<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1 TO
FORM 10-SB
--------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES ACT OF 1934
SKYLANDS FINANCIAL CORPORATION
------------------------
(Name of Small Business Issuer in Its Charter)
NEW JERSEY 22-3644018
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
24-26 Crossroads Center, Independence Township, NJ 07840
------------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
908-850-9010
---------------------------
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which
To be so Registered Each Class Is to be Registered
-------------------------- ------------------------------
Common Stock, $2.50 par value NASDAQ
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<PAGE> 2
PART I
ITEM 1 -- BUSINESS
General
Skylands Financial Corporation (the "Company") is a New Jersey corporation
organized in February, 1999 at the direction of the Board of Directors of
Skylands Community Bank (the "Bank") for the purpose of acquiring all the
capital stock of the Bank (the "Acquisition"). As part of the Acquisition,
shareholders of the Bank will receive shares of the Company's common stock,
$2.50 par value per share (the "Common Stock"), in a ratio of one share of
Common Stock for each outstanding share of the common stock of the Bank, $2.50
par value per share (the "Bank Common Stock"). The Acquisition is subject to the
approval or non-objection of the New Jersey Department of Banking and Insurance
(the "Department") and the Board of Governors of the Federal Reserve System (the
"FRB"). Upon consummation of the Acquisition, the only significant asset of the
Company will be its investment in the Bank. The Company's main office is located
at 24-26 Crossroads Center, Independence Township, New Jersey 07840.
The Bank is a commercial bank formed under the laws of New Jersey on May 17,
1989. The Bank commenced operations on October 9, 1990.
As of December 31, 1998, the Bank Common Stock was held by approximately 731
holders of record. As described above, upon consummation of the Acquisition,
shareholders of the Bank will receive shares of the Common Stock in exchange for
their shares of Bank Common Stock. In addition, the Company will assume the
Bank's obligations under its outstanding options. See "COMPENSATION OF DIRECTORS
AND OFFICERS - Stock Option Plans" and "RECENT SALES OF SECURITIES."
The Bank operates from its main office at 24-26 Crossroads Center, Independence
Township, New Jersey and six branch offices located in Warren, Sussex and Morris
Counties, New Jersey. See "PROPERTIES."
The Bank engages in the general business of commercial banking and offers
traditional deposit services such as checking, savings and certificates of
deposit. For its commercial customers, the Bank offers loans for equipment,
working capital needs and commercial real estate as well as New Jersey Economic
Development Authority and Small Business Administration loans. The Bank also
bids for tax anticipation notes and bond anticipation notes. In consumer
lending, the Bank offers personal, automobile, credit card, home equity and home
improvement loans and makes one-to-four family residential real estate loans
available for its customers. The Bank believes it offers competitive rates for
its deposit and loan services, thereby enabling consumers and business entities
in its service areas to avail themselves of the Bank's credit and non-credit
<PAGE> 3
services. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Financial Condition -- Loan Portfolio."
The Bank structures its specific services and charges in a manner designed to
attract the business of small and medium-sized businesses and the professional
community, as well as that of individuals, in the Sussex County, Warren County
and Morris County, New Jersey area. As a general rule, specific banking services
are offered only on a basis believed to be profitable. Such services are charged
for fully unless other aspects of the account relationship provide sufficient
earnings to offset the cost of the services provided.
The Bank believes it offers competitive rates for its services, thereby enabling
consumers and business entities in its service area to avail themselves of the
Bank's credit and non-credit services. See "COMPETITION".
The Bank is fully computerized and uses the data processing services of The
National Bank of Sussex County. All Bank departments are automated, and the Bank
believes that the data processing services available to Bank customers compare
favorably with those of competing financial institutions. The Bank is also a
member of the MAC Money Access Service, a regional automated teller network
system.
As of March 9, 1999, the Bank had 58 full time employees and 15 part time
employees. The Bank's employees are not members of any collective bargaining
group.
Competition
The Bank competes with commercial banks, savings banks and savings and loan
associations, some of which have assets, capital and lending limits (ceilings on
the amount of credit a bank may provide a single customer that are linked to the
institution's capital) greater than the Bank. There are approximately eleven
such institutions in the Bank's services area. The Bank competes both in
attracting deposits and borrowers with these institutions, as well as with
regional and national insurance companies and non-bank banks, with regulated
small loan companies and local credit unions, and with regional and national
issuers of money market funds.
In addition to having established deposit bases and loan portfolios, some of
these institutions, particularly the large regional commercial and savings
banks, have the ability to finance extensive advertising campaigns and to
allocate considerable resources to locations and products perceived as
profitable. Significantly, these institutions have larger lending limits and, in
certain cases, lower funding costs (the price a bank must pay for deposits and
other borrowed monies used to make loans to customers). Many of these
institutions also offer certain services, such as trust services, which are not
currently offered by the Bank.
The Bank has sought to offer an alternative, community-oriented style of banking
in an area which at present is mainly dominated by these larger, statewide
institutions. The Bank has sought to be a positive force by assisting in the
development of the residential sector, by serving the needs of small and
medium-sized businesses and the local professional community, and by meeting the
<PAGE> 4
requirements of individuals residing, working and shopping in the Bank's service
areas by extending consumer loans and by offering depository services. The Bank
believes that the following attributes of the Bank have made the Bank attractive
to local business people and residents:
o Competitively priced services.
o Direct and easy access to the Bank's management by members of the
community, whether during or after business hours.
o Local conditions and needs are taken into account by the Bank when
reviewing loan applications and making other business decisions
affecting members of the community.
o Responsiveness of the Bank's personnel for requests for information
and services by depositors and others.
o Depositors' funds are invested in the community.
o Positive involvement of the Bank in the community affairs of Sussex,
Warren and Morris Counties.
Supervision and Regulation
As a New Jersey chartered commercial bank, the Bank is subject to the
regulation, supervision and control of the New Jersey Department of Banking and
Insurance. As an FDIC insured institution, the Bank is subject to regulation,
supervision and control of the FDIC, an agency of the federal government. The
regulations of the FDIC and the Department impact virtually all activities of
the Bank, including the minimum level of capital the Bank must maintain, the
ability of the Bank to pay dividends, the ability of the Bank to expand through
new branches or acquisitions and various other matters.
General -- Recent Regulatory Enactments
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Deposit
Act") became law. The primary purpose of the Deposit Act is to recapitalize the
Savings Association Insurance Fund of the FDIC (the "SAIF") by charging all SAIF
member institutions a one-time special assessment. The Deposit Act will lead to
equalization of the deposit insurance assessments between BIF and SAIF insured
institutions, and will also separate out from insurance assessments payments
required for debt service and principal repayment on bonds issued by the Federal
Finance Corporation ("FICO") in the mid-1980s to fund a portion of the thrift
bailout. Under the Deposit Act, BIF-insured institutions like the Bank will, for
the first time, be required to pay a portion of the obligations owed under the
FICO bonds. SAIF institutions will be required to pay 6.4 basis points on
assessed deposits while BIF institutions will only be required to pay 1.3 basis
points on assessed deposits. This disparity will stay in effect until such time
as the federal thrift and commercial bank
<PAGE> 5
charters are merged and the deposit insurance funds are thereafter merged. Under
the Deposit Act, this may occur by January 1, 1999. At that time, all federally
insured institutions should have the same total FDIC assessment.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Interstate Act") was enacted. The Interstate Act generally
enhances the ability of bank holding companies to conduct their banking business
across state borders. The Interstate Act has two main provisions. The first
provision generally provides that, commencing on September 29, 1995, bank
holding companies may acquire banks located in any state regardless of the
provisions of state law. These acquisitions are subject to certain restrictions,
including caps on the total percentage of deposits that a bank holding company
may control both nationally and in any single state. New Jersey law currently
allows interstate acquisitions by bank holding companies whose home state has
"reciprocal" legislation which would allow acquisitions by New Jersey-based bank
holding companies.
The second major provision of the Interstate Act permits, beginning on June 1,
1996, banks located in different states to merge and continue to operate as a
single institution in more than one state. States may, by legislation passed
before June 1, 1996, opt out of the interstate bank merger provisions of the
Interstate Act. In addition, states may elect to opt in and allow interstate
bank mergers prior to June 1, 1996.
A final provision of the Interstate Act permits banks located in one state to
establish new branches in another state without obtaining a separate bank
charter in that state, but only if the state in which the branch is located has
adopted legislation specifically allowing interstate de novo branching.
In April, 1996, the New Jersey legislature passed legislation which would permit
interstate bank mergers prior to June 1, 1996, provided that the home state of
the institution acquiring the New Jersey institution permits interstate mergers
prior to June 1, 1997. In addition, the legislation permits an out-of-state
institution to acquire an existing branch of a New Jersey-based institution, and
thereby conduct a business in New Jersey. The legislation does not permit
interstate de novo branches. This legislation is likely to enhance competition
in the New Jersey marketplace as bank holding companies located outside of New
Jersey become freer to acquire institutions located within the state of New
Jersey.
The Bank's Common Stock is registered under the Securities Exchange Act of 1934.
As a result, the Bank is subject to the FDIC's rules regarding, among other
things, the filing of periodic public reports, the solicitation of proxies, and
the conduct of tender offers.
Bank Regulation
Insurance of Deposits
The Bank's deposits are insured up to a maximum of $100,000 per depositor under
the Bank Insurance Fund (BIF). The Federal Deposit Insurance Corporation
Improvements Act of 1991 ("FDICIA") is applicable to depository institutions and
deposit insurance. FDICIA requires the FDIC to establish a risk-based assessment
system for all insured depository institutions. Under this
<PAGE> 6
legislation, the FDIC is required to establish an insurance premium assessment
system based upon: (I) the probability that the insurance fund will incur a loss
with respect to the institution, (II) the likely amount of the loss, and (III)
the revenue needs of the insurance fund. In compliance with this mandate, the
FDIC has developed a matrix that sets the assessment premium for a particular
institution in accordance with its capital level and overall rating by the
primary regulator. Under the matrix as currently in effect, the assessment rate
ranges from 0 to 27 basis points of assessed deposits. The Bank is also subject
to a quarterly FICO assessment.
Capital Adequacy Guidelines
The Bank is subject to capital adequacy guidelines promulgated by the FDIC. The
FDIC has issued regulations to define the adequacy of capital based upon the
sensitivity of assets and off-balance sheet exposures to risk factors. Four
categories of risk weights (0%, 20%, 50% and 100%) were established to be
applied to different types of balance sheet assets and off-balance sheet
exposures. The aggregate of the risk weighted items (risk-based assets) is the
denominator of the ratio, the numerator of which is defined risk-based capital.
Under the regulations, risk-based capital has been classified into two
categories. Tier 1 capital includes common and qualifying perpetual preferred
stockholders' equity, less goodwill. Tier 2 capital includes mandatory
convertible debt, allowance for loan losses, subject to certain limitations, and
certain subordinated and term debt securities. Total qualifying capital consists
of Tier 1 capital and Tier 2 capital; however, the amount of Tier 2 capital may
not exceed the amount of Tier 1 capital in the computation of total qualifying
capital. The minimum capital ratio required under the above formula was 4% for
Tier 1 capital and 8% for total qualifying capital. The Bank at December 31,
1998 maintained a Tier 1 capital ratio of 10.84% and total qualifying capital
ratio of 12.10%.
The FDIC has also issued leverage capital adequacy standards. Under these
standards, in addition to the risk-based capital ratios, a bank must also
maintain a ratio of Tier 1 capital (using the risk-based capital definition) to
total assets of at least 3%. Institutions which are not "top-rated" will be
expected to maintain a ratio 100 to 200 basis points above this ratio. The
Bank's leverage ratio at December 31, 1998 was 6.84%.
Bank Holding Company Regulation
The Company will be a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As a bank holding company,
the Company will be required to file with the Federal Reserve Board an annual
report and such additional information as the Board may require pursuant to the
BHCA. The Federal Reserve Board may also make examinations of the Company and
its subsidiaries.
A bank holding company is generally prohibited from engaging in, or acquiring
direct or indirect control of more than five percent of the outstanding voting
shares of any company engaged in, activities other than banking and those deemed
closely related to banking by the Federal Reserve Board. Notice to or review by
the Federal Reserve Board of such "closely related" activities is necessary
before the Company can engage in such activities.
<PAGE> 7
Federal Reserve Regulation "Y" sets out those activities which are regarded as
closely related to banking or managing or controlling banks and, thus, are
permissible activities that may be engaged in by bank holding companies subject
to approval by or notice to the Federal Reserve Board. These activities include,
among other things, operating savings associations, providing data processing
services, providing investment or financial advisory services, and, subject to
various restrictions, engaging in securities brokerage and underwriting
activities.
A holding company and its banking subsidiary are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or lease
or sale of any property or the furnishing of services.
In addition to Federal bank holding company regulation, the Company will be
required to register as a bank holding company with the New Jersey Department of
Banking and Insurance. The Company will be required to file copies of the
reports it files with the Federal banking and securities regulators with the
Department.
Federal Securities Regulation
Upon effectiveness of this Registration Statement, the Company will become a
reporting company under the Securities and Exchange Act of 1934 (the "34 Act")
and will therefore be required to file quarterly and annual reports, as well as
certain other material, with the SEC.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business
Skylands Community Bank is a commercial bank formed under the laws of New Jersey
on May 17, 1989, and which commenced operations on October 9, 1990. The Bank's
main office and operations center is located at 24-26 Crossroads Center, Route
517, Independence Township, Warren County, New Jersey 07840. The Bank currently
has six branches. They are located at Netcong (the "Netcong Branch"), Succasunna
(the "Roxbury Branch"), Oxford (the "Oxford Branch"), Lake Hopatcong (the
"Jefferson Branch"), Stanhope (the "Byram Branch") and Rockaway (the "Rockaway
Branch"). As a full-service community bank, the Bank believes that the
establishment of these branch offices is an important steep in the continued
growth of the Bank. The Bank believes that these branches give the Bank access
to new markets, which allow it to expand its deposit base and present new
lending opportunities for the Bank.
The Bank engages in the general business of commercial banking and offers
traditional deposit services such as checking, savings and certificates of
deposit. For its commercial customers, the Bank offers loans for equipment,
working capital needs and commercial real estate as well as New Jersey Economic
Development Authority and Small Business Administration loans. The Bank also
bids for tax anticipation notes and bond anticipation notes. In consumer
lending, the Bank offers personal, automobile, credit card, home equity and home
improvement loans and makes one-to-four family residential real estate loans
available for its customers. The Bank believes it offers competitive rates for
its deposit and loan services, thereby enabling consumers
<PAGE> 8
and business entities in its service areas to avail themselves of the Bank's
credit and non-credit services.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Bank's financial statements
and the notes relating thereto included herein. When necessary,
reclassifications have been made to prior years' data throughout the following
discussion and analysis for purposes of compatibility with 1998 data.
The following table presents selected financial data as of December 31, 1998,
1997, 1996, 1995 and 1994, respectively, and for the years then ended. This
table should be read in conjunction with the Bank's financial statements and the
notes thereto included herein.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
STATEMENT OF OPERATIONS DATA 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 7,367,000 $ 6,038,000 $ 4,525,000 $ 2,856,000 $ 2,233,000
Provision for Possible Loan and Lease 665,000 632,000 488,000 266,000 68,000
Losses
Net Interest Income after Provision for 6,702,000 5,406,000 4,037,000 2,590,000 2,165,000
Possible Loan and Lease Losses
Total Other Income 889,000 673,000 508,000 377,000 316,000
Total Other Expenses 4,727,000 3,838,000 3,325,000 2,533,000 1,870,000
Net Income $ 1,831,000 $ 1,424,000 $ 750,000 $ 270,000 $ 505,000
============ ============ ============ ============ ============
Basic Earnings per Common Share (1)(3) $ 0.78 $ 0.61 $ 0.32 $ 0.15 $ 0.31
Diluted Earnings per Common Share (1)(3) $ 0.74 $ 0.59 $ 0.32 $ 0.15 $ 0.31
Net Interest Margin 4.76% 4.86% 4.42% 3.76% 4.33%
<CAPTION>
At At At At At
BALANCE SHEET DATA 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $179,535,000 $147,088,000 $119,916,000 $ 99,587,000 $ 69,589,000
Total Loans 117,323,000 90,441,000 67,219,000 45,601,000 31,017,000
Allowance for Possible Loan and Lease (1,873,000) (1,374,000) (973,000) (600,000) (345,000)
Losses
Total Deposits 165,259,000 134,917,000 106,191,000 88,242,000 63,533,000
Total Shareholders' Equity $ 13,619,000 $ 11,694,000 $ 10,166,000 $ 9,557,000 $ 5,715,000
Book Value per Common Share (1) 5.74 4.98 4.35 4.09 3.59
Tangible Book Value per Common Share (1)(2) 5.06 4.23 3.61 3.23 4.16
Allowance for Possible Loan and Lease 1.60% 1.52% 1.45% 1.32% 1.11%
Losses as a % of Total Loans
Allowance for Possible Loan and Lease 195% 716% 388% 84% 184%
Losses as a % of Non-accrual Loans
Allowance for Possible Loan and Lease Losses 140% 221% 132% 84% 184%
as a % of Non-accrual and Impaired Loans
Leverage Ratio 6.84% 6.81% 7.02% 7.78% 9.50%
</TABLE>
(1) All per share data has been restated to reflect the five percent stock
dividends paid in the second quarter of fiscal year 1994 and the first
quarter of fiscal year 1998.
(2) Tangible book value per common share is adjusted for the impact of
intangible assets (primarily the core deposit Intangible) and the
accumulated comprehensive income (loss).
(3) In 1997 the Company adopted SFAS No. 128 "Earnings Per Share." All Prior
year end earnings per share data has been restated to conform to this new
pronouncement.
<PAGE> 9
Financial Overview
During 1998, the Bank continued to realize the benefits of having expanded
operations into new market areas. The expanded operations and market areas
reflect the branch openings in Jefferson, Byram and Rockaway in 1997 and 1998.
These additional office locations resulted in additional deposits to fund
increased loan demand. The increased loan demand enabled the Bank to increase
the percentage of loans to assets and loans to deposit at December 31, 1998 to
65.3% and 71.0%, respectively, from 61.5% and 67.0% respectively at December 31,
1997. The security portfolio in turn, declined to 28.1% of total assets at
December 31, 1998 versus 31.9% of total assets at December 31, 1997. These
changes in the composition of the Bank's balance sheet contributed to the
positive financial results that the Bank recorded in 1998. In 1998, the Bank
reported net income of $1,831,000 as compared to $1,424,000 in 1997 and $750,000
in 1996. This represents annual increases in net income of 28.6% and 89.9% for
1998 and 1997, respectively. Net interest income before the loan loss provision
increased by $1,328,000 or 22.0% to $7,367,000 at December 31, 1998. The
provision for possible loan losses was $665,000 in 1998 as compared to $632,000
in 1997 and $488,000 in 1996. These provisions increased the year end balance of
the allowance for possible loan and lease losses (ALLL) for each period. The
increase in the ALLL is primarily attributable to increases in total loans and
also from an increase in non-performing assets during the year. The Bank's ratio
of the allowance for possible loan and lease losses to total loans at December
31, 1998 was 1.60% compared to 1.52% in 1997 and 1.45% in 1996.
Total assets as of December 31, 1998 were $179,535,000, as compared to
$147,088,000 at year-end 1997 and $119,916,000 at year-end 1996, for increases
of 22.1% and 22.7%, respectively. Total loans as of December 31, 1998 were
$117,323,000, as compared to $90,441,000 in 1997 and $67,219,000 in 1996, for
increases of 29.7% and 34.5%, respectively. Total deposits as of December 31,
1998 were $165,259,000 as compared to $134,917,000 in 1997 and $106,191,000 in
1996, for increases of 22.5% and 27.1%, respectively. The increases in total
assets, loans and deposits were attributable in large part to the continued
growth of the main office in Independence and the existing branches at Netcong,
Roxbury, Oxford and Jefferson, together with the opening of the Byram branch in
June of 1998. The opening of the Rockaway branch in December of 1998 did not
have a material impact on the 1998 financial results. Although the percentage of
non-accrual loans to total loans increased to 0.8% at December 31, 1998, versus
0.2% in 1997, asset quality remained strong.
Results of Operations
The Bank's results of operations depend primarily on its net interest income,
which is the difference between the interest earned on interest-earning assets
and the interest paid on funds borrowed to support those assets, such as
deposits. Net interest income is a function of the difference between the
weighted average rate received on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities, as well as the average level
of interest-bearing assets as compared with that of interest-bearing
liabilities. In 1998 the weighted average rate received on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities
declined. Net interest income was favorably impacted by the increase noted in
the loan
<PAGE> 10
portfolio, which is the primary source of interest income to the Bank. Net
income is also affected by the amount of non-interest income and other expenses.
In 1998, the Bank's net interest income was $7,367,000, as compared to
$6,038,000 in 1997, an increase of 22.0%. Interest income increased $2,174,000,
or 21.0% in 1998, primarily due to the increase in the Bank's average earning
assets, principally the loan and the investment portfolios. The growth in total
loans was the result of an ongoing effort by the Bank to generate new loans. The
investment portfolio is used primarily to enhance the Bank's yield on funds that
are in excess of the Bank's loan demand and to provide liquidity for future loan
growth or decreases in deposits. Interest expense increased by $845,000 or 19.5%
in 1998 versus an increase in interest expense of $673,000, or 18.4%, in 1997.
The Bank's increase in net interest income during 1998 was partially offset by
an increase of $889,000, or 23.2%, in other expenses resulting primarily from
the expansion of the branch network, an increase of $33,000, or 5.2%, in the
provision for loan losses and augmented by an increase in other income of
$216,000 or 32.1%.
In 1997, the Bank's net interest income was $6,038,000 as compared to $4,525,000
in 1996, an increase of $1,513,000, or 33.4%. Interest income increased
$2,186,000, or 26.7%, in 1997, primarily due to the increases in the Bank's loan
portfolio, and secondarily by increases in the investment portfolio. Interest
expense rose $673,000, or 18.4%, in 1997 when compared to 1996. The Bank's
increase in net interest income during 1997 was partially offset by increases of
$513,000, or 15.4%, in other expenses, an increase of $144,000, or 29.5%, in the
provision for loan losses and augmented by an increase in other income of
$165,000, or 32.5%.
Net Interest Income Summary
The following table reflects the components of the Bank's net interest income
for 1998 and 1997, respectively. They are: (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average rates earned
on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) the Bank's net interest differential (i.e., the difference
between the average rate earned on interest-earning assets and the average rate
paid on interest-bearing liabilities) and (5) the Bank's net interest margin on
interest-earning assets (i.e., net interest income divided by average
interest-earning assets). Loan balances include non-performing loans, which have
the effect of reducing the average rates earned on the Bank's loan portfolio.
All averages disclosed herein are daily averages.
<PAGE> 11
COMPARATIVE AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
1998 Average 1997 Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------------------------------------------------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Taxable Loans (net of unearned
Income) $102,399 $ 9,276 9.06% $ 78,595 $ 7,309 9.30%
Tax exempt loans 982 98 10.02% 930 72 7.72%
Taxable investment securities 48,201 3,029 6.28% 41,279 2,802 6.79%
Interest-bearing deposits at banks 893 41 4.59% 583 36 6.17%
Federal funds sold 2,375 130 5.47% 2,923 164 5.61%
-------- ------- ----- -------- ------- ----
Total interest earning assets 154,850 12,574 8.12% 124,310 10,383 8.35%
-------- ------- ----- -------- ------- ----
Non-interest earning assets 11,170 9,746
Allowance for possible loan and lease losses (1,558) (1,170)
Total Assets $164,462 $132,886
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Interest -bearing liabilities
NOW deposits $ 19,336 $ 344 1.78% $ 13,815 $ 285 2.06%
Savings deposits 44,695 1,643 3.68% 30,874 1,037 3.36%
Time deposits 57,283 3,143 5.49% 51,538 2,862 5.55%
Borrowings 767 40 5.22% 2,422 141 5.82%
-------- ------- ----- -------- ------- ----
Total interest-bearing liabilities 122,081 5,170 4.23% 98,649 4,325 4.38%
-------- ------- ----- -------- ------- ----
Non-interest-bearing liabilities:
Demand Deposits 29,116 22,876
Other Liabilities 750 645
-------- --------
Total non-interest-bearing liabilities 29,866 23,521
-------- --------
Shareholders' Equity: 12,515 10,716
-------- --------
Total liabilities and shareholders' equity $164,462 $132,886
======== ========
Tax equivalent adjustment (37) (20)
------- -------
Net interest differential $ 7,367 3.89% $ 6,038 3.97%
======= =======
Net yield on interest-earning assets 4.76% 4.86%
</TABLE>
<PAGE> 12
Net interest income also may be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table
demonstrates, for the years indicated the effect on interest income and interest
expense by changes in the average volume of interest-earning assets and
interest-bearing liabilities and by the changes in their corresponding yield and
costs.
<TABLE>
<CAPTION>
1998 versus 1997 1997 versus 1996
- -------------------------------------------------------------------------------------------------------
Total Total
Increase (Decrease) Average Average Increase Average Average Increase
Due To Change In: Volume Rate (Decrease) Volume Rate (Decrease)
- -------------------------------------------------------------------------------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Income:
Taxable Loans (net of unearned
Income) $ 2,156 $ (189) $ 1,967 $ 1,964 $ 7 $ 1,971
Tax exempt loans 5 21 26 42 9 51
Taxable investment securities 435 (208) 227 24 137 161
Interest-bearing deposits at banks 14 (9) 5 6 7 13
Federal funds sold (30) (4) (34) (4) 9 5
------- ------- ------- ------- ------- -------
Total interest-income 2,580 (389) 2,191 2,032 169 2,201
------- ------- ------- ------- ------- -------
Interest Expense
NOW deposits 98 (39) 59 83 37 120
Savings deposits 508 98 606 175 (25) 150
Time deposits 315 (34) 281 290 (7) 283
Total borrowings (86) (15) (101) 120 0 120
------- ------- ------- ------- ------- -------
Total interest expense 835 10 845 668 5 673
------- ------- ------- ------- ------- -------
Net interest income $ 1,745 $ (399) $ 1,346 $ 1,364 $ 164 $ 1,528
======= ======= ======= ======= ======= =======
</TABLE>
In 1998, the Bank's growth in net interest income was significant. It increased
by $1,329,000, or 22.0%. The increase in the average volume of interest earning
assets and, in particular, the growth of the loan portfolio both in actual
volume and also as a percentage of total earning assets was the primary reason
for this growth. The Net Yield on Interest-Earning Assets declined for the year
as the yield on earning assets declined due to reductions in the interest rate
environment and also due to the competitive pressures experienced with loan
pricing. Given the decline of 10 basis points in the Net Yield on
Interest-Earning Assets, it remains at 4.76% for 1998.
Interest income from tax exempt loans in the foregoing tables is calculated on a
tax equivalent basis using a 38% marginal tax rate.
Interest-Earning Assets
Total average interest-earning assets in 1998 increased $30,540,000, or 24.6%,
to $154,850,000 as compared to $124,310,000 in 1997. In 1997, total average
interest earning assets had increased $22,037,000, or 21.5%, as compared to
$102,273,000 in 1996. Growth in earning assets was primarily attributable to
increases in average loan balances which grew $23,856,000 or 30.0% in 1998
versus 1997, and $21,659,000 or 37.4% in 1997 versus 1996. The other major
component contributing to the increase in interest earning assets was the growth
of the investment portfolio. The growth in average volume was $6,922,000 or
16.8% over 1997 versus growth of $354,000, or .09%, in average volume in 1997
over 1996. In 1998 the ratio of average earning assets to average total assets
increased to 94.2% versus 93.5% and 93.1% in 1997 and 1996 respectively.
The growth of the loan portfolio contributed significantly to growth to the
increase in interest income. Income derived from increases in average taxable
loan volume as displayed in the table above was
<PAGE> 13
$2,156,000. Income derived from increases in average volume of taxable
investment securities was $435,000. This was partially offset by declines in the
yields associated with these categories which amounted to $397,000. The net
effect, however, is a significant increase in the Bank's interest income, which
has a positive impact on the entire income statement.
Interest-Bearing Liabilities
Total average interest-bearing liabilities increased to $122,081,000 in 1998, a
23.8% increase over the $98,649,000 average balance in 1997. In 1997, average
interest-bearing liabilities increased 20.1% over the average balance of
$82,131,000 in 1996. Interest expense during these same periods was $5,170,000
in 1998, $4,325,000 in 1997 and $3,652,000 in 1996. Increases in interest
expense, when comparing 1998 to 1996 and 1997 to 1996, were primarily
attributable to increases in the average balances maintained on deposit.
In 1998, the Bank's cost of funds was 4.23 %, as compared to 4.38% in 1997 and
4.45% in 1996. The decline in the Bank's cost of funds in 1998 was attributable
to closely monitoring the interest rates paid on deposits both by the Bank and
the competition in the Bank's market area and interest rate changes in the
market. The Bank acted promptly to change interest rates as the local and
national market changed and as the Bank's earning assets also repriced. Of the
total increase in interest expense of $845,000, only $10,000 is attributable to
interest rate increases. The average cost of interest bearing liabilities
declined in all categories, with the exception of savings deposits. The
percentage of certificates of deposit, the most expensive category of deposits,
as compared to total interest bearing deposits declined in 1998 with a
corresponding increase in the less expensive deposits as a percentage of total
deposits.
Other Income
Although not as significant as the increase in net interest income in its impact
on the bank's results of operations, other income, which is primarily
attributable to service fees received from deposit accounts, grew to $889,000 in
1998, as compared to $673,000 in 1997. This represented a gain of $216,000, or
32.1%. In 1997, other income grew $165,000 over the total of $508,000 in 1996,
an increase of 32.5%. The 1998 increase over 1997 includes net securities gains
of $62,000, versus losses of $10,000 recorded in 1997. Excluding securities
transactions, other income increased by $144,000, or 21.1%. This increase
further reinforces the gains in other income recorded in 1998 and illustrates
the increased earnings generated from both services and fees related to deposit
accounts and other fee income activities resulting from the overall expansion of
the Bank's customer base. It is believed that other income will continue to grow
as the Bank expands into new market areas and current markets continue to grow.
Other Expenses
Due to significant increases in the Bank's asset size, customer base and
the increase in the number of branches, other expenses increased in 1998. In
1998, the Jefferson branch was open for the full year versus five weeks in 1997
and the Byram Branch opened in mid- June of 1998. The Rockaway Branch opened in
late December 1998 and did not impact the Bank's results significantly for 1998.
The increase in Total Other Expenses in 1998 was $889,000 or 23.2% versus an
increase of $513,000 or 15.4% in 1997. The staff required to service the branch
locations and provide support service to the customer base impacted the increase
in salaries and benefits, which at $2,283,000 in 1998 increased by $497,000 or
27.8% versus total expense of $1,786,000 and an increase of $220,000 or 14% in
1997. Full time equivalent employees increased from 47 at December 31, 1997 to
60.5 at December 31, 1998, primarily due to the additional staff required to
service the Jefferson, Byram and Rockaway branches and also by additions to
support staff required to continue to provide superior customer service.
Occupancy
<PAGE> 14
expense increased by $119,000 to $467,000 in 1998. Management believes that
future increases in occupancy expense are inevitable, particularly with the
continued expansion of the branch network. Data processing fees were $251,000
for the year, while the cost of FDIC insurance increased to $16,000 as a result
of growth in the deposit base. Examination, audit and legal fees, and
consulting expenses increased by 92,000 and 35,000, respectively, primarily due
to certain non-recurring expenses. During 1998, the Bank incurred $32,000 in
expenses associated with the maintenance and disposition of Other Real Estate
Owned. This compares to expenses of $74,000 incurred in 1997 for a decrease of
$42,000 or 56.8% in this category.
Deposits
Deposits are the Bank's primary source of funds. The Bank offers a variety
of deposit accounts, and seeks to obtain its deposits primarily from the
communities it serves. In 1998, the Bank experienced growth in average deposit
balances of $31,327,000, or 26.3%, when compared to 1997. In 1997, the Bank
experienced growth in average deposits of $19,623,000, or 19.7%, when compared
to 1996. The growth in average deposits experienced in 1998 was accomplished
through deposits received at the Jefferson and Byram branches and increases in
deposits at the Bank's existing offices. The deposit increases are primarily the
result of the Bank's ongoing emphasis on customer service, extended hours of
operation, competitive rate structures and selective marketing. The Bank offered
an introductory interest rate on savings accounts at its Jefferson and Byram
branches that contributed to the growth of those branches and savings accounts
in general.
The components of the increase in average deposits when comparing 1998 to
1997, include average NOW deposits which grew $5,521,000, or 40.0%, average
savings deposits which grew $13,821,000, or 44.8%, average time deposits which
grew $5,745,000, or 11.1%. Average demand deposits, which are non-interest
bearing, grew $6,240,000, or 27.3%. During the period of 1997 to 1996, average
NOW deposits grew 41.3% or $4,035,000, average savings deposits grew 20.2%, or
$5,197,000, average time deposits grew 11.3%, or $5,226,000, and average demand
deposits grew 29.2%, or $5,165,000. Management believes its demand deposit
account has attracted depositors because it is offered free of monthly service
charges. Over the past three years, the aggregate amount of average
interest-bearing deposits has been approximately 81% of average total deposits.
Average municipal deposits in 1998, 1997 and 1996 were $16,571,000, $12,431,000
and $9,190,000, respectively. As of December 31, 1998, the Bank had no foreign
deposits.
The average amounts of deposits and average rates paid on deposits for
1998 and 1997, respectively, are summarized below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------------------------------------------------
(in thousands, except
percentages)
<S> <C> <C> <C> <C>
Demand deposits $ 29,116 -- $ 22,876 --
NOW deposits 19,336 1.78% 13,815 2.06%
Savings deposits 44,695 3.68% 30,874 3.36%
Time deposits 57,283 5.49% 51,538 5.55%
-------- --------
Total $150,430 $119,103
========= ========
</TABLE>
<PAGE> 15
The Bank does not actively solicit short-term deposits of $100,000 or more
because of the liquidity risks posed by such deposits. The following table
summarizes the maturity distribution of certificates of deposit of $100,000 or
more as of December 31, 1998:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Time deposits ($100,000 and over)
Three months or less $ 6,083
Over three months through twelve months 4,483
Over twelve months 1,282
-------
Total $11,848
=======
</TABLE>
Short Term Borrowings
At December 31, 1998, the Bank had no borrowed funds. Short-term borrowings are
used, when required, to meet daily liquidity needs for a specific period of
time.
Loan Portfolio
The Bank's loan portfolio at December 31, 1998 totaled $117,323,000, as compared
to $90,441,000 and $67,219,000 at December 31, 1997 and 1996, respectively.
Total loans at December 31,1998 represented an increase of $26,882,000, or
29.7%, when compared to year-end 1997. Total loans at year-end 1997 represented
an increase of $23,222,000, or 34.5%, when compared to year-end 1996.
The Bank's loan portfolio consists of commercial and industrial loans, real
estate loans and consumer loans. Commercial and industrial loans are made for
the purpose of providing working capital, financing the purchase of equipment or
inventory and for other business purposes. Real estate loans consist of loans
secured by commercial or residential real property and loans for the
construction of commercial and residential real property. Consumer loans are
made for the purpose of financing the purchase of consumer goods, home
improvements, and other personal needs, and are generally secured by the
personal property being purchased.
The Bank's loans are primarily to businesses and individuals located in
northwest New Jersey. The Bank has not made any loans to borrowers outside the
United States. Commercial lending activities are focused primarily on lending to
small and middle-sized corporate borrowers engaged in various businesses. The
Bank believes that certain of the same factors which have contributed to its
increase in deposits, i.e., customer service, competitive rate structures and
selective marketing, have enabled the Bank to gain market entry to local loans.
Bank mergers and lending curtailments at the larger banks have also contributed
to the Bank's efforts to attract borrowers.
The following table sets forth the classification of the Bank's loans by
major category as of December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Loan Classifications
1998 1997
---------------------------
(in thousands)
<S> <C> <C>
Commercial and industrial $ 47,708 $ 34,204
Real Estate -
Nonresidential properties 22,860 25,660
Residential properties 40,117 24,606
Installment loans to individuals 6,638 5,971
-------- --------
Total Loans $117,323 $ 90,441
======== ========
</TABLE>
<PAGE> 16
The following table sets forth fixed and adjustable rate loans as of December
31, 1998 in terms of interest rate sensitivity:
<TABLE>
<CAPTION>
Fixed & Adjustable Rate loans Within 1-5 After
(in thousands) 1 Year Years 5 Years Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans with fixed rate $ 3,571 $36,532 $29,067 $ 69,170
Loans with variable rate 39,634 8,519 0 48,153
------- ------- ------- --------
Total Loans $43,205 $45,051 $29,067 $117,323
======= ======= ======= ========
</TABLE>
Asset Quality
The Bank's principal earning assets are its loans. Inherent in the lending
function is the risk of deterioration in the borrowers' ability to repay their
loan under their existing loan agreement.
Non-performing assets include loans that are not accruing interest (non-accruing
loans) as a result of principal or interest being in default for a period of 90
days or more. When a loan is classified as non-accrual, interest accruals
discontinue and all past due interest, including interest applicable to prior
years, is reversed and charged against current income. Until the loan becomes
current, any payments received from the borrower are applied to outstanding
principal until such time as management determines that the financial condition
of the borrower and other factors merit recognition of such payments as
interest.
Non performing assets also include the Bank's holdings in other real estate
owned ("OREO"). At December 31, 1998 the Bank, through foreclosure, had
transferred one loan from non-accrual status to OREO with a balance of $105,000.
This property was commercial property. All amounts, when transferred to OREO,
are done at the lesser of the recorded loan balance or the fair value of the
property net of its related cost to sell. Any write-downs to the loan balance
required at the time the loan is transferred to OREO are recorded as a
charge-off against the allowance for possible loan and lease losses. Charge-offs
resulting from declines in the fair value of OREO properties subsequent to the
initial transfer from loans are expensed and included in other operating
expenses. In addition, costs associated with maintaining OREO properties
including utilities, taxes, and general repairs and maintenance are expensed as
incurred. It is the Bank's intent to dispose of OREO property as expeditiously
as possible at a value considered fair given current market conditions and
circumstances surrounding the sale. In 1998, the Bank incurred expenses related
to OREO properties of $32,000, inclusive of a loss of $6,000 on the sale of an
OREO property. The Bank had two OREO properties at December 31, 1997 totaling
$266,000, and three OREO properties at December 31, 1996, totaling $503,000.
Accounting standards require that a loan be recognized as impaired when it is
probable that all amounts will not be collected in accordance with the original
contracted terms of the loan agreement. At December 31, 1998 and 1997, impaired
loans consisted of non-accrual loans and one loan totaling $383,000 in 1998 and
$430,000 in 1997 that was previously on a non-performing status and which had
been renegotiated by the Bank in the fourth quarter 1996. At December 31, 1998
and 1997 the loan was performing in accordance with the agreed upon terms. The
loan has been returned to a performing status.
The Bank attempts to minimize overall credit risk through loan diversification
and its loan approval procedures. The Bank's due diligence begins at the time a
borrower and the Bank begin to discuss the origination of a loan. Documentation,
including a borrower's credit history, materials establishing the value and
liquidity of potential collateral, the purpose of the loan, the source and
timing of the repayment
<PAGE> 17
of the loan, and other factors are analyzed before a loan is submitted for
approval. Loans made are also subject to periodic review. See "Allowance for
loan and lease losses" below.
The following table sets forth the total of non-performing assets as of December
31, 1998 and 1997, respectively:
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Non-accrual loans $ 959 $ 192
Impaired loans - performing in
accordance with renegotiated terms 383 430
------ ------
Total non-accrual and impaired loans 1,342 622
Other real estate owned 105 266
------ ------
Total non-performing and
impaired assets $1,447 $ 888
====== ======
Allowance for possible
loan and lease losses
as a percentage of non-accrual loans 195% 716%
Allowance for possible loan and lease losses
as a percentage of non-accrual and
impaired loans 140% 221%
</TABLE>
The following sets forth the gross interest income that would have been
recorded during the 1998 fiscal year had non-accruing loans been current and the
amount of interest income actually recognized on these loans:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Contractual interest due $ 80,000
Interest recognized 8,000
</TABLE>
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established to provide for
potential losses in the Bank's loan portfolio and off balance sheet risks, such
as unused lines of credit and letters of credit. As of December 31, 1998, the
Bank has established $1,873,000 as an allowance for possible loan and lease
losses, as compared to an allowance of $1,374,000 as of December 31, 1997 and
an allowance of $973,000 as of December 31, 1996. The increase in the allowance
is primarily due to an increase in the Bank's total loan portfolio. It should
also be noted that this increase has occurred in the Bank's commercial loan
area which is usually a higher risk area. The growth on the ALLL was also
influenced by an increase in non-performing loans. However, at 0.28% of total
loans, the ratio of non-performing loans to total loans remains within the
Bank's peer group level. The Bank maintains an allowance for possible loan and
lease losses at a level considered by management to be adequate to cover the
inherent risks of loan loss associated with its loan portfolio, although actual
losses may vary from current estimates.
Risks within the loan portfolio are analyzed on a continuous basis by the
Bank's officers and the Bank's Audit Committee. A risk system, consisting of
multiple grading categories, is utilized as an analytical tool to assess risk
and appropriate reserves. In its internal loan review process, loans may be
classified to indicate that an increased level of monitoring is required and
for which, reserves may be allocated. Along with the risk system, management
further evaluates risk characteristics of the loan portfolio under current and
anticipated economic conditions and
<PAGE> 18
considers such factors as the financial condition of the borrower, past and
expected loss experience, and other factors management feels deserve recognition
in establishing an appropriate reserve. These estimates are reviewed at least
quarterly, and, as adjustments become necessary, they are realized in the
periods in which they become known. Additions to the allowance are made by
provisions charged to expense and the allowance is reduced by net charge-offs
(i.e., loans judged to be uncollectible and charged against the reserve, less
any recoveries on such loans).
The following is a summary of the reconciliation of the allowance for loan
and lease losses for fiscal years 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Balance at beginning of year $ 1,374 $ 973
Recoveries:
Commercial 15 1
Installment 4 10
Charge-offs:
Commercial (164) (207)
Installment (21) (35)
Provision charged to expense 665 632
------- -------
Balance of allowance at end of year $ 1,873 $ 1,374
======= =======
Ratio of net charge-offs to average
loans outstanding 0.16% 0.29%
</TABLE>
The following table sets forth, for each of the Bank's major lending areas, the
amount and percentage of the Bank's allowance for loan and lease losses
attributable to such category, and the percentage of total loans represented by
such category, as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
12/31/98 12/31/97
- ----------------------------------------------------------------------------------------------
% of % of % of % of
Amount ALLL Total Loans Amount ALLL Total Loans
- ----------------------------------------------------------------------------------------------
(in thousands, except
percentages)
<S> <C> <C> <C> <C> <C> <C>
Balance applicable to:
Commercial and industrial $ 754 40.26% 40.66% $ 568 41.34% 37.81%
Real estate -
Non-residential properties 540 28.83% 15.44% 431 31.37% 22.93%
Residential properties 54 2.88% 34.19% 36 2.62% 27.21%
Construction 10 0.53% 4.05% 10 0.73% 5.45%
Consumer 67 3.58% 5.66% 45 3.28% 6.60%
------ ------ ------ ------ ------ ------
Subtotal 1,425 76.08% 100.00% 1,090 79.34% 100.00%
------ ------ ------ ------ ------ ------
Impaired loan valuation
Allowance in accordance
with SFAS 114 166 8.86% 0.00% 116 8.44% 0.00%
------ ------ ------ ------ ------ ------
Unallocated reserves 282 15.06% 0.00% 168 12.22% 0.00%
------ ------ ------ ------ ------ ------
Total $1,873 100.00% 100.00% $1,374 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 19
Securities
The Bank maintains a securities portfolio to fund increases in loans or
decreases in deposits and to meet other liquidity needs. The portfolio is
composed of U.S. Treasury Securities, obligations of U.S. Government Agencies
and equity securities. The Bank does not engage in trading activities.
The following table sets forth the carrying value of the Bank's
securities portfolio as of the dates indicated. In accordance with SFAS 115,
securities held to maturity are stated at amortized cost and securities
available for sale are stated at their fair value.
<TABLE>
<CAPTION>
At December At December
31, 1998 31, 1997
-----------------------------------
(in thousands)
<S> <C> <C>
US Treasury securities $ 3,025 $ 4,714
Mortgage backed securities 46,193 39,683
US Agency securities 500 1,997
Other securities (1) 664 528
------- -------
Total $50,382 $46,922
======= =======
</TABLE>
(1) Represents equity investments in the Federal Home Loan Bank and
Atlantic Central Bankers Bank.
In accordance with SFAS No. 115, securities available for sale at December 31,
1998 have been recorded at their fair value with the gross unrealized gain of
$130,000 ($80,000 net income tax effect) reflected as an increase to
shareholders' equity.
The following table sets forth as of December 31, 1998 the maturity distribution
and weighted average yields of the Bank's securities portfolio (calculated on
the basis of the stated yields to maturity, considering applicable premium or
discount). U.S. Government Agency securities are stated based on stated
maturities, however actual maturities may differ based on speed of prepayment.
<TABLE>
<CAPTION>
Maturities and Weighted Average Yields of Securities Portfolio
Stated Maturities
Within 1 - 5 5 - 15 Over 15
1 Year Years Years Years Total
- ------------------------------------------------------------------------------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
US Treasury Securities:
Amortized cost $1,008 $2,017 $0 $0 $ 3,025
Yield 5.69% 5.56% 5.60%
US Government mortgage backed:
Amortized cost 0 202 37,778 8,213 $46,193
Yield 6.40% 6.47% 6.34% 6.44%
US Government Agency securities:
Amortized cost 0 500 0 0 $ 500
Yield 6.01% 6.01%
Other Securities
Amortized cost 0 0 0 664 $ 664
Yield 6.93% 6.93%
</TABLE>
<PAGE> 20
Liquidity
The Bank's liquidity is a measure of its ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
Bank's principal sources of funds are deposits, scheduled amortization and
prepayments of loan principal, sales, maturities and paydowns of investment
securities and funds provided by operations. Additionally, in May 1996 the Bank
was accepted as a member of the Federal Home Loan Bank of New York ("FHLB"). As
a member of the FHLB, the Bank obtained a line of credit which provides the Bank
with a source of additional liquidity. Advances under the credit agreement with
the FHLB are available on an overnight basis or for extended terms. Interest
rates on any advance activated by the Bank are determined at the time of the
advance. While scheduled loan payments and maturing investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
additional liquidity made available by the FHLB adds another source that can be
relied on to meet daily balance requirements and future loan demand.
Through the Bank's investment portfolio, the Bank has generally sought to obtain
a safe yet slightly higher yield than would have been available to the Bank as a
net seller of overnight Federal Funds. Through the investment portfolio, the
Bank attempts to manage, in part through principal paydowns of mortgage backed
securities and through the sale of available for sale securities when necessary,
the Bank's liquidity needs to meet anticipated loan demand and maturities of
deposits.
Interest Rate Risk
The Bank's Investment and Liquidity and Funds Management Committee (the
"Committee") manages the Bank's interest rate sensitivity, the repricing
characteristics of assets and liabilities and the risks associated with the
volatility of interest rates. The principal objective of asset/liability
management is to maximize net interest income within acceptable levels of risk.
The management of interest rate risk is accomplished by analyzing the maturity
and repricing relationships between interest earning assets and interest bearing
liabilities at specifics points in time (Gap) and income simulation analysis
which analyzes the effects of interest rate changes on net interest income over
specific periods of time and captures the dynamic impact of interest rate
changes on the mix of assets and liabilities.
To mitigate the impact of changes in interest rates, the balance sheet is
structured so that repricing opportunities exist for both assets and liabilities
at approximately the same time intervals. An imbalance in repricing
opportunities constitutes an interest sensitivity gap which is the difference
between rate sensitive assets and rate sensitive liabilities. This gap is
measured through the Rate Sensitive Balance Sheet, which calculates the periodic
gaps and a cumulative gap over the various time frames. The Bank pays particular
attention to the cumulative gap at the one-year time frame. An asset sensitive
gap indicates that assets reprice faster than liabilities and a liability
sensitive gap indicates that liabilities reprice faster than assets. The
Committee has established a guideline of 15% plus or minus as the maximum
cumulative gap as a percentage of average earning assets for the month at the
one year time frame. The one-year cumulative gap is -1.51% which falls within
the established guideline.
<PAGE> 21
<TABLE>
<CAPTION>
Rate Sensitive Balance Sheet
December 31, 1998
(in thousands, except percentages)
Less than 3 to 12 1 to 3 3 to 5 Over 5 All
Repricing Frequency 3 Months Months Years Years Years Others Total
------------------- -------- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal funds sold $ 2,500 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,500
Total investments 4,184 8,488 21,970 16,102 0 20 50,764
Loans 46,983 22,561 12,190 17,515 17,115 959 117,323
Non-interest-bearing assets 0 0 0 0 0 8,948 8,948
------- -------- -------- ------- ------- -------- --------
Total Assets $53,667 $ 31,049 $ 34,160 $33,617 $17,115 $ 9,927 $179,535
======= ======== ======== ======= ======= ======== ========
0
Source of Funds:
Interest-bearing deposits $13,507 $ 73,758 $ 47,324 $ 333 $ 103 $ 0 $135,025
Non interest-bearing deposits 0 0 0 0 0 30,234 30,234
Other Liabilities 0 0 0 0 0 657 657
Shareholders' Equity 0 0 0 0 0 13,619 13,619
------- -------- -------- ------- ------- -------- --------
Total Source of Funds $13,507 $ 73,758 $ 47,324 $333 $ 103 $ 44,510 $179,535
======= ======== ======== ======= ======= ======== ========
Gap 40,160 (42,709) (13,164) 33,284 17,012 (34,583)
Cumulative Gap 40,160 (2,549) (15,713) 17,571 34,583 0
Cumulative Gap/Avg Earning Assets 23.75% -1.51% -9.29% 10.39% 20.45% 0.00%
</TABLE>
This analysis is based on the assumptions as to the repricing
opportunities of the assets and liabilities. The average prepayments on mortgage
backed securities and fixed rate loans have been calculated and applied across
the maturity timeframes. NOW and Money Market accounts which have no contractual
maturity have been assigned to the 3-12 Month category and savings deposits
which also have no maturity have been assigned to the 1-3 Year category as it is
believed that these categories reflect depositor behavior relative to interest
rate sensitivity.
There are several shortcomings in the Gap analysis that must be recognized
in analyzing and implementing strategies based on the ratios generated by, and
the conclusions drawn from the Gap analysis. First of all, the assumptions noted
above may or may not accurately predict future repricing behavior based on the
actions taken by the Bank's customers (borrowers and depositors). The gap
analysis provided from the rate sensitive balance sheet is a static measure of
future repricing opportunities at a given moment in time. It does not consider
changes in the mix of various assets and liabilities and future growth rate
assumptions. In addition, the repricing characteristics of assets and
liabilities may vary substantially within a given period of time and do not
recognize the fact that the repricing of assets and liabilities is discretionary
and subject to competitive pressures and other internal and external factors
such as the prepayment speeds on mortgage backed securities.
The Bank also utilizes income simulation models as a result of some of
these shortcomings to provide a second analysis of the impact of interest rate
changes on the Bank's net interest income. The income simulation model utilizes
a projection of future balance sheet growth and the related income statement
results in its analysis. Balance sheet growth utilizes the contractual repricing
opportunities of assets and liabilities which include maturities and payments
for fixed rate instruments and repricing opportunities for variable rate
instruments together with future interest rate assumptions. The income
simulation model applies a rate shock of plus and minus 1%, 2% and 3% to the
balance sheet and measures the impact on net interest income. Interest rates are
changed proportionately to the driver rate, which is national prime. The results
are measured at the one-year time frame. Income amounts are
<PAGE> 22
presented as year to date at the one-year time frame. The following table
provides the results of the rate shock in the income simulation model:
Interest Rate Sensitivity Analysis
At December 1999
(thousands of dollars, except percentages)
<TABLE>
<CAPTION>
Interest Rate Net Interest
Change Income $ Change % Change
------ ------ -------- --------
<S> <C> <C> <C>
+3% 9,760 1,004 11.47%
+2% 9,424 668 7.63%
+1% 9,089 333 3.80%
Flat 8,756 0 0.00%
-1% 8,423 (333) -3.80%
-2% 8,092 (664) -7.58%
-3% 7,762 (994) -11.35%
</TABLE>
The results of the rate shock as shown in this table indicate that a plus or
minus 3% interest rate change would result in a plus 11.47% and a minus 11.35%
change in net interest income respectively. The results of this analysis
indicate that the Bank's net interest income and net income, while affected
negatively by a decline in interest rates would continue to be positive. The
Bank could also modify strategies and goals if it was perceived to be necessary.
However, as with Gap analysis, there are limitations to income simulation
modeling. The primary one is that the concept of an interest rate shock which
would result in all interest rates moving in the same direction at a given point
in time is highly unlikely. Factors such as competition and the management of
interest rate changes by the Bank would significantly modify the impact of a
rate shock.
Capital
A significant measure of the strength of a financial institution is its capital
base. The Bank's regulators (primarily the FDIC) have classified and defined
bank capital into the following components: (1) Tier I capital, which includes
tangible shareholders' equity for common stock and qualifying preferred stock,
and (2) Tier II capital, which includes a portion of the allowance for possible
loan and lease losses, certain qualifying long-term debt and preferred stock
which does not qualify for Tier I capital. Minimum capital levels for banks are
regulated by risk-based capital adequacy guidelines which require a bank to
maintain certain capital as a percent of a bank's assets and certain off-balance
sheet items adjusted for predefined credit risk factors (risk-adjusted assets).
A bank is required to maintain, at a minimum, Tier I capital as a percentage of
risk-adjusted assets of 4% and combined Tier I and Tier II capital (Total
Capital) as a percentage of risk-adjusted assets of 8%. As of December 31, 1998,
the Bank's Tier I and Total Capital ratios were 10.84% and 12.10% respectively.
At December 31, 1998, the Bank's shareholders' equity was $13,619,000, an
increase of $1,925,000 over shareholders' equity of $11,694,000 at December 31,
1997. The increase was attributable to net income of $1,831,000, a decrease in
unrealized gains on securities available for sale, net of tax effect, of $5,000,
an addition of $101,000 from the exercise of stock options, investments received
through the Dividend Reinvestment Plan of $143,000 and a decrease of $145,000
resulting from the payment of cash dividends.
In addition to the risk-based guidelines, the Bank's regulators require that a
bank which meets the regulator's highest performance and operating standards
maintain a minimum leverage ratio (Tier I capital as a percentage of tangible
assets) of 4%. For those banks with higher levels of risk or that are
<PAGE> 23
experiencing or anticipating significant growth, the minimum leverage ratio will
be proportionately increased. The minimum leverage ratio for each bank is
evaluated through the ongoing regulatory examination process. The Bank's
leverage ratio was 6.84% as of December 31, 1997, 6.81% as of December 31, 1997,
and 7.02% as of December 31, 1996. Management believes the Bank's leverage ratio
as of December 31, 1998 meets the regulators' minimum ratio requirements.
Market Information
On December 7, 1994, the Bank's Common Stock was listed for trading on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") SmallCap Market under the symbol "SKCB". Prior to that time, the
Common Stock was quoted on the OTC Bulletin Board operated by the NASD under
the symbol "SKYM".
The tabel below sets forth, for the periods indicated, the reported high
and low bid prices per share of Common Stock as reported by the NASDAQ. The
following quotations represent prices between dealers and do not include retail
markup, markdown or commissions and do not represent actual transactions:
<TABLE>
<CAPTION>
High Low
- ---------------------------------------------------------------------
<S> <C> <C>
1998 First Quarter $15.00 $13.00
Second Quarter 16.88 13.31
Third Quarter 17.75 12.13
Fourth Quarter 13.63 11.25
1997 First Quarter $ 8.50 $ 7.38
Second Quarter 8.25 7.25
Third Quarter 9.38 8.00
Fourth Quarter 15.63 8.88
</TABLE>
Holders
As of December 31, 1998, the Bank had approximately 731 shareholders of
record.
Dividends
During 1998 the Bank paid two cash dividends of $.03 per share each. They
were paid on May 22, 1998 and November 16, 1998. The future dividend policy of
the Bank is subject to the discretion of the Board of Directors and will depend
upon a number of factors, including future earnings, financial conditions, cash
needs and general business conditions.
The New Jersey Department of Banking and Insurance prohibits the payment
of dividends under certain circumstances as set forth below. No cash dividends
may be paid by the Bank unless, following the payment of each such dividend, the
capital stock of the Bank will be unimpaired and the Bank will have a surplus of
not less than fifty percent of its capital stock, or, if not, the payment of
such dividend will not reduce the surplus of the Bank. The Bank will also be
guided in its cash dividend policy by the FDIC requirements.
Year 2000 Compliance
The Bank is aware of the issues associated with the programming code in
existing computer systems as the "Year 2000" approaches. The Year 2000 problem
is pervasive and complex as virtually every computer operation may be affected
in some way by the rollover of a two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Bank has formed a Committee, which has identified the areas that must
be addressed. Those areas include the impact of the Year 2000 on the software
and hardware utilized by the Bank, the impact of the Year 2000 on Bank's
borrowers, the impact of the Year 2000 on the Bank's operating environment and
meeting unusual cash withdrawals by the Bank's depositors. The Committee has
supervised the testing of the computer hardware and software that is utilized by
the Bank to assess its date sensitivity and ability to recognize the Year 2000.
Testing indicates that all software and hardware used by the Bank is Year 2000
compliant. The Committee has drawn up contingency plans to address situations
that could arise if the Bank's systems malfunction as a result of internal or
external causes. The contingency plans also include procedures to provide
additional liquidity in the event of unusual cash withdrawals by depositors. The
Year 2000 activities include programs to raise the awareness of the Bank's
borrowers of the nature of the Year 2000 issue. The Bank expects to incur costs
of less than $10,000 to meet Year 2000 issues. In the opinion of Management, the
impact of Year 2000 compliance on the Bank's earnings will not be material.
ITEM 3 -- PROPERTIES
The Bank's principal offices are located at 24-26 Crossroads Center,
Independence Township, New Jersey. The Bank leases these offices. Pursuant to
the lease, the Bank rents approximately 6,159.15 square feet, which constitutes
19.57% of the rentable space in the center. The term of the lease expires
September 30, 1998. The lease also provides the Bank with an option to extend
the term from October 1, 1998 to September 30, 2002.
<PAGE> 24
The Bank leases the Roxbury Branch pursuant to a lease agreement with Eva
Mandel, the landlord, which provides for the leasing of approximately 2,300
square feet in an office located at 262 Route 10, Roxbury, New Jersey. The lease
has an initial five-year term which ends on September 30, 1999. The lease also
provides the Bank with an option to extend the lease for an additional five-year
term ending September 30, 2004.
In connection with the acquisition of the Netcong Branch, the Bank assumed
the obligations under the existing lease agreement with Ten Properties, L.P.,
the landlord, for the Netcong Branch, which is located at 9 Ledgewood Avenue,
Netcong, New Jersey. This office occupies approximately 1,670 square feet. In
July, 1996, pursuant to an option contained in the lease, the Bank purchased the
branch for a purchase price of $400,000.
The Bank leases the Jefferson Branch pursuant to a lease agreement with 15
South Plaza, A Limited Partnership, the landlord, which provides for the leasing
of approximately 2,500 square feet in an office, located in Suite 101, 664 Route
15 South, Lake Hopatcong, Roxbury, New Jersey. The lease has an initial
five-year term which ends on November 30, 2002. The lease also provides the Bank
with an option to extend the lease for an additional five-year term ending
November 30, 2007.
The Bank leases the Byram Branch pursuant to a lease agreement with
RoNetco Supermarkets, Inc., the landlord, which provides for the leasing of
approximately 450 square feet in the ShopRite supermarket located at 90-80 Route
206, Stanhope, New Jersey. The lease has an initial 5 year term which ends on
June 12, 2003, and provides for two 5-year renewal options.
During 1998, the Bank paid aggregate rentals under the foregoing leases of
approximately $193,000. The average remaining term of these leases is
approximately 2.3 years (without giving effect to any right of the Bank to renew
these leases).
The Bank also owns the property and building located at 157 Route 31
North, Oxford, New Jersey, which the Bank acquired in March 1996. The building
at this location consists of approximately 1,400 square feet. There are no
encumbrances on this property.
The Bank also owns the property and building located at 272 Route 46,
Rockaway, New Jersey, which the Bank acquired on November 10, 1998. The building
at this location consists of approximately 7,900 square feet, of which the Bank
occupies 3,000 square feet, and leases the remainder. There are no encumbrances
on this property.
Management believes the foregoing facilities are suitable for the Bank's
present operations.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 9, 1999, information with
respect to the Common Stock ownership of each person known by the Bank to own
beneficially more than 5% of the shares of the Bank's Common Stock, and the
beneficial ownership of all directors individually and all officers and
directors as a group:
<PAGE> 25
<TABLE>
<CAPTION>
Name & Address of Amount and Nature of Percent
Beneficial Owner(1) Beneficial Owner of Class
- ------------------- ---------------- --------
<S> <C> <C>
Norman S. Baron 65,475 (2) 2.75%
James L. Cochran 32,036 (3) 1.35%
Daniel M. DiCarlo, Jr. 19,178 (4) *
Michael Halpin 75,686 (5) 3.18%
Ralph C. Knechel 26,632 (6) 1.12%
J. William Noeltner 83,123 (7) 3.50%
Denis H. O'Rourke 35,139 (8) 1.48%
Paul J. Pinizzotto 61,774 (9) 2.60%
Dominick V. Romano 211,836 (10) 8.91%
Mark F. Strauss 15,464 (11) *
Norman Worth 4,256 (12) *
All directors & principal
officers as a group
(13 persons) 669,588 (13) 28.16%
</TABLE>
- ----------
* Ownership of less than 1%.
(1) The address for all persons listed is c/o Skylands Community Bank, P.O.
Box 507, Hackettstown, New Jersey 07840.
(2) Includes 11,312 shares and stock options for 4,859 shares owned directly,
245 shares owned by Mr. Baron's wife, 24,612 shares owned jointly with his
wife, 20,029 shares owned by the Trust Company of America MMP, and 4,020
shares owned by the Trust Company of America Profit Sharing Plan. Also
includes 848 shares held in a trust for his daughter's benefit of which
Mr. Baron's wife is trustee. Mr. Baron disclaims beneficial ownership of
the shares held in trust for his daughter.
(3) Includes 7,842 shares and stock options for 7,064 shares owned directly
and 15,941 shares owned jointly by Mr. Cochran and his wife.
<PAGE> 26
(4) Includes 11,542 shares and stock options for 7,064 shares owned directly,
and 572 shares owned by Mr. DiCarlo's immediate family.
(5) Includes vested stock options for 64,752 shares, but does not include
non-vested options for an additional 87,855 shares.
(6) Includes 9,649 shares and stock options for 7,064 shares owned directly.
Also includes 9,649 shares owned by Mr. Knechel's wife of which Mr.
Knechel disclaims beneficial ownership.
(7) Includes 69,444 shares and stock options for 4,859 shares owned directly,
and 8,820 shares owned by Skylands Investment Corp. (of which Mr. Noeltner
is the sole owner).
(8) Includes 205 shares and stock options for 4,308 shares owned directly, and
30,626 shares owned by Mr. O'Rourke's wife of which Mr. O'Rourke disclaims
beneficial ownership.
(9) Includes 39,705 shares and stock options for 7,064 shares owned directly
and 15,635 shares owned jointly with his wife.
(10) Includes 0 shares owned directly, stock options for 3,026 shares, 49,943
shares over which Mr. Romano shares voting and investment power with his
wife, 144,792 shares owned by RoNetco Supermarkets, Inc., of which Mr.
Romano is one of the owners, and 13,895 shares owned by members of Mr.
Romano's immediate family, for which Mr. Romano disclaims beneficial
ownership.
(11) Includes 10,631 shares and stock options for 4,308 shares owned directly,
and 525 shares owned by Mr. Strauss' parents.
(12) Includes 1,050 shares and stock options for 3,206 shares owned directly.
(13) Includes 6,217 shares and immediately exercisable stock options for 32,772
shares, in addition to shares and stock options described in notes 2-12.
ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS
Direction of the Bank is vested in the Board of Directors which must consist of
not less than five nor more than twenty five persons who are elected under the
Bank's Certificate of Incorporation. The term of each Director is one year. The
board presently consists of eleven Directors, each of whom has served as a
Director of the Bank since its inception, except for Michael Halpin, who joined
the Board of Directors in 1995, and Norman Worth, who joined in 1997.
The Board of Directors of the Company will initially consist of the members of
the Board of Directors of the Bank. Each Director of the Company is to serve a
three-year term and until his successor is duly elected by the shareholders of
the Company and qualified to serve on the Board of Directors; membership in the
Board of Directors is staggered, as is set forth in the Company's Certificate of
Incorporation.
<PAGE> 27
Set forth below are the names and certain biographical information regarding the
Directors of the Bank:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Positions and Offices
Name Age held with the Bank Principal Occupations for Past Five Years
- ---- --- ------------------ --------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norman S. Baron 53 Director and Secretary President and Chief Executive Officer of Baron's
Hallmark Shops.
- ----------------------------------------------------------------------------------------------------------------------------
James L. Cochran 69 Director Owner and President of Cochran Funeral Home, Inc.
(retired).
- ----------------------------------------------------------------------------------------------------------------------------
Daniel M. DiCarlo, Jr. 60 Director President and Chief Executive Officer of Area Lighting
Research Inc.; President and Chief Executive Officer
of East Rock Manufacturing & Technology, Inc. and Bolt
Electric Inc.; Partner in Asbury Leasing Co. and NUJA
Realty Co.; Secretary and Treasurer of WOJO Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Michael Halpin 56 Director, President Currently President and Chief Executive Officer of the
and Chief Executive Bank; August 1990 to May 1995, President and Chief
Officer Executive Officer of Lakeland Savings Bank and
Lakeland First Financial Group, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Ralph C. Knechel 72 Director President of Knechel Ford automobile dealership
(retired).
- ----------------------------------------------------------------------------------------------------------------------------
J. William Noeltner 62 Director and Vice Chairman of Insurance & Risk Managers, Inc. (division
Chairman of Traber and Vreeland, Inc.); President, Skylands
Investment Corp.
- ----------------------------------------------------------------------------------------------------------------------------
Denis H. O'Rourke 58 Director and Chairman President of Skylands Development Group, Inc. (real
estate development); 1984 to 1993, principal of Axial
Investors Group, Inc. (real estate development).
- ----------------------------------------------------------------------------------------------------------------------------
Paul J. Pinizzotto 51 Director Senior Vice President of The Vizzoni Group (real
estate development).
- ----------------------------------------------------------------------------------------------------------------------------
Dominick V. Romano 64 Director Vice President and Chief Executive Officer of RoNetco
Supermarkets, Inc.; Chairman of Readington Farms Inc.;
Director and Treasurer of Wakefern Food Corporation;
Partner in P&D Realty and PECD Realty.
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Positions and Offices
Name Age held with the Bank Principal Occupations for Past Five Years
- ---- --- ------------------ --------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mark F. Strauss 47 Director Corporate Counsel for Applied Wastewater Technology,
Inc.; General Counsel to VBCC, Inc. (formerly Vizzoni
Bros. Construction Co.); Of Counsel to Mauro, Savo,
Camerino & Grant (law firm).
- ----------------------------------------------------------------------------------------------------------------------------
Norman Worth 47 Director Partner, Vice President and General Manager of Radio
New Jersey (parent company of WRNJ); Partner in
Tri-Caps (telecommunications).
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
No director of the Bank is also a director of a company having a class of
securities registered under Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940.
PRINCIPAL OFFICERS
Set forth below is the name of and certain biographical information regarding
the additional principal officers of the Bank who do not also serve as a
Director. The term of office for each officer is one year.
Dan E. Marcmann - Mr. Marcmann, 45, is the Senior Vice President and Treasurer
of the Bank, having served as Vice President and Treasurer of the Bank from its
inception to the present. From 1986 to 1989, Mr. Marcmann served as Vice
President - Regional Coordinator of Operations and Sales for Carteret Savings
Bank in Morristown, New Jersey, during which time Mr. Marcmann was responsible,
among other things, for overseeing regulatory compliance, preparing and
administering budgets and reviewing personnel performance. Mr. Marcmann later
served as Carteret's Vice President - Retail Lending Manager and was responsible
for directing promotional efforts and implementing marketing strategies.
Bruce L. Schott - Mr. Schott, 58, is the Senior Vice President and Senior Loan
Officer of the Bank, having served as Vice President and Senior Loan Officer of
the Bank from July 1990 to the present. From 1986 to July 1990, Mr. Schott
served as the Regional Lender of First Fidelity Bank, North Jersey and was
responsible for overseeing commercial lending operations for eight branches.
ITEM 6 -- EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the last three
fiscal years to the Bank's chief executive officer and to each of the Bank's
four highest paid executive officers earning over $100,000 during fiscal year
1998. The following table does not include directors' fees.
<PAGE> 29
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Awards
-----------------------------------------------------
Name and Securities All Other
Principal Underlying Compensation
Position Year Salary($) Bonus($) Options(#) ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael Halpin, 1998 $176,628 $30,000 -0- $8,013(1)
President and Chief 1997 $176,631 $30,000 114,056 7,180(1)
Executive Officer 1996 $153,603 $12,670 551 7,021(1)
</TABLE>
- ----------
(1) Represents $1,560, $1,527, and $1,368 received in 1998, 1997 and 1996,
respectively, pursuant to the Bank's matched savings plan, matching
contributions to the 401(k) plan of $5,600, $4,800 and $4,800 in each of
1998, 1997 and 1996, respectively, and $853, $853, and $853 in insurance
premiums paid in 1998, 1997, and 1996, respectively, by the Bank with
respect to term life insurance maintained for the benefit of Mr. Halpin.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
On December 31, 1998, Michael Halpin exercised options for 4,000 shares of
common stock, at an exercise price of $5.16 per share The following table sets
forth for the named executive officers of the Bank, the number of unexercised
options held at December 31, 1998 and the potential value thereof based on the
closing per share sales price of the Bank's Common Stock of $12.00 on December
31, 1998.
<PAGE> 30
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at FY-End
at FY-End (#) ($)(1)
Exercisable (E)/ Exercisable (E)/
Name Unexercisable (U) Unexercisable (U)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael Halpin, 53,403(E) $281,047(E)
President & 99,204(U) $349,021(U)
Chief Executive Officer
</TABLE>
(1) Value based on actual closing per share sales price of the Bank's Common
Stock of $12.00 on December 31, 1998.
Employment Agreement
In May, 1998, the Bank entered into an Amended and Restated Employment
Agreement ("Employment Agreement") with Michael Halpin pursuant to which Mr.
Halpin serves as the President and Chief Executive Officer of the Bank. From and
after May 23, 1999, and on each May 23rd thereafter until the Employment
Agreement is terminated, the Employment Agreement is automatically extended for
36-month periods at an annual salary of $140,000 (subject to increases in the
discretion of the Bank). The Employment Agreement also provides that Mr. Halpin
may terminate his employment with the Bank upon the happening of certain events
following a "change in control" of the Bank (as defined in the Employment
Agreement). In the event Mr. Halpin is terminated by the Bank without cause, or
Mr. Halpin terminates his employment following a change in control, Mr. Halpin
would be entitled to severance equal to the amount of salary he would have
received under the agreement had it not been terminated or two times his salary
in effect at the time of termination, whichever is greater.
ITEM 7 -- INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with its directors and officers (and to
entities associated with such persons). Management believes that these
transactions were on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with other persons of similar creditworthiness, and did not involve
more than a normal risk of collectibility or present other unfavorable features.
ITEM 8 -- DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
common stock, $2.50 par value, and 1,000,000 shares of preferred stock, par
value $10 per share. The Bank currently has 2,371,432 shares issued and
outstanding. In addition, the Bank has issued options,
<PAGE> 31
as of December 31, 1998, for an aggregate of 320,668 shares of common stock.
Upon consummation of the Acquisition, the Company will issue one share of Common
Stock for each share of Bank Common Stock, and so will have approximately
2,371,432 shares outstanding. In addition, the Company will assume all of the
Bank's current stock option plans, reserving 320,668 shares for issuance
thereunder. No preferred stock will be outstanding upon consummation of the
Acquisition.
Dividends. The Company may pay dividends as declared from time to time by the
Company's Board of Directors out of funds legally available therefor, subject to
certain restrictions. Since dividends from the Bank will be the Company's sole
source of income, any restriction on the Bank's ability to pay dividends will
act as a restriction on the Company's ability to pay dividends. Under the New
Jersey Banking Act of 1948 (the "Banking Act"), no cash dividend may be paid by
the Bank unless, following the payment of such dividend, the capital stock of
the Bank will be unimpaired and the Bank will have a surplus of no less than 50%
of its capital stock or, if not, the payment of such dividend will not reduce
the surplus of the Bank. In addition, the Bank cannot pay dividends in such
amounts as would reduce its capital below the minimums imposed by regulation.
Voting Rights. Each holder of the Common Stock is entitled to one vote for each
share held on all matters voted upon by the shareholders, including the election
of directors. There is no cumulative voting in the election of directors.
Rights in Liquidation. In the event of a liquidation, dissolution or winding up
of the Company, each holder of the Common Stock would be entitled to receive a
pro rata portion of all assets of the Company available for distribution to
holders of the Common Stock after payment of all debts and liabilities of the
Company.
No Preemptive Rights; Redemption. Holders of shares of the Common Stock are not
entitled to preemptive rights with respect to any shares of the Common Stock
that may be issued. The Common Stock is not subject to call or redemption and is
fully paid and non-assessable.
TRANSFER AGENT
The Company's transfer agent for the Common Stock will be American Stock
Transfer & Trust Co., with offices at 40 Wall Street, New York, New York 10005.
<PAGE> 32
Part II
ITEM 1 -- MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
The Bank had 731 shareholders of record as of December 31, 1998. In
connection with the Plan the Holding Company has applied to have its Common
Stock approved for listing on NASDAQ SmallCap Market. Although the Holding
Company Common Stock may be listed on the NASDAQ Small Cap Market, no assurances
can be given that an active and liquid trading market will develop for the
Holding Company common stock or that if such a market develops, that it will be
maintained.
The table below sets forth, for the periods indicated, the reported high and low
bid prices per share of the Bank's Common Stock as reported by the NASDAQ. The
following quotations represent prices between dealers and do not include
retail markup, markdown or commissions and do not represent actual transactions:
<TABLE>
<CAPTION>
High Low
---------------------------------------------------------
1998
----
<S> <C> <C>
First Quarter $15.00 $13.00
Second Quarter 16.88 13.31
Third Quarter 17.75 12.13
Fourth Quarter 13.63 11.25
1997
----
First Quarter $ 8.50 $ 7.38
Second Quarter 8.25 7.25
Third Quarter 9.38 8.00
Fourth Quarter 15.63 8.88
</TABLE>
During 1998 the Bank paid two cash dividends of $.03 per share each. They
were paid on May 22, 1998 and November 16, 1998. On March 10, 1999, the Bank
declared a 5% stock dividend and a cash dividend of $0.02 per share, payable
April 16, 1999 to shareholders of record on March 31, 1999. The future dividend
policy of the Bank is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
conditions, cash needs and general business conditions. Although the amount of
future dividends will be determined by the Board of Directors of the Holding
Company based upon the Holding Company's earnings, capital needs, financial
condition and other relevant factors, the Holding Company currently intends to
adhere to the dividend policy previously established by the Bank.
The New Jersey Department of Banking and Insurance prohibits
the payment of dividends under certain circumstances, as set forth in this
paragraph. No cash dividends may be paid by the Bank unless, following the
payment of each such dividend, the capital stock of the Bank will be unimpaired
and the Bank will have a surplus of not less than fifty percent of its capital
stock, or, if not, the payment of such dividend will not reduce the
<PAGE> 33
surplus of the Bank. The Bank will also be guided in its cash dividend policy by
the FDIC requirements.
ITEM 2 -- LEGAL PROCEEDINGS
The Bank is not a party to any legal proceedings other than routine litigation
incidental to the Bank's business. The Bank believes that none of these
proceedings would, if adversely determined, have a material effect on the bank's
consolidated financial condition or results of operations.
ITEM 3 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4 -- RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities over the past three years. Other than
for purposes of stock dividends, dividend reinvestment, and stock option plans,
the Bank has not issued any securities over the past three years. Issuance of
the Common Stock in the Acquisition will be exempt from registration pursuant to
Section 3(a)(12) of the Securities Act of 1933, as amended.
ITEM 5 -- INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company provides that the Company shall
indemnify its present and former officers, directors, employees and agents and
persons serving at its request against expenses, including attorneys' fees,
judgments, fines or amounts paid in settlement incurred in connection with any
pending or threatened civil or criminal proceeding to the fullest extent
permitted by the New Jersey Business Corporation Act. The Certificate of
Incorporation also provides that such indemnification shall not exclude any
other rights to indemnification to which a person may otherwise be entitled, and
authorizes the Company to purchase insurance on behalf of any of the persons
enumerated against any liability whether or not the Company would have the power
to indemnify him under the provisions of the Certificate of Incorporation.
The New Jersey Business Corporation Act empowers a corporation to indemnify a
corporate agent against his expenses and liabilities incurred in connection with
any proceeding (other than a derivative lawsuit) involving the corporate agent
by reason of his being or having been a corporate agent if (a) the agent acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and (b) with respect to any criminal
proceeding, the corporate agent had not reasonable cause to believe his conduct
was unlawful. For purposes of the Act, the term "corporate agent" includes any
present or former director, officer, employee or agent of the corporation, and a
person serving as a "corporate agent" for any other enterprise at the request of
the corporation.
With respect to any derivative action, the corporation is empowered to indemnify
a corporate agent against his expenses (but not his liabilities) incurred in
connection with any proceeding involving the corporate agent by reason of his
being or having been a corporate agent if the agent
<PAGE> 34
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, only the court in
which the proceeding was brought can empower a corporation to indemnify a
corporate agent against expenses with respect to any claim, issue or matter as
to which the agent was adjudged liable for negligence or misconduct.
The corporation may indemnify a corporate agent in a specific case if a
determination is made by any of the following that the applicable standard of
conduct was met: (i) the Board of Directors, or a committee thereof, acting by a
majority vote of a quorum consisting of disinterested directors; (ii) by
independent legal counsel if there is not a quorum of disinterested directors or
if the disinterested quorum empowers counsel to make the determination; or (iii)
by the stockholders.
A corporate agent is entitled to mandatory indemnification to the extent that
the agent is successful on the merits or otherwise in any proceeding, or in
defense of any claim, issue or matter in the proceeding. If a corporation fails
or refuses to indemnify a corporate agent, whether the indemnification is
permissive or mandatory, the agent may apply to a court to grant him the
requested indemnification. In advance of the final disposition of a proceeding,
the corporation may pay an agent's expenses if the agent agrees to repay the
expenses unless it is ultimately determined that he is entitled to
indemnification.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Statements of Condition as of December 31, 1998 and 1997,
respectively.
(ii) Statements of Income for the years ended December 31, 1998, 1997 and
1996, respectively.
(iii) Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996, respectively.
(iv) Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996, respectively.
(v) Notes to Financial Statements, December 31, 1998, 1997 and 1996.
(vi) Report of Independent Public Accountants, January 21, 1999.
(vii) Statements of Condition, March 31, 1999 and December 31, 1998.
(viii)Statements of Income, 3 months ended March 31, 1999 and 1998.
(ix) Statements of Changes in Shareholders Equity to the three months
ended March 31, 1999.
(x) Statements of Cash Flows for the 3 months ended March 31, 1999
and 1998.
<PAGE> 35
<TABLE>
<CAPTION>
SKYLANDS COMMUNITY BANK
CONSOLIDATED STATEMENTS OF CONDITION
ASSETS December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND DUE FROM BANKS
Non interest-bearing $4,367,000 $5,446,000
Interest-bearing 592,000 667,000
FEDERAL FUNDS SOLD 2,500,000 100,000
------------ ------------
Total cash and cash equivalents 7,459,000 6,213,000
------------ ------------
SECURITIES
Available for sale, at market value 18,816,000 23,817,000
Held to maturity, at amortized cost (market value of
$31,771,000 in 1998 and $23,321,000 in 1997) 31,566,000 23,105,000
------------ ------------
Total securities 50,382,000 46,922,000
------------ ------------
LOANS 117,323,000 90,441,000
Less-
Unearned income (182,000) (157,000)
Allowance for possible loan and lease losses (1,873,000) (1,374,000)
------------ ------------
Net loans 115,268,000 88,910,000
------------ ------------
PREMISES AND EQUIPMENT, net 2,865,000 1,610,000
ACCRUED INTEREST RECEIVABLE 906,000 876,000
OTHER REAL ESTATE 105,000 266,000
OTHER ASSETS 2,550,000 2,291,000
Total assets $179,535,000 $147,088,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
DEPOSITS
Demand-
Non interest-bearing $30,234,000 $26,908,000
Interest-bearing 22,357,000 17,067,000
Savings 53,636,000 35,254,000
Time 59,032,000 55,688,000
------------ ------------
Total deposits 165,259,000 134,917,000
------------ ------------
INCOME TAXES PAYABLE 130,000 -
ACCRUED EXPENSES AND OTHER LIABILITIES 527,000 477,000
------------ ------------
Total liabilities 165,916,000 135,394,000
------------ ------------
COMMITMENTS AND CONTINGENCIES(Note 14)
SHAREHOLDERS' EQUITY
COMMON STOCK, par value $2.50 per share; 10,000,000 shares
authorized; 2,371,432 and 2,237,058 shares issued
and outstanding in 1998 and 1997, respectively 5,929,000 5,593,000
ADDITIONAL PAID-IN CAPITAL 4,998,000 3,514,000
RETAINED EARNINGS 2,562,000 2,452,000
ACCUMULATED OTHER COMPREHENSIVE INCOME 130,000 135,000
------------ ------------
Total shareholders' equity 13,619,000 11,694,000
------------ ------------
Total liabilities and shareholders' equity $179,535,000 $147,088,000
============ ============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
SKYLANDS COMMUNITY BANK
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,337,000 $ 7,361,000 $ 5,355,000
Interest on securities 3,070,000 2,838,000 2,663,000
Interest on Federal Funds sold 130,000 164,000 159,000
------------ ------------ ------------
Total interest income 12,537,000 10,363,000 8,177,000
INTEREST EXPENSE 5,170,000 4,325,000 3,652,000
------------ ------------ ------------
Net interest income 7,367,000 6,038,000 4,525,000
PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES 665,000 632,000 488,000
Net interest income after provision
for possible loan and lease losses 6,702,000 5,406,000 4,037,000
OTHER INCOME
Service charges and other fees 647,000 554,000 373,000
Gain (loss) on sale of securities 62,000 (10,000) 31,000
Other 180,000 129,000 104,000
------------ ------------ ------------
Total other income 889,000 673,000 508,000
OTHER EXPENSES
Salaries and employee benefits 2,283,000 1,786,000 1,566,000
Occupancy expense 467,000 348,000 352,000
Equipment expense 149,000 107,000 96,000
Other operating expenses 1,828,000 1,597,000 1,311,000
------------ ------------ ------------
Total other expenses 4,727,000 3,838,000 3,325,000
INCOME BEFORE PROVISION FOR INCOME TAXES 2,864,000 2,241,000 1,220,000
PROVISION FOR INCOME TAXES 1,033,000 817,000 470,000
------------ ------------ ------------
Net income $ 1,831,000 $ 1,424,000 $ 750,000
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,355,839 2,345,052 2,340,356
============ ============ ============
Diluted 2,472,008 2,393,656 2,365,897
============ ============ ============
BASIC EARNINGS PER SHARE $ 0.78 $ 0.61 $ 0.32
============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.74 $ 0.59 $ 0.32
============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
SKYLANDS COMMUNITY BANK
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $5,566,000 $3,486,000 $ 390,000 $ 115,000 $ 9,557,000
Exercise of stock options 7,000 4,000 0 0 11,000
Change in unrealized loss
on securities available
for sale, net of income
taxes 0 0 0 (152,000) $(152,000) (152,000)
Net income - 1996 0 0 750,000 0 750,000 750,000
----------------
Comprehensive income 598,000
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 5,573,000 3,490,000 1,140,000 (37,000) 10,166,000
Exercise of stock options 20,000 24,000 0 0 44,000
Cash dividend ($.05 per share) 0 0 (112,000) 0 (112,000)
Change in unrealized gain
on securities available
for sale, net of 0 0 0 172,000 172,000 172,000
income taxes
Net income - 1997 0 0 1,424,000 0 1,424,000 1,424,000
----------------
Comprehensive income 1,596,000
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 5,593,000 3,514,000 2,452,000 135,000 11,694,000
Exercise of stock options 28,000 73,000 0 0 101,000
5% Stock dividend 279,000 1,297,000 (1,576,000) 0 0
Dividend reinvestment plan 29,000 114,000 0 0 143,000
Cash dividends ($.06 per share)
and payments for fractional
shares 0 0 (145,000) 0 (145,000)
Change in unrealized loss
on securities available
for sale, net of income
taxes 0 0 0 (5,000) (5,000) (5,000)
Net income - 1998 0 0 1,831,000 0 1,831,000 1,831,000
----------------
Comprehensive income $1,826,000
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 $5,929,000 $4,998,000 $2,562,000 $130,000 $13,619,000
===========================================================================================
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
SKYLANDS COMMUNITY BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,831,000 $ 1,424,000 $ 750,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Provision for possible loan and lease losses 665,000 632,000 488,000
Provision for other real estate valuation allowance 0 (21,000) 21,000
Depreciation and amortization 359,000 290,000 272,000
(Gain) loss on sale of securities (62,000) 10,000 (31,000)
Premium amortization on securities, net 334,000 250,000 321,000
Deferred tax benefit (122,000) (148,000) (124,000)
Increase in accrued interest receivable (30,000) (138,000) (9,000)
Decrease (increase) in other assets (120,000) (6,000) 17,000
(Decrease) increase in Federal Funds purchased 0 (2,900,000) 1,400,000
(Decrease) increase in taxes payable 130,000 (406,000) 314,000
Increase in accrued expenses and other liabilities 50,000 224,000 58,000
------------ ------------ ------------
Net cash (used in) provided by operating activities 3,035,000 (789,000) 3,477,000
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of securities-
Available for sale (6,163,000) (5,136,000) (2,406,000)
Held to maturity (18,870,000) (11,035,000) (8,305,000)
Maturities of securities-
Available for sale 5,902,000 5,546,000 3,970,000
Held to maturity 10,179,000 2,780,000 1,802,000
Sales of securities-
Available for sale 5,213,000 3,706,000 4,810,000
Net increase in loans (27,023,000) (23,201,000) (22,213,000)
Capital expenditures (1,468,000) (194,000) (976,000)
------------ ------------ ------------
Net cash used in investing activities (32,230,000) (27,534,000) (23,318,000)
------------ ------------ ------------
FINANCING ACTIVITIES
Increase in deposits 30,342,000 28,726,000 17,948,000
Proceeds from the issuance of common stock, net 244,000 44,000 11,000
Dividends paid (145,000) (112,000) 0
------------ ------------ ------------
Net cash provided by financing activities 30,441,000 28,658,000 17,959,000
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,246,000 335,000 (1,882,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,213,000 5,878,000 7,760,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,459,000 $ 6,213,000 $ 5,878,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for-
Interest $ 5,070,000 $ 4,314,000 $ 3,606,000
Income taxes 942,000 1,392,000 359,000
Loans reclassified to other real estate 0 121,000 524,000
============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1998, 1997 and 1996
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Skylands Community Bank is a state chartered financial institution which
commenced operations in 1990. It is a full service community bank primarily
serving Warren, Sussex and Morris counties, New Jersey through its seven banking
locations.
The consolidated financial statements include all of the accounts of
Skylands Community Bank and its New Jersey investment company subsidiary
(collectively, the Bank). All intercompany transactions have been eliminated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements, which are prepared in
conformity with generally accepted accounting principles, require the use of
management estimates. The most significant estimate with regard to these
financial statements relates to the allowance for possible loan and lease
losses, and the carrying value of other real estate and the fair value of
financial instruments, as discussed in Notes 4, 6 and 16. Actual results may
differ from those assumed in management's estimates.
Securities
- --------------------------------------------------------------------------------
The Bank classifies its securities into three categories, as follows: (1)
held for investment purposes (held to maturity), (2) available for sale and (3)
held for trading purposes.
Securities for which the Bank has the ability and intent to hold to
maturity are classified as held to maturity. These securities are carried at
cost adjusted for amortization of premiums and accretion of discounts using the
interest method. Securities which are held for indefinite periods of time which
management intends to use as part of its asset/liability strategy, or that may
be sold in response to changes in interest rates, changes in prepayment risk,
increased capital requirements or other similar factors, are classified as
available for sale and are carried at their fair value. Differences between a
security's amortized cost and fair value is credited/charged directly to
shareholders' equity, net of income taxes. The cost of securities sold is
determined on a specific identification basis. Gains and losses on sales of
securities are recognized in the statement of income upon sale.
The Bank has no securities held for trading purposes as of December 31,
1998 or 1997.
Allowance for Possible Loan and Lease Losses
- --------------------------------------------------------------------------------
The allowance for possible loan and lease losses is maintained at a level
considered adequate to provide for potential loan losses, although, ultimate
losses may vary from current estimates. Adjustments to the allowance are
reflected in operations in the period in which they become known. The allowance
is increased by provisions charged to expense and reduced by net charge-offs.
The level of the allowance is based on management's evaluation of potential
losses in the loan portfolio, after consideration of appraised collateral
values, financial condition of the borrowers, as well as prevailing and
anticipated economic conditions. Credit reviews of the loan portfolio, designed
to identify potential charges to the allowance, are made on a periodic basis
during the year by senior management.
Impaired Loans
- --------------------------------------------------------------------------------
Accounting standards require that certain impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
original, effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the impaired
loan is less than the recorded investment in the loan, the impairment is
recorded through a valuation allowance. Large groups of smaller-balance
homogeneous loans, such as residential mortgage loans, credit card loans and
consumer loans are collectively evaluated for impairment.
19
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
================================================================================
Premises and Equipment
- --------------------------------------------------------------------------------
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on the straight-line method
over the estimated useful lives (or the lease term, if shorter, for leasehold
improvements) of the assets.
Other Real Estate
- --------------------------------------------------------------------------------
Other real estate includes loan collateral that has been formally
foreclosed. All amounts have been transferred into and carried in other real
estate at the lower of the loan value or fair market value less estimated costs
to sell the underlying collateral. The Bank incurred expenses related to such
properties and made adjustments to their carrying values resulting in net
expenses of $26,000, $74,000 and $37,000 in 1998, 1997 and 1996, respectively,
which is included in other operating expenses in the accompanying financial
statements.
Intangibles
- --------------------------------------------------------------------------------
Core deposit intangibles relating to premiums paid on the acquisition of
deposits are amortized on a straight-line basis over 15 years.
Income Taxes
- --------------------------------------------------------------------------------
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial reporting and the tax basis of existing
assets and liabilities.
Cash and Cash Equivalents
- --------------------------------------------------------------------------------
Cash and cash equivalents include cash on hand, non interest and
interest-bearing amounts due from banks and Federal Funds sold. Generally,
Federal Funds are sold for a one day period.
Interest Income And Fees On Loans
- --------------------------------------------------------------------------------
Interest on loans is credited to operations primarily based upon the
principal amount outstanding. When management believes there is sufficient doubt
as to the ultimate collectibility of interest on any loan, the accrual of
applicable interest is discontinued. Net loan origination fees are deferred and
amortized over the life of the related loan as an adjustment to the loan yield.
Earnings Per Share
- --------------------------------------------------------------------------------
Basic earnings per share is computed based on the weighted average number
of shares outstanding for the periods presented. Diluted earnings per share is
computed based on the weighted average number of shares outstanding for the
period presented adjusted for the effect of the stock options and warrants
outstanding, if dilutive.
New Financial Accounting Standards
- --------------------------------------------------------------------------------
The Bank adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," effective January 1, 1998. In
accordance with the new accounting standard, a complete set of financial
statements includes the components of comprehensive income. Comprehensive income
consists of net income or loss for the current period and revenues, expenses,
gains, and losses that have been previously excluded from the income statement
and were only reported as a component of equity. All prior periods have been
restated. Adoption of SFAS No. 130 did not have a material impact on the results
of operations, financial condition or disclosures of the Bank.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131") which is effective for all periods beginning after December 15,
1997. SFAS No. 131 requires that a company report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
Management has determined that the Bank does not have any reportable segments,
therefore, adoption of SFAS No. 131 did not have any effect on the Bank's
financial statements.
20
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
================================================================================
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, certain derivative instruments
imbedded in other contracts, and hedging activities. In particular, SFAS No. 133
requires a reporting company to record every covered derivative instrument on
its balance sheet as either an asset or liability measured at fair value.
SFAS No. 133 is effective for quarters of all fiscal years beginning after
June 15, 1999, but reporting companies may adopt it on a going forwards basis as
of the start of any fiscal quarter beginning on or after June 16, 1998. The Bank
does not currently have any derivative instruments, therefore, it does not
expect implementation of SFAS No. 133 to have a material impact on its financial
statements.
(3) DIVIDENDS
During 1998, the Bank paid two cash dividends of $.03 per share. The
future dividend policy of the Bank is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial conditions, cash needs and general business conditions.
The New Jersey Department of Banking and Insurance prohibits the payment
of dividends under certain circumstances as set forth below. No cash dividends
may be paid by the Bank unless, following the payment of each such dividend, the
capital stock of the Bank will be unimpaired and the Bank will have a surplus
(the sum of additional paid in capital and retained earnings) of not less than
fifty percent of its capital stock, or, if not, the payment of such dividend
will not reduce the surplus of the Bank. The Bank will also be guided in its
cash dividend policy by the FDIC requirements.
On January 14, 1998, the Board of Directors declared a 5% stock dividend
for shareholders of record as of February 4, 1998, payable on February 25, 1998.
Basic and diluted earnings per share data for all periods have been restated to
reflect this stock dividend.
(4) SECURITIES
Information with regard to the Bank's securities portfolio at December 31,
1998 and 1997 are as follows-
<TABLE>
<CAPTION>
1998
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury Securities $ 2,999,000 $ 26,000 $ 0 $ 3,025,000
Mortgage-backed Securities
(U.S. Agency issued) 14,942,000 185,000 0 15,127,000
Corporate Securities 664,000 0 0 664,000
- ----------------------------------------------------------------------------------------
$ 18,605,000 $ 211,000 $ 0 18,816,000
========================================================================================
Held to Maturity
U.S. Agency Securities $ 500,000 $ 2,000 $ 0 $ 502,000
Mortgage-backed Securities
(U.S. Agency issued) 31,066,000 238,000 (35,000) 31,269,000
- ----------------------------------------------------------------------------------------
$ 31,566,000 $ 240,000 $ (35,000) $ 31,771,000
========================================================================================
<CAPTION>
1997
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury Securities $ 4,733,000 $ 0 $ (19,000) $ 4,714,000
U.S. Agency Securities 1,000,000 0 (3,000) 997,000
Mortgage-backed Securities
(U.S. Agency issued) 17,336,000 242,000 0 17,578,000
Corporate Securities 528,000 0 0 528,000
- ----------------------------------------------------------------------------------------
$ 23,597,000 $ 242,000 $ (22,000) $ 23,817,000
========================================================================================
Held to Maturity
U.S. Agency Securities $ 1,000,000 $ 1,000 $ 0 $ 1,001,000
Mortgage-backed Securities
(U.S. Agency issued) 22,105,000 235,000 (20,000) 22,320,000
- ----------------------------------------------------------------------------------------
$ 23,105,000 $ 236,000 $ (20,000) $ 23,321,000
========================================================================================
</TABLE>
21
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
================================================================================
The amortized cost and estimated market value of securities at December
31, 1998 by contractual maturity, are shown below for securities held to
maturity and available for sale. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale
Due in one year through five years $ 1,663,000 $ 1,671,000
Due in more than five years 2,000,000 2,018,000
Mortgage backed Securities 14,942,000 15,127,000
- --------------------------------------------------------------------------------
$18,605,000 $18,816,000
================================================================================
Held to Maturity
Due in one year through five years $ 500,000 $ 502,000
Mortgage backed Securities 31,066,000 31,269,000
- --------------------------------------------------------------------------------
$31,566,000 $31,771,000
================================================================================
</TABLE>
Proceeds from sales of securities available for sale were $5,213,000 in
1998 resulting in gross gains of $65,000 and gross losses of $3,000. Proceeds
from sales of securities available for sale in 1997 were $3,706,000 resulting
in gross gains of $4,000 and gross losses of $14,000. Proceeds from sales of
securities available for sale in 1996 were $4,810,000 resulting in gross gains
of $31,000 and no losses.
At December 31, 1998, securities having a book value of $8,647,000 were
pledged to secure public deposits and for other purposes required by law.
(5) LOANS
Loans outstanding by classification at December 31, 1998 and 1997 are as
follows-
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate-
Nonresidential properties $ 22,860,000 $ 25,660,000
Residential properties 40,117,000 24,606,000
Commercial and industrial loans 47,708,000 34,204,000
Loans to individuals 6,638,000 5,971,000
- --------------------------------------------------------------------------------
$117,323,000 $ 90,441,000
================================================================================
</TABLE>
Loans made by the Bank are generally made in the local and surrounding
communities in which it operates. As a result, the operations of the Bank could
be adversely affected by changes in the local economy in which it operates.
Loans to related parties have been granted under terms and conditions in
accordance with the Bank's normal lending policies. These loans include loans
made to directors, executive officers and their associates, as defined. The
following is the activity in loans to related parties during 1998-
<TABLE>
<S> <C>
Outstanding loans at December 31, 1997 $ 1,121,000
New loans and advances 764,000
Repayments (201,000)
- --------------------------------------------------------------------------------
Outstanding loans at December 31, 1998 $ 1,684,000
================================================================================
</TABLE>
As of December 31, 1998, all loans to related parties are current as to
principal and interest payments.
(6) ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The allowance for possible loan and lease losses is based on estimates,
and ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become neces-
22
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
================================================================================
sary, they are reflected in operations in the periods in which they become
known. Changes in the allowance for possible loan and lease losses are
summarized as follows-
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,374,000 $ 973,000 $ 600,000
Provision charged to expense 665,000 632,000 488,000
Loans charged off (185,000) (242,000) (125,000)
Recoveries of loans previously
charged off 19,000 11,000 10,000
- --------------------------------------------------------------------------------
Balance, end of year $ 1,873,000 $ 1,374,000 $ 973,000
================================================================================
</TABLE>
As of December 31, 1998 and 1997, nonaccrual loans and loans past due 90
days or more totaled $959,000 and $192,000, respectively. Interest income that
would have been recorded in the financial statements had the above loans been
performing in accordance with their original terms was approximately $80,000 and
$58,000 in 1998 and 1997, respectively.
A loan is considered impaired when it is probable that the Bank will be
unable to collect all amounts due according to the original contractual terms of
the loan agreement. At December 31, 1998 and 1997, impaired loans consisted of
nonaccrual loans and one loan totaling $383,000 and $430,000 that was previously
on nonperforming status which has been renegotiated by the bank and is
performing in accordance with the agreed upon terms. This loan has been placed
back on performing status. As of December 31, 1998 and 1997 the Bank's recorded
investment in impaired loans and the related valuation allowance are as follows-
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans-
Valuation allowance required $1,342,000 $ 166,000 $ 430,000 $ 116,000
No valuation allowance required 0 0 192,000 0
- --------------------------------------------------------------------------------------
Total impaired loans $1,342,000 $ 166,000 $ 622,000 $ 116,000
======================================================================================
</TABLE>
The valuation allowance is included in the allowance for possible loan and
lease losses in the accompanying statement of condition. The average recorded
investment in impaired loans for the period ended December 31, 1998 and 1997 was
$930,000 and $735,000, respectively.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is doubtful, at
which time payments received are recorded as reductions of principal. The Bank
recognized and collected interest income on impaired loans in the amount of
$8,000 and $24,000 for the periods ended December 31, 1998 and 1997,
respectively.
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 are as follows-
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 544,000 $ 344,000
Buildings 1,301,000 480,000
Furniture and equipment 986,000 768,000
Leasehold improvements 873,000 657,000
- --------------------------------------------------------------------------------
3,704,000 2,249,000
Less- Accumulated depreciation and amortization (839,000) (639,000)
- --------------------------------------------------------------------------------
$ 2,865,000 $ 1,610,000
================================================================================
</TABLE>
23
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
================================================================================
(8) DEPOSITS
Time deposits in denominations of $100,000 or more totaled $11,848,000 and
$8,377,000 at December 31, 1998 and 1997, respectively.
Scheduled maturities of certificates of deposit at December 31, 1998 and
1997 are as follows-
<TABLE>
<CAPTION>
Over Three Over One
Months Year
Three Through Through Over
Months or Twelve Three Three
1998 Less Months Years Years Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 or more $ 6,083,000 $ 4,483,000 $ 1,282,000 $ 0 $11,848,000
Less than $100,000 7,424,000 24,914,000 14,410,000 436,000 47,184,000
<CAPTION>
1997
- ----------------------------------------------------------------------------------------
$100,000 or more $ 4,428,000 $ 2,615,000 $ 1,334,000 $ 0 $ 8,377,000
Less than $100,000 13,199,000 20,943,000 12,777,000 392,000 47,311,000
</TABLE>
(9) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1998, 1997 and 1996 are as follows-
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal-
Current $1,048,000 $838,000 $538,000
Deferred (122,000) (148,000) (124,000)
State 107,000 127,000 56,000
- ----------------------------------------------------------------------------------
Total $1,033,000 $817,000 $470,000
==================================================================================
</TABLE>
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Bank's assets and
liabilities. Cumulative temporary differences and carryforwards at December 31,
1998 and 1997 are as follows-
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Allowance for possible loan and lease losses $ 673,000 $ 536,000
Interest on nonaccrual loans 133,000 98,000
Unrealized holding (gain) loss on securities
available for sale (80,000) (83,000)
Other 16,000 (36,000)
- ----------------------------------------------------------------------------------
Net deferred taxes $ 742,000 $ 515,000
================================================================================
</TABLE>
A comparison of income tax expense at the Federal statutory rate in 1998,
1997 and 1996, to the Bank's provision for income taxes is as follows-
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
At statutory rate $ 974,000 $ 762,000 $ 415,000
Increase (decrease) from statutory
rate resulting from-
Tax-exempt interest income (55,000) (15,000) (4,000)
State income taxes, net of Federal
tax benefit 64,000 83,000 37,000
Other 50,000 (13,000) 22,000
- ----------------------------------------------------------------------------------
Provision for income taxes $ 1,033,000 $ 817,000 $ 470,000
==================================================================================
</TABLE>
24
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
================================================================================
(10) SHAREHOLDERS' EQUITY
In 1997, a Dividend Reinvestment Plan (DRP) was established and offered to
the shareholders of the Bank. The DRP allows shareholders to purchase stock of
the Bank with proceeds from their cash dividends. The cash dividends paid in
1998 were eligible to be reinvested in the DRP. The DRP also allows optional
quarterly cash purchases of any amount from $100 to $5,000. The purchases of
shares from both the cash dividends and the optional cash purchases were made
directly from the Bank through the issuance of approved, but previously unissued
shares of the common stock of the Bank. In 1998, the investments received
through the DRP resulted in $143,000 of additional capital for the Bank. There
were no purchases in 1997.
In 1991, the Shareholders approved the 1991 Non-Qualified Stock Option
Plan (the 1991 Plan). In 1994, the Shareholders of the Bank approved the 1994
Amended and Restated Incentive Stock Option Plan (the 1994 Plan). In 1996, the
Shareholders approved the 1996 Incentive Stock Option Plan (the 1996 Plan). In
1998, the Shareholders approved the 1997 Incentive Stock Option Plan (the 1997
Plan). Under these plans, the Board of Directors may grant options to officers
to purchase the Bank's stock. Option prices for the 1991 Plan are determined by
the Board, provided however, that the option price of shares may not be less
than 85% of the fair market value of shares at the date of grant. Option prices
for the 1994, 1996, and 1997 Plans may not be lower than the fair market value
of the shares at the date of grant. The period during which an option under all
plans may be exercised varies, but no option may be exercised after ten years
from the date of grant. There were 384,431 shares reserved for issuance under
the plans as of December 31, 1998.
Transactions under the plan are summarized as follows-
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Exercise Price
of Shares Per Share
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1995 93,821 $3.50-4.89
Options granted 33,915 6.37-6.79
Options exercised (2,756) 4.30-4.89
- --------------------------------------------------------------------------------
Outstanding, December 31, 1996 124,980 $3.50-6.79
Options granted 48,063 6.37-8.81
Options exercised (8,268) 7.38-8.81
- --------------------------------------------------------------------------------
Outstanding, December 31, 1997 164,775 3.50-8.81
Options granted 167,059 8.81-13.56
Options exercised (11,166) 4.30-5.16
- --------------------------------------------------------------------------------
Outstanding, December 31, 1998 320,668 $3.50-$13.56
================================================================================
</TABLE>
25
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Bank applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Bank's stock-option plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FASB Statement
123, the Bank's net income and earnings per share would have been reduced to the
pro forma amounts indicated below-
The following is a reconciliation of the calculation of basic and diluted
earnings per share-
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income-
As reported $ 1,831,000 $ 1,424,000 $ 750,000
Pro forma 1,633,000 1,351,000 698,000
Basic income per share-
As reported $ .78 $ .61 $ .32
Pro forma .69 .58 .30
Diluted income per share-
As reported $ .74 $ .59 $ .32
Pro forma .66 .56 .30
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997 and 1996, respectively; dividend
yield of .5% for 1998 and 1997 and 0% for 1996; expected volatility of 46%, 47%,
40% and 41% for the 1991, 1994, 1996 and 1997 Plan options, risk-free interest
rates of 5.9% for the 1991 Plan options, 6.2% and 6.7% for the 1994 Plan
options, 7.0% for the 1996 Plan options; 6.6% and 6.9% for the 1997 grants under
the 1996 Plan and 5.9%, 5.6% and 6.7% for the 1998 grants under the 1997 Plan;
and expected lives of 10 years for the 1991 Plan options, 4.3 years for the 1994
Plan options and 10 years for the 1996 and 1997 Plan options.
The following table summarizes information about stock options outstanding
at December 31, 1998-
<TABLE>
<CAPTION>
Number Number
Exercise Outstanding Remaining Exercisable at
Price December 31, 1998 Contractual Life December 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3.50 24,259 1.80 years 19,895
4.30 8,820 .33 years 8,820
4.89 3,306 1.33 years 3,306
5.16 38,000 7.00 years 21,200
6.37 27,300 7.40 years 10,920
6.79 4,959 2.33 years 4,959
7.38 4,959 3.30 years 4,959
8.81 113,505 8.70 years 22,700
11.53 13,212 9.20 years 6,000
13.38 32,060 4.30 years 32,060
13.56 50,288 9.20 years 12,700
- --------------------------------------------------------------------------------
320,668 147,519
================================================================================
</TABLE>
26
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
================================================================================
(11) EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and diluted
earnings per share-
<TABLE>
<CAPTION>
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31, 1998-
Basic earnings per share - Income
available to common shareholders $1,831,000 2,355,839 $. 78
===========
Effect of Dilutive Securities-Stock Options 0 116,169
- -------------------------------------------------------------------------------------------
Diluted earnings per share -- Income
available to common shareholders
plus assumed conversions $1,831,000 2,472,008 $. 74
===========================================================================================
For the Year Ended December 31, 1997-
Basic earnings per share -- Income
available to common shareholders $1,424,000 2,345,052 $. 61
===========
Effect of Dilutive Securities-Stock Options 0 48,604
- -------------------------------------------------------------------------------------------
Diluted earnings per share -- Income
available to common shareholders plus
assumed conversions $1,424,000 2,393,656 $. 59
===========================================================================================
For the Year Ended December 31, 1996-
Basic earnings per share -- Income
available to common shareholders $ 750,000 2,340,356 $. 32
===========
Effect of Dilutive Securities-Stock Options 0 25,541
- -------------------------------------------------------------------------------------------
Diluted earnings per share -- Income
available to common shareholders plus
assumed conversions $ 750,000 2,365,897 $. 32
===========================================================================================
</TABLE>
(12) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional,
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
27
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Bank's actual capital amounts and ratios are also presented in the
table-
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- --------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998-
Total capital (to Risk
Weighted Assets) $13,384,000 12.10% >=$8,852,000 >=8.00% >=$11,065,000 >=10.OO%
Tier I Capital (to Risk
Weighted Assets) 11,994,000 10.84 >=4,426,000 >=4.00 >=6,639,000 >=6.00
Tier I Capital (to
Average Assets) 11,994,000 6.84 >=7,072,000 >=4.00 >=8,840,000 >=5.00
As of December 31, 1997-
Total capital (to Risk
Weighted Assets) $11,056,748 12.32% >=$7,176,748 >=8.00% >=$8,980,748 >=10.00%
Tier I Capital (to Risk
Weighted Assets) 9,934,707 11.07 >=3,594,707 >=4.00 >=5,384,707 >=6.00
Tier I Capital
(to Average Assets) 9,934,707 6.81 >=5,834,707 >=4.00 >=7,284,707 >=5.00
</TABLE>
(13) EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) savings plan covering substantially all employees.
Under the plan, an employee can contribute up to 15% of their salary on a tax
deferred basis. The Bank may also make discretionary contributions to the Plan.
The Bank contributed approximately $49,000, $42,000 and $34,000 to the Plan in
1998, 1997, and 1996, respectively.
The Bank does not currently provide any post retirement or post employment
benefits to its employees other than the 401(k) plan.
(14) COMMITMENTS AND CONTINGENCIES
Litigation
- --------------------------------------------------------------------------------
The Bank may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In management's judgment,
the financial position or results of operations of the Bank will not be affected
materially by the final outcome of any present legal proceedings.
Commitments With Off-Balance Sheet Risk
- --------------------------------------------------------------------------------
The statement of condition does not reflect various commitments relating
to financial instruments which are used in the normal course of business.
Management does not anticipate that the settlement of those financial
instruments will have a material adverse effect on the Bank's financial
position. These instruments include primarily commitments to extend credit.
These financial instruments carry various degrees of credit risk, which is
defined as the possibility that a loss may occur from the failure of another
party to perform according to the terms of the contract.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank receives a fee for providing
a commitment. The Bank was committed to advance $13,818,000 to its borrowers as
of December 31, 1998, which generally expire within one year.
28
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS
================================================================================
Lease Obligations
- --------------------------------------------------------------------------------
As of December 31, 1998, future minimum rental payments under lease
obligations are as follows-
<TABLE>
<S> <C> <C> <C>
1999 $261,959 2002 $293,393
2000 292,435 2003 202,913
2001 296,172 Thereafter 90,000
</TABLE>
Total rental expense was approximately $205,000, $135,000 and $ 147,000 in
1998, 1997 and 1996, respectively.
Transactions with Related Party
- --------------------------------------------------------------------------------
In October 1997, the Bank entered into a five year sublease agreement with
RoNetco Supermarkets, Inc. for an in-store "Financial Service Facility" at a
supermarket in Byram, New Jersey which is operated by RoNetco Supermarkets, Inc.
The office opened in June of 1998 and rent paid during 1998 amounted to $16,195.
An officer and shareholder of RoNetco Supermarkets, Inc. is also a director of
the Bank. Management believes that this transaction was on substantially the
same terms and conditions as those prevailing at the time for comparable
transactions with non-related parties.
Required Cash Balances
- --------------------------------------------------------------------------------
Cash balances reserved to meet regulatory requirements amounted to
$1,296,000 and $1,481,000 at December 31, 1998 and 1997, respectively.
(15) OTHER OPERATING EXPENSES
The major components of other expenses are as follows-
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Data processing fees $ 251,000 $ 199,000 $ 199,000
FDIC insurance assessment 16,000 13,000 2,000
Directors fees 111,000 86,000 59,000
Advertising and marketing 75,000 95,000 30,000
Insurance 52,000 45,000 54,000
Examination, audit and legal fees 232,000 140,000 134,000
Correspondent and bank fees 63,000 55,000 37,000
Postage 104,000 81,000 76,000
Stationery and printing 54,000 60,000 70,000
Office supplies 96,000 60,000 41,000
Checkbooks 63,000 35,000 55,000
Customer relations 25,000 24,000 28,000
Core deposit amortization 130,000 130,000 130,000
Other 556,000 574,000 396,000
- --------------------------------------------------------------------------------
Total $1,828,000 $1,597,000 $1,311,000
================================================================================
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of fair value of the Bank's financial
instruments. For the Bank, as for most financial institutions, the bulk of its
assets and liabilities are considered financial instruments. Many of the Bank's
financial instruments lack an available trading market as characterized by a
willing buyer and willing seller engaging in an exchange transaction. It is also
the Bank's general practice and intent to hold its financial instruments to
maturity and not engage in trading or sales activities.
Estimated fair values have been determined by the Bank using the best available
data and an estimation methodology suitable for each category of financial
instruments.
29
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
================================================================================
The estimation methodologies used, the estimated fair values, and the
recorded book balances, were as follows-
Securities actively traded in the secondary market have been valued using
available market prices.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
value Fair value value Fair value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,459,000 $ 7,459,000 $ 6,213,000 $ 6,213,000
Securities available for sale 18,816,000 18,816,000 23,817,000 23,817,000
Securities held to maturity 31,566,000 31,771,000 23,105,000 23,321,000
</TABLE>
Loans and deposits with stated maturities have been valued using a present
value discounted cash flow with a discount rate approximating current market for
similar assets and liabilities. For those loans and deposits with floating
interest rates, it is assumed that estimated fair values generally approximate
the recorded book balances.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
value Fair value value Fair value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net, including accrued interest $116,174,000 $120,260,000 $ 89,786,000 $ 90,559,000
Deposits, including accrued interest 165,553,000 167,326,000 135,021,000 135,137,000
</TABLE>
There is no material difference between the notional amount and the
estimated fair value of off-balance sheet unfunded loan commitments at December
31, 1998 and 1997. The fair value of standby letters of credit is based on fees
charged for similar agreements; accordingly, the estimated fair value of standby
letters of credit is nominal.
(17) OTHER COMPREHENSIVE INCOME
The tax effect of other comprehensive income is as follows-
<TABLE>
<CAPTION>
Year Ended December, 1998 Before-Tax Amount Tax Effect Net of Tax Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities-
Unrealized holdings gains arising during period $53,000 $(20,000) $33,000
Less -- Reclassification adjustments
for gains realized in net income (62,000) 24,000 (38,000)
- -----------------------------------------------------------------------------------------------------
Other comprehensive loss $(9,000) $ 4,000 $(5,000)
=====================================================================================================
<CAPTION>
Year Ended December, 1997 Before-Tax Amount Tax Effect Net of Tax Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities-
Unrealized holdings gains arising during period $272,000 $(106,000) $ 166,000
Less -- Reclassification adjustments
for losses realized in net income 10,000 (4,000) 6,000
- -----------------------------------------------------------------------------------------------------
Other comprehensive income $282,000 $(110,000) $ 172,000
=====================================================================================================
<CAPTION>
Year Ended December, 1996 Before-Tax Amount Tax Effect Net of Tax Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities -
Unrealized holdings losses arising during period $(223,000) $90,000 $(133,000)
Less -- Reclassification adjustments
for gains realized in net income (31,000) 12,000 (19,000)
- -----------------------------------------------------------------------------------------------------
Other comprehensive loss $(254,000) $102,000 $(152,000)
=====================================================================================================
</TABLE>
30
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
To the Shareholders and
Board of Directors of
Skylines Community Bank:
We have audited the accompanying consolidated statements of condition of
Skylands Community Bank (a New Jersey State Chartered Bank) and its subsidiary
as of December 31, 1998 and 1997, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Skylands Community Bank and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 21, 1999
31
<PAGE> 52
Selected Financial Data
At its February 10, 1999 meeting the Board of Directors declared a 5% stock
dividend. The dividend was paid on April 16, 1999 to shareholders of record on
March 31, 1999. The following table restates the applicable share and per share
data for the periods indicated:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Weighted Average Shares Outstanding As Reported As Adjusted
----------- -----------
<S> <C> <C>
Basic 2,355,839 2,473,631
Diluted 2,472,008 2,595,608
Basic Earnings Per Share $0.78 $0.74
Diluted Earnings Per Share $0.74 $0.71
Common Shares Outstanding 2,371,432 2,490,004
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
Weighted Average Shares Outstanding As Reported As Adjusted
----------- -----------
<S> <C> <C>
Basic 2,345,052 2,462,305
Diluted 2,393,656 2,513,339
Basic Earnings Per Share $0.61 $ 0.58
Diluted Earnings Per Share $0.59 $ 0.57
Common Shares Outstanding 2,348,631 2,466,063
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Weighted Average Shares Outstanding As Reported As Adjusted
----------- -----------
<S> <C> <C>
Basic 2,340,356 2,457,374
Diluted 2,365,897 2,484,192
Basic Earnings Per Share $0.32 $ 0.31
Diluted Earnings Per Share $0.32 $ 0.30
Common Shares Outstanding 2,340,642 2,457,674
</TABLE>
<PAGE> 53
SKYLANDS COMMUNITY BANK
STATEMENTS OF CONDITION
March 31, 1999 and December 31, 1998
(in thousands except share data)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS
Non-interest bearing $ 7,255 $ 4,367
Interest bearing 432 592
FEDERAL FUNDS SOLD 0 2,500
--------- ---------
Total cash and cash equivalents 7,687 7,459
--------- ---------
SECURITIES
Available for sale at market value 18,486 18,816
Held to maturity at amortized cost
(market value of $38,014 in 1999
and $31,771 in 1998) 37,868 31,566
--------- ---------
Total securities 56,354 50,382
--------- ---------
LOANS 123,013 117,323
Less:
Unearned income (161) (182)
Allowance for possible loan and lease losses (1,972) (1,873)
--------- ---------
Net loans 120,880 115,268
--------- ---------
PREMISES AND EQUIPMENT, NET 2,957 2,865
ACCRUED INTEREST RECEIVABLE 904 906
OTHER REAL ESTATE 105 105
OTHER ASSETS 2,465 2,550
--------- ---------
Total assets $ 191,352 $ 179,535
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Deposits
Demand
Non-interest bearing $ 33,663 $ 30,234
Interest bearing 20,981 22,357
Savings 52,551 53,636
Time 63,900 59,032
--------- ---------
Total deposits 171,095 165,259
Federal Funds Purchased 5,000 0
Accrued Expenses and other liabilities 1,092 657
--------- ---------
Total liabilities 177,187 165,916
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock par value $2.50 per share
10,000,000 shares authorized;
2,500,241 and 2,466,048 shares issued
and outstanding in 1999 and 1998 respectively 6,251 5,929
Additional paid in capital 6,235 4,998
Retained Earnings 1,543 2,562
Accumulated other comprehensive income 136 130
--------- ---------
Total shareholder's equity 14,165 13,619
--------- ---------
Total liabilities and shareholders' equity $ 191,352 $ 179,535
========= =========
</TABLE>
<PAGE> 54
SKYLANDS COMMUNITY BANK
STATEMENTS OF INCOME
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three months
Ended March 31,
(unaudited)
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,624 $ 2,124
Interest on securities 832 760
Interest on federal funds sold 36 53
----------- -----------
Total Interest Income 3,492 2,937
INTEREST EXPENSE 1,347 1,200
----------- -----------
NET INTEREST INCOME 2,145 1,737
PROVISION FOR POSSIBLE LOAN LOSSES 112 100
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOANS LOSSES 2,033 1,637
----------- -----------
OTHER INCOME:
Loss on sale of securities 0 (3)
Other 236 179
----------- -----------
Total Other Income 236 176
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 631 507
Occupancy expense 144 112
Equipment and furniture expense 50 33
Other operating expense 576 460
----------- -----------
Total Other Expenses 1,401 1,112
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 868 701
PROVISION FOR INCOME TAXES 337 266
----------- -----------
NET INCOME $ 531 $ 435
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 2,496,312 2,466,048
=========== ===========
Diluted 2,584,951 2,570,188
=========== ===========
BASIC EARNINGS PER SHARE $ 0.21 $ 0.18
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.21 $ 0.17
=========== ===========
</TABLE>
<PAGE> 55
SKYLANDS COMMUNITY BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
For the three months ended March 31, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Total Comprehensive
Stock Capital Earnings Income (Loss) Equity Income
----- ------- -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ 5,929 $ 4,998 $ 2,562 $ 130 $ 13,619 --
Net Income - Three Months
Ended March 31, 1999 -- -- 531 -- 531 $ 531
5% Stock Dividend 297 1,203 (1,500) -- -- --
Exercise of Stock Options 20 18 -- -- 38 --
Dividend Reinvestment Plan 5 16 -- -- 21 --
Cash Dividend ($.02 per share) -- -- (50) -- (50) --
Unrealized Gain on Securities
Available for Sale, Net of Taxes of -- -- -- 6 6 6
($4) -------- -------- -------- -------- -------- --------
Balance March 31, 1999 $ 6,251 $ 6,235 $ 1,543 $ 136 $ 14,165 $ 537
======== ======== ======== ======== ======== ========
Disclosure of Reclassification Amount:
Unrealized Holding Gains
Arising During Period $ 6
Less: Reclassification Adjustments for
Gains Included in Net Income
(Net of Tax) 0
--------
Net Unrealized Gains on Securities $ 6
========
</TABLE>
For the three months ended March 31, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Total Comprehensive
Stock Capital Earnings Income (Loss) Equity Income
----- ------- -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 $ 5,593 $ 3,514 $ 2,452 $ 135 $ 11,694 --
Net Income - Three Months
Ended March 31, 1998 -- -- 435 -- 435 $ 435
5% Stock Dividend 279 1,298 (1,577) -- 0 --
Exercise of Stock Options -- -- -- -- 0 --
Payment for Fractional Shares -- -- (4) -- (4) --
Unrealized Gain on Securities
Available for Sale, Net of Taxes of ($20) -- -- -- 34 34 34
======== ======== ======== ======== ======== ========
Balance March 31, 1998 $ 5,872 $ 4,812 $ 1,306 $ 169 $ 12,159 $ 469
======== ======== ======== ======== ======== ========
Disclosure of Reclassification Amount:
Unrealized Holding Gains
Arising During Period
$ 31
Less: Reclassification Adjustments for
Losses Included in Net Income
(Net of Tax) 3
--------
Net Unrealized Gain on Securities $ 34
========
</TABLE>
<PAGE> 56
SKYLANDS COMMUNITY BANK
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
OPERATING ACTIVITIES 1999 1998
---- ----
<S> <C> <C>
Net Income: $ 531 $ 435
Adjustments to reconcile net income to net cash
Provided by(used in) operating activities
Provision for possible loan losses 112 100
Depreciation and amortization 101 80
Loss on sale of securities 0 3
Premium amortization on securities, net 74 65
Decrease in accrued interest receivable 2 36
Decrease(increase) in other assets 50 (162)
Increase in federal funds purchased 5,000 800
Increase(decrease) in accrued expenses and other liabilities 435 264
-------- --------
Net cash provided by operating activities 6,305 1,621
-------- --------
INVESTING ACTIVITIES
Purchase of securities-
Available for sale (978) (1,249)
Held to maturity (9,283) (4,163)
Maturities of securities-
Available for sale 1,300 1,106
Held to maturity 2,924 1,291
Sales of available for sale securities 0 1,726
Capital expenditures (161) (44)
Net increase in loans (5,724) (6,692)
-------- --------
Net cash used in investing activities (11,922) (8,025)
-------- --------
FINANCING ACTIVITIES
Increase in deposits 5,836 6,591
Proceeds from the issuance of common stock, net 59 0
Cash Dividends and payment of fractional (50) (4)
shares
-------- --------
Net cash provided by financing activities 5,845 6,587
Increase in cash and cash equivalents 228 183
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,459 6,213
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,687 $ 6,396
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 1,291 $ 1,197
Income Taxes 20 50
======== ========
</TABLE>
<PAGE> 57
PART III
ITEM 1 - INDEX TO EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement:
Exhibit Number Description
- -------------- -----------
3(a)* Certificate of Incorporation of the Company
3(b)* Bylaws of the Company.
10(a)* 1994 Amended and Restated Stock Option Plan.
10(b)* 1991 Non-Qualified Stock Option Plan.
10(c)* 1997 Incentive Stock Option Plan.
10(d)* 1996 Incentive Stock Option Plan.
10(e)* Summary Plan Description of 401(k) Plan.
10(f)* Amended and Restated Employment Agreement between the Bank
and Michael Halpin, dated May 23, 1998.
21(a)* List of Subsidiaries of the Company and the Bank.
- -----------
*All Exhibits have been filed previously and are incorporated by reference.
<PAGE> 58
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
SKYLANDS FINANCIAL CORPORATION
By: /s/ MICHAEL HALPIN
- -----------------------------------
Michael Halpin, President
Dated: June 14, 1999
<PAGE> 59
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3(a)* Certificate of Incorporation of the Company
3(b)* Bylaws of the Company.
10(a)* 1994 Amended and Restated Stock Option Plan.
10(b)* 1991 Non-Qualified Stock Option Plan.
10(c)* 1997 Incentive Stock Option Plan.
10(d)* 1996 Incentive Stock Option Plan.
10(e)* Summary Plan Description of 401(k) Plan.
10(f)* Amended and Restated Employment Agreement between the Bank
and Michael Halpin, dated May 23, 1998.
21(a)* List of Subsidiaries of the Company and the Bank.
- -----------
*All Exhibits have been filed previously and are incorporated by reference.
