<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended .....................................December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEES REQUIRED]
For the transaction period from _________ to __________
Commission File Number: 0-28700
First Home Bancorp Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3423990
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
125 South Broadway
Pennsville, New Jersey 08070
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code:
(609) 678-4400
Securities registered pursuant to Section 12 (b) of the Act:
Not Applicable
Securities registered purusant to Section 12(g) of the Act:
Common Stock (no par value)
-----------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $36,452,000 (1)
Number of shares of Common Stock outstanding as of March 14, 1997 was 2,708,426
shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to Shareholders for the year ended December
31, 1996 are incorporated into Part I and Part II of this form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Shareholders are incorporated into Part III, Items 10-13 of this Form 10-K.
- ------------------------------------
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of Common Stock outstanding, reduced by the number of shares of Common
Stock held by executive officers, directors and shareholders owning in excess of
10% of the registrant's Common Stock multiplied by the closing price for the
Common Stock on the Nasdaq National Market tier of the Nasdaq Stock Market on
March 14, 1997 The information provided shall in no way be construed as an
admission that any person whose holdings are excluded from this figure is an
affiliate of the registrant or that any person whose holdings are included in
this figure is not an affiliate of the registrant and any such admission is
hereby disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
<PAGE>
PART I
Item 1. Business.
Organization
First Home Bancorp Inc. (the "Company") is a New Jersey corporation and
a unitary savings and loan holding company registered under the Home Owners'
Loan Act, as amended ("HOLA"). The Company is the parent holding company of
First Home Savings Bank, F.S.B. (the "Bank"), a federally chartered savings
bank. The Company was organized in February 1996 for the purpose of acquiring
all of the capital stock of the Bank in connection with the reorganization of
the Bank into the holding company form of ownership. The reorganization was
consummated on May 31, 1996. The Company is registered as a holding company with
the Office of Thrift Supervision ("OTS") and is subject to OTS regulation,
examination, supervision, and reporting requirements.
The Bank conducts business from ten offices in Carneys Point, Elmer,
Gibbstown, Newfield, Pennsauken, Penns Grove, Pennsville and Westmont, New
Jersey, and Stanton and Wilmington, Delaware. The Bank also offers around the
clock banking through "HomeLine," a twenty-four hour telephone banking service,
and various automated teller machines. Organized as a New Jersey building and
loan association in 1928 under the name Penns Grove Building and Loan
Association, the Bank changed its name to First Savings and Loan Association of
Penns Grove in 1956 when it obtained federal insurance of accounts. On April 15,
1987, it converted to the stock form of organization and in June, 1988 changed
its name to First Home Savings Bank, S.L.A. On July 1, 1992, it acquired
Fidelity Mutual Savings and Loan Association of Westmont, New Jersey ("Fidelity
Mutual") through a conversion merger of Fidelity Mutual with and into the Bank.
The acquisition was accounted for as a purchase and resulted in the acquisition
of $79.9 million in assets and liabilities of $79.4 million. On June 25, 1993,
the Bank merged with and into White Eagle Federal Savings Bank ("White Eagle"),
a federally chartered savings bank organized in 1911 operating two offices in
Delaware with approximately $31 million in assets. As a result of the merger
with White Eagle, the Bank became a federally chartered savings bank and changed
its name to First Home Savings Bank, F.S.B. The transaction was accounted for as
a pooling-of-interests. On January 23, 1995, two retail-banking offices were
acquired and deposits of $15.9 million were assumed. The transaction was
accounted for as a purchase transaction.
Substantially all of the Company's consolidated revenues are derived
from the operations of the Bank with the Bank representing substantially all of
the Company's consolidated assets and liabilities at December 31, 1996. At
December 31, 1996, the Company had total assets, deposits and net worth of
approximately $498.4 million, $290.3 million and $32.6 million, respectively.
The Fidelity Mutual acquisition and the acquisition of the two
retail-banking offices were accounted for as purchases. As a result, the assets
and liabilities of Fidelity Mutual and the two retail-banking offices were
recorded at their fair market values on the books of the Bank at the time of the
acquisitions and the historical results of operations prior to the acquisitions
were not adjusted.
The Bank's principal business consists of attracting deposits from the
general public through its offices and investing such deposits, together with
funds from borrowings and operations, primarily in permanent loans (including
construction loans) secured by single-family residential real estate, consumer
loans and, to a lesser extent, loans secured by commercial real estate. At
present, the Bank also maintains a portfolio of mortgage-backed securities
("MBS") and other permissible investments, and, through its service corporation,
engages in the sale of insurance annuities and other activities.
The Company's and Bank's executive offices are located at 125 South
Broadway, Pennsville, N. J. 08070 and their phone number is (609) 678-4400.
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Lending Activities
General
Lending operations include the origination of long-term fixed-rate and
adjustable-rate loans secured by mortgages on residential real estate, consumer
loans and, to a lesser extent, commercial real estate loans.
Loan Portfolio Composition
At December 31, 1996, the net loan portfolio totaled $258.9 million,
representing 51.9% of the Company's total assets. Gross loans amounted to $265.7
million, of which $225.3 million were mortgage loans, comprised of $208.1
million in residential mortgage loans and construction loans and $17.2 million
in commercial real estate loans. In addition, $38.4 million was invested in
consumer loans and $2.0 million in commercial business loans at December 31,
1996.
The following table sets forth the composition of the loan portfolio by
type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
--------------- ---------------- -------------- --------------- ---------------
(dollars in thousands)
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential property $201,269 75.7% $203,375 77.4% $190,499 77.2% $161,507 72.8% $137,599 74.2%
Loans held for sale 676 .3 418 .2 288 .1 16,967 7.6 4,833 2.6
Construction 3,824 1.4 3,258 1.2 3,707 1.5 5,449 2.5 4,568 2.5
FHA and VA loans 2,304 .9 2,890 1.1 2,277 .9 2,711 1.2 3,190 1.7
Commercial 17,214 6.5 15,671 6.0 16,398 6.7 14,476 6.5 14,411 7.8
---------- ----- ---------- --- ---------- ----- ---------- ----- ---------- -----
Total real estate loans 225,287 84.8 225,612 85.9 213,169 86.4 201,110 90.6 164,601 88.8
--------- ---- --------- ---- --------- ---- --------- ---- --------- ----
Other commercial loans 1,948 .7 1,233 .5 928 .4 705 .3 724 .4
--------- ---- --------- ---- --------- ---- --------- ---- --------- ----
Consumer loans:
Mobile home loans 6,606 2.5 7,805 3.0 9,705 4.0 475 .2 450 .2
Equity 23,472 8.8 20,307 7.7 17,060 6.9 14,416 6.5 14,294 7.7
Automobile loans 4,631 1.8 4,088 1.6 3,017 1.2 2,933 1.3 3,348 1.8
Savings account loans 1,900 .7 1,712 .6 1,573 .6 1,573 .7 1,491 .8
Other loans 1,847 .7 1,827 .7 1,281 .5 774 .4 558 .3
--------- ---- --------- ---- --------- ---- --------- ---- --------- ----
Total consumer loans 38,456 14.5 35,739 13.6 32,636 13.2 20,171 9.1 20,141 10.8
--------- ---- --------- ---- --------- ---- --------- ---- --------- ----
Total loans receivable 265,691 100.0% 262,584 100.0% 246,733 100.0% 221,986 100.0% 185,466 100.0%
===== ===== ===== ===== =====
Less:
Loans in process (1,222) (1,681) (1,114) (2,065) (1,740)
Net deferred loan fees,
premiums and discounts (1,800) (2,123) (2,136) (1,214) (1,044)
Allowance for credit losses (3,760) (3,563) (3,315) (2,663) (2,063)
---------- --------- --------- --------- ---------
Total loans receivable, net $258,909 $255,217 $240,168 $216,044 $180,619
======== ======== ======== ======== ========
</TABLE>
Contractual Maturities
The following table reflects the scheduled contractual maturities of
the loan portfolio by type of loan at December 31, 1996. Loans with adjustable
or variable rates are included in the period in which they mature. Contractual
maturities of loans do not reflect anticipated repayments of the loan portfolio.
The average life of the loan is generally substantially less than the
contractual life because of early loan repayments, loan prepayments and
due-on-sale clauses in the mortgage contract. The table does not include
non-performing loans, unamortized premiums, discounts and fees.
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<TABLE>
<CAPTION>
Balance at Principal Repayments Contractually Due in Year(s) Ending December 31,
December 31, ------------------------------------------------------------------------
2000 2002 2007 2012 and
1996 1997 1998 1999 2001 2006 2011 Thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans
Adjustable rate $ 72,188 $ 4,457 $ 1,694 $ 1,906 $ 4,184 $11,805 $14,363 $33,779
Fixed rate 131,672 8,265 8,696 9,477 19,414 47,040 27,445 11,335
Consumer loans
Adjustable rate 3,993 30 26 27 52 128 126 3,604
Fixed rate 34,158 6,280 5,207 4,325 6,117 8,411 1,685 2,133
Commercial loans
Adjustable rate 9,893 1,760 436 445 885 2,278 2,208 1,881
Fixed rate 8,677 1,715 866 885 1,530 2,416 1,077 188
-------- ------- ------- ------- ------- ------- ------- -------
Total loans $260,581 $22,507 $16,925 $17,065 $32,182 $72,078 $46,904 $52,920
======== ======= ======= ======= ======= ======= ======= =======
</TABLE>
Of the $238.1 million of total loans due after one year, $158.3 million
are fixed rate loans and $79.8 million are adjustable rate loans.
Real Estate Lending
Residential Loans. The primary lending activity is the origination of
conventional loans to enable borrowers to purchase, refinance or construct
single-family homes. Mortgage loans originated are generally long-term loans
that amortize on a monthly basis, with principal and interest payments due each
month. Generally, mortgage loans are written under terms, conditions and
documentation which permit their sale into the secondary market to FHLMC, FNMA
and other investors.
In response to the objective to shorten the period for assets to
reprice, adjustable-rate mortgage loans are originated which reprice every one
or three years. However, to enhance the yield and to remain competitive, loans
are originated at fixed interest rates at terms from five to thirty years fixed
rate. Fixed-rate residential loans granted for terms of thirty years are
generally originated with the intent to sell in the secondary market. These
loans are generally classified as loans held for sale. Generally, after sale the
loans continue to be serviced by the Bank. Adjustable rate residential mortgage
loans amounted to approximately $72.2 million, or 34.7% of the portfolio of
residential mortgage loans at December 31, 1996.
Currently, adjustable-rate residential mortgage loans are offered that
have terms of thirty years and interest rates which adjust (up or down) every
one or three years, with a maximum adjustment of two percentage points per
adjustment period and six percentage points over the life of the loan. The index
used to calculate the interest rate adjustment is the weekly average yield on
U.S. Treasury securities adjusted to a constant maturity of one or three years
as made available in Federal Reserve Bulletin (H15).
Substantially, all fixed-rate residential mortgages include so-called
"due on sale" clauses, which are provisions giving the Bank the right to declare
a loan immediately due and payable in the event, among other things, the
borrower sells or otherwise disposes of the real property. The Bank utilizes the
due on sale clause as a means of accelerating the rate of early repayment of
loans.
The Bank generally limits the maximum loan-to-value ratio on
residential real estate loans to 90%. However, if private mortgage insurance is
obtained, up to 95% of the appraised value of the real estate securing the loan
could be lent.
Generally, title insurance policies are obtained on all real estate
loans. Borrowers must also obtain hazard insurance prior to closing. Borrowers
may be required to advance funds on a monthly basis together with each payment
of principal and interest to an escrow account for the payment of real estate
taxes and hazard insurance premiums.
Construction Loans. On a limited basis, residential construction loans
are granted. These loans are generally made on a non-speculative basis to the
owner occupants of the real estate, have terms of no longer than ten months and
provide for fixed or floating interest rates. All residential construction loans
are either repaid in full or converted to permanent loans when the construction
is completed. On a limited basis, commercial construction loans are also
granted.
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These loans are not actively solicited and are made on a case-by-case basis to
existing customers. At December 31, 1996 construction loans comprised 1.4% of
the total loan portfolio.
Commercial Real Estate Loans. While the focus of lending is on
single-family residential real estate loans, on a limited basis, loans secured
by mortgages on commercial real estate are granted. These loans are not actively
solicited and are made on a case-by-case basis. At December 31, 1996 commercial
real estate loans totaled $17.2 million or 6.5% of the total loan portfolio.
Collateral securing these loans include retail businesses, apartment dwellings
and other commercial type security. The loans are offered for various
maturities, interest rates and fees.
Commercial real estate loans generally involve a greater amount of risk
than residential mortgage loans. Typically such loans involve lending
substantially larger amounts to single borrowers or groups of related borrowers
than residential loans and the repayment experience on the loan generally
depends on the cash flow generated by the property securing the loan. In
determining loan terms, including interest rates and origination fees,
management considers both current market conditions and its analysis of the risk
associated with the particular project. The underwriting policies with respect
to commercial real estate are designed to help assure that a project's estimated
cash flow and applicable guarantees are sufficient to service the debt and that
the collateral provides adequate coverage in the event of a default. Generally,
loan-to-value ratios on commercial real estate do not exceed 80%. All properties
are appraised by independent professional appraisers and are reviewed by an
officer of the Bank.
Consumer Loans
Consumer lending includes lines of credit, equity and home improvement
loans, automobile loans, savings account loans, and other consumer loans
including mobile home loans and secured and unsecured personal loans. Equity
lines of credit require principal payments of $100 per month or 1/180 of the
remaining balance, whichever is greater. Home equity loans generally have terms
of ten years or less while all other consumer loans have terms of five years or
less. The interest rate on equity lines of credit float monthly based on the
prime rate. Other consumer loans carry fixed interest rates that are generally
higher than the rates offered on mortgage loans. At December 31, 1996, the
consumer loan portfolio was $38.5 million, or 14.5% of total loans.
During 1994, $10 million in fixed rate, seasoned consumer loans were
purchased from the Resolution Trust Corporation. The loans had initial terms of
15 and 20 years and are collateralized by mobile homes located in various
states. Collection and other servicing activity is performed by a third party.
The outstanding balance as of December 31, 1996 was $5.8 million.
Commercial Business Loans
On a limited basis, loans for commercial business purposes are granted.
These loans are not actively solicited and are made on a case-by-case basis to
existing customers. At December 31, 1996, commercial business loans totaled $1.9
million and represented .7% of the loan portfolio. The loans are both secured
and unsecured and have various rates and terms. The loans are generally subject
to monthly repricing or are made on a short-term demand basis. Repricing is
based on the prime rate plus a margin.
Loan Origination, Purchase and Sale
Residential real estate loans are generally originated in conformity
with standard underwriting criteria to assure maximum eligibility for possible
resale in the secondary market. Loan originations are developed from a number of
sources. Residential loans in the local market area are generated primarily from
business development officers, advertising, walk-in customers and referrals from
local real estate brokers and existing customers. Consumer loan originations are
currently being generated primarily through the branch network and advertising.
The mortgage loan approval process assesses the borrower's ability to
repay the loan, and the adequacy of the value of the property that will secure
the loan. Residential real estate loans are approved by the Executive Vice
President of Lending Operations (EVP-LO) within certain limits. Loans that
exceed $300,000 are approved by the Bank's Loan Committee. The Loan Committee
consists of four members of the Bank's Board of Directors. Loans that exceed
$500,000 require approval by the Bank's Board of Directors. Major commercial
mortgage loans are reviewed by and require the approval of the Bank's Board of
Directors.
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Consumer loans and commercial business loans are underwritten on the
basis of the borrower's credit history and an analysis of the borrower's ability
to repay the loan and the value of the collateral, if any. Consumer loans up to
$100,000 must be approved by the EVP-LO and the Consumer Loan Manager. Consumer
loans that exceed $100,000 are approved by the Bank's Loan Committee. Commercial
business loans up to $100,000 must be approved by the EVP-LO, Consumer Loan
Manager and President. Commercial business loans in excess of $100,000 and up to
$250,000 are approved by the Bank's Loan Committee.
Loans are also purchased from financial institutions and other third
parties. Generally, the loans are collateralized by single-family residential
properties and are located in various states. The Bank purchased residential
loans totaling $6.1 million, $22.2 million and $23.2 million, during the years
ended December 31, 1996, 1995 and 1994, respectively. In some instances,
collection and other servicing activity is performed by a third party servicer.
To reduce its portfolio of fixed-rate mortgages, provide servicing fee
income and additional cash to continue its lending program, residential loans
are sold for cash directly to FHLMC, FNMA or other investors. The Bank retains
as a servicing fee a portion of the interest paid by the borrower on loans sold.
Servicing responsibilities include loan payment collections and other loan
related servicing duties. At December 31, 1996, approximately $64.9 million in
loans were serviced for others.
The following table indicates mortgage loan origination, purchase,
repayment and sale activity during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at beginning of period $262,584 $246,733 $221,986 $185,466 $149,794
Loans originated:
Construction (reported gross) 6,149 5,729 6,989 7,813 5,476
Loans on existing property 31,068 20,473 45,770 58,300 56,445
Commercial loans 5,885 2,588 3,329 3,880 3,066
Consumer and other loans 15,994 14,965 12,390 9,439 10,545
-------- -------- -------- -------- --------
Total loans originated 59,096 43,755 68,478 79,432 75,532
Loans purchased (net) 6,121 22,227 23,239 36,006 5,337
-------- -------- -------- -------- --------
Total loans originated and purchased 65,217 65,982 91,717 115,438 80,869
Loans acquired through acquisition --- --- --- --- 26,835
Loans sold (8,588) (6,132) (18,317) (26,327) (16,067)
Principal repayments (52,101) (43,317) (49,183) (52,952) (55,500)
Other (1,421) (682) 530 361 (465)
-------- -------- -------- -------- --------
Net loan activity 3,107 15,851 24,747 36,520 35,672
-------- -------- -------- -------- --------
Total gross loans receivable at end of period $265,691 $262,584 $246,733 $221,986 $185,466
======== ======== ======== ======== ========
</TABLE>
Geographic Lending Area
The Bank has authority to lend anywhere in the United States. Although
it principally limits loan origination activities to southern New Jersey and the
state of Delaware, it purchases loans which are collateralized by single-family
residential properties located in various states from financial institutions and
other third parties. At December 31, 1996, approximately 74% of mortgage loans
receivable were collateralized by property located in New Jersey and Delaware.
All consumer and commercial business loans are located in the Bank's
immediate market area except the mobile home loans purchased in 1994. The mobile
home loans with outstanding balances totaling $5.8 million at December 31, 1996
are located in various states throughout the U.S.
Loan Origination and Other Fees
Fees are received both for the origination of loans and for making
commitments to originate residential loans and MBS. Fees are also received with
respect to residential mortgage loans that the Bank services, including late
charges, and
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credit life insurance premiums. Loan origination, commitment fees and discounts
vary with the volume and type of loans and commitments made and purchased and
with competitive and economic conditions. Generally, these fees are deferred and
recognized as yield adjustments to the related loans.
In the lending process, loan fees are charged which are calculated as a
percentage of the amount borrowed. The fees received in connection with the
origination of residential real estate loans generally do not exceed 3%. An
additional 1% is charged for providing the financing in connection with the
origination of a construction loan. All loan fees in excess of loan origination
costs are deferred and amortized into income over the estimated life of the
related loans. Net deferred fees, premiums and discounts amounted to $1.8
million, $2.1 million and $2.1 million as of December 31, 1996, 1995 and 1994,
respectively.
Servicing fees relating to residential mortgage loans sold amounted to
$214,000, $231,000, and $194,000, for the years ended December 31, 1996, 1995
and 1994, respectively.
Asset Quality
When a required payment on a loan is more than fifteen days late, a
late charge is assessed. If the late payment is not received within fifteen days
after it is due, the borrower is contacted by mail and payment is requested. In
most cases, the payment is made by the borrower as a result of this contact. If
the delinquency continues, the borrower is contacted. In certain instances, the
Bank may modify the loan or grant a limited moratorium on loan payments to
enable the borrower to reorganize his financial affairs.
If a mortgage loan continues in a delinquent status for ninety days or
more, the Bank generally will initiate appropriate legal action, including
commencing foreclosure proceedings or accepting from the borrower a voluntary
deed in lieu of foreclosure. If a foreclosure action is instituted and the loan
is not reinstated or paid-in-full, the property is sold at a judicial sale at
which, in some instances, the Bank is the buyer. The acquired property is then
listed in the "real estate owned" account until it is sold. Such sales may be
financed with a "loan to facilitate" which usually involves more favorable
borrowing terms than normally permitted by applicable regulations or the Bank's
loan underwriting criteria. The collection process for loans not secured by real
estate may involve seizure and liquidation of collateral, if any.
Generally, loans are placed on a "non-accrual" basis when contractually
past due over ninety days. When a loan is placed on a non-accrual basis, any
accrued and unpaid interest on such loan is reversed and charged against current
income. Loans are restored to accrual status only if the borrower has
demonstrated the ability to make future payments of principal and interest.
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Real estate owned is carried at the lower of cost (carrying value at
the date of acquisition) or estimated fair value less estimated cost to sell.
Subsequent costs directly related to the completion of construction or
improvement of the real estate are capitalized to the extent realizable. Gains
on the sale of real estate are recognized upon disposition of the property to
the extent allowable based on accounting requirements. Losses on such sales are
charged to operations as incurred. Carrying costs, such as maintenance, interest
and taxes are charged to operations as incurred.
Non-performing assets amounted to $4.2 million, $3.4 million and $4.9
million at December 31, 1996, 1995 and 1994, respectively. Non-performing assets
as a percentage of total assets was 0.8%, 0.8% and 1.3% at December 31, 1996,
1995 and 1994, respectively. The increase from 1995 to 1996 was attributable to
an increase in delinquencies on loans serviced by others from $754,000 in 1995
to $1,122,000 in 1996 and an increase in real estate owned from $426,000 in 1995
to $941,220 in 1996. The decrease from 1994 to 1995 was attributable to
decreases in delinquencies on loans serviced by others from $1,074,000 in 1994
to $754,000 in 1995. Of the $1,122,000 in delinquent loans that are serviced by
others, $269,000 have FHA insurance or a VA guaranty. The liquidation of these
assets is dependent upon the economy, demand for real estate and interest rates.
On January 1, 1995, FASB Statement 114, "Accounting by Creditors for
Impairment of a Loan" (FAS 114) was adopted which changed the in-substance
foreclosure rules. In-substance foreclosed loans are now classified as loans and
stated at the lower of cost or fair value. Data for 1992 through 1994 has been
restated to conform with the 1995 and 1996 presentations.
The following table sets forth for the periods indicated certain
information regarding non-performing assets. At December 31, 1995, one past due
loan of more than ninety days with a balance of $109,000 was accruing interest.
The loan was paying in accordance with an agreement with the bankruptcy court.
No loans were past due and accruing interest at the other periods shown.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Residential $2,316 $2,308 $3,732 $2,870 $2,532
Commercial 592 352 731 913 1,982
Consumer 305 261 108 81 17
-------- -------- -------- --------- ---------
Total non-accrual loans 3,213 2,921 4,571 3,864 4,531
Real estate owned 941 481 303 551 934
Other repossessed assets 7 6 --- 23 296
---------- ---------- ---------- --------- --------
Total non-performing assets $4,161 $3,408 $4,874 $4,438 $5,761
====== ====== ====== ====== ======
Total non-performing assets as a percent of
total assets 0.8% 0.8% 1.3% 1.3% 1.8%
====== ====== ====== ====== ======
</TABLE>
A committee comprised of the President, EVP-LO, Chief Financial
Officer, Investment Officer, and Treasurer of the Bank monitors the quality of
its assets on a regular basis. Under OTS regulations, all assets are subject to
a classification system that has three categories: (I) Substandard,
(ii)Doubtful, and (iii) Loss. An asset may fall within more than one category
and a portion of the asset may remain unclassified.
Assets classified Substandard are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Assets so classified have a well-defined weakness or weaknesses. They are
characterized by the distinct possibility that the Company may sustain some loss
if the deficiencies are not corrected.
Assets classified Doubtful have all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Assets classified Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. This classification does not mean that an asset has
absolutely no recovery or salvage value, but, rather, that it is not practical
or desirable to defer writing off a basically worthless asset even though
partial recovery may be effected in the future.
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The regulation also established a special mention category. Assets
included in this category do not currently expose the Bank to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. As of December 31,
1996, $2.1 million in residential real estate loans was categorized as special
mention.
The Bank is required to classify its assets on a regular basis. In
addition, in connection with examinations by the OTS, examiners have the
authority to identify problem assets and, if appropriate, classify them. When
assets are classified as Substandard or Doubtful, the Bank is required to
establish prudent general allowances for loan losses. When assets are classified
as Loss, the Bank is required to establish specific allowances for loan losses
in the amount of 100 percent of the portion of the asset classified Loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified Substandard or Doubtful may be included in
determining an institution's risk-based capital, while specific valuation
allowances for loan losses do not qualify as risk-based capital. The OTS
District Director of an insured institution has the authority to approve,
disapprove or modify any classifications of assets made pursuant to the
regulation and any amounts of allowances for loan losses established by insured
institutions or required by examiners pursuant to the regulation.
The following table sets forth information regarding assets classified
as Substandard as of December 31 for each of the following years. No assets were
classified as Doubtful and any asset classified as Loss was charged-off.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate owned $ 941 $ 481 $ 303 $ 551 $ 934
Other repossessed assets 7 6 --- 23 296
Commercial real estate loans 592 352 731 913 1,982
Residential mortgage loans 2,316 2,308 3,732 2,870 2,532
Consumer loans 305 261 108 81 17
Securities below investment grade --- --- --- --- 298
------ ------ ------ ------ ------
Total classified assets $4,161 $3,408 $4,874 $4,438 $6,059
====== ====== ====== ====== ======
Ratio of classified assets to total assets 0.8% 0.8% 1.3% 1.3% 1.9%
====== ====== ====== ====== ======
</TABLE>
The following is a description of classified assets:
Real Estate Owned and Other Repossessed Assets. At December 31, 1996,
11 real estate owned properties were classified as Substandard. The properties
are for sale and are either vacant or rented. The other repossessed asset is an
automobile.
Loans. At December 31, 1996, eighty-nine residential, commercial and
consumer loans classified were as Substandard.
Allowance for Credit Losses. Allowances are provided for specific loans
when losses are probable and can be estimated. When this occurs, management
considers the remaining principal balance and estimated net realizable value of
the property collateralizing the loan. Current and future operating and/or sales
conditions are considered. These estimates are susceptible to changes that could
result in further adjustment to results of operations. Recovery of the carrying
value of such loans is dependent to a great extent, on economic, operating and
other conditions that may be beyond management's control.
Allowance for credit losses is established based on the perceived risk
of the loan portfolio. The allowance is reviewed and adjusted quarterly based
upon a number of factors, including asset classifications, economic trends,
industry experience, geographic concentrations, estimated collateral values,
management's assessment of credit risk inherent in the portfolio, historical
loss experience and underwriting practices. If certain real estate markets
weaken, including New Jersey and Delaware, increases in the allowance may be
required in future periods.
8
<PAGE>
The table shown below reflects the changes in the allowance for credit
losses for the years indicated.
<TABLE>
<CAPTION>
Real Estate Mortgage
--------------------
Residential Commercial Other Total
----------- ---------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $1,375,977 $ 869,000 $ 418,000 $2,662,977
Additions charged to operations 215,680 24,315 310,005 550,000
Recoveries 2,179 105,685 38,420 146,284
Losses charged (496) (15,000) (28,425) (43,921)
--------------- ------------- ------------- -------------
Balance at December 31, 1994 1,593,340 984,000 738,000 3,315,340
Additions charged to operations 50,000 50,000 500,000 600,000
Recoveries 7,169 39,829 180,419 227,417
Losses charged (165,527) --- (414,900) (580,427)
------------ ----------------- ------------ ------------
Balance at December 31, 1995 1,484,982 1,073,829 1,003,519 3,562,330
Additions charged to operations 100,000 75,000 225,000 400,000
Recoveries 21,478 58,820 75,387 155,685
Losses charged (136,401) (12,761) (208,368) (357,530)
------------ ------------- ------------ ------------
Balance at December 31, 1996 $1,470,059 $1,194,888 $1,095,538 $3,760,485
========== ========== ========== ==========
</TABLE>
Net charge-offs from loans and foreclosed real estate as a percentage
of average loans outstanding were as follows for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net charge-offs (recoveries) from loans $201,845 $353,010 $(102,363)
Net charge-offs (recoveries) from foreclosed real estate 90,007 (65,193) 77,356
-------- -------- ----------
Total $291,852 $287,817 $ (25,007)
======== ======== ==========
% of average loans outstanding .11% .12% (.01)%
=== === ====
</TABLE>
The table below summarizes the general valuation allowance for loans by
asset classification and as a percentage of those portfolios for the years
indicated.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ------------------------- -----------------------
Percentage of Percentage of Percentage of
Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans $1,470,059 .71% $1,484,982 .71% $1,593,340 .81%
Commercial real estate loans 1,194,888 6.94 1,073,829 6.85 984,000 6.00
Other loans 1,095,538 2.85 1,003,519 2.71 738,000 2.20
----------- ---- ----------- ---- ------------ ----
Total $3,760,485 1.42% $3,562,330 1.36% $3,315,340 1.34%
========== ==== ========== ==== ========== ====
</TABLE>
For further discussion and summary of loss provisions see "Management's
Discussion and Analysis, Results of Operations -- Allowance and Provision for
Credit Losses" and Note 6 to the Consolidated Financial Statements.
9
<PAGE>
Investment Securities Activities
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets and is also permitted to make other approved security
investments. See "Regulation-Liquidity" and "Management's Discussion and
Analysis of Financial Condition--Liquidity, Cash Flows and Committed
Resources."
On December 31, 1993, Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115) issued by the Financial
Accounting Standards Board was adopted. For additional information see Notes 1,
2, 3, and 4 to the Consolidated Financial Statements.
In accordance with FAS 115, investments are classified into three
categories; those held-to-maturity and reported at amortized cost, for which the
Company has the positive intent and ability to hold-to-maturity; those
classified as available-for-sale and reported at fair value with unrealized
gains and losses, net of taxes, reported as a separate component of
shareholders' equity; and those classified as trading securities and reported at
fair value with unrealized gains and losses included in earnings.
The table below sets forth the composition of the investment securities
portfolio at amortized cost for the years indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Held to maturity:
U.S. Treasury note $ --- $ --- $ 1,000
U.S. Government agencies --- --- 22,000
Corporate notes --- --- 8,936
Tax exempt obligations 2,321 517 721
Federal Home Loan Bank stock 7,376 5,317 4,657
------------ ------------ ----------
Subtotal 9,697 5,834 37,314
------------ ------------ ----------
Held for trading:
Mutual fund 60 57 52
Common stock --- --- 404
------------ ------------ ----------
Subtotal 60 5 456
------------ ------------ ----------
Available-for-sale:
U.S. Government agencies 17,976 19,970 ---
Corporate notes 4,336 6,310 ---
Preferred stock 2,548 2,097 2,097
------------ ------------ ----------
Subtotal 24,860 28,377 2,097
------------ ------------ ----------
Total $34,617 $34,268 $39,867
============ ============ ===========
</TABLE>
The investment securities portfolio at December 31, 1996 categorized by
maturity is as follows:
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
----------- -------------
(dollars in thousands)
<S> <C> <C>
No maturity $ 9,984 6.59%
Due in one year or less 3,046 5.20%
Due after one year through five years 21,587 6.74%
--------
Total $34,617
=======
</TABLE>
10
<PAGE>
The following table sets forth the purchase, transfer, maturity
activity and repayments at amortized cost of the investment securities during
1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Investment securities at beginning of period $ 34,268 $ 39,867 $ 23,050
Purchases
U.S. Government agencies 9,008 10,965 22,000
Corporate notes --- 2,934 ---
Tax exempt obligations 2,321 517 721
Federal Home Loan Bank stock 2,059 660 706
Mutual fund 3 5 ---
Common stock 9,369 1,812 10,258
Preferred stock 1,500 --- 257
------- ------- -------
Total purchases 24,260 16,893 33,942
------- ------- -------
Sales
Mutual fund --- --- 25
Common stock 9,369 2,216 10,453
------- ------- -------
Total sales 9,369 2,216 10,478
------- ------- -------
Maturities
U.S. Treasury note --- 1,000 ---
U.S. Government agencies 10,979 13,000 ---
Corporate notes 1,997 5,555 4,230
Tax exempt obligations 517 721 1,538
Certificates of deposit --- --- 879
Preferred stock 1,049 --- ---
------- ------- -------
Total maturities 14,542 20,276 6,647
------- ------- -------
Investment securities at end of period $34,617 $34,268 $39,867
======= ======= =======
</TABLE>
Mortgage-Backed Securities Activities
A substantial part of the Bank's business involves investments in MBS.
The Bank invests in MBS to supplement local loan originations as well as to
reduce interest rate risk.
On December 31, 1993, FAS 115 issued by the Financial Accounting
Standards Board was adopted. The MBS portfolio is classified as either
held-to-maturity or available-for-sale. For additional information see Notes 1
and 5 to the Consolidated Financial Statements.
11
<PAGE>
The following table sets forth the composition of the mortgage-backed
securities portfolio at amortized cost by category.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Held to maturity:
FNMA pass-through certificates $ --- $ --- $ 2,747
FHLMC pass-through certificates --- --- 6,725
GNMA pass-through certificates --- --- 9,321
Non-agency pass-through certificates 6,143 7,320 4,195
REMIC 91,248 60,675 11,529
-------- -------- -------
Subtotal 97,391 67,995 34,517
-------- -------- -------
Available-for-sale:
FNMA pass-through certificates 1,863 2,341 ---
FHLMC pass-through certificates 4,342 5,574 ---
GNMA pass-through certificates 6,070 7,775 ---
REMIC 80,416 63,633 64,900
-------- -------- -------
Subtotal 92,691 79,323 64,900
-------- -------- -------
Total $190,082 $147,318 $99,417
======== ======== =======
</TABLE>
The mortgage-backed securities portfolio at December 31, 1996
categorized by contractual maturity is as follows:
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
---- -------------
(dollars in thousands)
<S> <C> <C>
Due in one year or less $ 674 6.73%
Due after one year through five years 2,553 7.73%
Due after five year through ten years 2,241 9.85%
Due after ten years 184,614 6.95%
--------
Total $190,082
========
</TABLE>
Actual maturities will differ from contractual maturities due to
prepayments.
The following table sets forth the purchase, transfer, sales activity and
repayments at amortized cost of the MBS during 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
MBS at beginning of period $147,318 $ 99,417 $ 95,702
Purchases of REMIC 54,590 54,841 25,529
Sales of REMIC (3,612) --- ---
Principal repayments (8,214) (6,940) (21,814)
-------- -------- ---------
MBS at end of period $190,082 $147,318 $ 99,417
======== ======== =========
</TABLE>
12
<PAGE>
Deposit and Borrowing Activities
General
Deposits are the principal source of funds for lending and other
investment purposes. Deposits are generated through the ten retail banking
offices, and to a lesser extent through brokers. In addition to deposits, funds
are derived from loan sales and repayments, borrowings, and from operations.
Loan repayments are a relatively stable source of funds, while deposit inflows
are significantly influenced by general interest rates and market conditions.
The Bank may borrow funds from the FHLB of New York and other sources.
Borrowings may be used on a short term basis to compensate for reductions in
deposits or other sources of funds, as well as on a long-term basis to support
expanded lending activities or other business purposes. Funds can also be
derived from the sale of loans and investment or mortgage-backed securities
available-for-sale.
Deposits
The Bank offers a wide variety of deposit accounts which are designed
to attract both short-term and long-term deposits. These deposits are obtained
primarily from residents of southern New Jersey and Delaware. Brokers are also
utilized to solicit deposits outside the market area. Generally, a fee of
one-quarter percent is paid to brokers for these accounts. The types of accounts
currently offered, include regular passbook and club accounts, interest-bearing
and non-interest-bearing NOW accounts, commercial accounts, money market deposit
accounts, fixed-rate certificate accounts with maturities ranging from three
months to sixty months and negotiated rate Jumbo certificates. Included among
these deposit products are Individual Retirement Accounts.
Retail fixed term, fixed rate certificates are the primary source of
deposits and at December 31, 1996 represented approximately 46.4% of deposits.
At December 31, 1996, the deposit base contained $25.0 million in 12 month,
$23.1 million in 24 month, and $19.9 million in six month, fixed term fixed rate
retail certificates, and represent 18.5%, 17.2%, and 14.8%, respectively, of
total retail certificates. Included in the 24 month certificate total is $21.6
million in Rate Bumper certificates in which the depositor may elect once during
the term of the certificate to increase the rate on his certificate to the
current rate offered on 24 month certificates.
Savings account interest rates are evaluated on an ongoing basis.
Deposit activity and interest rate movements and interest rates paid by
competitors are examined and evaluated weekly.
The following table sets forth information relating to deposit flows
during the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net increase in deposits before interest credited $12,332 $23,213 $ 6,313
Interest credited 7,790 7,854 5,468
------- ------- -------
Net increase in deposits $20,122 $31,067 $11,781
======= ======= =======
</TABLE>
The substantial increase during the year ended December 31, 1995
includes deposits assumed totaling $15,924,000 related to the acquisition of two
retail-banking offices in January 1995.
13
<PAGE>
The following table sets forth the amount and percentage of total
deposits for each type of deposit offered as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
-------------------- ------------------------ --------------------
Amount % Amount % Amount %
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Account Type
Savings and club accounts $ 34,541 11.9% $ 40,043 14.8% $ 45,301 19.0%
NOW and commercial accounts 34,072 11.8 33,335 12.4 29,215 12.2
Money market and other accounts 51,407 17.7 41,365 15.3 31,069 13.0
Retail certificates of deposit 134,631 46.41 27,635 47.3 99,928 41.8
Jumbo certificates of deposit 35,268 12.2 27,589 10.2 33,383 14.0
-------- ------ -------- ----- -------- -----
Total deposits $289,919 100.0% $269,967 100.0% $238,896 100.0%
======== ====== ======== ===== ======== =====
</TABLE>
The following table presents by various interest rate categories, the
amount of retail certificate accounts at December 31, 1996 and 1995 and the
amount of retail certificates accounts at December 31, 1996 maturing within one
year, two years, three years and after three years.
<TABLE>
<CAPTION>
Amounts at December 31, 1996 Maturing
-------------------------------------
At December 31, Within Within Within After
--------------- one two three three
1995 1996 year years years years
---- ---- ---- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Retail certificate accounts:
2.001- 4.00% $ 233 $ 78 $ 66 $ -- $ 12 $ --
4.001- 6.00% 98,337 120,642 82,107 27,726 6,353 4,456
6.001- 8.00% 28,853 13,719 5,939 887 2,205 4,688
8.001-10.00% 211 192 179 13 -- --
-------- -------- -------- -------- -------- --------
Total certificate accounts $127,634 $134,631 $ 88,291 $ 28,626 $ 8,570 $ 9,144
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents by various interest rate categories, the
amount of Jumbo certificates at December 31, 1996 and 1995 and the amount of
Jumbo certificate at December 31, 1996 maturing within one year, two years,
three years and after three years.
<TABLE>
<CAPTION>
Amounts at December 31, 1996 Maturing
-------------------------------------
At December 31, Within Within Within After
--------------- one two three three
1995 1996 year years years years
---- ---- ---- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Jumbo certificate accounts:
2.001-4.00% $ 99 $ --- $ --- $ --- $ --- $ ---
4.001-6.00% 23,995 33,783 24,562 7,961 867 393
6.001-8.00% 3,495 1,485 194 398 517 376
-------- --------- ---------- --------- --------- -------
Total certificate accounts $27,589 $35,268 $24,756 $ 8,359 $ 1,384 $ 769
======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
The following table presents certain information concerning deposit
accounts at December 31, 1996, including the weighted average rate of such
accounts and the scheduled quarterly maturities or repricing of the certificate
accounts.
<TABLE>
<CAPTION>
Weighed
% of Average
Total Nominal
Amount Deposits Rates
------ -------- -----
(dollars in thousands)
<S> <C> <C> <C>
Savings and club accounts $ 34,541 11.9% 2.77%
NOW 26,477 9.2 1.54
Money market and other accounts 51,407 17.7 4.05
Non-interest bearing accounts 7,595 2.6 ---
--------- ----- ----
Total 120,020 41.4 2.87
--------- ----- ----
Certificate accounts maturing by quarter:
March 31, 1997 40,743 14.0 5.18
June 30, 1997 37,688 13.0 5.34
September 30, 1997 19,673 6.8 5.49
December 31, 1997 14,943 5.1 5.52
March 31, 1998 12,930 4.5 5.52
June 30, 1998 9,535 3.3 5.53
September 30, 1998 9,116 3.1 5.48
December 31, 1998 5,405 1.9 5.45
March 31, 1999 3,436 1.2 5.58
June 30, 1999 3,003 1.0 5.70
September 30, 1999 1,333 .5 5.47
December 31, 1999 2,181 .8 6.08
Thereafter 9,913 3.4 5.94
--------- ----- ----
Total certificate amounts 169,899 58.6 5.43
--------- ----- ----
Total deposits $289,919 100.0% 4.37%
======== ===== ====
</TABLE>
Borrowings
Borrowings are obtained from the FHLB of New York. The Bank's capital
stock of the FHLB of New York and certain mortgage loans are pledged as
collateral to secure the borrowings. The borrowings also include securities sold
under agreement to repurchase. Securities sold under agreements to repurchase
are obligations collateralized by mortgage-backed securities or other
investments. Eligibility to obtain borrowings are subject to certain standards
related to creditworthiness. Such borrowings are made pursuant to several credit
programs. Each credit program has its own interest rate and range of maturities.
The FHLB of New York prescribes acceptable uses to which the borrowings pursuant
to each program may be put as well as limitations on the size of such
borrowings.
In addition to deposits, the FHLB of New York borrowings are utilized
to fund lending operations. At December 31, 1996, borrowings from the FHLB of
New York amounted to $136.6 million. These borrowings, which mature at various
dates through 2001, bear interest at rates between 5.08% and 7.52%.
15
<PAGE>
The following table sets forth certain information regarding FHLB
borrowings as of the end of and during the periods indicated:
<TABLE>
<CAPTION>
At December 31 Year Ended December 31,
-------------- ----------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Maximum amount of total borrowings outstanding
at any month end and at December 31, 1996 $136,622 $147,509 $105,797 $93,125
Approximate average total borrowings outstanding(1) N/A 120,987 93,038 85,650
Approximate weighted average rate(1) 5.82% 5.54% 5.83% 4.94%
</TABLE>
- -----------------------
(1) Average balances represent the arithmetic average of month-end balances.
Other borrowings consisted of securities sold under agreements to
repurchase obtained through a major securities broker. At December 31, 1996,
$36.5 million in other borrowings was outstanding. The borrowings which mature
at various dates through 1999, bear interest at rates between 5.57% and 5.84%.
The following table sets forth certain information regarding other
borrowings as of the end of and during the periods indicated:
<TABLE>
<CAPTION>
At December 31 Year Ended December 31,
-------------- ----------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Maximum amount of total borrowings outstanding
at any month end and at December 31, 1996 $36,526 $54,967 $44,516 $40,724
Approximate average total borrowings outstanding(1) N/A 43,967 39,318 28,365
Approximate weighted average rate(1) 5.73% 5.78% 6.03% 4.65%
</TABLE>
- --------------------------
(1) Average balances represent the arithmetic average of month-end balances.
Yield Earned, Rates Paid and Certain Ratios
The largest components of the Company's total income and total expense are
interest items. As a result, earnings are primarily dependent upon net interest
income, which is determined by its interest rate spread and the relative amounts
of interest-earning assets and interest-bearing liabilities. The interest rate
spread, the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities, are affected by economic factors that affect
interest rates, loan demand and deposit flows.
16
<PAGE>
The following table sets forth, for the periods indicated, the weighted
average yields earned on interest-earning assets, the weighted average rates
paid on interest-bearing liabilities and the applicable interest rate spreads.
Average interest-earning assets and average interest-bearing liabilities have
been computed on a monthly basis.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.44% 8.37% 7.90%
Weighted average yield on mortgage-backed securities 7.24% 7.32% 6.64%
Weighted average yield on investment portfolio 6.81% 6.86% 6.43%
Weighted average yield on all interest-earning assets 7.88% 7.90% 7.41%
Weighted average rate paid on deposits 4.35% 4.27% 3.56%
Weighted average rate paid on borrowings 5.60% 5.89% 4.86%
Weighted average rate paid on all interest-bearing liabilities 4.82% 4.81% 3.99%
Interest rate spread (spread between weighted average rate on
all interest-earning assets and all interest-bearing liabilities) 3.06% 3.09% 3.42%
Net yield on average interest-earning assets 3.26% 3.29% 3.56%
Ratio of interest-earning assets to interest-bearing liabilities 104.36% 104.22% 103.61%
</TABLE>
Competition
The Company encounters competition both in the attraction of deposits
and in the making of real estate and other loans. Direct competition for
deposits comes from other savings and loan associations, savings banks and
commercial banks with offices in Salem, Camden and Gloucester Counties in New
Jersey and New Castle County in Delaware. It also encounters competition for
deposits from money market funds, as well as corporate and government
securities. The principal methods used to attract accounts include other
services offered, the interest rates offered, the convenience of office
locations and advertising. Competition for real estate loans comes principally
from other thrift institutions, commercial banks, and mortgage banking
companies. The Company competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of the services it
provides borrowers, real estate brokers, and home builders.
Employees
As of December 31, 1996, the Company had 110 full-time employees and 15
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
17
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description of
these laws and regulations, as well as the description of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
First Home Bancorp Inc.
General
The Company is a unitary savings and loan holding company subject to
the provisions of HOLA. As a savings and loan holding company within the meaning
of the HOLA, the Company is subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.
Activities Restrictions.
There are generally no restrictions on the activities of a savings and
loan holding company which holds only one subsidiary savings association.
However, if the Director of the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association; (ii) transactions between the
savings association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings association subsidiary of
such a holding company fails to meet the qualified thrift lender ("QTL") test,
then such unitary savings and loan holding company also becomes subject to the
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association requalifies as a QTL within one year thereafter,
is required to register as, and become subject to the restrictions applicable
to, a bank holding company. See "- First Home Savings Bank, F.S.B. - Qualified
Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association may commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board
("FRB") as permissible for bank holding companies. Those activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
Transactions with Related Parties
The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any company that controls or is under common control with an
institution) or to make loans to certain insiders, is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). In a holding company context, the
parent holding company of a savings association (such as the Bank) and any
companies which are controlled by such parent holding company are affiliates of
the savings association. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and
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surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
provides that certain transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit standards,
that are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings associations are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4(c) of the Bank Holding Company Act
("BHC Act"). Further, no savings association may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, subject to an exception for extensions of credit
made pursuant to a benefit or compensation program that is widely available to
employees and does not give any preference to any executive officer over other
employees, these regulations require such loans to be made on terms
substantially the same as offered to unaffiliated individuals and to not involve
more than the normal risk of repayment. These regulations place limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and require certain approval procedures to be followed. The
OTS regulations, with certain minor variances, apply Regulation O to savings
associations.
Restrictions on Acquisitions.
Except under limited circumstances, savings and loan holding companies
are prohibited from acquiring, without prior approval of the Director of the
OTS, (i) control of any other savings association or savings and loan holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Pursuant to provisions of the Bank Holding Company Act of 1956 the FRB
may approve an application by a bank holding company to acquire control of a
savings association. A bank holding company that controls a savings association
is also permitted to merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the Bank Insurance Fund ("BIF") with the approval of
the appropriate federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings associations by
bank holding companies in recent years.
First Home Savings Bank, F.S.B.
General.
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the Federal Deposit
Insurance Corporation ("FDIC"), as the deposit insurer. The Bank is a member of
the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF")
managed by the FDIC. The Bank must file reports with the OTS and the FDIC
concerning its
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activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Bank and its operations.
The activities of savings institutions are governed by the HOLA and, in
certain respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and
the FDI Act were amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of
resolving problem savings institutions, establishing a new thrift insurance
fund, reorganizing the regulatory structure applicable to savings institutions,
and imposing bank-like standards on savings institutions. FDICIA, among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional safety and soundness operational standards and
restric tions. FIRREA and FDICIA both contain provisions affecting numerous
aspects of the operations and regulations of federally-insured savings
associations and empowers the OTS and the FDIC, among other agencies, to
promulgate regulations implementing their provisions.
Office of Thrift Supervision
The OTS is an office in the Department of the Treasury subject to the
general oversight of the Secretary of the Treasury. Except as modified by
FIRREA, the OTS possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency established originally to
insure the deposits, up to prescribed statutory limits, of federally insured
banks and to preserve the safety and soundness of the banking industry. Upon the
enactment of FIRREA, the FDIC also became the insurer, up to the prescribed
limits, of the deposit accounts held at federally insured savings associations
and established two separate insurance funds that it maintains and administers:
the BIF and the SAIF. As such, the FDIC has examination, supervisory, and
enforcement authority over all savings associations. The FDIC is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.
Federal Home Loan Bank System
The FHLB System, consisting of twelve FHLBs, now is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank is a member of the FHLB of New York. The Bank is required to
acquire and hold shares of capital stock in the FHLB of New York in an amount
equal to the greater of 1.0% of the aggregate outstanding principal amount of
home mortgage loans, home purchase contracts and similar obligations at the
beginning of each year or 5% of its borrowings from the FHLB. The Bank is in
compliance with this requirement with an investment in the stock of the FHLB of
New York of $7.4 million at December 31, 1996.
Each FHLB serves as a central credit facility for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
funds available
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to members in accordance with policies and procedures established by the FHLB
and the Board of Directors of the FHLB. These policies and procedures are
subject to the regulation and oversight of the FHFB. All borrowings from the
FHLB are required to be fully secured by sufficient collateral as determined by
the FHLB. At December 31, 1996, the Bank had $136.6 million in borrowings from
the FHLB of New York.
Insurance of Deposit Accounts
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to $100,000 per insured member (as defined by
law and regulation) by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums. Under the FDI Act insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under this system, institutions classified
as well capitalized (i.e., a tier 1 leverage ratio of at least 5%, tier 1
risk-based ratio of at least 6% ("Tier 1 risk-based capital") and total
risk-based ratio of at least 10%) and considered healthy pay the lowest premium,
while institutions that are less than adequately capitalized (i.e., tier 1
leverage and risk-based ratios of less than 4% or total risk-based ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions will be made by the
FDIC for each semi-annual assessment period.
The FDIC's assessments must be designed to maintain the SAIF's reserve
ratio at the designated reserve ratio of 1.25% of estimated SAIF insured
deposits or, if the SAIF's reserve ratio is below that level, to increase the
reserve ratio to the designated reserve ratio. The FDIC may not collect more for
the SAIF than is needed to fulfill its goal. Through the end of 1998, the
assessment rate for a SAIF member may not be less than the assessment rate for a
BIF member that poses a comparable risk to the deposit insurance fund.
In setting semiannual assessments for the BIF and SAIF the FDIC must
consider the following factors: (1) the fund's expected operating expenses; (2)
the funds case resolution expenditures and income; (3) the effect of assessments
on the earnings and capital of fund members; and (4) any other factors that the
FDIC deems appropriate.
Under an assessment schedule that was in effect through September 30,
1996, SAIF rates, including the assessment rate imposed by the Financing
Corporation ("FICO") to service the interest on its bond obligations, ranged
from 23 basis points for institutions in the best assessment risk classification
to 31 basis points for institutions in the lease favorable one. Since the BIF's
reserve ratio reached its designated reserve ratio on June 30, 1995, the
assessment rates for the BIF were revised effective in the third quarter of 1995
to provide a range of rates from 0 basis points to 27 basis points. As a result,
BIF insured institutions generally paid lower premiums than SAIF insured
institutions.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was
enacted (the "Funds Act"). This legislation required the FDIC to impose a
one-time special assessment on SAIF assessable deposits to raise the SAIF's
reserve ratio to the designated reserve ratio as of October 1, 1996. In response
to the requirements of the Funds Act, the FDIC imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995. The Bank's one-time special assessment, which was collected on
November 17, 1996, amounted to $1.6 million. Net of related tax benefits, the
one-time special assessment amounted to $1.0 million.
As a result of the one-time special assessment, the FDIC on December
11, 1996 adopted new assessment schedules for the SAIF which lowered the
assessment rates then in effect. The new schedules provide for a base assessment
schedule for the SAIF with rates ranging from 4 to 31 basis points, and an
adjusted assessment schedule that reduces these rates by 4 basis points. In
general, as a result of the adoption of these schedules, SAIF rates range from 0
to 27 basis points as of October 1, 1996. These schedules, unlike the schedules
they replace, do not include rates for the FICO assessment as a result of the
Funds Act which required that the FICO assessment be separated from the SAIF
assessment effective January 1, 1997. The Bank's rate, which had been 23 basis
points, has been reduced to 0 basis points under the SAIF new assessment
schedules. However, the Bank's assessment rate under the separate FICO
assessment schedule is 6.48 basis points.
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Prompt Corrective Regulatory Action.
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon which of the following five capital categories
applies to the institution. Generally, an institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio (total capital to
risk-weighted assets) of 10% or greater, a Tier 1 risk-based capital ratio (core
capital to risk weighted assets) of 6% or greater, and a leverage capital ratio
(core capital to adjusted total assets) of 5% or greater, and is not subject to
a regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater and generally a
leverage capital ratio of 4% or greater. An institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio that is less than
8%, has a Tier 1 risk-based capital ratio of less than 4% or generally has a
leverage capital ratio of less than 4%. A "significantly undercapitalized"
institution is one that has a total risk based capital ratio that is less than
6%, a Tier 1 risk based capital ratio that is less than 3%, or a leverage ratio
that is less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. In addition, the
OTS is authorized effectively to downgrade an institution to a lower capital
category than the institution's capital ratios would otherwise indicate, based
upon safety and soundness considerations (such as when the institution has
received a less than satisfactory examination rating in the categories of
capital, asset quality, management, earnings or liquidity ("CAMEL")).
Subject to a narrow exception, the OTS is required to appoint a
receiver or conservator for an institution that is critically undercapitalized.
The regulation also provides that a capital restoration plan must be filed with
the OTS within 45 days of the date an association receives notice that it is
"undercapitalized," In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions in growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Branching by Federally Chartered Associations
Federally chartered savings associations are permitted to branch
nationwide to the extent allowed by federal statute. This authority permits
associations to establish interstate networks and to geographically diversify
lines of business. OTS authority preempts any state law purporting to regulate
branching by federal savings associations.
The limitations that remain are statutory. An association may not
establish or operate a branch outside the state in which the association has its
home office if such branch would violate section 5(r) of the HOLA. This section
permits a federal savings association to branch outside its home state if (i)
the association meets the domestic building and loan test of Internal Revenue
Code section 7701(a)(19) or the asset composition test of subparagraph (c) of
that section or qualifies as a qualified thrift lender, and (ii) all branches in
each state branch outside of its home state also satisfies the domestic building
and loan test.
The limitations do not apply if (i) the branch results from a
supervisory acquisition under section 13(k) of the FDI Act; (ii) the branch was
authorized for the federal savings association prior to October 15, 1982; (iii)
the law of the state where the branch is to be located would permit
establishment of the branch if the association was a savings association or
savings bank chartered by the state in which its home office is located; or (iv)
the branch was operated lawfully as a branch under the state law prior to the
association's conversion to a federal charter.
The OTS will approve an application for branching only if the overall
policies, condition and operation of the applicant afford no basis for
supervisory objection and the proposed branch opens within 12 months of
approval. In addition, the institution must have a satisfactory record under the
Community Reinvestment Act ("CRA").
Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards including a leverage ratio (or core capital) requirement, a
tangible capital requirement and a risk-based capital requirement. A savings
association must meet all of these standards in order to be in compliance with
its regulatory capital requirements. These requirements are required to be
generally as stringent as the
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comparable capital requirements for national banks. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
savings associations on a case-by-case basis.
The leverage ratio standard requires that savings associations maintain
"core capital" of at least 3.0% of adjusted total assets (generally, an
institution's total assets calculated in accordance with generally accepted
accounting principles ("GAAP"), subject to certain adjustments). Core capital is
defined to include common shareholders' equity (including retained earnings),
certain non-cumulative perpetual preferred stock and any related surplus,
minority interests in equity accounts of consolidated subsidiaries and
"qualifying supervisory goodwill" less intangibles other than certain qualifying
intangible assets and mortgage servicing rights.
The capital regulations require tangible capital equal to at least 1.5%
of adjusted total assets. Tangible capital generally includes common
shareholders' equity and retained income, noncumulative perpetual preferred
stock and related income and minority interests in the equity accounts of fully
consolidated subsidiaries. Intangible assets must be deducted from tangible
capital and mortgage servicing rights (both originated and purchased) may be
included in a savings association's tangible capital up to certain limits.
In addition to requiring compliance with the leverage ratio and
tangible capital standards, the OTS capital regula tions also require that
savings associations satisfy a risk-based capital standard. This standard
assigns each asset held by an institution to one of four risk categories, based
on the amount of credit risk associated with a particular class of assets. The
categories range from 0% for assets backed by the full faith and credit of the
United States, or that pose no credit risk to the insured institution, to 100%
for delinquent or repossessed assets. The book value of assets in each category
is multiplied by the weighing factor (from 0% to 100%) assigned to that
category. These products are then totaled to arrive at total risk-weighted
assets. Off-balance sheet items are included in risk-weighted assets by
converting them to an approximate balance sheet "credit equivalent amount" based
on a conversion schedule. These credit equivalent amounts are then assigned to
risk categories in the same manner as balance sheet assets and are included in
risk-weighted assets. The regulations require that an insured institution attain
and maintain risk-based capital (core capital plus supplementary capital) equal
to no less than 8.0% of risk-weighted assets. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as core
capital and general valuation loan and lease allowances up to a maximum of 1.25%
of risk-weighted assets. Supplementary capital may be used to satisfy the risked
based requirement only to the extent of core capital. The OTS is also authorized
to require a savings association to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
nontraditional activities. At December 31, 1996, the Bank had no capital
investments that qualified as supplementary capital and had $2.6 million of
general valuation allowances which were included in risk-based capital, the
maximum allowable under the regulations.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating risk-based capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments.
The OTS regulations establish special capitalization requirements for
savings associations that own service corporations and other subsidiaries,
including subsidiary savings associations. According to these regulations
certain subsidiaries are consolidated for capital purposes and others are
excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for purposes of GAAP. For excludable subsidiaries the debt and
equity investments in such subsidiaries are deducted from assets and capital.
The FDIC has adopted a rule which provides that any insured depository
institution, including a savings association, with a tangible capital ratio
(which in general reflects those capital components recognized by the OTS for
its capital standard) to total assets of less than 2% will be deemed to be
operating in an unsafe or unsound condition unless the depository institution
has entered into and is in compliance with a written agreement with its primary
federal regulator to increase its capital to acceptable levels and as to which
the FDIC is a party. Depository institutions with a core capital ratio of at
least 2% may still be considered by the FDIC, under appropriate circumstances,
to be in an unsafe and unsound condition.
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The Bank is in full compliance with its capital requirements. The
following table reflects at December 31, 1996 the Bank's capital requirements,
the Bank's actual capital and the amount of capital maintained by the Bank in
excess of its requirements. For a reconciliation of the Bank's regulatory
capital to the Bank's capital as reported under generally accepted accounting
principles see Note 16 to the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
CORE CAPITAL TANGIBLE CAPITAL RISK-BASED CAPITAL
--------------------------- -------------------------- --------------------------
% OF % OF % OF
ADJUSTED ADJUSTED RISK
TOTAL TOTAL WEIGHTED
ASSETS AMOUNT ASSETS AMOUNT ASSETS AMOUNT
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Required Capital....... 3.00% $14,938 1.50% $7,469 8.00% $16,452
Actual Capital......... 6.45% 32,129 6.45% 32,129 16.84% 34,625
---- ------ ---- ------ ----- ------
Excess Capital......... 3.45% $17,191 4.95% $24,660 8.84% $18,173
==== ======= ==== ======= ==== =======
</TABLE>
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet current
or future capital requirements. The OTS must prohibit the asset growth of
associations not meeting their capital standards, except for certain limited
growth in low-risk assets up to net interest credited, and must issue a capital
directive against such associations. The OTS may grant to associations
exemptions from the various sanctions or penalties for failure to meet their
capital requirements (other than appointment of a conservator or receiver and
the mandatory growth restrictions) through the association's submission of and
compliance with an approved capital plan. The capital plan must indicate, among
other things, how the association will increase capital so as to achieve
compliance with capital standards. While a plan is being reviewed for approval,
an association may not grow beyond interest credited or pay dividends without
approval and is subject to other limitations. If the plan is not approved, the
association will be prohibited from increasing its assets or making any loans
and investments without OTS approval and must comply with other restrictions
imposed by the OTS. If the plan is approved, the association may be required to
enter into an operating agreement with the OTS that may provide, among other
things, that if specific targets within the plan are not met or the association
takes any action that does not comport with the accepted plan, certain activi
ties will be significantly restricted, a consent to merge agreement will be
executed, or management and the board of directors must resign upon request.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties and the establishment of restrictions on the association's operations.
The OTS capital regulation provides that the OTS, through enforcement
proceedings or otherwise, could require one or more of the following corrective
actions: (i) increasing the amount of the association's regulatory capital to a
specified level or levels; (ii) convening a meeting or meetings with the OTS'
supervision staff for the purpose of meeting the capital requirements; (iii)
reducing the rate of interest that may be paid on savings accounts; (iv)
limiting the receipt of deposits to those made to existing accounts; (v) ceasing
or limiting the issuance of new accounts of any or all classes or categories,
except in exchange for existing accounts; (vi) ceasing or limiting lending or
the making of a particular type or category of loan; (vii) ceasing or limiting
the purchase of loans or the making of specified other investments; (viii)
limiting operational expenditures to specified levels; (ix) increasing liquid
assets and maintaining such increased liquidity at specified levels; or (x)
taking such other action or actions as the Director of the OTS may deem
necessary or appropriate for the safety and soundness of the savings association
or depositors or investors in the savings association. The OTS also could impose
harsher measures, such as the appointment of a receiver or conservator or a
forced merger into another institution. The grounds for appointment of a
conservator or receiver include substantially insufficient capital and losses or
likely losses that will deplete substantially all capital with no reasonable
prospect for replenishment of capital without federal assistance. The OTS and
FDIC may also require such association to raise additional capital through the
issuance of common stock or other capital instruments.
Limitations on Dividends and Other Capital Distributions
OTS regulations imposes limitations on the ability of savings
associations to pay dividends or make other distributions of capital. Such
distributions include cash dividends, payments by an institution to repurchase
or otherwise
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acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The regulation
establishes a three-tiered system of regulation, with the greatest flexibility
being afforded to well-capitalized institutions. The regulation provides the OTS
with the authority to prohibit capital distributions otherwise permitted by this
rule if such distribution would constitute an unsafe or unsound practice.
An association that before and after the proposed distribution meets or
exceeds its fully phased-in capital requirement and that has not been advised by
the OTS that it is in need of more than normal supervision, is a Tier 1
association ("Tier 1 Association"). An association that before and after the
proposed distribution meets or exceeds its minimum regulatory capital
requirement, but not its fully phased-in capital requirement, is a Tier 2
association ("Tier 2 Association"). An association having capital that is less
than its minimum regulatory capital requirement is a Tier 3 association ("Tier 3
Association").
A Tier 1 Association can, upon 30 days notice to the OTS, make capital
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus 50% of its "surplus capital ratio" at the beginning of
the calendar year. The "surplus capital ratio" is the percentage by which the
association's ratio of total capital to assets exceeds the ratio of its capital
requirement to assets. Any additional amount of capital distributions will
require prior regulatory approval.
A Tier 2 Association can make a capital distribution, upon 30 days
notice to the OTS, only in accordance with the following schedule: (i) if the
association's current capital satisfies the 8% risk-based capital standard it
may make distributions up to 75% of net income over the most recent four
quarters.
A Tier 3 Association is not authorized under the regulation to make any
capital distributions unless it receives prior regulatory approval; or in the
case of an association operating in compliance with an approved capital plan,
the distribution is consistent with such approved capital plan.
Under the OTS prompt corrective action regulations, an association is
prohibited from making any capital distribution if, after the distribution, the
association would have (i) a total risk-based capital ratio of less than 8.0%;
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0%. See "Prompt Corrective Action Regulation."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice.
Because the Bank is a subsidiary of the Company, the proposed regulations would
require the Bank to provide notice to the OTS of its intent to make a capital
distribution. The Bank does not believe that the proposal will adversely affect
its ability to make capital distributions if it is adopted substantially as
proposed. No assurance can be given as to whether or in what form the
regulations may be adopted.
Liquidity Requirements
Under OTS regulations, a savings association is required to maintain an
average daily balance of liquid assets (cash, certain time deposits and savings
accounts, bankers acceptances, and specified United States government, state or
federal agency obligations and certain other investments) equal to a monthly
average of not less than a specified percentage of its net withdrawable accounts
plus borrowings payable in one year or less. This liquidity requirement, which
is currently 5.0%, may be changed from time to time by the OTS to any amount
within the range of 4.0% to 10.0% depending upon economic conditions and the
savings flow of savings associations. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1.0%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
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may be imposed for failure to meet liquidity requirements. The liquidity ratio
of the Bank at December 31, 1996 was 7.1%.
Qualified Thrift Lender Test
The HOLA requires savings associations to meet a QTL test. Under the
QTL test set forth in the HOLA, a savings association is required to maintain a
minimum of 65% of its "portfolio assets" (as defined in the statute) in certain
investments ("Qualified Thrift Investments") on a monthly average basis in nine
out of every 12 months. Qualified Thrift Investments generally consist of (i)
loans that were made to purchase, refinance, construct, improve or repair
domestic residential or manufactured housing, (ii) home equity loans, (iii)
securities backed by or representing an interest in mortgages on domestic
residential or manufactured housing, (iv) obligations issued by the federal
deposit insurance agencies and (v) shares of stock issued by the federal deposit
insurance agencies and (v) shares of stock issued by any FHLB. Subject to a 20%
of assets limitation, Qualified Thrift Investments also include consumer loans,
investments in certain subsidiaries, loans for the purchase or construction of
schools, churches, nursing homes and hospitals, 200% of investments in loans for
low-to-moderate income housing and certain other community-oriented investments,
and shares of stock issued by FHLMC or FNMA. Under Section 2303 of the Economic
Growth and Regulatory Paperwork Reduction Act of 1996, a savings association can
comply with the QTL test by either meeting the QTL test set forth in the HOLA
and implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code").
A savings association that fails the QTL test must either become a bank
(other than a savings bank) or become subject to the following restrictions on
its operations: (i) the savings association may not engage in any new activity
or make any new investment, directly or indirectly, unless such activity or
investment is permissible for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. In addition, beginning three years
after the savings association failed the QTL test, the savings association would
be prohibited from engaging in any activity not permissible for a national bank
and would have to repay any outstanding advances from an FHLB as promptly as
possible.
At December 31, 1996, approximately 96.7% of the Bank's assets were
invested in Qualified Thrift Investments and, therefore, the Bank met the QTL
test.
Loans to One Borrower
OTS regulations provide that the total loans and extensions of credit
by a savings association to a single borrower outstanding at one time and not
fully secured by marketable collateral having a market value at least equal to
the amount of the loan or extension of credit may not exceed 15% of unimpaired
capital and surplus. As a separate and additional limitation to the foregoing,
the total loans and extensions of credit by a savings association to one
borrower outstanding at one time and fully secured by marketable collateral
having a market value at least equal to the funds outstanding may not exceed 10%
of unimpaired capital and surplus. An exception to the general loans-to-one
borrower limitation exists for loans made by a savings association for the
development of domestic residential housing units. Such loans may not exceed the
lesser of $30 million, or 30% of the savings association's unimpaired capital
and surplus, but may be made only if: (i) the purchase price of each dwelling
unit financed with the loan proceeds is not greater than $500,000; (ii) the
savings association is in compliance with its capital requirements; (iii) the
OTS permits, by order, the higher lending limit permitted by this provision;
(iv) loans made under this exception to all borrowers do not, in the aggregate,
exceed 150% of the association's unimpaired capital; and (v) such loans comply
with the applicable loan-to-value requirements.
OTS regulations provide that investments in the commercial paper and
corporate debt securities of the same issuer will be treated as loans and will
be subject to the general limitation on loans to one borrower; however, the
regulations also provide that, notwithstanding the general limitation, a savings
association may invest up to 10% of its unimpaired capital and unimpaired
surplus in one issuer's commercial paper, if rated in the highest category by at
least two nationally recognized rating services. This investment authority is in
addition to any loans that the savings association may make to the same issuer.
The OTS may prescribe more stringent limits on loans to one borrower if
deemed appropriate to protect the safety and soundness of the savings
association. The OTS regulations also provide that a savings association's loans
to
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one borrower to finance the sale of real property acquired in satisfaction of
debts previously contracted for in good faith shall not, when aggregated with
all other loans to that borrower, exceed the general loans-to-one borrower
limitations.
At December 31, 1996, the Bank's limit on loans to one borrower was
$4.9 million. At December 31, 1996, the Bank's largest aggregate amount of loans
to one borrower was $1.9 million.
Brokered Deposits
Under FDIC regulations, well-capitalized savings institutions that are
not treated as troubled by the OTS are not subject to limitations on brokered
deposits. Adequately capitalized savings institutions are able to accept, renew
or roll over brokered deposits only: (i) with a waiver from the FDIC; and (ii)
subject to the limitation that they do not pay an effective yield on any such
deposit which exceeds by more than (a) 75 basis points the effective yield paid
on deposits of comparable size and maturity in such institution's normal market
area for deposits accepted in its normal market area; or (b) 120 basis points
for retail deposits and 130 basis points for wholesale deposits, respectively,
of the current yield on comparable maturity U.S. treasury obligations for
deposits accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited.
OTS Assessments
Savings associations are required by OTS regulations to pay assessments
to the OTS to fund the operations of the OTS. The general assessments, paid on a
semi-annual basis, is computed upon the savings association's assets including
consolidated subsidiaries as reported on its most recent quarterly thrift
financial report. The assessments paid by the Bank for the year ended December
31, 1996 was $106,116.
Appraisal Policy Regulations
The OTS has adopted real estate appraisal regulations to comply with
Title XI of FIRREA which requires that the various federal banking regulators
adopt regulations providing, at a minimum, that real estate appraisals utilized
in connection with real estate related financial transactions in which a
financial institution engages be performed in accordance with the appraisal
standards promulgated by the Appraisal Standards Board of the Appraisal
Foundation and that such appraisals be in writing. The regulations, as amended,
require that an appraisal using state certified or licensed appraisers, as
appropriate, be made for all real estate related financial transactions entered
into on or after August 9, 1990 except those transactions in which (i) the
transaction value is less than or equal to $250,000; (ii) a lien is placed on
real property solely through an abundance of caution; (iii) the transaction
involves a lease that is not the economic equivalent of a purchase or sale; (iv)
there is a transaction resulting from a maturing extension of credit under
certain circumstances; or (v) there is the sale of pools or real property
interests under certain circumstances. A real estate related financial
transaction means any transaction involving the sale, lease, purchase,
investment in or exchange of real property, including interests in property, or
the financing thereof, or the refinancing of real property or interests in
property as security for a loan or investment, including mortgage
backed-securities. The regulations provide that a state certified appraiser must
be used for all real estate related transactions having a transaction value of
$250,000 or more, except those involving appraisals of 1-to-4 family residential
properties (excluding from such exception, however, complex 1-to-4 family
residential property appraisals). The regulations define a "complex" appraisal
as one in which the property to be appraised, market conditions or form of
ownership are atypical. The regulations provide a presumption that appraisals
will be non-complex unless the savings association has readily available
information that a given appraisal will be complex. All other appraisals may be
performed either by a state certified appraiser or a state licensed appraiser.
The regulations require that all appraisals, among other things, (i)
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of the Appraisal Foundation; (ii) be based on the
definition of market value set forth in the regulations; (iii) be written and
contain sufficient information and analysis to support the institution's
decision to engage in the transaction; and (iv) analyze and report appropriate
deductions and discounts for proposed construction or renovation, partially
leased buildings, non-market lease terms, and tract developments with unsold
units.
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Activities of Savings Associations and Their Subsidiaries
FIRREA and FDIC regulations provide that, when a savings association
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings association
shall notify the FDIC and the OTS thirty days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with regulations and
orders of the OTS.
The OTS may determine that the continuation by a savings association of
its ownership or control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness, or stability of the association, or is
inconsistent with sound banking practices or with the purposes of the FDI Act.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Standards for Safety and Soundness
The OTS, along with the other federal banking agencies, adopted safety
and soundness guidelines relating to (i) internal controls and information
systems, (ii) internal audit systems; (iii) loan documentation; (iv) credit
underwriting; (v) interest rate exposure; (vi) asset growth; and (vii)
compensation, fees and benefits for executive officers, directors, employees and
principal shareholders. The operational, managerial and compensation standards
set out in the safety and soundness guidelines are used by the federal banking
agencies to identify and address problems at institutions before capital becomes
impaired. If an insured depository institution is notified that it fails to meet
any of the standards set forth in the guidelines, it will be required to submit
to the appropriate federal banking agency a compliance plan specifying the steps
that will be taken to cure the deficiency. If an institution fails to submit an
acceptable compliance plan or fails to implement the compliance plan, the
appropriate federal banking agency will require the institution to correct the
deficiency and until corrected may impose restrictions on the institution
including any of the restrictions applicable under the prompt corrective action
regulations.
The OTS and the other federal banking agencies adopted final
regulations which prescribe standards for extensions of credit (i) secured by
real estate or (ii) made for the purpose of financing the construction of
improvements on real estate. The OTS regulation requires each savings
association to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices and appropriate to
the size of the institution and the nature and scope of its real estate lending
activities. The standards also must be consistent with OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Institutions also are permitted to make a limited amount of loans that do not
conform to the loan-to-value limitations so long as such exceptions are reviewed
and justified appropriately. The guidelines also list a number of lending
situations in which exceptions to the loan-to-value standards are justified.
Enforcement.
Under the FDI Act, the OTS has primary enforcement responsibility over
savings institutions and has the authority to bring enforcement action against
all "institution-affiliated parties," including shareholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. Possible enforcement action ranges from the imposition of a capital
plan and capital directive to receivership, conservatorship or the termination
of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend
to the Director of OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director of OTS,
the FDIC has authority to take such action under certain circumstances.
Community Reinvestment Act
Under the CRA, as implemented by OTS regulations, a savings institution
has a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for
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financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most
recent examination.
Certain Restrictions on Acquisitions
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. Any company that
acquires such control becomes a "savings and loan holding company" subject to
registration, examination and regulation by the OTS as a savings and loan
holding company. In addition, federal law also provides that no "person," acting
directly or indirectly or through or in concert with one or more other persons,
other than a company, may acquire "control" of a savings association unless at
least 60 days prior written notice has been given to the OTS and the OTS has not
objected to the proposed acquisition.
Under OTS regulations "control" involves a 25% voting stock test,
control in any manner of the election of a majority of the institution's
directors, or a determination by the OTS that the acquiror has the power to
direct, or directly or indirectly to exercise a controlling influence over, the
management or policies of the institution. Acquisition of more than 10% of an
institution's voting stock, if the acquiror also is subject to any one of eight
"control factors," constitutes a rebuttable determination of control under the
regulations. The determination of control may be rebutted by submission to the
OTS, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of an insured institution's stock after the effective
date of the regulations must file with the OTS a certification that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily NOW and regular checking accounts). At December
31, 1996, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve require ments imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
Savings associations have the authority to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require an
association to exhaust other reasonable alternative sources of funds before
borrowing from the Federal Reserve. The Bank did not have any discount window
borrowings as of December 31, 1996.
TAXATION
Federal Taxation
For federal income tax purposes the Company files its income tax
returns on the basis of a calendar year. The Company uses the accrual method of
accounting to report its respective income and expenses.
The Company is subject to those rules of federal income taxation
generally applicable to corporations. For tax periods ending before January 1,
1996, however, the Bank, which met certain definitional tests under the Internal
Revenue Code of 1986, as amended (the "Code") primarily relating to its assets
and the nature of its business was permitted to establish a reserve for bad
debts and to make annual additions thereto. The Bank was generally able to
deduct such additions, within specified formulae limits, in arriving at its
taxable income. These rules were repealed pursuant to the Small Business Job
Protection Act of 1996 (the "Act"), which was passed by the Congress of the
United States on August 2, 1996, and which is effective with respect to bad debt
reserves of thrift institutions for all taxable years beginning after
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December 31, 1995. Specifically, the Act: (a) eliminated use of the "percentage
of income method" (generally, a percentage of specially computed taxable income
which is then used to compute the bad debt reserve deduction) for determining
bad debt reserves, and (b) restricted use of the "experience method" (under
which the bad debt reserve deduction is generally based on a formula tied to
actual debt charge-offs over a period of years) to saving institutions that do
not constitute "large banks" ("Large Banks") under Section 585 of the Code. For
these purposes, Large Banks may generally be defined as institutions which have,
in conjunction with their affiliated institutions (including members of the same
federal consolidated income tax group), average total assets for a particular
tax year in excess of $500,000,000. Institutions which are treated as Large
Banks are now limited to use of the "specific charge-off method" of accounting
for bad debt tax deductions.
The Act also generally requires savings institutions to recapture as
taxable income the amount of their "applicable excess reserves" (as defined
below) ratably over the six year period beginning with their first taxable year
beginning after 1995 (the "Six Year Period"). For these purposes, the applicable
excess reserves of a savings institution is generally equal to the excess of (i)
the balance of its bad debt reserves as of the close of its last taxable year
beginning prior to January 1, 1996, over (ii) the balance of its bad debt
reserves as of the close of its last taxable year beginning before January 1,
1988. In the case of certain institutions ("Small Banks") which do not
constitute Large Banks (as defined above), the amount of applicable excess
reserves is generally equal to the excess of (a) the amount described in clause
(i) of the immediately preceding sentence, over (b) the greater of (x) the
amount described in clause (ii) of the immediately preceding sentence or (y) the
amount of the savings institution's bad debt reserves as of the close of its
last taxable year beginning prior to January 1, 1996 calculated as if such
institution had consistently used the experience method.
Based on the foregoing, savings institutions are generally not required
to recapture into income their bad debt reserves attributable to pre-1988 tax
periods under the Act. Savings institutions which constitute Small Banks,
however, are generally required to recapture into income their reserves for
post-1987 tax periods only to the extent that such banks have historically
utilized the percentage of income method and not the experience method for
purposes of computing their bad debt reserves. Conversely, savings institutions
which constitute Large Banks are generally required to recapture into income
their reserves for post-1987 tax periods, regardless of whether such banks have
utilized the percentage of income method or the experience method for purposes
of computing their bad debt reserves.
The Bank has historically computed its bad debt deductions with respect
to qualifying real property loans under the experience method or the percentage
of taxable income method depending on the method which yielded the greatest tax
benefit. The Company's bad debt reserve for tax purposes was approximately $4.2
million at December 31, 1996. For the years ended December 31, 1995 and 1994,
the Bank computed its bad debt deduction with respect to qualifying real
property loans under the percentage of taxable income method. The Bank has
estimated that its total additional federal income tax liability over the Six
Year Period due to the bad debt reserve recapture required under the Act would
be approximately $343,000. Since the Bank provides tax expense for financial
reporting purposes, the elimination of the percentage of taxable income method
will not impact the results of operations. The Bank may, however, be able to
defer the commencement of the Six Year Period for up to an additional two year
period (i.e., through the close of its last taxable year beginning prior to
January 1, 1998) to the extent that it satisfies certain "residential loan
requirements" within such period (generally, to the extent that the principal
amount of residential loans made by the Bank in each of the two tax years
beginning after December 31, 1995 is not less than the average principal amount
of its residential loan originations for the six most recent tax years beginning
prior to January 1, 1996).
To the extent that the Bank makes a "non-dividend distribution" (as
defined below), all or a portion of such distribution may generally be
considered to be attributable to income which was appropriated to the pre-1988
bad debt reserves (or supplemental loan loss reserves) and deducted for federal
income tax purposes; in that event, such distribution to shareholders, including
redemptions or distributions in dissolution or liquidation, may generally not be
made without payment of federal income taxes at the then current income tax rate
by the institution on the amount of income deemed removed from the reserves for
such distribution. Under applicable Code provisions, the amount that would be
deemed removed from such reserves upon such distribution to stockholders and,
therefore, subject to corporate level taxation at the normal corporate tax rate,
would be the amount which, after a reduction for taxes on such amount, is equal
to the amount actually distributed to shareholders. Assuming a 35% tax rate, the
amount deemed removed would be the lesser of (1) approximately 154% of the
amount actually distributed or (2) the total amount of the reserves.
For federal income tax purposes, a distribution made by a corporation
is taxed as a dividend to the extent that the distribution is paid out of the
corporation's current or accumulated earnings and profits. To the extent that
the amount of such distribution exceeds current or accumulated earnings and
profits ("non-dividend distributions"), such excess is
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deemed for federal income tax purposes to be, as to any shareholder, first a
non-taxable return of capital reducing such shareholder's tax basis in his stock
by an amount equal to the distribution received and, to the extent such
non-dividend distributions exceed the shareholder's tax basis, such
distributions are treated as taxable income that constitutes capital gains if
the stock is held by the shareholder as a capital asset.
The maximum rate of regular corporate federal income tax applicable to
the Company is currently 34% (or 35% for taxable income in excess of $10
million). In addition to their regular federal income tax liability,
corporations are also subject to an alternative minimum tax similar to the
alternative minimum tax applicable to individuals. The corporate alternative
minimum tax rate is 20%. Corporations are subject to this alternative minimum
tax to the extent it exceeds their regular tax liability. The tax is applied to
"alternative minimum taxable income" which includes interest on certain
tax-exempt bonds and 75% of "adjusted current earnings" over alternative minimum
taxable income (computed without this item). The first $40,000 of alternative
minimum taxable income is exempt from the tax. Such exemption amount, however,
is reduced (but not below zero) by 25% of the amount by which a corporation's
alternative minimum taxable income exceeds $150,000.
Generally, when a corporation is subject to the alternative minimum
tax, it may carry forward (but not back) the amount of this tax indefinitely as
a credit against future liability for the regular income tax, but not the
alternative minimum tax. The alternative minimum tax credit is not allowable for
any minimum tax attributable to tax preference items which constitute permanent
exclusions of income (for example, tax-exempt interest) rather than deferral of
income.
State Taxation
The Company is subject to taxes which generally apply to New Jersey
domestic taxable corporations. Such corporations are generally subject to tax at
an amount equal to the greater of $200 or 9% of net income allocated to New
Jersey.
The Bank is taxed under the New Jersey Savings Institution Tax Act.
This Act exempts the Bank from all other New Jersey Corporate Franchise Taxes,
and from all local taxation of, upon or measured by tangible personal property
imposed by political subdivisions. The Savings Institution Tax is an excise tax
upon the privilege of doing business in the State of New Jersey at the rate of
3% per annum on net income. The Bank is also subject to a franchise tax in the
State of Delaware with regard to its branch operations in that State. This
Delaware franchise tax is asserted against the taxable income of Delaware
branches of federally chartered savings banks (such as the Bank) which are
headquartered in another State, and is computed based on tax rates which vary
from 8.7% (for taxable income of $20 million or less) to 1.7% (for taxable
income over $650 million).
Item 2. Properties.
The Company owns seven retail banking offices, its Administrative
office and its lending operations office. Three retail banking offices and the
accounting department office are leased. The leases expire by the year 2002.
Lease payments were $106,433 in 1996 and $104,049 in 1995. The Company's net
investment in branch offices, premises, equipment and leaseholds was $3.0
million at December 31, 1996.
Item 3. Legal Proceedings.
The Company is involved in litigation arising in the normal course of
business. In management's opinion, the resolution of all pending litigation will
not have a material adverse affect on the Company's financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol "FSPG." The following table sets
forth the high and low closing sales price for the Common Stock for each quarter
in the two year period ended December 31, 1996 as adjusted to reflect stock
splits. The table also reflects the cash dividends paid with respect to each
quarter as adjusted for stock splits.
For the Quarter Ended High Low Dividends
- --------------------- ---- --- ---------
March 31, 1995 $10.88 $10.13 $.09
June 30, 1995 11.06 10.31 .09
September 30, 1995 12.94 10.50 .09
December 31, 1995 14.25 12.75 .09
March 31, 1996 14.06 13.13 .09
June 30, 1996 14.06 13.31 .09
September 30, 1996 14.06 13.31 .09
December 31, 1996 14.63 13.50 .10
It is the current policy of the Company to pay a regular quarterly cash
dividend of $0.10 per share. Dividends, if and when paid, will be subject to
determination and declaration by the Board of Directors, which will take into
account the Company's financial condition, results of operations, tax
considerations, industry standards, economic conditions and other factors,
including the regulatory restrictions discussed below.
Funds for the payment of cash dividends by the Company on its Common
Stock are obtained solely from dividends paid to the Company by the Bank.
Accordingly, restrictions on the Bank's ability to pay cash dividends directly
affect the payment of cash dividends by the Company. OTS regulations limit the
Bank's ability to pay cash dividends on its capital stock. Under these
regulations, the Bank is not permitted to declare or pay a cash dividend on or
repurchase any of the Common Stock if the effect thereof would be to cause the
Bank's regulatory capital to be reduced below the Bank's regulatory capital
requirements or the amount of the Bank's liquidation account. At December 31,
1996, the Bank's regulatory capital exceeded its regulatory capital requirements
by approximately $17.2 million. For a discussion of OTS regulations affecting
the Bank's ability to declare and pay dividends see the discussion in Item 1
under the caption "Regulation - First Home Savings Bank, FSB - Limitations on
Dividends and Other Capital Distributions."
Item 6. Selected Financial Data.
The information set forth on page 3 of the Company's 1996 Annual Report
to Stockholders is incorporated herein by reference thereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The information contained under the caption "Management's Discussion
and Analysis" beginning on page 5 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference thereto.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements, the notes thereto, and the
opinion of independent certified public accountants thereon, appearing on pages
14 through 43 of the Company's Annual Report to Stockholders are incorporated
herein by reference thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement dated March 28, 1997.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement dated March 28, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item incorporated by reference to the
Company's definitive proxy statement dated March 28, 1997.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement dated March 28, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1) The following consolidated financial statements of the Company
and the opinion of independent certified public accountants
thereof:
Consolidated Statements of Financial Condition at December 31,
1996 and 1995
Consolidated Statements of Income for the Years Ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
2) Other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
and Office of Thrift Supervision are not required under the
related instructions or are inapplicable and therefore have been
omitted.
3) The following exhibits:
Exhibit #
- ---------
*3.1 Certificate of Incorporation.
*3.2 Bylaws.
*10.1(1) Employee Stock Compensation Program.
*10.2(1) 1996 Employee Stock Option Plan.
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*10.3(1) 1994 Stock Option Plan for Non-Employee Directors.
*10.4(1) Employment Agreement between First Home Savings Bank, F.S.B. and
Stephen D. Miller, as amended.
*10.5(1) Employment Agreement between First Home Savings Bank, F.S.B. and
Robert A. DiValerio, as amended.
*10.6(1) Employment Agreement between First Home Savings Bank, F.S.B. and Duff
P. O'Connor, as amended.
*10.7(1) Employment Agreement between First Home Savings Bank, F.S.B. and
Stephen R. Selverian, as amended.
*13 1996 Annual Report to Shareholders.
*21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP
*27 Financial Data Schedule.
- ----------
* Previously Filed
(1) Executive Compensation Plans and Arrangements.
(b) No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12b-15 of the rules and
regulations promulgated under the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to the registrant's Form 10-K report
to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST HOME BANCORP, INC.
DATE: April 22, 1997 By:/s/Stephen D. Miller
---------------------------
Stephen D. Miller, President
<PAGE>
EXHIBIT INDEX
Exhibit # Page
- --------- ----
* 3.1 Certificate of Incorporation.
* 3.2 Bylaws.
*10.1(1) Employee Stock Compensation Program.
*10.2(1) 1996 Employee Stock Option Plan.
*10.3(1) 1994 Stock Option Plan for Non-Employee Directors.
*10.4(1) Employment Agreement between First Home Savings Bank, F.S.B.
and Stephen D. Miller, as amended.
*10.5(1) Employment Agreement between First Home Savings Bank, F.S.B.
and Robert A. DiValerio, as amended.
*10.6(1) Employment Agreement between First Home Savings Bank, F.S.B.
and Duff P. O'Connor, as amended.
*10.7(1) Employment Agreement between First Home Savings Bank, F.S.B.
and Stephen R. Selverian, as amended.
*13 1996 Annual Report to Shareholders.
*21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP
*27 Financial Data Schedule.
- ----------
* Previously filed
(1) Executive Compensation Plans and Arrangements.
<PAGE>
Exhibit 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the registration statement on Form S-8 of our report dated
February 10, 1997 included in First Home Bancorp Inc.'s Form 10-K for the year
ended December 31, 1996.
Arthur Andersen LLP
Philadelphia, Pa.
April 14, 1997
