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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 0-7806
RAMAPO FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-1946561
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
64 MOUNTAIN VIEW BOULEVARD, WAYNE, NEW JERSEY 07470
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 696-6100
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section12(g) of the Act:
Common stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 15, 1996, the aggregate market value of the 7,790,309 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $34.1 million based on the closing sales price of
$4.375 per share of the registrant's Common Stock on March 15, 1996 as listed on
the National Association of Securities Dealers Automated Quotation National
Market System. For purposes of this calculation, it is assumed that directors,
executive officers and beneficial owners of more than 5% of the registrant's
outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of March 15, 1996: 8,096,449
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DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1 - Business Page 1 (To Our Shareholders)
and Pages 4 thru 18
(Management's Discussion and
Analysis of Consolidated
Financial Condition and Results
of Operations) of the Annual
Report to Stockholders for the
year ended December 31, 1995
(Exhibit 13).
PART II
Item 6 - Selected Financial Data Pages 2 and 3 of the Annual
Report to Stockholders for the
year ended December 31, 1995
(Exhibit 13).
Item 7 - Management's Discussion Pages 4 thru 18 of the Annual
and Analysis of Financial Report to Stockholders for the
Condition and Results of year ended December 31, 1995
Operations (Exhibit 13).
Item 8 - Financial Statements and Pages 19 thru 39 of the Annual
Supplementary Data Report to Stockholders for the
year ended December 31, 1995
(Exhibit 13).
PART III
Item 10- Directors and Executive All or part of items 10, 11, 12
Officers of the Registrant and 13 are contained in the
registrant's definitive Proxy
Statement for its 1996 Annual
Item 11- Executive Compensation Meeting of Stockholders to be
filed with the Securities and
Exchange Commission pursuant to
Item 12- Security Ownership of Regulation 14A.
Certain Beneficial Owners
and Mangement
Item 13- Certain Relationships and
Related Transactions
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RAMAPO FINANCIAL CORPORATION AND SUBSIDIARIES
Index to Form 10-K for December 31, 1995
Page No(s).
-----------
PART I
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure. 20
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
SIGNATURES 22
3
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PART I
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS AND MARKET AREA
Ramapo Financial Corporation (the "Corporation") is a New Jersey bank
holding company that owns all of the outstanding stock of The Ramapo Bank (the
"Bank"), a New Jersey state-chartered commercial bank. The Corporation and the
Bank are headquartered in Wayne, New Jersey, and five of the Bank's six offices
are in Wayne or nearby communities. The Bank's sixth branch is in the City of
Clifton a few miles to the east of Wayne. The Bank was founded in 1967 and
became a subsidiary of the Corporation in 1974. The Corporation commenced
operations in 1971 when it acquired ownership of Pilgrim State Bank
("Pilgrim"). In June 1993, the Corporation sold the principal banking assets
and liabilities of Pilgrim. As a result, the Bank is the Corporation's
principal subsidiary and its only remaining banking subsidiary. As of December
31, 1995, the Corporation had consolidated assets, deposits and stockholders'
equity of $246.5 million, $217.1 million and $27.2 million, respectively.
The Corporation considers its primary banking markets to be the Wayne area,
in which five of its six offices are located, and the City of Clifton. The Bank
also does business with customers in Essex, Morris and Passaic County
communities that are contiguous to these markets.
The Wayne area is a combination of upper middle income neighborhoods and
businesses that is located approximately 18 miles west of New York City.
According to 1990 census data, the area has almost 100,000 residents and a
median household income of $55,005, or about one-third higher than the state
average. In Wayne, itself, the median value of a single-family house was
$242,200. The number of private sector jobs in the area approximates the
resident workforce, and companies with corporate headquarters in Wayne include
Union Camp Corporation, GAF Corporation, GEC Marconi Electronic Systems
Corporation, Reckitt & Coleman Inc. and Castrol Inc.
Clifton is an urban center with a 1990 population of 71,984 and a per
household income that approximates the state average. The Bank's Clifton branch
provides access to a large number of prospective commercial loan customers.
The Corporation is supervised by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The Bank is supervised by the Federal
Deposit Insurance Corporation (the "FDIC") and the New Jersey Department of
Banking (the "State"), and its deposits are insured by the FDIC. The
Corporation's executive offices are located at 64 Mountain View Boulevard,
Wayne, New Jersey, and its main telephone number is (201) 696-6100.
GENERAL
The Corporation is a one-bank holding company headquartered in Wayne, New
Jersey whose primary operating subsidiary is the Bank. The Bank conducts a
general commercial and retail community banking business and offers a full range
of traditional deposit and lending services. Commercial services provided by the
Bank include real estate mortgage loans, term loans, revolving credit
arrangements, lines of credit, real estate construction loans, business checking
and savings accounts and certificates of deposit, as well as night depository,
wire transfer and collection services. The Bank also offers a full range of
consumer banking services, including checking, savings, NOW and money market
accounts, certificates of deposit, secured and unsecured loans, installment
loans, home equity loans, safe deposit boxes, holiday club accounts, collection
services, money orders and travelers checks. The Bank makes brokerage services
available to its customers through an affiliation with Invest Financial
Corporation, an independent company. It also conducts limited trust activities.
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MEMORANDUM OF UNDERSTANDING AND REGULATORY AGREEMENT
Memorandum of Understanding. Until March 21, 1996, the Bank had been
operating under a Memorandum of Understanding (the "MOU") with the FDIC and the
State. The MOU was issued in May, 1995 pursuant to an examination of the Bank by
the FDIC and the State as of November 30, 1994. The MOU replaced a Cease and
Desist Order (the "Order") which was issued in November, 1992 by the FDIC and
the State.
The MOU required the Bank to maintain its Tier 1 leverage capital ratio at
not less than 6.0%, to reduce the amount of classified assets to certain
specific levels, and to take various other actions. In addition, the MOU
restricted the Bank from paying dividends on its common stock without prior
written consent of the FDIC and the State. The FDIC has recently completed
another examination of the Bank as of December 31, 1995, and has found the Bank
to be in full compliance with the MOU. As a result, the FDIC terminated the MOU
on March 20, 1996. The State joined in that action a day later.
Agreement with the Federal Reserve Bank of New York. From November 26, 1993
to March 14, 1996, the Corporation operated under an agreement (the "Agreement")
with the Federal Reserve Bank of New York (the "Reserve Bank"). The Agreement
prohibited the Corporation from declaring or paying any dividends without the
prior written approval of the Reserve Bank. The Agreement also required the
Corporation to submit a capital plan designed to achieve and maintain an
adequate capital position for the consolidated organization, and addressing,
among other things, the capital requirements of both the Bank and the
Corporation, the requirements of the Capital Plan submitted to the FDIC, the
adequacy of the Bank's loan loss reserves, the anticipated level of earnings,
the source and timing of any additional capital infusions, a program to reduce
borrowing at the Corporation level and using such borrowed funds to infuse
additional capital into the Bank, and the Corporation's responsibility to act as
a source of strength, including capital support, for the Bank. The Corporation
also was required to submit a written consolidated contingency liquidity plan
describing actions to be taken by the Corporation to address any liquidity needs
of the Bank, including procedures for monitoring the Bank's deposit base and any
related funding needs and a written operating plan providing goals and
strategies for improving the Corporation's earnings.
The Agreement also prohibited, without the prior written consent of the
Reserve Bank, incurring any debt (including renewals of existing debt), the
payment to any one individual or entity in an amount in excess of $10,000 in any
calendar month or the redemption or repurchase of any outstanding stock. The
Agreement required the Corporation's Board of Directors to review all existing
employment contracts and discretionary bonus or incentive plans and certify, in
writing, that such contracts and plans were consistent with applicable laws and
safe and sound banking practices. The Agreement further required the
Corporation's Board of Directors to appoint a committee comprised of outside
directors to monitor compliance with the provisions of the Agreement and to
provide progress reports to the Reserve Bank detailing the form and manner of
all actions taken to secure compliance with the Agreement.
The Corporation has since received a full examination by the Reserve Bank
as of December 31, 1994 and a limited scope inspection as of September 30, 1995.
Based on the continued improvement in the Corporation's operations and full
compliance with the Agreement, the Reserve Bank terminated the Agreement on
March 15, 1996.
LENDING ACTIVITIES
Loan Portfolio. As of December 31, 1995, the Corporation's loans, net of
unearned discount and loans held for sale, represented 65.1% of its total
assets. As of December 31, 1995, its loan portfolio consisted of approximately
60.1% commercial and commercial real estate loans, 9.5% commercial real estate
construction loans, 5.4% residential real estate mortgage loans and 25.0%
installment loans. At December 31, 1995, substantially all of the Bank's loans
were to residents of and businesses located in northern New Jersey.
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Set forth below is selected data relating to the composition of the
Corporation's loan portfolio by type of loan and type of security at the dates
indicated. At December 31, 1995, the Corporation had no concentrations of loans
exceeding 10% of total loans in addition to those disclosed below. See "--Loan
Concentrations."
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and commercial real
estate................................... $ 96,469 60.1% $101,292 61.7% $114,889 61.6%
Commercial real estate
construction............................. 15,177 9.5 18,462 11.2 29,695 15.9
Residential real estate
mortgage (1)............................. 8,772 5.4 10,346 6.3 7,808 4.2
Installment................................ 40,128 25.0 34,211 20.8 34,211 18.3
-------- ----- -------- ----- -------- -----
Total.................................. $160,546 100.0% $164,311 100.0% $186,603 100.0%
======== ===== ======== ===== ======== =====
<CAPTION>
At December 31,
------------------------------------------------------
1992 1991
---- ----
Amount % Amount %
------ ---- ------ -----
<S> <C> <C> <C> <C>
Commercial and commercial real
estate................................... $154,508 58.1% $155,223 54.6%
Commercial real estate
construction............................. 33,527 12.6 47,246 16.6
Residential real estate
mortgage (1)............................. 26,414 9.9 32,766 11.5
Installment................................ 51,483 19.4 49,139 17.3
-------- ----- -------- -----
Total.................................. $265,932 100.0% $284,374 100.0%
======== ===== ======== =====
</TABLE>
(1) Excludes Loans Held For Sale.
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Origination of Loans. The Bank markets its loan programs primarily through
its branch managers and loan officers. In addition, the Bank receives loan
referrals from the SBA due to its Preferred Lender and Certified Lender status.
Existing customers of the bank may also make referrals of potential loan
customers.The Bank's commercial loan officers also have utilized Dun &
Bradstreet and other similar sources of information to target potential
commercial customers in the bank's target market. The Bank does not originate
installment loans through automobile dealers or other third party sources.
The Bank's lending activities are subject to its written, nondiscriminatory
underwriting policies and to loan origination procedures prescribed by the
bank's board of directors and its management. Each loan request is evaluated to
determine the borrower's ability to repay. In addition, where appropriate,
employment and other verifications are obtained. Credit reports and financial
statements are also obtained. Where loans are to be secured by real estate,
property valuations are performed by appraisers approved by the Bank's Board of
Directors.
The statutory legal limit for loans to one borrower applicable to the Bank
is generally 15% of capital funds at the time the loan is closed, unless an
exception is approved by the State. Such exceptions may be granted only in
limited circumstances. At December 31, 1995 the Bank's legal lending limit was
$4.2 million.
It is the Bank's policy to record a lien on the real estate securing the
loan (whether commercial or residential) and to obtain title insurance which
insures that the property is free of prior encumbrances. Borrowers also must
obtain hazard insurance policies prior to closing and, when the property is in a
flood plain as designated by the Department of Housing and Urban Development,
must obtain paid flood insurance policies. The properties securing the bank's
real estate loans are appraised by independent appraisers approved at least
annually by the Board of Directors. For all real estate loans of $50,000 or
more, the Bank also requires that the loan officer and the borrower complete an
environmental questionnaire to determine if a Phase I or II environmental audit
is necessary. On most residential loans, borrowers also are required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the bank makes disbursements for items such
as real estate taxes.
The Board of Directors has adopted a policy setting forth specified levels
of lending authority. All loans between $15,000 and $350,000 must be approved
by two officers of the Bank. All unsecured loans between $350,000 and $500,000
and secured loans between $350,000 and $750,000 must be approved by the
unanimous vote of the Bank's Senior Loan Committee, which includes the
Chairman of the Board, the President and the Senior Credit Officer of the Bank.
Loans in excess of those amounts and loans receiving less than a unanimous vote
for approval must be approved by the Executive Committee of the Board of
Directors or the full Board of Directors.
It is management's policy to monitor its loan portfolio continually to
anticipate and address potential and actual delinquencies. When a borrower fails
to make a payment on a loan, the Bank takes immediate steps to have the
delinquency cured and the loan restored to current status. Generally, as a
matter of policy, the Bank will contact the borrower after a loan has been
delinquent 30 days. If payment is not promptly received, the borrower is
contacted again, and efforts are made to formulate an affirmative plan to cure
the delinquency. With respect to commercial and commercial real estate loans
delinquent 30 days or more, collection efforts are reviewed by the Work Out
Committee to determine appropriate actions to be taken. Generally, after any
loan is delinquent 90 days or more, formal legal proceedings are commenced to
collect amounts owed. Legal proceedings may be commenced prior to such time,
however, and late fees generally are assessed against delinquent borrowers when
allowed by the terms of the loan documents.
Commercial Lending. The Bank's commercial lending activities are directed
to small and lower middle-market New Jersey-based businesses with $500,000 to
$25 million in annual sales. The Bank's commercial borrowers consist primarily
of firms engaged in manufacturing and distribution, retailers, and professionals
in health care, accounting and law. Generally, the Bank's commercial loans are
secured by the assets of the borrower, which may include accounts receivable,
inventory, equipment and other business assets, such as real estate, and are
guaranteed by the principals of the borrowers. The Bank's commercial loan
portfolio includes loans which may be at least partially secured by real estate
but for which the expected source of repayment for the loan is the cash flow
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resulting from the borrower's business. For years prior to 1993, the Bank
reported loans that were categorized as commercial real estate loans as part of
its commercial loan portfolio.
The Bank underwrites its commercial loans on the basis of the borrower's
cash flow and ability to service the debt from earnings rather than on the basis
of underlying collateral value, and seeks to structure such loans to have more
than one source of repayment. The borrower is required to provide the Bank with
sufficient information to allow the Bank to determine the creditworthiness of
the borrower, the stability of the borrower's industry and the competency of
management. In most instances, this information consists of at least three years
of financial statements, a statement of projected cash flows, current financial
information on any guarantor and any additional information on the collateral.
For loans with maturities exceeding one year, the Bank requires that borrowers
and guarantors provide updated financial information at least annually
throughout the term of the loan.
The Bank's commercial loans may be structured as term loans or as lines of
credit. Commercial term loans are generally made to finance the purchase of
assets and have maturities of five years or less. Commercial lines of credit are
typically for the purpose of providing working capital and are usually approved
with a one-year term. The Bank generally requires that line of credit borrowings
be repaid at least 30 consecutive days during the one-year period. The Bank also
offers both commercial and standby letters of credit for its commercial
borrowers. Commercial letters of credit are written for a maximum term of one
year. The terms of standby letters of credit generally do not exceed one year,
although in certain instances, renewable standby letters of credit may be issued
with the approval of the Chairman of the Board, President or the Senior Credit
Officer of the Bank and must be reviewed and approved annually.
The Bank's commercial loans generally have interest rates which float at,
or at some increment over, the Bank's commercial lending base rate. The Bank's
commercial lending base rate is determined by the Chairman of the Board,
President and Senior Credit Officer of the Bank.
The Bank participates in various lending programs of the Small Business
Administration (the "SBA") and the New Jersey Economic Development Authority
(the "EDA") and has been designated a Certified Lender and a Preferred Lender by
the SBA. Pursuant to the SBA Certified Lender program, the SBA must make a
decision on loan requests forwarded to it by the Bank within three business days
of receipt of the loan package. If approved, the SBA guarantees loans up to
$750,000 as follows: (i) up to 80% of loans of $100,000 or less; and (ii) 75%
of loans of more than $100,000. Guaranty fees are based on loan maturity and
the SBA's share. In addition, the Bank is one of approximately 20 New
Jersey financial institutions which participate with the EDA in a state-wide
loan pool for small businesses. Under the terms of this program, the Bank may
originate loans in an amount of up to $1.0 million for fixed asset financing or
$500,000 for working capital purposes and the EDA may purchase a participation
interest of up to 25% of the principal amount of the loan and may guarantee an
additional 25% of the remaining balance of the loan. Under the terms of the
guarantee programs of both the SBA and the EDA, in the event of a default by
the borrower, the SBA or EDA will pay to the Bank the guaranteed portion of the
loan. The Bank and the SBA or the EDA will rank pari passu with respect to the
collateral securing the loan. Any participation interest in loans purchased by
the EDA is subordinated to the Bank's interest in the event of default.
Commercial Real Estate Lending. The Bank's commercial real estate portfolio
consists of loans (i) the purpose of which was to acquire or develop real
estate, or (ii) where the primary source of repayment is liquidation of the real
estate held as collateral for the loan. Commercial real estate loans have been
made primarily to builders and developers to finance land acquisition,
development and construction. The commercial real estate loan portfolio includes
loans to finance the acquisition of investment properties, including office
buildings, warehouse space and strip shopping centers.
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Although terms vary, commercial real estate loans generally have maturities
of up to 5 years with payments based on amortization schedules of up to 25
years. Loans are offered at both fixed interest rates and rates that float at a
margin over the Bank's commercial lending base rate. The exact margin varies
with each loan and is determined based on the risk associated with the loan.
Borrowers generally are charged a commitment fee equal to 1% of the principal
amount of the loan. Loan-to-value ratios on the Bank's commercial real estate
loans when originated do not exceed 80% of the lesser of the appraised value or
the purchase price of the property. The amount of the loan also is determined
with reference to the amount of debt that can be supported by the property's
existing cash flow.
As part of the criteria for underwriting mini-permanent loans, the Bank
generally requires these properties to provide sufficient income to satisfy
operating expenses and debt service on the loan, and to provide a reasonable
return to the owners on their investment. In evaluating the loan request, the
Bank generally considers cash flow from leases that have unexpired terms at
least equal to the term of the loan.
Commercial real estate lending entails additional risks as compared to
residential property lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers.
Development of commercial real estate projects also may be subject to numerous
land use and environmental issues. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for commercial and retail space, and, as such, may be subject to a
greater extent to adverse conditions in the real estate market and in the
economy generally.
Construction Lending. Construction loans include loans for the
acquisition and development of land as well as loans for the construction of
income-producing properties and residential properties. The maximum term of such
loans is 24 months with the first 12 months allocated to development and the
remaining 12 months for sale of the developed property. The Bank generally
requires that the borrower's estimates of development and construction costs be
evaluated by a qualified engineer hired by the Bank but at the expense of the
borrower. Generally, interest payments only are required during the term of the
loan with interest based on a floating rate equal to the Bank's commercial
lending base rate or some increment over that rate. Fees equal to 1-1.5% of the
loan amount generally are charged. The Bank's construction loans generally do
not exceed 70% of the total cost of development or the lesser of 70% of the cost
or appraised value of the property. Since the primary source of repayment for
the loan is sales of the developed lots, the Bank requires that release prices
for individual lots be calculated such that the loan is repaid in full once 80%
of the land value in the project has been sold and released.
Residential Real Estate Lending. Prior to 1994, the Corporation and the
Bank had engaged in mortgage origination, underwriting, servicing and document
custodian services. Mortgage loans were sold in the secondary market with
servicing retained. During the first quarter of 1994, the Corporation sold
substantially all of its servicing rights and outsourced the origination of
mortgage loans. Although the outsourcing arrangement has since expired, the Bank
continues to offer residential mortgage loans in its market in a limited way.
As a result, the Corporation anticipates that loans held for sale will decrease
in future periods and that income attributable to the origination and sale of
mortgage loans also will decrease.
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Installment Lending. The Bank's installment loans include new and used
automobile loans, secured and unsecured personal loans, second mortgage loans
and home equity lines of credit. Generally, personal and new automobile
installment loans have a maximum term of 5 years. Installment loans for the
purchase of a used automobile have a maximum term of 4 years. Second mortgage
loans and home equity lines of credit have a maximum term of 15 years. The Bank
will lend up to 75% of the purchase price of a new automobile and, with respect
to used automobiles, 100% of the National Automobile Dealer's Association loan
value. For home equity lines of credit and second mortgage loans, the
combination of all existing loans on the property plus the requested loan may
not exceed 75% of the property's value. With respect to all automobile loans and
home equity and second mortgage loans, the borrower is required to maintain
hazard insurance naming the Bank as loss payee in an amount sufficient to repay
the loan in full in the event of damage to the collateral. Loans secured by
subordinate mortgages on real estate where the prior mortgage has a balance of
$200,000 or greater or where the loan amount exceeds $50,000 must be approved by
the Chairman of the Board, President or Senior Credit Officer of the Bank.
Installment loan applicants are required to complete a written application which
is evaluated using the Bank's credit scoring policy.
Loan Concentrations. The Bank grants various commercial and installment
loans, principally in northern New Jersey. A substantial portion of the Bank's
commercial loan portfolio consists of loans for which the purpose was to acquire
or develop real estate or for which the primary source or repayment is the
liquidation of the real estate held as collateral. Substantially all of the
commercial real estate securing such loans is located in northern New Jersey.
The ability of borrowers of such loans to repay them in accordance with their
terms, and the ability of the Corporation to realize recoveries in the event of
their default, are highly dependent upon conditions in the northern New Jersey
real estate industry.
The Bank's loan portfolio has certain concentrations of affiliated
borrowers. The three largest concentrations, all of which are involved in
commercial and residential real estate development and management, aggregate
$35,233,000 and $41,313,000 at December 31, 1995 and 1994, respectively.
The largest borrower concentration consists of loans to a group of
affiliated borrowers with an aggregate outstanding balance of $15,430,000 and
$15,433,000 at December 31, 1995 and 1994, respectively, all of which were
performing and current as to the required principal and interest payments. A
majority of these loans are secured by first mortgages on commercial properties
where third party loan payments paid directly to the Bank are the primary source
of repayment.
A second concentration involves loans to certain affiliated real estate
development companies whose principal owners have had a long-standing and
excellent relationship with the Bank. Outstanding balances for this group at
December 31, 1995 and 1994 were $12,245,000 and $16,871,000, respectively. All
such loans were performing as of the respective year end dates.
Another relationship consists of nine loans, primarily for the construction
or renovation of condominium units, totaling $7,558,000 and $9,009,000 at
December 31, 1995 and 1994, respectively. The majority of the loans are secured
by first mortgages on condominium developments with the principal source of
repayment currently consisting of third party lease payments which are paid
directly to the Bank. At December 31, 1995, such lease payments were sufficient
to service the debt in accordance with the restructured terms and cover all
expenses associated with the properties.
NONBANK SUBSIDIARIES
RFC High Ridge, Inc., RFC Harmony Park, Inc., RFC CKN, Inc., RFC National,
Inc., RFC Center Plaza, Inc. and RFC High Debi Hills, Inc. were organized in
1991. RFC Jefferson, Inc. was organized in 1992 and RFC Deer Trail, Inc. was
organized in 1993. All of the above nonbank subsidiaries currently hold real
estate or other collateral which was acquired through foreclosure of, or which
was deeded in lieu of foreclosure from, previously contracted debt. Ramapo
Investment Corporation was organized in 1986 for the purpose of holding certain
investments of the Bank. All of these corporations are wholly-owned subsidiaries
of the Bank.
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The Corporation also has a one-third interest in Bancorps' International
Trading Corporation, a multi-bank holding company-sponsored export trading
company, which ceased operations during 1991.
COMPETITION
The Corporation encounters competition primarily in seeking deposits and in
obtaining loan customers. The level of competition for deposits is quite high.
The Corporation's principal competitors for deposits are other financial
institutions within a few miles of the Bank's offices, including other banks,
savings institutions, and credit unions. Competition among these institutions is
based primarily on interest rates offered, service charges imposed on deposit
accounts, the quality of services rendered, and the convenience of banking
facilities. The Corporation's competitors are generally permitted, subject to
regulatory approval, to establish branches throughout the Corporation's market.
Additional competition for depositors' funds comes from United States Government
securities, private issuers of debt obligations and suppliers of other
investment alternatives for depositors, such as securities firms.
The Corporation also competes in its lending activities with other
financial institutions such as savings institutions, credit unions, securities
firms, insurance companies, small loan companies, finance companies, mortgage
companies and other sources of funds. Many of the Corporation's nonbank
competitors are not subject to the same extensive federal regulations that
govern bank holding companies and federally insured banks or state regulations
governing state-chartered banks. As a result, such nonbank competitors have
advantages over the Corporation in providing certain services. Many of the
financial institutions with which the Corporation competes in both lending and
deposit activities are larger than the Corporation.
EMPLOYEES
As of December 31, 1995, the Corporation and its subsidiaries had
approximately 104 full-time equivalent employees. None of the employees are
subject to a collective bargaining agreement. The Corporation considers its
relationships with its employees to be good.
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business, limit its management's
options to deploy assets and maximize income, and may significantly limit the
activities of institutions which do not meet regulatory capital or other
requirements. Areas subject to regulation and supervision by the bank regulatory
agencies include, among others: minimum capital levels; dividends; affiliate
transactions; expansion of locations; acquisitions and mergers; reserves against
deposits; deposit insurance premiums; credit underwriting standards; management
and internal controls; investments; and general safety and soundness of banks
and bank holding companies. Supervision, regulation and examination of the Bank
and the Corporation by the bank regulatory agencies are intended primarily for
the protection of depositors, the communities served by the institutions or
other governmental interests, rather than for holders of stock of the Bank or
the Corporation.
The following is a brief summary of certain statutes, rules and regulations
affecting the Corporation and the Bank. A number of other statutes and
regulations and governmental policies have an impact on their operations. The
Corporation is unable to predict the nature or the extent of the effects on its
business and earnings that fiscal or monetary policies, economic control or new
federal or state legislation may have in the future. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
Bank Holding Company Regulation. The Corporation is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"Holding Company Act"), and, as such, is subject to supervision and regulation
by the Federal Reserve. The Corporation is required to file reports with the
Federal Reserve and to furnish such additional information as the Federal
Reserve may require pursuant to the Holding Company Act. The Corporation also is
subject to regular examination by the Federal Reserve and is subject to
regulation by the Department.
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<PAGE> 12
A policy of the Federal Reserve requires the Corporation to act as a source
of financial and managerial strength to the Bank, and to commit resources to
support the Bank. In addition, any loans by the Corporation to the Bank would be
subordinate in right of payment to deposits and certain other indebtedness of
the Bank. The Federal Reserve has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets.
Holding Company Activities. With certain exceptions, the Holding Company
Act prohibits a bank holding company from acquiring direct or indirect ownership
or control of more than 5% of the voting shares of a company that is not a bank
or a bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions
involve certain nonbank activities which, by statute or by Federal Reserve
regulation or order, have been identified as activities closely related to the
business of banking. The activities of the Corporation are subject to these
legal and regulatory limitations under the Holding Company Act and the related
Federal Reserve regulations. Notwithstanding the Federal Reserve's prior
approval of specific nonbanking activities, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity, or to
terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that the continuation of such activity or such ownership or
control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company. Under Section 106 of
the 1970 amendments to the Holding Company Act and the regulations of the
Federal Reserve, bank holding companies and their subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of any property or services.
Acquisitions of Bank Holding Companies and Banks. Under the Holding Company
Act, any company must obtain approval of the Federal Reserve prior to acquiring
control of the Corporation or the Bank. For purposes of the Holding Company Act,
"control" is defined as ownership of more than 25% of any class of voting
securities of the Corporation or the Bank, the ability to control the election
of a majority of the directors, or the exercise of a controlling influence over
management or policies of the Corporation or the Bank.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any voting shares of any bank or bank holding company
if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company. Satisfactory
financial condition, particularly with regard to capital adequacy, and
satisfactory Community Reinvestment Act ("CRA") ratings generally are
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank was notified in 1995 that it has received a "Needs to Improve" CRA rating
as a result of a CRA examination as of December 31, 1994. This rating means that
the Bank has a less than satisfactory record of ascertaining and helping to meet
the credit needs of its entire delineated community, including low- and
moderate-income neighborhoods, in a manner consistent with its resources. The
Bank has initiated programs to improve its CRA lending record. The FDIC has
recently concluded a CRA examination of the Bank as of December 31, 1995, but
has not yet issued its written report. Management believes that its recent
lending record warrants an upgrade to "Satisfactory". In addition, the
Corporation is subject to various requirements under New Jersey laws concerning
future acquisitions, and a company desiring to acquire the Corporation also may
be subject to such laws, depending upon the nature of the acquiror and the means
by which the acquisition would be accomplished.
The Holding Company Act prohibits the Federal Reserve from approving an
application by a bank holding company to acquire voting shares of a bank located
outside the state in which the operations of the holding company's bank
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of New Jersey has enacted
reciprocal interstate banking statutes that authorize banks and their holding
companies in New Jersey to be acquired by banks or their holding companies in
states which also have enacted reciprocal banking legislation, and permits New
Jersey banks and their holding companies to acquire banks in such
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<PAGE> 13
other states. The Holding Company Act does not place territorial restrictions on
the activities of nonbank subsidiaries of bank holding companies.
The Change in Bank Control Act and the related regulations of the Federal
Reserve require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the Federal Reserve before such person or persons may acquire
control of the Corporation or the Bank. The Change in Bank Control Act defines
"control" as the power, directly or indirectly, to vote 25% or more of any
voting securities or to direct the management or policies of a bank holding
company or an insured bank.
Holding Company Dividends and Stock Repurchases. The Federal Reserve has
the power to prohibit dividends by bank holding companies if their actions
constitute unsafe or unsound practices. The Federal Reserve has issued a policy
statement on the payment of cash dividends by bank holding companies, which
expresses the Federal Reserve's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earnings retention
that is consistent with the company's capital needs, asset quality, and overall
financial condition. In addition, the Agreement required the Corporation to
obtain the written approval from the Federal Reserve prior to declaring or
paying any dividends while it was in effect.
As a bank holding company, the Corporation is required to give the Federal
Reserve prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of the
Corporation's consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve order, directive, or any condition imposed by, or
written agreement with, the Federal Reserve. In addition, the Agreement required
the Corporation to obtain written approval from the Federal Reserve prior to
redeeming or repurchasing any of its outstanding stock while it was in effect.
Bank Regulation. As a state-chartered bank which is not a member of the
Federal Reserve System, the Bank is subject to the primary federal supervision
of the FDIC under the Federal Deposit Insurance Act (the "FDIA"). The prior
approval of the FDIC is required for the Bank to establish or relocate a branch
office or to engage in any merger, consolidation or significant purchase or sale
of assets. The Bank also is subject to regulation and supervision by the
State. In addition, the Bank is subject to numerous federal and state laws
and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The FDIC and the State regularly examine the Bank's operations and
condition, including but not limited to capital adequacy, reserves, loans,
investments and management practices. These examinations are for the protection
of the Bank's depositors and the Bank Insurance Fund ("BIF") and not its
stockholder. In addition, the Bank is required to furnish quarterly and annual
reports to the FDIC. The FDIC's enforcement authority includes the power to
remove officers and directors and the authority to issue orders to prevent a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
The FDIC has adopted regulations regarding the capital adequacy of banks
subject to its primary supervision, which require such banks to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "--Regulatory Capital Requirements."
Statewide branching is permitted in New Jersey. Branch approvals are
subject to statutory standards relating to safety and soundness, competition,
public convenience and CRA performance.
Bank Dividends. New Jersey law permits the Bank to declare a dividend only
if, after payment thereof, its capital would be unimpaired and its remaining
surplus would equal at least 50 percent of its capital. Under the FDIA, the Bank
is prohibited from declaring or paying dividends or making any other capital
distribution if, after
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<PAGE> 14
that distribution, the Bank would fail to meet its regulatory capital
requirements. Prior to March 21, 1996, the Bank operated under regulatory
agreements with the FDIC and the State which affected the payment of dividends.
From November, 1992 to May, 1995, the Order prohibited the Bank from paying
dividends. From May, 1995 to March 21, 1996, the MOU required the Bank to
obtain permission from the FDIC and the State before declaring and paying
dividends. The MOU was terminated effective March 21, 1996. The FDIC also has
authority to prohibit the payment of dividends by a bank when it determines such
payment to be an unsafe and unsound banking practice. The FDIC may prohibit bank
holding companies of banks which are deemed to be "significantly
undercapitalized" under the FDIA or which fail to properly submit and implement
capital restoration plans required thereby from paying dividends or making other
capital distributions without the permission of the FDIC. See "-- Holding
Company Dividends and Stock Repurchases."
Restrictions Upon Intercompany Transactions. The Bank is subject to
restrictions imposed by federal law on extensions of credit to, and certain
other transactions with, the Corporation and other affiliates. Such restrictions
prevent the Corporation and such other affiliates from borrowing from the Bank
unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Such secured loans and other transactions by the Bank are
generally limited in amount as to the Corporation and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Corporation and all other
affiliates to an aggregate of 20% of the Bank's capital and surplus. These
regulations and restrictions may limit the Corporation's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses.
Real Estate Lending Guidelines. Under FDIC regulations, state banks must
adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens on or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits that
are clear and measurable), loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value limits for real
estate loans that are not in excess of the loan-to-value limits specified in the
Guidelines for the various types of real estate loans. The Interagency
Guidelines state, however, that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
Deposit Insurance. Since the Bank is an FDIC member institution, its
deposits are currently insured to a maximum of $100,000 per depositor through
the BIF, administered by the FDIC, and the Bank is required to pay semiannual
deposit insurance premium assessments to the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") included provisions to reform the federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums, and
permits the FDIC to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate assessment
income to repay amounts borrowed from the U.S. Treasury and other sources or for
any other purpose the FDIC deems necessary. Pursuant to FDICIA, the FDIC
implemented a transitional risk-based insurance premium system on January 1,
1993 which became the permanent risk-based premium system on January 1, 1994.
Generally, under this system, banks are assessed insurance premiums according to
how much risk they are deemed to present the BIF. As of January 1, 1996, such
premiums range from 0.00% to 0.27% of insured deposits. Banks with higher levels
of capital and involving a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital and/or involving a higher
degree of supervisory concern. Specifically, the assessment rate for an insured
depository institution depends upon the risk classification assigned to the
institution by the FDIC based upon the institution's capital level and
supervisory evaluations. Institutions are assigned to one of three capital
groups--well-capitalized, adequately capitalized or undercapitalized--based on
the data reported to regulators for the date closest to the last day of the
seventh month preceding the semiannual assessment period. Well-capitalized
institutions are institutions satisfying the following capital ratio standards:
(i) total risk-based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or
greater. Adequately capitalized institutions are institutions that do not meet
the standards for well-capitalized institutions but that satisfy the following
capital ratio standards:
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<PAGE> 15
(i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based
capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or
greater. Undercapitalized institutions consist of institutions that do not
qualify as either "well-capitalized" or "adequately capitalized." Within each
capital group, institutions are assigned to one of three subgroups on the basis
of supervisory evaluations by the institution's primary supervisory authority
and such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses that, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. Prior
to July 1, 1995, the assessment rates ranged from 0.23% of deposits for well-
capitalized institutions in Subgroup A to 0.31% of deposits for
under-capitalized institutions in Subgroup C. The Bank was deemed an
"undercapitalized" institution for deposit insurance assessment purposes during
that time. For the last six months of 1995, the assessment rates ranged from
0.04% of deposits for well-capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C. These rates were again
lowered effective January 1, 1996 to a range of 0.00% to 0.27% of deposits.
Since July 1, 1995, the Bank has been deemed well-capitalized for insurance
assessment purposes. The Bank's deposit assessment rates for the last half of
1995 and the first three months of 1996 were/are 0.07% and 0.03%, respectively.
Proposed Standards for Safety and Soundness. Under FDICIA, each federal
banking agency is required to prescribe, by regulation, noncapital safety and
soundness standards for institutions under its authority. The federal banking
agencies, including the Federal Reserve and the FDIC, have proposed standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees, benefits, and standards for asset quality and earnings
sufficiency. An institution which fails to meet any of these standards, when
they are established, would be required to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Corporation believes that the Bank
meets the standards which have been proposed.
Enforcement Powers. The bank regulatory agencies have broad discretion to
issue cease and desist orders if they determine that the Corporation or its
subsidiaries are engaging in "unsafe or unsound banking practices." In addition,
the federal bank regulatory authorities are empowered to impose substantial
civil money penalties for violations of certain federal banking statutes and
regulations, violation of a fiduciary duty, or violation of a final or temporary
cease and desist order, among other things. Financial institutions, and
directors, officers, employees, controlling shareholders, agents, consultants,
attorneys, accountants, appraisers and others associated with a depository
institution are subject to the imposition of fines, penalties, and other
enforcement actions based upon the conduct of their relationships with the
institution.
Under the FDIA, the FDIC may be appointed as a conservator or receiver for
a depository institution based upon a number of events and circumstances,
including: (i) consent by the board of directors of the institution; (ii)
cessation of the institution's status as an insured depository institution;
(iii) the institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized when required to do so, fails to submit an
acceptable capital plan or materially fails to implement an acceptable capital
plan; (iv) the institution is critically undercapitalized or otherwise has
substantially insufficient capital; (v) appointment of a conservator or receiver
by a state banking authority, such as the State; (vii) the institution's
assets are less than its obligations to its creditors and others; (viii)
substantial dissipation in the institution's assets or earnings due to violation
and statute or regulation or unsafe or unsound practice; (ix) a willful
violation of a cease and desist order that has become final; (x) an inability of
the institution to pay its obligations or meet its depositors' demands in the
normal course of business; or (xi) any concealment of the institution's books,
records or assets or refusal to submit to examination. The Corporation has few
assets other than its investment in the Bank. In the event of the appointment of
a receiver or conservator for the Bank, any remaining equity interest of the
Corporation in the Bank and of the Corporation's stockholders would likely be
eliminated.
Under the FDIA, the FDIC as a conservator or receiver of a depository
institution has express authority to repudiate contracts with such institution
which it determines to be burdensome or if such repudiation will promote
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<PAGE> 16
the orderly administration of the institution's affairs. Certain "qualified
financial contracts", defined to include securities contracts, commodity
contracts, forward contracts, repurchase agreements, and swap agreements,
generally are excluded from the repudiation powers of the FDIC. The FDIC is also
given authority to enforce contracts made by a depository institution
notwithstanding any contractual provision providing for termination, default,
acceleration, or exercise of rights upon, or solely by reason of, insolvency or
the appointment of a conservator or receiver. Insured depository institutions
also are prohibited from entering into contracts for goods, products or services
which would adversely affect the safety and soundness of the institutions.
Regulatory Capital Requirements. The Federal Reserve and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies and state-chartered banks that are not members
of the Federal Reserve System ("state nonmember banks"), respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
The regulations of the Federal Reserve and the FDIC require bank holding
companies and state nonmember banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve and the FDIC require
bank holding companies and state nonmember banks to maintain minimum regulatory
capital levels based upon a weighting of their assets and off- balance sheet
obligations according to risk. The risk-based capital rules have two basic
components: a Tier 1 or core capital requirement and a Tier 2 or supplementary
capital requirement. Tier 1 capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less most intangible assets, primarily goodwill. Tier 2 capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier 1 and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans, both of which carry a 50%
rating. Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government agencies, which have a 0% risk-weight. In converting
off-balance sheet items, direct credit substitutes, including general guarantees
and standby letters of credit backing financial obligations, are given a 100%
conversion factor. Transaction-related contingencies such as bid bonds, other
standby letters of credit and undrawn commitments, including commercial credit
lines with an initial maturity of more than one year, have a 50% conversion
factor. Short-term, self-liquidating trade contingencies are converted at 20%,
and short-term commitments have a 0% factor.
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The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios, (i) supplementary capital is limited to no more than 100% of core
capital, and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan losses which may be included as capital to 1.25% of total risk-weighted
assets.
FDICIA required the federal banking regulators to revise their risk-based
capital rules to take adequate account of interest rate risk, concentration of
credit risk, and the risks of non-traditional activities. The federal banking
regulators, including the Federal Reserve and the FDIC, have issued a proposed
rule that would add an interest rate risk component to the currently effective
risk-based capital standards. Under the proposal, bank holding companies and
banks with higher exposures to interest rate risk may be required to maintain
higher levels of capital. In addition, the federal banking regulators have
proposed regulations which allow the FDIC to increase regulatory capital
requirements on a case-by-case basis based upon the factors including the level
and severity of problem and adversely classified assets and loan portfolio and
other concentrations of credit risk.
At December 31, 1995, the Corporation's total risk-based capital and
leverage capital ratios were 14.66% and 10.08%, respectively. The minimum levels
established by the regulators for these measures are 8.00% and 3.00%,
respectively.
FDICIA also required the federal banking regulators to classify insured
depository institutions by capital levels and to take various prompt corrective
actions to resolve the problems of any institution that fails to satisfy the
capital standards. The FDIC has issued final regulations establishing these
capital levels and otherwise implementing FDICIA's prompt corrective action
provisions. Under FDICIA and these regulations, all institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to fail to satisfy
the minimum levels for any of its capital requirements.
Under the FDIC's prompt corrective action regulation, a "well-capitalized"
bank is one that is not subject to any regulatory order or directive to meet any
specific capital level and that has or exceeds the following capital levels: a
total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%,
and a leverage ratio of 5%. An "adequately capitalized" bank is one that does
not qualify as "well-capitalized" but meets or exceeds the following capital
requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
bank has the highest composite examination rating. A bank not meeting these
criteria will be treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which to which the bank's capital levels are below these standards. A bank that
falls within any of the three "undercapitalized" categories established by the
prompt corrective action regulation will be: (i) subject to increased monitoring
by the appropriate federal banking regulator; (ii) required to submit an
acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, will be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may be
required to divest the institution. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval. A critically undercapitalized
institution is prohibited from making payments of principal or interest on its
subordinated debt, except with respect to debt as approved by the FDIC or, until
July 15, 1996, with respect to subordinated debt outstanding on July 15, 1991
and not extended or otherwise renegotiated after July 15, 1991. If an
institution's ratio of tangible capital to total assets falls below a level
established by the appropriate federal banking regulator, which may not be less
than 2%, nor more than 65% of the minimum tangible capital level
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<PAGE> 18
otherwise required (the "critical capital level"), the institution will be
subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
Based on its examination as of December 31, 1995, the FDIC has informed the
Bank that the Bank is "well- capitalized" under the FDIC's prompt corrective
action regulation.
Federal regulators have the authority to increase the capital requirements
applicable to banks and bank holding companies in general and to the Corporation
and the Bank in particular. Although no such increases in requirements have been
announced or are anticipated, there can be no assurance that federal banking
regulators will not impose such higher requirements in the future, or that the
Bank would be able to obtain approval of a new or amended capital plan designed
to restore capital to such higher levels.
ITEM 2. PROPERTIES.
The following table sets forth the location and certain additional
information regarding the Corporation's offices at December 31, 1995. The
Corporation owns all of its offices except as indicated.
<TABLE>
<CAPTION>
NET BOOK
YEAR TOTAL TOTAL VALUE AT DECEMBER APPROXIMATE
BRANCH OPENED DEPOSITS INVESTMENT 31, 1995 SQUARE FOOTAGE
- ------ ------ -------- ---------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Main office 1980 $53,124 $1,648 $1,037 23,000
Packanack 1967 49,914 643 362 4,000
Valley 1972 39,868 738 488 8,000
Clifton 1974 23,760 282 24 (1) 2,000
North Haledon 1986 (2) 21,950 61 8 (3) 2,000
Butler 1986 (2) 28,446 236 142 (3) 2,000
</TABLE>
(1) Land lease.
(2) Date acquired.
(3) Leased.
The net book value of the Corporation's investment in premises and
equipment totalled approximately $2.7 million at December 31, 1995. For a
discussion of premises and equipment, see Note 11 of Notes to Consolidated
Financial Statements contained in the Corporation's 1995 Annual Report to
Stockholders.
ITEM 3. LEGAL PROCEEDINGS.
During the second quarter of 1995, a former senior officer of the
Corporation's former subsidiary, Pilgrim State Bank, sued the Corporation and
its former CEO alleging fraud arising from wrongful termination of employment.
The Corporation believes the suit is without merit and is vigorously defending
its position. The Corporation has been advised by counsel that its exposure for
defense costs and any liability is in any event limited to $150,000, the
deductible amount of its coverage under applicable insurance policies.
In addition to the aforementioned suit, the Corporation and its
subsidiaries are party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action
18
<PAGE> 19
arising from its business. Management does not consider that any such
proceedings depart from usual routine litigation and in its judgment, neither
the Corporation's consolidated financial position nor its results of operations
will be affected materially by any present proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Dividend Policy. The Corporation has suspended its annual dividend payment
on the Common Stock and has not paid dividends since February 1992. The payment
of dividends in the future is predicated on the redemption of all outstanding
Class A preferred stock, the continued profitable operations of the Corporation,
and other factors to be considered by the Board of Directors if all of the
foregoing factors are satisfied.
All other required information is incorporated by reference to Page 41 of
the Corporation's 1995 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The required information is incorporated by reference to Pages 2 and 3 of
the Corporation's 1995 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The required information is incorporated by reference to Pages 4 thru 18 of
the Corporation's 1995 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
A. Financial Statements
The required information is incorporated by reference to Pages 19 thru 39
of the Corporation's 1995 Annual Report to Stockholders.
<TABLE>
<CAPTION>
Page of
Annual Report
to Stockholders
---------------
<S> <C>
Report of Independent Public Accountants 39
Ramapo Financial Corporation and Subsidiaries:
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Changes in Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements (Notes 1 - 21) 23-38
B. Supplementary Data
</TABLE>
19
<PAGE> 20
No supplementary data is included in this report as it is inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "ITEM 1--ELECTION OF
DIRECTORS" in the Corporation's definitive proxy statement for the Corporation's
1996 Annual Meeting of Stockholders (the "Proxy Statement") to be filed with the
Commission is incorporated herein by reference.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following sets forth information with respect to executive officers of
the Corporation who do not serve on the Board of Directors.
AGE AS OF
NAME MARCH 31, 1996 TITLE
- ---- -------------- -----
Walter A. Wojcik, Jr. 46 Treasurer of the Corporation and the
Bank; Senior Vice President of the Bank
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the section captioned "ITEM 1--ELECTION OF
DIRECTORS--Executive Compensation and Other Benefits" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS: The information
required by Item 403(a) of Reg. S-K is incorporated herein by reference to the
section captioned "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT: The information required by Item
403(b) of Reg. S-K is incorporated herein by reference to the section captioned
"ITEM 1--ELECTION OF DIRECTORS--Security Ownership of Management" in the Proxy
Statement.
(c) CHANGES IN CONTROL: Management of the Corporation knows of no
arrangements, including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date result in a change
in control of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference
to the section captioned "ITEM 1--ELECTION OF DIRECTORS--Certain Relationships
and Related Transactions" in the Proxy Statement.
20
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
(1) Financial Statements. The following consolidated financial
statements are filed as a part of this report in Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision
is made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K and is also the Exhibit Index.
Page in
Sequentially
No. Description Numbered Copy
--- ----------- -------------
11 Statement re Computation of Per Share Earnings 23
13 Annual Report to Security Holders 24
21 Subsidiaries of the Registrant 25
23 Consent of Independent Public Accountants 26
27 Financial Data Schedule 27
(b) REPORTS ON FORM 8-K. The Registrant did not file any current
reports on Form 8-K during the quarter ended December 31, 1995.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.
There are no other financial statements and financial statement schedules which
were excluded from the Annual Report to Stockholders pursuant to Rule
14a-3(b)(1) which are required to be included herein.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAMAPO FINANCIAL CORPORATION
March 28, 1996 By: /s/ Mortimer J. O'Shea
-----------------------------
Mortimer J. O'Shea, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Mortimer J. O'Shea March 28, 1996
- --------------------------------------------
Mortimer J. O'Shea, Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Walter A. Wojcik, Jr. March 28, 1996
- --------------------------------------------
Walter A. Wojcik, Jr.
Treasurer
(Principal Financial and Accounting Officer)
/s/ Victor C. Otley, Jr. March 28, 1996
- --------------------------------------------
Victor C. Otley, Jr.
Chairman of the Board
/s/ James R. Kaplan March 28, 1996
- --------------------------------------------
James R. Kaplan
Director
/s/ Erwin D. Knauer March 28, 1996
- --------------------------------------------
Erwin D. Knauer, Director,
Senior Vice President
/s/ Louis S. Miller March 28, 1996
- --------------------------------------------
Louis S. Miller
Director
/s/ Richard S. Miller March 28, 1996
- --------------------------------------------
Richard S. Miller
Director
22
<PAGE> 23
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
11 Statement re Computation of Per Share Earnings
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
A. Net Income (Loss) $6,248,000 $ (977,000) $(8,972,000)
B. Unpaid Cumulative Dividends on
Class A Preferred Stock (50,000) (116,000) --
---------- ---------- -----------
C. Adjusted Net Income (Loss) $6,198,000 $(1,093,000) $(8,972,000)
D. Weighted Average Common Shares 8,175,819 2,874,600 1,244,374
E. Income (Loss) per Common Share (C/D) $ .76 $ (.38) $ (7.21)
</TABLE>
23
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
24
<PAGE> 2
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS
In 1995, Ramapo Financial Corporation registered its first full year of
profitability since 1991 and achieved a dramatic turnaround as measured by
earnings, financial strength, and asset quality.
RFC realized a year-to-year improvement of 261% when pre-tax income of
$2,036,000 in 1995 is compared to a pre-tax loss of $1,262,000 in 1994, without
taking into consideration significant 1995 tax benefits. RFC has recorded five
successive quarters of increased net income since the return to profitability in
the fourth quarter of 1994.
The factors which contributed to improved earnings in 1995 include a strong
net interest margin of 5.4%, a reduced provision for possible loan losses, and
control of other expenses.
RFC's capital strength was materially enhanced during 1995 by the retention
of earnings and, especially, by substantial tax benefits. At December 31, 1995,
stockholders' equity totalled $27,249,000 up 25% from year end 1994. Book value
per common share increased from $2.47 at December 31, 1994 to $3.28 at December
31, 1995. The capital ratios were very strong at the end of 1995, including a
Tier 1 leverage capital ratio of 10.08%. Shareholders who purchased RFC stock
in our equity offering in October 1994 have enjoyed a significant gain from $2
per share to the current price level.
The continued improvement in asset quality was evidenced by a reduction in
nonperforming assets from $17.8 million at December 31, 1994 to $8.7 million at
year end 1995. As nonperforming assets are remediated, RFC enjoys increased
interest income without additional funding costs. The allowance for possible
loan losses as a percentage of nonperforming loans increased to 112% at December
31, 1995, a significant improvement over recent years. The staff of the Workout
Group has contributed enormously to RFC's turnaround and expects to make further
progress in 1996.
In recent months, the calling efforts of our lending officers and branch
managers have begun to bear fruit. The smaller businesses in Northern New
Jersey are responding to RFC's community banking message. The large bank
consolidations in New Jersey are providing an opportunity for Ramapo to develop
and expand relations with the commercial, professional and consumer segments of
our market.
The market for consumer savings deposits is currently very competitive,
with a considerable amount of money flowing from banks to mutual funds and
common stock investments. We continue to garner some of that business through
INVEST, our investment products affiliate (not insured by the FDIC). In
addition, we will shortly introduce a relationship banking product to expand
existing consumer relationships and develop new customers for Ramapo.
As part of our focus on the future, we have introduced new logos for RFC and
The Ramapo Bank. This corporate image creates a uniform identity and reflects a
renewed commitment to delivering innovative products and services to our
customers.
We expect to work very hard in 1996 to improve operating earnings and build
the Ramapo franchise. Your directors, management and staff members appreciate
your continued support and we encourage you to use The Ramapo Bank for your own
banking needs and to recommend us to your friends and associates.
[PHOTO OF MORTIMER J. O'SHEA, ERWIN D. KNAUER, VICTOR C. OTLEY, JR.]
/s/ Mortimer J. O'Shea
- -----------------------------------------
MORTIMER J. O'SHEA
President and Chief Executive Officer
/s/ Erwin D. Knauer
- -----------------------------------------
ERWIN D. KNAUER
Senior Vice President
/s/ Victor C. Otley, Jr.
----------------------------------------
VICTOR C. OTLEY, JR.
Chairman of the Board
- --------------------------------------------------------------------------------
1
<PAGE> 3
- -------------------------------------------------------------------------------
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA
(Not covered by Report of Independent Public Accountants)
The selected consolidated financial and other data of Ramapo Financial
Corporation ("Corporation") set forth below does not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information, including the Consolidated Financial Statements and
related Notes, appearing elsewhere herein. On June 30, 1993, the Corporation
sold a substantial portion of the assets formerly owned by Pilgrim State Bank
("Pilgrim"), which had been a subsidiary of the Corporation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition and Recent Operating Environment -- Pilgrim Transaction and
Sale of Two Branch Offices."
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................................... $246,516 $238,216 $257,634 $451,311 $420,427
Cash and cash equivalents...................................... 14,962 42,486 26,594 85,206 38,368
Securities..................................................... 59,358 21,248 8,858 53,470 66,128
Gross loans (net of unearned income)........................... 160,546 164,311 186,603 265,932 284,374
Allowance for possible loan losses............................. 4,853 6,501 7,499 7,670 4,489
Loans held for sale............................................ 34 34 19,611 28,728 10,803
Total deposits................................................. 217,062 211,864 241,608 425,400 386,352
Other borrowings............................................... -- 1,292 5,916 8,591 8,876
Stockholders' equity........................................... 27,249 21,755 6,576 13,779 20,119
ASSET QUALITY (1):
Nonaccrual loans............................................... $ 4,190 $ 7,548 $ 21,881 $ 26,491 $ 24,572
Accruing loans 90 days or more delinquent...................... 141 240 1,182 2,822 2,153
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans..................................... 4,331 7,788 23,063 29,313 26,725
Other real estate, net......................................... 4,408 9,995 10,332 5,304 2,599
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets.................................... 8,739 17,783 33,395 34,617 29,324
Restructured loans............................................. 1,702 5,983 11,035 4,662 13,975
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and restructured loans............. $ 10,441 $ 23,766 $ 44,430 $ 39,279 $ 43,299
===================================================================================================================================
SUMMARY OF OPERATIONS:
Total interest and dividend income............................. $ 18,343 $ 14,919 $ 19,263 $ 28,665 $ 31,893
Total interest expense......................................... 6,106 4,958 8,709 13,506 18,161
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income............................... 12,237 9,961 10,554 15,159 13,732
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses............................. 500 1,221 4,440 10,222 3,240
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision
for possible loan losses...................................... 11,737 8,740 6,114 4,937 10,492
- -----------------------------------------------------------------------------------------------------------------------------------
Other income................................................... 2,447 3,322 8,936 11,178 9,592
- -----------------------------------------------------------------------------------------------------------------------------------
Other expense.................................................. 12,148 13,324 25,018 24,149 17,966
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes.............................. 2,036 (1,262) (9,968) (8,034) 2,118
(Benefit) provision for income taxes........................... (4,212) (285) (996) (2,192) 546
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss).............................................. $ 6,248 $ (977) $ (8,972) $ (5,842) $ 1,572
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE> 4
- --------------------------------------------------------------------------------
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE DATA:
Net income (loss) per common share............................... $ .76 $ (.38) $ (7.21) $ (4.69) $ 1.26
Book value per common share...................................... 3.28 2.47 3.88 11.07 16.17
Cash dividends declared per common share (2)..................... -- -- -- 0.40 0.40
SELECTED OPERATING RATIOS:
Return on average assets......................................... 2.56% (.42)% (2.58)% (1.32)% .40%
Return on average equity......................................... 27.85 (9.04) (87.65) (32.60) 8.17
Interest rate spread(3).......................................... 4.59 4.38 2.87 3.07 2.99
Net interest margin(3)........................................... 5.41 4.84 3.51 3.99 3.99
ASSET QUALITY RATIOS (1)(4):
Nonperforming loans as a percentage of loans, net of
unearned income................................................. 2.70% 4.74% 11.18% 9.95% 9.05%
Nonperforming assets as a percentage of total assets............. 3.55 7.47 12.96 7.67 6.97
Nonperforming assets and restructured loans
as a percentage of total assets................................. 4.24 9.98 17.25 8.70 10.30
Allowance for possible loan losses as a percentage
of loans, net of unearned income................................ 3.02 3.96 3.64 2.60 1.52
Allowance for possible loan losses as a percentage
of nonperforming loans.......................................... 112.05 83.47 32.52 26.17 16.80
Net charge-offs as a percentage of average loans,
net of unearned income.......................................... 1.36 1.29 1.75 2.27 .73
CAPITAL RATIOS (4)(5):
Stockholders' equity to total assets............................. 11.05% 9.13% 2.55% 3.05% 4.79%
Average stockholders' equity to average assets.................. 9.19 4.64 2.94 4.05 4.87
Tier 1 leverage capital ratio.................................... 10.08 9.16 2.45 3.01 4.76
Tier 1 risk-based capital ratio.................................. 13.37 12.18 2.99 4.43 6.42
Total risk-based capital ratio................................... 14.66 13.46 5.98 8.13 10.42
==================================================================================================================================
</TABLE>
(1) Nonperforming assets consist of nonperforming loans and other real estate
("ORE"). Nonperforming loans consist of nonaccrual loans and accruing loans
90 days or more delinquent. It is the policy of the Corporation to place a
loan on nonaccrual status when, in the opinion of management, the ultimate
collectibility of the principal or interest on the loan becomes doubtful. As
a general rule, a commercial or real estate loan more than 90 days past due
with respect to principal or interest is classified as a nonaccrual loan.
Installment loans generally are not placed on nonaccrual status but,
instead, are charged off at 90 days past due. Loans are considered
restructured loans if, for economic or legal reasons, a concession has been
granted to the borrower related to the borrower's financial difficulties
that the Corporation would not otherwise consider. As used herein, the term
"restructured loan" means a restructured loan on accrual status. ORE
includes loan collateral that has been formally repossessed and collateral
that is in the possession of The Ramapo Bank ("Bank") and under its control
without legal transfer of title. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan", loans previously classified as in-substance
foreclosure but for which the Corporation had not taken possession of the
collateral have been reclassified to loans.
(2) For 1991 and 1992, dividends were paid once per year in February.
(3) Interest rate spread represents the difference between the weighted average
tax-equivalent yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities. Net interest margin represents net
interest income on a tax-equivalent basis as a percentage of average
interest-earning assets.
(4) Asset quality ratios and risk-based capital ratios are end of period ratios,
except for net charge-offs as a percentage of average loans and average
stockholders' equity to average assets, which are based on average daily
balances. The Tier 1 leverage capital ratio utilizes average fourth quarter
assets in its calculation.
(5) For definitions and information relating to the Corporation's and the Bank's
regulatory capital requirements, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
- -------------------------------------------------------------------------------
3
<PAGE> 5
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Corporation's financial condition
as of December 31, 1995 and 1994 and results of operations for the years
ended December 31, 1995, 1994 and 1993 should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto and the
other information contained elsewhere herein.
FINANCIAL CONDITION AND RECENT OPERATING ENVIRONMENT
General. The Corporation returned to profitability for the full year in 1995,
continuing a turnaround that began in 1994. The significant operating losses
incurred in 1992 and 1993 followed an economic recession in New Jersey which
resulted in a decline in commercial and residential real estate values in the
Corporation's market. As the Corporation's nonperforming assets increased during
this period, so did provisions for possible loan losses necessary to compensate
for anticipated and actual loan losses, write-downs of ORE and other assets and
operating expenses associated with the high level of problem assets. The
Corporation also incurred significant losses on mortgage servicing operations.
The significant reduction in losses for the year ended December 31, 1994 was
primarily the result of an increased net interest spread due to rising interest
rates and the conversion of nonperforming assets to performing assets, decreased
provisions for possible loan losses and the substantial elimination of losses on
mortgage servicing operations. In addition, the successful completion of a
rights/community equity offering ("Offering") in October 1994 resulted in new
capital of $11.7 million, after expenses. Investment of those funds helped the
Corporation to achieve profitability during the fourth quarter and thus reduced
the year to date loss. In 1995, sustained profitability was made possible by a
further reduction in nonperforming assets and an increase in the net interest
margin. Meanwhile, the economic climate in the Corporation's market area showed
modest signs of improvement which led to a stabilization of real estate values.
On the regulatory front, the Corporation is operating under a 1993 Written
Agreement with the Federal Reserve Bank of New York ("FRB"). Based on the
continued improvement in the Corporation's operating environment, management
believes that the Written Agreement will be terminated during the first quarter
of 1996. The Bank's 1992 order to cease and desist ("Order") entered into with
the Federal Deposit Insurance Corporation ("FDIC") and the New Jersey Department
of Banking ("State") was replaced in 1995 with a less onerous Memorandum of
Understanding ("MOU"). Management also expects the MOU to be terminated in 1996.
For a more detailed discussion of these regulatory actions, see "Liquidity and
Capital Resources".
Looking forward, the Corporation's strategic focus has been redirected toward
being a community bank serving Wayne, Clifton and neighboring communities in
Passaic and Morris counties. Accordingly, management is changing the mix of the
Bank's loans over time to that of a more traditional community bank by
emphasizing lending to small businesses, professionals and consumers. The
Corporation's exposure to both commercial real estate lending and large
individual borrower concentrations is expected to be reduced. Management
believes that there is a significant opportunity to expand its small commercial
and consumer lending business given the number of small businesses and relative
affluence of the residents in its market. In addition, as a result of recent
consolidations of community banks in northern New Jersey into larger banks and
acquisitions of larger New Jersey banks by out-of-state institutions, management
believes that new business opportunities for the Corporation and the
Corporation's ability to increase market share have been enhanced. The Bank also
participates in various lending programs of the Small Business Administration
("SBA") and the New Jersey Economic Development Authority ("EDA") and has been
designated both a Certified Lender and a Preferred Lender by the SBA.
Significant changes in individual asset and liability categories are
discussed below.
The Corporation reduced its federal funds sold position by $27.4 million from
$33.2 million at December 31, 1994 to $5.8 million at December 31, 1995. Having
exceeded the required capital levels and having returned to profitability, the
Corporation no longer needed to maintain the high liquidity level it deemed
prudent during more difficult times. During 1994, federal funds sold increased
by $17.7 million from $15.5 million at December 31. 1993. Proceeds from the
Offering and loan paydowns provided the investable funds.
The Corporation's securities portfolio nearly tripled in size during 1995,
increasing $38.2 million from $21.2 million at December 31, 1994 to $59.4
million at December 31, 1995. The majority of the increase came from excess
federal funds sold with the remainder from loan paydowns and ORE sales. During
the prior year the securities portfolio increased $12.3 million due to the
Corporation's investing loan paydowns and proceeds of the Offering.
Loans decreased a modest $3.8 million, or 2.3%, in 1995, after having
decreased $22.3 million, or 12.0%, in 1994. Loan paydowns coupled with
management's efforts to reduce existing loan concentrations, increased
competition for business loans, and a cautious economic environment are all
factors which contributed to the reduction of loans during these two years.
The Corporation's intangible assets were $503,000, $773,000 and $1.1 million
at December 31, 1995, 1994, and 1993, respectively. Normal amortization was
responsible for the decreases in 1995 and 1994.
The Corporation's total deposits increased from $211.9 million at December
31, 1994 to $217.1 million at December 31, 1995, following a decrease in 1994
from $241.6 million at December 31, 1993. The $5.2 million, or 2.4%, increase in
1995 was primarily in the demand category, as the increase in time deposits was
just slightly in excess of the decline in savings deposits. The $29.7 million
decrease during 1994 was principally the result of the Corporation's sale of its
mortgage servicing operations, effective January 31, 1994, and the resulting
decrease in escrow deposit accounts maintained by the residential mortgage loan
borrowers.
Pilgrim Transaction and Sale of Two Branch Offices. On June 30, 1993, the
Corporation sold a substantial portion of Pilgrim's assets and transferred
substantially all of Pilgrim's liabilities to an unrelated bank. The Pilgrim
transaction resulted in a net loss to the Corporation of $121,000, which is the
difference between the unamortized goodwill written off and the premium realized
upon the sale.
Because the Pilgrim transaction occurred on June 30, 1993, the results of
operations for the period July 1, 1993 to December 31, 1993 no longer included
the results of operations of Pilgrim. For the first six months of 1993, Pilgrim
recorded net interest income of $2.1 million, a provision for loan losses of
$389,000, other income of $316,000, other expenses of $2.1 million and a pre-tax
loss of $107,000. These amounts include $510,000 in intercompany fees paid by
Pilgrim to the Corporation for services. Pilgrim's results of operations for the
first six months of 1993 include income and expenses related to assets and
liabilities of Pilgrim which were retained by the Corporation. For purposes of
illustration only, the Corporation estimates it would have recorded a net loss
for 1993 of $9.7 million, or $7.77 per common share, if Pilgrim had been sold on
January 1, 1993, rather than the $9.0 million loss, or $7.21 per share, actually
recorded for 1993. These pro-forma results reflect a provision for possible loan
losses of $311,000 which the Corporation estimates it would have recorded in the
first half of 1993 in connection with the Pilgrim assets retained. In addition,
as part of its strategy to improve its capital ratios and to focus its
activities in a limited market, in mid-1993 the Bank transferred substantially
all of the liabilities of two outlying branch offices located in Millburn, New
Jersey to another financial institution. The Bank completed the sale of the
liabilities associated with the branch offices on July 9, 1993 and subsequently
closed both branch offices. In connection with the sale of these branches, the
Bank sold deposit liabilities aggregating $10.2 million and incurred net losses
of $365,000, after receipt of a premium on the sale of the branches and the
write-off of unamortized intangible assets.
- -------------------------------------------------------------------------------
4
<PAGE> 6
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General. The Corporation's results of operations are dependent primarily on
its net interest and dividend income, which is the difference between interest
earned on its loans and investments and the interest paid on interest-bearing
liabilities. The Corporation's net income is also affected by the generation of
noninterest income, which primarily consists of service fees on deposit accounts
and, in prior years, gains on the sale of mortgage loans. As a result of the
sale in January 1994 of the mortgage servicing portion of the Corporation's
mortgage-related activities, gains on sales of mortgage loans and servicing
income were significantly lower in 1995 and 1994 than in prior years and
management anticipates that income from those sources will continue to be lower
in future periods. Net interest income is determined by (i) the difference
between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Corporation's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit flows
and general levels of nonperforming assets. In addition, net income is affected
by the level of operating expenses and establishment of loan loss reserves and
OREvaluation allowances.
The operations of the Corporation and the entire banking industry are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for and supply of real estate, competition among
lenders, the level of interest rates and the availability of funds. Deposit
flows and costs of funds are influenced by prevailing market rates of interest,
primarily on competing investments, account maturities and the levels of
personal income and savings in the market area.
In recent periods, the level of the Corporation's nonperforming assets has
significantly affected the Corporation's operating results due to the amounts of
the provisions for loan losses, which are charged against income, as well as the
expenses and losses related to ORE. The Corporation's nonperforming assets
increased dramatically beginning in 1990 and reached their highest level of
$49.4 million, or 16.0% of total assets, at June 30, 1993. Nonperforming assets
were subsequently reduced to $17.8 million and $8.7 million at December 31, 1994
and 1995, respectively. Although the Corporation earned $2,036,000 before tax
benefits in 1995, ORE operating expenses and valuation adjustments totaling $2.8
million prevented a much better result. The establishment of provisions for loan
losses of $1.2 million and $4.4 million in 1994 and 1993, respectively, as well
as the other adverse effects of holding nonperforming assets, including the loss
of interest income from such assets and costs related to the management and
disposition of ORE, contributed to the Corporation's net losses during such
years of $977,000, and $9.0 million, respectively.
Management anticipates that it can reduce its provisions for possible loan
losses and its provisions to the ORE valuation allowance because nonperforming
assets are properly carried on the Corporation's books at the lower of cost or
fair market value, based on updated appraisals, and because the economy in the
Corporation's market area has stabilized. ORE expenses are expected to decline
to the extent ORE is sold. Also, converting nonperforming assets to earning
assets will have a positive impact on the Corporation's net interest margin,
since more assets will earn interest without any increase in funding
liabilities.
The Corporation also incurred losses of $3.0 million in 1993 on its mortgage
servicing activities, largely due to $2.1 million of provisions for possible
losses on purchased mortgage servicing rights and excess servicing receivables.
As part of its strategy of emphasizing community banking activities, the
Corporation sold substantially all of its mortgage servicing portfolio in
January 1994. See Note 16 of Notes to Consolidated Financial Statements.
At December 31, 1995, the Bank continues to be the servicer of record for
approximately $24.7 million of mortgages for which it entered into a
sub-servicing arrangement with another institution. Mortgage servicing expenses
under this arrangement plus amortization of the residual purchased mortgage
servicing rights totaling approximately $113,000 at December 31, 1995 were
slightly less than servicing revenues in 1995. Future servicing revenues are
expected to be about equal to total servicing expenses. At December 31, 1994 and
1993, the Bank serviced mortgages for others totaling $33.8 million and $454.9
million, respectively.
Net Income (Loss). The Corporation had a net income for the year ended
December 31, 1995 of $6.2 million compared to a loss of $977,000 for the year
ended December 31, 1994. Most of the $3.3 million pre-tax improvement was due to
a $2.3 million increase in net interest and dividend income, with a $721,000
reduction in the provision for possible loan losses making up the bulk of the
remainder. A $3.9 million increase in tax benefits during 1995 was principally
due to the reversal of a $5.3 million valuation allowance against the
Corporation's net deferred tax asset which more than offset the increase in
regular current and deferred taxes of $1.4 million. The Corporation's net loss
in 1994 represents a substantial improvement from the $9.0 million loss recorded
in 1993. After factoring out the $107,000 loss attributed to Pilgrim in 1993,
the decrease in the net loss before taxes was $8.6 million in 1994. This
improvement is due to the absence of a $3.0 million net mortgage servicing loss
experienced in 1993, a reduction of the provision for possible loan losses of
$2.8 million, an increase in net interest income of $1.4 million which was
primarily the result of an increase in the net interest spread, a reduction of
ORE-related expenses totaling $704,000 and a reduction of legal fees, FDIC
assessments and audit and examination fees which aggregated $705,000.
Net Interest and Dividend Income. The largest component of the Corporation's
earnings is its net interest and dividend income. Net interest and dividend
income represents the income earned, principally on loans and investments, less
interest paid, principally on deposits. Net interest and dividend income on a
tax-equivalent basis increased by $2.3 million from $10.0 million for the year
ended December 31, 1994 to $12.3 million for the year ended December 31, 1995.
About $1.3 million of the increase is due to a 17 basis point rise in the net
interest spread, while the remainder is the result of a $20.0 million increase
in average earning assets when comparing 1995 to 1994. Most of the net interest
spread increase is due to an increase in the Corporation's average base lending
rate, which rose from 7.57% in 1994 to 8.83% in 1995. The rise in average
earning assets during 1995 compared to 1994 is primarily the result of an $11.6
million increase in average stockholders' equity due to the Offering in November
1994 and a $9.8 million decrease in average other assets, principally ORE. In
1994, net interest and dividend income decreased $851,000 from the $10.9 million
earned for the year ended December 31, 1993.
- -------------------------------------------------------------------------------
5
<PAGE> 7
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
This decrease in net interest and dividend income is primarily the result of
reduced average levels of assets and liabilities as a result of the Pilgrim
transaction and branch sales. This reduction in interest-earning assets and
interest-bearing liabilities was partially offset by a 151 basis point increase
in net interest spread from 2.87% for the year ended December 31, 1993 to 4.38%
for the year ended December 31, 1994. The Corporation's net interest spread
increased during 1994 as the Corporation's earning assets repriced more quickly
than its funding liabilities in a rising interest rate environment and as
nonaccrual loans were converted to earning assets. Also, the net interest spread
in the year ended December 31, 1993 was depressed during that period as the
Corporation maintained unusually high levels of liquid assets, which typically
carry lower rates of interest than other assets such as loans.
Average Balances, Interest and Average Yields and Rates. The following table
sets forth certain information relating to the Corporation's average
interest-earning assets and interest-bearing liabilities and reflects the
average yield on assets and the average cost of liabilities for the years
indicated. Such yields and costs are derived by dividing income or expense by
the average daily balance of assets or liabilities, respectively, for the
periods indicated. The table presents information for the fiscal years indicated
with respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which financial institutions have
traditionally used as an indicator of profitability. Net interest income is
affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. The combined effect of the
interest rate spread and the relative amounts of interest-earning assets and
interest-bearing liabilities is measured by the net interest margin, which is
calculated by dividing tax-equivalent net interest and dividend income by
average interest-earning assets.
- -------------------------------------------------------------------------------
6
<PAGE> 8
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing time deposits............ $ 181 $ 11 6.08% $ -- $ -- --%
Securities:
Taxable.................................. 49,433 3,150 6.37 14,249 766 5.38
Nontaxable (tax-equivalent basis)........ 914 103 11.27 1,094 115 10.51
Federal funds sold........................ 18,470 1,093 5.92 19,937 878 4.40
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2)......................... 112,228 9,772 8.71 125,094 9,252 7.40
Residential real estate (3).............. 9,349 768 8.21 12,822 1,018 7.94
Installment.............................. 36,138 3,481 9.63 33,479 2,929 8.75
- --------------------------------------------------------------------------------------------------------------------
Total loans............................. 157,715 14,021 8.89 171,395 13,199 7.70
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets........... 226,713 18,378 8.11 206,675 14,958 7.24
- --------------------------------------------------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks................... 9,197 9,392
Other assets.............................. 13,829 23,591
Allowance for possible loan losses........ (5,476) (6,594)
- --------------------------------------------------------------------------------------------------------------------
Total nonearning assets.................. 17,550 26,389
- --------------------------------------------------------------------------------------------------------------------
Total assets.......................... $244,263 $233,064
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 23,669 $ 364 1.54% $ 23,361 $ 444 1.90%
Savings deposits.......................... 76,032 1,924 2.53 90,574 2,160 2.38
Time deposits............................. 73,558 3,806 5.17 55,664 1,997 3.59
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits.......... 173,259 6,094 3.52 169,599 4,601 2.71
Other borrowings.......................... 106 12 11.32 3,720 357 9.60
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities....... 173,365 6,106 3.52 173,319 4,958 2.86
- --------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits........................... 46,100 46,230
Other liabilities......................... 2,361 2,712
- --------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing liabilities 48,461 48,942
Stockholders' equity....................... 22,437 10,803
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity.................................. $244,263 $233,064
====================================================================================================================
Net interest and dividend income
(tax-equivalent basis) .................... 12,272 10,000
Tax-equivalent adjustment................... (35) (39)
- --------------------------------------------------------------------------------------------------------------------
Net interest and dividend income........... $12,237 $ 9,961
====================================================================================================================
Net interest spread
(tax-equivalent basis) .................... 4.59% 4.38%
====================================================================================================================
Net interest margin
(tax-equivalent basis) .................... 5.41% 4.84%
====================================================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 130.77% 119.25%
====================================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1993
- --------------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing time deposits............ $ -- $ -- --%
Securities:
Taxable.................................. 23,797 1,113 4.68
Nontaxable (tax-equivalent basis)........ 11,365 874 7.69
Federal funds sold........................ 33,755 1,003 2.97
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2)......................... 164,217 10,246 6.24
Residential real estate (3).............. 34,034 2,742 8.06
Installment.............................. 42,400 3,582 8.45
- --------------------------------------------------------------------------------
Total loans............................. 240,651 16,570 6.89
- --------------------------------------------------------------------------------
Total interest-earning assets........... 309,568 19,560 6.32
- --------------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks................... 19,156
Other assets.............................. 26,023
Allowance for possible loan losses........ (6,892)
- --------------------------------------------------------------------------------
Total nonearning assets.................. 38,287
- --------------------------------------------------------------------------------
Total assets.......................... $347,855
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 29,191 $ 632 2.17%
Savings deposits.......................... 140,380 4,165 2.97
Time deposits............................. 74,309 3,071 4.13
- --------------------------------------------------------------------------------
Total interest-bearing deposits.......... 243,880 7,868 3.23
Other borrowings.......................... 8,216 841 10.24
- --------------------------------------------------------------------------------
Total interest-bearing liabilities....... 252,096 8,709 3.45
- --------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits........................... 82,701
Other liabilities......................... 2,822
- --------------------------------------------------------------------------------
Total noninterest-bearing liabilities 85,523
Stockholders' equity....................... 10,236
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity.................................. $347,855
================================================================================
Net interest and dividend income
(tax-equivalent basis) .................... 10,851
Tax-equivalent adjustment................... (297)
- --------------------------------------------------------------------------------
Net interest and dividend income........... $10,554
================================================================================
Net interest spread
(tax-equivalent basis) .................... 2.87%
================================================================================
Net interest margin
(tax-equivalent basis) .................... 3.51%
================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 122.80%
================================================================================
</TABLE>
(1) Average balances include nonaccrual loans. Loan fees and costs are included
in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases".
(2) Includes construction loans.
(3) Includes loans held for sale.
- --------------------------------------------------------------------------------
7
<PAGE> 9
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
Rate/Volume Analysis. The following table allocates the period-to-period
changes in the Corporation's various categories of interest and dividend income
and interest expense between changes due to changes in volume (calculated by
multiplying the change in average volume of the related interest-earning asset
or interest-bearing liability category by the prior year's rate) and changes due
to changes in rate (change in rate multiplied by prior year's volume). Interest
on nontaxable securities has been adjusted to a fully taxable equivalent basis
by the amount of taxes which would have been paid at a federal income tax rate
of 34%. Changes due to changes in rate-volume (changes in rate multiplied by
changes in volume) have been allocated proportionately between changes in volume
and changes in rate.
<TABLE>
<CAPTION>
==============================================================================================================================
YEAR ENDED DECEMBER 31
==============================================================================================================================
1995 VS. 1994 1994 VS. 1993
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
- ------------------------------------------------------------------------------------------------------------------------------
DUE TO DUE TO
- ------------------------------------------------------------------------------------------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest-bearing time deposits............. $ 6 $ 5 $ 11 $ -- $ -- $ --
Loans (includes loans held for sale)......... (1,109) 1,931 822 (5,161) 1,790 (3,371)
Securities:
Taxable................................... 2,218 165 2,383 (496) 149 (347)
Nontaxable ............................... (20) 9 (11) (996) 237 (759)
Federal funds sold ........................ (69) 284 215 (501) 376 (125)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income........ 1,026 2,394 3,420 (7,154) 2,552 (4,602)
=============================================================================================================================
Interest expense:
Savings deposits and interest-bearing
demand deposits........................... (359) 43 (316) (1,410) (783) (2,193)
Time deposits ............................. 764 1,045 1,809 (706) (368) (1,074)
Other borrowings........................... (399) 54 (345) (434) (50) (484)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................... 6 1,142 1,148 (2,550) (1,201) (3,751)
- -----------------------------------------------------------------------------------------------------------------------------
Changes in net interest and dividend income $ 1,020 $1,252 $2,272 $(4,604) $ 3,753 $ (851)
==============================================================================================================================
</TABLE>
Interest and Dividend Income. Total interest and dividend income on a
tax-equivalent basis increased by $3.4 million, or 22.9%, from $15.0 million for
the year ended December 31, 1994 to $18.4 million for the year ended December
31, 1995. Almost $2.4 million of this increase is due to an 87 basis point rise
in the average earning asset yield during 1995, which was primarily due to an
increase in the Corporation's average base lending rate from 7.57% in 1994 to
8.83% in 1995. The balance of the increase in total interest and dividend income
was due to a $20.0 million, or 9.7%, increase in average earning assets,
principally taxable securities.
Interest on loans increased $822,000, or 6.2%, for the year ended December
31, 1995 as compared to the year ended December 31, 1994. This increase was
mainly due to a 119 basis point increase in the average loan yield from 7.70% in
1994 to 8.89% in 1995. The aforementioned rise in the Corporation's average base
lending rate, which reflected the rise in prevailing interest rates during 1995,
is the chief cause of the yield increase. Offsetting the yield increase to some
extent was a drop in average loan outstandings of $13.7 million, or 8.0%,
between the periods. The bulk of the decrease in average loan outstandings was
in the commercial loan category, where new loans did not keep pace with loan
paydowns and charge-offs.
Interest on taxable securities increased by $2.4 million, or 311.1%, and
interest on nontaxable securities decreased $14,000 on a tax-equivalent basis,
or 12.2%, for the year ended December 31, 1995 as compared to the year ended
December 31, 1994. Over $2.2 million of the increase was caused by an increase
in the average balance of taxable securities from $14.2 million in 1994 to $49.4
million in 1995. The Corporation utilized funds obtained from ORE sales, loan
paydowns and the Offering, along with a small increase in average deposits, to
make the securities purchases. The decrease in interest on nontaxable securities
was entirely the result of a decrease in the average balance of such securities
caused by maturities.
Interest on federal funds sold increased by $215,000, or 24.5%, for the year
ended December 31, 1995 as compared to the year ended December 31, 1994. This
increase was entirely due to an increase in the average yield from 4.40% in 1994
to 5.92% in 1995. The rise in yield parallels the rise in average short-term
interest rates that occurred in 1995 as compared to 1994.
Total interest and dividend income on a tax-equivalent basis decreased by
$4.6 million, or 23.5%, from $19.5 million for the year ended December 31, 1993
to $14.9 million for the year ended December 31, 1994. The decrease in total
interest and dividend income was caused primarily by a $102.9 million, or 33.2%,
decrease in the average balance of earning assets, which was primarily the
result of the Pilgrim transaction. The decrease in interest and dividend income
during 1994 was offset, in part, by a 92 basis point increase in average yield
on earning assets reflecting increasing interest rates in the general economy.
Interest on loans decreased $3.4 million, or 20.3%, during the year ended
December 31, 1994 as compared to the year ended December 31, 1993. The decrease
in interest on loans was mainly due to a $69.3 million, or 28.8%, decrease in
the average balance of loans between the periods. The decrease in the average
balance of loans primarily reflects the Pilgrim transaction. The decrease in
interest income on loans was partially offset by an 81 basis point increase in
the average yield from 6.89% to 1993 to 7.70% in 1994, reflecting general
increases in prevailing interest rates and the reduction of nonaccrual loans.
Interest on taxable securities decreased by $347,000, or 31.2%, and interest
on nontaxable securities decreased by $759,000 on a tax-equivalent basis, or
86.8%, during the year ended December 31, 1994, as compared to the year ended
December 31, 1993. The decrease in interest on taxable securities was due, in
part, to a $9.5 million, or 40.1%, decline in the average balance of such
securities which is directly attributable to the sale of $29.8 million of
taxable securities in connection with the Pilgrim transaction.
- -------------------------------------------------------------------------------
8
<PAGE> 10
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
The decrease in income on taxable securities was offset, in part, by a 70
basis point increase in average yield on taxable securities. The decrease in
interest on nontaxable securities was primarily attributable to a $10.3 million,
or 90.4%, decrease in the average balance of such securities.
Interest on federal funds sold decreased by $125,000, or 12.5%, during the
year ended December 31, 1994 as compared to the year ended December 31, 1993.
The decrease in interest on federal funds sold was attributed to a decrease of
$13.8 million, or 40.9%, in average balance. The decrease in the average balance
on federal funds sold reflects the historically high levels of liquid assets
maintained by the Corporation during the year ended December 31, 1993 as a
result of funds received upon prepayments of loans by borrowers refinancing
loans to take advantage of decreasing interest rates, as well as the
Corporation's strategy of maintaining high levels of liquid assets to fund the
anticipated Pilgrim transaction and the branch sales.
Interest Expense. Total interest expense increased $1.1 million, or 23.2%,
from $5.0 million for the year ended December 31, 1994 to $6.1 million for the
year ended December 31, 1995. Since the average balance of total
interest-bearing liabilities remained about the same in 1995 as it was in 1994,
the increase in interest expense was almost entirely due to a rise in average
rates paid. Over 90% of the increase due to rate was in the time deposit
category, where average rates paid increased from 3.59% in 1994 to 5.17% in
1995. The vast majority of time deposits have original maturities of one year or
less and the rates paid on them in 1995 reflect the higher short-term rates that
prevailed in 1995 versus 1994. In addition, the Corporation paid a premium rate
of 7% on a six-month certificate of deposit which attracted over $16 million in
a special one-day promotion. Although the average balance of interest-bearing
deposits increased slightly in 1995 versus 1994, there was a marked shift from
lower cost savings deposits to higher cost time deposits. Average savings
deposits decreased $14.5 million, or 16.1%, in 1995 as compared to 1994, while
average time deposits increased $17.9 million, or 32.1%, during the same period.
Management believes that savings deposits will be harder to attract in the
future because the spreads between rates paid on savings and those offered by
alternative investments have widened significantly in recent years.
Total interest expense decreased $3.7 million, or 43.1%, from $8.7 million
for the year ended December 31, 1993 to $5.0 million for the year ended December
31, 1994. This decrease reflects a 59 basis point decrease in the average cost
of interest-bearing liabilities, as the Corporation was able to reprice its
liabilities at lower rates during 1994. The decrease in interest expense is also
due, in part, to a reduction in the average balance of interest-bearing
liabilities by $78.8 million which is primarily attributable to the Pilgrim
transaction and the branch sales. Interest on savings deposits and interest-
bearing demand deposits fell by $2.2 million, or 45.7%, $1.4 million of which
was due to a reduction in the average balances of savings and interest-bearing
demand deposits of $55.6 million. The reduction in average balance was due
primarily to the Pilgrim transaction. The remaining $783,000 decrease in expense
was due to a 54 basis point reduction of rates paid on savings and
interest-bearing demand deposits during 1994. Interest on time deposits fell by
$1.1 million, or 35.0%, which was due to a $18.6 million decline in average
balance and a 54 basis point decline in the average rate paid on time deposits
in 1994 as compared to 1993. Approximately $10.6 million, or 57.0% of the
decrease in the average balance in time deposits was due to the Pilgrim
transaction with the remainder due to investors seeking higher rates in
alternative investments as interest rates changed during the year.
The Corporation incurred interest expense on its other borrowings of $12,000,
$357,000 and $841,000 during the years ended December 31, 1995, 1994 and 1993,
respectively, which consisted of interest on subordinated debentures, and, in
addition, in 1993 on a note payable. See Note 12 of Notes to Consolidated
Financial Statements. On June 1, 1994 $4.6 million of the subordinated
debentures were redeemed and during the first quarter of 1995, the remaining
$1.3 million were redeemed.
Provision for Possible Loan Losses. The provision for possible loan losses
was $500,000, $1.2 million and $4.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. The much reduced provision for possible loan
losses in 1995 reflects the overall increase in loan quality, the continued
reduction of nonperforming assets and the further reduction of loan
concentrations. The decreased provision for possible loan losses during 1994
reflected the fact that there were only $2.2 million of net charge-offs as
compared to $4.2 million in 1993. The decline in charge-offs was due to a
stabilizing commercial real estate market in northern New Jersey and a decrease
in the Corporation's nonperforming loans. In 1993 the provision was highly
influenced by charge-offs and the need to restore reserve levels and reflected
the weak commercial real estate market in northern New Jersey and management's
efforts in identifying and quantifying potential losses in the loan portfolio.
Commercial real estate loans and real estate construction loans made up a
significant portion of the loans outstanding during the last three fiscal years.
The provision for possible loan losses is determined by management based on its
analysis of certain prevailing factors, including a review of the financial
status and credit standing of borrowers, real estate appraisals, prior loss
experience and management's judgment as to prevailing and anticipated economic
conditions within the Corporation's market area. For additional information, see
"Financial Condition and Recent Operating Environment -- General" and "Asset
Quality -- Allowance for Possible Loan Losses."
Other Income. Other income fell $875,000, or 26.3%, to $2.4 million for the
year ended December 31, 1995 from $3.3 million for the year ended December 31,
1994. The decline was primarily due to a drop in mortgage related income of
$330,000, a reduction of $164,000 of SBA loan fees recognized, and the
recognition in 1994 of $270,000 concerning premiums previously held in a trust
from the sale of the mortgage servicing operation. The 1994 amount also contains
$170,000 of income recognized as part of a comprehensive restructure of loans to
a group of affiliated borrowers, an event not repeated in 1995. Countering these
declines to some extent was a $127,000, or 9.1%, increase in service charges on
deposit accounts. Other income was $3.3 million for the year ended December 31,
1994 and $8.9 million for the year ended December 31, 1993, representing a
decrease of $5.6 million, or 62.8%. The primary factors contributing to the
decrease were decreases of $2.3 million, or 93.7%, in gain on mortgages sold, a
decrease of $2.2 million, or 90.4%, in mortgage servicing and application fees,
a decrease of $642,000, or 91.5%, in loan fee income on mortgages sold and a
$368,000, or 94.4%, decrease in document custodial fees, all of which were
attributable to the Corporation's sale of its mortgage servicing operations
effective January 31, 1994. In addition, service charges on deposit accounts
decreased by $159,000, or 10.3%, from $1.5 million in the year ended December
31, 1993 to $1.4 million in the year ended December 31, 1994, as the Corporation
maintained a lower average balance of deposit accounts following the Pilgrim
transaction. Other income increased by $216,000, or 23.3%, in 1994 primarily as
a result of the receipt of $270,000 related to the sale of the mortgage
servicing operation.
Other Expense. Other expense showed a $1.2 million, or 8.8%, decrease in
1995, declining from $13.3 million for the year ended December 31, 1994 to $12.1
million for for the year ended December 31, 1995. With the exception of total
ORE-related expenses which increased $603,000 in 1995, all major categories of
other expense decreased from 1994 amounts. Salaries and employee benefits
decreased $467,000, or 9.3%, largely due to a decrease in health insurance
benefits of $368,000. Commissions were also down $76,000 for 1995 as compared to
1994. Occupancy expense decreased $62,000 and equipment expense decreased
$55,000 for the year ended December 31, 1995 as com-
- -------------------------------------------------------------------------------
9
<PAGE> 11
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
pared to the year ended December 31, 1994. These decreases reflect the
widespread expense controls that were instituted during 1994. Other expense
declined $1.2 million in 1995 as compared to 1994, with significant reductions
in legal fees, FDIC assessments, bonding and insurance premiums and nonloan
losses. The aforementioned increase in ORE-related expenses was due to an
increase in valuation adjustments of $987,000 to reflect current market values
less costs to sell of the remaining ORE properties. Direct net costs of
operating these properties fell by $384,000 in 1995. Management expects that
future valuation adjustments and direct operating expenses related to ORE will
be significantly less than they were in 1995.
Other expense decreased by $11.7 million, or 46.7%, from $25.0 million for
the year ended December 31, 1993 to $13.3 million for the year ended December
31, 1994. The primary reason for this decrease was the downsizing that resulted
from the sale of the mortgage servicing operation effective January 31, 1994 and
from the Pilgrim transaction and the branch sales during 1993. The largest
component of the decrease was a $3.6 million, or 41.5%, reduction in salaries
and employee benefits. Additional reductions in other expense, resulting largely
from the sale of the Corporation's mortgage servicing operation, include the
nonrecurrence in 1994 of the provision for possible losses on purchased mortgage
service rights of $1.8 million, the loss on sale of mortgage operations of
$647,000 and the provision for possible losses on excess servicing receivable of
$303,000 which occurred in 1993. Further reductions in expenses related to the
amortization of intangible assets and credit reports/appraisal fees by $1.3
million, or 84.0%, and $607,000, or 71.3%, respectively, reflect a reduction in
intangible assets and loan origination activity that are also primarily a result
of the sale of the mortgage servicing operations. Net occupancy expense also
decreased during the year ended December 31, 1994 by $575,000, or 41.2%, as
compared to the year ended December 31, 1993, as a result of the downsizing
resulting from the sale of the mortgage servicing operation, the Pilgrim
transaction, and the branch sales. Total other real estate expenses decreased by
$520,000, or 19.1%, in the year ended December 31, 1994 as compared to the year
ended December 31, 1993 as a result of the decrease in the Corporation's level
of ORE during 1994.
Income Taxes. The Corporation had income tax benefits of $4.2 million,
$285,000 and $996,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The 1995 benefit is primarily attributable to the reversal of a
valuation allowance against the Corporation's net deferred tax asset totaling
$5.3 million. The 1994 benefit was the result of receiving a tax refund greater
than that anticipated at December 31, 1993.
Because of the significant operating losses in 1994, 1993 and 1992, the
Corporation recorded a full valuation allowance against its net deferred tax
asset at December 31, 1994. During 1995, management concluded that this
valuation allowance was no longer necessary because sufficient positive evidence
had accumulated. Such positive evidence included five consecutive quarters of
profitable operations, significant reductions in the level of nonperforming
assets and related expenses, continued strong net interest margins and operating
expense reductions.
At December 31, 1995, the Corporation has a Federal net operating loss
carryforward of $3.3 million, of which $2.5 million expires in 2009 and the
remainder in 2010, and a state net operating loss carryforward of $11.9 million
which expires as follows: $800,000 in 1998, $2.0 million in 1999, $6.7 million
in 2000, $1.6 million in 2001 and $800,000 in 2002.
Federal income tax returns for the years 1991, 1992 and 1993 are currently
being examined by the Internal Revenue Service. Management does not anticipate
that the results of this examination will have a material effect on the
Corporation's consolidated financial position or results of operations.
ASSET/LIABILITY MANAGEMENT
The principal determinant of the exposure of the Corporation's earnings to
interest rate risk is the timing difference between the repricing or maturity of
the Corporation's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. The Corporation has established an Asset/Liability
Management Committee which is comprised of the Corporation's Chairman of the
Board, President, Senior Vice President and Treasurer, and two outside
directors. This Committee meets at least monthly to review the maturities of the
Corporation's assets and liabilities, as well as to regulate the Corporation's
flow of funds and to coordinate the sources, uses and pricing of such funds. The
Committee's objective in structuring and pricing the Corporation's assets and
liabilities is to maintain an acceptable interest rate spread while minimizing
the effects of changes in interest rates.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, while conversely during a
period of falling interest rates, a negative gap would result in an increase in
net interest income and a positive gap would adversely affect net interest
income.
- --------------------------------------------------------------------------------
10
<PAGE> 12
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT (continued)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1995 which are expected
to mature or reprice in each of the time periods shown:
<TABLE>
<CAPTION>
==============================================================================================================================
THREE OVER THREE OVER ONE
MONTHS MONTHS TO YEAR TO OVER NONINTEREST-
IMMEDIATE OR LESS ONE YEAR FIVE YEARS FIVE YEARS SENSITIVE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans, net (1) ...................... $58,093 $ 28,706 $ 21,549 $32,343 $15,036 $ -- $155,727
Securities and interest-bearing
time deposits..................... -- 17,234 8,668 33,798 658 -- 60,358
Federal funds sold .................. 5,802 -- -- -- -- -- 5,802
Cash and other assets................ -- -- -- -- -- 24,629 24,629
- ------------------------------------------------------------------------------------------------------------------------------
Total assets........................ $63,895 $ 5,940 $ 30,217 $66,141 $15,694 $ 24,629 $246,516
==============================================================================================================================
Liabilities and stockholders' equity:
Demand deposits ..................... $ -- $ 25,740 $ -- $ -- $ -- $ 49,761 $ 75,501
Savings and time deposits (2) ....... -- 87,005 44,468 10,088 -- -- 141,561
Other liabilities ................... -- -- -- -- -- 2,205 2,205
Stockholders' equity ................ -- -- -- -- -- 27,249 27,249
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................ $ -- $112,745 $ 44,468 $10,088 $ -- $ 79,215 $246,516
==============================================================================================================================
Interest rate-sensitive gap........... $63,895 $(66,805) $(14,251) $56,053 $15,694 $(54,586)
Interest rate-sensitive gap as a
percentage of total assets .......... 25.9% (27.1)% (5.8)% 22.7% 6.4% (22.1)%
Cumulative interest rate-
sensitive gap ....................... $63,895 $ (2,910) $(17,161) $38,892 $54,586
Cumulative interest rate-
sensitive gap as a percentage
of total assets .................... 25.9% (1.2)% (7.0)% 15.8% 22.1%
==============================================================================================================================
</TABLE>
(1) The allowance for possible loan losses is included in the over one year to
five years category. No effect is given to anticipated loan prepayments.
(2) Money market accounts are included in the three months or less category,
based on the Corporation's recent experience of repricing such deposits
every three months or less. It is the opinion of management, however, that a
significant portion of these accounts is not interest sensitive.
Certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. In the event of a change in interest rates, prepayment
and early withdrawal levels could significantly change the gaps calculated in
the above table. The ability of borrowers to service their debts may decrease in
the event of an interest rate increase. Management considers these factors when
reviewing its gap position and establishing its ongoing asset/liability
strategy.
ASSET QUALITY
The following table sets forth, as of the dates indicated, the components of
the Corporation's delinquent loans, nonperforming assets and restructured loans.
Each component is discussed in greater detail below. Nonperforming assets
consist of nonaccrual loans, accruing loans 90 days or more delinquent and ORE.
It is the Corporation's policy to place a loan on nonaccrual status when, in the
opinion of management, the ultimate collectibility of the principal or interest
on the loan becomes doubtful. As a general rule, a commercial or real estate
loan more than 90 days past due with respect to principal or interest is
classified as a nonaccrual loan. Installment loans generally are not placed on
nonaccrual status but, instead, are charged off at 90 days past due. Loans are
considered restructured loans if, for economic or legal reasons, a concession
has been granted to the borrower related to the borrower's financial
difficulties that the creditor would not otherwise consider. The Corporation has
restructured certain loans in instances where a determination was made that
greater economic value will be realized under new terms than through
foreclosure, liquidation, or other disposition. ORE includes both loan
collateral that has been formally repossessed and collateral that is in the
bank's possession and under its control without legal transfer of title.
At the time of classification as ORE, loans are reduced to the fair value of
the collateral (if less than the loan receivable) by charge-offs against the
allowance for possible loan losses. ORE is carried on the books at the lower of
cost or fair value, less estimated costs to sell. Subsequent valuation
adjustments to the fair value of the collateral are charged or credited to
current operations.
- -------------------------------------------------------------------------------
11
<PAGE> 13
- --------------------------------------------------------------------------------
ASSET QUALITY (continued)
The following table sets forth delinquent loans, the components of nonperforming
assets, and restructured loans at the year ends indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans 30 - 89 days past due................. $ 3,644 $ 4,725 $ 2,303 $ 9,303 $18,288
=========================================================================================================================
Nonaccrual loans:
Commercial and commercial real estate................. $ 3,459 $ 6,617 $21,472 $25,343 $23,579
Residential real estate mortgage...................... 375 509 360 634 552
Installment........................................... 356 422 49 514 441
- -------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans............................... 4,190 7,548 21,881 26,491 24,572
- -------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial and commercial real estate................. 37 20 585 1,989 1,234
Residential real estate mortgage...................... 53 216 380 731 592
Installment........................................... 51 4 217 102 327
- -------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more ................ 141 240 1,182 2,822 2,153
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans............................ $ 4,331 $ 7,788 $23,063 $29,313 $26,725
=========================================================================================================================
ORE, net (1) .......................................... $ 4,408 $ 9,995 $10,332 $ 5,304 $ 2,599
=========================================================================================================================
Total nonperforming assets............................. $ 8,739 $17,783 $33,395 $34,617 $29,324
=========================================================================================================================
Restructured loans..................................... $ 1,702 $ 5,983 $11,035 $ 4,662 $13,975
=========================================================================================================================
Total nonperforming assets and restructured loans ... $10,441 $23,766 $44,430 $39,279 $43,299
=========================================================================================================================
</TABLE>
(1) Loans are classified as ORE when the Corporation has taken possession of the
collateral, regardless of whether formal foreclosure proceedings have taken
place.
During the year ended December 31, 1995, gross interest income of $1.3
million would have been recorded on loans accounted for on a nonaccrual basis if
the loans had been current throughout the period. Interest on such loans
included in income during such period amounted to $213,000. During the year
ended December 31, 1995, gross interest income of $18,000 would have been
recorded on restructured loans if the loans had been current throughout the
period in accordance with their original terms. Interest on such loans included
in income during such period amounted to $16,000.
The Corporation reduced its nonperforming assets from $17.8 million at
December 31, 1994 to $8.7 million at December 31, 1995, a $9.1 million or 51.1%
improvement. This reduction was achieved by $2.5 million in ORE sales, the
receipt if $5.3 million in principal payments, $3.6 million in charge-offs and
valuation adjustments, the return to accruing status of $1.4 million of
nonaccrual loans and a $99,000 reduction of loans past due 90 days or more,
offset in part by new nonaccrual loans and advances on ORE totaling $3.8
million. Of the $6.0 million of restructured loans at December 31, 1994, $5.8
million demonstrated performance at market rates and thus were transferred to
accrual status, while three loans totaling $1.5 million were restructured during
the year, the largest a commercial real estate loan of $1.2 million.
Changes in the Corporation's levels of problem assets during the five years
ended December 31, 1995 reflect the impact of the recessionary cycle as well as
the results of management's long- term efforts to work with its borrowers to
maximize recoveries.
Although the Corporation was profitable in 1995, nonperforming asset levels
and related expenses caused a significant reduction in earnings. Management is
committed to reducing nonperforming assets and related expenses to insignificant
levels through diligent loan remediation efforts and the institution of policies
and procedures to help minimize the risk of loan quality deterioration.
Management believes that the economy in the Corporation's market stabilized in
1994 and 1995. However, a significant increase in interest rates or other
changes in economic factors that adversely affect the ability of the
Corporation's borrowers and prospective purchasers of its ORE to service real
estate-related indebtedness may have a negative impact on the amounts ultimately
realized upon the collection of loans or the disposition of nonperforming
assets.
Nonaccrual and Delinquent Loans. When a loan is classified as nonaccrual,
interest which was accrued but unpaid during the year the loan was classified
nonaccrual is reversed from income, and any interest which was accrued during
the prior year but was unpaid is charged off against the allowance for possible
loan losses. While a loan is classified as nonaccrual, all collections are
applied as reductions of principal outstanding. Nonaccrual loans (including
those with partial charge-offs) may be returned to accrual status, even though
the loans are not current with respect to the contractual payments, provided two
criteria are met: (i) all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within a reasonable
period, and (ii) there is a sustained period of recent repayment performance (at
least six months) by the borrower in accordance with the contractual terms.
Loans that meet the above criteria would be classified as past due, as
appropriate, until they have been brought fully current.
The following table sets forth the types of loans comprising the
Corporation's nonperforming loans at December 31, 1995:
<TABLE>
<CAPTION>
==================================================================================================
LOANS 90 DAYS NONACCRUAL
OR MORE PAST DUE LOANS
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial real estate:
Raw land and construction projects............................... $ -- $ --
Retail/Office.................................................... -- 1,850
- -------------------------------------------------------------------------------
Total commercial real estate..................................... -- 1,850
- -------------------------------------------------------------------------------
One-to four-family residential real estate......................... 53 1,787
Commercial and industrial.......................................... 37 197
Installment........................................................ 51 356
- -------------------------------------------------------------------------------
Total............................................................ $141 $4,190
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 14
- --------------------------------------------------------------------------------
ASSET QUALITY (continued)
Restructured Loans. The Corporation has restructured loans in cases where a
borrower has been able to demonstrate a reasonable ability to meet the
restructured debt service obligation. As used herein, the term "restructured
loan" means a restructured loan on accrual status. At December 31, 1995, 1994
and 1993, the Corporation's restructured loans totalled $1.7 million, $6.0
million and $11.0 million, respectively. At December 31, 1995, the balance was
comprised of three commercial real estate loans, the largest totaling $1.2
million.
In order for a restructured loan to be removed from classification as a
restructured loan, the following criteria must be satisfied: (i) the borrower
must generally have been current in meeting the restructured terms for at least
six consecutive months or until the end of the year next following the date of
restructure, whichever is later, (ii) the restructured loan must provide for
principal amortization, (iii) the restructured loan must have an interest rate
and other features that are at least equivalent to market terms and (iv)
principal and interest amounts contractually due, including arrearages, are
reasonably assured of repayment within a reasonable period of time. Inevitably,
not all restructured loans will be viable as restructured, and it may be
necessary for the Corporation to make further concessions or to liquidate the
asset at a further discount, which may require a further write-down. The
Corporation transferred $5.8 million in loans that were classified as
restructured at December 31, 1994 to accrual status in 1995. Management
anticipates that two restructured loans totaling $1.4 million at December 31,
1995 will meet the criteria for transfer to accrual status in 1996.
Other Real Estate. Other real estate includes both loan collateral that has
been formally repossessed and collateral that is in the Corporation's possession
and under its control without legal transfer of title. ORE is carried on the
books at the lower of cost or fair value, less estimated costs to sell. In years
prior to 1994, loans classified as in-substance foreclosed but for which the
Corporation had not taken possession of the collateral have been reclassified to
loans to conform to the current presentation. Substantially all of the
Corporation's ORE is located in northern New Jersey.
The following table sets forth the types of properties which comprised the
Corporation's ORE portfolio at December 31, 1995:
<TABLE>
<CAPTION>
=============================================================
(In thousands)
<S> <C>
Commercial real estate:
Raw land and construction projects............... $ 2,667
Retail/office.................................... 4,082
- -----------------------------------------------------------
Total commercial real estate.................... 6,749
- -----------------------------------------------------------
Residential real estate:
One-to-four family............................... 270
- -----------------------------------------------------------
Valuation allowance.............................. (2,611
- -----------------------------------------------------------
Total.............................................. $ 4,408
===========================================================
</TABLE>
Management believes that the net carrying value of ORE at December 31, 1995
equaled the lower of the assets' balances when transferred to ORE or the
estimated fair value (after reduction for estimated selling costs) of the
properties acquired. Given current real estate and economic conditions in the
Corporation's market, however, no assurance can be given as to the extent to
which the Corporation will realize its current carrying value, the Corporation's
ability to continue to dispose of any significant amount of ORE or the period of
time it will take for the Corporation to achieve a significant reduction in the
amount of its ORE.
Other. Loans which were not classified as nonaccrual, 90 days past due or
restructured but where known information about possible credit problems of
borrowers caused management to have concerns as to the ability of the borrowers
to comply with present loan repayment terms amounted to $2.1 million at December
31, 1995. These loans consisted of one commercial loan with a principal balance
of $1.1 million, seven residential real estate mortgage loans with an aggregate
principal balance of $619,000 and installment loans with an aggregate principal
balance of $375,000.
Asset Concentrations. The Corporation's loan portfolio contains certain
concentrations of related borrowers. At December 31, 1995, the combined three
largest concentrations totalled $35.2 million, or 21.9% of the total loan
portfolio. The large balances outstanding on these loans may increase the risk
of potential loss exposure to the Corporation. The largest concentration
consisted of 14 loans with an aggregate balance of $15.4 million. The second
relationship consisted of 18 loans totalling $12.2 million. The third
relationship consisted of 9 loans totalling $7.6 million. At December 31, 1995,
all loans within these concentrations, including adversely classified loans,
were performing in accordance with their terms, and management believes that all
of these loans were properly valued on the Corporation's books.
At December 31, 1995 and 1994, commercial real estate mortgage and
construction loans totalled $97.5 million and $102.4 million and represented
60.7% and 64.9%, respectively, of the Corporation's total loan portfolio.
Substantially all of the commercial real estate securing such loans is located
in northern New Jersey. The ability of borrowers of such loans to repay them in
accordance with their terms, and the ability of the Corporation to realize
recoveries in the event of their default, are highly dependent upon conditions
in the northern New Jersey real estate industry. The Corporation's business plan
calls for the reduction of its concentration in assets dependent on the value of
commercial real estate by deemphasizing the origination of commercial real
estate loans while increasing originations of commercial and consumer loans.
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1995, regarding the dollar amount of commercial and commercial real
estate loans and commercial real estate construction loans maturing in the
Corporation's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
===================================================================================================================
DUE IN ONE DUE AFTER 1 DUE AFTER
YEAR OR LESS THROUGH 5 YEARS 5 YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial and commercial real estate ............... $68,827 $21,860 $5,782 $ 96,469
Commercial real estate construction ................. 10,881 4,296 -- 15,177
- -------------------------------------------------------------------------------------------------------------------
Total ........................................... $79,708 $26,156 $5,782 $111,646
===================================================================================================================
Loans with predetermined interest rates ............. $19,537 $26,156 $5,782 $ 51,475
Loans with floating interest rates .................. 60,171 -- -- 60,171
- -------------------------------------------------------------------------------------------------------------------
Total ........................................... $79,708 $26,156 $5,782 $111,646
===================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 15
- --------------------------------------------------------------------------------
ASSET QUALITY (continued)
Allowance for Possible Loan Losses. The allowance for possible loan losses is
determined by management based upon their evaluation of the known, as well as
the inherent, risks within the Corporation's loan portfolio and is maintained at
a level considered adequate to provide for potential loan losses. The allowance
for possible loan losses is increased by provisions charged to expense and
reduced by net charge-offs. In establishing the allowance for possible loan
losses, management considers, among other factors, previous loss experience, the
performance of individual loans in relation to contract terms, the size of
particular loans, the estimated fair value of collateral, the risk
characteristics of the loan portfolio generally, the current status and credit
standing of borrowers, management's judgment as to prevailing and anticipated
real estate values and other economic conditions in the Corporation's market
area and other factors affecting credit quality. Management believes the
allowance for possible loan losses at December 31, 1995 of $4.9 million, or
112.1% of nonperforming loans, was adequate. Management continues to actively
monitor the Corporation's asset quality and to charge off loans against the
allowance for possible loan losses as it deems appropriate. Although management
believes it uses the best information available to make determinations with
respect to the allowance for possible loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
in making the initial determinations.
The following table sets forth summary data related to the Corporation's
allowance for possible loan losses, the provision for possible loan losses and
charge-off experience for the years indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income (at end of period) (1)................ $160,580 $164,345 $206,214 $294,660 $295,177
===================================================================================================================================
Average loans outstanding (2)........................................ $157,715 $171,395 $240,651 $310,665 $289,760
===================================================================================================================================
Allowance balance (at beginning of year)............................ $ 6,501 $ 7,499 $ 7,670 $ 4,489 $ 3,360
Loans charged off:
Commercial and commercial real estate (3).......................... 3,640 2,265 4,011 6,588 1,687
Residential real estate mortgage................................. 3 49 22 20 20
Installment........................................................ 51 182 518 645 490
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans charged off........................................... 3,694 2,496 4,551 7,253 2,197
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans:
Commercial and commercial real estate, net (3).................... 1,511 253 275 188 75
Real estate - mortgage............................................ 6 -- 4 -- --
Installment....................................................... 29 24 61 24 11
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries................................................. 1,546 277 340 212 86
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans charged off............................................... 2,148 2,219 4,211 7,041 2,111
Provision for the period............................................ 500 1,221 4,440 10,222 3,240
Allowance related to loans sold..................................... -- -- (400) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) .................................. $ 4,853 $ 6,501 $ 7,499 $ 7,670 $ 4,489
===================================================================================================================================
Allowance for possible loan losses as a percentage of total
outstanding loans (at end of year) ................................. 3.02% 3.96% 3.64% 2.60% 1.52%
Allowance for possible loan losses as a percentage of
nonperforming loans (at end of year) ............................... 112.05% 83.47% 32.52% 26.17% 16.80%
Net loans charged off as a percentage of average loans outstanding .. 1.36% 1.29% 1.75% 2.27% .73%
===================================================================================================================================
</TABLE>
(1) Includes loans held for sale of $34,000, $34,000, $19.6 million, $28.7
million and $10.8 million at December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
(2) Includes average loans held for sale of $70,000, $2.6 million, $20.5
million, $24.4 million, and $11.9 million at December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
(3) Includes commercial real estate construction loans.
The Corporation made provisions for loan losses during the years ended
December 31, 1995, 1994 and 1993 of $500,000, $1.2 million and $4.4 million,
respectively, in order to address the uncertainty inherent in the loan
portfolio. Beginning in 1992, as the Corporation intensified its review and
administration of problem assets, management was better able to quantify the
risks in the loan portfolio, and as a result, the Corporation's loan charge-offs
increased. The recognition of these charge-offs, coupled with a decline in
delinquent and nonaccrual loans, enabled the Corporation to maintain its
allowance for loan losses during 1995 below the level of the previous year,
while representing a significantly higher percentage of nonperforming loans.
The Corporation maintains valuation allowances for potential losses on its
portfolio of ORE. The following table sets forth summary data related to the
total valuation allowances for ORE for the years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year......................................... $1,634 $ 885 $ --
Provision charged to expense........................................ 1,850 863 956
Write-downs to fair value and net losses incurred on sales.......... (873) (64) (121)
Other............................................................... -- (50) 50
- ------------------------------------------------------------------------------------------------------------
Balance at end of year............................................... $2,611 $1,634 $ 885
============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE> 16
- --------------------------------------------------------------------------------
ASSET QUALITY (continued)
During the last three years, management has intensified its ORE sales, review
and evaluation efforts. As a result, gross ORE balances have declined from $11.2
million at December 31, 1993 to $7.0 million at December 31, 1995, while the
valuation allowance has increased from $885,000 to $2.6 million during that
period. Management believes that future annual provisions to the valuation
allowances for ORE should be lower than those in 1995.
The FDIC and the State, as part of their respective supervisory functions,
periodically review the Bank's allowance for possible loan losses and the
allowance for potential ORE losses. Such regulatory reviews may require the Bank
to increase its provision for loan losses or to recognize further loan
charge-offs or write-downs of the carrying value of ORE, based on judgments
different from those of management.
Securities Portfolio. The Corporation invests a portion of its available
funds in a variety of short-term and medium-term instruments. The securities
portfolio provides a measure of liquidity through proceeds from scheduled
maturities and is utilized for pledging requirements on public and fiduciary
deposits. At December 31, 1995, securities having a book value of $2.5 million
were pledged as collateral for public funds and other purposes as required by
law.
The following tables set forth the carrying value of the Corporation's
available for sale and held to maturity securities portfolios at the dates
indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury ......................................... $ 4,532 11.5% $16,669 93.8% $6,037 68.2%
U.S. Government ....................................... 27,746 70.6 -- -- -- --
Obligations of state and political subdivisions ....... 883 2.2 934 5.3 2,661 30.0
Other ................................................. 6,167 15.7 160 .9 160 1.8
- -----------------------------------------------------------------------------------------------------------------------------
$39,328 100.0% $17,763 100.0% $8,858 100.0%
=============================================================================================================================
Held to maturity:
U.S. Treasury ......................................... $ -- --% $ 993 28.5% $ -- --%
U.S. Government ....................................... 19,530 97.5 1,992 57.2 -- --
Obligations of state and political subdivisions ....... 500 2.5 500 14.3 -- --
- -----------------------------------------------------------------------------------------------------------------------------
$20,030 100.0% $ 3,485 100.0% $ -- --%
=============================================================================================================================
</TABLE>
The Corporation's securities increased from $8.9 million at December 31,
1993, to $21.2 million at December 31, 1994, and to $59.4 million at December
31, 1995. The $38.2 million increase in securities during the year ended
December 31, 1995 was due to the Corporation's investing excess federal funds
sold as the need for such a high liquidity position diminished. The $12.3
million increase in securities during the year ended December 31, 1994 was due
to the Corporation's investing available proceeds from loan paydowns and the
Offering completed during the fourth quarter.
Overall, the Corporation's securities portfolio is high grade. The U.S.
Treasury and U.S. Government Agencies securities which comprise 87.3% of the
portfolio at December 31, 1995, carry the highest rating available by
Moody's-AAA. Obligations of state and political subdivisions are entirely those
of New Jersey origin. It is the Corporation's policy to buy only those issues
rated A or better by Moody's; however, in many cases, an issue is not rated due
to its small size. In such cases, the general credit rating of the municipality
or political subdivisions must be A rated. At December 31, 1995, the weighted
average maturity of all owned securities is 30.3 months, including a county
industrial development loan having a book value of $883,000 and a maturity in
2008. Also, $21.0 million and $8.9 million of securities classified as available
for sale and held to maturity, respectively, at December 31, 1995, were
purchased with options to be called back by the issuer prior to maturity at par
value.
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of December 31, 1993. In connection with the
adoption the Corporation classified all of its securities as available for sale,
primarily due to management's anticipated need to meet future liquidity
requirements. These securities are carried at their respective fair values.
Management determined the appropriate classification of debt securities at the
time of purchase. During 1994 and 1995, the Corporation classified certain
purchased securities as held to maturity. At December 31, 1995, 1994 and 1993,
the Corporation had no securities held for trading purposes. See Notes 1 and 4
of Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
15
<PAGE> 17
- -------------------------------------------------------------------------------
ASSET QUALITY (continued)
The following table sets forth scheduled maturities, carrying values, market
values and average yields on a tax-equivalent basis for the Corporation's
securities portfolio at December 31,1995:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
- -----------------------------------------------------------------------------------------------------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury ............... $4,532 5.95% $ -- --% $ -- --% $ -- --%
U.S. Government agencies..... -- -- 27,746(1) 6.21 -- -- -- --
Obligations of state and
political subdivisions... 44 11.36 213 11.36 374 11.36 252 11.36
Other ....................... -- -- 6,135(2) 6.03 32 5.50 -- --
- -----------------------------------------------------------------------------------------------------------------------
Total securities............. $4,576 6.00% $34,094 6.21% $406 10.90% $252 11.36%
=======================================================================================================================
Held to maturity:
U.S. Government agencies .... $3,004 7.59% $16,526 6.57% $ -- --% $ -- --%
Obligations of state and
political subdivisions .. 500 7.90 -- -- -- -- -- --
7.90
- -----------------------------------------------------------------------------------------------------------------------
Total securities............. $3,504 7.63% $16,526 6.57% $ -- --% $ -- --%
=======================================================================================================================
<CAPTION>
- ---------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO
- ---------------------------------------------------------------
CARRYING ESTIMATED AVERAGE
VALUE MARKET VALUE YIELD
- ---------------------------------------------------------------
<S> <C> <C> <C>
Available for sale:
U.S. Treasury .............. $ 4,532 $ 4,532 5.95%
U.S. Government agencies.... 27,746 27,746 6.21
Obligations of state and
political subdivisions.. 883 883 1.36
Other ...................... 6,167 6,167 6.03
- --------------------------------------------------------------
Total securities............ $39,328 $39,328 6.27%
==============================================================
Held to maturity:
U.S. Government agencies ... $19,530 $19,823 6.73%
Obligations of state and
political subdivisions . 500 503 7.90
- --------------------------------------------------------------
Total securities............ $20,030 $20,326 6.76%
==============================================================
</TABLE>
(1)Includes $10,714,000 of securities with floating rates.
(2)Includes $6,134,000 of securities with floating rates.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management is a continuous process that intends to insure the
Corporation's ability to meet present and future cash needs. In the short term,
cash is needed to meet credit requirements, deposit withdrawals, capital
expenditures, debt obligations, operating expenses, increases in other assets
and decreases in other liabilities. Liquidity management for the long term
encompasses providing funds for asset growth, development of new asset products
and recognizing trends in the marketplace which may affect the Corporation's
ability to attract and use funds. Providing sufficient cash to meet these
obligations on a timely basis at a reasonable cost is one of the objectives of
the Asset/Liability Committee.
The Corporation's major sources of liquidity are core deposits, scheduled
asset maturities, purchased funds, borrowings and net income. The Corporation's
loan and investment portfolios are relatively short-term, providing funds for
redeployment. Daily fluctuations in cash needs are met through purchases and
sales of federal funds. In addition, to meet short-term liquidity needs, the
Corporation has classified certain investment securities as available for sale.
Fluctuations in the Corporation's level of deposits is monitored closely by
management. By offering competitive rates on certificates of deposit, management
was able to increase the time deposit category by $8.0 million during 1995,
offsetting the $7.9 million decline in the savings category.
The following table sets forth the average balances and average interest
rates paid on deposits based on daily balances for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ................... $ 46,100 --% $ 46,230 --% $ 82,701 --%
Interest-bearing demand ...................... 23,669 1.54 23,361 1.90 29,191 2.17
Savings ...................................... 76,032 2.53 90,574 2.38 140,380 2.97
Time deposits ................................ 73,558 5.17 55,664 3.59 74,309 4.13
- ---------------------------------------------------------------------------------------------------------------------------
$219,359 2.78% $215,829 2.13% $326,581 2.41%
===========================================================================================================================
</TABLE>
The Corporation does not rely heavily on certificates of deposit over
$100,000 as a source of funds. During 1995, certificates of deposit of $100,000
or more averaged only 2.0% of total average deposits. Such deposits are not
aggressively bid for since they tend to be extremely rate sensitive and
therefore unreliable as a funding source.
The following table indicates the amount of the Corporation's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1995:
- -------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT
- -------------------------------------------------------------------------------
(In thousands)
Maturity period:
Three months or less ........................................ $2,124
Over three through twelve months ............................ 1,747
Over twelve months .......................................... 337
- ------------------------------------------------------------------------
Total .................................................... $4,208
===============================================================================
In addition to deposits, at December 31,1995, the Corporation's liabilities
included $2.2 million in accrued and other liabilities. The Corporation had no
federal funds purchased during the years ended December 31, 1995, 1994, and
1993.
- -------------------------------------------------------------------------------
16
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- --------------------------------------------------------------------------------
At December 31, 1995, the total approved loan commitments outstanding
amounted to $28.2 million and commitments under standby letters of credit
amounted to $620,000. Management believes that the Corporation has adequate
liquidity to meet all foreseeable obligations.
The Corporation, as a separately incorporated holding company, has no
significant operations other than serving as sole stockholder of the Bank. On an
unconsolidated basis, the Corporation has no paid employees, except as described
below, and, other than its investment in the Bank, has no significant assets,
liabilities or sources of income. The only expenses incurred by the Corporation
are described below.
The parent company's resources available to meet its cash obligations
subsequent to December 31, 1995 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits. On October
13, 1994, the Corporation completed a rights/community equity offering in which
6,500,000 shares of common stock were sold at $2 per share, resulting in gross
proceeds of $13,000,000. After offering expenses, $11.7 million of new capital
was raised, of which $7,500,000 was contributed to the Bank's capital.
The parent company's cash obligations subsequent to December 31, 1995
primarily include (1) fees relating to a consulting agreement entered into with
the former chief executive officer, (2) additional equity investments in the
Bank as may be necessary for the Bank to maintain certain regulatory capital
levels, (3) dividends on preferred stocks, and (4) other general obligations.
Based on current resources discussed above, management expects to meet the
Corporation's obligations at the parent company level for the foreseeable
future.
At December 31, 1993 and through October, 1994, the Corporation and the Bank
were below the regulatory capital minimums, primarily as a result of significant
operating losses experienced during 1992 and 1993 and to a lesser degree in
1994.
In November 1992, as a result of a regulatory examination, the Bank entered
into a stipulation and consent to the issuance of an order to cease and desist
with the FDIC and the State. Pursuant to a subsequent examination as of November
30, 1994, the Order was replaced by a Memorandum of Understanding among the
FDIC, the State and the Bank. The MOU requires the Bank to maintain its Tier 1
leverage capital ratio at not less than 6.0%, to reduce the amount of classified
assets to levels specified in the MOU, and to take various other actions. In
addition, the MOU restricts the Bank from paying dividends on its common stock
without prior written consent of the FDIC and the State. The FDIC has recently
completed another examination of the Bank as of December 31, 1995, but has not
yet issued its written report.
In November 1993, the FRB entered into a Written Agreement with the
Corporation based on its examination as of June 30, 1993. The Written Agreement
required the Corporation to submit a written plan to achieve and maintain
adequate capital levels, prohibited payment of dividends without prior FRB
approval, placed limits on expenditures, and required additional periodic
reports, among other provisions. The Corporation has since received a full
examination by the FRB as of December 31, 1994 and a limited-scope inspection as
of September 30, 1995. Based on the continued improvement in the Corporation's
operating environment, management believes that the Written Agreement will be
terminated during the first quarter of 1996.
The capital ratios of both the Corporation and the Bank at December 31, 1995
satisfy the capital stipulations in both the Written Agreement and MOU. At
December 31, 1995, management believes that they are in full compliance with the
MOU and expects it to be terminated in 1996.
See Note 2 of Notes to Consolidated Financial Statements for further
discussion of regulatory capital issues.
The following table reflects the capital ratios as of the specified dates:
<TABLE>
<CAPTION>
=====================================================================
REQUIRED
REGULATORY
DECEMBER 31 CAPITAL
- -----------------------------------------------
1995 1994 RATIOS (%)
- ---------------------------------------------------------------------
CORPORATION
<S> <C> <C> <C>
Tier 1 leverage capital........ 10.08% 9.16% * %
Risk-based capital
Tier 1.................... 13.37 12.18 4.00
Total (Tier 1 and Tier 2). 14.66 13.46 8.00
=====================================================================
BANK
Tier 1 leverage capital........ 8.62% 7.05% 6.00%
Risk-based capital
Tier 1..................... 11.45 9.42 4.00
Total (Tier 1 and Tier 2).. 12.74 10.70 8.00
=====================================================================
</TABLE>
* Three percent minimum, with most bank holding companies required to maintain
an additional 1% to 2%. Capital adequacy is determined through the
examination process.
Effective December 30, 1993, the Corporation completed a debt restructuring
with a lender. Under the terms of the restructuring, the remaining principal
balance of the note payable of $1,950,000 (after a cash repayment of $150,000 on
the effective date) was exchanged by the lender for 1,950 shares of Class A
Preferred Stock ("Preferred Stock"), with a liquidation preference of $1,000 per
share. Subsequent to the Offering, the Corporation redeemed $200,000 of the
Preferred Stock as required. During 1995, the Corporation redeemed 1,033 shares
of Preferred Stock and paid cumulative dividends on that stock of approximately
$108,000. Cumulative dividends of $11,000 were also paid in 1995 with respect to
the $200,000 of redeemable Preferred Stock that was redeemed in 1994. All
redemptions and dividend payments were done with regulatory approval. Management
has also received regulatory approval to redeem the remaining 717 shares of
Preferred Stock in 1996 and pay cumulative dividends thereon, subject to
attaining certain net income targets. Unpaid cumulative dividends on this stock
amounted to $93,000 at December 31, 1995. The holding company currently has an
adequate level of cash to accomplish such a redemption. See Note 14 of Notes to
Consolidated Financial Statements.
- -------------------------------------------------------------------------------
17
<PAGE> 19
- --------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Corporation
are monetary in nature. As a result, interest rates have a greater impact on the
Corporation's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Boards issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," in March 1995. This Statement is effective for the year ended December 31,
1996. Statement No. 121 requires that Long-Lived Assets to be held and used by
the Bank be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Corporation is currently completing its review of the impact of Statement 121 on
its financial statements and does not expect it to be material.
The Corporation adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures", as of January 1,
1995. SFAS No. 114 requires that certain impaired loans be measured based on
the present value of expected future cash flows discounted at the loans'
original effective interest rate. As a practical expedient, impairment may be
measured based on the loans' observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.
The Corporation has previously measured the allowance for possible loan losses
using methods similar to those prescribed in SFAS No. 114. As a result of
adopting these statements, no additional allowance for possible loan losses was
required as of January 1, 1995.
At December 31, 1995, the Corporation's impaired loans totaled $3,459,000, the
amount of its commercial nonaccrual loan portfolio. All such loans are
collateralized with real estate and have been written down to the fair value of
the collateral. Since the Corporation's recorded investment in these loans is
less than or equal to the fair value of the collateral, no valuation
allowances were required.
At December 31, 1995, the Corporation had one loan that resulted from a
troubled debt restructuring that occurred prior to the adoption of SFAS No.
114. The effect on income if interest on this loan had been recognized at its
original contractual rate during the year was not significant.
- --------------------------------------------------------------------------------
18
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks (Note 15) ............................................ $ 9,160,000 $ 9,326,000
Federal Funds Sold ........................................................... 5,802,000 33,160,000
- ---------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents .............................................. 14,962,000 42,486,000
- ---------------------------------------------------------------------------------------------------------------
Due from Bank - Interest-Bearing ............................................... 1,000,000 --
Securities (Notes 1, 4 and 8):
Available for Sale, at Fair Value .......................................... 39,328,000 17,763,000
Held to Maturity, at Cost (Fair Value $20,326,000 and $3,460,000)........... 20,030,000 3,485,000
Loans (Notes 1, 5, 6, 7, 8 and 9) .............................................. 160,580,000 164,345,000
Less: Allowance for Possible Loan Losses (Notes 1, 6 and 7) .................. 4,853,000 6,501,000
- ---------------------------------------------------------------------------------------------------------------
Net Loans .................................................................. 155,727,000 157,844,000
Premises and Equipment (Notes 1 and 11) ....................................... 2,675,000 2,584,000
Other Real Estate, net (Notes 1, 8 and 9) ..................................... 4,408,000 9,995,000
Other Assets, net (Note 13) ................................................... 7,883,000 3,286,000
Intangible Assets, net (Note 1) ............................................... 503,000 773,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ................................................................... $246,516,000 $238,216,000
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Noninterest-Bearing................................................ $ 49,761,000 $ 46,074,000
- Interest-Bearing................................................... 25,740,000 24,630,000
Savings..................................................................... 73,348,000 81,287,000
Time........................................................................ 64,005,000 56,483,000
Certificates of Deposit over $100,000....................................... 4,208,000 3,390,000
- ---------------------------------------------------------------------------------------------------------------
Total Deposits.............................................................. 217,062,000 211,864,000
Other Borrowings (Note 12).................................................... -- 1,292,000
Accrued Expenses and Other Liabilities........................................ 2,205,000 3,305,000
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities........................................................... 219,267,000 216,461,000
- ---------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 15 )
STOCKHOLDERS' EQUITY (Notes 1, 2 and 14)
Class A Preferred Stock, no par value:
Authorized shares - 1,950
Issued shares - 717 at December 31, 1995 and
1,750 at December 31, 1994, respectively.............................. 717,000 1,750,000
Common Stock, $1 par value:
Authorized shares - 15,000,000
Issued shares - 8,159,855 .................................................. 8,160,000 8,160,000
Capital In Excess of Par Value................................................ 13,101,000 13,101,000
Retained Earnings (Deficit)................................................... 5,479,000 (650,000)
Net Unrealized Holding Gains (Losses) on Securities Available for Sale ....... 86,000 (312,000)
Treasury Stock at Cost (63,406 shares)........................................ (294,000) (294,000)
- ----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity.................................................. 27,249,000 21,755,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $246,516,000 $238,216,000
================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
19
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including Fees (Note 1)..................................... $14,021,000 $13,199,000 $16,570,000
Securities (Notes 1 and 4)
Taxable.......................................................... 3,150,000 766,000 1,113,000
Nontaxable....................................................... 68,000 76,000 577,000
Other.............................................................. 1,104,000 878,000 1,003,000
- --------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME............................... 18,343,000 14,919,000 19,263,000
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings and Interest-Bearing Demand Deposits....................... 2,288,000 2,604,000 4,797,000
Time Deposits and Certificates of Deposit over $100,000............ 3,806,000 1,997,000 3,071,000
Other Borrowings (Note 12)......................................... 12,000 357,000 841,000
- --------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE........................................... 6,106,000 4,958,000 8,709,000
- --------------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME................................... 12,237,000 9,961,000 10,554,000
PROVISION FOR POSSIBLE LOAN LOSSES (NOTES 1, 6 AND 7)................. 500,000 1,221,000 4,440,000
- --------------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES........................................... 11,737,000 8,740,000 6,114,000
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts................................ 1,515,000 1,388,000 1,547,000
Brokerage Commissions.............................................. 298,000 319,000 465,000
Mortgage Application and Servicing Fees (Note 1)................... 136,000 236,000 2,466,000
Document Custodial Fees............................................ -- 22,000 390,000
Loan Fee Income on Mortgages Sold.................................. -- 60,000 702,000
Gain on Sales of Mortgage Loans (Note 1)........................... 4,000 152,000 2,426,000
Gain on Securities Transactions, net............................... 33,000 -- 11,000
Other Income....................................................... 461,000 1,145,000 929,000
- --------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME............................................... 2,447,000 3,322,000 8,936,000
- --------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits (Note 17)........................... 4,574,000 5,041,000 8,623,000
Net Occupancy Expense.............................................. 760,000 822,000 1,397,000
Equipment Expense.................................................. 561,000 616,000 878,000
Other Real Estate Expense - Cost of Operations, net................ 958,000 1,342,000 1,769,000
- Valuation Adjustments.................. 1,850,000 863,000 956,000
Other Expense (Note 20)............................................ 3,445,000 4,640,000 11,395,000
- --------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE............................................ 12,148,000 13,324,000 25,018,000
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES.................................. 2,036,000 (1,262,000) (9,968,000)
Benefit for Income Taxes (Notes 1 and 13)...................... (4,212,000) (285,000) (996,000)
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS).................................................. $ 6,248,000 $ (977,000) $(8,972,000)
==============================================================================================================
NET INCOME (LOSS) PER COMMON SHARE (Note 1)........................ $ .76 $ (.38) $ (7.21)
==============================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
20
<PAGE> 22
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
GAINS (LOSSES)
For the years ended CLASS A CAPITAL RETAINED ON SECURITIES
December 31, 1993, 1994 and 1995: PREFERRED COMMON IN EXCESS OF EARNINGS AVAILABLE TREASURY
STOCK STOCK PAR VALUE (DEFICIT) FOR SALE STOCK
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992............... $ -- $1,308,000 $ 3,466,000 $9,299,000 $ -- $(294,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Loss - 1993........................... -- -- -- (8,972,000) -- --
Issuance of Preferred Stock (Note 14)..... 1,750,000 -- -- -- -- --
Change in Net Unrealized Holding Gains.... -- -- -- -- 19,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993................ 1,750,000 1,308,000 3,466,000 327,000 19,000 (294,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Loss - 1994........................... -- -- -- (977,000) -- --
Change in Net Unrealized Holding
Gains (Losses) ........................ -- -- -- -- (331,000) --
Mandatory Excercise of Stock Purchase
Contracts (Note 12).................... -- 352,000 4,445,000 -- -- --
Net Proceeds from Issuance of
Common Stock (Note 2).................. -- 6,500,000 5,190,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994................ 1,750,000 8,160,000 13,101,000 (650,000) (312,000) (294,000)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME - 1995......................... -- -- -- 6,248,000 -- --
REDEMPTION OF PREFERRED STOCK
(NOTE 14).............................. (1,033,000) -- -- -- -- --
CASH DIVIDENDS ON PREFERRED STOCK
REDEEMED (NOTE 14)..................... -- -- -- (119,000) -- --
CHANGE IN NET UNREALIZED HOLDING
GAINS (LOSSES)......................... -- -- -- -- 398,000 --
=================================================================================================================================
BALANCE, DECEMBER 31, 1995................ $ 717,000 $8,160,000 $13,101,000 $5,479,000 $ 86,000 $(294,000)
=================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
21
<PAGE> 23
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Income (Loss).................................................................. $ 6,248,000 $ (977,000) $ (8,972,000)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization of Premises and Equipment.......................... 444,000 465,000 681,000
Amortization of Intangible Assets................................................ 270,000 247,000 1,542,000
(Accretion) Amortization of Securities (Discount) Premium, Net................... (395,000) (15,000) 250,000
Provision for Possible Loan Losses............................................... 500,000 1,221,000 4,440,000
Provision for Possible Losses on Other Real Estate............................... 1,850,000 863,000 956,000
Provision for Possible Losses on Mortgage Servicing Rights....................... -- -- 1,773,000
Deferred Income Tax (Benefit) Provision.......................................... (4,235,000) 386,000 986,000
Gain on Securities Transactions, net............................................. (33,000) -- (11,000)
Loans Made or Acquired and Held for Sale......................................... (321,000) (1,548,000) (277,560,000)
Proceeds from Loans Held for Sale................................................ 325,000 21,337,000 289,375,000
Gain on Sales of Loans Held for Sale............................................. (4,000) (212,000) (2,696,000)
(Gain) Loss on Sale of Other Real Estate......................................... (83,000) 10,000 (10,000)
(Increase) Decrease in Interest Receivable....................................... (797,000) (224,000) 925,000
(Decrease) Increase in Accrued Expenses and Other Liabilities.................... (1,100,000) 1,677,000 (75,000)
Write-off of Intangibles......................................................... -- -- 449,000
Decrease (Increase) in OtherAssets............................................... 378,000 1,894,000 (136,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities...................................... 3,047,000 25,124,000 11,917,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of Time Deposit from Bank................................................. (1,000,000) -- --
Securities Available for Sale:
Proceeds from Maturities......................................................... 15,422,000 6,835,000 64,135,000
Cash Paid Related to Premium on Securities Matured............................... (371,000) (142,000) (438,000)
Proceeds from Sales Prior to Maturity............................................ 8,504,000 1,026,000 5,649,000
Proceeds from Calls Prior to Maturity............................................ 1,000,000 -- --
Purchases........................................................................ (30,264,000) (16,940,000) (56,736,000)
Securities Held to Maturity:
Proceeds from Calls Prior to Maturity............................................ 8,925,000 -- --
Purchases........................................................................ (40,443,000) (3,485,000) --
Net Decrease in Loans Outstanding.................................................. 903,000 15,119,000 19,626,000
Purchase of Mortgage Servicing Rights.............................................. -- -- (27,000)
Capital Expenditures............................................................... (535,000) (91,000) (143,000)
Payments Received on Other Real Estate............................................. 2,674,000 29,000 7,000
Advances Made on Other Real Estate................................................. (677,000) (937,000) (500,000)
Proceeds from Sale of Other Real Estate............................................ 2,537,000 5,377,000 2,413,000
Payment for Net Liabilities Assumed
Relative to Pilgrim State Bank (Note 3)............................................ -- -- (42,909,000)
Sale of Mortgage Operations........................................................ -- 2,067,000 --
Other.............................................................................. -- -- 29,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities............................ (33,325,000) 8,858,000 (8,894,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Total Deposits.......................................... 5,198,000 (29,744,000) (60,885,000)
Repayment of Note Payable.......................................................... -- -- (750,000)
Redemption of Subordinated Debentures (Note 12).................................... (1,292,000) -- --
Redemption of Class A Preferred Stock (Note 14).................................... (1,033,000) (200,000) --
Cash Dividends on Preferred Stock (Note 14)........................................ (119,000) -- --
Proceeds from Stock Purchase Contracts Exercised (Note 12)......................... -- 164,000 --
Net Proceeds from Sale of Common Stock (Note 2).................................... -- 11,690,000 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities............................ 2,754,000 (18,090,000) (61,635,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents.................................. (27,524,000) 15,892,000 (58,612,000)
Cash and Cash Equivalents, Beginning of Year.......................................... 42,486,000 26,594,000 85,206,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year................................................ $14,962,000 $42,486,000 $ 26,594,000
==================================================================================================================================
Supplemental Cash Flow Disclosures:
Cash paid during year for:
Interest......................................................................... $ 5,948,000 $ 5,019,000 $ 9,337,000
Income Taxes, Net of Refunds..................................................... $ (373,000) $(2,565,000) $ (1,839,000)
==================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- -------------------------------------------------------------------------------
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Ramapo Financial Corporation owns The Ramapo Bank, a full service
commercial bank with six branches located in suburban northern New Jersey. The
Bank's primary source of revenue is providing loans to customers, who are
predominately small and middle market businesses and middle-income individuals.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ramapo
Financial Corporation ("Corporation") and its wholly-owned subsidiaries. During
1993, the shares of several wholly-owned subsidiaries, initially formed to hold
real estate and other collateral acquired through foreclosure, were transferred
from the Corporation to The Ramapo Bank ("Bank") and in March 1994, two
remaining wholly-owned subsidiaries were merged with and into the Corporation.
In June 1993, the Corporation's wholly-owned banking subsidiary, Pilgrim State
Bank, was merged with and into the Bank (see Note 3). In December 1993, RFC
Trading Corporation and RFC Services Corporation were merged with and into the
Corporation. Intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in comformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES
On December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under this standard, debt securities that the
Corporation has both the positive intent and ability to hold to maturity are
carried at amortized cost. Debt securities that the Corporation does not have
the positive intent and ability to hold to maturity, and all marketable equity
securities, are classified as either trading or available for sale and carried
at fair value. Unrealized holding gains and losses on securities classified as
available for sale are carried as a separate component of stockholders' equity,
net of tax.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. During 1995 and 1994, the Corporation classified certain purchased
securities as held to maturity. The Corporation had no securities held for
trading purposes at December 31, 1995 or 1994.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Realized gains and losses, and declines in value other
than temporary, are included in net securities gains (losses) on the statement
of operations. The cost of securities sold is based on the specific
identification method.
Fair value is determined by reference to quoted market prices. See Note 4
for the estimated fair values of the Corporation's investment portfolio.
LOANS
Loans are stated at their principal amount, net of unearned income, if any.
Interest income on loans is credited to income based on principal amounts
outstanding at applicable interest rates. Loan origination and commitment fees
and certain costs are deferred and the net amount is amortized as an adjustment
of the related loan's yield.
NONACCRUAL LOANS
The accrual of interest income on loans is discontinued when it is
determined that such loans are either doubtful of collection or are involved in
a protracted collection process. When interest accruals are discontinued,
accrued but uncollected interest credited to income in the current year is
generally reversed from income and interest which was accrued during the prior
year but was unpaid, if any, is charged off against the allowance for possible
loan losses. While a loan is classified as nonaccrual, collections of interest
and principal are applied as reductions of principal outstanding.
Nonaccrual loans (including those with partial charge-offs) can be returned
to accrual status, even though the loans are not current with respect to the
contractual payments, provided two criteria are met: (1) all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within a reasonable period, and (2) there is a sustained period of
repayment performance (at least six months) by the borrower in accordance with
the contractual terms. Loans that meet the above criteria would be classified as
past due, as appropriate, until they have been brought fully current.
RESTRUCTURED LOANS
Loans are considered troubled debt restructurings if, for economic or legal
reasons, a concession has been granted to the borrower related to the borrower's
financial difficulties that the creditor would not otherwise consider. The
Corporation has restructured certain loans in instances where a determination
was made that greater economic value will be realized under new terms than
through foreclosure, liquidation, or other disposition. Interest is recognized
on restructured loans such that a constant effective interest rate is applied to
the carrying amount of the loan in each period between restructuring and
maturity. A restructured loan that has demonstrated repayment performance (for a
period of six months either before or after the restructuring date) and has an
effective yield at least equal to a market rate at the time of restructuring is
classified as performing in the reporting period immediately following the year
it was disclosed as restructured.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level believed
adequate by management to absorb loan losses on loans currently outstanding. The
allowance is increased by provisions charged to expense and reduced by net
charge-offs. The level of the allowance is based on management's evaluation of
the inherent risks in the loan portfolio after consideration of prevailing and
anticipated economic conditions in the market area, appraised collateral values,
the current status and financial condition of borrowers, and prior loss
experience. The region in which the Bank operates had been affected by depressed
real estate values and a general downturn in economic conditions prior to 1993.
Though some stabilization of real estate values occurred in 1994 and 1995,
economic conditions during 1995 were not conducive to business expansion.
However, any further deterioration or changes in the economy affecting the
region in which the Bank operates may result in increased levels of
nonperforming assets, provisions for possible loan losses, and charge-offs.
LOAN IMPAIRMENT
On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure." SFAS No. 114 and
No. 118 are applicable to all loans with the exception of larger groups of
smaller homogeneous loans that are collectively evaluated for impairment. These
loan groups may include, but are not limited to, credit cards, residential
mortgages and consumer installment loans. SFAS No. 114 and No. 118 also apply to
all loans that are classified as troubled debt restructurings.
- --------------------------------------------------------------------------------
23
<PAGE> 25
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 114 and SFAS No. 118 define an impaired loan as a loan where,
according to current information and events, it is unlikely that the creditor
will be able to collect all amounts due according to the contractual terms of
the loan agreement. Impairment can be measured by the present value of expected
cash flows (net of estimated costs to sell) discounted at the loan's effective
interest rate or the fair value of the collateral if the loan is collateral
dependent. If the value of the impaired loan is less than the recorded
investment in the loan, the Bank will be required to establish a valuation
allowance, or adjust existing valuation allowances, with a corresponding charge
or credit to the provision for loan losses. These Statements apply to fiscal
years beginning after December 15, 1994. The Corporation evaluated impairment
under SFAS No. 114 and No. 118 for those loans that cannot be easily grouped
into homogeneous pools of loans and collectively evaluated for impairment. These
loans generally are commercial and real estate development loans. Because these
loans are collateral-dependent, the Bank primarily uses the fair value of the
collateral to determine impairment of loans. See Notes 6 and 7 for additional
information regarding impairment of loans.
LOAN SERVICING
The Corporation services its portfolio of real estate loans as well as
loans sold to investors. The total of such loans serviced which are owned by
investors and therefore are not included in the accompanying consolidated
balance sheets amounted to approximately $24,677,000 and $33,759,000 at December
31, 1995 and 1994, respectively. Fees earned for servicing loans are reported as
income when the related mortgage payments are collected. Loan servicing costs
are charged to expense as incurred. See Note 16 for additional information
regarding the sale of the mortgage servicing operation.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over estimated useful lives of ten to fifty years for buildings and
improvements, three to eight years for furniture and equipment, and over the
shorter of the useful life or lease term for leasehold improvements.
OTHER REAL ESTATE
Other real estate ("ORE") includes both loan collateral that has been
formally repossessed and collateral that is in the Corporation's possession and
under its control without legal transfer of title. ORE is carried on the books
at the lower of cost or fair value, less estimated costs to sell. Subsequent
valuation adjustments to the fair value of the collateral are charged/credited
to current operations. Carrying costs, such as maintenance and property taxes,
are charged to expense as incurred.
INTANGIBLE ASSETS
Categories of net intangible assets are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights (Note 16).... $123 $163
Core Deposit Premiums............................ 151 254
Premiums on Purchased Home Equity
Lines of Credit............................... 229 356
- --------------------------------------------------------------------------------
$503 $773
================================================================================
</TABLE>
Intangible assets are being amortized over the following periods:
Core Deposit Premiums................ 10 years
Premium on Purchased Home Equity
Lines of Credit.................. 7 years
Purchased Mortgage Servicing Rights.. Estimated average term of the loans
serviced, adjusted for estimated
prepayments.
In 1993, valuation adjustments of mortgage servicing rights of $1,773,000
were charged to operations to reflect current and expected future prepayments on
serviced mortgages (see Note 16). Amortization of intangibles totaled $270,000,
$247,000 and $1,542,000 for 1995, 1994 and 1993, respectively, of which $40,000,
$37,000 and $1,263,000, respectively, consisted of the amortization of purchased
mortgage servicing rights.
DIVIDEND RESTRICTIONS
The Corporation's payment of dividends is restricted by a formal agreement
with the Federal Reserve Bank of New York ("FRB") (see Note 2). New Jersey state
law permits the payment of dividends from the Bank to the Corporation to the
extent that the Bank will have a surplus of not less than 50% of its capital
stock or if not, payment of the dividend will not reduce its surplus. At
December 31, 1995 and 1994, the Bank had aggregate retained earnings of
$8,385,000 and $1,890,000, respectively, available under state law; however, the
Bank is restricted from paying dividends under the terms of the agreement with
the Federal Deposit Insurance Corporation ("FDIC") and the New Jersey Department
of Banking ("State") (see Note 2).
INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return. The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Corporation's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities. See Note 13 for additional information on income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires that the Corporation disclose estimated fair values for its financial
instruments. The fair value and the methodology of estimating fair value of the
other financial instruments for the Corporation are disclosed in the applicable
notes to the accompanying financial statements. A summary of carrying values and
fair values of financial investments is presented in Note 18.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined by dividing net income (loss) less
unpaid cumulative dividends on Class A Preferred Stock.by the weighted average
number of common shares outstanding during each year. The effect of outstanding
stock options (see Note 14) is reflected in the computation of per common share
amounts for 1995. Outstanding options and mandatory stock purchase contracts
(Note 12) in 1994 and 1993 were antidilutive and therefore were not reflected in
the computation of per share amounts for those years. The weighted average
numbers of shares outstanding for computing net income (loss) per share were
8,175,819, 2,874,600 and 1,244,374 for the years ended December 31, 1995, 1994
and 1993, respectively.
STATEMENT OF CASH FLOWS
Cash and cash equivalents, for purposes of reporting cash flows, includes
cash on hand, noninterest bearing balances due on demand from other banks, cash
items in process of collection (generally overnight) and federal funds sold.
NEW FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," in March 1995. This Statement is effective for the year ended December 31,
1996. SFAS No. 121 requires that Long-lived Assets to be held and used by the
Bank be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Corporation has determined that SFAS No.121 will not have a significant effect
on its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 consolidated
financial statements to conform to the 1995 presentation.
- -------------------------------------------------------------------------------
24
<PAGE> 26
- --------------------------------------------------------------------------------
NOTE 2: CAPITAL ADEQUACY AND REGULATORY MATTERS
In November 1992, as a result of a regulatory examination, the Bank entered
into a stipulation and consent to the issuance of an order to cease and desist
("Order") with the FDIC and the State. The Bank was examined by its regulators
as of November 30, 1994. Based on that examination, on May 18, 1995 the Order
was replaced by a Memorandum of Understanding ("MOU") among the FDIC, the State
and the Bank. The MOU requires the Bank to maintain its Tier 1 leverage capital
ratio at not less than 6.0%, to reduce the amount of classified assets to levels
specified in the MOU, and to take various other actions. In addition, the MOU
restricts the Bank from paying dividends on its common stock without the prior
written consent of the FDIC and the State. The FDIC has recently completed
another examination of the Bank as of December 31, 1995, but has not yet issued
its written report.
In November 1993, the FRB entered into a Written Agreement with the
Corporation based on its examination as of June 30, 1993. The Written Agreement
required the Corporation to submit a written plan to achieve and maintain
adequate capital levels, prohibited payment of dividends without prior FRB
approval, placed limits on expenditures, and required additional periodic
reports, among other provisions. The Corporation has since received a full
examination by the FRB as of December 31, 1994 and a limited-scope inspection as
of September 30, 1995. Based on the continued improvement in the Corporation's
operating environment, management believes that the Written Agreement will be
terminated during the first quarter of 1996.
On October 13, 1994, the Corporation completed a rights/community equity
offering ("Offering") in which 6,500,000 shares of common stock were sold at $2
per share, resulting in gross proceeds of $13,000,000. After offering expenses,
$11.7 million of new capital was raised, of which $7,500,000 was contributed to
the Bank's capital. The capital ratios of both the Corporation and the Bank at
December 31, 1995 satisfy the capital stipulations in both the Written Agreement
and the MOU. At December 31, 1995, management believes that they are in full
compliance with the MOU.
The following table reflects the capital ratios as of the specified dates:
<TABLE>
<CAPTION>
================================================================================
REQUIRED
REGULATORY
DECEMBER 31 CAPITAL
1995 1994 RATIOS (%)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATION
Tier 1 leverage capital......... 10.08% 9.16% *
Risk-based capital:
Tier 1....................... 13.37 12.18 4.00
Total (Tier 1 and Tier 2).... 14.66 13.46 8.00
BANK
Tier 1 leverage capital........ 8.62% 7.05% 6.00%
Risk-based capital:
Tier 1....................... 11.45 9.42 4.00
Total (Tier 1 and Tier 2).... 12.74 10.70 8.00
================================================================================
</TABLE>
*Three percent minimum, with most bank holding companies required to maintain an
additional 1% to 2%. Capital adequacy is determined through the examination
process.
NOTE 3: BANK MERGER AND SALE OF ASSETS
In accordance with a definitive Purchase and Assumption Agreement (the
Agreement) with another financial institution dated April 14, 1993, the
Corporation merged its other banking subsidiary, Pilgrim State Bank (Pilgrim),
with the Bank in June 1993. Under the terms of the Agreement, the Corporation
received $820,000 for the stock of Pilgrim from the Bank. Simultaneous to the
merger, the Bank sold most of the assets and liabilities of Pilgrim to the
purchaser.
The purchase price was equal to Pilgrim's total stockholder's equity at the
closing date, minus the net book value of the Pilgrim assets which were retained
by the Bank, plus a premium of $226,000. The Corporation recorded a net loss,
after the writeoff of unamortized goodwill of $121,000. Net assets of Pilgrim
prior to the merger were $5,456,000. Accordingly, because the Bank retained net
assets of approximately $7,994,000 (primarily commercial loans and related
reserves), the Bank paid $2,312,000 to the purchaser.
Net interest and dividend income for Pilgrim was $2,039,000 and the loss
before income taxes was ($107,000) for six months of operations in the year
ended December 31, 1993.
- -------------------------------------------------------------------------------
25
<PAGE> 27
- --------------------------------------------------------------------------------
NOTE 4: SECURITIES
The following is a summary of available for sale securities and held to maturity
securities at the dates indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
HISTORICAL COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES ESTIMATED FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE (In thousands)
U.S. Treasury:
Maturing within 1 year.......... $ 4,516 $ 16 $ -- $ 4,532
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Maturing 1 to 5 years........... 27,597 156 (7) 27,746
- ----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year.......... 44 -- -- 44
Maturing 1 to 5 years........... 213 -- -- 213
Maturing 5 to 10 years.......... 374 -- -- 374
Maturing after 10 years......... 252 -- -- 252
- -----------------------------------------------------------------------------------------------------------------------------------
883 -- -- 883
- -----------------------------------------------------------------------------------------------------------------------------------
Other:
Maturing 1 to 5 years........... 6,154 -- (19) 6,135
Maturing 5 to 10 years.......... 35 -- (3) 32
- -----------------------------------------------------------------------------------------------------------------------------------
6,189 -- (22) 6,167
- -----------------------------------------------------------------------------------------------------------------------------------
$39,185 $172 $(29) $39,328
===================================================================================================================================
HELD TO MATURITY
U.S. Government Agencies:
Maturing within 1 year.......... $ 3,004 $ 48 $ -- $ 3,052
Maturing 1 to 5 years........... 16,526 245 -- 16,771
- -----------------------------------------------------------------------------------------------------------------------------------
19,530 293 -- 19,823
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year.......... 500 3 -- 503
- -----------------------------------------------------------------------------------------------------------------------------------
$20,030 $296 $ -- $20,326
===================================================================================================================================
<CAPTION>
DECEMBER 31, 1994
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury:
Maturing within 1 year.......... $ 5,945 $ -- $ (79) $ 5,866
Maturing 1 to 5 years........... 11,035 -- (232) 10,803
- -----------------------------------------------------------------------------------------------------------------------------------
16,980 -- (311) 16,669
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:.
Maturing within 1 year......... 51 -- -- 51
Maturing 1 to 5 years........... 198 -- -- 198
Maturing 5 to 10 years.......... 347 -- -- 347
Maturing after 10 years......... 338 -- -- 338
- -----------------------------------------------------------------------------------------------------------------------------------
934 -- -- 934
- -----------------------------------------------------------------------------------------------------------------------------------
Other:
Maturing 1 to 5 years........... 51 -- -- 51
Maturing 5 to 10 years.......... 110 -- (1) 109
- -----------------------------------------------------------------------------------------------------------------------------------
161 -- (1) 160
- -----------------------------------------------------------------------------------------------------------------------------------
$18,075 $ -- $(312) $17,763
===================================================================================================================================
HELD TO MATURITY
U.S. Treasury:
Maturing 1 to 5 years........... $ 993 $ -- $ (15) $ 978
- -----------------------------------------------------------------------------------------------------------------------------------
993 -- (15) 978
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Maturing 1 to 5 years........... 1,992 -- (10) 1,982
- -----------------------------------------------------------------------------------------------------------------------------------
1,992 -- (10) 1,982
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing 1 to 5 years........... 500 -- -- 500
- -----------------------------------------------------------------------------------------------------------------------------------
500 -- -- 500
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3,485 $ -- $ (25) $ 3,460
===================================================================================================================================
</TABLE>
Securities at December 31, 1995 and 1994 having a book value of $2,497,000
and $2,139,000, respectively, were pledged as collateral for public deposits and
for other purposes as required by law.
Proceeds from sales and calls prior to maturity of securities available for
sale during 1995 were $9,504,000, resulting in gross gains of $8,000 and no
losses. Proceeds from calls prior to maturity of securities held to maturity
during 1995 were $8,925,000, resulting in gross gains of $25,000 and no losses.
In 1994, proceeds from sales of securities available for sale were $1,026,000,
resulting in gross gains of $1,000 and gross losses of $1,000.
At its October 1995 meeting, the Financial Accounting Standards Board voted
to allow a one-time reclassification of any portion of an enterprise's held to
maturity debt security portfolio without tainting the remaining held to maturity
portfolio. In connection therewith, securities with an amortized cost of
$14,969,000 were transferred from the held to maturity category. Upon transfer,
an unrealized holding gain of $71,800 was recorded.
- -------------------------------------------------------------------------------
26
<PAGE> 28
- -------------------------------------------------------------------------------
NOTE 5: LOANS
The Bank grants various commercial and consumer loans, principally within
New Jersey. A substantial portion of the Bank's commercial loan portfolio
consists of loans for which the purpose was to acquire or develop real estate or
for which the primary source of repayment is the liquidation of the real estate
held as collateral. The Bank's commercial loan portfolio also includes loans
which may be at least partially secured by real estate but for which the
expected source of repayment is the cash flow from the borrower's business.
Accordingly, a substantial portion of the borrowers' ability to honor their
loans is dependent on the success of the real estate industry in the Bank's
market area.
The composition of the loan portfolio, net of unearned income, is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial and commercial real estate.................. $ 96,469 $101,292
Commercial real estate construction.................... 15,177 18,462
Residential real estate mortgage....................... 8,806 10,380
Installment............................................ 40,128 34,211
- --------------------------------------------------------------------------------------------------------------
$160,580 $164,345
==============================================================================================================
</TABLE>
The Bank's loan portfolio has certain concentrations of affiliated
borrowers. The three largest concentrations, all of which are involved in
commercial and residential real estate development and management, aggregate
$35,233,000 and $41,313,000 at December 31, 1995 and 1994, respectively. The
largest borrower concentration consists of loans to a group of affiliated
borrowers with an aggregate balance of $15,430,000 and $15,433,000 at December
31, 1995 and 1994, respectively. A majority of these loans are secured by first
mortgages on commercial properties where third party loan payments paid directly
to the Bank are the primary source of repayment.
A second concentration involves loans to certain affiliated real estate
development companies whose principal owners have had a long standing and
excellent relationship with the Bank. Outstanding balances for this group at
December 31, 1995 and 1994 were $12,245,000 and $16,871,000, respectively. All
such loans were performing as of the respective year end dates.
Another relationship consists of nine loans, primarily for the construction
or renovation of condominium units, totaling $7,558,000 and $9,009,000 at
December 31, 1995 and 1994, respectively.
Loans for which the accrual of interest has been discontinued totaled
$4,190,000 and $7,548,000 at December 31, 1995 and 1994, respectively.
Restructured loans for which terms have been modified totaled $1,702,000 and
$5,983,000 at December 31, 1995 and 1994, respectively. At December 31, 1995,
the Corporation had no commitments to advance funds to borrowers with
restructured terms.
Interest income on nonaccrual loans, additional interest income on
restructurings that would have been recognized under the original terms of such
loans, and the interest income actually received, are summarized below:
<TABLE>
<CAPTION>
=============================================================================================================
YEAR ENDED
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Interest income which would have been recognized on nonaccrual loans.................. $1,265 $1,388
Contractual interest income which would have been recognized on restructured loans.... 18 325
Interest income received.............................................................. (229) (472)
- --------------------------------------------------------------------------------------------------------------
Interest income not recognized........................................................ $1,054 $1,241
==============================================================================================================
</TABLE>
NOTE 6: IMPAIRED LOANS AND TROUBLED DEBT RESTRUCTURING
The Corporation adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures", as of January 1, 1995. SFAS No.
114 requires that certain impaired loans be measured based on the present value
of expected future cash flows discounted at the loans' original effective
interest rate. As a practical expedient, impairment may be measured based on the
loans' observable market price or the fair value of the collateral if the loan
is collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
The Corporation has previously measured the allowance for possible loan
losses using methods similar to those prescribed in SFAS No. 114. As a result of
adopting these statements, no additional allowance for possible loan losses was
required as of January 1, 1995.
At December 31, 1995, the Corporation's impaired loans totaled $3,459,000,
the amount of its commercial nonaccrual loan portfolio. All such loans are
collateralized with real estate and have been written down to the fair value of
the collateral. Since the Corporation's recorded investment in these loans is
less than or equal to the fair value of the collateral, no valuation allowances
were required.
At December 31, 1995, the Corporation had one loan that resulted from a
troubled debt restructuring that occurred prior to the adoption of SFAS No. 114.
The effect on income if interest on this loan had been recognized at its
original contractual rate during the year was not significant.
- -------------------------------------------------------------------------------
27
<PAGE> 29
NOTE 7: ALLOWANCE FOR POSSIBLE LOAN LOSSES
The level of the allowance is based on management's evaluation of the
inherent risks in the loan portfolio after consideration of prevailing and
anticipated economic conditions in the market area, the current status and
credit standing of borrowers, and prior loss experience. The adequacy of the
allowance is reviewed no less frequently than quarterly by senior management and
the respective Boards of Directors of the Bank and the Corporation.
Considerable uncertainty exists as to the ultimate performance of certain
loans as a result of recent economic conditions in the region. These
uncertainties could result in the Corporation's experiencing increased levels of
nonperforming loans, greater charge-offs and increased provisions for possible
loan losses in subsequent periods when losses become known.
The following summarizes the activity in the allowance for possible loan
losses:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Balance, beginning of year............................................... $ 6,501 $ 7,499 $ 7,670
Allowance related to loans sold (Note 3)............................... -- -- (400)
Provision charged to expense........................................... 500 1,221 4,440
Recoveries of loans previously charged off............................. 1,546 277 340
Loans charged off...................................................... (3,694) (2,496) (4,551)
- ------------------------------------------------------------------------------------------------------------
Balance, end of year...................................................... $ 4,853 $ 6,501 $ 7,499
============================================================================================================
</TABLE>
NOTE 8: NONPERFORMING ASSETS
Nonperforming assets at the indicated dates are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
90 DAYS
PAST DUE
OR MORE NONACCRUAL TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Commercial and commercial real estate.............................. $ 37 $2,460 $ 2,497
Commercial real estate construction................................ -- 999 999
Residential real estate mortgage................................... 53 375 428
Installment........................................................ 51 356 407
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans....................................... $141 $4,190 $ 4,331
================================================================================================================
Other real estate (Notes 1 and 9)..................................... 4,408
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming assets...................................... $ 8,739
================================================================================================================
Ratio of total nonperforming assets to total assets................... 3.56%
===============================================================================================================
DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
90 DAYS
PAST DUE
OR MORE NONACCRUAL TOTAL
- ----------------------------------------------------------------------------------------------------------------
Loans:
Commercial and commercial real estate............................... $ 20 $5,086 $ 5,106
Commercial real estate construction................................. -- 1,531 1,531
Residential real estate mortgage.................................... 216 509 725
Installment......................................................... 4 422 426
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans........................................ $240 $7,548 $ 7,788
================================================================================================================
Other real estate (Notes 1 and 9)...................................... 9,995
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming assets....................................... $17,783
================================================================================================================
Ratio of total nonperforming assets to total assets.................... 7.47%
================================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
28
<PAGE> 30
NOTE 9: OTHER REAL ESTATE
The following table summarizes the investment in other real estate by
project or property type at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROJECT OR PROPERTY TYPE NUMBER AMOUNT NUMBER AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial real estate:
Raw land and construction projects...................................... 5 $2,667 6 $6,859
Retail/office........................................................... 3 4,082 3 4,673
- -------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate........................................ 8 6,749 9 11,532
- -------------------------------------------------------------------------------------------------------------------------------
Residential real estate:
One to four family...................................................... 2 270 1 97
- -------------------------------------------------------------------------------------------------------------------------------
Total other real estate............................................... 10 7,019 10 11,629
Valuation allowance....................................................... (2,611) (1,634)
- -------------------------------------------------------------------------------------------------------------------------------
$4,408 $9,995
===============================================================================================================================
</TABLE>
A summary of activity in other real estate for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Balance, beginning of year, net.......................................................................... $9,995 $10,332
Transfers from nonaccrual loans.......................................................................... 648 4,967
Transfers from accrual loans............................................................................. 66 --
Advances................................................................................................. 677 937
Sales of properties...................................................................................... (2,454) (5,377)
Payments from borrowers.................................................................................. (2,674) (29)
Charge-offs or write-downs............................................................................... (873) (86)
Increase in valuation allowance.......................................................................... (977) (749)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year, net................................................................................ $4,408 $ 9,995
==================================================================================================================================
</TABLE>
An analysis of the valuation allowance for other real estate for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Balance, beginning of year............................................................. $1,634 $ 885 $ --
Provision charged to expense......................................................... 1,850 863 956
Write-downs to fair value and net losses incurred on sales........................... (873) (64) (121)
Other................................................................................ -- (50) 50
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year................................................................... $2,611 $1,634 $885
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10: LOANS TO RELATED PARTIES
Loans to related parties include loans made to directors and executive
officers (and their affiliated interests) of the Corporation and its
subsidiaries. The following analysis shows the activity of related party loans
during 1995:
<TABLE>
<CAPTION>
==================================================================================================================================
(In thousands)
<S> <C>
Balance, December 31, 1994............................................................................................. $266
Additions ........................................................................................................... 566
Repayments .......................................................................................................... (166)
Resignation of officers.............................................................................................. (7)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ............................................................................................ $659
=================================================================================================================================
</TABLE>
All related party loans were current as to interest and principal at December
31, 1995.
- -------------------------------------------------------------------------------
29
<PAGE> 31
- ------------------------------------------------------------------------------
NOTE 11: PREMISES AND EQUIPMENT
At December 31, premises and equipment consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land and improvements......................................................... $ 286 $ 286
Buildings and improvements.................................................... 2,743 2,676
Leasehold improvements........................................................ 578 454
Furniture and equipment....................................................... 2,131 1,920
- -----------------------------------------------------------------------------------------------------
5,738 5,336
Less - Accumulated depreciation and amortization.............................. 3,063 2,752
- -----------------------------------------------------------------------------------------------------
$2,675 $2,584
=====================================================================================================
</TABLE>
NOTE 12: OTHER BORROWINGS
In June 1985, the Corporation issued 11% subordinated debentures due June
1995 with mandatory stock purchase contracts ("Equity Contracts"). The Equity
Contracts obligated the holders to purchase shares of common stock at a price of
$13.625 per share on June 1, 1994. Payment for shares could be made in cash or
by the surrender of 11% subordinated debentures equal to the purchase price.
During 1994, the remaining $4,799,000 of Equity Contracts were exercised and
converted into 352,075 shares of common stock. Payment for these shares was made
primarily through the surrender of $4,633,000 of the 11% subordinated
debentures, with the balance consisting of cash payments. The balance
outstanding, net of unamortized debt discount at December 31, 1994 was
$1,292,000.
On February 1, 1995, the Corporation redeemed, prior to maturity, the
remaining $1,292,000 of subordinated debentures at par, in accordance with
provisions of the original issuance and with regulatory approval.
NOTE 13: INCOME TAXES
The current and deferred amounts of the (benefit) provision for income taxes
as of December 31 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal........................................................... $ 21 $(671) $(2,029)(A)
State............................................................. 2 -- 47
Deferred............................................................ 1,039 386 986
- ---------------------------------------------------------------------------------------------------
Total current and deferred.......................................... 1,062 (285) (996)
- ---------------------------------------------------------------------------------------------------
Benefit of reduction in deferred tax asset valuation allowance...... (5,274) -- --
Total benefit for income taxes...................................... $(4,212) $(285) $ (996)
===================================================================================================
</TABLE>
(A) Realized in 1994 through the refund of taxes paid in previous years.
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and for
income tax purposes.
- --------------------------------------------------------------------------------
30
<PAGE> 32
- -------------------------------------------------------------------------------
NOTE 13: INCOME TAXES (CONTINUED)
Cumulative temporary differences giving rise to a significant portion of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
===================================================================================================
DEFERRED ASSET
(LIABILITY)
DECEMBER 31
- ---------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Allowance for possible losses on loans and other real estate............... $2,138 $ 3,202
Gain on restructured loans................................................. 307 32
Depreciation and amortization.............................................. (314) (400)
Net nonaccrual interest (charge-offs) income............................... (162) 110
Accrued liabilities not currently deductible............................... 100 463
Federal and state net operating loss carryforwards......................... 1,847 1,511
Alternative minimum tax credits............................................ 311 311
Net holding (gains) losses on securities available for sale................ (57) 125
Other...................................................................... 8 45
- ---------------------------------------------------------------------------------------------------
4,178 5,399
Valuation allowance........................................................ -- (5,399)
- ---------------------------------------------------------------------------------------------------
Net deferred tax asset included in Other Assets....................... $4,178 $ --
===================================================================================================
</TABLE>
Because of the significant operating losses in 1994, 1993 and 1992, the
Corporation recorded a full valuation allowance against its net deferred tax
asset at December 31, 1994. During 1995, management concluded that this
valuation allowance was no longer necessary because sufficient positive evidence
had accumulated. Such positive evidence included five consecutive quarters of
profitable operations, significant reductions in the level of nonperforming
assets and related expenses, continued strong net interest margins and operating
expense reductions.
At December 31, 1995, the Corporation has a Federal net operating loss
carryforward of $3.3 million, of which $2.5 million expires in 2009 and the
remainder in 2010, and a state net operating loss carryforward of $11.9 million
which expires as follows: $800,000 in 1998, $2.0 million in 1999, $6.7 million
in 2000, $1.6 million in 2001 and $800,000 in 2002.
Federal income tax returns for the years 1991, 1992 and 1993 are currently
being examined by the Internal Revenue Service. Management does not anticipate
that the results of this examination will have a material effect on the
Corporation's consolidated financial position or results of operations.
A reconciliation of income taxes calculated at the U. S. statutory rate of
34% to the actual income tax benefit is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Statutory provision (benefit).............................................. $ 692 $(429) $(3,185)
Reduction in Federal taxes resulting from tax-exempt income................. (23) (31) (196)
State taxes on income, net of Federal tax benefit........................... 122 -- 31
Tax refund greater than receivable recorded................................. (81) (285) --
(Decrease) increase in valuation allowance for deferred tax assets.......... (5,274) 920 2,488
Other....................................................................... 352 (460) (134)
- --------------------------------------------------------------------------------------------------------------------
$(4,212) $(285) $ (996)
====================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE> 33
- --------------------------------------------------------------------------------
NOTE 14: STOCKHOLDERS' EQUITY
On December 28, 1993, the Corporation amended its Certificate of
Incorporation approving the authorization of 1,950 shares of Class A Cumulative
Preferred Stock ("Preferred Stock"), without par value. The holder of this
nonvoting stock, which was exchanged for the forgiveness of a note payable, is
entitled to cumulative cash dividends payable quarterly, commencing on April 10,
1994. The dividends are payable when they are declared by the Board of
Directors, provided that the Corporation's and the Bank's leverage capital
ratios shall be at least equal to 4% and 6%, respectively. Such dividend
payments are also subject to regulatory approval. At December 31, 1995,
preferred stock dividends in arrears totaled $93,000.
The dividends are payable quarterly at the following annual rates:
<TABLE>
<CAPTION>
===========================================================
RATE
<S> <C>
1994 ................................................. 6%
1995 ................................................. 7%
1996 ................................................. 8%
1997.................................................. 9%
Thereafter............................................ 10%
===========================================================
</TABLE>
The Preferred Stock has a stated value of $1,000 per share and a
liquidation preference of $1,000 per share plus accrued dividends. The Preferred
Stock is not convertible and is redeemable for $1,000 per share plus accrued
dividends at the option of the Corporation, with the exception of 200 shares
which were redeemed on November 30, 1994. These 200 shares were required to be
redeemed for $1,000 per share plus accrued dividends upon completion of the
Offering.
During 1995, the Corporation redeemed 1,033 shares of Preferred Stock and
paid cumulative dividends on that stock of approximately $108,000. Cumulative
dividends of $11,000 were also paid in 1995 with respect to the $200,000 of
redeemable Preferred Stock that was redeemed on November 30, 1994. All
redemptions and dividend payments received regulatory approval.
Under the 1982 Incentive Stock Option Plan, no additional shares of the
Corporation's common stock were available for grant. Options granted were priced
at the fair market value at the date of grant ($18.125), and are exercisable at
25% annually beginning in the second year and expire ten years after the date of
grant which was 1986. At December 31, 1995, there were 12,000 options
outstanding under this plan, all of which were exercisable. Under the 1986
Nonstatutory Stock Option Plan, 100,000 shares of common stock are available for
grant.
In 1994, concurrent with an employment contract, the Corporation entered
into a nonstatutory stock option agreement ("Option Agreement") with the new
president and CEO. Pursuant to the Option Agreement, the Corporation granted an
option to purchase shares of common stock up to an aggregate value of $500,000.
The exercise of these options was conditioned upon the successful completion of
the Offering, which was achieved on October 13, 1994 (see Note 2).
The options were granted in three separate tiers as follows: (1) Tier 1
options having an aggregate exercise price of $170,000 exercisable at the
Offering Price (the Offering Price was $2 per share), (2) Tier 2 having an
aggregate exercise price of $165,000 exercisable at the price at which the
Common Stock is sold in the Offering plus 50% of the difference between the
adjusted book value of the shares, as defined in the Option Agreement, and the
Offering Price ($2.32 per share), and (3) Tier 3 Options for stock having an
aggregate exercise price of $165,000 exercisable at the greater of the Offering
Price or the adjusted book value of the shares ($2.63 per share).
Twenty-five percent of the Tier 1, 2 and 3 options become exercisable one,
two and three years, respectively, after March 17, 1994 (the effective date).
The remaining options for each tier become exercisable in 25% increments on each
of the three subsequent anniversaries from the applicable effective date. The
Option Agreement further provides that the vesting schedule will be accelerated
and all options will become exercisable upon a "change in control," as defined
in the contract. All unexercised options expire seven years from the effective
date. In addition, exercise of the options is also subject to the Corporation's
achieving certain annual performance standards relating to profitability and
return on equity.
At the annual meeting of stockholders held on May 16, 1995, two additional
stock option plans were approved. The first, the Ramapo Financial Corporation
1995 Employee Stock Option Plan ("Employee Plan"), provides for the granting of
incentive stock options and nonqualified stock options to officers and other
employees of the Corporation and its subsidiaries. The maximum number of shares
of common stock of the Corporation, $1 par value, that may be made subject to
options granted pursuant to the Employee Plan is 750,000. Options shall have a
term of no more than ten years from the date of grant. Exercisability of the
options is determined by a committee of the Board of Directors at the time of
grant; in general, no option may be exercisable within six months of the date it
is granted. The minimum exercise price per share for each option granted is the
last sale price for such shares on NASDAQ on the date of grant. On June 8, 1995,
the Corporation granted incentive options to purchase 255,000 shares of its
common stock at $3.8125 per share.
The second plan, the Ramapo Financial Corporation 1995 Stock Option Plan
for Nonemployee Directors ("Directors' Plan"), provides for the granting of
nonqualified stock options to nonemployee directors of the Corporation and its
subsidiaries. The maximum number of shares of common stock, $1 par value, that
may be made subject to options granted pursuant to the Directors' Plan is
200,000. In accordance with the terms of the Directors' Plan, a one-time grant
of years of service options was made effective May 16, 1995 totaling 65,000
shares subject to option. Such options became exercisable six months after their
grant. The exercise price of $3.50 was determined by the last sale price on the
date of grant. The Directors' Plan also provides for annual grant options to be
granted in 1996 and annually thereafter until May 16, 2005, the expiration date
of the Directors' Plan. Each eligible director will automatically be granted
such an option to purchase 1,800 shares. A total of 50% of such options become
exercisable after six months from the date of grant with the remainder becoming
exercisable after eighteen months from the date of grant. The exercise price per
share will be determined by the last sale price on the date of grant.
As of December 31, 1995, there were 1,280,964 shares reserved for future
issuance under these Plans.
Option activity for the years ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
==================================================================================================================
1995 1994 1993
NUMBER PRICE NUMBER PRICE NUMBER PRICE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year........... 230,934 12,000 58,000
Options granted...................... 320,000 $3.50-$ 3.81 218,934 $2.00-$ 2.63 -- $ --
Options cancelled.................... (5,500) 3.81 -- -- (46,000) 18.13
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year................. 545,434 2.00- 18.13 230,934 2.00- 18.13 12,000 18.13
==================================================================================================================
Options exercisable, end of year..... 139,375 $3.50-$18.13 12,000 $18.13 12,000 $18.13
==================================================================================================================
</TABLE>
32
<PAGE> 34
- --------------------------------------------------------------------------------
NOTE 15: COMMITMENTS AND CONTINGENCIES
The consolidated balance sheets as of December 31, 1995 and 1994 do not
reflect various commitments relating to financial instruments which are used in
the normal course of business. These instruments include commitments to extend
credit and letters of credit. These financial instruments carry various degrees
of credit risk, which is defined as the possibility that a loss may occur from
the failure of another party to perform according to the terms of the contract.
Management does not anticipate that the settlement of these financial
instruments will have a material adverse effect on the Corporation's financial
position or results of operations.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. In the normal course of business, the
Corporation receives a fee for providing a commitment. The Corporation was
committed to advance $28,247,000 and $29,840,000 to its borrowers as of December
31, 1995 and 1994, respectively. The majority of such commitments expire within
one year. These commitments include a $300,000 revolving line of credit, at the
Bank's base rate, to a related party.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Corporation has entered
into standby letters of credit contracts with its customers totaling $620,000
and $462,000 as of December 31, 1995 and 1994, respectively, which generally
expire within one year.
The Corporation and its subsidiaries lease land, buildings and equipment in
several locations for their banking facilities under operating leases which
expire at various dates through 1999 but which contain certain renewal options.
Total rent expense was approximately $154,000, $202,000 and $600,000, for 1995,
1994 and 1993, respectively.
On March 1, 1995, the Corporation entered into a five-year license
agreement with its banking software provider. Minimum annual payments under this
agreement are expected to be approximately $66,000.
At December 31, 1995, aggregate annual minimum rental commitments under
noncancellable leases having an initial or remaining term of more than one year
are as follows:
<TABLE>
================================================================================
<S> <C>
1996 ............................................................... $113,000
1997 ............................................................... 115,000
1998 ............................................................... 87,000
1999 ............................................................... 42,000
- --------------------------------------------------------------------------------
$357,000
================================================================================
</TABLE>
It is expected that in the normal course of business leases that expire
will be renewed or replaced by leases of other properties; thus it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1996.
Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. The reserve
balances aggregated $3,172,000 and $2,889,000 at December 31, 1995 and 1994,
respectively.
The Corporation and its subsidiaries are parties, in the ordinary course of
business, to litigation involving collection matters, contract claims and other
miscellaneous causes of action. Management does not consider that any such
proceedings depart from usual, routine litigation and in their judgment, the
Corporation's consolidated financial position and results of operations will not
be affected materially by any present proceedings.
NOTE 16: SALE OF MORTGAGE SERVICING
In January 1994, the Bank sold the mortgage servicing portion of its
mortgage-related activities. The sale price was equivalent to .57% of the unpaid
principal balance of loans within the servicing portfolio which were less than
sixty days past due. Under the terms of the agreement, a portion of the purchase
price was held in a trust for a period of eleven months, at which time the
purchase price would be adjusted based upon specified prepayment rates. In
December 1994, the purchase price was adjusted in accordance with the terms of
the agreement, and the Corporation recorded $270,000 of income previously held
in the trust.
The Corporation recorded a total provision of $2,723,000 in the
accompanying 1993 consolidated statement of operations, of which $1,773,000
relates to valuation adjustments resulting from an impairment of the purchased
mortgage servicing rights asset and $303,000 for an impairment of the excess
servicing receivables asset. The additional provision of $647,000 in 1993
primarily results from loss contingencies associated with the contract for sale.
Net mortgage servicing losses related to the mortgage servicing portion of
the Bank's mortgage-related activities amounted to approximately $3,002,000 for
the year ended December 31, 1993.
- -------------------------------------------------------------------------------
33
<PAGE> 35
- -------------------------------------------------------------------------------
NOTE 17: BENEFIT PLANS
The Corporation and its subsidiaries have a savings plan for all employees
under which the Corporation is required to match employee contributions up to 5%
of each participant's annual compensation.
In 1989, the Corporation and its subsidiaries adopted a supplemental income
plan for certain key employees which required the Corporation to make annual
contributions to the plan for a period of five years. The types of benefits
which may be granted under the supplemental income plan include (a) a
preretirement death benefit payable in ten annual installments if the
participant dies during active employment, (b) a severance benefit payable in a
lump sum if termination occurs other than through death, retirement, permanent
disability or termination for specified causes and (c) a retirement benefit
payable in ten annual installments following retirement after attainment of age
65. At December 31, 1995, seven current and former employees or their
beneficiaries were participating in this plan. The Corporation accrues for the
liability during the period of active employment, in accordance with accounting
for deferred compensation contracts.
Charges to operations for the above plans for the years ended December 31,
1995, 1994 and 1993 were $146,000, $120,000 and $237,000, respectively.
In December, 1990, the Financial Accounting Standards Board issued a
standard on accounting for post-retirement benefits other than pensions. This
standard requires that the expected cost of post-retirement benefits be charged
to expense during the years the employees render service. Since adoption in
1993, this standard has not had any effect on the Corporation's financial
statements because the Corporation does not have any post-retirement benefits.
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of fair value versus the carrying value of the
Corporation's financial instruments. For the Corporation, as for most financial
institutions, the bulk of its assets and liabilities are considered financial
instruments. Many of the Corporation's financial instruments lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction. It is also the Corporation's general practice and
intent to hold its financial instruments to maturity and not engage in trading
or sales activities. Therefore, significant estimations and present value
calculations were used by the Corporation for the purpose of this disclosure.
Estimated fair values have been determined by the Corporation using the
best available data and an estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates, it is assumed that estimated fair values generally approximate the
recorded book balances.
The estimation methodologies used, the estimated fair values, and the
record book balances at December 31, 1995 and 1994, were as follows:
Financial instruments actively traded in the secondary market and which
have been valued using available market prices.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $14,962,000 $14,962,000 $42,486,000 $42,486,000
Securities available for sale at fair value (Note 4) .... 39,328,000 39,328,000 17,763,000 17,763,000
Securities held to maturity (Note 4) .................... 20,030,000 20,326,000 3,485,000 3,459,000
Redeemable subordinated debentures (Note 12) ............ -- -- 1,292,000 1,266,000
========================================================================================================================
</TABLE>
Financial instruments with stated maturities have been valued using a present
value discounted cash flow with a discount rate approximating current market for
similar assets and liabilities. Financial instrument assets with variable rates
and financial instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the recorded book
balance.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due from bank - interest-bearing......................... $ 1,000,000 $ 1,005,000 $ -- $ --
Gross Loans.............................................. 162,028,000 162,271,000 165,700,000 161,752,000
Deposits................................................. 217,890,000 218,096,000 212,521,000 212,218,000
==========================================================================================================================
</TABLE>
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
There is no material difference between the notional amount and the
estimated fair value of off-balance-sheet unfunded loan commitments which
totaled $28,247,000 and $29,840,000 at December 31, 1995 and 1994, respectively
and are generally priced at market at time of funding. Standby letters of credit
totaling $620,000 and $462,000 as of December 31, 1995 and 1994, respectively,
are based on fees charged for similar agreements and are also assumed to have no
material difference in fair value to off-balance-sheet value. See also Note 15
for additional discussion relating to these off-balance-sheet activities. At
December 31, 1995 and 1994, fees related to the unexpired terms of letters of
credit were not significant.
- --------------------------------------------------------------------------------
34
<PAGE> 36
- --------------------------------------------------------------------------------
NOTE 19: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS (In thousands)
<S> <C> <C>
Cash and Due from Banks.............................................................................. $ 273 $ 303
Interest-Bearing Time Deposits....................................................................... 3,083 5,288
Investment in Bank Subsidiary (Equity Method)........................................................ 23,713 16,821
Other Assets......................................................................................... 488 796
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS....................................................................................... $27,557 $23,208
LIABILITIES
Other Borrowings..................................................................................... $ -- $ 1,292
Other Liabilities.................................................................................... 308 161
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities.................................................................................. 308 1,453
STOCKHOLDERS' EQUITY
Class A Preferred Stock ............................................................................ 717 1,750
Common Stock......................................................................................... 8,160 8,160
Capital in Excess of Par Value....................................................................... 13,101 13,101
Retained Earnings (Deficit).......................................................................... 5,479 (650)
Net Unrealized Holding Gains (Losses) on Securities Available for Sale............................... 86 (312)
Treasury Stock....................................................................................... (294) (294)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity......................................................................... 27,249 21,755
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................................... $27,557 $23,208
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Income
Mortgage Application and Servicing Fees............................................... $ -- $ 151 $ 1,229
Management Fees from Subsidiaries..................................................... -- -- 1,307
Service Fees from Subsidiaries ....................................................... -- -- 3,810
Rental Income from Subsidiaries....................................................... 165 180 --
Interest on Time Deposit at Subsidiary Bank........................................... 195 70 41
Other Income.......................................................................... 1 90 66
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Income.............................................................. 361 491 6,453
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses....................................................................... 603 1,383 7,274
Loss before Income Taxes and Equity in
Undistributed Income (Loss) of Subsidiaries........................................... (242) (892) (821)
Income Tax Provision..................................................................... 5 -- 30
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before Equity in Undistributed Income (Loss)
of Subsidiaries....................................................................... (247) (892) (851)
Equity in Undistributed Income (Loss) of Subsidiaries.................................... 6,495 (85) (8,121)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)..................................................................... $6,248 $ (977) $(8,972)
==================================================================================================================================
</TABLE>
(A) No Federal income tax is applicable to the income received from subsidiaries
since the parent company and subsidiaries file a consolidated Federal income tax
return.
- --------------------------------------------------------------------------------
35
<PAGE> 37
- --------------------------------------------------------------------------------
NOTE 19: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
(PARENT COMPANY ONLY) (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss).................................................................... $ 6,248 $ (977) $(8,972)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Equity in Undistributed (Income) Loss of Subsidiaries........................... (6,495) 85 8,121
Depreciation and Amortization................................................... 116 118 262
Write-off of Goodwill........................................................... -- -- 348
Decrease in Other Assets........................................................ 193 1,550 413
Increase (Decrease) in Other Liabilities........................................ 147 (670) (68)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities........................................ 209 106 104
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net Decrease in Loans Outstanding.................................................... -- -- 179
Capital Expenditures................................................................. -- -- (16)
Additional Equity Investment in Subsidiary........................................... -- (7,500) (124)
Repayment of Investment in Bank Subsidiary Sold...................................... -- -- 820
==================================================================================================================================
Net Cash (Used In) Provided By Investing Activities.................................... -- (7,500) 859
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayment of Note Payable............................................................ -- -- (750)
Redemption of Subordinated Debentures............................................... (1,292) -- --
Redemption of Class A Preferred Stock............................................... (1,033) (200) --
Cash Dividends on Preferred Stock.................................................... (119) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from Stock Purchase Contracts Exercised.................................... -- 164 --
Proceeds from Sale of Common Stock.................................................. -- 11,690 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Financing Activities.................................... (2,444) 11,654 (750)
- ----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents................................... (2,235) 4,260 213
Cash and Cash Equivalents, Beginning of Year........................................... 5,591 1,331 1,118
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year................................................. $ 3,356 $ 5,591 $ 1,331
==================================================================================================================================
</TABLE>
The parent company's resources available to meet its cash obligations
subsequent to December 31, 1995 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits.
The parent company's cash obligations subsequent to December 31, 1995
primarily include (1) fees relating to a consulting agreement entered into with
the former chief executive officer, (2) additional equity investments in its
bank subsidiary as may be necessary for the bank to maintain certain regulatory
capital levels, (3) dividends on preferred stock, and (4) other general
obligations.
Based on current resources discussed above, management expects to meet its
obligations at the parent company level for the foreseeable future.
- --------------------------------------------------------------------------------
36
<PAGE> 38
- --------------------------------------------------------------------------------
NOTE 20: SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
Major categories of other expense for the indicated periods are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Legal (a)................................................................................ $ 457 $ 532 $ 940
Postage and freight ..................................................................... 171 202 287
Stationery and printing.................................................................. 198 137 277
FDIC insurance assessment................................................................ 398 684 1,037
Audit and examinations .................................................................. 259 288 538
Telephone ............................................................................... 165 214 399
Consulting fees ......................................................................... 325 349 314
Credit reports/appraisal fees ........................................................... 156 244 851
Bonding and insurance ................................................................... 241 353 396
Amortization of intangible assets ....................................................... 270 247 1,542
Provision for possible losses on purchased
mortgage servicing rights (Note 15).................................................... -- -- 1,773
Provision for possible losses on excess
servicing receivable (Note 15)......................................................... -- -- 303
Loss on sale of mortgage operations (Note 15)............................................ -- -- 647
Other losses ............................................................................ 51 232 599
All other expenses ...................................................................... 754 1,158 1,492
- ---------------------------------------------------------------------------------------------------------------------------------
$3,445 $4,640 $11,395
=================================================================================================================================
</TABLE>
(a) Includes $360,000, $543,000 and $758,000 for 1995, 1994 and 1993,
respectively, paid to a law firm of which two directors of the Corporation are
principals. Payments are higher than total recorded expense in 1994 due to the
difference in the timing of cash payments and expense accruals.
- --------------------------------------------------------------------------------
37
<PAGE> 39
- --------------------------------------------------------------------------------
NOTE 21: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the years ended December
31, 1995 and 1994 is unaudited. However, in the opinion of management, all
adjustments, which include normal recurring adjustments necessary to present
fairly the results of operations for the periods, are reflected. Results of
operations for the periods are not necessarily indicative of the results of the
entire year or any other interim period.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest and dividend income.................................. $4,399 $4,610 $4,729 $4,605
Total interest expense ............................................. 1,357 1,612 1,692 1,445
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income.................................. 3,042 2,998 3,037 3,160
Provision for possible loan losses.................................. 450 225 125 (300)(A)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for
possible loan losses ............................................ 2,592 2,773 2,912 3,460
Total other income ................................................. 719 577 545 606
Total other expense ................................................ 2,868 2,840 2,906 3,534
Net income.......................................................... 405 466 502 4,875(B)
Net income per common share ........................................ $ .05 $ .05 $ .06 $ .59
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1994
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest and dividend income.................................. $ 3,476 $ 3,571 $3,759 $ 4,113
Total interest expense ............................................. 1,274 1,264 1,203 1,217
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income.................................. 2,202 2,307 2,556 2,896
Provision for possible loan losses.................................. 371 257 183 410
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for
possible loan losses ............................................ 1,831 2,050 2,373 2,486
Total other income ................................................. 864 699 640 1,119
Total other expense ................................................ 3,485 3,141 3,047 3,651
Net (loss) income .................................................. (790) (392) (34) 239
Net (loss) income per common share ................................. $ (.66) $ (.31) $ (.04) $ .03
=================================================================================================================================
</TABLE>
(A) Due to a $1.1 million loan recovery in the fourth quarter, the Corporation
recaptured $300,000 of loan loss provisions previously charged to
operations in 1995.
(B) Includes tax benefits of $4.3 million, primarily due to the reversal of a
valuation allowance against the Corporation's net deferred tax asset.
- --------------------------------------------------------------------------------
38
<PAGE> 40
ARTHUR ANDERSEN LLP
To the Stockholders and
Board of Directors of
Ramapo Financial Corporation:
We have audited the accompanying consolidated balance sheets of Ramapo
Financial Corporation (a New Jersey corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ramapo
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Arthur Anderson LLP
Roseland, New Jersey
January 17, 1996
39
<PAGE> 41
- --------------------------------------------------------------------------------
RAMAPO FINANCIAL CORPORATION
OFFICERS & DIRECTORS OF RAMAPO FINANCIAL CORPORATION
-----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
OFFICERS MORTIMER J. O'SHEA JANET M. MALOY STEVEN KURDYLA
President and Corporate Secretary Chief Auditor
Chief Executive Officer
LARS SWANSON JOSEPH MANCINI
ERWIN D. KNAUER Assistant Vice President/ Senior Auditor
Senior Vice President Assistant Secretary
WALTER A. WOJCIK, JR.
Treasurer
-----------------------------------------------------------------------------------------------------------------------
DIRECTORS VICTOR C. OTLEY, JR. ERWIN D. KNAUER RICHARD S. MILLER
Chairman of the Board President Attorney
Attorney The Ramapo Bank Williams, Caliri, Miller & Otley
Williams, Caliri, Miller & Otley A Professional Corporation
A Professional Corporation LOUIS S. MILLER
Retired MORTIMER J. O'SHEA
DONALD W. BARNEY Consultant to President and
Treasurer R.D. Hunter & Company Chief Executive Officer
Union Camp Corporation
JAMES R. KAPLAN
Chairman, CEO and President
Cornell Dubiller Electronics, Inc.
THE RAMAPO BANK
OFFICERS & DIRECTORS OF THE RAMAPO BANK
-----------------------------------------------------------------------------------------------------------------------
OFFICERS MORTIMER J. O'SHEA WILLIAM OLB STEVEN KURDYLA
Chairman of the Board and Senior Vice President Chief Auditor
Chief Executive Officer
WALTER A. WOJCIK, JR. JOSEPH MANCINI
ERWIN D. KNAUER Senior Vice President Senior Auditor
President Treasurer
DETLEF H. FELSCHOW JANET M. MALOY
Senior Vice President Corporate Secretary
R. PETER MACK
Senior Vice President
-----------------------------------------------------------------------------------------------------------------------
VICE ROGER COOK JANYTH PRIMROSE RONALD SEVERINO
PRESIDENTS SCOTT D. MC LAUGHLIN
-----------------------------------------------------------------------------------------------------------------------
ASSISTANT WALTER N. ALESANDRO MARILYN B. KAPLAN MATT RUSSOMANNO
VICE PRESIDENTS ROBERT BOWLBY KAREN MERGENTHALER ROBERT SFERRAZZA
DAWN CHASE NANCY PALEK LARS SWANSON
DEBRA CIPOLETTI KEVIN C. PASHKE TODD ULLRICH
-----------------------------------------------------------------------------------------------------------------------
ASSISTANT VIRGINIA L. HUFF
SECRETARIES
-----------------------------------------------------------------------------------------------------------------------
ASSISTANT KELLY KAPUSTA CYNTHIA MURILLO PAM TIPPER
TREASURERS BARBARA REDDING MASSENZIO GENEVIEVE RESTIVO
-----------------------------------------------------------------------------------------------------------------------
NEIL M. FRIED CHRISTOPHER EIGEN
Investment Officer Assistant Operations Officer
-----------------------------------------------------------------------------------------------------------------------
DIRECTORS MORTIMER J. O'SHEA ERWIN D. KNAUER RICHARD S. MILLER
Chairman of the Board and President Attorney
Chief Executive Officer The Ramapo Bank Williams, Caliri, Miller & Orley
A Professional Corporation
DONALD W. BARNEY SOLOMON W. MASTERS
Treasurer President VICTOR C. OTLEY, JR.
Union Camp Corporation ERA Masters Realtors Attorney
Williams, Caliri, Miller & Otley
VINCENT R. D'ACCARDI LOUIS S. MILLER A Professional Corporation
Owner Retired
Lake Developers Inc. Consultant to R.D. Hunter &
Company
JAMES R. KAPLAN
Chairman, CEO and President
Cornell Dubilier Electronics, Inc.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 42
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BUSINESS JOHN A. DEMETRIUS, CPA LOUIS D. MARCH WILLIAM P. SHAUGHNESSY, CPA
DEVELOPMENT President President Shaughnessy, Giella & Co., P.C.
COUNCIL Demetrius & Co., L.L.C. March Associates, Inc.
STEVEN GERBER, ESQ. JOHN J. SCURA, II, ESQ. GEORGE P. STRUBLE, ESQ.
Gerber & Samson John J. Scura, Attorney at Law Sabbath, Struble, Ragno, Petrie,
Orobo and Spinato, P.C.
JEROLD P. GOLDBERG, CPA
Financial Consultant
CORPORATE INFORMATION
- -----------------------------------------------------------------------------------------------------------------------
FORM 10-K ANNUAL MEETING OF
STOCKHOLDERS
The Corporation's annual report, on Form 10-K,
required to be filed with the Securities and Exchange Tuesday, April 30, 1996, 4:00 p.m.
Commission, is available on written request to: Radisson Hotel
690 Rt. 46 East
Mr. Walter A. Wojcik, Jr., Treasurer Fairfield, New Jersey 07004
Ramapo Financial Corporation
64 Mountain View Boulevard
Wayne, New Jersey 07470
INQUIRIES
All other information -- contact:
TRANSFER AGENT Janet M. Maloy, Corporation Secretary
The Ramapo Financial Corporation
Chemical Mellon Shareholder Services, L.L.C. 64 Mountain View Boulevard
85 Challenger Road, Overpeck Center Wayne, New Jersey 07470
Ridgefield Park, New Jersey 07660 (201) 305-4102
MARKET AND STOCK INFORMATION
- -----------------------------------------------------------------------------------------------------------------------
Ramapo Financial Corporation's shares are traded in the over-the-counter market under the NASDAQ symbol RMPO.
The stock is quoted in the Wall Street Journal's and other publications' NASDAQ National Market Issues listings.
As of December 31, 1995, there were 1,903 stockholders of record of the common stock.
The following table sets forth, for the calendar periods indicated, the high and low market quotations as reported by
NASDAQ. There were no cash dividends declared for the periods indicated.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 3 3/4 2 11/16 4 1/16 3 3/4 4 11/16 3 3/4 4 9/16 3 7/8
1994 3 1/2 2 1/4 5 2 3/4 4 3/4 2 1/4 2 3/4 2
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
MARKET FIA CAPITAL GROUP INC. GRUNTAL & CO. INCORPORATED FIRST ALBANY CORPORATION
MAKERS
RYAN BECK & CO. INC. NASH WEISS/DIV OF SHARKIN INV. MCCONNELL BUDD & DOWNES
HERZOG, HEINE, GEDULD, INC. TUCKER ANTHONY INCORPORATED
SANDLER O'NEILL & PARTNERS SHERWOOD SECURITIES CORP.
DILLON, READ & CO., INC. LEGG MASON WOOD WALKER INC.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Ramapo Financial Corporation
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- --------------- ----------
<S> <C> <C>
The Ramapo Bank (2) New Jersey 100%
RFC High Ridge, Inc. New Jersey 100%
RFC Harmony Park, Inc. New Jersey 100%
RFC CKN, Inc. New Jersey 100%
RFC National, Inc. New Jersey 100%
RFC Center Plaza, Inc. New Jersey 100%
RFC High Debi Hills, Inc. New Jersey 100%
RFC Jefferson, Inc. New Jersey 100%
RFC Deer Trail Development, Inc. New Jersey 100%
Ramapo Investment Corporation New Jersey 100%
Bancorps' International Trading Corporation (2) New Jersey 33.3%
</TABLE>
- -------------------
(1) Except for Bancorps' International Trading Corporation, which is accounted
for using the equity method of accounting, the assets, liabilities and
operations of the subsidiaries are included in the consolidated financial
statements contained in Item 8 hereof. Unless otherwise indicated, all
subsidiaries are subsidiaries of the Bank.
(2) Subsidiary of the Corporation.
25
<PAGE> 1
EXHIBIT 23
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ramapo Financial Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 17, 1996 and to all
references to our Firm. It should be noted that we have not audited any
financial statements of Ramapo Financial Corporation subsequent to December 31,
1995 or performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,160,000
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 5,802,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,328,000
<INVESTMENTS-CARRYING> 20,030,000
<INVESTMENTS-MARKET> 20,326,000
<LOANS> 160,580,000
<ALLOWANCE> 4,853,000
<TOTAL-ASSETS> 246,516,000
<DEPOSITS> 217,062,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,205,000
<LONG-TERM> 0
0
717,000
<COMMON> 8,160,000
<OTHER-SE> 18,372,000
<TOTAL-LIABILITIES-AND-EQUITY> 246,516,000
<INTEREST-LOAN> 14,021,000
<INTEREST-INVEST> 3,218,000
<INTEREST-OTHER> 1,104,000
<INTEREST-TOTAL> 18,343,000
<INTEREST-DEPOSIT> 6,094,000
<INTEREST-EXPENSE> 6,106,000
<INTEREST-INCOME-NET> 12,237,000
<LOAN-LOSSES> 500,000
<SECURITIES-GAINS> 33,000
<EXPENSE-OTHER> 12,148,000
<INCOME-PRETAX> 2,036,000
<INCOME-PRE-EXTRAORDINARY> 2,036,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,248,000
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
<YIELD-ACTUAL> 5.40
<LOANS-NON> 4,190,000
<LOANS-PAST> 141,000
<LOANS-TROUBLED> 1,702,000
<LOANS-PROBLEM> 2,100,000
<ALLOWANCE-OPEN> 6,501,000
<CHARGE-OFFS> 3,694,000
<RECOVERIES> 1,546,000
<ALLOWANCE-CLOSE> 4,853,000
<ALLOWANCE-DOMESTIC> 4,853,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
