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UNITED STATES
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
For the fiscal year ended December 31, 1996
OR
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-7806
RAMAPO FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-1946561
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
64 Mountain View Boulevard, Wayne, New Jersey 07470
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(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 Section 12(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 (ss.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 14, 1997, the aggregate market value of the 7,676,520 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $47.0 million based on the closing sales price of
$6.125 per share of the registrant's Common Stock on March 14, 1997 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 14, 1997: 8,099,449
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DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1 - Business Page 1 (Ramapo Financial
Corporation), Pages 2 and 3 (To Our
Shareholders), and Pages 7 thru 21
(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,
1996 (Exhibit 13).
PART II
Item 6 - Selected Financial Data Pages 5 and 6 of the Annual Report to
Stockholders for the year ended
December 31, 1996 (Exhibit 13).
Item 7 - Management's Discussion Pages 7 thru 21 of the Annual
and Analysis of Financial Report to Stockholders for the year
Condition and Results of ended December 31, 1996 (Exhibit 13).
Operations
Item 8 - Financial Statements and Pages 22 thru 42 of the Annual Report
Supplementary Data to Stockholders for the year ended
December 31, 1996 (Exhibit 13).
PART III
Item 10 - Directors and Executive All or part of items 10, 11, 12 and 13
Officers of the Registrant are contained in the registrant's
definitive Proxy Statement for its
Item 11 - Executive Compensation 1997 Annual Meeting of Stockholders
to be filed with the Securities and
Item 12 - Security Ownership of Exchange Commission pursuant to
Certain Beneficial Owners Regulation 14A.
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, 1996
PART I Page No.
--------
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
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. 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
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 20
SIGNATURES 22
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PART I
Item 1. Business.
Description of Business and Market Area
Ramapo Financial Corporation ("Corporation") is a New Jersey bank holding
company that owns all of the outstanding stock of The Ramapo Bank ("Bank"), a
New Jersey state-chartered commercial bank. The Corporation and the Bank are
headquartered in Wayne, Passaic County, New Jersey, and six of the Bank's seven
offices are in Wayne or nearby communities. The Bank's seventh 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, 1996, the Corporation
had consolidated assets, deposits and stockholders' equity of $271.5 million,
$239.9 million and $29.0 million, respectively.
The Corporation considers its primary banking markets to be the Wayne
area, in which six of its seven 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 ("Federal Reserve"). The Bank is supervised by the Federal
Deposit Insurance Corporation ("FDIC") and the New Jersey Department of Banking
("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 recently introduced a product
that allows commercial customers to access their deposit accounts via personal
computer. 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. Automated teller machines at all branch locations plus
telephone access to deposit account information provide convenience to
consumers. 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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Regulatory Orders
Both the Corporation and the Bank were released from regulatory orders
during the first quarter of 1996. The Corporation had been operating under a
Written Agreement ("Written Agreement") with the Federal Reserve Bank of New
York ("FRB") since November, 1993. Based on a limited scope inspection by the
FRB as of September 30, 1995 which noted the continued improvement in the
Corporation's operations, the Written Agreement was terminated in March, 1996.
The Bank had been operating under a Memorandum of Understanding ("MOU")
issued by the FDIC and the State in May, 1995. The MOU replaced a more onerous
order to cease and desist which had been jointly issued by the FDIC and State in
November, 1992. The MOU was terminated in March, 1996 as a result of the FDIC's
examination of the Bank as of December 31, 1995.
Lending Activities
Loan Portfolio. As of December 31, 1996, the Corporation's loans, net of
unearned discount, represented 60.8% of its total assets. As of December 31,
1996, its loan portfolio consisted of approximately 64.1% commercial and
commercial real estate loans, 6.6% commercial real estate construction loans,
4.5% residential real estate mortgage loans and 29.8% installment loans. At
December 31, 1996, 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, 1996, 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,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ --------------- --------------- --------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and commercial real
estate...................... $105,819 64.1% $ 96,469 60.1% $101,292 61.7% $114,889 61.6% $154,508 58.1%
Commercial real estate
construction................ 10,949 6.6 15,177 9.5 18,462 11.2 29,695 15.9 33,527 12.6
Residential real estate
mortgage (1)................ 7,443 4.5 8,772 5.4 10,346 6.3 7,808 4.2 26,414 9.9
Installment................... 40,859 29.8 40,128 25.0 34,211 20.8 34,211 18.3 51,483 19.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total..................... $165,070 100.0% $160,546 100.0% $164,311 100.0% $186,603 100.0% $265,932 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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(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, 1996 the Bank's legal lending limit was
$4.7 million.
It is the Bank's policy on purchase money mortgages 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 first
mortgage 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 unsecured loans between $15,000 and $350,000, and all
secured loans between $15,000 and $500,000 must be approved by two officers of
the Bank. All unsecured loans between $350,000 and $500,000 and secured loans
between $500,000 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 two lending Senior Vice Presidents 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 the Bank's 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 primarily on the basis of the
borrower's cash flow and ability to service the debt from earnings and
secondarily 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 one of the lending
Senior Vice Presidents 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 the lending Senior Vice Presidents 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 $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.
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 normally 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.
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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 than residential loans 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 lesser of the total cost of development or the appraised
value of the developed 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.
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 one of the lending Senior Vice
Presidents 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.
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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
$32,605,000 and $35,233,000 at December 31, 1996 and 1995, respectively.
The largest borrower concentration consists of loans to a group of
affiliated borrowers with an aggregate outstanding balance of $15,157,000 and
$15,430,000 at December 31, 1996 and 1995, 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, 1996 and 1995 were $10,226,000 and $12,245,000, 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 $7,222,000 and
$7,558,000 at December 31, 1996 and 1995, 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, 1996, 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. Four 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; the
remainder are inactive. 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.
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.
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Employees
As of December 31, 1996, the Corporation and its subsidiaries had
approximately 106 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.
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 Corporation, however, does not have significant financial
resources apart from its investment in 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. Bank holding companies
and their subsidiaries are also prohibited from
11
<PAGE> 12
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 1996 that it had received a "Satisfactory" CRA rating by
the FDIC based on the FDIC's CRA examination as of December 31, 1995. 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 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 Written Agreement required the Corporation
to obtain written approval from the FRB prior to declaring or paying any
dividends while the Written Agreement 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 Written Agreement
required the Corporation to obtain written approval from the FRB prior to
redeeming or repurchasing any of its outstanding stock while it was in effect.
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<PAGE> 13
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 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
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<PAGE> 14
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 to 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: (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 undercapitalized 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 rate for the first
half of 1996 was 0.3%; since then, it has been 0.00%.
In addition, the Deposit Insurance Act of 1996 authorized the Financing
Corporation ("FICO") to levy assessments on BIF-assessable deposits and
stipulated that the rate must equal one-fifth the FICO assessment rate that is
applied to deposits assessable by the Savings Association Insurance Fund. The
rate established for the Bank for 1997 through 1999 is .01296%.
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,
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<PAGE> 15
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 of any
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 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 non-member 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
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<PAGE> 16
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.
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 nontraditional activities. The federal banking
regulators, including the Federal Reserve and the FDIC, have issued a new rule,
effective January 1, 1997, that would add a market risk component to the
currently effective risk-based capital standards. Under the new rule, bank
holding companies and banks with higher exposures to market risk such as
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, 1996, the Corporation's total risk-based capital and
leverage capital ratios were 15.5% and 10.5%, respectively. The minimum levels
established by the regulators for these measures are 8.0% and 3.0%,
respectively.
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<PAGE> 17
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 its interest in 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 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 informed the
Bank that the Bank was "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.
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<PAGE> 18
Item 2. Properties.
The following table sets forth the location of and certain additional
information regarding the Corporation's offices at December 31, 1996. The
Corporation owns all of its offices except as indicated.
Net Book
Year Total Total Value at December Approximate
Branch Opened Deposits Investment 31, 1996 Square Footage
- ------ ------ -------- ---------- ----------------- --------------
(Dollars in thousands)
Main office 1980 $52,719 $1,698 $1,035 23,000
Packanack 1967 55,114 664 351 4,000
Valley 1972 43,412 738 465 8,000
Clifton 1974 24,257 76 15(1) 2,000
North Haledon 1986(2) 22,420 58 2(3) 2,000
Butler 1986(2) 40,823 240 126(3) 2,000
Fairfield 1996 1,144(4) 4 4(3) 2,000
- ----------
(1) Land lease.
(2) Date acquired.
(3) Leased.
(4) Opened October, 1996
The net book value of the Corporation's investment in premises and
equipment totalled approximately $3.3 million at December 31, 1996. For a
discussion of premises and equipment, see Note 8 of Notes to Consolidated
Financial Statements contained in the Corporation's 1996 Annual Report to
Stockholders.
Item 3. Legal Proceedings.
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 arising from their 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 a 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, 1996.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
Dividend Policy. The Corporation declared quarterly dividends in each of
the third and fourth quarters of 1996. Prior to these declarations, no dividend
had been paid since February, 1992, when an annual dividend was paid. The
payment of dividends in the future is predicated upon the continued profitable
operations of the Corporation.
All other required information is incorporated by reference to Page 44 of
the Corporation's 1996 Annual Report to Stockholders.
Item 6. Selected Financial Data.
The required information is incorporated by reference to Pages 5 and 6 of
the Corporation's 1996 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 7 thru 21
of the Corporation's 1996 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
A. Financial Statements
The required information is incorporated by reference to Pages 22 thru 42
of the Corporation's 1996 Annual Report to Stockholders.
Page of
Annual Report
to Stockholders
---------------
Report of Independent Public Accountants 42
Ramapo Financial Corporation and Subsidiaries:
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Changes in Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements (Notes 1 - 19) 26-41
B. Supplementary Data
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.
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<PAGE> 20
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
1997 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, 1997 Title
- ---- -------------- -----
Walter A. Wojcik, Jr. 47 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.
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:
20
<PAGE> 21
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
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.
Page in
Sequentially
No. Description Numbered Copy
--- ----------- -------------
11 Statement re Computation of Per Share Earnings 24
13 Annual Report to Security Holders 25
21 Subsidiaries of the Registrant 66
23 Consent of Independent Public Accountants 67
27 Financial Data Schedule 68
(b) Reports on Form 8-K. The Registrant did not file any current reports
on Form 8-K during the quarter ended December 31, 1996.
(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 27, 1997 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 27, 1997
- ----------------------------------------------
Mortimer J. O'Shea, Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Walter A. Wojcik, Jr. March 27, 1997
- ----------------------------------------------
Walter A. Wojcik, Jr.
Treasurer
(Principal Financial and Accounting Officer)
/s/ Victor C. Otley, Jr. March 27, 1997
- -----------------------------------------------
Victor C. Otley, Jr.
Chairman of the Board
/s/ Erwin D. Knauer March 27, 1997
- ----------------------------------------------
Erwin D. Knauer, Director
Senior Vice President
/s/ Louis S. Miller March 28, 1997
- ----------------------------------------------
Louis S. Miller
Director
/s/ Richard S. Miller March 27, 1997
- -----------------------------------------------
Richard S. Miller
Director
22
<PAGE> 23
EXHIBIT INDEX
--------------
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
Year ended December 31
-------------------------------------
1996 1995 1994
---------- ---------- -----------
A. Net Income (Loss) $3,056,000 $6,248,000 $ (977,000)
B. Unpaid Cumulative Dividends on
Class A Preferred Stock -- (50,000) (116,000)
---------- ---------- -----------
C. Adjusted Net Income (Loss) $3,056,000 $6,198,000 $(1,093,000)
D. Weighted Average Common Shares 8,205,032 8,175,819 2,874,600
E. Income (Loss) per Common Share (C/D) $ .37 $ .76 $ (.38)
24
<PAGE> 1
EXHIBIT 13
Annual Report to Security Holders
25
<PAGE> 2
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,
which had been a subsidiary of the Corporation.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ............................................. $271,524 $246,516 $238,216 $257,634 $451,311
Cash and cash equivalents ................................ 29,758 14,962 42,486 26,594 85,206
Securities ............................................... 68,043 59,358 21,248 8,858 53,470
Gross loans (net of unearned income) ..................... 165,070 160,546 164,311 186,603 265,932
Allowance for possible loan losses ....................... 5,115 4,853 6,501 7,499 7,670
Loans held for sale ...................................... -- 34 34 19,611 28,728
Total deposits ........................................... 239,889 217,062 211,864 241,608 425,400
Other borrowings ......................................... -- -- 1,292 5,916 8,591
Stockholders' equity ..................................... 29,036 27,249 21,755 6,576 13,779
ASSET QUALITY (1):
Nonaccrual loans ......................................... $ 1,053 $ 4,190 $ 7,548 $ 21,881 $ 26,491
Accruing loans 90 days or more delinquent ................ 152 141 240 1,182 2,822
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans ................................ 1,205 4,331 7,788 23,063 29,313
- -----------------------------------------------------------------------------------------------------------------------------------
Other real estate, net ................................... 2,211 4,408 9,995 10,332 5,304
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets ............................. 3,416 8,739 17,783 33,395 34,617
Restructured loans ....................................... 1,540 1,702 5,983 11,035 4,662
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and restructured loans ...... $ 4,956 $ 10,441 $ 23,766 $ 44,430 $ 39,279
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Total interest income .................................... $18,218 $ 18,343 $ 14,919 $ 19,263 $ 28,665
Total interest expense ................................... 5,804 6,106 4,958 8,709 13,506
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ...................................... 12,414 12,237 9,961 10,554 15,159
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses ....................... 400 500 1,221 4,440 10,222
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses ............................... 12,014 11,737 8,740 6,114 4,937
- -----------------------------------------------------------------------------------------------------------------------------------
Other income ............................................. 2,374 2,447 3,322 8,936 11,178
- -----------------------------------------------------------------------------------------------------------------------------------
Other expense ............................................ 10,054 12,148 13,324 25,018 24,149
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ........................ 4,334 2,036 (1,262) (9,968) (8,034)
Provision (benefit) for income taxes ..................... 1,278 (4,212) (285) (996) (2,192)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ........................................ $ 3,056 $ 6,248 $ (977) $ (8,972) $ (5,842)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 3
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE DATA:
Net income (loss) per common share ......................... $ .37 $ .76 $ (.38) $ (7.21) $ (4.69)
Book value per common share ................................ 3.59 3.28 2.47 3.88 11.07
Cash dividends declared per common share (2) ............... .04 -- -- -- 0.40
SELECTED OPERATING RATIOS:
Return on average assets ................................... 1.23% 2.56% (.42)% (2.58)% (1.32)%
Return on average equity ................................... 11.09 27.85 (9.04) (87.65) (32.60)
Interest rate spread(3) .................................... 4.54 4.59 4.38 2.87 3.07
Net interest margin(3) ..................................... 5.41 5.41 4.84 3.51 3.99
ASSET QUALITY RATIOS (1)(4):
Nonperforming loans as a percentage of loans, net of
unearned income ........................................... .73% 2.70% 4.74% 11.18 % 9.95 %
Nonperforming assets as a percentage of total assets ....... 1.26 3.55 7.47 12.96 7.67
Nonperforming assets and restructured loans
as a percentage of total assets ........................... 1.83 4.24 9.98 17.25 8.70
Allowance for possible loan losses as a percentage
of loans, net of unearned income .......................... 3.10 3.02 3.96 3.64 2.60
Allowance for possible loan losses as a percentage
of nonperforming loans .................................... 424.48 112.05 83.47 32.52 26.17
Net charge-offs as a percentage of average loans,
net of unearned income .................................... .09 1.36 1.29 1.75 2.27
CAPITAL RATIOS (4)(5):
Stockholders' equity to total assets ....................... 10.69% 11.05% 9.13% 2.55 % 3.05 %
Average stockholders' equity to average assets ............. 11.07 9.19 4.64 2.94 4.05
Tier 1 leverage capital ratio .............................. 10.47 10.08 9.16 2.45 3.01
Tier 1 risk-based capital ratio ............................ 14.27 13.37 12.18 2.99 4.43
Total risk-based capital ratio ............................. 15.54 14.66 13.46 5.98 8.13
- ---------------------------------------------------------------------------------------------------------------------------------
</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 1996, two quarterly dividends.
(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."
6
<PAGE> 4
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, 1996 and 1995 and results of operations for the years ended
December 31, 1996, 1995 and 1994 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 termination of all regulatory orders and the opening of a new
branch office signaled the Corporation's full return to health in 1996. 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 dramatic 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. During 1996,
nonperforming assets were reduced to a level considered normal for a healthy
institution, helping the Corporation to more than double its income before taxes
compared to the prior year. Meanwhile, the economic climate in the Corporation's
market area showed modest signs of improvement which led to a stabilization of
real estate values.
Both the Corporation and its wholly owned subsidiary, the Bank, were released
from regulatory orders in the first quarter of 1996. The Corporation had been
operating under a Written Agreement with the Federal Reserve Bank of New York
("FRB") since November, 1993. Based on a limited scope inspection by the FRB as
of September 30, 1995 which noted the continued improvement in the Corporation's
operations, the Written Agreement was terminated in March, 1996.
The Bank had been operating under a Memorandum of Understanding ("MOU")
issued by the Federal Deposit Insurance Corporation ("FDIC") and the New Jersey
Department of Banking ("State") in May, 1995. The MOU replaced a more onerous
order to cease and desist which had been jointly issued by the FDIC and State in
November, 1992. The MOU was terminated in March, 1996 as a result of the FDIC's
examination of the Bank as of December 31, 1995.
Looking forward, the Corporation's strategic focus has been redirected toward
being a community bank serving Wayne, Clifton and neighboring communities in
Passaic, Morris and Essex 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 large, individual borrower concentrations is expected
to be reduced. Management believes that there is a significant opportunity to
expand its lending to small businesses and consumers, given the number of
companies in the area and the relative affluence of its residents. 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 Corporation is actively developing new products and is seeking new
branch sites in order to better serve its business and retail customers. 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.
Although the Corporation's federal funds sold position increased by $11.9
million from $5.8 million at December 31, 1995 to $17.7 million at December 31,
1996, the average balance decreased from 1995 to 1996 by $11.1 million, from
$18.5 million to $7.4 million. This reduction in overnight funds occurred
because the Corporation no longer needed to maintain the high liquidity level it
deemed prudent during more difficult times. During 1995, the average balance
decreased a more modest $1.4 million from the 1994 average balance, marking the
beginning of the liquidity reduction effort. Funds provided from the reduction
were primarily invested in the securities portfolio, enabling the Corporation to
earn higher yields.
The Corporation's securities portfolio increased $8.6 million in 1996, from
$59.4 million at December 31, 1995 to $68.0 million at December 31, 1996. Also,
in order to achieve certain asset/liability management objectives, the
Corporation changed the composition of the portfolio in 1996 from one holding
primarily fixed-rate securities to one holding approximately 50% fixed-rate and
50% floating-rate securities. In 1995, the Corporation's securities portfolio
nearly tripled in size, increasing $38.2 million from $21.2 million at December
31, 1994 to $59.4 million at December 31, 1995.
Loans increased a modest $4.6 million in 1996, after having decreased $3.8
million in 1995. 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 lack of
significant loan growth during these two years.
The Corporation's intangible assets were $869,000, $503,000 and $773,000 at
December 31, 1996, 1995, and 1994, respectively. The increase in 1996 was due to
a $622,000 deposit premium paid to another commercial bank for the purchase of
deposits and accrued interest totaling $9.7 million. Normal amortization was
responsible for the 1995 decrease from 1994.
The Corporation experienced deposit growth of $22.8 million and $5.2 million
for the years ended December 31, 1996 and 1995, respectively. The aforementioned
deposit acquisition and the opening of a new branch office late in 1996
accounted for about half of the 1996 increase. In both years, the greatest
amount of growth occurred in the demand deposit category.
7
<PAGE> 5
RESULTS OF OPERATIONS
GENERAL. The Corporation's results of operations are dependent primarily on
its net interest 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 1996, 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
ORE valuation 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 $8.7 million and $3.4 million at December 31, 1995
and 1996, respectively. The $3.4 million represents just 1.26% of total assets.
Despite these reductions, expenses related to ORE and nonperforming loans
remained at high levels. ORE operating expenses and valuation adjustments
totaled $1.0 million, $2.8 million, $2.2 million and $2.7 million for the years
ended December 31, 1996, 1995, 1994 and 1993, respectively, while the provision
for possible loan losses was $400,000, $500,000, $1.2 million and $4.4 million
for those respective years. In addition, loss of interest income, legal expenses
and management time spent on ORE management and disposition further reduced
earnings during those years.
Because of the small number of ORE properties remaining, management is
confident that ORE-related expenses will be significantly reduced in 1997 and
future years. Management also anticipates that future provisions for possible
loan losses will not be greater than those taken in 1996 and 1995, barring
unforeseen economic events.
- -----------------------------------------------------
$ MILLIONS
20 17.8
15
10 8.7
5
0 3.4
- -----------------------------------------------------
12/31/94 12/31/95 12/31/96
NONPERFORMING ASSETS
NET INCOME. The Corporation had net income of $3.1 million for the year ended
December 31, 1996 compared to net income of $6.2 million for the year ended
December 31, 1995. Because 1995 net income included a $4.2 million tax benefit
due to the reversal of a valuation allowance against the Corporation's net
deferred tax asset, a comparison of net income before taxes is more indicative
of the progress the Corporation has made. On that basis, the Corporation earned
$4.3 million in 1996 versus $2.0 million in 1995, a $2.3 million (112.9%)
increase. The principal reason for this improvement is a $2.1 million reduction
in other expense. Chief among the reductions is a $1.8 million drop in ORE
operating expenses and valuation allowances which was made possible by the
continued sales of these properties. Also significant was a $364,000 decrease in
the FDIC insurance assessment due to the Bank's being placed in the lowest risk
capital category for assessment purposes by the FDIC. The improvement in net
income before taxes began in 1995, when the Corporation earned $3.3 million more
than in 1994. Most of that 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.
- -------------------------------------------------------
$ MILLIONS
5.0
4.0 4.3
3.0
2.0 2.0
1.0
0
(1.0) (1.3)
(2.0)
- -------------------------------------------------------
1994 1995 1996
NET INCOME (LOSS) BEFORE TAXES
NET INTEREST INCOME. The largest component of the Corporation's earnings is
its net interest income. Net interest income represents the income earned,
principally on loans and investments, less interest paid, principally on
deposits. Net interest income on a tax-equivalent basis increased by $183,000
from $12.3 million for the year ended December 31, 1995 to $12.5 million for the
year ended December 31, 1996. The increase is due to a $604,000 rise caused by a
$3.4 million increase in average interest-earning assets which was offset in
part by a $421,000 decline due to a five basis point drop in the net interest
spread. Most of the rise in average interest-earning assets came in the loans
category, which increased $2.4 million. Taken together, average securities and
federal funds sold increased only $201,000 from 1995 to 1996. Average
installment loans rose $3.7 million in 1996 versus 1995, partially offset by a
$1.2 million decrease in average mortgage loans. The five basis point drop in
the net interest spread resulted from a 17 basis point drop in the yield on
earning assets which exceeded the 12 basis point decline in the cost of
interest-bearing liabilities. In 1995, net interest income on a tax-equivalent
basis increased $2.3 million over 1994. About $1.3 million of the increase is
due to a 21 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 October 1994 and a $9.8 million decrease in
average other assets, principally ORE.
8
<PAGE> 6
RESULTS OF OPERATIONS (continued)
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 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 income by average
interest-earning assets.
9
<PAGE> 7
RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing time deposits...... $ 923 $ 56 6.07% $ 181 $ 11 6.08% $ -- $ -- --%
Securities:
Taxable............................. 60,467 3,693 6.11 49,433 3,150 6.37 14,249 766 5.38
Nontaxable (tax-equivalent basis)... 1,197 120 9.86 914 103 11.27 1,094 115 10.51
Federal funds sold................... 7,354 397 5.40 18,470 1,093 5.92 19,937 878 4.40
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2).................... 112,124 9,781 8.72 112,228 9,772 8.71 125,094 9,252 7.40
Residential real estate (3)......... 8,152 702 8.61 9,349 768 8.21 12,822 1,018 7.94
Installment......................... 39,849 3,510 8.81 36,138 3,481 9.63 33,479 2,929 8.75
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans........................ 160,125 13,993 8.74 157,715 14,021 8.89 171,395 13,199 7.70
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets...... 230,066 18,259 7.94 226,713 18,378 8.11 206,675 14,958 7.24
- -----------------------------------------------------------------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks.............. 10,157 9,197 9,392
Other assets......................... 13,996 13,829 23,591
Allowance for possible loan losses... (5,345) (5,476) (6,594)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonearning assets............. 18,808 17,550 26,389
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets..................... $248,874 $244,263 $233,064
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits..... $ 27,388 $ 335 1.22% $ 23,669 $ 364 1.54% $ 23,361 $ 444 1.90%
Savings deposits..................... 74,549 2,032 2.73 76,032 1,924 2.53 90,574 2,160 2.38
Time deposits........................ 68,608 3,435 5.01 73,558 3,806 5.17 55,664 1,997 3.59
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits..... 170,545 5,802 3.40 173,259 6,094 3.52 169,599 4,601 2.71
Other borrowings..................... 35 2 5.64 106 12 11.32 3,720 357 9.60
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities.. 170,580 5,804 3.40 173,365 6,106 3.52 173,319 4,958 2.86
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits...................... 48,048 46,100 46,230
Other liabilities.................... 2,695 2,361 2,712
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities......................... 50,743 48,461 48,942
Stockholders' equity.................. 27,551 22,437 10,803
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity............................. $248,874 $244,263 $233,064
===================================================================================================================================
Net interest income
(tax-equivalent basis) ............... 12,455 12,272 10,000
Tax-equivalent adjustment.............. (41) (35) (39)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income................... $12,414 $12,237 $ 9,961
===================================================================================================================================
Net interest spread
(tax-equivalent basis) ............... 4.54% 4.59% 4.38%
===================================================================================================================================
Net interest margin
(tax-equivalent basis) ............... 5.41% 5.41% 4.84%
===================================================================================================================================
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 134.87% 130.77% 119.25%
===================================================================================================================================
</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.
10
<PAGE> 8
RESULTS OF OPERATIONS (continued)
RATE/VOLUME ANALYSIS. The following table allocates the period-to-period
changes in the Corporation's various categories of interest 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
1996 VS. 1995 1995 VS. 1994
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing time deposits............. $ 45 $ -- $ 45 $ 6 $ 5 $ 11
Loans (includes loans held for sale)....... 212 (240) (28) (1,109) 1,931 822
Securities:
Taxable................................... 677 (134) 543 2,218 165 2,383
Nontaxable ............................... 32 (15) 17 (20) 9 (11)
Federal funds sold ........................ (607) (89) (696) (69) 284 215
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income..................... 359 (478) (119) 1,026 2,394 3,420
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits and interest-bearing
demand deposits........................... 14 65 79 (359) 43 (316)
Time deposits ............................. (254) (117) (371) 764 1,045 1,809
Other borrowings........................... (5) (5) (10) (399) 54 (345)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense ................... (245) (57) (302) 6 1,142 1,148
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in net interest income............. $ 604 $(421) $ 183 $ 1,020 $1,252 $ 2,272
===================================================================================================================================
</TABLE>
INTEREST INCOME. Total interest income on a tax-equivalent basis decreased a
modest $119,000 (.7%), from $18.4 million for the year ended December 31, 1995
to $18.3 million for the year ended December 31, 1996. As the chart above
illustrates, volume-related increases of $359,000 were more than offset by
rate-related decreases totaling $478,000. Although average interest-earning
assets increased $3.4 million in 1996 as compared to 1995, the average yield on
those assets declined 17 basis points, largely due to a 56 basis point drop in
the Corporation's average base lending rate.
Interest on loans decreased $28,000 (.2%) for the year 1996 as compared to
1995. A 15 basis point decrease in the average loan yield during 1996 more than
offset the increase in average loan balances of $2.4 million (1.5%). The base
lending rate decrease affected the installment category the most, resulting in
an 82 basis point decline in average yield in 1996 versus 1995. The installment
category also accounted for all of the average balance increase in loans, as
efforts to attract new consumer loans resulted in an increase of $3.7 million
(10.3%) in average balance. De-emphasis of mortgage loan originations and normal
principal payments caused mortgage loans to decrease $1.2 million (12.8%) in
average balances, more than offsetting a 40 basis point increase in average
yield. Above-normal loan prepayments more than offset commercial loan
originations, resulting in a slight drop in average balances.
The largest increase in interest income in 1996 was in taxable securities,
which increased $543,000 in 1996 versus 1995. The $11.0 million increase in
average balance resulted in $667,000 of additional interest income, more than
offsetting the $134,000 reduction due to the 26 basis point decline in average
yield resulting from lower prevailing interest rates. Funding for the purchase
of securities was provided by the $11.1 million decline in average federal funds
sold. The reduction in federal funds sold was a result of the diminished need
for the abundant liquidity maintained in 1995. Overall, interest on federal
funds sold declined $696,000 in 1996 versus 1995, primarily due to the decrease
in average balances. A rate drop of 52 basis points, reflecting lower prevailing
overnight rates in 1996 than in 1995, led to an $89,000 decrease in interest
income.
Total interest income on a tax-equivalent basis increased by $3.4 million
(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 (9.7%)
increase in average earning assets, principally taxable securities.
Interest on loans increased $822,000 (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 loans outstanding of $13.7 million (8.0%) between
the periods. The bulk of the decrease in average loans outstanding 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 (311.1%), and
interest on nontaxable securities decreased $14,000 (12.2%) on a tax-equivalent
basis 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
11
<PAGE> 9
RESULTS OF OPERATIONS (continued)
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 (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.
INTEREST EXPENSE. Total interest expense decreased $302,000 (4.9%) from $6.1
million for the year ended December 31, 1995 to $5.8 million for the year ended
December 31, 1996. A decline of $2.8 million in average interest-bearing
liabilities accounted for $245,000 of the decrease, while a slight decline in
rates in selected deposit categories was the reason for the remainder of the
decrease. Decreases of $5.0 million (6.7%) and $1.5 million (2.0%) in the
average balances of time deposits and savings deposits, respectively, were
partially offset by a $3.7 million (15.7%) increase in average interest-bearing
demand balances in 1996. One reason for the decrease in time deposits is that in
1995, 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. About
$12 million of this was from new customers, the majority of whom did not renew
their certificates upon maturity. These certificates were primarily responsible
for the 16 basis point drop in rate on time deposits in 1996 as compared to
1995. The payment of higher, more competitive rates on certain savings products
was responsible for the 20 basis point increase in rate in 1996 versus 1995 and
also for keeping the decrease in average balance to such a small level after a
$14.5 million (16.1%) decline in 1995 as compared to 1994. Management believes
that savings deposits will be harder to attract in future years because the
spreads between rates paid on savings and those offered by alternative
investments have widened significantly recently. Despite a rate decrease in the
interest-bearing demand category, efforts to attract new deposits proved
successful.
Total interest expense increased $1.1 million (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 aforementioned 7% certificate adversely affected the average time
deposit rate paid in 1995. 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 (16.1%) in 1995 as compared to 1994, while
average time deposits increased $17.9 million (32.1%) during the same period.
The Corporation incurred interest expense on its other borrowings of $2,000,
$12,000, and $357,000 during the years ended December 31, 1996, 1995, 1994,
respectively, which consisted of interest on federal funds purchased in 1996 and
interest on subordinated debentures in 1995 and 1994. The remaining $1.3 million
of subordinated debentures were redeemed during the first quarter of 1995. See
Note 11 of Notes to Consolidated Financial Statements.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $400,000, $500,000 and $1.2 million for the years ended December 31, 1996,
1995 and 1994, respectively. The much reduced provisions for possible loan
losses in 1996 and 1995 reflect the overall increase in loan quality, the
continued reduction of nonperforming assets and the further reduction of loan
concentrations. Also, net charge-offs of $138,000, $2.1 million and $2.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively were
dramatically lower than the $4.2 million and $7.0 million recorded in 1993 and
1992, respectively. Management has been successful in recovering $803,000 and
$1.5 million in 1996 and 1995 respectively, of loans previously charged-off and
is hopeful that continued efforts will produce similar results in the future.
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. 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 decreased just $73,000 (3.0%) for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. The primary
cause of this decrease was a $123,000 (8.1%) drop in service charges on deposit
accounts in 1996. Management believes that service charges decreased because
there were fewer accounts, on average, in the demand and savings categories in
1996 versus 1995, and because the average balance of these accounts increased in
1996, thus avoiding certain service charges.
Other income fell $875,000 (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 (9.1%) increase in service charges on deposit
accounts.
OTHER EXPENSE. Other expense decreased $2.1 million (17.2%), from $12.2
million for the year ended December 31, 1995 to $10.1 million for the year ended
December 31, 1996. The majority of this decrease, $1.8 million, was in ORE
operating expenses and valuation adjustments, which reflects the maintenance and
disposition of fewer properties than in 1995. Management expects that future
valuation adjustments and direct operating expenses related to ORE will be
substantially less than they were in 1996. A $637,000 decrease in the other
expense line item was partially offset by increases of $243,000, $51,000 and
$25,000 in salaries and employee benefits, net occupancy expense and equipment
expense, respectively. The most significant decreases in other expense were in
the FDIC assessment and in legal expenses. The FDIC assessment declined $364,000
in 1996 due to the Bank's being placed in the lowest risk category for
assessment purposes by the FDIC. Legal fees decreased $145,000 in 1996 compared
to 1995 primarily due to the fewer number of nonperforming assets being managed
in 1996. The increase in salaries and employee benefits was due to merit raises
and a performance bonus accrual. Occupancy expense was higher in 1996 because of
the more than five months of rent paid for the Bank's new Fairfield office
opened in 1996 and because of higher than normal snow removal expenses resulting
from the harsh winter weather.
Other expense showed a $1.2 million (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
12
<PAGE> 10
RESULTS OF OPERATIONS (continued)
compared 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.
<TABLE>
<CAPTION>
[GRAPH]
- -------------------------------------------------------
$ MILLIONS
1994 1995 1996
<S> <C> <C> <C>
15
12 13.3
9 12.1
6
3 10.1
0
- -------------------------------------------------------
</TABLE>
OTHER EXPENSES
INCOME TAXES. The Corporation had an income tax provision of $1.3 million for
the year ended December 31, 1996 and income tax benefits of $4.2 million and
$285,000 for the years ended December 31, 1995 and 1994, respectively. The 1996
provision includes the effect of the reversal of $496,000 of tax reserves no
longer deemed necessary. 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, 1996, the Corporation has a state net operating loss
carryforward of $3.7 million which expires as follows: $2.2 in 2000 and $1.5 in
2001.
Federal income tax returns for the years 1991, 1992 and 1993 were examined by
the Internal Revenue Service. Audit adjustments assessed during 1996 as a result
of this examination were immaterial.
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 Bank's Chairman of the Board,
President, four Senior Vice Presidents, and three outside directors. This
Committee meets at least monthly to review the interest-rate sensitivity 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 negative 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.
13
<PAGE> 11
ASSET/LIABILITY MANAGEMENT (continued)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 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-
TOTAL 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) ...................... $50,060 $ 27,619 $ 15,615 $47,974 $18,687 $ -- $159,955
Securities and interest-bearing
time deposit...................... -- 32,427 8,407 27,608 601 -- 69,043
Federal funds sold .................. 17,680 -- -- -- -- -- 17,680
Cash and other assets................ -- -- -- -- -- 24,846 24,846
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets........................ $67,740 $ 60,046 $ 24,022 $75,582 $19,288 $ 24,846 $271,524
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Demand deposits ..................... $ -- $ 31,846 $ -- $ -- $ -- $ 58,421 $ 90,267
Savings and time deposits (2) ....... -- 101,815 36,356 11,419 32 -- 149,622
Other liabilities ................... -- -- -- -- -- 2,599 2,599
Stockholders' equity ................ -- -- -- -- -- 29,036 29,036
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................ $ -- $133,661 $ 36,356 $11,419 $ 32 $ 90,056 $271,524
===================================================================================================================================
Interest rate-sensitive gap........... $67,740 $(73,615) $(12,334) $64,163 $19,256 $(65,210)
Interest rate-sensitive gap as a
percentage of total assets .......... 24.9% (27.1)% (4.5)% 23.6% 7.1% (24.0)%
Cumulative interest rate-
sensitive gap ....................... $67,740 $ (5,875) $(18,209) $45,954 $65,210
Cumulative interest rate-
sensitive gap as a percentage
of total assets .................... 24.9% (2.2)% (6.7)% 16.9% 24.0%
===================================================================================================================================
</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 in
its asset/liability software model, which is used to simulate expected and
unexpected shifts in interest rates and their effect on net interest income.
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.
14
<PAGE> 12
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
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans 30 - 89 days past due........................... $1,023 $ 3,644 $ 4,725 $ 2,303 $ 9,303
===================================================================================================================================
Nonaccrual loans:
Commercial and commercial real estate........................... $ 866 $ 3,459 $ 6,617 $21,472 $25,343
Residential real estate mortgage................................ 104 375 509 360 634
Installment..................................................... 63 356 422 49 514
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans......................................... 1,053 4,190 7,548 21,881 26,491
- -----------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial and commercial real estate........................... 46 37 20 585 1,989
Residential real estate mortgage................................ 61 53 216 380 731
Installment..................................................... 45 51 4 217 102
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more .......................... 152 141 240 1,182 2,822
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans...................................... $1,205 $ 4,331 $ 7,788 $23,063 $29,313
===================================================================================================================================
ORE, net (1) .................................................... $2,211 $ 4,408 $ 9,995 $10,332 $ 5,304
===================================================================================================================================
Total nonperforming assets....................................... $3,416 $ 8,739 $17,783 $33,395 $34,617
===================================================================================================================================
Restructured loans............................................... $1,540 $ 1,702 $ 5,983 $11,035 $ 4,662
===================================================================================================================================
Total nonperforming assets and restructured loans ............. $4,956 $10,441 $23,766 $44,430 $39,279
===================================================================================================================================
</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, 1996, gross interest income of $349,000
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 $18,000. Gross interest income of $260,000
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 $243,000.
The Corporation reduced its nonperforming assets from $8.7 million at
December 31, 1995 to $3.4 million at December 31, 1996, a $5.3 million (60.9%)
improvement. This reduction was achieved by $2.2 million in ORE sales, the
receipt of $2.2 million in principal payments, $3.0 million in charge-offs and
valuation adjustments, the return to accruing status of $1.6 million of
nonaccrual loans, offset in part by new nonaccrual loans and ORE of $1.3
million, a net increase of $416,000 in loans past due 90 days or more, and a
decrease in the valuation allowance for ORE of $2.0 million. The four loans that
comprised the restructured category at December 31, 1995 all demonstrated
performance at market rates and thus were transferred to performing status
during 1996, while one commercial real estate loan of $1.5 million that had been
on nonaccrual status was restructured.
The dramatic reduction in nonperforming assets from $34.6 million at December
31, 1992 to $3.4 million at December 31, 1996 was primarily due to the $18.9
million in charge-offs taken in that period, as well as to management's
long-term efforts to work with its borrowers to maximize recoveries.
Although 1996 marked the Corporation's second consecutive year of
profitability, 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 has stabilized since 1994. 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, 1996:
<TABLE>
<CAPTION>
====================================================================================================
LOANS 90 DAYS NONACCRUAL
OR MORE PAST DUE LOANS
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial real estate - Retail/office................................ $ -- $ 504
One-to four-family residential real estate............................ 61 324
Commercial and industrial............................................. 46 162
Installment........................................................... 45 63
- ----------------------------------------------------------------------------------------------------
Total............................................................... $152 $1,053
====================================================================================================
</TABLE>
15
<PAGE> 13
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, 1996, 1995
and 1994, the Corporation's restructured loans totalled $1.5 million, $1.7
million and $6.0 million, respectively. At December 31, 1996, the balance
consisted of one commercial real estate loan that had been on nonaccrual status.
At this time, management believes that the commercial real estate loan that was
classified as restructured at December 31, 1996 will not meet the criteria for
transfer to accrual status in 1997.
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 all $1.7 million in loans that were classified as
restructured at December 31, 1995 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. 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, 1996:
<TABLE>
<CAPTION>
=================================================================
(In thousands)
<S> <C>
Commercial real estate:
Raw land and construction projects............... $1,764
Retail/office.................................... 1,000
- -----------------------------------------------------------------
Total commercial real estate..................... 2,764
- -----------------------------------------------------------------
Valuation allowance.............................. 553
- -----------------------------------------------------------------
Total.............................................. $2,211
=================================================================
</TABLE>
Management believes that the net carrying value of ORE at December 31, 1996
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 $606,000 at December 31,
1996. These loans consisted of three residential real estate mortgage loans with
an aggregate principal balance of $393,000 and seventeen installment loans with
an aggregate principal balance of $213,000.
ASSET CONCENTRATIONS. The Corporation's loan portfolio contains certain
concentrations of related borrowers. At December 31, 1996, the combined three
largest concentrations totalled $32.6 million, or 19.8% 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 12 loans with an aggregate balance of $15.2 million. The second
relationship consisted of 15 loans totalling $10.2 million. The third
relationship consisted of eight loans totalling $7.2 million. At December 31,
1996, 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, 1996 and 1995, commercial real estate mortgage and
construction loans totalled $102.4 million and $97.5 million and represented
62.0% and 60.7%, 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.
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
December 31, 1996, 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 .......................... $53,438 $43,516 $8,865 $105,819
Commercial real estate construction ............................ 9,641 1,308 -- 10,949
- -------------------------------------------------------------------------------------------------------------------------------
Total ...................................................... $63,079 $44,824 $8,865 $116,768
===============================================================================================================================
Loans with predetermined interest rates ........................ $ 9,657 $44,824 $8,865 $ 63,346
Loans with floating interest rates ............................. 53,422 -- -- 53,422
- -------------------------------------------------------------------------------------------------------------------------------
Total ...................................................... $63,079 $44,824 $8,865 $116,768
===============================================================================================================================
</TABLE>
16
<PAGE> 14
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, 1996 of $5.1 million, or
424.5% 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
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income (at end of period) (1) ............. $165,070 $160,580 $164,345 $206,214 $294,660
==============================================================================================================================
Average loans outstanding (2) .................................... $160,125 $157,715 $171,395 $240,651 $310,665
==============================================================================================================================
Allowance balance (at beginning of year) ......................... $ 4,853 $ 6,501 $ 7,499 $ 7,670 $ 4,489
Loans charged off:
Commercial and commercial real estate (3) ...................... 824 3,640 2,265 4,011 6,588
Residential real estate mortgage ............................... 18 3 49 22 20
Installment .................................................... 99 51 182 518 645
- ------------------------------------------------------------------------------------------------------------------------------
Total loans charged off ....................................... 941 3,694 2,496 4,551 7,253
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans:
Commercial and commercial real estate, net (3) ................ 783 1,511 253 275 188
Real estate - mortgage ........................................ 2 6 -- 4 --
Installment ................................................... 18 29 24 61 24
- ------------------------------------------------------------------------------------------------------------------------------
Total recoveries ............................................. 803 1,546 277 340 212
- ------------------------------------------------------------------------------------------------------------------------------
Net loans charged off ............................................ 138 2,148 2,219 4,211 7,041
Provision for the period ......................................... 400 500 1,221 4,440 10,222
Allowance related to loans sold .................................. -- -- -- (400) --
- ------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) ............................... $ 5,115 $ 4,853 $ 6,501 $ 7,499 $ 7,670
==============================================================================================================================
Allowance for possible loan losses as a percentage of total
outstanding loans (at end of year) .............................. 3.10% 3.02% 3.96% 3.64% 2.60%
Allowance for possible loan losses as a percentage of
nonperforming loans (at end of year) ............................ 424.48% 112.05% 83.47% 32.52% 26.17%
Net loans charged off as a percentage of average loans outstanding .09% 1.36% 1.29% 1.75% 2.27%
==============================================================================================================================
</TABLE>
(1) Includes loans held for sale of $0, $34,000, $34,000, $19.6 million and
$28.7 million at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(2) Includes average loans held for sale of $32,000, $70,000, $2.6 million,
$20.5 million, and $24.4 million at December 31, 1996, 1995, 1994, 1993 and
1992, respectively.
(3) Includes commercial real estate construction loans.
The Corporation made provisions for possible loan losses during the years
ended December 31, 1996, 1995 and 1994 of $400,000, $500,000 and $1.2 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 1996 and 1995 below the level of the previous
years, 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
- --------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year .............................. $ 2,611 $1,634 $ 885
Provision charged to expense ............................. 780 1,850 863
Write-downs to fair value and net losses incurred on sales (2,838) (873) (64)
Other .................................................... -- -- (50)
- --------------------------------------------------------------------------------------------------
Balance at end of year .................................... $ 553 $2,611 $1,634
==================================================================================================
</TABLE>
17
<PAGE> 15
ASSET QUALITY (continued)
Through intensive management effort, gross ORE balances have declined from
$11.6 million at December 31, 1994 to $2.8 million at December 31, 1996. The
latter total is comprised of six properties, the largest of which is valued at
$1.4 million. Management believes that future annual provisions to the valuation
allowances for ORE should be lower than the 1996 provision.
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, 1996, securities having a book value of $6.5 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
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(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%
U.S. Government Agencies ...................... 34,622 83.2 27,746 70.6 -- --
Obligations of State and Political Subdivisions 851 2.0 883 2.2 934 5.3
Other ......................................... 6,175 14.8 6,167 15.7 160 .9
- ------------------------------------------------------------------------------------------------------------------------
$41,648 100.0% $39,328 100.0% $17,763 100.0%
========================================================================================================================
Held to maturity:
U.S. Treasury ................................. $ 7,516 28.5% $ -- -- % $ 993 28.5%
U.S. Government Agencies ...................... 17,542 66.5 19,530 97.5 1,992 57.2
Obligations of State and Political Subdivisions 1,337 5.0 500 2.5 500 14.3
- ------------------------------------------------------------------------------------------------------------------------
$26,395 100.0% $20,030 100.0% $ 3,485 100.0%
========================================================================================================================
</TABLE>
The Corporation's securities increased from $21.2 million at December 31,
1994, to $59.4 million at December 31, 1995, and to $68.0 million at December
31, 1996. The $8.6 million increase in securities during the year ended December
31, 1996 was due to the Corporation's investing the deposits acquired from
another commercial bank and loan paydown proceeds. 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.
Overall, the Corporation's securities portfolio is high grade. The U.S.
Treasury and U.S. Government Agencies securities which comprise 87.7% of the
portfolio at December 31, 1996, 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, 1996, the weighted
average maturity of all owned securities is 29.2 months, including a county
industrial development loan having a book value of $851,000 and a maturity in
2008. Also, $8.9 million and $8.0 million of securities classified as available
for sale and held to maturity, respectively, at December 31, 1996, 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 1996 and 1995, the Corporation classified certain
purchased securities as held to maturity. At December 31, 1996, 1995 and 1994,
the Corporation had no securities held for trading purposes. See Notes 1 and 2
of Notes to Consolidated Financial Statements.
18
<PAGE> 16
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 31,1996:
<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. Government Agencies.. $4,531(1) 5.56% $30,091(2) 5.68% $ -- --% $ -- --%
Obligations of State and
Political Subdivisions 47 11.36 226 11.36 395 11.36 183 11.36
Other .................... -- -- 6,152(3) 5.74 23 5.50 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Securities ......... $4,578 5.62% $36,469 5.73% $418 11.04% $183 11.36%
Held to Maturity:
U.S. Treasury ............ $ -- --% $ 7,516 5.80% $ -- --% $ -- --%
U.S. Government Agencies.. 5,815(4) 7.09 11,727 6.19 -- -- -- --
Obligations of State and
Political Subdivisions 162 5.40 1,175 6.62 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Securities ......... $5,977 7.04% $20,418 6.07% $ -- --% $ -- --%
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=====================================================================
TOTAL INVESTMENT PORTFOLIO
- ---------------------------------------------------------------------
CARRYING ESTIMATED AVERAGE
VALUE MARKET VALUE YIELD
- ---------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Available for Sale:
U.S. Government Agencies.. $34,622 $34,622 5.67%
Obligations of State and
Political Subdivisions 851 851 11.36
Other .................... 6,175 6,175 5.74
- ---------------------------------------------------------------------
Total Securities ......... $41,648 $41,648 5.79%
=====================================================================
Held to Maturity:
U.S. Treasury ............ $ 7,516 $ 7,426 5.80%
U.S. Government Agencies.. 17,542 17,575 6.49
Obligations of State and
Political Subdivisions 1,337 1,338 6.47
- ---------------------------------------------------------------------
Total Securities ......... $26,395 $26,339 6.29%
=====================================================================
</TABLE>
(1)Includes $4,531,000 of securities with floating rates. (2) Includes
$23,139,000 of securities with floating rates. (3) Includes $6,142,000 of
securities with floating rates. (4) Includes $495,000 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, 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.
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>
=============================================================================================================
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
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 ................. $ 48,048 --% $ 46,100 --% $ 46,230 --%
Interest-bearing demand .................... 27,388 1.22 23,669 1.54 23,361 1.90
Savings .................................... 74,549 2.73 76,032 2.53 90,574 2.38
Time ....................................... 68,608 5.01 73,558 5.17 55,664 3.59
- -------------------------------------------------------------------------------------------------------------
$218,593 2.65% $219,359 2.78% $215,829 2.13%
=============================================================================================================
</TABLE>
The Corporation does not rely heavily on certificates of deposit over
$100,000 as a source of funds. During 1996, certificates of deposit of $100,000
or more averaged only 1.7% 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,
1996:
<TABLE>
<CAPTION>
====================================================================================
CERTIFICATES OF DEPOSIT
- ------------------------------------------------------------------------------------
(in thousands)
<S> <C>
Maturity period:
Three months or less ................................ $2,104
Over three through twelve months .................... 2,023
Over twelve months .................................. 338
- --------------------------------------------------------------------------
Total ............................................ $4,465
==========================================================================
</TABLE>
In addition to deposits, at December 31,1996, the Corporation's liabilities
included $2.6 million in accrued and other liabilities. The Corporation had an
immaterial amount of federal funds purchased during 1996 and no federal funds
purchased during the years ended December 31, 1995 and 1994.
19
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES (continued)
At December 31, 1996, the total approved loan commitments outstanding
amounted to $31.2 million and commitments under standby letters of credit
amounted to $825,000. 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, 1996 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from subsidiary Bank.
The parent company's cash obligations subsequent to December 31, 1996
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 common stock, 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.
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that if undertaken, could have
a direct material effect on the Corporation's and Bank's financial statements.
Under capital adequacy guidelines (Corporation and Bank) and the regulatory
framework for prompt corrective action (Bank only), the Corporation and Bank
each must meet specific capital guidelines that involve quantitative measures of
their respective assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's and Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. The Corporation was notified by the FRB that it was
"well capitalized" based on the FRB's examination as of June 30, 1996. To be
categorized as "well capitalized" the Corporation and the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since those notifications
that management believes have changed the Corporation's or the Bank's respective
category.
<TABLE>
<CAPTION>
===================================================================
ACTUAL
AMOUNT RATIO
- -------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $29,424,000 15.5%
Bank.................................. $26,831,000 14.2%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $27,032,000 14.3%
Bank.................................. $24,445,000 12.9%
Tier 1 Capital (to Average Assets):
Corporation........................... $27,032,000 10.5%
Bank.................................. $24,445,000 9.5%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $26,570,000 14.7%
Bank.................................. $23,030,000 12.7%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $24,237,000 13.4%
Bank.................................. $20,713,000 11.5%
Tier 1 Capital (to Average Assets):
Corporation........................... $24,237,000 10.1%
Bank.................................. $20,713,000 8.6%
===================================================================
</TABLE>
<TABLE>
<CAPTION>
=====================================================================================================================
FOR CAPITAL
ADEQUACY PURPOSES
- ---------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $15,148,000 greater than or equal to 8.0
Bank.................................. greater than or equal to $15,106,000 greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $ 7,574,000 greater than or equal to 4.0
Bank.................................. greater than or equal to $ 7,553,000 greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $10,321,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $10,312,000 greater than or equal to 4.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $14,499,000 greater than or equal to 8.0%
Bank.................................. greater than or equal to $14,468,000 greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $ 7,249,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $ 7,234,000 greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $ 9,622,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $ 9,610,000 greater than or equal to 4.0%
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=====================================================================================================================
TO BE WELL CAPITALIZED UNDER
PROMPT CORRECTIVE ACTION PROVISIONS
- ---------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $18,935,000 greater than or equal to 10.0%
Bank.................................. greater than or equal to $18,882,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $11,361,000 greater than or equal to 6.0%
Bank.................................. greater than or equal to $11,329,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $12,902,000 greater than or equal to 5.0%
Bank.................................. greater than or equal to $12,889,000 greater than or equal to 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $18,123,000 greater than or equal to 10.0%
Bank.................................. greater than or equal to $18,085,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $10,874,000 greater than or equal to 6.0%
Bank.................................. greater than or equal to $10,851,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $12,028,000 greater than or equal to 5.0%
Bank.................................. greater than or equal to $12,013,000 greater than or equal to 5.0%
=====================================================================================================================
</TABLE>
Both the Corporation and the Bank were released from regulatory orders during
the first quarter of 1996.
The Corporation had been operating under a Written Agreement with the FRB
since November, 1993 and the Bank had been operating under a Memorandum of
Understanding issued by the FDIC and the New Jersey Department of Banking in
May, 1995.
20
<PAGE> 18
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
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement 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 adoption of SFAS No. 121 has not had a material effect on its
financial statements.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October, 1995. This standard permits but does not
require an entity to account for stock options and other equity instruments
awarded to employees as compensation by using a method based on the fair value
of the equity instruments. The standard also requires, effective January 1,
1996, for the Corporation to make certain pro forma disclosures. The Corporation
elected to adopt only the new disclosure requirements of this accounting
standard.
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, 1996, the Corporation's impaired loans totaled $2,386,000,
the amount of its commercial nonaccrual and restructured 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.
21
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
===================================================================================================================================
DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents:
<S> <C> <C>
Cash and Due from Banks ........................................................................ $ 12,078,000 $ 9,160,000
Federal Funds Sold.............................................................................. 17,680,000 5,802,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents................................................................ 29,758,000 14,962,000
- -----------------------------------------------------------------------------------------------------------------------------------
Due from Bank - Interest-Bearing ................................................................. 1,000,000 1,000,000
Securities:
Available for Sale, at Fair Value............................................................... 41,648,000 39,328,000
Held to Maturity, at Cost (Fair Value $26,339,000 and $20,326,000).............................. 26,395,000 20,030,000
Loans ............................................................................................ 165,070,000 160,580,000
Less: Allowance for Possible Loan Losses ....................................................... 5,115,000 4,853,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans...................................................................................... 159,955,000 155,727,000
Premises and Equipment, net ...................................................................... 3,260,000 2,675,000
Other Real Estate, net ........................................................................... 2,211,000 4,408,000
Other Assets, net ................................................................................ 6,428,000 7,883,000
Intangible Assets, net ........................................................................... 869,000 503,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.................................................................................... $271,524,000 $246,516,000
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Noninterest-Bearing.................................................................... $ 58,421,000 $ 49,761,000
- Interest-Bearing....................................................................... 31,846,000 25,740,000
Savings......................................................................................... 80,832,000 73,348,000
Time............................................................................................ 64,325,000 64,005,000
Certificates of Deposit over $100,000........................................................... 4,465,000 4,208,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits.................................................................................. 239,889,000 217,062,000
Accrued Expenses and Other Liabilities.......................................................... 2,599,000 2,205,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities............................................................................... 242,488,000 219,267,000
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A Preferred Stock, no par value:
Authorized shares - 1,950
Issued shares - 717 at December 31, 1995........................................................ -- 717,000
Common Stock, $1 par value:
Authorized shares - 15,000,000
Issued shares - 8,160,605 at December 31, 1996 and
8,159,855 at December 31, 1995, respectively.............................................. 8,161,000 8,160,000
Capital In Excess of Par Value.................................................................... 13,103,000 13,101,000
Retained Earnings ............................................................................... 8,105,000 5,479,000
Net Unrealized Holding (Losses) Gains on Securities Available for Sale, Net of Tax................ (39,000) 86,000
Treasury Stock at Cost (63,406 shares)............................................................ (294,000) (294,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity...................................................................... 29,036,000 27,249,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................................... $271,524,000 $246,516,000
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
22
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
===================================================================================================================================
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Loans, including Fees ................................................................. $13,993,000 $14,021,000 $13,199,000
Securities:
Taxable.............................................................................. 3,693,000 3,150,000 766,000
Nontaxable........................................................................... 79,000 68,000 76,000
Other.................................................................................. 453,000 1,104,000 878,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME................................................................ 18,218,000 18,343,000 14,919,000
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings and Interest-Bearing Demand Deposits........................................... 2,367,000 2,288,000 2,604,000
Time Deposits and Certificates of Deposit over $100,000................................ 3,435,000 3,806,000 1,997,000
Other Borrowings ...................................................................... 2,000 12,000 357,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE............................................................... 5,804,000 6,106,000 4,958,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME.................................................................... 12,414,000 12,237,000 9,961,000
PROVISION FOR POSSIBLE LOAN LOSSES ....................................................... 400,000 500,000 1,221,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES............................................................... 12,014,000 11,737,000 8,740,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts.................................................... 1,392,000 1,515,000 1,388,000
Brokerage Commissions.................................................................. 312,000 298,000 319,000
(Loss) Gain on Securities Transactions, net............................................ (16,000) 33,000 --
Other Income........................................................................... 686,000 601,000 1,615,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME................................................................... 2,374,000 2,447,000 3,322,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits ........................................................ 4,817,000 4,574,000 5,041,000
Net Occupancy Expense.................................................................. 811,000 760,000 822,000
Equipment Expense...................................................................... 586,000 561,000 616,000
Other Real Estate Expense - Cost of Operations, net.................................... 252,000 958,000 1,342,000
- Valuation Adjustments...................................... 780,000 1,850,000 863,000
Other Expense ......................................................................... 2,808,000 3,445,000 4,640,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE................................................................ 10,054,000 12,148,000 13,324,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES...................................................... 4,334,000 2,036,000 (1,262,000)
Provision (Benefit) for Income Taxes .............................................. 1,278,000 (4,212,000) (285,000)
===================================================================================================================================
NET INCOME (LOSS)...................................................................... $ 3,056,000 $ 6,248,000 $ (977,000)
===================================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE .................................................... $ .37 $ .76 $ (.38)
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE> 21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===================================================================================================================================
NET
UNREALIZED
HOLDING
(LOSSES) GAINS
FOR THE YEARS ENDED CLASS A CAPITAL RETAINED ON SECURITIES
DECEMBER 31, 1994, 1995 AND 1996: 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, 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
(Losses) Gains ................... -- -- -- -- (331,000) --
Mandatory Exercise of Stock Purchase
Contracts ........................ -- 352,000 4,445,000 -- -- --
Net Proceeds from Issuance of
Common Stock ..................... -- 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 ....... (1,033,000) -- -- -- -- --
Cash Dividends on Preferred Stock
Redeemed ......................... -- -- -- (119,000) -- --
Change in Net Unrealized Holding
(Losses) Gains, Net of Tax ....... -- -- -- -- 398,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 .......... 717,000 8,160,000 13,101,000 5,479,000 86,000 (294,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income - 1996 ................... -- -- -- 3,056,000 -- --
Redemption of Preferred Stock ....... (717,000) -- -- -- -- --
Cash Dividends on Preferred Stock
Redeemed ......................... -- -- -- (106,000) -- --
Cash Dividends on Common Stock,
$.04 per Share ................... -- -- -- (324,000) -- --
Stock Options Exercised ............. -- 1,000 2,000 -- -- --
Change in Net Unrealized Holding
(Losses) Gains, Net of Tax ....... -- -- -- -- (125,000) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 .......... $ -- $8,161,000 $13,103,000 $ 8,105,000 $ (39,000) $(294,000)
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===================================================================================================================================
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss).................................................................. $ 3,056,000 $ 6,248,000 $ (977,000)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization of Premises and Equipment.......................... 485,000 444,000 465,000
Amortization of Intangible Assets................................................ 256,000 270,000 247,000
Accretion of Securities Discount, net............................................ (96,000) (395,000) (15,000)
Provision for Possible Loan Losses............................................... 400,000 500,000 1,221,000
Provision for Possible Losses on Other Real Estate............................... 780,000 1,850,000 863,000
Deferred Income Tax Provision (Benefit).......................................... 829,000 (4,235,000) 386,000
Loss (Gain) on Securities Transactions, net.................................... 16,000 (33,000) --
Loans Made or Acquired and Held for Sale......................................... (720,000) (321,000) (1,548,000)
Proceeds from Loans Held for Sale................................................ 721,000 325,000 21,337,000
Gain on Sales of Loans Held for Sale............................................. (1,000) (4,000) (212,000)
(Gain) Loss on Sale of Other Real Estate......................................... (137,000) (83,000) 10,000
Decrease (Increase) in Interest Receivable....................................... 319,000 (797,000) (224,000)
Increase (Decrease) in Accrued Expenses and Other Liabilities.................... 232,000 (1,100,000) 1,677,000
Decrease in Other Assets......................................................... 392,000 378,000 1,894,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities...................................... 6,532,000 3,047,000 25,124,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of Time Deposit from Bank................................................. (1,000,000) (1,000,000) --
Maturity of Time Deposit from Bank................................................. 1,000,000 -- --
Securities Available for Sale:
Proceeds from Maturities......................................................... 3,533,000 15,051,000 6,693,000
Proceeds from Sales Prior to Maturity............................................ 14,309,000 8,504,000 1,026,000
Proceeds from Calls Prior to Maturity............................................ 8,000,000 1,000,000 --
Purchases........................................................................ (28,295,000) (30,264,000) (16,940,000)
Securities Held to Maturity:
Proceeds from Maturities......................................................... 3,500,000 -- --
Proceeds from Calls Prior to Maturity............................................ 4,002,000 8,925,000 --
Purchases........................................................................ (13,863,000) (40,443,000) (3,485,000)
Net (Increase) Decrease in Loans Outstanding....................................... (5,105,000) 903,000 15,119,000
Capital Expenditures............................................................... (1,074,000) (535,000) (91,000)
Payments Received on Other Real Estate............................................. -- 2,674,000 29,000
Advances Made on Other Real Estate................................................. (286,000) (677,000) (937,000)
Proceeds from Sales of Other Real Estate........................................... 2,316,000 2,537,000 5,377,000
Premium Paid for Deposits.......................................................... (622,000) -- --
Sale of Mortgage Operations........................................................ -- -- 2,067,000
Other.............................................................................. 4,000 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities............................ (13,581,000) (33,325,000) 8,858,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Total Deposits.......................................... 22,827,000 5,198,000 (29,744,000)
Redemption of Subordinated Debentures ............................................. -- (1,292,000) --
Redemption of Class A Preferred Stock ............................................. (717,000) (1,033,000) (200,000)
Cash Dividends on Preferred Stock ................................................. (106,000) (119,000) --
Cash Dividends on Common Stock .................................................... (162,000) -- --
Proceeds from Stock Options and Stock Purchase Contracts Exercised ................ 3,000 -- 164,000
Net Proceeds from Sale of Common Stock ............................................ -- -- 11,690,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities............................ 21,845,000 2,754,000 (18,090,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents.................................. 14,796,000 (27,524,000) 15,892,000
Cash and Cash Equivalents, Beginning of Year.......................................... 14,962,000 42,486,000 26,594,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year................................................ $ 29,758,000 $ 14,962,000 $ 42,486,000
===================================================================================================================================
Supplemental Cash Flow Disclosures:
Cash paid during year for:
Interest......................................................................... $ 5,816,000 $ 5,948,000 $ 5,019,000
Income Taxes, Net of Refunds..................................................... $ (103,000) $ (373,000) $ (2,565,000)
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Ramapo Financial Corporation ("Corporation") owns The Ramapo Bank ("Bank"), a
full service commercial bank with seven 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 the
Corporation, the Bank and subsidiaries of the Bank. In March 1994, two other
wholly-owned subsidiaries were merged with and into the Corporation.
Intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SECURITIES
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 both 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 1996 and 1995, the Corporation classified certain purchased
securities as held to maturity. The Corporation had no securities held for
trading purposes at December 31, 1996 or 1995.
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 2 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
Prior to the adoption of SFAS No. 114 (discussed below), loans were
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
fore-closure, 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.
Since then, real estate values have improved modestly and remained stable.
Certain business sectors have expanded, though overall business growth has been
flat. 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, residential mortgages and
consumer installment loans. SFAS No. 114 and No. 118 also apply to all loans
that are classified as troubled debt restructurings.
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
26
<PAGE> 24
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 3 and 4
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 $18,745,000 and $24,677,000 at December 31, 1996 and
1995, 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 13 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
- ---------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights (Note 13).... $ 83 $123
Core Deposit Premiums............................ 665 151
Premiums on Purchased Home Equity
Lines of Credit............................... 121 229
- ---------------------------------------------------------------------
$869 $503
=====================================================================
</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 November, 1996, the Bank purchased deposits and accrued interest totaling
$9,695,000 from another commercial bank and paid a deposit premium of $622,000.
Amortization of intangibles totaled $256,000, $270,000 and $247,000 for 1996,
1995 and 1994, respectively, of which $40,000, $40,000 and $37,000,
respectively, consisted of the amortization of purchased mortgage servicing
rights.
DIVIDEND RESTRICTIONS
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, 1996 and 1995, the Bank had aggregate retained earnings
of $11,247,000 and $8,385,000, respectively, available under state law.
INCOME TAXES
The Corporation, the Bank and subsidiaries of the Bank 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 10 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 15.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined by dividing net income (loss) less
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 11) is reflected in the computation of per common share
amounts for 1996 and 1995. Outstanding options and mandatory stock purchase
contracts (Note 9) in 1994 were antidilutive and therefore were not reflected in
the computation of the per share amount for that year. The weighted average
numbers of shares outstanding for computing net income (loss) per share were
8,205,032, 8,175,819 and 2,874,600 for the years ended December 31, 1996, 1995
and 1994, 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
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement 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 adoption of SFAS No. 121 has not had a material effect on its
financial statements.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October, 1995. This standard permits but does not
require an entity to account for stock options and other equity instruments
awarded to employees as compensation by using a method based on the fair value
of the equity instruments. The standard also requires, effective January 1,
1996, for the Corporation to make certain pro forma disclosures. The Corporation
elected to adopt only the new disclosure requirements of this accounting
standard. See Note 11.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
27
<PAGE> 25
NOTE 2: SECURITIES
The following is a summary of available for sale securities and held to
maturity securities at the dates indicated:
<TABLE>
<CAPTION>
===================================================================================================================================
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
HISTORICAL COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES ESTIMATED FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government Agencies:
Maturing within 1 year ........ $ 4,533 $ 1 $ (3) $ 4,531
Maturing 1 to 5 years ......... 30,145 28 (82) 30,091
- -----------------------------------------------------------------------------------------------------------------------------------
34,678 29 (85) 34,622
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year ........ 47 -- -- 47
Maturing 1 to 5 years ......... 226 -- -- 226
Maturing 5 to 10 years ........ 395 -- -- 395
Maturing after 10 years ....... 183 -- -- 183
- -----------------------------------------------------------------------------------------------------------------------------------
851 -- -- 851
- -----------------------------------------------------------------------------------------------------------------------------------
Other:
Maturing 1 to 5 years ......... 6,159 8 (15) 6,152
Maturing 5 to 10 years ........ 25 -- (2) 23
- -----------------------------------------------------------------------------------------------------------------------------------
6,184 8 (17) 6,175
- -----------------------------------------------------------------------------------------------------------------------------------
$41,713 $ 37 $(102) $41,648
===================================================================================================================================
HELD TO MATURITY
U.S. Treasury:
Maturing 1 to 5 years ......... $ 7,516 $ 16 $(106) $ 7,426
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Maturing within 1 year ........ 5,815 36 -- 5,851
Maturing 1 to 5 years ......... 11,727 19 (22) 11,724
- -----------------------------------------------------------------------------------------------------------------------------------
17,542 55 (22) 17,575
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year ........ 162 -- -- 162
Maturing 1 to 5 years ......... 1,175 3 (2) 1,176
- -----------------------------------------------------------------------------------------------------------------------------------
1,337 3 (2) 1,338
- -----------------------------------------------------------------------------------------------------------------------------------
$26,395 $ 74 $(130) $26,339
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================================
DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
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
===============================================================================================================================
</TABLE>
Securities at December 31, 1996 and 1995 having a book value of $6,507,000
and $2,497,000, 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 1996 were $22,309,000, resulting in gross gains of $25,000 and gross
losses of $43,000. Proceeds from calls prior to maturity of securities held to
maturity during 1996 were $4,002,000, resulting in gross gains of $2,000 and no
losses. 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.
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 at December 31, 1995 from the held to maturity
category to the available for sale category. Upon transfer, an unrealized
holding gain of $71,800 was recorded.
28
<PAGE> 26
NOTE 3: 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. 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 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.
The composition of the loan portfolio, net of unearned income, is as follows:
<TABLE>
<CAPTION>
=================================================================
DECEMBER 31
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial and commercial real estate $105,819 $ 96,469
Commercial real estate construction . 10,949 15,177
Residential real estate mortgage .... 7,443 8,806
Installment ......................... 40,859 40,128
- -----------------------------------------------------------------
$165,070 $160,580
=================================================================
</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 $32,605,000 and
$35,233,000 at December 31, 1996 and 1995, respectively. The largest borrower
concentration consists of loans to a group of affiliated borrowers with an
aggregate balance of $15,157,000 and $15,430,000 at December 31, 1996 and 1995,
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, 1996 and 1995 were $10,226,000 and $12,245,000, respectively. All
such loans were performing as of the respective year end dates.
The third relationship consists of loans primarily for the construction or
renovation of condominium units, totaling $7,222,000 and $7,558,000 at December
31, 1996 and 1995, respectively.
Loans for which the accrual of interest has been discontinued totaled
$1,053,000 and $4,190,000 at December 31, 1996 and 1995, respectively.
Restructured loans for which terms have been modified totaled $1,500,000 and
$1,702,000 at December 31, 1996 and 1995, respectively. At December 31, 1996,
the Corporation had no commitments to advance funds to borrowers with
restructured terms.
Interest income that would have been recognized on nonaccrual loans under the
original terms of such loans, contractual interest income on restructured loans
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
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Interest income which would have been recognized on nonaccrual loans ............. $349 $1,265
Contractual interest income which would have been recognized on restructured loans 260 18
Interest income received ......................................................... 262) (229)
- ---------------------------------------------------------------------------------------------------------
Interest income not recognized ................................................... $347 $1,054
=========================================================================================================
</TABLE>
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.
The Corporation's impaired loans totaled $2,386,000 and $5,161,000 at
December 31, 1996 and 1995, respectively, the amount of its commercial
nonaccrual and restructured loan portfolios on those dates. 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.
29
<PAGE> 27
NOTE 4: 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
- -----------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year .... $4,853 $ 6,501 $ 7,499
Provision charged to expense 400 500 1,221
Recoveries of loans
previously charged off ... 803 1,546 277
Loans charged off .......... (941) (3,694) (2,496)
- -----------------------------------------------------------------------
Balance, end of year .......... $5,115 $ 4,853 $ 6,501
=======================================================================
</TABLE>
NOTE 5: NONPERFORMING ASSETS
Nonperforming assets at the indicated dates are summarized as follows:
<TABLE>
<CAPTION>
========================================================================================
DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
90 DAYS
PAST DUE
OR MORE NONACCRUAL TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Commercial and commercial real estate .......... $ 46 $ 886 $ 932
Residential real estate mortgage ............... 61 104 165
Installment .................................... 45 63 108
- ----------------------------------------------------------------------------------------
Total nonperforming loans ................... $152 $1,053 $1,205
========================================================================================
Other real estate, net (Notes 1 and 6) ............ 2,211
- ----------------------------------------------------------------------------------------
Total nonperforming assets .................. $3,416
========================================================================================
Ratio of total nonperforming assets to total assets 1.26%
========================================================================================
</TABLE>
<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, net (Notes 1 and 6) ....................... 4,408
- --------------------------------------------------------------------------------------------------
Total nonperforming assets ............................. $8,739
==================================================================================================
Ratio of total nonperforming assets to total assets .......... 3.55%
==================================================================================================
</TABLE>
30
<PAGE> 28
NOTE 6: OTHER REAL ESTATE
The following table summarizes the investment in other real estate by project
or property type at December 31:
<TABLE>
<CAPTION>
========================================================================================
1996 1995
- ----------------------------------------------------------------------------------------
PROJECT OR PROPERTY TYPE NUMBER AMOUNT NUMBER AMOUNT
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial real estate:
Raw land and construction
projects ....................... 3 $1,764 5 $2,667
Retail/office .................... 3 1,000 3 4,082
- ----------------------------------------------------------------------------------------
Total commercial real estate.. 6 2,764 8 6,749
- ----------------------------------------------------------------------------------------
Residential real estate:
One to four family ............... -- -- 2 270
- ----------------------------------------------------------------------------------------
Total other real estate ........ 6 2,764 10 7,019
Valuation allowance ................ (553) (2,611)
- ----------------------------------------------------------------------------------------
$2,211 $4,408
========================================================================================
</TABLE>
A summary of activity in other real estate for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Balance, beginning of year, net ...................... $ 4,408 $ 9,995
Transfers from nonaccrual loans ...................... 476 648
Transfers from accrual loans ......................... -- 66
Advances ............................................. 286 677
Sales of properties .................................. (2,179) (2,454)
Payments from borrowers -- ........................... -- (2,674)
Charge-offs or write-downs ........................... (2,838) (873)
Decrease (increase) in valuation allowance ........... 2,058 (977)
- --------------------------------------------------------------------------------
Balance, end of year, net ............................ $ 2,211 $ 4,408
================================================================================
</TABLE>
An analysis of the valuation allowance for other real estate for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
===================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year ................................. $ 2,611 $1,634 $ 885
Provision charged to expense ............................. 780 1,850 863
Write-downs to fair value and net losses incurred on
sales .................................................. (2,838) (873) (64)
Other .................................................... -- -- (50)
- ---------------------------------------------------------------------------------------------------
Balance, end of year ....................................... $ 553 $2,611 $1,634
===================================================================================================
</TABLE>
NOTE 7: 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 1996:
<TABLE>
<CAPTION>
==============================================
(In thousands)
<S> <C>
Balance, December 31, 1995 ..... $ 659
Additions .................... 1,438
Repayments ................... (245)
Resignation of officers ...... (3)
- ----------------------------------------------
Balance, December 31, 1996 ..... $1,849
==============================================
</TABLE>
All related party loans were current as to interest and principal at December
31, 1996.
31
<PAGE> 29
NOTE 8: PREMISES AND EQUIPMENT
At December 31, premises and equipment consists of the following:
<TABLE>
<CAPTION>
========================================================================
1996 1995
- ------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land and improvements .......................... $ 286 $ 286
Buildings and improvements ..................... 2,815 2,743
Leasehold improvements ......................... 378 578
Furniture and equipment ........................ 2,726 2,131
- ------------------------------------------------------------------------
6,205 5,738
Less - Accumulated depreciation and
amortization ................................. 2,945 3,063
- ------------------------------------------------------------------------
$3,260 $2,675
========================================================================
</TABLE>
NOTE 9: OTHER BORROWINGS
In June 1985, the Corporation issued 11% subordinated debentures due June
1995 with mandatory stock purchase contracts exercisable not later than June,
1994 ("Equity Contracts"). During 1994, the remaining $4,799,000 of Equity
Contracts were exercised primarily through the surrender of $4,633,000 of the
11% subordinated debentures, with the balance consisting of cash payments. At
December 31, 1994, $1,292,000 of 11% subordinated debentures were outstanding.
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.
32
<PAGE> 30
NOTE 10: INCOME TAXES
The current and deferred amounts of the provision (benefit) for income taxes
as of December 31 are as follows:
<TABLE>
<CAPTION>
====================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal .................................................... $ 449 $ 21 $(671)
State ...................................................... -- 2 --
Deferred ..................................................... 829 1,039 386
- ---------------------------------------------------------------------------------------------------
Total current and deferred ................................... 1,278 1,062 (285)
- ---------------------------------------------------------------------------------------------------
Benefit of reduction in deferred tax asset valuation
allowance .................................................. -- (5,274) --
- ---------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes ................... $1,278 $(4,212) $(285)
====================================================================================================
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and for
income tax purposes.
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
- -------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Allowance for possible losses on loans and other real
estate ................................................... $1,802 $2,138
Gain on restructured loans ................................. 299 307
Depreciation and amortization .............................. 173 (314)
Net nonaccrual interest charge-offs ........................ (74) (162)
Accrued liabilities not currently deductible ............... 148 100
Federal and state net operating loss carryforwards ......... 222 1,847
Alternative minimum tax credits ............................ 750 311
Net holding (gains) losses on securities available for
sale ..................................................... 26 (57)
Other ...................................................... (64) 8
- -------------------------------------------------------------------------------------
3,282 4,178
Valuation allowance ........................................ -- --
- -------------------------------------------------------------------------------------
Net deferred tax asset included in Other Assets ....... $3,282 $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, 1996, the Corporation has a state net operating loss
carryforward of $3.7 million which expires as follows: $2.2 million in 2000 and
$1.5 million in 2001.
A reconciliation of income taxes calculated at the U. S. statutory rate of
34% to the actual income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
========================================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Statutory provision (benefit) .................................... $1,474 $ 692 $(429)
Reduction in Federal taxes resulting from tax-exempt income ...... (15) (23) (31)
State taxes on income, net of Federal tax benefit ................ 327 122 --
Reversals of accruals no longer required ......................... (496) -- --
Tax refund greater than receivable recorded ...................... -- (81) (285)
(Decrease) increase in valuation allowance for deferred tax
assets ........................................................ -- (5,274) 920
Other ............................................................ (12) 352 (460)
- --------------------------------------------------------------------------------------------------------
$1,278 $(4,212) $(285)
========================================================================================================
</TABLE>
33
<PAGE> 31
NOTE 11: STOCKHOLDERS' EQUITY
PREFERRED STOCK
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. Under the terms of a
debt restructuring with a lender, these shares were exchanged for the remaining
principal balance of a note payable of $1,950,000.
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 shares of
redeemable Preferred Stock that were redeemed on November 30, 1994. In March,
1996, the Corporation redeemed the remaining 717 shares of Preferred Stock and
paid cumulative dividends on that stock of approximately $106,000. All
redemptions and dividend payments received regulatory approval.
STOCK OPTIONS
In May, 1996, the 12,000 options exercisable at $18.125 per share under the
1982 Incentive Stock Option Plan expired. Under the 1986 Nonstatutory Stock
Option Plan, 100,000 shares of common stock are available for grant and no
previously granted options are outstanding.
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 exercise price of
$500,000. The exercise of these options was conditioned upon the successful
completion of a common stock offering ("Offering"), which was achieved on
October 13, 1994, when 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 $7.5 million was contributed to the
Bank's capital.
The options were granted in three separate tiers as follows: (1) Tier 1
options having an aggregate exercise price of $170,000 exercisable at $2 per
share, (2) Tier 2 options having an aggregate exercise price of $165,000
exercisable at $2.32 per share and (3) Tier 3 options having an aggregate
exercise price of $165,000 exercisable at $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.
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 per share 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 on the date of the annual
meeting of stockholders until May 16, 2005, the expiration date of the
Directors' Plan. Each eligible director will automatically be annually granted
such an option to purchase 1,800 shares. A total of 50% of such options become
exercisable six months from the date of grant with the remainder becoming
exercisable 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, 1996, 1,268,964 shares were reserved for future issuance
under the Option Agreement and these three Plans.
Option activity for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER PRICE NUMBER PRICE NUMBER PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year................ 545,434 230,934 12,000
Options granted........................... 262,100 $4.81 - $ 4.88 320,000 $3.50 - $ 3.81 218,934 $2.00 - $ 2.63
Options exercised......................... (750) $3.81 -- -- -- --
Options cancelled......................... (39,250) 3.81 - 18.13 (5,500) 3.81 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year...................... 767,534 2.00 - 4.88 545,434 2.00 - 18.13 230,934 2.00 - 18.13
===================================================================================================================================
Options exercisable, end of year.......... 304,736 $2.00 - $ 4.88 139,375 $2.00 - $18.13 12,000 $18.13
===================================================================================================================================
</TABLE>
The Corporation applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. The
compensation cost that has been charged against income for its performance-based
plan was $108,000, $120,000 and $0 for 1996, 1995, and 1994, respectively. Had
compensation cost for the Corporation's stock option plans been determined based
on the fair value at the grant date for awards granted after December 31, 1994
under those plans consistent with the method of SFAS No. 123, "Accounting of
Stock Based Compensation," the Corporation's net income and income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
=============================================================
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Net Income:
As reported............... $3,056,000 $6,248,000
Pro forma ................ $2,880,000 $6,117,000
Income per share:
As reported............... $ .37 $ .76
Pro forma ................ $ .35 $ .74
=============================================================
</TABLE>
34
<PAGE> 32
NOTE 11: STOCKHOLDERS' EQUITY (continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; dividend yield of
2.5% for both years; expected volatility of 25% and 29% for all options;
risk-free interest rates of 6.9% and 6.1% for the Employee Plan options, and
6.5% and 6.4% for the Directors' Plan options; and expected lives of 7.8 and 7.7
years for the Employee Plan options and 6.5 and 6.3 years for the Directors'
Plan options.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
=============================================================================
EXERCISE NUMBER OUTSTANDING NUMBER EXERCISABLE REMAINING
PRICE AT DECEMBER 31, 1996 AT DECEMBER 31, 1996 CONTRACTUAL LIFE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$2.00 85,000 42,500 4.2 years
2.32 71,244 17,811 4.2
2.63 62,690 -- 4.2
3.50 65,000 65,000 8.4
3.81 221,500 110,750 8.4
4.81 249,500 62,375 9.5
4.88 12,600 6,300 9.3
- -----------------------------------------------------------------------------
767,534 304,736
=============================================================================
</TABLE>
NOTE 12: COMMITMENTS AND CONTINGENCIES
The consolidated balance sheets as of December 31, 1996 and 1995 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 often receives a fee for providing a commitment. The Corporation was
committed to advance $31,163,000 and $28,247,000 to its borrowers as of December
31, 1996 and 1995, 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 $825,000
and $620,000 as of December 31, 1996 and 1995, 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 2009 but which contain certain renewal options.
Total rent expense was approximately $183,000, $154,000 and $202,000, for 1996,
1995 and 1994, respectively.
On March 1, 1995, the Corporation entered into a five-year license agreement
with its banking software provider. Minimum future annual payments under this
agreement are expected to be approximately $72,000.
At December 31, 1996, aggregate annual minimum rental commitments under
noncancelable leases having an initial or remaining term of more than one year
are as follows:
<TABLE>
======================================
<S> <C>
1997 ............. $ 209,000
1998 ............. 181,000
1999 ............. 136,000
2000 ............. 95,000
2001 ............. 96,000
Thereafter ....... 552,000
- --------------------------------------
$1,269,000
======================================
</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
1997.
Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. The reserve
balances aggregated $4,299,000 and $3,172,000 at December 31, 1996 and 1995,
respectively.
NOTE 13: SALE OF MORTGAGE SERVICING
In January 1994, the Bank sold substantially all of 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.
35
<PAGE> 33
NOTE 14: 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
pre-retirement 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, 1996, 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,
1996, 1995 and 1994 were $167,000, $146,000 and $120,000, respectively.
Other than the benefit provided by the supplemental income plan described
above, the Corporation does not provide any post-retirement benefits for its
employees.
NOTE 15: 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 recorded
book balances at December 31, 1996 and 1995, were as follows:
Financial instruments actively traded in the secondary market have been
valued using available market prices.
<TABLE>
<CAPTION>
========================================================================================================================
DECEMBER 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................... $29,758,000 $29,758,000 $14,962,000 $14,962,000
Securities available for sale at fair value (Note 2) ... 41,648,000 41,648,000 39,328,000 39,328,000
Securities held to maturity (Note 2) ................... 26,395,000 26,339,000 20,030,000 20,326,000
========================================================================================================================
</TABLE>
Financial instruments with stated maturities have been valued using a present
value discounted cash flow method 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, 1996 DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due from bank - interest-bearing................... $ 1,001,000 $ 1,001,000 $ 1,001,000 $ 1,005,000
Gross loans, including accrued interest............ 166,336,000 164,050,000 162,028,000 162,271,000
Deposits, including accrued interest............... 240,704,000 240,848,000 217,890,000 218,096,000
==================================================================================================================
</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
$31,163,000 and $28,247,000 at December 31, 1996 and 1995, respectively, and are
generally priced at market at time of funding. Standby letters of credit
totaling $825,000 and $620,000 as of December 31, 1996 and 1995, 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 12
for additional discussion relating to these off-balance-sheet activities. At
December 31, 1996 and 1995, fees related to the unexpired terms of letters of
credit were not significant.
36
<PAGE> 34
NOTE 16: REGULATORY CAPITAL
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that if undertaken, could have
a direct material effect on the Corporation's and Bank's financial statements.
Under capital adequacy guidelines (Corporation and Bank) and the regulatory
framework for prompt corrective action (Bank only), the Corporation and Bank
each must meet specific capital guidelines that involve quantitative measures of
their respective assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's and Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. The
Corporation was notified by the Federal Reserve Bank of New York ("FRB") that it
was "well capitalized" based on the FRB's examination as of June 30, 1996. To be
categorized as "well capitalized" the Corporation and the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since those notifications
that management believes have changed the Corporation's or the Bank's respective
category.
<TABLE>
<CAPTION>
====================================================================
ACTUAL
- --------------------------------------------------------------------
AMOUNT RATIO
- --------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted
Assets):
Corporation........................... $29,424,000 15.5%
Bank.................................. $26,831,000 14.2%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $27,032,000 14.3%
Bank.................................. $24,446,000 12.9%
Tier 1 Capital (to Average Assets):
Corporation........................... $27,032,000 10.5%
Bank.................................. $24,446,000 9.5%
- --------------------------------------------------------------------
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $26,570,000 14.7%
Bank.................................. $23,030,000 12.7%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $24,237,000 13.4%
Bank.................................. $20,713,000 11.5%
Tier 1 Capital (to Average Assets):
Corporation........................... $24,237,000 10.1%
Bank.................................. $20,713,000 8.6%
====================================================================
</TABLE>
<TABLE>
<CAPTION>
=======================================================================================================================
FOR CAPITAL
ADEQUACY PURPOSES
- -----------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted
Assets):
Corporation........................... greater than or equal to $15,148,000 greater than or equal to 8.0%
Bank.................................. greater than or equal to $15,106,000 greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $ 7,574,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $ 7,553,000 greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $10,321,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $10,312,000 greater than or equal to 4.0%
- -----------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $14,499,000 greater than or equal to 8.0%
Bank.................................. greater than or equal to $14,468,000 greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $ 7,249,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $ 7,234,000 greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $ 9,622,000 greater than or equal to 4.0%
Bank.................................. greater than or equal to $ 9,610,000 greater than or equal to 4.0%
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=====================================================================================================================
TO BE WELL CAPITALIZED UNDER
PROMPT CORRECTIVE ACTION PROVISIONS
- ---------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted
Assets):
Corporation........................... greater than or equal to $18,935,000 greater than or equal to 10.0%
Bank.................................. greater than or equal to $18,882,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $11,361,000 greater than or equal to 6.0%
Bank.................................. greater than or equal to $11,329,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $12,902,000 greater than or equal to 5.0%
Bank.................................. greater than or equal to $12,889,000 greater than or equal to 5.0%
- ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $18,123,000 greater than or equal to 10.0%
Bank.................................. greater than or equal to $18,085,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... greater than or equal to $10,874,000 greater than or equal to 6.0%
Bank.................................. greater than or equal to $10,851,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... greater than or equal to $12,028,000 greater than or equal to 5.0%
Bank.................................. greater than or equal to $12,013,000 greater than or equal to 5.0%
=====================================================================================================================
</TABLE>
Both the Corporation and the Bank were released from regulatory orders during
the first quarter of 1996. The Corporation had been operating under a Written
Agreement with the FRB since November, 1993 and the Bank had been operating
under a Memorandum of Understanding issued by the FDIC and the New Jersey
Department of Banking in May, 1995.
37
<PAGE> 35
NOTE 17: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
========================================================================================================
BALANCE SHEETS DECEMBER 31
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Cash and Due from Banks...................................................... $ 76 $ 273
Interest-Bearing Time Deposits .............................................. 2,469 3,083
Investment in Bank Subsidiary (Equity Method) ............................... 26,450 23,713
Other Assets ................................................................ 847 488
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS .............................................................. $29,842 $27,557
========================================================================================================
Liabilities - Other
Other Liabilities ........................................................... $ 806 $ 308
========================================================================================================
Stockholders' Equity
Class A Preferred Stock ..................................................... -- 717
Common Stock ................................................................ 8,161 8,160
Capital in Excess of Par Value .............................................. 13,103 13,101
Retained Earnings ........................................................... 8,105 5,479
Net Unrealized Holding (Losses) Gains on Securities Available for Sale ...... (39) 86
Treasury Stock .............................................................. (294) (294)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity ................................................ 29,036 27,249
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $29,842 $27,557
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Income
Mortgage Application and Servicing Fees ............... $ -- $ -- $ 151
Rental Income from Subsidiary Bank .................... 180 165 180
Interest on Time Deposit at Subsidiary Bank ........... 124 195 70
Dividends from Subsidiary Bank ........................ 324 -- --
Other Income .......................................... 58 1 90
- ------------------------------------------------------------------------------------------------
Total Operating Income .............................. 686 361 491
- ------------------------------------------------------------------------------------------------
Operating Expenses ....................................... 559 603 1,383
Income (Loss) before Income Taxes and Equity in
Undistributed Income (Loss) of Subsidiaries ........... 127 (242) (892)
Income Tax (Benefit) Provision ........................... (67) 5 --
- ------------------------------------------------------------------------------------------------
Income (Loss) before Equity in Undistributed Income (Loss)
of Subsidiaries ....................................... 194 (247) (892)
Equity in Undistributed Income (Loss) of Subsidiaries .... 2,862 6,495 (85)
- ------------------------------------------------------------------------------------------------
Net Income (Loss) ..................................... $3,056 $6,248 $ (977)
================================================================================================
</TABLE>
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.
38
<PAGE> 36
NOTE 17: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
(PARENT COMPANY ONLY) (Continued)
<TABLE>
<CAPTION>
=======================================================================================================================
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) ........................................................... $ 3,056 $ 6,248 $ (977)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Equity in Undistributed (Income) Loss of Subsidiaries .................. (2,862) (6,495) 85
Depreciation and Amortization .......................................... 115 116 118
Dividends Declared but Not Paid ........................................ (162) -- --
(Increase) Decrease in Other Assets .................................... (474) 193 1,550
Increase (Decrease) in Other Liabilities ............................... 498 147 (670)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ............................... 171 209 106
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Additional Equity Investment in Subsidiary .................................. -- -- (7,500)
=======================================================================================================================
Net Cash Used In Investing Activities ......................................... -- -- (7,500)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Redemption of Subordinated Debentures ...................................... -- (1,292) --
Redemption of Class A Preferred Stock ...................................... (717) (1,033) (200)
Cash Dividends on Preferred Stock .......................................... (106) (119) --
Cash Dividends on Common Stock ............................................. (162) -- --
Proceeds from Stock Options and Stock Purchase Contracts Exercised ......... 3 -- 164
Proceeds from Sale of Common Stock ......................................... -- -- 11,690
- -----------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Financing Activities ........................... (982) (2,444) 11,654
- -----------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents .......................... (811) (2,235) 4,260
Cash and Cash Equivalents, Beginning of Year .................................. 3,356 5,591 1,331
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ........................................ $ 2,545 $ 3,356 $ 5,591
=======================================================================================================================
</TABLE>
The parent company's resources available to meet its cash obligations
subsequent to December 31, 1996 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from subsidiary Bank.
The parent company's cash obligations subsequent to December 31, 1996
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 common 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.
39
<PAGE> 37
NOTE 18: SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
Major categories of other expense for the indicated periods are as follows:
<TABLE>
<CAPTION>
===============================================================
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Legal* .......................... $ 312 $ 457 $ 532
Postage and freight ............. 167 171 202
Stationery and printing ......... 248 198 137
FDIC insurance assessment ....... 34 398 684
Audit and examinations .......... 174 259 288
Telephone ....................... 152 165 214
Consulting fees ................. 212 325 349
Credit reports/appraisal fees ... 125 156 244
Bonding and insurance ........... 207 241 353
Amortization of intangible assets 256 270 247
Advertising ..................... 231 137 168
Other losses .................... 19 51 232
All other expenses .............. 671 617 990
- ---------------------------------------------------------------
$2,808 $3,445 $4,640
===============================================================
</TABLE>
* Includes $288,000, $360,000 and $543,000 for 1996, 1995 and 1994,
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.
40
<PAGE> 38
NOTE 19: QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following quarterly financial information for the years ended December
31, 1996 and 1995 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>
==============================================================================================================
1996
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income.......................... $4,385 $4,536 $4,600 $4,697
Total interest expense ........................ 1,392 1,437 1,478 1,497
- ---------------------------------------------------------------------------------------------------------------
Net interest income.......................... 2,993 3,099 3,122 3,200
Provision for possible loan losses............. 120 40 120 120
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses ....................... 2,873 3,059 3,002 3,080
Total other income ............................ 715 549 589 536
Total other expense ........................... 2,763 2,633 2,327 2,346
Net income..................................... 503 592 767 1,194(A)
Net income per common share ................... $ .06 $ .07 $ .09 $ .14
===============================================================================================================
</TABLE>
<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 income............................ $4,399 $4,610 $4,729 $4,605
Total interest expense .......................... 1,357 1,612 1,692 1,445
- ---------------------------------------------------------------------------------------------------------------
Net interest income............................ 3,042 2,998 3,037 3,160
Provision for possible loan losses............... 450 225 125 (300)(B)
- ---------------------------------------------------------------------------------------------------------------
Net interest 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(C)
Net income per common share ..................... $ .05 $ .05 $ .06 $ .59
===============================================================================================================
</TABLE>
(A) Includes the effect of the reversal of $496,000 of tax reserves no longer
deemed necessary.
(B) 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.
(C) Includes tax benefits of $4.3 million, primarily due to the reversal of a
valuation allowance against the Corporation's net deferred tax asset.
41
<PAGE> 39
[ARTHUR ANDERSEN LLP LETTERHEAD]
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 15, 1997
42
<PAGE> 40
RAMAPO FINANCIAL CORPORATION
Officers & Directors of Ramapo Financial Corporation
================================================================================
OFFICERS
MORTIMER J. O' SHEA
President and Chief Executive Officer
ERWIN D. KNAUER
Senior Vice President
WALTER A. WOJCIK, JR.
Treasurer
JANET M. MALOY
Corporate Secretary
LARS SWANSON
Assistant Vice President/Assistant Secretary
VIRGINIA HUFF
Assistant Secretary
STEVEN KURDYLA
Chief Auditor
JOSEPH MANCINI
Senior Auditor
- --------------------------------------------------------------------------------
DIRECTORS
VICTOR C. OTLEY, JR.
Chairman of the Board
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation
DONALD W. BARNEY
Vice President and Treasurer
Union Camp Corporation
JAMES R. KAPLAN
Chairman, CEO and President
Cornell Dubilier Electronics, Inc.
ERWIN D. KNAUER
President
The Ramapo Bank
LOUIS S. MILLER
Retired
RICHARD S. MILLER
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation
MORTIMER J. O' SHEA
President and Chief Executive Officer
THE RAMAPO BANK
Officers & Directors of The Ramapo Bank
================================================================================
OFFICERS
MORTIMER J. O' SHEA
Chairman of the Board and Chief Executive Officer
ERWIN D. KNAUER
President
DETLEF H. FELSCHOW
Senior Vice President
PAUL E. FITZGERALD
Senior Vice President
R. PETER MACK
Senior Vice President
WILLIAM OLB
Senior Vice President
WALTER A. WOJCIK, JR.
Senior Vice President and Treasurer
JANET M. MALOY
Corporate Secretary
STEVEN KURDYLA
Chief Auditor
JOSEPH MANCINI
Senior Auditor
- --------------------------------------------------------------------------------
VICE PRESIDENTS
ROBERT BOWLBY
ROGER COOK
SCOTT D. MC LAUGHLIN
JANYTH PRIMROSE
RONALD SEVERINO
CAROLE ZICKER
- --------------------------------------------------------------------------------
ASSISTANT VICE PRESIDENTS
WALTER N. ALESANDRO
DAWN CHASE
MARILYN B. KAPLAN
KAREN MERGENTHALER
NANCY SHAULIS
KEVIN C. PASHKE
EMILIO RAMIL
GEORGE REISSNER
ROBERT SFERRAZZA
LARS SWANSON
TODD ULLRICH
- --------------------------------------------------------------------------------
ASSISTANT SECRETARIES
VIRGINIA L. HUFF
- --------------------------------------------------------------------------------
ASSISTANT TREASURERS
KELLY KAPUSTA
BARBARA REDDING MASSENZIO
PAULA MCKOWEN
CYNTHIA MURILLO
GENEVIEVE RESTIVO
PAMELA TIPPER
- --------------------------------------------------------------------------------
NEIL M. FRIED
Investment Officer
CHRISTOPHER EIGEN
Assistant Operations Officer
- --------------------------------------------------------------------------------
DIRECTORS
MORTIMER J. O' SHEA
Chairman of the Board and Chief Executive Officer
DONALD W. BARNEY
Vice President and Treasurer
Union Camp Corporation
VINCENT R. D'ACCARDI
Owner
Lake Developers Inc.
JAMES R. KAPLAN
Chairman, CEO and President
Cornell Dubilier Electronics, Inc.
ERWIN D. KNAUER
President
The Ramapo Bank
SOLOMON W. MASTERS
President
ERA Masters Realtors
LOUIS S. MILLER
CPA, Retired
RICHARD S. MILLER
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation
VICTOR C. OTLEY, JR.
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation
- --------------------------------------------------------------------------------
BUSINESS DEVELOPMENT COUNCIL
JAMES A. CODIROLI
Retired
JOHN A. DEMETRIUS, CPA
President
Demetrius & Co., L.L.C.
STEVEN GERBER, ESQ.
Gerber & Samson
JEROLD P. GOLDBERG, CPA
Financial Consultant
LOUIS D. MARCH
President
March Associates, Inc.
JOHN J. SCURA, II, ESQ.
John J. Scura, Attorney at Law
MICHAEL J. SHENKER, CPA
Sax Macy Fromm & Co., PC
GEORGE P. STRUBLE, ESQ.
Sabbath, Struble, Ragno, Petrie, Oroho and Spinato, P.C.
43
<PAGE> 41
<TABLE>
<S> <C>
CORPORATE INFORMATION
-------------------------------------------------------------------------------------------------------------------
FORM 10-K ANNUAL MEETING OF
STOCKHOLDERS
The Corporation's annual report, on Form 10-K, Tuesday, May 6, 1997,4:00 p.m.
required to be filed with the Securities and Exchange Radisson Hotel
Commission, is available on written request to: 690 Rt. 46 East
Fairfield, New Jersey 07004
Mr. Walter A. Wojcik, Jr., Treasures
Ramapo Financial Corporation
64 Mountain View Boulevard
Wayne, New Jersey 07470
TRANSFER AGENT INQUIRIES
Chase Mellon Shareholder Services, L.L.C. All other information--contact:
85 Challenger Road, Overpeck Center Janet M. Maloy, Corporate Secretary
Ridgefield Park, New Jersey 07660 Ramapo Financial Corporation
64 Mountain View Boulevard
Wayne, New Jersey 07470
(201) 305-4102
</TABLE>
<TABLE>
<S> <C>
MARKET AND STOCK INFORMATION
- ------------------------------------------------------------------------------------------------------------------------
Ramapo Financial Corporation's shares are traded on the NASDAQ National Market tier of the NASDAQ Stock Market under the
Symbol RMPO. The stock is quoted in the Wall Street Journal's and other publications' NASDAQ National Market Issues listings.
As of December 31, 1996, there were 1,822 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.
Cash dividends of $.02 per share were declared in each of the third and fourth quarters of 1996.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------------------------------------------------------------------------------------
1996 . . . . . . . 4 11/16 3 3/4 5 3/8 4 9/16 5 1/16 4 7/16 5 1/2 4 7/8
1995 . . . . . . . 3 5/8 2 11/16 4 1/16 3 1/4 4 11/16 3 5/8 4 9/16 3 7/8
</TABLE>
<TABLE>
<C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
MARKET Dillon, Read & Co., Inc. Legg Mason Wood Walker Inc. Sandler O'Neill & Partners
MAKERS FIA Capital Group Inc. McConnell Budd & Downes Sherwood Securities Corp.
Gruntal & Co. Incorporated Nash Weiss/Div of Shatkin Inv. Smith Barnes Inc.
Herzog, Heine, Geduld, Inc. Ryan Beck & Co. Inc. Tucker Anthony Incorporated
</TABLE>
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
Parent
Ramapo Financial Corporation
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- ------------- ---------
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%
- ----------
(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.
66
<PAGE> 1
EXHIBIT 23
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 15, 1997 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,
1996 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,078,000
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 17,680,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,648,000
<INVESTMENTS-CARRYING> 26,395,000
<INVESTMENTS-MARKET> 26,339,000
<LOANS> 165,070,000
<ALLOWANCE> 5,115,000
<TOTAL-ASSETS> 271,524,000
<DEPOSITS> 239,889,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,599,000
<LONG-TERM> 0
0
0
<COMMON> 8,161,000
<OTHER-SE> 20,875,000
<TOTAL-LIABILITIES-AND-EQUITY> 271,524,000
<INTEREST-LOAN> 13,993,000
<INTEREST-INVEST> 3,772,000
<INTEREST-OTHER> 453,000
<INTEREST-TOTAL> 18,218,000
<INTEREST-DEPOSIT> 5,802,000
<INTEREST-EXPENSE> 5,804,000
<INTEREST-INCOME-NET> 12,414,000
<LOAN-LOSSES> 400,000
<SECURITIES-GAINS> (16,000)
<EXPENSE-OTHER> 10,054,000
<INCOME-PRETAX> 4,334,000
<INCOME-PRE-EXTRAORDINARY> 3,056,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,056,000
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 5.40
<LOANS-NON> 1,053,000
<LOANS-PAST> 152,000
<LOANS-TROUBLED> 1,540,000
<LOANS-PROBLEM> 606,000
<ALLOWANCE-OPEN> 4,853,000
<CHARGE-OFFS> 941,000
<RECOVERIES> 803,000
<ALLOWANCE-CLOSE> 5,115,000
<ALLOWANCE-DOMESTIC> 5,115,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
