<PAGE>
As filed with the Securities and Exchange Commission on July 11, 1996
Registration No. 333 - 01827
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 2
to
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INDEPENDENCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2483513
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Lake Street
Ramsey, New Jersey 07446
(201) 825-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Kevin J. Killian, Executive Vice President
1100 Lake Street
Ramsey, New Jersey 07446
(201) 825-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Lawrence R. Wiseman, Esquire Charles C. Zall, Esquire
Blank Rome Comisky & McCauley Saul Ewing Remick & Saul
1200 Four Penn Center Plaza 3800 Centre Square West
Philadelphia, PA 19103 Philadelphia, PA 19102
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
PROSPECTUS
INDEPENDENCE BANCORP, INC.
1,523,750 Shares of Common Stock
This Prospectus covers (i) the issuance of a maximum of 776,875
shares of Common Stock, $1.667 par value (the "Common Stock"), of Independence
Bancorp, Inc. (the "Company") reserved for issuance upon conversion of the
Company's Series A 9% Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") into Common Stock or the issuance of such Common Stock
pursuant to the standby arrangements described herein and the reoffering of
any Common Stock issued pursuant to such standby arrangements and (ii) the
issuance of a maximum of 746,875 shares of Common Stock, reserved for issuance
upon exercise of rights (the "Common Stock Purchase Rights") to purchase one
share of Common Stock for $9.60 per share (subject to adjustment in certain
events) until the earlier to occur of October 30, 1997 or the conversion or
redemption of the Series A Preferred Stock to which such Common Stock Purchase
Right is attached or, the issuance of such Common Stock pursuant to the standby
arrangements described herein and the reoffering of any Common Stock issued
pursuant to such standby arrangement. The Common Stock Purchase Rights are not
transferable separately from the Series A Preferred Stock.
The Company has called all of the Series A Preferred Stock for
redemption on [ ], 1996 (the "Redemption Date") at a redemption price of
$8.30, together with accumulated and unpaid dividends thereon of $[ ] from [
], 1996 to the Redemption Date, for a total redemption price of $[ ] for each
share of Series A Preferred Stock (the "Redemption Price"). No dividends will
accrue on the Series A Preferred Stock from and after the Redemption Date. On
June 13, 1996 the Company declared a dividend of $.18 per share on the Series
A Preferred Stock payable on July 30, 1996 to shareholders of record on June
28, 1996. Prior to the close of business on the Redemption Date, the Series A
Preferred Stock may be converted at a conversion ratio of one share of Common
Stock for each share of Series A Preferred Stock, and prior to the earlier of
the Redemption Date or the date the underlying Series A Preferred Stock is
converted, the Common Stock Purchase Right attached thereto may be exercised
for $9.60 per share to purchase one share of Common Stock. Holders who convert
their Series A Preferred Stock into Common Stock will not be entitled to
receive dividends accrued since [ ], 1996. Any Series A Preferred Stock called
and not surrendered for conversion by the close of business on the Redemption
Date will be redeemed and any Common Stock Purchase Right attached to Series A
Preferred Stock which has not been exercised prior to the Redemption Date
shall be null and void.
The Common Stock is traded on the NASDAQ National Market under the
symbol IBNJ. The closing sale price of the Common Stock on [ ], 1996, as
reported on the NASDAQ National Market, was $[ ] per share.
Based on the above-stated last sale price of the Common Stock on [ ],
1996, the market value of the Common Stock into which each share of Series A
Preferred Stock is convertible is approximately $[ ], or considerably higher
than the amount to be received upon redemption. Such value is, of course,
subject to change depending on the market price of the Common Stock. SO LONG
AS THE MARKET PRICE OF THE COMMON STOCK IS HIGHER THAN $[ ] PER SHARE, A
HOLDER WHO CONVERTS HIS SERIES A PREFERRED STOCK WILL RECEIVE COMMON STOCK
WITH A MARKET VALUE GREATER THAN THE AMOUNT OF CASH RECEIVABLE UPON REDEMPTION
OF THE SERIES A PREFERRED STOCK.
<PAGE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
BANK INSURANCE FUND, SAVINGS ASSOCIATION INSURANCE FUND
OR ANY OTHER GOVERNMENTAL AGENCY.
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The Company has made standby arrangements with Janney Montgomery
Scott Inc. (the "Purchaser") pursuant to which the Purchaser has agreed,
subject to certain conditions, to purchase from the Company such number of
shares of Common Stock which, in the aggregate, would have been issuable (i)
upon conversion of Series A Preferred Stock which either have been surrendered
for redemption or have not been surrendered for conversion prior to the close
of business on the Redemption Date, and (ii) upon exercise of the Common Stock
Purchase Rights attached to the Series A Preferred Stock which have not been
exercised and which expire on the Redemption Date. The standby arrangement
provides for a negotiated per share purchase price based on prevailing market
conditions at the time of sale. Pursuant to the standby arrangement, the
Company will receive proceeds equal to the number of shares of Common Stock
purchased by the Purchaser multipled by the agreed upon purchase price,
irrespective of the number of shares sold by the Purchaser or the price at
which such shares are sold by the Puchaser. Pursuant to the standby
arrangement, the Purchaser will initially offer such shares at the negotiated
per share purchase price and the Company will receive the negotiated per share
purchase price less an 8% discount. The Purchaser may also acquire Series A
Preferred Stock in the open market or otherwise prior to the Redemption Date,
and has agreed to convert into Common Stock all shares of Series A Preferred
Stock so purchased (and exercise all related Common Stock Purchase Rights) and
all Series A Preferred Stock (and exercise all related Common Stock Purchase
Rights) it otherwise beneficially owns. The Company will pay the Purchaser a
fee of $1.12 per share for each share of Series A Preferred Stock so converted
by the Purchaser. The Company has also agreed to pay to the Purchaser in
addition to the commission referenced above an advisory fee equal to $75,000
plus their out-of-pocket expenses in connection therewith up to a maximum of
$50,000. See "Standby and Other Arrangements" for a further description of the
Purchaser's compensation arrangements.
Prior to or after the Redemption Date, the Purchaser may offer to the
public shares of Common Stock, including shares acquired through the purchase
and conversion of the Series A Preferred Stock (and the exercise of the
related Common Stock Purchase Rights) at prices set from time to time by the
Purchaser. Each such price when set will not exceed the greater of the last
sale or current asked price of the Common Stock as reported in the NASDAQ
National Market plus the amount of any concession to dealers, and an offering
price on any calendar day will not be increased more than once during such
day. The Purchaser may thus realize profits or losses independent of the
compensation referred to under "Standby and Other Arrangements." The Purchaser
may also make sales to dealers at prices which represent concessions from the
prices at which such shares are then being offered to the public. The amount
of such concessions is to be determined from time to time by the Purchaser.
Any Common Stock so offered is offered subject to prior sale, when, as and if
received by the Purchaser and subject to its right to reject orders in whole
or in part.
INVESTORS ARE URGED TO READ AND CONSIDER CAREFULLY
THE INFORMATION SET FORTH UNDER "RISK FACTORS."
SEE PAGE [ ] OF THE PROSPECTUS
Janney Montgomery Scott Inc.
The date of this Prospectus is [ ], 1996.
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IN CONNECTION WITH THIS OFFERING, THE PURCHASER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME. IN CONNECTION WITH THIS OFFERING, THE PURCHASER AND ITS AFFILIATES
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE EXCHANGE ACT.
(SEE "STANDBY AND OTHER ARRANGEMENTS") DURING THIS OFFERING, CERTAIN PERSONS
AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN
TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE
COMPANY'S COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10b-6, 10b-7, AND
10b-8 UNDER THE EXCHANGE ACT.
AVAILABLE INFORMATION
As permitted by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), this Prospectus omits certain
information contained in the Registration Statement on Form S-3 filed by the
Company with the Commission under the Securities Act of 1933, as amended, of
which this Prospectus is a part. For such information, reference is made to
the Registration Statement and the exhibits thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete; with respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement or
incorporated by reference therein, reference is made to such contract,
agreement or other document for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Room 1024, Washington, DC 20549; and at the
Commission's New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621; and
copies of such material can be obtained from the Public Reference Section of
the Commission, Washington, DC 20549 at prescribed rates. The Common Stock of
the Company is listed on the NASDAQ National Market and such reports, proxy
statements and other information can also be inspected at the offices of
NASDAQ Operations, 1735 K Street, N.W., Washington, DC 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and portions of documents filed by the
Company with the Commission are hereby incorporated by reference into this
Prospectus and made a part hereof: the Annual Report on Form 10-K for the year
ended December 31, 1995 and the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
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All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Common Stock offered hereby
shall be deemed to be incorporated by reference in this Prospectus and to be
part of this Prospectus from the date of filing of such documents. Any
statement contained herein or in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed to constitute
a part of this Prospectus, except as so modified or superseded.
The Company hereby undertakes to provide without charge to each
person, including any beneficial owner to whom a copy of this Prospectus has
been delivered, upon written or oral request of such person, a copy of any or
all of the information that has been incorporated by reference in this
Prospectus (not including exhibits to such information unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates). Written or oral requests for such copies should be
directed to Independence Bancorp, Inc., 1100 Lake Street, Ramsey, New Jersey
07446, Attention: Kevin J. Killian, Executive Vice President; (201) 825-1000.
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PROSPECTUS SUMMARY
The information set forth below is qualified in its entirety by the
detailed information and financial statements appearing elsewhere in this
Prospectus. References to the "Company" in this Prospectus shall, unless the
context otherwise requires, include the Company and the Bank.
The Company
Independence Bancorp, Inc. ("Bancorp" or the "Company") is a one-bank
holding company headquartered in Ramsey, New Jersey. At March 31, 1996, on a
consolidated basis, the Company had total assets of approximately $338.3
million, total deposits of approximately $316.8 million, and total
stockholders' equity of approximately $19.0 million.
The Company has one bank subsidiary, Independence Bank of New Jersey
("Independence" or the "Bank"), which is a New Jersey chartered commercial
bank subject to regulation by the New Jersey Department of Banking (the
"Department") and, because its deposits are federally insured by the Bank
Insurance Fund ("BIF"), the Federal Deposit Insurance Corporation ("FDIC").
The Bank currently accounts for substantially all of the total assets and the
net income of the Company.
The Bank is an independent community bank which seeks to provide
personal attention and professional financial assistance to its customers. The
Bank is a locally managed, owned and oriented financial institution.
The Bank is a member of the Commerce Network (the "Network") and has
the exclusive right to use the "Yes Bank" logo within its primary service
area. The Network is a group of five community banks with over 70 branch
banking offices throughout New Jersey and Southeastern Pennsylvania that
provides certain marketing support and technical support services to its
members which allows them to take advantage of the Network's size.
The Bank engages in a full service commercial and retail banking
business from seven offices in Bergen County, New Jersey and one office in
Passaic County, New Jersey. These commercial and retail banking services are
provided by the Bank primarily to consumers and small to mid-size companies
within its primary service area (i.e., Bergen and Passaic Counties, New
Jersey). Lending services are focused on commercial real estate, commercial
and consumer lending to local borrowers. The Bank's lending and investing
activities are funded principally by deposits gathered through its retail
branch offices.
The Bank has focused its strategy for growth primarily on the further
development of its community-based retail banking network. The objective of
this corporate strategy is to build earnings growth potential for the future
as the retail branch office network matures. The Bank's branch concept will
use a prototype or standardized branch office building, convenient locations
and active marketing, all designed to attract retail deposits. Using this
prototype branch concept, the Bank plans to open a number of new branch
offices in the next five years.
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The Bank's retail approach to banking emphasizes a combination of
long-term customer relationships, quick responses to customer needs, active
marketing, convenient locations, free personal checking with no minimum
balance requirements and free business checking for customers maintaining a
minimum balance of $1,000 and extended hours of operation (including Saturday
and Sunday). The Bank's retail approach to banking has produced low cost
deposits and has resulted in a high concentration of demand and savings
deposits due to convenience and service rather than rate. As of March 31,
1996, 77.0% of the Bank's total deposits represented demand and savings
deposits, while 23.0% represented time deposits. Financial highlights of the
Bank include the following:
o Profitability. The Bank's net income has improved from $1.2
million for the year ended December 31, 1993 to $3.0 million
for the year ended December 31, 1995. This performance has
resulted in an increase in return on average assets (ROA) from
.49% in 1993 to 1.01% in 1995. Return on average common equity
(ROE) increased from 8.77% for the year ended December 31,
1993 to 18.39% for the year ended December 31, 1995. Net
interest margin increased from 5.11% to 5.26% over this same
time period. The Bank's net income improved from $549,000 for
the three months ended March 31, 1995 to $843,000 for the
three months ended March 31, 1996.
o Asset Quality. The nonperforming assets as a percentage of
total assets ratio was .89% at March 31, 1996. The allowance
for possible loan losses to nonperforming loans ratio was
179.82% at March 31, 1996 and the net charge-offs to average
loan ratios was .02% at March 31, 1996.
o Deposit, Loan and Asset Growth. The Bank's deposits have grown
from $244.7 million at December 31, 1993 to $316.8 million at
March 31, 1996. This deposit growth has fueled the Bank's loan
growth from $121.6 million at December 31, 1993 to $145.9
million at March 31, 1996. Total assets over that period have
increased to $338.3 million from $260.9 million.
The Company maintains its executive offices at 1100 Lake Street,
Ramsey, New Jersey 07446; telephone 201-825-1000.
A potential investor should be aware of certain considerations that
could have an adverse effect on the Company. For a discussion of these issues
see "INVESTMENT RISKS."
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<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered.................................. 1,523,750 shares of Common Stock, par value $1.667
per share, to be used in connection with the call for
redemption of all of the Company's Series A
Preferred Stock and the attached Common Stock
Purchase Rights and the related Standby Purchase
Agreement. See "Alternatives Available to Holders
of Series A Preferred Stock" and "Standby and
Other Arrangements."
Common Stock Issued After the Offering................ 2,844,598 shares.
Estimated Net Proceeds to the Company................. $6,920,272. See "Use of Proceeds."(1)
Use of Proceeds....................................... For general corporate purposes, including the
funding of the redemption of the Series A Preferred
Stock not tendered for conversion and providing
additional equity capital to the Company's bank
subsidiary for use as working capital and to support
its growth.
NASDAQ National Market Symbol......................... IBNJ.
Cash Dividends........................................ Cash dividends are currently paid quarterly on the
Common Stock at the annual rate of $0.25 per
share. The Company has recently announced that the annual rate of
cash dividends on the Common Stock will increase to $0.30 in the third
quarter of 1996 and $0.35 in the fourth quarter of 1996. See
"DIVIDENDS."
Conversion of Series A Preferred Stock and The Company's ESOP, which owns 187,387 shares
exercise of Common Stock Purchase Rights of Series A Preferred Stock, has indicated it will
by the Company's ESOP and by the sell a sufficient number of shares of Series A Preferred
Company's Directors and Executive Officers............ Stock in the market and/or to the Purchaser at market prices so as to
allow the ESOP to have sufficient funds to exercise all Common Stock
Purchase Rights attached to the shares of Series A Preferred Stock not
sold. The ESOP has also indicated it will convert all shares of Series A
Preferred Stock not sold. Additionally, the directors and executive
officers of the Company have indicated their intention to convert a
total of 70,544 shares of Series A Preferred stock, which represents
all of the shares of Series A Preferred Stock owned by them
and exercise a total of 67,844 Common Stock Purchase Rights,
which represents substantially all of the Common Stock
Purchase Rights attached to the shares of Series A Preferred
Stock.
</TABLE>
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(1) Assumes conversion of all outstanding shares of Series A Preferred Stock,
exercise of approximately 85% of the 746,875 Common Stock Purchase Rights
at $9.60 and the sale of 109,488 shares of Common Stock to the Purchaser at
an estimated price of $12.50 per share (less 8% discount). No assurance
can be given as to the price of Common Stock sold to the Purchaser.
See "Standby and Other Arrangements."
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ALTERNATIVES AVAILABLE TO HOLDERS OF
SERIES A PREFERRED STOCK
The Company has called for redemption at the close of business on
[ ], 1996 (the "Redemption Date"), all of the Company's outstanding Series
A Preferred Stock. Pursuant to the terms of the Series A Preferred Stock,
holders of the Series A Preferred Stock will be entitled to receive upon
redemption a total redemption price of $[ ] (the "Redemption Price") for each
share of Series A Preferred Stock which equals the redemption price of $8.30
plus accrued dividends of $[ ] from [ ], 1996.
Payment of the Redemption Price will be made by the Transfer Agent,
on and after the Redemption Date, upon receipt of the Series A Preferred Stock
so redeemed. On and after the Redemption Date, dividends will cease to accrue
and holders of Series A Preferred Stock will not have any rights as such
holders other than the right to receive $[ ] per share of Series A Preferred
Stock upon surrender for redemption. On June 13, 1996 the Company declared a
dividend of $.18 per share on the Series A Preferred Stock payable on July 30,
1996 to shareholders of record on June 28, 1996. As a result of the foregoing
call for redemption, the Common Stock Purchase Rights attached to the shares
of Series A Preferred Stock will expire on the earlier of the date the Series
A Preferred Stock is converted or the Redemption Date, after which time such
Common Stock Purchase Rights will be null and void.
The following alternatives are available with respect to holders of
Series A Preferred Stock:
(1) Convert the Series A Preferred Stock at a conversion
ratio of one share of Common Stock for each share of Series A
Preferred Stock. On [ ], 1996, the closing sale price of the Common
Stock, as reported on the NASDAQ National Market was $[ ] per share.
THE CONVERSION RIGHT EXPIRES AT THE CLOSE OF BUSINESS (5:00 P.M. NEW
YORK CITY TIME) ON THE REDEMPTION DATE, [ ], 1996; and/or
Based on the above-stated last sale price of the Common
Stock on [ ], 1996, the market value of the Common Stock into which
each share of Series A Preferred Stock is convertible is
approximately $[ ], or considerably higher than the amount to be
received upon redemption. Such value is, of course, subject to change
depending on the market price of the Common Stock. SO LONG AS THE
MARKET PRICE OF THE COMMON STOCK IS HIGHER THAN $[ ] PER SHARE, A
HOLDER WHO CONVERTS HIS SERIES A PREFERRED STOCK WILL RECEIVE COMMON
STOCK WITH A MARKET VALUE GREATER THAN THE AMOUNT OF CASH RECEIVABLE
UPON REDEMPTION OF THE SERIES A PREFERRED STOCK.
(2) Exercise the Common Stock Purchase Right at an exercise
price of $9.60 per share of Common Stock. On [ ], 1996, the closing
sale price of the Common Stock, as reported on the NASDAQ National
Market was $[ ] per share. THE EXERCISE RIGHT EXPIRES AT THE CLOSE OF
BUSINESS (5:00 P.M., NEW YORK CITY TIME) ON THE REDEMPTION DATE, [ ],
1996; or
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Based on the above-stated sale price of the Common Stock on
[ ], 1996, the market value of the Common Stock purchasable upon the
exercise of the Common Stock Purchase Right is approximately $[ ], or
considerably higher than the amount to be paid upon exercise. Such
value is, of course, subject to change depending on the market price
of the Common Stock. SO LONG AS THE MARKET PRICE OF THE COMMON STOCK
IS HIGHER THAN $[ ] PER SHARE, A HOLDER WHO EXERCISES HIS COMMON
STOCK PURCHASE RIGHTS WILL RECEIVE COMMON STOCK WITH A MARKET VALUE
GREATER THAN THE AMOUNT PAID UPON EXERCISE OF THE COMMON STOCK
PURCHASE RIGHT.
(3) Sell the Series A Preferred Stock (which includes the
Common Stock Purchase Rights attached thereto) in the open market.
Holders of Series A Preferred Stock should consult with their own
advisers regarding if and when they should sell their Series A
Preferred Stock and the tax consequences thereof; or
(4) Accept the Redemption Price of $[ ] for each share of
Series A Preferred Stock called for redemption; and/or
(5) Do not exercise the Common Stock Purchase Right.
SERIES A PREFERRED STOCK NOT RECEIVED FOR CONVERSION PRIOR TO THE
CLOSE OF BUSINESS ON [ ], 1996 WILL BE REDEEMED AS SET FORTH ABOVE. A HOLDER
OF SERIES A PREFERRED STOCK MAY BOTH CONVERT THE SHARES OF SERIES A PREFERRED
STOCK AND EXERCISE THE COMMON STOCK PURCHASE RIGHT RELATED THERETO.
COMMON STOCK PURCHASE RIGHTS NOT EXERCISED PRIOR TO THE CONVERSION OR
REDEMPTION OF THE SERIES A PREFERRED STOCK TO WHICH THEY ARE ATTACHED WILL BE
NULL AND VOID.
Anyone with questions or needing assistance concerning the various
options available with respect to the Series A Preferred Stock called for
redemption should call (201) 825-1000 and ask to speak to Kevin J. Killian,
Executive Vice President, or call the Transfer Agent, The First National Bank of
Boston, at (617) 575-3170 and ask to speak to the Investor Relations Unit about
the various options.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information of the
Company for each of the years in the five years ended December 31, 1995 and
for each of the three months ended March 31, 1996 and 1995 has been derived
from the Company's consolidated financial statements. Such selected
consolidated financial information should be read in conjunction with the
Company's consolidated financial statements as of December 31, 1995 and 1994
and for each of the three years in the period ended December 31, 1995 and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1994 1993 1992 1991
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(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income.................... $ 20,711 $ 17,073 $ 16,471 $ 17,238 $ 19,139
Interest expense................... 6,122 4,610 4,764 6,554 10,252
------------- ------------ ------------ ------------ -------------
Net interest income................ 14,589 12,463 11,707 10,684 8,887
Provision for possible loan losses. 559 1,014 2,635 2,697 10,162
------------- ------------ ------------ ------------ -------------
Net interest income (loss) after
provision for possible loan losses 14,030 11,449 9,072 7,987 (1,275)
Non-interest income................ 2,131 2,057 3,333 2,606 3,988
Non-interest expense............... 11,800 11,000 10,912 9,590 8,652
------------- ------------ ------------ ------------ -------------
Income (loss) before income taxes.. 4,361 2,506 1,493 1,003 (5,939)
Income tax provision (benefit)..... 1,311 823 284 -- (1,875)
------------- ------------ ------------ ------------ -------------
Net income (loss).................. $ 3,050 $1,683 $1,209 $1,003 $ (4,064)
============= ============ ============ ============ =============
Common Share Data:
Net income (loss) (primary)........ $ 1.79 $ .95 $ .50 $ .68 $ (3.14)
Net income (loss) (fully diluted).. 1.43 .87 .50 .68 (3.14)
Cash dividends declared............ .075 -- -- -- .15
Book value (year/period end) (fully 8.72 7.97 7.17 6.68 6.65
diluted)...........................
Average common shares outstanding:
Fully diluted.................... 2,127,188 1,933,570 1,305,668 1,305,668 1,294,381
Common shares outstanding
(at end of year/period).......... 1,312,748 1,308,328 1,305,668 1,305,668 1,305,668
Balance Sheet Data (at year/period end):
Total assets....................... $325,187 $283,251 $260,935 $247,161 $236,870
Total loans, net................... 139,800 127,828 121,652 129,346 117,735
Securities......................... 136,663 115,869 91,203 66,955 55,348
Total deposits..................... 304,346 265,432 244,683 231,596 227,190
Stockholders' equity............... 18,627 15,412 14,169 13,458 8,606
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Income Statement Data:
Interest income.................... $ 5,446 $ 4,894
Interest expense................... 1,586 1,372
------------ -------------
Net interest income................ 3,860 3,522
Provision for possible loan losses. 120 180
------------ -------------
Net interest income (loss) after
provision for possible loan losses 3,740 3,342
Non-interest income................ 790 498
Non-interest expense............... 3,255 3,019
------------ -------------
Income (loss) before income taxes.. 1,275 821
Income tax provision (benefit)..... 432 272
------------ -------------
Net income (loss).................. $ 843 $ 549
============ =============
Common Share Data:
Net income (loss) (primary)........ $ .47 $ .31
Net income (loss) (fully diluted).. .39 .26
Cash dividends declared............ .0625 --
Book value (year/period end) (fully 8.69 7.52
diluted)...........................
Average common shares outstanding:
Fully diluted.................... 2,187,796 2,112,224
Common shares outstanding
(at end of year/period).......... 1,315,329 1,308,328
Balance Sheet Data (at year/period end):
Total assets....................... 338,389 301,733
Total loans, net................... 145,987 131,920
Securities......................... 138,301 119,342
Total deposits..................... 316,877 283,146
Stockholders' equity............... 19,005 15,893
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------ ------------ ------------ -------------
(in thousands, except per share data and ratios)
Operating Ratios:
Return on average assets........... 1.01% .63% .49% .43% (1.75)%
Return on average common equity.... 18.39 11.37 8.77 10.33 (41.54)
Net interest margin................ 5.26 5.06 5.11 5.00 4.31
Dividend payout.................... 4.19 -- -- -- --
Asset Quality Ratios:
Allowance for possible loan losses
to total loans................... 1.89% 2.02% 2.01% 2.56% 2.63%
Allowance for possible loan losses to
non-performing loans............. 156.72 77.04 44.56 32.19 24.32
Non-performing loans to total loans 1.21 2.62 4.51 5.92 9.97
Non-performing assets as a percentage
of total assets.................. 0.93 1.64 2.72 4.41 5.81
Net charge-offs to average loans.. 0.36 0.70 2.71 1.93 7.90
Capital Ratios:
Average equity to average assets... 5.52% 5.50% 5.55% 4.13% 4.21%
Leverage capital................... 5.76 5.46 5.31 5.28 3.63
Tier I capital to risk-adjusted assets 10.70 10.23 9.27 8.24 6.08
Total capital to risk-adjusted assets 11.95 11.71 10.97 10.02 7.59
March 31,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Operating Ratios:
Return on average assets........... 1.03% .78%
Return on average common equity.... 18.15 13.99
Net interest margin................ 5.20 5.38
Dividend payout.................... 13.30 --
Asset Quality Ratios:
Allowance for possible loan losses
to total loans................... 1.89% 2.09%
Allowance for possible loan losses to
non-performing loans............. 179.82 90.46
Non-performing loans to total loans 1.05 2.31
Non-performing assets as a percentage
of total assets.................. .89 1.34
Net charge-offs to average loans.. .02 (.04)
Capital Ratios:
Average equity to average assets... 5.62 5.27
Leverage capital................... 5.77 5.43
Tier I capital to risk-adjusted assets 10.49 10.16
Total capital to risk-adjusted assets 11.62 11.56
</TABLE>
-12-
<PAGE>
RISK FACTORS
Investors are urged to read and consider carefully the information
set forth below as well as the other information set forth in this Prospectus.
Market for Common Stock
The Common Stock trades on the NASDAQ National Market under the
symbol "IBNJ", however there has been only limited trading in the Common
Stock. It is not expected that an active market for the Common Stock will
develop in the foreseeable future. See "Price Range of Common Stock." Stock
subject to limited trading may be subject to greater price volatility.
Investors in the shares of Common Stock must, therefore, be prepared to assume
the risk of their investment for an indefinite period of time.
Cash Dividends
The Company's Board of Directors resumed payment of cash dividends on
the Common Stock in the second quarter of 1995. The payment of dividends,
among other things, will depend upon the earnings, capital requirements, and
financial condition of the Bank. Accordingly, investors cannot rely on any
cash dividends to recover the cost of their investment. See "Dividends".
Stock Not an Insured Deposit
Investments in the Common Stock are not deposits insured against loss
by the FDIC or any other entity.
Economic Conditions and Related Uncertainties
Banking is affected, directly and indirectly, by local, domestic, and
international economic and political conditions, and by government monetary
and fiscal policies Conditions such as inflation, recession, unemployment,
volatile interest rates, tight money supply, scarce natural resources, real
estate values, international conflicts and other factors beyond the Company's
control, may adversely affect the potential profitability of the Bank. Any
future rise in interest rates, while increasing the income yield on the Bank's
earning assets, may adversely affect loan demand and the cost of funds and,
consequently, the profitability of the Bank. Any future decreases in interest
rates may adversely affect the Bank's profitability because such decreases may
reduce the amounts which the Bank may earn on its assets. Economic downturns
could result in the delinquency of outstanding loans. Management does not
expect any one particular factor to affect the Bank's results of operations.
However, a continued downtrend in several areas, including real estate,
construction and consumer spending, could have an adverse impact on the Bank's
profitability.
Community Reinvestment Act Rating
The Bank recently received a "satisfactory" rating from the Federal
Deposit Insurance Corporation ("FDIC") under the Community Reinvestment Act
("CRA"). However during 1994 and 1995 the Bank received a "needs to improve"
rating from the FDIC under the CRA. An institution's CRA rating is considered
by regulators in determining whether to grant charters, branches and other
deposit facilities, relocations, mergers, consolidations and acquisitions.
Performance less than satisfactory may be the basis for denying an
application. A "needs to improve" rating could have an effect upon the ability
of the Bank to expand in the future.The Bank's current plans call for the
opening of a number of new branch offices in the next five years.The Bank has
taken steps to maintain its "satisfactory" rating under the CRA. See
"Supervision and Regulation."
-13-
<PAGE>
Effect of Interest Rates on the Bank and the Company
The operations of financial institutions such as the Bank are
dependent to a large degree on net interest income which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings. An institution's net interest income is significantly
affected by market rates of interest which in turn are affected by prevailing
economic conditions, by the fiscal and monetary policies of the federal
government and by the policies of various regulatory agencies. At March 31,
1996 total interest earning assets maturing or repricing within one year were
less than total interest bearing liabilities maturing or repricing during the
same time period by $81.37 million, representing a negative cumulative one
year gap of 24.05%. Like all financial institutions, the Bank's balance sheet
is affected by fluctuations in interest rates. While gap analysis is a general
indicator of the potential effect that changing interest rates may have on net
interest income, the gap itself does not present a complete picture of
interest rate sensitivity. First, changes in the general level of interest
rates do not affect all categories of assets and liabilities equally or
simultaneously. Second, assumptions must be made to construct a gap table.
Money- market deposits, for example, which have no contractual maturity, are
assigned a repricing interval of 90 days. Management can influence the actual
repricing of the deposits independent of the gap assumption. Third, the gap
table represents a one-day position and cannot incorporate a changing mix of
assets and liabilities over time as interest rates change. Volatility in
interest rates can also result in disintermediation, which is the flow of
funds away from financial institutions into direct investments, such as US
Government and corporate securities and other investment vehicles, including
mutual funds, which, because of the absence of federal insurance premiums and
reserve requirements, generally pay higher rates of return than financial
institutions. The Company does not feel that changes in interest rates would
have a material impact on operations. At March 31, 1996, the net unrealized
loss on the Bank's held to maturity securities portfolio was $1.4 million. See
"Management's Discussion of Financial Condition and Results of Operations."
Allowance for Possible Loan Losses
The Bank has established an allowance for possible loan losses which
management believes to be adequate to offset potential losses currently
inherent in the Bank's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Bank to increase its allowance for
possible loan losses.
Competition
Vigorous competition exists in all major areas in which the Company
and the Bank presently engage in business. The Company and the Bank face
competition from various financial and non-financial businesses. In addition,
the Bank faces intense competition in local and national markets from other
banking and financial institutions. Many of these competitors have
substantially greater resources and capital than do the Company and the Bank.
In addition, many of the Bank's competitors have higher legal lending limits
than does the Bank. Particularly intense competition exists for sources of
funds including savings and retail time deposits and for loans, deposits and
other services that the Bank offers. See "Business."
-14-
<PAGE>
Principal Stockholders
After the Redemption of the Series A Preferred Stock, the ESOP and the
directors and officers of the Bank will beneficially own approximately 23.1%
of the outstanding Common Stock. See "Principal Stockholders."
Accounting Standards
The operations of the Company are affected by accounting standards
issued by the Financial Accounting Standards Board ("FASB") which the Company
is required to adopt. The adoption of such standards can have the effect of
reducing the Company's earnings and capital. Information on current FASB
standards that affect the Bank can be found in the Notes to Financial
Statements contained in this Prospectus.
Limitation of Officers' and Directors' Liabilities under New Jersey Law
Pursuant to the Company's Certificate of Incorporation, as authorized
under applicable New Jersey law, directors of the Company are not liable for
monetary damages for breach of fiduciary duty, except in connection with a
breach of the duty of loyalty, for acts or omissions not in good faith or
which involve a knowing violation of law, for dividend payments or stock
repurchases illegal under New Jersey law or for any transaction in which a
director has derived an improper personal benefit. The Company's Bylaws
provide that the Company must indemnify its officers and directors to the
fullest extent permitted by law for all expenses incurred in settlement of
actions against such persons in connection with their service to the Company.
Federal and State Regulation
The operations of the Company and the Bank are heavily regulated and
will be affected by present and future legislation and by the policies
established from time to time by various federal and state regulatory
authorities. In particular, the monetary policies of the FRB have had a
significant effect on the operating results of banks in the past, and are
expected to continue to do so in the future. Among the instruments of monetary
policy used by the FRB to implement its objectives are changes in the discount
rate charged on bank borrowings and changes in the reserve requirements on
bank deposits. It is not possible to predict what changes, if any, will be
made to existing federal and state legislation or the effect that such changes
may have on the future business and earnings prospects of the Company. During
the past several years, significant legislative attention has been focused on
the regulation and deregulation of the financial services industry. Non-bank
financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business. As a New Jersey
chartered commercial bank which is not a member of the Federal Reserve System,
the Bank is subject to the regulation, supervision, control and examination by
the FDIC and the New Jersey Department of Banking. See "Government Supervision
and Regulation."
USE OF PROCEEDS
The maximum amount required to redeem all shares of Series A Preferred
Stock called for redemption is $[ ]. The net proceeds to the Company from the
sale of the Common Stock to the Purchaser pursuant to the agreement described
herein under "Standby and Other Arrangements" are estimated to be approximately
$6,920,272 (assuming conversion of all of the Series A Preferred Stock, the
exercise of approximately 85% of the 746,875 Common Stock Purchase Rights at
$9.60 and the sale of 109,488 shares of Common Stock to the Purchaser at an
estimated price of $12.50 per share (less 8% discount)). See "Standby and Other
Arrangements." The Company intends to use the net proceeds for general corporate
purposes including the funding of the redemption of the Series A Preferred Stock
-15-
<PAGE>
not tendered for conversion and providing additional equity capital to the
Company's bank subsidiary for use as working capital and to support its growth.
No specific proceeds from this Offering are being designated to open new branch
offices over the next five years. Although the Company intends to use its
general corporate funds to open such branches, it is possible that a portion of
the net proceeds from this Offering will be used to open new branch offices over
the next five years. Pending such uses, the net proceeds are anticipated to be
invested in short-term interest-bearing investments.
CAPITALIZATION
The following table sets forth the unaudited consolidated
capitalization of the Company (i) as of March 31, 1996 and (ii) as of March
31, 1996, as adjusted to give effect to the conversion or redemption of the
Series A Preferred Stock and the sale of the Common Stock to the Purchaser
pursuant to the agreement described herein under "Standby and Other
Arrangements."
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------
Actual As Adjusted(2)
-------------------- ----------------------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, no par value, 1,000,000 shares authorized
Series A 9% Cumulative Convertible Preferred Stock, stated
value $1.00; authorized 776,875 shares and 776,875 shares
issued and outstanding (liquidating preference:
$8.00 per share totaling $6,215,000)......................... $ 777 $ 0
Series B Non-Convertible Preferred Stock, stated value
$1.00; authorized 217,500 shares and no shares issued
and outstanding (no liquidation preference)(1).................. -- --
Common Stock, par value $1.667 per share;
authorized 5,000,000 shares and 1,312,748
shares outstanding.......................................... 2,193 4,733
Additional Paid-In Capital...................................... 12,946 18,103
Retained earnings............................................... 4,206 4,206
Net unrealized holding gain on securities
available for sale, net of income taxes..................... 17 17
Unearned ESOP Preferred Stock................................... (1,134) (1,134)
-------------------- -----------------
Total stockholders' equity.................................. $19,005 $25,925
==================== =================
Capital Ratios:
Leverage capital................................................ 5.77% 7.88%
Tier 1 capital to risk adjusted assets.......................... 10.49 14.34%
Total capital to risk adjusted assets........................... 11.62 15.73%
</TABLE>
- -------------
(1) Commerce Bancorp, Inc. owns 30,000 shares of Series A Preferred Stock
and 187,500 Stock Purchase Warrants ("Warrants") which expire on
October 31, 1997 and prior thereto are exercisable at $9.60 per share
(subject to adjustment under certain circumstances). The Common Stock
Purchase Rights attached to the Series A Preferred Stock owned by
Commerce and the Warrants are exercisable only into shares of the
Series B Preferred Stock. See "DESCRIPTION OF SECURITIES - Series B
NonConvertible Preferred Stock."
(2) Assumes conversion of all outstanding shares of Series A Preferred
Stock, the exercise of approximately 85% of the 746,875 Common Stock
Purchase Rights at $9.60, the sale of 109,488 shares of Common Stock
to the Purchaser as an estimated price of $12.50 per share (less 8%
discount).
-16-
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is listed for quotation on the NASDAQ
National Market under the symbol IBNJ. Trading in the Common Stock has been
limited. The following table sets forth the range of the high and low sales
prices for the Common Stock for the first and second quarters of 1996, for
each quarter in 1995 and the fourth quarter of 1994 and the range of high and
low bid prices for the Common Stock for the first three quarters of 1994. The
high and low bid prices reflect inter-dealer quotations, without retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Dividends
Year Quarter High Low Paid
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 Second............................... $13.50 $11.50 $0.0625 (1)
First................................ 14.75 12.75 $0.0625
1995 Fourth............................... 14.50 12.50 $ 0.025
Third................................ 14.25 12.25 $ 0.025
Second............................... 13.25 9.50 $ 0.025
First................................ 10.50 8.50 --
1994 Fourth............................... 10.50 8.75 --
Third................................ 8.25 8.00 --
Second............................... 8.25 7.50 --
First................................ 8.25 7.25 --
</TABLE>
- -------------
(1) Declared April 25, 1996; paid on June 15, 1996 to
stockholders of record as of May 15, 1996.
On [ ], 1996, the last reported sale price of the Common Stock, as
reported on the NASDAQ National Market, was $[ ] per share.
As of March 31, 1996, there were 1,315,329 shares of the Company's
Common Stock outstanding and approximately 610 holders of record of such
stock.
DIVIDENDS
The Company paid cash dividends on its Common Stock of $0.075 per
share in 1995. Prior thereto, the Company had not paid cash dividends on its
Common Stock since 1991. The Company paid a cash dividend of $0.0625 per share
on its Common Stock in the first and second quarters of 1996.
The Company currently intends to pay cash dividends on its Common
Stock on a quarterly basis in the foreseeable future. The Company has recently
announced that the annual rate of cash dividends on the Common Stock will
increase to $0.30 in the third quarter of 1996 and $0.35 in the fourth quarter
of 1996. However, because the ability to pay cash dividends depends upon a
number of factors including those stated below, there can be no assurance that
cash dividends will be paid in the future. Future cash or stock dividends will
be subject to determination and declaration by the Board of Directors, which
will consider the earnings, financial condition and capital needs of the
Company and the Bank and the restrictions discussed herein.
-17-
<PAGE>
Subject to such preferences, limitations and relative rights as may be
fixed for any series of preferred stock that may be issued, the holders of the
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. Under the New Jersey
Business Corporation Act, the Company may not pay cash dividends if, after
giving effect thereto, either (i) the Company would be unable to pay its debts
as they become due in the usual course of its business; or (ii) the Company's
total assets would be less than its total liabilities.
Funds for the payment of cash dividends by the Company on its Common
Stock and preferred stock are obtained solely from dividends paid to the Company
by the Bank. Accordingly, restrictions on the Bank's ability to pay cash
dividends directly affect the payment of cash dividends by the Company. The Bank
is subject to certain limitations on the amount of cash dividends that it may
pay by the New Jersey Banking Act of 1948, as amended (the "Banking Act"). Under
the Banking Act, no dividends may be paid by the Bank unless, following the
payment of the dividend, the capital stock of the Bank is unimpaired and either
(i) the Bank will have a surplus of not less than 50% of its capital stock, or
(ii) the payment of the dividend will not reduce the surplus of the Bank.
Under the Financial Institutions Supervisory Act, the FDIC has the
authority to prohibit a state-chartered bank from engaging in conduct which,
in the FDIC's opinion, consists of an unsafe or unsound banking practice.
Under certain circumstances, the FDIC could claim that the payment of a
dividend or other distribution by a bank to its sole shareholder constitutes
an unsafe or unsound practice.
The FRB has requested that it be notified by the Company at least 30
days prior to the Company's declaration of dividends with respect to common
shares now or in the future outstanding. Such notice is required to include an
analysis of the impact of payment of any common dividends on the Company's
capital position and loan loss reserve needs. It is possible that upon review
of the Company's analysis the Federal Reserve Board may limit or prohibit the
payment by the Company of cash dividends with respect to the Common Stock.
However, management believes that the Federal Reserve Board is not likely to
take any action to limit the payment of cash dividends on the Common Stock.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
This financial review presents management's discussion and analysis of results
of operations and financial condition. It should be read in conjunction with the
audited consolidated financial statements and the accompanying notes appearing
in this report.
OVERVIEW
Independence Bancorp's (the "Company") performance for 1995 was highlighted by
continued progress in earnings growth, record levels in deposits, loans and
assets and improved asset quality. This was the fourth consecutive year of
improved earnings and net income exceeded the previous high achieved in 1989.
For the first time in four years a common stock cash dividend was paid.
Net income for 1995 was $3.1 million, an increase of 81.2% compared to the $1.7
million recorded in 1994. The results for 1994 rose 39.2% over the $1.2 million
recorded in 1993. Fully diluted earnings per common share were $1.43 for 1995 as
compared to $.87 for 1994, and $.50 for 1993. Earnings were enhanced by the loan
and securities growth experienced during the year. Return on average assets
("ROA") was 1.01% in 1995 as compared to .63% in 1994 and .49% in 1993, while
the return on average equity ("ROE") was 18.39% in 1995, which compared to
11.37% in 1994 and 8.77% in 1993.
Continued progress in asset quality was reflected by the decline in
non-performing assets. During 1995, non-performing loans, including impaired
loans, and other real estate ("ORE") declined 34.9%, or $1.6 million, to $3.0
million, or .93% of total assets. The comparable figures for December 31, 1994
and 1993 were $4.6 million, or 1.64% and $7.1 million, or 2.72%, respectively.
Consolidated assets at year end 1995 amounted to $325.2 million, representing an
increase of 14.8% over 1994. Loans, net of unearned fees, amounted to $142.5
million, or 43.8% of total assets, at December 31, 1995 as compared to $130.5
million, or 46.1% of total assets, at year end 1994. Total securities, including
securities available for sale, increased to $136.7 million and accounted for
42.0% of total assets as compared to 40.9% last year. Time deposits increased by
$13.7 million, or 25.6%, to $67.2 million at year end. Demand deposits, both
non-interest and interest bearing, and savings deposits grew by $25.2 million,
or 11.9%, over 1994 to $237.1 million.
At December 31, 1995, the Company's Tier I capital was 10.70% and Total capital
was 11.95% as compared to 10.23% and 11.71%, respectively, at December 31, 1994.
The leverage ratio at year end 1995 was 5.76%, as compared to 5.46% for the
prior year. At December 31, 1995, Independence Bank of New Jersey's (the "Bank")
Tier I, Total capital and leverage capital ratios were 11.29%, 12.54% and 6.10%,
respectively.
-19-
<PAGE>
RESULTS OF OPERATION
SUMMARY
Net income before preferred dividends for the year ended December 31, 1995 was
$3.1 million, or $1.43 fully diluted per common share compared to $1.7 million,
or $.87 fully diluted per common share, in 1994 and $1.2 million, or $.50 per
fully diluted common share in 1993. Earnings performance for 1995 reflected
gains in net interest income, an increase in non-interest income and a decrease
in the provision for possible loan losses. These positive factors were partially
offset by an increase in non-interest expense. For the year ended December 31,
1995, net interest income rose $2.1 million, or 16.8%, over the prior year as a
result of growth in earning assets, particularly securities, as well as
increased non-interest bearing demand deposits. The provision for possible loan
losses decreased $455 thousand as a result of the declining level of
non-performing loans. Non-interest expenses increased $800 thousand reflecting
increases in salaries and benefits, advertising, and stationary and supplies
expense.
Net interest income in 1994 rose 6.5% over the prior year as a result of an
increase in non-interest bearing demand deposits and the favorable impact of
lower non-performing loans on earning assets. The loan loss provision decreased
$1.6 million as a result of the declining levels of non-performing loans. These
factors were partially offset by the $1.3 million decrease in non-interest
income and the $539 thousand increase in the provision for income taxes.
NET INTEREST INCOME
Tax equivalent net interest income increased $2.2 million in 1995 or 17.6%,
compared to increases of 6.8% in 1994 and 9.3% in 1993. The net interest margin
was 5.26% in 1995 versus 5.06% in 1994 and 5.11% in 1993. The increase in 1995
was primarily due to the increase in earning assets and slightly wider interest
rate spreads, coupled with a 22.8% increase in non-interest bearing liabilities.
The table on pages 7 and 8 provides the components of average assets and
liabilities together with their respective yields. The table on page 6 provides
a reconciliation of the changes in net interest income attributable to
variations in balances and yields.
Average earning assets increased $31.8 million in 1995 compared to an increase
of $17.8 million in 1994. Average earning assets comprise 92.1% of total assets,
compared to 92.2% in 1994 and 92.4% in 1993.
Average loans increased $11.2 million or 8.9% in 1995 compared to a decrease of
4.2% in 1994. Loans grew throughout 1995, and showed a marked increase in the
fourth quarter. At year end, loans outstanding had grown 9.2% overall from year
end 1994 levels. The Company's securities portfolio (securities held to maturity
and securities available for sale) increased on average $16.3 million or 14.9%
in 1995 compared to an increase of 32.5% in 1994.
-20-
<PAGE>
Average interest bearing liabilities increased $19.9 million or 10.2% in 1995,
compared to an increase of 6.0% in 1994 and 1.2% in 1993. The ratio of average
non-interest bearing deposits to interest bearing liabilities was 32.0% for
1995, compared to 28.7% for 1994 and 25.6% for 1993. The increase in
non-interest bearing deposits comes from the Company's expanded customer base
and its ability to attract and retain these type of deposits.
The Company's net interest rate spread increased 4 basis points during 1995 to
4.61%, following a decrease of 4 basis points in 1994 to 4.57% and an increase
of 21 basis points in 1993 to 4.61%. Yields on earning assets increased 53 basis
points during 1995 to 7.45% compared to a decrease of 27 basis points in 1994 to
6.92% and 86 basis points in 1993 to 7.19%.
The rates paid on interest bearing liabilities increased 49 basis points during
1995 to 2.84% compared to a decrease of 23 basis points in 1994 to 2.35% and a
decrease of 100 basis points in 1993 to 2.58%. In 1995, the Company continued to
benefit from the ratio of non-interest demand and low cost deposits to total
earning assets, without significantly increasing deposit rates.
In 1994, the net interest margin benefited from a substantial increase in the
ratio of non-interest demand and low cost deposits to total earning assets,
reducing overall funding costs during the year. However, earning asset growth
was primarily in securities- from 40% of earning assets in 1993 to 47% in 1994-
which reduced the yield on earning assets in 1994.
-21-
<PAGE>
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
Due to Changes in (1): Due to Changes in (1):
-------------------------------- -------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income
Securities:
Taxable....................... $ 815 $ 293 $1,108 $1,518 $ (598) $ 920
Tax-exempt.................... 120 (7) 113 -- 2 2
Federal funds sold................ 281 184 465 (105) 152 47
Loans:
Commercial.................... (156) 523 367 (707) 42 (665)
Real estate................... 995 70 1,065 340 (47) 293
Installment................... 160 363 523 (141) 172 31
Tax-exempt.................... (6) 3 (3) 40 (17) 23
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income..................... 2,155 1,520 3,675 852 (237) 615
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits:
NOW accounts.................. 70 58 128 207 (226) (19)
Money-market.................. 86 75 161 (80) (10) (90)
Savings deposits.............. (46) (21) (67) 347 (306) 41
Time deposits................. 536 762 1,298 (207) (2) (209)
Long-term debt - ESOP Loan.... (10) 2 (8) 123 -- 123
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense.................... 636 876 1,512 390 (544) (154)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase.............................. $1,519 $ 644 $2,163 $ 462 $ 307 $769
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change of each.
-22-
<PAGE>
- ------------------------------------------------------------------------------
AVERAGE STATEMENTS OF CONDITION WITH
RESULTANT INTEREST AND AVERAGE RATES
- ------------------------------------------------------------------------------
The following table reflects the components of the Company's net
interest income, setting forth, for the year ends presented herein, (1) average
assets, liabilities and stockholders' equity, (2) interest income earned on
interest earning assets and interest expense paid on interest bearing
liabilities, (3) average yields earned on interest earning assets and average
rates paid on interest bearing liabilities, and (4) the Company's net yield on
interest earning assets (i.e., net interest income divided by average interest
earning assets). Rates are computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Average Average
(In thousands) Balance Interest Yield
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Securities:
Taxable................................. $123,719 $ 7,120 5.76%
Tax-exempt.............................. 2,087 126 6.12
Deposits with banks......................... 4,230 245 5.79
Federal funds sold.......................... 12,757 755 5.84
Loans:(1)
Commercial.............................. 28,085 2,672 9.51
Real estate............................. 73,813 6,437 8.72
Installment............................. 33,484 3,318 9.91
Tax-exempt.............................. 949 122 12.86
- -----------------------------------------------------------------------------------------------------------
Total interest earning assets................... 279,124 20,795 7.45
- -----------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks..................... 17,128
Other assets................................ 9,758
Allowance for possible loans losses............. (2,796)
- -----------------------------------------------------------------------------------------------------------
Total assets.................................... $303,214
- -----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
NOW accounts................................ $ 48,525 $ 823 1.70
Money-market................................ 40,222 940 2.34
Savings deposits............................ 65,076 1,384 2.13
Time deposits............................... 60,844 2,860 4.70
Long-term debt - ESOP Loan.................. 1,246 115 9.23
- -----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities.............. 215,913 6,122 2.84
- -----------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits............................. 69,070
Other liabilities........................... 1,646
Stockholders' equity............................ 16,585
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity...... $303,214
- -----------------------------------------------------------------------------------------------------------
Net interest income................................................ $ 14,673
- -----------------------------------------------------------------------------------------------------------
Net interest spread................................................ 4.61%
- -----------------------------------------------------------------------------------------------------------
Total cost of funds................................................ 2.19%
- -----------------------------------------------------------------------------------------------------------
Net interest margin................................................ 5.26%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Non-accrual loans are included in the daily average loan amounts
outstanding. Fees are included in loan interest. Loans and total interest
earnings assets are net of unearned income.
-23-
<PAGE>
<TABLE>
<CAPTION>
1994 1993
- ------------------------------------------------------- ----------------------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
- ------------------ ---------------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$109,341 $ 6,012 5.50% $ 82,533 $ 5,092 6.17%
133 13 9.91 100 11 10.61
5,464 208 3.81 8,164 244 2.99
7,298 290 3.92 8,174 243 2.93
30,021 2,305 7.68 38,012 2,970 7.81
62,377 5,372 8.61 58,473 5,079 8.69
31,733 2,795 8.81 33,384 2,764 8.28
998 125 12.54 746 102 13.68
- ----------------------------------------------------------------------------------------------------------------
247,365 17,120 6.92 229,586 16,505 7.19
- ----------------------------------------------------------------------------------------------------------------
14,231 12,475
9,283 9,425
(2,588) (3,029)
- ----------------------------------------------------------------------------------------------------------------
$268,291 $248,457
- ----------------------------------------------------------------------------------------------------------------
$ 44,184 $ 695 1.57% $ 38,302 $ 714 1.87%
36,359 779 2.14 37,018 869 2.35
67,083 1,451 2.16 57,950 1,410 2.43
47,067 1,562 3.32 51,733 1,771 3.42
1,355 123 9.08 -- -- --
- ----------------------------------------------------------------------------------------------------------------
196,048 4,610 2.35 185,003 4,764 2.58
- ----------------------------------------------------------------------------------------------------------------
56,231 47,295
1,212 2,391
14,800 13,768
- ----------------------------------------------------------------------------------------------------------------
$269,291 $248,457
- ----------------------------------------------------------------------------------------------------------------
$ 12,510 $ 11,741
- ----------------------------------------------------------------------------------------------------------------
4.57% 4.61%
- ----------------------------------------------------------------------------------------------------------------
1.86% 2.08%
- ----------------------------------------------------------------------------------------------------------------
5.06% 5.11%
</TABLE>
-24-
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
The Company maintains an allowance for possible loan losses at a level
considered by management to be adequate to cover the inherent risk of loss
associated with its loan portfolio. The allowance for possible loan losses is
based on estimates, and ultimate losses may vary from the current estimates.
Management reviews the loan portfolio and evaluates credit risk on a quarterly
basis. Such review takes into consideration the financial condition of the
borrowers, fair market value of the collateral, level of delinquency, historical
loss experience by portfolio, industry trends and the impact of local and
national economic conditions. If there are any significant changes to the
Company's estimate of the adequacy of the allowance, they are reflected in
operations during the period in which they become known. For a future discussion
see "Asset Quality and Risk Elements."
The provision for possible loan losses was $559 thousand for 1995 as compared to
$1.0 million for 1994 and $2.6 million for 1993. This reduction was due
principally to the decline in non-performing loans arising primarily from
improved economic conditions and real estate values in the Company's market
area.
NON-INTEREST INCOME
Various types of non-interest income, such as service charges on deposit
accounts and other service charges, commissions and fees are generated through
the Company's core business operations. Total non-interest income amounted to
$2.1 million in 1995 which approximates 1994. Total non-interest income in 1994,
including securities gains, decreased $1.2 million, or 36.4%, from 1993. The
decrease in non-interest income in 1994 reflects the adoption of the Free
Personal Checking Program that was instituted during early 1994.
The following table presents the components of non-interest income for the years
ended December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
For the Year Ended Percent
December 31 Increase (Decrease)
- -----------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1995 vs 1994 1994 vs 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest income
Service charges on deposit
Accounts ................ $1,299 $1,154 $1,409 12.6 % (18.1)%
Securities gains .......... -- -- 472 * *
Gain on sale of loans ..... 25 3 603 733.3 (99.5)
Safe deposit rental income 103 107 114 (3.7) (6.1)
Other commissions and fees 213 207 194 2.9 6.7
Other ..................... 491 586 541 (16.2) 8.3
- -----------------------------------------------------------------------------------------
$2,131 $2,057 $3,333 3.6 % (38.3)%
=========================================================================================
</TABLE>
* Percentage change not revelant.
-25-
<PAGE>
Service charges on deposit accounts increased $145 thousand, or 12.6% to $1.3
million in 1995. This growth was primarily attributable to the growth in
deposits experienced during 1995. Service charges on deposit accounts represents
61.0%, 56.1% and 49.2% of total non-interest income, not including securities
gains, for the three years ended December 31, 1995.
Other income totaled $832 thousand in 1995 as compared with $903 thousand for
1994. The decrease in 1995 in other income is attributable to the gains on sale
of ORE that occurred in 1994 which were partially offset by the increases in
automated teller network fees and check printing income. Other income in 1994
decreased 37.8% from 1993. The decrease in 1994 is attributable to the one-time
gain on the sale of fixed rate mortgage loans that occurred in 1993.
During 1995 and 1994 there were no sales of securities. Net gains on securities
transactions in 1993 amounted to $472 thousand. The gains in 1993 were
recognized as certain government mortgage-backed securities were sold to reduce
prepayment risk resulting from the declining interest rate environment and heavy
refinancing activity.
NON-INTEREST EXPENSE
Non-interest expense totaled $11.8 million for 1995, $800 thousand or 7.3%,
above the 1994 level. This compared to an increase in 1994 of $88 thousand, or
.8%, over 1993.
Non-interest expense categories for the years ended December 31, 1995, 1994 and
1993 are shown in the table below.
<TABLE>
<CAPTION>
For the Year Ended Percent
December 31 Increase (Decrease)
- ------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1995 vs 1994 1994 vs 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest expense
Salaries and employee
benefits ............... $5,481 $4,900 $4,628 11.9 % 5.9 %
Occupancy ................. 1,499 1,452 1,396 3.2 4.0
Equipment ................. 1,041 892 788 16.7 13.2
Foreclosed real estate
expense ................ 425 491 625 (13.4) (21.4)
FDIC insurance assessment . 339 643 644 (47.3) .2
Legal fees(a) ............. 259 360 502 (28.1) (28.3)
Audit and regulatory
expenses ............... 104 221 379 (52.9) (41.7)
Credit reports ............ 195 172 298 13.4 (42.3)
Other ..................... 2,457 1,869 1,652 31.5 13.1
- ------------------------------------------------------------------------------------------------------
$11,800 $11,000 $10,912 7.3 % .8 %
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Bank paid a total of $119, $135 and $192 in legal fees to a law firm of
which a director is a partner during the years ended December 31, 1995,
1994, and 1993, respectively.
-26-
<PAGE>
The largest component of non-interest expense is salaries and employee benefits
which accounted for 46.4% of total non-interest expense in 1995 as compared to
44.5% and 42.4% in 1994 and 1993, respectively. Salaries and employee benefits
expense totaled $5.5 million, in 1995 as compared with $4.9 million in 1994. The
$581 thousand, or 11.9% increase, compared to an 5.9% increase in 1994. These
increases are due primarily to staffing increases relative to the Company's
growth, normal wage increases and increases in the cost of employee benefits,
primarily the Employee Stock Ownership Plan. Total full-time equivalent
employees at December 31, 1995 were 182, compared to 161 at December 31, 1994,
an increase of 13.0%. This compares to full-time equivalent employees of 150 at
December 31, 1993.
Occupancy expenses were $1.5 million for 1995, an increase of 3.2% over 1994.
This increase was attributed to normal increases in the operating expenses of
the Company's facilities. The increase in 1994 over 1993 was primarily due to
increased levels of rents and additional maintenance costs, primarily snow
removal in the first quarter of 1994. Equipment expenses in 1995 amounted to
$1.0 million, an increase of $149 thousand, or 16.7% over 1994. The increase was
principally due to additional lease and maintenance costs associated with new
equipment required to support the data processing conversion and the branch
automation project completed in the third quarter of 1994. Also reflected in
1995 is the installation of two new on-site automated teller machines and
related costs.
FDIC insurance of $339 thousand for the year ended December 31, 1995, decreased
$304 thousand or 47.3% compared to $643 thousand for the year ended December 31,
1994. During 1995, the Company received the most favorable risk classification
for purposes of determining the annual deposit insurance assessment rate, which
resulted in a refund of $170 thousand from the FDIC for excess premium payments
made during 1995. Although the Company's deposits increased in 1995, the overall
rate charged by the FDIC decreased 82.6%. Insurance premiums in 1994 remained at
the same level as 1993 as the decrease in the overall rate charged by the FDIC
more than offset the increase in the Company's deposits.
Foreclosed real estate expense, which results from costs of holding and
operating other real estate in addition to valuation reserves, were $425
thousand for 1995, down $66 thousand, or 13.4% from 1994 due to a reduction in
the number of ORE properties. In 1994, these costs were $491 thousand as
compared to $625 thousand in 1993. A provision of $230 thousand to increase
valuation reserves was recorded in 1995, compared to $277 thousand in 1994
Other expenses, which include legal fees, audit and regulatory expenses, loan
related expenses and advertising were $3.0 million in 1995, an increase of $393
thousand, or 15.0% from 1994. Other expenses for 1994 were $2.6 million, or 7.4%
lower than that of 1993. This increase in 1995 was the result of higher
advertising costs, stationery and supplies expense and loan related expenses.
These increases were offset by lower legal fees and lower audit and regulatory
charges. The decrease in 1994 was the result of lower legal fees and lower audit
and regulatory costs offset by higher stationery and supplies expense and
advertising costs.
-27-
<PAGE>
INCOME TAXES
The provision for income taxes increased $488 thousand in 1995 to $1.3 million,
as compared to $823 thousand in 1994 and $284 thousand in 1993. These increases
were primarily attributable to the Company's improved earnings.
Effective January 1, 1992, the Company began accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to temporary differences between financial statement and the income tax basis of
assets and liabilities and net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not.
The Company has a future tax liability attributable to temporary differences of
$153 thousand.
FINANCIAL CONDITION
Total average assets increased $34.9 million, or 13.0%, to $303.2 million in
1995, while total assets reached $325.2 million at year end, an increase of
14.8% from the 1994 balance. Average interest earning assets, which represented
92.1% of total average assets, increased $31.8 million, or 12.8%, from 1994 to
$279.1 million in 1995. Specifically, average total securities, including
short-term investments, increased $20.5 million, or 16.8%, over 1994. Average
loan balances increased by 8.9% or $11.2 million during 1995. The majority of
this growth was in the real estate portfolio.
SECURITIES
The Company maintains a securities portfolio to fund increases in loans or
decreases in deposits. The portfolio is comprised of securities that the Company
believes will suit its needs and perform reasonably well under various interest
rate scenarios. The Company's securities portfolio is comprised primarily of
U.S. government and federal agency securities. These securities are of high
quality and are extremely liquid.
The Company's securities portfolio consists of securities classified as held to
maturity and available for sale. The Company designates securities upon purchase
into one of the two categories. At December 31, 1995, securities classified as
held to maturity totaled $90.3 million and represented securities that the
Company has the positive intent and ability to hold to maturity. Available for
sale securities totaled $46.4 million and represented securities that the
Company may sell to meet liquidity needs or in response to significant changes
in interest rates or prepayment risks. The Company took advantage of the
one-time opportunity to transfer securities out of the held to maturity category
without penalty. The Company transferred $40.7 million of securities that had
been previously classified as held to maturity to available for sale in December
1995. These consisted of $32.7 million in U.S. Treasury securities and $8.0
million of obligations of other U.S. government agencies.
-28-
<PAGE>
At December 31, 1995, the securities portfolio, including available for sale,
totaled $136.7 million, an increase of 17.9% from year end 1994. On average, the
securities portfolio increased 14.9% in 1995 and 32.3% in 1994. Average
securities represented 45.1%, 44.3% and 36.0% of earning assets for 1995, 1994
and 1993, respectively.
At December 31, 1995, the Company had net unrealized gains in the held to
maturity securities portfolio of $29 thousand as compared to net unrealized
losses of $8.1 million at December 31, 1994.
The following table presents selected securities categories as of December 31,
1995, reflecting the maturity distribution and weighted average yield, on a
fully taxable-equivalent basis, of the Company's held to maturity securities.
<TABLE>
<CAPTION>
After 1 Year After 5 Years
Within but Within but Within
(In thousands) 1 Year 5 Years 10 Years After 10 Years Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Book value ............. $ -- $ 23,496 $ -- $ -- $ 23,496
- ------------------------------------------------------------------------------------------------------------
Weighted Average Yield -- % 5.11% -- % -- % 5.11%
- ------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
Government agencies:
Book value ............. 1,106 41,800 5,107 13,480 61,493
- ------------------------------------------------------------------------------------------------------------
Weighted Average Yield. 7.00% 6.22% 6.04% 6.88% 6.36%
- ------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions:
Book value ............. 5,008 200 100 -- 5,308
- ------------------------------------------------------------------------------------------------------------
Weighted Average Yield.. 3.77% 6.13% 5.2% -- % 3.89%
- ------------------------------------------------------------------------------------------------------------
Total securities:
Book value .............. $ 6,114 $ 65,496 $ 5,207 $ 13,480 $ 90,297
- ------------------------------------------------------------------------------------------------------------
Weighted Average Yield.. 4.35% 5.82% 6.03% 6.88% 5.89%
=============================================================================================================
</TABLE>
The following table presents available for sale securities as of December 31,
1995 and the maturity distribution and weighted average yield, on a fully
taxable-equivalent basis.
-29-
<PAGE>
<TABLE>
<CAPTION>
After 1 Year After 5 Years
Within but Within but Within
(In thousands) 1 Year 5 Years 10 Years After 10 Years Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Treasury securities:
Book value ................ $ 12,745 $ 17,174 $ 4,177 $ -- $ 34,096
- ----------------------------------------------------------------------------------------------------
Weighted Average Yield ..... 5.67% 5.74% 6.04% --% 5.75%
- ----------------------------------------------------------------------------------------------------
Obligations of other U.S.
Government agencies:
Book value ................ -- 7,125 4,093 55 11,273
- ----------------------------------------------------------------------------------------------------
Weighted Average Yield ..... --% 7.15% 6.10% 8.50% 6.77%
- ----------------------------------------------------------------------------------------------------
Equity Securities:
Book value ................ -- -- -- 997 997
- ----------------------------------------------------------------------------------------------------
Weighted Average Yield ..... --% --% --% 6.00% 6.00%
- ----------------------------------------------------------------------------------------------------
Total Securities:
Book value ................ $ 12,745 $ 24,299 $ 8,270 $ 1,052 $ 46,366
- ----------------------------------------------------------------------------------------------------
Weighted Average Yield ..... 5.67% 6.15% 6.06% 6.13% 6.01%
- ----------------------------------------------------------------------------------------------------
</TABLE>
LOANS
The loan portfolio totaled $142.5 million at December 31, 1995, an increase of
9.2% from December 31, 1994. This follows a 5.1% increase in 1994. Average total
loans for the year were $136.3 million, representing a 8.9% increase from 1994,
compared to a 4.2% average decrease experienced in 1994.
The following table shows the classification of loans by major category, at
December 31, for each of the past five years:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial .................... $ 26,592 $ 27,109 $ 32,839 $ 44,566 $ 55,026
Real estate: Construction ..... 5,777 2,750 3,885 884 734
Commercial.............. 44,360 39,803 34,463 28,656 23,829
Residential............. 29,378 28,205 20,466 24,523 10,437
Installment ................... 36,387 32,591 32,491 34,117 30,893
- --------------------------------------------------------------------------------------
Total ...................... $142,494 $130,458 $124,144 $132,746 $120,919
- --------------------------------------------------------------------------------------
</TABLE>
Commercial loans are made to companies located within the Company's market area
for working capital and other short-term needs and term loans for the
acquisition of assets. Commercial loans decreased by $517 thousand, or 1.9% for
the year and represented 18.7% of the total loan portfolio. This follows a
decrease of $5.7 million, or 17.4%, in 1994 from 1993. Construction loans are
primarily made to local developers. Construction loans are primarily made on
single family structures which are generally under contract before being built.
Advances under loans are closely monitored and made after inspection by officers
of the Company. Construction loans increased $3.0 million or 110.1% in 1995 from
1994. The growth in construction loans was due to the increased activity in the
Company's market area. Construction loans decreased by $1.1 million in 1994 from
1993. The decline in the portfolio in 1994 was the result of completed projects
going to permanent financing.
-30-
<PAGE>
Commercial mortgage loans are made to local property owners and are written
using strict underwriting standards. Commercial mortgage loans increased in 1995
by $4.5 million, or 11.4%, from 1994 and comprise 31.1% of the Company's total
loan portfolio. Commercial mortgages increased from 1993 to 1994 by $5.3
million, or 15.5%. The commercial mortgage portfolio is primarily owner occupied
properties.
At December 31, 1995, residential loans totaled $29.4 million, or 20.6% of the
Company's total loan portfolio. Residential loans are predominately secured by
one to four family properties in the Company's primary market area. Residential
loans increased by $1.2 million, or 4.2%, from 1994 to 1995 primarily as a
result of the Company adding to its adjustable rate portfolio. Adjustable rate
loans are generally retained in the portfolio. Residential loans increased by
$7.7 million, or 37.8%, from 1993 to 1994. In order to maintain interest rate
risk at levels in line with the Company's internal requirements, loans may be
periodically sold into the secondary market. This allows the Company to keep its
portfolio mixed between fixed rate and variable rate loans, as well as
maintaining a shorter maturity of its portfolio.
Installment loans at December 31, 1995 increased $3.8 million, or 11.6%, from
December 31, 1994. The increase was due to the increase of $4.7 million in fixed
rate home equity loans. Installment loans increased slightly at December 31,
1994 from December, 1993. The increase was due to the increase of $1.4 million
in fixed rate home equity loans offset by the decrease of $887 thousand and $361
thousand in the adjustable rate home equity portfolio and the credit card
portfolio, respectively.
The following table summarizes the maturities of certain loan categories at
December 31, 1995:
<TABLE>
<CAPTION>
Due in Due in Due in
One Year One to Over Five
(In thousands) or Less Five Years Years Total
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Commercial....................... $ 1,859 $ 4,824 $ 19,909 $ 26,592
Real estate:
Construction................. 5,777 -- -- 5,777
Commercial................... 1,297 21,481 21,582 44,360
Residential.................. 8,569 12,760 8,049 29,378
Installment...................... 2,006 4,309 30,072 36,387
- ------------------------------------------------------------------------------------------------------
Total.................... $19,508 $43,374 $79,612 $142,494
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
Included above in loans due after one year are adjustable rate loans of $51,803
and fixed rate loans of $71,183.
-31-
<PAGE>
Loan concentrations are considered to exist when there are amounts loaned to
separate borrowers engaged in similar activities which would cause them to be
similarly impacted by economic or other conditions. At December 31, 1995 and
1994, there were no concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed as a category on the Company's financial statements.
ASSET QUALITY AND RISK ELEMENTS
Lending is one of the most important functions performed by the Company and by
its very nature, it is the most risky, complicated and profitable part of the
Company's business. A separate risk management function monitors risk
assessment, credit file maintenance and overall financial condition of
borrowers. Additionally, efforts are made to limit concentrations of credit
within the loan portfolio so as to minimize the impact of a downturn in any one
economic sector.
Management realizes that some degree of risk must be expected in the normal
course of lending activities. Reserves are maintained to absorb such potential
loan losses. The allowance for possible loan losses and related provision are a
statement of management's evaluation of the credit portfolio and economic
climate.
Statements of Financial Accounting Standards (SFAS) No. 114 and No. 118,
"Accounting by Creditors for Impairment of a Loan," were adopted effective
January 1, 1995. These new statements require that an impaired loan that is
within the scope of this statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
at the loan's observable market price, or if the loan is collateral dependent,
based on the fair value of the collateral. A loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. As of December 31, 1995, impaired loans totaled $1.7 million.
Non-performing assets include non-accrual loans, impaired loans and other real
estate (ORE). Loans which are past due in excess of 90 days as to the collection
of principal or interest constitute non-accrual loans, except that loans which
are contractually past due by more than 90 days may continue on an accrual basis
if the loan is sufficiently collateralized and is in the process of being
collected. ORE is acquired though foreclosure on loans secured by land or real
estate. ORE is reported at the lower of carrying value or fair market value as
determined by appraisal on the date of acquisition less costs to dispose.
Non-performing assets were $3.0 million and $4.6 million at December 31, 1995
and 1994, respectively, and amounted to .93% and 1.64% of total assets for each
of these periods, respectively. This total risk element is at the lowest level
in the last six years. Non-accrual loans totaled $1.6 million and $2.6 million,
at December 31, 1995 and December 31, 1994, respectively. Impaired loans not
included in non-accrual totaled $146 thousand at December 31, 1995 compared to
$792 thousand at December 31, 1994. ORE amounted to $1.3 million at December 31,
1995, an increase of $79 thousand or 6.5% from ORE of $1.2 million at December
31, 1994. All costs associated with the holding and maintaining of ORE
properties are expensed as incurred. The decrease in non-performing assets is
the result of loans returned to accrual status, payoffs, payments and
charge-offs.
-32-
<PAGE>
The following table sets forth summary data related to the allowance for
possible loan losses, the provision for possible loan losses and charge-off
experience for the past five years:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income, (at end of year)........ $142,494 $130,458 $124,144 $132,746 $120,919
- ------------------------------------------------------------------------------------------------------------
Average loans outstanding ............................. $136,331 $125,129 $130,615 $128,727 $129,894
- ------------------------------------------------------------------------------------------------------------
Balance of allowance for possible loan losses
at beginning of year ................................ $2,630 $2,492 $3,400 $3,184 $3,278
Loans charged-off:
Commercial .......................................... 658 1,040 2,974 993 7,303
Commercial lease financing .......................... -- 32 190 1,464 1,375
Real estate-construction ............................ -- -- -- -- 174
Real estate-commercial .............................. -- 1 -- 131 --
Real estate-residential ............................. 77 11 41 12 146
Installment ......................................... 191 152 804 794 1,640
- ------------------------------------------------------------------------------------------------------------
Total loans charged-off......................... 926 1,236 4,009 3,394 10,638
- ------------------------------------------------------------------------------------------------------------
Recoveries of loans:
Commercial .......................................... 323 146 177 659 285
Commercial lease financing .......................... 9 66 155 150 57
Real estate-commercial .............................. -- 1 1 16 3
Real estate-residential ............................. -- -- 20 --- ---
Installment ......................................... 99 147 113 88 37
- ------------------------------------------------------------------------------------------------------------
Total recoveries ............................... 431 360 466 913 382
- ------------------------------------------------------------------------------------------------------------
Net loans charged-off ................................. 495 876 3,543 2,481 10,256
Provision charged to expense .......................... 559 1,014 2,635 2,697 10,162
- ------------------------------------------------------------------------------------------------------------
Balance at end of year ................................ $2,694 $2,630 $2,492 $3,400 $3,184
- ------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses to total
loans outstanding (at end of year)................... 1.89% 2.02% 2.01% 2.56% 2.63%
- ------------------------------------------------------------------------------------------------------------
Net loans charged-off to average loans outstanding..... .36% .70% 2.71% 1.93% 7.90%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the allocation of the allowance for possible loan
losses by category of loans and the percentage of loans in each category to
total loans. The allocation is based upon management's review of the portfolio
as well as historical trends and current loan growth.
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans to Amount Loans to Amount Loans to Amount Loans to Amount Loans to
of Total of Total of Total of Total of Total
(In thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ................... $942 18.3% $1,291 20.3% $1,214 24.7% $1,946 30.7% $1,501 39.7%
Commercial lease financing.... 9 .3 8 .6 25 1.3 56 2.6 699 5.8
Real estate-construction...... 138 2.5 152 2.1 39 3.2 7 .6 27 .5
Real estate-commercial........ 1,019 32.7 691 30.3 680 27.7 587 21.7 317 19.7
Real estate-residential....... 235 20.6 191 21.7 157 16.5 218 18.3 160 8.4
Installment .................. 351 25.6 297 25.0 377 26.6 586 26.1 480 25.9
----------------------------------------------------------------------------------------------------------------------------------
Total ...................... $2,694 100.0% $2,630 100.0% $2,492 100.0% $3,400 100.0% $3,184 100.0%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
The allowance for possible loan losses at year end 1995 was $2.7 million, an
increase of $64 thousand as compared to year end 1994. The allowance at December
31, 1995 represents 1.89% of total loans outstanding as compared to 2.02% at
December 31, 1994. At December 31, 1995 and 1994, the allowance for possible
loan losses represented 156.7% and 77.0% of total non-performing loans,
respectively.
The Company is continually analyzing its loan portfolio in order to identify
early risk elements that require managements attention. The loan portfolio is
subject to review by lending management, the Company's internal loan review
staff, the Company's independent public accountants and various regulatory
agencies. The Company believes that its low level of risk elements are a
reflection of the Company's strict underwriting discipline and its practice of
early problem recognition and resolution.
As of December 31, 1995, a commercial mortgage in the amount of $1.6 million was
classified as a potential problem loan. This is a loan which management has
information which indicates that the borrower may not be able to comply with
current payment terms. Although there is some question about the borrowers
ability to comply with current loan payment terms, minimal losses, if any, are
anticipated.
Net loan charge-offs were $495 thousand for the year ended December 31, 1995 as
compared with $876 thousand for the year ended December 31, 1994. The ratio of
net charge-offs to average loans amounted to .36% for 1995 as compared with .70%
in 1994.
DEPOSITS
The Company's deposit base is its primary source of funds. The Company offers a
broad range of deposit products, including non-interest bearing demand deposits,
NOW accounts, savings accounts, money-market accounts and certificates of
deposit. The Company remains a deposit-driven financial institution with
emphasis on core deposit accumulation and retention as a basis for sound growth
and profitability.
The December 31, 1995 total deposit balance of $304.3 million represents an
increase of $38.9 million, or 14.7%, from the December 31, 1994 balance of
$265.4 million. This increase was primarily the result of the $26.7 million
increase in demand deposits, both non-interest bearing and interest bearing, and
the $13.7 million increase in time deposits partially offset by the $1.5 million
decrease in savings deposits. The Company believes that its record of sustaining
core deposit growth is reflective of the Company's retail approach to banking
which emphasizes a combination of free checking accounts, convenient branch
locations, extended hours of operation, quality service and active marketing.
-34-
<PAGE>
The following is a breakdown of the maturity of certificates of deposits of
$100,000 or more as of December 31, 1995 and 1994, respectively:
(In thousands) 1995 1994
-----------------------------------------------
3 months or less ........ $11,422 $5,010
3 to 6 months ........... 511 587
6 to 12 months .......... 720 232
Over 12 months .......... 425 218
-----------------------------------------------
Total ............ $13,078 $6,047
-----------------------------------------------
INTEREST RATE SENSITIVITY
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by the Company's Asset/Liability Committee. The
principal objective of the Committee is to maximize net interest income within
acceptable levels of risk established by policy. The Committee attempts to
maintain stable net interest margins by generally matching the volume of assets
and liabilities maturing, or subject to repricing, and by adjusting rates in
relation to market conditions to influence volumes and spreads.
The following table shows the gap position of the Company at December 31, 1995:
<TABLE>
<CAPTION>
Due Between
Due Within 91 Days and Due After Non-Interest
(In thousands) 90 Days One Year One Year Bearing Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loans ........................ $59,565 $12,059 $69,151 $1,719 $142,494
Short-term investments............ 18,631 -- -- -- 18,631
Securities ....................... 3,641 16,316 116,706 -- 136,663
Non-interest bearing assets....... -- -- -- 27,399 27,399
- --------------------------------------------------------------------------------------------------------
Total assets.................... $81,837 $28,375 $185,857 $29,118 $325,187
- --------------------------------------------------------------------------------------------------------
Interest bearing deposits......... $168,606 $15,876 $38,987 $ -- $223,469
Other liabilities ................ -- -- -- 83,091 83,091
Stockholders' equity.............. -- -- -- 18,627 18,627
- --------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity .......... $168,606 $15,876 $38,987 $101,718 $325,187
- --------------------------------------------------------------------------------------------------------
Period gap ....................... ($86,769) $12,499 $146,870 ($72,600)
- --------------------------------------------------------------------------------------------------------
Cumulative gap ................... (86,769) (74,270) 72,600
- --------------------------------------------------------------------------------------------------------
Period gap to total assets........ (26.68)% 3.84% 45.16%
Cumulative gap to total assets.... (26.68)% (22.84)% 22.32%
- --------------------------------------------------------------------------------------------------------
</TABLE>
-35-
<PAGE>
The difference between the volume of assets and liabilities that reprice in a
given period is the interest sensitivity gap. A "positive" gap results when more
assets than liabilities mature or are repriced in a given time frame.
Conversely, a "negative" gap results when there are more liabilities than assets
maturing or being repriced during a given period of time. The smaller the gap,
the less the effect of market volatility on net interest income. Asset/liability
management is the utilization of this information to develop strategies to
allocate funds to certain types of assets and to offer different liability
products to achieve a certain asset/liability balance in order to produce
desired profit margins.
As depicted in the table above, sensitivity to interest rate fluctuations is
measured in a number of time frames. At December 31, 1995, rate sensitive
liabilities exceeded rate sensitive assets at the 90 day interval and resulted
in a negative gap of $86.8 million. Rate sensitive assets exceeded rate
sensitive liabilities at the 91 to 365 day interval by $12.5 million. The total
cumulative negative gap repricing within 365 days is $74.3 million. As the
Company is liability sensitive, the Company's net interest margin would be
negatively affected in a rising rate environment as liabilities reprice more
quickly than assets. Management has identified numerous strategies, including a
redeployment of asset maturities and cash flows to insulate net interest income
from the effects of changes in interest rates.
These gap positions are monitored as part of the committee process. This
activity includes periodic forecasts of future business activity which are
applied to various interest rate environments in a simulation process. The use
of these financial modeling techniques assists management in its continuing
efforts to achieve stable earnings growth in an ever-changing interest rate
environment.
While gap analysis is a general indicator of the potential effect that changing
interest rates may have on net interest income, the gap itself does not present
a complete picture of interest rate sensitivity. First, changes in the general
level of interest rates do not affect all categories of assets and liabilities
equally or simultaneously. Second, assumptions must be made to construct a gap
table. Money-market deposits, for example, which have no contractual maturity,
are assigned a repricing interval of 90 days. Management can influence the
actual repricing of the deposits independent of the gap assumption. Third, the
gap table represents a one-day position and cannot incorporate a changing mix of
assets and liabilities over time as interest rates change.
For this reason, the Company primarily uses simulation techniques to project
future net interest income streams, incorporating the current "gap" position,
the forecasted balance sheet mix and the market rates and bank products under a
variety of interest rate scenarios.
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset/liability
management seeks to ensure that these needs are met at a reasonable cost. On the
asset side, liquid funds are maintained in the form of cash and due from banks,
federal funds sold and unpledged short-term securities and securities available
for sale. At December 31, 1995, these assets amounted to $85.3 million as
compared to $34.2 million for the same period in 1994. This represents 26.2% and
12.1% of total assets at December 31, 1995 and 1994, respectively.
-36-
<PAGE>
The primary source of liquidity is the Company's ability to attract new deposits
and retain deposit obligations as they mature. The Company utilizes its branch
network to access retail customers who provide a highly stable source of core
funds. These funds are comprised of demand deposits, savings accounts and
certificates of deposit. Core deposits averaged $283.7 million and $250.9
million for 1995 and 1994, respectively, representing an increase of $32.8
million, or 13.1%. The Company remains a deposit-driven financial institution
with emphasis on core deposit accumulation and retention as a basis for sound
growth and profitability. The Company believes that its record of sustaining
core deposit growth is reflective of the Company's retail approach to banking
which emphasizes a combination of free personal checking accounts, convenient
branch locations, extended hours of operation, quality service and active
marketing. Historically, the overall liquidity of the Company has been enhanced
by the significant amount of core deposits.
CAPITAL RESOURCES
A significant measure of the strength of a financial institution is a strong
capital base which can expand in close proportion to asset growth. It is the
capital base which provides the primary risk insurance to depositors. Also, it
is an important consideration to federal regulators, analysts of the Company's
common stock, as well as others in the marketplace.
The Federal Reserve Board and the FDIC have issued risk-based capital guidelines
for U.S. banking organizations. The objective of these efforts was to provide a
more uniform capital framework that is sensitive to differences in risk profiles
among banking companies.
The guidelines define a two-tier framework. Tier I capital consists of common
stockholders' equity and qualifying perpetual preferred stock, less goodwill,
while total Tier I and Tier II capital consists of Tier I capital and the
allowance for possible loan losses up to 1.25% of risk-weighted assets.
The table below presents in summary form the risk-based and leverage capital
ratios of the Company and the Bank as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Company Bank Company Bank
- ---------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios
Tier I Capital:
Actual ....................... 10.70% 11.29% 10.23% 11.30%
Regulatory Minimum Requirement 4.00% 4.00% 4.00% 4.00%
Combined Tier I and Tier II Capital:
Actual ....................... 11.95% 12.54% 11.71% 12.55%
Regulatory Minimum Requirement 8.00% 8.00% 8.00% 8.00%
Leverage Ratios
Actual ....................... 5.76% 6.10% 5.46% 6.02%
Regulatory Minimum Requirement 4.00% to 5.00% 4.00% to 5.00% 4.00% to 5.00% 4.00% to 5.00%
- ---------------------------------------------------------------------- --------------------------------
</TABLE>
-37-
<PAGE>
Three Months Ended March 31, 1996
Overview
The Company recorded net income applicable to Common Stock for the
three months ended March 31, 1996 of $730 thousand, or $.39 per fully diluted
common share. This compares to net income applicable to Common Stock for the
three months ended March 31, 1995 of $409 thousand, or $.26 per fully diluted
common share. Net income per fully diluted common share for the first quarter
of 1996 reflects an increase of 50% over the comparable period in 1995. The
Company's first quarter 1996 net income benefitted from a $338 thousand, or
9.6% increase in net interest income before the provision for possible loan
losses as compared to the same period in 1995. Also contributing to the
earnings growth for the first quarter of 1996 was a $60 thousand, or 33.3%
reduction in the allowance for possible loan losses and a $292 thousand, or
58.6% increase in non-interest income. Included in the increase in
non-interest income is a gain on sale of available for sale securities of $254
thousand, partially offset by a 7.8% or $236 thousand increase in non-interest
expense.
As of March 31, 1996, the Company's Capital ratios were: 5.77% for
Tier I leverage capital; 10.49% for Tier I capital to risk-adjusted assets;
and 11.62% for total Tier capital to risk-adjusted assets. The Bank's ratios
as of March 31, 1996 were 6.08% for Tier I leverage capital; 11.01% for Tier I
capital to risk-adjusted assets; and 12.27% for total Tier capital to
risk-adjusted assets. All ratios remain above regulatory mandated levels.
Non-accrual loans and total non-performing assets declined 50.0%, and
25.3%, respectively, from March 31, 1995 to March 31, 1996. Total
non-performing assets at March 31, 1996 remained at the same level as that of
December 31, 1995.
Net Interest Income
Net interest income, stated on a fully tax equivalent (FTE) basis,
increased $366 thousand, or 10.4% for the first quarter of 1996 as compared to
the first quarter of 1995. Net interest margins were 5.20% for the three
months ended March 31, 1996 and 5.38% for the three months ended March 31,
1995.
Interest income (FTE) totalled $5.5 million for the first three
months of 1996, an increase of 11.8%, or $581 thousand, as compared to the
same period in 1995, while interest expense increased 15.7%, or $215 thousand
during this period. Growth in average securities, interest bearing deposits
with banks, commercial and residential real estate and installment loans and
federal funds substantially accounted for the increase in net interest income.
Similarly, increases in average time deposits and N.O.W. accounts primarily
accounted for the increase in interest expense.
Average interest earning assets for the first three months of 1996
increased $35.3 million, or 13.2%, over the comparable period in 1995,
however, the overall rate on earning assets decreased by 15 basis points due
to the decrease in rates received on federal funds and interest-bearing
deposits with banks. Securities, and commercial and residential real estate
loans are primarily responsible for the growth in average earning assets with
increases of $14.8 million and $12.0 million, respectively, as compared with
the same period of 1995.
-38-
<PAGE>
The Company's average rate paid on interest-bearing liabilities
increased 8 basis points for the three month period ended March 31, 1996, as
compared to the same period of 1995. The cost of these interest-bearing
liabilities increased to 2.76% for the first quarter of 1996 compared to 2.68%
for the first quarter of 1995 primarily due to higher rates paid on time
deposits. Average demand deposits for the first quarter of 1996 increased
$12.7 million, or 19.7% compared to the first quarter of 1995. Average time
deposits, and other interest bearing liabilities increased $12.7 million, or
22.5%, and $11.0 million, or 7.3%, respectively, for the first quarter of 1996
as compared to the same period in 1995.
Included in interest-earning assets are loans on which the accrual of
interest has been discontinued. Such non-accrual loans amounted to $1.6
million at March 31, 1996. Had these loans been current in accordance with
their terms, interest income on loans for the first quarter of 1996 would have
been $38 thousand higher.
Allowance and Provision for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
considered adequate by management to absorb potential loan losses. It is the
result of an ongoing analysis which relates outstanding balances to expected
allowance levels required to absorb future credit losses. Current economic
problems are addressed through management's assessment of anticipated changes
in the regional economic climate, changes in composition and volume of the
loan portfolio and variances in levels of classified, non-performing and past
due loans. Allowance adequacy calculations are completed by applying risk
assessments to determine specific and general allowance requirements for
problem and non-problem loans.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114 and No. 118, "Accounting by Creditors for Impairment of a
Loan", as of January 1, 1995. SFAS 114 requires that an impaired loan, as
defined, be measured based on the present value of expected future cash flows
discounted at the loan's original effective interest rate. A loan is
considered impaired when, in the Bank's opinion, the Bank will be unable to
collect all amounts due according to the original contractual term of the loan
agreement. Groups of smaller homogeneous loans, such as consumer loans and
residential real estate loans, are specifically excluded from this definition.
Impairment may be measured based on the loan's observable market price of 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. Management has
determined that its nonaccrual loans and those loans previously classified as
insubstance foreclosures are impaired loans.
The Bank had previously estimated its allowance for possible loan
losses using methods similar to those prescribed in SFAS 114. Adoption of
these statements did not require any additional provisions for possible loan
losses as of January 1, 1995.
As of March 31, 1996 included in the Company's total loan portfolio
of $148.8 million, it had under SFAS 114 a total recorded investment in
impaired loans of $1.6 million. Of this amount, $1.5 million did not require a
valuation allowance. For the remaining $97 thousand of impaired loans there
was a $76 thousand valuation allowance established. This valuation allowance
was included in the $2.8 million allowance for possible loan losses in the
Bank's consolidated statement of condition. The average recorded investment in
impaired loans for the first quarter of 1996 was $1.7 million.
-39-
<PAGE>
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining investment is doubtful in which case
payments received are recorded as reductions of principal. The Bank did not
recognize interest income on impaired loans for the first quarter of 1996.
The following table lists selected data relating to the loan
portfolio and certain other factors which were considered by management in
determining the amount of the allowance for possible loan losses for the
period ended March 31, 1996.
As of, or For the Period Ended
(in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
Non-Accrual Loans:
Commercial.................................................. $ 735 $ 2,233
Real estate-commercial...................................... 239 526
Real estate-residential..................................... 318 121
Installment................................................. 269 239
------------------ -----------------
Total.............................................. 1,561 3,119
Other real estate owned.............................................. 1,453 915
------------------ -----------------
Total non-performing assets........................ $ 3,014 $ 4,034
================== =================
Ratio of non-performing assets
to total assets............................................. .89% 1.34%
Accruing loans past due 90 days or more:
Commercial.................................................. $ 193 $ 95
Real estate-commercial...................................... 329 --
Installment................................................. 8 48
------------------ -----------------
Total.............................................. $ 530 $ 143
</TABLE>
For the three months ended March 31, 1996, net loan charge-offs were
$9 thousand as compared with net loan recoveries of $12 thousand for the same
period of 1995. There were $91 thousand in charge-offs, of which $76 thousand
or 83.5% were commercial loans, and the remaining 16.5% were installment
loans. Recoveries during the first three months of 1996 were for commercial
and installment loans previously charged off and totalled $24 thousand and $58
thousand, respectively.
At March 31, 1996, the Company's non-accrual loans, impaired loans,
and other real estate (in total, non-performing assets) totalled $3.0 million
as compared to $4.0 million at March 31, 1995. Delinquent loans (i.e. loans 90
days or more past due, and still accruing) increased $387 thousand
-40-
<PAGE>
due to one commercial loan of $193 thousand and two commercial real estate
loans totalling $329 thousand.
As of March 31, 1996, a commercial mortgage in the amount of $1.6
million was classified as a potential problem loan. Subsequent to March 31,
1996, the Company has placed this loan on non-accrual status. This is a loan
as to which management has information indicating that the borrower may not be
able to comply with current payment terms. Although there is some question
about the borrower's ability to comply with current loan terms, minimal loss,
if any, is anticipated.
At March 31, 1996, the Company's allowance for possible loan losses
was $2.8 million, approximately equal to the level of the allowance for
possible loan losses at March 31, 1995. For March 31, 1996, this represented
1.9% of total loans and 179.7% of total non-performing loans. This compares to
2.1% of total loans and 90.5% of total non-performing loans at March 31, 1995.
The Company's allowance for possible loan losses at December 31, 1995 was $2.7
million, or 1.9% of loans and 156.7% of total non-performing loans.
Non-Interest Income
Non-interest income for the three months ended March 31, 1996
increased $292 thousand or 58.6% over the comparable period in 1995. During
the first quarter of 1996, the Company sold $8.0 million of its securities
classified as available for sale which resulted in a gain of $254 thousand,
while no sales of available for sale securities occurred during the first
quarter of 1995. Non-interest income, excluding gains from sales of
securities, increased $38 thousand, or 7.6% for the first quarter of 1996 as
compared to the same period of 1995. Service charges on deposit accounts for
the three months ended March 31, 1996 increased $18 thousand or 5.9% over the
first three months of 1995 as a result of increased income from account
related charges. Other non-interest income for the first quarter of 1996
increased $20 thousand or 10.4% over the same period of 1995 primarily due to
increased income from ATM fees, safe deposit fees, check printing income, and
other loan fees, partially offset by a decrease in credit card fee income.
Non-Interest Expense
Non-interest expense for the first quarter of 1996 totalled $3.3
million, an increase of $236 thousand, or 7.8% over the comparable period of
1995. First quarter 1996 and 1995 non-interest expense annualized as a
percentage of total average assets was 3.96% and 4.18%, respectively. Salaries
and employee benefits for the three months ended March 31, 1996 increased $252
thousand, or 18.8% over the first quarter of 1995 as a result of additions to
staff and increased expense relating to maintaining the Company's employee
stock option plan ("ESOP"). In December 1995, the Company elected to adopt the
American Institute of Certified Public Accountants Statement of Position 93-6
(SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans", with
retroactive application, as required, effective January 1, 1994. The required
adjustments and per share effect have been reflected in the fourth quarter
1995 and 1994 since the effect on interim quarters would not be significantly
different from amounts previously reported. Debt of the ESOP is recorded as
debt of the Company, and shares pledged as collateral for the debt are
reported as unearned ESOP preferred stock in the balance sheet. As the debt is
repaid, shares are released from collateral, and compensation expense is
reported for an amount equal to the current market price of the shares, and
the shares become outstanding for earnings per share computations. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings, and
dividends on unallocated ESOP shares are recorded as a reduction of the ESOP
debt and related accrued interest.
-41-
<PAGE>
As a result of the adoption of SOP 93-6, the Company reported
compensation expense of $64 thousand and $36 thousand, for the first quarter
of 1996 and 1995, respectively. Interest expense relating to the ESOP for the
three months ended March 31, 1996 totaled $27 thousand. Interest incurred on
the ESOP debt during the first quarter of 1995 was not recorded by the
Company, as the Company reflected the effects of SOP 93-6 in the fourth
quarter of 1995 only. First quarter 1996 occupancy and equipment expenses
increased $22 thousand or 3.5% over the first quarter of 1995 primarily due to
building maintenance costs and equipment depreciation expense. These costs
were partially offset by a reduction in equipment maintenance costs, and
building and leasehold depreciation. Other non-interest expenses for the first
quarter of 1996 decreased $38 thousand or 3.6% as compared to the same period
of 1995. Insurance premiums on deposit accounts for the first quarter of 1996
decreased $161 thousand or 99.4% as compared to the same period of 1995 as a
result of the Company receiving the most favorable risk classification during
1995. Other non-interest expenses, excluding insurance premiums on deposit
accounts for the first quarter of 1996 increased $123 thousand or 13.9% over
the same period of 1995 due to compliance expenses, higher advertising and
marketing-related costs, professional fees, and stationery and postage
expenses, partially offset by decreases in legal expense and costs associated
with the holding of other real estate owned.
Interest Rate Sensitivity and Liquidity
Management has identified numerous strategies, including a
redeployment of asset maturities and cash flows in an attempt to insulate net
interest income from the effects of changes in interest rates. Sensitivity to
interest rate fluctuations is measured in a number of time frames. Gap
positions are monitored as part of the Asset/Liability Committee ("ALCO")
process. This activity includes periodic forecasts of future business activity
which are applied to various interest rate environments in a simulation
process. The use of these financial modeling techniques assists management in
its continuing efforts to achieve stable earnings growth in an everchanging
interest rate environment. While gap analysis is a general indicator of the
potential effect that changing interest rates may have on net interest income,
the gap itself does not present a complete picture of interest rate
sensitivity. For this reason, the Company primarily uses simulation techniques
to project future net interest income streams, incorporating the current "gap"
position, the forecasted balance sheet mix and the anticipated spread
relationships between market rates and bank products under a variety of
interest rate scenerios.
Liquidity measures the ability to satisfy current and future cash
flow needs as they become due. The Company's primary sources of liquidity are
deposits, loan repayments and securities. During the first three months of
1996 and 1995, average balances in marketable securities and other short-term
investments comprised 47.6% and 46.5% of average total assets, respectively.
During the first three months of 1996, average deposit balances (after
interest credited) increased 8.3% to $307.2 million from December 31, 1995.
-42-
<PAGE>
The Company maintains a securities portfolio to fund increases in
loans or decreases in deposits, and is comprised of securities that the
Company believes will suit its needs and perform reasonably well under various
interest rate scenerios. These securities, which consists primarily of
obligations of the U.S. Treasury and U.S. Government Agencies and issues of
state and political subdivisions totalled $138.3 million at March 31, 1996, an
increase of 1.2% or $1.6 million over December 31, 1995. In December 1995, the
Company took advantage of the one-time opportunity to transfer securities out
of the held to maturity category without penalty, and transferred $40.7
million of securities that had been previously classified as held to maturity
to available for sale. At March 31, 1996, the Company's securities classified
as held to maturity reflected gross unrealized gains of $57 thousand and gross
unrealized losses of $1.5 million. Securities available for sale at March 31,
1996 totaled $36.7 million, a decrease of $9.6 million or 20.8% as compared to
December 31, 1995 due to matured and called bonds, and sales of securities
which occurred during the first quarter of 1996.
In accordance with SFAS 115, at March 31, 1996, the Company had
unrealized gains of $17 thousand (net of tax effects) in total stockholders'
equity for net increases in the fair market values of its securities
classified as available for sale. The Company had no securities classified as
trading securities as of March 31, 1996.
The Company remains a deposit-driven financial institution with
emphasis on core deposit accumulation and retention as a basis for sound
growth and profit ability. The Company believes that its record of sustaining
core deposit growth is reflective of the Company's retail approach to banking
which emphasizes a combination of free checking accounts, convenient branch
locations, extended hours of service, quality service and active marketing.
Historically, the overall liquidity of the Company has been enhanced by the
significant amount of core deposits.
Capital Resources
At March 31, 1996, stockholders' equity totaled $19.0 million or 5.6%
of total assets, as compared with $18.6 million, or 5.7%, at December 31,
1995.
The Federal Reserve Board standards applicable to bank holding
companies and similar standards of the Federal Deposit Insurance Corporation
applicable to banks classify capital into two tiers, referred to as Tier I and
Tier II. Tier I capital consists primarily of common stockholders' equity and
qualifying perpetual preferred stock, less goodwill. Tier II capital consists
of the allowance for possible loan and lease losses up to 1.25% of
risk-weighted assets.
The Federal Reserve Board requires each bank holding company to
maintain a minimum leverage ratio of 3.0% (Tier I capital to quarterly average
total assets). The minimum 3.0% leverage requirement applies only to top-rated
banking organizations without any operating, financial or supervisory
deficiencies. Other organizations are expected to hold an additional capital
cushion of at least 100 to 200 basis points of Tier I capital, and, in all
cases, banking organizations should hold capital commensurate with the level
and nature of all the risks to which they are exposed. The Company's leverage
capital ratio at March 31, 1996 was 5.77%. On March 31, 1996, the Bank's
leverage capital ratio was 6.08%.
-43-
<PAGE>
The following table reflects the Company's and Bank's capital ratios
as of March 31, 1996:
Company Bank
- ------------------------------------------ --------- --------------
Tier I Capital:
Actual............................ 10.49% 11.01%
Regulatory Minimum Requirement.... 4.00% 4.00%
Combined Tier I and Tier II Capital:
Actual............................ 11.62% 12.27%
Regulatory Minimum Requirement.... 8.00% 8.00%
Leverage Ratio:
Actual............................ 5.77% 6.08%
Regulatory Minimum Requirement.... 4.00%- 4.00%-
5.00% 5.00%
-44-
<PAGE>
BUSINESS
General
Independence Bancorp, Inc. (the "Company") is a New Jersey business
corporation which is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Holding Company Act"). As a bank
holding company, the Company's operations are confined to the ownership and
operation of banks and activities deemed by the Federal Reserve Board to be
closely related to banking to be a proper incident thereto. The Company
incorporated on November 10, 1983 for the purpose of acquiring Independence
Bank of New Jersey (the "Bank") and thereby enabling the Company to operate
within the bank holding company structure. On June 28, 1984 the Company
acquired 100 percent of the outstanding shares of the Bank.
Except as otherwise indicated, all references herein to the Company
include the Bank.
The principal activities of the Company are the owning and
supervising of the Bank, which engages in a general banking business from
seven offices located in Bergen County, New Jersey and one office in Passaic
County, New Jersey. The day-to-day affairs of the Bank are managed by the
Bank's officers and directors. The Company's principal executive offices are
located at 1100 Lake Street, Ramsey, New Jersey 07446.
The Bank
The Bank is an independent community bank which seeks to provide
personal attention and professional financial assistance to its customers. The
Bank is a locally managed, owned and oriented financial institution.
The Bank is a member of the Commerce Network (the "Network") and has
the exclusive right to use the "Yes Bank" logo within its primary service
area. The Network provides certain marketing and support services to the Bank.
The Network is a group of five community banks with over 70 branch banking
offices throughout New Jersey and southeastern Pennsylvania that provides
certain marketing support services and technical support services to its
members which allows them to take advantage of the Network's size.
The Bank provides a broad range of retail and commercial banking
services for consumers and small and mid-sized companies through branch
offices in Ramsey, Allendale, Ridgewood, Mahwah, Montvale, Park Ridge,
Hackensack and Hawthorne, New Jersey. The Bank's lending and investment
activities are funded principally by retail deposits gathered through its
retail branch office network. The Bank is not a member of the Federal Reserve
System. The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of
the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. As of March 31, 1996, the Bank had total assets of
approximately $339.0 million, total deposits of approximately $316.9 million
and total stockholders' equity of approximately $20.0 million.
The Bank has focused its strategy for growth primarily on the further
development of its community-based retail banking network. The objective of
this corporate strategy is to build earnings growth potential for the future
as the retail branch office network matures. The Bank's branch concept uses a
prototype or standardized branch office building, convenient locations and
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active marketing, all designed to attract retail deposits. Using this
prototype branch concept, the Bank plans to open a number of new branch
offices in the next five years. The Bank's retail approach to banking
emphasizes a combination of long-term customer relationships, quick responses
to customer needs, active marketing, convenient locations, free checking for
customers maintaining certain minimum balances and extended hours of
operation. The Bank has attempted to locate its branches in the fastest
growing communities within its primary service area.
Commercial loans are made to companies located within the Bank's
market area for working capital and other short term needs and term loans for
the acquisition of assets. Construction loans are primarily made to local
developers and are primarily made on single family structures which are
generally under contract before being built. Commercial mortgage loans are
made to local property owners. Residential loans are predominantly secured by
one-to-four family properties in the Bank's primary market area. The Bank's
underwriting standards require a careful consideration of a borrower's
financial condition, as reflected on acceptable financial statements, as well
as the management capability, industry and economic environment affecting the
borrower. Each potential credit is evaluated on, among other factors, the
specific purpose and structure of the loan, the source of and schedule for
repayment, the borrower's financial strength and character, and the value of
any collateral. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Bank is not dependent on any one or more major customers.
Service Area
The Bank's primary service area includes Bergen and Passaic Counties,
New Jersey and more particularly the following cities located in these
counties where the Bank has branch offices: Ramsey, Allendale, Ridgewood,
Mahwah, Montvale, Park Ridge, Hackensack and Hawthorne. Retail deposits
gathered through these focused branching activities are used to support the
Bank's lending throughout Northern New Jersey.
Retail Banking Activities
The Bank provides a broad range of retail banking services and
products, including free personal checking accounts and savings programs,
negotiable orders of withdrawal ("NOW") accounts, money-market accounts,
certificates of deposit, secured and unsecured loans, consumer loan programs
(including installment loans for home improvement and the purchase of consumer
goods and automobiles), home equity and Visa/MasterCard revolving lines of
credit, overdraft checking, mortgage loans, safe deposit facilities, wire
transfers, automated teller facilities, money orders and holiday club
accounts.
Commercial Banking Activities
The Bank offers a broad range of commercial banking services,
including free business checking accounts (subject to a $1,000 minimum
balance), night depository facilities, wire transfers, money-market accounts,
certificates of deposit, short-term loans for seasonal or working capital
purposes, term loans for fixed assets and expansion purposes, revolving credit
plans and other commercial loans to fit the needs of its customers. The Bank
also finances the construction of business properties and makes real estate
mortgage loans on completed buildings. Where the needs
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<PAGE>
of the customer exceed the Bank's lending limit for any one customer
(approximately $3.3 million at December 31, 1995), the Bank may participate
with other banks in making a loan.
Competition
The Bank's service area is characterized by intense competition for
banking business among bank holding companies and commercial banks, thrift
institutions and other financial institutions. The Bank actively competes with
such banks and financial institutions for local retail and commercial
accounts. The Bank also is subject to competition from other major banking and
financial institutions outside its service area, many of which are
substantially larger and have greater financial resources than the Bank. Other
competitors, including credit unions, consumer finance companies, insurance
companies and money-market mutual funds, compete with certain lending and
deposit gathering services offered by the Bank.
Other institutions may have the ability to finance wide-ranging
advertising campaigns, and to allocate investment assets to regions of highest
yield and demand. Many institutions offer services such as trust services and
international banking which the Bank does not directly offer (but which the
Bank may offer indirectly through other institutions). Many institutions, by
virtue of their greater total capital, can have substantially higher lending
limits than the Bank.
In commercial transactions, the Bank's legal lending limit to a
single borrower (approximately $3.4 million as of March 31, 1996) permits it
to compete effectively for the business of smaller businesses. However, this
legal lending limit is considerably lower than that of various competing
institutions and thus may act as a constraint on the Bank's effectiveness in
competing for financings in excess of these limits.
In consumer transactions, the Bank believes that it is able to
compete effectively with larger financial institutions because it offers
longer hours of operation, personalized service and competitive interest rates
on savings and time accounts with low minimum deposit requirements.
In order to compete more effectively with other financial
institutions both within and beyond its primary service area, the Bank uses,
to the fullest extent possible, the flexibility which independent status
permits. This includes an emphasis on specialized services for the small
business person and professional contacts by the Bank's officers, directors
and employees, and the greatest possible efforts to understand fully the
financial situation of relatively small borrowers. The size of such borrowers,
in management's opinion, often inhibits close attention to their needs by
larger institutions. The Bank may seek to arrange for loans in excess of its
lending limit on a participation basis with other financial institutions in
order to more fully to service customers whose loan demands exceed the Bank's
lending limit.
The Bank endeavors to be competitive with all competing financial
institutions in its primary service area with respect to interest rates paid
on time and saving deposits, its overdraft charges on deposit accounts, and
interest rates charged on loans.
National Monetary Policy
In addition to being affected by general economic conditions, the
earnings and growth of the Bank and the Company are affected by the policies
of the regulatory agencies, including the Board of Governors of the Federal
Reserve System ("FRB") and FDIC. An important function of the
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FRB is to regulate the money supply and credit conditions. Among the
instruments used to implement these objectives are open market operations in
United States Government securities, setting the discount rate and changes in
reserve requirements against bank deposits. These instruments are used in
varying combinations to influence overall growth of bank loans, investments
and deposits and their use may also affect interest rates charged on loans or
paid on deposits. The monetary policies and regulations of the FRB have had a
significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
Employees
As of March 31, 1996, the Company, including the Bank, had
approximately 179 full-time equivalent employees of whom 67 were part-time.
The Company considers its relationships with its employees to be good.
Legal Proceedings
Neither the Company, the Bank nor any of their properties is subject
to any legal proceedings other than routine and non-material litigation
incidental to its business which primarily consists of collection proceedings
in which the Bank is seeking to enforce obligations due it.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory
controls increase the cost of doing business. The operations of the Bank are
subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, and limitations
on the types of investments that may be made and the types of services which
can be offered. Various consumer laws and regulations also affect the
operations of the Bank.
The Company
The Company is registered as a "bank holding company" under the
Holding Company Act and is, therefore, subject to regulation by the FRB.
Under the Holding Company Act, the Company is required to obtain the
prior approval of the FRB before it can merge or consolidate with any other
bank holding company or acquire all or substantially all of the assets of any
bank that is not already majority owned by it or acquire direct or indirect
ownership or control of any voting shares of any bank that is not already
majority owned by it, if after such acquisition it would directly or
indirectly own or control more than 5% of the voting stock of such bank. See
"Recent Legislation."
The Company is generally prohibited under the Holding Company Act
from engaging in, or acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the FRB, by order or regulation, has found such activities to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making such determination, the FRB considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the The Company maintains a securities
portfolio to fund increases in loans or decreases in deposits, and is
comprised of securities that the Company believes will suit its needs and
perform reasonably well under various interest rate scenerios. These
securities, which consists primarily of obligations of the U.S. Treasury and
U.S. Government Agencies and issues of state and political public which
outweigh the possible adverse effects. The FRB has by regulation determined
that certain activities are closely related to banking within the meaning of
the Holding Company Act. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice, acting as an
insurance agent for certain types of credit-related life insurance; leasing
personal property on a full payout, non-operating basis; and certain stock
brokerage and investment advisory services.
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<PAGE>
Under the policy of the FRB with respect to bank holding company
operations, a bank holding company is deemed to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent
such policy. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("1991 Banking Law"), a bank holding company is required to guarantee
that any "undercapitalized" (as such term is defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards as of the time the institution
failed to comply with such capital restoration plan.
In addition, under the Holding Company Act, the Company is required
to file periodic reports of its operations with, and is subject to examination
by, the FRB.
The Company is also under the jurisdiction of the Securities and
Exchange Commission and various state securities commissions for matters
related to the offering and sale of its securities, and is subject to the
Securities and Exchange Commission's rules and regulations relating to
periodic reporting, reporting to shareholders, proxy solicitation and insider
trading.
The Company, as an affiliate of the Bank within the meaning of the
Federal Reserve Act, is subject to certain restrictions under the Federal
Reserve Act regarding, among other things, extensions of credit to it by the
Bank and the use of the stock or other securities of the Company as collateral
for loans by the Bank to any borrower. Further, under the Federal Reserve Act
and the FRB regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with
extensions of credit or provisions of property or services. These so-called
"anti-tie-in provisions" generally provide that a bank may not extend credit,
lease or sell property or furnish any service or fix or vary the consideration
for any of the foregoing (or obtain the same from), to a customer on the
condition or requirement that the customer provide some additional credit,
property or service to the bank, the bank's holding company or any other
subsidiary of the bank's holding company, or on the condition or requirement
that the customer not obtain other credit, property or services from a
competitor of the bank, the bank's holding company or any subsidiary of the
bank's holding company.
The Bank
The Bank, as a state-chartered commercial bank, is subject to the New
Jersey Banking Act of 1948, as amended. The Bank is also subject to the
supervision of, and to regular examination by, the New Jersey Department of
Banking ("Department") and the FDIC and is required to furnish periodic
reports to each agency. Although the Bank is not a member of the Federal
Reserve System, it is still subject to substantial regulation by the FRB. The
approval of the Department is necessary for the establishment of any
additional branch offices by any state bank, subject to applicable state law
restrictions. Under present New Jersey Law, the Bank may operate offices at
any location in New Jersey approved by the Department. See "Recent
Legislation."
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<PAGE>
The aspects of the lending and deposits business of the Bank which is
regulated by the above mentioned agencies include, among others, personal
lending and mortgage lending. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth
specific restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
State-chartered banks are prohibited from engaging as principals in
activities that are not permitted for national banks, unless: (i) the FDIC
determines the activity would pose no significant risk to the appropriate
deposit insurance fund, and (ii) the bank is, and continues to be, in
compliance with all applicable capital standards. The Bank currently does not
engage as principal in activities not permitted for national banks.
The Bank, as an institution, the deposits of which are insured by the
BIF of the FDIC, is subject to an insurance assessment imposed by the FDIC.
The insurance assessment paid by BIF- insured institutions is determined under
a risk-based assessment system. Under this system, banks pay a semi-annual
assessment at a rate which is based upon the assessment risk classification
assigned to the bank by the FDIC. In determining the assessment risk
classification, the FDIC assigns each bank to one of the three capital groups
and within each capital group to one of the three supervisory subgroups.
Depending upon the assessment risk classification assigned to a bank, the
semi-annual assessments paid by banks range from 0.00% of an institution's
average assessment base for banks assigned to the highest capital group and
highest supervisory subgroup to 0.31% for banks assigned to the lowest capital
group and lowest supervisory subgroup. Banks are notified of the assessment
risk classification by the first day of the month preceding each semi-annual
period.
The Bank's current assessment rate is 0.00%.
Under the Community Reinvestment Act, as amended ("CRA"), as
implemented by FDIC regulations, a bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low- and moderate- income
neighborhoods. CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with CRA. CRA requires the
FDIC to assess an institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution. The CRA requires public disclosure of an
institution's CRA rating and requires that the FDIC provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system. An institution's CRA rating is considered in
determining whether to grant charters, branches and other deposit facilities,
relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. The Bank recently
received a "satisfactory" rating from the FDIC under the CRA. However in 1994
and 1995, the Bank received a "needs to improve" rating, which is the rating
immediately below "satisfactory." A "needs to improve" rating could have an
effect on the ability of the Bank to expand in the future. The Company has
taken steps to maintain its "satisfactory" rating under CRA including
strengthening its ongoing commitment to small business lending and expanding
its commitment to specialized lending to low- and moderate-income areas within
the Company's market areas. While the Company believes that its efforts will
be successful in maintaining the Bank's CRA
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<PAGE>
rating, there can be no assurances that the Company's efforts will be
successful and that the rating will be maintained.
Capital Requirements
Effective December 31, 1992, risk-based capital standards issued by
bank regulatory authorities in the United States were fully implemented. These
capital standards attempt to relate a banking company's capital to the risk
profile of its assets and provide the basis for which all banking companies
and banks are evaluated in terms of capital adequacy. The risk-based capital
standards require all banking organizations to meet a minimum ratio of total
capital to risk weighted assets of 8.00% (including certain off-balance sheet
activities, such as standby letters of credit) of which at least 4.00% is
required to be in the form of Tier I capital.
A banking organization's qualifying total capital consists of two
components: Tier I capital (core capital) and Tier II capital (supplementary
capital). At least 50% of a banking organization's total regulatory capital
must consist of Tier I capital. Tier I capital is an amount equal to the sum
of (i) common stockholders' equity (including adjustments for any surplus or
deficit); (ii) non-cumulative perpetual preferred stock (plus, for bank
holding companies, cumulative perpetual preferred stock in an amount up to 25%
of Tier I capital); and (iii) the company's minority interest in the equity
account of consolidated subsidiaries, less certain goodwill items.
Tier II capital may consist of a limited amount of subordinated debt
and intermediate-term preferred stock, certain hybrid capital instruments and
other debt securities, perpetual preferred stock and a limited amount of the
allowance for possible loan losses.
Under the risk-weighted capital guidelines, balance sheet assets and
certain off-balance sheet items, such as standby letter of credit, are
assigned to one of four risk-weight categories (0%, 20%, 50% or 100%)
according to the nature of the assets and their collateral or the identity of
any obligor or guarantor. For example, cash is assigned to the 0% risk
category, while loans secured by one-to-four family residences are assigned to
the 50% risk category. The aggregated amount of such assets and off-balance
sheet items in each risk category is adjusted by the risk-weight assigned to
that category to determine weighted values, which are added together to
determine the total risk- weighted assets for the banking organization.
Accordingly, an asset, such as a commercial loan, which is assigned to a 100%
risk category is included in risk-weighted assets at its nominal face value,
whereas a loan secured by a single-family mortgage is included at only 50% of
its nominal face value.
Under regulations issued by the FRB, bank holding companies,
including the Company, are required to maintain 3% minimum leverage capital
ratio (Tier I capital, less intangible assets, to total average assets) plus
an additional capital cushion of 100 to 200 basis points (1 - 2%). In order
for an institution to operate at or near the minimum leverage requirements of
3%, the FRB expects that such institution would have well-diversified risk, no
undue interest rate risk exposure, excellent asset quality, high liquidity and
good earnings. In general, the bank holding company would have to be
considered a strong banking organization, rated in the highest category under
the bank holding company rating system and have no significant plans for
expansion. Higher capital ratios of up to 5% will generally be required if all
the above characteristics are not exhibited, or if the institution is
undertaking expansion, seeking to engage in new activities, or otherwise faces
unusual or abnormal risks.
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The FDIC adopted a similar rule for insured non-member banks, such as
the Bank, in March 1991. Pursuant to the rule, the FDIC is not precluded from
requiring a bank to maintain a higher capital level based on the institution's
particular risk profile. The FDIC rule provides that institutions not in
compliance with the regulation are expected to be operating in compliance with
a capital plan or agreement with the regulator. If they do not do so, they are
deemed to be engaging in an unsafe and unsound practice and may be subject to
enforcement action. Enforcement actions could include a capital directive, a
cease and desist order, civil monetary penalties, removal and prohibition
orders against institution-affiliated parties, the establishment of
restrictions on the Bank's operations, and appointment of a conservator or
receiver. Failure to maintain capital of at least 2% of assets constitutes an
unsafe and unsound condition justifying termination of FDIC insurance.
The 1991 Banking Law requires each federal Banking agency including
the Board of Governors of the FRB to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities, as
well as reflect the actual performance and expected risk of loss on
multi-family mortgages. All of the bank regulatory agencies recently issued a
final rule that amends their capital guidelines for interest rate risk and
requires such agencies to consider in their evaluation of a bank's capital
adequacy the exposure of a bank's capital and economic value to changes in
interest rates. This final rule does not establish an explicit supervisory
threshold. The agencies intend, at a subsequent date, to incorporate explicit
minimum requirements for interest rate risk into their risk based capital
standards and have proposed a supervisory model to be used together with bank
internal models to gather data and hopefully propose at a later date explicit
minimum requirements. This law also requires each federal Banking agency,
including the FRB, to specify, by regulation, the levels at which an insured
institution would be considered "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." At December 31, 1995, the Bank and the Company each met the
regulatory definition of a "well-capitalized" financial institution, i.e., a
leverage capital ratio exceeding 5%, and a Tier I risk-based capital ratio
exceeding 6%, and a total risk-based capital ratio exceeding 10%.
Recent Legislation
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate
Act"). Among other things, the Interstate Act permits bank holding companies
to acquire banks in any state one year after enactment. Beginning June 1,
1997, a bank may merge with a bank in another state so long as both states
have not opted out of interstate branching between the date of enactment of
the Interstate Act and May 31, 1997. States may enact laws opting out of
interstate branching before June 1, 1997, subject to certain conditions.
States may also enact laws permitting interstate merger transactions before
June 1, 1997 and host states may impose conditions on a branch resulting from
an interest merger transaction that occurs before June 1, 1997, if the
conditions do not discriminate against out-of-state banks, are not preempted
by Federal law and do not apply or require performance after May 31, 1997.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
Under the Interstate Act, the Federal Deposit Insurance Act is
amended to permit the responsible Federal regulatory agency to approve the
acquisition of a branch of an insured bank by an out-of-state bank or bank
holding company without the acquisition of the entire bank or the
establishment of a "de novo" branch only if the law of the state in which the
branch is located permits out-of-state banks to acquire a branch of a bank
without acquiring the bank or permits out-of-state banks to establish "de
novo" branches.
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New Jersey recent passed legislation opting-in early to
interstate bank mergers and allowing out-of-state banks and bank holding
companies to branch in New Jersey by the acquisition of a branch without the
acquisition of the entire bank.
On September 23, 1994, the President signed into law the "Riegle
Community Development and Regulatory Improvement Act of 1994" (the
"Development Act"). Among other things, the Development Act establishes a $382
million fund (the "Fund") to promote economic development and credit
availability in underserved communities by providing financial and technical
assistance to community development financial institutions ("CDFIs").
CDFIs include banks, savings associations and bank holding companies
which have a primary mission of promoting community development. Institutions
receiving monies from the Fund will be required to provide matching funds
dollar for dollar. Under the Fund, a CDFI may receive up to $5 million over a
three-year period, with affiliates in other states not presently served
eligible to receive up to an additional $3.75 million over three years.
One third of the Fund will be used to finance the Bank Enterprise
Act, an existing (but previously unfunded) incentive program designed to
encourage depository institutions to increase funding in distressed
neighborhoods.
In addition to the above, the Development Act contains provisions
relating to, among others, small business capital formation, small business
loan securitization, consumer protection for "reverse mortgages," paperwork
reduction and reform of the national flood insurance program.
The foregoing is a summary and general description of certain
provisions of each of the Interstate Act and the Development Act and does not
purport to be complete. Many of the provisions of each will be implemented
through the adoption of regulations by the various Federal banking agencies.
Moreover, many of the significant provisions of the legislation have not yet
become effective. As of the date hereof, the Company is continuing to study
the legislation and regulations relating to the legislation but cannot yet
assess its impact on the Company.
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MANAGEMENT
The following table sets forth certain information with respect to
the executive officers and directors of the Company and the Bank. The
directors each serve for a one year term and until their successors are
elected and qualified. Except for Mr. Bosma who became a director in 1991,
each of the directors of the Company has served in such capacity since the
formation of the Company in 1984. Each director of the Company is also a
director of the Bank. Officers of the Company and the Bank serve at the
discretion of their respective Boards of Directors.
<TABLE>
<CAPTION>
Age as of Position with the Company
Name December 31, 1995 and/or Bank
- ---------------------------- --------------------------- ----------------------------------------------
<S> <C>
James R. Napolitano 53 Chairman of the Board and
Principal Executive Officer of the
Company and Bank
A. Roger Bosma 53 President of the Company and Bank;
Chief Credit Officer of the Bank;
Director of the Company and Bank
Joseph LoScalzo 61 Director of the Company and Bank
Esko J. Koskinen 71 Director of the Company and Bank
William F. Dator 52 Director of the Company and Bank
Julius J. Franchini 60 Director of the Company and Bank
Robert F. Frasco 63 Director of the Company and Bank
Robert O. Hagman 70 Director of the Company and Bank
Joseph A. Haynes 53 Director of the Company and Bank
Kevin J. Killian 39 Executive Vice President, Chief
Financial Officer and Secretary of
the Company and the Bank
Patrick W. Thaller 52 Executive Vice President and Chief
Lending Officer of the Bank
</TABLE>
Except as noted below, each of the directors and officers of the
Company and Bank has had the same principal occupation or employment for at
least the past five years.
Mr. Napolitano has been Chairman of the Board of the Company since
1984 and Bank since 1975. In April, 1991 in his capacity as Chairman of the
Board, Mr. Napolitano assumed executive officer responsibilities at the
Company and Bank. In July 1995, Mr. Napolitano assumed the Principal Executive
Officer's function of the Company and the Bank. In addition to his duties at
the Company and Bank, he continues to have a limited law practice with the law
firm of Napolitano & Napolitano, Esquire, Ramsey, New Jersey, of which he is a
partner.
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Mr. Bosma has served as President of the Company and Bank since March
18, 1991, Chief Executive Officer of the Company and Bank from March 18, 1991
to July, 1995 and Chief Credit Officer of the Bank since July 1995. Prior
thereto, he served as a Senior Vice President of Credit at First Fidelity
Bancorp responsible for establishing credit policy and credit training since
1985.
Mr. LoScalzo is President of LoScalzo Builders, Ltd., Allendale, New
Jersey.
Mr. Koskinen is President of Greenway Construction Co., Inc.,
Montvale, New Jersey.
Mr. Dator is Partner of The Dator Commercial Agency, Inc. (Real
Estate), Mahwah, New Jersey.
Mr. Franchini is President of Lynn Chevrolet, Inc., Kearny, New
Jersey and President of Franchini Chevrolet, Inc., Garfield, New Jersey.
Mr. Frasco is President of Frasco Enterprises (Real Estate), Mahwah,
New Jersey.
Mr. Hagman is a Partner of CSA Equipment Company, Floral Park, New
Jersey.
Mr. Haynes is a Registered Representative of Smith Barney, Paramus,
New Jersey.
Mr. Killian joined the Company and Bank in March, 1992. Prior to that
time for more than five years, he was employed in various positions by First
Fidelity Bank, N.A., including Assistant Vice President - Budget Manager, Vice
President - Division Controller and Vice President Corporate Budget Manager.
Mr. Thaller joined the Bank in July, 1995. Prior to that time for
more than five years, he was employed in various positions by the Bank of New
York, N.A. and its predecessor, National Community Bank of New Jersey,
including President, Northeast Region and Senior Officer of Banking Group and
Executive Vice President.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus with respect to the beneficial ownership of the Company Common
Stock and/or Series A Preferred Stock by (i) the persons known by the Company
to be beneficial owners of more than five percent of its Common Stock and/or
Series A Preferred Stock, (ii) by each director of the Company, and (iii) by
all directors and executive officers of the Company, as a group. Except as
otherwise noted, each beneficial owner listed has sole investment and voting
power with respect to the Common Stock and/or Series A Preferred Stock. See
"Description of Securities - Series B Non-Convertible Preferred Stock" for a
description of the Company securities beneficially owned by Commerce Bancorp,
Inc.
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
-------------------------------- ------------------------------
Shares Shares
Beneficially Percent Beneficially Percent
Name and Address of Beneficial Owner Owned (A) of Class Owned (A) of Class
- --------------------------------------------------- ------------------ ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Independence Employee Stock Ownership Plan
1100 Lake Street
Ramsey, NJ 07446................................. 374,774 (b) 22.2 187,387 24.1
Robert F. and Linda Frasco
53 Indianfield Court
Mahwah, NJ 07430................................ 110,299 (c) 8.1 22,500 2.9
Julius J. Franchini
461 Kearny Avenue
Kearny, NJ 07032................................ 93,518 (d) 7.0 8,900 1.1
Thomas E. and Barbara L. Napolitano
18 Lancaster Court
Ramsey, NJ 07446................................ 76,256 (e) 5.7 12,500 1.6
James R. and Catherine Napolitano
754 Barnstable Lane
Franklin Lakes, NJ 07417........................ 68,788 (f) 5.2 7,834 1.0
A. Roger Bosma.................................... 13,760 (g) 1.0 1,650 *
Joseph LoScalzo................................... 49,407 (h) 3.7 7,710 1.0
Esko J. Koskinen.................................. 58,009 (i) 4.3 9,300 1.2
William F. Dator.................................. 5,043 (j) * -- --
Robert O. Hagman.................................. 25,667 (k) 1.9 5,400 *
Joseph A. Haynes.................................. 28,315 (l) 2.1 6,250 *
All directors and executive officers of
the Company as a group (12 persons).............. 455,445 (m) 30.2 70,544 9.1
</TABLE>
- ---------------
*less than 1%
(a) The securities "beneficially owned" by an individual are determined
in accordance with the definition of "beneficial ownership" set
forth in the regulations of the Securities and Exchange Commission
and, accordingly, may include securities owned by or for, among
others, the wife and/or minor children of the individual and any
other relative who has the same home as such individual, as well as
other securities as to which the individual has or shares voting or
investment power or has the right to acquire within 60 days after
the date of this Prospectus. Beneficial ownership may be disclaimed
as to certain of the securities.
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<PAGE>
(b) Includes 187,387 shares of Common Stock which can be acquired upon
the conversion of the Series A Preferred Stock and 187,387 shares
which can be acquired upon the exercise of the Common Stock Purchase
Rights included with the Series A Preferred Stock. See "REDEMPTION
OF SERIES A PREFERRED STOCK.
(c) Includes 22,500 shares which could be acquired upon the conversion
of the Series A Preferred Stock and 22,500 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 4,025 shares
which could be acquired upon the exercise of options granted under
the 1990 Stock Option Plan for Non-Employee Directors, as amended
(the "1990 Plan").
(d) Includes 8,900 shares which could be acquired upon the conversion of
the Series A Preferred Stock and 8,900 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 4,025 shares
which may be acquired upon the exercise of options granted under the
1990 Plan.
(e) Includes 12,500 shares which could be acquired upon conversion of
the Series A Preferred Stock and 12,500 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock.
(f) Includes 39,195 shares held jointly by Mr. Napolitano and his wife.
Includes 6,326 shares held by Mr. Napolitano's wife and children.
Includes 2,386 shares which could be acquired upon the conversion of
the Series A Preferred Stock and 2,386 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 5,448 shares
held by Mr. Napolitano's wife which can be acquired upon the
conversion of the Series A Preferred Stock and 5,448 shares which
could be acquired upon the exercise of the Common Stock Purchase
Rights included with the Series A Preferred Stock. Does not include
79,200 shares held by relatives of Mr. Napolitano as to which he
disclaims beneficial ownership. Includes 525 shares which may be
acquired upon the exercise of options granted under the 1990 Plan.
Includes 3,500 shares which may be acquired upon the exercise of
options granted under the 1986 Stock Option Plan.
(g) Includes 1,000 shares which could be acquired upon the conversion of
the Series A Preferred Stock and 1,000 shares which could be
acquired upon the exercise of the Common Stock Purchase Right
included with the Series A Preferred Stock. Includes 650 shares held
by Mr. Bosma's wife and children which can be acquired upon the
conversion of the Series A Preferred Stock and 650 shares which
could be acquired upon the exercise of the Common Stock Purchase
Rights included with the Series A Preferred Stock. Includes 10,250
shares which may be acquired upon the exercise of options granted
under the 1986 Stock Option Plan.
(h) Excludes 2,714 shares held by or on behalf of Mr. LoScalzo's
children as to which he disclaims beneficial ownership. Includes
4,025 shares which may be acquired upon the exercise of options
granted under the 1990 Plan. Includes 7,085 shares which could be
acquired upon the conversion of the Series A Preferred Stock and
7,085 shares which could be acquired upon the exercise of the Common
Stock Purchase Rights included with the Series A Preferred Stock.
Includes 625 shares held by Mr. LoScalzo's wife which can be
acquired upon the conversion of the Series A Preferred stock and 625
shares which could be acquired upon the exercise of the Common Stock
Purchase Rights included with the Series A Preferred Stock.
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<PAGE>
(i) Includes 34,308 shares held by Greenway Construction Profit Sharing
Plan of which Mr. Koskinen is a trustee. Includes 7,000 shares held
by Greenway Construction Profit Sharing Plan which could be acquired
upon the conversion of the Series A Preferred Stock and 7,000 shares
which could be acquired upon the exercise of the Common Stock
Purchase Rights included with the Series A Preferred Stock. Includes
an additional 1,550 shares which could be acquired upon the
conversion of the Series A Preferred Stock and 1,550 which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 750 shares held
by Mr. Koskinen's wife which could be acquired upon the conversion
of the Series A Preferred Stock and 750 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Does not include 5,201
shares held by relatives of Mr. Koskinen as to which he disclaims
beneficial ownership. Includes 4,025 shares which may be acquired
upon the exercise of options granted under the 1990 Plan.
(j) Includes 393 shares which are held by Mr. Dator's wife as custodian
for Mr. Dator's children. Excludes 921 shares held by Mr. Dator's
children. Mr. Dator disclaims beneficial ownership with respect to
these shares. Includes 4,025 shares which may be acquired upon the
exercise of options granted under the 1990 Plan.
(k) Includes 5,400 shares which could be acquired upon the conversion of
the Series A Preferred stock and 5,400 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 4,025 shares
which may be acquired upon the exercise of options granted under the
1990 Plan.
(l) Excludes 53 shares held by the son of Mr. Haynes. Mr. Haynes
disclaims beneficial ownership with respect to these shares.
Includes 6,250 shares which could be acquired upon the conversion of
the Series A Preferred Stock and 6,250 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 4,025 shares
which may be acquired upon the exercise of options granted under the
1990 Plan.
(m) Includes 70,544 shares which could be acquired upon the conversion
of the Series A Preferred Stock and 70,544 shares which could be
acquired upon the exercise of the Common Stock Purchase Rights
included with the Series A Preferred Stock. Includes 18,625 shares
which may be acquired upon the exercise of options granted under the
1986 Stock Option Plan. Includes 28,700 shares which may be acquired
upon the exercise of options granted under the 1990 Plan.
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<PAGE>
DESCRIPTION OF SECURITIES
The following statements are summaries of certain provisions of the
Company's capital stock and are qualified in their entirety by reference to
the complete text of the Company's Certificate of Incorporation, as amended
(the "Certificate"), a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Company is authorized to issue 5,000,000 shares of Common Stock,
par value $1.667 per share, and 1,000,000 shares of Preferred Stock, without
par value.
Under the Certificate, the Board of Directors is authorized, without
further stockholder action, to provide for the issuance of the Preferred Stock
in one or more classes or series within any class or classes, with such
designations, preferences, qualifications, limitations and special or relative
rights, if any, as may be designated by the Board of Directors. The authority
of the Board of Directors includes, but is not limited to, the determination
or fixing of the following with respect to shares of each class or any series
thereof: (i) the voting rights and powers, if any, (ii) the rates and times at
which, and the terms and conditions on which, dividends, if any, will be paid,
and any dividend preferences or rights of cumulation, (iii) whether shares
shall be convertible or exchangeable, and, if so, the terms and provisions
thereof, (iv) whether shares shall be redeemable, and, if so, the terms and
conditions thereof, and (v) the rights and preferences (if any) upon the
voluntary or involuntary dissolution, liquidation or winding up of the
Company.
Series A Preferred Stock
Pursuant to its authority under the Certificate, the Board of
Directors of the Company has authorized the issuance of 776,875 shares of the
Series A Preferred Stock, all of which is issued and outstanding.
Dividends. Holders of the Series A Preferred Stock are entitled to
cumulative dividends accruing from the date of issue, when, as and if declared
by the Board of Directors out of funds legally available therefor, at the
annual rate of $0.72 per share. For information regarding certain restrictions
on the payment of dividends, see "Dividends." Subject to change by the Board
of Directors, dividends are payable quarterly on the thirtieth day of January,
April, July, and October, to holders of record as they appear on the record
books of the Company on the last day of the month preceding the month in which
the dividend is payable. If all accrued dividends on the Series A Preferred
Stock have not been paid or set apart for payment, (i) no dividends or other
distributions may be paid or set apart for payment on the Common Stock or any
other class of capital stock ranking on parity with or junior to the Series A
Preferred Stock as to dividends or other distributions, (ii) the Company is
prohibited from repurchasing, redeeming or otherwise acquiring Common Stock or
any other class of capital stock ranking on parity with or junior to the
Series A Preferred Stock as to dividends and other distributions, and (iii)
the Company is prohibited from issuing any preferred stock which ranks senior
to or on parity with the Series A Preferred Stock.
Liquidation. In the event of any liquidation, dissolution or winding
up of the affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities of the
Company, the holders of the Series A Preferred Stock are entitled to receive,
out of the assets of the Company legally available for distribution to its
shareholders, the amount of $8.00 in cash for each share of the Series A
Preferred Stock, plus an amount equal to all dividends accrued and unpaid on
each such share up to the date fixed for distribution, before any distribution
may be made to the holders of the Company's Common Stock or any other class of
capital stock ranking junior to the Series A Preferred Stock as to dividends
or other distributions. If, after payment or provision for payment of the
debts and other liabilities of the Company, the remaining net assets of the
Company are not sufficient to pay the holders of the Series A Preferred Stock
and preferred stock of all other series ranking on parity with the Series A
Preferred Stock as to dividends and other distributions the full amounts of
their respective preferences, the holders of the Series A Preferred Stock and
preferred stock of all such other series would share ratably in any
distribution of assets.
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Redemption. The Series A Preferred Stock is redeemable in whole or in
part, at the option of the Company, at the following redemption prices per
share during the following periods:
If Redeemed in the
12-Month Period Then the Redemption
Beginning October 31, Price Shall Be
- --------------------------------- -----------------------------------
1995 $ 8.30
1996 and thereafter $ 8.00
plus in each case any accumulated and unpaid dividends to the date fixed
for redemption.
If less than all of the outstanding shares of the Series A Preferred
Stock are to be redeemed, redemption may be by lot, pro rata or any other
means which the Board of Directors of the Company determines to be equitable.
All rights of the holders of the Series A Preferred Stock called for
redemption shall cease on the date fixed for redemption (or, except for any
rights of conversion, on any prior date on which the redemption price plus
accumulated and unpaid dividends are deposited in trust).
Notice of redemption must be mailed at least 30 days but not more
than 60 days prior to the redemption date to each holder of shares of the
Series A Preferred Stock to be redeemed at their respective addresses as shown
on the record books of the Company.
The Series A Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Conversion. At any time prior to redemption, shares of the Series A
Preferred Stock are convertible at the option of the holders thereof into
Common Stock at the conversion rate of one share of Common Stock for each
share of the Series A Preferred Stock, except that, with respect to shares of
the Series A Preferred Stock called for redemption, the right to convert shall
cease at the close of business on the redemption date. No payment or
adjustment on account of dividends accrued or in arrears will be made on the
shares of the Series A Preferred Stock surrendered for conversion.
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<PAGE>
The conversion rate is subject to adjustment in the event of payment
of a dividend in shares of capital stock of the Company, any subdivision or
combination of the Common Stock or a reclassification of the Common Stock. The
conversion rate also will be adjusted in case of any issuance of rights to
holders of Common Stock to subscribe for shares of Common Stock at less than
current market price or any distribution to holders of Common Stock of
evidences of indebtedness or assets.
No fractional shares will be issued on conversion, but if such
conversion results in a fraction, a cash adjustment will be paid.
Voting Rights. Except under the limited circumstances described below
and as required by applicable law, the Series A Preferred Stock has no voting
rights.
If there is a default in the payment of full dividends on the Series
A Preferred Stock for six non-consecutive quarterly dividend periods or four
consecutive quarterly dividend periods, the holders of the Series A Preferred
Stock will be entitled to notice of all meetings of the Company and to full
voting rights (together with the holders of Common Stock but not as a separate
class unless otherwise required by law) at all meetings and on all matters,
and each holder of shares of the Series A Preferred Stock will be entitled to
one vote for all full shares of Common Stock into which the aggregate number
of shares of Series A Preferred Stock held are convertible as of the record
date for such vote. All such voting rights will terminate when all defaults in
such dividends have been cured and the dividend for the then current quarterly
dividend period has been paid or declared and set apart for payment.
If any amendment to the Company's Certificate would amend, alter or
repeal any of the preferences, special rights or powers of the Series A
Preferred Stock, authorize any reclassification of the Series A Preferred
Stock, or create any class of stock having a dividend payment or liquidation
payment preference equal or superior to the Series A Preferred Stock, then the
affirmative vote of the holders of two-thirds of all outstanding shares of the
Series A Preferred Stock, voting as a separate class, would be required for
its adoption.
Common Stock Purchase Rights. Each full share of Series A Preferred
Stock entitles the holder thereof to purchase, upon exercise thereof, one
fully paid and nonassessable share of Common Stock for $9.60 per share until
the earlier to occur of 5:00 P.M., New York time, on October 31, 1997, the
redemption of the Series A Preferred Stock or the conversion of the Series A
Preferred Stock, when such rights will expire. The Common Stock Purchase
Rights exercise price and the number and type of shares to be issued on
exercise thereof are subject to adjustments under certain circumstances
including the payment of a dividend in shares of capital stock of the Company,
any subdivision or combination of the Common Stock, a reclassification of the
Common Stock and in the event the Company issues additional shares of common
stock at a price below the then current exercise price.
The Common Stock Purchase Rights are evidenced only by a legend on
the Series A Preferred Stock certificate. The Common Stock Purchase Rights may
be combined, exchanged or transferred upon the records of the Company only
with the Series A Preferred Stock and the Common Stock Purchase Rights may not
be split up, combined, exchanged or transferred separately upon the records of
the Company.
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The Common Stock Purchase Rights may be exercised by surrendering the
Series A Preferred Stock certificate at the offices of the Company (or if the
Company has a transfer agent, the offices of the Company's transfer agent)
together with written notice to the Company (or the Company's transfer agent)
that the holder elects to exercise the rights, the number of shares of Common
Stock desired to be purchased and the applicable rights purchase price.
Fractional shares of the Company's Common Stock will not be issued
upon the exercise of the Common Stock Purchase Rights but cash will be paid in
lieu of fractional shares.
Other. The holders of the Series A Preferred Stock are not entitled
to any preemptive rights. Shares of the Series A Preferred Stock redeemed or
converted shall be deemed to be authorized and unissued shares of preferred
stock.
Series B Non-Convertible Preferred Stock
Pursuant to its authority under the Certificate, the Board of
Directors of the Company has authorized the issuance of 217,500 shares of the
Series B Non-Convertible Preferred Stock ("Series B Preferred Stock"), none of
which is issued and outstanding. Commerce Bancorp, Inc. owns 30,000 shares of
Series A Preferred Stock and 187,500 Stock Purchase Warrants ("Warrants")
which expire on October 31, 1997 and prior thereto are exercisable at $9.60
per share (subject to adjustment under certain circumstances). The Common
Stock Purchase Rights attached to the Series A Preferred Stock and the
Warrants owned by Commerce are exercisable only into shares of the Series B
Preferred Stock. Commerce Bancorp, Inc. also beneficially owns 35,327 shares of
Common Stock.
Dividends. Holders of the Series B Preferred Stock are entitled to
non-preferential dividends, when, as and if declared by the Board of Directors
out of funds legally available therefor, at the same rate as are declared and
paid to holders of the Company's Common Stock. For information regarding
certain restrictions on the payment of dividends, see "Dividends." Dividends
on each share of Series B Preferred Stock outstanding shall not be cumulative.
Dividends (whether in cash, stock or otherwise) shall not be declared and paid
on the Company's Common Stock without the declaration and payment of
equivalent dividends on the Series B Preferred Stock. Holders of the Series B
Preferred Stock shall be entitled to participate in any dividends or other
distributions (whether in cash, stock or otherwise) declared and paid on or
with respect to any Common Stock ratably with any Common Stock.
Liquidation. In the event of any liquidation, dissolution or winding
up of the affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities of the
Company, and subject to the rights of the holders of any stock of the Company
ranking senior to the Series B Preferred Stock in respect of distributions
upon liquidation, dissolution or winding up of the Company, such as the Series
A Preferred Stock, the holders of the outstanding Series B Preferred Stock
shall be entitled to receive and share ratably with any distribution of assets
to be made to the holders of any Common Stock.
Voting Rights. Except under the limited circumstances described below
and as required by applicable law, the Series B Preferred Stock has no voting
rights.
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If any amendment to the Company's Certificate would amend, alter or
repeal any of the preferences, special rights or powers of the Series B
Preferred Stock or authorize any reclassification of the Series B Preferred
Stock then the affirmative vote of the holders of two-thirds of all
outstanding shares of the Series B Preferred Stock, voting as a separate
class, would be required for its adoption.
Ranking. The Series B Preferred Stock shall rank junior to the Series
A Preferred Stock and on parity with the Company's Common Stock as to the
payment of dividends and the distribution of assets on liquidation,
dissolution and winding up of the Company, and, unless otherwise provided in
the Certificate of Incorporation of the Company, as amended, or a Certificate
of Designations relating to a subsequent series of preferred stock of the
Company, the Series B Preferred Stock shall rank junior to all other series of
the Company's preferred stock, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up.
Other. The holders of the Series B Preferred Stock are not entitled
to any preemptive rights. The shares of Series B Preferred Stock shall not be
redeemable or convertible.
Common Stock
Voting Rights. Holders of Common Stock are entitled to one vote for
each share held and have no cumulative voting rights for the election of
directors.
Dividends. Subject to such preferences, limitations and relative
rights as may be fixed for any series of preferred stock that may be issued,
including the Series A Preferred Stock, holders of Common Stock are entitled
to receive such dividends, when, as and if declared by the Board of Directors
out of funds legally available therefor. For information regarding certain
restrictions on the payment of dividends, see "Dividends."
Liquidation. In the event of liquidation, after payment or provision for
payment of all debts and liabilities and subject to the rights of any series
of preferred stock which may be outstanding, including the Series A Preferred
Stock, holders of Common Stock would share pro rata in all assets
distributable to shareholders in respect of shares held by them.
Other. Holders of Common Stock have no preemptive rights. The shares
of Common Stock issuable upon conversion of the Series A Preferred Stock and
the exercise of the Common Stock Purchase Rights will, when issued, be validly
issued, fully paid and non-assessable.
Transfer Agent
The transfer agent, conversion agent or registrar for the Series A
Preferred Stock and the transfer agent and registrar for the Common Stock
issuable upon conversion of the Series A Preferred Stock and issuable upon the
exercise of the Common Stock Purchase Rights is The First National Bank of
Boston.
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<PAGE>
"Anti-Takeover" Provisions and Management Implications
The Certificate contains certain provisions which may be deemed to be
"anti-takeover" in nature in that such provisions may deter, discourage or
make more difficult the assumption of control of the Company by another
corporation or person through a tender offer, merger, proxy contest or similar
transaction or series of transactions.
One of these provisions relates to the ability of the Company to
issue up to 5,000,000 shares of Common Stock (of which 1,312,748 are presently
outstanding) and up to 1,000,000 shares of preferred stock (of which 776,875
are presently outstanding) with such rights, preferences and limitations as
the Board of Directors may determine. These additional shares of Common Stock
and preferred stock were authorized for the purpose of providing the Company's
Board of Directors with as much flexibility as possible to issue additional
shares, without further shareholder approval, for proper corporate purposes
including financing, acquisitions, stock dividends, stock splits, employee
incentive plans, and other similar purposes. However, these additional shares
may also be used by the Board of Directors (if consistent with its fiduciary
responsibilities) to deter future attempts to gain control over the Company.
A second provision requires the affirmative vote of 80% of the
outstanding shares of capital stock of the Company issued and entitled to vote
to approve any merger or consolidation of the Company or any sale or lease of
substantially all of the Company's assets, unless the transaction is approved
by the Board of Directors.
The overall effect of the foregoing provisions may be to deter a
future tender offer. Shareholders may view any such offer to be in their best
interests should any offer include a substantial premium over the market price
of the Common Stock at that time. In addition, these provisions may have the
effect of assisting the Company's management to retain its position and place
it in a better position to resist changes that the shareholders may want to
make if dissatisfied with the conduct of the Company's business. The Board of
Directors of the Company does not presently know of a third party that plans
to make an offer to acquire the Company through a tender offer, merger or
purchase of substantially all of the assets of the Company.
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<PAGE>
REDEMPTION OF SERIES A PREFERRED STOCK
The Company has called for redemption at the close of business on [
], 1996 (the "Redemption Date"), all of the Company's outstanding Series A
Preferred Stock. Pursuant to the terms of the Series A Preferred Stock,
holders of the Series A Preferred Stock will be entitled to receive upon
redemption a total redemption price of $[ ] (the "Redemption Price") for each
share of Series A Preferred Stock which equals the redemption price of $8.30
plus accrued dividends of $[ ] from [ ], 1996.
Payment of the Redemption Price will be made by the Transfer Agent,
on and after the Redemption Date, upon receipt of the Series A Preferred Stock
so redeemed. On and after the Redemption Date, dividends will cease to accrue
and holders of Series A Preferred Stock will not have any rights as such
holders other than the right to receive $[ ] per share of Series A Preferred
Stock upon surrender for redemption. On June 13, 1996 the Company declared a
dividend of $.18 per share on the Series A Preferred Stock payable on July 30,
1996 to shareholders of record on June 28, 1996. As a result of the foregoing
call for redemption, the Common Stock Purchase Rights attached to the shares
of Series A Preferred Stock will expire on the earlier of the date the Series
A Preferred Stock is converted or the Redemption Date, after which time such
Common Stock Purchase Rights will be null and void.
The following alternatives are available with respect to holders of
Series A Preferred Stock:
(1) Convert the Series A Preferred Stock at a conversion
ratio of one share of Common Stock for each share of Series A
Preferred Stock. On [ ], 1996, the closing sale price of the Common
Stock, as reported on the NASDAQ National Market was $[ ] per share.
Upon conversion of the Series A Preferred Stock, no payment or
adjustment will be made in respect of accrued dividends. THE
CONVERSION RIGHT EXPIRES AT THE CLOSE OF BUSINESS (5:00 P.M. NEW YORK
CITY TIME) ON THE REDEMPTION DATE, [ ], 1996; and/or
Based on the above-stated last sale price of the Common
Stock on [ ], 1996, the market value of the Common Stock into which
each share of Series A Preferred Stock is convertible is
approximately $[ ], or considerably higher than the amount to be
received upon redemption. Such value is, of course, subject to change
depending on the market price of the Common Stock. SO LONG AS THE
MARKET PRICE OF THE COMMON STOCK IS HIGHER THAN $[ ] PER SHARE, A
HOLDER WHO CONVERTS HIS SERIES A PREFERRED STOCK WILL RECEIVE COMMON
STOCK WITH A MARKET VALUE GREATER THAN THE AMOUNT OF CASH RECEIVABLE
UPON REDEMPTION OF THE SERIES A PREFERRED STOCK.
(2) Exercise the Common Stock Purchase Right at an exercise
price of $9.60 per share of Common Stock. On [ ], 1996, the closing
sale price of the Common Stock, as reported on the NASDAQ National
Market was $[ ] per share. THE EXERCISE RIGHT EXPIRES AT THE CLOSE OF
BUSINESS (5:00 P.M., NEW YORK CITY TIME) ON THE REDEMPTION DATE, [ ],
1996; or
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<PAGE>
Based on the above-stated sale price of the Common Stock on
[ ], 1996, the market value of the Common Stock purchasable upon the
exercise of the Common Stock Purchase Right is approximately $[ ], or
considerably higher than the amount to be paid upon exercise. Such
value is, of course, subject to change depending on the market price
of the Common Stock. SO LONG AS THE MARKET PRICE OF THE COMMON STOCK
IS HIGHER THAN $[ ] PER SHARE, A HOLDER WHO EXERCISES HIS COMMON
STOCK PURCHASE RIGHTS WILL RECEIVE COMMON STOCK WITH A MARKET VALUE
GREATER THAN THE AMOUNT PAID UPON EXERCISE OF THE COMMON STOCK
PURCHASE RIGHT.
(3) Sell the Series A Preferred Stock (which includes the
Common Stock Purchase Rights attached thereto) in the open market.
Holders of Series A Preferred Stock should consult with their own
advisers regarding if and when they should sell their Series A
Preferred Stock and the tax consequences thereof; or
(4) Accept the Redemption Price of $[ ] for each share of
Series A Preferred Stock called for redemption; and/or
(5) Do not exercise the Common Stock Purchase Right.
SERIES A PREFERRED STOCK NOT RECEIVED FOR CONVERSION PRIOR TO THE
CLOSE OF BUSINESS ON [ ], 1996 WILL BE REDEEMED AS SET FORTH ABOVE. A HOLDER
OF SERIES A PREFERRED STOCK MAY BOTH CONVERT THE SHARES OF SERIES A PREFERRED
STOCK AND EXERCISE THE COMMON STOCK PURCHASE RIGHTS RELATED THERETO.
COMMON STOCK PURCHASE RIGHTS NOT EXERCISED PRIOR TO THE CONVERSION OR
REDEMPTION OF THE SERIES A PREFERRED STOCK TO WHICH THEY ARE ATTACHED WILL BE
NULL AND VOID.
Anyone with questions or needing assistance concerning the various
options available with respect to the Series A Preferred Stock called for
redemption should call (201) 825-1000 and ask to speak to Kevin J. Killian,
Executive Vice President, or call the Transfer Agent, The First National Bank of
Boston, at (617) 575-3170 and ask to speak to the Investors Relations Unit about
the various options.
The Company's Employee Stock Ownership Plan and
Directors and Officers of the Company.
The Company's Employee Stock Ownership Plan ("ESOP") which currently
owns 187,387 shares of Series A Preferred Stock has indicated it will sell a
sufficient number of shares of Series A Preferred Stock in the market and/or
to the Purchaser at market prices so as to allow the ESOP to have sufficient
funds to exercise all Common Stock Purchase Rights attached to the shares of
Series A Preferred Stock not sold. The ESOP has also indicated it will convert
all shares of Series A Preferred Stock not sold.
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The directors and officers of the Company have indicated their
intention to convert all of the shares of Series A Preferred Stock owned by
them into Common Stock and exercise substantially all of the Common Stock
Purchase Rights associated with the shares of Series A Preferred Stock. It is
anticipated that the directors and officers of the Company will beneficially
own approximately an aggregate of 455,445 shares of Common Stock following the
redemption of the Series A Preferred Stock set forth in this Prospectus. See
"Principal Stockholders."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Blank Rome Comisky & McCauley, Cherry Hill, New
Jersey and Philadelphia, Pennsylvania, counsel to the Company, the material
federal income tax consequences of the conversion of Series A Preferred Stock
into Common Stock, of the redemption of Series A Preferred Stock and of the
exercise of the Common Stock Purchase Rights are set forth in the following
discussion. The discussion is based upon currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing regulations
thereunder and current administrative rulings and court decisions. The
discussion does not address federal income tax consequences of the sale of the
Series A Preferred Stock or other potentially relevant federal income tax
matters, nor does it address the federal income tax consequences that may be
relevant to particular categories of holders subject to special treatment
under certain federal income tax laws such as dealers in securities,
tax-exempt entities, banks, insurance companies, and foreign individuals and
entities. Accordingly, the federal income tax consequences to a particular
holder of a conversion or redemption of the Series A Preferred Stock and of
the exercise of the Common Stock Purchase Rights may differ from the
consequences described herein. The discussion also does not describe any tax
consequences arising out of the tax laws of any state, locality, or foreign
jurisdiction. Holders of Series A Preferred Stock should consult their own tax
advisers about the federal, state, local, and foreign tax consequences of the
conversion or redemption of Series A Preferred Stock and of the exercise of
the Common Stock Purchase Rights.
Conversion into Common Stock. Except as discussed below, a holder
generally will recognize no gain or loss for regular federal income tax
purposes on the conversion of Series A Preferred Stock into shares of Common
Stock. A holder's tax basis in shares of Common Stock received upon conversion
in the aggregate will be the same as the holder's tax basis in the Series A
Preferred Stock converted into such shares. If a holder holds Series A
Preferred Stock as a capital asset, the holder's holding period for shares of
Common Stock received upon conversion of the Series A Preferred Stock will
include the holder's holding period for the Series A Preferred Stock.
Redemption. A holder generally will recognize gain or loss equal to
the difference, if any, between the holder's tax basis in the Series A
Preferred Stock and the amount realized by the holder upon the redemption.
(The amount realized for purposes of determining gain or loss will not include
the amount paid in connection with the redemption for accrued dividends that
have either been declared or with respect to which the holder otherwise has a
legal right prior to the date of the redemption, which will generally be
taxable as dividend income.) Gain or loss resulting from redemption of the
Series A Preferred Stock will generally be taxed under Section 302 of the Code
as gain or loss from the sale or exchange of Series A Preferred Stock if the
redemption: (i) results in a "complete termination" of the holder's stock
interest in the Company under Section 302(b)(3) of the Code; (ii) is
"substantially disproportionate" with respect to the holder under Section
302(b)(2) of the Code; or (iii) is "not essentially equivalent to a dividend"
with respect to the shareholder under Section 302(b)(1) of the Code. For
purposes of determining whether any of these tests (the "Section 302 Tests")
have been met, shares considered owned by a holder by reason of certain
constructive ownership rules under the Code, as well as shares actually owned,
must generally be taken into account. A distribution to a shareholder will be
"not essentially equivalent to a dividend" if it results in a "meaningful
reduction" in the shareholder's stock interest in the Company.
-67-
<PAGE>
If any of the Section 302 Tests are satisfied, the redemption of the
Series A Preferred Stock would generally result in taxable gain or loss to a
holder equal to the difference between the amount of cash received (except, as
described above, if attributable to accrued dividends) and the shareholder's
tax basis in the Series A Preferred Stock redeemed. Such gain or loss would be
capital gain or loss if the Series A Preferred Stock were held as a capital
asset, and would be long-term capital gain or loss if the holding period for
the Series A Preferred Stock were to exceed one year (determined as of the
Redemption Date). If the redemption does not satisfy any of the Section 302
Tests, the gross proceeds received by the shareholder would be treated as a
distribution taxable as a dividend to the extent of the Company's current and
accumulated earnings and profits (as determined for federal tax purposes) and
any excess would first be treated as a return of the holder's tax basis in the
redeemed shares (to the extent thereof) and then as a gain from a sale or
exchange of the Series A Preferred Stock.
Exercise of Common Stock Purchase Rights. Generally, a holder of
Common Stock Purchase Rights will not recognize any gain or loss on the
purchase of shares of Common Stock for cash upon exercise of the Common Stock
Purchase Rights. The tax basis of the shares received will be equal to the tax
basis, as adjusted, in the Common Stock Purchase Rights so exercised, plus the
cash exercise price. The holding period of the shares received upon exercise
of a Common Stock Purchase Right for cash will not include the period during
which the Common Stock Purchase Right was held, but will commence only upon
the exercise date of the Common Stock Purchase Right.
Tax Withholding. Information reporting to the Internal Revenue
Service ("IRS") will be required with respect to payments of dividends made on
the Series A Preferred Stock. Under applicable law and regulations, the
Company generally will be required to withhold, and will withhold, 31% of the
dividends paid on the Series A Preferred Stock, unless the holder or other
payee furnishes to the Company his taxpayer identification number (social
security number or employer identification number) and certifies that he is
not subject to backup withholding, and the Company has not been notified by
the IRS that the payee has under-reported interest or dividend payments.
Information reporting and withholding may also be required on the redemption
or conversion of Series A Preferred Stock if the holder fails to furnish his
taxpayer identification number or unless the holder is otherwise exempt from
withholding. Similar information reporting and withholding rules apply with
respect to dividends on and sales of the Common Stock.
-68-
<PAGE>
STANDBY AND OTHER ARRANGEMENTS
Upon the terms and subject to the conditions contained in the Standby
Agreement, dated [ ], 1996 (the "Standby Agreement"), Janney Montgomery Scott
Inc. (the "Purchaser") has agreed to purchase from the Company (i) such number
of shares of Common Stock which, in the aggregate, would have been issuable upon
conversion of the Series A Preferred Stock surrendered for redemption or not
surrendered for conversion prior to the close of business on the Redemption
Date, and (ii) such number of shares of Common Stock which, in the aggregate,
would have been issuable upon exercise of the Common Stock Purchase Rights
attached to the shares of Series A Preferred Stock which were not exercised, for
a negotiated per share purchase price based on prevailing market conditions at
the time of sale for all shares of Common Stock sold pursuant to the Standby
Agreement less an 8% discount.
The Purchaser may also acquire Series A Preferred Stock in the open
market or otherwise prior to the Redemption Date including shares of Series A
Preferred Stock from the ESOP. The Purchaser has agreed to convert into Common
Stock all Series A Preferred Stock so purchased (and exercise all related
Common Stock Purchase Rights) and all other Series A Preferred Stock (and
exercise all related Common Stock Purchase Rights) it may beneficially own.
The Company will pay the Purchaser a fee of $1.12 per share for each share of
Series A Preferred Stock so coverted by the Purchaser.
The Standby Agreement provides that the Purchaser will offer any
Common Stock purchased from the Company for resale as set forth on the cover
page of this Prospectus. The Purchaser may also make sales of such shares to
certain securities dealers at prices which may reflect concessions from the
prices at which such shares are then being offered to the public. The amount
of such concessions will be determined from time to time by the Purchaser. The
shares of Common Stock so offered are offered by the Purchaser subject to
prior sale, when, as, and if received by the Purchaser and subject to their
right to reject orders in whole and in part.
Pursuant to the terms of the Standby Agreement and in consideration
of their commitment and obligations thereunder, the Company has agreed to pay
to the Purchaser in addition to the commission referenced above an advisory
fee equal to $75,000 plus their out-of-pocket expenses in connection therewith
up to a maximum of $50,000.
The Purchaser may assist in the solicitation of conversions by
holders of Series A Preferred Stock but will receive no commission therefor.
The Company has agreed to indemnify the Purchaser against certain liabilities,
including certain liabilities under the Securities Act, including civil
liabilities which arise out of or are based upon any untrue statement or
alleged untrue statement of certain material facts contained in this
Prospectus or the omission or alleged omission to state herein a material fact
required to be stated herein or necessary to make the statements herein not
misleading and certain liabilities under the Securities Act or to contribute
to payments which the Purchaser may be required to make in respect thereof.
In connection with this offering, the Purchaser and its respective
affiliates may engage in passive market making transactions in the Common
Stock on the NASDAQ National Market in accordance with Rule 10b-6A under the
Exchange Act, as amended, during a period before commencement of offers or
sales of the shares offered hereby. Under Rule 10b-6A, market makers in the
Company's Common Stock who are participating in the underwriting can continue
to make a market during the two day "cooling-off" period prior to the
commencement of the offering at a price no higher than the highest independent
bid. The passive market making transactions must comply with applicable volume
and price limits and be identified as such.
-69-
<PAGE>
During the 90 days following the effective date of the Registration
Statement, except with the Purchaser's prior written consent and except for
(i) the issuance of the shares of Common Stock pursuant to the Standby
Agreement, (ii) the issuance of Common Stock upon conversion of the Series A
Preferred Stock and/or the issuance of Common Stock upon the exercise of
Common Stock Purchase Rights, and (iii) the issuance of Common Stock or
options pursuant to any existing employee stock option, restricted stock,
stock purchase or 401(k) plans, the Company will not offer for sale, sell, or
otherwise dispose of, or file a registration statement under the Securities
Act covering, any shares of its Common Stock, or sell or grant options,
rights, or warrants with respect to, or securities convertible into, any
shares of its Common Stock.
-70-
<PAGE>
LEGAL MATTERS
An opinion will be delivered by Blank Rome Comisky & McCauley, Cherry
Hill, New Jersey and Philadelphia, Pennsylvania to the effect that the shares
of Common Stock will, when issued as contemplated in this Prospectus, be
validly issued, fully paid and non-assessable. Certain legal matters relating
to the Standby Agreement will be passed upon for the Purchaser by Saul, Ewing,
Remick & Saul, Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 appearing in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
-71-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Annual Financial Statements:
Report of Independent Public Accountants.............................. F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994.......... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993......................................F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993................. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993......................................F-5
Notes to Consolidated Financial Statements............................ F-6
Unaudited Interim Financial Statements:
Consolidated Condensed Balance Sheet as of March 31, 1996.............F-26
Consolidated Condensed Statements of Income for the
Three Month Periods Ended March 31, 1996 and 1995....................F-27
Consolidated Condensed Statements of Cash Flows for the
Three Month Periods Ended March 31, 1996 and 1995....................F-28
Notes to Consolidated Condensed Financial Statements..................F-29
-72-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Independence Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Independence
Bancorp, Inc. (a New Jersey corporation) and subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Independence Bancorp, Inc. and
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 10 to the consolidated financial statements, on
January 1, 1994 the Company changed its method of accounting for securities and
in 1995, retroactive to January 1, 1994, its method of accounting for its
Employee Stock Ownership Plan.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 19, 1996
F-1
<PAGE>
INDEPENDENCE BANCORP, INC. AND SUBSIDIARY
==============================================================================
CONSOLIDATED BALANCE SHEETS
==============================================================================
<TABLE>
December 31
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks (Note 2) .............................................. $20,280 $17,326
Interest bearing deposits in other banks ...................................... 5,811 4,860
Federal funds sold ............................................................ 12,820 8,550
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ......................................... 38,911 30,736
- ----------------------------------------------------------------------------------------------------------------
Securities (Notes 1 and 3)
Available for sale, at market ............................................ 46,366 3,451
Held to maturity, at cost (market value $90,326 and $104,364) ........... 90,297 112,418
- ----------------------------------------------------------------------------------------------------------------
Total securities .................................................. 136,663 115,869
- ---------------------------------------------------------------------------------------------------------------
Loans (Notes 1, 4 and 5)
Commercial ............................................................... 26,592 27,109
Real estate-construction ................................................. 5,777 2,750
Real estate-commercial ................................................... 44,360 39,803
Real estate-residential .................................................. 29,378 28,205
Installment .................................................................. 36,387 32,591
- ---------------------------------------------------------------------------------------------------------------
Total loans ....................................................... 142,494 130,458
Less:
Allowance for possible loan losses ....................................... 2,694 2,630
- ---------------------------------------------------------------------------------------------------------------
Loans, net ........................................................ 139,800 127,828
- ---------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Notes 1 and 6) ................................... 5,455 5,257
Accrued interest receivable ................................................... 2,759 1,890
Other real estate, net (Notes 1 and 4) ........................................ 1,230 1,148
Other assets .................................................................. 369 523
- ---------------------------------------------------------------------------------------------------------------
Total assets ...................................................... $325,187 $283,251
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits
Demand (non-interest bearing) ............................................ $80,877 $63,569
Money-market, NOW and super NOW .......................................... 91,293 81,928
Savings .................................................................. 64,928 66,397
Time certificates of $100,000 or more .................................... 13,078 6,047
Other time certificates .................................................. 54,170 47,491
- ---------------------------------------------------------------------------------------------------------------
Total deposits .................................................... 304,346 265,432
- ---------------------------------------------------------------------------------------------------------------
Other liabilities ............................................................. 1,020 1,100
Employee Stock Ownership Plan (ESOP) debt (Note 10) ........................... 1,194 1,307
- ---------------------------------------------------------------------------------------------------------------
Total liabilities ................................................. 306,560 267,839
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
Stockholders' equity (Notes 8, 9, 10 and 12)
Preferred stock, no par value, 1,000,000 shares authorized .................... --- ---
Cumulative convertible preferred stock, 9% Series A, $1 par value,
776,875 issued and outstanding (liquidation value $6,215) ................ 777 777
Non convertible preferred stock, Series B, $1 stated value,
authorized 217,500 shares, none issued ................................... --- ---
Common stock, par value $1.667 per share, 5,000,000 authorized;
1,312,748 and 1,308,328, respectively, issued and outstanding ............ 2,189 2,182
Additional Paid-In Capital .................................................... 12,970 12,802
Retained earnings ............................................................. 3,594 1,084
Net unrealized holding gain (loss) on securities available for sale,
net of income taxes ...................................................... 291 (126)
Unearned ESOP preferred stock ................................................. (1,194) (1,307)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity ........................................ 18,627 15,412
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ........................ $325,187 $283,251
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-2
<PAGE>
INDEPENDENCE BANCORP, INC. AND SUBSIDIARY
===============================================================================
CONSOLIDATED STATEMENTS OF INCOME
===============================================================================
<TABLE>
Year Ended December 31
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans .................................................. $12,508 $10,554 $10,885
Securities:
Taxable ........................................... 7,120 6,012 5,092
Tax-exempt ........................................ 83 9 7
Deposits with banks .................................... 245 208 244
Federal funds sold ..................................... 755 290 243
- -------------------------------------------------------------------------------------------------
Total interest income .................................. 20,711 17,073 16,471
- -------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits ................................... 6,007 4,487 4,764
Interest on ESOP loan (Note 10) ....................... 115 123 ---
- -------------------------------------------------------------------------------------------------
Total interest expense ................................. 6,122 4,610 4,764
- -------------------------------------------------------------------------------------------------
Net interest income .................................... 14,589 12,463 11,707
Provision for possible loan losses .......................... 559 1,014 2,635
- -------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses ................................... 14,030 11,449 9,072
- -------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposit accounts .................... 1,299 1,154 1,409
Gain on sale of -
Securities ........................................ --- --- 472
Residential mortgage loans and
related servicing rights ......................... 25 3 603
Other income ........................................... 807 900 849
- -------------------------------------------------------------------------------------------------
2,131 2,057 3,333
- -------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits ......................... 5,481 4,900 4,628
Occupancy .............................................. 1,499 1,452 1,396
Equipment .............................................. 1,041 892 788
Other expenses (Note 13) ............................... 3,779 3,756 4,100
- -------------------------------------------------------------------------------------------------
11,800 11,000 10,912
- -------------------------------------------------------------------------------------------------
Income before income taxes ............................. 4,361 2,506 1,493
Income tax provision (Notes 1 and 11) .................. 1,311 823 284
- -------------------------------------------------------------------------------------------------
Net income .................................................. 3,050 1,683 1,209
Dividends on preferred stock (Note 10) ............... 441 432 559
- -------------------------------------------------------------------------------------------------
Net income applicable to common stock ....................... $ 2,609 $ 1,260 $ 650
- -------------------------------------------------------------------------------------------------
Income per common share (Note 1)
Primary ..................................................... $ 1.79 $ 95 $ .50
Fully Diluted ............................................... 1.43 .87 .50
- -------------------------------------------------------------------------------------------------
Average common shares outstanding:
Primary ..................................................... 1,461 1,317 1,306
Fully diluted ............................................... 2,127 1,934 1,306
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
INDEPENDENCE BANCORP, INC. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES
- -------------------------------------------------------------------------------
IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Cumulative Gain (Loss) Unearned
Convertible Additional Retained on Securities ESOP Total
Preferred Common Paid-In Earnings Available Preferred Stockholders'
(In thousands, except share data) Stock Stock Capital (Deficit) for Sale Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 777 $2,177 $12,790 ($814) $ -- ($1,472) $13,458
Net income-1993 ............................ 1,209 1,209
Cash dividends on preferred stock
($.72 per share) ........................ (559) (559)
Principal payment on ESOP debt ............. 61 61
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 777 2,177 12,790 (164) -- (1,411) 14,169
Net income-1994 ............................ 683 1,683
Cash dividends on preferred stock
($.72 per share) ........................ (432) (432)
Common stock issued pursuant to
stock option plan (2,250 shares) ........ 4 10 14
Common stock issued pursuant to
stock bonus plan (410 shares) ........... 1 2 (3)
ESOP shares earned ......................... 104 104
Net unrealized holding loss on securities
available for sale, net of tax benefit .. (126) (126)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 777 2,182 12,802 1,084 (126) (1,307) 15,412
Net income-1995 ............................ 3,050 3,050
Cash dividends on preferred stock
($.72 per share) ........................ (441) (441)
Cash dividends on common stock
($.075 per share) ....................... (99) (99)
Common stock issued pursuant to
dividend reinvestment and
stock option plans (4,420 shares) ....... 7 40 47
ESOP shares earned ......................... 82 113 195
Tax benefit on dividends paid to ESOP ...... 46 46
Change in net unrealized holding gain (loss)
on securities available for sale, net of
income taxes ............................ 417 417
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 777 $2,189 $12,970 $3,594 $ 291 ($1,194) $18,627
===================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
======================================================================================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................................ $ 3,050 $ 1,683 $ 1,209
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for possible loan losses .................................... 559 1,014 2,635
Depreciation of bank premises and equipment ........................... 621 606 659
Net amortization and accretion on securities .......................... (37) 385 312
Provision for possible losses on other real estate .................... 230 277 375
Gain on sale of securities ............................................ -- -- (472)
Loss (gain) on sale of other real estate .............................. 3 (106) (37)
Gain on sale of residential mortgage loan and
related servicing rights ........................................ (25) (3) (603)
Increase in accrued interest receivable ............................... (869) (336) (162)
Decrease in other assets .............................................. 154 318 343
(Decrease) increase in other liabilities .............................. (80) 428 38
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments ...................................... 556 2,583 3,088
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................. 3,606 4,266 4,297
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of securities:
Held to maturity ................................................ -- -- 24,491
Proceeds from maturities of securities:
Available for sale .............................................. 3,345 2,194 --
Held to maturity ................................................ 17,681 13,872 20,992
Purchase of securities:
Available for sale .............................................. (3,842) -- --
Held to maturity ................................................ (37,574) 41,315) (69,571)
Net (increase) decrease in loans ...................................... (12,677) (8,728) 4,823
(Increase) decrease in other real estate .............................. (79) 1,560 (582)
Capital expenditures .................................................. (819) (979) (627)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................. (33,965) (33,396) (20,474)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in deposit accounts ...................................... 38,914 20,749 13,087
Principal payments on ESOP debt ....................................... 113 104 61
Proceeds from the issuance of common stock ............................ 47 14 --
Dividends paid on preferred stock ..................................... (441) (432) (559)
Dividends paid on common stock ........................................ (99) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................. 38,534 20,435 12,589
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .................. 8,175 (8,695) (3,588)
Cash and cash equivalents, beginning of year .......................... 30,736 39,431 43,019
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ................................ $ 38,911 $ 30,736 $ 39,431
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ........................................................ $ 6,007 $ 4,487 $ 4,764
Income taxes .................................................... 900 420 90
======================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------
(Amounts in thousands, except share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Independence Bancorp, Inc. ( the "Company") commenced
operations in June, 1984, as a New Jersey corporation and as a bank holding
company registered under the Bank Holding Company Act of 1956. Through its
banking subsidiary Independence Bank of New Jersey (the "Bank"), the Company
provides a full range of banking services to individual and corporate customers
primarily located in Northeastern New Jersey. The Company is regulated by
various Federal and state agencies and is subject to periodic examination by
those regulatory authorities.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The significant accounting policies are summarized as follows:
Principles of Consolidation and Use of Estimates. The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiary, the Bank and the Bank's wholly-owned investment subsidiary,
Independence Asset Management, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Securities. The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115), effective January 1, 1994. SFAS 115 requires the Company to classify its
securities as: (1) held to maturity, (2) available for sale and (3) trading.
Securities held to maturity consist of debt securities that management intends
to, and the Company has the ability to, hold until maturity. Such securities are
stated at cost, adjusted for amortization of premium and accretion of discount.
Securities available for sale consist of debt and equity securities that are not
intended to be held to maturity and are not held for trading. Securities
available for sale are reported at fair value, with unrealized gains and losses
credited or charged, net of tax effect, directly to stockholders' equity.
Realized gains and losses on securities available for sale are determined on a
specific identification basis.
F-6
<PAGE>
The Company has not classified any of its securities as trading.
Loans. Substantially all loans classified as commercial loans are at least
partially secured by real estate. Loans are stated at their principal amount
outstanding, net of any unearned income and net of loan origination fees and
costs. Nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized over the life of the loan as an adjustment to
the loan's yield. The Bank does not accrue interest on any loan when factors
indicate collectibility is doubtful. In general, the accrual of interest is
discontinued when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, interest credited to income in the
current year is reversed, and interest accrued in the prior year is charged to
the allowance for possible loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest. Non-accrual
loans are returned to accrual status when interest is received on a current
basis and other factors indicating doubtful collection cease.
Allowance for Possible Loan Losses. The allowance for possible loan losses is
maintained at a level believed by management to be adequate to meet reasonably
foreseeable loan losses on the basis of many factors including the risk
characteristics of the portfolio, underlying collateral, current and anticipated
economic conditions that may affect the borrower's ability to pay, specific
problem loans, and trends in loan delinquencies and charge-offs. Possible losses
on loans are provided for under the allowance method of accounting. The
allowance is increased by provisions charged to earnings and reduced by loan
charge-offs, net of recoveries. Loans are charged off in whole or in part when,
in management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
possible loan losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for possible
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended, as of January 1, 1995. This statement requires 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. This
statement is not applicable to large groups of smaller homogeneous loans, such
as residential mortgage loans, credit card loans and consumer loans, which are
collectively evaluated for impairment.
The Company had previously measured the allowance for possible loan losses using
methods similar to those prescribed in the statement. As a result of adopting
these statements, no additional allowance for possible loan losses was required
as of January 1, 1995.
F-7
<PAGE>
Premises and Equipment. Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the lives of the
related leases, or the life of the improvement, whichever is shorter.
Other Real Estate. Other real estate is comprised of commercial and residential
real estate properties acquired in partial or total satisfaction of problem
loans.
Other real estate is carried at the lower of fair value, as determined by
current appraisals, less estimated costs to sell, or the recorded investment in
the loan on the property. Losses identified at the time of acquisition of such
properties are charged against the allowance for possible loan losses.
Subsequent write-downs that may be required to the carrying value of these
assets and losses realized from asset sales are charged to other operating
expenses. Costs of holding such property are charged to expense as incurred.
Gains, to the extent allowable, realized on the disposition of these properties
are included in other operating income.
Income Taxes. The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company files a consolidated Federal income tax return, and the amount of
income tax expense or benefit is allocated on a subsidiary by subsidiary basis.
Interest on Loans. Interest on commercial, industrial, simple interest
installment and real estate loans is credited to operations based upon the
principal amount outstanding. Interest on other installment loans is taken into
income on scheduled payment dates by use of the sum-of-the-month-digits method.
Net Income Per Common Share. Primary net income per common and common equivalent
shares, after preferred dividends, is based on the weighted average common
shares and common share equivalents, including stock options and warrants,
outstanding during the year, adjusted for the effect of subsequent common stock
dividends and after adjustment for the elimination of dividends paid on
unallocated shares of the ESOP Plan (See Note 10). Fully diluted income per
share is based on the weighted average number of common and common equivalent
shares outstanding adjusted for shares issuable upon conversion of preferred
stock and the elimination of dividends paid on unallocated shares of the ESOP
Plan. For the year ended December 31, 1993, shares issuable upon conversion of
preferred stock and stock options were antidilutive and have not been included
in the computations of per share information.
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest bearing deposits with
banks and Federal funds sold.
F-8
<PAGE>
Reclassifications. Certain reclassifications have been made to prior period
consolidated financial statements to place them on a basis comparable with the
current period consolidated financial statements.
New Financial Accounting Standards. The Financial Accounting Standards Boards
(FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of." in March 1995. This statement is
effective for the year ended December 31, 1996. Statement No. 121 requires that
long-lived assets to be held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company has evaluated the impact of
Statement No. 121 on its financial statements and does not expect it to be
material.
NOTE 2. CASH AND DUE FROM BANKS
The Bank is required to maintain a cash reserve balance based upon its deposits
in accordance with banking regulations. The average amount of this reserve for
the years ended December 31, 1995 and 1994 was approximately $4,334 and $3,274,
respectively.
NOTE 3. SECURITIES
The amortized cost and estimated market values of the Company's securities
available for sale portfolio at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
=================================================================================================================
<S> <C> <C> <C> <C>
U. S. Treasury securities ...................... $33,644 $ 462 ($ 10) $34,096
Obligations of other U.S. Government agencies... 11,283 68 (78) 11,273
Equity securities .............................. 997 -- -- 997
- -----------------------------------------------------------------------------------------------------------------
Total ................................ $45,924 $ 530 ($ 88) $46,366
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
=================================================================================================================
<S> <C> <C> <C> <C>
Obligations of other U.S. Government agencies... $3,651 $ -- ($200) $3,451
=================================================================================================================
</TABLE>
F-9
<PAGE>
Information relative to the Company's securities held to maturity portfolio at
December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
===============================================================================================================
<S> <C> <C> <C> <C>
U. S. Treasury securities .......................... $ 23,496 $111 ($137) $23,470
Obligations of other U.S. Government agencies ...... 61,493 293 (241) 61,545
Obligations of states and political subdivisions ... 5,308 8 (5) 5,311
- ---------------------------------------------------------------------------------------------------------------
Total .................................... $ 90,297 $412 ($383) $90,326
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
===============================================================================================================
<S> <C> <C> <C> <C>
U. S. Treasury securities .......................... $ 57,471 $-- $(3,522) $53,949
Obligations of other U.S. Government agencies ...... 54,647 -- (4,532) 50,115
Obligations of states and political subdivisions ... 300 -- -- 300
- ---------------------------------------------------------------------------------------------------------------
Total .................................... $112,418 $-- $(8,054) $104,364
===============================================================================================================
</TABLE>
The contractual maturities of securities at December 31, 1995 are set forth in
the following table:
<TABLE>
<CAPTION>
Held to Maturity Available For Sale
-------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
===============================================================================================================
<S> <C> <C> <C> <C>
Due in one year .................................... $ 5,008 $ 5,004 $12,712 $12,745
Due after one year through five years .............. 52,015 52,062 20,897 21,177
Due after five years through ten years ............. 3,204 3,234 8,062 8,270
Mortgage-backed securities ........................ 30,070 30,026 3,256 3,178
Equity securities .................................. -- -- 997 997
- ---------------------------------------------------------------------------------------------------------------
Total securities ......................... $90,297 $90,326 $45,924 $46,366
===============================================================================================================
</TABLE>
Actual maturities on debt securities may differ from those presented above as
certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty.
In November 1995, the FASB issued a special report - "A Guide to Implementation
of Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities." This special report allowed a company to make a one-time
reclassification of securities from its held to maturity category without
tainting the classification of the other securities remaining within the
category. Accordingly, in December 1995, the Bank reclassified $40.7 million of
held to maturity securities to available for sale resulting in a mark-to-market
gain of $286, net of tax.
F-10
<PAGE>
In 1993, the Company sold securities totaling $24,982 for a gross gain of $472.
No securities were sold during 1994 and 1995.
The carrying value of securities pledged to secure public deposits, treasury tax
and loan deposits and for other purposes as required by law, approximate $1,243
at December 31, 1995.
NOTE 4. LOANS
Non-Performing Assets
The following table presents categories of non-performing assets, and the ratio
of total non-performing assets to total assets:
1995 1994
===========================================================================
Non-accrual loans:
Commercial .............................. $ 994 $2,207
Commercial lease financing .............. -- 22
Installment ............................. 272 306
Real estate-commercial .................. 285 758
Real estate-residential ................. 168 121
- ---------------------------------------------------------------------------
Total ......................... 1,719 3,414
- ---------------------------------------------------------------------------
Other real estate owned ...................... 1,301 1,222
- ---------------------------------------------------------------------------
Total non-performing assets .................. $3,020 $4,636
- ---------------------------------------------------------------------------
Ratio of non-performing assets to total assets 0.93% 1.64%
- ---------------------------------------------------------------------------
Accruing loans past due 90 days or more:
Commercial .............................. $ 21 $ 154
Installment ............................. 12 35
- ---------------------------------------------------------------------------
Total ......................... $ 33 $ 189
===========================================================================
The amount of interest income lost on those loans classified as non-accrual in
1995 and 1994, had these loans been current in accordance with their original
terms, was $136 and $250, respectively. There were no significant restructured
loan amounts at December 31, 1995 and 1994.
F-11
<PAGE>
Related Party Loans
Loans have been granted to officers and directors of the Company and its
subsidiary and to their associates. As of December 31, 1995, there were no
related party loans which were past due. The aggregate dollar amount of these
loans was $3,483 and $7,323 at December 31, 1995 and 1994, respectively. During
1995, there were $1,903 of new loans made and repayments totaled $3,016 and a
reduction of $2,727 due to the resignation of a director.
NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based upon estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reflected in
operations in the periods in which they become known.
A summary of the activity in the allowance for possible loan losses is as
follows:
1995 1994 1993
============================================================================
Balance at beginning of year ..... $ 2,630 $ 2,492 $ 3,400
Provision charged to operations... 559 1,014 2,635
Recoveries of charged-off loans... 431 360 466
Loans charged-off ................ (926) (1,236) (4,009)
- ----------------------------------------------------------------------------
Balance at end of year....... $ 2,694 $ 2,630 $ 2,492
============================================================================
A loan is considered impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. These loans consist primarily of non-accrual loans but may include
performing loans to the extent that situations arise which would reduce the
probability of collection in accordance with the contractual terms. As of
December 31, 1995, the Company's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
Recorded Valuation
Investment Allowance
---------- ---------
Impaired loans -
Valuation allowance required $ 160 $ 115
No valuation allowance required 1,559 --
------- ------
Total Impaired Loans $ 1,719 $ 115
======= ======
This valuation allowance is included in the allowance for possible loan losses
in the consolidated balance sheet.
F-12
<PAGE>
The average recorded investment in impaired loans for the year ended December
31, 1995 was $2,686. 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 Company did not recognize any interest income on impaired loans
for the year ended December 31, 1995.
NOTE 6. PREMISES AND EQUIPMENT
The net carrying amount of premises and equipment is summarized as follows:
December 31
--------------------
1995 1994
===========================================================================
Land and land improvements ......................... $1,476 $1,457
Building ........................................... 2,503 2,122
Furniture, fixtures and equipment .................. 3,316 2,820
Leasehold improvements ............................. 2,038 2,023
- ---------------------------------------------------------------------------
9,333 8,422
Less accumulated depreciation and amortization ..... 3,878 3,165
- ---------------------------------------------------------------------------
$5,455 $5,257
===========================================================================
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Certain Bank facilities are occupied under non-cancelable long-term operating
leases which expire at various dates through 2013. Certain lease agreements
provide for renewal options and increases in rental payments based upon
increases in the consumer price index or the lessor's cost of operating the
facility. Minimum aggregate annual lease payments for the remainder of the term
are as follows:
================================================================
1996 ................................................... $ 957
1997 ................................................... 740
1998 ................................................... 637
1999 ................................................... 671
2000 ................................................... 709
Thereafter ............................................. 4,405
- ----------------------------------------------------------------
Total lease commitments .......................... $8,119
================================================================
Net occupancy and equipment expense for 1995, 1994 and 1993 includes
approximately $1,106, $992 and $932, respectively, of rental expense for bank
facilities.
F-13
<PAGE>
The Bank leases one of its branches from a director and its headquarters
facility from a partnership in which a director has a substantial interest. In
management's opinion, the terms of these leases are considered comparable to
those which would exist with unaffiliated parties, and aggregate rental payments
under these leases totaled $554, $477 and $453, in 1995, 1994 and 1993,
respectively, and are included in net occupancy and equipment expense.
Financial Instruments With Off-Balance Sheet Risk
In the ordinary course of the business of meeting the financial needs of its
customers, the Company through its banking subsidiary, is party to various
financial instruments which are properly not reflected in the consolidated
financial statements. These financial instruments include standby letters of
credit, unused portions of lines of credit and commitments to extend various
types of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amounts recognized in the consolidated financial statements. The Company
seeks to limit any exposure of credit loss by applying the same credit
underwriting standards it uses for on-balance sheet lending facilities. The
following table provides a summary of financial instruments with off-balance
sheet risk at December 31, 1995:
Contract
Amount
==========================================================================
Standby letters of credit .................................... $ 3,276
Commitments under unused lines of credit ..................... 47,661
Outstanding loan commitments ................................. 12,737
- --------------------------------------------------------------------------
Total financial instruments with off-balance sheet risk $63,674
==========================================================================
Litigation
In the normal course of business, the Company may be a party to various legal
proceedings and claims. In the opinion of management, the consolidated financial
position or results of operations of the Company will not be materially affected
by the outcome of such legal proceedings and claims.
NOTE 8. BENEFIT PLANS
Stock Option Plan
Under the 1986 Employee Stock Option Plan and the 1994 Employee Stock Option
Plan (the "Option Plans") 102,102 and 100,000 shares of common stock,
respectively, were available for issuance under the plan to key employees of the
Company and its subsidiary.
F-14
<PAGE>
At the date the options are granted, the exercise price cannot be less than the
fair market value of the Company's common stock. The options may not be
exercised until one year from the date the options are granted, and expire ten
years from such date. The following is a summary of the option transactions
which occurred under the Option Plans during 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Number of
Shares Price Per Share
==================================================================================================
<S> <C> <C>
Balance, December 31, 1992 ...................................... 81,488 $5.50 - $22.68
Options granted ................................................. 25,400 6.25
Options canceled ............................................... (6,372) 6.00 - 22.68
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1993 ...................................... 100,516 5.50 - 22.68
Options granted ................................................. 18,600 8.75
Options canceled ............................................... (25,081) 6.00 - 22.68
Options exercised ............................................... (2,250) 6.00
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ...................................... 91,785 5.50 - 22.68
Options granted ................................................. 20,600 13.25
Options canceled ............................................... (3,036) 6.00 - 22.68
Options exercised ............................................... (1,591) 6.00 - 8.75
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (40,100 shares exercisable) .......... 107,758 $5.50 - $22.68
==================================================================================================
</TABLE>
The 1990 Stock Option Plan for Non-Employee Directors (the "Non-Employee Plan")
reserves 84,000 shares of the Company's common stock for issuance under the plan
to members of the Board of Directors of the Company and its subsidiary who are
not also employees. At the date the options are granted, the exercise price
cannot be less than the fair market value of the Company's common stock. The
options may not be exercised until one year from the date the options are
granted and expire ten years from such date. The following is a summary of the
option transactions which occurred under the Non-Employee Plan during 1995, 1994
and 1993.
<TABLE>
<CAPTION>
Number of
Shares Price Per Share
==================================================================================================
<S> <C> <C>
Balance, December 31, 1992 ...................................... 12,725 $6.00 - $18.09
Options granted ................................................. 4,000 7.50
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1993 ...................................... 16,725 6.00 - 18.09
Options granted ................................................. 8,000 8.00
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ...................................... 24,725 6.00 - 18.09
Options granted ................................................. 7,000 11.375
Options canceled ............................................... (3,025) 6.00 - 18.09
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (21,700 shares exercisable) .......... 28,700 $6.00 - $18.09
==================================================================================================
</TABLE>
F-15
<PAGE>
Dividend Reinvestment Plan
The Company's Dividend Reinvestment Plan authorizes the sale of 100,000 shares
of common stock to stockholders who choose to invest all or a portion of their
cash dividends. During 1995, 2,828 shares of common stock were issued through
the dividend reinvestment plan. During 1994 and 1993, no shares of common stock
were issued through the dividend reinvestment plan.
Retirement Savings Plan
The Company has a retirement savings plan covering substantially all of its
employees. Under the Plan, the Company matches 50 percent of the employee's
contribution (up to a maximum of three percent of their contribution). The
Company's contributions under the Plan were approximately $69, $61 and $59 in
1995, 1994 and 1993, respectively.
The Company and the Bank offer no postretirement or postemployment employee
benefits other than those described above.
NOTE 9. PREFERRED STOCK
On October 16, 1992, the Company issued 776,875 shares of nonvoting Series A 9%
cumulative convertible preferred stock. The 9% convertible preferred stock bears
a cumulative annual dividend of $.72 per share and is convertible at any time at
the option of the holder into one share of common stock, subject to adjustment
in certain events. The 9% convertible preferred stock is redeemable at the
option of the Company, under certain circumstances, at redemption prices ranging
from $9.20 to $8.00 per share plus any accumulated and unpaid dividends to the
date fixed for redemption.
Each share of the 9% convertible preferred stock gives the holder thereof the
option to purchase one share of common stock for $9.60 per share, subject to
adjustment in certain events, until the earlier to occur of October 30, 1997 or
the conversion or redemption of the 9% convertible preferred stock. The common
stock purchase right is not transferable separately from the 9% convertible
preferred stock.
NOTE 10. EMPLOYEE STOCK OWNERSHIP PLAN
In 1992, the Company's Board of Directors approved the adoption of an Employee
Stock Ownership Plan ("ESOP"). The ESOP is a qualified retirement plan for the
benefit of eligible employees of the Company and its subsidiary. The ESOP
invests primarily in common stock or preferred stock which is convertible into
common stock. The assets of the ESOP are held in a trust fund pursuant to a
Trust Agreement. The trustees under the Trust Agreement are authorized to invest
up to 100% of the trust fund in common stock or convertible preferred stock of
the Company. The trustees are also authorized to borrow money for the purpose of
purchasing common stock or convertible preferred stock of the Company.
F-16
<PAGE>
The ESOP purchased directly from the Company 187,500 shares of the 9%
convertible preferred stock during the 1992 preferred stock offering. To
purchase such shares, the ESOP received a loan from a bank in which a former
director of the Company has a substantial interest. The loan bears interest at a
fixed annual rate of 9% and is a five year term loan requiring 19 quarterly
payments of principal and interest of $57 and a final quarterly balloon payment
of the remaining principal and interest. The loan is secured by a pledge of the
shares owned by the ESOP. In addition, the Company has guaranteed repayment of
the loan and is required to contribute annually to the ESOP an amount sufficient
to pay the required debt service on the loan. As part of the lending
arrangement, the Company has issued the lending bank a stock purchase warrant to
purchase 187,500 shares of the Company's Series B Preferred Stock.
The Accounting Standards Division of the American Institute of Certified Public
Accountants issued Statement of Position 93-6 (SOP 93-6), Employers' Accounting
for Employee Stock Ownership Plans, in November 1993. SOP 93-6 requires
accounting for ESOPs under the shares allocated method for shares purchased by
the ESOPs after December 31, 1992. Application of the guidance in this SOP may
be elected, and is encouraged, for shares acquired by ESOPs on or before
December 31, 1992. The Company elected to adopt this statement in 1995 with
retroactive application, as required, effective January 1, 1994.
A summary of dividends and expenses for the ESOP follows:
December 31,
----------------------
1995 1994
-------- --------
Compensation expense $ 196 $ 104
Interest expense 115 123
Dividends -
Allocated shares 17 8
Unallocated shares 118 127
In 1993, the Company reported compensation expense of $95 which is equal to the
ESOP debt principal repayments less dividends received by the ESOP. Interest
incurred on the ESOP debt of $132 in 1993 was not recorded by the Company.
Dividends paid on ESOP shares were reflected as a reduction of retained earnings
and all ESOP shares were considered outstanding for earnings per share
computations.
All dividends received by the ESOP are used to pay debt service. The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from collateral and allocated to active employees based on the
proportion of debt service paid in the year. Debt of the ESOP is recorded as
debt of the Company and the shares pledged as collateral are reported as
unearned ESOP preferred stock in the balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of ESOP debt and related accrued interest. During 1993, 176,377 shares
of preferred stock were considered outstanding for earnings per share purposes
that are no longer considered outstanding 1995 and 1994.
F-17
<PAGE>
The ESOP preferred shares as of December 31, 1995 and 1994 are as follows:
1995 1994
---------- ----------
Allocated shares, beginning of year 24,100 11,123
Shares released for allocation on December 31 14,202 12,977
Unearned shares, at end of year 149,085 163,400
---------- ----------
Total ESOP preferred shares 187,387 187,500
---------- ----------
Fair value of unearned shares at December 31 $2,348,000 $1,797,000
========== ==========
During 1995, 113 shares were withdrawn from the ESOP.
F-18
<PAGE>
NOTE 11. INCOME TAXES
The current and deferred amounts of Federal income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1995 1994 1993
==================================================================================================
<S> <C> <C> <C>
Current .................................................... $1,619 $594 $141
Deferred ................................................... (308) 229 143
- --------------------------------------------------------------------------------------------------
$1,311 $823 $141
==================================================================================================
</TABLE>
A reconciliation of the Federal income tax provision to the applicable
statutory Federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1995 1994 1993
==================================================================================================
<S> <C> <C> <C>
Income before income taxes ................................. $ 4,361 $ 2,506 $ 1,493
Tax expense at statutory rate .............................. 1,483 852 508
Increase (decrease) in Federal income tax resulting from:
Tax-exempt interest .................................. (48) (25) (24)
Reduction of valuation allowance on deferred tax asset (124) -- (346)
Other, net ........................................... -- (4) 146
- --------------------------------------------------------------------------------------------------
$ 1,311 $ 823 $ 284
==================================================================================================
</TABLE>
The components of the net deferred tax asset (liability) at December 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1994
=========================================================================================
<S> <C> <C>
Allowance for possible loan losses .................... ($302) ($172)
Depreciation .......................................... 149 (31)
Other, net ............................................ -- 35
Federal tax operating loss carryforwards .............. -- --
Federal MAT credit carryforward ....................... -- 403
- -----------------------------------------------------------------------------------------
Total ................................................. (153) 235
Valuation allowance ................................... -- (124)
- -----------------------------------------------------------------------------------------
(153) 111
Unrealized (gain) loss on securities available for sale (161) 74
- -----------------------------------------------------------------------------------------
($314) $ 185
=========================================================================================
</TABLE>
The Company recorded a valuation allowance of $124 thousand against its net
deferred tax asset at December 31, 1994. During 1995, this valuation allowance
was reversed as the Company believes its income levels have fully stabilized and
it is more likely than not that the Company will realize the benefit of its
deferred tax asset.
F-19
<PAGE>
NOTE 12. CAPITAL REQUIREMENTS
The Bank's regulators have classified and defined bank capital into the
following components: (1) Tier I capital which includes intangible stockholders'
equity for common stock and certain perpetual preferred stock and (2) Tier II
capital which includes a portion of the allowance for possible loan losses,
certain qualifying long-term debt and preferred stock which does not qualify for
Tier I capital. The Company's regulators have implemented risk-based capital
guidelines which require a bank to maintain certain minimum capital as a percent
of such bank's assets and certain off-balance sheet items adjusted for
predefined credit risk factors (risk-adjusted assets). The regulatory minimum
Tier I and combined Tier I and Tier II capital ratios are 4.0% and 8.0%,
respectively. In addition to the risk-based capital requirements, a bank is also
required by its regulators to maintain a certain level of Tier I capital as a
percent of average tangible assets (leverage ratio).
The following table reflects the Company and the Bank's capital ratios as of
December 31, 1995:
The following table reflects capital ratios as of December 31, 1995:
<TABLE>
<CAPTION>
Required Regulatory
Actual Capital Ratios (%)
=====================================================================================
<S> <C> <C>
Company
Tier I leverage capital .......................... 5.76% 4.00% to 5.00%
Risk-based capital
Tier I ................................... 10.70 4.00
Total (Tier I and Tier II) ............... 11.95 8.00
Bank
Tier I leverage capital .......................... 6.10% 4.00% to 5.00%
Risk-based capital
Tier I ................................... 11.29 4.00
Total (Tier I and Tier II) ............... 12.54 8.00
=====================================================================================
</TABLE>
The Federal Reserve Board (FRB) also stipulates certain capital requirements for
the Company and the Bank. In the opinion of management, the Company's leverage
capital ratio of 5.76% and the Bank's leverage capital ratio of 6.10% at
December 31, 1995, are in excess of the FRB's minimum requirements for such
ratios.
F-20
<PAGE>
NOTE 13. OTHER EXPENSES
Other non-interest expense for the years ended December 31, 1995, 1994 and 1993
consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
======================================================================================
<S> <C> <C> <C>
Foreclosed real estate expense .................. $ 425 $ 491 $ 625
FDIC insurance assessment ....................... 339 643 644
Legal fees (a) .................................. 259 360 502
Audit and regulatory expenses ................... 104 221 379
Credit reports .................................. 195 172 298
Other ........................................... 2,457 1,869 1,652
- --------------------------------------------------------------------------------------
$3,779 $3,756 $4,100
======================================================================================
</TABLE>
(a) The Bank paid a total of $119, $135, and $192 in legal fees to a law firm
of which a director is a partner during the years ended December 31, 1995,
1994, and 1993, respectively.
NOTE 14. RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS
Certain bank regulatory limitations exist on the availability of subsidiary bank
undistributed net assets for the payment of dividends to the Company without the
prior approval of the bank regulatory authorities.
Under New Jersey State Law dividends may be paid only if capital would remain
unimpaired and remaining surplus would be no less than 50% of capital stock. In
addition to these statutory restrictions, the subsidiary bank is required to
maintain adequate levels of capital. At December 31, 1995, $4,522 was available
under the most restrictive limitations for the payment of dividends to the
Company.
F-21
<PAGE>
NOTE 15. INDEPENDENCE BANCORP, INC.
Financial Statements of Parent Company Only
<TABLE>
<CAPTION>
December 31
---------------------------
CONDENSED BALANCE SHEETS 1995 1994
=======================================================================================================
<S> <C> <C>
Assets:
Deposits in subsidiary ............................................. $ 124 $ 143
Other assets ....................................................... 205 44
Investment in subsidiary ........................................... 19,594 16,674
- -------------------------------------------------------------------------------------------------------
Total Assets ................................................. $19,923 $16,861
=======================================================================================================
Liabilities and Stockholders' Equity:
Employee Stock Ownership Plan (ESOP) Debt ........................... $ 1,194 $ 1,307
Other liabilities ................................................... 102 142
Stockholders' equity ................................................ 18,627 15,412
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity .................... $19,923 $16,861
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
CONDENSED STATEMENTS OF INCOME 1995 1994 1993
=======================================================================================================
<S> <C> <C> <C>
Dividends from subsidiary .......................................... $ 816 $ 717 $ 517
Expenses:
Interest expense - ESOP loan .................................. 115 123 --
General and administrative expenses ........................... 296 182 162
- ------------------------------------------------------------------------------------------------------
Income before income taxes ......................................... 405 412 355
Income tax benefit ................................................. 139 77 32
- ------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary ......... 544 489 387
Equity in undistributed income of subsidiary ....................... 2,506 1,194 822
- ------------------------------------------------------------------------------------------------------
Net income ......................................................... $3,050 $1,683 $1,209
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993
==============================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $3,050 $1,683 $1,209
Less equity in undistributed income of subsidiary .................. (2,506) (1,194) (822)
(Increase) decrease in other assets ................................ (161) (44) 21
Decrease in other liabilities ...................................... (40) (136) (5)
Other, net ......................................................... 18 -- --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .......................... 361 309 403
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid - preferred ......................................... (441) (432) (559)
Dividends paid - common ........................................... (99) -- --
Issuance of common stock ........................................... 47 14 --
Principal payment on ESOP debt ..................................... 113 104 61
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities .............................. (380) (314) (498)
- --------------------------------------------------------------------------------------------------------------
Net change in cash ................................................. (19) (5) (95)
Cash at beginning of year .......................................... 143 148 243
- --------------------------------------------------------------------------------------------------------------
Cash at end of year ................................................ $ 124 $ 143 $ 148
==============================================================================================================
</TABLE>
F-22
<PAGE>
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. In cases
where the quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimated future cash flows, and judgments regarding expected
loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates involve uncertainties
and are subjective in nature, and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are determined for on- and off-balance sheet financial
instruments, without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Tax implications related to the realization of the
unrealized gains and losses have a significant effect on fair value estimates
and have not been considered in any of the estimates.
Reasonable comparability between financial institutions may not be likely due to
the various valuation techniques permitted and numerous estimates which must be
made given the absence of secondary markets for many of the financial
instruments. This lack of uniform valuation methodologies introduces a greater
degree of subjectively of these estimated fair values.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and cash equivalents, and accrued interest receivable:
- -----------------------------------------------------------
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
F-23
<PAGE>
Securities:
- -----------
The fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans:
- ------
The fair values of loans are estimated by discounting future cash flows, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposits:
- ---------
The fair value of demand and savings deposits are equal to the carrying amounts
reported in the consolidated financial statements. For certificates of deposit,
fair value is estimated using the rates currently offered for deposits of
similar maturities.
Standby letters of credit and commitments to extend credit:
- -----------------------------------------------------------
These off-balance sheet instruments are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding,
therefore, the fair values of these items are substantially similar to the
related notional amounts.
The carrying values and estimated fair values of the Bank's financial statements
are as follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========================================================================================================================
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ............................. $38,911 $38,911 $30,736 $30,736
Securities available for sale ......................... 46,366 46,366 3,451 3,451
Securities held to maturity ........................... 90,297 90,326 112,418 104,364
Loans, net ............................................ 139,800 143,944 127,828 127,333
Accrued interest receivable ........................... 2,759 2,759 1,890 1,890
Financial liabilities:
Deposits .............................................. 304,346 304,882 265,432 265,519
Accrued interest payable .............................. 458 458 345 345
========================================================================================================================
</TABLE>
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet unfunded loan commitments and standby letters of
credits which totaled $60,398 and $3,276, respectively, at December 31, 1995 and
$50,089 and $2,423 as of December 31, 1994, respectively.
F-24
<PAGE>
NOTE 17. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the two years ended December
31, 1995 is unaudited. However, in the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the
results of operations for the periods, are reflected. Results of operations for
the periods are not necessarily indicative of the results of the entire year or
any other interim period.
<TABLE>
<CAPTION>
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------
1995 March 31 June 30 September 30 December 31
================================================================================================================
<S> <C> <C> <C> <C>
Total interest income ................................... $4,894 $5,198 $5,232 $5,387
Net interest income...................................... 3,522 3,687 3,705 3,675
Provision for possible loan losses ...................... 180 160 140 79
Net income .............................................. 549 700 831 970
Net income per share - primary .......................... $ 31 $ .42 $ .44 $ .64*
Net income per share - fully diluted .................... $ 26 $ .33 $ .35 $ .47*
- ----------------------------------------------------------------------------------------------------------------
1994
- ----------------------------------------------------------------------------------------------------------------
Total interest income ................................... $3,927 $4,167 $4,379 $4,600
Net interest income...................................... 2,901 3,092 3,237 3,233
Provision for possible loan losses ...................... 250 250 250 264
Net income .............................................. 401 431 456 395
Net income per share - primary ........................... $ 20 $ .22 $ .24 $ .28
Net income per share - fully diluted ..................... $ 19 $ .20 $ .21 $ .28
================================================================================================================
</TABLE>
* The Company adopted the AICPA Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans", in December 1995 (See Note
10). The required adjustments and per share effect have been reflected in the
fourth quarter of 1995 and 1994 since the effect on interim quarters would
not be significantly different from amounts previously reported.
F-25
<PAGE>
INDEPENDENCE BANCORP, INC. and SUBSIDIARY
Consolidated Balance Sheet (unaudited)
<TABLE>
<CAPTION>
March 31,
(In thousands, except share data) 1996
- ---------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks................................................... $ 18,281
Interest bearing deposits in other banks.................................. 4,073
Federal funds sold........................................................ 21,365
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents............................................. 43,719
- ---------------------------------------------------------------------------------------------
Securities
Available for sale, at market......................................... 36,744
Held to maturity, at cost (market value $100,112 and $90,326)......... 101,557
- ---------------------------------------------------------------------------------------------
Total securities.................................................. 138,301
Loans
Commercial............................................................ 27,321
Real estate-construction.............................................. 4,811
Real estate-commercial................................................ 49,122
Real estate-residential............................................... 31,233
Installment........................................................... 36,305
- ---------------------------------------------------------------------------------------------
Total loans....................................................... 148,792
Less:
Allowance for possible loan losses.................................... 2,805
- ---------------------------------------------------------------------------------------------
Loans, net........................................................ 145,987
- ---------------------------------------------------------------------------------------------
Premises and equipment, net............................................... 5,593
Accrued interest receivable............................................... 3,023
Other real estate, net.................................................... 1,381
Other assets.............................................................. 385
- ---------------------------------------------------------------------------------------------
Total assets.......................................................... $338,389
=============================================================================================
Liabilities and Stockholders' Equity
Deposits
Demand (non-interest bearing)......................................... 76,955
Money market, NOW, and super NOW...................................... 101,267
Savings............................................................... 65,619
Time certificates of $100,000 or more................................. 19,532
Other time certificates............................................... 53,504
- ---------------------------------------------------------------------------------------------
Total deposits.................................................... 316,877
Other liabilities......................................................... 1,370
Employee Stock Ownership Plan (ESOP) debt................................. 1,137
- ---------------------------------------------------------------------------------------------
Total liabilities..................................................... 319,384
- ---------------------------------------------------------------------------------------------
Commitments and Contingencies.............................................
Stockholders' equity......................................................
Preferred stock, no par value, 1,000,000 shares authorized................
Cumulative convertible preferred stock, 9% Series A, $1.00 par value,
776,875 issued and outstanding (liquidation value - $6,215)........... 777
Nonconvertible preferred stock, Series B, $1.00 stated value,
authorized 217,500 shares, non issued................................. --
Common stock, par value $1.867 per share, 5,000,000 authorized;
1,315,329 issued and outstanding...................................... 2,193
Additional paid-in capital................................................ 12,946
Retained earnings......................................................... 4,206
Net unrealized holding gain on securities available for sale, net
of income taxes....................................................... 17
Unearned ESOP preferred stock............................................. (1,134)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity............................................ 19,005
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity............................ $338,389
=============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-26
<PAGE>
INDEPENDENCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
(In thousands, except share data) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Loans..................................................... $ 3,248 $ 2,968
Securities
Taxable............................................... 1,830 1,682
Tax-exempt............................................ 55 4
Deposits with banks....................................... 118 80
Federal funds sold........................................ 195 160
- --------------------------------------------------------------------------------------------------------
Total interest income................................. 5,446 4,894
- --------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits...................................... 1,559 1,372
Interest on ESOP loan..................................... 27 --
- --------------------------------------------------------------------------------------------------------
Total interest expense................................ 1,586 1,372
- --------------------------------------------------------------------------------------------------------
Net interest income................................... 3,860 3,522
Provision for possible loan losses............................ 120 180
- --------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses.............................. 3,740 3,342
- --------------------------------------------------------------------------------------------------------
Non-Interest Income:
Service charges on deposit accounts....................... 323 305
Gain on sale of securities................................ 254 --
Other income.............................................. 213 193
- --------------------------------------------------------------------------------------------------------
790 498
- --------------------------------------------------------------------------------------------------------
Non-Interest Expense:
Salaries and employee benefits............................ 1,592 1,340
Occupancy................................................. 391 378
Equipment................................................. 266 257
Other expenses............................................ 1,006 1,044
- --------------------------------------------------------------------------------------------------------
3,255 3,019
- --------------------------------------------------------------------------------------------------------
Income before income taxes................................ 1,275 821
Income tax provision...................................... 432 272
- --------------------------------------------------------------------------------------------------------
Net Income 843 549
Dividends on preferred stock.............................. 113 140
- --------------------------------------------------------------------------------------------------------
Net income applicable to common stock..................... $ 730 $ 409
========================================================================================================
Net Income Per Common Share
Primary................................................... $ .47 $ .31
Fully Diluted............................................. .39 .26
========================================================================================================
Average Common Shares Outstanding
Primary................................................... 1,560,722 1,321,282
Fully Diluted............................................. 2,187,796 2,112,224
========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-27
<PAGE>
INDEPENDENCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities: 1996 1995
- -------------------------------------------------------------------------------------------------------------
Net Income......................................................... $ 843 $ 549
- -------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for possible loan losses................................. 120 180
Depreciation of bank premises and equipment........................ 176 187
Net amortization and accretion on securities....................... (36) 70
Provision for possible losses on other real estate................. -- 140
Loss on sale of other real estate.................................. 4 3
Gain on sale of residential mortgage loans and
related servicing rights.......................................... (2) (4)
Net loan (charge-offs) recoveries.................................. (9) 12
Net gain on sale of securities available for sale.................. (254) --
Increase in accrued interest receivable............................ (263) (525)
(Increase) decrease in other assets................................ (16) 27
Increase in other liabilities...................................... 350 356
- -------------------------------------------------------------------------------------------------------------
Total Adjustments................................................. 70 446
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities.......................... 913 995
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of securities:
Available for sale................................................ 2,226 54
Held for maturity................................................. 5,454 3,119
Purchase of securities:
Available for sale................................................ (4,551) (2,872)
Held for maturity................................................. (13,387) (3,896)
Sale of securities available for sale.............................. 8,547 --
Net increase in loans.............................................. (6,657) (4,447)
Sale of other real estate.......................................... 159 438
Capital expenditures............................................... (314) (406)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities.............................. (8,503) (8,010)
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in deposit accounts................................... 12,531 17,714
Principal payments on ESOP debt.................................... 30 27
Proceeds from the issuance of common stock......................... 32 --
Dividends paid on common stock..................................... (82) --
Dividends paid on preferred stock.................................. (113) (140)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities.......................... 12,398 17,601
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents............... 4,808 10,586
Cash and cash equivalents, beginning of year....................... 38,911 30,736
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................. $43,719 $41,322
- -------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest.......................................................... $ 1,587 $ 1,372
Income taxes...................................................... -- 175
Noncash investing activities:
Loans transferred to other real estate............................ 300 165
(Increase) decrease - market valuation of securities
available for sale............................................ 415 71
Securities transferred from held to maturity to available for sale -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-28
<PAGE>
INDEPENDENCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. Accordingly, they
do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. Therefore,
it is suggested that the accompanying unaudited consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in Independence Bancorp, Inc.'s (the Company) December 31,
1995 Annual Report to Shareholders. In the opinion of management, the
accompanying unaudited consolidated financial statements include all
adjustments of a normal recurring nature necessary to present fairly the
Company's financial position as of March 31, 1996, the results of its
operations for the three months then ended, and cash flows for the first three
months of 1996. The results of operations for such interim periods are not
necessarily indicative of the results to be expected for the full year.
Note 2. Summary of Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements of Independence Bancorp,Inc.
include the accounts of the Company and its wholly-owned subsidiary,
Independence Bank of New Jersey (the Bank). All significant intercompany
accounts and transactions have been eliminated.
Securities
The Company adopted Statement of Financial Accounting Standard No.
115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115), effective January 1, 1994. SFAS 115 requires the Company to classify its
securities as: (1) held to maturity, (2) available for sale, and (3) trading.
Securities held to maturity consist of debt securities that
management intends to, and the Company has the ability to, hold until
maturity. Such securities are stated at cost, adjusted for amortization of
premium and accretion of discount.
Securities available for sale consist of debt and equity securities
that are not intended to be held to maturity and are not held for trading.
Securities available for sale are reported at fair value, with unrealized
gains and losses credited or charged, net of tax effect, directly to
stockholders' equity. Realized gains and losses on securities available for
sale are determined on a specific identification basis.
The Company has not classified any of its securities as trading.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans
Substantially all loans classified as commercial loans are at least
partially secured by real estate. Loans are stated at their principal amount
outstanding, net of any unearned income and net of loan origination fees and
costs. Nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized over the life of the loan as an adjustment
to the loans' yield. The Bank does not accrue interest on any loan when
factors indicate collectibility is doubtful. In general, the accrual of
interest is discontinued when a loan becomes 90 days past due as to principal
or interest. When interest accruals are discontinued, interest credited to
income in the current year is reversed, and interest accrued in the prior year
is charged to the allowance for possible loan losses. Management may elect to
continue the accrual of interest when the estimated net realizable value of
collateral is sufficient to cover the principal balance and accrued interest.
Nonaccrual loans are returned to accrual status when interest is received on a
current basis and other factors indicating doubtful collection cease.
Allowance for possible loan losses
The allowance for possible loan losses is maintained at a level
believed by management to be adequate to meet reasonably foreseeable loan
losses on the basis of many factors including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that may affect the borrower's ability to pay, specific problem loans, and
trends in loan delinquencies and charge-offs. Possible losses on loans are
provided for under the allowance method of accounting. The allowance is
increased by provisions charged to earnings and reduced by loan charge-offs,
net of recoveries. Loans are charged-off in whole or in part when, in
management's opinion, collectibility is not probable.
While management uses available information to establish the
allowance for possible loan losses, future additions to the allowance may be
necessary if economic developments differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those
of management.
Other Real Estate
Other real estate is comprised of commercial and residential real
estate properties acquired in partial or total satisfaction of problem loans.
Other real estate is carried at the lower of fair value, as determined by
current appraisals, less estimated costs to sell, or the recorded investment
in the loan on the property. Losses identified at the time of acquisition of
such properties are charged against the allowance for possible loan losses.
Subsequent write-downs that may be required to the carrying value of these
assets and losses realized from asset sales are charged to other operating
expenses. Costs of holding such property are charged to expense as incurred.
Gains, to the extent allowable, realized on the disposition of these
properties are included in other operating income.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Income per common share
Primary net income per common and common equivalent shares, after
preferred dividends, is based on the weighted average common shares and common
share equivalents, including stock options and warrants outstanding during the
year, adjusted for the effect of subsequent common stock dividends and after
adjustment for the elimination of dividends paid on unallocated shares of the
ESOP Plan. Fully diluted income per share is based on the weighted average
number of common and common equivalent shares outstanding adjusted for shares
issuable upon conversion of preferred stock and the elimination of dividends
paid on unallocated shares of the ESOP Plan.
Note 3. Commitments and Contingent Liabilities
In the normal course of business, there are outstanding various legal
proceedings, commitments and contingent liabilities, such as guarantees and
commitments to extend credit which are not reflected in the accompanying
financial statements. At March 31, 1996 standby letters of credit were
approximately $3,568,000. In addition, the Company has committed $27,633,000
for home equity loans; $24,764,000 for commercial and residential real estate
loans; $10,632,000 for commercial lines of credit and $6,132,000 for all other
commitments.
In the judgment of management, the financial position or results of
operations of the Company will not be materially adversely affected by the
outcome of any present legal proceedings or other commitments and contingent
liabilities.
F-31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
============================================================== ==============================================================
No dealer, salesperson or any other individual has been
authorized to give any information or make any 1,523,750 Shares
representations not contained in this Prospectus in
connection with the offering covered by this Prospectus.
If given or made, such information or representations
must not be relied upon as having been authorized by
the Company or the Purchaser. This Prospectus does
not constitute an offer to sell, or a solicitation of an INDEPENDENCE BANCORP, INC.
offer to buy the Common Stock in any jurisdiction
where, or to any person to whom, it is unlawful to make
such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under Common Stock
any circumstances, create an implication that there has
not been any change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.
----------------
TABLE OF CONTENTS PROSPECTUS
Page
Available Information....................................
Incorporation of Certain Documents by Reference..........
Prospectus Summary.......................................
Alternatives Available to Holders of
Series A Preferred Stock............................
Selected Consolidated Financial Information..............
Risk Factors.............................................
Use of Proceeds..........................................
Capitalization...........................................
Price Range of Common Stock.............................. Janney Montgomery Scott Inc.
Dividends................................................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations..............................
Business.................................................
Supervision and Regulation...............................
Management...............................................
Principal Stockholders...................................
Description of Securities................................
Redemption of Series A Preferred Stock................... July [ ], 1996
Certain Federal Income Tax Consequences..................
Standby and Other Arrangements...........................
Legal Matters............................................
Experts..................................................
Index to Consolidated Financial Statements...............
============================================================== ==============================================================
</TABLE>
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Company in connection
with the issuance and distribution of the securities being registered hereby
are as follows:
Amount
---------------
Securities and Exchange Commission Registration Fee........ $ 7,233
Printing and Engraving Expenses............................ 15,000
Accounting Fees and Expenses............................... 60,000
Legal Fees and Expenses.................................... 100,000
Blue Sky Qualification Fees and Expenses................... 5,000
Transfer Agent............................................. 7,500
Miscellaneous.............................................. 14,267
---------------
Total............................................. 209,000
===============
- ------------------
Item 15. Indemnification of Directors and Officers.
Section 14A:3-5 of the New Jersey Business Corporation Act provides,
in substance, that New Jersey corporations shall have the power, under
specified circumstances, to indemnify their directors, officers, employees and
agents against their expenses and liabilities in connection with any
proceedings brought against them and against their expenses in connection with
any proceeding by or in the right of the corporation, by reason of the fact
that they were or are such directors, officers, employees or agents.
Article VI of the Company's by-laws, filed an Exhibit hereto,
provides as follows:
ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS.
Section 601. The Company shall, to the fullest extent now or
hereafter permitted by Section 14A:3-5 of the New Jersey Business Corporation
Act, as amended from time to time, indemnify any director or officer of the
Company.
The Board of Directors, by resolution adopted in each specific
instance, may similarly indemnify any person other than a director or officer
of the Company for liabilities incurred by him in connection with services
rendered by him at the request of the Company or any of its subsidiaries.
II-1
<PAGE>
The provisions of this section shall be applicable to all actions,
suits or proceedings commenced after its adoption, whether such arise out of
acts or omissions which occurred prior to or subsequent to such adoption and
shall continue as to a person who has ceased to be a director or officer or to
render services at the request of the company and shall inure to the benefit
of the heirs, executors and administrators of such a person. The rights of
indemnification provided for herein shall not be deemed the exclusive rights
to which any director, officer, employee or agent of the company may be
entitled.
Section 602. The Corporation may indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he 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 except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only
to the extent that the court of the county in which the registered office of
the Corporation is located or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for such expenses which the
court shall deem proper.
Section 603. The indemnification provided for in the preceding
sections shall be paid by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or other agent is proper under the circumstances because he has met
the applicable standard of conduct set forth in each section, this
determination to be made by the Board of Directors by majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or in any other manner authorized by law which the Board of
Directors shall direct; provided, however, that to the extent that a director,
officer, employee or agent has been successful on the merits or otherwise in
defense of any such suit, action or proceeding, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
Section 604. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding as authorized in the
manner provided in Section 603 of this Article upon receipt of an undertaking
by or on behalf of the director, officer, employee or agent to repay such
amount unless it shall be ultimately determined that he is entitled to be
indemnified by the corporation as authorized in this Article.
Section 605. The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
II-2
<PAGE>
Section 606. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have
the power to indemnify him against such liability under the provisions of this
Section.
<TABLE>
<CAPTION>
<S> <C>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit No. Description
*1.1 Form of Standby Agreement between the Company and Janney Montgomery Scott Inc.
*3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Bylaws of the Company, as amended.
*5.1 Opinion of Blank Rome Comisky & McCauley.
8.1 Tax Opinion of Blank Rome Comisky & McCauley.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Blank Rome Comisky & McCauley (included in Exhibits 5.1 and 8.1).
*24.1 Power of Attorney (included on the signature page of Part II of this Registration
Statement).
*27.1 Financial Data Schedule.
99.0 Transmittal Documents.
</TABLE>
- ---------------
* Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules
Not applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration sttement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424(b)
of this chapter) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 (Section 239.13 of this
chapter) or Form S-8 (Section 239.16b of this chapter), and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13
or section 15(d) of the Securities Exchange Act of 1934 that are incorprorated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
The undersigned registrant hereby undertakes to supplement the
prospectus after the expiration of the redemption period, to set forth the
results of the redemption offer, the transactions by the underwriters during
the redemption period, the amount of securities to be purchased by the
underwriters and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Ramsey, New Jersey, on this 10th
day of July, 1996.
INDEPENDENCE BANCORP, INC.
By:/s/James R. Napolitano
James R. Napolitano, Chairman
of the Board
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons, in the capacities indicated, on July 10, 1996.
Signature Capacity
- --------------------------------- -------------------------------------
/s/James R. Napolitano
- --------------------------- Chairman of the Board (Principal
James R. Napolitano Executive Officer)
/s/A. Roger Bosma
- --------------------------- President and Director
A. Roger Bosma
/s/Kevin J. Killian
- --------------------------- Executive Vice President and Chief
Kevin J. Killian Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
* Director
- ---------------------------
Joseph LoScalzo
II-6
<PAGE>
* Director
- ---------------------------
Esko J. Koskinen
* Director
- ---------------------------
William F. Dator
* Director
- ---------------------------
Julius J. Franchini
* Director
- ---------------------------
Robert F. Frasco
* Director
- ---------------------------
Robert O. Hagman
* Director
- ---------------------------
Joseph A. Haynes
*By:/s/Kevin J. Killian
- ---------------------------
Kevin J. Killian
Attorney-in-Fact
II-7
<PAGE>
BLANK ROME COMISKY & McCAULEY
LETTERHEAD
June 7, 1996
Independence Bancorp, Inc.
1100 Lake Street
Ramsey, New Jersey 07446
Re: Independence Bancorp, Inc.\ Registration Statement
on Form S-3 (Registration No. 333-01827)
Gentlemen:
We have acted as counsel to Independence Bancorp, Inc., a New Jersey
Corporation (the "Company"), in connection with a Registration Statement on
Form S-3 (Registration No. 333-01827) (the "Registration Statement"), of which
a prospectus (the "Prospectus") is a part, filed by the Company with the
United states ("U.S.") Securities and Exchange Commission under the Securities
Act of 1933, as amended. This opinion is furnished pursuant to the
requirements of Item 601(b)(8) of Regulation S-K.
In connection with the opinion rendered below, we have examined the
Registration Statement and certain other documents that we deemed necessary to
examine in order to issue the opinions set forth below. In rendering our
opinion, we have assumed that each of the documents referred to above has been
duly authorized, executed, and delivered, is authentic, if an original, or
accurate, if a copy, and has not been amended after execution thereof
subsequent to our review.
We express no opinions except as set forth below and our opinion is
based solely upon the facts as set forth in the Registration Statement.
Accordingly, we express no opinion as to tax matters that may arise if, for
example, the facts are not as set forth in the Prospectus.
Our opinion is also based on the current provisions of the Code,
applicable Treasury Regulations promulgated thereunder, and rulings,
procedures, and other pronouncements published by the U.S. Internal Revenue
Service. Such laws, regulations, rulings, case law and pronouncements are
subject to change at any time, and such change may adversely affect the
continuing validity of the opinion set forth below.
Based on the foregoing, we hereby adopt and incorporate by reference
the opinion set forth in the Prospectus under the caption "Certain Federal
Income Tax Consequences".
We hereby consent to the filing of this opinion letter as an exhibit
to the Registration Statement. We also consent to the use of our name in the
Prospectus under the caption "Certain Federal Income Tax Consequences."
The foregoing opinion is limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any state,
locality, or foreign country. We undertake no obligation to update the
opinions expressed herein after the date of this letter.
Very truly yours,
/s/ BLANK ROME COMISKY & McCAULEY
------------------------------------
BLANK ROME COMISKY & McCAULEY
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Independence Bancorp, Inc.
As independent public accountants, we hereby consent to the use of
our report dated January 19, 1996 and to all references to our Firm included in
or made a part of this Amendment No. 2 to Form S-3.
/s/ ARTHUR ANDERSEN LLP
----------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
July 10, 1996
<PAGE>
[INDEPENDENCE LETTERHEAD]
[ ], 1996
Dear Series A 9% Cumulative Convertible
Preferred Stock Shareholder:
Independence Bancorp, Inc. has exercised its right to redeem all of
Independence's Series A 9% Cumulative Convertible Preferred Stock, on [ ], 1996.
Therefore, all of each Series A Preferred Stock Shareholder's shares have been
called for redemption. Enclosed with this letter is a formal "Notice of
Redemption" and "Prospectus" setting forth the specific terms of the redemption,
the available alternatives with respect to the redemption and the procedures to
be followed. All Shareholders are advised to read this material thoroughly
before making any decisions.
As a Series A Preferred Stock Shareholder, you have the following
options with respect to the shares of Series A Preferred Stock called for
redemption:
1. Convert the Series A Preferred Stock at a conversion ratio of one
share of Independence Common Stock for each share of Series A Preferred Stock.
2. Exercise the Common Stock Purchase Right which is attached to each
share of Series A Preferred Stock redeemed by purchasing an additional share
of Independence Common Stock at a purchase price of $9.60 per share.
3. Sell the shares of Series A Preferred Stock (which includes the
Common Stock Purchase Right attached thereto) in the open market.
4. Accept the redemption price of $[ ] for each share
of Series A Preferred Stock called for redemption.
5. Let the Common Stock Purchase Right attached to each share of
Series A Preferred Stock called for redemption lapse on [ ], 1996.
<PAGE>
[ ], 1996
Page 2
Based on the last sale price of the Independence Common Stock on [ ],
1996, the market value of the Common Stock into which each share of Series A
Preferred Stock is convertible is approximately $[ ] and the market value of
the Common Stock purchasable upon the exercise of each Common Stock Purchase
Right is approximately $[ ], and in either case, considerably higher than the
amount to be paid upon redemption or upon exercise, as the case may be. Such
value is, of course, subject to change depending on the market price of
Independence Common Stock. A holder of Series A Preferred Stock may both
convert the shares of Series A Preferred Stock and exercise the Common Stock
Purchase Right attached thereto.
Also enclosed with this letter is a Letter of Transmittal and return
envelope for use by those Series A Preferred Stock Shareholders who wish to
convert their shares of Independence Series A Preferred Stock into shares of
Independence Common Stock, exercise their Common Stock Purchase Rights, or
both.
For those shareholders who wish to take advantage of this conversion
option and/or exercise their Common Stock Purchase Rights, the enclosed Letter
of Transmittal should be signed, dated and forwarded to The First National
Bank of Boston at one of the addresses set forth on the front page of the
Letter of Transmittal in accordance with the instructions in the Letter of
Transmittal together with the Series A Preferred Stock Certificates, and a
check made payable to "Independence Bancorp" for the exercise price if Common
Stock Purchase Rights are being exercised, on or prior to [ ], 1996. The First
National Bank of Boston must actually receive this material on or prior to the
close of business on [ ], 1996. Upon timely receipt of your materials, the
Transfer Agent will promptly forward to you: a Common Stock certificate
representing one share of Independence Common Stock for each share of
Independence Series A Preferred Stock converted and one share of Independence
Common Stock for each Common Stock Purchase Right exercised.
<PAGE>
[ ], 1996
Page 3
Those shareholders of Series A Preferred Stock who do not wish to
convert their shares or exercise their Common Stock Purchase Rights but
instead choose to receive the Redemption Price should not forward their Series
A Preferred Stock Certificates to The First National Bank of Boston at this
time. A separate Letter of Transmittal and Instructions will be forwarded to
you on or about [ ], 1996.
If you have any questions concerning the procedure described above,
please contact The First National Bank of Boston, Investors Relations Unit at
one of the addresses set forth on the front page of the Letter of Transmittal,
or telephone (617) 575-3170 or Kevin J. Killian, Executive Vice President,
Independence Bancorp, Inc., 1100 Lake Street, Ramsey, New Jersey 07446 or
telephone (201) 512-2980.
Very truly yours,
James R. Napolitano
Chairman of the Board
Enclosures
<PAGE>
INDEPENDENCE BANCORP, INC.
Series A 9% Cumulative Convertible Preferred Stock
NOTICE OF REDEMPTION
NOTICE IS HEREBY GIVEN, that Independence Bancorp, Inc.
("Independence") has exercised its right, pursuant to Section 4 of the Series A
9% Cumulative Convertible Preferred Stock Designation adopted by the
Independence Bancorp, Inc. Board of Directors on August 13, 1992, and which was
filed with the New Jersey Secretary of State on October 13, 1992, to redeem all
of Independence's Series A 9% Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock"), on [ ], 1996, the date fixed for redemption.
Therefore, all of each Series A Preferred Stock Shareholder's shares has been
called for redemption.
As a result of the foregoing call for redemption, the Common Stock
Purchase Rights attached to the shares of Series A Preferred stock will expire
on the earlier of the date the Series A Preferred Stock is converted or [ ],
1996, the date fixed for redemption, after which time such Common Stock Purchase
Rights will be null and void.
As a Series A Preferred Stock Shareholder, you have the following
options with respect to the shares of Series A Preferred Stock and the Common
Stock Purchase Rights attached thereto:
1. REDEMPTION. Shareholders of Series A Preferred Stock
may accept the redemption price of $[ ] for each share of
Series A Preferred Stock called for redemption.
For those shareholders who wish to take advantage of this redemption
option, certificates representing shares of Series A Preferred Stock must be
surrendered to The First National Bank of Boston, at one of the addresses set
forth on the front page of the Letter of Transmittal, at anytime on or after [
], 1996. Upon the surrender of certificates representing shares of Series A
Preferred Stock, the Transfer Agent will promptly forward to each shareholder
the redemption payment based on the number of each shareholder's shares.
Dividends on the Series A Preferred Stock called for redemption will cease to
accrue on and after [ ], 1996.
<PAGE>
Shareholders who wish to redeem their shares of Series A Preferred
Stock should not forward their Series A Preferred Stock Certificates to the
First National Bank of Boston at this time. A separate Letter of Transmittal
and Instructions will be forwarded to them on or about [ ], 1996.
The federal income tax consequences of the redemption of Series A
Preferred Stock is discussed on pages [ ] of the Prospectus which accompanies
this Notice.
2. CONVERSION. Shareholders of Series A Preferred Stock
may elect to convert their Series A Preferred Stock at a
conversion ratio of one share of Independence Common Stock for
each share of Series A Preferred Stock.
Based on the last sale price of the Independence Common Stock on [ ],
1996, the market value of the Common Stock into which each share of Series A
Preferred Stock is convertible is approximately $[ ]. Such value, however, is
subject to change depending on the market price of the Independence Common
Stock. As long as the market price of the Independence Common Stock is higher
than $[ ] per share, a holder who converts his Series A Preferred Stock will
receive Independence Common Stock that has a market value greater than the
amount which would be received upon surrender of Series A Preferred Stock for
redemption. No payments or adjustments in respect of dividends will be made
upon the conversion of any Series A Preferred Stock.
For those shareholders who wish to take advantage of this conversion
option, the enclosed Letter of Transmittal should be completed, as necessary,
signed, dated and forwarded to The First National Bank of Boston, at one of
the addresses set forth on the front page of the Letter of Transmittal, in
accordance with the instructions in the Letter of Transmittal together with
the Series A Preferred Stock Certificates. The First National Bank of Boston
must actually receive this material on or prior to the close of business on [
], 1996. Upon timely receipt, the Transfer Agent will promptly forward to you
a Common Stock certificate representing one share of Independence Common Stock
for each share of Independence Series A Preferred Stock converted.
2
<PAGE>
After the close of business on [ ], 1996, the Series A Preferred
Stock called for redemption will no longer be convertible into shares of
Independence Common Stock.
The federal income tax consequences of the conversion of Series A
Preferred Stock into Common Stock is discussed on pages [ ] of the Prospectus
which accompanies this Notice.
3. EXERCISE OF COMMON STOCK PURCHASE RIGHTS. Shareholders of Series A
Preferred Stock may elect to exercise the Common Stock Purchase Right which is
attached to each share of Series A Preferred Stock redeemed at a purchase
price of $9.60 per share of Independence Common Stock.
Based on the last sale price of Independence Common Stock on [ ],
1996, the market value of the Independence Common Stock purchasable upon the
exercise of the Common Stock Purchase Right is approximately $[ ]. Such value,
however, is subject to change depending on the market price of the
Independence Common Stock. As long as the market price of the Independence
Common Stock is higher than $[ ] per share, a holder who exercises his Common
Stock Purchase Rights will receive Independence Common Stock that has a market
value greater than the amount paid upon exercise of the Common Stock Purchase
Rights.
For those shareholders who wish to exercise their Common Stock
Purchase Rights, the enclosed Letter of Transmittal should be signed, dated
and forwarded to The First National Bank of Boston, at one of the addresses
set forth on the front page of the Letter of Transmittal, in accordance with
the instructions in the Letter of Transmittal together with the Series A
Preferred Stock Certificates, and a check made payable to "Independence
Bancorp" for the exercise price, on or prior to [ ], 1996. The First National
Bank of Boston must actually receive this material on or prior to the close of
business on [ ], 1996. Upon timely receipt of these materials, the Transfer
Agent will promptly forward to you one share of Independence Common Stock for
each Common Stock Purchase Right exercised.
The federal income tax consequences of the exercise of the Common
Stock Purchase Right is discussed on pages [ ] of the Prospectus which
accompanies this Notice.
4. SALE OF SERIES A PREFERRED STOCK IN THE OPEN MARKET. Shareholders
of Series A Preferred Stock may elect to sell their shares of Series A
Preferred Stock (which includes the Common Stock Purchase Right attached
thereto) in the open market.
3
<PAGE>
5. NOT EXERCISE THE COMMON STOCK PURCHASE RIGHTS. Shareholders may
convert or redeem their shares of Series A Preferred Stock and not exercise
the Common Stock Purchase Rights attached to their shares of Series A
Preferred Stock. Common Stock Purchase Rights attached to shares of Series A
Preferred Stock not exercised prior to the close of business on [ ], 1996 will
be null and void.
If you have any questions with respect to the foregoing options,
please contact The First National Bank of Boston, Investors Relations Unit, at
one of the addresses set forth on the front page of the Letter of Transmittal,
or telephone (617) 575-3170 or Kevin J. Killian, Executive Vice President,
Independence Bancorp, Inc., 1100 Lake Street, Ramsey, New Jersey 07446 or
telephone (201) 512-2980.
INDEPENDENCE BANCORP, INC.
4
<PAGE>
LETTER OF TRANSMITTAL
INDEPENDENCE BANCORP, INC.
To Accompany Series A 9% Cumulative Convertible Preferred Stock
(CUSIP No. [ ])
PLEASE COMPLETE THIS LETTER OF TRANSMITTAL CAREFULLY AND DELIVER IT
WITH YOUR CERTIFICATES FOR INDEPENDENCE BANCORP, INC. SERIES A 9% CUMULATIVE
CONVERTIBLE PREFERRED STOCK AT THE ADDRESS BELOW. THIS TRANSMITTAL LETTER,
YOUR CERTIFICATES AND ANY ACCOMPANYING DOCUMENTS MUST BE RECEIVED BY THE FIRST
NATIONAL BANK OF BOSTON ON OR PRIOR TO THE CLOSE OF BUSINESS ON [ ], 1996, IF
YOU ARE TO RECEIVE THE SHARES OF INDEPENDENCE BANCORP, INC. COMMON STOCK DUE
YOU AS EITHER A CONSEQUENCE OF THE CONVERSION OF YOUR SHARES OF INDEPENDENCE
BANCORP, INC. SERIES A 9% CUMULATIVE CONVERTIBLE PREFERRED STOCK CALLED FOR
REDEMPTION OR THE EXERCISE OF THE COMMON STOCK PURCHASE RIGHTS WHICH ARE
ATTACHED TO SHARES OF INDEPENDENCE BANCORP, INC. SERIES A 9% CUMULATIVE
CONVERTIBLE PREFERRED STOCK CALLED FOR REDEMPTION. THERE WILL BE NO
EXTENSIONS.
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
The First National Bank of Boston The First National Bank BancBoston Trust Company of
P. O. Box 1889 of Boston New York
Mail Stop: 45-02-53 Shareholder Services 55 Broadway, 3rd Floor
Boston, Massachusetts 02105 Division New York, New York
150 Royall Street
Mail Stop: 45-02-53
Canton, Massachusetts
02021
</TABLE>
DO NOT SEND STOCK CERTIFICATES TO INDEPENDENCE BANCORP, INC.
PLEASE READ CAREFULLY THE INSTRUCTIONS ACCOMPANYING
THIS LETTER OF TRANSMITTAL.
ITEM A.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Series A Preferred Stock
Surrendered for Conversion
Name and Address of Registered Holder(s) as Shown on and/or for the Exercise of
Series A Preferred Stock certificates Common Stock Purchase Rights
(Please fill in unless label with correct name and address is already affixed) (Attach list if necessary)
================================================================================================================================
Total Number
of Shares of
Certificate Series A
Number(s) Preferred Stock
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
Total
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
I wish to convert (please check ONE):
|_| ALL of the shares of Series A Preferred Stock called for redemption.
|_| _________ shares of Series A Preferred Stock called for redemption.
|_| None of the shares of Series A Preferred Stock called for redemption.
I wish to exercise (please check ONE):
|_| ALL of the Common Stock Purchase Rights which are attached to my
shares of Series A Preferred Stock called for redemption.
|_| _________ of the Common Stock Purchase Rights which are attached to
my shares of Series A Preferred Stock called for redemption.
|_| None of the Common Stock Purchase Rights which are attached to my
shares of Series A Preferred Stock called for redemption.
I am enclosing:
|_| A check made payable to Independence Bancorp, Inc. in the amount of
$_______ which represents the payment required to exercise the
number of Rights listed above.
PLEASE SEE INSTRUCTION NUMBER 9 REGARDING PAYMENT
OF THE APPROPRIATE EXERCISE PRICE.
ITEM B.
Dear Sirs:
The certificate(s) enclosed herewith and described below of the Series A
9% Cumulative Convertible Preferred Stock of Independence Bancorp, Inc.
("Independence" and the "Series A Preferred Stock") are either surrendered for
conversion at a conversion ratio of one (1) share of Independence Common Stock
for each share of Independence Series A Preferred, or the exercise of the
Common Stock Purchase Right which is attached to each share of Series A
Preferred Stock called for redemption at an exercise price of $9.60 per share
of Independence Common Stock or both.
The undersigned understands that the certificates representing the shares
of Independence Common Stock (issued either upon conversion of the Series A
Preferred Stock or the exercise of the Common Stock Purchase Right or both)
will be sent by mail to the registered owner of such shares at the address of
such owner as shown on the stock records of Independence, unless the
alternative delivery instructions below are completed.
-2-
<PAGE>
The undersigned represents that he has full power and authority to
irrevocably surrender the shares evidenced by the below-described certificates
and that he has good and unencumbered title thereto, free and clear of all
liens, charges and adverse claims and acknowledges that Independence and The
First National Bank of Boston are relying upon the representation in acting
pursuant hereto. All authority herein conferred shall survive the death or
incapacity of the undersigned, and all obligations of the undersigned
hereunder shall be binding upon heirs, personal representatives, successors
and assigns of the undersigned. The undersigned shall upon request execute any
additional documents necessary or desirable to complete the transaction
contemplated herein.
-3-
<PAGE>
THE METHOD OF DELIVERY IS AT THE OPTION AND RISK OF THE HOLDER OF
SERIES A PREFERRED STOCK, BUT IF MAIL IS USED, CERTIFIED OR
REGISTERED MAIL, PROPERLY INSURED, IS RECOMMENDED.
ITEM C.
- ----------------------------------------------------------
SPECIAL TRANSFER INSTRUCTIONS
To be completed ONLY if (a) The Letter of
Transmittal is signed by someone other than the
registered holder(s) of the Series A Preferred
Stock, or (b) the Common Stock certificate(s) is to
be issued in above. the name of and sent to someone
other than the registered holder(s)of the Series A
Preferred Stock. If this section is completed, your
signature must be guaranteed below. to
IMPORTANT: See Instructions 3 and 4.
(Type or Print)
Name(s)
-------------------------------------------------
Address
-------------------------------------------------
(Number and Street)
-------------------------------------------------
(City)
-------------------------------------------------
(State)
-------------------------------------------------
(Zip Code)
-------------------------------------------------
(Social Security or Taxpayer Identification No.)
IMPORTANT: See Substitute Form W-9.
- ---------------------------------------------------------
<PAGE>
ITEM D.
------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if the Common Stock
certificate(s) is to be mailed to someone other
than the registered holder(s) of the Series A
Preferred Stock or any address other than that of
the registered holder(s) indicated
(Type or Print)
Name(s)
-------------------------------------------------
Address
-------------------------------------------------
(Number and Street)
-------------------------------------------------
(City)
-------------------------------------------------
(State)
-------------------------------------------------
(Zip Code)
------------------------------------------------------------
-4-
<PAGE>
ITEM E.
The undersigned acknowledges receipt of the Notice of Redemption of
the Series A Preferred Stock dated [ ], 1996 (the "Notice of Redemption") and
the Independence Prospectus dated [ ], 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUST BE SIGNED BY REGISTERED
HOLDER(S) EXACTLY AS NAME(S) Dated:
APPEAR(S) ON THE SERIES A PREFERRED --------------------------------------------
STOCK CERTIFICATE(S) OR BY THE MOST
RECENT TRANSFEREE. Signature:
PLEASE NOTE THAT UNDER CERTAIN --------------------------------------------
CIRCUMSTANCES SIGNATURES MUST BE
GUARANTEED. Signature:
--------------------------------------------
SEE INSTRUCTION 3.
Telephone Number: ( )
------------------------------------
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</TABLE>
ITEM F.
IMPORTANT TAX INFORMATION
Must Be Completed
Under the Federal income tax law, a nonexempt holder of Series A
Preferred Stock whose Series A Preferred Stock is converted or who exercises
Common Stock Purchase Rights is required to provide his or her correct
taxpayer identification number on Substitute Form W-9 below, unless such
person has already done so. If such holder of Series A Preferred Stock is an
individual, the taxpayer identification number is his or her social security
number. If the correct taxpayer identification number is not provided, the
holder of Series A Preferred Stock may be subject to penalties imposed by the
Internal Revenue Service. In order to avoid delay, it is recommended that each
nonexempt holder of Series A Preferred Stock complete and sign the Substitute
Form W-9 below, whether or not such holder of Series A Preferred Stock has
already furnished his or her correct taxpayer identification number.
If Item C above (Special Transfer Instructions) has been completed,
the taxpayer identification number of the person named therein must be
provided in the Substitute Form W-9 below and such person must sign the
certification.
<TABLE>
<CAPTION>
PAYOR'S NAME: THE FIRST NATIONAL BANK OF BOSTON
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part 1 Please provide your TIN in
Form W-9 the Box at Right and Social Security Number
Certify by Signing and
Department of the Treasury Dating Below
Internal Revenue Service TIN:________________________________
Payor's Request for Taxpayer or Employer Identification Number
Identification Number (TIN)
and Certification
---------------------------------------
Part 2 Awaiting Taxpayer
Identification Number |_|
- -----------------------------------------------------------------------------------------------------------------------
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
The number shown on this form is my correct TIN (or I am waiting for a number to be issued to me).
- -----------------------------------------------------------------------------------------------------------------------
SIGNATURE: DATE: , 199
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
INSTRUCTIONS
1. General
Please do not send Series A Preferred Stock certificates directly to
Independence. The Series A Preferred Stock certificates, together with the
completed Letter of Transmittal, any separate notice of election to convert or
exercise the Common Stock Purchase Right, any endorsement or instrument of
assignment, and any other required supporting documents, should be mailed or
otherwise delivered to The First National Bank of Boston at its addresses
indicated on the front of this Letter of Transmittal. If mail is used,
transmission by certified or registered mail, properly insured, is recommended
as a precaution against loss. The method of transmitting Series A Preferred
Stock, however, is at the option and risk of the holder.
2. Letter of Transmittal Signed by Registered Holder(s) AND Common Stock
Certificate(s) to be Issued in the Name of Registered Holder(s).
No endorsement of the surrendered Series A Preferred Stock,
additional instrument or transfer or signature guarantee is required if, under
the following circumstances:
(a) The Letter of Transmittal (and any separate notice of
election to convert or exercise the Common Stock Purchase Rights) is
signed by the registered holder(s) of the surrendered Series A
Preferred Stock; and
(b) the Common Stock certificate(s), pursuant to either
conversion of the Series A Preferred Stock or exercise of the Common
Stock Purchase Right, is to be issued in the name of the registered
holder(s) of the surrendered Series A Preferred Stock certificates.
3. Letter of Transmittal Signed by Someone Other Than Registered
Holder(s) OR Common Stock Certificate(s) to be Issued in the Name of
Someone Other Than Registered Holder(s).
If (a) the Letter of Transmittal (or any separate notice of election
to convert) is signed by someone other than the registered holder(s) of the
surrendered Series A Preferred Stock or if (b) any Common Stock certificate(s)
is to be issued in the name of someone other than the registered holder(s) of
the surrendered Series A Preferred Stock certificates, then:
(i) Item C. entitled "Special Transfer Instructions" (and
Item D. entitled "Special Delivery Instructions," if applicable) must
be completed; and
(ii) the surrendered Series A Preferred Stock certificates
must be duly endorsed or accompanied by appropriate instruments of
transfer signed by the registered holder(s) exactly as the name(s) of
the registered holder(s) appears on the surrendered Series A
Preferred Stock certificates; and
(iii) the signature(s) of the registered holder(s) on such
endorsement or instrument of transfer must be guaranteed by a
financial institution that is a member of the Securities Transfer
Agents Medallion Program ("STAMP"), the Stock Exchange Medallion
Program ("SEMP") or The New York Stock Exchange, Inc. Medallion
Signature Program ("MSP") (collectively a "Permitted Institution");
and
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<PAGE>
(iv) the signature(s) on the Letter of Transmittal (and any
separate notice of election) must be guaranteed by a Permitted
Institution.
(See also Instruction 5 below.)
4. Signatures by Agents; Supporting Documents.
In all cases where an instrument of transfer or this Letter of
Transmittal is executed by an officer of a corporation, an attorney, trustee,
executor, administrator, guardian, or other fiduciary, the person so executing
must give his full title in such capacity. Proper evidence of such person's
authority to act in such capacity and to make such transfer must accompany the
Series A Preferred Stock certificates surrendered.
5. Lost or Destroyed Series A Preferred Stock Certificates.
If your Series A Preferred Stock certificate(s) has been either lost
or destroyed, notify The First National Bank of Boston, at one of its
addresses indicated on the front of this Letter of Transmittal, of this fact
promptly in writing. You will then be instructed as to the steps you must take
in order to either convert the Series A Preferred Stock which you own or
exercise the attached Common Stock Purchase Right.
6. No Adjustment; No Fractional Shares.
No adjustments with respect to dividends will be made upon the
conversion of any Series A Preferred Stock. No fractional shares of Common
Stock will be issued upon either conversion of Series A Preferred Stock or
exercise of the Common Stock Purchase Right.
7. Taxpayer Identification Number.
Unless you qualify for an exemption, you are required to provide a
correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 in Item
F. If Item C (Special Transfer Instructions) has been completed, the TIN of
the person named in Item C must be provided, and such person must sign and
date the certification in Item F. See Item F, "Important Tax Information," for
additional information and the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9."
8. Partial Conversion.
If less than all of the number of shares of Series A Preferred Stock
enclosed herewith are desired to be converted, check the appropriate box and
fill in the number of shares of Series A Preferred Stock which you actually
wish to convert in the space provided under Item A on the front of this Letter
of Transmittal. A new Series A Preferred Stock Certificate will be sent to you
promptly for the remainder of the unredeemed portion not converted of the
Series A Preferred Stock which was evidenced by your old certificate. The
share amount, if any, of the redeemed portion not converted will be "retained
by the Exchange Agent" until the redemption date at which time a check will be
issued for the applicable payment amount.
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<PAGE>
9. Partial Exercise of Common Stock Purchase Rights.
If less than all of the Common Stock Purchase Rights attached to the
shares of Series A Preferred Stock called for redemption are desired to be
exercised, please check the appropriate box and fill in the number of shares
of Common Stock desired to be purchased in the space provided under Item A.
Please enclose a check made payable to "Independence Bancorp" for the exercise
price ($9.60 multiplied by the number of shares of Common Stock desired to be
purchased) together with this Letter of Transmittal. A new Series A Preferred
Stock Certificate without the attached Common Stock Purchase Right will be
sent to you promptly.
10. No Contingent Surrender.
No alternative, conditional or contingent surrender of certificate(s)
will be accepted.
11. Final Determination.
All questions as to validity, form, eligibility and time of receipt
and acceptance of any surrendered certificate(s) will be determined by The
First National Bank of Boston whose determinations will be final and binding.
12. Additional Copies.
Additional copies of the Notice of Redemption, Independence's
Prospectus dated [ ], 1996 and this Letter of Transmittal may be obtained from
The First National Bank of Boston at its address indicated at the top of the
Letter of Transmittal.
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