 237,250
Federal Home Loan Bank stock 236,300 250,000
Loans, net 42,135,483 37,937,537
Property and equipment, net 4,199,140 4,232,820
Accrued interest receivable 217,672 251,725
Other assets 369,027 341,221
------------ -------------
Total assets $ 62,244,745 $ 63,633,099
============ =============
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $ 48,129,168 $ 47,522,005
Advances from Federal Home Loan Bank 4,800,000 4,725,000
Drafts outstanding 178,380 2,289,560
Other borrowings 150,000 -
Other liabilities 202,268 257,429
------------ -------------
Total liabilities 53,459,816 54,793,994
------------ -------------
Shareholders Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued - -
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,000,000 issued and outstanding 10,000 10,000
Additional paid-in capital 9,741,658 9,741,658
Retained deficit (1,197,079) (1,203,432)
Accumulated other comprehensive income 230,350 290,879
------------ -------------
Total shareholders' equity 8,784,929 8,839,105
------------ -------------
Total liabilities and shareholders' equity $ 62,244,745 $ 63,633,099
============ =============
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
2
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2003 2002
-------- --------
Interest Income:
Interest and fees on loans $ 563,728 $ 470,234
Investment securities 201,491 231,286
Federal funds sold 3,424 141
---------- ----------
Total interest income 768,643 701,661
---------- ----------
Interest Expense:
Deposits 209,135 206,425
Securities sold under agreements to repurchase - 28,782
Advances from Federal Home Loan Bank 34,325 -
Federal funds purchased 1,589 4,127
---------- ----------
Total interest expense 245,049 239,334
---------- ----------
Net Interest Income 523,594 462,327
Provision for Loan Losses 44,225 9,325
---------- ----------
Net Interest Income After Provision for Loan Losses 479,369 453,002
---------- ----------
Non-Interest Income:
Service fees on deposit accounts 37,775 23,755
Mortgage brokerage income 37,840 16,730
Gain on sale of investment securities 11,714 -
Other 13,556 15,051
---------- ----------
Total non-interest income 100,885 55,536
---------- ----------
Total Income 580,254 508,538
---------- ----------
Non-Interest Expense:
Salaries and benefits 316,380 284,039
Occupancy, furniture and equipment 96,173 85,045
Data processing 49,239 48,396
Marketing 17,138 14,697
Printing, supplies and postage 18,564 9,440
Other 72,607 59,049
---------- ----------
Total non-interest expenses 570,101 500,666
---------- ----------
Income Before Income Taxes 10,153 7,872
Income Tax Provision 3,800 3,366
---------- ----------
Net Income $ 6,353 $ 4,506
========= ==========
Basic and Diluted Earnings per Share $ 0.01 $ 0.00
Weighted Average Shares Outstanding - Basic 1,000,000 1,000,000
Weighted Average Shares Outstanding - Diluted 1,017,977 1,000,000
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
3
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-in Retained Comprehensive Shareholders
Shares Amount Capital Deficit Income (Loss) Equity
------------- ----------- ------------- --------------- --------------- ---------------
Balance, December 31, 2001 1,000,000 $ 10,000 $ 9,741,658 $(1,240,960) $ 247,494 $ 8,758,192
-----------
Net income - - - 4,506 - 4,506
Other comprehensive loss, net of
tax:
Unrealized holding gain on
securities available for sale
net of tax effect of $62,573 - - - - (121,465) (121,465)
-----------
Comprehensive loss - - - - - (116,959)
--------- -------- ----------- ----------- ---------- -----------
Balance, March 31, 2002 1,000,000 $ 10,000 $ 9,741,658 $(1,236,454) $ 126,029 $ 8,641,233
========= ======== =========== =========== ========== ===========
Balance, December 31, 2002 1,000,000 $ 10,000 $ 9,741,658 $(1,203,432) $ 290,879 $ 8,839,105
---------- -----------
Net income - - - 6,353 - 6,353
Other comprehensive loss, net of
tax:
Unrealized holding gain on
securities available for sale,
net of tax effect of $31,214 - - - - (53,149) -
Reclassification of net gain on
securities available for sale
included in net income, net of
tax effect of $4,334 - - - - (7,380) -
----------
Other comprehensive loss - - - - (60,529) (60,529)
--------- -------- ----------- ----------- ---------- -----------
Comprehensive loss - - - - - (54,176)
--------- -------- ----------- ----------- ---------- -----------
Balance, March 31, 2003 1,000,000 $ 10,000 $ 9,741,658 $(1,197,079) $ 230,350 $ 8,784,929
========= ======== =========== =========== ========== ===========
See Notes to Consolidated Financial Statements, which are an integral part of
these statements
4
NEW COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2003 2002
------------ -----------
Operating Activities:
Net income $ 6,353 $ 4,506
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for loan losses 44,225 9,325
Depreciation and amortization 36,564 26,974
Gain on sale of investment securities (11,714) -
Decrease in accrued interest receivable 34,053 20,344
Decrease (increase)in other assets 7,743 (71,894)
(Decrease) in other liabilities (55,161) (49,840)
----------- -----------
Net cash provided by (used for) operating activities 62,063 (60,585)
----------- -----------
Investing Activities:
Increase in loans, net (4,242,171) (774,825)
Purchase of investment securities available for sale - (501,052)
Purchase of investment securities held to maturity - (198,688)
Redemption (purchase) of Federal Home Loan Bank stock 13,700 (5,600)
Proceeds from principal payments on investment securities available
for sale 1,066,260 835,323
Proceeds from principal payments on investment securities held to
maturity 74,513 -
Proceeds from sale or call of investment securities available for 415,147 -
sale
Purchase of property and equipment (9,316) (1,433)
----------- -----------
Net cash used for investing activities (2,681,867) (646,275)
----------- -----------
Financing Activities:
Increase (decrease) in deposits, net 607,163 (2,638,492)
Net increase in advances from Federal Home Loan Bank 75,000 -
Net decrease in securities sold under agreement to repurchase - (64,000)
(Decrease) increase in drafts outstanding (2,111,180) 498,661
Net increase in federal funds purchased 150,000 2,115,000
----------- -----------
Net cash used for financing activities (1,279,017) (88,831)
----------- -----------
Net Decrease in Cash and Cash Equivalents (3,898,821) (795,691)
Cash and Cash Equivalents, Beginning of Period 6,359,586 2,024,336
----------- -----------
Cash and Cash Equivalents, End of Period $ 2,460,765 $ 1,228,645
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 241,552 $ 458,002
=========== ===========
Income Taxes $ 2,675 $ -
=========== ===========
See Notes to Consolidated Financial Statements, which are an integral part of
these statements.
5
NEW COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Organization and Basis of Presentation
-----------------------------------------------
Organization
------------
New Commerce BanCorp (the "Holding Company"), is incorporated under the laws of
the State of South Carolina for the purpose of operating as a bank holding
company for New Commerce Bank (the "Bank"). The Bank provides full commercial
banking services to customers and is subject to regulation of the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation. The
Holding Company is subject to the regulation of the Federal Reserve Board.
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results for the year ending December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Form 10-KSB for the period ended December 31, 2002
(Registration Number 333-70589) as filed with the Securities and Exchange
Commission.
Note 2 - Earnings per Share
---------------------------
The following schedule reconciles the numerators and denominators of the basic
and diluted earnings per share ("EPS") computations for the three-month periods
ended March 31, 2003 and 2002. Diluted common shares arise from the potentially
dilutive effect of the stock options and warrants outstanding.
Three Months Ended
March 31,
----------------------------
2003 2002
------------- ------------
Basic EPS:
Net income $ 6,353 $ 4,506
Average common shares outstanding 1,000,000 1,000,000
---------- ----------
Basic earnings per share $ 0.01 $ 0.00
========== ==========
Diluted EPS:
Net income $ 6,353 $ 4,506
---------- ----------
Average common shares outstanding 1,000,000 1,000,000
Dilutive effect of stock options and warrants 17,977 -
---------- ----------
Average dilutive shares outstanding 1,017,977 1,000,000
---------- ----------
Diluted earnings per share $ 0.01 $ 0.00
========== ==========
6
Note 3 - Stock Options and Warrants
-----------------------------------
We have two stock-based employee compensation plans and we account for those
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
income (loss), as all stock options and warrants granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation.
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- --------------
Net income as reported $ 6,353 $ 4,506
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related income tax effect 8,534 $ 8,915
-------- --------
Pro forma net loss $ (2,181) $ (4,409)
======== ========
Earnings (loss) per share:
Basic and diluted - as reported $ 0.01 $ 0.00
======== ========
Basic and diluted - pro forma $ (0.00) $ (0.00)
======== ========
The following is an analysis of stock option activity for the three months ended
March 31, 2003 and 2002:
2003 2002
----------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------- --------------
Outstanding at beginning of period 128,000 $ 8.22 113,000 $ 8.35
Granted - - 20,000 7.94
Forfeitures - - (14,000) 9.14
------- -------
Outstanding at end of period 128,000 8.22 119,000 8.19
======= =======
Options exercisable 40,400 8.85 19,200 9.83
======= =======
Shares available for grant 22,000 40,000
======= =======
Upon completion of the 1999 stock offering, each of our organizers received
warrants to purchase 7,500 shares of common stock or a total of 90,000 shares at
$10.00 per share. The warrants vested immediately and are exercisable through
January 12, 2009.
7
Item 2. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------
The following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, New Commerce Bank, during the periods included in the accompanying
consolidated financial statements. This commentary should be read in conjunction
with the financial statements and the related notes and the other statistical
information included in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management for
future operations, and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. The words "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate,"
"continue," "may," and "intend," as well as other similar words and expressions
of the future, are intended to identify forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including, without limitation:
o significant increases in competitive pressure in the banking and
financial services industries;
o changes in the interest rate environment which could reduce anticipated
or actual margins;
o changes in political conditions or the legislative or regulatory
environment;
o the level of allowance for loan loss;
o the rate of delinquencies and amounts of charge-offs;
o the rates of loan growth;
o adverse changes in asset quality and resulting credit risk-related
losses and expenses;
o general economic conditions, either nationally or regionally and
especially in primary service area, becoming less favorable than
expected resulting in, among other things, a deterioration in credit
quality;
o changes occurring in business conditions and inflation;
o changes in technology;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties detailed from time to time in our filings
with the Securities and Exchange Commission.
8
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Certain accounting policies involve significant
judgments and assumptions by management. These judgments have a material impact
on the carrying value of certain assets and liabilities. Management judgments
and assumptions are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of
these judgments, actual results could differ and could have a material impact on
the carrying values of assets and liabilities and the results of operations. We
believe that the allowance for loan losses methodology represents a significant
accounting policy, which requires the most critical judgments and estimates used
in preparation of our consolidated financial statements. Refer to the "Results
of Operations for the Three Months Ended March 31, 2003 Compared to the Three
Months Ended March 31, 2002 - Provision for Loan Losses" as well as the "Balance
Sheet Review at March 31, 2003 - Loans and Allowance for Loan Losses"
discussions below.
Results of Operations for the Three Months Ended March 31, 2003 Compared to the
Three Months Ended March 31, 2002
Consolidated net income for our first quarter of 2003, which ended March 31,
2003, was $6,353, or $0.01 per share, compared to net income of $4,506, or $0.00
per share, for the first quarter of 2002, which ended March 31, 2002. Following
is a discussion of the more significant components of our net income.
9
Net Interest Income
-------------------
The largest component of total income is net interest income, the difference
between the income earned on assets and the interest accrued or paid on deposits
and borrowings used to support such assets. The volume and mix of assets and
liabilities and their sensitivity to interest rate movement determine changes in
net interest income. Net interest margin is determined by dividing annualized
net interest income by average earning assets. Net interest spread is derived
from determining the weighted-average rate of interest paid on deposits and
borrowings and subtracting them from the weighted-average yield on earning
assets. Net interest income for the quarter ended March 31, 2003 was $523,594,
compared to $462,327 for the same period last year, an increase of 13%. This
increase was the result of increased balances of earning assets and the impact
of lower interest rates on our interest-bearing liabilities, offset partially by
the effect of lower interest rates on earning assets.
For the quarter ended March 31, 2003, average earning assets totaled $54.8
million with an annualized average yield of 5.61%. Average earning assets and
annualized average yield were $44.8 million and 6.26%, respectively, for the
quarter ended March 31, 2002. For the quarter ended March 31, 2003, average
interest-bearing liabilities totaled $51.6 million with an annualized average
cost of 1.90%. Average interest-bearing liabilities and annualized average cost
were $41.7 million and 2.30%, respectively, for the quarter ended March 31,
2002.
Because loans often provide a higher yield than other types of earning assets,
one of our goals is to maintain our loan portfolio as the largest component of
total earning assets. Loans comprised approximately 73% and 64% of average
earning assets for the first quarter of 2003 and 2002, respectively. Loan
interest income for the quarter ended March 31, 2003 totaled $563,728, compared
to $470,234 for the same period in 2002. The annualized average yield on loans
was 5.64% for the quarter ended March 31, 2003, compared to 6.51% for the same
period in 2002. The yield decreased as a result of the declining interest rate
environment and its impact on our variable rate loan portfolio (which is about
73% of our loans). Average balances of loans increased to $40.0 million during
the quarter ended March 31, 2003, an increase of $11.2 million over the average
of $28.8 million during the comparable quarter in 2002. The increase in average
balances offset the impact of the decrease in yield on interest income.
Investment securities averaged $14.1 million, or 26% of average earning assets,
for the first quarter of 2003, compared to $15.9 million, or 35% of average
earning assets, for the same period in 2002. Interest earned on investment
securities amounted to $201,491 for the quarter ended March 31, 2003, compared
to $231,286 for the quarter ended March 31, 2002. Investment securities yielded
5.71% during the first quarter of 2003, compared to 5.82% during the same period
last year. This difference resulted from the effect of the sale of securities
held in the portfolio during the period ended March 31, 2002 that had a higher
yield than the average yield on securities held in the portfolio during the
quarter ended March 31, 2003 and the purchase of lower yielding securities
subsequent to the prior year quarter.
Interest expense for the quarter ended March 31, 2003 was $245,049 compared to
$239,334 for the same period last year. The largest component of interest
expense is interest on deposit accounts. The average balance of deposits
increased to $46.2 million during the quarter ended March 31, 2003 from $35.7
million during the quarter ended March 31, 2002. The annualized average cost of
deposits was 1.81% for the quarter ended March 31, 2003, compared to 2.31% for
the same period in 2002. The decrease was due to market interest rates declining
throughout 2002, which has impacted the rates we offer to our depositors.
Interest on other interest-bearing liabilities for the quarter ended March 31,
2003 was $35,914 at an average cost of 2.64% compared to $32,909 at and average
rate of 2.21% during the same period in 2002. The overall cost of funds was
1.90% for the quarter ended March 31, 2003, compared to 2.30% for the same
period in 2002.
Provision for Loan Losses
-------------------------
The provision for loan losses is the charge to operating earnings that our
management believes is necessary to maintain the allowance for loan losses at an
adequate level. The amount charged to the provision is based on a review of
past-due loans and delinquency trends, actual losses, classified and criticized
loans, loan portfolio growth, concentrations of credit, economic conditions,
historical charge-off activity and internal credit risk ratings. Loan
charge-offs and recoveries are charged or credited directly to the allowance.
For the quarter ended March 31, 2003, the provision for loan losses was $44,225
compared to $9,325 for the same period last year. This increase of $34,900
reflects, and is consistent with, our loan growth since the quarter ended March
31. See "Balance Sheet Review at March 31, 2003 - Loans and Allowance for Loan
Losses.
10
Non-Interest Income
-------------------
Non-interest income for the quarter ended March 31, 2003 was $100,885, compared
to $55,536 for the same period in 2002, an increase of $45,349. Mortgage
brokerage income was $37,840, compared to $16,730 for the same period in 2002,
an increase of $21,110. Mortgage loan originations in recent months have
increased due to refinancing activity related to the current low mortgage loan
interest rate environment. Another component of the increase was a gain of
$11,714 on the sale of investment securities during the quarter ended March 31,
2003 that was not present in the prior year quarter. We sell securities from
time to time for various reasons including liquidity needs, changes in credit
quality, market valuation factors, etc. Since the principal purpose of our
investment portfolio is liquidity management and not to derive income from
trading activity, we consider this gain a nonrecurring item. Currently, we have
no plans to sell additional securities. All other fees and charges increased due
to the growth in account relationships experienced during the current period,
particularly checking accounts.
Non-Interest Expense
--------------------
Non-interest expense for the quarter ended March 31, 2003 was $570,101, compared
to $500,666 for the same period in 2002. The principal component of this
increase was in salaries and benefits, the largest component of non-interest
expense, which increased by $32,341 to $316,380 for the quarter ended March 31,
2003 from $284,039 for the quarter ended March 31, 2002. This increase is the
result of annual raises and the hiring of additional staff since the prior year
quarter, particularly an additional commercial lender and a retail banking
manager. Additionally, commissions paid on mortgage loan originations increased
during the current quarter due to the increase in mortgage origination income as
previously discussed. We expect salaries and benefits to continue to increase as
we continue to grow and add personnel to support the growth.
Balance Sheet Review at March 31, 2003
General
-------
Total consolidated assets decreased $1.4 million to $62.2 million at March 31,
2003 from $63.6 at December 31, 2002. This 2% decrease in assets was comprised
principally of a $3.9 million decrease in cash and federal funds sold. These
assets decreased as the result of the settlement of $2.1 million of drafts that
were outstanding at December 31, 2002. Loans outstanding increased $4.2 million
during the quarter. Our loans have increased in part due to the hiring of an
additional commercial loan officer late in the first quarter of the 2002 and our
continued focus on establishing new client relationships. Investment securities
decreased by $1.6 million due to the sale of securities and from principal
collections on mortgage-backed securities.
There was a $607,000 increase in deposits, bringing deposits up to $48.1 million
at March 31, 2003. There were both increases and decreases in deposit balances
of several of our larger commercial and personal account relationships. The net
effect was that we had a decrease in balances of deposits of clients in our
market area. We obtained additional brokered deposits to fund our loan growth.
The total of such brokered deposits at March 31, 2002 was $1.8 million.
For more analysis of the components of the changes in asset and liabilities, see
the following discussion of major balance sheet categories and the Consolidated
Statements of Cash Flows included in "Item 1. Financial Statements."
We closely monitor and seek to maintain appropriate levels of interest earning
assets and interest bearing liabilities so that maturities of assets are such
that adequate funds are provided to meet customer withdrawals and loan demand.
11
Loans and Allowance for Loan Losses
-----------------------------------
Outstanding loans represented the largest component of earning assets as of
March 31, 2003 at $42.7 million, or 77% of total earning assets, compared to 68%
at December 31, 2002. Loans have increased 11% since December 31, 2002. Balances
within the major loan categories were as follows:
March 31, 2003 December 31, 2002
------------------------------- -------------------------------
Amount Percent Amount Percent
--------------- ------------- ---------------- -------------
Commercial $ 7,106,968 16.6% $ 6,462,271 16.8%
Real estate - construction 1,848,308 4.4 1,781,866 4.6
Real estate - mortgage 27,125,243 63.5 24,760,074 64.4
Consumer 6,632,066 15.5 5,474,605 14.2
----------- ----- ----------- -----
Total loans 42,712,585 100.0% 38,478,816 100.0%
===== =====
Allowance for loan losses (534,000) (492,000)
Deferred loan costs, net (43,102) (49,279)
----------- -----------
Net loans $42,135,483 $37,937,537
=========== ===========
The loan portfolio is periodically reviewed to evaluate the outstanding loans,
to measure both the performance of the portfolio and the adequacy of the
allowance for loan losses, and to provide for probable losses inherent in the
loan portfolio.
This analysis and determination of the level of the allowance includes a review
of past-due loans and delinquency trends, actual losses, classified and
criticized loans, loan portfolio growth, concentrations of credit, economic
conditions, historical charge-off activity and internal credit risk ratings.
Management's judgment as to the adequacy of the allowance is based upon a number
of assumptions about future events, which it believes to be reasonable, but
which may or may not be accurate. Because of the inherent uncertainty of
assumptions made during the evaluation process, there can be no assurance that
loan losses in future periods will not exceed the allowance for loan losses or
that additional allocations will not be required. The following is an analysis
of the allowance for loan losses:
Allowance for loan losses, December 31, 2002 $ 492,000
Provision 44,225
Charge-offs - consumer (2,225)
---------
Allowance for loan losses, March 31, 2003 $ 534,000
=========
Allowance for loan losses to loans outstanding:
March 31, 2003 1.25%
=========
December 31, 2002 1.28%
=========
Nonperforming assets consist of nonaccrual loans, other real estate owned, and
repossessed collateral. Generally, loans are placed on nonaccrual status when
they become 90 days past due, or when management believes that the borrower's
financial condition is such that collection of the loan is doubtful. Interest
stops accruing when a loan is placed on nonaccrual status. Interest income on
these loans is recognized when payments are received. There were neither any
nonaccrual loans nor any loans delinquent more than 90 days at March 31, 2003
and December 31, 2002.
12
Investment Portfolio
--------------------
Investment securities represented 22% and 26% of earning assets at March 31,
2003 and December 31, 2002, respectively. We primarily invest in government
agency or government-sponsored agency securities, mortgage-backed securities,
collateralized mortgage obligations and credit quality corporate bonds. We also
own stock in the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta.
The following is a table of investment securities by category at March 31, 2003
and December 31, 2002:
March 31, December 31,
2003 2002
---------------- ----------------
Federal agency obligations $ 783,820 $ 786,123
Mortgage-backed securities 7,505,058 8,217,642
Collateralized mortgage obligations 345,576 1,186,470
Corporate bonds 2,538,803 2,546,075
----------- -----------
Total available for sale $ 11,173,257 $ 12,736,310
============ ============
Held to maturity
Federal agency obligations $ 199,088 $ 199,001
Mortgage-backed securities 516,763 587,649
Trust preferred securities 500,000 500,000
------------ ------------
Total held to maturity $ 1,215,851 $ 1,286,650
============ ============
Deposits
--------
Balances within the major deposit categories as of March 31, 2003 and December
31, 2002 were as follows:
March 31, December 31,
2003 2002
---------------- ----------------
Non-interest bearing demand deposits $ 6,914,096 $ 4,877,681
Interest bearing checking 3,422,858 3,332,544
Savings deposits 764,066 564,582
Money market accounts 13,373,984 17,279,741
Time deposits less than $100,000 10,989,842 10,707,188
Time deposits of $100,000 or more 12,664,322 10,760,269
------------ ------------
$ 48,129,168 $ 47,522,005
============ ============
Other Borrowings
----------------
We maintain federal funds lines of credit with correspondent banks to meet
short-term liquidity needs. As a member of the FHLB, we have access to
borrowings through various FHLB programs. At March 31, 2003, and December 31,
2002 there were short-term borrowings outstanding of $150,000 and $0,
respectively, and FHLB advances of $4,800,000 and $4,725,000, respectively.
13
Interest Rate Sensitivity
-------------------------
Interest rate sensitivity is defined as the exposure to variability in net
interest income resulting from changes in market-based interest rates.
Asset/liability management is the process by which we monitor and control the
mix, maturities, and interest sensitivity of our assets and liabilities.
Asset/liability management seeks to ensure adequate liquidity and to maintain an
appropriate balance between interest-sensitive assets and liabilities to
minimize potentially adverse impacts on earnings from changes in market interest
rates. Interest rate sensitivity can be managed by repricing assets or
liabilities, selling securities available-for-sale, replacing an asset or
liability at maturity, or adjusting the interest rate during the life of an
asset or liability. We believe that interest rate risk management becomes
increasingly important in an interest rate environment and economy such as the
one that we are currently experiencing.
We monitor interest rate sensitivity by measuring our interest sensitivity
through a "gap" analysis, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing
within a given time period. However, since interest rates and yields on various
interest sensitive assets and liabilities do not all adjust in the same degree
when there is a change in prevailing interest rates (such as prime rate), the
traditional gap analysis is only a general indicator of rate sensitivity and net
interest income volatility. Therefore, we also contract with a third-party to
assist in the preparation of a rate sensitivity model which applies rate
sensitivity measures to assets and liabilities that will reprice within one year
at assumed upward and downward shifts in prime rate. From our latest analysis,
we have estimated that net interest income over a one-year timeframe generally
would decrease with a decrease in prime rate and increase with an increase in
prime rate. The estimates, using a 100 basis point shift in prime rate downward
and upward, shows an effect on net interest income of approximately minus
$100,000 and plus $100,000, respectively. These numbers are to be taken as
general indications only, in that they were derived from a methodology that
utilizes numerous assumptions about sensitivities of various assets and
liabilities to changes in interest rates. These estimates are used as a guide by
management, recognizing that model risk is always present whenever assumptions
of the future must be made. Actual results may differ from the estimates, should
there be changes in interest rates.
Liquidity Management
--------------------
Liquidity management involves monitoring our sources and uses of funds in order
to meet our day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management is made more complicated because
different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of the investment portfolio is
fairly predictable and subject to a high degree of control at the time
investment decisions are made. However, net deposit inflows and outflows are far
less predictable and are not subject to nearly the same degree of control. We
must maintain adequate liquidity to respond to short-term deposit withdrawals,
maturities of short-term borrowings, loan demand and payment of operating
expenses.
At March 31, 2003, our liquid assets, consisting of cash and due from banks and
federal funds sold, amounted to $2.5 million and represented 4% of total assets.
Investment securities totaled $12.4 million and represented 20% of total assets.
Investment securities that have not been pledged as collateral for deposits in
excess of FDIC coverage or for other borrowings (and classified as available-for
sale) provide a secondary source of liquidity since they can be converted to
cash in a timely manner. At March 31, 2003, we had securities with a market
value of $3.1 million classified as available for sale that were not pledged.
Our ability to maintain and expand our deposit base and borrowing capabilities
also serves as a source of liquidity. Our loan to deposit ratio at March 31,
2003 was 89%. We plan to meet our future cash needs through the liquidation of
temporary investments, maturities of loans, maturities and cash flows from
investment securities, generation of deposits, and the utilization of borrowing
arrangements with correspondent banks. We maintain federal funds lines of credit
with correspondent banks in the amount of $5,800,000, lines of credit with the
Federal Reserve Bank, and we are a member of the Federal Home Loan Bank, from
which application for borrowings can be made for leverage purposes. At March 31,
2003, we had approximately $12.4 million in available credit under our FHLB
facility, of which $4.8 million had been utilized. Any advances under the FHLB
facility must be collateralized with qualifying collateral, which at March 31,
2003 consisted of non-pledged investment securities and FHLB stock. We believe
that our existing stable base of core deposits and other funding sources along
with continued growth in our deposit base, are adequate to meet our operating
needs and we are not aware of any events which may result in a significant
adverse impact on liquidity.
14
Through the operations of our bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At March 31, 2003,
we had issued commitments to extend credit of $7.5 million through various types
of commercial lending arrangements (principally unfunded lines of credit). We
evaluate each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate. We manage the credit risk on these
commitments by subjecting them to normal underwriting and risk management
processes
The bank has a five-year contract for data processing services through April
2004. Costs under this contract are approximately $10,500 per month.
Capital Adequacy
----------------
Shareholders' equity was $8.8 million at March 31, 2003 and $8.8 million at
December 31, 2002. The Federal Reserve Board and bank regulatory agencies
require bank holding companies and financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0% to 100%.
The Federal Reserve guidelines also contain an exemption from the capital
requirements for bank holding companies with less than $150 million in
consolidated assets. Because we have less than $150 million in assets, our
holding company is not currently subject to these guidelines. However, the bank
falls under these rules as set by bank regulatory agencies.
Under the capital adequacy guidelines, capital is classified into two tiers.
Tier 1 capital consists of common shareholders' equity, excluding the unrealized
gain or loss on securities available for sale, minus certain intangible assets.
Tier 2 capital consists of the general reserve for loan losses subject to
certain limitations. The qualifying capital base for purposes of the risk-based
capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The bank is
also required to maintain capital at a minimum level based on total average
assets, which is known as the Tier 1 leverage ratio. The bank exceeded the
minimum capital requirements set by the regulatory agencies at March 31, 2003.
Below is a table that reflects the leverage and risk-based regulatory capital
ratios of the bank at March 31, 2003.
Required
amount Required Actual amount Actual
(in $000's) Percent (in $000's) Percent
-------------- ----------- -------------- -----------
Total capital $4,149 8.0% 7,629 14.7%
Tier 1 capital 2,075 4.0 7,095 13.7
Tier 1 leverage capital 2,384 4.0 7,095 11.9
Impact of Inflation
The assets and liabilities of financial institutions such as ours are primarily
monetary in nature. Therefore, interest rates have a more significant effect on
our performance than do the effects of changes in the general rate of inflation
and changing prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the relationships between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those, which may result from inflation.
Recently Issued Accounting Standards
Accounting standards that have been issued or proposed that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
15
Item 3. Controls and Procedures
-------------------------------
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
16
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-------------------------
There are no material pending legal proceedings to which we or our subsidiary is
party to or which any of their property is the subject.
Item 2. Changes in Securities
-----------------------------
Not Applicable.
Item 3. Defaults upon Senior Securities
---------------------------------------
Not Applicable.
Item 4. Submission of Matters of Security Holders to a Vote
-----------------------------------------------------------
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 2003.
Item 5. Other Information
-------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the first quarter ended
March 31, 2003.
99.1 The Company filed a Form 8-K on March 28, 2003 to disclose that
the Chief Executive Officer, Frank W. Wingate, and the Chief
Financial Officer, R. Lamar Simpson, each furnished to the SEC the
certification required pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW COMMERCE BANCORP
--------------------
(Registrant)
Date: May 14, 2003 By: /s/ Frank W. Wingate
-----------------------------------
Frank W. Wingate
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ R. Lamar Simpson
-----------------------------------
R. Lamar Simpson
Senior Vice President and Chief Financial
Officer
18
Certification
I, Frank W. Wingate, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of New Commerce BanCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Frank W. Wingate
-----------------------------------
Frank W. Wingate
President and Chief Executive Officer
19
Certification
I, R. Lamar Simpson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of New Commerce BanCorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ R. Lamar Simpson
-----------------------------------
R. Lamar Simpson
Senior Vice President and Chief Financial
Officer
20