=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 29, 1997
SOVEREIGN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 0-16533 23-2453088
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Ident. No.)
1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 320-8400
N/A
(Former name or former address, if changed since last report.)
1
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The Consolidated statements of Condition, Consolidated
Statements of Income, Consolidated Statements of Changes in
Shareholders' Equity and Consolidated Statements of Cash Flows
for the year ended December 31, 1996, 1995, and 1994, of
Bankers Corp., and the related Notes to Consolidated Financial
Statements, are incorporated herein by reference to Exhibit
99.2 hereof.
The Unaudited Consolidated Statement of Condition as of June
30, 1997, the Unaudited Consolidated Statements of Income for
the three-month and six-month periods ended June 30, 1997 and
1996, and the Unaudited Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 1997 and 1996 of
Bankers Corp., and the related Notes to Unaudited Consolidated
Financial Statements, are incorporated herein by reference to
Exhibit 99.3 hereof.
(b) Pro forma financial information.
The pro forma financial statements of Sovereign
Bancorp, Inc. and Bankers Corp. required by Item 7(b)
of Form 8-K are incorporated herein by reference to
Exhibit 99.4 hereof.
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of
August 29, 1997, between Sovereign Bancorp, Inc.
and Bankers Corp.*
23 Consent of KPMG Peat Marwick LLP.
99.2 The Consolidated Statements of Condition as of
December 31, 1996 and 1995, and the related
Statements of Income, Changes in Stockholders' Equity
and Cash Flows for the years ended December 31, 1996,
1995, and 1994, of Bankers Corp., and the related
Notes to Consolidated Financial Statements and the
Report of KPMG Peat Marwick LLP thereon.
99.3 The Unaudited Consolidated Statement of Condition as
of June 30, 1997, the Unaudited Consolidated
Statements of Income
2
<PAGE>
and Cash Flows for the six-month periods ended June
30, 1997 and 1996, of Bankers Corp., and the related
Notes to Unaudited Consolidated Financial Statements,
are incorporated herein by reference to pages 3
through 7 of the Quarterly Report on Form 10-Q of
Bankers Corp. for the Quarter ended June 30, 1997.
99.4 Pro forma financial statements of Sovereign
Bancorp, Inc. and Bankers Corp.
- --------------------
*Previously filed.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
SOVEREIGN BANCORP, INC.
Dated: November 10, 1997
By /s/ Mark McCollom
----------------------
Mark McCollom
Senior Vice President
4
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT PAGE NO.
23 Consent of KPMG Peat Marwick LLP
99.2 Consolidated Statements of Conditions as of
December 31, 1996 and 1995 and the Related
Statements of Income, Changes in
Stockholders Equity and Cash Flows for the
years ended December 31, 1996, 1995, and
1994 of Bankers Corp. and the related
notes to Consolidated Financial Statements
and the Report of KPMG Peat Marwick LLP
thereon.
99.4 Pro Forma Financial Statements of Sovereign
Bancorp, Inc. and Bankers Corp.
5
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Sovereign Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-20186, Form S-8 No. 33-29034, Form S-8 No. 33-39453, Form S-8
No. 33-44108, Form S-8 No. 33-89586, Form S-8 No.33-89592, Form S-3 No.
33-46870, Form S-3 No. 333-39113, Form S-8 No. 333-05309, Form S-8 No.
333-05251, Form S-4 No. 333-3209 and Form S-4 333-32109-01) of Sovereign
Bancorp, Inc. of our report dated January 31, 1997, except as to note 2, which
is as of February 5, 1997, with respect to the consolidated statements of
condition of Bankers Corp. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, which report appears in the Form 8-K/A No. 1 of Sovereign
Bancorp, Inc. dated November 10, 1997.
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 13, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Bankers Corp.:
We have audited the accompanying consolidated statements of condition of
Bankers Corp. and subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bankers Corp. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 31, 1997 except as to note 2,
which is as of February 5, 1997
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition
(dollars in thousands) December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash on hand and due from banks (note 4)............................................................. $ 15,957 $ 23,337
Securities available for sale (note 5)............................................................... 34,181 0
Investment securities held to maturity, estimated market value of $26,036 and $67,735
at December 31, 1996 and 1995, respectively (note 6)............................................. 25,961 66,831
Mortgage and asset-backed securities, held to maturity, estimated market value of $685,780
and $463,116 at December 31, 1996 and 1995, respectively (note 7)................................ 681,518 460,574
Loans net of unearned income and premiums (note 8)................................................... 1,672,234 1,321,396
Less: Allowance for loan losses................................................................. 6,596 8,137
------------ ------------
Net loans..................................................................................... 1,665,638 1,313,259
Banking premises, furniture and equipment, net (note 9).............................................. 10,846 11,357
Accrued interest receivable ......................................................................... 15,181 13,090
Intangible assets, net of accumulated amortization of $8,712 and $7,931
at December 31, 1996 and 1995, respectively...................................................... 3,329 4,110
Other Real Estate Owned, net (OREO) (note 8)......................................................... 4,662 6,057
Other assets (notes 12 and 15)....................................................................... 2,511 3,300
------------ ------------
Total Assets.................................................................................. 2,459,784 1,901,915
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to depositors: (note 10)
Interest bearing................................................................................. 1,578,452 1,581,094
Non-interest bearing............................................................................. 50,610 50,160
------------ ------------
Total deposits................................................................................ 1,629,062 1,631,254
Short-term borrowings (notes 5, 6, 7 and 11)......................................................... 614,090 67,245
Mortgage escrow deposits............................................................................. 12,203 10,078
Income taxes payable (note 12)....................................................................... 1,348 869
Other liabilities.................................................................................... 10,204 5,531
------------ ------------
Total liabilities............................................................................. 2,266,907 1,714,977
------------ ------------
Stockholders' equity (notes 2, 14 and 15): Preferred stock, authorized
10,000,000 shares None issued Common stock, par value $.01:20,000,000 shares
authorized,
14,269,200 shares issued........................................................................ 143 143
Additional paid-in capital....................................................................... 101,138 101,138
Retained earnings................................................................................ 117,525 101,592
Less:
Unallocated Common Stock held by the ESOP........................................................ 301 621
Common Stock in Treasury, at cost: 1,891,016 shares and 1,347,043 shares, respectively .......... 25,060 15,314
Net unrealized losses on securities available for sale, net of tax............................... 568 0
------------ ------------
Total stockholders' equity.................................................................... 192,877 186,938
------------ ------------
Commitments and contingencies (notes 14, 15 and 16).................................................. 0 0
------------ ------------
Total Liabilities and Stockholders' Equity........................................................... $ 2,459,784 $ 1,901,915
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended December 31,
(dollars in thousands except per share data) 1996 1995 1994
<S> <C> <C> <C>
Interest income:
Real estate loans (note 8)........................ $ 109,460 $ 91,278 $ 75,212
Other loans....................................... 4,661 4,989 4,377
Mortgage and asset-backed securities.............. 33,642 26,949 19,106
Investment securities, includes dividends-taxable. 5,112 5,468 7,724
Municipals-nontaxable............................. 61 61 71
Short-term investments............................ 87 354 7
Federal funds sold................................ 82 166 105
------------ ------------ ------------
Total interest income........................... 153,105 129,265 106,602
------------ ------------ ------------
Interest expense:
Deposits.......................................... 73,358 69,833 46,966
Short-term borrowings............................. 17,521 3,985 4,103
ESOP debt (note 14)............................... 0 0 54
------------ ------------ ------------
Total interest expense.......................... 90,879 73,818 51,123
------------ ------------ ------------
Net interest income............................. 62,226 55,447 55,479
Provision for loan losses (note 8).............. (3,950) (5,500) (3,970)
------------ ------------ ------------
Net interest income after provision for loan losses 58,276 49,947 51,509
------------ ------------ ------------
Other Income:
Fees and service charges.......................... 1,946 2,145 2,043
(Losses) gains on securities transactions (notes 5,6 and 7) 0 (1,665) 0
Gains (losses) on loan sales.................... 26 28 (712)
Other income...................................... 169 231 352
------------ ------------ ------------
Total other income.............................. 2,141 739 1,683
------------ ------------ ------------
Other Expense:
Salaries and employee benefits (notes 14 and 15).. 9,018 8,844 8,645
Occupancy expense (note 16)....................... 2,855 2,770 3,052
FDIC Insurance premium (note 13).................. 3,883 2,309 3,148
Amortization of intangibles....................... 781 938 1,253
Net losses and expenses on OREO................... 758 674 675
Other operating expense........................... 5,296 4,464 4,357
------------ ------------ ------------
Total other expenses............................ 22,591 19,999 21,130
------------ ------------ ------------
Income before income tax expense................ 37,826 30,687 32,062
Income tax expense (note 12)......................... 13,501 10,683 11,058
------------ ------------ ------------
Net income...................................... $ 24,325 $ 20,004 $ 21,004
============ ============ ============
Primary earnings per share....................................... $1.90 $1.51 $1.56
Fully diluted earnings per share................................ $1.90 $1.51 $1.56
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Net Unrealized
Losses on
Additional Common Stock Common Stock Securities Total
Common Paid-In Retained held by held by Treasury Available Stockholders'
(dollars in thousands) Stock Capital Earnings the ESOP the MRP Stock For Sale Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ............ $ 119 $ 59,675 $114,656 ($ 1,506) ($ 317) ($11,501) $ 0 $161,126
Changes in accounting principle,
January 1, 1994- Securities
available for sale .................... 0 0 0 0 0 0 9 9
20% stock dividend declared June, 1994 .. 24 41,463 (41,487) 0 0 0 0 0
Net income .............................. 0 0 21,004 0 0 0 0 21,004
Cash Dividends .......................... 0 0 (5,290) 0 0 0 0 (5,290)
Exercise of stock options ............... 0 0 (177) 0 0 259 0 82
Treasury Stock acquired, net ............ 0 0 0 0 0 (3,699) 0 (3,699)
Allocation of ESOP shares ............... 0 0 0 435 0 0 0 435
Amortization of MRP shares .............. 0 0 0 0 254 0 0 254
Net increase in unrealized losses on
securities available for sale,
net of tax ............................ 0 0 0 0 0 0 (1,916) (1,916)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ............ $ 143 $101,138 $ 88,706 ($ 1,071) ($ 63) ($14,941) ($ 1,907) $172,005
Net income .............................. 0 0 20,004 0 0 0 0 20,004
Cash Dividends .......................... 0 0 (6,710) 0 0 0 0 (6,710)
Exercise of stock options ............... 0 0 (408) 0 0 583 0 175
Treasury Stock acquired, net ............ 0 0 0 0 0 (956) 0 (956)
Allocation of ESOP shares ............... 0 0 0 450 0 0 0 450
Amortization of MRP shares .............. 0 0 0 0 63 0 0 63
Decrease in unrealized losses on
securities available for sale,
net of tax ............................ 0 0 0 0 0 0 1,907 1,907
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ............ $ 143 $101,138 $101,592 ($ 621) $ 0 ($15,314) 0 $186,938
Net Income .............................. 0 0 24,325 0 0 0 0 24,325
Cash Dividends .......................... 0 0 (7,742) 0 0 0 0 (7,742)
Exercise of stock options ............... 0 0 (650) 0 0 912 0 262
Treasury Stock acquired, net ............ 0 0 0 0 0 (10,658) 0 (10,658)
Allocation of ESOP shares ............... 0 0 0 320 0 0 0 320
Increase in unrealized losses on
securities available for sale,
net of tax ........................... 0 0 0 0 0 0 (568) (568)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 ............ $ 143 $101,138 $117,525 ($ 301) $ 0 $(25,060) ($ 568) $192,877
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................. $ 24,325 $ 20,004 $ 21,004
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation .............................................................................. 1,027 1,165 1,488
Provision for loan losses ................................................................. 3,950 5,500 3,970
Provision for uncollectible interest receivable ........................................... 2,267 2,809 2,243
Provision for deferred taxes .............................................................. 571 (1,238) 0
Net amortization of deferred fees, discounts and premiums on loans ........................ 515 530 433
Origination of loans available for sale ................................................... (1,226) (1,426) (6,955)
Proceeds from sales of loans available for sale ........................................... 1,342 9,871 13,566
Net (gains) losses on sales of loans available for sale ................................... (26) (28) 712
Net (accretion) amortization of premiums and discounts on securities held to maturity ..... (349) (632) 530
Net losses on the sale of securities available for sale ................................... 0 1,665 0
Net decrease in OREO from sales and losses ................................................ 8,864 7,339 8,507
Amortization of ESOP & MRPs ............................................................... 320 513 689
Amortization of intangibles ............................................................... 781 938 1,252
Increase in accrued interest receivable ................................................... (4,358) (4,517) (3,054)
Decrease (increase) in other assets ....................................................... 551 1,743 (1,532)
Increase in mortgage escrow deposits ...................................................... 2,125 540 1,542
Increase (decrease) in other liabilities and income taxes payable ......................... 4,980 269 (1,271)
--------- --------- ---------
Net cash provided by operating activities ............................................... 45,659 45,045 43,124
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans ......................................................................... (517,457) (183,740) (212,831)
Net decrease in loans ..................................................................... 153,054 68,204 90,260
Purchase of mortgage and asset-backed securities held to maturity ......................... (335,865) (144,298) (159,271)
Principal payments of mortgage and asset-backed securities held to maturity ............... 115,294 69,990 90,804
Purchase of investment securities held to maturity ........................................ (13,756) (4,925) 0
Proceeds from maturities and calls of investment securities held to maturity .............. 54,620 20,256 34,977
Purchase of securities available for sale ................................................. (35,099) (1,929) 0
Proceeds from sale of securities available for sale ....................................... 0 14,625 0
Banking premises, furniture and equipment expenditures .................................... (516) (316) (661)
--------- --------- ---------
Net cash used in investing activities ................................................... (579,725) (162,133) (156,722)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchases .................................................................. (10,658) (956) (3,699)
Principal payment on ESOP debt ............................................................ 0 0 (1,506)
Net increase (decrease) in demand and savings deposits .................................... 41,307 34,511 (3,688)
Net (decrease) increase in time deposits .................................................. (43,499) 143,209 81,233
Net increase (decrease)in short-term borrowings ........................................... 546,845 (48,521) 46,814
Dividends paid ............................................................................ (7,571) (6,453) (4,838)
Exercise of stock options- ................................................................ 262 175 82
--------- --------- ---------
Net cash provided by financing activities ............................................... 526,686 121,965 114,398
--------- --------- ---------
(Decrease) increase in cash and cash equivalents .......................................... (7,380) 4,877 800
Cash and cash equivalents at beginning of year ............................................ 23,337 18,460 17,660
--------- --------- ---------
Cash and cash equivalents at end of year ................................................ $ 15,957 $ 23,337 $ 18,460
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest ................................................................................ $ 86,801 $ 73,917 $ 51,280
Income taxes ............................................................................ 12,145 12,027 10,265
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans ............................................. $ 7,469 $ 8,685 $ 7,409
Loans held to maturity reclassified as loans available for sale ......................... 8,013 9,410 0
Loans available for sale reclassified as loans held to maturity ......................... 0 0 3,351
Mortgage backed securities held to maturity reclassified as securities
available for sale ..................................................................... 0 13,700 17,149
Securities available for sale reclassified as mortgage backed
securities held to maturity ........................................................... 0 0 12,363
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bankers Corp. (the
Corporation) and its wholly-owned subsidiary Bankers Savings (the Bank) and its
inactive wholly-owned subsidiary, PASI Development, Incorporated. All
inter-company balances and transactions have been eliminated in the consolidated
financial statements. Certain amounts in prior periods have been restated to
conform to current presentation.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through branch offices in New Jersey. The Bank is subject to
competition from other financial institutions. The Bank is subject to the
regulations of certain Federal agencies and undergoes periodic examinations by
those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
condition and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
SECURITIES
Securities include investment securities and mortgage and asset-backed
securities. Effective January 1, 1994, the Bank accounts for securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115
requires that securities classified as available for sale be carried at fair
value with unrealized gains and losses reported net of applicable taxes as a
separate component of stockholders' equity.
Management determines the appropriate classification of the securities at the
time of purchase. Securities that may be sold in response to changing market and
interest rate conditions or as part of an overall asset liability strategy are
classified as available for sale. If management has the intent and the Bank has
the ability at the time of purchase to hold securities until maturity, they are
classified as held to maturity and carried at cost, adjusted for amortization of
premiums and accretion of discounts. Any portion of unrealized loss on an
individual security deemed to be other than temporary is recognized as a
realized loss in the period in which such determination is made. Gains or losses
on sales of securities are based upon the specific identification method.
PREMIUMS AND DISCOUNTS
Premiums and discounts on loans and securities purchased are amortized on a
method that approximates a level yield over the estimated average lives of the
assets.
LOANS
Loans are stated at their outstanding principal amount. Interest income on loans
is accrued and credited to interest income as earned. The accrual of income on
loans is discontinued after the loan becomes 120 days past due or when certain
factors indicate reasonable doubt as to the collectibility of principal and
interest. Once a loan becomes 120 days past due, interest accrued but not
collected is reserved. Subsequent cash receipts are either applied to the
outstanding principal balance or recorded as interest income depending on
management's assessment of the ultimate collectibility of principal and
interest.
LOANS AVAILABLE FOR SALE
6
<PAGE>
Mortgage loans available for sale are reported at the lower of cost or market on
an aggregate basis. Mortgages are carried net of deferred fees which are
recognized as income at the time the loans are sold to permanent investors.
Mortgage loans available for sale when securitized to facilitate their sale are
then included with securities available for sale. Gains and losses on the sale
of loans are recognized at the settlement date and are determined by the
difference between the net proceeds and the carrying value.
ALLOWANCE FOR LOAN LOSSES
Losses on loans are charged to the allowance for loan losses. Additions to this
allowance are made by recoveries of loans previously charged off and by a
provision charged to expense. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on collectibility of loans and prior loan loss
experience. Management believes that the allowance for loan losses is adequate.
The determination of the balance for the allowance for the loan losses is based
on an analysis of the loan portfolio, historical loan loss experience, economic
conditions and other factors that warrant recognition in providing for an
adequate allowance. Additions to the allowance may be necessary based on changes
in the economic conditions and other factors or as various regulatory agencies
may require after an examination based on their judgement and the information
available to them at the time of the examination.
LOAN FEES
Loan origination fees and certain direct costs of originations are deferred and
recognized over the estimated life of the loan as an adjustment to the loan's
yield.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Statement of Financial Accounting Standards No. 114, ("SFAS No. 114")
"Accounting by Creditors for Impairment of a Loan" and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," were adopted on January 1, 1995. These
statements address the accounting for impaired loans and specify how allowances
for loan losses related to these impaired loans are calculated. The Corporation
defined the population of impaired loans to include non-accrual loans in excess
of $500,000. Smaller balance homogeneous loans that are collectively evaluated
for impairment such as residential mortgage loans are specifically excluded from
the impaired loan portfolio. Adoption of these new standards had no effect on
the level of the allowance for loan losses or operating results for the year
ended December 31, 1995.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consists of foreclosed properties and is
recorded at the lower of the book value of the loan or the fair value of the
asset acquired, less estimated disposition costs. The excess, if any, of the
loan amount over the fair value of the asset acquired is charged off against the
allowance for loan losses. In accordance with AICPA Statement of Position 92-3,
"Accounting for Foreclosed Assets," subsequent changes in the value of OREO are
recorded directly to an OREO reserve. Increases in the OREO reserve as well as
expenses to administer such OREO, and any gains or losses realized upon the sale
of the property are charged to operating expenses.
BANKING PREMISES, FURNITURE AND EQUIPMENT
Land is carried at cost, and banking premises, furniture and equipment are
carried at cost, less accumulated depreciation. Depreciation on land
improvements and banking premises is provided for using the straight-line method
over the estimated useful life of ten to fifty years. The Bank depreciates
furniture and equipment using the declining balance method over the estimated
useful life of three to ten years. Leasehold improvements are amortized over the
term of the lease or estimated useful life of the asset, if shorter.
Expenditures for betterments and major renewals are capitalized, while repairs
and maintenance costs are charged to operations as incurred. Gains and losses on
dispositions are reflected in current operations.
INTANGIBLE ASSETS
Cost in excess of fair value of net assets acquired as the result of branch
purchases are being amortized on an accelerated basis over a period
approximating an average life of 10 years.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In the third quarter of 1995, the Corporation adopted, retroactive to January 1,
1995, Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Financial Accounting
Standards Board ("FASB") Statement No. 65, "Accounting for Certain Mortgage
Banking Activities" ("SFAS 65"), to require that mortgage banking enterprises
recognize as a separate asset the right to service mortgage loans for others
however those servicing rights are acquired. Previously under SFAS 65, only
7
<PAGE>
purchased mortgage servicing rights were permitted to be recognized. Under SFAS
122, mortgage servicing rights acquired through the sale of loans with servicing
rights retained will also be recognized. SFAS 122 also requires that mortgage
servicing rights be assessed for impairment based on the fair value of those
rights.
The Corporation's criteria for, and policies relating to, estimating the fair
value of mortgage servicing rights are consistent with the methods utilized for
estimating the fair value of purchased mortgage servicing rights as determined
by references to independent third party sources.
The adoption of SFAS 122 did not have a material effect on the Corporation's
earnings, liquidity and capital resources. As a result of the adoption of SFAS
122, the Corporation recognized a gain of $13,000 and $99,000 during the years
1996 and 1995, respectively. Originated mortgage servicing rights amounted to
$99,000 at December 31, 1996 and are being amortized over the life of the loans.
PENSION PLAN
The Bank's funded pension plan covers all employees who have met the eligibility
requirements of the plan. The Bank's funding policy is to contribute annually an
amount that can be deducted for Federal income tax purposes.
INCOME TAXES
The Corporation accounts for income taxes in accordance with the asset and
liability method. Under this method ,deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and due from banks and Federal funds sold. Generally, Federal funds are
sold for one-day periods.
EARNINGS PER SHARE
Earnings per share was computed by dividing net income applicable to common
stock by the total of the average number of common shares outstanding and the
additional dilutive effect of stock options outstanding during the respective
periods. The dilutive effect of stock options are considered in both primary and
fully diluted computations using the treasury stock method.
8
<PAGE>
Earnings per share has been computed based on the following:
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net income applicable to
common stock............................................ $24,325 $20,004 $21,004
Average number of common
shares outstanding...................................... 12,556 12,904 13,173
Average number of common
shares and common
equivalent shares outstanding........................... 12,808 13,223 13,500
Average number of common
shares and common
equivalent shares outstanding,
assuming full dilution.................................. 12,820 13,227 13,506
</TABLE>
STOCK OPTION PLANS
The Bank has accounted for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Bank adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Bank has
elected to continue to apply the provisions of APB Opinion No. 25.
NOTE 2 SUBSEQUENT EVENTS
On February 5, 1997, the Corporation signed a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Sovereign Bancorp, Inc. ("Sovereign")
headquartered in Wyomissing, Pennsylvania, providing for the merger of the
Corporation with and into Sovereign. The transaction is subject to customary
conditions including regulatory and shareholder approvals and is expected to be
consummated during the fourth quarter of 1997. The terms of the Merger Agreement
in part call for Sovereign to exchange $25.50 in Sovereign common stock for each
outstanding share of the Corporation's common stock. The price will stay fixed
at $25.50 per share of the Corporation's common stock if Sovereign's average
stock price remains between $11.00 and $16.50 per share (collectively, the
"collars") during a 15-day pricing period prior to the closing of the
transaction. The collars and the maximum and minimum exchange ratio will be
adjusted for Sovereign's 6-for-5 stock dividend declared January 16, 1997 and
payable March 14, 1997 and will be further adjusted for subsequent stock
dividends and splits so that the Corporation's shareholders shall receive the
same total dollar value. The number of shares of Sovereign common stock which
stockholders of the Corporation will receive upon consummation is based upon the
calculation set forth in the Merger Agreement.
NOTE 3 CONVERSION TO STOCK SAVINGS BANK, FORMATION OF BANK HOLDING COMPANY AND
SALE OF COMMON STOCK
On March 23, 1990 the Bank converted from a mutual savings bank to a capital
stock savings bank. The Bank issued all of its outstanding capital stock to
the Corporation, the holding company for the Bank's common stock.
At the time of conversion, the Bank established a liquidation account in an
amount equal to the Bank's net worth at March 31, 1989, for the benefit of
eligible account holders. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts in
the Bank after conversion.
9
<PAGE>
The liquidation account will be reduced annually to the extent that eligible
account holders have reduced their eligible deposits, and shall cease upon the
closing of the accounts and shall never be increased. In the event of
liquidation of the Bank, such person shall be entitled, after all payments to
creditors, to a distribution from the liquidation account before any
distribution to stockholders. As of December 31, 1996 the balance in the
liquidation account was $3.9 million.
NOTE 4 CASH ON HAND AND DUE FROM BANKS
Included in cash on hand and due from banks at December 31, 1996 and 1995 was
$4,975,000 and $4,637,000, respectively, representing reserves required to be
maintained by the Federal Reserve Bank.
NOTE 5 SECURITIES AVAILABLE FOR SALE
Securities available for sale as of December 31, 1996 are comprised of US
Treasury Notes with an estimated market value of $34,181,000 and an amortized
cost of $35,082,000. Gross unrealized losses on these securities were $901,000
at December 31, 1996. There were no security sales in 1996. Proceeds from sales
of securities available sale for 1995 were $14,625,000 with gross gains of $0
and gross losses of $1,665,000. There were no security sales in 1994. Securities
available for sale with an amortized cost of approximately $30,103,000 were
pledged under repurchase agreements at December 31, 1996.
In November 1995, the FASB issued a special report on the implementation of SFAS
No. 115. This special report provided an opportunity for a onetime reassessment
of the classification of securities as of a single measurement date between
November 15, 1995 and December 31, 1995. On December 19, 1995, the Bank recorded
a net transfer of $13,700,000 of mortgage-backed securities to available for
sale and subsequently sold the securities prior to December 31, 1995.
NOTE 6 INVESTMENT SECURITIES - HELD TO MATURITY
A summary of the amortized cost and estimated market value of investment
securities held to maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
(dollars in thousands)
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds:
US Treasury securities,
US Government Agency
obligations ................. $ 500 $ 0 $ 0 $ 500 $ 25,469 $ 308 $ 0 $ 25,777
Corporate ...................... 24,486 104 71 24,519 40,382 533 6 40,909
Municipals ..................... 975 42 0 1,017 980 69 0 1,049
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Investment Securities
held to maturity ............ $ 25,961 $ 146 $ 71 $ 26,036 $ 66,831 $ 910 $ 6 $ 67,735
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities due to prepayment or early call
privileges of the issuer.
10
<PAGE>
Estimated
Amortized Market
(dollars in thousands) Cost Value
Due in one year or less ...................... $20,904 $21,004
Due after one year
through five years ........................ 2,944 2,897
Due after five years
through ten years ......................... 200 193
Due after ten years .......................... 1,913 1,942
------- -------
$25,961 $26,036
======= =======
There were no sales of investment securities during 1996, 1995 and 1994.
Proceeds from maturities and calls of investment securities held to maturity
during 1996, 1995 and 1994 were $54,620,000, $20,256,000 and $34,977,000,
respectively.
Securities with an amortized cost of approximately $500,000 and $300,000 were
pledged for Treasury, Tax and Loan balances and public funds, respectively, at
December 31, 1996 and $5,005,000 and $300,000, respectively, at December 31,
1995. Securities with an amortized cost of approximately $0 and $14,998,000 were
pledged under repurchase agreements at December 31, 1996 and 1995, respectively.
NOTE 7 MORTGAGE-AND ASSET-BACKED SECURITIES - HELD TO MATURITY
Mortgage and asset-backed securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
(dollars in thousands)
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
Certificates of
participants in
pools of mort-
gage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC and FNMA .......... $ 180,847 $ 4,045 $ 0 $ 184,892 $ 206,267 $ 3,701 $ 0 $ 209,968
GNMA .................... 156,044 1,508 93 157,459 86,305 633 0 86,938
Sears Mortgage
Securities Corp. ........ 777 0 17 760 991 8 0 999
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
337,668 5,553 110 343,111 293,563 4,342 0 297,905
Collateralized ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
mortgage
obligations
and asset-backed
securities:
FHLMC and FNMA .......... 183,266 694 589 183,371 19,170 0 236 18,934
Privately issued ........ 160,584 425 1,711 159,298 147,841 268 1,832 146,277
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
343,850 1,119 2,300 342,669 167,011 268 2,068 165,211
Total mortgage ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
and asset-backed
securities held
to maturity ............. $ 681,518 $ 6,672 $ 2,410 $ 685,780 $ 460,574 $ 4,610 $ 2,068 $ 463,116
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
There were no sales of mortgage and asset-backed securities during 1996, 1995
and 1994.
11
<PAGE>
Securities with an amortized cost of approximately $351,000 and $442,000 were
pledged for public funds at December 31, 1996 and 1995, respectively. Securities
with an amortized cost of approximately $599,774,000 and $34,258,000 were
pledged under repurchase agreements at December 31, 1996 and 1995, respectively.
NOTE 8 LOANS AND OREO
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
Mortgage loans:
<S> <C> <C>
1-4 Family Residential .............................................. $ 1,517,069 $ 1,169,271
V.A. guaranteed and
F.H.A insured ..................................................... 31,901 38,490
Construction ........................................................ 1,157 1,880
Commercial and multi-family ......................................... 50,525 56,143
Conventional available
for sale .......................................................... 8,916 993
----------- -----------
1,609,568 1,266,777
Home equity loans ...................................................... 50,920 43,846
Consumer loans and other ............................................... 7,010 7,582
----------- -----------
1,667,498 1,318,205
Net premium on loans purchased ......................................... 5,253 3,932
Deferred loan fees ..................................................... (517) (741)
----------- -----------
Total loans ....................................................... $ 1,672,234 $ 1,321,396
=========== ===========
</TABLE>
Non-performing assets are as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Non-accrual loans ............................................................ $21,345 $24,947
Loans 90 days or more past due
and still accruing ....................................................... 3,014 1,446
------- -------
Non-performing loans ......................................................... $24,359 $26,393
======= =======
Other real estate owned ...................................................... 5,267 6,407
Less allowance for other
real estate owned ........................................................ 605 350
------- -------
Total other real estate owned ................................................ $ 4,662 $ 6,057
======= =======
</TABLE>
12
<PAGE>
The activity in the allowance for other real estate owned is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year ................................... $ 350 $ 602 $ 935
Provision charged
to operations ............................................... 0 0 0
Recoveries(Charge-offs) ........................................ 255 (252) (333)
----- ----- -----
Balance at end of year ......................................... $ 605 $ 350 $ 602
===== ===== =====
</TABLE>
The average balance of impaired loans during 1996 and 1995 was $120,000 and
$981,000, respectively. At December 31, 1996 there were no impaired loans and at
December 31, 1995 impaired loans totaled $604,000. Included in the allowance for
loan losses at December 31, 1995 was $240,000 relating to impaired loans. There
was no cash basis interest income recognized on impaired loans during 1996.
There were no commitments to fund additional amounts to these borrowers. The
amount of interest income which would have been recorded under contractual terms
for non-accrual loans totaled $2,267,000, $2,809,000 and $2,243,000 in 1996,
1995 and 1994, respectively.
Loans serviced by the Bank for others at December 31, 1996 and 1995 totaled
approximately $105,666,000 and $118,706,000, respectively, and are excluded from
the Bank's portfolio.
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year .................................. $ 8,137 $ 8,145 $ 8,898
Provision charged
to operations .............................................. 3,950 5,500 3,970
Charge-offs ................................................... (5,668) (5,665) (4,733)
Recoveries .................................................... 177 157 10
------- ------- -------
Balance at end of year ........................................ $ 6,596 $ 8,137 $ 8,145
======= ======= =======
</TABLE>
The Bank grants residential real estate loans on single and multi-family
dwellings throughout the State of New Jersey and purchases in and out of state
residential mortgage pools. Its borrowers' abilities to repay their obligations
are dependent upon various factors, including the borrowers' income and net
worth, cash flows generated by the underlying collateral, value of the
underlying collateral and priority of the Bank's lien on the property. Such
factors are dependent upon various economic conditions and individual
circumstances beyond the Bank's control. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and other
real estate owned is susceptible to changes in market conditions. The Bank
believes its lending policies and procedures, including those procedures over
purchased mortgage pools, adequately minimize the potential exposure to such
risks and that adequate provisions for loan losses are provided for all known
and inherent risks. Collateral and/or government or private guarantees are
required for virtually all loans.
13
<PAGE>
NOTE 9 BANKING PREMISES, FURNITURE AND EQUIPMENT
Banking premises, furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
1996 1995
<S> <C> <C>
Cost:
Land .................................................................... $ 1,833 $ 1,833
Banking premises ........................................................ 11,156 11,165
Leasehold improvements .................................................. 1,738 1,599
Furniture and equipment ................................................. 8,179 7,793
------- -------
22,906 22,390
Less accumulated
depreciation ............................................................ 12,060 11,033
------- -------
Total banking premises,
furniture and equipment ................................................. $10,846 $11,357
======= =======
</TABLE>
NOTE 10 DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(dollars in thousands)
<S> <C> <C>
Savings ............................................................................ $ 163,559 $ 175,777
Money market accounts .............................................................. 419,581 371,129
NOW and Super NOW accounts ......................................................... 82,411 77,730
Time accounts ...................................................................... 843,816 891,302
Time accounts, $100,000 or over .................................................... 66,864 62,877
Club deposits ...................................................................... 3,118 2,652
Demand deposits .................................................................... 49,713 49,787
---------- ----------
Total deposits ..................................................................... $1,629,062 $1,631,254
========== ==========
</TABLE>
Time deposit account maturities are summarized below:
<TABLE>
<CAPTION>
December 31,
1996 1995
(dollars in thousands)
<S> <C> <C>
Within one year ........................................................ $769,576 $762,803
One to two years ....................................................... 101,519 113,764
Over two years ......................................................... 39,585 77,612
-------- --------
Total time deposits .................................................... $910,680 $954,179
======== ========
</TABLE>
14
<PAGE>
NOTE 11 SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
<S> <C> <C>
Federal funds purchased:
Balance at December 31.................................... $11,000 $18,500
Average balance........................................... 8,116 5,555
Maximum amount
outstanding at any
month end............................................. 31,000 21,000
Average interest rate:
During the year........................................ 5.45% 5.86%
At December 31......................................... 7.25% 6.00%
</TABLE>
Federal funds purchased generally mature the day following the date of purchase.
<TABLE>
<CAPTION>
<S> <C> <C>
Securities sold under agreements to repurchase:
Balance at December 31 ................................ $603,090 $48,745
Average balance............................................ 307,120 60,896
Maximum amount
outstanding at any
month end............................................. 605,822 89,745
Average interest rate:
During the year........................................ 5.56% 6.01%
At December 31......................................... 5.65% 5.82%
</TABLE>
The following table presents the repurchase liability, interest rate, amortized
cost and estimated market value of the securities sold under agreement to
repurchase at December 31, 1996, summarized by maturity distribution. Mortgage
and asset-backed securities held to maturity with an amortized cost of
$599,774,000 and US Treasury securities available for sale with an amortized
cost of $30,103,000 were pledged under repurchase agreements.
<TABLE>
<CAPTION>
At December 31, 1996
Repurchase Interest Amortized Estimated
(dollars in thousands) Liability Rate Cost Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in 31 to 90 days..................... $407,400 5.67% $423,003 $427,625
Due in 91 to 180 days.................... 143,178 5.59 150,854 150,926
Due in over 180 days..................... 52,512 5.50 56,020 55,093
</TABLE>
15
<PAGE>
NOTE 12 INCOME TAXES
Income tax expense attributable to income from continuing operations consists
of:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Current tax expense:
Federal .............................................. $ 11,887 $ 10,936 $ 10,159
State ................................................ 1,043 985 898
-------- -------- --------
12,930 11,921 11,057
Deferred tax expense:
Federal .............................................. 525 (1,136) 1
State ................................................ 46 (102) 0
-------- -------- --------
571 (1,238) 1
Total income tax expense ................................. $ 13,501 $ 10,683 $ 11,058
======== ======== ========
</TABLE>
A reconciliation between the effective Federal income tax expense and the amount
computed by multiplying the applicable statutory Federal income tax rate is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Income before tax .......................................... $ 37,826 $ 30,687 $ 32,062
======== ======== ========
Computed "expected"
tax expense at 35%
for 1996, 1995, and 1994 ................................ $ 13,239 $ 10,740 $ 11,222
Increase (decrease)
in income tax
expense resulting from:
State income tax,
net of Federal benefit .................................. 708 574 584
Other, net ................................................. (446) (631) (748)
-------- -------- --------
Income tax expense ......................................... $ 13,501 $ 10,683 $ 11,058
======== ======== ========
</TABLE>
16
<PAGE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1996, 1995 and 1994 are presented below in
thousands:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation, principally due to financial accrual .............................. $ 408 $ 358 $ 316
Accrual for post-retirement
benefits ............................................................................... 252 264 270
Unrealized holding losses on securities available for sale ............................... 0 0 1,120
Accrued interest ......................................................................... 46 30 0
Deferred origination fees ................................................................ 323 353 463
Compensated absences, principally due to accrual for financial
reporting purposes ..................................................................... 74 136 134
Mortgages, principally due to financial reporting allowance
for loan loss reserves ................................................................. 2,437 3,007 3,010
Other Real Estate Owned, due to financial reporting provisions for
doubtful collection .................................................................... 223 129 222
Other .................................................................................... 36 18 17
------ ------ ------
Total gross deferred tax assets .......................................................... 3,799 4,295 5,552
Less valuation allowances ................................................................ 0 0 0
------ ------ ------
Total deferred tax assets ................................................................ $3,799 $4,295 $5,552
Deferred tax liabilities:
Banking premises, furniture, & equipment, principally due to
differences in depreciation ............................................................ $ 228 $ 213 $ 208
Investments, due to difference in basis in accreted discount for tax
and financial reporting purposes ....................................................... 458 371 162
Prepaid FDIC Insurance ................................................................... 42 115 601
Intangible assets due to differences in amortization expected allowable
for tax versus financial reporting purposes .............................................. 394 456 574
Mortgages, principally due to tax basis reserve increases in excess of
base year reserves ..................................................................... 400 396 1,510
Deferred loan origination cost ........................................................... 221 168 86
Bonds, due to basis differences due to tax versus financial reporting
carrying values ........................................................................ 87 66 44
Pension accruals, principally due to differences in allowable funding
levels for tax versus financial reporting purposes ..................................... 32 5 14
Originated mortgage servicing rights (SFAS 122) .......................................... 37 34 0
------ ------ ------
Total deferred tax liabilities ........................................................... $1,899 $1,824 $3,199
------ ------ ------
Net Deferred Tax Assets .................................................................. $1,900 $2,471 $2,353
====== ====== ======
</TABLE>
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax asset account since it is "more likely than not"
that the deferred tax asset will be realized through a carryback to taxable
income and tax planning strategies. The conclusion that it is "more likely than
not" that the deferred tax asset will be realized is based on the history of
earnings and the prospects for continued growth including an analysis of
potential uncertainties that may affect future operating results. Management
believes that future taxable income will be sufficient to realize the benefits
of temporary deductible differences. Management will continue to review the tax
criteria related to the recognition of deferred tax assets.
The tax bad debt reserve method previously available to thrift institutions was
repealed in 1996. As a result, the Bank must change from the reserve method to
the specific charge-off method to compute its bad debt deduction.
Upon repeal, the Bank is required generally to recapture into income the portion
of its bad debt reserves (other than the supplemental reserve) that exceeds its
base year reserves, approximately $1,100,000.
17
<PAGE>
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. If the Bank meets a
"residential loan requirement" for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax years. Thus, recapture
can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior to
1996. Refinancings and home equity loans are excluded. The Bank has already
accrued the tax liability for the recapture amount.
NOTE 13 RECAPITALIZATION OF SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
institutions such as the Bank that have SAIF deposits, to recapitalize the SAIF
and spread the obligations for payment of Financing Corporation ("FICO") bonds
across all SAIF and BIF members. The Federal Deposit Insurance Corporation
("FDIC") special assessment amounted to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The special assessment was recognized in
1996 and is tax deductible. The Bank took a charge of $2.8 million before
tax-effect, as a result of the FDIC special assessment. This legislation
eliminated the substantial disparity between the amount that BIF and SAIF member
institutions have been paying for deposit insurance premiums.
NOTE 14 EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") DEBT
As part of the conversion to stock ownership, the Bank established an Employee
Stock Ownership Plan and Trust (the "ESOP"). The ESOP borrowed $2,956,770 from a
third party and purchased 867,319 shares of common stock of the Corporation. The
loan was secured by the shares of stock and guaranteed by the Bank. Shares have
been restated to reflect the 10% stock dividend, the 2 for 1 stock split and the
20% stock dividend. The loan to the third party with a remaining balance of
$1,249,670 was paid off by the Corporation in July 1994 and an unsecured term
note in the same amount was entered into between the ESOP and the Corporation.
The net cost to the Bank in 1996 for shares allocated to participants was
$222,000 and was included in salaries and employee expense which is exclusive of
$98,000 for dividends received by the ESOP during the year. The net cost to the
Bank in 1995 for shares allocated to participants was $305,000 and was included
in salaries and employee benefit expense which is exclusive of $145,000 for
dividends received by the ESOP during the year. The net cost to the Bank in 1994
for shares allocated to participants was $326,000, of which $54,000 was included
in interest expense paid to a third party and $272,000 was included in salaries
and employee benefits expense which is exclusive of $163,000 for dividends
received by the ESOP during the year
NOTE 15 EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank's non-contributory pension plan covers eligible employees who have met
the age and continuous service requirements of the plan. The benefits are based
on years of service and the employees' compensation during the last three years
of employment.
The following tables set forth the plan's funded status based on actuarial
valuation at September 30, 1996 and 1995 and amounts recognized in the
Corporation's consolidated financial statements at December 31, 1996 and 1995.
18
<PAGE>
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested ......................................................................... $ 5,060 $ 4,885
Non-vested ..................................................................... 302 257
------- -------
Accumulated benefit
obligation ...................................................................... 5,362 5,142
Effect of projected
future compensation
levels .......................................................................... 1,245 1,164
------- -------
Projected benefit
obligation ...................................................................... 6,607 6,306
Fair value of plan assets .......................................................... 8,039 7,268
------- -------
Excess of assets over
projected benefit
obligation ...................................................................... 1,432 962
Amount contributed
during fourth quarter ........................................................... 0 14
Unrecognized transition asset ...................................................... (270) (376)
Unrecognized gain .................................................................. (1,187) (549)
Unrecognized past
service liability ............................................................... (35) (38)
------- -------
(Accrued) prepaid expense .......................................................... $ (60) $ 13
======= =======
</TABLE>
Benefit obligations were determined using a weighted average discount rate of
7.75% as of September 30, 1996 and 7.50% as of September 30, 1995.
Net pension benefit includes the following components:
<TABLE>
<CAPTION>
Years ended
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost benefits earned
during the year ............................................ $ 290 $ 240 $ 288
Interest cost on projected
benefit obligation ......................................... 464 435 386
Return on plan assets ......................................... (1,005) (1,299) (12)
Net amortization and
deferral ................................................... 324 702 (587)
------- ------- -------
Total net periodic pension
expense ................................................... $ 73 $ 78 $ 75
======= ======= =======
</TABLE>
19
<PAGE>
The net periodic pension expense was determined using a weighted average
discount rate of 7.50% in 1996, 8.25% in 1995 and 7.00% in 1994. The long-term
weighted average rate of compensation was 5.50% for 1996, 6.00% for 1995 and
5.50% for 1994. The long-term weighted average rate of return on plan assets was
8.00% for 1996, 1995 and 1994. Plan assets consist of pooled mutual funds
managed by the Retirement System Group Inc.
POST-RETIREMENT BENEFITS
The Bank also provides certain health care and life insurance benefits to
eligible retired employees. Current eligible employees must satisfy certain
service and age requirements in order to be covered for post-retirement benefits
other than pensions. Currently, the Post-Retirement Benefit Plan is unfunded.
The post-retirement health care costs are capped. In addition, benefits are not
provided to anyone who was not at least age 55 on October 1, 1991.
The components of net periodic post-retirement benefit costs are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost ....................................................... $ 0 $ 6 $ 8
Interest cost ...................................................... 45 71 64
Net amortization ................................................... (7) 24 34
---- ---- ----
Net periodic post-retirement
benefit cost .................................................... $ 38 $101 $106
==== ==== ====
</TABLE>
The status of the post-retirement plan is as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Accumulated post-retirement benefit obligation:
A) Retirees ........................................................... ($405) ($726) ($663)
B) Active fully eligible
plan participants ................................................ (172) (130) (146)
C) Other active plan
participants ..................................................... (16) (79) (78)
----- ----- -----
(593) (935) (887)
Unrecognized (gain)/loss .................................................. (90) 220 156
----- ----- -----
Accrued post-retirement
benefit cost ......................................................... ($683) ($715) ($731)
===== ===== =====
</TABLE>
The 1996, 1995 and 1994 post-retirement costs were determined using assumed
weighted average discount rates of 7.50 %, 8.25% and 7.00%, respectively.
Assumed compensation increases were 5.50% for 1996, 6.00% for 1995 and 5.50% for
1994.
STOCK OPTION PLANS
Under the terms of two previous stock option plans, a total of 1,426,920 shares
of the Corporation's common stock were initially reserved for grant to eligible
employees and directors. The options granted under such plans are, in general,
exercisable not earlier than one year after the date of grant, at a price equal
to the fair market value of the common stock on the date of grant, and expire
not more than ten years after the date of grant. The stock options will vest
during a period of up to five years after the date of grant.
20
<PAGE>
A summary of stock activity related to these stock option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
STOCK OPTION PLANS ---------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1993 ......................................... 454,173 $3.41 & 11.98
Exercised ............................................................. (24,162) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1994 ......................................... 430,011 $3.41 & 11.98
Exercised ............................................................. (51,467) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1995 ......................................... 378,544 $3.41 & 11.98
Exercised ............................................................. (76,940) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1996 ......................................... 301,604 $3.41 & 11.98
</TABLE>
As of December 31, 1996 options for 290,085 shares were exercisable and the
weighted average exercise price was $3.92. No additional options will be granted
under these plans.
In 1993, the Corporation's stockholders approved two new stock option plans: a
key employees plan and an outside director plan. The number of shares reserved
under those plans shall not exceed 912,000 shares subject to adjustment for
stock dividends and splits. The options granted under this plan are, in general,
exercisable not earlier than one year after the date of grant, at a price equal
to the fair market value of the common stock on the date of grant, and expire
not more than ten years after the date of grant. The stock options will vest
during a period of up to five years after the date of grant.
21
<PAGE>
A summary of the key employee stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
-------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 ............................................... 31,200 $11.98
Granted .................................................................... 0
Exercised .................................................................. 0
------ ------
Outstanding at December 31, 1994 ............................................... 31,200 $11.98
Granted .................................................................... 9,000 13.50
Exercised .................................................................. 0
Expired .................................................................... 0
------ ------
Outstanding at December 31, 1995 ............................................... 40,200 $11.98 & 13.50
Granted .................................................................... 6,000 16.69
Exercised .................................................................. 0
Expired .................................................................... 0
------ ------
Outstanding at December 31, 1996 ............................................... 46,200 $11.98, 13.50 & 16.69
</TABLE>
There were no options granted under the outside directors' plan at December 31,
1996. All 46,200 options outstanding at December 31, 1996 were related to the
key employees stock option plan and 20,520 were exercisable with a weighted
average exercise price of $12.11. Options for 865,800 shares were available for
future grant. The option price per share represents the market value of the
Corporation's stock on the date of grant. The per share weighted-average fair
value of stock options granted during 1996 and 1995 was $3.16 and $3.46 on the
date of grant using the Black Shcoles option-pricing model with the following
weighted-average assumptions: 1996-expected dividend yield 3.46%, risk-free
interest rate of 5.36% and the expected life of 5 years; 1995-expected dividend
yield 3.13%, risk-free interest rate of 7.76% and the expected life of 5 years.
The Bank applies APB Opinion No. 25 in accounting for its Plans and accordingly,
no compensation cost has been recognized for its stock options in the financial
statements. Had the Bank determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the effect on 1996 and
1995 income before taxes and net income would have been immaterial, and the
effect is not expected to be material in future years.
DIRECTORS' PLANS
The Board of Directors of the Corporation has adopted the Bankers Corp. Outside
Directors' Deferred Compensation Plan ("Deferred Compensation Plan"). Under the
Deferred Compensation Plan each outside director shall become a participant in
the plan as of the first day of the month coincident with or next following his
completion of 84 months of credited service as an outside director. The deferred
compensation benefit will be paid to the participant or his heirs in equal
monthly installments for a period which shall not exceed the lesser of the
number of months of the participants credited service or 180 months. The annual
deferred compensation benefit shall be an amount equal to one-half of the sum of
the average of the last three (3) years annual Directors' retainer fee paid by
the Corporation to its Outside Directors, plus the average of the last three (3)
years fee paid for attendance at the regular Directors' Meeting. Two former
director's are currently receiving benefits under this plan which totaled
$16,704 for 1996 and $11,836 for 1995. The unfunded cost of this obligation is
accrued for on a current basis and totaled $45,000 for 1996, $42,000 for 1995
and $29,000 for 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
Under the ESOP, an employee of the Bank and/or its affiliates shall become a
participant when he or she has completed at least six (6) months of credited
service. The ESOP is to be funded by the Bank's annual contributions made in
cash (which will be invested primarily in the Corporation's common stock) or
common stock. Shares purchased by the ESOP are held in a suspense account for
allocation among the participants as the loan is paid.
22
<PAGE>
Contributions to the ESOP and shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. Benefits become 20% vested after the third year of credited service,
with an additional 20% vesting each year thereafter until 100% vesting after
seven years. For any year in which the aggregate of benefits to key employees
exceeds 60% of the aggregate benefits accrued to non-key employees, benefits
allocated to participants in that year will become 20% vested after two years,
increasing to 100% after six years. Forfeitures will be reallocated annually
among remaining participating employees. Benefits may be payable upon
retirement, separation from service, disability or death.
MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST
The Bank has established the Bankers Savings 1989 Management Recognition and
Retention Plan and Trust (the "MRP"), as a method of providing employees in key
management positions with a proprietary interest in the Corporation and to
encourage such key employees to remain with the Bank. The Bank contributed
$1,269,000 to the MRP to enable it to acquire 372,240 shares of the common stock
offered in the initial public offering. Under the MRP, awards can be granted to
key employees in the form of shares of common stock held by the MRP. Key
employees of the Bank will earn (i.e. become vested in) the shares of common
stock over a period of five years at an annual cost to the Bank of $254,000. The
cost to the Bank in 1995 totaled $63,000 and is now complete. There will be no
ongoing costs for future periods.
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
The Corporation and the Bank have entered into an employment agreement with one
executive officer for three (3) years with an annual provision for automatic
continuance unless timely notice is given. In an event of a change of control,
as defined in the agreement, or if the Corporation or the Bank terminates the
executive officer for reasons other than cause, the executive officer would be
entitled to receive severance payments of approximately three years salary,
bonus and other benefits.
Special termination agreements among the Corporation, the Bank and three
executive officers provide for a three year term. Commencing on the first
anniversary date and continuing on each anniversary thereafter, the agreements
will automatically be extended so that the remaining term shall be three years.
In the event a change in control occurs, each executive would be entitled to
receive payments in an amount equal to three times the highest annual base
salary paid. All agreements provide for termination for cause at any time.
NOTE 16 COMMITMENTS AND CONTINGENCIES
The Bank has entered into several lease agreements for branch sites. At December
31, 1996, approximate minimum annual rental commitments under these operating
leases, including the option periods, are as follows (dollars in thousands):
December 31,
PERIOD AMOUNT
1997........................................... $ 369
1998........................................... 369
1999........................................... 309
2000........................................... 275
2001........................................... 160
Thereafter through 2004..................... 190
--------------
Total $ 1,672
=========
Rental expense for 1996, 1995, and 1994 was $378,000, $289,000 and $239,000,
respectively.
In the normal course of business, there are outstanding various legal
proceedings, claims, commitments and contingent liabilities, such as guarantees
and commitments to extend credit, including loan commitments of $35.9 million
and $18.7 million (primarily residential mortgages) at December 31, 1996 and
1995, respectively, standby letters of credit of $1,778,000 and $128,000 at
December 31, 1996 and 1995, respectively, and undisbursed home equity credit
lines of $41.9 million and $36.2 million at December 31, 1996 and 1995,
respectively, which are not reflected in the accompanying consolidated financial
statements. In the
23
<PAGE>
opinion of management, the consolidated financial position of the Corporation
will not be materially affected by the outcome of such legal proceedings and
claims or by such commitments and contingent liabilities.
The Bank maintains $45.0 million in lines of credit with other banks. Borrowings
outstanding under these lines totaled $11.0 million and $18.5 million at
December 31, 1996 and 1995, respectively.
NOTE 17 DIVIDEND RESTRICTIONS
Subject to applicable law, the Board of Directors of the Bank and of Bankers
Corp. may each provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including,
without limitation, net income, capital requirements, financial condition,
alternative investment options, tax implications, prevailing economic
conditions, industry practices and other factors deemed to be relevant at the
time.
No dividends may be paid by the Bank to the Corporation if such dividends reduce
stockholders' equity below the amount required for the liquidation account (see
note 3) or applicable regulatory capital requirements.
The New Jersey Banking Law further restricts the amounts of dividends paid by
the Bank on its common stock to an amount which, following the payments of such
dividends, will not reduce paid in capital and retained earnings to an amount
less than 50% of common stock or the payment of such dividend will not reduce
the statutory surplus of the Bank. The Bank's certificate of incorporation
requires a capital surplus of $4 million. At December 31, 1996, the Bank's total
equity was $192.4 million of which $2.5 million was common stock.
NOTE 18 CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
<TABLE>
STATEMENTS OF CONDITION December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Assets
Investment in subsidiary bank ............................................... $192,442 $186,309
Advances to subsidiary bank ................................................. 2,115 217
Loans to subsidiary bank ESOP ............................................... 301 621
Dividends receivable
from subsidiary bank ...................................................... 0 1,600
-------- --------
Total assets .............................................................. $194,858 $188,747
======== ========
Liabilities and Stockholders' Equity:
Dividends payable ........................................................... 1,981 1,809
-------- --------
Total liabilities ......................................................... 1,981 1,809
-------- --------
Stockholders' Equity ...................................................... 192,877 186,938
-------- --------
Total Liabilities and
Stockholders' Equity .................................................. $194,858 $188,747
======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Dividend income from
subsidiary Bank ........................................... $ 18,000 $ 6,200 $ 7,800
Interest Income on ESOP Loan .................................. 38 76 38
Expenses ...................................................... (93) (84) (136)
-------- -------- --------
Income before equity in
undistributed earnings
of the subsidiary bank .................................. 17,945 6,192 7,702
Equity in undistributed
earnings of the
subsidiary bank ......................................... 6,380 13,812 13,302
-------- -------- --------
Net income .............................................. $ 24,325 $ 20,004 $ 21,004
======== ======== ========
</TABLE>
25
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOW Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 24,325 $ 20,004 $ 21,004
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
earnings of the
subsidiary bank ...................................... (6,380) (13,812) (13,302)
(Decrease)increase
in other liabilities ............................................. 1 (132) 132
Decrease (increase) in dividends
receivable ....................................................... 1,600 (1,600) 0
-------- -------- --------
Net cash provided by
operating activities ....................................... 19,546 4,460 7,834
-------- -------- --------
Cash flows from investing activities:
Net change in ESOP loan ........................................ 320 450 (1,071)
(Increase) decrease in advances
to subsidiary bank ....................................... (1,899) 2,324 1,692
-------- -------- --------
Net cash (used in) provided
by investing activities .................................. (1,579) 2,774 621
-------- -------- --------
Cash flows from financing activities:
Treasury stock purchases ....................................... (10,658) (956) (3,699)
Dividends paid ................................................. (7,571) (6,453) (4,838)
Exercise of stock
options, net .......................................... 262 175 82
-------- -------- --------
Net cash used in
financing activities ........................................... (17,967) (7,234) (8,455)
-------- -------- --------
Net change in cash
for the year ..................................................... $ 0 $ 0 $ 0
======== ======== ========
</TABLE>
26
<PAGE>
NOTE 19 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain 1996 and 1995 quarterly consolidated financial
data:
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Quarter ended
Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
1996
Interest income............................ $42,546 $39,254 $36,895 $34,410
Interest expense........................... 26,429 23,586 21,464 19,400
Net Interest income........................ 16,117 15,668 15,431 15,010
Provision for loan losses.................. 900 900 1,250 900
Gains on sale of loans................... 11 5 5 5
Income before income tax expense......... 10,921 7,612 9,592 9,701
Net income................................. 6,957 5,022 6,139 6,207
Earnings per share:
Primary................................. .55 .40 .48 .47
Fully diluted........................... .55 .40 .48 .47
Cash Dividend Per share............... .16 .16 .16 .14
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Quarter ended
Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
1995
Interest income....................................... $33,945 $32,521 $31,885 $30,914
Interest expense...................................... 20,066 19,014 18,205 16,533
Net Interest income................................... 13,879 13,507 13,680 14,381
Provision for loan losses............................. 2,000 1,500 1,000 1,000
Loss on security transactions......................... (1,655) 0 0 (10)
Income before income tax expense...................... 6,062 8,071 8,039 8,515
Net income............................................ 4,222 5,181 5,149 5,452
Earnings per share:
Primary........................................... 0.32 0.39 0.39 0.41
Fully diluted..................................... 0.32 0.39 0.39 0.41
Cash Dividend Per share............................... 0.14 0.14 0.12 0.12
</TABLE>
27
<PAGE>
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107. "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Corporation
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments at
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 15,957 $ 15,957 $ 23,337 $ 23,337
Securities available for sale................... 34,181 34,181 --- ---
Investment securities........................... 25,961 26,036 66,831 67,735
Mortgage and asset-backed securities........... 681,518 685,780 460,574 463,116
Net loans...................................... 1,665,638 1,676,961 1,313,259 1,324,951
Accrued interest receivable.................... 15,181 15,181 13,090 13,090
Financial liabilities:
Deposits....................................... $1,629,062 1,630,952 $1,631,254 $1,634,635
Short-term borrowings.......................... 614,090 614,204 67,245 67,245
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.
INVESTMENT SECURITIES
All investment securities are actively traded in a secondary market and have
been valued using quoted market prices.
MORTGAGE AND ASSET-BACKED SECURITIES
All mortgage-and asset-backed securities are actively traded in a secondary
market and have been valued using quoted market prices.
NET LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as residential and
commercial real estate, commercial and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms, and by
performing and non-performing categories.
The fair value of loans is estimated by discounting contractual cash flows using
estimated market discount rates which reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing credit costs.
The fair value of significant non-performing loans is based on either recent
external appraisals or estimated cash flows which are discounted using a rate
commensurate with the associated risk. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available market
information and specific borrower information.
ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.
28
<PAGE>
DEPOSITS
The fair value of deposits, with no stated maturity, such as non-interest
bearing demand deposits, savings, and NOW and money market accounts, is equal to
the amount payable on demand as of December 31, 1996 and 1995. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
SHORT-TERM BORROWINGS
The fair value of short-term borrowings is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for borrowing of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties and at
December 31, 1996 and 1995 approximates the contract amount.
LIMITATIONS
The preceding fair value estimates were made at December 31, 1996 and 1995,
based on pertinent market data and relevant information on the financial
instrument. These estimates do not include any premium or discount that could
result from an offer to sell at one-time the Bank's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Bank's financial instruments, fair value estimates
were necessarily based on judgments with respect to future expected loss
experience, current economic conditions, risk assessments of various financial
instruments involving a myriad of individual borrowers, and other factors. Given
the innately subjective nature of these estimates, the uncertainties surrounding
them and the matters of significant judgment that must be applied, these fair
value estimates cannot be calculated with precision. Modifications in such
assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 1996 and 1995, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
NOTE 21 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1996, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject and meets the requirements to be
categorized as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events that management believes
would have changed the Bank's capital classification.
29
<PAGE>
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
FDIC REQUIREMENTS
------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL CAPITALIZED
--------------- ----------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Leverage(Tier 1)capital $189,680 7.87% $ 96,435 4.00% $120,544 5.00%
Risk-based capital:
Tier 1 189,680 16.64 45,584 4.00 68,377 6.00
Total 193,308 16.96 91,169 8.00 113,961 10.00
DECEMBER 31, 1995
Leverage(Tier 1)capital $182,200 9.69% $ 75,178 4.00% 93,973 5.00%
Risk-based capital:
Tier 1 182,200 19.47 37,424 4.00 56,137 6.00
Total 184,797 19.75 74,849 8.00 93,561 10.00
</TABLE>
NOTE 22 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
The statement provides standards for distinguishing transfers of financial
assets that are sales from those that are secured borrowings, and provides
guidance on the recognition and measurement of asset servicing contracts and on
debt extinguishments. As issued, SFAS 125 is effective for transactions
occurring after December 31, 1996. However, as a result of an amendment to SFAS
125 issued by the FASB in December 1996, certain provisions of SFAS 125
are deferred for an additional year. Adoption of the new accounting standard is
not expected to have a material impact on the Corporation.
30
EXHIBIT 99.4
Pro Forma Unaudited Combined Condensed Balance Sheet as of June 30, 1997.
The following unaudited pro forma combined condensed balance sheet
information reflects (i) the historical consolidated balance sheets of Sovereign
and Bankers as of June 30, 1997 and (ii) the pro forma combined condensed
balance sheet of Sovereign as of such date, after giving effect to the Merger.
The Merger has been reflected as a pooling of interests effective as of June 30,
1997.
Pro Forma Unaudited Balance Sheet
As of June 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Sovereign
Pro and
Forma Bankers
Sovereign Bankers Adjustments Combined
--------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Cash and amounts due from
depository institutions ........... $ 133,910 $ 15,126 $ - $ 149,036
Investment and mortgage-backed
securities ........................ 3,661,919 971,011 (291)(2) 4,632,930
Loans ............................... 6,829,705 1,540,362 - 8,370,067
Allowance for possible loan losses .. (48,948) (7,689) - (56,637)
Goodwill and other intangible
assets ............................ 108,041 3,009 - 111,050
Other assets ........................ 213,945 45,016 - 258,961
----------- ---------- ----------- -----------
TOTAL ASSETS ........................ $10,898,572 $2,566,835 (291) $13,465,407
=========== ========== =========== ===========
Deposits ............................ $ 5,856,717 $1,656,927 $ - $ 7,513,644
Borrowings .......................... 4,345,152 678,806 - 5,023,958
Other liabilities ................... 65,098 27,566 - 92,664
----------- ---------- ----------- -----------
TOTAL LIABILITIES ................... 10,266,967 2,363,299 - 12,630,266
TRUST PREFERRED SECURITIES .......... 97,568 -
---------- --------
Preferred stock ..................... 96,441 - - 96,441
Common stock (1) .................... 301,749 101,281 (25,170)(2)(3) 378,151
Unallocated common stock held by
ESOP .............................. (33,091) - - (33,091)
Treasury stock ...................... (147) (24,879) 24,879(3) (147)
Unrecognized gain on investments .... 4,537 (613) - 3,924
Retained earnings ................... 164,548 127,747 - 292,295
----------- ---------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY .......... 534,037 203,536 (291) 737,573
----------- ---------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................ $10,898,572 $2,566,835 $ (291) $13,465,407
=========== ========== =========== ===========
</TABLE>
- ------------------------
(1) Sovereign common stock has no par value; accordingly,
amounts shown include surplus.
(2) Represents cancellation of Sovereign's investment in Bankers
common stock.
(3) Represents cancellation of treasury shares of Bankers.
1
<PAGE>
Pro Forma Unaudited Combined Condensed Statements of Income for
the Six Months Ended June 30, 1997 and 1996 and the Years Ended
December 31, 1996, 1995, and 1994.
The following unaudited pro forma combined condensed statements of
income reflect the historical consolidated statements of income of Sovereign and
Bankers, as indicated below, for each period presented and the pro forma
combined condensed statements of income of Sovereign, after giving effect to the
Merger. The Merger has been reflected as a pooling of interests. The pro forma
combined condensed statements of income for the six months ended June 30, 1997
and 1996 and the years ended December 31, 1996, 1995, and 1994 were prepared on
the assumption that the Merger had been effected as of the beginning of the
applicable six-month or annual period for Sovereign or Bankers, as the case may
be.
Pro Forma Unaudited Income Statement
For the Six Months Ended June 30, 1997
(In thousands, except per share data)
Sovereign
and
Bankers
Sovereign Bankers Combined
--------- ------- ---------
Interest income ............ $360,816 $89,398 $450,214
Interest expense ........... 234,302 55,548 289,850
-------- ------- --------
Net interest income ........ 126,514 2,300 160,364
Provision for possible
loan losses .............. 9,700 2,300 12,000
-------- ------- --------
Net interest income after
provision for possible
loan losses .............. 116,814 31,550 148,364
-------- ------- --------
Other non-interest income .. 16,905 1,222 18,127
Non-interest expense ....... 82,776 10,278 93,054
-------- ------- --------
Income before taxes ........ 50,943 22,494 73,437
Income taxes ............... 20,230 8,172 28,402
-------- ------- --------
Net income ................. $ 30,713 $14,322 $ 45,035
======== ======= ========
Earnings per share ......... $ 0.39 $ 1.13 $ 0.44
======== ======= ========
2
<PAGE>
Pro Forma Unaudited Income Statement
For the Six Months Ended June 30, 1996
(In thousands, except per share data)
Sovereign
and
Bankers
Sovereign Bankers Combined
--------- ------- ----------
Interest income ............ $313,564 $71,305 $384,869
Interest expense ........... 195,986 40,863 236,849
-------- ------- --------
Net interest income ........ 117,578 30,442 148,020
Provision for possible
loan losses .............. 2,216 2,150 4,366
-------- ------- --------
Net interest income after
provision for possible
loan losses .............. 115,362 28,292 143,654
-------- ------- --------
Other non-interest income .. 17,660 1,056 18,716
Non-interest expense ....... 77,939 10,056 87,995
-------- ------- --------
Income before taxes ........ 55,083 19,292 74,375
Income taxes ............... 20,794 6,947 27,741
-------- ------- --------
Net income ................. $ 34,289 $12,345 $ 46,634
======== ======= ========
Earnings per share ......... $ 0.45 $ 0.95 $ 0.46
======== ======= ========
3
<PAGE>
Pro Forma Unaudited Combined Condensed Income Statement
For the Year Ended December 31, 1996
(In thousands, except per share data)
Sovereign
and
Bankers
Sovereign Bankers Combined
--------- ------- ----------
Interest income ............ $665,489 $153,105 $818,594
Interest expense ........... 423,594 90,879 514,473
-------- -------- --------
Net interest income ........ 241,895 62,226 304,121
Provision for possible
loan losses .............. 11,416 3,950 15,366
-------- -------- --------
Net interest income after
provision for possible
loan losses .............. 230,479 58,276 288,755
-------- -------- --------
Other non-interest income .. 44,163 2,141 46,304
Non-interest expense ....... 198,893 22,591 221,484
-------- -------- --------
Income before taxes ........ 75,749 37,826 113,575
Income taxes ............... 29,935 13,501 43,436
-------- -------- --------
Net income ................. $ 45,814 $ 24,325 $ 70,139
======== ======== ========
Earnings per share ......... $ 0.59 $ 1.90 $ 0.69
======== ======== ========
4
<PAGE>
Pro Forma Unaudited Combined Condensed Income Statement
For the Year Ended December 31, 1995
(In thousands, except per share data)
Sovereign
and
Bankers
Sovereign Bankers Combined
--------- ------- -----------
Interest income ............ $537,380 $129,265 $666,645
Interest expense ........... 340,570 73,818 414,388
-------- -------- --------
Net interest income ........ 196,810 55,447 252,257
Provision for possible
loan losses .............. 2,650 5,500 8,150
-------- -------- --------
Net interest income after
provision for possible
loan losses .............. 194,160 49,947 244,107
-------- -------- --------
Other non-interest income .. 32,197 739 32,936
Non-interest expense ....... 135,280 19,999 155,279
-------- -------- --------
Income before taxes ........ 91,077 30,687 121,764
Income taxes ............... 30,671 10,683 41,354
-------- -------- --------
Net income ................. $ 60,406 $ 20,004 $ 80,410
======== ======== ========
Earnings per share ......... $ 0.82 $ 1.51 $ 0.82
======== ======== ========
5
<PAGE>
Pro Forma Unaudited Combined Condensed Income Statement
For the Year Ended December 31, 1994
(In thousands, except per share data)
Sovereign
and
Bankers
Sovereign Bankers Combined
--------- ------- ----------
Interest income ............ $389,076 $106,602 $495,678
Interest expense ........... 212,189 51,123 263,312
-------- -------- --------
Net interest income ........ 176,887 55,479 232,366
Provision for possible
loan losses .............. 5,992 3,970 9,962
-------- -------- --------
Net interest income after
provision for possible
loan losses .............. 170,895 51,509 222,404
-------- -------- --------
Other non-interest income .. 18,704 1,683 20,387
Non-interest expense ....... 109,870 21,130 131,000
-------- -------- --------
Income before taxes ........ 79,729 32,062 111,791
Income taxes ............... 29,830 11,058 40,888
-------- -------- --------
Net income ................. $ 49,899 $ 21,004 $ 70,903
======== ======== ========
Earnings per share ......... $ 0.74 $ 1.56 $ 0.77
======== ======== ========
6
<PAGE>
