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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER: 0-15826
WASHINGTON BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-28000126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 WASHINGTON STREET, HOBOKEN, NEW JERSEY 07030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 659-0013
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of March 1, 1994, there were issued and outstanding 2,307,937 shares
of the Registrant's common stock.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing sales price of the Registrant's common
stock as quoted on the Nasdaq National Market on February 28, 1994 was
approximately $27.3 million (The exclusion from such amount of the market
value of shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant).
DOCUMENTS INCORPORATED BY REFERENCE
1. Part III--Definitive Proxy Statement for the Registrant's 1994 Annual
Meeting of Stockholders.
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TABLE OF CONTENTS
Item
No. Description Page
- ---- ----------- ----
PART I
1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 7
4 Submission of Matters to a Vote of Stockholders . . . . . . . . 7
4A Executive Officers of the Registrant. . . . . . . . . . . . . . 8
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . 9
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . 10
8 Financial Statements and Supplementary Data . . . . . . . . . . 28
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 53
PART III
10 Directors of the Registrant . . . . . . . . . . . . . . . . . . 54
11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . 54
12 Security Ownership of Certain Beneficial Owners and Management. 54
13 Certain Relationships and Related Transactions. . . . . . . . . 54
Part IV
14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 56
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PART I
ITEM 1. BUSINESS
GENERAL
Washington Bancorp, Inc. (the "Company"), a Delaware business
corporation, is a bank holding company whose principal subsidiary is
Washington Savings Bank (the "Bank"), a New Jersey-chartered capital stock
savings bank, headquartered in Hoboken, New Jersey, whose deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC"). The sole activity of
the Company at this time is its ownership of all of the outstanding capital
stock of the Bank. At December 31, 1993, the Company had unconsolidated total
assets and stockholders' equity of $33.5 million.
The Bank, organized in 1857, is headquartered in Hoboken, New Jersey. The
Bank conducts its business through three full-service banking offices and a
Loan Center in Hoboken, and five other full-service banking offices located in
Guttenberg, Lyndhurst, Ridgefield Park, Wallington and Weehawken, New Jersey.
At December 31, 1993, the Bank had total assets of $282.8 million, deposits of
$247.0 million and stockholder's equity of $32.7 million.
The Bank is principally engaged in the business of attracting deposits
from the general public and investing those funds in adjustable-rate
residential mortgage loans and investment securities.
For information regarding the Bank's lending business, securities
portfolio, results of operations, asset quality and financial condition, see
Item 7 of this Annual Report on Form 10-K.
On November 8, 1993, the Company and the Bank signed a definitive
agreement (the "Agreement") providing for the merger of the Company with and
into Hubco, Inc. ("Hubco") and, immediately following, the merger of the Bank
with and into Hudson United Bank, both of Union City, New Jersey. Under the
terms of the Agreement, shareholders of the Company will receive either $16.10
in cash or .6708 of a share of a new Series A Convertible Preferred Stock of
Hubco for each share of the Company's common stock. In addition, the Company
issued an option to Hubco, exercisable in certain circumstances, to acquire
765,000 shares of its authorized but unissued common stock at a price of
$11.50 per share. The Agreement is subject to several conditions, including
regulatory and shareholder approvals.
COMPETITION
The Bank faces significant competition both in originating mortgage,
consumer and other loans and in attracting deposits. The Bank's competition
for loans comes principally from savings and loan associations, savings banks,
mortgage banking companies (many of which are subsidiaries of major commercial
banks), insurance companies and other institutional lenders. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks, credit unions and other
financial institutions. Competition may increase as a result of the continuing
reduction in the restrictions on the interstate operations of financial
institutions. The Bank faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds. Many of the Bank's competitors, whether traditional financial
institutions or otherwise, have much greater financial and marketing resources
than those of the Bank.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers and their real estate brokers. The Bank competes for deposits
through pricing, the offering of a variety of deposit accounts and by
providing personal service.
PERSONNEL
As of December 31, 1993, the Bank had 108 employees, of whom 80 were
full-time and 28 were part-time. The employees are not represented by a
collective bargaining unit.
REGULATION AND SUPERVISION
GENERAL
The Company owns all of the capital stock of the Bank and is a bank
holding company within the meaning of the Bank Holding Company Act of 1956, as
amended ("BHCA"). As a bank holding company, the Company is subject to
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regulation by the Board of Governors of the Federal Reserve System ("FRB")
under the BHCA. As a company whose stock is publicly-traded, the Company is
also subject to the reporting, proxy solicitation, and other regulations of
the Securities and Exchange Commission ("SEC").
The Bank is a New Jersey-chartered capital stock savings bank, the
accounts of which are insured by the FDIC, and, as such, is subject to the
regulation, supervision and examination of the New Jersey Department of
Banking and the FDIC.
NEW JERSEY LAW
The New Jersey Department of Banking (the "Banking Department") regulates
the Bank's internal organization as well as its deposit, lending and
investment activities. The Banking Department must approve changes to the
Bank's certificate of incorporation, the establishment or relocation of branch
offices and mergers involving the Bank. In addition, the Banking Department
conducts periodic examinations of the Bank. Many of the areas regulated by the
Banking Department are subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and savings banks in New Jersey with
respect to lending and investment authority as well as interest rate
limitations. As federal law has expanded the authority of federally-chartered
savings institutions to engage in activities previously reserved for
commercial banks, New Jersey legislation and regulations ("parity
legislation") have given New Jersey-chartered savings banks, such as the Bank,
the powers of federally-chartered savings institutions, including the
authority to make ARM loans, consumer loans, second mortgage loans, mortgage
checking advances and commercial loans.
INSURANCE OF DEPOSITS
The Bank's deposit accounts are insured by the FDIC up to a maximum of
$100,000 per insured depositor. The FDIC issues regulations, conducts periodic
examinations, requires the filing of reports and generally supervises the
operations of its insured banks. This supervision and regulation is intended
for the protection of depositors.
Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for
non-compliance. For example, proceedings may be instituted against any insured
bank or any director, officer or employee of such bank who engages in unsafe
and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate insurance of accounts
pursuant to procedures established for that purpose.
Federal banking legislation has substantially increased the deposit
insurance premiums which depository institutions are required to pay. A system
of risk-based premiums for Federal deposit insurance has been developed
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "FDICIA".
FEDERAL REGULATION OF HOLDING COMPANIES
The Company and its subsidiary are subject to examination, regulation and
periodic reporting under the BHCA, as administered by the FRB. The Company is
required to obtain the prior approval of the FRB in order to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior
FRB approval is also required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any voting shares of such bank or
bank holding company. In addition to the approval of the FRB, before any bank
acquisition can be completed, prior approval thereof may also be required from
other agencies having supervisory jurisdiction over the bank to be acquired.
In addition, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
principal activities that the FRB has determined by regulation to be so
closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services;
(iv) acting as fiduciary or investment or financial advisor; (v) leasing
personal or real property; and (vi) making investments in corporations or
projects designed primarily to promote community welfare.
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Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extension of credit to
the bank holding company or any of its subsidiaries, on investments in the
stock or other securities of such holding company or its subsidiaries, and on
the acceptance of such stocks or securities as collateral for loans. Moreover,
subsidiaries of bank holding companies are prohibited from engaging in certain
tie-in arrangements (with the holding company or any of its subsidiaries) in
connection with any extension of credit or lease or sale of property or
furnishing of services.
DIVIDEND RESTRICTIONS
On January 18, 1994, the FRB rescinded a Memorandum of Understanding
which had prevented the Company from paying dividends. During 1993, the FDIC
and the Banking Department rescinded a Memorandum of Understanding which had
imposed a similar restriction on the Bank.
Dividends payable by the Bank to the Company and dividends payable by the
Company to stockholders are subject to various limitations imposed by federal
and state laws, regulations and policies adopted by federal and state
regulatory agencies. The Bank is required by federal law to obtain FDIC
approval for the payment of dividends if the total of all dividends declared
by the Bank in any year exceed the total of the Bank's net profits (as
defined) for that year and the retained net profits (as defined) for the
preceding two years, less any required transfers to surplus. Under New Jersey
law, the Bank may not pay dividends unless, following payment, the capital
stock of the Bank would be unimpaired and (a) the Bank will have a surplus of
not less than 50% of its capital stock, or, if not, (b) the payment of such
dividends will not reduce the surplus of the Bank.
If, in the opinion of the applicable regulatory authority, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require that such bank
cease and desist from such practice or, as a result of an unrelated practice,
require the bank to limit dividends in the future. The Federal Reserve Board
has similar authority with respect to bank holding companies. In addition, the
Federal Reserve Board and FDIC have issued policy statements which provide
that insured banks and bank holding companies should generally only pay
dividends out of current operating earnings. Regulatory pressures to
reclassify and charge-off loans and to establish additional loan loss reserves
can have the effect of reducing current operating earnings and thus impacting
an institution's ability to pay dividends. Finally, as referred to below and
in Item 7 of this Annual Report on Form 10-K, the regulatory authorities have
established guidelines with respect to the maintenance of appropriate levels
of capital by banks and bank holding companies under their jurisdiction.
Compliance with the standards set forth in such policy statements and
guidelines could limit the amount of dividends which the Bank may pay to the
Company and the dividends which the Company may pay to stockholders. In
addition, the Company must satisfy dividend restrictions imposed on all
Delaware business corporations in order to be able to pay dividends to
stockholders. See "FDICIA" for information regarding the impact of FDICIA upon
the capacity to pay dividends.
FDICIA
FDICIA substantially revised the bank regulatory provisions of the
Federal Deposit Insurance Act and several other federal banking statutes.
Among other things, FDICIA requires federal banking agencies to broaden the
scope of regulatory corrective action taken with respect to banks that do not
meet minimum capital requirements and to take such actions promptly in order
to minimize losses to the FDIC. Under FDICIA, federal banking agencies
established five capital tiers: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". FDICIA imposes significant restrictions on the operations
of a depository institution that is not in either of the first two of such
categories. A depository institution's capital tier will depend upon the
relationship of its capital to various capital measures. A depository
institution will be deemed to be "well capitalized" if it significantly
exceeds the minimum level required by regulation for each relevant capital
measure, "adequately capitalized" if it meets each such measure,
"undercapitalized" if it fails to meet any such measure, "significantly
undercapitalized" if it is significantly below any such measure and
"critically undercapitalized" if it fails to meet any critical capital level
set forth in the regulations. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating or is deemed to
be in an unsafe or unsound condition or to be engaging in unsafe or unsound
practices.
Under regulations adopted under these provisions, for an institution to
be well capitalized it must have a total risk-based capital ratio of at least
10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage
ratio of at least 5% and not be subject to any specific capital order or
directive. For an institution to be adequately capitalized it
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must have a total risk-based capital ratio of at least 8%, a Tier I risk-based
capital ratio of at least 4% and a Tier I leverage ratio of at least 4% (or in
some cases 3%). Under the regulations, an institution will be deemed to be
undercapitalized if the bank has a total risk-based capital ratio that is less
than 8%, a Tier I risk-based capital ratio that is less than 4%, or a Tier I
leverage ratio of less than 4% (or in some cases 3%). An institution will be
deemed to be significantly undercapitalized if the bank has a total risk-based
capital ratio that is less than 6%, a Tier I risk-based capital ratio that is
less than 3%, or a leverage ratio that is less than 3% and will be deemed to
be critically undercapitalized if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
FDICIA generally prohibits an insured depository institution from making
a capital distribution (including the payment of dividends) or paying
management fees to any person that controls the institution if it thereafter
would be undercapitalized. If an institution becomes undercapitalized, it will
be generally restricted from borrowing from the Federal Reserve, increasing
its average total assets, making any acquisitions, establishing any branches
or engaging in any new line of business. An undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate federal
banking agency, which plan must, in the opinion of such agency, be based on
realistic assumptions and be "likely to succeed" in restoring the
institution's capital. In connection with the approval of such a plan, the
holding company of the institution must guarantee that the institution will
comply with the plan, subject to a limitation of liability equal to a portion
of the institution's assets. If an undercapitalized institution fails to
submit an acceptable plan or fails to implement such a plan, it will be
treated as if it is significantly uncapitalized.
Under FDICIA, bank regulators are directed to require "significantly
undercapitalized" institutions, among other things, to restrict business
activities, raise capital through a sale of stock, merge with another
institution and/or take any other action which the agency determines would
better carry out the purposes of FDICIA.
Within 90 days after an institution is determined to be "critically
undercapitalized", the appropriate federal banking agency must, in most cases,
appoint a receiver or conservator for the institution or take such other
action as the agency determines would better achieve the purposes of FDICIA.
In general, "critically undercapitalized" institutions will be prohibited from
paying principal or interest on their subordinated debt and will be subject to
other substantial restrictions.
Under FDICIA, an institution that is not well capitalized is generally
prohibited from accepting brokered deposits. Undercapitalized institutions are
prohibited from offering interest rates on deposits significantly higher than
prevailing rates.
The provisions of FDICIA governing capital regulations became effective
on December 19, 1992. FDICIA also directs that each federal banking agency
prescribe standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, a maximum ratio of classified assets to capital, a
minimum ratio of market value to book value for publicly traded shares (if
feasible) and such other standards as the agency deems appropriate.
FDICIA also contains a variety of other provisions that could affect the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch, limitations on
credit exposure between banks, restrictions on loans to a bank's insiders and
guidelines governing regulatory examinations.
Pursuant to FDICIA, the FDIC has developed a risk-based assessment
system, under which the assessment rate for an insured depository institution
varies according to its level of risk. An institution's risk category will
depend upon whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized and whether it is assigned to
Subgroup A, B, or C. Subgroup A institutions are financially sound
institutions with few minor weaknesses; Subgroup B institutions are
institutions that demonstrate weaknesses which, if not corrected, could result
in significant deterioration; and Subgroup C institutions are institutions for
which there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct
the areas of weakness. Based on its capital and supervisory subgroups, each
member institution will be assigned an annual FDIC assessment rate per $100 of
insured deposits varying between 0.23% per annum (for well capitalized
Subgroup A institutions) and 0.31% per annum (for undercapitalized Subgroup C
institutions), although the FDIC may expand the difference between the maximum
and minimum rates.
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Although it remains possible that insurance assessments could be further
increased and/or that there may be a special additional assessment, based upon
public statements by regulatory authorities regarding the insurance funds, the
Company does not anticipate that there will be any material increase in
assessments in the near future. A significant increase in the assessment could
have an adverse impact on the Company's results of operations.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain condition indicating that a "default" is likely to occur
in the absence of regulatory assistance. FIRREA and the Crime Control Act of
1990 expand the enforcement powers available to federal banking regulators,
including providing greater flexibility to impose enforcement action,
expanding the category of persons dealing with a bank who are subject to
enforcement action, and increasing the potential civil and criminal penalties.
In addition, in the event of a holding company insolvency, the Crime Control
Act of 1990 affords a priority in respect of capital commitments made by the
holding company on behalf of its subsidiary banks.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks ("FHL Banks"), each subject to Federal Housing Finance
Board ("FHFB") supervision and regulation. The FHL Banks provide a central
credit facility for member insured institutions. As a member of the FHL Bank
of New York, the Bank is required to own shares of capital stock in the FHL
Bank of New York in an amount equal to the greater of (a) 1% of the aggregate
principal amount of its unpaid home mortgage loans, home purchase contracts,
and similar obligations, (b) 5% of advances (borrowings) from the FHL Bank or
(c) 1% of 30% of total assets. The Bank is in compliance with this requirement
with an investment in FHL Bank of New York stock at December 31, 1993 of
$1.711 million.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
Federal and state statutes require prior approval by or notice to the
appropriate bank regulatory authority before any person would be permitted to
acquire control of the Company or a specific percentage of its common stock.
Under the BHCA, any company (other than an existing bank holding company) is
required to obtain prior approval from the FRB before it may obtain control of
the Company. Control generally is defined to mean (i) directly or indirectly
owning, controlling or having the power to vote 25% or more of any class of
voting securities of the Company, (ii) controlling the election of a majority
of the Company's directors, or (iii) directly or indirectly exercising a
controlling influence over the Company's management or policies. Prior FRB
approval is required before an existing bank holding company can acquire more
than 5% of the Company's Common Stock. Under the Federal Change in Bank
Control Act ("CIBCA"), a prior written notice must be submitted to the FRB if
any individual or other person, or group acting in concert, seeks to acquire
10% or more of the shares of the Company's outstanding Common Stock. Under the
CIBCA, a proposed acquisition may be consummated unless the FRB disapproves of
the acquisition within 60 days after a complete notice is filed or the FRB
extends such 60 day period.
New Jersey banking law provides that, except in certain emergency
situations, no person shall, without the prior approval of the Commissioner,
directly or indirectly obtain or exercise control of a capital stock savings
bank or offer to acquire beneficial ownership or control of more than 5% of
the then outstanding voting shares of a capital stock savings bank.
Delaware law prohibits a Delaware corporation, such as the Company, from
engaging in a "business combination" with an "interested stockholder" for 3
years following the date that a person becomes an interested stockholder. An
interested stockholder is a person who owns 15% or more of the corporation's
outstanding voting stock, or an affiliate or associate of the corporation who
owned 15% in the previous 3 years, and his or her affiliates and associates.
Stockholders who owned 15% prior to December 23, 1987, or who acquired their
shares pursuant to a pre-existing tender or exchange offer, are not covered by
the statute whether or not they acquire additional shares.
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The 3-year moratorium imposed on business combinations does not apply if:
(1) prior to a person becoming an interested stockholder, the board of
directors approves the business combination or the transaction which
resulted in the person becoming an interested stockholder, or
(2) the interested stockholder owns 85% of the corporation's voting
stock upon consummation of the transaction which made him or her an
interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers and shares held by ESOPs or
other employee stock plans which do not permit employees to decide
confidentially whether to accept a tender offer), or
(3) on or after the date a person becomes an interested stockholder, the
board approves the business combination and it is also approved at a
meeting by two-thirds of the voting stock not owned by the
interested stockholder.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Bank and, therefore, of the Company are affected not
only by economic conditions, but also by the monetary and fiscal policies of
the United States and its agencies (particularly the Federal Reserve Board)
and other official agencies. The Federal Reserve Board can and does implement
national monetary policy, such as the curbing of inflation and combating of
recession, by its open market operation in United States Government
securities, control of the discount rate applicable to borrowings and the
establishment of reserve requirements against deposits and certain liabilities
of depository institutions. The actions of the Federal Reserve Board influence
the level of loans, investments and deposits and also affect interest rates
charged on loans or paid on deposits. The nature and impact of future changes
in monetary and fiscal policies are not predictable.
From time to time, various proposals are made in the United States
Congress and the New Jersey legislature and before various regulatory
authorities which would alter the powers of different types of banking
organizations or remove restrictions on such organizations and which would
change the existing regulatory framework for bank, bank holding companies and
other financial institutions. It is impossible to predict whether any of such
proposals will be adopted and the impact, if any, of such adoption on the
business of the Company.
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ITEM 2. PROPERTIES
The following table sets forth the location of the Bank's offices and
other related information as of December 31, 1993.
Year Expiration Lease
Facility Date of Renewal
Location Opened Owned Leased Lease Option
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Hoboken Main Office . . . . 1929 X -- -- --
101 Washington Street
Hoboken, NJ 07030
Hoboken . . . . . . . . . . 1973 X -- -- --
609-611 Washington Street
Hoboken, NJ 07030
Hoboken . . . . . . . . . . 1973 X -- -- --
1018 Washington Street
Hoboken, NJ 07030
Weehawken . . . . . . . . . 1974 X -- -- --
4200 Park Avenue
Weehawken, NJ 07087
Ridgefield Park . . . . . . 1974 X -- -- --
240 Main Street
Ridgefield Park, NJ 07660
Lyndhurst . . . . . . . . . 1974 -- X 2/98 --
425 Valley Brook Avenue
Lyndhurst Shopping Plaza
Lyndhurst, NJ 07071
Guttenberg . . . . . . . . 1975 X -- -- --
6812 Park Avenue
Guttenberg, NJ 07093
Wallington . . . . . . . . 1977 -- X 3/97 --
357 Paterson Avenue
Wallington, NJ 07057
ITEM 3. LEGAL PROCEEDINGS
In October 1991, a complaint was filed by a former officer in New Jersey
Superior Court against the Company, the Bank and certain directors and
officers seeking unspecified damages relating to the termination of such
officer's employment. The Company and individual defendants have filed an
answer and have asserted certain counterclaims. Although this complaint was
recently dismissed, it was dismissed without prejudice to the plaintiff's
right to refile the complaint by March 31, 1994. In April 1992, a complaint
was filed in the New Jersey Superior Court against the Company and the Bank
seeking unspecified damages and alleging violations of state securities laws,
certain banking laws and state common law. In February 1994, the plaintiffs
amended their complaint to add claims against nine individual defendants,
including current and former officers and directors of the Company and the
Bank. This lawsuit is in the discovery stage. Management believes that the
defendants have meritorious defenses in both of these actions and intends to
vigorously defend these actions. Given the uncertainties involved in judicial
proceedings and the preliminary stage of discovery in these matters,
management cannot determine the precise amount of any potential loss that may
arise in these matters. Accordingly, no provision for loss, if any, that may
result upon resolution of these matters has been recorded in the Company's
financial statements.
The Bank is also subject to other legal proceedings involving collection
matters, contract claims and miscellaneous items arising in the normal course
of business. It is the opinion of management that the resolution of such legal
proceedings will not have a material impact on the financial statements of the
Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of the year ended December 31, 1993.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and business experience of
the Company's executive officers. Where dates are not given, the periods
extend back until at least January 1, 1989.
Positions Held and Business Experience for
Name Age Past Five Years
- ---- --- ------------------------------------------
Paul C. Rotondi...... 69 Chairman of the Board and Chief Executive
Officer of the Company and the Bank.
Theodore J. Doll..... 49 President and Chief Operating Officer of the
Company and the Bank since December 26, 1989.
Executive Vice President of the Company and the
Bank from October through December 1989. Prior
to October 1989, Mr. Doll had been retired.
Ronald J. Pearce..... 46 Senior Vice President and Senior Lending Officer
of the Bank since December 1989. Prior to
December 1989, Vice President and Senior
Mortgage Lending Officer of the Bank.
Thomas S. Bingham.... 34 Secretary, Treasurer and Chief Financial Officer
of the Company since April 1990. Senior Vice
President and Treasurer of the Bank since
December 1989. Prior to December 1989,
Comptroller of the Bank.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded over-the-counter on the Nasdaq National Market
under the symbol: WBNC. The quarterly price range of Common Stock for the last
two years is as follows:
Closing sale price
------------------
High Low
---- ---
1992 1st Quarter . . . . . . . . . $ 5.00 $3.50
2nd Quarter . . . . . . . . . 5.75 4.00
3rd Quarter . . . . . . . . . 6.00 4.75
4th Quarter . . . . . . . . . 7.50 5.75
1993 1st Quarter . . . . . . . . . $ 8.25 $6.50
2nd Quarter . . . . . . . . . 8.00 6.25
3rd Quarter . . . . . . . . . 8.00 6.25
4th Quarter . . . . . . . . . 14.50 7.50
For information regarding the agreed upon sale price in the Agreement,
see Item 1 of this Annual Report on Form 10-K.
As of December 31, 1993, the number of shareholders of record was 759.
DIVIDENDS DECLARED ON COMMON STOCK
During 1993 and 1992, the Company was subject to a Memorandum of
Understanding with the FRB which required FRB approval prior to the payment of
any cash dividends. The Memorandum of Understanding was rescinded in January
1994. No dividends have been declared subsequent to that date. Due to the
Agreement with Hubco, the Company does not anticipate declaring a dividend.
For additional information regarding dividend restrictions, see Item 1 of this
Annual Report on Form 10-K and Note 13 of the Notes to Consolidated Financial
Statements.
8
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements of the Company and the accompanying
Notes thereto, which are presented elsewhere herein.
Year ended December 31,
---------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Operating data:
Interest income . . . . . . $ 18,557 $ 21,879 $ 27,594 $ 31,301 $ 33,142
Interest expense. . . . . . 8,812 12,190 19,119 22,543 23,730
-------- -------- -------- -------- --------
Net interest income . . . . 9,745 9,689 8,475 8,758 9,412
Provision for losses on
loans. . . . . . . . . . . 420 1,100 1,500 2,350 6,927
-------- -------- -------- -------- --------
Net interest income after
provision for losses on
loans. . . . . . . . . . . 9,325 8,589 6,975 6,408 2,485
Other income. . . . . . . . 949 2,290 2,569 859 585
Other expenses. . . . . . . 8,768 8,694 9,306 10,674 7,959
-------- -------- -------- -------- --------
Income/(loss) before income
taxes, extraordinary items
and change in accounting
principle. . . . . . . . . 1,506 2,185 238 (3,407) (4,889)
Income tax expense/
(benefit) . . . . . . . . . (1,018) 628 552 (1,538) (989)
-------- -------- -------- -------- --------
Income/(loss) before
extraordinary items and
change in accounting
principle. . . . . . . . . 2,524 1,557 (314) (1,869) (3,900)
Extraordinary items . . . . -- 539 (1,034) -- --
Change in accounting
principle. . . . . . . . . 300 -- -- -- --
-------- -------- -------- -------- --------
Net income/(loss) . . . . . $ 2,824 $ 2,096 $ (1,348) $ (1,869) $ (3,900)
======== ======== ======== ======== ========
Per Share Data:
Weighted average number of
common shares outstanding
(in thousands) . . . . . . 2,297 2,276 2,264 2,264 2,262
Dividends per share . . . . $ -- $ -- $ -- $ 0.07 $ 0.28
Income/(loss) per share:
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle. . . . . . . . . $ 1.10 $ 0.68 $ (0.14) $ (0.83) $ (1.72)
Extraordinary items. . . . -- 0.24 (0.46) -- --
Cumulative effect of change
in accounting principle. . .13 -- -- -- --
-------- -------- -------- -------- --------
Net income/(loss) per
share . . . . . . . . . . $ 1.23 $ 0.92 $ (0.60) $ (0.83) $ (1.72)
======== ======== ======== ======== ========
Balance Sheet Summary:
Investment and mortgage-
backed securities. . . . . $ 92,264 $ 67,576 $ 56,455 $ 79,904 $ 57,677
Loans, net. . . . . . . . . 170,185 191,501 195,508 230,557 244,714
Total assets. . . . . . . . 282,635 285,771 293,727 337,626 351,281
Deposits. . . . . . . . . . 246,043 252,623 259,021 275,327 273,383
Advances from FHLB. . . . . 400 -- -- 28,500 40,500
Stockholders' equity. . . . 33,541 30,469 28,216 29,215 30,830
Performance Ratios:
Return on average assets. . 0.99% 0.72% (0.42%) (0.54%) (1.08%)
Return on average equity. . 8.98 7.21 (4.72) (6.16) (11.16)
Dividend payout . . . . . . -- -- -- (8.43) (16.54)
Average equity to average
assets . . . . . . . . . . 11.04 10.03 8.91 8.78 9.70
Net interest margin . . . . 3.58 3.55 2.80 2.65 2.69
Asset Quality Ratios:
Allowance for losses on
loans to total loans,
net. . . . . . . . . . . . 1.66% 1.45% 1.53% 1.12% 1.93%
Allowance for losses on
loans to nonperforming
loans. . . . . . . . . . . 21.84 31.52 17.97 14.86 27.01
Allowance for losses on
loans and REO to non-
performing assets. . . . . 21.49 19.39 14.14 12.00 18.77
Non-performing loans to
total loans, net. . . . . 7.61 4.60 8.51 7.52 7.14
Non-performing assets to
total loans, net plus
other real estate, net . . 11.30 10.66 14.03 11.83 9.96
Net charge-offs to average
loans, net . . . . . . . . 0.19 0.66 0.47 1.89 2.07
9
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is an analysis of the financial condition and
results of operations of the Company for the years ended December 31, 1993,
1992 and 1991 and should be read in conjunction with the Consolidated
Financial Statements of the Company and accompanying Notes thereto, which
are presented elsewhere herein.
OVERVIEW
During 1993, the Company and the Bank experienced the following:
(A) The Bankruptcy Loan
During the first quarter, a Chapter 11 bankruptcy petition was filed by
the obligor of an approximately $9.0 million loan, a loan on which the Bank
currently has a first mortgage and an assignment-of-rents (the "Bankruptcy
Loan"). On November 10, 1993, the Court dismissed the bankruptcy petition.
Nevertheless, the Bank did not receive any of the rental payments from April
1993 through November 1993, as the payments were made to a
debtor-in-possession account and, pursuant to a Court Order, were released to
the City of Philadelphia to pay a substantial portion of property tax
arrearages. Rental payments were resumed to the Bank in December 1993. On
January 29, 1994, the Bank paid approximately $450,000 to the City of
Philadelphia to resolve all remaining property tax arrearages and to pay 1994
property taxes. The amount of such payment was capitalized into the Bankruptcy
Loan balance. The interest income which would have been recorded had the
rental payments been received and the actual income recorded approximated
$580,000 and $295,000, respectively, for the year ended December 31, 1993. The
Bank continues to classify the Bankruptcy Loan as a nonaccrual loan.
Management believes that, based on an August 2, 1993 appraisal of $12.2
million, the Company has adequate collateral with respect to the Bankruptcy
Loan and anticipates collection of the outstanding principal balance thereof.
The Bank anticipates that the Bankruptcy Loan will be renegotiated during
1994. At December 31, 1993, there was no accrued interest receivable on the
Company's financial statements for the Bankruptcy Loan and approximately
$264,000 of the general reserve of the allowance for losses on loans was
allocated for the Bankruptcy Loan.
The Bankruptcy Loan is secured by an approximately 450,000 square foot
building which is rented to the Internal Revenue Service (the "IRS") under a
lease which is cancelable by the IRS upon 60 days' notice. The building is
situated in northeast Philadelphia in a site with two other IRS facilities.
The IRS announced in early December 1993 that this site will be converted into
a customer service center with an approximate loss of 2,500 permanent and
seasonal jobs. It has been reported in the press that the process of reducing
the workforce at the northeast Philadelphia center will begin in 1996 and be
completed in 1999. The effect, if any, of the conversion and reduction in
workforce on the building securing this loan is unknown at this time.
(B) Regulatory Restrictions Rescinded
During the third quarter, the FDIC completed its examination of the Bank
as of August 2, 1993. As a result of that examination, the FDIC and the
Banking Department rescinded the Memorandum of Understanding which the Bank
had signed on December 22, 1992 with the FDIC and the Banking Department in
connection with their examination as of July 13, 1992.
Subsequently, the FRB completed an off-site analysis of the Company. As a
result of that analysis, in January 1994, the FRB rescinded the Memorandum of
Understanding, which the Company had signed on August 13, 1991 with the FRB in
connection with its examination as of December 31, 1990.
(C) Prepayment
During the fourth quarter, a first mortgage of $7.0 million and a
revolving line of credit of $1.4 million to one borrower were prepaid (the
"Prepaid Loan"). These performing loans, which had a weighted average yield of
9.8%, had collectively been the Bank's second largest loan concentration and
had been one of two loan concentrations, the other being the Bankruptcy Loan,
with a concentration greater than 10% of stockholders' equity.
(D) Merger With Hubco, Inc.
On November 8, 1993, the Company and the Bank signed a definitive
agreement (the "Agreement") providing for the merger of the Company with and
into Hubco, Inc. ("Hubco") and, immediately following, the merger of the
10
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<PAGE>
Bank with and into Hudson United Bank, both of Union City, New Jersey. Under
the terms of the Agreement, shareholders of the Company will receive either
$16.10 in cash or .6708 of a share of new Series A Convertible Preferred Stock
of Hubco for each share of the Company's common stock. In addition, the Company
issued an option to Hubco, exercisable in certain circumstances, to acquire
765,000 shares of its authorized but unissued common stock at a price of $11.50
per share. The Agreement is subject to several conditions, including regulatory
and shareholder approvals. Since significant conditions to effect the merger
have not occurred, most merger costs are not included in the 1993 results of
operations.
NET INCOME
Net income for the year ended December 31, 1993 was $2.8 million, or
$1.23 per share, as compared with net income of $2.1 million, or $0.92 per
share, for the year ended December 31, 1992. Income before extraordinary item
and change in accounting principle for the year ended December 31, 1993 was
$2.5 million, or $1.10 per share, as compared with income before extraordinary
item and change in accounting principle of $1.6 million, or $.68 per share,
for the year ended December 31, 1992. Included in 1993 net income is $300,000,
or $0.13 per share, due to the cumulative effect of a change in accounting for
income taxes. During 1992, an extraordinary credit in the amount of $539,000,
or $.24 per share, was recorded to utilize net operating loss carryforwards.
There were no extraordinary items in 1993.
A comparison between the two most recent years' net income, and income
before extraordinary items and cumulative effect of change in accounting
principle, is significantly affected by income tax matters. In 1993, an income
tax benefit of $1.0 million was recorded as a result of a $809,000 reduction
in the deferred tax asset valuation allowance (to a zero balance) and an
income tax refund of $747,000, offset by current taxes of approximately
$538,000. In 1992, income tax expense of $628,000 was a result of current
taxes.
Excluding the above items, income before income taxes, extraordinary
items, and cumulative effect of change in accounting principle decreased to
$1.5 million for the year ended December 31, 1993 from $2.2 million for the
year ended December 31, 1992. The decrease of approximately $700,000 was
primarily the result of a decrease in net security gains of $1.6 million; an
increase in REO expense (net) of $286,000; and a decrease in gains on sale of
loans of $40,000. These items were partially offset by a decrease in the
provision for losses on loans of $680,000; a decrease of $214,000 in occupancy
and equipment expense; a $187,000 gain on sale of a bank building in 1993;
interest income of $136,000 on the aforementioned income tax refund; and an
increase in net interest income of $57,000. For a more detailed discussion of
each such item, see "Results of Operations--1993 Compared to 1992."
SECURITIES PORTFOLIO
Two main objectives of the securities portfolio is to maintain a high
standard of quality and liquidity. Quality is dictated by the investment
policy which permits, but is not limited to, investment in Federal funds sold,
U.S. Treasury securities, U.S. government agency securities, corporate bonds
and notes with a minimum rating of AA, commercial paper, bankers acceptances
and certain mortgage-backed securities. Except for the required investment in
equity securities of the Federal Home Loan Bank of New York (the "FHLB"),
investment in equity securities is not permitted by the investment policy. The
liquidity objective is to maintain sufficient liquidity for deposit
withdrawals, loan demand and operating expenses.
During 1993, the Financial Accounting Standards Board (the "FASB") issued
and the Company adopted Statement of Financial Accounting Standards No. 115:
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 requires entities to classify their securities into either a
held-to-maturity, available-for-sale or trading category. Most of the
Company's securities are classified as available-for-sale securities because
such securities may be sold prior to maturity for various reasons, even though
management currently does not intend to sell such securities.
Available-for-sale securities are accounted for at fair value with fair value
changes reported as a separate component of stockholders' equity, net of
applicable taxes. The cumulative effect of the change in accounting principle
as of the end of fiscal year 1993 was to increase the carrying value of
securities by $286,000, decrease the net deferred tax asset by $100,000 and
increase stockholders' equity by $186,000.
11
<PAGE>
<PAGE>
Below are the combined carrying values of securities available-for-sale
and held-to-maturity at year-end for the last three years:
December 31,
--------------------------
1993 1992 1991
---- ---- ----
(Dollars in thousands)
Short-term securities:
Federal funds sold . . . . . $ 1,900 $ 3,000 $18,300
------- ------- -------
Investment securities:
U.S. Treasury. . . . . . . . 65,368 19,090 52,786
U.S. Government agencies . . 505 5,611 --
Corporate bonds and notes. . 4,139 24,841 --
Other securities . . . . . . 1,577 9,188 --
------- ------- -------
Total investment securities 71,589 58,730 52,786
------- ------- -------
Mortgage-backed securities. . 18,964 7,213 1,517
------- ------- -------
Total securities portfolio. $92,453 $68,943 $72,603
======= ======= =======
At December 31, 1993 and 1991, there were no securities to any one issuer
(other than the Federal government) which exceeded 10% of stockholders'
equity. At December 31, 1992, aggregate securities totalling $4.2 million with
General Electric Corporation and $3.6 million with IBM Credit Corporation were
the only securities to any one issuer (other than the Federal government)
which exceeded 10% of stockholders' equity. Reference is made to footnote 3 of
the Notes to Consolidated Financial Statements for information concerning
market values, gross unrealized gains and losses, and weighted average yields
of investment and mortgage-backed securities.
Short-term securities
Short-term securities are comprised solely of overnight Federal funds
sold. Federal funds sold averaged $6 million, $12 million and $7 million in
1993, 1992 and 1991, respectively, while year end balances were $1.9 million,
$3.0 million and $18.3 million, respectively. The average amount of Federal
funds sold for 1992 was higher than comparable years because the Company had
excess funds from the sale of U.S. Treasury securities which were invested in
overnight Federal funds sold until certain callable securities were available.
The large Federal funds position at year end 1991 was due to sales of
performing loans during the last week of 1991.
Investment securities
Investment securities (including securities available for sale) were
$71.6 million at December 31, 1993 as compared to $58.7 million at December
31, 1992, and averaged $54.3 million in 1993 as compared to $53.0 million in
1992. The 1993 year end balance is significantly higher than the comparable
1992 balance because funds from the Prepaid Loan were placed in investment
securities. The 1993 average balance is only slightly more than the comparable
1992 average balance because the Prepaid Loan was prepaid in the fourth
quarter of 1993. As of December 31, 1992, 75% of U.S. Government agencies and
corporate bonds and notes had call dates at various times during 1993 and
1994. As anticipated, $18.8 million of such investment securities were called
during 1993. In addition, there were $12.6 million of sales and $17.0 million
of maturities. A portion of the proceeds from such calls, sales, and
maturities were used to purchase $62.6 million of investment securities with
a weighted average yield of 4.28% and a weighted average maturity of 3.1
years. The majority of the purchases were U.S. Treasury securities. At
December 31, 1993, there were $5.6 million of securities with 1994 call dates.
Mortgage-Backed Securities
Mortgage-backed securities (including securities available for sale) were
$19.0 million at December 31, 1993 as compared to $7.2 million at December 31,
1992, and averaged $18.9 million in 1993 as compared to $2.6 million in 1992.
The increases in both the 1993 year-end balance and 1993 average balance were
due to a change in investment strategy. Proceeds from loan payoffs and
investment security maturities and calls were used to purchase mortgage-backed
securities of $23.2 million during 1993. At the time of purchase, these
securities had an estimated weighted average life of approximately 2.9 years
and a weighted average yield to average life of 6.05%. However, due
12
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<PAGE>
to declining interest rates during 1993, prepayments on the mortgage-backed
securities portfolio occurred more rapidly than originally anticipated,
resulting in increased premium amortization of $227,000 during 1993. The
effect of increasing premium amortization was to decrease the weighted average
yield on the mortgage-backed portfolio 120 basis points to 4.85% for 1993.
LOANS; NONPERFORMING ASSETS; REO; AND ALLOWANCE FOR LOSSES ON LOANS AND REO
Loans
Total loans (including loans held for sale) were $174.0 million at
December 31, 1993 as compared to $195.4 million at December 31, 1992, and
averaged $189.2 million in 1993 as compared to $201.8 million in 1992. The
primary reasons for the decrease in loans was the prepayment of the Prepaid
Loan and the sale of $8.7 million of one-to-four family performing mortgage
loans. As of December 31, 1993, there were approximately $4.9 million of loans
classified as held for sale as compared to $9.0 million at December 31, 1992.
The primary market area for lending encompasses Hudson and Bergen counties,
New Jersey.
Below are the year-end balances and percentages of year-end total loans,
excluding loans held for sale, for the most recent five years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
1-4 family . . . . . . . . $109,211 64.58% $125,858 67.51% $135,133 67.64% $162,612 69.22% $166,823 66.37%
Multifamily/commercial . . 53,860 31.85 52,743 28.29 55,940 28.00 58,993 25.11 58,561 23.30
Construction . . . . . . . 3,283 1.95 2,533 1.36 1,449 0.73 2,192 0.93 3,530 1.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans. . 166,354 98.38 181,134 97.16 192,522 96.37 223,797 95.26 228,914 91.08
Commercial/financial. . . . 1,422 0.84 3,552 1.91 4,081 2.04 5,275 2.25 11,539 4.59
Consumer and other loans. . 1,322 0.78 1,731 0.93 3,176 1.59 5,859 2.49 10,894 4.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans. . . . . . . . 169,098 100.00% 186,417 100.00% 199,779 100.00% 234,931 100.00% 251,347 100.00%
====== ====== ====== ====== ======== ======
Less: Allowance for losses
on loans, deferred loan
fees and unearned income . 3,765 3,916 4,271 4,374 6,633
-------- -------- -------- -------- --------
Net loans. . . . . . . . . $165,333 $182,501 $195,508 $230,557 $244,714
======== ======== ======== ======== ========
</TABLE>
One-to-Four Family Mortgage Loans--Conventional mortgage loans
collateralized by mortgages on one-to-four family residences are obtained
primarily from existing customers, mortgage brokers, and referrals by real
estate brokers and local attorneys. The Company offers fixed rate loans and
adjustable rate mortgage ("ARM") loans, the interest rates on which adjust
generally based on half-year, 1 year and 3 year Treasury indices. During 1993,
the Company originated approximately $11.4 million of one-to-four family
loans, sold or identified for sale $9.5 million, transferred to REO $1.5
million, incurred charge offs of $0.3 million and received principal payments
of $16.8 million.
Of the one-to-four family loans, 82.2% and 88.1% were ARM loans at
December 31, 1993 and 1992, respectively. ARM loans generally have annual
interest rate adjustment limitations of 1% to 2% and a lifetime interest rate
adjustment limitation of 6%. These limitations, based on the initial rate,
limit the interest rate sensitivity of such loans during a period of rapidly
changing interest rates. The interest rate adjustments of ARM loans may
increase the likelihood of refinances during periods of substantial declining
interest rates and increase the likelihood of delinquencies during periods of
substantial rising interest rates.
Multi-family/Commercial Real Estate Loans--The mortgage loan portfolio
includes mortgage loans collateralized by multi-family, mixed-use and
commercial real property. The multi-family real property serving as collateral
for these loans consists primarily of residential buildings with ten or fewer
residential units, as well as buildings with four or fewer residential units
where at least one of the units is used for commercial purposes. During 1993,
the Company originated $11.6 million of multi-family/commercial real estate
loans, transferred to REO $1.9
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million, charged off $0.2 million and received principal payments of $8.3
million, the largest of which was the $7.0 million first mortgage relating to
the Prepaid Loan.
As of December 31 1993, there were seven commercial real property loans
greater than $1 million, which loans approximated $20.2 million, or 37.5%, of
the multi-family/commercial real estate portfolio. The largest of these loans
is the Bankruptcy Loan. The remaining six loans are performing. Refer to the
"Overview" section for a discussion of the Bankruptcy Loan.
Certain of the multi-family/commercial mortgage loans are "balloon"
loans, which are amortized over significantly longer periods than their term
to maturity. These loans involve a greater risk to the Company because the
principal amount may not be significantly reduced prior to maturity. Moreover,
upon maturity, changes in the financial condition of the borrower may affect
the ability of the borrower to repay the loan. At December 31, 1993 and 1992,
the multi-family/commercial mortgage loan portfolio included $29.4 million and
$17.9 million of "balloon" loans, comprising 54.6% and 34.0% of
multi-family/commercial loans, and comprising 17.4% and 9.6% of total loans
(excluding loans held for sale), respectively.
Construction Loans--The Company has granted construction loans primarily
for the purpose of rehabilitating multi-family/commercial dwellings. Such
loans are generally one year, floating-rate loans. During 1993, the Bank
originated $3.5 million of construction loans, transferred to REO $0.3 million
and refinanced $2.4 million into first mortgages. The amount of undisbursed
construction funds was $0.9 million as of December 31, 1993 and $0.2 million
as of the prior year-end.
Commercial/Financial Loans--At year end 1993, the commercial/financial
loan portfolio consisted primarily of two revolving lines of credit to one
borrower whose collective balance was $1.2 million. These lines of credit are
used for real estate development and are collateralized by various properties
with an aggregate loan-to-value ratio of less than than 50%. The Company has
discontinued making commercial and financial loans except to honor existing
revolving lines of credit to such borrower.
During 1993, the Company honored $1.1 million of drawdowns against
existing lines of credit to performing loan borrowers, transferred to REO $0.2
million, and received principal payments of $3.1 million, the largest of which
was a $1.4 million line of credit prepayment relating to the Prepaid Loan.
Consumer and Other Loans--The Company has granted both collateralized and
uncollateralized personal loans, automobile loans, loans collateralized by
deposit accounts, second mortgages on principal residences and second
mortgages on investment residential properties. Such second mortgages
represented $0.7 million, or 53.8%, of total consumer and other loans as of
December 31, 1993, as compared to $1.1 million, or 64.5%, of total consumer
and other loans as of December 31, 1992. Such second mortgages generally are
limited to the difference between 75% of the appraised value of the property
and the amount of other indebtedness collateralized thereby. Generally, the
current terms of second mortgage loans have maturities of 1 or 3 years with a
maximum 15-year amortization. Upon maturity, the Company will either demand
repayment or renegotiate the loan. Also during 1993, a new home improvement
loan product was offered to low and moderate income households and provided
home improvement loans aggregating $106,000 to homeowners in Bergen County.
During 1993, the Bank granted $0.4 million of consumer and other loans,
transferred to REO $0.3 million, charged-off $0.1 million and received
principal payments of $0.4 million.
Nonperforming Assets
Nonperforming assets are comprised of nonperforming loans (i.e.,
nonaccrual loans, loans past due over 90 days and still accruing, and
troubled-debt restructurings) and REO. Reference is made to footnote 1 of the
Notes to Consolidated Financial Statements for an explanation of the
accounting policies regarding nonaccrual loans and REO. Troubled-debt
restructurings represent loans (other than loans to individuals for household,
family, and other expenditures; and real estate loans secured by one-to-four
family residential properties) to borrowers who experienced repayment
difficulties for which concessions were granted that provide for more
preferential terms than the current market for new debt with similar risks.
Interest on loans that have been restructured is recognized according to the
new terms.
14
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Below are year-end balances of nonperforming assets and the ratio of
nonperforming assets to total assets for the most recent five years:
December 31,
-------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans. . . . . . $12,798 $ 8,599 $16,022 $17,351 $17,474
Troubled-debt
restructurings . . . . . . 152 207 612 -- --
Loans past due over 90 days
and still accruing . . . . -- -- -- -- --
------- ------- ------- ------- -------
Nonperforming loans. . . . 12,950 8,806 16,634 17,351 17,474
REO, net. . . . . . . . . . 7,078 12,998 12,563 11,294 7,674
------- ------- ------- ------- -------
Nonperforming assets . . . $20,028 $21,804 $29,197 $28,645 $25,148
======= ======= ======= ======= =======
Nonperforming assets to
total assets . . . . . . . 7.1% 7.6% 9.9% 8.5% 7.2%
=== === === === ===
During 1993, nonperforming loans and nonaccrual loans increased 47.1% and
48.8%, respectively, primarily due to the addition of the Bankruptcy Loan to
nonaccrual status. Excluding the Bankruptcy Loan, nonaccrual loans were $4.0
million as of December 31, 1993 as compared to $8.6 million as of December 31,
1992, a decrease of 53.5%. The decrease in nonperforming loans, excluding the
Bankruptcy Loan, was primarily attributable to bringing current $2.9 million,
transferring to REO $2.5 million, receiving repayments of $2.0 million and
charging off $0.3 million, offset by additional nonperforming loans of $3.1
million. Refer to the "Overview" section for a discussion of the Bankruptcy
Loan.
With regards to the $152,000 troubled-debt restructured loan, the
borrower has remained current with the restructured terms since the
restructuring in 1991. At that time, the loan was $616,000; it has been
reduced to $612,000 as of December 31, 1991 through payments. During 1992, the
loan was partially charged-off in the amount of $285,000 based on data
available to the Bank. That amount may be recovered in the future if the
borrower continues to remain current, although no assurances can be given that
such a recovery will occur. All other declines in the loan balance are
attributable to repayment of principal. The Company did not recognize any
income on this loan during 1993.
Based upon the accounting policies as more fully described in Note 1 to
the Consolidated Financial Statements, there are no loans past due more than
90 days and still accruing.
Interest on nonperforming loans which would have been recorded based upon
original contract terms would have approximated $826,000, $609,000, $975,000,
$824,000 and $222,000 for the years 1993, 1992, 1991, 1990 and 1989,
respectively. Interest income on those loans, which was recorded only when
received, amounted to $223,000, $416,000, $548,000, $536,000 and $140,000 for
the years 1993, 1992, 1991, 1990 and 1989, respectively.
Other Real Estate Owned
REO consists of real estate properties acquired through foreclosure or
deed in lieu of foreclosure and "in-substance" foreclosures ("ISF"). ISF
represent loans accounted for as foreclosed property even though the Bank does
not have title to the property. (For an explanation as to why a loan is
classified as an ISF, refer to footnote 1 of the Notes to Consolidated
Financial Statements). When all other efforts to restructure a loan have
failed to produce an equitable resolution of the delinquency, the often
time-consuming foreclosure process is initiated. Foreclosure is the final step
in the process of realizing some value on a seriously delinquent loan.
Management would prefer not to have to foreclose but in order to protect its
interest this action sometimes must be taken.
15
<PAGE>
<PAGE>
For the most part, REO is geographically concentrated in New Jersey as
described in the table below:
Amount Percentage
------ ----------
(Dollars in thousands)
Hudson County . . . . . . . . . . . . . . . . $4,704 66.4%
Bergen County . . . . . . . . . . . . . . . . 804 11.4
Other Counties. . . . . . . . . . . . . . . . 1,570 22.2
------ -----
Total REO . . . . . . . . . . . . . . . . . . $7,078 100.0%
====== =====
Such geographic concentration has enabled management to develop some
expertise in ascertaining property market values and establishing contact with
potential purchasers. Below is the activity in REO for the last three years:
<TABLE>
<CAPTION>
1993 1992 1991
------------------- ------------------ ------------------
Number of Number of Number of
Properties Amount Properties Amount Properties Amount
---------- ------ ---------- ------ ---------- ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Beginning of year . . . . 69 $13.0 64 $12.6 58 $11.3
Additions . . . . . . . . 34 4.2 33 5.3 45 9.6
Sales . . . . . . . . . . (43) (9.1) (28) (4.0) (39) (7.1)
Provision for losses. . . -- (1.0) -- (0.9) -- (1.2)
--- ----- --- ----- --- -----
End of year . . . . . . . 60 $ 7.1 69 $13.0 64 $12.6
=== ===== === ===== === =====
</TABLE>
Management generally attempts to sell REO as quickly as possible, as is
illustrated by the sales of REO as a percent of prior year balances. However,
in most situations, the lengthy foreclosure process has hindered management
from taking title to REO for at least two years. In certain other cases,
management has decided to hold collateral until it is more marketable. In such
instances, management may seek to enhance the value of such properties through
various means, including capital improvements, tax appeals, and procurement of
development approvals. Of the properties that were in REO as of December 31,
1992, 33 were still in REO as of December 31, 1993 and had a carrying value of
$4.2 million as of year-end 1993. Of such 33 properties, the titles to 15
properties aggregating $1.6 million have still not been obtained, primarily
due to the lengthy foreclosure process.
The dollar distribution of REO properties, as of December 31, 1993, is as
follows:
<TABLE>
<CAPTION>
Number of
Properties Amount Average Balance
---------- ------ --------------
<S> <C> <C> <C>
Greater than $500,000 . . . . . . . . . . . . . . . . . . . . . . . . 1 $1,500,000 $1,500,000
Greater than $250,000 and less than or equal to $500,000. . . . . . . 2 900,000 450,000
Greater than $100,000 and less than or equal to $250,000. . . . . . . 21 3,278,000 156,000
Greater than $ 50,000 and less than or equal to $100,000. . . . . . . 9 702,000 78,000
Greater than $ 0 and less than or equal to $ 50,000 . . . . . . . . . 21 698,000 33,000
Equal to $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 -- --
-- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 $7,078,000 $ 118,000
== ========== ==========
</TABLE>
The largest REO property is a six-story 128,000 square foot commercial
use building located in Jersey City, New Jersey. The carrying value of $1.5
million at December 31, 1993 represented 21.1% of REO, net at December 31,
1993. For the year ended December 31, 1993, this property incurred carrying
costs (net of rental income) of $101,000, while being approximately 70%
rented.
16
<PAGE>
<PAGE>
Allowance for Losses on Loans and Allowance for Losses on REO
The following table presents, for the past five years, information
demonstrating the relationship among the allowance for losses on loans, the
provision for losses on loans, charge-offs, recoveries, and total and average
loans outstanding.
December 31,
--------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance, beginning of
year . . . . . . . . . . . $ 2,776 $ 2,989 $ 2,579 $ 4,720 $ 3,782
-------- -------- -------- -------- --------
Loans charged-off:
Real estate. . . . . . . . 524 932 719 1,525 2,503
Commercial . . . . . . . . 26 325 194 1,434 2,123
Consumer . . . . . . . . . 79 313 418 1,880 1,420
-------- -------- -------- -------- --------
Total loans charged-off . 629 1,570 1,331 4,839 6,046
-------- -------- -------- -------- --------
Recoveries on loans:
Real estate. . . . . . . . 124 97 32 105 1
Commercial . . . . . . . . 81 67 165 77 6
Consumer . . . . . . . . . 56 93 44 166 51
-------- -------- -------- -------- --------
Total recoveries. . . . . 261 257 241 348 58
-------- -------- -------- -------- --------
Net loans charged-off . . . 368 1,313 1,090 4,491 5,988
-------- -------- -------- -------- --------
Provision for losses on
loans. . . . . . . . . . . 420 1,100 1,500 2,350 6,926
-------- -------- -------- -------- --------
Allowance, end of year. . . $ 2,828 $ 2,776 $ 2,989 $ 2,579 $ 4,720
======== ======== ======== ======== ========
Total loans outstanding . . $169,098 $186,417 $199,779 $234,931 $251,347
======== ======== ======== ======== ========
Average loans outstanding
during the year. . . . . . $189,233 $201,829 $236,267 $240,008 $294,046
======== ======== ======== ======== ========
Net loans charged-off as a
percent of average loans
outstanding. . . . . . . . 0.19% 0.65% 0.46% 1.87% 2.04%
====== ====== ====== ====== ======
Allowance for losses on
loans as a percent of:
total loans outstanding . 1.67% 1.49% 1.50% 1.10% 1.88%
====== ====== ====== ====== ======
total nonperforming loans
outstanding. . . . . . . 21.84% 31.52% 17.97% 14.86% 27.01%
====== ====== ====== ====== ======
The 62% reduction in the provision for losses on loans for 1993 reflects
a 53% decrease in nonaccrual loans (excluding the Bankruptcy Loan, the
principal of which is perceived by management to be adequately collateralized)
to $4.0 million; a 6.2% reduction in average loan balances, of which one was
the Prepaid Loan; and a decrease in the ratio of net loans charged-off as a
percentage of average loans outstanding to 0.19% in 1993 from 0.65% in 1992.
Asset quality and adequacy of the allowance for losses is monitored on a
periodic basis. Additions to the allowance for losses on loans are made
through charges against earnings (the provision for losses on loans) and
recoveries on previously charged-off loans; the allowance is reduced when
loans are determined to be uncollectible and are charged-off. In establishing
the amount of the allowance (and hence the amount of the provision) for losses
on loans, management establishes percentage allocations with respect to the
performing loan portfolio and classified loans. In addition, specific
allocations are made for classified loans. In determining percentage
allocations for the performing loan portfolio and classified loans, management
considers prevailing and anticipated economic conditions, past and anticipated
loss experience, the diversification and size of the portfolio, off-balance
sheet risks, and the nature and level of nonperforming assets. In analyzing
classified loans, management considers the financial status and credit history
of the borrower, the value of collateral, the sufficiency of loan
documentation, analyses of bank regulators, and other factors considered
relevant by management on a loan-by-loan basis.
The entire allowance for losses on loans is available to absorb potential
losses from all loans. At the same time, the allowance may be allocated to
specific loans or loan categories. For purposes of complying with Securities
and
17
<PAGE>
<PAGE>
Exchange Commission disclosure requirements, the table below presents an
allocation of the entire allowance for losses on loans for the past five
years. The allocation of the allowance for losses on loans should neither be
interpreted as an indication of future charge-offs, nor as an indication that
charge-offs in future periods will necessarily occur in these amounts or in
the implied proportions. See the table at the beginning of "Loans;
Nonperforming Assets; REO; and Allowance for Losses on Loans and REO" for
information regarding loans outstanding in each loan category.
December 31,
-------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands)
Real estate:
1-4 family . . . . . . . . . . . . $1,485 $1,313 $ 953 $1,081 $ 905
Multifamily/commercial . . . . . . 1,287 1,286 1,324 665 1,334
Construction . . . . . . . . . . . 17 11 4 5 35
------ ------ ------ ------ ------
Total allowance for losses on
real estate loans . . . . . . . 2,789 2,610 2,281 1,751 2,274
Commercial/financial. . . . . . . . 21 110 458 447 1,219
Consumer and other loans. . . . . . 18 56 250 381 1,227
------ ------ ------ ------ ------
Total allowance for losses on
loans. . . . . . . . . . . . . . $2,828 $2,776 $2,989 $2,579 $4,720
====== ====== ====== ====== ======
The following table presents, for the past five years, information
demonstrating the relationship among the allowance for losses on REO, the
provision for losses on REO, charge-offs on REO sold, and total and average
REO outstanding:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year. . . . $ 1,802 $ 1,328 $ 976 $ -- $ --
Provision for losses on REO . . . . 1,024 852 1,170 1,673 --
Losses charged-off on REO sold. . . (946) (378) (818) (697) --
------- ------- ------- ------- ------
Allowance, end of year. . . . . . . $ 1,880 $ 1,802 $ 1,328 $ 976 $ --
======= ======= ======= ======= ======
Total REO outstanding. . . . . . . $ 8,958 $14,800 $13,891 $12,270 $7,674
======= ======= ======= ======= ======
Average REO outstanding during the
year . . . . . . . . . . . . . . . $10,689 $14,182 $10,147 $ 9,596 $1,910
======= ======= ======= ======= ======
Provision for losses on REO as a
percent of average REO
outstanding. . . . . . . . . . . . 9.58% 6.01% 11.53% 17.43% N/A
===== ===== ===== ===== ===
Allowance for losses on REO as a
percent of total REO outstanding. 20.99% 12.18% 9.56% 7.95% N/A
===== ===== ===== ===== ===
</TABLE>
The allowance for losses on REO is established through charges to
operations in the form of a provision for losses on REO that is reflected
(along with real estate taxes, repairs and maintenance, and insurance, net of
rental income and net gains on sales of REO) in the expense caption--"REO
expense, net." Factors considered in establishing the allowance for losses
on REO include appraisals of the fair market value of each property and/or
management's assessment of the overall real estate market for that type of
property in its condition and location.
The 1993 provision for losses on REO increased over the 1992 provision
for losses on REO primarily due to reducing the carrying value on the Bank's
largest REO property by $100,000 in 1993. The provision for losses on REO as a
percent of average REO outstanding increased to 9.58% from 6.01% due to the
sale of a $3.2 million parcel of REO in early 1993. The average balance of REO
in 1992 included the $3.2 million and thus lowered the provision for losses as
a percent of average REO outstanding. There was no allowance established
against the $3.2 million loan.
The allowance for losses on REO as a percent of total REO outstanding
increased to 20.99% in 1993 from 12.18% in 1992 partly due to the
aforementioned sale of a $3.2 million parcel of REO, as well as accumulated
provisions against the 33 properties aggregating $4.2 million which were
included in REO as of December 31, 1993 and 1992.
In total, during 1993, the provision for losses on loans and REO
approximated $1.4 million, of which $420,000 was a provision for losses on
loans and $1.0 million was a reduction in the carrying value of REO. The
allowances for
18
<PAGE>
<PAGE>
losses on loans and REO represented 36% of gross non-performing
assets (excluding the Bankruptcy Loan) at December 31, 1993 as compared to 21%
at December 31, 1992, and represented 21% of gross non-performing assets
(including the Bankruptcy Loan) at December 31, 1993 and 1992.
DEPOSITS AND FHLB ADVANCES
The Company offers a broad line of deposit accounts, including, but not
limited to, savings accounts, certificates of deposit ("CDs"), interest and
non-interest bearing checking accounts, individual retirement accounts,
holiday club accounts, business checking accounts and low-cost checking
accounts. The low-cost checking accounts are offered in connection with the
New Jersey Consumer Checking Account Law which recognizes the need to offer
low cost checking accounts to all people. Company policy does not permit
funding by brokered certificates of deposit.
During 1993, the Company continued to reduce rates on its deposit base,
reflecting market conditions. The rates on passbook savings decreased 75 basis
points to 2.50% at December 31, 1993 from 3.25% at December 31, 1992, a
decrease of 23%. The weighted average cost of funds for CDs at December 31,
1993 was 3.98%, as compared to 5.01% at December 31, 1992. As a result of the
lower yields on interest-bearing deposits, net withdrawals of CDs were $10.7
million and total interest-bearing deposits decreased $7.2 million during
1993. The average balance of CDs decreased from $142.1 million in 1992 to
$127.2 million in 1993, while the average balance of regular savings increased
from $95.3 million in 1992 to $102.1 million in 1993. The migration into
regular savings accounts improved net interest income since, on average, the
rates on regular savings accounts were 141 basis points less than the rates on
CDs.
A maturity distribution of the Company's CDs of $100,000 and over at
December 31, 1993 is presented in the following table:
December 31, 1993
---------------------------
Average
effective
interest rate Amount
------------- ------------
Market-rate certificates $100,000 and over maturing:
Three months or less . . . . . . . . . . . . . . 4.02% $2,754,760
Three months to six months . . . . . . . . . . . 3.32 1,710,739
Six months to one year . . . . . . . . . . . . . 4.12 1,819,949
One to two years . . . . . . . . . . . . . . . . 4.51 527,622
Two to three years . . . . . . . . . . . . . . . 4.99 701,366
Three to five years. . . . . . . . . . . . . . . 5.05 1,113,268
---- ----------
Total certificates of deposit $100,000 and over. 4.14% $8,627,704
==== ==========
The Company borrowed $400,000 in long term advances from the FHLB through
its Community Investment Program at a below-market interest rate of 4.88%
during 1993. The funds were used to originate a below-market interest rate loan
to a borrower that provides training and job placement assistance for
vocationally handicapped and economically disadvantaged individuals.
RESULTS OF OPERATIONS--1993 COMPARED TO 1992
Net Interest Income
The Company is principally engaged in the business of attracting deposits
from the general public and investing those funds in adjustable-rate mortgage
loans and investment securities. Accordingly, net interest income (the
difference between the income from interest-earning assets, such as loans and
investments, and the cost of interest-bearing liabilities, such as deposit
accounts and borrowed funds) remains a significant element in earnings.
19
<PAGE>
<PAGE>
The Yield/Cost Analysis sets forth, for the three years ended December
31, 1993, (i) average assets, liabilities and stockholders' equity, (ii)
interest income earned on interest-earning assets and interest expense paid on
interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, (iv) the
interest rate spread (i.e., the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities),
(v) the net yield on interest-earning assets (i.e., net interest income as a
percentage of average interest-earning assets), and (vi) the ratio of average
interest-earning assets to average interest-bearing liabilities. Yields and
costs are derived by dividing the interest income and interest expense by the
average balance of interest-earning assets and interest-bearing liabilities,
respectively, for the years shown. As a result, the effect of including
nonperforming loans in the average balances of loans outstanding is to reduce
the average yield earned on loans.
<TABLE>
<CAPTION>
Yield/Cost Analysis December 31,
----------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------ ---------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
------- ------- ------ ------- ------- ------ -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (1):
Mortgage. . . . . . . . $185,046 $14,419 7.79% $195,565 $17,548 8.97% $227,139 $21,790 9.59%
Commercial and
consumer . . . . . . . 4,187 363 8.67 6,264 493 7.87 9,128 826 9.05
-------- ------- -------- ------- -------- -------
Total loans. . . . . . 189,233 14,782 7.81 201,829 18,041 8.94 236,267 22,616 9.57
Investment securities. . 54,295 2,488 4.58 53,048 3,057 5.76 46,882 3,535 7.54
Mortgage-backed
securities. . . . . . . 18,899 916 4.85 2,606 193 7.41 10,438 849 8.13
Federal funds sold . . . 5,958 172 2.89 12,412 381 3.07 6,813 372 5.46
Deposits due from banks. 1,847 48 2.60 1,683 51 3.03 485 23 4.74
Federal Home Loan Bank
stock, at cost. . . . . 1,708 151 8.84 1,702 156 9.17 2,170 199 9.17
-------- ------- -------- ------- -------- -------
Total interest-earnings
assets. . . . . . . . 271,940 18,557 6.83 273,280 21,879 8.01 303,055 27,594 9.11
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-earnings
assets . . . . . . . . . 12,892 16,481 17,159
-------- -------- --------
Total assets . . . . . $284,832 $289,761 $320,214
======== ======== ========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Regular savings . . . . $102,071 2,976 2.92 $ 95,305 3,764 3.95 $ 80,326 4,356 5.42
Market-rate
certificates . . . . . 127,197 5,510 4.33 142,107 8,004 5.63 164,756 12,148 7.37
Checking and money
market accounts. . . . 11,590 308 2.66 11,517 422 3.66 11,704 645 5.51
Advances from FHLB and
ESOP debt. . . . . . . 363 18 4.96 26 1 3.85 23,558 1,970 8.36
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities. . . . . 241,221 8,812 3.65 248,955 12,191 4.90 280,344 19,119 6.82
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-bearing
liabilities:
Other deposits (2). . . 10,844 11,085 8,469
Other liabilities . . . 1,332 647 2,859
-------- -------- --------
Total noninterest-
bearing liabilities . 12,176 11,732 11,328
Stockholders' equity. . . 31,435 29,074 28,542
-------- -------- --------
Total liabilities and
stockholders' equity. $284,832 $289,761 $320,214
======== ======== ========
Net interest income/
interest rate spread . . $ 9,745 3.18% $ 9,688 3.11% $ 8,475 2.29%
======= ===== ======= ===== ======= =====
Net interest-earnings
assets/net yield on
interest-earnings
assets . . . . . . . . . $ 30,719 3.58% $ 24,325 3.55% $ 22,711 2.80%
======== ===== ======== ===== ======== =====
Ratio of interest-earning
assets to interest-
bearing liabilities. . . 1.13x 1.10x 1.08x
===== ===== =====
- --------------
<FN>
(1) Includes nonperforming loans and loans held for sale, and excludes REO
(in-substance and by deed). Also, loan fees are included in interest
income.
(2) Includes regular checking and escrow accounts.
</FN>
</TABLE>
20
<PAGE>
<PAGE>
Changes in net interest income are a result of the relative volume of
interest-earning assets and interest-bearing liabilities and the rates earned
and paid on them, respectively. Net interest income can also be analyzed in
terms of the impact of changing rates and changing volumes. The Bank's
Rate/Volume Analysis reflects the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense
during the periods indicated. Changes attributable to both volume and rate
have been allocated proportionately.
Rate/Volume Analysis
<TABLE>
<CAPTION>
1993 compared to 1992 1992 compared to 1991
-------------------------- -------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------ ------------------
Volume Rate Net Volume Rate Net
------- ---- ---- ------ ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Mortgage loans (1) . . . . $ (944) $(2,185) $(3,129) $(3,029) $(1,213) $(4,242)
Commercial and consumer
loans (1) . . . . . . . . (163) 33 (130) (259) (74) (333)
Investment securities. . . 72 (641) (569) 465 (942) (477)
Mortgage-backed securities 1,207 (484) 723 (637) (19) (656)
Federal funds sold . . . . (198) (11) (209) 306 (297) 9
Federal Home Loan Bank
stock . . . . . . . . . . 1 (6) (5) (43) -- (43)
Deposits due from banks. . 5 (8) (3) 57 (29) 28
------ ------ ------ ------ ------ ------
Total interest income . . (20) (3,302) (3,322) (3,140) (2,574) (5,714)
------ ------ ------ ------ ------ ------
Interest Expense:
Regular savings. . . . . . 267 (1,055) (788) 812 (1,404) (592)
Market rate certificates . (840) (1,654) (2,494) (1,670) (2,474) (4,144)
Checking and money market
accounts. . . . . . . . . 3 (117) (114) (10) (213) (223)
Advances from FHLB and ESOP
debt. . . . . . . . . . . 13 4 17 (1,968) (1) (1,969)
------ ------ ------ ------ ------ ------
Total interest expense. . (557) (2,822) (3,379) (2,836) (4,092) (6,928)
------ ------ ------ ------ ------ ------
Changes in net interest
income . . . . . . . . . . $ 537 $ (480) $ 57 $ (304) $1,518 $1,214
====== ======= ====== ====== ====== ======
<FN>
(1) Includes nonperforming loans and loans held for sale, and excludes REO
(in-substance and by-deed). Also, loan fees are included in interest
income.
</FN>
</TABLE>
Net interest income increased $57,000, or 0.60%, to $9.7 million in 1993.
During 1993, net interest-earning assets increased (primarily due to a
reduction in REO), yields of interest-bearing liabilities declined more
rapidly than yields of interest-earning assets, and higher costing CDs
migrated into lower costing passbook savings accounts. These factors were
largely offset by $580,000 of foregone interest from the Bankruptcy Loan.
During 1993, the interest rate spread increased slightly to 3.18% from 3.11%
in 1992.
Total interest income decreased $3.3 million, or 15.2%, during 1993,
primarily due to $580,000 of foregone interest from the Bankruptcy Loan, lower
yields earned on substantially all interest-earning asset categories, and a
change in the mix of interest-earning assets. Average yields on the Company's
two largest interest-earning assets, the mortgage loan and investment
portfolios, declined 118 basis points during 1993. Such declines reflect
declining market interest rates and the foregone interest on the Bankruptcy
Loan. In addition, the mix of interest-earning assets negatively impacted
interest income, as higher yielding assets, such as mortgage loans which
earned 7.79% on average in 1993, were sold and reinvested in lower yielding
assets, such as mortgage-backed securities which yielded 4.85%. The average
balance of mortgage-backed securities increased from $2.6 million in 1992 to
$18.9 million in 1993, while the average balances of mortgages loans and
commercial and consumer loans decreased from $195.6 million and $6.3 million,
respectively, in 1992 to $185.0 million and $4.2 million, respectively, in
1993. The average balance of mortgage-backed securities increased due to
purchases which were funded by calls and maturities of investment securities
and loan payoffs. The average balance of mortgage loans decreased due to sales
of one-to-four family performing mortgage loans and the prepayment of the
first mortgage portion of the Prepaid Loan. The decrease in the average
balance of commercial and consumer loans reflects the prepayment of the line
of credit portion of the Prepaid Loan and other prepayments.
21
<PAGE>
<PAGE>
Total interest expense decreased $3.4 million, or 27.7%, in 1993 due to
lower rates paid on most interest-bearing liabilities, a lower average balance
of interest-bearing liabilities and a change in the liability mix. Lower rates
paid were a result of the declining rate environment. On average, interest
rates paid on CDs and regular savings accounts declined 130 basis points and
103 basis points, respectively. The average balance of interest-bearing
liabilities decreased $7.7 million, primarily due to a decrease in the average
balance of CDs of $14.9 million partially offset by an increase of $6.8
million in the average balance of regular savings accounts. Such liability mix
change decreased interest expense since, on average, regular savings accounts
cost 141 basis points less than CDs.
Provision for Losses on Loans
(Reference is made to "Loans; Nonperforming Assets; REO and Allowance for
Losses on Loans and Allowance for Losses on REO" and to footnotes 1 and 4 of
the Notes to Consolidated Financial Statements). A provision for losses on
loans of $420,000 was recorded in 1993 as compared to $1.1 million in 1992, a
decline of 62%. Such lower amount of a provision for losses on loans in 1993
versus 1992 reflects a decrease of 53% in nonaccrual loans (excluding the
Bankruptcy Loan, the principal of which is perceived by management to be
adequately collateralized) to $4.0 million; a 6.2% reduction in net average
loan balances, of which one was the Prepaid Loan; and a decrease in the ratio
of net loans charged-off as a percentage of average loans outstanding to 0.19%
in 1993 from 0.65% in 1992.
There can be no assurance that the decreasing provision trend over the
last five years will continue into the future.
Other Income
Total other (i.e. non-interest) income decreased $1.3 million, or 58.6%,
during 1993 primarily due to a decrease in gains on sales of securities of
$1.6 million, partially offset by a gain on sale of a bank building of $187,000
and interest income of $136,000 on an income tax refund. The decline in gains
on sale of securities was due to a decrease in sales volume of $59.6 million,
to $14.6 million in 1993 versus $74.2 million in 1992.
Other Expenses
Total other (i.e. non-interest) expenses increased $74,000, or 0.86%, for
1993 versus 1992. The increase was due to an increase of $286,000, or 24.4%,
in REO expense (net) as described in the following table and an increase of
$93,000, or 15.7%, in FDIC expense due to an increase in the assessment rate.
Offsetting such increases were a decrease of $213,000, or 21.1%, in occupancy
expense, due primarily to recognizing costs for a branch closing which took
place during 1992; a decrease of $52,000, or 1.5%, in salaries and employee
benefits due to reductions in the number of employees and some employee
benefits; and a decrease of $40,000, or 1.7%, in other expenses.
The components of REO expense, net are as follows:
Year ended December 31,
------------------------
1993 1992
----- -----
(Dollars in thousands)
REO expense, net:
Provision for losses . . . . . . $1,024 $ 852
Carrying costs, net of rental income . 737 721
Gain on sale, net. . . . . . . . . . . (304) (401)
------ ------
Total REO expense, net . . . . . . . $1,457 $1,172
====== ======
The increase in the provision for losses on REO was primarily due to
recognizing market value writedowns of $100,000 on the Bank's largest REO
property in 1993.
Income Tax Expense
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109: "Accounting for Income Taxes" ("SFAS 109"), which resulted
in a change in accounting principle and a cumulative benefit of $300,000, or
$.13 per share. SFAS 109 requires an asset and liability approach, the
objective of which is to establish deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis
of assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled.
During 1993, an income tax benefit of $1.0 million was recorded,
reflecting an income tax refund of $747,000, a deferred tax adjustment of
$809,000 in order to reduce the valuation allowance since the time of adopting
SFAS 109,
22
<PAGE>
<PAGE>
and a tax provision of $538,000. Excluding the income tax refund and the
deferred tax adjustment, the effective tax rate was 35.7% for 1993. In 1992,
income tax expense was $628,000, which was partially offset by the utilization
of $539,000 of the 1991 net operating loss carryforward. The effective tax
rate in 1992 was 28.7%.
RESULTS OF OPERATIONS--1992 COMPARED TO 1991
General
During 1992, the Company reported a profit for the first time in five
years, reporting net income of $2.1 million as compared to a net loss of $1.3
million in 1991. Results from core business operations were $500,000 (net of
tax and extraordinary item), while gains from the sale of securities were $1.6
million (net of tax and extraordinary item). Much of the improvement in
operations resulted from an increase in net interest income. A substantial
part of the improvement in net interest income stemmed from an increase in the
interest rate spread caused by the downward spiral of interest rates and the
reduction in the cost of funds resulting from the prepayment of FHLB advances
at the conclusion of 1991. The gain from the sales of securities was also a
direct reflection of the downward spiral of interest rates, since the market
value of such assets move in the opposite direction of interest rates.
Net interest income
Net interest income increased $1.2 million, or 14.3%, to $9.7 million in
1992. The increase from 1991 was partially due to an improvement in the
interest rate spread as the cost of "borrowing" funds from depositors declined
more rapidly than the decline in interest rates earned on loans to mortgage
customers and partially due to a decrease in the average balance of
nonperforming assets from December 31, 1991 to December 31, 1992. As a result,
the interest rate spread and net yield on interest-earning assets increased
from 2.29% and 2.80%, respectively, in 1991 to 3.11% and 3.55%, respectively,
in 1992.
Total interest income decreased $5.7 million, or 20.7%, during 1992 due
to a reduction in the volume of most interest-earning assets, lower yields
earned on substantially all interest-earning asset categories, and a change in
the mix of interest-earning assets. The average balance of mortgage-backed
securities, mortgage loans, and commercial and consumer loans decreased from
$10.4 million, $227.1 million and $9.1 million, respectively, in 1991 to $2.6
million, $195.6 million and $6.3 million, respectively, in 1992. The average
balance of mortgage-backed securities decreased due to liquidating the
portfolio at the end of 1991; the average balance of mortgage loans decreased
due to sales of one to four family performing mortgage loans during the fourth
quarter of 1991 and during 1992; and the decrease in the average balance of
commercial and consumer loans reflects the fact that the Bank has virtually
discontinued originating commercial and consumer loans since 1988. Average
yields on the two largest earning assets, the mortgage loan and investment
portfolios, declined 62 and 178 basis points, respectively, during 1992. Such
declines reflected declining market interest rates. In addition, the mix of
interest-earning assets negatively impacted interest income as the higher
yielding assets mentioned above (mortgage loans earning 8.97%, commercial and
consumer loans earning 7.87%, and mortgage-backed securities earning 7.41%)
were sold in 1991 and reinvested in lower yielding assets, such as investment
securities yielding 5.76% and federal funds sold yielding 3.07%.
Total interest expense decreased $6.9 million, or 36.2%, in 1992 due to
lower rates paid on all interest-bearing liabilities, a lower average balance
of interest-bearing liabilities and a change in the liability mix. Lower rates
paid were a result of the declining rate environment. On average, interest
rates paid on CDs and regular savings accounts declined 174 basis points and
147 basis points, respectively. The average balance of interest-bearing
liabilities decreased $31.4 million partially due to repayments of FHLB and
ESOP borrowings during 1991, which lowered the average balance $23.6 million,
and secondarily, to net withdrawals of $6.7 million in other interest-bearing
deposits. The total decrease in the average balance of CDs of $22.6 million
was partially offset by a $15.0 million increase in the average balance of
regular savings accounts, from $80.3 million in 1991 to $95.3 million in 1992.
The liability mix change continued a trend that began in 1991 whereby CD
withdrawals are "temporarily" placed in regular savings accounts. Such
liability mix change decreased interest expense since the cost of regular
savings accounts during 1992 was 10 basis points and 30 basis points less on
average than a six-month and one year CD, respectively.
Provision for Losses on Loans
A provision for losses on loans of $1.1 million was recorded in 1992 as
compared to $1.5 million in 1991, a decline of 27%. Such lower amount of a
provision for losses on loans in 1992 versus 1991 reflected a decrease of $6.8
million, or 34%, in the average balance of nonaccrual loans to $13.4 million
in 1992 as compared to $20.2 million in
23
<PAGE>
<PAGE>
1991. Although the 1992 provision represented an improvement over the
provision for the four preceding years, the absolute dollar amount of the
provision, especially when coupled with net REO expenses, continued to act as
a limitation on profitability.
Other Income
Total other (i.e. non-interest) income decreased $279,000, or 10.9%,
during 1992 due to a decrease in gains on sales of one-to-four family
performing mortgage loans of $1.1 million, offset by an increase in net gains
on security sales of $781,000. The lower gains on sales of one-to-four family
performing mortgage loans was due to a decrease in sales volume of $24.8
million, or 61.5%, to $15.5 million in 1992 versus $40.3 million in 1991.
Other Expenses
Total other (i.e. non-interest) expenses decreased $612,000, or 6.6%, for
1992 versus 1991. Contributing to the improvement in other expenses were a
decrease of $764,000, or 39.5%, in REO expense (net); and a $405,000, or
10.3%, decrease in salaries and employee benefits due to lower deferred
compensation expense as a result of the fully funded ESOP, a decrease of 9% in
full-time equivalent employees and lower costs for some employee benefit
plans. Offsetting such improvements were increases in other expenses of
$397,000, or 19.9%, due primarily to legal matters, consulting fees, and
miscellaneous other operating expenses, and occupancy expense (net) of
$141,000, or 16.2%, due primarily to recognizing costs for a branch closing
which took place during the third quarter of 1992.
Income Tax Expense
During 1992, income tax expense of $628,000 was recorded which reflects
an effective tax rate of 28.7%. The effective tax rate differed from the
statutory Federal income tax rate of 34% due to a greater bad debts deduction
for tax purposes than for financial reporting purposes. Partially offsetting
income tax expense was the utilization of $539,000 of the 1991 net operating
loss carryforward. Total income tax expense during 1991 was $552,000,
primarily due to writing-off the net deferred tax asset as a result of the tax
loss carryforward position.
ASSET AND LIABILITY MANAGEMENT
The principal objectives of asset and liability management are to manage
exposure to changes in the interest rate environment, maintain adequate
liquidity and sustain a strong capital base. Asset and liability management is
directed by the Bank's Operations Committee, whose members consist of certain
members of the Board of Directors and senior management. The Asset and
Liability Committee ("ALCO"), comprised of certain key officers, is a
subcommittee of the Operations Committee that makes recommendations to the
Operations Committee regarding the objectives described above.
Interest Rate Sensitivity
One of the tools that ALCO utilizes to manage exposure to changes in the
interest rate environment is a static GAP analysis, which is a general
indicator of the potential future effect that changing rates may have on net
interest income. A static GAP analysis demonstrates, as of a particular date,
the extent to which assets and liabilities will mature or reprice within a
specific time frame. A financial institution is considered asset sensitive
within a particular time frame if maturing and repricing assets exceed
maturing and repricing liabilities during such time frame. Likewise, a
financial institution is considered liability sensitive within a particular
time frame if maturing and repricing liabilities exceed maturing and repricing
assets during such time frame. In general, asset sensitive positions will
maximize net interest income during periods of increasing interest rates and
liability sensitive positions will maximize net interest income during periods
of declining interest rates.
A static GAP analysis is not a complete picture of the impact of interest
rate changes on net interest income. First, changes in the general level of
interest rates will not affect all categories of assets and liabilities in the
same manner or at the same time. Second, a static GAP analysis represents a
one-day position; variations actually occur on a daily basis as financial
institutions adjust their interest sensitivity throughout the year. Third,
assumptions must be made regarding the manner in which specific assets and
liabilities will reprice. A goal of the current operating strategy is to have
interest-bearing liabilities maturing and repricing within one year exceed
interest-earning assets maturing and repricing within that period. The static
cumulative one-year GAP position was a negative $34.9 million, or 12.3%, at
December 31, 1993. The following Interest Sensitivity Static GAP Analysis
presents the consolidated interest rate sensitivity position at December 31,
1993.
24
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity GAP Analysis
More than More than More than More than More than
3 months 3 months to 6 months 1 year to 3 years to 5 years to Over 10
or less 6 months to 1 year 3 years 5 years 10 years years Total
-------- ----------- --------- --------- ---------- ---------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets(1):
Real Estate Loans(2):
1-4 Family:
Adjustable rate. . . . . . $ 9,710 $ 12,404 $ 45,316 $13,336 $ 7,907 $ 1,150 $ -- $ 89,823
Fixed. . . . . . . . . . . 1,116 39 613 248 991 2,846 14,387 20,240
Other Real Estate:
Adjustable rate. . . . . . 6,658 2,783 9,179 2,333 1,105 3,279 1,673 27,010
Fixed. . . . . . . . . . . 4,076 146 1,991 9,914 1,266 3,895 12,845 34,133
All other loans(2):
Adjustable rate(3). . . . . 1,136 -- -- 152 -- 134 -- 1,422
Fixed (4) . . . . . . . . . 637 56 -- 108 246 198 77 1,322
Mortgage-backed
securities (5). . . . . . . -- -- -- -- 174 2,461 16,329 18,964
Investment securities(5):
U.S Treasury. . . . . . . . -- -- -- 47,497 17,871 -- -- 65,368
U.S. Government agencies. . -- 505 -- -- -- -- -- 505
Corporate bonds and notes . 2,709 102 1,025 303 -- -- -- 4,139
Other securities. . . . . . 22 -- 1,555 -- -- -- -- 1,577
Federal funds sold. . . . . 1,900 -- -- -- -- -- -- 1,900
Due from banks. . . . . . . 1,735 -- -- -- -- -- -- 1,735
------- -------- -------- ------- ------- ------- ------- -------
Total interest-earning
assets. . . . . . . . . . 29,699 16,035 59,679 73,891 29,560 13,963 45,311 268,138
------- -------- -------- ------- ------- ------- ------- -------
Interest-Bearing Liabilities:
Regular savings(6) . . . . . 28,121 2,341 4,682 22,630 17,167 20,289 7,804 103,034
Market rate certificates . . 40,664 24,559 28,515 22,174 6,690 -- -- 122,602
Money market deposit
accounts. . . . . . . . . . 6,700 -- -- -- -- -- -- 6,700
Checking accounts. . . . . . 4,690 -- -- -- -- -- -- 4,690
------- -------- -------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities . . . . . . . 80,175 26,900 33,197 44,804 23,857 20,289 7,804 237,026
------- -------- -------- ------- ------- ------- ------- -------
Interest rate sensitivity gap
per period(7). . . . . . . . $(50,476) $(10,865) $ 26,482 $ 29,087 $ 5,703 $(6,326) $37,507 $ 31,112
======== ======== ======== ======== ======= ======= ======= ========
Cumulative interest rate
sensitivity gap(7) . . . . . $(50,476) $(61,341) $(34,859)$ (5,772) $ (69) $(6,395) $31,112
Cumulative interest rate
sensitivity gap as
a percent of total assets. . (17.9)% (21.7)% (12.3)% (2.0)% (0.0%) (2.3)% 11.0%
Cumulative percentage of
interest-sensitive assets
to interest-sensitive
liabilities. . . . . . . . . 37.0% 42.7% 75.1% 96.9% 100.0% 97.2% 113.1%
- -----------------
<FN>
(1) Excludes common stock of the FHLB of New York ($1,711).
(2) Includes nonperforming loans and loans held for sale, and excludes REO.
If nonperforming loans were excluded, the 1 year or less cumulative GAP
would have been ($37,030) or (13.1)% of total assets and the cumulative
percentage of interest-sensitive assets to interest-sensitive
liabilities would have been 73.0%.
(3) Represents commercial/financial loans.
(4) Represents consumer and other loans.
(5) Call dates, if any, are used to indicate repricing dates if it is more
likely than not that the investment will be called. Includes securities
available for sale.
(6) $25 million of regular savings deposits are assumed to reprice within 3
months; the remaining balance is assumed to reprice at the rate of 4%
within 3 months, 4% within 3 to 6 months, 6% within 6 months to 1 year,
29% within 1 to 3 years, 22% within 3 to 5 years, 26% within 5 to 10
years, and 10% over ten years.
(7) If all regular savings were to reprice within 1 year or less, the
one-year cumulative GAP as of December 31, 1993 would have been
($101,926) or (36.1)% of total assets and the cumulative percentage of
interest-sensitive assets to interest-sensitive liabilities would have
been 51.0%.
</FN>
</TABLE>
25
<PAGE>
<PAGE>
LIQUIDITY
Liquidity is the ability to meet current cash needs in order to fund
loans and deposit withdrawals, make debt payments, and cover operating
expenses. The primary sources of funds are deposits, amortization, prepayments
and sales of loans, maturities of investment securities, and amortization and
prepayments of mortgage-backed securities. While scheduled loan payments and
maturing investment securities represent a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by the general interest rate climate, economic conditions,
and competition.
The FDIC defines a bank's liquidity ratio as the sum of net cash,
short-term investments and marketable securities divided by the sum of net
deposits and short-term liabilities. The Bank's liquidity ratio at December
31, 1993 and 1992, as calculated according to FDIC guidelines, was 38.8% and
28.8%, respectively. The amount of assets used in the liquidity ratio
calculation was $96.4 million and $73.4 million as of December 31, 1993 and
1992, respectively. The increase in the liquidity ratio is due to loan
prepayments, especially the Prepaid Loan, and sales of REO.
In addition to the liquidity ratio, liquidity can also be described in
terms of cash and cash equivalents. Cash and cash equivalents, which are cash
on hand, amounts due from banks and Federal funds sold (generally due within
one-week periods), declined $1.2 million during 1993. During 1993, operating
activities provided $4.3 million and investment activities provided $829,000
in cash flow while financing activities used $6.3 million. The $4.3 million of
cash provided by operating activities was primarily the result of interest
income earned on loans, and an income tax refund received and interest
thereon; these items were offset by interest paid on deposits, cash paid to
employees and for other expenses, and loans originated for resale. The $6.3
million used in financing activities primarily funded net deposit outflows.
As of December 31, 1993 and 1992, the Company held $1.0 million of cash
and cash equivalents at the holding company level. Management does not regard
the amount of such cash and cash equivalents to be significant from a
liquidity perspective except in terms of a potential source of future
contributions to the Bank.
A line of credit in the amount of $14.3 million with the FHLB is also
available to meet liquidity purposes. Such line of credit, none of which was
in use at December 31, 1993, must be renewed annually.
CAPITAL RESOURCES
Under banking policies issued by the FRB and the FDIC, an adequate level
of regulatory capital sufficient to meet minimum leverage, core and total
risk-based capital ratios must be maintained. The minimum leverage capital
ratio is calculated by dividing core capital by average total assets of the
most recent quarter-end. The risk-based capital ratios require assets and
certain off-balance-sheet activities to be classified into categories, and
specified levels of capital to be maintained for each category. The least
capital is required for the category deemed to have the least risk, and the
most capital is required for the category deemed to have the greatest risk.
For purposes of leverage and risk-based capital guidelines, core capital (also
known as Tier I capital) consists of common equity in accordance with
generally accepted accounting principles ("GAAP"), excluding net unrealized
gains or losses on available-for-sale securities and deferred tax assets that
are dependent on projected taxable income greater than one year in the future,
and total capital consists of core capital plus a portion of the allowance for
losses on loans. The qualifying portion of the allowance for losses on loans
approximated $1.8 million as of December 31, 1993 and $2.3 million as of
December 31, 1992.
As of December 31, 1993 and 1992, capital ratios were as follows:
December 31,
-------------------------------------
1993 1992
---------------- ------------------
Capital ratios: Required* Company Bank Company Bank
-------------- ---------- ------- ---- ------- ----
Leverage. . . . . . . . . 5.00% 11.70% 11.38% 10.62% 10.33%
Core risk-based . . . . . 6.00 23.55 22.90 16.32 15.87
Total risk-based. . . . . 10.00 24.81 24.16 17.58 17.12
- ---------------
* For qualification as a well-capitalized institution.
As noted in the above table, the Company's and the Bank's capital ratios
substantially exceed the minimum capital requirements of a well-capitalized
institution. The increase during 1993 in the leverage ratio is due primarily
to
26
<PAGE>
<PAGE>
net income and, secondarily, to a lower level of assets in 1993 than in 1992.
The increase in the risk-based capital ratios is due primarily to increases in
U.S. Treasury and mortgage-backed securities, and decreases in loans and
corporate bonds and notes.
The FDIC and the FRB (collectively referred to as the "Regulators") have
issued proposed guidelines to the risk-based capital ratios which would
incorporate an interest-rate risk component. Complete implementation of the
guidelines for assessing the adequacy of capital would become effective
December 31, 1994. However, the Regulators have also proposed that examiners
apply the guidelines on an advisory basis beginning with examinations starting
after December 31, 1993. If such proposed guidelines were applied as of
December 31, 1993, the revised risk-based capital ratios would still be in
compliance with minimum capital requirements.
Stockholders' equity increased from $30.5 million at December 31, 1992 to
$33.5 million at December 31, 1993, reflecting net income of $2.8 million and
credits resulting from recognition of deferred compensation of the Management
Retention Plan and adoption of SFAS 115.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"). SFAS 114 establishes criteria for
accounting for loans that have been impaired. It requires that impaired loans
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 the fair value of the collateral if the loan is collateral
dependent. The Company has not fully evaluated the effect of SFAS 114 on its
financial statements. SFAS 114 is effective for fiscal years beginning after
December 15, 1994. The Company plans to adopt SFAS 114 in 1995 with no prior
period adjustment
In December 1992, the FASB issued Statement of Financial Accounting
Standards No. 112. "Employers' Accounting for Postemployment Benefits"
("SFAS 112"). SFAS 112 requires accrual accounting for benefits provided to
former or inactive employees after employment but before retirement--including
salary continuation, disability benefits, severance pay and continuation of
health care benefits. Under SFAS 112, each benefit will be accrued either over
the employee's working career for benefits that vest or vary based on an
employee's years of service, or as an expense at the date of the event giving
rise to the benefits (e.g., at the date of disability). SFAS 112 is effective
for fiscal years beginning after December 15, 1993. Earlier application is not
required by the FASB. The Company plans to adopt SFAS 112 in 1994 with no
prior period restatement. Management believes that the effect of adopting
SFAS 112 will not be significant on the financial position or results of
operations of the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation is reflected primarily in the increased cost of
operations. Unlike most industrial companies, the primary assets and
liabilities of the Company are monetary. As a result, interest rates have a
more significant impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
27
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are presented herein on the following pages:
Report of Independent Accountants ............................... 29
The Company and Subsidiary:
Consolidated Balance Sheets ................................... 30
Consolidated Statements of Operations ......................... 31
Consolidated Statements of Changes in Stockholders' Equity..... 32
Consolidated Statements of Cash Flows ......................... 33
Notes to Consolidated Financial Statements .................... 35
(b) The following supplementary financial information is presented herein
on the following page:
Summary of Quarterly Results .................................. 53
28
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of Washington Bancorp, Inc.
Hoboken, New Jersey
We have audited the accompanying consolidated balance sheets of
Washington Bancorp, Inc. and Subsidiary as of December 31, 1993 and 1992, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1993. 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 consolidated financial position of
Washington Bancorp, Inc. and Subsidiary as of December 31, 1993 and 1992, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993
the Company changed its method of accounting for income taxes and its method
of accounting for investments in debt and equity securities.
As discussed in Note 11 to the consolidated financial statements, the
Company is presently a defendant in two lawsuits. One lawsuit seeks
unspecified damages and alleges violations of state securities laws, certain
banking laws and state common law. The other was filed by a former Bank
officer and alleges wrongful termination and seeks unspecified damages. Legal
counsel has advised the Company that the effect, if any, of the ultimate
outcome of these actions cannot presently be determined, and accordingly, no
provision for loss, if any, that may result upon resolution of these matters
has been made in the accompanying consolidated financial statements.
/s/COOPERS & LYBRAND
Coopers & Lybrand
Parsippany, New Jersey
January 28, 1994
29
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1993 1992
----- -----
Assets
Cash and due from banks . . . . . . . . $ 4,283,032 $ 4,336,433
Federal funds sold. . . . . . . . . . . 1,900,000 3,000,000
------------ ------------
Cash and cash equivalents. . . . . . . 6,183,032 7,336,433
Investment securities:
Available-for-sale . . . . . . . . . . 57,740,195 1,936,700
Held-to-maturity (market value
$14,128,000 and $57,430,000). . . . . 13,848,830 56,793,662
Mortgage-backed securities:
Available-for-sale . . . . . . . . . . 9,516,832 --
Held-to-maturity (market value
$9,365,000 and $7,197,000). . . . . . 9,447,366 7,213,343
Loans:
Held-for-sale (market value
$4,909,000 and $9,032,000). . . . . . 4,852,000 9,000,000
In portfolio (net of allowance for
losses of $2,828,000 and
$2,776,000) . . . . . . . . . . . . . 165,332,900 182,500,728
Other real estate owned ("REO") (net
of allowance for losses of $1,880,000
and $1,802,000). . . . . . . . . . . . 7,078,038 12,998,022
Accrued interest receivable . . . . . . 2,563,176 2,606,893
Premises and equipment, net . . . . . . 2,614,031 2,840,090
Federal Home Loan Bank stock, at cost . 1,711,300 1,632,000
Income tax refund . . . . . . . . . . . -- 320,000
Deferred income tax asset . . . . . . . 1,369,000 250,000
Other assets. . . . . . . . . . . . . . 378,636 342,758
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . . $282,635,336 $285,770,629
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Interest-bearing deposits. . . . . . . $237,026,264 $244,249,625
Noninterest-bearing deposits . . . . . 9,016,464 8,373,055
------------ ------------
Total deposits. . . . . . . . . . . . 246,042,728 252,622,680
Advances from Federal Home Loan
Bank ("FHLB") . . . . . . . . . . . . 400,000 --
Mortgage escrow deposits . . . . . . . 1,276,819 1,393,709
Accrued interest payable . . . . . . . 189,154 336,657
Other liabilities. . . . . . . . . . . 1,185,136 948,538
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . 249,093,837 255,301,584
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.10 per
share, 3,000,000 shares authorized,
no shares issued and outstanding. . . -- --
Common stock, par value $.10 per share,
6,000,000 shares authorized,
shares issued and outstanding--
2,307,687 in 1993
and 2,307,187 in 1992 . . . . . . . . 230,768 230,718
Paid-in capital. . . . . . . . . . . . 22,500,728 22,498,778
Retained earnings. . . . . . . . . . . 10,744,003 7,919,549
Unrealized gain on available-for-sale
securities, net of tax. . . . . . . . 186,000 --
------------ ------------
33,661,499 30,649,045
Deferred compensation--Management
Recognition and Retention Plan
("MRP"). . . . . . . . . . . . . . . . (120,000) (180,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . 33,541,499 30,469,045
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . $282,635,336 $285,770,629
============ ============
See notes to consolidated financial statements
30
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------
1993 1992 1991
---- ---- ----
Interest income:
Loans, including fees . . . . . . $14,781,686 $18,041,437 $22,616,388
U.S. Treasury obligations . . . . 1,766,978 2,833,951 1,995,094
Mortgage-backed securities. . . . 915,652 193,365 849,600
Federal funds sold. . . . . . . . 171,990 380,910 372,369
Dividends . . . . . . . . . . . . 150,639 155,715 199,088
Due from banks. . . . . . . . . . 48,311 50,378 22,719
Other investment securities . . . 722,669 223,335 1,538,383
----------- ----------- -----------
Total interest income . . . . . . 18,557,925 21,879,091 27,593,641
----------- ----------- -----------
Interest expense:
Deposits. . . . . . . . . . . . . 8,794,623 12,189,233 17,148,425
Borrowed funds. . . . . . . . . . 17,809 1,350 1,970,423
----------- ----------- -----------
Total interest expense. . . . . . 8,812,432 12,190,583 19,118,848
----------- ----------- -----------
Net interest income. . . . . . . 9,745,493 9,688,508 8,474,793
----------- ----------- -----------
Provision for losses on loans. . . 420,000 1,100,000 1,500,000
----------- ----------- -----------
Net interest income after provision
for losses on loans. . . . . . . 9,325,493 8,588,508 6,974,793
----------- ----------- -----------
Other income:
Service charges on deposit
accounts . . . . . . . . . . . . 186,459 181,743 149,163
Gain on sale of loans, net. . . . 157,030 196,845 1,275,976
Security gains, net . . . . . . . 22,450 1,638,132 856,843
Gain on sale of bank building . . 186,519 -- --
Other . . . . . . . . . . . . . . 396,675 273,536 287,286
----------- ----------- -----------
Total other income. . . . . . . . 949,133 2,290,256 2,569,268
----------- ----------- -----------
Other expenses:
Salaries and employee benefits. . 3,468,089 3,519,704 3,924,724
REO expense, net. . . . . . . . . 1,457,341 1,171,544 1,935,927
Occupancy and equipment expenses,
net . . . . . . . . . . . . . . 797,303 1,010,739 869,705
Federal Deposit Insurance
Corporation ("FDIC") assessment. 690,516 597,054 577,945
Other . . . . . . . . . . . . . . 2,354,923 2,394,742 1,997,571
----------- ----------- -----------
Total other expenses. . . . . . . 8,768,172 8,693,783 9,305,872
----------- ----------- -----------
Income before income taxes,
extraordinary items and
cumulative effect of change in
accounting principle. . . . . . 1,506,454 2,184,981 238,189
Income tax benefit/(expense) . . 1,018,000 (628,000) (552,000)
----------- ----------- -----------
Income/(loss) before extraordinary
items and cumulative effect of
change in accounting
principle . . . . . . . . . . . 2,524,454 1,556,981 (313,811)
Extraordinary items:
Utilization of net operating
loss ("NOL") carryforward. . . -- 539,000 --
Loss on early extinguishment of
FHLB advances (net of applicable
income tax effect of $-0-) . . -- -- (1,034,319)
Cumulative effect of change in
accounting principle. . . . . . 300,000 -- --
----------- ----------- -----------
NET INCOME/(LOSS). . . . . . . . $ 2,824,454 $ 2,095,981 $(1,348,130)
=========== =========== ===========
Income/(loss) per share:
Income/(loss) before extraordinary
items and cumulative effect of
change in accounting
principle . . . . . . . . . . . $ 1.10 $ 0.68 $ (0.14)
Extraordinary items. . . . . . . -- 0.24 (0.46)
Cumulative effect of change in
accounting principle. . . . . . .13 -- --
----------- ----------- -----------
NET INCOME/(LOSS). . . . . . . . $ 1.23 $ 0.92 $ (0.60)
=========== =========== ===========
Weighted average number of shares
outstanding . . . . . . . . . . . 2,296,876 2,276,035 2,263,547
=========== =========== ===========
See notes to consolidated financial statements
31
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
gain on Deferred
available- compensation
Preferred Common Paid-in for-sale Retained -------------
stock stock capital securities earnings ESOP MRP Total
---------- ------- ------- ---------- -------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1991. . $ -- $230,718 $22,498,778 $ -- $ 7,171,698 $(386,400) $(300,000) $29,214,794
Recognition of deferred
compensation
expense. . . . . . . . . . -- -- -- -- -- 289,800 60,000 349,800
Net loss. . . . . . . . . . -- -- -- -- (1,348,130) -- -- (1,348,130)
----- -------- ----------- -------- ----------- --------- --------- -----------
BALANCE, December 31, 1991. -- 230,718 22,498,778 -- 5,823,568 (96,600) (240,000) 28,216,464
Recognition of deferred
compensation expense . . . -- -- -- -- -- 96,600 60,000 156,600
Net income. . . . . . . . . -- -- -- -- 2,095,981 -- -- 2,095,981
----- -------- ----------- -------- ----------- --------- --------- -----------
BALANCE, December 31, 1992. -- 230,718 22,498,778 -- 7,919,549 -- (180,000) 30,469,045
Recognition of deferred
compensation expense . . . -- -- -- -- -- -- 60,000 60,000
Excercise of stock options. -- 50 1,950 -- -- -- -- 2,000
Adoption of SFAS 115. . . . -- -- -- 186,000 -- -- -- 186,000
Net income. . . . . . . . . -- -- -- -- 2,824,454 -- -- 2,824,454
----- -------- ----------- -------- ----------- --------- --------- -----------
BALANCE, December 31, 1993. $ -- $230,768 $22,500,728 $186,000 $10,744,003 $ -- $(120,000) $33,541,499
===== ======== =========== ======== =========== ========= ========= ===========
See notes to consolidated financial statements
</TABLE>
32
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------
1993 1992 1991
---- ---- ----
Cash Flows from Operating Activities:
Interest received . . . . . . . $ 20,368,341 $ 22,383,276 $ 27,978,824
Loan fees received . . . . . . 288,037 449,833 406,092
Service charges on deposits
received . . . . . . . . . . . 186,459 181,743 149,163
Miscellaneous other income
received . . . . . . . . . . . 260,392 273,536 287,286
Income tax refund received . . 1,196,969 -- 1,105,511
Income taxes paid . . . . . . . (545,107) (609,000) --
Loans originated for resale . . (852,000) -- --
Interest paid . . . . . . . . . (8,959,935) (12,520,427) (19,699,816)
Cash paid to employees and for
other expenses . . . . . . . . (7,630,874) (7,863,590) (5,278,204)
----------- ----------- ------------
Net cash provided by operating
activities . . . . . . . . . 4,312,282 2,295,371 4,948,856
----------- ----------- ------------
Cash Flows from Investing Activities:
Proceeds from maturity of term
federal funds sold. . . . . . . -- 9,000,000 --
Purchase of term federal funds
sold . . . . . . . . . . . . . -- -- (9,000,000)
Proceeds from sales of securities
available-for-sale . . . . . . 3,375,706 19,834,531 --
Proceeds from maturities of
securities available-for-
sale. . . . . . . . . . . . . . 500,000 -- --
Purchase of securities available-
for-sale . . . . . . . . . . . (60,197,058) (21,353,814) --
Principal collected on mortgage-
backed securities available-
for-sale. . . . . . . . . . . . 2,967,578 -- --
Purchase of mortgage-backed
securities available-
for-sale .. . . . . . . . . . . (10,847,957) -- --
Proceeds from sales of loans
held for sale . . . . . . . . . 7,021,863 15,717,358 34,600,519
Proceeds from sales of investment
securities . . . . . . . . . . 9,248,633 54,466,694 68,049,943
Proceeds from maturities of
investment securities . . . . . 35,371,615 10,445,843 52,378,000
Purchase of investment securities (2,452,068) (68,592,457)(117,910,408)
Principal collected on
mortgage-backed securities. . . 5,769,780 532,190 1,042,580
Proceeds from sales of
mortgage-backed securities. . . 2,028,385 1,533,314 27,191,360
Purchase of mortgage-backed
securities . . . . . . . . . . (10,534,937) (7,785,292) --
Purchase of loans . . . . . . . -- (10,086,000) --
Net decrease/(increase) in loans
and loans held for sale . . . . 14,240,619 (7,095,165) (11,481,243)
Recoveries on loans charged-off 261,348 257,045 240,898
Proceeds from sale of bank
building . . . . . . . . . . . 224,100 -- --
Capital expenditures . . . . . (64,614) (312,723) (261,474)
Proceeds from sales of REO, net of
financed sales and closing costs 3,995,466 1,126,761 2,658,486
Proceeds from redemption of FHLB
stock . . . . . . . . . . . . -- 520,300 104,600
Purchase of FHLB stock . . . . (79,300) -- --
----------- ----------- ------------
Net cash (used in)/provided by
investing activities . . . . . 829,159 (1,791,415) 47,613,261
----------- ----------- ------------
Cash Flows from Financing Activities:
Net increase in savings and
transaction accounts. . . . . . 4,164,930 14,330,173 5,693,096
Net decrease in certificates of
deposit . . . . . . . . . . . (10,744,882) (20,728,505) (21,998,795)
Net increase/(decrease) in mortgage
escrow deposits . . . . . . . (116,890) (739,381) 149,309
Repayment of advances from FHLB -- -- (45,134,319)
Advances from FHLB . . . . . . 400,000 -- 15,600,000
Exercise of stock options . . . 2,000 -- --
----------- ----------- ------------
Net cash used in financing
activities . . . . . . . . . (6,294,842) (7,137,713) (45,690,709)
----------- ----------- ------------
Net Increase/(Decrease) in Cash and
Cash Equivalents . . . . . . . (1,153,401) (6,633,757) 6,871,408
Cash and Cash Equivalents,
beginning of year. . . . . . . . 7,336,433 13,970,190 7,098,782
----------- ----------- ------------
Cash and Cash Equivalents, end of
year . . . . . . . . . . . . . $ 6,183,032 $ 7,336,433 $ 13,970,190
=========== =========== ============
See notes to consolidated financial statements
33
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Year ended December 31,
---------------------------------
1993 1992 1991
---- ---- ----
Reconciliation of Net Income/(Loss)
to Net Cash Provided by
Operating Activities:
Net income/(loss) . . . . . . . . $ 2,824,454 $ 2,095,981 $ (1,348,130)
Adjustments to reconcile net income/
(loss) to net cash
provided by operating activities:
Depreciation . . . . . . . . . 253,092 372,186 319,678
Provision for losses on loans and
REO . . . . . . . . . . . . . 1,443,965 1,951,900 2,670,206
Recognition of deferred
compensation expense . . . . . 60,000 156,600 349,800
Deferred loan fees . . . . . . (194,779) (163,765) (248,842)
Deferred taxes . . . . . . . . (699,000) (250,000) 552,000
Gain on sales of investment and
mortgage-backed securities . (67,623) (1,671,946) (1,078,931)
Loss on sales of investment and
mortgage-backed securities . 45,173 33,814 222,088
Gain on sale of bank building (186,519) -- --
Gain on sales of REO . . . . . (429,255) (454,734) (329,927)
Loss on sales of REO . . . . . 125,355 53,887 153,157
Gain on sale of loans . . . . (157,030) (206,314) (1,275,976)
Loss on sale of loans . . . . -- 9,469 --
Premium amortization, net of
discount earned. . . . . . . . 2,249,515 817,490 243,249
Extraordinary loss on early
extinguishment of FHLB
advances . . . . . . . . . . -- -- 1,034,319
Changes in operating assets and
liabilities:
(Increase) in loans originated
for resale. . . . . . . . . . (852,000) -- --
(Increase)/decrease in income
tax refund receivable . . . . 320,000 (320,000) 243,000
(Increase)/decrease in accrued
interest receivable . . . . 43,717 300,293 796,868
(Increase)/decrease in other
assets . . . . . . . . . . (35,878) 83,567 890,585
Increase/(decrease) in accrued
interest payable . . . . . . (147,503) (329,844) (580,968)
Increase/(decrease) in other
liabilities . . . . . . . . (283,402) (183,213) 2,336,680
----------- ----------- -----------
Net cash provided by operating
activities . . . . . . . . . . . $ 4,312,282 $ 2,295,371 $ 4,948,856
=========== =========== ===========
Supplemental Schedule of Noncash
Investing and Financing
Activities:
Transfer of loans to REO . . . $ 3,705,035 $ 5,330,339 $ 9,571,387
=========== =========== ===========
Portion of REO sales financed
by the Bank. . . . . . . . . . $ 5,427,475 $ 3,486,900 $ 4,700,200
=========== =========== ===========
Transfer of loans to loans held
for sale, net . . . . . . . . $ -- $24,520,513 $ --
=========== =========== ===========
Exchange of loans for
mortgage-backed securities . . $ 1,788,408 $ -- $ 6,732,250
=========== =========== ===========
Available-for-sale securities
market value change. . . . . . $ 186,000 $ -- $ --
=========== =========== ===========
See notes to consolidated financial statements
34
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Washington Bancorp, Inc. and
Subsidiary follow generally accepted accounting principles and general
practices applicable to the banking industry. The policies which materially
affect the determination of financial position, results of operations and cash
flows are summarized below.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Washington
Bancorp, Inc, (the "Company") and its wholly-owned subsidiary, Washington
Savings Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated.
STATEMENTS OF CASH FLOWS
The statements of cash flows are presented using the direct method. For
purposes of reporting cash flows, cash and cash equivalents are cash on hand,
amounts due from banks and Federal funds sold (generally due within a one-week
period).
SECURITIES
During 1993, the Financial Accounting Standards Board (the "FASB") issued
and the Company adopted Statement of Financial Accounting Standards No. 115:
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 requires entities to classify their securities into either a
held-to-maturity, available-for-sale or trading category. Each of these
classifications require a different basis of accounting.
Securities in which there is both the positive intent and ability to hold
until call date, if any, or maturity are classified as held-to-maturity and
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Premiums are amortized and discounts are accreted using the level
yield method over the period to call, if any, or maturity for investments, and
over the estimated remaining lives based on anticipated prepayments for
mortgage-backed securities. Gains and losses, if any, are recognized when
securities are sold by the specific identification method.
Securities which may be sold prior to maturity for either asset/liability
purposes or for other reasons are classified as available-for-sale and are
accounted for at fair value with fair value changes, net of tax, reported as a
net amount in a separate component of stockholders' equity.
The Company does not engage in trading securities; however, such
securities would be accounted for at fair value with fair value changes
reported in the income statement.
The effect of adopting SFAS 115 as of December 31, 1993 was to increase
securities by $286,000, reduce the net deferred tax asset by $100,000 and
increase stockholders' equity by $186,000. There was no effect on the results
of operations.
The Bank, as a member of the Federal Home Loan Bank of New York ("FHLB"),
is required to hold shares of capital stock in the FHLB in an amount equal to
one percent of the outstanding balance of mortgage loans or five percent of
its outstanding advances from the FHLB, whichever is greater.
LOANS
Loans in which there is both the intent and ability to hold until
maturity are carried at their principal amounts outstanding. Generally, when a
loan is past due as to payment of principal or interest for ninety days or
when, in the opinion of management, the accrual of interest should be ceased
before ninety days, it is the Company's policy to cease accruing interest and
to place such a loan on a "nonaccrual status". Any accrued but unpaid interest
previously recorded, if not adequately collateralized, is charged against
current period interest income. Cash receipts on nonaccrual loans are recorded
as either income or as a reduction of principal, according to management's
judgement as to the collectibility of principal.
35
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan origination fees and certain direct loan origination costs are
offset, and the resulting net amount is deferred and amortized as an
adjustment of the loans' yields. Net loan fees are generally amortized over
the contractual lives of the related loans.
Loans held for sale are carried at the lower of aggregate cost or market.
No valuation allowance was required at December 31, 1993 or 1992. Gains and
losses, including deferred loan origination fees, are recognized when loans
are sold by the specific identification method.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114").
SFAS 114 establishes criteria for accounting for loans that have been
impaired. It requires that impaired loans 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 the fair value of
the collateral if the loan is collateral dependent. The Company has not fully
evaluated the effect of SFAS 114 on its financial statements. SFAS 114 is
effective for fiscal years beginning after December 15, 1994. The Company
plans to adopt SFAS 114 in 1995 with no prior period restatement.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is established through charges to
operations in the form of a provision for losses on loans. Loans which are
determined to be uncollectible are charged against the allowance account and
subsequent recoveries, if any, are credited to the account. The provision for
losses on loans is based upon percentage allocations with regard to the
performing loan portfolio, as well as specific allocations for classified
loans. Loans are classified in accordance with their estimated risk based on
various factors, including: (a) the financial status and credit history of the
borrower; (b) collateral value; (c) loan documentation; (d) prevailing and
anticipated economic conditions; and (e) such other factors that, in
management's judgement, warrant current recognition in providing an adequate
allowance.
OTHER REAL ESTATE OWNED ("REO"), NET
REO consists of real estate properties acquired through foreclosure or
deed in lieu of foreclosure and "in-substance" foreclosures ("ISF"). A loan is
classified as an in-substance foreclosure even though actual foreclosure has
not occurred based upon the following criteria: the borrower has little or no
equity in the collateral based upon its current estimated fair value; proceeds
for repayment are expected to come only from the operations or sale of the
collateral; and either the borrower has abandoned control of the collateral or
it is doubtful that the borrower will rebuild equity in the collateral or
repay the loan by other means in the foreseeable future.
REO is carried at the lower of cost (principal balance of the former loan
plus cost of obtaining title and possession) or net realizable value. When a
property is transferred to ISF, the excess of the loan balance over market or
the estimated net realizable value is charged to the allowance for losses on
loans.
The allowance for losses on REO is established through charges to
operations in the form of a provision for losses on REO that is reflected in
the expense caption--"REO expense, net." Factors considered in establishing
the allowance for losses on REO include appraisals of the fair market value of
a property and management's assessment of the overall real estate market for
that type of property and its location. In addition, carrying costs (e.g. real
estate taxes, repairs and maintenance, and insurance), net of rental income,
are charged to operations in the current period and are reflected in the
expense caption--"REO expense, net".
PREMISES AND EQUIPMENT, NET
Land is carried at cost. Buildings, building improvements, and furniture
and equipment are stated at cost less accumulated depreciation computed on the
straight-line basis over the estimated useful lives of each type of asset.
Leasehold improvements are stated at cost less accumulated amortization
computed on a straight-line basis over the term of the lease or useful life,
whichever is less. Expenditures for maintenance and repairs are charged to
expense; major replacements and betterments are capitalized. Gains and losses
on dispositions are reflected in current operations.
36
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES
The Company and the Bank file a consolidated federal income tax return.
State income tax returns are filed on a separate basis.
Prior to 1993, the Company recorded income tax provisions in accordance
with Accounting Principles Board Opinion No.11: "Income Taxes" ("APB 11"),
which recorded deferred income taxes on transactions which are reported for
financial statement purposes in different years than for income tax
purposes--principally loan fees, interest on nonaccrual loans and carrying
costs of REO.
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109: "Accounting for Income Taxes" ("SFAS 109") with no prior
period adjustment. SFAS 109 requires an asset and liability approach, the
objective of which is to establish deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis
of assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. The effect of adopting SFAS 109, as of
January 1, 1993, was to increase assets and net earnings by $300,000, or $.13
per share.
PENSION PLAN AND POSTRETIREMENT BENEFITS
A noncontributory defined benefit pension plan is provided through
Retirement System Group Inc. that covers substantially all employees. Benefits
are based upon years of service and generally upon the employee's average
compensation during the three consecutive years prior to normal retirement.
The funding policy is generally to make the minimum annual contributions
required by applicable regulations. Pension cost is determined by Statement of
Financial Accounting Standards No. 87: "Employers' Accounting for Pensions."
The Entry Age Normal Cost Method was used to determine the actuarial present
value of accumulated and projected benefit obligations.
During 1992, the Company undertook a policy to eliminate its balance sheet
liability under the new Statement of Financial Accounting Standards No. 106:
"Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106").
This goal was achieved in a two step process. First, current retirees were
offered, and accepted, a lump sum payment equal to a percentage of the
estimated cost to the Company of each retiree's future health insurance
premiums in exchange for the Company's liability for future coverage. The
aggregate lump sum amount for all such retirees approximated $77,000 and was
paid in two equal installments in January 1992 and 1993. Second, the
obligation for future retirees was moved to the tax-qualified pension plan.
Future retirees who meet certain age and service requirements will be awarded
a supplemental pension benefit equal to a percentage of estimated future
health insurance premiums.
During 1992 and prior periods, postretirement health care benefits were
recognized in the year that the benefits were paid to certain retired
employees--the "pay-as-you-go" or cash basis. The costs of providing
postretirement health care benefits approximated $42,000 and $38,000 for the
years ended December 31, 1992 and 1991, respectively.
POSTEMPLOYMENT BENEFITS
In December 1992, the FASB issued Statement of Financial Accounting
Standards No. 112: "Employers' Accounting for Postemployment Benefits" ("SFAS
112"). SFAS 112 requires accrual accounting for benefits provided to former or
inactive employees after employment but before retirement--including salary
continuation, disability benefits, severance pay and continuation of health
care benefits. Under SFAS 112, each benefit will be accrued either over the
employee's working career for benefits that vest or vary based on an
employee's years of service, or as an expense at the date of the event giving
rise to the benefits (e.g., at the date of disability). SFAS 112 is effective
for fiscal years beginning after December 15, 1993. Earlier application is not
required by the FASB. The Company plans to adopt SFAS 112 in 1994 with no
prior period restatement. Management believes that the effect of adopting SFAS
112 will not be significant on the financial position or results of operations
of the Company.
FINANCIAL INSTRUMENTS
Disclosures are made of the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the consolidated
balance sheet, for which it is practicable to estimate fair value as of the
balance sheet
37
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date. Changes in market conditions subsequent to that date are not reflected
and the fair value of financial instruments are not representative of the
Company's total value. For example, when quoted market prices are not
available, the Company calculates the present value of anticipated future cash
flows. In that regard, the estimated fair value will be affected by prepayment
and discount rate assumptions. Such method may not provide the actual amount
which would be realized in the ultimate sale of the financial instrument.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
Cash and short-term investments
The carrying amount is a reasonable estimate of fair value.
Securities
Fair values are based on quoted market prices as published by various
quotation services or, if quoted market prices are not available, on dealer
quotes. Fair value of the investment in FHLB is its carrying amount.
Loan receivables and commitments to extend credit
Loans are grouped into homogeneous categories, such as one-to-four family
mortgages, consumer loans, and loans held for sale. Fair value is based on
either a quoted market price from a dealer for similar maturities, interest
rate and type of collateral or the present value of anticipated future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit risks and for the same remaining maturities.
Deposit liabilities
Carrying amount is a reasonable estimate of fair value for savings,
demand deposit, and money market accounts. Fair value of certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
PER SHARE DATA
Income/(loss) per share was computed by dividing net income/(loss) for
each year by the weighted average number of shares outstanding (which excludes
unvested shares of the MRP).
RECLASSIFICATIONS
Certain reclassifications have been made to the 1992 and 1991 financial
statements to conform to the 1993 presentation.
2. CASH AND DUE FROM BANKS
Reserves maintained to meet Federal Reserve Board regulations amounted to
$331,000 and $280,000 during the bi-weekly maintenance periods that included
December 31, 1993 and 1992, respectively.
38
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
3. SECURITIES
December 31, 1993 December 31, 1992
---------------------------------------------- -------------------------------------------
Gross Gross
Weighted Unrealized Weighted Unrealized
Average Carrying --------------- Market Average Carrying ------------- Market
Yield Value Gains Losses Value Yield Value Gains Losses Value
------ ------- ----- ------ ----- ------ ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD TO
MATURITY
U.S. Treasury:
Maturing between 1-5 years . . . 5.45% $13,546 $275 $ (1) $13,820 5.95% $19,090 $453 $ -- $19,543
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
U.S. Government agencies:
Maturing within 1 year . . . . . -- -- -- -- -- 3.74 5,611 2 (7) 5,606
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
Corporate Bonds and Notes:
Maturing within 1 year . . . . . -- -- -- -- -- 4.00 19,754 187 (37) 19,904
Maturing between 1-5 years . . . 4.28 303 5 -- 308 4.53 3,151 46 (2) 3,195
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
4.28 303 5 -- 308 4.07 22,905 233 (39) 23,099
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
Other Securities:
Maturing within 1 year . . . . . -- -- -- -- -- 3.65 9,188 2 (8) 9,182
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
5.43% $13,849 $280 $ (1) $14,128 4.58% $56,794 $690 $(54) $57,430
==== ======= ==== ====== ======= ===== ======= ==== ===== =======
MORTGAGED-BACKED SECURITIES HELD
TO MATURITY
Government National
Mortgage Association ("GNMA")
pass-through certificates. . . . 6.24% $ 7,155 $ 14 $ (75) $ 7,094 7.12% $ 7,213 $ 16 $(32) $ 7,197
Federal National Mortgage
Association ("FNMA") pass-through
certificates . . . . . . . . . . 5.85 1,582 5 (21) 1,566 -- -- -- -- --
Federal Home Loan Mortgage
Association (FHLMC") pass-through
certificates . . . . . . . . . . 5.67 710 -- (5) 705 -- -- -- -- --
---- ------- ---- ------ ------- ----- ------- ---- ------ -------
6.13% $ 9,447 $ 19 $(101) $ 9,365 7.12% $ 7,213 $ 16 $(32) $ 7,197
==== ======= ==== ====== ======= ===== ======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
-------------------- -------------------------------------------
Gross
Weighted Carrying Weighted Unrealized
Average Market Average Carrying ------------- Market
Yield Value Yield Value Gains Losses Value
------ -------- ------ ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE
FOR SALE
U.S. Treasury:
Maturing between 1-5 years . . . 4.69% $51,822 --% $ -- $ -- $ -- $ --
U.S. Government agencies:
Maturing within 1 year . . . . . 3.59 505 -- -- -- -- --
Corporate Bonds and Notes:
Maturing within 1 year . . . . . 4.12 3,836 4.64 1,937 17 -- 1,954
Other Securities:
Maturing within 1 year . . . . . 4.50 1,577 -- -- -- -- --
---- ------- ---- ------ ----- ----- ------
4.64% $57,740 4.64% $1,937 $ 17 $ -- $1,954
==== ======= ==== ===== ===== ===== ======
MORTGAGED-BACKED SECURITIES
AVAILABLE FOR SALE
GNMA pass-through certificates. . 6.82% $ 5,986 --% $ -- $ -- $ -- $ --
FHLMC pass-through certificates . 7.82 2,558 -- -- -- -- --
FNMA pass-through certificates. . 5.53 973 -- -- -- -- --
---- ------- ---- ------ ----- ----- ------
6.95% $ 9,517 --% $ -- $ -- $ -- $ --
==== ======= ==== ====== ===== ===== ======
</TABLE>
During 1993, the Company adopted SFAS 115 which increased the carrying
value of the available-for-sale securities by $286,000 for unrealized gains.
The carrying value of securities pledged to collateralize public deposits
approximated $828,000 and $1,454,000 at December 31, 1993 and 1992,
respectively.
39
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LOANS AND REO
Loans
The primary market area for lending encompasses Hudson and Bergen
Counties, New Jersey. The following table sets forth the composition of the
loan portfolio:
December 31,
---------------------------
1993 1992
------------ ------------
Real estate:
1-4 family . . . . . . . . . . . . . . . . . $109,211,067 $125,858,058
Multi-family/commercial. . . . . . . . . . . 53,860,461 52,742,859
Construction . . . . . . . . . . . . . . . . 3,282,555 2,533,164
------------ ------------
Total real estate loans . . . . . . . . . . 166,354,083 181,134,081
Commercial/financial. . . . . . . . . . . . . 1,421,985 3,551,679
Consumer and other loans. . . . . . . . . . . 1,322,178 1,731,241
------------ ------------
Total loans . . . . . . . . . . . . . . . . 169,098,246 186,417,001
Less:
Unearned interest. . . . . . . . . . . . . . 79,393 87,541
Deferred loan fees . . . . . . . . . . . . . 857,953 1,052,732
Allowance for losses . . . . . . . . . . . . 2,828,000 2,776,000
------------ ------------
Loans, net. . . . . . . . . . . . . . . . . $165,332,900 $182,500,728
============ ============
Nonperforming loans
Nonperforming loans, which are a component of loans, include loans which
are accounted for on a nonaccrual basis and troubled debt restructurings.
December 31,
---------------------------
1993 1992
------------ ------------
Nonaccrual loans:
Real estate loans:
1-4 family. . . . . . . . . . . . . . . . . $ 2,783,813 $5,527,941
Multi-family/commercial . . . . . . . . . . 9,981,691 1,648,146
Construction. . . . . . . . . . . . . . . . -- 944,000
----------- ----------
Total real estate loans. . . . . . . . . . 12,765,504 8,120,087
Commercial/financial . . . . . . . . . . . . -- 224,591
Consumer and other loans . . . . . . . . . . 32,647 254,571
----------- ----------
Total nonaccrual loans . . . . . . . . . . 12,798,151 8,599,249
Troubled debt restructurings:
Commercial/financial. . . . . . . . . . . . 151,788 207,088
----------- ----------
Total nonperforming loans. . . . . . . . . $12,949,939 $8,806,337
=========== ==========
Interest on nonperforming loans which would have been recorded had such
loans been performing (based upon original contract terms) throughout the
period approximated $826,000, $609,000 and $975,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. Interest income on those
loans, which is recorded only when received, amounted to $223,000, $416,000
and $548,000 for the years ended December 31, 1993, 1992 and 1991,
respectively.
During the first quarter of 1993, a Chapter 11 bankruptcy petition was
filed by the obligor of an approximately $9.0 million loan, a loan on which
the Bank currently has a first mortgage and an assignment-of-rents (the
40
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Bankruptcy Loan"). On November 10, 1993, the Court dismissed the bankruptcy
petition. Nevertheless, the Bank did not receive any of the rental payments
from April 1993 through November 1993, as the payments were made to a
debtor-in-possession account and pursuant to a Court Order were released to
the City of Philadelphia (and not to the Bank) to pay a substantial portion of
property tax arrearages. Rental payments were resumed to the Bank in December
1993. On January 29, 1994, the Bank paid approximately $450,000 to the City
of Philadelphia to resolve all remaining property tax arrearages and to pay
1994 property taxes. The amount of such payment was capitalized into the
Bankruptcy Loan balance. The Bank anticipates that the Bankruptcy Loan will
be renegotiated during 1994. The Bank has classified the Bankruptcy Loan as
a nonaccrual loan included in the multi-family/commercial category. Management
believes that the Bank has adequate collateral with respect to the Bankruptcy
Loan and anticipates collection of the outstanding principal balance.
REO
December 31,
-----------------------
1993 1992
--------- -----------
Acquired by foreclosure or deed in
lieu of foreclosure. . . . . . . . $3,920,667 $ 7,460,541
Loans foreclosed in-substance . . . 5,037,371 7,339,481
Less: Allowance for losses on REO . 1,880,000 1,802,000
---------- -----------
REO, net . . . . . . . . . . . . . $7,078,038 $12,998,022
========== ===========
Allowance for losses on loans and REO
Loans REO Total
---------- ---------- ----------
Balance, December 31, 1990. . . . . $2,579,000 $ 976,000 $3,555,000
Provision for losses. . . . . . . . 1,500,000 1,170,206 2,670,206
Recoveries. . . . . . . . . . . . . 240,898 -- 240,898
Losses charged off. . . . . . . . . (1,330,898) (818,206) (2,149,104)
---------- ---------- ----------
Balance, December 31, 1991. . . . . 2,989,000 1,328,000 4,317,000
Provision for losses. . . . . . . . 1,100,000 851,900 1,951,900
Recoveries. . . . . . . . . . . . . 257,045 -- 257,045
Losses charged off. . . . . . . . . (1,570,045) (377,900) (1,947,945)
---------- ---------- ----------
Balance, December 31, 1992. . . . . 2,776,000 1,802,000 4,578,000
Provision for losses. . . . . . . . 420,000 1,023,965 1,443,965
Recoveries. . . . . . . . . . . . . 261,319 -- 261,319
Losses charged off. . . . . . . . . (629,319) (945,965) (1,575,284)
---------- ---------- ----------
Balance, December 31, 1993. . . . . $2,828,000 $1,880,000 $4,708,000
========== ========== ==========
Related-Party Loans
An analysis of activity with respect to loans outstanding to directors,
officers, their entities and immediate family is as follows:
Year ended December 31,
----------------------
1993 1992
--------- ----------
Balance, beginning of year. . . . . . . . . . . $ 866,000 $1,007,000
New loans. . . . . . . . . . . . . . . . . . . -- 356,000
Repayments/reductions. . . . . . . . . . . . . (320,000) (497,000)
--------- ----------
Balance, end of year. . . . . . . . . . . . . . $ 546,000 $ 866,000
========= ==========
As of December 31, 1993 and 1992, $543,000 and $842,000, respectively, of
such loans represented collateralized real estate loans and $3,000 and
$24,000, respectively, represented uncollateralized loans. All such loans
were, in the opinion of management, made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with outside third parties.
41
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PREMISES AND EQUIPMENT
December 31,
------------
1993 1992
---------- ----------
Land. . . . . . . . . . . . . . . . . . . . . . . . $ 513,570 $ 532,496
Buildings . . . . . . . . . . . . . . . . . . . . . 3,185,933 3,211,426
Leasehold improvements. . . . . . . . . . . . . . . 145,123 356,462
Equipment . . . . . . . . . . . . . . . . . . . . . 2,483,214 2,423,942
---------- ----------
6,327,840 6,524,326
Less: Accumulated depreciation and amortization . . 3,713,809 3,684,236
---------- ----------
$2,614,031 $2,840,090
========== ==========
During 1993, a building used to store bank-owned vehicles (i.e., a
garage) with a net book value of $37,000 was sold for $224,000.
6. INTEREST-BEARING DEPOSITS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1993 1992
----------------------- ------------------------
Average Average
effective effective
interest rate Amount interest rate Amount
------------- ------ ------------- -------
<S> <C> <C> <C> <C>
Regular savings accounts. . . . . . . . . . . . . . . . . . . 2.50% $103,033,812 3.25% $ 99,347,342
Money market accounts . . . . . . . . . . . . . . . . . . . . 2.25 6,700,155 3.15 7,369,440
Checking accounts . . . . . . . . . . . . . . . . . . . . . . 2.00 4,690,136 2.90 4,185,800
---- ------------ ---- ------------
Total savings and transaction deposits . . . . . . . . . . . 2.47 114,424,103 3.23 110,902,582
---- ------------ ---- ------------
Market-rate certificates under $100,000 maturing:
Three months or less . . . . . . . . . . . . . . . . . . . . 3.84 37,909,328 4.86 45,781,741
Three months to six months . . . . . . . . . . . . . . . . . 3.69 22,848,926 4.97 29,851,480
Six months to one year . . . . . . . . . . . . . . . . . . . 3.65 26,694,662 4.79 33,046,983
One to two years . . . . . . . . . . . . . . . . . . . . . . 4.36 10,430,845 6.22 11,860,462
Two to three years . . . . . . . . . . . . . . . . . . . . . 4.91 10,514,059 4.91 3,212,207
Three to five years. . . . . . . . . . . . . . . . . . . . . 5.07 5,576,637 6.11 1,225,039
Market-rate certificates $100,000 and over maturing:
Three months or less . . . . . . . . . . . . . . . . . . . . 4.02 2,754,760 4.90 3,294,615
Three months to six months . . . . . . . . . . . . . . . . . 3.32 1,710,739 4.68 2,014,480
Six months to one year . . . . . . . . . . . . . . . . . . . 4.12 1,819,949 5.16 2,417,186
One to two years . . . . . . . . . . . . . . . . . . . . . . 4.51 527,622 6.89 428,375
Two to three years . . . . . . . . . . . . . . . . . . . . . 4.99 701,366 5.30 214,475
Three to five year . . . . . . . . . . . . . . . . . . . . . 5.05 1,113,268 -- --
---- ------------ ---- ------------
Total certificates of deposit . . . . . . . . . . . . . . . 3.98 122,602,161 5.01 133,347,043
---- ------------ ---- ------------
Total interest-bearing deposits. . . . . . . . . . . . . . 3.25% $237,026,264 4.20% $244,249,625
==== ============ ==== ============
Average effective interest rate on all deposits . . . . . . . 3.13% 4.04%
==== ====
</TABLE>
7. BORROWINGS
On February 1, 1993, the FHLB advanced the Company $400,000, maturing on
February 1, 1996. There were no advances during 1992. The average amount
outstanding during 1993 and 1991 was $367,000 and $23,308,000, respectively,
with a weighted average rate of 4.9% and 8.4%, respectively. The FHLB advance
is collateralized by
42
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
mortgage-backed securities and the mortgage loan portfolio. During the fourth
quarter of 1991, the proceeds primarily from the sale of one-to-four family
performing mortgage loans and investment securities were used to prepay
$15,900,000 of FHLB advances, incurring approximately $1,034,000 of early
extinguishment costs. The costs have been included in the consolidated
statements of operations as an extraordinary item. Due to the net operating
loss carryforward position, there was no income tax effect for these
transactions.
In 1987, the Bank established an Employee Stock Ownership Plan ("ESOP"),
which borrowed $l,449,000 from an unrelated third party lender to acquire
138,000 shares of the Company's Common Stock at $10.50 per share (secured by
the shares purchased). The loan was scheduled to mature in 1997; however, the
ESOP, at its option, repaid the remaining balance of the loan during 1992 with
no penalty. The ESOP repaid the loan as contributions were received from the
Bank. Interest was paid and accrued monthly at a variable rate which
approximated the prime rate. The related interest expense incurred for the
years ended December 31, 1992 and 1991 approximated $1,000 and $23,000, at an
effective rate of 3.9% and 9.3%, respectively.
The Bank also has a line of credit, which expires on September 1, 1994,
of approximately $14.3 million with the FHLB, none of which was in use at
December 31, 1993.
8. PENSION PLAN
The components of net periodic pension cost include the following:
Year ended December 31,
-------------------------------
1993 1992 1991
-------- -------- --------
Service cost of benefits earned . . . . . $131,925 $122,405 $102,672
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . 220,512 209,194 205,182
Actual return on plan assets. . . . . . . (408,089) (279,886) (210,743)
Net amortization:
Deferred investment liability. . . . . . 147,402 33,433 --
Unrecognized net transition asset. . . . (58,356) (58,356) (58,356)
Unrecognized prior service liability . . (254) 1,456 1,456
-------- -------- --------
Net periodic pension cost . . . . . . . . $ 33,140 $ 28,246 $ 40,211
======== ======== ========
43
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plan, which invests primarily in marketable
equity and debt securities, and the amounts recognized in the consolidated
balance sheets are as follows:
December 31,
--------------------------
1993 1992
----------- -----------
Actuarial present value of accumulated benefit
obligation:
Vested benefits. . . . . . . . . . . . . . . . $(2,838,600) $(2,338,576)
Nonvested benefits . . . . . . . . . . . . . . (182,800) (150,610)
----------- -----------
Accumulated benefit obligation . . . . . . . . (3,021,400) (2,489,186)
Effect of assumed increase in future
compensation levels. . . . . . . . . . . . . . (415,000) (341,898)
----------- -----------
Projected benefit obligation. . . . . . . . . . (3,436,400) (2,831,084)
Plan assets at fair value . . . . . . . . . . . 3,617,300 3,333,266
----------- -----------
Plan assets in excess of projected
benefit obligation. . . . . . . . . . . . . . . 180,900 502,182
Unrecognized net transition asset . . . . . . . (242,200) (300,524)
Unrecognized net (gain)/loss. . . . . . . . . . 87,200 (142,334)
Unrecognized prior service liability. . . . . . (7,500) (7,784)
----------- -----------
Net pension asset . . . . . . . . . . . . . . . $ 18,400 $ 51,540
========== ==========
The expected long-term rate of return on plan assets used in determining
the net periodic pension cost was 8.00% in 1993, 1992 and 1991. The projected
benefit obligation is based on an assumed discount rate of 7.00% in 1993 and
8.00% in 1992, and an assumed rate of compensation increase of 5.5% and 6.00%
in 1993 and 1992, respectively. The original net transition asset of $650,660
is being amortized over approximately eleven years and is due to expire in
1998.
9. BENEFIT PLANS
The expense charged to operations for the following benefit plans during
the years ended December 31, 1993, 1992 and 1991 approximated $151,000,
$193,000 and $376,000, respectively.
Incentive Stock Option Plan ("Option Plan")
The Option Plan authorizes the granting of 172,500 nonqualified and
incentive stock options through 1997 to certain officers and other key
employees. Each option entitles the holder to purchase one share of Common
Stock at an exercise price equal to the fair market value as of the date of
grant. Options may be exercisable at such times (not after ten years from
grant) as the Stock Option Plan Committee determines. The exercise price may
be paid in cash or Common Stock. The following table summarizes stock option
transactions during the three years ended December 31, 1993:
Balance at January 1, 1991, exercisable between $5.25
and $18.75 . . . . . . . . . . . . . . . . . . . . . . . . 58,000
Granted in 1992 at $4.00. . . . . . . . . . . . . . . . . 26,500
Granted in 1993 at $7.25. . . . . . . . . . . . . . . . . 88,000
Exercised in 1993 at $4.00. . . . . . . . . . . . . . . . (500)
-------
Balance at December 31, 1993, exercisable between $4.00
and $18.75 . . . . . . . . . . . . . . . . . . . . . . . . 172,000
=======
Exercisable at December 31, 1993. . . . . . . . . . . . . . 74,700
=======
Available for future grant of stock options . . . . . . . . --
=======
44
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Ownership Plan ("ESOP")
The ESOP, established for employees age 21 or older who have at least one
year of credited service, was funded by discretionary cash contributions that
are invested in the Common Stock. Benefits may be paid either in shares of
Common Stock or in cash. Shares purchased with such proceeds are held in a
suspense account by the ESOP Trustee for allocation among members. Benefits
become 20% vested each year of credited service, with 100% vesting after 5
years of credited service. Forfeitures will be reallocated among remaining
participating employees. Benefits may be payable upon retirement, early
retirement, disability or separation from service.
The ESOP Trustee must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Shares for
which employees do not give instructions, shares held by the ESOP trustee and
unallocated shares will be voted in the same proportion as the shares with
respect to which instructions have been given.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended (which applies to all employee stock
ownership plans), and the regulations of the Internal Revenue Service and the
Department of Labor thereunder. The Company has begun to terminate the ESOP.
The effect of terminating the ESOP will not be significant to the financial
position or results of operations of the Company.
Management Recognition Plan ("MRP")
The MRP was established as a method of providing employees in key
positions with a proprietary interest in a manner designed to encourage such
key employees to remain with the Company. The Company contributed $630,000 to
the MRP to enable it to acquire 60,000 shares of Common Stock. Such amount
represents deferred compensation and has been accounted for as a reduction of
stockholders' equity. Awards generally vest over either a three or five year
period and will be 100% vested upon termination of employment by death,
disability, retirement, or following a change in control of the Company.
Option Plan for Outside Directors ("Directors' Option Plan")
Each member of the Board of Directors who is not an officer or employee
of the Company was granted a single non-qualified option to purchase 7,187.5
shares (aggregate 57,500 shares) of the Common Stock at an exercise price
equal to the fair market value as of the date of grant. Each option granted
under the Directors' Option Plan expires upon the earlier of ten years
following the date of the option or thirty days following the date the
optionee ceases to be a director. The following table summarizes the
Directors' Option Plan transactions during the three years ended December 31,
1993:
Balance at January 1, 1991, exercisable between $10.50
and $13.00 . . . . . . . . . . . . . . . . . . . . . . . . 50,312.50
Granted in 1993 at $7.25. . . . . . . . . . . . . . . . . 10,782.00
Options returned for granting in 1993 . . . . . . . . . . (10,782.00)
----------
Balance at December 31, 1993, excersisable between $7.25
and $13.00 . . . . . . . . . . . . . . . . . . . . . . . . 50,312.50
==========
Exercisable at December 31, 1993. . . . . . . . . . . . . . 50,312.50
==========
Available for future grant of stock options . . . . . . . . --
==========
Deferred Compensation Plan for Outside Directors ("DCP")
During 1993, the DCP, a plan which covers any outside director who has
served in that capacity for at least five consecutive calendar years, was
approved in principle subject to certain conditions. Eligibility, benefits and
vesting will continue should an outside director subsequently become an
officer or employee. An outside director becomes fully vested upon either
fifteen years of service as director, sixty-five years of age, death, or
change in control of the Company, as described below. Subsequent to
retirement, the DCP provides an annual benefit equal to (a) 50% of the outside
director's annual retainer in effect at the time of retirement (the "then
current retainer"), plus (b) 5% of the then current retainer for each
additional year of service in excess of 5 years (up to a maximum of 10
additional years).
45
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Benefits are based on actuarial assumptions then in effect under the
Retirement Plan of the Bank. Benefits payable under the DCP shall be paid
directly from the general assets of the Company. The Company is not obligated
to set aside, earmark or escrow funds or other assets to satisfy its
obligations under the DCP. At December 31, 1993, the accumulated
postretirement benefit obligation reflected on the consolidated balance sheet
in other liabilities was $25,000.
In the event of a change in control of the Company, each outside director
(regardless of whether he has served as a director for five years) who is
neither an officer nor an employee shall receive a single cash payment equal
to four times the then current retainer. The cumulative liability under a
change in control of the Company is approximately $252,000. Such cumulative
liability in excess of the aforementioned $25,000 was not reflected in the
consolidated financial statements as of December 31, 1993.
Bonus programs
Employees of the Bank are awarded cash bonuses based upon length of
service, responsibility level and performance.
10. INCOME TAX EXPENSE/(BENEFIT)
Year ended December 31,
----------------------
1993 1992 1991
---- ---- ----
(Dollars in thousands)
Current:
Federal. . . . . . . . . . . . . . . . . . . $ 396 $ 288 $ --
State. . . . . . . . . . . . . . . . . . . . 32 51 --
------- ----- -----
428 339 --
Deferred. . . . . . . . . . . . . . . . . . . 110 (250) --
Elimination of valuation allowance. . . . . . (809) -- --
Income tax refund . . . . . . . . . . . . . . (747) -- --
Charge in lieu of income taxes. . . . . . . . -- 539 --
Write-off of net deferred tax asset . . . . . -- -- 552
------- ----- -----
$(1,018) $ 628 $ 552
======= ===== =====
Upon adoption of SFAS 109, deferred tax assets of $2.4 million, deferred
tax liabilities of $1.0 million and a valuation allowance of $809,000 were
established, resulting in a net deferred tax asset of $550,000 as of January
1, 1993. As of December 31, 1993, the $809,000 valuation allowance was reduced
to zero as a result of taxes paid in prior and current years and anticipated
future taxable income sufficient to realize these tax benefits. Based upon the
Company's historical and current pretax earnings, management believes it is
more likely than not that the Company will generate future net taxable income
in sufficient amounts to realize its net deferred tax asset at December 31,
1993, however, there can be no assurance that the Company will generate any
earnings or any specific level of continuing earnings. In addition during
1993, an income tax refund of $747,000 was received as a result of an
overassessment of previously paid federal income taxes.
During 1992, the Company utilized its remaining net operating loss
carryforwards of approximately $754,000 for federal income tax purposes and
approximately $1,700,000 for financial reporting purposes to record an
extraordinary credit in the amount of $539,000, which partially offset income
tax expense of $628,000. During 1991, the $552,000 of expense was primarily a
result of the write-off of the net deferred tax asset as a result of the
Company's tax loss carryforward position.
46
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the reported income tax expense/(benefit) and
the amount computed by multiplying income before income taxes, extraordinary
items and cumulative effect of change in accounting principle by the statutory
Federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1993 1992 1991
--------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory expense . . . . . . . . . . . . . . . . . . . . $ 512 34.0% $ 743 34.0% $ 81 34.0%
(Deductible)/ nondeductible provision
for losses on loans. . . . . . . . . . . . . . . . . . . -- -- (151) (6.9) 160 67.3
State income tax, net of federal benefit. . . . . . . . . 30 2.0 35 1.6 -- --
Reduction in valuation allowance. . . . . . . . . . . . . (809) (53.7) -- -- -- --
Income tax refunds. . . . . . . . . . . . . . . . . . . . (747) (49.6) -- -- -- --
Write-off of deferred tax asset, net of
benefit. . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 310 130.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (.3) 1 -- 1 (.2)
------- ------ ----- ---- ----- -----
$(1,018) (67.6)% $ 628 28.7% $ 552 231.7%
======= ====== ===== ==== ===== =====
</TABLE>
Temporary differences, which give rise to deferred tax assets and
liabilities under SFAS 109, as of December 31, 1993, are as follows:
Deferred Tax
---------------------
Assets Liabilities
------ -----------
(Dollars in thousands)
Financial basis reserve for losses on loans and REO . . $1,710 $ --
Tax basis reserve for losses on loans and REO
in excess of base year tax reserve . . . . . . . . . . -- 1,088
Deferred loan origination fees. . . . . . . . . . . . . 309 --
Interest on nonaccrual loans. . . . . . . . . . . . . . 262 --
Premises and equipment. . . . . . . . . . . . . . . . . 146 --
Deferred compensation . . . . . . . . . . . . . . . . . 83 --
Unrealized gain on available for sale securities. . . . -- 100
Other . . . . . . . . . . . . . . . . . . . . . . . . . 54 7
------ ------
Deferred taxes/liabilities. . . . . . . . . . . . . . . $2,564 $1,195
====== ======
Net deferred tax asset. . . . . . . . . . . . . . . . . $1,369
======
Under APB 11, the provision for losses on loans and REO was treated as a
permanent difference which did not require deferred taxes. Under SFAS 109,
differences between the book and tax basis reserve for losses on loans and REO
are treated as temporary differences requiring deferred taxes, except that no
deferred tax liability is required for the base year tax reserve of
approximately $270,000 as of December 31, 1993.
47
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The deferred income tax provision/(benefit) on income from operations is
due to the following items:
Year ended December 31,
------------------------
1993 1992 1991
---- ---- ----
(Dollars in thousands)
Financial basis reserve for losses on loans and
REO. . . . . . . . . . . . . . . . . . . . . . $ 63 $ -- $ --
Tax basis reserve for losses on loans and REO in
excess of base year tax reserve. . . . . . . . (87) -- --
Deferred loan origination fees. . . . . . . . . (70) (248) --
Interest on nonaccrual loans. . . . . . . . . . 186 23 --
Deferred compensation . . . . . . . . . . . . . (26) (28) --
Other . . . . . . . . . . . . . . . . . . . . . 44 3 --
---- ----- ----
$110 $(250) $ --
==== ===== ====
11. COMMITMENTS AND CONTINGENCIES
Total rent expense for all bank branches under operating leases was
approximately $73,000, $130,000 and $105,000 for the years ended December 31,
1993, 1992 and 1991, respectively. Future minimum lease payments required
under noncancellable operating leases for bank branches as of December 31,
1993 are as follows:
1994 . . . . . . . . . . . . . $ 71,000
1995 . . . . . . . . . . . . . 71,000
1996 . . . . . . . . . . . . . 71,000
1997 . . . . . . . . . . . . . 50,000
1998 . . . . . . . . . . . . . 7,000
Thereafter . . . . . . . . . . --
--------
$270,000
========
Certain of the above leases contain renewal options which provide for
increased rental payments as a result of increases in real estate taxes. It is
generally expected that in the normal course of business, leases that expire
will be renewed or replaced by other leases with similar terms.
The Company has entered into a severance agreement with a certain key
executive. In the event of a change in control of the Company (such as the
Merger referred to in Note 15), this executive will receive a payment equal to
three times his average annual compensation over the five previous years of
his employment with the Bank, if terminated for other than cause or upon
certain other events of termination of employment. In the event that severance
payments combined with other payments to be made to this executive by the
Company in connection with the Merger would constitute an excess parachute
payment under Section 280 G of the Internal Revenue Code of 1986, as amended,
then the executive will receive a combination of benefits and payments which
will equal the maximum aggregate amount which can be paid to the executive
without constituting such an excess parachute payment.
In October 1991, a complaint was filed by a former officer in New Jersey
Superior Court against the Company, the Bank and certain directors and
officers seeking unspecified damages relating to the termination of such
officer's employment. The Company and individual defendants have filed an
answer and have asserted certain counterclaims. Although this complaint was
recently dismissed, it was dismissed without prejudice to the plaintiff's
right to refile the complaint by March 31, 1994. In April 1992, a complaint
was filed in the New Jersey Superior Court against the Company and the Bank
seeking unspecified damages and alleging violations of state securities laws,
certain banking laws and state common law. This lawsuit is in the discovery
stage. The plaintiffs recently amended their complaint to add claims against
nine individual defendants, including current and former officers and
directors of the Company and the Bank. Management believes that the defendants
have meritorious defenses in both of these matters and intends to vigorously
defend these matters. Given the uncertainties involved in judicial proceedings
and the preliminary stage of discovery in these matters, management cannot
determine the precise amount of any potential loss that may arise in these
matters. Accordingly, no provision for loss, if any, that may result upon
resolution of these matters has been recorded in the Company's consolidated
financial statements.
48
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank is also subject to other legal proceedings involving collection
matters, contract claims and miscellaneous items arising in the normal course
of business. It is the opinion of management that the resolution of such legal
proceedings will not have a material impact on the financial statements of the
Company or the Bank.
12. FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk which are properly not recorded in the
consolidated financial statements. These financial instruments principally
represent commitments to extend credit to potential borrowers and involve, to
varying degrees, elements of credit and interest-rate risk. At December 31,
1993 and 1992, the exposure to credit loss in the event of nonperformance by
potential customers was represented by the contractual amount of the financial
instruments as follows:
Expiration
Contractual Interest Dates
Amount Rates Through
---------- ------- ----------
At December 31, 1993:
Loan commitments--variable . . . . . $1,575,000 6.3%- 9.5% March 1994
Loan commitments--fixed. . . . . . . 4,939,000 6.3 -10.5 March 1994
Lines of credit--variable. . . . . . 1,081,000 7.5 -11.0 September 1994
Undisbursed construction loans--
fixed . . . . . . . . . . . . . . . 853,000 8.0 -10.0 August 1995
At December 31, 1992:
Loan commitments--variable . . . . . $2,628,000 5.8%- 8.0% March 1993
Loan commitments--fixed. . . . . . . 2,519,000 7.8 -10.5 March 1993
Lines of credit--variable. . . . . . 808,000 8.0 -11.0 November 1993
Undisbursed construction loans--
fixed . . . . . . . . . . . . . . . 197,000 7.0 -10.0 October 1993
Since loan commitments and lines of credit may expire without being
exercised, the total commitment amount does not necessarily represent future
cash requirements. In addition, expiration dates may be extended. The amount of
collateral obtained upon originating the loan is based upon management's credit
evaluation of the potential borrower and the real estate financed.
Concentrations of Credit Risk
The Company's exposure to credit risk is dependent upon the economic
condition of its primary market areas for lending--Bergen and Hudson counties,
New Jersey. In addition, as of December 31, 1993, the Bankruptcy Loan is the
only loan to any one borrower whose aggregate loan concentration was greater
than 10% of stockholders' equity. Refer to Note 4 for a discussion of the
Bankruptcy Loan. Furthermore, another borrower whose aggregate loan balance was
greater than 10% of stockholders' equity as of December 31, 1992, prepaid such
loan during 1993.
The Company originates adjustable-rate loans to manage its interest
exposure on its deposits. The adjustable-rate loans have interest rate
adjustment limitations with annual and lifetime caps and are generally indexed
to the 1 and 3 year Treasury indices. Future market factors may affect the
correlation of the interest rate adjustment with the rates paid on deposits that
have been primarily utilized to fund such loans. No loans had reached their
interest rate adjustment limitation ceiling as of December 31, 1993.
49
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The estimated fair values of financial instruments, for which it is
practicable to estimate fair values, as of December 31, 1993 and 1992 are as
follows:
December 31,
---------------------------------------
1993 1992
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- ------- -----
(in thousands)
Financial assets:
Cash and Federal funds sold. . . $ 6,183 $ 6,183 $ 7,336 $ 7,336
Investments available for sale . 57,740 57,740 1,936 1,954
Mortgage-backed securities
available for sale. . . . . . . 9,517 9,517 -- --
Loans held for sale. . . . . . . 4,852 4,909 9,000 9,032
Investment securities. . . . . . 13,849 14,128 56,794 57,430
Mortgage-backed securities . . . 9,447 9,365 7,213 7,197
Loans. . . . . . . . . . . . . . 169,098 186,417
Less: allowance for losses. . . (2,828) (2,776)
unearned income. . . . . . . (937) (1,140)
------- -------
165,333 169,292 182,501 182,283
Investment in FHLB . . . . . . . 1,711 1,711 1,632 1,632
Financial liabilities:
Deposits . . . . . . . . . . . . 246,043 246,305 252,623 253,287
Advances . . . . . . . . . . . . 400 401 -- --
13. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
In 1987, when the Bank converted from a savings bank in mutual form to a
savings bank in stock form, the Company established a liquidation account in
an amount equal to the Bank's surplus and reserves at December 31, 1986
($14,351,000). The liquidation account will be maintained for the benefit of
eligible depositors who held deposit accounts of $50 or more in the Bank as of
December 31, 1985 and who continue to maintain their accounts in the Bank. The
liquidation account is reduced annually to the extent that eligible depositors
have reduced their eligible deposits (subsequent increases will not restore an
interest in the liquidation account). In the unlikely event of a complete
liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in a proportionate amount to the
then current adjusted eligible balances for accounts then held. No dividends
may be paid to stockholders if such dividends reduce stockholders' equity
below the liquidation account, which was approximately $1.4 million at
December 31, 1993.
Certain restrictions exist regarding the ability of the Bank to transfer
funds to the Company in the form of cash dividends, loans or advances. FDIC
regulations limit the amount of dividends that may be paid by the Bank to the
Company without prior approval of the FDIC to net profits (as defined) for the
current year and the retained net profits (as defined) for the preceding two
years. In addition, State banking regulations allow for the payment of
dividends in any amount provided that capital stock will be unimpaired and
there remains an additional amount of paid-in capital of not less than 50% of
the capital stock amount. As of December 31, 1993, the undistributed earnings
of the Bank approximated $11.6 million, of which $3.6 million was available
for the payment of dividends to the Company.
14. REGULATORY MATTERS
During the third quarter, the Federal Deposit Insurance Corporation (the
"FDIC") completed its examination of the Bank as of August 2, 1993. As a
result of that examination, the FDIC rescinded its Memorandum of
Understanding which the Bank had signed on December 22, 1992 with the FDIC and
the State of New Jersey Department of Banking in connection with their
examination as of July 13, 1992.
50
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subsequently, the Federal Reserve Bank of New York (the "FRB") completed
an off-site analysis of the Company. As a result of that analysis, the FRB
rescinded its Memorandum of Understanding, which the Company had originally
signed on August 13, 1991 in connection with the FRB's examination as of
December 31, 1990.
Under banking policies issued by the FDIC and the FRB, the Company and
the Bank must maintain an adequate level of capital sufficient to meet a
leverage capital ratio, a core risk-based capital ratio and a total risk-based
capital ratio. The leverage capital ratio is calculated by dividing core
capital by average total assets of the most recent quarter-end. The risk-based
capital ratios require the Company and the Bank to classify their assets and
certain off-balance-sheet activities into categories, and maintain specified
levels of capital for each category. The least capital is required for the
category deemed to have the least risk, and the most capital is required for
the category deemed to have the greatest risk. For purposes of leverage and
risk-based capital guidelines, core capital (also known as Tier 1 capital)
consists of common equity in accordance with generally accepted accounting
principles ("GAAP") excluding net unrealized gains or losses on
available-for-sale securities and deferred tax assets that are dependent on
the future taxable income greater than one year, and total capital consists of
core capital plus a portion of the allowance for losses on loans. The
qualifying portion of the allowance for losses on loans for the Company and
the Bank was approximately $1.8 million and $2.3 million as of December 31,
1993 and 1992, respectively. As of December 31, 1993 and 1992, capital ratios
were as follows:
December 31,
------------------------------------
1993 1992
---------------- ----------------
Capital ratios: Required* Company Bank Company Bank
- --------------- -------- ------- ---- ------- ----
Leverage. . . . . . . . . . 5.00% 11.70% 11.38% 10.62% 10.33%
Core risk-based . . . . . . 6.00 23.55 22.90 16.32 15.87
Total risk-based. . . . . . 10.00 24.81 24.16 17.58 17.12
- ------------
*For qualification as a well-capitalized institution.
15. MERGER AGREEMENT
On November 8, 1993, the Company signed a definitive agreement (the
"Agreement") providing for the merger of the Company with and into Hubco, Inc.
of Union City, New Jersey. Under the terms of the Agreement, shareholders of
the Company will receive either $16.10 in cash or .6708 of a share of new
Series A Convertible Preferred Stock of Hubco, Inc. for each share of the
Company's common stock. In addition, the Company issued an option to Hubco,
Inc., exercisable in certain circumstances, to acquire 765,000 shares of its
authorized but unissued stock at a price of $11.50 per share. The Agreement is
subject to several conditions, including regulatory and shareholder approvals.
Since significant conditions to effect the merger have not occurred, most
merger costs are not included in the 1993 results of operations in the
accompanying financial statements.
51
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PARENT ONLY FINANCIAL INFORMATION
The following are the balance sheets as of December 31, 1993 and 1992,
and the statements of operations and retained earnings and the statements of
cash flows for the years ended December 31, 1993, 1992 and 1991 for Washington
Bancorp, Inc. (parent company only).
BALANCE SHEETS
December 31,
--------------------------
1993 1992
----------- -----------
Assets:
Due from banks. . . . . . . . . . . . . . . . . $ 1,002,000 $ 1,000,000
Investment in wholly-owned subsidiary,
equity basis . . . . . . . . . . . . . . . . . 32,539,499 29,469,045
----------- -----------
$33,541,499 $30,469,045
=========== ===========
Stockholders' Equity:
Preferred stock, par value $.10 per share,
3,000,000 shares authorized, no shares issued
and outstanding. . . . . . . . . . . . . . . . $ -- $ --
Common stock, par value $.10 per share, 6,000,000
shares authorized, shares issued and outstanding--
2,307,687 in 1993 and 2,307,187 in 1992 . . . 230,768 230,718
Paid-in capital . . . . . . . . . . . . . . . . 22,500,728 22,498,778
Retained earnings . . . . . . . . . . . . . . . 10,744,003 7,919,549
Unrealized gain on available-for-sale securities,
net of tax . . . . . . . . . . . . . . . . . . 186,000 --
----------- -----------
33,661,499 30,649,045
Deferred compensation--MRP. . . . . . . . . . . (120,000) (180,000)
----------- -----------
$33,541,499 $30,469,045
=========== ===========
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Year ended December 31,
----------------------------------------
1993 1992 1991
----------- ----------- -----------
Equity in undistributed earnings/
(loss) of subsidiary . . . . . . $ 2,824,454 $ 2,095,981 $ (1,348,130)
Retained earnings, beginning of
year . . . . . . . . . . . . . . 7,919,549 5,823,568 7,171,698
----------- ----------- ------------
Retained earnings, end of year. . $10,744,003 $ 7,919,549 $ 5,823,568
=========== =========== ============
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------
1993 1992 1991
----------- ----------- -----------
Cash Flows from Financing Activities:
Exercise of stock options . . . . $ 2,000 $ -- $ --
Cash, at beginning of year. . . . 1,000,000 1,000,000 1,000,000
---------- ---------- ----------
Cash, at end of year. . . . . . . $1,002,000 $1,000,000 $1,000,000
========== ========== ==========
52
<PAGE>
<PAGE>
WASHINGTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. Summary of Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
The results of operations on a quarterly basis are presented in the
following tables:
1993 1992
------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------ ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . $4,452 $4,634 $4,669 $4,802 $5,030 $5,442 $5,688 $5,719
Interest expense. . . . . . . . . . . . . . . 1,987 2,153 2,260 2,412 2,664 2,891 3,136 3,499
------ ------ ------ ------ ------ ------ ------ ------
Net interest income . . . . . . . . . . . . . 2,465 2,481 2,409 2,390 2,366 2,551 2,552 2,220
Provision for losses on loans . . . . . . . . 70 50 100 200 350 400 200 150
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after provision
for losses on loans. . . . . . . . . . . . . 2,395 2,431 2,309 2,190 2,016 2,151 2,352 2,070
Net security transactions . . . . . . . . . . (7) (13) 12 30 426 1,197 10 5
Net gain on sale of loans . . . . . . . . . . 16 (3) 144 -- -- 132 65 --
Other non-interest income . . . . . . . . . . 304 110 116 240 99 134 111 111
REO expense, net. . . . . . . . . . . . . . . 533 372 116 436 556 251 145 219
Other non-interest expense. . . . . . . . . . 1,885 1,666 1,903 1,857 1,673 1,839 2,095 1,916
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle. . . . . . . . . . . . . . . . . . 290 487 562 167 312 1,524 298 51
Income tax benefit/(expense) (1). . . . . . . 703 (179) (201) 695 11 (559) (62) (18)
------ ------ ------ ------ ------ ------ ------ ------
Income before extraordinary item and
cumulative effect of change in
accounting principle . . . . . . . . . . . . 993 308 361 862 323 965 236 33
Extraordinary item. . . . . . . . . . . . . . -- -- -- -- (17) 481 57 18
Cumulative effect of change in
accounting principle (2) . . . . . . . . . . -- -- -- 300 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income. . . . . . . . . . . . . . . . . . $ 993 $ 308 $ 361 $1,162 $ 306 $1,446 $ 293 $ 51
====== ====== ====== ====== ====== ====== ====== ======
Per share data:
Income before extraordinary
items and cumulative effect of change
in accounting principle. . . . . . . . . . . $0.43 $0.14 $0.16 $.38 $0.14 $0.43 $0.10 $0.01
Extraordinary items . . . . . . . . . . . . . -- -- -- -- (0.01) 0.21 0.03 0.01
Cumulative effect of change in
accounting principle . . . . . . . . . . . . -- -- -- 0.13 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income. . . . . . . . . . . . . . . . . . $0.43 $0.14 $0.16 $0.51 $0.13 $0.64 $0.13 $0.02
====== ====== ====== ====== ====== ====== ====== ======
<FN>
(1) The first quarter of 1993 includes an income tax refund of $747,000 and the
fourth quarter of 1993 includes a deferred tax adjustment of $809,000 in
order to reduce the deferred tax asset valuation allowance (to a zero balance).
(2) The cumulative effect of change in accounting principle resulted from the
adoption of SFAS 109 -- "Accounting for Income Taxes".
</FN>
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
53
<PAGE>
<PAGE>
PART III
Item 10. Directors of the Registrant
The Company responds to this Item by incorporating herein by reference
the material responsive to such Item in the Company's definitive proxy
statement for its 1994 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The Company responds to this Item by incorporating herein by reference
the material responsive to such Item in the Company's definitive proxy
statement for its 1994 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company responds to this Item by incorporating herein by reference
the material responsive to such Item in the Company's definitive proxy
statement for its 1994 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The Company responds to this Item by incorporating herein by reference
the material responsive to such Item in the Company's definitive proxy
statement for its 1994 Annual Meeting of Stockholders.
54
<PAGE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
Financial Statements have been included in Item 8.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
(b) Exhibits
The following exhibits are filed as part of this Report.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1* Articles of Incorporation
3.2* Bylaws
10.1* Washington Savings Bank Employee Stock Ownership Plan
10.2** Washington Savings Bank Management Recognition Plan, as amended
10.3*** Washington Bancorp, Inc. Incentive Stock Option Plan
10.4*** Washington Bancorp, Inc. Option Plan for Outside Directors
10.5**** Severance Agreement between Washington Savings Bank, Washington
Bancorp, Inc. and Paul Rotondi
10.6***** Agreement and Plan of Merger among Washington Bancorp, Inc.,
Washington Savings Bank, Hubco, Inc. and Hudson United Bank,
dated November 8, 1993.
10.7 Washington Savings Bank Deferred Compensation Plan for Outside
Directors
22.1****** Subsidiaries of the Registrant
24.1 Consent of Coopers & Lybrand
25.1 Power of Attorney
- ------------
* Incorporated by reference to Exhibits 3.1, 3.2 and 10.1 filed with
the Company's Registration Statement on Form S-1, No. 33-12637.
** Incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
*** Incorporated by reference to Exhibits A and B, respectively, of the
Company's 1989 Proxy Statement.
**** Incorporated by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1989.
***** Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
****** Incorporated by reference to Exhibit 22.1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.
(c) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the three
months ended December 31, 1993.
55
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WASHINGTON BANCORP, INC.
By /s/ PAUL C. ROTONDI
-----------------------------
(PAUL C. ROTONDI)
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Dated: March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 1994 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ PAUL C. ROTONDI Chairman of the Board and Chief
- ------------------------------ Executive Officer and*
(PAUL C. ROTONDI) as attorney in fact
*/s/ THOMAS S. BINGHAM Chief Financial and Accounting Officer
- ------------------------------
(THOMAS S. BINGHAM)
Directors:
*/s/ THEODORE DOLL, JR.
- ------------------------------ -----------------------------
(WILSON A. BRITTEN) (THEODORE DOLL JR.)
*/s/ JOSEPH A. TIGHE, JR. /s/ PAUL C. ROTONDI
- ------------------------------ -----------------------------
(JOSEPH A. TIGHE, JR.) (PAUL C. ROTONDI)
*/s/ ROBERT A. HAND */s/ JAMES M. UNGERLEIDER
- ------------------------------ -----------------------------
(ROBERT A. HAND) (JAMES M. UNGERLEIDER)
*/s/ THEODORE J. DOLL
- ------------------------------
(THEODORE J. DOLL)
*/s/ DUNCAN M. LASHER */s/ CHARLES A. ROTONDI
- ------------------------------ -----------------------------
(DUNCAN M. LASHER) (CHARLES A. ROTONDI)
56
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<PAGE>
EXHIBIT INDEX
WASHINGTON BANCORP, INC.
EXHIBIT Page
NUMBER DESCRIPTION Number
- ------- ----------- ------
3.1* Articles of Incorporation
3.2* Bylaws
10.1* Washington Savings Bank Employee Stock Ownership Plan
10.2** Washington Savings Bank Management Recognition Plan,
as amended
10.3*** Washington Bancorp, Inc. Incentive Stock Option Plan
10.4*** Washington Bancorp, Inc. Option Plan for Outside
Directors
10.5**** Severance Agreement between Washington Savings Bank,
Washington Bancorp, Inc. and Paul Rotondi
10.6***** Agreement and Plan of Merger among Washington Bancorp,
Inc., Washington Savings Bank, Hubco, Inc. and Hudson
United Bank, dated November 8, 1993.
10.7 Washington Savings Bank Deferred Compensation Plan for
Outside Directors 60
22.1****** Subsidiaries of the Registrant
24.1 Consent of Coopers & Lybrand 58
25.1 Power of Attorney 59
- ------------
* Incorporated by reference to Exhibits 3.1, 3.2 and 10.1 filed with
the Company's Registration Statement on Form S-1, No. 33-12637.
** Incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
*** Incorporated by reference to Exhibits A and B, respectively, of the
Company's 1989 Proxy Statement.
**** Incorporated by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1989.
***** Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
****** Incorporated by reference to Exhibit 22.1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.
57
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<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the 1993 Annual Report on Form 10-K
and to the incorporation by reference in the Prospectuses constituting
part of the Registration Statements on Form S-8 No. 33-25089 and
No. 33-25090 of Washington Bancorp, Inc. of our report, which includes
an explanatory paragraph regarding changes in accounting principles and
includes an explanatory paragraph regarding an action seeking unspecified
damages and alleging violations of state securities laws, certain banking
laws and state common law and a lawsuit filed by a former Bank officer
which alleges wrongful termination and seeks unspecified damages, dated
January 28, 1994, on our audits of the consolidated financial statements
of Washington Bancorp, Inc. and Subsidiary as of December 31, 1993 and
1992 and for each of the three years in the period ended December 31, 1993,
which report appears on page 29 of the 1993 Annual Report on Form 10-K.
/s/COOPERS & LYBRAND
Coopers & Lybrand
Parsippany, New Jersey
March 30, 1994
58<PAGE>
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned officers and directors of Washington Bancorp,
Inc. desire to authorize Paul C. Rotondi, Theodore J. Doll and Thomas S.
Bingham to act as their attorneys in fact and agents, for the purpose of
executing and filing the Annual Report described below, including all
amendments and supplements thereto,
NOW THEREFORE,
NOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul C. Rotondi, Theodore J. Doll and Thomas S.
Bingham and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, to sign the Annual Report on
Form 10-K for the year ended December 31, 1993, including any and all
amendments thereto, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Report on the 22nd
day of March, 1994.
SIGNATURE TITLE
--------- -----
/s/ PAUL C. ROTONDI Chairman of the Board
- -----------------------------------
(PAUL C. ROTONDI)
Director
- -----------------------------------
(WILSON A. BRITTEN)
/s/ THEODORE DOLL, JR. Director
- -----------------------------------
(THEODORE DOLL, JR.)
/s/ THEODORE J. DOLL Director
- -----------------------------------
(THEODORE J. DOLL)
/s/ ROBERT A. HAND Director
- -----------------------------------
(ROBERT A. HAND)
/s/ CHARLES A. ROTONDI Director
- -----------------------------------
(CHARLES A. ROTONDI)
/s/ JOSEPH A. TIGHE, JR. Director
- -----------------------------------
(JOSEPH A. TIGHE, JR.)
/s/ JAMES M. UNGERLEIDER Director
- -----------------------------------
(JAMES M. UNGERLEIDER)
/s/ DUNCAN M. LASHER Director
- -----------------------------------
(DUNCAN M. LASHER)
/s/ THOMAS S. BINGHAM Chief Financial and Accounting Officer
- -----------------------------------
(THOMAS S. BINGHAM)
59
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Washington Savings Bank
Deferred Compensation Plan
For Outside Directors
60
<PAGE>
<PAGE>
Washington Savings Bank
Deferred Compensation Plan
For Outside Directors
TABLE OF CONTENTS
ARTICLE PAGE
I Definitions 62
II Eligibility 64
III Benefits 64
IV Vesting 65
V Death Benefits 66
VI Payment of Benefits 67
VII Funding 67
VIII Administration of the Plan 67
IX Miscellaneous 70
61
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Washington Savings Bank
Deferred Compensation Plan
For Outside Directors
WHEREAS, Washington Savings Bank (the "Company") desires to
reward certain members of its Board of Directors for services
provided to the Company.
NOW THEREFORE, the Company does hereby adopt the Washington
Savings Bank Deferred Compensation Plan for Outside Directors
(the "Plan"), effective September 14, 1993.
ARTICLE I
Definitions
In this Plan, unless the context clearly implies otherwise, the
singular includes the plural, the masculine includes the
feminine, and initially capitalized words have the following
meanings:
1.1 Actuarial Assumptions. An amount or benefit of
equivalent current value to the amount or benefit which
would have been provided to or on account of a Qualified
Outside Director determined on the basis of such
actuarial assumptions then in effect under the Retirement
Plan of Washington Savings Bank in Retirement System for
Savings Institutions (the "Retirement Plan"). In the
event that the Retirement Plan has been terminated at the
time a benefit is to be determined, then the interest
rate used shall be fifty percent (50%) of the sum of (i)
the prime rate of Citibank plus (ii) the 10 year constant
maturity U.S. Treasury bond as of the relevant date.
1.2 Board. The Board of Directors of Washington Savings Bank
as constituted from time to time.
1.3 Change in Control. For purposes of this Plan, a Change
in Control of the Company shall mean a change in control
of a nature that: (i) would be required to be reported in
response to Item 1 of a Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a change in the
outstanding voting stock of the Holding Company such that
a change in control of the Holding Company has occurred
within the meaning of 12 U.S.C. (sec)1817, Change in Bank
Control Act, or Section 303.4(a) of the Rules and
Regulations for FDIC Insured Institutions promulgated
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thereunder; (iii) provided that, without limitation, such
a Change in Control shall be deemed to have occurred at
such time as (a) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rule 13d-3
issued under the Exchange Act), directly or indirectly,
of securities of the Holding Company representing 20% or
more of the combined voting power of the Holding
Company's outstanding securities ordinarily having the
right to vote on the election of directors (except for
any securities purchased by the ESOP of the Company); or
(b) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof
whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding
Company's shareholders was approved by the Holding
Company's Nominating Committee, shall be, for purposes of
this clause (b), considered as though he were a member of
the Incumbent Board; or (c) a merger, consolidation or
sale of all or substantially all the assets of the
Holding Company occurs; or (d) a proxy statement
soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of
the Holding Company, seeking stockholder approval of the
reorganization, merger or consolidation of the Holding
Company with one or more corporations as a result of
which the outstanding shares of the class of securities
then subject to the 1987 Incentive Stock Option Plan of
the Holding Company (the "Stock Option Plan") are
exchanged for or converted into cash or property or
securities not issued by the Holding Company shall be
distributed, regardless of whether the reorganization,
merger or consolidation shall have been affirmatively
recommended to the Holding Company's stockholders by a
majority of the members of its Board of Directors.
1.4 Committee. The Washington Savings Bank Deferred
Compensation Plan Committee appointed by the Board to
administer this Plan. The Committee shall be responsible
for the administration of this Plan in accordance with
Article VIII.
1.5 Company. Washington Savings Bank or any successor
thereto.
1.6 Holding Company. Washington Bancorp, Inc.
1.7 Outside Director. Any member of the Board who is neither
an officer nor an employee of the Company or its
affiliates at the time appointed to the Board.
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1.8 Plan. The Washington Savings Bank Deferred Compensation
Plan for Outside Directors as amended and/or restated
from time to time.
1.9 Plan Year. Each twelve (12) consecutive month period
beginning January 1 and ending December 31.
1.10 Qualified Outside Director. Any Outside Director who has
served in that capacity for at least five consecutive
calendar years. In the event of a Change in Control,
each Outside Director then a member of the Board shall be
a Qualified Outside Director even if service to the Board
has been less then five consecutive calendar years.
ARTICLE II
Eligibility
2.1 Any Qualified Outside Director shall be eligible to
receive retirement benefits as set forth in Article III.
2.2 The Board may withhold approval for benefits for a
Qualified Outside Director only if the Qualified Outside
Director's retirement is due to conduct which would
support termination of an employee for "cause."
2.3 If an Outside Director becomes an officer or employee of
the Company or its affiliates, then service on the Board
while such an officer or employee will count towards
eligibility, benefits, and vesting.
ARTICLE III
Benefits
3.1 In the absence of a Change in Control, and subject to
sections 3.3 and 3.4 herein, a vested Qualified Outside
Director will receive an annual benefit equal to:
(a) 50% of the Board's annual retainer in effect at
the time of retirement or separation (the "Then
Current Retainer") plus
(b) 5% of the Then Current Retainer for each
additional year of service in excess of 5 years
(up to a maximum of 10 additional years).
3.2 Upon the occurrence of a Change in Control, each
Qualified Outside Director who is neither an officer nor
an employee of the Company or the Holding Company at the
time of such occurrence, shall (i) be eligible for
benefits under the Plan, (ii) be treated as fully vested,
regardless of whether he has 15 years of service or has
attained age 65, and (iii) receive a benefit as follows:
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(a) The benefit for a Qualified Outside Director shall
be equal to the product of four times the Then
Current Retainer (as defined in section 3.1).
(b) Subject to section 3.3 herein, each Qualified
Outside Director will receive the value of the
benefit determined pursuant to this section 3.2(a)
in a single cash payment as soon as possible
following the Change in Control.
3.3 Upon the occurrence of a Change in Control, payment of
benefits pursuant to section 3.1 shall cease and the
Qualified Outside Director shall instead receive a single
cash payment as soon as possible following the Change in
Control equal to the benefit for which the Qualified
Outside Director is eligible under section 3.2(a)
reduced, but not below zero, by the sum of all payments
previously paid to such Qualified Outside Director
pursuant to section 3.1. If the Qualified Outside
Director is ineligible to receive any benefits under
section 3.2, then, notwithstanding the provisions of the
Plan to the contrary, the Qualified Outside Director
shall receive no benefits pursuant to this Plan after the
occurrence of a Change in Control.
The Committee shall notify each Qualified Outside
Director of the occurrence of a Change in Control, the
total amount of benefits previously paid pursuant to
section 3.1, and the amount of benefits, if any, to be
paid in a single cash payment following the Change in
Control. For purposes of this section 3.3, any Qualified
Outside Director entitled to no additional benefits
pursuant to this section 3.3 shall be deemed paid in full
upon delivery of the Committee's notice. Once benefits
have been paid in accordance with this section 3.3, no
other payments shall be due under this Plan.
3.4 Notwithstanding sections 3.1 and 3.2, benefits which are
prohibited or limited by the Comprehensive Thrift and
Bank Fraud Prosecution and Taxpayer Recovery Act of 1990
shall not be payable without the consent of the
appropriate federal banking agency and the written
concurrence of the Federal Deposit Insurance Corporation.
The Company shall exert its best efforts to obtain such
consent and concurrence.
ARTICLE IV
Vesting
A Qualified Outside Director will vest in his or her benefit
while such director is serving on the Board upon the first of
the following to occur: (i) the completion of 15 years as a
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director of the Company; (ii) the Qualified Outside Director's
65th birthday; (iii) the Qualified Outside Director's death; or
(iv) the occurrence of a Change in Control.
ARTICLE V
Death Benefits
5.1 Subject to section 5.4, if a Qualified Outside Director
otherwise eligible for benefits dies, then 50% of such
benefits shall be payable to his surviving spouse
depending on such Outside Director's age at the date of
death.
5.2 If the deceased Qualified Outside Director had already
attained age 65, the surviving spouse will receive such
benefits for which the Qualified Outside Director was
otherwise eligible until the death or remarriage of the
spouse or the occurrence of a Change in Control. In the
absence of a Change in Control benefits shall be paid
monthly.
5.3 If the deceased Qualified Outside Director had not
attained age 65 at the date of death, then the surviving
spouse will receive such benefits, payable in monthly
installments, for which the Qualified Outside Director
was otherwise eligible until the first of the following
occurs: (i) the spouse remarries; (ii) the spouse dies;
(iii) the occurrence of a Change in Control; or (iv) 180
monthly payments are made.
5.4 Upon the occurrence of a Change in Control, payment of
death benefits to the surviving spouse pursuant to
section 5.2 or 5.3, as applicable, shall cease and the
surviving spouse shall instead receive a single cash
payment as soon as possible following the Change in
Control equal to the benefit for which the Qualified
Outside Director (to whom the surviving spouse was
married) was eligible under section 3.2(a) reduced, but
not below zero, by the sum of all payments previously
paid pursuant to section 5.3 or 5.4, as applicable, to
such surviving spouse. If the Qualified Outside Director
was ineligible to receive any benefits under section 3.2,
then, notwithstanding the provisions of this Plan to the
contrary, the surviving spouse shall receive no benefits
pursuant to this Plan after the occurrence of a Change in
Control.
The Committee shall notify each surviving spouse of a
deceased Qualified Outside Director of the occurrence of
a Change in Control, the total amount of benefits
previously paid pursuant to this Article V and the amount
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of benefits, if any, to be paid in a single cash payment
following the Change in Control. For purposes of this
section 5.4, any surviving spouse entitled to no
additional benefits pursuant to this section 5.4 shall be
deemed paid in full upon delivery of the Committee's
notice. Once benefits have been paid in accordance with
this section 5.4, no other payments shall be due under
this Plan.
ARTICLE VI
Payment of Benefits
6.1 Timing. Except as otherwise provided in Section 3.2, a
Qualified Outside Director shall be entitled to receive
benefits under the Plan on the later of his retirement or
separation from the Board or his 65th birthday.
6.2 Form of Payment. Except as otherwise provided in Section
3.2, a Qualified Outside Director's benefits shall be
paid in the form of a life annuity payable in monthly
installments.
ARTICLE VII
Funding
Benefits payable under this Plan shall be paid directly from
the general assets of the Company. The Company shall not be
obligated to set aside, earmark or escrow any funds or other
assets to satisfy its obligations under this Plan, and the
Qualified Outside Director and his spouse shall not have any
property interest in any specific assets of the Company other
than the unsecured right to receive payments from the Company
as provided herein.
ARTICLE VIII
Administration of the Plan
8.1 The Committee shall be generally responsible for the
operation and administration of the Plan. To the extent
that powers are not delegated to others pursuant to the
provisions of this Plan, the Committee shall have such
powers as may be necessary to carry out the provisions of
the Plan and to perform its duties hereunder, including,
without limiting the generality of the foregoing, the
power:
(a) To appoint, retain, and terminate such persons as
it deems necessary or advisable to assist in the
administration of the Plan or to render advice
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with respect to the responsibilities of the
Committee under the Plan, including accountants,
actuaries, administrators and attorneys.
(b) To make use of the services of the employees of
the Company in administrative matters.
(c) To obtain and act on the basis of all tables,
valuations, certificates, opinions, and reports
furnished by the persons described in paragraph
(a) or (b) above. Any determination based on
Actuarial Assumptions by the actuary selected by
the Committee shall be conclusive and binding on
the Company, the Committee, and all Qualified
Outside Directors.
(d) To review the manner in which benefit claims and
other aspects of the Plan administration have been
handled by the employees of the Company.
(e) To determine all benefits and resolve all
questions pertaining to the administration and
interpretation of the Plan provisions, either by
rules of general applicability or by particular
decisions. To the maximum extent permitted by
law, all interpretations of the Plan and other
decisions of the Committee shall be conclusive and
binding on all parties.
(f) To adopt such forms, rules and regulations as it
shall deem necessary or appropriate for the
administration of the Plan and the conduct of its
affairs, provided that any such forms, rules and
regulations shall not be inconsistent with the
provisions of the Plan.
(g) To remedy any inequity resulting from incorrect
information received, communicated or resulting
from administrative error.
(h) To commence or defend any litigation arising from
the operation of the Plan in any legal or
administrative proceeding.
8.2 Required Information. Any Qualified Outside Director and
any spouse eligible to receive benefits under the Plan
shall furnish to the Committee any information or proof
requested by the Committee and reasonably required for
the proper administration of the Plan. Failure on the
part of the Qualified Outside Director or spouse to
comply with any such request within a reasonable period
of time shall be sufficient grounds for delay in the
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payment of benefits under the Plan until such information
or proof is received by the Committee.
8.3 Expenses. All expenses incident to the operation and
administration of the Plan reasonably incurred,
including, without limitation by way of specification,
the fees and expenses of attorneys and advisors, and for
such other professional, technical and clerical
assistance as may be required, shall be paid by the
Company.
8.4 Indemnification. To the extent coverage is not provided
by any applicable insurance policy, the Company hereby
agrees to indemnify the Committee and each of its
members, and the Board and each of its members, and to
hold them harmless against all liability, joint and
several, for their acts, omissions and conduct and for
the acts, omissions and conduct of their duly appointed
agents made in good faith pursuant to the provisions of
the Plan, including any out-of-pocket expenses reasonably
incurred in the defense of any claim relating thereto;
provided, however, that no person or entity so
indemnified shall voluntarily assume or admit any
liability, nor, except at its or his own cost, shall any
of the foregoing make any payment, assume any obligations
or incur any expense without the prior written consent of
the Board. The Company may purchase, at its expense,
liability insurance to protect the Company and the
persons indemnified hereunder from liability incurred in
the good faith administration of this Plan.
8.5 Claims Procedure and Review.
(a) Claims for benefits under the Plan shall be filed
in writing by a claimant with the Committee.
Within sixty (60) days after receipt of such
claim, the Committee shall act on the claim and
shall notify the claimant in writing as to whether
the claim has been granted in whole or in part;
provided, however, if the claimant has not
received written notice of such decision within
such sixty-day period, the claimant shall, for the
purpose of subsection (c) of this Section, regard
his claim as having been denied.
(b) Any notice of denial of a claim in whole or in
part shall set forth (i) the specific reason or
reasons for the denial, (ii) reference to the Plan
provisions on which the denial is based, and (iii)
a copy of the Plan's claim and review provisions.
69
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(c) Any claimant who has been denied a claim in whole
or in part under the Plan shall be entitled, upon
the filing of a written request for review with
the Committee within sixty (60) days after receipt
by the claimant of written notice of denial of his
claim (or, if the claimant had not received
written notice of the decision within the
sixty-day period described in subsection (a) of
this Section, within one hundred twenty (120) days
of receipt of the claim form by the Committee), to
appeal the denial of his claim to the Committee.
(d) The claimant shall be entitled in connection with
such appeal to examine pertinent documents and
submit issues and comments in writing to the
Committee. Any decision on review by the
Committee shall be in writing, and shall include
specific reasons for the decision (including
reference to the Plan provisions on which the
decision is based). Such decision shall be made
by the Committee not later than sixty (60) days
after receipt by it of the claimant's request for
review.
ARTICLE IX
Miscellaneous
9.1 Amendment or Termination.
(a) The Board reserves the right to amend, modify,
restate or terminate the Plan; provided, however,
that no such action by the Board shall reduce a
Qualified Outside Director's benefit accrued as of
the time thereof. Provided, further that no such
amendment or termination may occur as a result of
a Change in Control, within three years after a
Change in Control, or as part of any plan to
effect a Change in Control.
(b) If the Plan is terminated or amended, a
determination shall be made of the Qualified
Outside Director's benefit as of the Plan
termination or amendment date. Neither the
termination nor an amendment of the Plan shall
adversely affect any person who, at the time of
such action, satisfies the Plan's definition of
Qualified Outside Director without such person's
consent.
9.2 Status as Director. Nothing herein contained shall be
deemed: (a) to give any Qualified Outside Director the
right to be retained as a director of the Company; (b) to
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give the Company the right to require any Qualified
Outside Director to remain on the Board; or (c) to affect
any Qualified Outside Director's membership on the Board.
9.3 Payments to Incompetents. If a Qualified Outside
Director or spouse entitled to receive any benefits
hereunder is adjudged to be legally incapable of giving a
valid receipt and discharge for such benefits, they will
be paid to the duly appointed guardian of such
incompetent or to such other legally appointed person as
the Committee may designate. Such payment shall, to the
extent made, be deemed a complete discharge of any
liability for such payment under the Plan.
9.4. Inalienability of Benefits. The right of any person to
any benefit or payment under the Plan shall not be
subject to voluntary or involuntary transfer, alienation
or assignment, and, to the fullest extent permitted by
law, shall not be subject to attachment, execution,
garnishment, sequestration or other legal or equitable
process. In the event a person who is receiving or is
entitled to receive benefits under the Plan attempts to
assign, transfer or dispose of such right, or if an
attempt is made to subject said right to such process,
then such assignment, transfer or disposition shall be
null and void.
9.5 Governing Law. Except to the extent preempted by Federal
law, the Plan shall be governed by and construed in
accordance with the laws of the State of New Jersey.
9.6 Arbitration. Any dispute or controversy arising under or
in connection with this Agreement which cannot be
resolved informally by the parties, including the
arbitrability of the dispute itself, shall be submitted
to arbitration and adjudicated pursuant to the rules of
the American Arbitration Association then in effect,
except that the parties to such arbitration shall be
entitled to engage in pre-trial discovery, to the extent
permitted by and according to the provisions of the
Federal Rules of Civil Procedure. Pending the resolution
of any such dispute or controversy, the Participant shall
continue to receive all benefits to which he was entitled
immediately prior to the time such controversy or dispute
arose. The decision of the arbitrator shall be final and
binding on all parties hereto, and judgment may be
entered on the arbitrator's award in any court having
jurisdiction thereof.
9.7 Severability. In case any provision of this Plan shall be
held illegal or invalid for any reason, such illegality
or invalidity shall not affect the remaining provi-
71
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sions of the Plan, and the Plan shall be construed and
enforced as if such illegal and invalid provisions had
never been set forth.
9.8 Income and Payroll Tax Withholding. To the extent
required by the laws in effect at the time payments are
made under this Plan, the Company shall withhold from
such payments any taxes required to be withheld for
federal, state or local government purposes.
IN WITNESS WHEREOF, WASHINGTON SAVINGS BANK has adopted this
plan effective as of the 14th day of September, 1993.
ATTEST (SEAL): WASHINGTON SAVINGS BANK
/s/ANTONIA GADALETA BY:/s/PAUL C. ROTONDI
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