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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _______________ to __________________
Commission File Number 0-28700
FIRST HOME BANCORP INC.
(Exact name of Registrant as specified in its charter)
New Jersey 22-3423990
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
125 SOUTH BROADWAY
Pennsville, New Jersey 08070
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(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 pursuant to Section 12(g) of the Act:
Common Stock (no par value)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 voting stock held by non-affiliates of
the Registrant is $63,100,000.(1)
The number of shares of Common Stock outstanding as of March 18, 1998
was 2,708,426 shares.
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(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 on March 18, 1998. 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.
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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 ("HOLA"), as amended. 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 through 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 $31.0 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.
Accordingly, the assets and liabilities of Fidelity Mutual and the two
retail-banking offices were recorded at their fair market values on the books at
the time of the acquisitions and the historical results of operations prior to
the acquisitions were not adjusted.
On December 18, 1997, the Company and Sovereign Bancorp ("Sovereign")
entered into an Agreement and Plan of Merger (the "Merger Agreement") providing
for the acquisition (the "Merger") of the Company by Sovereign. Subject to the
terms of the Merger Agreement, and as adjusted for a six for five stock split
previously announced by Sovereign which is payable on April 15, 1998, each
holder of Company common stock will receive as consideration upon consummation
of the transaction $31.25 in value of Sovereign common stock for each share of
Company common stock if Sovereign's stock price remains between $15.00 and
$18.33 per share during the 15-day period prior to the closing of the
transaction. If the average price of Sovereign's stock drops below $15.00 per
share during the pricing period prior to closing, shareholders of the Company
would be entitled to receive a fixed rate of 2.083 shares of Sovereign common
stock for each share of Company common stock. If Sovereign's average stock price
is above $18.33 per share during the pricing period prior to Closing,
shareholders of the Company would be entitled to receive a fixed rate of 1.705
shares of Sovereign common stock for each share of Company common stock.
The Merger Agreement may be terminated by the Company if the average
stock price of Sovereign common stock is less than $11.25 per share, provided
however, that if the Company elects to terminate the
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Agreement because Sovereign's average stock price is less than $11.25, Sovereign
shall have the option to elect to increase the Applicable Exchange Ratio (as
defined in the Merger Agreement) to an amount which when multiplied by the
Sovereign average stock price, determined as of the Closing Date, is equal to
$23.44. In addition, the Merger Agreement may be terminated by mutual consent of
the parties, and by either party in the event closing does not occur by July 31,
1998. Additionally, either party may terminate the Merger Agreement based upon
the other party's failure to perform or observe in any material respect its
obligations under the Merger Agreement.
Consummation of the transactions contemplated by the Merger Agreement is
subject to various conditions, including (i) receipt of the requisite approval
of the Merger Agreement by the shareholders of the Company, (ii) receipt of
requisite regulatory approvals from the OTS and any other applicable regulatory
authorities, (iii) receipt of opinions from the parties' respective legal
counsel (including an opinion by Sovereign's counsel as to the tax treatment of
certain aspects of the Merger), (iv) receipt of a letter from Sovereign's
independent public accountants to the effect that the Merger shall be accounted
for as a pooling-of-interests, and (v) satisfaction of certain other conditions.
Consummation of the Merger is expected in the second quarter of 1998.
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, 1997. At
December 31, 1997, the Company had total consolidated assets, deposits and net
worth of approximately $537.8 million, $326.0 million and $37.4 million,
respectively.
The Company'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 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 Company 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.
The Company is subject to examination and comprehensive regulation by
the OTS and the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of the Federal Home Loan Bank of New York ("FHLB of New York" or "FHLB"),
which is one of the 12 regional banks comprising the Federal Home Loan Bank
System ("FHLB System"). The Bank is also subject to regulation by the Federal
Reserve Board ("FRB") governing reserves required to be maintained against
deposits and certain other matters.
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.
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.
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Loan Portfolio Composition
At December 31, 1997, the net loan portfolio totaled $276.3 million,
representing 51.4% of the Company's total assets. Gross loans amounted to $284.6
million, of which $234.0 million were mortgage loans comprised of $216.3 million
in residential mortgage loans and construction loans and $17.7 million in
commercial real estate loans. In addition, $48.2 million was invested in
consumer loans and $2.3 million in commercial business loans at December 31,
1997.
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,
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1997 1996 1995 1994 1993
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(dollars in thousands)
Amount % Amount % Amount % Amount % Amount %
---------- ---- -------- ---- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Real Estate loans:
Residential property....... $208,809 73.4% $201,269 75.7% $203,375 77.4% $190,499 77.2% $161,507 72.8%
Loans held for sale........ 310 .1 676 .3 418 .2 288 .1 16,967 7.6
Construction............... 5,486 1.9 3,824 1.4 3,258 1.2 3,707 1.5 5,449 2.5
FHA and VA loans........... 1,674 .6 2,304 .9 2,890 1.1 2,277 .9 2,711 1.2
Commercial................. 17,715 6.2 17,214 6.5 15,671 6.0 16,398 6.7 14,476 6.5
-------- ----- --------- ------ -------- ------ -------- ------ -------- -----
Total real estate loans...... 233,994 82.2 225,287 84.8 225,612 85.9 213,169 86.4 201,110 90.6
-------- ----- --------- ------ -------- ------ -------- ------ -------- -----
Other commercial loans....... 2,348 .8 1,948 .7 1,233 .5 928 .4 705 .3
-------- ----- --------- ------ -------- ------ -------- ------ -------- -----
Consumer loans:
Mobile home loans.......... 5,651 2.0 6,606 2.5 7,805 3.0 9.705 4.0 475 .2
Equity..................... 33,691 11.8 23,472 8.8 20,307 7.7 17,060 6.9 14,416 6.5
Automobile loans........... 4,720 1.7 4,631 1.8 4,088 1.6 3,017 1.2 2,933 1.3
Savings account loans...... 1,950 .7 1,900 .7 1,712 .6 1,573 .6 1,573 .7
Other loans................ 2,211 .8 1,847 .7 1,827 .7 1,281 .5 774 .4
-------- ----- --------- ------ -------- ------ -------- ------ -------- -----
Total consumer loans......... 48,223 17.0 38,456 14.5 35,739 13.6 32,636 13.2 20,171 9.1
-------- ----- --------- ------ -------- ------ -------- ------ -------- -----
Total loans receivable....... 284,565 100.0% 265,691 100.0% 262,584 100.0% 246,733 100.0% 221,986 100.0%
===== ===== ===== ===== =====
Less:
Loans in process........... (3,045) (1,222) (1,681) (1,114) (2,065)
Net deferred loan fees,
premiums and discounts (1,618) (1,800) (2,124) (2,136) (1,214)
Allowance for credit losses.. (3,616) (3,760) (3,562) (3,315) (2,663)
-------- -------- --------- ------- --------
Total loans receivable, net.. $276,286 $258,909 $255,217 $240,168 $216,044
======== ======== ======== ======== ========
</TABLE>
Contractual Maturities
The following table reflects the scheduled contractual maturities of
the loan portfolio by type of loan at December 31, 1997. 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 actual life of the loan is generally substantially less than the contractual
life because of 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
December 31, Due in Year(s) Ending December 31,
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2001- 2003- 2008- 2013 and
1997 1998 1999 2000 2002 2007 2012 Thereafter
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(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans:
Adjustable rate.............. $75,946 $ 5,035 $ 1,768 $ 2,028 $ 3,812 $11,429 $13,490 $38,384
Fixed rate................... 134,508 8,473 9,302 9,635 19,986 48,908 27,662 10,542
Consumer loans
Adjustable rate.............. 4,161 32 27 27 54 132 130 3,759
Fixed rate................... 43,752 7,746 6,396 5,828 8,900 10,221 2,604 2,057
Commercial loans
Adjustable rate.............. 7,952 1,935 478 424 732 1,463 1,501 1,419
Fixed rate................... 11,533 1,787 1,339 1,767 1,806 3,186 1,429 219
---------- --------- --------- --------- ------------------ --------- ----------
Total loans..................... $277,852 $25,008 $19,310 $19,709 $35,290 $75,339 $46,816 $56,380
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</TABLE>
Of the $252.8 million total loans due after one year, $171.7 million
are fixed rate loans and $81.1 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.
To shorten the period for assets to reprice, adjustable-rate mortgage
loans are originated which reprice either annually or on a three year basis.
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 residential
loans granted for terms of thirty years are generally originated with the intent
for sale into the secondary market. These loans are generally classified as
loans held for sale. Generally, after their sale, the loans continue to be
serviced by the Company. Adjustable rate residential mortgage loans amounted to
approximately $75.9 million, or 36.2% of the portfolio of residential mortgage
loans at December 31, 1997.
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, or initially three years then every year thereafter, 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 Company 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 Company utilizes
the due on sale clause as a means of accelerating the rate of early repayment of
fixed-rate loans.
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The Company 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 loaned.
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. These loans are not actively solicited and are made on a case-by-case
basis to existing customers. At December 31, 1997 construction loans comprised
1.9% 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, 1997 commercial
real estate loans totaled $17.7 million, or 6.2% 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
risks 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 home equity lines of credit, 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 residential mortgage loans. At December 31,
1997, the consumer loan portfolio was $48.2 million, or 17.0% of total loans.
During 1994, $10.0 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
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mobile homes located in various states. Collection and other servicing activity
is performed by a third party. The outstanding balance as of December 31, 1997
was $4.7 million, or 1.7% of total loans.
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, 1997, commercial business loans totaled $2.3
million and represented 0.8% 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
Thirty year fixed rate, and some hybrid variable rate residential real
estate loans are generally originated in conformity with standard underwriting
criteria to assure maximum eligibility for possible resale in the secondary
market. Fifteen year fixed rate and certain adjustable rate mortgages are
originated for portfolio. 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 Vice
President-Lending or the Executive Vice President of Lending/Operations (EVP-LO)
within certain limits. Loans between $300,000 and $750,000 require approval by
the Vice President-Lending and the EVP-LO. Loans between $750,000 to $1,000,000
require approval by the Loan Committee. The Loan Committee consists of four
members of the Board of Directors, three of which are independent outside
directors. Loans that exceed $1,000,000 or loans in excess of the "Loans to One
Borrower" policy limits (50% of regulatory limit or $2.7 million) are reviewed
by and require the approval of the Board of Directors.
Consumer loans and commercial business loans are underwritten on the
basis of the borrower's credit history, 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 are approved by the Consumer Loan Manager. Consumer loans between
$100,000 and $300,000 are required to be approved by Consumer Loan Manager or
Vice President-Lending and the EVP-LO. Loans between of $300,000 and $500,000
require the approval of the Loan Committee. Loans in excess of $500,000 or loans
in excess of the "Loans to One Borrower" policy limits (50% of regulatory limit
or $2.7 million) requires the approval of the Board of Directors.
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 Company purchased residential
loans totaling $19.4 million, $6.1 million and $22.2 million, during the years
ended December 31, 1997, 1996 and 1995, respectively. In most instances,
collection and other servicing activity is performed by a third party servicer.
To reduce its portfolio of fixed-rate mortgages and to provide
servicing fee income and additional liquidity to continue lending, residential
loans are sold for cash directly to FHLMC, FNMA or other investors. The Company
retains as a servicing fee a portion of the interest paid by the borrower on
loans
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sold. Servicing responsibilities include loan payment collections and other loan
related servicing duties. At December 31, 1997, approximately $65.2 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,
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1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at beginning of period.. $265,691 $262,584 $246,733 $221,986 $185,466
Loans originated:
Construction (reported gross).................... 7,528 6,149 5,729 6,989 7,813
Loans on existing property....................... 23,550 31,068 20,461 46,348 58,300
Commercial loans................................. 3,687 5,885 2,588 3,329 3,880
Consumer and other loans......................... 25,268 15,994 14,965 12,390 9,439
--------- --------- --------- --------- ---------
Total loans originated............................... 60,033 59,096 43,743 69,056 79,432
Loans purchased (net)................................ 19,437 6,121 22,227 23,239 36,006
--------- ---------- --------- --------- ----------
Total loans originated and purchases................. 79,470 65,217 65,970 92,295 115,438
Loans sold........................................... (7,013) (8,588) (6,132) (18,317) (26,327)
Principal repayments................................. (54,715) (52,515) (44,201) (49,183) (52,952)
Other................................................ 1,132 (1,007) 214 (48) 361
--------- ---------- ------------------------ -----------
Net loan activity.................................... 18,874 3,107 15,851 24,747 36,520
---------- ----------- ---------- ---------- ----------
Total gross loans receivable at end of period ....... $284,565 $265,691 $262,584 $246,733 $221,986
======== ======== ======== ======== ========
</TABLE>
Geographic Lending Area
The Company has authority to lend anywhere in the United States.
Although loan originations are generally in the vicinity of its branch network,
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, 1997, the majority of mortgage loans receivable were
collateralized by property located in New Jersey and Delaware.
All consumer and commercial business loans are located in the Company's
immediate market area except the mobile home loans purchased in 1994. The mobile
home loans with outstanding balances totaling $4.7 million at December 31, 1997
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 it services, including late charges,
and credit life insurance premiums. Loan fees and discounts vary with the type
and terms of loans and with competitive and economic conditions. Generally, all
loan fees in excess of loan origination costs are deferred and amortized into
income over the estimated life of 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 3.0%. An
additional 1.0% is charged for providing the financing in connection with the
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origination of a construction loan. Net deferred fees, premiums and discounts
amounted to $1.6 million, $1.8 million and $2.1 million as of December 31, 1997,
1996 and 1995, respectively.
Servicing fees relating to residential mortgage loans sold amounted to
$190,000, $214,000, and $231,000, for the years ended December 31, 1997, 1996
and 1995, 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 again. In certain
instances, the Bank may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his or her financial affairs.
If a mortgage loan continues in a delinquent status for more than
ninety days, the Company 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 Company is the buyer. The acquired
property is then carried as "real estate owned" until sold. Such sales may be
financed with a "loan to facilitate" which usually involves more favorable
borrowing terms than normally permitted by the Company'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 90 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 may be restored to accrual status if the borrower has demonstrated the
ability to make future payments of principal and interest.
Real estate owned is carried at the lower of cost (carrying value at
the date of acquisition) or estimated fair value less estimated costs 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 generally accepted accounting principals (GAAP).
Losses on such sales are charged to operations as incurred. Carrying costs, such
as maintenance and property taxes are charged to operations as incurred.
Non-performing assets amounted to $4.2 million, $4.2 million and $3.4
million at December 31, 1997, 1996 and 1995, respectively. Non-performing assets
as a percentage of total assets were 0.8%, at each of December 31, 1997, 1996
and 1995. There were no significant changes in the amount and type of
non-performing assets from 1996 and 1997. 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 $941,000 in 1996. Of the $1,122,000 in delinquent loans that
are serviced by others at December 31, 1996, $269,000 have FHA insurance or a VA
guaranty. The liquidation of non-performing assets is dependent upon the
economy, demand for real estate and interest rates.
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On January 1, 1995, Financial Accounting Standards Board (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.
The following table sets forth for the periods indicated certain
information regarding non-performing assets. At December 31, 1997, three past
due loans of more than 90 days with balances totaling $267,000 were accruing
interest. Two loans are in the process of being refinanced by another financial
institution. These loans are anticipated to be repaid at the end of March 1998.
The third loan is paying in accordance with a repayment agreement. At December
31, 1995, one past due loan of more than 90 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,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans.........................................
Residential........................................... $2,471 $2,316 $2,308 $3,732 $2,870
Commercial............................................ 577 592 352 731 913
Consumer.............................................. 310 305 261 108 81
------- ------- -------- ------ ------
Total non-accrual loans................................... 3,358 3,213 2,921 4,571 3,864
Real estate owned......................................... 855 941 481 303 551
Other repossessed assets.................................. -- 7 6 -- 23
------- ------- -------- ------ ------
Total non-performing assets............................... $4,213 $4,161 $3,408 $4,874 $4,438
====== ======= ====== ====== ======
Total non-performing assets as a percent of total assets.. 0.8% 0.8% 0.8% 1.3% 1.3%
====== ======= ====== ====== ======
</TABLE>
A committee comprised of the President, EVP-LO, Chief Financial
Officer, Vice President-Lending/Operations, Investment Officer, and Treasurer of
the Bank monitors the quality of its assets on a periodic 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 existing facts, 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 assets has
absolutely no recovery or salvage value, but, rather, that it is not practical
or desirable to defer writing off the asset even though partial recovery may be
effected in the future.
-9-
<PAGE>
The regulation also established a special mention category. Assets
included in this category do not currently expose the Company to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's attention. As of December 31, 1997,
$2.3 million in loans was categorized as special mention.
The Company 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 Company is required to
establish prudent general allowances for loan losses. When assets are classified
as Loss, the Company 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 Company's
policy is not to carry specific valuation allowances on classified assets. 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,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate owned............................ $ 855 $ 941 $ 481 $ 303 $ 551
Other repossessed assets..................... -- 7 6 -- 23
Commercial real estate loans................. 577 592 352 731 913
Residential mortgage loans................... 2,471 2,316 2,308 3,732 2,870
Consumer loans............................... 310 305 261 108 81
------ ------ ------ ------ ------
Total classified assets...................... $4,213 $4,161 $3,408 $4,874 $4,438
====== ====== ====== ====== ======
Ratio of classified assets to total assets... 0.8% 0.8% 0.8% 1.3% 1.3%
====== ====== ====== ====== ======
</TABLE>
The following is a description of classified assets:
Real Estate Owned and Other Repossessed Assets. At December 31, 1997,
11 real estate owned properties were classified as Substandard. The properties
are for sale and are either vacant or rented.
Loans. At December 31, 1997, 79 residential, commercial and consumer
loans were classified as Substandard.
Allowance for Credit Losses. Allowance for credit losses is established
based on the perceived risk of the loan portfolio. The allowance is reviewed and
adjusted 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
-10-
<PAGE>
underwriting practices. If certain real estate markets weaken, particularly New
Jersey and Delaware, increases in the allowance may be required in future
periods.
Charge-offs are recorded against 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.
The table shown below reflects the changes in the allowance for credit
losses for the years indicated.
<TABLE>
<CAPTION>
Real Estate Mortgage
---------------------------------------------------------
(in thousands)
Residential Commercial Other Total
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995..................... $ 1,593 $ 984 $ 738 $ 3,315
Additions charged to operations............ 50 50 500 600
Recoveries................................. 7 40 180 227
Losses charged............................. (165) -- (415) (580)
-------- ------- -------- --------
Balance at December 31, 1995................... 1,485 1,074 1,003 3,562
Additions charged to operations............ 100 75 225 400
Recoveries................................. 21 59 75 155
Losses charged............................. (136) (13) (208) (357)
-------- --------- -------- --------
Balance at December 31, 1996................... 1,470 1,195 1,095 3,760
Additions charged to operations............ 25 125 250 400
Recoveries................................. 28 20 116 164
Losses charged............................. (113) (268) (327) (708)
-------- -------- -------- --------
Balance at December 31, 1997................... $1,410 $1,072 $1,134 $3,616
====== ====== ====== ======
</TABLE>
Net charge-offs from loans and foreclosed real estate as percentage of
average loans outstanding were as follows for the years indicated:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net charge-offs (recoveries) from loans....................... $544 $202 $353
Net charge-offs (recoveries) from foreclosed real estate...... 37 90 (65)
----- ------ -----
Total......................................................... $581 $292 $288
==== ==== ====
% of average loans outstanding................................ .22% .11% .12%
==== ==== ====
</TABLE>
-11-
<PAGE>
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>
1997 1996 1995
--------------------------- --------------------------- ----------------------------
Percentage Percentage Percentage
Amount of Portfolio Amount of Portfolio Amount of Portfolio
------------- ------------ ------------- ------------ -------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans $1,410 .65% $1,470 .71% $1,485 .71%
Commercial real estate loans 1,072 6.05 1,195 6.94 1,074 6.85
Other loans 1,134 2.24 1,095 2.85 1,003 2.71
----- ---- ----- ---- ----- ----
Total $3,616 1.29% $3,760 1.42% $3,562 1.36%
====== ==== ====== ==== ====== ====
</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.
Investment Securities Activities
The Company is required under federal regulations to maintain a minimum
amount of liquid assets and is also permitted to invest in 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 of Notes 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 of those
classified as available-for-sale and reported at fair value with unrealized
gains and losses, net of tax, 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.
-12-
<PAGE>
The table below sets forth the composition of the investment securities
portfolio at amortized cost for the years indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Held to maturity:
Tax exempt obligations...................... $ 2,233 $ 2,321 $ 517
Federal Home Loan Bank stock................ 7,376 7,376 5,317
-------- -------- --------
Subtotal......................................... 9,609 9,697 5,834
-------- -------- --------
Held for trading:
Mutual fund................................. 64 60 57
-------- -------- --------
Subtotal......................................... 64 60 57
-------- -------- --------
Available-for-sale:
U.S. Government agencies ................... 13,459 17,976 19,970
Corporate notes............................. 3,629 4,336 6,310
Common stock................................ 791 -- --
Preferred stock............................. 2,548 2,548 2,097
-------- -------- --------
Subtotal......................................... 20,427 24,860 28,377
-------- -------- --------
Total............................................ $30,100 $34,617 $34,268
======== ======== ========
</TABLE>
The investment securities portfolio at December 31, 1997 categorized by
maturity is as follows:
<TABLE>
<CAPTION>
Weighted
Amortized Average
Cost Yield
------------ -------------
(dollars in thousands)
<S> <C> <C> <C>
No maturity............................................... $10,779 6.41%(1)
Due in one year or less................................... 5,229 5.54%
Due after one year through five years..................... 14,092 6.77%
--------
Total..................................................... $30,100
=======
</TABLE>
(1) Includes current dividend yield on FHLB stock, preferred and common
stock.
-13-
<PAGE>
The following table sets forth the purchase, transfer, maturity
activity and repayments at amortized cost of the investment securities during
1997, 1996, and 1995.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Investment securities at beginning of period......... $34,617 $34,268 $39,867
Purchases............................................
U.S. Government agencies........................ 7,465 9,026 10,965
Corporate notes................................. -- -- 2,934
Tax exempt obligations.......................... 1,756 2,321 517
Federal Home Loan Bank stock.................... -- 2,058 660
Mutual fund..................................... 4 3 5
Common stock.................................... 10,597 9,369 1,812
Preferred stock................................. -- 1,500 --
-------- -------- --------
Total purchases...................................... 19,822 24,277 16,893
-------- -------- --------
Sales................................................
Stock........................................... 9,809 10,418 2,216
-------- -------- --------
Total sales.......................................... 9,809 10,418 2,216
-------- -------- --------
Maturities...........................................
U.S. Treasury note.............................. -- -- 1,000
U.S. Government agencies........................ 12,011 10,996 13,000
Corporate notes................................. 725 1,997 5,555
Tax exempt obligations.......................... 1,794 517 721
-------- -------- --------
Total maturities..................................... 14,530 13,510 20,276
-------- -------- --------
Investment securities at end of period............... $30,100 $34,617 $34,268
======== ======== ========
</TABLE>
Mortgage-Backed Securities Activity
A substantial part of the Company's business includes investments in
MBS. The Company 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 of Notes to the Consolidated Financial Statements.
-14-
<PAGE>
The following table sets forth the composition of the mortgage-backed
securities portfolio at amortized cost by category.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1997 1996 1995
---------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Held to maturity.....................................
FNMA pass-through certificates.................. $ 9,672 $ -- $ --
FHLMC pass-through certificates................. 8,771 -- --
Non-agency pass-through certificates............ 5,444 6,143 7,320
REMIC........................................... 104,001 91,248 60,675
---------- --------- ----------
Subtotal............................................. 127,888 97,391 67,995
---------- --------- ----------
Available-for-sale:
FNMA pass-through certificates.................. 1,482 1,863 2,341
FHLMC pass-through certificates................. 2,997 4,342 5,574
GNMA pass-through certificates.................. 4,875 6,070 7,775
REMIC........................................... 78,520 80,416 63,633
---------- --------- ----------
Subtotal............................................. 87,874 92,691 79,323
---------- --------- ----------
Total................................................ $215,762 $190,082 $147,318
========== ========= ==========
</TABLE>
The mortgage-backed securities portfolio at December 31, 1997
categorized by contractual maturity is as follows:
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
------------ -----------------
(dollars in thousands)
<S> <C> <C>
Due after one year through five years................... $ 2,022 7.74%
Due after five years through ten years ................. 7,012 7.56%
Due after ten years .................................... 206,728 6.75%
---------
Total................................................... $215,762
========
</TABLE>
Actual maturities will differ from contractual maturities due to
prepayments.
-15-
<PAGE>
The following table sets forth the purchase, transfer, sales activity,
repayments and amortization of fair market premium at amortized cost of the MBS
during 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
MBS at beginning of period........................... $190,082 $147,318 $ 99,417
Purchases of MBS..................................... 46,814 55,491 54,841
Sales of MBS......................................... -- (3,612) --
Principal repayments................................. (21,134) (9,085) (6,800)
Amortization of fair market premium.................. -- (30) (140)
---------- ---------- ----------
MBS at end of period................................. $215,762 $190,082 $147,318
========== ========== ==========
</TABLE>
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, principal repayments on MBS,
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 Company 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 investments or
mortgage-backed securities available-for-sale.
Deposits
The Company offers a 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 northern 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 (includes "flexible interest money account" --
"FIMA") and municipal deposits, 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, 1997 represented approximately 42.6% of deposits.
At December 31, 1997, the deposit base contained $17.4 million in eight month,
$17.0 million in 60 month, and $16.1 million in 12 month fixed term fixed-rate
retail certificates which represent 12.5%, 12.2%, and 11.6%, respectively, of
total retail certificates. At December 31, 1997, the Bank had $13.5 million in
24 month retail certificates with a rate bumper feature. The rate bumper
certificates allow the depositor to elect once during the term of the
certificate to increase
-16-
<PAGE>
the rate on the certificate to the current rate offered on 24 month
certificates. The rate bumper feature was discontinued for all certificates
opened or rolled over after December 31, 1997.
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,
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net increase in deposits before interest credited........... $26,898 $12,332 $23,213
Interest credited........................................... 8,847 7,790 7,854
-------- -------- --------
Net increase in deposits.................................... $35,745 $20,122 $31,067
======== ======== ========
</TABLE>
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,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Account Type Amount % Amount % Amount %
- ------------------------------------------- --------- ----- --------- ----- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings and club accounts.................. $ 32,185 9.9% $ 34,541 11.9% $ 40,043 14.8%
NOW and commercial accounts................ 35,442 10.9 34,072 11.8 33,335 12.4
Money market, municipal deposits,
and FIMA .............................. 72,274 22.2 51,407 17.7 41,365 15.3
Retail certificates of deposit............. 138,778 42.6 134,631 46.4 127,635 47.3
Jumbo certificates of deposit.............. 47,068 14.4 35,268 12.2 27,589 10.2
--------- ------ --------- ------ ----------------
Total deposits............................. $325,747 100.0% $289,919 100.0% $269,967 100.0%
========= ====== ========= ====== ================
</TABLE>
The following table presents by various interest rate categories, the
amount of retail certificate accounts at December 31, 1997 and 1996 and the
amount of retail certificate accounts at December 31, 1997 maturing within one
year, two years, three years and after three years.
<TABLE>
<CAPTION>
At December 31, Amounts at December 31, 1997
Maturing
--------------------- -------------------------------------
Within Within After
Within two three three
1996 1997 one year years years years
--------- ---------- -------- -------- -------- -------
Retail certificate accounts: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
2.001 - 4.00%.......................... $ 78 $ 12 $ -- $ 12 $ -- $ --
4.001 - 6.00%.......................... 120,642 127,797 94,608 21,117 6,817 5,255
6.001 - 8.00%.......................... 13,719 10,954 1,086 2,195 7,673
8.001 - 10.00%......................... 192 15 15 -- -- --
--------- ---------- -------- -------- -------- -------
Total certificate accounts................. $134,631 $138,778 $95,709 $23,324 $14,490 $5,255
========= ========== ======== ======== ======== =======
</TABLE>
-17-
<PAGE>
The following table presents by various interest rate categories, the
amount of Jumbo certificates at December 31, 1997 and 1996 and the amount of
Jumbo certificates at December 31, 1997 maturing within one year, two years,
three years and after three years.
<TABLE>
<CAPTION>
At December 31, Amounts at December 31, 1997
Maturing
------------------- ------------------------------------
Within Within After
Within two three three
1996 1997 one year years years years
-------- --------- -------- -------- ------- -------
Jumbo certificate accounts: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
4.001 - 6.00%......................... $33,783 $32,544 $27,962 $ 4,582 $ -- $ --
6.001 - 8.00%......................... 1,485 14,524 498 7,527 3,377 3,122
-------- --------- -------- -------- ------- -------
Total certificate accounts................. $35,268 $47,068 $28,460 $12,109 $ 3,377 $3,122
======== ========= ======== ======== ======= =======
</TABLE>
The following table presents certain information concerning deposit
accounts at December 31, 1997, including the weighted average rate of such
accounts and the scheduled quarterly maturities or repricing of the certificate
accounts.
<TABLE>
<CAPTION>
Weighted
% of Average
Total Nominal
Amount Deposits Rates
----------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Savings and club accounts............................ $ 32,185 9.9% 2.76%
NOW.................................................. 27,595 8.4 1.26
Money market, municipal deposits, and
FIMA accounts.................................... 72,274 22.2 4.31
Non-interest bearing accounts........................ 7,847 2.4 --
--------- ----- ----
Total................................................ 139,901 42.9 3.11
------- ---- ----
Certificate accounts maturing by quarter:
March 31, 1998.................................. 54,249 16.7 5.36
June 30, 1998................................... 30,404 9.3 5.28
September 30, 1998.............................. 25,218 7.7 5.49
December 31, 1998............................... 14,298 4.4 5.37
March 31, 1999.................................. 7,484 2.3 5.69
June 30, 1999................................... 7,654 2.4 5.85
September 30, 1999.............................. 11,351 3.5 5.85
December 31, 1999............................... 8,944 2.7 5.87
March 31, 2000.................................. 9,582 2.9 6.12
June 30, 2000................................... 4,910 1.5 6.05
September 30, 2000.............................. 1,828 .6 6.05
December 31, 2000............................... 1,547 .5 5.88
Thereafter...................................... 8,377 2.6 5.94
---------- --- ----
Total certificate amounts............................ 185,846 57.1 5.55
--------- ---- ----
Total deposits....................................... $325,747 100.0% 4.50%
======== ===== ====
</TABLE>
-18-
<PAGE>
Borrowings
Borrowings are obtained from the FHLB of New York and a major
securities broker (for additional information see Note 12 of Notes to the
Consolidated Financial Statements). The Company's capital stock of the FHLB of
New York and certain mortgage loans are pledged as collateral to secure the
advances from the FHLB of New York. Eligibility to obtain advances are subject
to certain standards related to creditworthiness. Such advances 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 advances pursuant to each program may be put as well as limitations on
the size of such advances.
In addition to deposits, the FHLB of New York advances are utilized to
fund lending operations. At December 31, 1997, advances from the FHLB of New
York amounted to $95.6 million. These advances, which mature at various dates
through 2002, bear interest at rates between 5.31% and 7.52%.
The following table sets forth certain information regarding FHLB
advances as of the end of and during the periods indicated:
<TABLE>
<CAPTION>
At
December 31, Year Ended December 31,
-------------- -----------------------------------------
1997 1997 1996 1995
-------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Maximum amount of total advances outstanding at any
month end and at December 31, 1997................. $95,561 $105,475 $116,597 $105,797
Approximate average total advances outstanding (1)....... N/A 95,283 108,357 93,038
Approximate weighted average rate (1).................... 5.97% 5.92% 5.76% 5.83%
</TABLE>
- ----------
(1) Average daily balances are used in 1997 and 1996. Average month-end
balances are used in 1995.
Borrowings also include securities sold under agreements to repurchase.
Securities sold under agreements to repurchase are obligations collateralized by
mortgage-backed securities or other investments. These borrowings consisted of
securities sold under agreements to repurchase obtained through a major
securities broker and the FHLB of New York. At December 31, 1997, $76.3 million
in securities sold under agreements to repurchase were outstanding. The
agreements which mature at various dates through 2000, bear interest at rates
between 5.74% and 6.11%. At December 31, 1997, $62.0 million in reverse
repurchase agreements are callable one year earlier at the option of the lender.
-19-
<PAGE>
The following table sets forth certain information regarding securities
sold under agreements to repurchase as of the end of and during the periods
indicated:
<TABLE>
<CAPTION>
At
December 31, Year Ended December 31,
-------------- -----------------------------------------
1997 1997 1996 1995
-------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Maximum amount of total repurchase agreements
outstanding at any month end and at December 31, 1997. $76,268 $84,559 $54,967 $44,516
Approximate average total repurchase N/A 73,881 43,976 39,318
agreements outstanding (1)............................
Approximate weighted average rate (1).................... 5.97% 5.80% 5.78% 6.03%
</TABLE>
- ----------
(1) Average daily balances are used in 1997 and 1996. Average month-end
balances are used in 1995.
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.
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 daily basis for 1997 and 1996. Month-end balances were used
for 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Weighted average yield on loan portfolio.......................... 8.38% 8.46% 8.37%
Weighted average yield on mortgage-backed securities.............. 7.12% 7.32% 7.32%
Weighted average yield on investment portfolio.................... 6.84% 6.90% 6.86%
Weighted average yield on all interest-earning assets............. 7.78% 7.93% 7.90%
Weighted average rate paid on deposits............................ 4.45% 4.36% 4.27%
Weighted average rate paid on borrowings.......................... 5.87% 5.71% 5.89%
Weighted average rate paid on all interest-bearing liabilities.... 4.96% 4.86% 4.81%
Interest rate spread (spread between weighted average rate on
all interest-earning assets and all interest-bearing liabilities) 2.82% 3.07% 3.09%
Net yield on average interest-earning assets...................... 3.05% 3.28% 3.29%
Ratio of interest-earning assets to interest-bearing liabilities.. 104.83% 104.55% 104.22%
</TABLE>
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<PAGE>
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 thrift institution, 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, 1997, the Company had 109 full-time employees and 16
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
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<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
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<PAGE>
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. The activities described in
(i) through (vi) above may only be engaged in after giving the OTS prior notice
and being informed that the OTS does not object to such activities. 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 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.
-23-
<PAGE>
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. 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 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
restrictions. 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.
-24-
<PAGE>
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 regu latory 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 Federal Home Loan Bank ("FHLB") System, consisting of twelve FHLBs,
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 5.0% 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, 1997.
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 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, 1997, the Bank had $95.6
million in advances and $26.2 million in repurchase agreements for a total of
$121.8 million in borrowings from the FHLB of New York.
-25-
<PAGE>
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 5.0%, tier 1
risk-based ratio of at least 6.0% ("Tier 1 risk-based capital") and total
risk-based ratio of at least 10.0%) 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 4.0% or total risk-based
ratio of less than 8.0%) and considered of substantial supervisory concern pay
the highest premium. Risk classification of all insured institutions will be
made by the FDIC 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.
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<PAGE>
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.
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 10.0% or greater, a Tier 1 risk-based capital ratio
(core capital to risk weighted assets) of 6.0% or greater, and a leverage
capital ratio (core capital to adjusted total assets) of 5.0% 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 8.0% or
greater, a Tier 1 risk-based capital ratio of 4.0% or greater and generally a
leverage capital ratio of 4.0% or greater. An institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier 1 risk-based capital ratio of less than 4.0% or generally has a
leverage capital ratio of less than 4.0%. A "significantly undercapitalized"
institution is one that has a total risk based capital ratio that is less than
6.0%, a Tier 1 risk based capital ratio that is less than 3.0%, or a leverage
ratio that is less than 3.0%. 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 2.0%. 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, liquidity or sensitivity to market
risk ("CAMELS")).
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.
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<PAGE>
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 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 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 regulations 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
-28-
<PAGE>
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, 1997, the Bank had no capital
investments that qualified as supplementary capital and had $2.9 million of
general valuation allowances which were included in risk-based capital, the
maximum allowable under the regulations.
Under OTS regulations, an institution with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component from total capital for purposes of calculating the risk-based capital
requirement. Interest rate exposure is measured, generally as the decline in an
institution's net portfolio value that would result from a 200 basis point
increase or decrease in market interest rates (whichever would result in lower
net portfolio value), divided by the estimated economic value of the savings
association's assets. The interest rate risk component to be deducted from total
capital is equal to one-half of the difference between an institution's measured
exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the
estimated economic value of the institution's assets. In August 1995, the OTS
indefinitely delayed implementation of its IRR regulation.
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 2.0% will be deemed to be
operating in an unsafe or unsound condition unless the depository institution
has entered into and is in com pliance with a written agreement with its primary
federal regulator to increase its capital to acceptable levels
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<PAGE>
and as to which the FDIC is a party. Depository institutions with a core capital
ratio of at least 2.0% may still be considered by the FDIC, under appropriate
circumstances, to be in an unsafe and unsound condition.
The Bank is in full compliance with its capital requirements. The
following table reflects at December 31, 1997 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 15 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% $16,083 1.50% $ 8,042 8.00% $18,471
Actual Capital 6.60% 35,387 6.60% 35,387 16.55% 38,207
---- -------- ---- ------- ----- --------
Excess Capital 3.60% $19,304 5.10% $27,345 8.55% $19,736
==== ======= ==== ======= ====== =======
</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
activities 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 regu lation 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
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(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 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 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 accor dance with the following schedule: (i) if the
association's current capital satisfies the 8.0% risk-based capital standard it
may make distributions up to 75.0% 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
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subsidiary of a holding company) provided that it has a CAMELS 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 50.0% 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 or
quarterly 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 4.0%, 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. The Bank
exceeded its liquidity requirement at December 31, 1997.
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 65.0% 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
20.0% 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, 20.0% 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
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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, 1997, approximately 98.5% 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 15.0% 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
10.0% 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 30.0% 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 10.0% 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 one borrower to finance the sale of real property acquired in satisfaction of
debts previ ously 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, 1997, the Bank's limit on loans to one borrower was
$5.3 million. At December 31, 1997, the Bank's largest aggregate amount of loans
to one borrower was $3.9 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
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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 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, 1997 was $114,000.
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
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which case penalties may be as high as $1.0 million per day. Criminal penalties
for most financial institution crimes include fines of up to $1.0 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 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 25.0% 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 10.0% 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
10.0% 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 determi
nation or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
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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, 1997, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements 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 alter native sources of funds before
borrowing from the Federal Reserve. The Bank did not have any discount window
borrowings as of December 31, 1997.
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 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
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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, 1997. For the years ended December 31, 1995, 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
$340,000. 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 has been able to defer the commencement of the
Six Year Period for the two year period (i.e., through the close of its last
taxable year beginning prior to January 1, 1998). The Bank satisfied 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 35.0% 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 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,
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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 34.0% (or 35.0% for taxable income in excess of $10.0
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 20.0%. 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 75.0% 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 25.0% 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 7.5% (for taxable income of $100,000
or less) or 9.0% (for taxable income over $100,000) 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
3.0% 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 $117,000 in 1997 and $106,000 in 1996. The Company's net
investment in branch offices, premises, equipment and leaseholds was $2.8
million at December 31, 1997.
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.
-39-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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, 1997 as adjusted to reflect stock
splits. The table also reflects the cash dividends paid with respect to each
quarter as adjusted for stock splits.
<TABLE>
<CAPTION>
For the Quarter Ended High Low Dividends
- ------------------------------------ ------------- ---------------- ------------------
<S> <C> <C> <C>
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
March 31, 1997 19.25 13.88 .10
June 30, 1997 19.38 17.88 .10
September 30, 1997 22.38 18.88 .10
December 31, 1997 33.00 21.25 .10
</TABLE>
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 (see Note 19 to the
Consolidated Financial Statements). 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, 1997, the Bank's regulatory capital
exceeded its regulatory capital requirements by approx imately $19.3 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."
-40-
<PAGE>
As of March 18, 1998, the Company's outstanding common stock was held
of record by approximately 950 shareholders. This estimate does not include an
indeterminate number of shareholders whose shares are held by brokers in "street
name."
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data) At or for the year ended December 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION INFORMATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets (1) $537,798 $498,399 $453,039 $388,621 $351,600
Loans receivable 276,286 258,909 255,217 240,168 216,044
Mortgage-backed securities 215,896 188,607 146,760 94,333 95,979
Investment securities 22,944 27,356 29,304 35,019 19,170
Deposits 326,043 290,298 270,176 239,108 227,327
Borrowings 171,829 173,148 150,126 123,633 98,331
Total shareholders' equity (2) 37,385 32,645 30,103 23,075 23,097
Book value per share (3) 13.80 12.05 11.12 8.58 8.86
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT INFORMATION
- -------------------------------------------------------------------------------------------------------------------
Total interest income $38,968 $36,450 $32,489 $26,775 $24,570
Total interest expense 23,680 21,364 18,972 13,901 12,152
Net interest income 15,288 15,086 13,517 12,874 12,418
Provision for credit losses 400 400 600 550 700
------- ------- ------- ------- -------
Net interest income after provision
for credit losses 14,888 14,686 12,917 12,324 11,718
Other income 1,333 1,387 2,307 1,240 1,784
SAIF recapitalization assessment --- 1,564 --- --- ---
Other expenses 9,127 9,189 7,853 6,866 7,020
------- ------- ------- ------- -------
Income before income taxes 7,094 5,320 7,371 6,698 6,482
Income taxes 2,366 1,035 2,660 2,495 2,426
------- ------- ------- ------- -------
Net income before cumulative effect of
a change in accounting principle 4,728 4,285 4,711 4,203 4,056
Cumulative effect of a change in
accounting principle --- --- --- --- 543
------- ------- ------- ------- -------
Net income $ 4,728 $ 4,285 $ 4,711 $ 4,203 $ 4,599
========= ======== ======== ======== ========
Net income per share:
Net income before cumulative effect of
a change in accounting principle $ 1.75 $ 1.58 $ 1.74 $ 1.56 $ 1.55
Cumulative effect of a change in
accounting principle -- -- -- -- .21
------- ------- ------- ------- -------
Basic net income per share (3) $ 1.75 $ 1.58 $ 1.74 $ 1.56 $ 1.76
========= ======== ======== ======== ========
Diluted net income per share (3) $ 1.72 $ 1.57 $ 1.74 $ 1.56 $ 1.72
========= ======== ======== ======== ========
Dividends per share (3) $ .40 $ .37 $ .36 $ .32 $ .24
========= ======== ======== ======== ========
</TABLE>
(footnotes on page 42)
-41-
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended December 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
SELECTED OTHER DATA (4)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets before cumulative
effect of a change in accounting principle .92% .91% 1.11% 1.12% 1.23%
Return on average assets after cumulative
effect of a change in accounting principle .92% .91% 1.11% 1.12% 1.40%
Return on average equity before cumulative
effect of a change in accounting principle 13.67% 13.79% 17.52% 17.79% 19.05%
Return on average equity after cumulative
effect of a change in accounting principle 13.67% 13.79% 17.52% 17.79% 21.60%
Dividend payout ratio 22.86% 23.42% 20.69% 20.51% 13.64%
Average shareholders' equity to average assets 6.72% 6.56% 6.34% 6.31% 6.47%
Capital ratios:
GAAP 6.74% 6.43% 6.64% 5.94% 6.56%
Tangible and core (2) 6.60% 6.45% 6.47% 6.69% 6.49%
Risk-based (2) 16.55% 16.84% 15.68% 15.65% 14.92%
Average interest rate spread 2.82% 3.07% 3.09% 3.42% 3.80%
Net yield on average interest-earning assets 3.05% 3.28% 3.29% 3.56% 3.94%
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.83% 104.55% 104.22% 103.61% 103.58%
General and administrative expense
to average assets 1.71% 1.84% 1.79% 1.75% 1.94%
Asset quality ratios:
Non-performing loans to total loans 1.20% 1.22% 1.13% 1.64% 1.07%
Non-performing assets to total assets .78% .83% .75% 1.25% 1.26%
Allowance for possible credit losses to
non-performing loans 107.69% 117.04% 121.94% 84.30% 114.09%
Allowance for possible credit losses to
non-performing assets 85.84% 90.38% 104.52% 68.02% 60.01%
Full service banking offices at end of period 10 10 10 8 8
</TABLE>
- -------------------------
(1) On January 23, 1995, two retail-banking offices located in Elmer and
Newfield, New Jersey were acquired and, in connection therewith, deposits
of $15.9 million were assumed. On June 25, 1993, White Eagle Federal
Savings Bank was acquired in a merger transaction accounted for as a
pooling-of-interests.
(2) The Bank exceeds all regulatory capital requirements. For additional
information see Note 15 to the Company's consolidated financial statements.
(3) The Company's book value, net income per share and dividends per share have
been adjusted to give effect to four-for-three stock splits effected in
February 1993, February 1994 and February 1997. In addition, net income per
share calculations have been restated to conform to Financial Accounting
Statement 128 "Earnings Per Share".
(4) Based on average daily balances beginning in 1996. Prior years are based on
month end balances where averages are indicated.
-42-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
The Company is the sole shareholder of the Bank and the Bank represents
substantially all of the Company's consolidated assets and liabilities at
December 31, 1997. Substantially all of the Company's consolidated revenues are
derived from the operations of the Bank. The Bank's business is that of a
financial intermediary and consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage and other loans. The Bank provides consumer banking
services in eight retail banking offices in New Jersey and two retail banking
offices in Delaware. The Bank is subject to significant competition from other
financial institutions, and is also subject to regulation and examination by the
OTS and the FDIC.
The Company's earnings are primarily dependent upon net interest
income. Net interest income is obtained from interest earned on loans and
investments less interest paid on deposits and borrowings. In addition to net
interest income, the Company derives other income from fees related to deposit
services, loan servicing fees, and other banking related fees and charges. In
addition to interest expense, major expenses primarily consist of salaries and
employee benefits, occupancy and equipment expenses, provision for credit
losses, marketing, deposit insurance premiums, and other operating expenses.
Earnings are also affected by gains and losses related to mortgage-banking
activity and investments held for trading. Funds for lending and investment are
obtained from deposit gathering at branch locations, investment and loan
repayments, proceeds from loan sales, borrowings, and cash flows from
operations.
Net interest income is affected by interest rate movements, general
economic conditions, and the competition for funds and loans. Lending activities
are influenced by a number of factors including the overall level of interest
rates, the market demand for housing, conditions in the construction industry
and the availability of funds. Availability of funds is affected by loan
repayments, loan sales, borrowing capacity and deposit gathering ability.
The Company has made, and may continue to make, certain forward-looking
statements with respect to market risk, expenses, the effect of competition on
net interest margin and net interest income, investment strategy and income,
deposit growth and other financial business matters for future periods. The
Company cautions that these forward-looking statements are subject to various
assumptions, risks, and uncertainties. Because the realization of the underlying
assumptions can not be guaranteed, actual results could differ materially from
forward-looking statements.
In addition to the factors identified herein, the following could cause
actual results to differ materially from such forward-looking statements:
pricing pressures on loan and deposit products, actions of bank and nonbank
competitors, changes in local and national economic conditions, changes in
regulatory requirements, actions of the Federal Reserve Board, and customers'
acceptance of the Company's products and services.
The Company's forward-looking statements are relevant only as of the
date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
-43-
<PAGE>
The year 1997 was characterized by a flattening yield curve and
increased competition for financial assets and yields. The yield on
interest-earning assets decreased to 7.78% for the year ended December 31, 1997
from 7.93% for the year ended December 31, 1996. The cost of interest-bearing
liabilities increased to 4.96% for the year ended December 31, 1997 from 4.86%
for the year ended December 31, 1996.
The following table sets forth for the periods indicated, information
regarding: (1) the yield on interest-earning assets and cost of interest-bearing
liabilities as of December 31, 1997; (2) the average balance of interest-earning
assets and the resultant interest income and average yields; (3) the total
dollar amount of interest-bearing liabilities (which include $7.8 million, $7.6
million, and $7.0 million of non-interest bearing deposits at December 31, 1997,
1996 and 1995, respectively) and the resultant interest expense and average
costs; (4) the net interest income; (5) interest rate spread; (6) the net yield
on weighted average interest-earning assets; and (7) the ratio of average
interest-earning assets to average interest-bearing liabilities. Average daily
balances are used for these calculations beginning in 1996. Average balances for
1995 were calculated on a month end balance basis. The table is not presented on
a tax equivalent basis because the Company's investment in tax-free obligations
is not material.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------------------------- -------------------------- ----------------------------
(dollars in thousands)
As of Average Average Average
Dec. 31, Average Yield/ Average Yield/ Average Yield/
1997 Balance Interest Rate Balance Interest Rate Balance Interest Rate
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) 8.28% $269,120 $22,555 8.38% $256,497 $21,712 8.46% $244,900 $20,490 8.37%
Mortgage-backed securities 7.04 198,950 14,173 7.12 169,984 12,448 7.32 128,805 9,435 7.32
Other (2) 6.49 32,746 2,240 6.84 33,205 2,290 6.90 37,393 2,564 6.86
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 7.67 500,816 38,968 7.78 459,686 36,450 7.93 411,098 32,489 7.90
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Non interest-earning assets 13,461 13,654 12,995
------- ------- -------
Total assets $514,277 $473,340 $424,093
======== ======== ========
Interest-bearing liabilities:
Deposits 4.50 $308,560 13,744 4.45 $277,799 12,121 4.36 $262,095 11,179 4.27
Borrowings 5.97 169,164 9,936 5.87 161,873 9,243 5.71 132,360 7,793 5.89
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total int.-bearing liabilities 5.01 477,724 23,680 4.96 439,672 21,364 4.86 394,455 18,972 4.81
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Non interest-bearing liabilities 1,980 2,599 2,743
------- ----- -------
Total liabilities 479,704 442,271 397,198
------- ------- -------
Shareholders' equity 34,573 31,069 26,895
------- ------- -------
Total liabilities and
shareholders' equity $514,277 $473,340 $424,093
======== ======== ========
Net interest income $15,288 $15,086 $13,517
======= ======= =======
Interest rate spread 2.66% 2.82% 3.07% 3.09%
==== ==== ==== ====
Net yield on weighted average
interest-earning assets 3.05% 3.28% 3.29%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 104.83% 104.55% 104.22%
====== ====== ======
</TABLE>
- ------------------------------------
(1) Amount is net of deferred loan origination costs, loans in process, net
unearned discount on loans purchased and allowance for credit losses and
includes non-performing loans.
(2) Consists of interest-earning deposits, short-term funds, investment
securities and Federal Home Loan Bank stock.
-44-
<PAGE>
Rate / Volume Analysis
Net interest income can also be analyzed in terms of the impact of
changing rates and changing volume. The following table describes the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities affected interest income and interest
expense during the periods indicated. Information is provided on changes in each
category attributable to (i) changes due to volume (changes in volume multiplied
by prior rate), (ii) changes due to rates (changes in rates multiplied by prior
volume) and (iii) net change. The net change attributable to the combined impact
of volume and rate has been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------- ----------------------------
(in thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio $1,059 $ (216) $ 843 $1,033 $ 189 $1,222
Mortgage-backed securities 2,085 (360) 1,725 3,125 (112) 3,013
Other (1) (31) (19) (50) (256) (18) (274)
------ -------- ------ ------ ----- ------
Total interest-earning assets 3,113 (595) 2,518 3,902 59 3,961
------ -------- ------ ------ ----- ------
Interest expense:
Deposits 1,370 253 1,623 707 235 942
Borrowings 423 270 693 1,841 (391) 1,450
------ -------- ------ ------ ----- ------
Total interest-bearing liabilities 1,793 523 2,316 2,548 (156) 2,392
------ -------- ------ ------ ----- ------
Net change in net interest income $1,320 $(1,118) $ 202 $1,354 $ 215 $1,569
====== ======= ====== ====== ===== ======
</TABLE>
- ---------------------
(1) Consists of interest-earning deposits, short-term funds, investment
securities and Federal Home Loan Bank stock.
Interest Rate Risk Management
The types of market risk exposures generally faced by banking entities
include interest rate risk, equity market price risk, foreign currency risk and
commodity price risk. Due to the nature of its operations, only interest rate
risk is significant to the Company.
The Company has a program to control its interest rate risk. The
strategy includes an emphasis on originating adjustable rate mortgage (ARM)
loans, the purchase of adjustable rate and short-term mortgage-backed securities
(MBS) and the origination of short-term consumer loans. The Board of Directors
has instructed management to maintain interest rate risk within prescribed
limits. An internal asset/liability modeling system monitors the effect on
income of changing market interest rates.
The difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period (gap) is also
monitored. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. When
interest rate sensitive liabilities exceed interest rate sensitive assets, the
gap is considered negative. However, because all interest rates and yields do
not adjust at the same velocity, the gap is only a general indicator of interest
rate sensitivity.
-45-
<PAGE>
During a period of rising interest rates, a negative gap tends to
adversely affect net interest income while a positive gap tends to increase net
interest income. During a period of declining interest rates, a negative gap
tends to increase net interest income while a positive gap tends to adversely
affect net interest income.
The Company's net interest income tends to increase in periods of
declining interest rates because its interest-bearing liabilities generally
reprice faster than its interest-earning assets. The Company's net interest
income tends to decrease in periods of rising interest rates. Therefore, rising
interest rates, particularly when combined with a flattening yield curve, could
have a significant negative impact on net interest income in future periods.
The Company's analysis of the gap between its interest-earning assets
and interest-bearing liabilities within specified periods includes the effects
of certain hedging techniques which are used by the Company to manage interest
rate risk. The Company used an interest rate swap agreement for this purpose.
An interest rate swap is a contractual agreement pursuant to which the
parties exchange interest payments on a specified principal amount (referred to
as the "notional amount") for a specific period, without the exchange of the
underlying principal amount.
The Company entered into an interest rate swap to effectively fix the
cost of short-term funding sources which are used to purchase interest-earning
assets with longer effective maturities. This agreement reduces the impact of
increases in interest rates by offsetting the cost of short-term funding sources
with an increased settlement from the swap transaction.
The net effect of the Company's interest rate swap increased the
Company's interest expense by $18,000 during the year ended December 31, 1997.
Although the impact of the interest rate swap reduced the Company's net interest
income in 1997, it decreased the imbalance between the Company's
interest-earning assets and interest-bearing liabilities within shorter
maturities, thereby reducing the Company's exposure to increases in interest
rates that may occur in the future.
The following table summarizes the amount of interest-earning assets
and interest-bearing liabilities outstanding as of December 31, 1997, which are
anticipated to mature, prepay or reprice in each of the time periods shown.
Adjustable and floating rate assets are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which they are
due. Loans and MBS are included in the periods in which they are anticipated to
be repaid. If available, estimated prepayment speeds were obtained from external
sources. Otherwise, they were estimated by management based on the experience of
the portfolio. Non-performing loans have been excluded from interest-earning
assets. Marketable equity securities available-for-sale are included in the
twelve months or less period. Money market demand accounts (MMDA) and other
accounts, NOW and savings accounts which are subject to immediate withdrawal and
repricing are classified at decay rates based upon assumptions provided by the
OTS.
-46-
<PAGE>
<TABLE>
<CAPTION>
Twelve
Months 1-3 3-5 5-10 10-20 Over 20
or less Years Years Years Years Years Total
------- ----- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Residential mortgage loans
Adjustable rate $ 50,345 $ 24,783 $ 818 $ -- $ -- $ -- $ 75,946
Fixed rate 27,189 39,171 26,144 31,016 10,801 187 134,508
Mortgage-backed securities
Adjustable rate 97,054 15,591 --- --- --- --- 112,645
Fixed rate 17,305 26,674 18,722 26,512 14,450 1,293 104,956
Consumer and commercial loans
Adjustable rate 9,320 2,793 --- --- --- --- 12,113
Fixed rate 22,865 20,567 7,373 3,958 522 --- 55,285
Loans held for sale 310 --- --- --- --- --- 310
Investment securities 9,304 1,000 13,105 --- --- 7,376 30,785
Investment securities held for trading 64 --- --- --- --- --- 64
-------- --------- ------- ------ ------ ------ -------
Total 233,756 130,579 66,162 61,486 25,773 8,856 526,612
-------- --------- ------- ------ ------ ------ -------
Interest-bearing liabilities:
Deposits
Savings accounts 4,506 7,208 5,331 8,018 5,546 1,576 32,185
NOW and non-interest
bearing demand accounts 6,025 9,151 6,305 8,462 4,646 853 35,442
MMDA and other accounts 22,405 26,126 12,439 9,536 1,725 43 72,274
Certificates of deposit 124,169 53,300 8,377 --- --- --- 185,846
Borrowings 103,096 66,133 2,600 --- --- --- 171,829
Interest rate swaps
(pay fixed, receive floating) (20,000) 20,000 ---- --- --- --- ---
-------- --------- ------- ------ ------ ------ -------
Total 240,201 181,918 35,052 26,016 11,917 2,472 497,576
-------- --------- ------- ------ ------ ------ -------
Excess int.-earning assets (liabilities) $ (6,445) $(51,339) $ 31,110 $35,470 $13,856 $ 6,384 $ 29,036
========= ======== ======== ======= ======= ======== ========
Cumulative excess interest-earning
assets (liabilities) $ (6,445) $(57,784) $(26,674) $ 8,796 $22,652 $29,036
========= ======== ======== ======== ======= =======
Ratio of GAP during the period
to total assets (1.20)% (9.54)% 5.78% 6.60% 2.57% 1.19%
===== ===== ==== ==== ==== ====
Ratio of cumulative GAP
to total assets (1.20)% (10.74)% (4.96)% 1.64% 4.21% 5.40%
===== ====== ===== ==== ==== ====
</TABLE>
Interest Rate Sensitivity
The following table provides information about the Company's interest
rate sensitive financial instruments, including an interest rate swap. The table
provides expected cash flows and weighted average rates for each significant
interest rate sensitive financial instrument by expected maturity period
(contractual maturity date adjusted by assumed prepayment rates on loans and MBS
assets). The interest rate swap is presented at the notional amount and the
weighted average interest rate by contractual maturity date.
Loan balances exclude non-performing loans. Interest rates are not
adjusted for unearned discounts, premiums and deferred loan fees. If available,
estimated prepayment speeds were obtained from external sources. Otherwise, they
were estimated by management based on the experience of the portfolio. See notes
to the table for additional information.
-47-
<PAGE>
In evaluating the Company's exposure to interest rate sensitivity,
certain limitations inherent in the method of analysis presented in the
foregoing table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods for repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as adjustable
rate mortgage loans, have features which restrict changes in interest rates in
the short-term and over the life of the asset. Further, in the event of a change
in interest rates, prepayment on loans and early withdrawals on time deposits
may deviate significantly from those assumed in the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase. The Company considers all of these factors in monitoring its
exposure to interest rate sensitivity.
<TABLE>
<CAPTION>
Expected Maturity Period
--------------------------------------------
(dollars in thousands)
Estimated
Fair
1998 1999 2000 2001 2002 Beyond Total Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans (1) $ 50,364 $ 27,867 $31,871 $16,364 $17,153 $ 46,174 $189,793 $196,398
Average rate 8.72% 8.53% 8.23% 8.31% 8.21% 6.45% 7.97%
Adjustable rate loans (1) 17,278 11,064 12,223 8,422 8,869 30,203 88,059 85,300
Average rate 8.57% 8.41% 7.45% 8.01% 9.12% 8.09% 8.23%
Fixed rate MBS (1) 17,305 11,335 15,339 9,104 9,618 42,255 104,956 106,006
Average rate 7.75% 7.25% 7.30% 9.35% 9.10% 7.42% 7.76%
Adjustable rate MBS (1) 17,431 12,740 14,751 9,045 10,849 47,829 112,645 112,066
Average rate 6.75% 6.68% 6.44% 6.28% 6.10% 6.05% 6.30%
Fixed rate investments (2) 8,697 --- 1,000 5,000 8,105 --- 22,802 22,802
Average rate 5.30% --- 6.50% 6.53% 6.94% --- 6.21%
Adjustable rate investments (3) 607 --- --- --- --- 7,376 7,983 7,983
Average rate 4.74% --- --- --- --- 7.05% 6.87%
--------- --------- ------- ------- ------- ------- -------- --------
Total (4) $111,682 $ 63,006 $75,184 $47,935 $54,594 $173,837 $526,238 $530,555
======== ========= ======= ======= ======= ======== ======== ========
Average rate 7.95% 7.90% 7.54% 7.89% 7.91% 6.89% 7.52%
Fixed rate deposits (5) $124,169 $ 35,433 $17,867 $ 3,717 $ 4,660 $ --- $185,846 $186,287
Average rate 5.37% 5.82% 6.07% 5.95% 5.93% --- 5.55%
Adjustable rate deposits (6) 32,936 24,335 18,151 13,671 10,403 40,405 139,901 139,901
Average rate 3.49% 3.38% 3.26% 3.15% 3.03% 2.58% 3.11%
Fixed rate borrowings (7) 54,096 47,875 18,258 600 2,000 --- 122,829 122,494
Average rate 5.92% 5.97% 6.35% 7.12% 6.51% --- 6.02%
Adjustable rate borrowings 49,000 --- --- --- --- --- 49,000 49,000
Average rate 5.84% --- --- --- --- --- 5.84%
Interest rate swap (8) (20,000) 20,000 --- --- --- --- --- (3)
Average pay rate --- 6.10% --- --- --- --- 6.10%
Average receive rate 5.77% --- --- --- --- --- 5.77%
--------- --------- ------- ------- ------- ------- -------- --------
Total $240,201 $127,643 $54,276 $17,988 $17,063 $40,405 $497,576 $497,679
======== ======== ======= ======= ======= ======= ======== ========
Average rate 5.80% 4.54% 5.22% 3.86% 4.23% 2.58% 5.03%
</TABLE>
(1) Amounts are based on contractual maturities, adjusted for expected
prepayments.
(2) Amounts are based on the earlier of call dates or on contractual
maturities. Equity securities available-for-sale are included in the first
year.
(3) Amounts include FHLB stock.
(4) Trading assets in the amount of $64,000 are not included in the table.
(5) Amounts are based on contractual maturities of time deposits.
(6) Amounts are based on assumed decay rates provided by the OTS for all
accounts without stated maturities. Estimated fair value is the amount
payable on demand at the reporting date.
(7) Amounts are based on the earlier of call dates or contractual maturities.
(8) Amounts are based on the notional amount and the contractual maturity.
Interest rates adjust every ninety days based on LIBOR.
-48-
<PAGE>
Impact of the Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations, including
the inability to process transactions or engage in similar normal business
activities.
The Company's determined that the third party vendors with which the
Company contracts will be required to modify or replace portions of software and
hardware so that computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company believes that with modifications or
replacements to existing software and hardware and conversions to new software
and hardware, the Year 2000 Issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on operations.
The Company developed a comprehensive list of software and hardware
used by the Company. Every vendor was contacted regarding the Year 2000 Issue.
The Company was tracking the progress each vendor was making in resolving the
problems associated with the Year 2000 Issue. The Company's primary vendor
developed a plan for all its customers to participate.
The Company planned to utilize internal and external sources to
identify, test, reprogram or replace software for Year 2000 modifications.
However, in anticipation of the merger with Sovereign, the Year 2000 project was
suspended. After the merger with Sovereign, existing loan and deposit processing
functions will be processed within Sovereign's processing systems. Sovereign has
plans to make wholesale changes to the Company's loan and deposit processing
during the third quarter of 1998. There can be no guarantee that the merger will
be approved and the data processing conversion will be completed as planned. It
is not certain that the systems on which Sovereign rely will be timely converted
for Year 2000 and that there will be no adverse effect on operations.
If the merger is not completed as planned, the Company believes that
there is sufficient time remaining to address the Year 2000 Issue as a stand
alone company. The costs associated with modifying existing systems applications
would be expensed as incurred. The Company does not expect costs associated with
application modifications for Year 2000 compliance to be material. Since the
remaining time period is limited, availability and cost of personnel trained in
the area is unknown, and the full extent of the Year 2000 Issue may not have
been identified, the current estimate of cost could increase.
Results of Operations
The Company's net income for the year ended December 31, 1997 was $4.7
million compared to $4.3 million for 1996 and $4.7 million for 1995. The
following discussion describes and explains the significant components and
changes in the Company's results of operations for the three years ended
December 31, 1997.
Interest Income
Interest income for the years ended December 31, 1997, 1996, and 1995
was $39.0 million, $36.4 million, and $32.5 million, respectively. The $2.6
million increase in interest income from 1996 to 1997 was due to a $41.1 million
increase in average interest-earning assets. The increase in average
interest-earning
-49-
<PAGE>
assets was offset by a decrease in the yield on interest-earning assets to 7.78%
for the year ended December 31, 1997 from 7.93% for the year ended December 31,
1996. The $3.9 million increase in interest income from 1995 to 1996 was due to
a $48.6 million increase in average interest-earning assets. The increase during
1996 was also attributable to an increase in the yield on interest-earning
assets to 7.93% for the year ended December 31, 1996 from 7.90% for the year
ended December 31, 1995. The increase in interest-earning assets during both
years was primarily attributable to the purchase of MBS. MBS increased an
average of $29.0 million and $41.2 million during 1997 and 1996, respectively.
Interest Expense
Interest expense for the years ended December 31, 1997, 1996 and 1995
was $23.7 million, $21.4 million and $19.0 million, respectively. The increase
in interest expense in 1997 from 1996 was primarily attributable to an increase
of $38.1 million in average interest-bearing liabilities. The increase in
average deposits of $30.8 million was primarily responsible for the increase in
average interest-bearing liabilities. This increase along with an increase in
the cost of funds to 4.96% in 1997 from 4.86% in 1996 accounted for the $2.3
million increase in interest expense. The increase in interest expense in 1996
from 1995 was primarily attributable to an increase of $45.2 million in average
interest-bearing liabilities. An increase in average borrowings of $29.5 million
and an increase in average deposits of $15.7 million account for the increase in
average interest-bearing liabilities. These increases along with an increase in
the cost of funds to 4.86% in 1996 from 4.81% in 1995 accounted for the $2.4
million increase in interest expense.
Net Interest Income
Net interest income increased $202,000, or 1.3%, in 1997 and $1.6
million, or 11.6%, in 1996 over the respective prior years. During 1997 the
increase in net interest income was attributable to the increase in volume of
interest earning-assets and interest-bearing liabilities at a positive spread.
However, the Company's positive spread was reduced by the impact of a flattening
yield curve. While short-term interest rates increased, long-term interest rates
declined. The combined impact of these changing interest rates increased the
Company's cost of interest-bearing liabilities as the yield on interest-earning
assets decreased.
The increase in 1996 was primarily attributable to the increase in
volume of interest-earning assets and interest-bearing liabilities at a positive
spread. Net interest income was also increased due to the decline in the cost of
borrowings. The Company's borrowed money is generally short-term and the
decrease in short-term interest rates during 1996 reduced the cost of borrowed
money.
Allowance and Provision for Credit Losses
The provision for credit losses amounted to $400,000, $400,000 and
$600,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The
provision for credit losses was provided after considering the status of
non-performing loans, adverse situations that may affect a borrower's ability to
repay, the value of collateral securing the loans, net charge-offs, industry
standards and other considerations that effect the perceived risk in the loan
portfolio. Commercial loans, which generally have a greater credit risk,
comprised $20.1 million, or 7.0%, of the total loan portfolio at December 31,
1997 compared to $19.2 million, or 7.2%, of the total loan portfolio at December
31, 1996. Non-performing loans, net of amounts charged-off, were $3.4 million,
or 1.2%, and $3.2 million, or 1.2%, of the total loan portfolio at December 31,
1997 and 1996, respectively. The allowance for credit losses totaled $3.6
million, or 1.3%, and $3.8 million, or 1.4%, of total loans at December 31, 1997
and 1996, respectively. In management's opinion, based on its review of the
current quality of the loan portfolio, general economic conditions and
historical experience, the allowance for credit losses is adequate to cover
future credit losses.
-50-
<PAGE>
Other Income
Other income decreased by $54,000 and $920,000 during 1997 and 1996,
respectively. The decrease in 1997 was attributable to the reduction in the
accretion of excess fair value of $183,000 related to negative goodwill from a
prior acquisition. This decrease was partially offset by gains on the sale of
loans of $34,000 (an increase of $118,000 from the $84,000 loss in 1996).
The decrease in 1996 was attributable to non-recurring income received
in 1995 of: (i) $672,000 from the recovery of an insurance claim and (ii)
$135,000 in interest on a tax refund, and losses on the sale of loans of $84,000
during 1996 (a decrease of $212,000 from the $128,000 profit on sale of loans in
1995). These decreases were partially offset by increases in gains from trading
activity of $71,000 and gains from the sale of mortgage-backed securities of
$25,000.
Operating Expenses
In 1997, operating expenses excluding merger costs of $126,000,
decreased by $188,000, or 2.0%, from 1996 (excluding Savings Association
Insurance Fund (SAIF) recapitalization assessment), primarily as a result of
reductions in federal insurance premiums of $367,000, amortization of deposit
premiums of $143,000 and net real estate operations expense of $99,000. These
decreases were offset by increases in other operating expense, salaries and
employee benefits, marketing and occupancy and equipment expense of $158,000,
$124,000, $99,000 and $40,000, respectively, from those of the prior year.
In 1996 operating expenses, excluding SAIF recapitalization assessment
of $1.6 million, increased by $1.3 million, or 17.0%, from 1995, primarily as a
result of operating and marketing costs related to the ten retail-banking
offices. In 1996, the Company focused on increasing market awareness of the Bank
and the services offered to customers by increasing the marketing budget,
installing more automated teller machines and introducing "Homeline," a 24 hour
telephone banking service. Salaries and employee benefits, other operating
expense, net real estate operations expense, occupancy and equipment, and
marketing expense increased $568,000, $260,000, $210,000, $172,000 and $155,000,
respectively, from those of the prior year.
On September 30, 1996, the Deposit Insurance Funds Act of 1996, which
required the recapitalization of the SAIF, became law. Accordingly, all
depository institutions with SAIF insured deposits were charged a one-time
special assessment on their SAIF-assessable deposits as of March 31, 1995 at the
rate of 65.7 basis points. The Bank's portion of the special assessment was $1.6
million.
Income Taxes
In 1997, the Company expensed $2.4 million in combined federal and
state income taxes on pre-tax income of $7.1 million compared to $1.8 million of
tax expense in 1996 on pre-tax income of $5.3 million. Tax expense increased by
$599,000, or 33.9%, as pre-tax income increased by $1.8 million, or 33.3%. The
Company's effective income tax rate increased to 33.4% for the year ended
December 31, 1997 from 33.2% for the year ended December 31, 1996.
In 1996, the Company expensed $1.8 million in combined federal and
state income taxes on pre-tax income of $5.3 million compared to $2.7 million of
tax expense in 1995 on pre-tax income of $7.4 million. Tax expense decreased
$893,000, or 33.6%, as pre-tax income decreased by $2.1 million, or 27.8%. The
Company's effective income tax rate decreased to 33.2% for the year ended
December 31, 1996 from 36.1% for the year ended December 31, 1995.
-51-
<PAGE>
A recovery of a valuation allowance related to deferred income taxes
was recognized in the amount of $732,000 during the year ended December 31,
1996. The recovery was recognized after considering the impact of a change in
the Internal Revenue Code and the estimated timing of temporary differences
related to deferred loan fees for tax purposes.
Financial Condition
Total assets increased to $537.8 million at December 31, 1997 from
$498.4 million at December 31, 1996, an increase of 7.9%. This increase
primarily reflects the increase in MBS and loans receivable. MBS increased to
$215.9 million at December 31, 1997 from $188.6 million at December 31, 1996, an
increase of $27.3 million, or 14.5%. Loans receivable increased to $276.3
million at December 31, 1997 from $258.9 million at December 31, 1996, an
increase of $17.4 million, or 6.7%.
Total liabilities increased to $500.4 million at December 31, 1997 from
$465.8 million at December 31, 1996, an increase of 7.4%. The increase in
liabilities of $34.6 million was primarily attributable to an increase in
deposits of $35.7 million, offset by a decrease in borrowings of $1.3 million.
Shareholders' equity increased to $37.4 million at December 31, 1997
from $32.6 million at December 31, 1996. This increase was primarily the result
of net income of $4.7 million, plus an increase in unrealized gains on
securities available-for-sale of $1.1 million (see Notes 1, 4 and 5 to the
accompanying Consolidated Financial Statements), and less the payment of cash
dividends of $1.0 million. At December 31, 1997, the Bank exceeded its core,
tangible and risk-weighted assets capital requirements by $19.3 million, $27.3
million and $19.7 million, respectively. For additional information regarding
the Bank's regulatory capital requirements see Note 15 to the accompanying
Consolidated Financial Statements.
Liquidity, Cash Flows and Committed Resources
The Bank is currently required by the OTS to maintain average daily
balances of liquid assets in an amount equal to 4.0% of certain net withdrawable
deposits and borrowings payable in one year or less to assure its ability to
meet demand for withdrawals and repayment of short-term borrowings. The
liquidity requirements vary from time to time at the direction of the OTS
depending upon economic conditions and deposit flows. The Bank exceeded its
liquidity requirement at December 31, 1997 and 1996. Management believes that
liquidity is being maintained at adequate levels.
The Bank's primary source of cash is its financing activity. Funds
obtained from financing activities include net deposit inflows and borrowings.
Net deposit inflows totaled $35.7 million while borrowing decreased $1.3 million
during 1997. During the year ended December 31, 1996, net borrowings increased
by $23.0 million and net deposit inflows increased by $20.1 million.
The Bank's primary investment activity is lending. Loans originated or
purchased for the portfolio totaled $72.9 million, $56.4 million and $59.7
million during the years ended December 31, 1997, 1996 and 1995, respectively.
MBS are also a significant investment activity. MBS purchases totaled $46.8
million, $55.5 million and $54.8 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash flows from investing activities were provided
by repayments on existing loans and MBS which totaled $75.8 million, $61.6
million and $51.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997, outstanding commitments, including undisbursed
loans in process, to originate or purchase loans totaled $14.6 million.
Commitments to originate and purchase mortgage loans
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<PAGE>
included $3.7 million in fixed rate mortgage loans. Thirty-year fixed rate
mortgage loans originated are classified as loans held-for-sale. Forward
agreements are entered into to sell these loans in the secondary market at the
time of commitment. Twenty-year and fifteen-year fixed rate mortgage loans are
currently retained as investments. All commitments are anticipated to fund
within one year. It is anticipated that funding for these commitments will be
obtained from normal cash flows. Certificate accounts in the amount of $124.2
million are scheduled to mature during the year ending December 31, 1998. It is
anticipated that a substantial portion of these maturing deposits will be
retained.
Impact of Inflation And Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the presentation of financial condition and measurement of operating
results in terms of historical dollars, disregarding inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of inflation. Interest rates do not
necessarily move in the same direction, or with the same magnitude, as the
prices of goods and services, since such prices are affected by inflation.
Inflation can have a more direct impact on certain categories of
operating expenses such as salaries and wages, employee benefits, occupancy
costs and other operating expenses. These expenses fluctuate with changes in
general price levels.
Because primary assets include substantial fixed rate, fixed term loans
and ARM loans which generally reprice annually, changes in interest rates in the
economy have a gradual impact on the yield on assets. Primary liabilities
include savings deposits which are short term in nature and therefore adjust
with changes in the economy. In general, periods of high inflation are
accompanied by high interest rates. When interest rates move up rapidly, the
cost of funds increases rapidly while the yield on interest-earning assets
increases slowly, resulting in a negative impact on net income. Conversely,
during periods of low inflation, lower and more moderate interest rates are
normally present, which results in a lower cost of funds and a more favorable
impact on net income.
Current Accounting Pronouncements
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of FAS 130 is to report a measure of all
changes in equity that result from economic events of the period other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. FAS 130 is effective for fiscal years
beginning after December 15, 1997. Adoption of the statement will require the
Company to include all nonowner changes in equity as components of comprehensive
income. Currently, such nonowner changes in equity include only unrealized gains
and losses on available-for-sale investment securities.
In June 1997, FASB issued Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131). FAS 131 requires an entity
to discuss financial information in a manner consistent with internally used
information and requires more detailed disclosures of operating and reporting
segments than are currently in practice. FAS 131 is effective for financial
statements for periods beginning
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<PAGE>
after December 15, 1997. The adoption of FAS 131 is not expected to have a
material effect on the Company's financial condition or results of operations.
Management does not believe additional disclosures will be required as a result
of the adoption of this statement.
Selected Quarterly Information
The following table sets forth, for the periods indicated, unaudited
quarterly results of operations. The net income per share data have been
adjusted for stock splits.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ----------------- ----------------- ----------------
1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- -------- -------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income....................... $9,441 $8,833 $9,697 $9,029 $9,817 $9,195 $10,013 $9,393
Net interest income................... 3,828 3,732 3,804 3,774 3,785 3,797 3,871 3,783
Net income............................ 1,298 1,165 1,122 1,110 1,153 864 1,155 1,146
Net income per share data:
Basic net income.................. .48 .43 .41 .41 .43 .32 .43 .42
Diluted net income................ .48 .42 .40 .41 .42 .32 .42 .42
</TABLE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required in response to this Item is incorporated
herein by reference from Part II, Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Interest Rate Sensitivity."
-54-
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
First Home Bancorp Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Home Bancorp Inc. and subsidiaries (the "Company")
as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of First Home Bancorp Inc. and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Philadelphia, Pa.
February 9, 1998
-55-
<PAGE>
First Home Bancorp Inc.
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 5,450 $ 5,133
Interest-earning deposits and short-term funds 732 1,302
Investment securities held-to-maturity (market value - 1997 $2,233;
1996 $2,321) 2,233 2,321
Investment securities held for trading at market value 64 60
Investment securities available-for-sale at market value 20,647 24,975
Mortgage-backed securities held-to-maturity (market value - 1997 $130,064;
1996 $98,418) 127,888 97,391
Mortgage-backed securities available-for-sale at market value 88,008 91,216
Loans receivable - net 275,976 258,234
Loans held for sale at market value 310 676
Accrued interest receivable 3,216 3,013
Real estate owned and other repossessed assets 855 948
Federal Home Loan Bank stock-at cost 7,376 7,376
Office properties and equipment 2,844 2,999
Deposit premium (accumulated amortization - 1997 $630; 1996 $515) 516 631
Net deferred income taxes 653 1,347
Prepaid expenses and other assets 1,030 777
-------- --------
TOTAL ASSETS $537,798 $498,399
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $326,043 $290,298
Borrowings 171,829 173,148
Advances by borrowers for taxes and insurance 416 445
Accrued interest payable 844 588
Excess of fair value over cost --- 66
Accounts payable and accrued expenses 1,281 1,209
-------- --------
Total liabilities 500,413 465,754
-------- --------
Commitments and contingencies (Note 18)
Shareholders' equity:
Preferred stock - no par value; 1,000,000 shares authorized;
none issued --- ---
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding, 2,708,426 shares --- ---
Paid-in capital in excess of par 8,923 8,923
Retained earnings - partially restricted 28,235 24,592
Unrealized gain (loss) on securities available-for-sale, net 227 (870)
-------- --------
Total shareholders' equity 37,385 32,645
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $537,798 $498,399
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-56-
<PAGE>
First Home Bancorp Inc.
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------- ------- -------
(in thousands, except for share data)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $22,555 $21,712 $20,490
Interest on mortgage-backed securities 14,173 12,448 9,435
Other interest income and dividends 2,240 2,290 2,564
------- ------- -------
Total interest income 38,968 36,450 32,489
INTEREST EXPENSE:
Interest on deposits 13,744 12,121 11,179
Interest on borrowed money 9,936 9,243 7,793
------- ------- -------
Total interest expense 23,680 21,364 18,972
------- ------- -------
NET INTEREST INCOME 15,288 15,086 13,517
PROVISION FOR CREDIT LOSSES 400 400 600
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 14,888 14,686 12,917
------- ------- -------
OTHER INCOME:
Service charges and other fees 600 571 505
Loan servicing fees 190 214 231
Profit (loss) on sale or valuation of:
Loans held for sale 34 (84) 128
Investment securities held for trading 234 223 152
Mortgage-backed securities available-for-sale --- 25 ---
Accretion of excess of fair value over cost 66 249 249
Other income 209 189 1,042
------- ------- -------
Total other income 1,333 1,387 2,307
------- ------- -------
OPERATING EXPENSES:
General and administrative expenses:
Salaries and employee benefits 4,352 4,228 3,660
Occupancy and equipment 1,336 1,296 1,124
Marketing 540 441 286
Federal insurance premiums 177 544 574
Other operating expenses 2,363 2,205 1,945
------- ------- -------
Total general and administrative expenses 8,768 8,714 7,589
SAIF recapitalization assessment --- 1,564 ---
Amortization of deposit premium 115 258 257
Real estate operations - net 118 217 7
Merger costs 126 --- ---
------- ------- -------
Total operating expenses 9,127 10,753 7,853
------- ------- -------
INCOME BEFORE INCOME TAXES 7,094 5,320 7,371
------- ------- -------
INCOME TAX EXPENSE:
Current 2,290 1,424 2,710
Deferred 76 343 (50)
------- ------- -------
Total current and deferred income taxes 2,366 1,767 2,660
Recovery of deferred tax valuation allowance --- (732) ---
------- ------- -------
Total income taxes 2,366 1,035 2,660
------- ------- -------
NET INCOME $ 4,728 $ 4,285 $ 4,711
======== ======== ========
Per share data:
Basic net income per share $ 1.75 $ 1.58 $ 1.74
Diluted net income per share $ 1.72 $ 1.57 $ 1.74
Average number of shares outstanding - basic 2,708,426 2,707,034 2,703,493
Average number of shares outstanding - diluted 2,756,445 2,724,028 2,714,643
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-57-
<PAGE>
First Home Bancorp Inc.
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Paid-in Unrealized
Capital Gain
in (Loss) Total
Excess Retained on Shareholders'
of Par Earnings Securities Equity
------ -------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $8,872 $17,579 $(3,377) $23,074
Stock issued upon exercise of
stock options 47 --- --- 47
Dividends $.36 per share --- (975) --- (975)
Unrealized gain on securities, net --- --- 3,246 3,246
Net income --- 4,711 --- 4,711
------ ------- ------ -------
Balance at December 31, 1995 8,919 21,315 (131) 30,103
Stock issued upon exercise of
stock options 4 --- --- 4
Cash in lieu of fractional shares --- (7) --- (7)
Dividends $.37 per share --- (1,001) --- (1,001)
Unrealized loss on securities, net --- --- (739) (739)
Net income --- 4,285 --- 4,285
------ ------- ------ -------
Balance at December 31, 1996 8,923 24,592 (870) 32,645
Cash in lieu of fractional shares --- (2) --- (2)
Dividends $.40 per share --- (1,083) --- (1,083)
Unrealized gain on securities, net --- --- 1,097 1,097
Net income --- 4,728 --- 4,728
------ ------- ------ -------
Balance at December 31, 1997 $8,923 $28,235 $ 227 $37,385
====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
First Home Bancorp Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 4,728 $ 4,285 $ 4,711
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 400 400 600
Depreciation 362 360 299
Accretion of excess fair value over cost (66) (249) (249)
Amortization of fair market premiums --- 50 186
Amortization of deposit premiums 115 258 257
Net gains on investment securities held for trading (234) (223) (152)
Purchase of investment securities held for trading (9,809) (9,372) (1,817)
Proceeds from sale of investment securities held for trading 10,039 9,592 2,369
Gains from sale of mortgage-backed securities available-for-sale --- (25) ---
Loans originated for sale (6,613) (8,845) (6,262)
Proceeds from loans sold 7,013 8,504 6,260
Net (gain) loss on sale of loans (34) 84 (128)
Increase in accrued interest receivable (203) (110) (403)
Increase in accrued interest payable 256 33 106
Decrease (increase) in deferred income taxes 76 (389) (50)
Net other (179) (563) 169
-------- -------- -------
Net cash provided by operating activities 5,851 3,790 5,896
-------- -------- -------
INVESTMENT ACTIVITIES:
Proceeds from maturities of investment securities 14,534 14,561 20,275
Proceeds from sale of mortgage-backed securities available-for-sale --- 3,637 ---
Purchase of:
Investment securities (10,013) (12,847) (14,416)
Mortgage-backed securities (46,814) (55,491) (54,841)
Repayments on mortgage-backed securities 21,134 9,085 6,800
Purchase of FHLB stock --- (2,058) (660)
Purchase of property and equipment (207) (773) (285)
Decrease (increase) in real estate owned 93 (461) 454
Principal collected on loans 54,715 52,515 44,201
Loans originated or acquired (72,857) (56,372) (59,708)
Cash obtained from acquisition of branches --- --- 14,512
-------- -------- -------
Net cash used by investing activities (39,415) (48,204) (43,668)
-------- -------- -------
</TABLE>
-59-
<PAGE>
First Home Bancorp Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in:
Demand deposits, NOW accounts, and savings accounts 19,921 5,278 1,050
Certificates of deposit 15,824 14,845 14,093
Proceeds from borrowings 22,474 41,625 37,414
Repayment of borrowings (23,794) (18,603) (10,900)
Cash dividends and cash in lieu of fractional shares (1,085) (1,009) (975)
Proceeds from exercise of common stock options --- 4 47
Net (decrease) increase in advances from borrowers for taxes
and insurance (29) 52 (83)
------- ------- --------
Net cash provided by financing activities 33,311 42,192 40,646
------- ------- --------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (253) (2,222) 2,874
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 6,435 8,657 5,783
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,182 $ 6,435 $ 8,657
======= ======= ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
During 1995, investments and mortgage backed-securities with a book value of
$32,019,901 were transferred from held to maturity to available-for-sale. See
Note 1 - Summary of significant accounting policies investment policy.
The Company issued 677,284 shares of Common Stock no par value on February 14,
1997, to effect a four-for-three stock split declared effective December 31,
1996.
The accompanying notes are an integral part of these consolidated financial
statements.
-60-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Home Bancorp Inc. (the Company) follows accounting and reporting
practices in accordance with generally accepted accounting principles (GAAP)
normally adhered to by financial institutions. The more significant accounting
policies are summarized below.
Principles of Consolidation - The consolidated financial statements
include the accounts of First Home Bancorp Inc., its wholly-owned subsidiary,
First Home Savings Bank, F.S.B. (the Bank) and the Bank's wholly owned
subsidiaries. The Company's business is conducted primarily through the Bank.
Intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior years' financial statements to
conform to the classifications used in 1997.
Nature of Operations - The Bank conducts business through ten
full-service offices located in Camden, Gloucester, and Salem Counties, in New
Jersey, and New Castle County in Delaware. The Bank was chartered in 1911 for
the purpose of attracting retail savings deposits to provide mortgage funds for
the community. Today, while home lending is still the cornerstone of activities,
the Bank is a full service bank offering a broad range of products and services
to borrowers and depositors.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from the estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand and in banks and interest-earning deposits.
Investment Policy - In accordance with the Financial Accounting
Standards (FAS) Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (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 tax, 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.
Realized security gains and losses are computed using the specific
identification method and are recorded on a trade date basis.
The investment in Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale - Loans held for sale are carried at the lower of
aggregate cost (remaining principal net of unearned premiums and discounts) or
market.
.
Disclosure About Derivative Financial Instruments - During 1997 and
1996, the Company was a party to financial instruments with off-balance-sheet
risk in the normal course of business to reduce its exposure to fluctuations in
interest rates (hedging). The off-balance-sheet financial instruments were
forward commitments and interest rate swaps. Those instruments involve, to
varying degrees, elements of
-61-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
credit, interest rate, or liquidity risk in excess of the amounts recognized in
the balance sheets. The contract or notional amounts of those instruments
represent the extent of involvement the Company has in these financial
instruments.
Credit risk is controlled by conducting transactions with major
investment firms and by setting policies for transaction volume limitations and
periodic monitoring. Each dealer was carefully evaluated on the basis of its
financial strength, reputation and expertise. Unless noted otherwise, the
Company does not require collateral or other securities to support derivative
financial instruments with credit risk.
Derivatives are classified as hedges of specific on-balance-sheet
items, off-balance-sheet items or anticipated transactions. In order for
derivatives to qualify for hedge accounting treatment, the following conditions
must be met: 1) the underlying item being hedged by derivatives exposes the
Company to interest rate risk, 2) the derivatives used serves to reduce the
Company's sensitivity to interest rate risk, and 3) the derivative used is
designed and deemed effective in hedging the Company's exposure to interest rate
risk. For derivatives designated as hedges of interest rate exposure, gains or
losses are deferred and included in the carrying amounts of the related item
exposing the Company to interest rate risk and ultimately recognized in income
as part of those carrying amounts. Gains or losses resulting from early
terminations of derivatives are deferred and amortized over the remaining term
of the underlying balance sheet item or the remaining term of the derivative, as
appropriate.
Derivatives not qualifying for hedge accounting treatment would be
carried at market value with realized and unrealized gains and losses included
in noninterest income. During 1997, 1996 and 1995, all of the Company's
derivatives qualified as hedges of specific on balance sheet items.
A forward contract is a legal agreement between two parties to purchase
or sell a specific quantity of a financial instrument, at a specified price,
with delivery and settlement at a specified future date. Because forward
contracts lack the liquidity and protection provided by regulated exchanges,
there is a heightened risk of default by the counterparties. At December 31,
1997 and 1996 the Company had no exposure to credit loss in the event of
non-performance by other parties to forward contracts. See Note 7 for additional
information.
The Company periodically enters into interest rate swap agreements to
help reduce certain interest rate exposure on a portion of its borrowings. An
interest rate swap is a contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amount represents the base on which
interest due each counterparty is calculated and does not represent the
potential for gains or losses associated with the market risk or credit risk of
such transactions. At December 31, 1997, the Company had a $20.0 million
notional amount interest rate swap agreement outstanding on which the Company
pays a fixed interest rate of 6.10% and receives a floating interest rate based
on three-month LIBOR. At December 31, 1997, three-month LIBOR was 5.875%.
Periodic net cash settlements under the swap agreement are recorded as an
adjustment to interest expense over the life of the agreement. Included in
interest expense for the year ended December 31, 1997 was $18,000 of expense
related to the interest rate swap agreement. The interest rate swap agreement
matures on August 20, 1999. In the event of liquidation of the liability to
which the interest rate swap is linked, the interest rate swap would be recorded
at its fair market value with any change in such market value recorded in the
period such event occurs. No interest rate swap agreements were entered into or
outstanding during 1996.
-62-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mortgage-Backed Securities - Mortgage-backed securities (MBS),
including real estate mortgage investment conduits (REMICS), classified as
held-to-maturity are carried at cost and are adjusted for amortization of
premiums and accretion of discounts over the term of the securities using a
method which approximates the interest method. Temporary changes in the market
value of the securities are not recognized since it is management's intention to
hold these MBS to maturity. In management's opinion, the Company has the ability
to hold these securities to maturity. MBS classified as available-for-sale, in
accordance with FAS 115, are reported at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of shareholders' equity.
Allowance for Credit Losses - An allowance for credit losses is
maintained at a level that management considers adequate to provide for losses
based upon an evaluation of known and inherent risks attendant with the loan
portfolio. Management's evaluation is based on periodic review of the loan
portfolio and considers such factors as payment history, adverse situations
which may affect a borrower's ability to repay, collateral adequacy and current
economic conditions. For large loans deemed to be impaired due to an expectation
that all contractual payments probably will not be received, impairment is
measured by comparing the Bank's recorded investment in the loan to the fair
value of the collateral. Actual losses may vary from current estimates. These
estimates are reviewed periodically and adjustments, as necessary, are recorded
in the period in which they become known.
Allowance for Uncollected Interest - Interest is not recognized on
loans deemed to be uncollectible. Generally, this includes loans that are more
than three months delinquent. Such interest, if collected, is credited to income
in the period of recovery. The allowance for uncollected interest is netted
against accrued interest receivable for financial reporting purposes.
Unearned Premiums and Discounts - Unearned premiums and discounts on
assets purchased or acquired are amortized over the estimated life using a
method which approximates the effective interest method.
Loan Fees and Origination Costs - Loan origination fees and related
direct loan origination costs are deferred and recognized over the life of the
loan as an adjustment to yield. The amount of net loan origination fees
recognized as a yield adjustment is reflected as interest income in the
consolidated statements of income. The unamortized balance of net loan
origination fees is reflected in the consolidated statements of financial
condition as part of loans receivable-net.
Mortgage Servicing Rights - The cost of mortgage servicing rights is
amortized over the period of estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using prepayment assumptions based on current market
interest rates. For purposes of measuring impairment, the rights are stratified
based on the interest rates of the underlying loans. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights
exceed their fair value.
Real Estate Owned - Real estate acquired in settlement of loans is
carried at the lower of cost or estimated fair value less estimated costs 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 and
losses are charged to operations as incurred. Carrying costs, such as
maintenance, interest, and taxes, are charged to operations as incurred. Rental
income is recognized as a reduction of operating costs.
-63-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Office Properties and Equipment - Office buildings and equipment are
recorded at cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method based on the estimated useful life of
the related asset. The cost of leasehold improvements is amortized over the
estimated life of the improvement or the term of the lease, whichever is
shorter. The asset cost and accumulated depreciation or amortization for
property retirements and disposals are eliminated from the respective accounts,
and any resultant gain or loss is included in net income as incurred. The cost
of maintenance and repairs is charged to operating expense, as incurred. The
cost of major additions and improvements is capitalized.
Deposit Premium - The premium resulting from the valuation of core
deposits acquired in the purchase of branch offices is amortized over the
estimated remaining life of the existing customer deposit base acquired using a
method which approximates the effective interest method. The estimated life at
the time of purchase was ten years. Amortization periods are monitored to
determine if events and circumstances require such periods to be reduced.
Income Taxes - The Company files a consolidated federal income tax
return and separate state income tax returns. In accordance with FAS Statement
No. 109, "Accounting for Income Taxes" (FAS 109), deferred income tax expense or
benefit is determined by recognizing deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
realization of deferred tax assets is assessed and a valuation allowance
provided, when necessary, for that portion of the asset which is not likely to
be realized. Management believes, based upon current facts, that it is more
likely than not that there will be sufficient taxable income in future years to
realize any deferred tax assets. The effect on deferred tax assets and
liabilities of a change in income tax rates is recognized in earnings in the
period of the enactment date.
Securities Sold Under Agreements to Repurchase - The Bank enters into
sales of securities under agreements to repurchase (reverse repurchase
agreements). Reverse repurchase agreements are treated as borrowings.
Excess of Fair Value Over Cost - The excess of the fair value over cost
of net assets acquired after adjustment of non-current assets resulted from the
conversion merger of Fidelity Mutual Savings & Loan Association in July 1992.
The excess of fair value over cost is amortized over the economic life of the
related long term interest-earning assets, estimated to be approximately six
years.
Interest Rate Risk - The Company is principally engaged in the business
of attracting deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured by real estate,
to purchase mortgage-backed and other investment securities and, to a lesser
extent, to make consumer loans. The potential for interest rate risk exists as a
result of the shorter duration of the Company's interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising interest rate environment, liabilities will reprice faster than assets
thereby reducing the market value of long-term assets and reducing net interest
income. For this reason, management regularly monitors the maturity structure of
the Company's assets and liabilities in order to measure its level of interest
rate risk and plan for potential future volatility.
-64-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Business Combination and Acquisitions - On May 31, 1996, the Bank
completed a reorganization into a holding company form of ownership, and the
Bank became a wholly-owned subsidiary of First Home Bancorp Inc. (the newly
formed holding company). The shareholders of the Bank exchanged their shares of
the Bank for the same number of shares of First Home Bancorp Inc.
Since the merger was essentially accounted for in a manner similar to
that in pooling-of-interests, the consolidated financial statements of the
holding company remain the same as those prior to the reorganization. As of the
effective date of the reorganization, the assets, liabilities and shareholders'
equity of the Bank were reflected on the Company's consolidated balance sheet at
their historical values. Also, the consolidated statement of operations of the
Company subsequent to the reorganization reflects the consolidated operations of
the Bank as if the reorganization had taken place prior to the periods covered
by such financial statements. At December 31, 1997, substantially all of the
holding company's assets are invested in capital stock of the Bank (see Note
23).
On January 23, 1995, certain assets were purchased and deposit
liabilities were assumed pursuant to an agreement entered into on September 21,
1994 to purchase two retail banking offices. The deposit liabilities assumed
amounted to $15,924,000 and the net assets received, consisting primarily of
cash, amounted to $14,766,000. The fair value of liabilities assumed exceeded
the fair value of tangible assets acquired by $1,146,000 and was allocated to
deposit premium.
Net Income and Dividends Per Share - On January 7, 1997 the Board of
Directors declared a four-for-three stock split effective December 31, 1996,
which was effected in the form of a stock dividend and distributed on February
14, 1997, to holders of record on January 22, 1997. Accordingly, net income per
share and dividends per share have been restated to reflect the increased number
of shares outstanding in each prior period. The Company declared and paid a $.10
per share dividend during each quarter of 1997.
The Company adopted FAS Statement No. 128, "Earnings Per Share" (FAS
128), on December 31, 1997. FAS 128 requires dual presentation of basic and
diluted net income per share on the face of the income statement. The Company's
basic net income per share is calculated as net income divided by the weighted
average number of shares outstanding. For diluted net income per share, net
income is divided by the weighted average number of shares outstanding plus the
incremental number of shares added as a result of converting common stock
equivalents, calculated using the treasury stock method. The Company's common
stock equivalents consist solely of outstanding stock options. (See Note 17).
A reconciliation of the weighted average shares outstanding used to
calculate basic net income per share and diluted net income per share follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding (basic) 2,708,426 2,707,034 2,703,493
Impact of dilutive common stock equivalents 48,019 16,994 11,150
--------- --------- ---------
Weighted average shares outstanding (diluted) 2,756,445 2,724,028 2,714,643
========= ========= =========
</TABLE>
Recently Issued or Proposed Accounting Standards - In March 1995, the
FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). This statement
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the
-65-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. This statement is effective for financial statements for
fiscal years beginning after December 15, 1995, and accordingly, the Company
adopted the statement January 1, 1996. The effect of adopting the statement was
not significant.
In May 1995, the FASB issued Statement No. 122 "Accounting for Mortgage
Servicing Rights," (FAS 122). This statement requires that the Company recognize
rights to service mortgage loans for others as separate assets regardless of how
those servicing rights are acquired. An institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells those loans with servicing rights retained should allocate a portion
of the cost of the loans to mortgage servicing rights. FAS 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of MBS. Additionally, FAS 122 requires that capitalized mortgage
servicing rights be assessed for impairment, based on the fair value of those
rights. FAS 122 is required to be applied prospectively for fiscal years
beginning after December 15, 1995 to transactions in which an entity acquires
mortgage servicing rights and to impairment evaluations of all capitalized
mortgage servicing rights. Retroactive application is prohibited. The Company
adopted the statement January 1, 1996. The effect of the adoption did not have a
material effect on consolidated financial position or results of operations.
In October 1995, FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement requires certain disclosures
about stock-based employee compensation arrangements, defines a fair value based
method of accounting for an employee stock option or similar equity instruments,
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for stock-based compensation plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities
electing to remain with the accounting in APB 25 must make pro forma disclosures
of net income and net income per share as if the fair value based method of
accounting defined in FAS 123 had been applied. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date, or
other measurement date, over the amount an employee must pay to acquire the
stock. FAS 123 is effective for fiscal years beginning after December 15, 1995.
Under FAS 123, the Company has elected to disclose on a pro forma basis the fair
value method of accounting for stock-based compensation. Pro forma disclosures
required for entities that elect to continue to measure compensation cost using
APB 25 must include the effects of all awards granted in fiscal years that began
after December 15, 1994. The Company adopted the statement on January 1, 1996
and will continue accounting for stock-based compensation under APB 25. See Note
17 for pro forma disclosures required by FAS 123.
In June 1996, the FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(FAS 125). FAS 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. FAS 125 also defines accounting treatment for
servicing assets and other retained interests in the assets that
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<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
are transferred. FAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. FAS 127 was also issued in 1996 and amended FAS
125 by deferring for one year the effective date for certain provisions of FAS
125. The Company adopted FAS 125, as amended, on January 1, 1997, and the
provisions of FAS 127 on January 1, 1998. The adoption of FAS 125 and FAS 127
did not have a material effect on the Company's financial condition or results
of operations.
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of FAS 130 is to report a measure of all
changes in equity that result from economic events of the period other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. FAS 130 is effective for fiscal years
beginning after December 15, 1997. Adoption of the statement will require the
Company to include all nonowner changes in equity as components of comprehensive
income. Currently, such nonowner changes in equity include only unrealized gains
and losses on available-for-sale investment securities.
In June 1997, FASB issued Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131). FAS 131 requires an entity
to discuss financial information in a manner consistent with internally used
information and requires more detailed disclosures of operating and reporting
segments than are currently in practice. FAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of FAS
131 is not expected to have a material effect on the Company's financial
condition or results of operations. Management does not believe additional
disclosures will be required as a result of the adoption of this statement.
Disclosures about Fair Value of Financial Instruments - The following
disclosure of the estimated fair value of financial instruments is made in
accordance with the requirements of FAS 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Bank using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amount the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on estimated fair
value amounts.
-67-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents......................... $ 6,182 $ 6,182 $ 6,435 $ 6,435
Investment securities held-to-maturity............ 2,233 2,233 2,321 2,321
Investment securities held for trading............ 64 64 60 60
Investment securities available-for-sale.......... 20,647 20,647 24,975 24,975
Mortgage-backed securities held-to-maturity....... 127,888 130,064 97,391 98,418
Mortgaged-backed securities available-for-sale.... 88,008 88,008 91,216 91,216
Loans receivable.................................. 277,852 281,388 260,581 262,724
Loans held for sale............................... 310 310 676 676
Liabilities:
Demand deposits................................... 139,901 139,901 120,020 120,077
Time deposits..................................... 185,846 186,287 169,899 170,269
Borrowings........................................ 171,829 171,494 173,148 172,814
Off balance sheet instruments:
Interest rate swap................................ N/A (3) -- --
</TABLE>
Cash and cash equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment securities held-to-maturity, held for trading and
available-for-sale - For investment securities held-to-maturity, held for
trading and available-for-sale, estimated fair values are based on quoted market
prices or dealer quotes. If a quoted market price or dealer quote is not
available, fair value is estimated using quoted market prices for substantially
similar investments.
Mortgage-backed securities held-to-maturity and available-for-sale -
Estimated fair value for MBS issued by governmental sponsored agencies is based
on quoted market prices. The fair value of MBS issued by non-governmental
sponsored agencies is estimated based on similar securities with quoted market
prices and adjusted for any differences in credit ratings or maturities.
Loans receivable - For certain homogeneous categories of loans, such as
residential mortgage loans and other consumer loans, fair value is estimated
using the quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics and guarantees. The fair values of other
types of loans are estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics. The
fair value of other types of loans are estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and remaining maturities. Non-performing loans of
$3,358,000 and $3,213,000, allowance for credit losses of $3,616,000 and
$3,760,000 and deferred loan fees, discounts and premiums (net) of $1,618,000
and $1,800,000 are not included in the carrying amount or estimated fair value
at December 31, 1997 and 1996, respectively.
Demand deposits and time deposits - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of
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<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
fixed maturity time deposits is estimated by discounting the future cash flows
using interest rates currently offered for deposits of similar remaining
maturities.
Borrowings - Interest rates currently available to the Company for debt
with similar terms and remaining maturities are used to estimate the fair value
of existing debt.
Off balance sheets instruments - Fair value for the Company's interest
rate swap is based on current settlement values. The Bank had outstanding
commitments to extend credit of $14.6 million at December 31, 1997. Such
commitments include fixed and variable rate mortgage and consumer loan
commitments. The value of the commitment is a reasonable estimate of the fair
value as the fees and rates charged are approximately consistent with the
amounts which would be charged to enter into similar arrangements at year end.
2. INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities held-to-maturity at December 31, 1997 and 1996
consisted of tax exempt obligations due in less than one year.
3. INVESTMENT SECURITIES HELD FOR TRADING
Investment securities held for trading at December 31, 1997 and 1996
consisted of an investment in a mutual fund.
The Company buys and sells debt and equity securities that are
classified as trading securities. At each reporting period, the Company adjusts
the value of these securities to market value. Net gains of $234,000, $223,000
and $152,000 were recorded in 1997, 1996 and 1995, respectively.
-69-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government Agencies
Due after one year through five years $13,459 $ 55 $ -- $13,514
Corporate Notes
Due in one year or less 2,996 9 --- 3,005
Due after one year through five years 633 27 --- 660
Common stock 791 74 --- 865
Preferred stock 2,548 56 (1) 2,603
------- ----- ------ -------
Total $20,427 $221 $(1) $20,647
======= ==== === =======
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
U.S. Government Agencies
Due after one year through five years $17,976 $ 73 $(17) $18,032
Corporate Notes
Due in one year or less 725 2 --- 727
Due after one year through five years 2,972 37 --- 3,009
Due after five years through ten years 639 11 --- 650
Preferred stock 2,548 9 --- 2,557
------- ----- ------ -------
Total $24,860 $132 $(17) $24,975
======= ==== ==== =======
</TABLE>
U.S. Government Agencies consist of $13,459,000 and $15,976,000 of
callable agency notes at December 31, 1997 and 1996, respectively. In addition,
in 1996 $2,000,000 of step up securities with periodic interest rates
adjustments and call dates were included in U.S. Government Agencies.
-70-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
Available-for-Sale
FNMA pass-through certificates $ 1,482 $ 19 $ (2) $ 1,499
FHLMC pass-through certificates 2,997 212 --- 3,209
GNMA pass-through certificates 4,875 407 --- 5,282
Real estate mortgage investment
conduit obligations 78,520 834 (1,336) 78,018
-------- -------- --------- --------
Total mortgage-backed securities
available-for-sale $87,874 $1,472 $(1,338) $88,008
======= ====== ======= =======
Mortgage-Backed Securities
Held to Maturity
Non-agency pass through certificates $ 5,444 $ 36 $ --- $ 5,480
FNMA pass-through certificates 9,672 149 --- 9,821
FHLMC pass-through certificates 8,771 96 --- 8,867
Real estate mortgage investment
conduit obligations 104,001 1,926 (31) 105,896
-------- -------- --------- --------
Total mortgage-backed securities
held to maturity $127,888 $2,207 $(31) $130,064
======== ====== ======== ========
December 31, 1996
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(in thousands)
Mortgage-Backed Securities
Available-for-Sale
FNMA pass-through certificates $ 1,863 $ 34 $ (2) $ 1,895
FHLMC pass-through certificates 4,342 237 --- 4,579
GNMA pass-through certificates 6,070 390 --- 6,460
Real estate mortgage investment
conduit obligations 80,416 277 (2,411) 78,282
-------- -------- --------- --------
Total mortgage-backed securities
available-for-sale $92,691 $938 $(2,413) $91,216
======= ====== ======= =======
Mortgage-Backed Securities
Held to Maturity
Non-agency pass through certificates $ 6,143 $ 48 $ (7) $ 6,184
Real estate mortgage investment
conduit obligations 91,248 1,203 (217) 92,234
-------- -------- --------- --------
Total mortgage-backed securities
held to maturity $97,391 $1,251 $(224) $98,418
======= ====== ======== =======
</TABLE>
-71-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mortgage-backed securities with amortized costs of $80,773,000 and
$66,690,000 and market values of approximately $81,389,000 and $66,990,000 were
pledged as collateral for securities sold under agreements to repurchase at
December 31, 1997 and 1996, respectively.
The Company had FHLMC pass-through certificates with amortized costs of
$2,104,000 and $800,000 and market values of $2,246,000 and $846,000 pledged for
the Treasury, Tax, and Loan Account and the Discount Window at the Federal
Reserve Bank of Philadelphia at December 31, 1997 and 1996, respectively.
Gains of $25,000 were recognized in 1996 from the sales of MBS
available-for-sale. There were no sales of MBS during 1997 and 1995.
Expected maturities of MBS will differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
6. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Residential mortgage loans on existing property $210,483 $203,574
Construction mortgage loans 5,486 3,824
Commercial real estate loans 17,715 17,214
Commercial business loans 2,348 1,948
Consumer loans:
Home equity loans 29,497 19,479
Mobile home loans 5,651 6,606
Equity lines of credit 4,194 3,993
Automobile loans 4,720 4,631
Other loans 4,161 3,747
-------- --------
Total 284,255 265,016
Undisbursed portion of loans in process (3,045) (1,222)
Deferred loan fees, discounts and premiums (net) (1,618) (1,800)
Allowance for credit losses (3,616) (3,760)
-------- --------
Total $275,976 $258,234
======== ========
</TABLE>
The Company originates or purchases both adjustable and fixed interest
rate loans. At December 31, 1997 the composition of loans (excluding
non-performing loans, deferred loan fees, discounts, premiums, and allowance for
credit losses), by maturity or repricing was as follows:
Fixed Adjustable
Rate Rate
-------- ----------
(in thousands)
1 month - 1 year $ 5,186 $54,481
1 - 3 years 5,779 32,225
3 - 5 years 22,738 1,353
5 - 10 years 42,221 ---
10 - 20 years 103,655 ---
over 20 years 10,214 ---
-------- -------
Total $189,793 $88,059
======== =======
-72-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1-year or 3-year U.S. Treasury interest rate. Market
factors affect the correlation of the interest rate adjustment to the interest
rates the Company pays on short-term deposits which have primarily been used to
fund these loans.
At December 31, 1997 and 1996, the Company was servicing loans for
others amounting to $65,200,000 and $64,900,000, respectively. Servicing loans
for others generally consists of collecting mortgage payments, disbursing
payments to investors and processing foreclosures. Loan servicing income is
recorded upon receipt and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. Mortgage servicing
rights of $60,000 and $73,000 were capitalized in 1997 and 1996, respectively.
Amortization of mortgage servicing rights were $10,000 and $4,000 in 1997 and
1996, respectively.
Loans to executive officers and directors at December 31, 1997 and 1996
were $873,000 and $832,000, respectively. Additional loans and repayments for
the year ended December 31, 1997 were $292,000 and $251,000, respectively.
At December 31, 1997 the majority of loans receivable were
collateralized by property located in New Jersey and Delaware.
The following schedule summarizes the changes in the allowance for
credit losses:
Year Ended December 31,
1997 1996 1995
------ ------ ------
(in thousands)
Beginning balance $3,760 $3,562 $3,315
Provision for credit losses 400 400 600
Charge-offs (708) (358) (580)
Recoveries 164 156 227
------ ------ ------
Total $3,616 $3,760 $3,562
====== ====== ======
Non-accrual loans at December 31, 1997 and 1996, net of charge-offs,
were $3,358,000 and $3,213,000, respectively. The reserve for delinquent
interest on loans totaled $289,000 and $261,000 at December 31, 1997 and 1996,
respectively, and is netted against accrued interest receivable.
At December 31, 1997 and 1996, the recorded investment in loans that
are considered to be impaired totaled $351,000 and $334,000 (of which $201,000
and $160,000 were included in non-accrual loans), respectively. All impaired
loans have no allowances for credit losses as a result of $65,000 and $115,000
in charge-offs during 1997 and 1996, respectively. The average recorded
investment in impaired loans were $325,000 and $274,000 during the years ended
December 31, 1997 and 1996, respectively. Payments received on impaired loans
that are classified non-accrual are recognized as income on the cash basis. For
the years ended December 31, 1997 and 1996, the Company recognized interest
income of $25,000 and $24,000 on impaired loans.
7. LOANS HELD FOR SALE
Loans held for sale at December 31, 1997 and 1996 amounted to $310,000
and $676,000, respectively. Loans held for sale consist of 30 year fixed-rate
residential mortgage loans which qualify for sale in the secondary market. These
loans are recorded at the lower of cost or market value determined on an
aggregate basis.
-73-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, the Company had $770,000 and $1,043,000
in forward loan sale contracts to an agency. Loans held-for-sale and settled and
loan applications in various stages of the underwriting process as of December
31, 1997 will be used to satisfy these forward loan sales.
Net gains of $34,000 and $128,000 on the sale of loans held for sale
were recorded in 1997 and 1995, respectively. Net losses of $84,000 were
recorded in 1996.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 consisted of
the following:
December 31,
1997 1996
------ ------
(in thousands)
Loans $1,606 $1,566
Mortgage-backed securities 1,170 986
Investment securities 440 461
------ ------
Total $3,216 $3,013
====== ======
9. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
Real estate owned and other repossessed assets at December 31, 1997 and
1996 consisted of the following:
December 31,
1997 1996
---- ----
(in thousands)
Real estate owned $855 $941
Other repossessed assets --- 7
---- ----
Total $855 $948
==== ====
-74-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications
as follows:
December 31,
1997 1996
------ ------
(in thousands)
Land, buildings and improvements $3,730 $3,689
Furniture and equipment 1,604 1,437
------ ------
Total 5,334 5,126
Less accumulated depreciation (2,490) (2,127)
------ ------
Total $2,844 $ 2,999
====== =======
The Company leases three branch offices and other office space. The
leases of these facilities are accounted for as operating leases. Total
rental expense was $117,000, $106,000, and $104,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Minimum rental commitments under the operating leases are as follows:
(in thousands)
1998 $ 85
1999 34
2000 31
2001 31
2002 8
----- ----
Total $189
11. DEPOSITS
Deposits at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------- ---------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
----------- ---------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
NOW accounts.................................... $ 27,595 1.26% $ 26,477 1.54%
Non-interest bearing accounts................... 7,847 -- 7,594 --
Money market, municipal deposits, and other 72,274 4.31 51,408 4.05
accounts........................................
Savings and club accounts....................... 32,185 2.76 34,541 2.77
-------- ---- -------- ----
Subtotal........................................ 139,901 3.11 120,020 2.87
------- ---- ------- ----
Certificates by maturity:
6 months or less................................ 84,653 5.33 78,431 5.26
6 months to 1 year.............................. 39,516 5.45 34,616 5.50
1 to 2 years.................................... 35,433 5.82 36,985 5.51
2 to 3 years.................................... 17,867 6.07 9,954 5.71
Over 3 years.................................... 8,377 5.94 9,913 5.94
-------- ---- --------- ----
Total certificates.............................. 185,846 5.55 169,899 5.43
------- ---- ------- ----
Subtotal........................................ 325,747 4.50% 289,919 4.37%
==== ====
Accrued interest payable........................ 296 379
-------------- ----------
Total........................................... $ 326,043 $ 290,298
========== ==========
</TABLE>
-75-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Jumbo Certificates of Deposits are accounts in excess of $95,000 that
are solicited directly or through brokers in the national market. At December
31, 1997 and 1996 the Company had $47,068,000 and $35,268,000, respectively, in
Jumbo Certificates of Deposit of which $20,075,000 and $14,715,000,
respectively, were brokered deposits.
At December 31, 1997 and 1996, mortgage loans and MBS aggregating
$12,352,000 and $1,617,000, respectively, were pledged for public fund deposits
as required by the New Jersey Department of Banking's Governmental Unit Deposit
Protection Act.
REMICS with amortized costs of $492,000 and $498,000 and market values
of $496,000 and $492,000 were pledged for savings deposits at December 31, 1997
and 1996, respectively.
Following is a summary of interest expense by type of account:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
NOW $ 378 $ 408 $ 518
Money market, municipal deposits and other 2,646 1,859 1,359
Savings and club 923 1,032 1,175
Certificate 9,797 8,822 8,127
--------- --------- ---------
Total $13,744 $12,121 $11,179
======= ======= =======
</TABLE>
Interest paid on deposits for the years ended December 31, 1997, 1996
and 1995 was $13,826,000, $11,951,000, and $11,183,000, respectively.
12. BORROWINGS
Borrowings at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------------- ------------- ------------ ------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances maturing during:
1997........................................ $ -- --% $ 66,765 5.69%(1)
1998........................................ 68,828(1) 5.86 19,828 5.99
1999........................................ 17,875 6.09 15,875 6.03
2000........................................ 6,258 6.58 6,257 6.58
2001........................................ 600 7.12 600 7.12
2002........................................ 2,000 6.51 -- --
--------- ---- -------- ----
Total............................................ 95,561 5.97% 109,325 5.85%
--------- ---- -------- ----
Securities sold under repurchase
agreements maturing during
1997........................................ -- --% 43,823 5.67%
1998........................................ 14,268 6.08 -- --
1999 (2).................................... 20,000 5.82 20,000 5.84
2000 (2).................................... 42,000 6.01 -- --
--------- ---- -------- ----
Total............................................ 76,268 5.97 63,823 5.72
--------- ---- -------- ----
Total borrowings................................. $ 171,829 5.97% $173,148 5.80%
========= ==== ======== ====
</TABLE>
- ----------------------------
(1) Borrowing rates on the line of credit are presented based on a 31 day
average rate.
(2) Callable one year earlier at the option of the lender.
-76-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank has a line of credit at the Federal Home Loan Bank for
$51,098,000 of which $44,000,000 was outstanding at December 31, 1997. The
interest rate adjusts daily based on the Federal Funds rate.
Advances from the Federal Home Loan Bank include borrowings that adjust
quarterly based on the London Interbank Offered Rate (LIBOR). Adjustable
borrowings totaled $5,000,000 and $10,000,000 at December 31, 1997 and 1996,
respectively. Advances from the Federal Home Loan Bank are collateralized by
Federal Home Loan Bank stock and substantially all first mortgage loans.
Advances from the Federal Home Loan Bank averaged $95,283,000 and $108,357,000
and the maximum outstanding at any month-end was $105,475,000 and $116,597,000
during the years ended December 31, 1997 and 1996, respectively.
Securities sold under agreement to repurchase are treated as
borrowings. These agreements were collateralized by MBS with amortized costs of
$80,773,000 and $66,690,000 and market values of approximately $81,389,000 and
$66,990,000 at December 31, 1997 and 1996, respectively. The MBS underlying the
agreements were delivered to, and are held by the dealers and the FHLB who
arranged the transactions. Securities sold under agreements to repurchase
averaged $73,881,000 and $53,516,000 and the maximum outstanding at any
month-end was $84,559,000 and $67,001,000 during the years ended December 31,
1997 and 1996, respectively.
13. SAIF RECAPITALIZATION ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996, which
includes the recapitalization of the Savings Association Insurance Fund (SAIF),
became law. Accordingly, all depository institutions with SAIF insured deposits
were charged a one-time special assessment on their SAIF-assessable deposits as
of March 31, 1995 at the rate of 65.7 basis points, paid on November 27, 1996.
The Bank's assessment was $1,564,000. SAIF reduced the insurance premium from
$.23 per $100 of deposits to $.0648 per $100 of deposits starting in 1997.
14. INCOME TAXES
The Bank was previously permitted under the Internal Revenue Code (the
Code) to deduct an annual addition to the reserve for bad debts in determining
taxable income, subject to certain limitations. The Bank's deduction for the
year ended December 31, 1995 was based upon the percentage of taxable income
method as defined by the Code. The bad debt deduction allowable under this
method equaled 8% of taxable income determined without regard to that deduction
and with certain adjustments. This addition differed from the bad debt
experience used for financial accounting purposes.
In August 1996, The Small Business Job Protection Act (the Act) was
signed into law. The Act repealed the percentage of taxable income method of
accounting for bad debts for thrift institutions effective for years beginning
after December 31, 1995. The Act provides that bad debt reserves accumulated
prior to 1988 be exempt from recapture. Bad debt reserves accumulated after 1987
("applicable excess reserves") are subject to recapture. The Act requires the
Bank as of January 1, 1996 to change its method of computing reserves for bad
debts to the experience method. The bad debt deduction allowable under this
method is available to financial institutions with assets less than $500
million. Generally, this method will allow the Bank to deduct an annual addition
to the reserve for bad debts equal to the increase in the balance of the Bank's
reserve for bad debts at the end of the year to an amount equal to the
percentage of total loans at the end of the year, computed using the ratio of
the previous six years net chargeoffs divided by the sum of the previous six
years total outstanding loans at year end. Since the Bank's assets exceed $500
million, it will be permitted to deduct only actual bad debts as they occur.
The Act requires that a thrift institution subject to the change in its
method of computing reserves for bad debts treat such change as a change in a
method of accounting determined solely with respect to the
-77-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
"applicable excess reserves" of the institution. The amount of the applicable
excess reserves will be taken into account ratably over a six taxable year
period, beginning with the first taxable year after December 31, 1995. The
timing of this recapture was delayed for two years since the Bank met certain
loan origination requirements as provided by the Act. The amount of applicable
excess reserves subject to recapture totaled approximately $944,000 and the
related tax liability included in the Bank's net deferred taxes totaled $340,000
at December 31, 1995. For financial reporting purposes, the Bank will not incur
any additional tax expenses. At December 31, 1997, under FAS 109, deferred taxes
were provided on the difference between the book reserve at December 31, 1995
and the applicable excess reserve in the amount equal to the Bank's increase in
the tax reserve from December 31, 1987 to December 31, 1995. Retained earnings
includes approximately $3,229,000 representing bad debt deductions for which no
deferred income taxes have been provided at December 31, 1997 and 1996. Under
the Code, this amount may become taxable if dissolution, liquidation or certain
other distributions occur. However, under FAS 109, the Bank is not required to
provide deferred taxes for reserves established prior to December 1987. The
following are the major sources of temporary differences and their deferred tax
effect at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Credit loss reserve $1,302 $1,354
Unrealized loss on securities available-for-sale --- 490
Deposit premium 145 131
Other 27 ---
------ ------
Total deferred tax assets 1,474 1,975
------ ------
Deferred Tax Liabilities:
Deferred loan fees 196 142
Unrealized loss on loans held for sale 29 90
Depreciation 85 53
Mortgage servicing 43 ---
Unrealized gain on securities available-for-sale 128 ---
Excess reserves subject to recapture 340 343
------ ------
Total deferred tax liabilities 821 628
------ ------
Net deferred tax asset $ 653 $1,347
======= ======
</TABLE>
-78-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's effective tax rate differs from the statutory federal
income tax rate for the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------------- ------------------ -------------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $2,412 34.0% $1,809 34.0% $2,506 34.0%
Increase (decrease) in
taxes resulting from:
Accretion of excess of
fair value over cost (23) (.3) (85) (1.6) (85) (1.2)
Increase in valuation
allowance for
deferred tax asset --- --- 115 2.2 130 1.8
Tax-free interest (43) (.6) (14) (.3) (10) (.1)
State income tax, net
of federal benefit 144 2.0 87 1.6 151 2.0
Other, net (124) (1.7) (145) (2.7) (32) (.4)
------ ---- ------ ---- ------ ----
Total current and
deferred income taxes $2,366 33.4% $1,767 33.2% $2,660 36.1%
====== ==== ====== ==== ====== ====
</TABLE>
Deferred federal income tax expense (benefit) consisted of the
following tax effects of temporary differences:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Accelerated depreciation $32 $ 26 $ 14
Deferred loan fees 54 264 42
Acquisition costs --- 32 38
Excess reserves subject to recapture (3) (13) 150
Mortgage servicing 43 --- ---
Loan loss reserve (net) 52 44 40
Loans held for sale (61) 69 (247)
Deposit premium (14) (66) (65)
Other, net (27) (13) (22)
--- ---- ----
Total $76 $343 $(50)
=== ==== ====
</TABLE>
The Company made income tax payments of $2,217,000, $1,712,000 and
$2,539,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
A recovery of a valuation allowance related to deferred income taxes
was recognized in the amount of $732,000 during 1996. The recovery was
recognized after considering the impact of a change in the Code related to the
bad debt deduction and the estimated timing of temporary differences related to
deferred loan fees for tax purposes.
15. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The Office of Thrift Supervision
(OTS) sets forth capital standards applicable to all thrifts. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary
-79-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations) to
adjusted assets (as defined), and of Tier I and total capital (as defined) to
risk-weighted assets (as defined). As of December 31, 1997, management believes
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997 and December 31, 1996, the most recent
notification from the OTS categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum tangible, core and risk-based
ratios. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's regulatory capital amounts differ from those presented under
GAAP. The following is a reconciliation of GAAP capital to regulatory capital at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Regulatory Capital
Core, Tangible
and Tier 1 Risk-Based Total Risk-Based
--------------------- ----------------
(in thousands)
<S> <C> <C>
At December 31, 1997
GAAP capital $36,212 $36,212
Deposit premium (516) (516)
Investment in subsidiary (165) (165)
Unrealized gains on certain available-for-sale securities (144) (144)
Equity investment --- (75)
Allowance for credit losses --- 2,895
------- -------
Regulatory capital $35,387 $38,207
======= =======
At December 31, 1996
GAAP capital $32,029 $32,029
Deposit premium (631) (631)
Investment in subsidiary (145) (145)
Unrealized losses on certain available-for-sale securities 876 876
Equity investment --- (75)
Allowance for credit losses --- 2,571
------- -------
Regulatory capital $32,129 $34,625
======= =======
</TABLE>
-80-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The table below presents the Bank's actual and regulatory required
capital amounts for core, tangible, tier 1 risk-based and total risk-based
capital for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Required to be
Required for Well Capitalized
Capital Adequacy Under Prompt
Actual Purposes Corrective Action
---------------------- --------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997:
Core (Leverage) $35,387 6.60% $16,083 3.0% $26,805 5.0%
Tangible 35,387 6.60 8,042 1.5 N/A N/A
Tier I risk-based 35,387 15.33 9,236 4.0 13,853 6.0
Total risk-based 38,207 16.55 18,471 8.0 23,089 10.0
At December 31, 1996:
Core (Leverage) $32,129 6.45% $14,938 3.0% $24,897 5.0%
Tangible 32,129 6.45 7,469 1.5 N/A N/A
Tier I risk-based 32,129 15.62 8,226 4.0 12,339 6.0
Total risk-based 34,625 16.84 16,452 8.0 20,565 10.0
</TABLE>
16. EMPLOYEE STOCK OWNERSHIP PLANS
A non-leveraged Employee Stock Ownership Plan (Plan) is provided for
eligible employees. The Plan contains provisions which allow employees to enter
into salary reduction arrangements intended to qualify under Section 401(k) of
the Code. The number of allocated shares in the Plan was 188,875 and 183,681 at
December 31, 1997 and 1996, respectively. The allocation includes shares
purchased by plan participants funded by their own self-directed contributions.
The Board of Directors approved matching contributions to the Plan with
respect to those employees who elected salary reduction contributions. In
addition, a discretionary profit sharing contribution may be approved by the
Board of Directors. The total Plan contribution, including the discretionary
profit sharing contribution, totaled $233,000, $271,000 and $216,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
17. STOCK OPTIONS
The Shareholders approved the adoption by the Board of Directors of an
Employee Stock Compensation Program and Stock Option Plan for Non-Employee
Directors (the Programs). Pursuant to the Programs, stock options may be granted
which qualify as incentive stock options as well as stock options that do not
qualify as incentive options under the Code. Non-employee directors, full-time
officers, and key employees are eligible to receive options under the Programs.
There are 412,700 shares of Common Stock available for issuance under the
Programs at December 31, 1997.
-81-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
A summary of the Company's Programs at December 31, 1997, 1996 and 1995
and changes during the years then ended is presented in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 120,961 $11.99 81,441 $10.54 74,424 $ 8.08
Granted 5,000 18.75 41,029 14.52 26,385 12.59
Exercised --- --- (1,509) 2.85 (16,271) 2.85
Forfeiture (4,000) 11.56 0 --- (3,097) 9.28
------- ------ ------ ------ ------ -------
Ending balance 121,961 $12.28 120,961 $11.99 81,441 $10.54
======= ====== ======= ====== ====== ======
Exercisable at end of year 30,430 0 1,509
======== ======= ======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $9.28 to $18.75. The weighted average remaining contractual life of those
options was 8.05 years.
For years beginning January 1, 1995, pro forma information regarding
net income and net income per share is required by FAS 123. The Black-Scholes
option pricing model was used to estimate the fair value of the options granted.
The Black-Scholes model does not consider vesting and transfer restrictions. The
model requires input of highly subjective assumptions including the expected
stock price volatility. Because input assumptions can materiality affect the
fair value estimate, in management's opinion the model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The following table sets forth for the periods indicated information
regarding (1) risk-free interest rates; (2) dividend yields; (3) volatility
factors of the expected market price of the common stock; (4) weighted-average
expected lives of the options; and (5) the weighted-average fair value of
options granted.
<TABLE>
<CAPTION>
Fair value information:
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates 6.88% 6.28% 5.92%
Dividend yields 2.13% 2.55% 2.67%
Volatility 24.26% 23.86% 24.84%
Expected life in years 7.5 7.5 7.5
Fair value of options granted $6.40 $4.40 $3.71
</TABLE>
In accordance with APB 25 under the intrinsic value based method, the
Company is required to recognize compensation expense for the excess of the
quoted market price of the stock at the grant date over the amount an employee
or non-employee director must pay to acquire the stock. Since all stock options
are granted at market, no compensation expense was recognized at the grant date.
Since the Company has elected to remain with the accounting in APB 25,
disclosures of net income and net income per share are required as if the fair
value based method of accounting defined in FAS 123 had been applied. All
options granted to date have 10 year terms and vest and become fully exercisable
three years after the grant date. For the purpose of pro forma disclosure, the
estimated fair value of the options are amortized to expense over the options'
vesting period. Compensation expense related to options granted prior to
amortization totaled $32,000, $180,000 and $98,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Since all options vest over a three year
period, compensation expense of $101,000, $41,000 and $7,000 are reflected in
the pro forma adjustments. Additionally, since stock options granted to outside
directors do not qualify as incentive stock options under the Code, they have
been tax effected in the pro forma presentation.
The Company's net income, basic EPS and diluted EPS as reported and on
a pro forma basis for the years indicated were as follows:
-82-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net Income As Reported $4,728 $4,285 $4,711
Pro Forma $4,638 $4,251 $4,706
Basic EPS As Reported $1.75 $1.58 $1.74
Pro Forma $1.71 $1.57 $1.74
Diluted EPS As Reported $1.72 $1.57 $1.74
Pro Forma $1.68 $1.56 $1.74
</TABLE>
Because the FAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of that to be expected in future years.
18. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit which involve, in varying degrees, elements of credit and
interest rate risk that are not recognized in the consolidated statements of
financial condition.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments as it does for on balance-sheet
instruments.
Commitments outstanding at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Fixed rate mortgage loans (current market rates
6.25% to 9.625% at December 31, 1997) $ 3,741 $ 2,310
Adjustable rate mortgage loans 651 1,107
Purchase of fixed rate mortgage loans --- 7,189
Unused lines of credit 6,520 5,421
Letters of credit 305 574
Consumer loans 294 564
Loans in process 3,045 1,222
------- -------
Total $14,556 $18,387
======= =======
</TABLE>
At December 31, 1997, all commitments are expected to be funded within
one year.
19. RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31, 1997,
approximately $13,324,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
20. RELATED PARTIES
The Company effected securities transactions through companies which
are controlled by a member of the Board of Directors. The Director is the
chairman and director of a company which is a broker-dealer
-83-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
of securities. The transactions consist of purchases from and sales to these
broker-dealers of mortgage-backed securities and other investment securities in
the ordinary course of business. The aggregate amount of securities purchased
from these broker-dealers during 1997, 1996 and 1995 were approximately $22
million, $22 million and $23 million, respectively. Total securities
transactions for 1997, 1996 and 1995 were $78 million, $91 million and $73
million, respectively. The aggregate amount of securities sold to these
broker-dealers during 1996 was $1.6 million. The aggregate amount of securities
sold during 1996 was $13 million. There were no sales to these broker-dealers
during 1997. There were no accounts payable/receivable to or from these
companies at December 31, 1997 and 1996. Offers to purchase from or sell to
other unaffiliated broker-dealers are solicited at the time of the purchase or
sale to ensure that the terms of these securities transactions are comparable to
the terms that could be obtained from other unaffiliated broker-dealers.
21. LITIGATION AND SETTLEMENTS
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 effect on its financial position, liquidity or
results of operations. In March 1995, the Bank received $672,000 in settlement
of an insurance claim in regards to the Fidelity Mutual acquisition. This amount
is included in other income in the consolidated statement of income for 1995.
22. MERGER
On December 18, 1997, the Company entered into an Agreement and Plan of
Merger with and into Sovereign Bancorp. The Merger is anticipated to be
consummated with an exchange of stock and is intended to constitute a tax free
reorganization under the Internal Revenue Code and be accounted for as a
pooling-of-interest under GAAP. Regulatory approvals, the approval of the
Company's shareholders, and other conditions are required before the merger can
be consummated.
23. PARENT COMPANY FINANCIAL INFORMATION
First Home Bancorp Inc. is a holding company organized under New Jersey
law. It was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank in connection with the reorganization of the Bank to
the holding company form. The Company was formed on February 22, 1996 and the
reorganization was consummated on May 31, 1996.
-84-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Condensed financial statements of First Home Bancorp Inc. are as follows:
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 324 $ 500
Investments available-for-sale 858 ---
Investment in subsidiary bank 36,212 32,029
Prepaid expenses and other assets 386 394
--------- -----------
TOTAL ASSETS $37,780 $32,923
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 395 $ 278
--------- -----------
TOTAL LIABILITIES 395 278
--------- -----------
Shareholders' equity:
Common stock - no par value --- ---
Paid in capital in excess of par 8,923 8,923
Retained earnings 28,235 24,592
Unrealized gain (loss) on securities available-for-sale, net 227 (870)
--------- -----------
Total shareholders' equity 37,385 32,645
--------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,780 $32,923
======= =======
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For year ended Period from February 22, 1996
December 31, 1997 through December 31, 1996
----------------- -------------------------
(in thousands)
<S> <C> <C>
Interest income and dividends $ 30 $ 9
Dividend from subsidiary bank 1,771 1,300
Equity in undistributed earnings of subsidiary bank 3,132 3,009
-------- ---------
Total income 4,933 4,318
Other operating expenses 193 41
Merger costs 126 ---
-------- ---------
Net income before taxes 4,614 4,277
Income tax benefit 114 8
-------- ---------
Net income $4,728 $4,285
====== ======
</TABLE>
-85-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
For the Year February 22, 1996
Ended through
December 31, 1997 December 31, 1996
----------------- -----------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,728 $ 4,285
Equity in undistributed earnings of subsidiary bank (3,132) (3,009)
Net other 99 (115)
------- -------
Net cash used in operating activities 1,695 1,161
------- -------
INVESTING ACTIVITIES:
Purchase of securities (786) ---
------- -------
Net cash used in investing activities (786) ---
------- -------
FINANCING ACTIVITIES:
Cash dividends and cash in lieu of fractional shares (1,085) (765)
Company formation --- 100
Proceeds from exercise of common stock options --- 4
------- -------
Net cash used in financing activities (1,085) (661)
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (176) 500
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 500 ---
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 324 $ 500
======== ========
</TABLE>
-86-
<PAGE>
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
-87-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------ ---------------- ---------------------------------------------
<S> <C> <C>
Stephen D. Miller 61 President and Director
Robert A. Divalerio 49 Senior Executive Vice President, Chief
Financial Officer, and Secretary
Duff P. O'Connor 42 Executive Vice President
Adam J. Gagliardi(1)(2) 46 Director
Eugene J. Martell(1)(2)(3) 50 Director
Frederick M. Palfrey(1)(2)(3) 66 Director
W. Kenneth Porch(1)(2) 58 Director
Stephen R. Selverian(3) 58 Director and Executive Vice President
Rodger D. Shay(1)(2)(3) 61 Director
</TABLE>
- ----------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
Stephen D. Miller. Mr. Miller has been President of the Company since
its formation in 1996 and of the Bank since 1974. From 1971 until 1974 Mr.
Miller was the managing officer of the Bank.
Robert A. DiValerio, CPA. Mr. DiValerio is the Senior Executive Vice
President, Chief Operating Officer and Secretary of the Company and has served
in such capacities with the Company since its organization in February 1996 and
with the Bank in various capacities since December 1984.
Duff P. O'Connor. Mr. O'Connor is Executive Vice President and has
served in such capacity with the Company since its organization in February 1996
and with the Bank in various capacities since 1978.
Adam J. Gagliardi, Jr. Mr. Gagliardi has served as President of United
Vending, Inc., a company engaged in the automated food service and amusement
industry, since 1976.
Eugene J. Martell. Mr. Martell has been a building contractor engaged
in general construction since 1971.
Frederick M. Palfrey. Mr. Palfrey was a chemist associated with the
DuPont Company since 1953 until his retirement in 1992. He is currently an
independent consultant.
W. Kenneth Porch. Mr. Porch has been a vegetable produce farmer in
Salem County, New Jersey since 1968.
-88-
<PAGE>
Stephen R. Selverian. Mr. Selverian is the Executive Vice President of
the Company and the Bank. He was President of Fidelity Mutual Savings and Loan
Association from 1981 until its acquisition by the Bank on July 1, 1992.
Rodger D. Shay. Mr. Shay has been Chairman and Director of Shay Assets
Management, Inc. since August 1997 (previously President and Director from 1990
to August 1997). Chairman of the Board, Director and President of Asset
Management Fund, Inc. since August 1997 (previously Director from 1985 to 1990).
Chairman and Director of Shay Financial Services, Inc. since August 1997
(previously President and Director from 1990 to August 1997). President, Chief
Executive Officer and member of the Managing Board of Shay Assets Management Co.
from 1990 to December 1997. President, Chief Executive Officer and member of the
Managing Board of Shay Financial Services Co. from 1990 to December 1997. Vice
President since 1995 of Institutional Investors Capital Appreciation Fund Inc.
and M.S.B. Fund Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth certain information for each of the
three years ended December 31, 1997 regarding the compensation earned by the
Company's chief executive officer and each of the other most highly compensated
executive officers who earned in excess of $100,000 for services rendered in all
capacities for each of the three years ended December 31, 1997.
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
-------------------------------------- ------------
Name and Option All Other
Principal Position Year Salary(2) Bonus(3) Awards(4) Compensation(5)
------------------ ---- --------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Stephen D. Miller................... 1997 $230,000 $ 82,877 -- $12,962
President 1996 210,000 100,800 9,012 15,194
1995 165,000 41,250 6,481 14,364
Robert A. DiValerio................. 1997 $156,625 $ 47,031 -- $12.962
Senior Executive Vice 1996 145,000 58,000 6,223 15,194
President and Treasurer 1995 120,000 24,000 4,444 12,961
Duff P. O'Connor.................... 1997 $118,375 $ 35,546 -- $12,962
Executive Vice President 1996 110,000 44,000 4,721 13,067
1995 95,000 19,000 3,519 10,152
Stephen R. Selverian................ 1997 $118,375 $ 35,546 -- $12,962
Executive Vice President 1996 112,000 44,800 4,807 13,504
1995 106,600 21,320 3,944 11,600
</TABLE>
-89-
<PAGE>
- ---------------
(1) The Company also provides Messrs. Miller, DiValerio, O'Connor and
Selverian with Company cars for their use. The amount of perquisites, as
determined in accordance with the rules of the Securities and Exchange
Commission relating to executive compensation, did not exceed the lesser
of $50,000 or 10% of salary for fiscal 1997.
(2) Includes amounts of salary deferred by the named executive officers
pursuant to the First Home Savings Bank Employee Stock Ownership Plan (the
"Plan"). Under the terms of the Plan, participants may elect to have up to
10% of their annual compensation deferred.
(3) Represents bonuses granted pursuant to the Executive Incentive
Compensation Plan, which bases bonuses upon a percentage of officers'
salaries if the Company meets certain financial goals set by the Board of
Directors.
(4) The Company maintains the Employee Stock Compensation Program (the
"Program"). Options granted under the Program are exercisable after three
years. The number of shares have been adjusted after giving effect to the
four-for-three stock split.
(5) Includes amounts credited to the named executive officers accounts
maintained under the Plan.
Employment Agreements
The Company has entered into an employment agreement with each of
Messrs. Miller, DiValerio, O'Connor and Selverian. The rates of salary currently
payable under the agreements are $243,800 for Mr. Miller, $166,025 for Mr.
DiValerio, and $125,475 each for Mr. O'Connor and Mr. Selverian. Salary changes
may be negotiated from time to time during the term of the agreement. In
addition, incentive compensation or bonuses may be awarded the employee from
time to time by the Board of Directors. The term of the agreement for each
officer is three years. The term of each agreement automatically extends for an
additional one year period on December 31 of each year, provided no written
notice is given by either the Company or the employee to terminate the automatic
extension and the extension is explicitly reviewed and approved in writing by
the Board of Directors. The Company may terminate the employees' employment or
suspend its obligations under the agreements in certain limited circumstances
with or without cause. The employees may terminate their employment under the
agreements for good reason, as defined in the agreements. The agreements define
good reason to include a change in control of the Company, a change in or
limitation of the employees' duties or powers, removal of the employees from or
failure to re-elect them to the positions specified in the agreements, a
reduction in the employees rate of compensation or benefits or the failure of
the Company to observe any covenant in the agreement to be observed or performed
by the Company.
If the Company terminates an employee's employment without cause or an
employee terminates his employment for good reason, the Company is required to
pay the terminated employee for the duration of the agreement's term (as if the
employee's employment had not terminated) (i) annually, 100% of the employee's
annual salary at the time of the termination; (ii) annually, an amount equal to
the average of the three highest annual incentive compensation payments paid to
the terminated employee; and (iii) medical, pension and similar benefits
comparable to those furnished to the employee immediately prior to the
termination. In the event of termination for good reason as the result of a
change in control and the present value of these payments is equal to or in
excess of 300% of the employees "base amount," as defined in Section
280G(b)(3)(A) of the Internal Revenue Code, the employee has waived the right to
receive such amount of such payments which is sufficient to reduce the present
value of such payments below 300% of the base amount. Also, notwithstanding
anything to the contrary contained in the agreements, the employee may not
receive any amount upon termination of employment (whether pursuant to the
agreement or any
-90-
<PAGE>
other policy or arrangement) which would cause the employee to receive an amount
which exceeds three times the average of all compensation paid to the employee
by the Company during each of the five years preceding the year in which the
employee's employment is terminated.
Option Grants in Last Fiscal Year
There were no stock option grants awarded under the Company's Employee
Stock Option Program for fiscal 1997 to the Company's executive officers named
in the Summary Compensation Table.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning the
exercise of stock options during fiscal 1997 and the number and value of
unexercised options held at the end of fiscal 1997 (based upon the last sale
price December 31, 1997 of $30.125 per share) by the executive officers of the
Company named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Fiscal Year End at Fiscal Year-End
Name on Exercise Realized Exercisable / Unexercisable Exercisable / Unexercisable
---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Stephen D. Miller - 0 - $ 0 8,080/22,900 $168,417/$395,572
Robert A. DiValerio - 0 - 0 5,657/15,851 117,913/274,018
Duff P. O'Connor - 0 - 0 4,633/12,487 96,569/216,619
Stephen R. Selverian - 0 - 0 5,392/13,694 112,389/238,938
</TABLE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 18, 1998, certain
information with respect to the beneficial ownership of the Common Stock (i) by
each person who is known by the Company to be the beneficial owner of more than
5% of the Common Stock, (ii) by each director of the Company, (iii) by each
executive officer of the Company named in the Summary Compensation Table and
(iv) by all directors and executive officers as a group. Except as otherwise
noted, each beneficial owner listed has sole investment and voting power with
respect to the Common Stock.
-91-
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership (1) Percent of Class (2)
- ----------------------------------------------------- ----------------- --------------------
<S> <C> <C>
First Home Savings Bank, FSB......................... 161,387(3) 6.0
Employee Stock Ownership Plan
125 South Broadway
Pennsville, NJ 08070
Grace D. Shay........................................ 225,576(4) 8.3
105 Arvida Parkway
Coral Gables, FL 33156
Wellington Management Company, LLP................... 135,632(5) 5.0
75 State Street
Boston, MA 02104
Directors:
Adam J. Gagliardi, Jr................................ 77,473(6) 2.9
Eugene J. Martell.................................... 100,592 3.7
Stephen D. Miller.................................... 114,616(7) 4.2
125 South Broadway
Pennsville, NJ 08070
Frederick M. Palfrey................................. 13,983(8) *
25 Fenwick Drive
Careys Point, NJ 08069
W. Kenneth Porch..................................... 55,830(9) 2.1
RD #1, Box 17A
Pedricktown, NJ 08067
Stephen R. Selverian................................. 27,984(10) 1.0
Rodger D. Shay....................................... 225,576(4) 8.3
105 Arvida Parkway
Coral Gables, FL 33156
All directors and executive
officers of the Company as a group
(10 persons)......................................... 731,830(11) 26.4
</TABLE>
- ----------------
*Less than 1%
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission and, accordingly,
may include securities owned by or for, among others, the spouse and/or
minor children of the individual and any other relative who has the same
house as such individual, as well as other securities as to which the
individual
-92-
<PAGE>
has or shares voting or investment power or has the right to acquire
within 60 days after March 18, 1998. Beneficial ownership may be
disclaimed as to certain of the securities.
(2) Based on 2,708,426 shares outstanding, except when the percentage
reported relates to shares of Common Stock that a person has a right to
acquire within 60 days after March 18, 1998, in which case it is based on
the number of shares of Common Stock that would be outstanding after the
exercise of such right.
(3) The First Home Savings Bank Employee Stock Ownership Plan (the "ESOP")
has voting power with respect to 158,378 of these shares only if voting
of these shares are not directed by the participants of the ESOP.
(4) Grace D. Shay and Rodger D. Shay jointly own 124,444 shares of Common
Stock. Each has shared voting and investment power with respect to these
shares. Mr. Shay has shared investment and voting power with respect to
24,000 shares which are owned of record by a corporate trust of which Mr.
Shay is a director.
(5) The information with respect to Wellington Management Company's ("WMC")
beneficial ownership of the Bank's Common Stock is derived from a
Schedule 13G filed by WMC with the Securities and Exchange Commission in
January 1998. The information reflects WMC's beneficial ownership as of
December 31, 1997. WMC has shared voting power with respect to 135,632
shares and shared investment power with respect to 111,632 shares. The
shares are owned by a variety of investment advisory clients of WMC,
which clients receive dividends and the proceeds from the sale of such
shares.
(6) Mr. Gagliardi has shared investment and voting power with respect to
22,122 of these shares.
(7) Mr. Miller has shared investment and shared voting power with respect to
7,993 of these shares, shared investment power and sole voting power with
respect to 17,312 of these shares and sole investment power and sole
voting power with respect to 89,311 of these shares. Does not include
144,075 shares held by the ESOP, of which Mr. Miller is a co-trustee.
(8) Mr. Palfrey has shared investment and voting power with respect to 1,169
of these shares. Does not include 161,387 shares held by the ESOP, of
which Mr. Palfrey is a co-trustee.
(9) Does not include 161,387 shares held by the ESOP, of which Mr. Porch is
a co-trustee.
(10) Mr. Selverian has shared investment and voting power with respect to
3,378 of these shares. Mr. Selverian has sole voting power and no
investment power with respect to 4,926 shares held by the Company's
Employee Stock Ownership Plan.
(11) Does not include 161,387 shares held by the ESOP, of which certain
directors are trustees.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Shay Financial Services Inc. Rodger D. Shay, a director, is also a
chairman and president of Shay Financial Services Inc. which is a licensed
broker-dealer which effects securities transactions with the Bank. The
transactions consist primarily of the purchase from and sale to these broker
dealers of mortgage-backed securities and other investment securities in the
ordinary course of the Bank's business. The aggregate amount of securities
purchased from or sold to these broker dealers during 1997 was approximately $22
million. The Bank may enter into short-term borrowing transactions from these
brokers. There were no such financings during 1997. The Bank believes that the
terms of these securities transactions are comparable to the terms that could be
obtained with other broker-dealers.
-93-
<PAGE>
Indebtedness of Management. The Bank has had, and expects to continue
to have, loan and other banking transactions with its directors, officers and
their respective associates. All such loan and other banking transactions (i)
were made in the ordinary course of business, (ii) were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and (iii) did not
involve more than the normal risk of collectability or present other unfavorable
features.
-94-
<PAGE>
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,
1997 and 1996.
Consolidated Statements of Income for the Years Ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995.
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.
*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.
-95-
<PAGE>
*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.
**10.8 Agreement and Plan of Merger, dated as of December 18, 1997,
between Sovereign Bancorp and First Home Bancorp inc.
*21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule.
- ----------------
(1) Executive Compensation Plans and Arrangements.
* Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996
** Incorporated by reference to the Company's Form 8-K/A filed
January 16, 1998
(b) The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
1. Form 8-K dated December 24, 1997 reporting under Item 5 relating to an
Agreement and Plan of Merger into Sovereign Bancorp.
2. Form 8-K-A dated January 16, 1998 reporting under Item 5 relating to
additional information regarding the Agreement and Plan of Merger into
Sovereign Bancorp.
-96-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST HOME SAVINGS BANK, S.L.A.
DATE: March 27, 1998 By: /s/ Stephen D. Miller
------------------------------------
Stephen D. Miller, President
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Stephen D. Miller President and Chairman of the Board March 27, 1998
- ------------------------------------
Stephen D. Miller
/s/ Robert A. DiValerio Senior Executive Vice President March 27, 1998
- ------------------------------------
Robert A. DiValerio (Principal Financial Officer and
Principal Accounting Officer)
/s/ Adam J. Gagliardi, Jr. Director March 27, 1998
- ------------------------------------
Adam J. Gagliardi, Jr.
/s/ Eugene J. Martell Director March 27, 1998
- ------------------------------------
Eugene J. Martell
/s/ Frederick M. Palfrey Director March 27, 1998
- ------------------------------------
Frederick M. Palfrey
/s/W. Kenneth Porch Director March 27, 1998
- ------------------------------------
W. Kenneth Porch
/s/ Stephen R. Selverian Executive Vice President March 27, 1998
- ------------------------------------
Stephen R. Selverian and Director
/s/ Rodger D. Shay Director March 27, 1998
- ------------------------------------
Rodger D. Shay
</TABLE>
-97-
<PAGE>
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
*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.
**10.8 Agreement and Plan of Merger, dated as of December 18, 1997,
between Sovereign Bancorp and First Home Bancorp inc.
*21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule.
- ----------
(1) Executive Compensation Plans and Arrangements.
* Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996
** Incorporated by reference to the Company's Form 8-K/A filed
January 16, 1998
-98-
<PAGE>
EXHIBIT 23.1
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
reported dated February 9, 1998 included in First Home Bancorp Inc.'s Form 10-K
for the year ended December 31, 1997.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 24, 1998
99
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION AS OF DECEMBER 31, 1997 AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001009195
<NAME> FIRST HOME BANCORP INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,450
<INT-BEARING-DEPOSITS> 732
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<ALLOWANCE> 3,616
<TOTAL-ASSETS> 537,798
<DEPOSITS> 326,043
<SHORT-TERM> 83,096
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<LONG-TERM> 88,733
0
0
<COMMON> 0
<OTHER-SE> 37,385
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<EXPENSE-OTHER> 9,127
<INCOME-PRETAX> 7,094
<INCOME-PRE-EXTRAORDINARY> 7,094
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,728
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 7.78
<LOANS-NON> 3,358
<LOANS-PAST> 267
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 3,760
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<ALLOWANCE-UNALLOCATED> 0
</TABLE>
