<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
0-24997
Commission File Number
SOUTH JERSEY FINANCIAL CORPORATION, INC.
(Name of small business issuer in its charter.)
DELAWARE 22-3615289
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4651 Route 42, Turnersville, New Jersey 08012
(Address of Principal Executive Offices) (Zip Code)
(856) 629-6000
(Issuer's telephone number)
None
Securities registered under Section 12(b) of the Exchange Act
Common Stock, par value $.01 per share
Securities registered under Section 12(g) of the Exchange Act
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB.
[ X ]
The issuer's revenues for its most recent fiscal year were $22,397,000.
As of March 20, 2000, the issuer had 3,423,571 shares of common stock
outstanding.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was $49,327,479. This figure is based on the
average bid and asked price of the issuer's common stock on March 13, 2000,
which was $17.25 as reported in The Wall Street Journal. For purposes of this
calculation, the registrant is assuming that directors and executive officers
are affiliates.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ]
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INDEX
<TABLE>
<CAPTION>
PART I
Page No.
<S> <C> <C>
Item 1. Description of Business.....................................................................1
Item 2. Description of Property....................................................................28
Item 3. Legal Proceedings..........................................................................28
Item 4. Submission of Matters to a Vote of Security Holders........................................28
PART II
Item 5. Market for the Common Equity
and Related Stockholder Matters............................................................29
Item 6. Management's Discussion and Analysis or Plan of Operations.................................29
Item 7. Financial Statements.......................................................................39
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure........................................................40
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.................................................40
Item 10. Executive Compensation.....................................................................42
Item 11. Security Ownership of Certain Beneficial Owners and Management.............................45
Item 12. Certain Relationships and Related Transactions.............................................46
Item 13. Exhibits and Reports on Form 8-K...........................................................47
</TABLE>
SIGNATURES
<PAGE>
PART I
Item 1. Description of Business.
- ---------------------------------
General
South Jersey Financial Corporation, Inc. (the "Company") was
incorporated under Delaware law on September 28, 1998. The Company was formed to
acquire South Jersey Savings and Loan Association, Turnersville, New Jersey (the
"Association") as part of the Association's conversion from a mutual to stock
form of organization (the "Conversion"). In connection with the Conversion, on
February 12, 1999, the Company issued an aggregate 3,793,430 shares of its
common stock, par value $0.01 per share (the "Common Stock"), of which 3,512,435
shares were sold in a subscription offering at a purchase price of $10 per share
and 280,995 shares were issued and contributed to the South Jersey Savings
Charitable Foundation (the "Foundation"), a charitable foundation established by
the Association. The Company is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). Currently, the Company does not transact any material
business other than through its subsidiary, the Association. At December 31,
1999, the Company had total assets of $334.5 million, total deposits of $237.9
million and equity of $57.3 million.
The Association was originally organized in 1921 and operated as Knight
Park Building and Loan Association of Collingswood, New Jersey. In 1950, the
Association merged with Vineyard Building and Loan Association and changed its
name to South Jersey Savings and Loan Association. The Company conducts business
from its home office and operation centers located in Turnersville, New Jersey
and its two full service branch offices located in Collingswood and Glendora,
New Jersey. The Company's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
three banking offices and investing those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
mortgage loans and consumer loans, including home equity loans, and home equity
lines of credit. To a lesser extent, the Company also originates multi- family
and commercial real estate loans. The Association currently originates all of
its loans for investment. The Company also invests in mortgage-backed securities
and investment securities, primarily U.S. government and agency obligations, and
other permissible investments. The Company's revenues are derived principally
from interest on its loans and interest and dividends on its investment and
mortgage-backed securities and other noninterest income. The Company's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed securities and Federal Home Loan Bank ("FHLB") advances.
Recent Developments
Acquisition by Richmond County Financial Corporation
Pursuant to an Agreement and Plan of Merger dated as of March 15, 2000,
by and among the Company, Richmond County Financial Corp. ("Richmond County")
and a wholly owned subsidiary of Richmond County, Richmond County Acquisition,
Inc. ("Acquisition Sub"), the Company has agreed to merge with Acquisition Sub,
with the Company being the surviving corporation. Immediately after this merger,
the Association will merge with Richmond County Savings Bank ("Richmond County
Bank"), with Richmond County Bank being the surviving institution. Richmond
County intends to operate the Association's Collingswood, Glendora, and
Turnersville offices as a division of Richmond County Bank. Under the merger
agreement, each outstanding share of the Company's common stock will
automatically become exchangeable for $20.00 in cash. The merger is subject to
approval of the holders of a majority of the outstanding stock of the Company
and to regulatory approval. It is anticipated that the transaction will be
submitted to a vote of the Company's shareholders in the second quarter of the
year.
Market Area
1
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The Company is a community-oriented banking institution offering a
variety of financial products and services to meet the needs of the communities
it serves. The Company's lending and deposit gathering is concentrated in its
primary market area consisting of Gloucester and Camden Counties, New Jersey.
All of the Company's offices are located within 20 miles of Philadelphia,
Pennsylvania. The Company invests primarily in loans secured by first or second
mortgages on properties located in areas surrounding its offices.
Turnersville is located in largely suburban Gloucester County, New
Jersey on State Highway 42 approximately 50 miles northwest of Atlantic City,
New Jersey and 20 miles southeast of Philadelphia. Collingswood and Glendora are
located in Camden County, New Jersey, which primarily consists of mature fully
developed communities. Heavily traveled U.S. Interstates 95, 295, 676 and 76 run
through the Company's primary market area. These highways provide easy access to
the cities of Philadelphia, New York and Newark, New Jersey, which are major
international centers for business, commerce and trade. In recent years,
Gloucester County has experienced an influx of new residents and employers as
the Philadelphia suburbs have expanded into the Company's primary market area.
The economy in the Company's primary market area is based upon a
mixture of service and retail trade. Other employment is provided by a variety
of wholesale trade, manufacturing, federal, state and local government,
hospitals, universities and utilities. This area is also home to commuters
working in Philadelphia and, to a lesser extent, New York. In the late 1980's
and early 1990's, due in part to the effects of a prolonged decline in the
national and regional economy, layoffs in the financial services industry and
corporate relocations, New Jersey experienced reduced levels of employment.
These events, in conjunction with a surplus of available commercial and
residential properties, resulted in an overall decline during this period in the
underlying values of properties located in New Jersey. However, New Jersey's
real estate market has recovered in recent periods. Whether improvement will
continue is dependent, in large part, upon the general economic health of the
United States and New Jersey, and other factors beyond the Company's control
and, therefore, cannot be estimated.
Competition
The Company faces significant competition both in generating loans and
in attracting deposits. The Company's primary market area is highly competitive
and the Company faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Association. The Conversion, by
increasing the Association's capital and adding the resources of the Company as
a possible source of strength for the Association, should promote the
Association's ability to compete and to take advantage of growth opportunities
that might arise. The Company's competition for loans comes principally from
commercial banks, savings banks, mortgage brokers, mortgage banking companies
and insurance companies. Its most direct competition for deposits has
historically come from savings banks and associations, commercial banks and
credit unions. In addition, the Company faces increasing competition for
deposits from non-bank institutions such as brokerage firms and insurance
companies in such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions. In addition, the Company recognizes that its customer
base focuses on convenience and access to services. In this regard, the Company
has addressed these customer desires through the implementation of telephone
banking, increased office hours and the issuance of debit cards. The Company may
also seek to expand its lending activities into areas outside of its primary
market area.
Personnel
As of December 31, 1999, the Company had 60 full-time employees and 21
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to
be good.
Lending Activities
2
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Loan Portfolio Composition. The Company's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residential
real estate. At December 31, 1999, the Company's loans totalled $148.7 million,
of which $126.5 million, or 85.1%, were one- to four-family residential first
mortgage loans. Such residential mortgage loans consisted of 95.4% of fixed-rate
loans and 4.6% of adjustable-rate loans, most of which were indexed to the one
or three year Constant Maturity Treasury ("CMT") Index. At December 31, 1999,
the Company also had $2.9 million, or 2.0%, of total loans, in multi-family and
commercial real estate loans.
The Company's consumer loans at December 31, 1999 aggregated $19.3
million, or 13.0%, of total loans. Such consumer loans included $15.7 million of
home equity loans, $1.0 million of home equity lines of credit, $2.0 million of
education loans and $584 thousand of other consumer loans. The Company's home
equity loans and lines of credit and education loans constituted 86.5% and 10.4%
of consumer loans, respectively, and 11.2% and 1.4% of total loans,
respectively, at December 31, 1999.
The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the Company on
loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve Board
("FRB"), and legislative tax policies.
3
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
---------- --------- --------- --------- ---------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family...... $ 126,472 85.06% $ 88,068 81.21% $ 78,488 78.42% $ 80,681 76.05%
Multi-family and commercial 2,934 1.97 3,181 2.94 3,179 3.18 6,707 6.32
---------- -------- ----------- -------- ----------- ------ ----------- ------
Total real estate loans 129,406 87.03 91,249 84.15 81,667 81.60 87,388 82.37
Consumer loans:
Home equity loans and
lines of credit........ 16,691 11.23 14,403 13.28 15,254 15.24 15,313 14.43
Education................ 2,011 1.35 2,144 1.98 2,427 2.43 2,514 2.37
Other.................... 584 0.39 644 0.59 732 0.73 879 0.83
------------ ------ ----------- ------- ----------- ------ ------------ ------
Total consumer loans 19,286 12.97 17,191 15.85 18,413 18.40 18,706 17.63
---------- ------ ---------- ------ ---------- ----- ---------- -----
Total loans........... 148,692 100.00% 108,440 100.00% 100,080 100.00% 106,094 100.00%
====== ====== ====== ======
Less:
Deferred loan origination fees
and (premiums) discounts... (10) 323 447 645
Allowance for loan losses.. 1,044 940 667 1,186
-------- -------- --------- ---------
Total loans, net...... $147,658 $107,177 $ 98,966 $104,263
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1995
Percent
Amount of Total
--------- ---------
<S> <C> <C>
Real estate loans:
One- to four-family...... $ 82,935 77.45%
Multi-family and commercial 7,007 6.54
---------- ------
Total real estate loans 89,942 83.99
Consumer loans:
Home equity loans and
lines of credit........ 14,301 13.35
Education................ 1,912 1.79
Other.................... 935 0.87
--------- ------
Total consumer loans 17,148 16.01
---------- -----
Total loans........... 107,090 100.00%
======
Less:
Deferred loan origination fees
and (premiums) discounts.... 670
Allowance for loan losses... 1,068
--------
Total loans, net...... $105,352
========
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Company's total loans at December 31, 1999. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------
Multi-
One- to Family and
Four- Commercial Total
Family Real Estate Consumer Loans
---------- ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less...................................... $ 260 $ 560 $ 1,362 $ 2,182
After one year:
More than one year to three years..................... 846 115 1,409 2,370
More than three years to five years................... 2,584 481 3,265 6,330
More than five years to 10 years...................... 45,505 - 7,909 53,414
More than 10 years to 20 years........................ 43,519 1,106 5,341 49,966
More than 20 years.................................... 33,758 672 -- 34,430
------- -------- ----------- ----------
Total amount due................................... $126,472 $2,934 $19,286 $148,692
======== ====== ======= ========
</TABLE>
The following table sets forth, at December 31, 1999 the dollar amount
of loans contractually due after December 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
----------------------------------------------
Fixed Adjustable Total
--------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family.................................... $120,387 $5,825 $126,212
Multi-family and commercial............................... 1,302 1,072 2,374
--------- ------------ ----------
Total real estate loans................................ 121,689 6,897 128,586
Consumer loans............................................... 14,917 3,007 17,924
--------- ------------ ----------
Total loans............................................ $136,606 $9,904 $146,510
========= ============ ==========
</TABLE>
Origination, Purchasing and Servicing of Loans. The Company's mortgage
lending activities are conducted primarily by its loan personnel operating at
its banking offices. All loans originated by the Company are underwritten
pursuant to the Company's policies and procedures. The Company originates both
adjustable-rate and fixed-rate loans, the substantial majority of which are
fixed-rate loans. The Company's ability to originate fixed- or adjustable-rate
loans is dependent upon the relative customer demand for such loans, which is
affected by the current and expected future level of interest rates. It is the
general policy of the Company to retain all loans originated in its portfolio.
In an effort to address the diminished internal loan growth in recent
years, the Company is focusing its lending activities on the communities
surrounding its Turnersville, New Jersey office which is located in more
suburban Gloucester County. The Company may also seek to expand its primary
market area and its lending activities to areas outside of Gloucester and Camden
Counties. However, there can be no assurances that such geographic expansion
activities will take place or, if they do take place, that they will be
successful. To augment loan growth, $30.3 million of one-to-four family loans
were purchased during 1999. In most instances loan servicing was performed by a
third party.
The following table sets forth the Company's loan originations,
purchases, sales and principal repayments for the years indicated:
5
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1999 1998 1997
----------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Loans at beginning of year.................................................. $108,440 $100,080 $106,094
-------- -------- --------
Originations:
Real estate:
One- to four-family................................................ 23,475 17,083 8,580
Multi-family and commercial........................................ 596 357 205
------------ -----------------------
Total real estate loan originations............................. 24,071 17,440 8,785
Consumer:
Home equity loans and lines of credit.............................. 8,142 6,300 6,343
Education.......................................................... 227 323 290
Other.............................................................. 465 522 606
------------ -----------------------
Total consumer loan originations................................ 8,834 7,145 7,239
----------- ----------- ----------
Total loans originated.......................................... 32,905 24,585 16,024
Loans purchased............................................................. 30,336 6,532 --
Deduct:
Principal loan repayments and prepayments................................ 22,709 22,617 22,011
Loan sales(1)......................................................... -- 90 --
Transfers to REO...................................................... 280 50 27
------------ ------------------------
Total deductions................................................ 22,989 22,757 22,038
---------- --------- ---------
Net loan activity........................................................... 40,252 8,360 (6,014)
---------- ---------- ----------
Loans at end of year.................................................. $148,692 $108,440 $100,080
======== ======== ========
</TABLE>
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(1) In 1998, the Association sold its Freddie Mac ("FHLMC") servicing
portfolio and its related participatory interest of $90,000 in such loan
portfolio.
One- to Four-Family Mortgage Lending. The Company currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by single residences, which are considered to be real property
which contain one to four residences. Most of such loans are located in the
Company's primary market area. One- to four-family mortgage loan originations
are generally obtained from the Company's in-house loan representatives, from
existing or past customers and through advertising and referrals from members of
the Company's local communities. At December 31, 1999, the Company's one- to
four-family mortgage loans totalled $126.5 million, or 85.1%, of total loans. Of
the one- to four-family mortgage loans outstanding at that date, 95.4% were
fixed-rate loans and 4.6% were ARM loans.
The Company currently offers fixed-rate mortgage loans with terms of up
to 30 years. The Company also currently offers a number of ARM loans with terms
of up to 30 years and interest rates which adjust every one or three years from
the outset of the loan. The interest rates for the Company's ARM loans are
indexed to either the one or three year CMT Index. The Company's ARM loans
generally provide for periodic (not more than 2%) and overall (not more than 6%)
caps on the increase or decrease in the interest rate at any adjustment date and
over the life of the loan.
The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Association's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. Periodic and lifetime caps on interest
rate increases help to reduce the risks associated with adjustable-rate loans
but also limit the interest rate sensitivity of such loans.
6
<PAGE>
All one- to four-family mortgage loans are underwritten according to
the Company's policies and guidelines. Generally, the Company originates one- to
four-family residential mortgage loans in amounts of up to 80% of the lower
of the appraised value or selling price of the property securing the loan and up
to 95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Company generally include
due-on-sale clauses which provide the Company with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the yields on the Company's fixed-rate mortgage
loan portfolio and the Association has generally exercised its rights under
these clauses. The Company requires fire, casualty, title and, when applicable,
flood insurance on all properties securing real estate loans made by the
Company.
The Company has, in the recent past, purchased primarily one-to
four-family mortgage loans from other banks, and had approximately $35.1 million
in such loans at December 31, 1999. The loans were located primarily in New
Jersey, Ohio, and the New England States and were closed in the name of the
originating institution. Initial underwriting was performed by the originating
institution and was reviewed by the Company prior to purchase.
The Company offers employees of the Company, other than executive
officers and directors, who satisfy certain criteria and the general
underwriting standards of the Company, fixed and adjustable-rate mortgage and
consumer loans with reduced loan origination fees and/or interest rates which
are currently 100 basis points below the rates offered to the Company's other
customers, the Employee Mortgage Rate ("EMR"). The EMR is limited to the
purchase, construction or refinancing of an employee's owner-occupied primary
residence and consumer loans. The EMR normally ceases upon termination of
employment or if the property no longer is the employee's primary residence.
Upon termination of the EMR, the interest rate reverts to the contract rate in
effect at the time that the loan was extended. All other terms and conditions
contained in the original mortgage and note continue to remain in effect. As of
December 31, 1999, the Company had $2.1 million of EMR loans, or 1.4%, of total
loans.
Multi-family and Commercial Real Estate Lending. The Company originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings or retail facilities located in the Company's primary
market area. The Company's multi-family and commercial real estate underwriting
policies provide that such real estate loans may be made in amounts of up to 70%
of the appraised value of the property, subject to the Company's current
loans-to-one-borrower policy limit, which at December 31, 1999 was $5.7 million.
The Company's multi-family and commercial real estate loans may be made with
terms of up to 20 years and are offered with interest rates that adjust
periodically. In reaching its decision on whether to make a multi-family or
commercial real estate loan, the Company considers the net operating income of
the property, the borrower's expertise, credit history and profitability and the
value of the underlying property. Environmental risk evaluations are generally
required for all multi-family and commercial real estate loans. Generally, all
multi-family and commercial real estate loans made to corporations, partnerships
and other business entities require personal guarantees by the principals. On an
exception basis, the Company may not require a personal guarantee on such loans
depending on the creditworthiness of the borrower and the amount of the
downpayment and other mitigating circumstances. The Company's multi-family and
commercial real estate loan portfolio at December 31, 1999 was $2.9 million, or
2.0%, of total loans. The largest multi-family or commercial real estate loan in
the Association's portfolio at December 31, 1999 was a performing $232,000 loan
secured by an office building and warehouse in Cherry Hill, New Jersey.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. The Company seeks to minimize these risks through its underwriting
standards.
Consumer Lending. Consumer loans at December 31, 1999 amounted to $19.3
million, or 13.0%, of the Company's total loans, and consisted primarily of home
equity loans, home equity lines of credit, education loans and, to a
significantly lesser extent, secured and unsecured personal loans and new and
used automobile loans. Such loans
7
<PAGE>
are generally originated in the Company's primary market area and generally are
secured by real estate, deposit accounts and automobiles. These loans are
typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans.
The Company offers home equity loans ("HELs") and home equity lines of
credit ("HELOCs") (collectively, "equity loans"). Most of the Company's equity
loans are secured by second mortgages on one- to four-family residences located
in the Company's primary market area. At December 31, 1999, these loans totalled
$16.7 million, or 11.2%, of the Company's total loans and 86.5% of consumer
loans. HELs are generally offered with terms of up to 15 years and only with
fixed-rates of interest which will vary depending on the amortization period
chosen by the borrower. At December 31, 1999, HELs totalled $15.7 million, or
10.6%, of the Company's total loans and 81.4% of consumer loans. HELOCs
generally have adjustable-rates of interest which adjust on a monthly basis. The
adjustable-rate of interest charged on such loans is indexed to the prime rate
as reported in The Wall Street Journal. Adjustable-rate HELOCs generally provide
for overall caps (not more than 6% above the initial interest rate) on the
increase or decrease in the interest rate over the life of the loan. At December
31, 1999, the Company had $3.1 million of HELOCs of which $1.0 million, or 0.7%
of total loans, was drawn down at such date. The underwriting standards employed
by the Company for equity loans include a determination of the applicant's
credit history and an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan and the value of the collateral
securing the loan. Generally, the maximum combined loan-to-value ratio ("LTV")
on equity loans is 80% on owner-occupied properties and 70% on
non-owner-occupied properties. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Company also originates other types of consumer loans primarily
consisting of secured and unsecured personal loans and new and used automobile
loans. At December 31, 1999, these consumer loans totalled $584,000, or 0.4%, of
the Company's total loans and 3.0% of consumer loans. Secured personal loans are
generally secured by deposit accounts. Unsecured personal loans generally have a
maximum borrowing limitation of $7,500 and generally require a debt ratio (the
ratio of debt service to net earnings) of 36%. Automobile loans have a maximum
borrowing limitation of 80% of the sale price of a new automobile or 80% of the
fair market value of a used automobile. At December 31, 1999, personal loans
totalled $323,000, or 1.7%, of consumer loans; and automobile loans totalled
$71,000, or 0.4%, of consumer loans. At December 31, 1999, education loans
totalled $2.0 million, or 10.4%, of consumer loans and 1.4% of the Company's
total loans.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family mortgage loans. In
such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Company and oversees the Company's
lending activity. The Board of Directors has established a Loan Committee
comprised of four members of the Company's Board of Directors. In addition, the
Company maintains an "In House" Loan Committee comprised of the Association's
President, Executive Vice President, Senior Lending Officer and Vice President
of Lending.
The Board of Directors has authorized the following persons and groups
of persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans in amounts up to $240,000 may be approved by the Association's In
House Loan Committee; and all such loans in excess of $240,000 require the
approval of the Board's Loan Committee. All multi-family and commercial real
estate loans require the approval of the Board's Loan Committee.
8
<PAGE>
With respect to consumer loans, home equity loans and equity lines of
credit in amounts up to $25,000 and automobile loans in amounts up to $10,000
may be approved by the Association's Vice President of Lending; home equity
loans and equity lines of credit in excess of $25,000 and up to $50,000 and
automobile loans in excess of $10,000 and up to $15,000 require the approval of
the Association's Senior Lending Officer; home equity loans and equity lines of
credit in excess of $50,000 and up to $100,000 and automobile loans in excess of
$15,000 and up to $25,000 require the approval of the Association's In House
Loan Committee; and home equity loans and equity lines of credit in excess of
$100,000 and automobile loans in excess of $25,000 require the approval of the
Board's Loan Committee.
Loans on savings accounts may be approved by any branch manager or
assistant branch manager. Such loans are fully secured by the savings account or
certificate of deposit utilized as collateral for the loan.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a quarterly review of all loans or lending
relationships delinquent 30 days or more and all real estate owned ("REO"). The
procedures taken by the Company with respect to delinquencies vary depending on
the nature of the loan, period and cause of delinquency and whether the borrower
has been habitually delinquent. When a borrower fails to make a required payment
on a loan, the Association may take a number of steps to have the borrower cure
the delinquency and restore the loan to current status. The Company generally
sends the borrower a written notice of non-payment after the loan is first past
due. The Company's guidelines provide that telephone, written correspondence
and/or face-to-face contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Company will attempt to obtain
full payment, work out a repayment schedule with the borrower to avoid
foreclosure or, in some instances, accept a deed in lieu of foreclosure. In the
event payment is not then received or the loan not otherwise satisfied,
additional letters and telephone calls generally are made. If the loan is still
not brought current or satisfied and it becomes necessary for the Company to
take legal action, which typically occurs after a loan is 90 days or more
delinquent, the Company will commence foreclosure proceedings against any real
or personal property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Association, becomes real estate owned.
Federal regulations and the Company's Asset Classification Policy
require that the Company utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Company has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Company currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Company classifies one or more assets, or portions thereof, as
Substandard, it establishes a general valuation allowance for loan losses in an
amount deemed prudent by management. General valuation allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When the Company classifies one or more
assets, or portions thereof, as Doubtful, it establishes a specific allowance
for losses equal to 50% of the amount of the asset so classified, with respect
to uncollateralized assets, and the difference between the loan amount and the
collateral value with respect to collateralized assets. Assets, or portions
thereof, classified as Loss are charged off.
9
<PAGE>
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary. In addition, the OTS or other
federal banking agencies may require the Company to recognize additions to the
allowance, based on their judgments about information available to them at the
time of their examination.
The Company's In House Loan Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Company classifies assets in
accordance with the management guidelines described above. At December 31, 1999,
the Company had $409,000 of assets designated as substandard which consisted of
8 mortgage loans and 2 consumer loans. At December 31, 1999, the Company had no
loans classified as Loss. As of December 31, 1999, the Company also had a total
of two loans, totalling $18,000, designated as Special Mention. At December 31,
1999, the largest adversely (other than Special Mention) classified loan was a
mortgage loan with an aggregate carrying balance of $229,000 and was secured by
an apartment building. The following table sets forth the delinquencies in the
Company's loan portfolio as of the dates indicated.
10
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------------ -----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- -------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of of Balance of of Balance of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
---------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family....... -- $ -- 5 $124 3 $120 6 $199
Multi-family and
commercial.............. 1 229 -- -- -- -- 1 58
Consumer Loans:
Home equity loans and
lines of credit......... -- -- 1 1 2 57 5 205
Education................. 12 52 35 86 17 35 23 52
Other..................... 0 0 1 6 1 1 1 3
--- ------- --- ------- --- ------- --- -------
Total.................. 13 $281 42 $217 23 $213 36 $517
== ==== == ==== == ==== == ====
Delinquent loans to
total loans, net.......... 0.19% 0.15% 0.20% 0.48%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
60-89 Days 90 Days or More
-------------------- --------------------
Number Principal Number Principal
of Balance of of Balance of
Loans Loans Loans Loans
---------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family....... 3 $162 11 $328
Multi-family and
commercial.............. -- -- 1 57
Consumer Loans:
Home equity loans and
lines of credit......... 4 133 2 100
Education................. 16 31 46 110
Other..................... 2 6 2 7
---- ------ ---- ------
Total.................. 25 $332 62 $602
=== ==== === ====
Delinquent loans to
total loans, net.......... 0.34% 0.61%
</TABLE>
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding non-accrual loans and REO. At December 31, 1999,
non-accrual loans totalled $131,000 consisting of 7 loans. At December 31, 1999,
the Company had $86,000 of education loans which were 90 days or more
delinquent, but for which it continued to accrue interest because of government
guarantees. It is the policy of the Company to cease accruing interest on
mortgage loans 90 days or more past due and to cease accruing interest on
consumer loans 60 days or more past due (unless the loan principal and interest
are determined by management to be fully secured and in the process of
collection) and to charge off most of the accrued interest. At December 31,
1999, 1998 and 1997, the Company had recorded investments of $0, $76,000, and
$77,000, respectively, in impaired loans which had specific allowances of $0,
$9,000, and $10,000, respectively. For the years ended December 31, 1999, 1998
and 1997, the amount of interest income that would have been recognized on
non-accrual loans if such loans had continued to perform in accordance with
their contractual terms was $10,000, $46,000, and $54,000, respectively.
11
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family real estate....... $124 $199 $328 $783 $292
Multi-family and commercial
real estate......................... -- 58 57 -- 142
Consumer.............................. 7 266 246 61 92
--- ----- ----- ----- ------
Total(1)........................... 131 523 631 844 526
Real estate owned (REO)(2)............... -- -- -- -- 23
------ ------ ------ ------ ------
Total nonperforming assets(3)...... 131 523 631 844 549
Troubled debt restructurings............. -- 67 -- 155 116
----- ------ ----- ----- -----
Troubled debt restructurings and
total nonperforming assets............. $131 $590 $631 $999 $665
==== ==== ==== ==== ====
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans.............. 0.09% 0.54% 0.63% 0.94% 0.62%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets............. 0.04% 0.21% 0.25% 0.41% 0.28%
.........................................
</TABLE>
(1) Total non-accruing loans equals total nonperforming loans.
(2) Real estate owned balances are shown net of related specific loss
allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable based on information currently known to management. The allowance
is based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the Company to
make additional provisions for estimated loan losses based upon their judgments
about information available to them at the time of their examination. As of
December 31, 1999, the Company's allowance for loan losses was 0.70% of total
loans compared to 0.87% as of December 31, 1998. The Company had non-accrual
loans of $131,000 and $523,000 at December 31, 1999 and December 31, 1998,
respectively. The Company will continue to monitor and modify its allowance for
loan losses as conditions dictate. While management believes the Company's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Company's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Company or that adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
12
<PAGE>
The following table sets forth activity in the Company's allowance for
loan losses for the years indicated.
<TABLE>
<CAPTION>
At or for the Year ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning
of year............................. $940 $667 $1,186 $1,068 $ 968
Charged-off loans:
One- to four-family real estate.... 71 12 370 4 35
Multi-family and commercial
real estate.................... -- -- 516 20 --
Consumer........................... 19 21 37 41 45
------ ------ -- -- --
Total charged-off loans......... 90 33 923 65 80
------ ------ --- -- --
Recoveries on loans previously
charged off:
One- to four-family real estate.... 38 4 -- -- --
Consumer........................... 1 2 4 3 --
------- ------- --------- --------- --------
Total recoveries................ 39 6 4 3 --
-------- ------- --------- --------- --------
Net loans charged-off................. (51) (27) (919) (62) (80)
Provision for loan losses............. 155 300 400 180 180
----- ----- ------- ------- -------
Allowance for loan losses, end
of year............................. $1,044 $940 $ 667 $1,186 $1,068
====== ==== ======= ====== ======
Net loans charged-off to average
interest-earning loans............. 0.04% 0.03% 0.89% 0.06% 0.07%
Allowance for loan losses to total
loans, net........................ 0.71% 0.88% 0.67% 1.14% 1.01%
Allowance for loan losses to
nonperforming loans and
troubled debt restructuring......... 797.22% 159.22% 105.71% 118.72% 166.36%
Net loans charged-off to
allowance for loan losses........... 4.89% 2.85% 137.78% 5.23% 7.49%
Recoveries to charge-offs............. 43.33% 17.06% 0.43% 4.62% -- %
</TABLE>
13
<PAGE>
The following table sets forth the Company's allowance for loan losses
in each of the categories listed at the dates indicated and the percentage of
such amounts to the total allowance and the percentage of loans in each category
to total loans.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
% of Percent % of Percent % of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each in Each in each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
-------- -------- --------- ------- --------- --------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate........ $518 49.62% 87.03% $533 56.70% 84.15% $313 46.93% 81.60%
Consumer........... 180 17.24 12.97 233 24.79 15.85 129 19.34 18.40
Unallocated........ 346 33.14 -- 174 18.51 -- 225 33.73 --
----- ------- -------- ----- ------- -------- ----- ------- --------
Total allowance
for loan losses $1,044 100.00% 100.00% $940 100.00% 100.00% $667 100.00% 100.00%
====== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in Each in each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------- --------- --------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate........ $ 915 77.15% 82.37% $ 766 71.72% 83.99%
Consumer........... 105 8.85 17.63 102 9.55 16.01
Unallocated........ 166 14.00 -- 200 18.73 --
------- ------- -------- ------- ------- --------
Total allowance
for loan losses $1,186 100.00% 100.00% $1,068 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
14
<PAGE>
Real Estate Owned. At both December 31, 1999 and December 31, 1998, the
Company had no real estate owned. When the Company does acquire property through
foreclosure or deed in lieu of foreclosure, it is initially recorded at the
lesser of the carrying value of the loan or fair value of the property at the
date of acquisition less estimated costs to sell. Thereafter, if there is a
further deterioration in value, the Association provides for a specific
valuation allowance and charges operations for the diminution in value. It is
the policy of the Company to have obtained an appraisal or broker's price
opinion on all real estate subject to foreclosure proceedings prior to the time
of foreclosure. It is the Company's policy to require appraisals on a periodic
basis on foreclosed properties or conduct inspections on foreclosed properties.
Investment Activities
New Jersey chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and certificates of deposit of insured
banks and savings institutions. Subject to various restrictions, New Jersey
chartered savings institutions may also invest their assets in investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a state- chartered savings institution is otherwise authorized
to make directly. Additionally, the Association must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations. Historically,
the Association has maintained liquid assets above the minimum OTS requirements
and at a level considered to be adequate to meet its normal daily activities.
The investment policy of the Association, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. The Company primarily
utilizes investments in securities for liquidity management and as a method of
deploying excess funding not utilized for investment in loans. Generally, the
Company's investment policy is more restrictive than the OTS regulations allow
and, accordingly, the Company has invested primarily in U.S. government and
agency securities, which qualify as liquid assets under the OTS regulations,
federal funds and U.S. government sponsored agency issued mortgage-backed
securities. As required by Statement of Financial Accounting Standards ("SFAS")
No. 115, the Company has established an investment portfolio of securities that
are categorized as held-to-maturity, available-for-sale or held for trading. The
Company generally invests in securities as a method of utilizing funds not
utilized for loan origination activity and as a method of maintaining liquidity
at levels deemed appropriate by management. The Company does not currently
maintain a portfolio of securities categorized as held for trading. At December
31, 1999, the available for sale securities portfolio totalled $49.0, or 14.6%,
of assets, and the held-to-maturity portfolio totalled $122.3 million, or 36.6%,
of assets.
At December 31, 1999, the Company had invested $83.0 million in Fannie
Mae ("FNMA"), FHLMC and Ginnie Mae ("GNMA") mortgage-backed securities, or
24.8%, of total assets, $25.5 million of which was classified as
available-for-sale and $57.5 million was classified as held-to-maturity. In
addition, $30.7 million, or 9.2%, of total assets, were debt obligations issued
by federal agencies which generally have stated maturities from one month to
four years. Also, $36.7 million, or 11.0%, of total assets were debt obligations
issued by federal agencies which have stated maturities from 12 to 18 years, but
which also have call features. Such callable securities allow the issuer, after
a specified period of time, to repay the security prior to its stated maturity.
The Company is subject to additional interest rate risk and reinvestment risk
compared to its evaluation of that risk if changes in interest rates exceed
ranges anticipated by the Company in estimating the anticipated life of such
callable investment securities. Investments in mortgage-backed securities
involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates.
15
<PAGE>
The following table sets forth information regarding the amortized cost
and fair value of the Company's securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ---------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Investment securities held-to-maturity:
Obligations of U.S.
government agencies................. $64,737 $ 61,555 $69,870 $ 70,611 $ 78,934 $ 79,502
Other securities..................... 100 100 100 100 100 100
----------- ----------- ---------- ---------- ----------- -----------
Total investment securities held-to-
maturity......................... 64,837 61,655 69,970 70,711 79,034 79,602
----------- ----------- ---------- ---------- ----------- -----------
Investment securities available-for-sale:
Obligations of U.S.
government agencies................. 3,000 2,721 -- -- -- --
Mutual Funds........................... 21,106 20,794 -- -- -- --
----------- ----------- ---------- ---------- ----------- -----------
Total investment securities available-for-
sale............................. 24,106 23,515 -- -- -- --
----------- ----------- ---------- ---------- ----------- -----------
Total Investment securities................. 88,943 85,170 69,970 70,711 79,034 79,602
----------- ----------- ---------- ---------- ----------- -----------
Mortgage-backed securities:
Mortgage-backed securities held-
to-maturity:
FHLMC................................. 14,331 14,288 20,334 20,967 26,679 27,013
FNMA.................................. 42,716 40,756 29,763 30,165 17,627 17,673
GNMA.................................. 461 486 686 740 925 977
----------- ----------- ---------- ---------- ----------- -----------
Total mortgaged-backed securities held-
to-maturity.................. 57,508 55,530 50,783 51,872 45,231 45,663
----------- ----------- ---------- ---------- ----------- -----------
Mortgage-backed securities available-
for-sale:
FHLMC................................. 1,949 1,924 -- -- -- --
FNMA.................................. 9,714 9,320 -- -- -- --
GNMA.................................. 14,636 14,239 -- -- -- --
----------- ----------- ---------- ---------- ----------- -----------
Total mortgaged-backed securities-
available- for sale............... 26,299 25,483 -- -- -- --
----------- ----------- ---------- ---------- ----------- -----------
Total mortgage-backed securities............ 83,807 81,013 50,783 51,872 45,231 45,663
----------- ----------- ---------- ---------- ----------- -----------
FHLB stock: 2,138 2,138 1,249 1,249 1,233 1,233
----------- ----------- ---------- ---------- ----------- -----------
Total securities $ 174,888 $ 168,231 $ 122,002 $ 123,832 $ 125,498 $ 126,498
=========== =========== ========== ========== =========== ===========
</TABLE>
16
<PAGE>
The following table sets forth the Company's securities activities at
amortized cost for the years indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
Mortgage-backed securities, beginning of year.............................. $50,783 $45,231 $41,398
Purchases: mortgage-backed securities..................................... 47,844 20,059 10,030
Repayments and prepayments:
mortgage-backed securities............................................... 12,864 14,495 6,167
Sales: mortgage-backed securities......................................... 2,000 -- --
Decrease in discount/(premium)............................................. 44 (12) (30)
--------- ---------- ----------
Mortgage-backed securities, end of year.................................... $83,807 $50,783 $45,231
======= ======= =======
Investment securities:
Investment securities, beginning of year................................... $69,970 $79,034 $77,110
Purchases: investment securities.......................................... 49,997 34,731 36,215
Calls: investment securities.............................................. 11,000 31,020 17,000
Maturities: investment securities......................................... 15,917 12,600 17,000
Sales: investment securities.............................................. 3,894 -- --
Decrease in premium........................................................ (213) (175) (291)
-------- --------- ---------
Investment securities, end of year......................................... $88,943 $69,970 $79,034
======= ======= =======
FHLB stock:
FHLB stock, beginning of year.............................................. $1,249 $1,233 $1,150
Purchases.................................................................. 889 16 83
Redemptions................................................................ -- -- --
--------- --------- ---------
FHLB stock, end of year.................................................... $2,138 $1,249 $1,233
====== ====== ======
</TABLE>
The table below sets forth information regarding the amortized cost,
weighted average yields and contractual maturities of the Company's investment
securities and mortgage-backed securities as of December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
More than Five
More than One Year Years
One Year or Less to Five Years to Ten Years More than Ten Years Total
------------------- ------------------- --------------- --------------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Obligations of U.S.
Government agencies $11,020 7.02% $19,617 6.41% $ -- --% $37,100 6.90% $67,737 6.77%
Other investments.... -- -- 100 3.50 -- -- -- -- 100 3.50
Mortgage-backed
securities............ 2 10.50 496 9.08 4,766 7.93 78,543 6.78 83,807 6.86
FHLB stock............... 2,138 6.75 -- -- -- -- -- -- 2,138 6.75
------- ------ ------ ------ ------
Total securities
at amortized cost..... $13,160 6.98% $20,213 6.46% $4,766 7.93% $115,643 6.82% $153,782 6.82%
======= ======= ====== ======== ========
</TABLE>
17
<PAGE>
Sources of Funds
General. Deposits, loan repayments and prepayments, cash flows
generated from operations and FHLB advances are the primary sources of the
Company's funds for use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of checking, money
market, savings, NOW, certificate accounts and Individual Retirement Accounts.
At December 31, 1999, certificate of deposit accounts represented 50.9% of total
deposits. At December 31, 1999, core deposits (savings, NOW, money market and
club accounts) represented 49.1% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Company has historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including print media and generally does not solicit deposits from
outside its market area. The Company does not actively solicit certificate
accounts in excess of $100,000 or use brokers to obtain deposits. At December
31, 1999, $52.9 million, or 43.7%, of the Company 's certificate of deposit
accounts were to mature within one year.
The following table presents the deposit activity of the Company for
the years indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ --------- ------------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) before interest
credited..................................... $(7,541) $3,889 $(2,336)
Interest credited............................ 9,145 9,153 8,708
------- ------- -----
Net increase................................. $1,604 $13,042 $6,372
====== ======= ======
</TABLE>
At December 31, 1999, the Company had $10.9 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
--------------- ------- --------
(Dollars in thousands)
<S> <C> <C>
Three months or less.......................... $ 1,260 4.73%
Over 3 through 6 months....................... 542 5.09
Over 6 through 12 months...................... 1,164 5.19
Over 12 months................................ 7,943 6.29
---------
Total................................ $10,909 5.93%
=======
</TABLE>
18
<PAGE>
The following table sets forth the distribution of the Company's
average deposit accounts for the years indicated and the weighted average
interest rates on each category of deposits presented and such information at
December 31, 1999. Averages for the years presented utilize month-end balances.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- ---------------------------
Percent Average Average Percent of Average Average Percent of Average
Total Rate Balance Total Rate Balance Total Rate
Average Average Paid Average Paid Average Paid
Balance Deposits Deposits Deposits
--------- -------- -------- -------- --------- -------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts............. $ 34,339 14.4% 2.75% $34,227 14.9% 2.74% $ 35,599 16.3% 2.68%
Money market accounts........ 44,900 18.8 3.35 43,453 18.9 3.43 41,597 19.0 3.67
NOW accounts................. 30,190 12.6 2.00 28,659 12.5 2.18 27,598 12.6 2.34
Club accounts................ 1,092 0.5 2.60 1,050 0.5 2.51 1,009 0.5 2.52
Certificates of deposit...... 122,119 51.2 5.56 117,302 51.1 5.76 108,506 49.7 5.68
Noninterest-bearing deposits:
Demand deposits.......... 5,944 2.5 -- 4,749 2.1 -- 4,244 1.9 --
-------- ------ ------ ----- ------- ------
Total average deposits $238,584 100.0% 4.10% $229,440 100.0% 4.29% $218,553 100.0% 4.26%
======== ===== ======== ===== ======== =====
</TABLE>
19
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1999 At December 31,
--------------------------------------------------- ---------------------
Less One Two to Over
than One to Two Three Three
Year Years Years Years Total 1998 1997
-------- --------- -------- --------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ 1,608 $ -- $ -- $ 16 $ 1,624 $ 616 $ --
4.01 to 5.00%......... 33,488 5,933 -- 14 39,435 19,885 5,052
5.01 to 6.00%......... 16,263 14,508 2,918 11,992 45,681 66,424 71,398
6.01 to 7.00%......... 1,554 4,750 15,377 12,710 34,391 35,266 33,474
7.01 to 8.00%......... 28 -- -- -- 28 27 1,357
8.01 to 9.00%......... -- -- -- -- -- 4 5
-------- --------- -------- --------- --------- --------- ----------
Total certificate
accounts......... $52,941 $25,191 $18,295 $24,732 $121,159 $122,222 $111,286
======= ======= ======= ======= ======== ======== ========
</TABLE>
Borrowings. The Company utilizes advances from the FHLB of New York as
an alternative to retail deposits to fund its operations as part of its
operating strategy. These FHLB advances are collateralized primarily by the
Company's mortgage loans, investment securities and mortgage-backed securities
and secondarily by the Company's investment in capital stock of the FHLB of New
York. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB of New York will advance to member institutions, including the
Association, fluctuates from time to time in accordance with the policies of the
FHLB of New York. At December 31, 1999 and 1998, the Company had $37.1 million
and $20.6 million in outstanding FHLB advances, respectively.
The following table sets forth information regarding the Company's
borrowed funds at or for the years ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............. $30,940 $3,222 $176
======= ====== ====
Maximum amount outstanding at any
month-end during the year............. $39,476 $20,576 $176
======= ======= ====
Balance outstanding at end of year...... $37,074 $20,576 $176
======= ======= ====
Average interest rate during the year... 5.22% 5.14% 6.62%
==== ==== ====
Weighted average interest rate at end of year 5.23% 5.06% 6.62%
==== ==== ====
</TABLE>
20
<PAGE>
REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the New Jersey Department of Banking and Insurance (the
"Department"), as its chartering agency, the OTS, as its primary federal
regulator, and the FDIC, as the deposit insurer. The Association is a member of
the FHLB System. The Association's deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund (the "SAIF") managed by the
FDIC. The Company and Association must file reports with the Commissioner of the
Department (the "Commissioner"), 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 Department,
the OTS and the FDIC to test the Association'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 Department, the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Association
and their operations. The Company, as a savings and loan holding company, is
required to file certain reports with and otherwise comply with the rules and
regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws.
The description of statutory provisions and regulations applicable to
savings associations set forth in this Form 10-KSB do not purport to be complete
descriptions of such statutes and regulations and their effects on the
Association and the Company and is qualified in its entirety by reference to
such statutes and regulations.
Federal Regulation of Savings Institutions
Business Activities. The activities of New Jersey chartered, FDIC
insured savings institutions are governed by New Jersey law, federal statutes
applicable to state-chartered and FDIC-insured savings associations and the
regulations issued by the agencies to implement these laws. These laws and
regulations delineate the nature and extent of the activities in which savings
associations may engage.
Activities and Investment. Federal law imposes certain restrictions on
the activities and investments of state savings associations such as the
Association. No state savings association may engage as principal in any
activity that is not permissible for federally chartered savings associations
unless the association is in compliance with federal regulatory capital
requirements and the FDIC has determined that the activity does not pose a
significant risk to the deposit insurance fund. A state savings association may
engage in an activity that is permissible for a federal savings association, but
in a greater amount, only if the institution is in capital compliance and the
FDIC has not determined that engaging in that amount of activity poses a risk to
the affected deposit insurance fund. Also, a state savings association may not
acquire directly an equity investment of a type or in an amount that is not
permissible for federal associations except shares of service corporations so
long as the institution is in capital compliance and the FDIC determines that no
significant risk to the deposit insurance fund is posed by the investment.
Loans-to-One Borrower. Savings institutions are generally subject to
the national bank limit on loans-to-one borrower. This limit is 15% of the
Association's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral. At December 31, 1999, the Association's regulatory limit on
loans-to-one borrower was $6.6 million. At December 31, 1999, the Association's
largest aggregate amount of loans-to-one borrower consisted of $796,000 in real
estate mortgage loans which were secured by one- to four-family, multi-family
and commercial properties.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
meet the standards for a "domestic building and loan association" under the
federal tax code or maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain
21
<PAGE>
"qualified thrift investments" (primarily residential mortgages and related
investments, including mortgage-backed and related securities) in at least 9
months out of each 12-month period. A savings association that fails the QTL
test must either convert to a bank charter or operate under certain
restrictions. As of December 31, 1999, the Association maintained 95.5% of its
portfolio assets in qualified thrift investments and, therefore, met the test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments 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 rule during the first quarter of 1999 established three
tiers of institutions, which were based primarily on an institution's capital
level. An institution that exceeded all fully phased-in regulatory capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice to, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. Effective April 1, 1999, the
OTS's capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required, the institution must still provide prior notice to OTS of the
capital distribution if, like the Association, it is controlled by a holding
company.
In the event the Association's capital fell below its capital
requirements or the OTS notified it that it was in need of more than normal
supervision, the Association's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Association's average liquidity ratio for
the year ended December 31, 1999 was 41.63%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS and to the Department to fund the agencies' operations.
The assessments paid by the Association to these agencies for the year ended
December 31, 1999 totalled $78,000.
Transactions with Related Parties. The Association'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, including the
Company and any non-savings institution subsidiaries that the Company may
establish) is limited by federal law. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution and the aggregate amount of transactions with
all affiliates is limited 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 federal law and the purchase
of low quality assets from affiliates is generally prohibited. Federal law
generally requires 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
non-affiliated companies.
Enforcement. The OTS has primary federal enforcement responsibility
over federally insured savings institutions and has the authority to bring
action against all "institution-affiliated parties," including stockholders, and
22
<PAGE>
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
$1 million per day in especially egregious cases. The FDIC also has the
authority to take enforcement action with respect to a particular savings
institution under certain circumstances. Federal and state law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness to implement these safety and soundness standards. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ("core" or "Tier 1" capital) ratio (4.0% if the institution has
not received the highest evaluation rating) and an 8.0% risk based capital
standard. Core (Tier 1) capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights and
credit card relationships. The OTS regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards institutions generally
must deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. In addition, the OTS prompt corrective action
regulation provides that a savings institution that has a leverage capital ratio
of less than 4% (3% for institutions receiving the highest examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8.0%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned based on the risks
OTS believes are inherent in the type of asset. The components of core capital
are equivalent to those discussed earlier under the leverage standard. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
Institutions may also include in supplementary capital up to 45% of the pretax
unrealized holding gains on available-for-sale equity securities with readily
determinable fair values.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Savings associations with "above normal" interest rate
risk exposure would be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. The OTS has postponed
indefinitely the date that the component will first be deducted from an
institution's total capital. At December 31, 1999, the Association met each of
its capital requirements, in each case on a fully phased-in basis.
Prompt Corrective Regulatory Action
The OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has a total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
capital or risk-based assets ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based capital less
than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage
ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration
23
<PAGE>
plan must be filed with the OTS within 45 days of the date an association
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
may become immediately applicable to the institution depending upon its
category, including, but not limited to, increased monitoring by regulators,
restrictions on growth and capital distributions and limitations on expansion.
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.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. An institution is also placed in one of
three supervisory subcategories within each capital group, based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates. The FDIC currently has an
assessment schedule for SAIF-insured deposits of 0 to 22 basis points of
assessable deposits.
SAIF members also must make payments on bonds issued by the Financing
Corporation in the late 1980s to recapitalize the predecessor to SAIF. Effective
January 1, 2000, such payments will be shared on an equal basis with all members
of the FDIC's Bank Insurance Fund.
The Association's assessment rate for 1999 was 6.105 basis points and
the regular premium expense, including FICO payments, for this period was
$139,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Association.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis.
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 management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1.0%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB stock at December
31, 1999 of $2.1 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1999, 1998 and 1997,
dividends from the FHLB to the Association amounted to approximately $120,000,
$90,000 and $81,000, respectively. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Association.
24
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$44.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3.0% and for accounts greater than $44.3 million, the
reserve requirement is $1.4 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Association is in
compliance with the foregoing requirements.
New Jersey Law
General. The Commissioner regulates, among other things, the
Association's internal business procedures as well as its deposits, lending and
investment activities, and its ability to declare and pay dividends. The
Commissioner must approve changes to the Association's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of the Association. Certain of the areas regulated by the
Commissioner are not subject to similar regulation by the FDIC.
Enforcement. Under New Jersey law, the Commissioner has extensive
enforcement authority over New Jersey savings and loan institutions and, under
certain circumstances, affiliated parties, insiders, and agents. The
Commissioner's enforcement authority includes: cease and desist orders,
receivership, conservatorship, restraining orders, removal of officers and
directors, emergency closures, dissolution, and liquidation. Fines for
violations range from $100 per day to $5,000.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the federal law. As such, the Company is required
to register with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
The Association must notify the OTS 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Association continues to be a qualified
thrift lender. The Gramm-Leach-Bliley Act of 1999 imposed activities
restrictions on unitary savings and loan holding companies, generally limiting
their activities to those permitted to "financial holding companies" by the Act,
including insurance and investment banking, and those authorized for multiple
savings and loan companies. Unitary savings and loan holding companies existing
or applied for on or before May 4, 1999 were grandfathered and may continue to
engage in any activity. However, the Act would not allow a grandfathered unitary
savings and loan holding company to be acquired by a company engaged in
activities outside of those authorized for financial holding companies or
multiple savings and loan holding companies. Upon any non-supervisory
acquisition by the Company of another savings association, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. Federal law limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under the Bank Holding Company Act subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. A savings and loan holding company is also prohibited
25
<PAGE>
from acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by federal law; or acquiring
or retaining control of a depository institution that is not insured by the
FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Federal Securities Laws
Prior to the Conversion, the Company filed with the SEC a registration
statement under the Securities Act of 1933 (the "Securities Act") for the
registration of the common stock to be issued pursuant to the Conversion (the
"Common Stock"). Upon completion of the Conversion, the Company's Common Stock
became registered with the SEC under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
issued in the Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Company may be
resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association report their income on a
December 31 calendar year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Association's reserve for bad
debts discussed below. The following discussion of tax matters material to the
operations of the Company and the Association is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Association or the Company. The Association was last audited by the
Internal Revenue Service ("IRS") in 1991 and has not been audited by the New
Jersey Department of Revenue ("DOR") in the past five years.
Bad Debt Reserve. For taxable years beginning after December 31, 1995,
although the 1996 Tax Act generally repealed the bad debt method of accounting
for thrift institutions, thrift institutions such as the Association that are
treated as small banks under the Code (those with assets under $500 million) are
allowed to utilize the experience method or the specific charge-off method to
account for bad debt losses. Thus, the Association will take a bad debt
deduction for federal income tax purposes which is based on its current or
historic net charge-offs. For tax years beginning prior to December 31, 1995,
the Association as a qualifying thrift had been permitted to establish a reserve
for bad debts and to make annual additions to such reserve, which were
deductible for federal income tax purposes. Under such prior tax law, generally
the Association recognized a bad debt deduction equal to 8% of taxable income.
26
<PAGE>
Under the 1996 Tax Act, the Association is required to recapture all or
a portion of the additions to its bad debt reserve made subsequent to the base
year (which is the Association's last taxable year beginning before January 1,
1988). The Association began to recapture such bad debt reserves ratably over a
six-year period commencing in the Association's calendar 1996 tax year. In
fiscal 1997, the Association recorded a deferred tax liability for this bad debt
recapture. As a result, the recapture is not anticipated to have an effect on
the Association's future net income or federal income tax expense for financial
reporting purposes.
Potential Recapture of Base Year Bad Debt Revenue. The Association's
bad debt reserve as of the base year is not subject to automatic recapture as
long as the Association continues to carry on the business of banking. If the
Association no longer qualifies as a bank, the balance of the pre-1988 reserves
(and the supplemental reserves) is restored to income ratably over a six-year
period beginning in the tax year the Association no longer qualifies as a bank.
The base year bad debt reserve is also subject to recapture to the extent that
the Association makes "non-dividend distributions" that are considered as made
from the pre-1988 bad debt reserves. To the extent that such reserves exceed the
amount that would have been allowed under the experience method ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. "Non-dividend distributions" include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. The amount of additional taxable income created
from an Excess Distribution is the amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, if
after the Conversion, the Association makes a "non-dividend distribution," then
approximately one and one-half times the amount so distributed would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). The Association
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Generally, only
90% of AMTI can be offset by net operating loss carryovers of which the
Association currently has none. AMTI is increased by an amount equal to 75% of
the amount by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). In addition, for taxable years beginning after June 30, 1986
and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2 million was imposed on corporations,
including the Association, whether or not an Alternative Minimum Tax ("AMT") is
paid. The Association does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. For federal purposes,
the Company may exclude from its income 100% of dividends received from the
Association as a member of the same affiliated group of corporations. This
corporate dividends received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Company and the
Association will not file a consolidated tax return, except that if the Company
or the Association own more than 20% of the stock of a corporation distributing
a dividend then, generally, 80% of any dividends received may be deducted.
State and Local Taxation
The Association is subject to New Jersey's Savings Institution Tax at
the rate of 3% on its taxable income, before net operating loss deductions and
special deductions for federal income tax purposes. The Company will be required
to file a New Jersey income tax return because it will be doing business in New
Jersey. For New Jersey tax purposes, regular corporations are presently taxed at
a rate equal to 9% of taxable income. For this purpose, "taxable income"
generally means Federal taxable income subject to certain adjustments (including
addition of interest income on state and municipal obligations).
Delaware Taxation
27
<PAGE>
As a Delaware holding company not earning income in Delaware, the
Company is exempt from Delaware corporate income tax but is required to file an
annual report with and pay an annual franchise tax to the State of Delaware.
However, to the extent that the Company conducts business outside of Delaware,
the Company may be considered doing business and subject to additional taxing
jurisdictions outside of Delaware.
Item 2. Description of Property.
The Company currently conducts its business through three full
service banking offices and two operations centers located in Gloucester and
Camden Counties, New Jersey. The following table sets forth the Company's
offices as of December 31, 1999.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Leasehold Total
Year Date of Improvements at Deposits at
Leased or Leased or Lease December 31, December
Location Owned Acquired Expiration 1999 31, 1999
- -------- ------------ -------- -------------- ----------------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Administrative/Home Office:
4651 Route 42
Turnersville, NJ 08012 Owned 1979 -- $953 $ 48,874
Branch Offices:
627 Haddon Avenue
Collingswood, NJ 08108 Owned 1957 -- 1,160 112,370
10 E. Evesham Road
Glendora, NJ 08029 Owned 1967 -- 81 76,608
Operations Centers:
4641 Route 42
Turnersville, NJ 08012 Leased 1996 June 2000(1) 4 --
251 Johnson Road December --
Turnersville, NJ 08012 Leased 1988 1999(2) -- --
-------- -------
Total.......................................................................... $2,198 $237,852
====== ========
</TABLE>
- -------------------------------
(1) The Company is currently in the second of two one-year renewal options. At
the expiration of the lease it is the Company's intention to continue the
lease on a month to month basis.
(2) Since the expiration of the lease's original three-year term, the Company
has continuously renewed the lease for one-year periods. The lease is
currently on a month to month basis.
Item 3. Legal Proceedings.
- --------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition, results of operations or cash
flows.
Item 4. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
On February 16, 2000, the Company held a Special Meeting of
Shareholders to vote on the approval of the South Jersey Financial
28
<PAGE>
Corporation, Inc. 2000 Stock Option Plan, the approval of the South Jersey
Financial Corporation, Inc. 2000 Restricted Stock Plan, and the ratification of
the appointment of Deloitte & Touche LLP as independent auditors of South Jersey
Financial Corporation, Inc. for the year ending December 31, 2000.
<TABLE>
<CAPTION>
Withheld/ Broker
Proposal Votes For Against Abstain Non-Votes
- ------------------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Stock Option Plan 2,237,425 269,494 13,443 710,939
Restricted Stock Plan 2,175,555 328,123 16,684 710,939
Ratification of Auditors 3,209,453 15,934 5,914 --
</TABLE>
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters.
- ---------------------------------------------------------------------
The Company began trading its Common Stock on the Nasdaq National
Market ("Nasdaq") on February 12, 1999 under the symbol "SJFC." The reported
average bid and asked prices on March 13, 2000 are $17.25 and $17.25,
respectively. On November 26, 1999 the Company paid a cash dividend of $.09 per
share to shareholders of record as of November 10, 1999. The Company had
approximately 1,134 shareholders of record as of March 13, 2000.
The following table sets forth the range of high and low sales prices
on the common stock for each quarterly period since initial trading began on
February 12, 1999. The closing market price of the common stock at December 31,
1999 was 15 5/8.
<TABLE>
<CAPTION>
For the Quarter Ended High Low Dividends
- ------------------------------------------ ------------ ---------------- -------------------
<S> <C> <C> <C>
March 31, 1999 $ 11 9/16 $ 10 5/8 na
June 30, 1999 $ 14 1/8 $ 11 1/16 na
September 30, 1999 $ 15 1/8 $ 13 1/2 na
December 31, 1999 $ 15 5/8 $ 13 1/8 $ .09
</TABLE>
Item 6. Management's Discussion and Analysis or Plan of Operations.
- -------------------------------------------------------------------
General
The Company does not transact any material business other than through
its wholly owned subsidiary, the Association. The Association's results of
operations are dependent primarily on net interest income, which is the
difference between the income earned on its loan and investment portfolios and
its cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by the Association's provision for loan
losses, security sales activities, service charges and other fee income, and
noninterest expense. The Association's noninterest expense principally consists
of compensation and employee benefits, office occupancy and equipment expense,
federal deposit insurance premiums, data processing, advertising and business
promotion and other expenses. Results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.
Forward-Looking Statements
The preceding and following discussion may contain certain
forward-looking statements which are based on management's current expectations
regarding economic, legislative, and regulatory issues that may impact the
Company's earnings in future periods. Factors that could cause future results to
vary materially from current
29
<PAGE>
management expectations include, but are not limited to: general economic
conditions, changes in interest rates, deposit flows, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory and technological factors affecting the Company's operations,
pricing, products and services. In particular, these issues may impact
management's estimates used in evaluating market risk and interest rate risk in
its NPV table, loan loss provisions, classification of assets, Year 2000 issues,
accounting estimates and other estimates used throughout this discussion.
Further description of the risks and uncertainties to the business are included
in detail in the "Description of Business" section (Item 1) of the Company's 10-
KSB.
Management Strategy
The Association operates as a family and consumer-oriented community
savings and loan association, offering traditional savings deposit and loan
products to its local community. In recent years, the Association's strategy has
been to maintain profitability while managing its equity position and limiting
its credit and interest rate risk exposure. To accomplish these objectives, the
Association has sought to:
o Control credit risk by emphasizing the origination of
single-family, owner-occupied residential mortgage loans and
consumer loans, consisting primarily of home equity loans and
lines of credit
o Offer superior service and competitive rates to increase its
core deposit base
o Invest funds in excess of loan demand in mortgage-backed,
investment securities, and whole loan purchases from other
financial institutions
In addition, the Company recognizes that its customer base focuses on
convenience and access to services. In this regard, the Company has addressed
these customer desires through the implementation of telephone banking,
increased office hours and the issuance of debit cards. The Company may also
seek to expand its lending activities into areas outside of its primary market
area.
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Information About Market Risk
The principal objective of the Company's interest rate risk management
is to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Company's Interest Rate Risk
Management Policy. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Board of
Directors is responsible for reviewing asset/liability policies and interest
rate risk position. The Board of Directors reviews the Company's interest rate
risk position on a quarterly basis. In connection with such review, the Board
evaluates the Company's business activities and strategies, the effect of those
strategies on the Company's net interest margin, the market value of the
portfolio, and the effect the changes in interest rates will have on the
Association's portfolio and exposure limits. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing and competitively pricing its
adjustable-rate and shorter-term (up to 15 years) fixed-rate loan products in an
effort to make those products more attractive to potential borrowers; and (2)
investing in shorter-term securities which generally bear lower yields, compared
to longer-term investments, but which better position the Association for
increases in market interest rates.
Quantitative Information About Market Risk
30
<PAGE>
Net Portfolio Value. The Company's interest rate sensitivity is
primarily monitored by management through the use of a model which internally
generates estimates of the change in the Association's net portfolio value
("NPV") over a range of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities, and off- balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The OTS
model is based upon data submitted on the Association's quarterly Thrift
Financial Reports. The following table sets forth the Association's NPV as of
December 31, 1999 (the latest NPV analysis prepared by the OTS), as calculated
by the OTS. The analysis was augmented to include holding company assets
utilizing internal modeling based on OTS assumptions.
<TABLE>
<CAPTION>
NPV as Percent of
Change in Value of Assets
Interest Rates Net Portfolio Value ------------------------------
In Basis Points ------------------------------------------------- NPV
(Rate Shock) Amount $ Change % Change Ratio Change (1)
- ---------------- ---------- ---------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $42,721 $(16,869) (28)% 13.97% (392)
200 47,373 (12,218) (21) 15.10 (279)
100 53,912 (5,679) (10) 16.65 (124)
Static 59,591 17.89
(100) 64,612 5,021 8 18.90 101
(200) 65,407 5,816 10 18.86 97
(300) 64,929 5,338 9 18.52 63
- ---------------------------
</TABLE>
(1) Expressed in basis points.
Shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require the making of
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
31
<PAGE>
Average Balance Sheets. The following tables set forth information
relating to the Company at and for the years ended December 31, 1999, 1998 and
1997. The average yields and costs are derived by dividing income or expense by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown, except where noted otherwise, and reflect
annualized yields and costs. For 1999, averages balances were derived using
average daily balances. For 1998 and 1997, average balances are derived from
average monthly balances. The use of average monthly balances rather than
average daily balances does not result in any material differences in the
following presentation. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------- ----------- --------- ------------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans (1):
Real Estate............................... $116,783 $ 8,512 7.29% $ 83,729 $ 6,575 7.85%
Consumer.................................. 18,249 1,510 8.27 17,816 1,522 8.54
------ ----- ---------- ---------
Total loans .......................... 135,032 10,022 7.42 101,545 8,097 7.97
Mortgage-backed securities.................. 75,325 5,175 6.87 48,203 3,532 7.33
Investment securities (2):
Taxable................................... 94,706 5,951 6.28 82,394 5,652 6.86
Non-taxable............................... -- -- -- -- -- --
Interest-earning deposits................... 15,130 730 4.83 20,961 1,081 5.16
---------- ------- ---------- ---------
Total interest-earning assets............. 320,193 21,878 6.83% 253,103 18,362 7.25%
Noninterest-earning assets..................... 7,126 7,306
----------- -----------
Total assets.......................... $327,319 $260,409
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits.................................... $239,146 9,920 4.15% $229,440 9,839 4.29%
FHLB advances............................... 30,940 1,615 5.22 3,222 166 5.14
----------- ---------- ----------- ----------
Total interest-bearing liabilities.... 270,086 11,535 4.27 232,662 10,005 4.30
-------- --------
Noninterest-bearing liabilities............. 1,114 1,926
----------- -----------
Total liabilities..................... 271,200 234,588
Equity...................................... 56,119 25,821
---------- ----------
Total liabilities and equity.......... $327,319 $260,409
======== ========
Net interest-earning assets................. $ 50,107 $ 20,441
======== =========
Net interest income/interest
rate spread (3)............................ $10,343 2.56% $8,357 2.95%
======= ==== ====== ====
Net interest margin as a percentage
of interest-earning assets (4)............ 3.23% 3.30%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities............ 118.55% 108.79%
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997
Average
Average Yield/
Balance Interest Rate
------------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Loans (1):
Real Estate............................... $ 84,564 $ 6,738 7.97%
Consumer.................................. 18,691 1,618 8.66
---------- ---------
Total loans .......................... 103,255 8,356 8.09
Mortgage-backed securities.................. 44,506 3,434 7.72
Investment securities (2):
Taxable................................... 78,114 5,245 6.71
Non-taxable............................... -- -- --
Interest-earning deposits................... 11,152 605 5.42
---------- ---------
Total interest-earning assets............. 237,027 17,640 7.44%
Noninterest-earning assets..................... 7,037
-----------
Total assets.......................... $244,064
========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits.................................... $218,553 9,318 4.26%
FHLB advances............................... 176 12 6.62
----------- ----------
Total interest-bearing liabilities.... 218,729 9,330 4.27
--------
Noninterest-bearing liabilities............. 1,787
-----------
Total liabilities..................... 220,516
Equity...................................... 23,548
----------
Total liabilities and equity.......... $244,064
========
Net interest-earning assets................. $ 18,298
=========
Net interest income/interest
rate spread (3)............................ $8,310 3.17%
====== ====
Net interest margin as a percentage
of interest-earning assets (4)............ 3.51%
====
Ratio of interest-earning assets
to interest-bearing liabilities............ 108.37%
=======
</TABLE>
- -------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, and include nonperforming loans.
(2) Includes investment securities held-to-maturity, investment securities
available-for-sale and stock in the FHLB New York.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
32
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the years indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------------ ------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------- ------------------------
Rate Volume Net Rate Volume Net
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Real Estate........................... $ (498) $ 2,435 $ 1,937 $ (96) $ (67) $ (163)
Consumer.............................. (49) 37 ( 12) (21) (75) (96)
----------- ----------- ----------- ----------- ----------- -----------
Total loans........................ (547) 2,472 1,925 (117) (142) (259)
Mortgage-backed securities............... (234) 1,877 1,643 (174) 272 98
Investment securities (taxable).......... (502) 801 299 124 284 408
Investment securities (non taxable)...... -- -- -- -- -- --
Interest-earning deposits................ (66) (285) (351) (57) 532 475
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets...... (1,349) 4,865 3,516 (224) 946 722
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits................................. (358) 439 81 69 452 521
Borrowed money........................... 3 1,446 1,449 (3) 157 154
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities..... (355) 1,885 1,530 66 609 675
----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) in net interest income.. $ (994) $ 2,980 $ 1,986 $ (290) $ 337 $ 47
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
Compared to
Year Ended
December 31, 1996
-------------------------------------
Increase (Decrease)
Due to
Rate Volume Net
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Real Estate........................... $ (11) $ (291) $(302)
Consumer.............................. (24) 99 75
----------- ----------- -----------
Total loans........................ (35) (192) (227)
Mortgage-backed securities............... (62) 536 474
Investment securities (taxable).......... 294 9 303
Investment securities (non taxable)...... -- -- --
Interest-earning deposits................ 34 66 100
----------- ----------- -----------
Total interest-earning assets...... 231 419 650
----------- ----------- -----------
Interest-bearing liabilities:
Deposits................................. (14) 214 200
Borrowed money........................... -- -- --
----------- ----------- -----------
Total interest-bearing liabilities..... (14) 214 200
----------- ----------- -----------
Increase (decrease) in net interest income.. $ 245 $ 205 $ 450
=========== =========== ===========
</TABLE>
33
<PAGE>
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased $48.8 million, or 17.1%, to $334.5 million at
December 31, 1999 from $285.6 million at December 31, 1998. The increase in
assets was funded primarily by proceeds of the Conversion and an increase in
borrowed funds which was utilized to increase the Company's loan portfolio and
mortgage-backed securities portfolio.
Cash and cash equivalents decreased $44.2 million to $5.8 million at
December 31, 1999 from $50.0 million at December 31, 1998. The decrease in cash
and cash equivalents was a result of a shift from shorter term to longer term
assets.
The investment securities portfolio increased $18.4 million, or 26.3%,
to $88.4 million at December 31, 1999 from $70.0 million at December 31, 1998.
As noted above, portions of the net proceeds of the Conversion and the decrease
in cash and cash equivalents, were utilized to increase the investment
securities portfolio.
The mortgage-backed securities portfolio increased $32.2 million, or
$63.4%, to $83.0 million at December 31, 1999 from $50.8 million at December 31,
1998. As noted above, portions of the net proceeds of the Conversion and the
decrease in cash and cash equivalents, were utilized to increase the
mortgage-backed securities portfolio.
The net loan portfolio increased $40.5 million, or 37.8%, to $147.7
million at December 31, 1999 from $107.2 million at December 31, 1998. Total
real estate loans increased $38.2 million, or 41.8%, to $129.4 million at
December 31, 1999 from $91.2 million at December 31, 1998. This increase was
primarily due to loan purchases from other financial institutions of $30.3
million and increased loan originations. Consumer loans increased $2.1 million,
or 12.2%, to $19.3 million at December 31, 1999 from $17.2 million at December
31, 1998. This increase was due to increased loan originations and lower
prepayments on the consumer loan portfolio.
Total non performing loans decreased to $131 thousand at December 31,
1999 from $523 thousand at December 31, 1998, representing 0.09% and 0.48%,
respectively, of total loans at such date.
Total deposits increased $1.6 million, or 0.7%, to $237.9 million at
December 31, 1999 from $236.2 at December 31, 1998. This increase was primarily
due to an increase of $2.2 million in core deposits (savings, money market and
NOW Accounts), offset by a decrease in $1.1 million in certificates of deposit.
Non-interest bearing demand accounts increased $508 thousand.
Advances from the FHLB increased $16.5 million to $37.1 million, or
80.2%, at December 31, 1999 from $20.6 million at December 31, 1998. A feature
of the Company's business plan is to leverage the balance sheet through the
utilization of advances to fund asset growth.
Total equity increased by $30.4 million to $57.3 million, or 113.1%, at
December 31, 1999 from $26.9 million at December 31, 1998. This increase was
primarily a result of proceeds raised in the mutual to stock Conversion.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General. For the year ended December 31, 1999, the Company had core
operating earnings of $2.6 million compared to $2.2 million for the year ended
December 31, 1998. Including a non-recurring charge resulting from a $2.8
million contribution to establish the South Jersey Savings Charitable Foundation
and the related tax benefit of $1.1 million, the Company experienced net income
of $914 thousand for the year ended December 31, 1999.
Interest Income. Total interest income increased $3.5 million, or
19.1%, to $21.9 million at December 31, 1999 from $18.4 million at December 31,
1998, primarily due to an increase of $67.1 million, or 26.5%, in the average
balance of interest earning assets, offset by a decrease of 42 basis points in
the weighted average yield on interest earning assets to 6.83% for the year
ended December 31, 1999 from 7.25% for the year ended December 31, 1998.
34
<PAGE>
Interest income on loans increased $1.9 million, or 23.8%, to $10.0 million for
the year ended December 31, 1999 from $8.1 million for the year ended December
31, 1998. This increase was primarily due to an increase of $33.5 million, or
33.0%, in the average balance of loans offset by a decrease of 55 basis points
in the weighted average yield to 7.42% for the year ended December 31, 1999 from
7.97% for the year ended December 31, 1998. Interest income on mortgage- backed
securities increased $1.6 million, or 46.5%, to $5.2 million for the year ended
December 31, 1999 from $3.5 million for the year ended December 31, 1998. This
increase was due to an increase of $27.1 million, or 56.3%, in the average
balance of mortgage-backed securities, offset by a decrease of 46 basis points
in the weighted average yield to 6.87% for the year ended December 31, 1999 from
7.33% for the year ended December 31, 1998. Interest income on investment
securities increased $299 thousand, or 5.3%, to $6.0 million for the year ended
December 31, 1999 from $5.7 million for the year ended December 31, 1998. The
increase was due to an increase of $12.3 million, or 14.9%, in the average
balance of investment securities offset by a decrease of 58 basis points in the
weighted average yield to 6.28% for the year ended December 31, 1999 from 6.86%
for the year ended December 31, 1998. Interest income on interest earning
deposits decreased $351 thousand, or 32.5%, to $730 thousand for the year ended
December 31, 1999 from $1.1 million for the year ended December 31, 1998. The
decrease was due to a decrease of $5.8 million, or 27.8%, in the average balance
of interest earning deposits and a decrease of 33 basis points in the weighted
average yield to 4.83% for the year ended December 31, 1999 from 5.16% for the
year ended December 31, 1998.
Interest Expense. Interest expense increased $1.5 million, or 15.3%, to
$11.5 million for the year ended December 31, 1999 from $10.0 million for the
year ended December 31, 1998. Interest expense on deposts increased $81
thousand, or 0.8%, to $9.9 million for the year ended December 31, 1999. The
increase was primarily due to an increase in the average balance of deposits of
$9.7 million, or 4.2%, to $239.1 million for the year ended December 31, 1999
from $229.4 million for the year ended December 31, 1998, offset by a decrease
of 14 basis points in the weighted average cost of deposits to 4.15% for the
year ended December 31, 1999 from 4.29% for the year ended December 31, 1998.
Interest expense on borrowings increased to $1.6 million for the year ended
December 31, 1999 from $166 thousand for the year ended December 31, 1998. The
increase in interest expense on borrowings was due to an increase in the average
balance of borrowings to $30.9 million for the year ended December 31, 1999 from
$3.2 million for the year ended December 31, 1998 and an increase in the
weighted average cost of borrowings of 8 basis points for the year ended
December 31, 1999 to 5.22%, from 5.14% for the year ended December 31, 1998.
Provision for loan losses. The provision for loan losses decreased $145
thousand to $155 thousand for the year ended December 31, 1999 from $300
thousand for the year ended December 31, 1998. The decrease in the provision for
loan losses was the result of a decrease of non performing loans at December 31,
1999 compared to December 31, 1998. At December 31, 1999 and December 31, 1998,
the ratios of non performing loans to net loans were .09% and .49%,
respectively. Management periodically analyzes the sufficiency of its allowance
based upon portfolio composition, asset classifications, loan to value ratios,
potential impairments in the loan portfolio and other factors. Management
believes the provision for loan losses and the allowance for loan losses are
currently reasonable and adequate to cover any probable losses reasonably
expected in the existing loan portfolio. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans and other factors,
both within and outside of management's control.
Noninterest income. Noninterest income decreased $55 thousand, or 9.6%,
to $519 thousand for the year ended December 31, 1999 from $574 thousand for the
year ended December 31, 1998. The decrease was primarily attributable to net
losses on real estate sold and available for sale securities of $67 thousand for
the year ended December 31, 1999 compared to a gain of $3 thousand for the year
ended December 31, 1998.
Noninterest expense. Non interest expense increased $4.2 million to
$9.4 million for the year ended December 31, 1999 from $5.2 million for the year
ended December 31, 1998. The increase in non interest expense was primarily the
result of a contribution to the South Jersey Savings Charitable Foundation in
the amount of $2.8 million. The South Jersey Savings Charitable Foundation is a
charitable foundation established by the Company during the Conversion and will
be completely dedicated to community activities and the promotion of charitable
causes.
35
<PAGE>
Compensation and employee benefits increased $617 thousand, or 19.2%, to
$3.8 million for the year ended December 31, 1999 from $3.2 million for the year
ended December 31, 1998. The increase was primarily due to compensation charges
resulting from the establishment of an ESOP, normal increases in salaries and
staffing levels, and increases in benefit costs. Office occupancy expense
increased $110 thousand to $839 thousand for the year ended December 31, 1999
from $729 thousand for the year ended December 31, 1998. This increase was due
to a charge to earnings of $128 thousand for the write-off of developmental
costs associated with a planned office addition offset by a slight decrease in
depreciation expenses. Other operating expenses increased $555 thousand to $1.3
million for the year ended December 31, 1999 from $719 thousand for the year
ended December 31, 1998. This increase was primarily due to increased costs
related to being a public company which includes costs for the Company's annual
meeting of shareholders, proxy solicitation, increased legal fees, increased
accounting and auditing fees, and franchise taxes.
Income Taxes. Income tax expense totaled $401 thousand for the year
ended December 31, 1999 compared to $1.2 million for the year ended December 31,
1998, resulting in effective tax rates of 30.5% and 36.0% for the years ended
December 31, 1999 and 1998, respectively. The decrease in income tax expense for
the year ended December 31, 1998 was attributable to a decrease in pre-tax
income, which decreased to $1.3 million for the year ended December 31, 1999
from $3.4 million for the year ended December 31, 1998. The Company received a
tax benefit of $1.1 million due to the contribution to the charitable foundation
in the first quarter of 1999.
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997
General. Net income for the year ended December 31, 1998 totaled $2.2
million which was a decrease of $91 thousand, or 4.0%, from $2.3 million for the
year ended December 31, 1997. The decrease was attributed to an increase in
noninterest expense partially offset by an increase in net interest income and a
decrease in the provision for loan losses. The net interest margin decreased for
the year ended December 31, 1998 due to lower long term interest rates.
Interest Income. Total interest income increased by $722 thousand, or
4.1%, to $18.4 million for the year ended December 31, 1998 from $17.6 million
at December 31, 1997, primarily due to an increase of $16.1 million, or 6.8%, in
the average balance of interest earnings assets, offset by a decrease of 19
basis points in the weighted average yield on interest earning assets to 7.25%
for the year ended December 31, 1998 from 7.44% for the year ended December 31,
1997. Interest income on loans decreased $259,000, or 3.1%, to $8.1 million for
the year ended December 31, 1998 from $8.4 million for the year ended December
31, 1997. This decrease was due to a decrease of $1.7 million in the average
balance of loans and a decrease of 12 basis points in the weighted average yield
to 7.97% for the year ended December 31, 1998, from 8.09% for the year ended
December 31, 1997. Interest income on mortgage-backed securities increased $98
thousand, or 2.8%, to $3.5 million for the year ended December 31, 1998 from
$3.4 million for the year ended December 31, 1997. The increase was due to an
increase of $3.7 million, or 8.3%, in the average balance of mortgage-backed
securities offset by a 39 basis point decrease in the weighted average yield to
7.33% for the year ended December 31, 1998 from 7.72% for the year ended
December 31, 1997. Interest income on investment securities and interest bearing
deposits increased $883 thousand, or 15.1%, to $6.7 million for the year ended
December 31, 1998, from $5.8 million for the year ended December 31, 1997. The
increase was due to an increase of $14.1 million, or 15.8%, in the average
balance of such assets offset by a decrease of 4 basis points in the weighted
average yield to 6.51% for the year ended December 31, 1998 from 6.55% for year
ended December 31, 1997.
Interest Expense. Interest expense increased by $675 thousand, or 7.2%,
to $10.0 million for the year ended December 31, 1998, from $9.3 million for the
year ended December 31, 1997. Interest expense on deposits increased $521
thousand, or 5.6%, to $9.8 million for the year ended December 31, 1998 from
$9.3 million for the year ended December 31, 1997. The increase was primarily
due to an increase in the average balance of certificates accounts to $117.3
million for the year ended December 31, 1998, from $108.5 million for the year
ended December 31, 1997, and an increase of 7 basis points in the weighted
average cost of certificate accounts to 5.79% for the year ended December 31,
1998, from 5.72% for the year ended December 31, 1997. The increase in the
average balance of certificate accounts was primarily due to efforts to solicit
certificate accounts by more competitively pricing such accounts to attract
longer- term deposits. Interest expense on advances increased to $166 thousand
for the year ended December 31, 1998 from $12 thousand for the year ended
December 31, 1997, an increase of $154 thousand. The increase in interest
36
<PAGE>
expense on advances was attributed to an increase in the average balance of
advances to $3.2 million for the year ended December 31, 1998 from $176 thousand
for the year ended December 31, 1997.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1998 was $300 thousand, compared to $400 thousand for the
year ended December 31, 1997. The $100 thousand, or 25.0% decrease
was attributable to a pay off in 1997 of the largest commercial real estate loan
on which provisions had been made for a probable loss. At December 31, 1998 and
December 31, 1997, the ratios of the allowance for loan losses to non-
performing assets was 159.22% and 105.71%, respectively. Management periodically
analyzes the sufficiency of its allowances based upon portfolio composition,
asset classifications, loan-to-value ratios, potential impairments in the loan
portfolio, and other factors.
Noninterest Income. Noninterest income decreased $15 thousand, or 2.5%,
to $574 thousand for the year ended December 31, 1998, from $589 thousand for
the year ended December 31, 1997. The decrease is attributable to a decrease in
service fees on checking accounts, loan servicing fee income and loss of rental
income on a rental property.
Noninterest Expense. Total noninterest expense increased $274 thousand,
or 5.5%, to $5.2 million for the year ended December 31, 1998, from $5.0 million
for the year ended December 31, 1997. Compensation and employee benefits
increased $242 thousand or 8.2%, to $3.2 million for the year ended December 31,
1998 from $3.0 million for the year ended December 31, 1997, primarily due to
normal increases in salaries as well as increases in benefits costs. Data
processing increased $34 thousand or 10.1%, to $360 thousand for the year ended
December 31, 1998 from $326 thousand for the year ended December 31, 1997. The
increase was due to the introduction in the third quarter of 1998 of a telephone
banking service and an increase in pricing by the Association's outside data
processor.
Income Taxes. Income tax expense totaled $1.2 million for the year
ended December 31, 1998 compared to $1.3 million for the year ended December 31,
1997, resulting in effective tax rates of 36.0% for both years ended December
31, 1998 and 1997. The decrease in income tax expense for the year ended
December 31, 1998 was attributable to a decrease in pre-tax income, which
decreased to $3.4 million for the year ended December 31, 1998 from $3.5 million
for the year ended December 31, 1997.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans, mortgage- backed and investment securities and
borrowings from the FHLB-New York. The Company uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows, mortgage prepayments
and the exercise of call features are greatly influenced by general interest
rates, economic conditions and competition. The Association has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Association's currently required
liquidity ratio is 4.0%. At December 31, 1999 the Association's liquidity ratio
was 41.63%.
At December 31, 1999, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $44.6 million, or 13.85%,
of total adjusted assets, which is above the required level of $4.9 million, or
1.5%; core capital of $44.6 million, or 13.85%, of total adjusted assets, which
is above the required level of $9.7 million, or 3.0%; and risk-based capital of
$45.6 million, or 37.91%, of risk-weighted assets, which is above the required
level of $9.6 million, or 8.0%.
The Company's most liquid assets are cash and cash equivalents. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1999,
cash and cash equivalents totalled $5.8 million, or 1.73% of total assets.
37
<PAGE>
The Company has other sources of liquidity if a need for additional
funds arises, including FHLB advances which offers several different credit
programs, each of which has its own interest rate and range of maturities. At
December 31, 1999, the Company had $37.1 in advances outstanding from the FHLB.
The maximum amount that the FHLB will advance fluctuates from time to time in
accordance with policies of the FHLB. Depending on market conditions, the
pricing of deposit products and FHLB advances, the Company may rely on FHLB
borrowing to fund asset growth.
Outstanding commitments to originate first mortgage loans totalled $746
thousand at December 31, 1999. Management of the Company anticipates that it
will have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1999 totalled $52.9 million. The Company relies primarily on
competitive rates, customer service, and long-standing relationships with
customers to retain deposits. From time to time, the Company will also offer
competitive special rates to its customers to increase retention. Based upon the
Company's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Company.
Year 2000 Compliance
The Company accomplished the objectives established in its Year 2000
Action Plan. All internal software and hardware used in the Company's business
made it through the transaction from 1999 to 2000 without any abnormalities or
inaccurate results. In addition, the Company's critical vendors and suppliers
also made the transition successfully. As evidenced by our quiet and uneventful
transition to the new millenium, the interests of our customers were well
protected during the entire project.
Other critical, future dates previously identified as being potentially
vulnerable to the Year 2000 problem were tested as part of the century rollover
testing. All critical applications thought to be impacted by future dates were
evaluated and further testing of various dates conducted as necessary. Any
potential problems identified during this testing have been corrected. Our
success with century rollover testing gives us confidence that testing of other
future critical dates is just as reliable. We therefore do not anticipate any
problems associated with these future dates.
The Company engaged in an upgrade of its technology systems in addition
to implementing its Year 2000 policy. The Association has budgeted approximately
$150,000 in connection with the costs associated with achieving Year 2000
compliance and its related technology systems upgrade and, as of December 31,
1999, had expended approximately $110,000.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP,")
which require the measurement of financial position and operating results
generally in terms of historical dollar amounts without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Association's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Association are monetary in nature. As a result, interest rates have a greater
impact on the Association's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for change
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000 as amended by SFAS No.
137. Management of the Company is in the process of evaluating the impact, if
any, this statement will have on the Company's results of operations or
financial position when adopted.
38
<PAGE>
Item 7. Financial Statements.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
South Jersey Financial Corporation, Inc. and Subsidiary:
We have audited the accompanying consolidated statement of financial condition
of South Jersey Financial Corporation, Inc. and subsidiary (the "Company") as of
December 31, 1999, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended. We have also
audited the related statement of financial condition of South Jersey Savings and
Loan Association (the "Predecessor Association") as of December 31, 1998 and the
related statements of income and retained earnings, and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management and the Predecessor Association'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, such financial statements present fairly, in all material
respects, the consolidated financial position of South Jersey Financial
Corporation, Inc. and subsidiary at December 31, 1999 and the results of their
operations and their cash flows for the year then ended, and the financial
position of South Jersey Savings and Loan Association at December 31, 1998 and
the results of its operations and its cash flows for the years ended December
1998 and 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 28, 2000 (March 15, 2000 as to
Note 17)
F-1
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> 1999 1998
<S> <C> <C>
ASSETS (In thousands)
Cash and cash equivalents $ 5,800 $ 49,987
Investment securities held to maturity (approximate fair values -
1999, $61,655; 1998, $70,711) 64,837 69,970
Investment securities available for sale at fair value 23,515
Mortgage-backed securities held to maturity (approximate fair values -
1999, $55,530; 1998, $51,872) 57,508 50,783
Mortgage-backed securities available for sale at fair value 25,483
Federal Home Loan Bank stock - at cost 2,138 1,249
Loans receivable, net 147,658 107,177
Accrued interest receivable 2,570 2,220
Office properties and equipment 2,922 3,164
Deferred income taxes 1,729 122
Prepaid expenses and other assets 313 965
--------- ---------
TOTAL ASSETS $ 334,473 $ 285,637
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 237,852 $ 236,248
Advances from Federal Home Loan Bank 37,074 20,576
Advances from borrowers for taxes and insurance 907 840
Accounts payable and accrued expenses 1,260 1,056
Income taxes payable 132 53
--------- ---------
Total liabilities 277,225 258,773
--------- ---------
Shareholders' equity:
Preferred stock - $0.01 par value; 1,000,000 shares authorized;
none issued Common stock - $0.01 par value; 14,000,000 shares
authorized;
3,793,430 issued and outstanding 38
Paid-in-capital in excess of par 36,265
Unearned ESOP shares (2,832)
Treasury stock at cost - 189,671 shares (2,831)
Retained earnings - partially restricted 27,481 26,864
Accumulated other comprehensive loss (873)
--------- ---------
57,248 26,864
Total shareholders' equity --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 334,473 $ 285,637
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 10,022 $ 8,097 $ 8,356
Interest on mortgage-backed securities 5,175 3,532 3,434
Interest on investment securities 6,681 6,733 5,850
---------- ------- -------
Total interest income 21,878 18,362 17,640
---------- ------- -------
INTEREST EXPENSE
Interest on deposits 9,920 9,839 9,318
Interest on borrowed money 1,615 166 12
---------- ------- -------
Total interest expense 11,535 10,005 9,330
---------- ------- -------
NET INTEREST INCOME 10,343 8,357 8,310
PROVISION FOR LOAN LOSSES 155 300 400
---------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,188 8,057 7,910
---------- ------- -------
OTHER INCOME
Service charges and other fees 582 566 590
Gain (loss) on sale of loans and real estate (32) 3 (15)
Net loss on sale of available for sale securities (35)
Other 4 5 14
---------- ------- -------
Total other income 519 574 589
---------- ------- -------
OPERATING EXPENSES
Compensation and employee benefits 3,836 3,219 2,977
Premises and equipment 839 729 723
Federal deposit insurance premiums 139 136 138
Data processing 394 360 326
Advertising 99 71 56
Other operating 1,274 719 740
Foundation contribution 2,811
---------- ------- -------
Total operating expenses 9,392 5,234 4,960
---------- ------- -------
INCOME BEFORE INCOME TAXES 1,315 3,397 3,539
INCOME TAXES 401 1,222 1,273
---------- ------- -------
NET INCOME $ 914 $ 2,175 $ 2,266
========== ======= =======
PER SHARE DATA:
Basic and diluted net income per share $ 0.20
==========
Average number of shares-basic and diluted 3,422,896
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Paid in Retained Accumulated
Capital Unearned Earnings - Other Total
Comprehensive Common in Excess ESOP Treasury Partially Comprehensive Shareholders'
Income Stock of Par Shares Stock Restricted Loss Equity
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 22,423 $ 22,423
Net income 2,266 2,266
-------- --------
BALANCE, DECEMBER 31, 1997 24,689 24,689
Net income 2,175 2,175
-------- --------
BALANCE, DECEMBER 31, 1998 26,864 26,864
Issuance of Common Stock $ 38 $ 36,228 36,266
Common stock acquired by stock
benefit plan $(3,035) (3,035)
Dividends paid (297) (297)
ESOP shares committed to be released 37 203 240
Purchase of treasury stock $ (2,831) (2,831)
Comprehensive income:
Net income $ 914 914 914
Unrealized loss on available
for sale securities, net of tax (873) $ (873) (873)
------
Total comprehensive income $ 41
====== ---- -------- ------- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1999 $ 38 $ 36,265 $(2,832) $ (2,831) $ 27,481 $ (873) $ 57,248
==== ======== ======= ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
(In thousands)
<S>
OPERATING ACTIVITIES <C> <C> <C>
Net income $ 914 $ 2,175 $ 2,266
Provision for loan losses 155 300 400
Provision for depreciation 273 294 297
Amortization of premium/discounts on mortgage-backed securities, net (42) 13 30
Amortization of premium/discounts on investments, net 213 176 290
Amortization of premium/discounts on loans, net (60) (136) (81)
ESOP expense 261
Gain on sale of mortgage-backed securities available for sale (9)
Loss on sale of investments available for sale 44
Write off development costs 128
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable (350) 40 191
Prepaid expenses and other assets 652 (423) (26)
Deferred income taxes (1,075) (106) (12)
Deferred and prepaid loan fees (272) 11 (117)
Accounts payable and accrued expenses 204 95 (31)
Income taxes payable 79 8 45
------- -------- --------
Net cash provided by operating activities 1,115 2,447 3,252
------- -------- --------
INVESTING ACTIVITIES
Purchase of:
Mortgage-backed securities (47,844) (20,059) (10,030)
Investment securities (49,997) (34,731) (36,215)
Federal Home Loan Bank Stock (889) (16) (82)
Office properties and equipment (282) (135) (193)
Proceeds from:
Sale of loans 90
Maturing mortgage-backed securities 12,864 14,495 6,167
Sale of mortgage-backed securities 2,009
Maturing investment securities 26,917 43,620 34,000
Sale of investments 3,850
Sale of office properties and equipment 123
Principal collected on long-term loans 22,937 22,640 21,119
Long-term loans originated or acquired (63,241) (31,117) (16,025)
--------- -------- --------
Net cash used in investing activities (93,553) (5,213) (1,259)
--------- -------- --------
FINANCING ACTIVITIES:
Net increase in deposits 1,604 13,042 6,371
Net increase in FHLB advances 16,498 20,400
Increase in advances from borrowers for taxes and insurance 67 111 (58)
Purchase of treasury stock (2,831)
Dividends on common stock (297)
Net proceeds from issuance of common stock 33,210
--------- -------- --------
Net cash provided by financing activities 48,251 33,553 6,313
--------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (44,187) 30,787 8,306
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 49,987 19,200 10,894
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD 5,800 49,987 19,200
--------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest $ 11,506 $ 9,927 $ 9,354
========= ======== ========
Income taxes $ 1,380 $ 1,077 $ 1,245
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCIAL ACTIVITIES:
Loans receivable transferred to real estate owned $ 280 $ 50 $ 28
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
South Jersey Financial Corporation, Inc. (the "Company") was incorporated
under Delaware law in September 1998 for the purpose of serving as the
holding company of South Jersey Savings and Loan Association (the
"Association") as part of the Association's conversion from the mutual to
stock form of organization (the "Conversion"). The Company is a savings and
loan holding company and is subject to regulation by the Office of Thrift
Supervision (the "OTS"), the Federal Deposit Insurance Corporation and the
Securities and Exchange Commission (the "SEC"). The Conversion, completed on
February 12, 1999, resulted in the Company issuing an aggregate of 3,793,430
shares of its common stock, par value $.01 per share, of which 3,512,435
shares were sold in a subscription offering at a purchase price of $10 per
share and 280,995 shares were issued and contributed to South Jersey Savings
Charitable Foundation. Total proceeds of $32,090,000 were reduced by
Conversion expenses of approximately $1,700,000 and the excess of proceeds
over the par value of the stock was credited to paid-in-capital in excess of
par. As a result of this Conversion, approximately $15,200,000 of capital
was contributed to the Association from the Company in exchange for all of
the outstanding capital stock of the Association.
The Association established an ESOP for the benefit of eligible employees,
effective upon the Conversion. The ESOP purchased 303,474 shares of common
stock issued in the Conversion utilizing proceeds of a loan from the Company.
The Company established a charitable foundation ("Foundation") in connection
with the Conversion and donated 280,995 shares of the Company's common stock
to the Foundation. The Foundation has been dedicated to charitable purposes
within the communities in which the Association operates and to complement
the Association's existing community activities.
Prior to the Conversion, the Company had not engaged in any material
operations. The financial statements for the periods prior to February 12,
1999 are the statements of the Association.
The primary business of the Company is to act as a holding company for the
Association. The primary business of the Association is attracting customer
deposits from the general public through its branches and investing these
deposits, together with funds from borrowings and operations, primarily in
loans secured by mortgages on residential real estate, consumer loans and
mortgage-backed and investment securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the Company's significant accounting and reporting
policies:
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 consolidated financial statements
and the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
<PAGE>
Accounting for Certain Debt and Equity Securities - The Company classifies
investments as follows:
Securities that the Company has the positive intent and ability to hold to
maturity are classified as "held-to-maturity" and reported at amortized
cost.
Securities not classified as held-to-maturity are classified as "available-
for-sale" and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
shareholders' equity, net of applicable income taxes.
Provision for Loan Losses - Provision for loan losses include charges to
reduce the recorded balances of loans receivable to their estimated net
realizable value or fair value, as applicable. Such provisions are based on
management's estimate of net realizable value or fair value of the
collateral, as applicable, considering the current operating or sales
conditions, thereby causing these estimates to be particularly susceptible to
changes that could result in a material adjustment to results of operations
in the near term. Recovery of the carrying value of such loans is dependent
to a great extent on economic, operating and other conditions that may be
beyond the Company's control.
Real Estate Acquired Through Foreclosure - Real estate acquired through
foreclosure is carried at the lower of fair value less estimated cost to sell
or the balance of the loan on the property at date of acquisition. Costs
related to the development of property are capitalized and those related to
holding the property are charged to expense.
Interest Income on Loans - Interest income is recognized as earned. Interest
accruals are generally discontinued when a loan becomes 90 days past due or
when principal or interest is considered doubtful of collection. When
interest accruals are discontinued, interest credited to income is reversed.
Office Properties and Equipment - Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method
over the expected useful lives of the assets. The costs of maintenance and
repairs are expensed as they are incurred and renewals and betterments are
capitalized.
Deferred Loan Fees - The Company defers all loan fees, net of certain direct
loan origination costs. The balance is accreted into income as a yield
adjustment over the life of the loan using the interest method.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash, interest-bearing deposits (with original
maturities of 90 days or less), and federal funds sold. Generally federal
funds are purchased the following day.
Income Taxes - Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable
to future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Earnings Per Share - Basic and diluted earnings per share for 1999 is
computed by dividing income available to common stockholders (net income from
February 12, 1999 through December 31, 1999 or $670,000) by the weighted-
average number of common shares outstanding for the period.
Comprehensive Income - In 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. This
statement requires the Company to present, as a component of comprehensive
income, the amounts from transactions and other events which currently are
excluded from the statement of income and are recorded directly to
shareholders' equity.
F-7
<PAGE>
Accounting Principles Issued But Not Yet Adopted - In June 1998, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This
statement, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Management of the Company is
in the process of evaluating the impact, if any, this statement will have on
the Company's results of operations or financial position when adopted.
Reclassifications - Certain reclassifications have been made to the 1998 and
1997 financial statements to conform with the 1999 presentation. Such
reclassifications had no impact on reported net income.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Investment Securities: (In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
U. S. Treasury and Government agencies $ 28,222 $ 42 $ 457 $ 27,807
FHLB notes 36,515 2,767 33,748
Municipal obligations 100 100
--------- -------- -------- --------
Total $ 64,837 $ 42 $ 3,224 $ 61,655
========= ======== ======== ========
Available-for-sale:
FHLB notes $ 3,000 $ 279 $ 2,721
Mutual funds 21,106 312 20,794
--------- -------- --------
Total $ 24,106 $ 591 $ 23,515
========= ======== ========
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Investment Securities (In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury and Government agencies $ 33,606 $ 667 $ 34,273
FHLB notes 36,264 224 $ 150 36,338
Municipal obligations 100 100
--------- -------- -------- --------
Total $ 69,970 $ 891 $ 150 $ 70,711
========= ======== ======== ========
</TABLE>
At December 31, 1998, the Company had no investment securities available for
sale. For the year ended December 31, 1999, proceeds from sales of investment
securities available for sale of $3,850,000 resulted in gross realized losses of
$44,000.
F-8
<PAGE>
The amortized cost and approximate fair values of debt securities at December
31, 1999 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Approximate
Amortized Fair
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ 11,020 $ 11,025
Due after one year through five years 19,717 19,490
Due after five years 37,100 33,861
-------- --------
Total $ 67,837 $ 64,376
======== ========
</TABLE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Mortgage-Backed Securities (In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA pass-through certificates $ 461 $ 25 $ 486
FNMA pass-through certificates 42,716 57 $ 2,017 40,756
FHLMC pass-through certificates 14,331 112 155 14,288
--------- ------- -------- --------
Total $ 57,508 $ 194 $ 2,172 $ 55,530
========= ======= ======== ========
Available-for-sale:
GNMA pass-through certificates $ 14,636 $ 397 $ 14,239
FNMA pass-through certificates 9,714 394 9,320
FHLMC pass-through certificates 1,949 25 1,924
--------- -------- --------
Total $ 26,299 $ 816 $ 25,483
========= ======== ========
<CAPTION>
December 31, 1998
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Held to Maturity:
GNMA pass-through certificates $ 686 $ 54 $ 740
FNMA pass-through certificates 29,763 475 $ 73 30,165
FHLMC pass-through certificates 20,334 633 20,967
--------- ------- ------ --------
Total $ 50,783 $ 1,162 $ 73 $ 51,872
========= ======= ====== ========
</TABLE>
F-9
<PAGE>
At December 31, 1998, the Company had no mortgage-backed securities available
for sale. For the year ended December 31, 1999, proceeds from sales of
mortgage-backed securities available for sale of $2,009,000 resulted in gross
realized gains of $9,000.
At December 31, 1999, the amortized cost of mortgage-backed securities
pledged for public deposits was $547,000. At December 31, 1999, the
amortized cost of mortgage-backed securities pledged for FHLB borrowings was
$26,406,000.
5. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Residential mortgage loans (primarily single family) $ 127,364 $ 89,249
Nonresidential mortgage loans 2,042 2,000
Home equity loans and equity lines of credit 16,691 14,403
Education loans 2,011 2,144
Other consumer loans 584 644
---------- ----------
148,692 108,440
Allowance for loan losses (1,044) (940)
Net deferred fees and other credits 10 (323)
---------- ----------
Net loans receivable $ 147,658 $ 107,177
========== ==========
</TABLE>
The Company lends to borrowers primarily in its local market area. The ultimate
repayment of these loans is dependant to a certain degree on the local economy
and the real estate market.
Nonaccrual loans amounted to $131,000, $523,000 and $631,469 at December 31,
1999, 1998 and 1997, respectively. Interest income which should have been earned
on these loans during the years ended December 31, 1999, 1998 and 1997 was
$10,000, $46,000 and $54,087, respectively. Interest income recognized on these
loans during the years ended December 31, 1999 and 1998 was $2,000, $38,000 and
$26,376, respectively.
F-10
<PAGE>
The Company originates and purchases both adjustable and fixed interest rates
loans. At December 31, 1999, the composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed-Rate Adjustable-Rate
-------------------------------------------- ----------------------------------------
Term to Rate Book
Term to Maturity Book Value Adjustment Value
(In thousands) (In thousands)
<S> <C> <C> <C>
1 month to one year $ 2,172 1 month to one year $ 7,561
1 year to 3 years 2,270 1 year to 3 years 2,353
3 years to 5 years 6,165
5 years to 10 years 51,249
10 years to 20 years 46,810
Over 20 years 30,112
--------- -------
$ 138,778 $ 9,914
========= =======
</TABLE>
The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to prime rate or U.S. Treasury rates. Future market factors
may affect the correlation of the interest rate adjustment with the rates the
Company pays on the short-term deposits that have been primarily utilized to
fund these loans.
The total amount of loans being serviced for the benefit of others was
approximately $1,540,000 at December 31, 1998. No loans were serviced for
others at December 31, 1999.
An analysis of activity in allowance for losses at December 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 940 $ 667 $ 1,186
Provision for losses 155 300 400
Charge-offs (90) (33) (923)
Recoveries 39 6 4
------- ----- -------
Balance, end of period $ 1,044 $ 940 $ 667
======= ===== =======
</TABLE>
The provision for loan losses charged to expense is based upon past loan
experiences and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. An insignificant
delay or insignificant shortfall in amount of payments does not necessarily
result in the loan being identified as impaired. For this purpose, delays
less than 90 days are considered to be insignificant.
F-11
<PAGE>
The following table summarizes impaired loan information:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
(In thousands)
<S> <C> <C>
Total recorded investment in impaired loans with allowance
for loan losses in accordance with SFAS No. 114 $ 0 $ 76
==== ====
Total recorded investment in impaired loans 0 76
==== ====
Total allowance related to impaired loans in accordance
with SFAS No. 114 0 9
==== ====
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Average investment in impaired loans $ 36 $ 77 $ 362
===== ===== =====
Cash basis interest income recognized on impaired loans $ 0 $ 3 $ 4
===== ===== =====
Interest income recognized on impaired loans $ 0 $ 3 $ 4
===== ===== =====
</TABLE>
Interest payments on impaired loans are typically applied to principal unless
collectibility of the principal amount is fully assured, in which case
interest is recognized on the cash basis.
Commercial loans and consumer loans are placed on nonaccrual at the time the
loan is 60 days delinquent unless the credit is well secured and in the
process of collection. Generally, commercial loans and consumer loans are
charged off no later than after they become 120 days delinquent unless the
loan is well secured and in the process of collection, or other extenuating
circumstances support collection. Residential real estate and commercial
real estate loans are typically placed on nonaccrual at the time the loan is
90 days delinquent. In all cases, loans must be placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is
considered doubtful.
Certain directors and officers of the Company have loans with the Company.
Such loans were made in the ordinary course of business and do not represent
more than a normal risk of collection. Total loans to these persons amounted
to $277,000, $286,000 and $294,000 at December 31, 1999, 1998 and 1997,
respectively. Loan repayments for the year ended December 31, 1999, 1998 and
1997 were $9,000, $8,000 and $8,000, respectively.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Investments and interest-bearing deposits $ 1,298 $ 1,295
Mortgage-backed securities 496 325
Loans receivable 776 600
------- -------
Total $ 2,570 $ 2,220
======= =======
</TABLE>
F-12
<PAGE>
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1999 and 1998 are summarized
by major classifications as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land and buildings $ 3,179 $ 3,370
Furniture and equipment 2,468 2,305
------- -------
Total 5,647 5,675
Accumulated depreciation (2,725) (2,511)
------- -------
Net $ 2,922 $ 3,164
======= =======
</TABLE>
8. DEPOSITS
Deposits consist of the following major classifications at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Amount Percent Amount Percent
(In thousands)
<S> <C> <C> <C> <C>
Passbook and clubs $ 34,114 14.4% $ 34,921 14.8%
Checking accounts 37,618 15.8 36,433 15.4
Money market demand 44,961 18.9 42,672 18.1
-------- ------- -------- -------
Core account total 116,693 49.1 114,026 48.3
-------- ------- -------- -------
Certificates:
Less than $100,000 110,250 46.3 111,853 47.3
$100,000 or more 10,909 4.6 10,369 4.4
-------- ------- -------- -------
Certificate total 121,159 50.9 122,222 51.7
-------- ------- -------- -------
Total 237,852 100.0% 236,248 100.0%
======== ======= ======== =======
</TABLE>
The weighted average cost of deposits was 4.1% and 4.3% at December 31, 1999
and 1998, respectively. The Company had no brokered deposits at December 31,
1999 or 1998.
A summary of certificates by maturity at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Amount Percent
(In thousands)
<S> <C> <C>
One year or less $ 52,941 43.7%
One through three years 43,486 35.9
Three through five years 12,451 10.3
Over Five years 12,281 10.1
-------- -----
Total $121,159 100.0%
======== =====
</TABLE>
F-13
<PAGE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Passbook and clubs $ 1,077 $ 965 $ 978
Checking Accounts 601 625 646
Money Market Demand 1,456 1,490 1,527
Certificates 6,822 6,796 6,203
Early withdrawal penalties (36) (37) (35)
------- ------- -------
Total $ 9,920 $ 9,839 $ 9,319
======= ======= =======
</TABLE>
9. BORROWINGS
The Company had outstanding advances from the Federal Home Loan Bank of New
York as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998
------------------------ ------------------------
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank
advances maturing in:
1999 $ 1,000 4.760%
2000 $ 9,498 5.694%
2001 132 6.615 132 6.615
2002 44 6.615 44 6.615
2003 5,000 4.950 5,000 4.950
2005 2,000 5.080 2,000 5.080
2006 500 5.530
2008 12,400 5.098 12,400 5.098
2009 7,500 5.543
-------- ----- -------- -----
Total $ 37,074 5.232% $ 20,576 5.057%
======== ===== ======== =====
</TABLE>
Included in the table above at December 31, 1999 and 1998 are advances
callable by the FHLB at various dates.
The advances were collateralized by Federal Home Loan Bank stock and first
mortgage loans and securities held by the Company.
F-14
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
Commitments at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fixed rate mortgages $ 746
Consumer loans 312
Unused lines of credit 2,181
Mortgage-backed securities 2,000
-------
Total $ 5,239
=======
</TABLE>
At December 31, 1999, all commitments are expected to be funded within one
year.
11. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 1,702 $ 1,226 $ 1,039
State (41) 102 106
------- ------- -------
Total current 1,661 1,328 1,145
Deferred - federal income taxes (benefit) (1,260) (106) 128
------- ------- -------
Total $ 401 $ 1,222 $ 1,273
======= ======= =======
</TABLE>
The Company's provision for income taxes differs from the amounts determined
by applying the statutory federal income tax rate to income taxes for the
following reasons:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
At Statutory rate $ 460 35.0% $1,189 35.0% $1,238 35.0%
Surtax exemption (13) (1.0) (34) (1.0) (35) (1.0)
Adjustments resulting in:
State tax- net of federal
tax provision (27) (2.0) 66 2.0 69 2.0
Other, net (19) (1.5) 1 1
----- ------ ------ ----- ------ -----
Total $ 401 30.5 % $1,222 36.0% $1,273 36.0%
===== ====== ====== ===== ====== =====
</TABLE>
F-15
<PAGE>
Items that gave rise to significant portions of the deferred tax accounts at
December 31, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan costs $ 33 $ 57
Deferred loan fees 59 78
Allowance for loan losses 216 99
Charitable contribution 975
Unrealized loss on available for sale securities 532
------- -------
Total 1,815 234
Deferred tax liabilities - Property (74) (112)
Other (12)
------- -------
Total $ 1,729 $ 122
======= =======
</TABLE>
11. DEFINED CONTRIBUTION PLAN
The Company has a noncontributory, defined contribution plan for all regular
full-time employees meeting certain eligibility requirements. Expense
related to the plan, which is based on a percentage of the participants'
salaries as provided by the plan, was $292,000, $277,000 and $266,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
12. REGULATORY CAPITAL REQUIREMENT
The Association is subject to various capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possible additional discretionary -
actions by regulators that, if undertaken, could have a direct material
effect on the Association's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association 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 tier I risk-based and
risk-based capital (as defined) to risk-weighted assets (as defined).
Management believes, as of December 31, 1999, that the Association meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Association as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association must maintain minimum core
and risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Association's category.
The Association's actual tangible, core and tier risk-based capital equals
its retained earnings as of December 31, 1999 and 1998. Included in the
Association's actual risk-based capital are permitted amounts of the
allowance for loan losses of $1,044,000 and $931,000 as of December 31, 1999
and 1998, respectively.
F-16
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Required for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Tangible Capital $ 44,584 13.85% $ 4,827 1.50% N/A N/A
Core Capital 44,584 13.85 9,654 3.00 $ 16,091 5.00%
Tier 1 Risk-Based Capital 44,584 37.05 N/A N/A 7,221 6.00
Risk Based Capital 45,627 37.91 9,627 8.00 12,034 10.00
December 31, 1998:
Tangible Capital $ 24,689 9.88% $ 3,747 1.50% N/A N/A
Core Capital 24,689 9.88 7,494 3.00 $ 12,490 5.00%
Tier 1 Risk-Based Capital 24,689 26.56 N/A N/A 5,577 6.00
Risk Based Capital 25,343 27.27 7,436 8.00 9,295 10.00
</TABLE>
At the time of Conversion, the Association established a liquidation account
in an amount of approximately $26,000,000, its equity as reflected in the
latest balance sheet used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders who continue to maintain
their accounts at the Association after the conversion. In the event of a
complete liquidation of the Association, each eligible account holder and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures
about Fair Value of Financial Instruments. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts 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 the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998
---------------------------------- -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets:
Cash and Cash Equivalents $ 5,800 $ 5,800 $ 49,987 $ 49,987
Investment Securities 88,352 85,170 69,970 70,711
Mortgage-backed Securities 82,991 81,013 50,783 51,872
FHLB stock 2,138 2,138 1,249 1,249
Loans Receivable, net 147,658 144,004 107,177 109,813
Liabilities:
Deposits 237,852 236,859 236,248 239,726
Advances from Federal
Home Loan Bank 37,074 33,995 20,576 20,323
</TABLE>
F-17
<PAGE>
The estimated fair value of investment securities and mortgage-backed
securities are based on quoted market prices, dealer quotes and prices
obtained from independent pricing services. Although the FHLB stock is an
equity interest in an FHLB, it is carried at cost because it does not have a
readily determined fair value.
The fair value of loans, time deposits, and advances from the Federal Home
Loan Bank were based on data published by the OTS. The fair value of demand
deposits and savings accounts is the amount reported in the financial
statements.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The deferred income amounts of approximately $4,000 at
December 31, 1999 and 1998, on such off-balance sheet financial instruments
approximates their fair values.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1999 and 1998. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts since December 31, 1999 and 1998 and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
14. 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 and other consumer
loans and to purchase certain investments. The potential for interest rate
risk exists as a result of the shorter repricing period of the Company's
interest-sensitive liabilities compared to the generally longer repricing
period of interest-sensitive assets. In a rising rate environment
liabilities will reprice faster than assets, thereby reducing the market
value of long-term assets and net interest income. For this reason,
management regularly monitors the maturity structure of the Association's
assets and liabilities in order to measure this risk and enacts measures to
manage the volatility of future interest rate movements.
15. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Association established an ESOP for
the benefit of eligible employees. The ESOP purchased 303,474 shares of
common stock in the Conversion utilizing proceeds of a loan from the
Company. The loan will be repaid over a period of 15 years and is
collateralized by the common stock purchased by the ESOP. At December 31,
1999, 20,232 shares of the total ESOP were allocated to participants. The
Company accounts for its ESOP in accordance with AICPA Statement of Position
93-6, Employers Accounting for Employee Stock Ownership Plans, which
requires the Company to recognize compensation expense equal to the fair
value of the ESOP shares during the periods in which they become committed
to be released. To the extent that the fair value of the ESOP shares differs
from the cost of such shares, this differential will be charged or credited
to equity as additional paid-in capital. Management expects the recorded
amount of expense to fluctuate as continuing adjustments are made to reflect
changes in the fair value of the ESOP shares. The Company recorded
compensation and employee benefit expense related to the ESOP of $261,000
for the year ended December 31, 1999.
F-18
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of South Jersey Financial Corporation are as
follows:
<TABLE>
<CAPTION>
December 31,
1999
Statements of Financial Condition (In thousands)
<S> <C>
Assets
Cash and cash equivalents $ 1,829
Investment in subsidiary 44,105
Investment securities available for sale at fair value 2,721
Mortgage-backed securities available for sale at fair value 7,347
Other assets 1,524
--------
Total Assets $ 57,526
========
Liabilities and Shareholders' Equity
Liabilities -
Accounts payable and accrued expenses $ 278
--------
Shareholders' equity:
Common stock 38
Paid-in-capital in excess of par 36,265
Unearned ESOP shares (2,832)
Treasury stock (2,831)
Retained earnings - partially restricted 27,481
Accumulated other comprehensive loss (873)
--------
Total shareholders' equity 57,248
--------
Total Liabilities and Shareholders' Equity $ 57,526
========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
(Dollars in thousands)
<S> <C>
Statement of Income
Income:
Interest income $ 949
Interest expense 60
--------
Net Interest Income 889
--------
Other Income -
Equity in undistributed income of subsidiary 2,506
--------
Operating Expenses:
Other operating 629
Foundation contribution 2,811
--------
Total operating expenses 3,440
--------
Income Before Income Taxes (45)
Income Tax (Benefit) Expense (959)
--------
Net Income $ 914
========
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
(Dollars in thousands)
<S> <C>
Statement of Cash Flows
Operating Activities:
Net income $ 914
Amortization of premium/discounts on mortgage-backed securities, net (6)
ESOP expense 261
Changes in assets and liabilities which provided (used) cash:
Other assets (1,262)
Accounts payable and accrued expenses 278
-------
Net cash provided by operating activities 185
-------
Investing Activities:
Capital investment in subsidiary bank (15,214)
Increase in investment in subsidiary bank (2,506)
Purchase of:
Mortgage-backed securities (7,950)
Investment securities (3,000)
Maturing mortgage-backed securities 232
-------
Net cash used in investing activities (28,438)
-------
Financing Activities:
Purchase of treasury stock (2,831)
Dividends on common stock (297)
Net proceeds from issuance of common stock 33,210
-------
Net cash provided by financing activities 30,082
-------
Increase in Cash and Cash Equivalents 1,829
Cash and Cash Equivalents, beginning of year 0
-------
Cash and Cash Equivalents, end of year $ 1,829
=======
</TABLE>
17. ACQUISITION OF THE COMPANY
Pursuant to an Agreement and Plan of Merger dated as of March 15, 2000, by
and among the Company, Richmond County Financial Corp. ("Richmond County")
and Richmond County Acquisition, Inc. ("Acquisition Sub"), the Company has
agreed to merge with the Acquisition Sub, with the Company being the
surviving corporation. Immediately after this merger, the Association will
merge with Richmond County Savings Bank ("Richmond County Bank"), with
Richmond County Bank being the surviving institution. Under the merger
agreement, each outstanding share of the Company's common stock will
automatically become exchangeable for $20.00 in cash. The merger is subject
to approval of the holders of a majority of the outstanding stock of the
Company and to regulatory approval. It is anticipated that the transaction
will be submitted to a vote of the Company's shareholders in the second
quarter of the year.
F-21
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
----------------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
----------------------------------------------------------------------
The Company's Board of Directors currently consists of eight members
and is divided into three classes, each of which contains approximately
one-third of the Board. Six members of the Board are independent directors and
two are members of management. The directors are elected by the stockholders of
the Company for staggered three year terms, or until their successors are
elected and qualified.
Information regarding the directors is provided below. Unless otherwise
stated, each individual has held his current occupation for the past five years.
The age indicated in each individual's biography is as of December 31, 1999.
Except for Messrs. Seidman and Baer, the indicated period for service as a
director includes service as a director of the Association.
The following directors have terms ending in 2000:
Robert J. Colacicco has been employed with the Association since 1967 and has
served as President and Chief Executive Officer of the Association since 1971
and President and Chief Executive Officer of the Company since 1998. Mr.
Colacicco has been a member of the Board of Directors since 1976. Age 65.
Richard G. Mohrfeld is currently an employee of Mohrfeld-Petro, Inc. and was the
former President of Mohrfeld, Inc., heating oil distributors located in
Collingswood, New Jersey. Mr. Mohrfeld has been a member of the Board of
Directors since 1983. Age 54.
John V. Field has been a practicing attorney for the past 29 years. He is sole
shareholder in the firm of John V. Field, PA. In 1977, Mr. Field became General
Counsel of the Association. Mr. Field has been a Member of the Board of
Directors since 1998. Age 55
The following directors have terms ending in 2001:
Richard W. Culbertson, Jr. is a certified public accountant and a partner in the
firm of Bowman & Company LLP, Voorhees, New Jersey. Mr. Culbertson has been a
member of the Board of Directors since 1992 and has served as Chairman of the
Board since 1998. Age 55.
Ronald L. Woods is a representative of Lenny, Vermaat and Leonard, a real estate
brokerage firm located in Haddonfield, New Jersey. Mr. Woods has been a member
of the Board of Directors since 1998. Age 41.
The following directors have terms ending in 2002:
Gregory M. DiPaolo is Executive Vice President, Treasurer and Chief Operating
Officer of the Association and has been Executive Vice President and Chief
Operating Officer of the Company since 1998. Mr. DiPaolo has been employed by
the Association since 1973 and has been a member of the Board of Directors since
1982. Age 51.
Lawrence B. Seidman is an attorney and the manager of Seidman & Associates,
L.L.C. and Seidman & Associates II, L.L.C.; the President of Veteri Place Corp.,
the sole General Partner of Seidman Investment Partnership, LP and Seidman
Investment Partnership II, LP; manager of Federal Holdings, L.L.C.; and a
business consultant to certain corporations and individuals, including, but not
limited to, Kerrimatt, LP and Crown Associates, L.L.C. These entities
40
<PAGE>
are generally engaged in investing in publicly-traded securities. Mr. Seidman is
also a director of CNY Financial Corporation. Mr. Seidman is a former director
of Crestmont Financial Corporation, The Savings Bank of Rockland County and
Atlantic Gulf Corporation. Mr. Seidman has been a member of the Board of
Directors since 1999. Age 52
Richard Baer is President of Casper Partition Systems, Inc., a company that
refurbishes office partitions for retail sale, located in Newark, New Jersey.
Mr. Baer has been a member of the Board of Directors since 1999. Age 52.
Executive Officers Who Are Not Directors
Jane E. Brode joined the Association in 1972 and has served in various
positions since that time. In 1992, Ms. Brode became Senior Vice President. Ms.
Brode is responsible for the Association's retail savings department. Age 50.
Joseph M. Sidebotham joined the Association in 1979 and has been
Controller since 1980. In 1992, Mr. Sidebotham was promoted to Senior Vice
President. Mr. Sidebotham is responsible for regulatory reporting, monitoring
investments, MIS and the accounting and internal auditing functions of the
Association. Mr. Sidebotham has also been Chief Accounting Officer and Corporate
Secretary of the Company since 1998. Age 44.
Paul D. Wampler joined the Association in 1997 and is Senior Vice
President. Mr. Wampler is the Association's Chief Lending Officer and oversees
all mortgage and consumer lending activities. Age 40.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than 10% of
any registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Executive officers, directors
and greater than 10% stockholders are required by regulation to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of the reports it has received
and written representations provided to the Company from the individuals
required to file the reports, the Company believes that each of the Company's
executive officers and directors has complied with applicable reporting
requirements for transactions in South Jersey Financial Corporation's common
stock during the year ended December 31, 1999.
Item 10. Executive Compensation.
Director Compensation of the Association and the Company
All non-employee directors and director emeritus of the Association
receive an annual retainer of $9,500 a year, except that the Chairman of the
Board receives an annual retainer of $10,500. All non-employee directors and
director emeritus of the Association also receive $500 for each Board meeting
attended and $250 for each Committee meeting attended. Non-employee directors
and director emeritus of the Company receive an annual retainer of $3,500 and do
not receive additional fees for meetings of the Board of Directors of the
Company.
Consulting Agreement
On August 16, 1999, the Company entered into a consulting agreement
with Mr. Seidman. The agreement, which is for a one-year term, commenced on
August 16, 1999 and provided that Mr. Seidman be paid an amount of $45,000 for
consulting services to the Company.
41
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Company for services rendered in all capacities during
the years ended December 31, 1999, 1998 and 1997, to the Chief Executive Officer
and to executive officers of the Company who received salary and bonus in excess
of $100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term Compensation(2)
------------------------------
Annual Compensation(1) Awards Payouts
---------------------------------- ---------------------- ------
Other Restricted Securities
Name and Fiscal Annual Stock Underlying LTIP All Other
Principal Positions Year Salary Bonus Compensation(2) Awards Options/SARs Payouts Compensation(3)
- ------------------- ------ ---------- ------- ------------- -------- ------------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert J. Colacicco 1999 $170,435 $37,496 -- -- -- -- $ 51,036
President and Chief 1998 $153,331 $32,599 -- -- -- -- $ 44,884
Executive Officer 1997 $141,107 $31,044 -- -- -- -- $ 39,821
Gregory M. DiPaolo 1999 $142,730 $32,064 -- -- -- -- $ 37,894
Executive Vice President 1998 $128,410 $25,201 -- -- -- -- $ 27,851
Treasurer and 1997 $118,102 $25,982 -- -- -- -- $ 25,231
Chief Operating Officer
Jane E. Brode 1999 $ 94,328 14,147 -- -- -- -- $16,987
Senior Vice President
Savings
Joseph M. Sidebothan 1999 $ 87,422 $23,111 -- -- -- -- $16,932
Corporate Secretary and
Chief Accounting Officer
</TABLE>
(1) Under Annual Compensation, the column titled "Bonus" consists of Board
approved discretionary bonus. During 1999, Messrs. DiPaolo and Sidebotham
received Board approved discretionary bonuses of $2,000 and $10,000,
respectively, for their efforts in connection with the Association's mutual
to stock conversion transaction. In addition, a Board-approved
discretionary cash bonus for all Named Executive Officers for the year
ended December 31, 1999 was determined and paid in 2000.
(2) The aggregate amount of perquisites and other personal benefits was the
lesser of $50,000 or 10% of the total salary and bonus reported. For 1999,
1998 and 1997, the Company had no stock-related plans in existence.
(3) For 1999, other compensation consists of employer contributions of $30,000,
$29,429, $16,728 and $16,391, to the Association's money purchase pension
plan on behalf of Messrs. Colacicco, DiPaolo and Sidebotham and Ms. Brode,
respectively. For 1999, other compensation also includes the value of life
insurance premiums of $3,033, $1,005, $204 and $596 paid by the Association
on behalf of Messrs. Colacicco, DiPaolo and Sidebotham and Ms. Brode,
respectively. For 1999, other compensation also includes employer
contributions of $18,003 and $7,460 credited under the Company's
supplemental executive retirement plan for Messrs. Colacicco and DiPaolo,
respectively.
42
<PAGE>
Employment Agreements
Effective February 12, 1999, the Association entered into employment
agreements (collectively, the "Association Employment Agreements") with Messrs.
Colacicco, DiPaolo, Sidebotham and Ms. Brode, and the Company entered into
employment agreements with Messrs. Colacicco, DiPaolo and Sidebotham
(collectively, the "Company Employment Agreements") (individually, the
"Executive" and, collectively, the "Executives"). The employment agreements were
subject to the review and approval of the OTS. Review of compensation
arrangements by the OTS does not indicate, and should not be construed to
indicate, that the OTS has passed upon the merits of such arrangements. The
employment agreements are intended to ensure that the Association and the
Company will be able to maintain a stable and competent management base. The
continued success of the Association and the Company depends to a significant
degree on the skills and competence of the Executives.
The Association Employment Agreements provide for a three-year term for
Messrs. Colacicco and DiPaolo and a two-year term for Mr. Sidebotham and Ms.
Brode. The Association Employment Agreements provide that commencing on the
first anniversary date and continuing each anniversary date thereafter the Board
of Directors may extend the agreement for an additional year so that the
remaining term shall be three years, in the case of Messrs. Colacicco and
DiPaolo, and two years, in the case of Mr. Sidebotham and Ms. Brode, unless
written notice of non-renewal is given by the Board of Directors after
conducting a performance evaluation of the Executive. The Company Employment
Agreements provide for a three-year term for Messrs. Colacicco and DiPaolo and a
two-year term for Mr. Sidebotham. The terms of the Company Employment Agreements
shall be extended on a daily basis, unless written notice of non-renewal is
given by the Board of the Company. The Association and Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
In addition to the base salary, the employment agreements provide for, among
other things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing fringe benefits available to
similarly situated executive personnel. The employment agreements provide for
termination by the Association or the Company for cause (as defined in the
agreements) at any time. In the event the Association or the Company chooses to
terminate the Executive's employment for reasons other than for cause or, in the
event of the Executive's resignation from the Association and the Company upon:
(i) failure to re-elect the Executive to his current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Association or the Company; or (v)
a breach of the Employment Agreements by the Association or the Company, the
Executive or, in the event of death, the Executive's beneficiary would be
entitled to receive an amount generally equal to the remaining base salary and
bonus payments that would have been paid to the Executive during the remaining
term of the employment agreements. In addition, the Executive would receive a
payment attributable to the contribution that would have been made on the
Executive's behalf to any employee benefit plans of the Association or the
Company during the remaining term of the employment agreements, together with
the value of stock-based incentives previously awarded to the Executive. The
Association and the Company would also continue and pay for the Executive's
life, health and disability coverage for the remaining term of the employment
agreement. Upon any termination of the Executive, the Executive is subject to a
covenant not to compete with the Company or the Association for one year.
Under the agreements, if involuntary termination or voluntary
termination follows a change in control of the Association or the Company, the
Executive or, in the event of the Executive's death, the Executive's
beneficiary, would receive a severance payment generally equal to the greater
of: (i) the payments due for the remaining terms of the agreement, including the
value of stock-based incentives previously awarded to the Executive; or (ii)
three times the average of the five preceding taxable years' annual
compensation. The Association and the Company would also continue the
Executive's life, health, and disability coverage for thirty-six months, in the
case of Messrs. Colacicco and DiPaolo, and twenty-four months in the case of Mr.
Sidebotham and Ms. Brode. Notwithstanding that both agreements provide for a
severance payment in the event of a change in control, the Executive may receive
a severance payment under only one agreement. In the event of a change in
control of the Association or Company, the total amount of payments due under
the Employment Agreements, based solely on the base salaries paid to the
Executives, and excluding any benefits under any employee benefit plan which may
otherwise become payable, would equal approximately $1.6 million.
43
<PAGE>
Payments to the Executive under the Association Employment Agreements
are guaranteed by the Company in the event that payments or benefits are not
paid by the Association. Payment under the Company Employment Agreements would
be made by the Company. All reasonable costs and legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating to
the employment agreements will be paid by the Company, if the Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement. The employment agreements also provide that the Association and
Company shall indemnify the Executive to the fullest extent allowable under
federal, New Jersey and Delaware law, respectively.
Benefit Plans
Pension Plan. The Association sponsors the South Jersey Savings and
Loan Association Money Purchase Pension Plan (the "Pension Plan"). Generally,
employees of the Association become members of the Pension Plan upon the
completion of two years of service with the Association (as described in the
plan document) and the attainment of age twenty-one. The Association makes
annual contributions to the Association sufficient to fund retirement benefits
for participant's employees, as determined in accordance with a formula set
forth in the plan document. Specifically, the Pension Plan currently provides
that, subject to applicable limitations, the Association will make annual
contributions to the plan on behalf of each participant equal to 5.7% of the
participant's compensation in excess of the social security taxable wage base
(as described in the plan documents) and 13.5% of the participant's compensation
without regard to the social security taxable wage base. Participants are always
fully vested in benefits allocated to their accounts under the Pension Plan. In
general, benefits allocated to participant's accounts under the Pension Plan,
plus earnings thereon become distributable in the event of the death, attainment
of normal retirement age (as described in the plan document), or termination of
employment.
Supplemental Executive Retirement Plan. The Internal Revenue Code (the
"Code") limits the amount of compensation the Association may consider in
providing benefits under its tax-qualified retirement plans, such as the Pension
Plan and the Association's employee stock ownership plan (ESOP). The Code
further limits the amount of contributions and benefit accruals under such plans
on behalf of any employee. To provide benefits to make up for the reduction in
benefits flowing from these limits in connection with the Pension Plan, the
Association has adopted a non- qualified deferred compensation arrangement,
sometimes referred to as a "Supplemental Executive Retirement Plan" ("SERP"). In
connection with the Conversion, the Association amended the deferral
compensation plan to provide for benefits related to the ESOP. The SERP will
generally provide benefits to eligible individuals (designated by the Board of
Directors of the Association or its affiliates) that cannot be provided under
the Pension Plan and/or ESOP as a result of the limitations imposed by the Code,
but that would have been provided under the Pension Plan and/or ESOP but for
such limitations. In addition to providing for benefits lost under tax-qualified
plans as a result of limitations imposed by the Code, the SERP will also make up
lost ESOP benefits to designated individuals who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement of
an eligible individual or upon a change in control of the Association or the
Company prior to complete repayment of the ESOP Loan, the SERP will provide the
individual with a benefit equal to what the individual would have received under
the ESOP had he remained employed throughout the term of the ESOP or had the
ESOP not been terminated prior to the scheduled repayment of the ESOP loan. An
individual's benefits under the SERP will become payable upon the participant's
retirement (in accordance with the standard retirement policies of the
Association), upon the change in control of the Association or the Company, or
as determined under the ESOP and Pension Plan.
44
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners. The following table
sets forth information as to those persons believed by management to be
beneficial owners of more than 5% of the Company's outstanding shares of Common
Stock as of March 13, 2000 or as disclosed in certain reports received to date
regarding such ownership filed by such persons with the Company and with the
SEC, in accordance with Sections 13(d) and 13(g) of the Exchange Act. Other than
those persons listed below, the Company is not aware of any person, as such term
is defined in the Exchange Act, that owns more than 5% of the Company's Common
Stock as of March 13, 2000.
<TABLE>
<CAPTION>
Name and Address of
Title of Class Beneficial Owner Number of Shares Percent of Class
- ------------------------ -------------------------------------------- ------------------ ------------------
<S> <C> <C> <C>
Common Stock Seidman and Associates, L.L.C., 328,100(1) 9.6%
Seidman and Associates II, L.L.C.,
Seidman Investment Partnership, L.P.,
Seidman Investment Partnership II, L.P.
Lawrence B. Seidman, Kerrimatt, L.P.
Federal Holdings, L.L.C., Benchmark
Partners, L.P., Richard Whitman,
Lorraine DiPaolo
100 Misty Lane
Parsippany, New Jersey 07054
Common Stock South Jersey Savings and Loan Association 303,474(2) 8.9%
Employee Stock Ownership Plan
4651 Route 42
Turnersville, New Jersey 08012
Common Stock The South Jersey Savings Charitable Foundation 280,995(3) 8.2%
4651 Route 42
Turnersville, New Jersey 08012
Common Stock Wallace R. Weitz & Company 240,000(4) 7.0%
One Pacific Place
Suite 600
Omaha, NE 68124
</TABLE>
(1) Based on information disclosed by the group of reporting persons set forth
herein in a Schedule 13D filed with the SEC.
(2) Shares of Common Stock were acquired by the ESOP in the Association's
conversion. The ESOP Committee administers the ESOP. First Bankers Trust
Company, N.A. has been appointed as the corporate trustee for the ESOP
("ESOP Trustee"). The ESOP Trustee, subject to its fiduciary duty, must
vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. Under the ESOP, unallocated shares held
in a suspense account will be voted by the ESOP Trustee in a manner
calculated to most accurately reflect the instructions received from
participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA. As of March 13, 2000, 20,232
shares have been allocated and 283,242 shares remain unallocated.
(3) The Foundation was established and funded by the Company in connection with
the Association's Conversion with an amount of the Company's Common Stock
equal to 8.0% of the total amount of Common Stock sold in the Conversion.
The Foundation is a Delaware non-stock corporation and is dedicated to the
promotion of charitable purposes within the communities in which the
Association operates. The Foundation is governed by a board of directors
with four members, three of whom are directors or officers of the Company
or the Association. Pursuant to the terms of the contribution of Common
Stock, as mandated by the OTS, all shares of Common Stock held by the
Foundation must be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by shareholders of the
Company.
(4) Based on information disclosed by the reporting person set forth herein in
a Schedule 13G filed with the SEC on February 4, 2000.
45
<PAGE>
Security Ownership of Management. The following table sets forth as of
March 13, 2000 the number of shares of Common Stock beneficially owned by each
director, each Named Executive Officer and all directors and executive officers
as a group. Ownership information is based upon information furnished by the
respective individuals.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Title of Class Name Ownership(1) Class(2)
- --------------------------- -------------------------- ---------------- ------------
<S> <C> <C> <C>
Directors
Common Stock Arthur E. Armitage, Jr.(3) 15,443(4) *
Common Stock Richard Baer 1,000(4) *
Common Stock Robert J. Colacicco 33,436(5) *
Common Stock Richard W. Culbertston, Jr. 11,443(4) *
Common Stock Gregory M. DiPaolo 50,821(5) 1.5%
Common Stock John V. Field 25,443(4) *
Common Stock Richard G. Mohrfeld 20,443(4) *
Common Stock Lawrence B. Seidman(6) 328,100(4) 9.6%
Common Stock Ronald L. Woods 34,043(4) *
Named Executive Officers
(Who are not Directors)
Common Stock Jane E. Brode 19,400(5) *
Common Stock Joseph M. Sidebotham 13,900(5) *
Common Stock All Directors and Executive 564,007 16.5%
Officers as a Group (12
persons)
</TABLE>
* Does not exceed 1.0% of the Company's voting securities.
(1) Each person effectively exercises sole (or shares with spouse or other
immediate family members) voting or dispositive power as to shares
reported.
(2) As of March 13, 2000, there were 3,423,571 shares of Common Stock
outstanding.
(3) Mr. Armitage is a director of South Jersey Savings and Loan Association
only.
(4) Includes 5,443 shares awarded to each outside director under the South
Jersey Financial Corp, Inc. 2000 Restricted Stock Plan.
(5) Includes 18,236, 16,021, 7,500, 7,500 shares awarded to Messrs. Colacicco,
DiPaolo and Sidebotham and Ms. Brode respectively, under the South Jersey
Financial Corporation, Inc. 2000 Restricted Stock Plan.
(6) For further information concerning shares beneficially held by Mr. Seidman,
see "Security Ownership of Certain Beneficial Owners."
Item 12. Certain Relationships and Related Transactions.
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Association's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors.
The Association currently makes loans to its executive officers and
directors on the same terms and conditions offered to the general public. The
Association's policy provides that all loans made by the Association to its
executive officers and directors be made in the ordinary course of business, on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable features. As
of December 31, 1999, one of the Association's directors,
46
<PAGE>
Mr. Mohrfeld, had a residential first mortgage loan with the Association which
had an outstanding balance totaling $208,000. In addition, one of the
Association's directors, Mr. Woods, is the executor of an estate which has a
residential first mortgage loan with the Association which had an outstanding
balance totalling $69,000, at December 31, 1999. Such loans were made by the
Association in the ordinary course of business, with no favorable terms and such
loan does not involve more than the normal risk of collectibility or present
unfavorable features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, and holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
Other Transactions With Affiliates
The Company and the Association utilize the services of the law offices
of John V. Field, PA, of which Mr. Field, a director of the Company and the
Association, is the sole shareholder, for a variety of legal work relating to
the ordinary course of the Company's and Association's business. During 1999,
the Company and the Association made payments to Mr. Field's firm for legal
services totalling $34,000.
Item 13. Exhibits and Reports on Form 8-K.
- -------------------------------------------
(a) The following exhibits are filed as a part of this report:
Exhibit
Number
-------
3.1 Certificate of Incorporation of South Jersey Financial
Corporation, Inc. (1)
3.2 By-Laws of South Jersey Financial Corporation, Inc. (1)
4.0 Stock Certificate of South Jersey Financial
Corporation, Inc.(1)
10.3 Employment Agreement between South Jersey Savings and Loan
Association and Robert J. Colacicco(2)
10.4 Employment Agreement between South Jersey Savings and Loan
Association and Gregory M. DiPaolo(2)
10.5 Employment Agreement between South Jersey Savings and Loan
Association and Joseph M. Sidebotham(2)
10.6 Employment Agreement between South Jersey Savings and Loan
Association and Jane E. Brode(2)
10.8 Employment Agreement between South Jersey Financial
Corporation, Inc. and Robert J. Colacicco(2)
10.9 Employment Agreement between South Jersey Financial
Corporation, Inc. and Gregory M. DiPaolo(2)
10.10 Employment Agreement between South Jersey Financial
Corporation, Inc. and Joseph M. Sidebotham(2)
10.12 Form of South Jersey Savings and Loan Association Supplemental
Executive Retirement Plan (1)
10.13 South Jersey Financial Corporation, Inc. 2000 Stock Option
Plan (3)
10.14 South Jersey Financial Corporation, Inc. 2000 Restricted Stock
Plan (3)
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
99.0 Return on Equity and Asset Ratios
-----------------------------
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form SB-2, and any
amendments thereto, Registration No. 333-65519.
(2) Incorporated by reference into this document from the Exhibits to
the Registrant's Form 10-KSB, as filed with the Securities and
Exchange Commission on March 30, 1999.
(3) Incorporated by reference into this document from Appendices A and
B to the Proxy Statement for the Special Meeting of Shareholders
held on February 16, 2000, as filed with the Securities Exchange
Commission on January 4, 2000.
(b) Reports on Form 8-K.
On October 28, 1999, the Company filed an 8-K to declare a cash
dividend of $.09 per share to stockholders of record on November
10, 1999.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
South Jersey Financial Corporation, Inc.
By: /s/ Robert J. Colacicco Date: March 24, 2000
----------------------------------------
Robert J. Colacicco
President, Chief Executive Officer and Director
In accordance with the Exchange Act, 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/ Robert J. Colacicco President, Chief Executive March 24, 2000
- ------------------------------------------- Officer and Director
Robert J. Colacicco (principal executive
officer)
/s/ Gregory M. DiPaolo Executive Vice President, March 24, 2000
- ----------------------------------------- Treasurer, Chief Operating
Gregory M. DiPaolo Officer and Director (principal
financial officer)
/s/ Joseph M. Sidebotham Corporate Secretary and March 24, 2000
- ---------------------------------------- Chief Accounting Officer
Joseph M. Sidebotham (principal accounting officer)
/s/ Richard W. Culbertson, Jr. Director and Chairman of March 24, 2000
- ----------------------------------------- the Board
Richard W. Culbertson, Jr.
/s/ Richard Baer Director March 24, 2000
- -----------------------------------------
Richard Baer
/s/ John V. Field Director March 24, 2000
- ------------------------------------------
John V. Field
/s/ Richard G. Mohrfeld Director March 24, 2000
- -----------------------------------------
Richard G. Mohrfeld
/s/ Lawrence B. Seidman Director March 24, 2000
- ------------------------------------------
Lawrence B. Seidman
/s/ Ronald L. Woods Director March 24, 2000
- ------------------------------------------
Ronald L. Woods
</TABLE>
<PAGE>
Exhibit 11
South Jersey Financial Corporation, Inc.
Computation of Per Share Earnings
For the Year Ended December 31, 1999
(In thousands, except per share data)
Net income $ 914
==============
Average shares outstanding (1) 3,422,896
==============
Earnings per share (2) $0.20
==============
(1) Only the ESOP shares released in their respective periods were considered
outstanding for the purposes of the weighted average shares outstanding
calculation.
(2) Earnings per share, basic and diluted, are the same for the period and
represent data since becoming a public company on February 12, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTH JERSEY FINANCIAL CORPORATION, INC. AT AND FOR THE
YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,454
<INT-BEARING-DEPOSITS> 396
<FED-FUNDS-SOLD> 1,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,998
<INVESTMENTS-CARRYING> 124,483
<INVESTMENTS-MARKET> 119,323
<LOANS> 148,702
<ALLOWANCE> 1,044
<TOTAL-ASSETS> 334,473
<DEPOSITS> 237,852
<SHORT-TERM> 9,498
<LIABILITIES-OTHER> 2,299
<LONG-TERM> 27,576
0
0
<COMMON> 38
<OTHER-SE> 57,210
<TOTAL-LIABILITIES-AND-EQUITY> 334,473
<INTEREST-LOAN> 10,022
<INTEREST-INVEST> 11,856
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,878
<INTEREST-DEPOSIT> 9,920
<INTEREST-EXPENSE> 11,535
<INTEREST-INCOME-NET> 10,343
<LOAN-LOSSES> 155
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 9,392
<INCOME-PRETAX> 1,315
<INCOME-PRE-EXTRAORDINARY> 1,315
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 914
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.83
<LOANS-NON> 131
<LOANS-PAST> 86
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 409
<ALLOWANCE-OPEN> 698
<CHARGE-OFFS> 90
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 1,044
<ALLOWANCE-DOMESTIC> 1,044
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 346
</TABLE>
<PAGE>
EXHIBIT 99.0
Return on Equity and Asset Ratios
<TABLE>
<CAPTION>
At or for the year ended December 31,
----------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Return on average assets 0.28% 0.83% 0.93%
Return on average equity 1.63% 8.42% 9.62%
Average equity to average assets 17.15% 9.91% 9.65%
</TABLE>
For 1999, average balances were derived using average daily balances.
For 1998 and 1997, average balances are derived from average monthly balances.
The use of average monthly balances rather than average daily balances does not
result in any material differences in the above presentation. Results are based
on annual operating results, although the results applicable to periods prior to
February 12, 1999 represent the activity only of the Association.
