-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1An1Gx8DXGQaumuSv9Y0x4b2yyN7i36JsQXBZZOY/ASIfVoDjaO389O9l/5lfNl L+YEV9gXYD9eVcnZlF/Qkw== 0000903594-98-000073.txt : 19980518 0000903594-98-000073.hdr.sgml : 19980518 ACCESSION NUMBER: 0000903594-98-000073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY FINANCIAL HOLDING CORPORATION CENTRAL INDEX KEY: 0000872401 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222762462 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24316 FILM NUMBER: 98622684 BUSINESS ADDRESS: STREET 1: 222 HADDON AVE CITY: WESTMONT STATE: NJ ZIP: 08108 BUSINESS PHONE: 6098697900 MAIL ADDRESS: STREET 1: 222 HADDON AVENUE CITY: WESTMONT STATE: NJ ZIP: 08108 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 1998. OR ( ) TRANSIT REPORT PURSUANT TO SECTION 35 OR 15 (d) OF THE SECURITIES ACT OF 1934. For the transition period from ____________ to _____________. Commission File Number: 0-24316 Community Financial Holding Corporation (Exact name of registrant as specified in its charter) New Jersey 52-1712224 State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 222 Haddon Avenue 08108 Westmont NJ (Zip Code) (Address of Principal Executive Offices) (609) 869-7900 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Class Outstanding as of April 30, 1998 Common Stock, $5.00 par value 1,044,236 INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 Consolidated Income Statements - Three Months ended March 31, 1998 and 1997. Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997 Notes to Consolidated Financial Statements - March 31, 1998 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Signatures
PART I. Item 1. - FINANCIAL INFORMATION COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 1998 1997 Cash and Due from Banks $ 10,970,691 $ 10,852,186 Federal Funds Sold 12,050,000 7,300,000 Securities Available for Sale (Amortized Cost of $19,462,853 at March 31, 1998 and $15,950,353 at December 31, 1997) 19,441,694 15,950,261 Investment Securities (Market Value of $23,872,025 at March 31, 1998 and $22,120,512 at December 31, 1997) 23,705,629 21,959,122 Loans Held For Sale 2,950,847 1,745,821 Loans 87,755,031 86,773,603 Less: Allowance for Loan Losses (1,059,911) (973,991) Net Loans 86,695,120 85,799,612 Bank Premises and Equipment, Net 4,823,687 4,885,853 Accrued Interest Receivable 1,073,427 1,172,092 Deferred Tax Assets 125,790 118,524 Other Assets 971,954 887,944 Total Assets $162,808,839 $150,671,415 LIABILITIES Demand Deposits $ 98,908,005 $ 92,184,858 Savings Deposits 21,879,302 19,567,902 Time Deposits 27,855,931 25,004,042 Total Deposits 148,643,238 136,756,802 Accrued Interest Payable 681,324 583,858 Securities Sold Under Repurchase Agreements 1,612,368 1,596,498 Other Liabilities 133,523 149,645 Total Liabilities 151,070,453 139,086,803 SHAREHOLDERS' EQUITY Common Stock $5 Par Value Authorized 1,600,000 Shares Issued and Outstanding: 1,044,236 at March 31, 1998 and 1,027,713 at December 31, 1997 5,272,180 5,189,565 Additional Paid In Capital 5,588,901 5,514,547 Retained Earnings 1,008,029 999,422 Less Treasury Stock, at Cost, 10,200 Shares (118,844) (118,844) Accumulated Comprehensive Income/(Loss) (11,880) (78) Total Shareholders' Equity 11,738,386 11,584,612 Total Liabilities & Shareholders Equity $162,808,839 $150,671,415
The accompanying notes are an integral part of these statements. COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS For The Three Months Ended March 31, 1998 And 1997 Three Months Ended March 31, 1998 1997 Interest Income: Interest and Fees on Loans $1,883,389 $1,611,292 Interest on Federal Funds Sold 135,827 33,696 Interest and Dividends on Investments: Taxable 446,646 455,019 Non-Taxable 142,451 76,879 Total Interest Income 2,608,313 2,176,886 Interest Expense: Interest on Demand Deposits 374,457 277,421 Interest on Savings Deposits 118,123 102,798 Interest on Time Deposits 350,257 298,668 Interest on Short Term Borrowings 21,399 10,625 Total Interest Expense 864,236 689,512 Net Interest Income 1,744,077 1,487,374 Provision for Loan Losses 105,000 75,000 Net Interest Income After Provision for Loan Losses 1,639,077 1,412,374 Other Income: Service Charges on Deposit Accounts 180,615 136,600 Mortgage Banking Activities 225,599 62,435 Other Income, Service Charges and Fees 41,539 14,998 Total Other Income 447,753 214,033 Other Expenses: Salaries, Wages and Employee Benefits 998,055 727,124 Occupancy and Equipment Expenses 316,227 243,237 Data Processing Expense 125,614 108,240 Other Operating Expenses 437,763 340,597 Total Other Expenses 1,877,659 1,419,198 Income Before Income Taxes 209,171 207,209 Income Tax Expense 43,595 66,513 Net Income 165,576 140,696 Change in Tax Effected Unrealized Loss On Securities Available For Sale 11,802 184,565 Total Comprehensive Income/(Loss) $ 153,774 $ (43,869) Net Income Per Share Information: Basic Earnings Per Share $0.16 $0.14 Diluted Earnings Per Share 0.14 0.13 The accompanying notes are an integral part of these statements. COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended March 31, 1998 and 1997
Three Months Ended March 31, 1998 1997 CASH FLOW FROM OPERATING ACTIVITIES: Net Income $165,576 $140,696 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED BY OPERATING ACTIVITIES: Depreciation and Amortization 120,738 84,917 Provision For Loan Losses 105,000 75,000 Accretion (Amortization) of Discount (Premium) on Securities, Net (846) 800 Deferred Tax Assets (7,266) (78,185) Cash Disbursed For Mortgage Banking Activities (10,602,193) (2,492,917) Cash Disbursed For Mortgage Banking Activities 9,397,167 2,724,490 Decrease In Accrued Interest Receivable 98,665 24,402 Increase In Other Assets (84,010) (271,483) Increase In Accrued Interest Payable 97,466 31,033 Decrease In Other Liabilities (16,122) (45,770) Total Adjustments (891,401) 52,287 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (725,825) 192,983 CASH FLOW FROM INVESTING ACTIVITIES: Proceeds From Maturity Of Securities Available For Sale 3,000,000 3,000,000 Proceeds From Maturities and Prepayments Of Investment Securities 3,654,696 45,694 Purchases Of Securities Available For Sale (6,504,707) (3,406,521) Purchases Of Investment Securities (5,398,885) (2,303,211) Loans Made To Customers, Net (1,000,508) (487,356) Premises And Equipment Expenditures (58,572) (627,487) NET CASH USED IN INVESTING ACTIVITIES (6,307,976) (3,778,881) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits 11,886,436 (1,175,191) Net Increase (Decrease) In Short Term Borrowings 15,870 (2,378,412) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 11,902,306 (3,553,603) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,868,505 (7,139,501) CASH AND CASH EQUIVALENTS AS OF BEGINNING OF YEAR 18,152,186 16,332,683 CASH AND CASH EQUIVALENTS AS OF March 31 $23,020,691 $ 9,193,182 SUPPLEMENTAL DISCLOSURE: Cash Paid During The Year: Interest $766,770 $658,479 Income Taxes 104,000 90,000 Non-Cash Items: Change In Net Unrealized Gain/(Loss) From Securities Available For Sale (11,802) (279,644) Change In Tax Effect Of Unrealized Gain/(Loss) From Securities Available For Sale (7,266) (95,079)
The accompanying notes are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of Community Financial Holding Corporation (the Corporation) and its wholly owned subsidiary Community National Bank of New Jersey (the Bank) as of March 31, 1998 and 1997 and the results of their operations for the three months ended March 31, 1998 and 1997. The accounting policies and reporting practices of the Corporation are in accordance with generally accepted accounting principals and have been followed on a consistent basis. The accompanying consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and accordingly do not include all of the detailed schedules, information and notes necessary for a fair presentation of financial condition, results of operations and cash flows in accordance with generally accepted accounting principals. This quarterly report should be read in conjunction with Form 10-K dated December 31, 1997, which contains audited consolidated financial statements of the Corporation. The results of operations for the three months ended March 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. Principals of Consolidation The financial statements consolidate the Holding Company and its subsidiary, the Bank collectively referred to as the "Corporation". All significant intercompany balances have been eliminated. Use of Estimates Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties to the extent considered practical. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Federal funds generally are purchased and sold for a one-day period. Stock Option Plan The Corporation accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued To Employees, and related interpretations. As such, compensation expense would be reported on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On January 1, 1996, the Corporation adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock- based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the annual pro forma disclosure required by SFAS No. 123. Accounting for Mortgage Servicing Rights The Bank, which services mortgage loans for others in return for a fee, recognizes as an asset the right to service mortgage loans, regardless of how they were acquired. Additionally, the Bank assesses the fair value of these assets at each reporting date to determine impairment. Impairment, if any, is recognized in the statement of income through a valuation reserve. The mortgage servicing rights are amortized over the estimated life of the underlying servicing using the interest rate method. Comprehensive Income In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income ("SFAS No. 130") SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Bank has made the appropriate disclosures in the applicable consolidated financial statements, as required. Segment Reporting In September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprise report selected information about operating segments in interim financial reports issued to shareholders in the second year of its application. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Management has not yet determined the impact, if any, of this statement on the Bank. Employers' Disclosures about Pension and Other Postretirement Benefits In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("Statement No. 132") which amends the disclosure requirements of Statements Nos. 87, "Employers' Accounting for Pensions" ("Statement No. 87"), 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits" ("Statement No. 88"), and 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("Statement No. 106"). Statement No. 132 is applicable to all entities. This statement standardizes the disclosure requirements of Statements Nos. 87 and 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. Statement No. 132 only addresses disclosure and does not change any of the measurement or recognition provisions provided for in Statements Nos. 87, 88, or 106. The Statement is effective for fiscal years beginning after December 15, 1997. Restatement of comparative period disclosures is required unless the information is not readily available, in which case the notes to the financial statements shall include all available information and a description of the information not available. The impact, if any, of this Statement on the Corporation would be to require additional disclosures in the Corporations' financial statements. Note 2. Earnings Per Share In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share". This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly-held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement of all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 1998 and 1997: Three Months Ended March 31, 1998 1997 Numerator: Net income $165,576 $ 140,696 Denominator: Denominator for basic earnings per share - weighted average shares 1,044,236 1,027,713 Effect of dilutive securities: Employee Stock Options and Warrants 135,134 95,246 Denominator for diluted earnings per share - adjusted weighted average shares and assumed exercised 1,179,370 1,122,959 Basic earnings per share $0.16 $0.14 Diluted earnings per share $0.14 $0.13 The computation of the 1997 average number of common shares and all per share data gives retroactive recognition to a 5% stock dividend declared in December 1997. Warrants issued to the underwriter of the Corporation's 1994 public offering of 450,000 shares of common stock were exercised in March 1998. Total warrants outstanding to purchase 27,349 shares of common stock, each with a fair value of $24.00, were exercised at a price of $9.50 per share. Pursuant to a cashless exchange provision of the warrants, the Corporation issued and exchanged 16,523 shares of common stock for the total warrants outstanding. Note 3. Securities Applicable securities are classified in three categories consisting of held-to-maturity (investment), trading and available for sale. Trading securities are those which are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities for which the Corporation has the ability and intent to hold the security until maturity. All other securities not included in trading or held to maturity are classified as available for sale. Held-to-maturity securities are reported at amortized cost, while trading securities and available-for-sale securities are reported losses are included in current earnings. Available-for-sale securities are accounted for by reporting unrealized gains and losses as a separate component of shareholders equity, net of tax. Note 4. Loans Held For Sale The Bank originates residential real estate loans and sells primarily fixed rate loans to various investors such as mortgage companies and agencies. The Bank has purchase commitments at par value for all loans held for sale. The interest income earned from the loan closing date to the date of sale is recorded in Interest and Fees on Loans. Note 5. Loans Interest on loans is included in interest income on the accrual method over the terms of the loans based upon the principal balances outstanding. Income recognition of interest is discontinued when, in the opinion of management, the collectibility of such interest becomes doubtful. A loan is generally classified as non-accrual when principal or interest has consistently been in default for a period of 90 days or more or because of a deterioration in the financial condition of the borrower such that payment in full of principal and interest is not expected. Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and in the process of collection. Loan origination fees are offset by certain direct origination costs. Net deferred loan fees are amortized over the life of the related loans as an adjustment of the yield on the loans. Impaired loans are measured based on the present value of expected future cash flows discounted at the loans' effective interest rate or, as a practical expedient, at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. For purposes of applying the measurement criteria for impaired loans the Bank excludes large groups of smaller-balance homogeneous loans, primarily consisting of residential real estate loans and consumer loans, as well as commercial, financial and agriculture loans with balance less than $100,000. For applicable loans, the Bank evaluates the need for impairment recognition when a loan becomes non-accrual, or earlier if based on management's assessment of the relevant facts and circumstances, it is probable that the Bank will be unable to collect all proceeds due according to the contractual terms of the loan agreement. The Bank's policy for the recognition of interest income on impaired loans is the same as for non-accrual loans discussed previously. Impaired loans are charged off when the Bank determines that foreclosure is probable and the fair value of the collateral is less than the recorded investment of the impaired loan. Note 6. Allowance for Loan Losses The allowance for loan losses represents the amount which, in management's judgment, is necessary to cover estimated loan losses. Management performs a quarterly assessment of the credit portfolio in order to determine the appropriate level of the allowance. The factors considered in this evaluation include, but are not necessarily limited to, estimated losses from loan and off-balance sheet arrangements; general economic conditions; deterioration in credit concentration or pledged collateral; historical loss experience; and trends in portfolio volume, maturity, composition, delinquencies, and non-accruals. 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 other factors used in management's determination. In addition, various regulatory agencies, as an integral part of their examination process periodically review the Corporations' allowance for losses on loans. Such agencies may require the Corporation to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. Accounts are charged directly against the allowance as soon as probability of loss is established, taking into consideration such factors as the customer's financial condition, underlying collateral and guarantees. Recoveries on previously charged off loans are added to the allowance. Note 7. Bank Premises and Equipment Land, buildings and equipment owned by the Corporation are carried at amortized cost. The Corporation leases certain facilities under long-term agreements. Leasehold improvements are capitalized and amortized over the lease term, including extension options or the estimated useful lives of the improvements, whichever is shorter. Depreciation of buildings and equipment is based on the economic useful lives of the assets, ranging from five to forty years, using the straight line method. Maintenance and repairs which do not extend the useful life of the assets are charged to current operating expenses. Note 8. Income Taxes The Corporation accounts for income taxes under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be resolved or settled. The effect on deferred taxes of a change in tax rates is recognizable in income in the period that includes the enactment date. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview On March 3, 1998, the Corporation, the Bank, HUBCO, Inc. ("HUBCO") and Hudson United Bank entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the Corporation will be merged with and into HUBCO with HUBCO as the surviving corporation (the "Merger"). In the Merger, each share of the common stock of the Corporation will be exchanged for 0.695 shares of HUBCO common stock. Outstanding options to purchase the common stock of the Corporation issued under the Corporation's 1994 Employee and Director Stock Option Plan (the "Option Plan") will be exchanged in the Merger for HUBCO common stock in accordance with the terms of the Option Plan. The Merger is expected to be consummated during the third quarter of 1998, subject to the satisfaction of certain conditions, including among others, approval of the Merger by the Corporation's shareholders and receipt of required regulatory approvals. The transaction will be accounted for as a pooling of interests. The Merger Agreement also provides for the merger of the Bank with and into Hudson United Bank, a wholly-owned subsidiary of HUBCO, with Hudson United Bank surviving such merger. Concurrently with the execution of the Merger Agreement, the Corporation entered into a Stock Option Agreement with HUBCO pursuant to which the Corporation granted HUBCO an option to purchase up to 252,790 shares of the common stock of the Corporation at a price of $24.40 per share, exercisable upon the occurrence of certain events. The Corporation reported net income for the first three months of 1998 of $166,000, an increase of $25,000, or 17.7% when compared to the first three months of 1997. The increase in earnings was due primarily to increases in net interest income and fee income and a reduction in the level of income tax expense. These gains were partially offset by an increase in the provision for loan losses and an increase in operating expenses which was related to four branch locations acquired in 1996. These branches were opened in September 1996, February 1997, May 1997 and September 1997. Net interest income for the first three months of 1998 was $1.7 million, an increase of $257,000 or 17.3% over the first three months of 1997. Non-interest income for the first three months of 1998 was $448,000, an increase of $234,000 or 109.2% over the first three months of 1997. These increases were due primarily to the Corporation's expansion of mortgage banking activities. The provision for loan losses for the first three months of 1998 was $105,000, an increase of $30,000 or 40.0% from the provision for the first three months of 1997. Non-interest expenses for the first three months of 1998 were $1.9 million, an increase of $458,000 or 32.3% as compared to the first three months of 1997. Income tax expense for the first three months of 1998 was $44,000, a decrease of $23,000 from 1997 primarily the result of an increase in non-taxable interest income. Expressed on a diluted earnings per share basis (after giving retroactive effect to the payment of a 5% stock dividend in 1997), net income for the first three months of 1998 was $0.14 per share compared to $0.13 per share for the first three months of 1997. Book value per share as of March 31, 1998 was $11.24 a decrease of $0.03 from book value per share of $11.27 at December 31, 1997. The Corporation's assets totalled $162.8 million at March 31, 1998, an increase of $12.1 million or 8.1% from total assets of $150.7 million at December 31, 1997. The increase was due primarily to an $11.9 million increase in total deposits resulting from the branch expansion. The increase in deposits occurred primarily in demand deposits which increased $6.7 million or 7.3% as compared to December 31, 1997. In addition, savings deposits and certificates of deposit grew $5.2 million or 11.6% from December 31, 1997. Loans were $87.7 million at March 31, 1998, an increase of $981,000 or 1.1% from $86.8 million at December 31, 1997. Cash and cash equivalents, including federal funds sold, increased $4.9 million or 26.8% to $23.0 million at March 31, 1998 from $18.1 million at December 31, 1997. The investment portfolio was $43.1 million at March 31, 1998, an increase of $5.2 million or 13.8% from $37.9 million at December 31, 1997. Loans held for sale were $2.9 million at March 31, 1998, an increase of $1.2 million or 69.0% as compared to $1.7 million at December 31, 1997. Loans held for sale are mortgage loans which were originated by the Banks' residential mortgage department and for which commitments for sale at par have been obtained. Bank premises and equipment at March 31, 1998 were $4.8 million a decrease of $62,000 from $4.9 million at December 31, 1997. Other assets increased $84,000 or 9.5% from $972,000 at December 31, 1997. The increase in other assets occurred primarily as a result of the Banks' purchase of additional mortgage servicing rights. Mortgage servicing rights increased $69,000 from $298,000 at December 31, 1997 to $367,000 at March 31, 1998. Net Interest Income The principal source of revenue for the Corporation is net interest income. Net interest income is the difference between interest income earned on loans and other interest-earning assets and interest expense paid on deposits. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income was $1.7 million for the three months ended March 31, 1998. This represents an increase of 17.3% when compared to net interest income of $1.5 million for the same period in 1997. Average interest-earning assets for the first three months of 1998 were $141.0 million, an increase of $29.2 million or 26.2% as compared to the first three months of 1997. The most significant increase in average earning assets occurred in the loan portfolio, primarily in residential mortgage loans. The loan portfolio average balance for the first three months of 1998 was $89.1 million, an increase of $15.5 million or 21.0% as compared to the first three months of 1997. This increase was funded primarily from the increase in deposits resulting from the branch expansion. Average deposits for the first three months of 1998 were $142.0 million, an increase of $29.8 or 26.6% as compared to $112.1 million in average deposits for the three month period ended March 31, 1997. The positive impact on net interest income from increased interest-earning assets was partially offset by the increase in interest-bearing deposits. Average interest-bearing deposits for the first three months of 1998 were $98.3 million, an increase of $17.9 million or 22.3% as compared to the first three months of 1997. The most significant increase in interest-bearing deposits occurred in interest-bearing demand deposits. The interest- bearing demand deposit average balance for the first three months of 1998 was $50.9 million, an increase of $11.6 million or 29.4% over the first three months of 1997. The savings deposit average balance for the first three months of 1998 was $20.5 million, an increase of $3.0 million or 17.2% as compared to the first three months of 1997. The average balance for certificates of deposit increased $3.3 million or 14.1% from $23.5 million for the three months ended March 31, 1997 to $26.8 million for the three months ended March 31, 1998. Net interest margin is calculated as the tax-equivalent net interest income divided by the average earning assets and represents the Corporations' net yield on its earning assets. The net interest margin decreased from 5.53% to 5.22% for the three months ended March 31, 1997 and 1998, respectively. This decrease is primarily resultant from a decrease in the yield earned on average interest-earning assets from 8.05% to 7.70% for the first three months of 1997 as compared to the first three months of 1998, a decrease of 35 basis points. The most significant decrease in interest yield was in the loan portfolio, primarily commercial and installment loans. The average yield from the commercial loan portfolio dropped 22 basis points from 9.15% to 8.93% and the average yield from the installment loan portfolio decreased 17 basis points from 8.86% to 8.69% for the three months ended March 31, 1997 and 1998, respectively. The average interest rate paid for interest bearing deposits also increased 7 basis points from 3.44% for the first three months of 1997 to 3.51 for the first three months of 1998. This increase occurred primarily in the rate paid for interest-bearing demand deposits and certificates of deposit. The table below illustrates the changes in interest rate margin and interest rate spread based on average amounts outstanding for the three months ended March 31, 1998 and 1997. Three Months Ended March 31, 1998 1997 ASSETS Securities 6.39% 6.46% Fed Funds 5.47% 5.46% Loans 8.57% 8.88% Total Earning Assets 7.70% 8.05% LIABILITIES Demand Deposits 2.98% 2.86% Savings Deposits 2.33% 2.38% Time Deposits 5.30% 5.16% Repurchase Agreements 5.19% 4.64% Total Interest Bearing Liabilities 4.05% 3.44% Net Interest Rate Spread 3.65% 4.61% Net Interest Rate Margin 5.22% 5.53% Net interest income is also affected by the mix of interest- earning assets and interest-bearing and non-interest bearing liabilities. Average loans, which are the highest yielding earning assets, for the three months ended March 31, 1998 were 57.2% of average assets as compared to 60.1% of average assets for the three months ended March 31, 1997. This decrease was offset by the decrease in the average balance for certificates of deposit and repurchase agreements, the highest yielding liabilities, for the three months ending March 31, 1998, which were 18.3% of average assets as compared to 19.9% of average assets for the three months ended March 31, 1997. In addition, average non-interest bearing deposits for the three months ended March 31, 1998 were 28.0% of average assets as compared to 24.0% for the three months ended March 31, 1997. The average balance for non-interest bearing deposits was $43.7 million for the three months ended March 31, 1998 as compared to $29.4 million for the three months ended March 31, 1997, an increase of $14.3 million or 48.6%. Non-Interest Income Non-interest income was $448,000 for the first three months of 1998, an increase of 109.2% or $234,000 compared to $214,000 for the first three months of 1997. A primary component of non- interest income is fee income generated by the Bank's residential mortgage department. This fee income was $226,000 for the first three months of 1998 compared to $62,000 for the first three months of 1997. Service charges on deposit accounts were $181,000 for the first three months of 1998, an increase of $44,000 or 32.2% from $137,000 for the first three months of 1997. This increase was largely due to the increased deposit account activity that has resulted from the branch expansion and the addition of new depositors attracted by the Bank's program, implemented in February 1996, that offers demand deposit accounts at no charge to the customer. Management believes that these "free-checking accounts" enable the Bank to have greater access to new and existing markets. The Corporation had 9,223 demand deposit accounts at March 31, 1997 and 13,088 demand deposit accounts at March 31, 1998, an increase of 3,865 accounts or 41.9%. The Corporation had $31.2 million of non-interest bearing demand deposits at March 31, 1997 and $48.8 million of non- interest bearing demand deposits at March 31, 1998, an increase of $17.7 million or 56.7%. The increase in non-interest bearing deposits helped lower the average cost of funds 5 basis points from 2.46% for the first three months of 1997 to 2.41% for the first three months of 1998. Non-Interest Expenses Non-interest expense increased $458,000 or 32.3% in the first three months of 1998 compared to the first three months of 1997. Expenses related to salary and occupancy and other costs associated with the opening of three new branches in 1997 and continued expansion of the Mortgage Department represent the largest portion of the increase. Salaries and benefits increased 37.3% or $271,000 in the first three months of 1998 compared to the first three months of 1997. These increases were due primarily to staff additions (which increased to 109 full time equivalent employees at March 31, 1998 from 87 at March 31, 1997) as well as merit increases in salaries and increased health care costs. Occupancy and equipment expenses increased $73,000 or 30.0% in the first three months of 1998 compared to the first three months of 1997. This increase was primarily due to the branch expansion. Data processing expenses increased $17,000 or 16.0% for the three months ended March 31, 1998 as compared to the three months ended March 31, 1997 primarily to increased transaction volume from the increase in deposit accounts. Primary components in the $97,000 or 28.5% increase in other operating expenses for the first three months of 1998, as compared to the first three months of 1997, include such expenses as postage, telephone and other general operating expenses, much of which is associated with the new branches and the residential mortgage department expansion. In addition, the Corporation recognized a net loss of $14,000 in January 1998 from the sale of one residential property taken in foreclosure during 1997. Income Taxes Income taxes decreased to $44,000 from $67,000, or 34.5%, in the first three months of 1998 and 1997, respectively. The decrease resulted primarily from an increased level of non- taxable interest income from local municipal bonds. The effective tax rates for the first three months of 1998 and 1997 were 20.8% and 32.1%, respectively. Provisions for Loan Losses The Corporation determines the provision for loan losses through a quarterly analysis of the adequacy of the loan loss reserve. Factors such as economic conditions and trends, the volume of non-performing loans, concentrations of credit risk, adverse situations that may affect a borrower's ability to pay, and prior loss experience within the various categories of the portfolio are considered when reviewing the risks in the portfolio. While management believes the allowance for loan losses is currently adequate, further additions to the allowance will be predicated upon general economic conditions, the condition of specific borrowers and overall growth of the loan portfolio. Provisions for loan losses were $105,000 for the first three months of 1998 as compared to a provision of $75,000 for the first three months of 1997. The higher provision for the first three months of 1998 was due to overall growth of the loan portfolio. The allowance for loan losses was $1.1 million at March 31, 1998 and $732,000 at March 31, 1997. The Bank had net charge-offs of $19,000 and $81,000 for the three months ended March 31, 1998 and 1997, respectively. The following is a summary of the activity in the allowance for loan losses for the three months ended March 31, 1998 and 1997. Three Months Ended March 31, 1998 1997 Balance at the beginning of period $ 973,991 $738,353 Provision for loan losses 105,000 75,000 Recoveries 4,971 4,552 Losses charged against the allowance (24,051) (85,427) Balance at March 31, $1,059,911 $732,478 The increase in the provision for loan losses in the first three month period of 1998 reflects the increase in the loan portfolio which grew to $87.8 million at March 31, 1998 from $72.8 million at March 31, 1997. While the amount of loans past due more than ninety days and still accruing and the amount of non-accrual loans has increased, the increase is the result of several unrelated loans. Management has, through its most recent analysis of the adequacy of the allowance for loan losses completed as of March 31, 1998, determined the allowance to be adequate. Future additions to the allowance for loan losses through provisions charged to operations will be determined as a result of management's continuing analysis of the adequacy for the allowance of loan losses. The following is a summary of the Company's non-performing assets as of March 31, 1998 and December 31, 1997. March 31, December 31, (DOLLARS IN THOUSANDS) 1998 1997 Past due 90 days or more and still accruing $ 154 $ 147 Non-accrual loans 880 657 Total non-performing loans 1,034 804 Other real estate owned 64 108 Total non-performing assets $1,098 $ 912 Non-performing loans as a percentage of loans 1.18% 0.93% Non-performing loans as a percentage of loan and OREO 1.18% 1.05% Non-performing assets as a percentage of assets 0.67% 0.60% The increase in non-performing loans from December 31, 1997 to March 31, 1998 is not due to any one loan but several unrelated loans. All non-performing loans are, in the opinion of management, either adequately collateralized and in process of collection, or adequately reserved in the Corporation's allowance for loan losses. The other real estate owned at March 31, 1998 is one residential property taken in foreclosure. Management anticipates this property will be sold in 1998. When loans are placed on non-accrual, accrued income from the current period is reversed from current earnings. Consumer loans are charged off when principal or interest is 120 or more days delinquent, or are placed on non-accrual if the collateral is sufficient to recover the principal. All non-accrual loans are, in the opinion of management, either adequately collateralized, in process of collection, or adequately provided for in the Corporation's allowance for loan losses. The Corporation's commercial loan portfolio is largely loans secured by owner occupied commercial real estate with an average loan to value ratio under 75%. There is no significant concentration in the portfolio with any business or industrial segment. The Corporation's consumer loan portfolio consists of home equity, automobile, credit cards and personal loans. Approximately 50% of the consumer portfolio consists of home equity loans. The average loan to value ratio of these loans is under 75%. The Corporation's lending activity extends to individuals and small and medium sized businesses primarily within its primary service area, which is predominantly Camden, Gloucester and Burlington Counties, New Jersey. The primary service area is a diverse economic and employment market with no significant dependence on any one industry or large employer. Impact of Year 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a continuing assessment, the Corporation has preliminarily determined that it, or third party vendors with which the Corporation contracts, will be required to modify or replace portions of software and hardware so that computer systems will function properly with respect to dates in the year 2000 and thereafter. The Corporation presently believes that with modifications or replacements to existing software and hardware and conversions to new software and hardware, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Corporation. The Corporation is initiating an ongoing program of formal communications with all of its significant suppliers and large customers to determine the extent to which the Corporation's interface systems and its outstanding loans to such customers are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. However, there can be no guarantee that the systems of other companies on which the Corporation's systems rely or to which the Bank has extended credit will be timely converted and would not have an adverse effect on the Corporation's systems or operations. The Corporation will utilize both internal and external resources to reprogram, or replace, and test the software and hardware for Year 2000 modifications. The Corporation anticipates completing the Year 2000 project prior to any anticipated impact on its operating systems. Although the Corporation's assessment is not yet complete, the Corporation believes that the expenses associated with the Year 2000 project for 1998 may be material. The timetable in which the Corporation believes it will complete the Year 2000 modifications is based on management's best estimate, which was derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Although the Corporation believes that the program outlined above should be adequate to address the Year 2000 Issue, there can be no assurance to that effect. Liquidity Liquidity represents the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, federal funds sold, securities classified as available for sale, and loans maturing within one year. As a result of the Corporation's management of liquid assets, and the ability to generate liquidity through liability funds, management believes that the Corporation maintains overall liquidity sufficient to satisfy its deposit requirements and meet its customers' credit needs. At March 31, 1998, cash, securities classified as available for sale, and federal funds sold were 26.1% of total assets compared to 22.6% of total assets at December 31, 1997. Asset liquidity is also provided by managing loan and securities investment maturities. At March 31, 1998, approximately $20.8 million or 23.7% of loans will mature within a one year period. At March 31, 1998, approximately $14.4 million or 33.3% of securities will mature within a one year period. To the extent possible, loans are funded with deposits or other funding with coinciding maturity or repricing dates. Capital Resources The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions, economic forces and growth and expansion activities. The Corporation seeks to maintain a capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. The Corporation's capital position continues to exceed regulatory minimums. The primary indicators relied on by the Federal Reserve Board and other bank regulators in measuring strength of capital position are the Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Leverage Ratio. Tier 1 Capital consists of common and qualifying preferred stockholders' equity less goodwill. Total Capital consists of Tier 1 Capital, and a portion of the allowance for possible loan losses. Risk- based capital ratios are calculated with reference to risk weighted assets which consists of both on and off balance sheet risks (such as letters of credit and unused lines of credit). The Corporation's Tier 1 Risk Based Capital Ratio was 11.7% at March 31, 1998 compared to 12.1% at December 31, 1997. The Corporation's Total Risk Based Capital Ratio was 12.7% at March 31, 1998 compared to 13.1% at December 31, 1997. These ratios are in excess of the mandated minimum requirements of 4.0% and 8.0% respectively. The Leverage Ratio consists of Tier 1 capital divided by quarterly average assets. At March 31, 1998, the Corporation's Leverage Ratio was 7.8% which exceeded the required minimum Leverage Ratio of 4.0%. Item 3. Quantitative and Qualitative Disclosures About Market Risk A "small business issuer," as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, is not required to provide information under this Item. The Corporation is a small business issuer. PART II - OTHER INFORMATION Item 5. Other Information On April 19, 1998, the Corporation declared a quarterly cash dividend of $0.14 per common share, payable June 1, 1998 to shareholders of record on May 18, 1998. This dividend is the first cash dividend declared by the Corporation since its formation in 1991. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The exhibits to this Form 10-Q are listed in the Index to Exhibits, which immediately follows the signature page to this Form 10-Q. (b) Reports on Form 8-K. The Corporation filed a Report on Form 8-K with the Securities and Exchange Commission on March 13, 1998 reporting under Item 5 the execution of the Agreement and Plan of Merger dated March 2, 1998 among the Corporation, the Bank, HUBCO, Inc. and Hudson United Bank, and related transactions. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY FINANCIAL HOLDING CORPORATION Date: May 15, 1998 By/s/Gerard M. Banmiller Gerard M. Banmiller President & Chief Executive Officer Date: May 15, 1998 By/s/Kevin L. Kutcher Kevin L. Kutcher Treasurer/Chief Financial Officer EXHIBIT INDEX 2.1* Agreement and Plan of Merger, dated as of March 2, 1998, by and between Community Financial Holding Corporation, Community National Bank of New Jersey, HUBCO, Inc., and Hudson United Bank, is incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on March 13, 1998. 2.2* Stock Option Agreement, dated as of March 2, 1998, by and between Community Financial Holding Corporation and HUBCO, Inc., is incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed on March 13, 1998. 3.1.1* Certificate of Incorporation of the Registrant, as amended through February 7, 1991, is incorporated herein by reference to Exhibit 3.1.1 of the Registrant's Registration Statement on Form S-1, No. 33-78696 filed with the Securities and Exchange Commission (the "Registration Statement"). 3.1.2* Certificate of Amendment, dated May 18, 1994, to the Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 3.1.2 of the Registration Statement. 3.2* By-Laws of the Registrant are incorporated herein by reference to Exhibit 3.2 of the Registration Statement. 27.1 Financial Data Schedule at and for the three months ended March 31, 1998. 27.2 Restated Financial Data Schedule at and for the three months ended March 31, 1997. * Previously Filed EX-27.1 2
9 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 10,970,691 0 12,050,000 0 22,392,541 23,705,629 23,872,025 87,755,031 1,059,911 162,808,839 148,643,238 1,612,368 814,847 0 0 0 5,272,180 6,466,206 162,808,839 1,883,389 589,097 135,827 2,608,313 842,837 864,236 1,744,077 105,000 0 1,877,659 209,171 209,171 0 0 165,576 0.16 0.14 5.22 880,000 154,000 0 0 973,991 24,051 4,971 1,059,911 1,059,911 0 0
EX-27.2 3
9 3-MOS DEC-31-1996 JAN-01-1997 MAR-31-1997 8,893,182 0 300,000 0 14,806,496 20,400,175 20,262,524 73,867,238 732,478 122,915,110 110,273,137 902,174 837,913 0 0 0 4,944,870 5,957,016 122,915,110 1,611,292 531,898 33,696 2,176,886 678,887 689,512 1,487,374 75,000 0 1,419,198 207,209 207,209 0 0 140,696 0.14 0.13 5.57 518,000 120,000 0 0 738,353 85,427 4,552 732,478 732,478 0 0
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