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, 1997
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
(Exact name of registrant as specified in its charter)
New Jersey 22-1946561
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
64 Mountain View Boulevard, Wayne, New Jersey 07470
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 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 13, 1998, the aggregate market value of the 7,786,528 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $65.2 million based on the closing sales price of
$8.375 per share of the registrant's Common Stock on March 13, 1998 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 13, 1998: 8,128,324
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DOCUMENTS INCORPORATED BY REFERENCE
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PART I
Item 1 - Business Pages 1 and 2 (To Our Shareholders),
and Pages 5 thru 19 (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, 1997 (Exhibit
13).
PART II
Item 6 - Selected Financial Data Pages 3 and 4 of the Annual Report to
Stockholders for the year ended
December 31, 1997 (Exhibit 13).
Item 7 - Management's Discussion Pages 5 thru 19 of the Annual
and Analysis of Financial Report to Stockholders for the year
Condition and Results of Operations ended December 31, 1997 (Exhibit 13).
Item 8 - Financial Statements and Pages 20 thru 40 of the Annual Report
Supplementary Data to Stockholders for the year ended
December 31, 1997 (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 1998 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, 1997
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PART I
Item 1. Business 4
Item 2. Properties 17
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 all of the Bank's eight
offices are within 15 miles of its headquarters building. 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, 1997,
the Corporation had consolidated assets, deposits and stockholders' equity of
$285.7 million, $249.8 million and $31.3 million, respectively.
The Corporation considers its primary banking markets to be the Wayne area,
in which five of its eight offices are located, and the cities of Butler,
Clifton and Parsippany. 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.
Butler is a small community north of Wayne with a 1990 population of 7,392
residents and numerous small businesses. Butler's average household income is
$49,375. 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.
Parsippany is a prosperous community of 48,478 located to the west of Wayne. It
has an average household income of $53,092 and is the home to major corporations
and small businesses alike.
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 (973) 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, certificates of deposit, and repurchase agreement "sweep"
accounts, as well as night depository, wire transfer, collection and deposit
account access via personal computer services. The Bank also offers a full range
of consumer banking services, including checking, savings, NOW and money market
accounts, certificates of deposit, secured and unsecured loans, installment
loans, home equity loans, safe deposit boxes, holiday club accounts, collection
services, money orders and travelers checks. 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, 1997, the Corporation's loans, net of
unearned discount, represented 59.2% of its total assets. As of December 31,
1997, its loan portfolio consisted of approximately 65.4% commercial and
commercial real estate loans, 6.2% commercial real estate construction loans,
3.7% residential real estate mortgage loans and 24.7% installment loans. At
December 31, 1997, 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, 1997, the Corporation had no concentrations of loans
exceeding 10% of total loans in addition to those disclosed below. See "--Loan
Concentrations."
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At December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
(Dollars in thousands)
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Commercial and commercial real
estate $110,589 65.4% $105,819 64.1% $ 96,469 60.1% $101,292 61.7% $114,889 61.6%
Commercial real estate
construction 10,553 6.2 10,949 6.6 15,177 9.5 18,462 11.2 29,695 15.9
Residential real estate
mortgage (1) 6,179 3.7 7,443 4.5 8,772 5.4 10,346 6.3 7,808 4.2
Installment 41,785 24.7 40,859 29.8 40,128 25.0 34,211 20.8 34,211 18.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $169,106 100.0% $165,070 100.0% $160,546 100.0% $164,311 100.0% $186,603 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
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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, 1997 the Bank's legal lending limit was
$5.0 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 commercial 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, service providers,
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
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loan is the cash flow 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.
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. The outsourcing arrangement has since expired.
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 loans have a four year term
and new automobile installment loans have a maximum term of five years.
Installment loans for the purchase of a used automobile have a maximum term of
four years. Second mortgage loans have a maximum term of 20 years, while home
equity lines of credit are revolving and payment terms are based on a 15 year
amortization. The Bank will lend up to 80% of the purchase price of a new
automobile and, with respect to used automobiles, 75% of the lesser of National
Automobile Dealers Association (NADA) loan value or equivalent loan value or
sales price if a purchase. 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 is
$250,000 or greater, or where the loan amount exceeds $50,000, require approval
either from the Department Supervisor, the in-charge lending Senior Vice
President, President or Chairman of the Board.
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
$31,245,000 and $32,605,000 at December 31, 1997 and 1996, respectively. The
largest borrower concentration consists of loans to a group of affiliated
borrowers with an aggregate balance of $15,011,000 and $15,157,000 at December
31, 1997 and 1996, respectively. A majority of these loans is 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 relationship consists of loans primarily for the construction or
renovation of condominium units, totaling $8,209,000 and $7,222,000 at December
31, 1997 and 1996, respectively.
The third concentration involves loans to certain affiliated real estate
development companies whose principal owners have had a longstanding
relationship with the Bank. Outstanding balances for this group at December 31,
1997 and 1996 were $8,025,000 and $10,226,000, respectively. One commercial loan
of $2.1 million from these concentrations became nonperforming subsequent to
December 31, 1997.
Nonbank Subsidiaries
RFC High Ridge, Inc., RFC Harmony Park, 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. Three 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. Another nonbank subsidiary, RFC CKN, Inc., was dissolved in 1997.
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.
Employees
As of December 31, 1997, the Corporation and its subsidiaries had
approximately 110 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.
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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 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 regular examination,
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 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 them 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 Corporation's activities are subject to these legal and
regulatory limitations under the Holding Company Act and 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 engaging in certain tie-in arrangements in
connection with any extension of credit or provision of any property or
services.
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<PAGE>
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. Federal Reserve regulations provide that an
acquisition of voting securities of a bank holding company which results in a
person or group which is acting in concert owning, controlling or holding the
power to vote 10% or more or any class of voting securities of the bank holding
company will be presumed to constitute the acquisition of control if the bank
holding company has registered securities under the Securities Exchange Act of
1934 or if no other person will own, control or hold the power to vote a greater
percentage of the class of voting securities immediately after the transaction.
Holding Company Dividends and Stock Repurchases. The Federal Reserve has
the power to prohibit bank holding companies from paying dividends if their
actions are deemed to constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies. The policy statement 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.
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
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<PAGE>
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.
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 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 the Corporation. The Bank
is also 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. Such regulations require those 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 of the dividends, 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 by the FDIC from paying
dividends or making other capital distributions without the FDIC's permission.
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 its 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 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. As to the Corporation and all other affiliates such transactions are
limited 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 establishing appropriate limits and
standards for extensions of credit that are secured by liens on or interests in
real estate or that are made for the purpose of financing permanent improvements
to real estate. These policies
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must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits that are clear and measurable), loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators. The
Interagency Guidelines, among other things, call upon depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the loan-to-value limits specified in the Interagency 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. The Bank is also 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. FDICIA
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. Under a risk-based insurance premium
system which became permanent during 1994, banks are assessed insurance premiums
according to how much risk they are deemed to present to the BIF. 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. Effective January 1, 1996 the assessment rates
ranged from 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 1997 was 0.00%.
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 rates, which change
quarterly, established for the Bank for 1997 ranged from .01260% to .01300%. The
rate for the first quarter of 1998 was set at .01256%.
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 adopted the Interagency
Guidelines Establishing Standards for Safety and Soundness which cover internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees,
benefits, and
14
<PAGE>
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 the Bank meets all of the standards which have been adopted.
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 may 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 a broad range of
persons associated with them are subject to the imposition of fines, penalties,
and other enforcement actions based upon the conduct of their relationships with
the institutions.
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
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,
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<PAGE>
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, 1997, the Corporation's total risk-based capital and
leverage capital ratios were 16.5% and 10.5%, respectively. The minimum levels
established by the regulators for these measures are 8.0% and 3.0%,
respectively.
FDICIA also required the federal banking regulators to classify insured
depository institutions by capital levels and to take various prompt corrective
actions to resolve the problems of any institution that fails to satisfy the
capital standards. The FDIC has issued final regulations establishing these
capital levels and otherwise implementing FDICIA's prompt corrective action
provisions. Under FDICIA and these regulations, all institutions,
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<PAGE>
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. 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.
Item 2. Properties.
The following table sets forth the location of and certain additional
information regarding the Corporation's offices at December 31, 1997. The
Corporation owns all of its offices except as indicated.
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Year Total Total Net Book Approximate
Branch Opened Deposits Investment Value Square Footage
- ------ ------ -------- ---------- -------- --------------
(Dollars in thousands)
Main office 1980 $51,293 $ 1,701 $ 979 23,000
Packanack 1967 52,145 664 319 4,000
Valley 1972 46,976 731 444 8,000
Clifton 1974 25,516 56 9(1) 2,000
North Haledon 1986(2) 20,688 58 -- (3) 2,000
Butler 1986(2) 41,435 240 113(3) 2,000
Fairfield 1996 7,768 4 2(3) 2,000
Parsippany 1997 3,939(4) -- -- (3) 1,900
- ----------
(1) Land lease.
(2) Date acquired.
(3) Leased.
(4) Opened August, 1997
The net book value of the Corporation's investment in premises and
equipment totalled approximately $3.2 million at December 31, 1997. For a
discussion of premises and equipment, see Note 6 of Notes to Consolidated
Financial Statements contained in the Corporation's 1997 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, 1997.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
Dividend Policy. Commencing with the third quarter of 1996, the Corporation
has declared quarterly dividends. 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 42 of
the Corporation's 1997 Annual Report to Stockholders.
Item 6. Selected Financial Data.
The required information is incorporated by reference to Pages 3 and 4 of
the Corporation's 1997 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 5 thru 19 of
the Corporation's 1997 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
A. Financial Statements
The required information is incorporated by reference to Pages 20 thru 40
of the Corporation's 1997 Annual Report to Stockholders.
Page of
Annual Report
to Stockholders
---------------
Report of Independent Public Accountants 40
Ramapo Financial Corporation and Subsidiaries:
Consolidated Balance Sheets 20
Consolidated Statements of Income 21
Consolidated Statements of Changes in Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements (Notes 1 - 17) 24-39
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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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
1998 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, 1998 Title
- ---- -------------- -----
Walter A. Wojcik, Jr. 48 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>
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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
-- ----------- -------------
3 Restated Certificate of Incorporation 24
11 Statement re Computation of Per Share Earnings 29
13 Annual Report to Security Holders 30
21 Subsidiaries of the Registrant 75
23 Consent of Independent Public Accountants 76
27 Financial Data Schedule 77
(b) Reports on Form 8-K. The Registrant did not file any current reports on
Form 8-K during the quarter ended December 31, 1997.
(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>
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, 1998 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, 1998
- ----------------------------------------
Mortimer J. O'Shea, Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Walter A. Wojcik, Jr. March 27, 1998
- ----------------------------------------
Walter A. Wojcik, Jr.
Treasurer
(Principal Financial and Accounting Officer)
/s/ Victor C. Otley, Jr. March 27, 1998
- ----------------------------------------
Victor C. Otley, Jr.
Chairman of the Board
/s/ Erwin D. Knauer March 27, 1998
- ----------------------------------------
Erwin D. Knauer, Director
Senior Vice President
/s/ Donald W. Barney March 27, 1998
- ----------------------------------------
Donald W. Barney
Director
/s/ Richard S. Miller March 27, 1998
- ----------------------------------------
Richard S. Miller
Director
22
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
3 Restated Certificate of Incorporation
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
23
Exhibit 3
RESTATED CERTIFICATE OF INCORPORATION
OF
RAMAPO FINANCIAL CORPORATION
[As Amended through February 13, 1998]
(formerly Cegrove Corp.)
TO: Secretary of State
State of New Jersey
The undersigned hereby certifies as follows in order to restate the
certificate of incorporation of Ramapo Financial Corporation (formerly Cegrove
Corp.), a business corporation of the State of New Jersey, pursuant to N.J.S.A.
14A:9-5(2) and 14A:9-5(4) of the New Jersey Business Corporation Act:
1. Name. The name of the corporation is RAMAPO FINANCIAL CORPORATION.
2. Purposes. The purposes for which the corporation is formed are as
follows:
a. To act as a bank holding company, with all of the rights, powers
and privileges, and subject to all of the limitations, specified in any
applicable State or Federal legislation from time to time in effect; and
b. Generally to engage in any activities within the purposes for which
corporation may be organized under the New Jersey Business Corporation Act.
3. Authorized Stock.
a. Total Authorized Stock. The total number of shares of stock which
the corporation shall have authority to issue is Sixteen Million
(16,000,000) shares, consisting of (1) Fifteen Million (15,000,000) shares
of Common Stock having a par value of One Dollar ($1.00) per share ("Par
Value Common Stock"), and (2) One Million (1,000,000) shares of stock
initially having no par value per share which may be divided into classes
and into series within any class or classes as determined by the Board of
Directors ("No Par Stock").
b. Par Value Common Stock
(1) The corporation's Par Value Common Stock shall be entitled to
one vote per share at all annual meetings of shareholders for the
election of directors and at all annual or special meetings of
shareholders at which shareholders of the corporation are entitled to
vote. Prior to the issuance of any shares of No Par Stock entitled to
vote, the holders of outstanding Par Value Common Stock shall be the
only shareholders entitled to vote. In the event of the issuance of
any shares of No Par Stock entitled to vote, the relative voting
rights of the holders of Par Value Common Stock and such other shares
shall be as determined by the Board of Directors in amending the
certificate of incorporation with respect to such No Par Stock.
1
<PAGE>
(2) The Board of Directors is authorized to issue shares of Par
Value Common Stock to such person(s), firm(s), corporation(s) or
others, and for such lawful consideration(s), as the Board of
Directors shall from time to time determine.
(3) Prior to the issuance of any shares of No Par Stock, the
holders of outstanding Par Value Common Stock shall be entitled to all
dividends declared with respect to stock of the corporation, and to
all assets of the corporation distributable to shareholders upon
liquidation. In the event of the issuance of any shares of No Par
Stock, the relative dividend rights, rights upon liquidation, and
other relative rights, preferences and limitations shall be as
determined by the Board of Directors in amending the certificate of
incorporation with respect to such No Par Stock.
c. No Par Stock
(1) General Authority. The Board of Directors is authorized,
subject to limitations prescribed by law and the provisions of this
paragraph 3, to take action as provided herein with respect to the One
Million (1,000,000) shares of No Par Stock. In furtherance and not in
limitation of the foregoing general authority of the Board of
Directors, which shall be broadly construed to the extent permitted by
the New Jersey Business Corporation Act as now in existence or
hereafter amended, or successor statute of like intent applicable to
the corporation, the authority of the Board with respect to the
corporation's No Par Stock shall include determination of the
following:
(a) The division of shares of No Par Stock into classes such
as common stock or preferred stock and into series within any
class or classes.
(b) The designation and the number of shares of any class or
series. This authority shall include the power to increase the
number of shares of any such class or series previously
determined by the Board of Directors, and shall include the power
to decrease such previously determined number of shares to a
number not less than the number of the shares then outstanding.
Upon any such decrease, the affected shares shall continue as
part of the authorized shares and shall have such designation and
such relative rights, preferences and limitations as they had
before the Board of Directors first acted to include them in such
class or series.
(c) The relative rights, preferences and limitations of the
shares of any class or series. This authority shall include, but
not be limited to, determination of the following to the extent
permitted by law:
i) The dividend rate on the shares of such class or
whether dividends shall be cumulative, and if so, from which
date or dates, and the relative rights of priority, if any,
of payment of dividends on shares of that class or series;
ii) Whether that class or series shall have voting
rights, in addition to the voting rights provided by law
and, if so, the terms of such voting rights;
iii) Whether that class or series shall have conversion
privileges, and if so, the terms and conditions of such
conversion, including provision for adjustment of the
conversion rate in such events as the Board of Directors
shall determine;
iv) Whether or not the shares of that class or series
shall be redeemable, and, if so, the terms and conditions of
such redemption, including the date or dates upon or after
which they shall be redeemable, and the amount per share
2
<PAGE>
payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
v) Whether that class or series shall have a sinking
fund for the redemption or purchase of shares of that class
or series, and if so, the terms and amount of such sinking
fund;
vi) Whether or not the shares shall have a stated
value, and if so, the stated value thereof;
vii) The rights of the shares of that class or series
in the event of voluntary or involuntary liquidation,
dissolution or winding up of the corporation, and the
relative rights of priority, if any, of payment of shares of
that class or series;
viii) Any other relative rights, preferences and
limitations of that class or series;
ix) To the extent determined by the Board of Directors,
dividends on any one or more classes or series of
outstanding shares of No Par Stock may be paid or declared
and set apart for payment, before any dividends shall be
paid or declared and set apart for payment on the Par Value
Common Stock with respect to the same dividend period.
(d) This authority shall further include the power to
determine relative rights and preferences which are prior or
subordinate to, or equal with, the Par Value Common Stock and/or
shares of any other class or series, whether or not such other
shares are issued and outstanding at the time when the Board of
Directors acts to determine such relative rights and preferences.
(2) Change of Established But Unissued No Par Stock. The Board of
Directors is authorized to change the designation or number of shares, or
the relative rights, preferences and limitations of the shares, of any
theretofore established class or series of No Par Stock no shares of which
have been issued.
(3) Class A Preferred Stock. [Omitted]
(4) Action on No Par Stock by Directors. In exercising its authority
to take action with respect to any shares of No Par Stock other than the
Class A Preferred Stock described in subparagraph 3.c.(3) above, the Board
shall adopt a resolution setting forth its action and stating the
designation and number of shares, and the relative rights, preferences and
limitations of the shares, of each class and series thereby created or with
respect to which it has made a determination or change. Before the issuance
of any such shares of No Par Stock, the corporation shall execute and file
a certificate of amendment to the certificate of incorporation regarding
such action in accordance with N.J.S.A. 14A:7-2(4), as amended, or
successor statute of like intent.
4. Number and Classification of Directors. The number of directors of the
corporation shall be fixed from time to time by or in the manner provided in the
Bylaws, but the number thereof shall never be less than three (3). The directors
are hereby divided into three (3) classes, each class to consist, as nearly as
may be, of one-third (1/3) of the number of directors then constituting the
whole board. The directors in a class to be elected at a given annual election
shall be elected for a full term of three (3) years to succeed those directors
whose terms expire. Each director shall hold office for the term for which such
director is elected and until such director's successor shall have been elected
and qualified.
3
<PAGE>
This paragraph 4 of the restated certificate of incorporation, relating to the
number and classification of directors, may be amended, altered or repealed only
by the holders of (a) at least eighty percent (80%) of the outstanding stock
entitled to vote and (b) at least eighty percent (80%) of the outstanding stock
entitled to vote and not held by any "Major Shareholder" (as defined in
subparagraph 5.b.(2) below).
5. Restrictions on Certain Business Combinations.
a. In addition to any other requirement of this certificate of
incorporation or any applicable law, no Business Combination (as defined
below) shall occur in which the corporation is a party unless such Business
Combination shall have met the requirements of subparagraph 5.c. below.
b. The terms used in this paragraph 5, and elsewhere in this restated
certificate of incorporation if specifically referred to therein, shall
have the meanings defined below:
(1) "Business Combination" means a merger or consolidation, a
sale of 10% or more of the consolidated assets of the corporation and
its subsidiaries in one transaction or a series of related
transactions, the issuance of equity securities or securities
convertible into equity securities of the corporation and/or one or
more of its subsidiaries, a reclassification or recapitalization
involving stock of the corporation and/or one or more of its
subsidiaries, and/or a redemption of shares of outstanding stock by
the corporation and/or its subsidiaries, if a Major Shareholder exists
at the time of any such transactions or combination of transactions,
or if a shareholder or group of shareholders becomes a Major
Shareholder as a result of such transaction or combination of
transactions.
(2) "Major Shareholder" means any individual, group of
individuals, partnership, trust, corporation or other business entity
or combination of such persons acting in concert with respect to the
corporation's stock which is the beneficial owner of five percent (5%)
or more of the total combined voting power of all classes of
outstanding stock of the corporation entitled to vote. In making such
calculation, stock held by any affiliate or associate of any such
individual(s) or entity or combination shall be included both for
purposes of determining whether a 5% interest exists and for purposes
of designating such affiliate or associate as a Major Shareholder.
c. No Business Combination shall occur with a Major Shareholder unless
one of the following alternative requirements is met:
(1) the Business Combination shall have been approved by
two-thirds (2/3) of the members of the Board of Directors, in addition
to such shareholders' approval (if any) as may be required by law or
with respect to such transaction; or
(2) the Business Combination shall have been approved by the
holders of at least eighty percent (80%) of the outstanding stock
entitled to vote and not held by such Major Shareholder.
d. The provisions of this paragraph 5, relating to restrictions on
certain business combinations, may be amended, altered or repealed only by
the holders of (a) at least eighty percent (80%) of the outstanding stock
entitled to vote and (b) at least eighty percent (80%) of the outstanding
stock entitled to vote and not held by any Major Shareholder.
6. Supermajority Requirement for Removal of Directors. No amendment to the
certificate of incorporation permitting the removal of one or more or all of the
directors without cause shall be adopted unless such amendment shall have been
approved by the holders of (a) at least eighty percent (80%) of the outstanding
stock entitled to vote and (b) at least eighty percent (80%) of the outstanding
stock entitled to vote and not held by any "Major Shareholder" (as defined in
subparagraph 5.b.(2) above).
4
<PAGE>
7. Current Directors. Seven (7) persons currently constitute the
corporation's current Board of Directors. Their names and addresses are as
follows:
Donald W. Barney Richard S. Miller
815 Pond Brook Road 26 Marlton Drive
Franklin Lakes, NJ 07417 Wayne, NJ 07470
James R. Kaplan Mortimer J. O'Shea
35 Alpine Drive 7 McVickers Lane
Wayne, NJ 07470 Mendham, NJ 07945
Erwin D. Knauer Victor C. Otley, Jr.
10 Jay Street 48 Indian Road
Old Tappan, NJ 07675 Wayne, NJ 07470
Louis S. Miller
401 E. 42nd Street
Paterson, NJ 07504
8. Current Registered Office and Registered Agent. The corporation's
current Registered Office is 64 Mountain View Boulevard, Wayne, NJ 07470. The
name of the corporation's current Registered Agent at such Registered Office is
Erwin D. Knauer.
5
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ------------------------------
Weighted Avg. Per Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations. $ 3,205,000 $ 3,056,000 $ 6,248,000
Less: Preferred stock dividends .. -- (12,000) (96,000)
Net Income Per Share - Basic:
----------- ----------- -----------
Income available to common
shareholders ..................... $ 3,205,000 8,100,055 $.40 $ 3,044,000 8,096,961 $.38 $ 6,152,000 8,096,449 $.76
Effect of Dilutive Securities:
Options granted to employees ..... 274,436 84,783 74,234
Options granted to nonemployee
directors ....................... 35,386 16,312 5,136
Net Income Per Share - Diluted:
--------- --------- ---------
Income available to common
shareholders plus assumed
conversions ..................... $ 3,205,000 8,409,877 $.38 $ 3,044,000 8,198,056 $.37 $ 6,152,000 8,175,819 $.75
</TABLE>
EXHIBIT 13
Annual Report to Security Holders
<PAGE>
Ramapo
Financial Corporation
[PHOTO]
Banking Innovation. Timeless Values.
1997
Annual Report
<PAGE>
TO OUR
SHAREHOLDERS
Ramapo Financial Corporation reported net income of $3,205,000 in 1997,
which produced basic and diluted earnings of $.40 and $.38 per share,
respectively.
Net income increased 4.9% over 1996, however, pre-tax earnings in 1997 were
actually 17.9% higher than in 1996 when there was a one-time tax credit of
$496,000.
Pre-tax income reached a record level in 1997, which marked the 30th
anniversary of the founding of The Ramapo Bank.
Shareholders were rewarded with a 72.5% increase in the stock price in
1997. In part, this favorable development tracked a good year for stocks
generally, but also reflected RFC's strong fundamentals and successful strategy
as a customer focused provider of financial services. Despite volatility in many
bank stocks since year end, our current price continues to reflect a significant
increase over the year ago level.
Investment bankers and analysts have highlighted our strong fundamentals:
net interest margin, fee income and expense control. This is an historic
perspective. We'd like to think that there are other strong fundamentals that
are the key to this corporation's future success. They are: our personalized
responsiveness to smaller businesses and the public; the sophistication of the
talent and products that we offer; and the service we provide at all levels of
the company. These latter fundamentals will serve us well this year and beyond.
The Ramapo Bank opened its eighth branch in August 1997. The new Parsippany
office is a convenient depository for some of our existing business customers,
and also serves as a base of operations for business development efforts in one
of Morris County's larger municipalities. We are pleased with our steady
progress in Parsippany, which is receptive to our style of community banking.
[PHOTO]
Erwin D. Knauer Mortimer J. O'Shea Victor C. Otley, Jr
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
12/31/96 12/31/97
-------- --------
Price per Common Share $5.00 $8.63
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<<PLOT POINTS TO COME>>
1
<PAGE>
We continue to see growth in core deposits, which helps us maintain a
strong net interest margin (5.31% in 1997). Average deposits in 1997 were up
9.9% over the previous year. Loan growth was modest in 1997, and intense rate
competition among commercial lenders will continue in 1998. Ramapo will maintain
its high credit standards in this environment, and we are encouraged by the
number of new business loans we've had the opportunity to review and approve in
the early months of 1998. Our Retail Lending Unit has developed enhancements to
our popular home equity product, and has initiated a new marketing campaign.
We've also added a lending officer who specialized in loans to our small
business customers.
Brokerage commissions earned by our INVEST affiliate increased by 20.5% in
1997, and we will add another representative in 1998 to respond to our
customers' increased interest in a wider array of investment products. We've
started target-marketing our customer base with direct mail offerings, and we
will expand this activity in the coming year. The Commercial Access product,
which provides business customers with a computer link to account information
and account transactions, has been successfully installed at a number of our
customers' offices.
The Year 2000 date change poses a challenge to most businesses and
especially to financial institutions. Ramapo has created an internal committee
to deal with this issue and is on track to address all Year 2000 related
problems in a timely manner. Costs associated with this project have not been
material to date. Coincidentally, our computer system will be upgraded in 1998
to increase the effectiveness of our data processing function.
The banking industry is enjoying a period of stable interest rates and
financial strength. Ramapo Financial Corporation is positioned to do well in the
current economic environment. Should the national and regional economies falter,
we believe that RFC will be able to maintain an acceptable level of
profitability. Our experienced banking professionals are doing the right things
to retain our customers, as well as attract new customers to Ramapo. As many of
our competitors merge into out-of-state institutions, RFC becomes a logical
banking choice for more businesses and families in our neighborhoods.
As always, we appreciate hearing from you with questions or suggestions.
Please feel free to call us at 973/305-4101.
/s/ Victor C. Otley
Victor C. Otley, Jr.
Chairman of the Board
/s/ Mortimer J. O'Shea
Mortimer J. O'Shea
President and Chief Executive Officer
/s/ Erwin D. Knauer
Erwin D. Knauer
Senior Vice President
2
<PAGE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets .................................................. $ 285,727 $ 271,524 $ 246,516 $ 238,216 $ 257,634
Cash and cash equivalents ..................................... 20,275 29,758 14,962 42,486 26,594
Securities .................................................... 88,994 68,043 59,358 21,248 8,858
Gross loans (net of unearned income) .......................... 169,106 165,070 160,546 164,311 186,603
Allowance for possible loan losses ............................ 4,628 5,115 4,853 6,501 7,499
Loans held for sale ........................................... -- -- 34 34 19,611
Total deposits ................................................ 249,760 239,889 217,062 211,864 241,608
Other borrowings .............................................. 1,677 -- -- 1,292 5,916
Stockholders' equity .......................................... 31,297 29,036 27,249 21,755 6,576
Asset Quality (1):
Nonaccrual loans .............................................. $ 745 $ 1,053 $ 4,190 $ 7,548 $ 21,881
Accruing loans 90 days or more delinquent ..................... 112 152 141 240 1,182
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans ................................... 857 1,205 4,331 7,788 23,063
- ------------------------------------------------------------------------------------------------------------------------------------
Other real estate, net ........................................ 2,192 2,211 4,408 9,995 10,332
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets .................................. 3,049 3,416 8,739 17,783 33,395
Restructured loans ............................................ 1,475 1,540 1,702 5,983 11,035
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and restructured loans ........... $ 4,524 $ 4,956 $ 10,441 $ 23,766 $ 44,430
====================================================================================================================================
Summary of Operations:
Total interest income ......................................... $ 19,734 $ 18,218 $ 18,343 $ 14,919 $ 19,263
Total interest expense ........................................ 6,297 5,804 6,106 4,958 8,709
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ........................................... 13,437 12,414 12,237 9,961 10,554
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses ............................ 480 400 500 1,221 4,440
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses .................................... 12,957 12,014 11,737 8,740 6,114
- ------------------------------------------------------------------------------------------------------------------------------------
Other income .................................................. 2,182 2,374 2,447 3,322 8,936
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense ................................................. 10,028 10,054 12,148 13,324 25,018
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ............................. 5,111 4,334 2,036 (1,262) (9,968)
Provision (benefit) for income taxes .......................... 1,906 1,278 (4,212) (285) (996)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ............................................. $ 3,205 $ 3,056 $ 6,248 $ (977) $ (8,972)
====================================================================================================================================
</TABLE>
3
<PAGE>
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
At or For the Year ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Common Share Data:
Net income (loss) per common share - basic ..................... $ .40 $ .38 $ .77 $ (.38) $ (7.21)
- diluted ................... .38 .37 .76 (.38) (7.21)
Book value per common share .................................... 3.86 3.59 3.28 2.47 3.88
Cash dividends declared per common share (2) ................... .12 .04 -- -- --
Selected Operating Ratios:
Return on average assets ....................................... 1.17% 1.23% 2.56% (.42)% (2.58)%
Return on average equity ....................................... 10.66 11.09 27.85 (9.04) (87.65)
Interest rate spread(3) ........................................ 4.34 4.54 4.59 4.38 2.87
Net interest margin(3) ......................................... 5.31 5.41 5.41 4.84 3.51
Asset Quality Ratios (1)(4):
Nonperforming loans as a percentage of loans, net of
unearned income .............................................. .51% .73% 2.70% 4.74% 11.18%
Nonperforming assets as a percentage of total assets ........... 1.07 1.26 3.55 7.47 12.96
Nonperforming assets and restructured loans
as a percentage of total assets .............................. 1.58 1.83 4.24 9.98 17.25
Allowance for possible loan losses as a percentage
of loans, net of unearned income ............................. 2.74 3.10 3.02 3.96 3.64
Allowance for possible loan losses as a percentage
of nonperforming loans ....................................... 540.02 424.48 112.05 83.47 32.52
Net charge-offs as a percentage of average loans,
net of unearned income ....................................... .58 .09 1.36 1.29 1.75
Capital Ratios (4)(5):
Stockholders' equity to total assets ........................... 10.93% 10.69% 11.05% 9.13% 2.55%
Average stockholders' equity to average assets ................. 10.98 11.07 9.19 4.64 2.94
Tier 1 leverage capital ratio .................................. 10.47 10.47 10.08 9.16 2.45
Tier 1 risk-based capital ratio ................................ 15.26 14.27 13.37 12.18 2.99
Total risk-based capital ratio ................................. 16.52 15.54 14.66 13.46 5.98
====================================================================================================================================
</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. Consumer loans not secured by real estate generally are not placed on
nonaccrual status but, instead, are charged off at 90 days past due. Prior
to 1995, loans were considered restructured loans if, for economic or legal
reasons, a concession had 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.
(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."
4
<PAGE>
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, 1997 and 1996 and results of operations for
the years ended December 31, 1997, 1996 and 1995 should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto and the other information contained elsewhere herein.
Financial Condition and Recent Operating Environment
General. The corporation's improvement continued in 1997, marking the third
full year of increased profitability since the turnaround that began in 1994.
The Corporation incurred significant operating losses in 1992 and 1993 following
an economic recession in New Jersey which resulted in a decline in commercial
and residential real estate values in the Corporation's market. Nonperforming
assets increased dramatically during this period as did associated expenses. The
Corporation also incurred significant losses on mortgage servicing operations.
As a result, both the Corporation and its wholly owned subsidiary, The Ramapo
Bank ("Bank"), were placed under regulatory orders by their respective
regulators during those years.
Under new leadership, the Corporation moved quickly beginning in the latter
half of 1993 to reduce nonperforming assets, shed unprofitable operations and
raise capital. 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 by an increase in the net interest margin. During the
first quarter of 1996, both the Corporation and the Bank were released from
regulatory orders. By year-end, nonperforming assets were reduced to their
lowest level since 1981, 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. A new branch office was opened in 1996 and
another in 1997. Net interest income grew $1.0 million in 1997 and was primarily
responsible for the 17.9% growth in pre-tax income as compared to 1996.
The Corporation faces the future as a profitable, well-capitalized
community bank committed to providing superior service to businesses,
professionals, and consumers alike. It has managed to reduce its exposure to
large, individual borrower concentrations and 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 introduced two new products in
1997 aimed at its commercial customers and is actively exploring wholesale and
retail growth strategies.
Significant changes in individual asset and liability categories are
discussed below.
Cash and due from banks declined $2.5 million from $12.1 million at
December 31, 1996 to $9.6 million at December 31, 1997, primarily due to a
reduction in the reserve balance required to be kept at the Federal Reserve Bank
("FRB"). Federal funds sold dropped $7.0 million between the two year-ends,
although the average balance for this category rose $1.8 million in 1997 versus
1996. In 1996, the average balance of federal funds sold decreased by $11.1
million compared to 1995, chiefly because the Corporation no longer needed to
maintain the high liquidity level it deemed prudent during more difficult times.
The Corporation's securities portfolio grew by $21.0 million in 1997, from
$68.0 million at December 31, 1996 to $89.0 million at December 31, 1997. This
increase was made possible by deposit growth and the aforementioned reductions
in the due from banks and federal funds sold categories. During 1996, the
portfolio increased $8.6 million over 1995.
Loans increased $4.0 million in 1997, reaching $169.1 million at year end.
This follows a $4.6 million increase in 1996. Although management was encouraged
by the level of loan originations in 1997, significant loan paydowns offset the
new loans resulting in a very modest level of growth. Other factors contributing
to the lack of meaningful loan growth over the last few years are management's
efforts to reduce existing loan concentrations and increased competition for
business loans.
Other assets decreased from $7.9 million at December 31, 1995 to $5.9
million at December 31, 1997, primarily due to a $1.7 million decrease in the
Corporation's deferred tax asset during that timespan.
The Corporation's intangible assets were $621,000, $869,000 and $503,000 at
December 31, 1997, 1996, and 1995, respectively. The decrease in 1997 was mainly
due to normal amortization. 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.
The Corporation experienced deposit growth of $9.9 million and $22.8
million for the years ended December 31, 1997 and 1996, respectively. The 1997
increase was spread among all categories of deposits except time deposits under
$100,000. The branch office opened in 1996 accounted for the major part of the
increase. The deposit acquisition mentioned earlier and the new branch office
were responsible for about half of the 1996 increase.
5
<PAGE>
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
commissions earned by a brokerage affiliate. 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.
Prior to 1997, the level of the Corporation's nonperforming assets
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 $3.4 million at December 31, 1996. 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,
and $2.2 million for the years ended December 31, 1996, 1995, and 1994,
respectively, while the provision for possible loan losses was $400,000,
$500,000, and $1.2 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. In 1997, nonperforming
assets declined further to $3.0 million, or 1.07% of total assets, while ORE
operating expenses and valuation adjustments totaled just $234,000.
Because of the small number of ORE properties remaining, management is
confident that ORE-related expenses will be further reduced in 1998. Management
also anticipates that future provisions for possible loan losses will not be
greater than those taken in 1997 and 1996, barring unforeseen economic events.
Net Income. The Corporation had net income of $3.2 million for the year
ended December 31, 1997 compared to net income of $3.1 million for the year
ended December 31, 1996. Because 1996 net income included a $496,000 tax
benefit, a comparison of net income before taxes is more indicative of the
progress the Corporation has made. On that basis, the Corporation earned $5.1
million in 1997 versus $4.3 million in 1996, a $777,000 increase. The principal
reason for this improvement is a $1.0 million (8.2%) increase in net interest
income. Total other income decreased $192,000 (8.1%) and total other expense
also decreased slightly in 1997 versus 1996. In 1996, the Corporation's pre-tax
income was $4.3 million as compared to $2.0 million in 1995, a $2.3 million
(112.9%) increase. The primary reason for this increase 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 Federal Deposit Insurance Corporation ("FDIC") insurance assessment due to
lower assessment rates and to the Bank's being placed in the lowest risk capital
category for assessment purposes by the FDIC.
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 $1.1
million from $12.4 million for the year ended December 31, 1996 to $13.5 million
for the year ended December 31, 1997. The increase is due to a $1.4 million rise
caused by a $24.9 million increase in average interest-earning assets which was
offset in part by a $316,000 decline due to a 20 basis point drop in the net
interest spread. Most of the rise in interest-earning assets came in the
securities portfolio, which increased $17.8 million (28.9%). Average federal
funds sold rose $1.8 million, while total loans made up the balance of the
increase with a rise of $5.3 million. Most of the loan growth was in the
commercial loans category, which increased $5.2 million. A $1.5 million increase
in installment loans was nearly offset by a $1.4 million reduction in
residential mortgage loans. Although the Corporation is not an active mortgage
lender, it has begun to purchase mortgage securities for its portfolio. At
December 31, 1997, the carrying value of mortgage-backed securities totaled
$10.6 million. The 20 basis point drop in the net interest spread was due to a
16 basis point decline in the yield on earning assets and a four basis point
rise in the cost of interest-bearing liabilities. In 1996, net interest income
on a tax-equivalent basis increased only $183,000 compared to 1995. The increase
resulted from 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 decrease 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 decline in the yield on earning assets which exceeded the
2 basis point reduction in the cost of interest-bearing liabilities.
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.
6
<PAGE>
Results Of Operations (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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 ....... $ 899 $ 52 5.78% $ 923 $ 56 6.07% $ 181 $ 11 6.08%
Securities:
Taxable ............................ 75,039 4,545 6.06 60,467 3,693 6.11 49,433 3,150 6.37
Nontaxable (tax-equivalent basis) .. 4,424 325 7.35 1,197 120 9.86 914 103 11.27
Federal funds sold .................. 9,146 506 5.53 7,354 397 5.40 18,470 1,093 5.92
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2) .................. 117,372 10,308 8.78 112,124 9,781 8.72 112,228 9,772 8.71
Residential real estate (3) ....... 6,766 570 8.42 8,152 702 8.61 9,349 768 8.21
Installment ....................... 41,306 3,539 8.57 39,849 3,510 8.81 36,138 3,481 9.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans ...................... 165,444 14,417 8.71 160,125 13,993 8.74 157,715 14,021 8.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .... 254,952 19,845 7.78 230,066 18,259 7.94 226,713 18,378 8.11
- ------------------------------------------------------------------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks .............. 11,512 10,157 9,197
Other assets ......................... 12,200 13,996 13,829
Allowance for possible loan losses ... (4,884) (5,345) (5,476)
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonearning assets ............. 18,828 18,808 17,550
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ....................... $273,780 $248,874 $244,263
====================================================================================================================================
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits ..... $ 32,006 $ 360 1.12% $ 27,388 $ 335 1.22% $ 23,669 $ 364 1.54%
Savings deposits ..................... 81,468 2,439 2.99 74,549 2,032 2.73 76,032 1,924 2.53
Time deposits ........................ 68,750 3,470 5.05 68,608 3,435 5.01 73,558 3,806 5.17
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ..... 182,224 6,269 3.44 170,545 5,802 3.40 173,259 6,094 3.52
Other borrowings ..................... 628 29 4.62 35 2 5.64 106 12 11.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .. 182,852 6,298 3.44 170,580 5,804 3.40 173,365 6,106 3.52
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits ...................... 58,035 48,048 46,100
Other liabilities .................... 2,841 2,695 2,361
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities ........................ 60,876 50,743 48,461
Stockholders' equity .................. 30,052 27,551 22,437
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................. $273,780 $248,874 $244,263
====================================================================================================================================
Net interest income
(tax-equivalent basis) ................ 13,547 12,455 12,272
Tax-equivalent adjustment .............. (110) (41) (35)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ................... $ 13,437 $12,414 $12,237
====================================================================================================================================
Net interest spread
(tax-equivalent basis) ................ 4.34% 4.54% 4.59%
====================================================================================================================================
Net interest margin
(tax-equivalent basis) ................ 5.31% 5.41% 5.41%
====================================================================================================================================
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................... 139.43% 134.87% 130.77%
====================================================================================================================================
</TABLE>
(1) Average balances include nonaccrual loans. Loan fees and costs are included
in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases".
(2) Includes construction loans.
(3) Includes loans held for sale.
7
<PAGE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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 ..................... $ (1) $ (3) $ (4) $ 45 $ -- $ 45
Loans (includes loans held for sale) ................. 471 (47) 424 212 (240) (28)
Securities:
Taxable ........................................... 882 (30) 852 677 (134) 543
Nontaxable ........................................ 242 (37) 205 32 (15) 17
Federal funds sold ................................. 99 10 109 (607) (89) (696)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income ............................. 1,693 (107) 1,586 359 (478) (119)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits and interest-bearing
demand deposits ................................... 254 178 432 14 65 79
Time deposits ...................................... 7 28 35 (254) (117) (371)
Other borrowings ................................... 24 3 27 (5) (5) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense ............................ 285 209 494 (245) (57) (302)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in net interest income ..................... $ 1,408 $ (316) $ 1,092 $ 604 $ (421) $ 183
====================================================================================================================================
</TABLE>
Interest Income. In 1997, interest income on tax-equivalent basis increased
$1.6 million (8.7%), rising from $18.2 million for 1996 to $19.8 million for
1997. As the chart above illustrates, volume-related increases of $1.7 million
were offset slightly by rate-related decreases of $107,000. Average
interest-earning assets increased $24.9 million (9.6%), which more than offset a
16 basis point decline in the yield on those assets.
The securities portfolio accounted for the largest increase in interest
income in 1997. The $1.1 million (27.7%) increase in interest income resulted
from a $14.6 million rise in average taxable securities and a $3.2 million jump
in average nontaxable securities. These increases more than offset the five and
251 basis point reductions in the respective yields on these securities. Since
nonearning assets in 1997 averaged only $20,000 more than in 1996, the funding
for the purchase of securities in 1997 came directly from deposit growth.
Federal funds sold contributed $109,000 to the interest income increase in 1997,
largely due to the $1.8 million rise in average federal funds sold outstanding.
Rates on federal funds sold averaged 13 basis points more in 1997 than in 1996,
reflecting prevailing daily rates.
Loans provided $424,000 of 1997's increase in interest income. Despite
strong loan originations during the year, average loans outstanding only grew
$5.3 million in 1997 versus 1996 due to a high level of loan paydowns. The
$471,000 increase in interest income related to that growth was virtually all in
the commercial and commercial real estate category. This category of loans also
experienced a six basis point rise in yield in 1997 compared to 1996.
Installment loans averaged almost $1.5 million more in 1997 than in 1996, but a
24 basis point decline in the average yield reduced the increase in interest
income in 1997 to just $29,000. The mortgage loan portfolio continues to pay
down, resulting in a $1.4 million reduction in 1997 average balances. The
average yield on these mortgage loans also dropped, contributing to an overall
$132,000 decrease in 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. 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. Cessation of residential 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 $677,000 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.
8
<PAGE>
Results Of Operations (continued)
Interest Expense. Total interest expense increased $494,000 (8.5%) from
$5.8 million for the year ended December 31, 1996 to $6.3 million for the year
ended December 31, 1997. An increase of $12.3 million of average
interest-bearing liabilities was responsible for $285,000 of the increase, while
the remaining $209,000 was due to a modest four basis point increase in the
average rate paid on those liabilities. The bulk of the increase in average
interest-bearing liabilities came in the interest-bearing demand and savings
categories, which rose $4.6 million (16.9%) and $6.9 million (9.3%)
respectively. Average time deposits increased only $142,000 in 1997 and a new
repurchase agreement product made up the remainder of the increase with a rise
of $593,000 in other borrowings. Although the average rate paid on
interest-bearing demand deposits fell ten basis points in 1997, this had no
effect on average balances because of the transactional nature of these
deposits. However, within the savings category, there was a definite movement
towards the higher rate products in 1997, causing a 26 basis point increase in
the average rate. The average rate paid on time deposits increased only four
basis points in 1997.
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 seven-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. Despite a rate decrease in
the interest-bearing demand category, efforts to attract new deposits proved
successful. Management believes that savings deposits will be difficult to
attract in future years because the spreads between rates paid on savings and
those offered by alternative investments have remained wide.
The Corporation incurred interest expense on its other borrowings of
$29,000, $2,000 and $12,000 during the years ended December 31, 1997, 1996 and
1995 respectively, which consisted of interest on repurchase agreements in 1997,
interest on federal funds purchased in 1996, and interest on subordinated
debentures in 1995. The remaining $1.3 million of subordinated debentures were
redeemed during the first quarter of 1995. See Note 8 of the Notes to
Consolidated Financial Statements.
Provision for Possible Loan Losses. The provision for possible loan losses
was $480,000, $400,000, and $500,000 for the years ended December 31, 1997, 1996
and 1995, respectively. The much reduced provisions for possible loan losses in
these years compared to provisions in 1992 to 1994 reflect the overall increase
in loan quality, the continued reduction of nonperforming assets and the further
reduction of loan concentrations. Loan charge-offs in 1997 were $1.1 million,
just slightly more than the $941,000 charged-off in 1996 but well below the $3.7
million charged-off in 1995. In 1997, loan recoveries totaled only $134,000
compared to the $803,000 and $1.5 million recovered in 1996 and 1995,
respectively. Management remains optimistic that continued collection efforts
will result in significant future recoveries.
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 declined $192,000 (8.1%) from $2.4 million for
the year ended December 31, 1996 to $2.2 million for 1997. The major reason for
the decrease is that there were almost $220,000 of prior year interest
recoveries and gains on sales of other real estate in 1996 and only $26,000 of
interest recoveries in 1997. Commissions from the Corporation's brokerage
affiliate rose nicely in 1997, increasing $64,000 (20.5%) over the 1996 total,
This increase was offset in part by a $24,000 (1.7%) decrease in service charges
on deposit accounts.
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 Expense. Total other expense declined $26,000 from 1996 to 1997. A
$798,000 reduction in ORE operating expenses and valuation adjustments was
almost entirely offset by increases of $596,000, $72,000, and $101,000 in
salaries and employee benefits, occupancy expenses, and equipment expense,
respectively. Due to the small number of ORE properties left, management expects
that valuation adjustments and operating expenses related to ORE in 1998 will be
below 1997 levels. The increase in salaries and employee benefits is the result
of several factors. First, the average number of full-time equivalent employees
increased by 6.54 employees in 1997 versus 1996, primarily due to the staffing
of the two newest branch offices. Second, the expense accrual required for
performance-based stock options increased $188,000 in 1997 compared to 1996,
largely a result of the rise in the Corporation's stock price. Merit raises
account for the balance of the increase. The occupancy and equipment expense
increases are almost entirely due to the two newest branch offices; their
combined expense for these categories was $162,000 higher in 1997 than in 1996,
when the first of these branches opened in August.
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. 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 a reduction in assessment rates and 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.
9
<PAGE>
Results Of Operations (continued)
The Corporation utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. During 1997,
senior management embarked on a project to determine the full scope and related
costs of this problem to insure that the Corporation's systems continue to meet
its internal needs and those of its customers. Since all of the Corporation's
software was purchased rather than developed in-house, the Corporation is
dependent on these software providers to make any programming changes needed for
the software to become year 2000 compliant. To date, the Corporation has
identified all affected hardware and software, has contacted vendors to
determine if their software is year 2000 compliant and, if not, what plans they
have to make it so, and has begun testing the applications to insure year 2000
compatibility. Minimal costs have been incurred thus far for year 2000
compliance. Management estimates that future costs incurred in this project will
not be material.
Income Taxes. The Corporation had income tax provisions of $1.9 million and
$1.3 million for the years ended December 31, 1997 and 1996, respectively, and
an income tax benefit of $4.2 million for the year ended December 31, 1995. 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.
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, 1997, the Corporation had no federal or state net operating
loss carryforwards.
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.
10
<PAGE>
Interest Rate Risk
Interest rate risk is inherent in the Corporation's core activities of
lending, investing and soliciting deposits. Because there is a difference
between the amount of the Corporation's interest-earning assets and the amount
of interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in
specified time periods, the Corporation is exposed to risk resulting from
interest rate fluctuations. The Corporation defines interest rate risk simply as
the risk that the Corporation's earnings will change when interest rates change.
Managing interest rate risk is the province of the Corporation's Asset/Liability
Management Committee. 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 Corporation monitors and controls interest rate risk through a variety
of techniques including use of an interest rate sensitivity model and
traditional interest rate sensitivity gap analysis. The model is used monthly to
project future net interest income and to estimate the effect on projected net
interest income of various changes in interest rates and balance sheet growth
rates. Through the model, management attempts to simulate future interest rate
behavior based on past behavior and the current competitive environment.
Traditional gap analysis involves arranging the Corporation's interest-earning
assets and interest-bearing liabilities by repricing periods and then computing
the difference, or interest rate sensitivity gap, between the assets and
liabilities which are estimated to reprice during each time period and
cumulatively through the end of each time period.
The interest rate sensitivity model requires, among things, estimates of:
(1) the magnitude and timing of changes in yields and costs on individual
categories of interest-earning assets and interest-bearing liabilities in
response to changes in market interest rates; (2) future cash flows; (3)
prepayment and early redemption rates; and (4) balance sheet growth rates.
Gap analysis requires estimates as to when individual categories of
interest sensitive assets and liabilities will reprice and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Like sensitivity modeling, gap analysis does not
take into account the fact that repricing of assets and liabilities is
discretionary and subject to competitive and other pressures.
Changes in the estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. For example, the rate shocks used in the table below assume
that year-end interest rates change immediately and that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. Past
interest rate behavior suggests that rates rarely change as described above.
Therefore, these techniques may not accurately reflect the impact of general
interest rate movements on the Corporation's net interest income.
The base case information in the following table shows an estimate of the
Corporation's net interest income for 1998 assuming that both interest rates and
the Corporation's interest sensitive assets and liabilities remain at December
31, 1997 levels. The rate shock information shows estimates of net interest
income for 1998 assuming rate shocks of plus 100 and 200 basis points and minus
100 and 200 basis points. The information set forth in the following table is
based on significant estimates and assumptions, and constitutes a "forward
looking statement" within the meaning of that term as set forth in Rule 175 of
the Securities Act of 1933 and Rule 36-6 of the Securities Act of 1934.
================================================================================
Net Interest Income for 1998
- --------------------------------------------------------------------------------
% Change
From
Rate Scenario Amount Base Case
- --------------------------------------------------------------------------------
(Dollars in thousands)
+200 basis point rate shock......................... $13,305 (1.47)%
+100 basis point rate shock......................... 13,358 (1.08)
Base Case .......................................... 13,504 --
- -100 basis point rate shock......................... 13,196 (2.28)
- -200 basis point rate shock......................... 12,736 (5.69)
================================================================================
Although there are more interest-bearing liabilities that would reprice
with a change in interest rates than there are interest-earning assets, a shock
and sustained decrease in rates would result in a decrease in net interest
income because of differences in the timing of the repricing of these assets and
liabilities. A further decrease in net interest income occurs when a 200 basis
point shock is applied because certain categories of interest-bearing
liabilities cannot absorb a 200 basis point rate decline due to their current
rates being below 2% or because of assumed rate floors. When rates are assumed
to increase 100 and 200 basis points, net interest income decreases slightly
because the negative effect on net interest income of having a greater volume of
interest-bearing liabilities reprice than interest-earning assets outweighs the
positive effect of their repricing slower than the assets.
11
<PAGE>
Interest Rate Risk (continued)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 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) ....................... $ 44,088 $ 19,496 $ 19,228 $ 48,667 $ 32,999 $ -- $ 164,478
Securities ........................... -- 34,026 13,062 34,328 7,578 -- 88,994
Federal funds sold ................... 10,725 -- -- -- -- -- 10,725
Cash and other assets ................ -- -- -- -- -- 21,530 21,530
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ........................ $ 54,813 $ 53,522 $ 32,290 $ 82,995 $ 40,577 $ 21,530 $ 285,727
====================================================================================================================================
Liabilities and stockholders' equity:
Demand deposits ...................... $ -- $ 34,546 $ -- $ -- $ -- $ 60,367 $ 94,913
Savings and time deposits (2) ........ -- 108,563 36,863 9,421 -- -- 154,847
Securities sold under agreements to
repurchase ......................... 1,677 -- -- -- -- -- 1,677
Other liabilities .................... -- -- -- -- -- 2,993 2,993
Stockholders' equity ................. -- -- -- -- -- 31,297 31,297
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................. $ 1,677 $ 143,109 $ 36,863 $ 9,421 $ -- $ 94,657 $ 285,727
====================================================================================================================================
Interest rate sensitivity gap ......... $ 53,136 $ (89,587) $ (4,573) $ 73,574 $ 40,577 $ (73,127)
Interest rate sensitivity gap as a
percentage of total assets ........... 18.6% (31.4)% (1.6)% 25.7% 14.2% (25.6)%
Cumulative interest rate
sensitivity gap ...................... $ 53,136 $ (36,451) $ (41,024) $ 32,550 $ 73,127
Cumulative interest rate
sensitivity gap as a percentage
of total assets ..................... 18.6% (12.8)% (14.4)% 11.4% 25.6%
====================================================================================================================================
</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.
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. Consumer loans not secured by real estate
generally are not placed on nonaccrual status but, instead, are charged off at
90 days past due. Prior to 1995, loans were considered restructured loans if,
for economic or legal reasons, a concession had been granted to the borrower
related to the borrower's financial difficulties that the creditor would not
otherwise consider. The Corporation had 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.
12
<PAGE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans 30 - 89 days past due ....................... $ 3,256 $ 1,023 $ 3,644 $ 4,725 $ 2,303
====================================================================================================================================
Nonaccrual loans:
Commercial and commercial real estate ....................... $ 490 $ 886 $ 3,459 $ 6,617 $21,472
Residential real estate mortgage ............................ 211 104 375 509 360
Installment ................................................. 44 63 356 422 49
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans ..................................... 745 1,053 4,190 7,548 21,881
- ------------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial and commercial real estate ....................... 8 46 37 20 585
Residential real estate mortgage ............................ 104 61 53 216 380
Installment ................................................. -- 45 51 4 217
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more ....................... 112 152 141 240 1,182
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans .................................. $ 857 $ 1,205 $ 4,331 $ 7,788 $23,063
====================================================================================================================================
ORE, net (1) ................................................. $ 2,192 $ 2,211 $ 4,408 $ 9,995 $10,332
====================================================================================================================================
Total nonperforming assets ................................... $ 3,049 $ 3,416 $ 8,739 $17,783 $33,395
====================================================================================================================================
Restructured loans ........................................... $ 1,475 $ 1,540 $ 1,702 $ 5,983 $11,035
====================================================================================================================================
Total nonperforming assets and restructured loans .......... $ 4,524 $ 4,956 $10,441 $23,766 $44,430
====================================================================================================================================
</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, 1997, gross interest income of $326,000
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 $4,000. Gross interest income of $144,000
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 $114,000.
The Corporation further reduced its nonperforming assets in 1997, going
from $3.4 million at December 31, 1996, to $3.0 million at December 31, 1997.
The loans past due 90 days or more and ORE categories had net reductions of
$40,000 and $19,000, respectively. Nonaccrual loan activity in 1997 included one
$55,000 mortgage loan transferring in from the loans past due 90 days or more
category, $955,000 of transfers from performing loans, less chargeoffs of
$933,00, principal repayments of $185,000 and a $200,000 loan which was returned
to accruing status. The one restructured loan at December 31, 1996 continued to
perform in accordance with its restructured terms during 1997.
The dramatic reduction in nonperforming assets from $33.4 million at
December 31, 1993 to $3.4 million at December 31, 1996 was primarily due to
charge-offs taken in that period, ORE asset sales and management's long-term
efforts to work with its borrowers to maximize recoveries.
In 1997, ORE-related expenses were much lower than in preceding years.
Management is striving to keep future ORE-related expenses at or below 1997
levels and has instituted 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, 1997:
================================================================================
Loans 90 Days Nonaccrual
or More Past Due Loans
- --------------------------------------------------------------------------------
(In thousands)
One-to four-family residential real estate.... $104 $216
Commercial and industrial..................... 8 485
Installment................................... -- 44
- --------------------------------------------------------------------------------
Total....................................... $112 $745
================================================================================
13
<PAGE>
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, 1997, 1996
and 1995, the Corporation's restructured loans totalled $1.5 million, $1.5
million and $1.7 million, respectively. At December 31, 1997 and 1996, the
balance consisted of one commercial real estate loan that had been on nonaccrual
status prior to 1996. This loan has performed in accordance with its modified
terms throughout 1996 and 1997.
Impaired Loans. Accounting standards require 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's impaired loans totaled $2,464,000 and $2,426,000 at
December 31, 1997 and 1996, respectively, the amount of its commercial
nonaccrual and restructured loan portfolios and other qualifying loans, if any,
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.
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.
At December 31, 1997, ORE consisted of one parcel of raw land carried at
$1.4 million, two parcels of residential building lots carried at a total of
$675,000, and one residence carried at $256,000. A general valuation allowance
of $139,000 is carried against these properties as an estimate of the costs to
sell them.
Management believes that the net carrying value of ORE at December 31, 1997
equaled the lower of the assets' balances when transferred to ORE or the
estimated fair value (after reduction for estimated selling costs) of the
properties acquired. Given current real estate and economic conditions in the
Corporation's market, however, no assurance can be given as to the extent to
which the Corporation will realize its current carrying value, the Corporation's
ability to continue to dispose of any significant amount of ORE or the period of
time it will take for the Corporation to achieve a significant reduction in the
amount of its ORE.
Other. Loans which were not classified as nonaccrual, 90 days past due or
restructured but where known information about possible credit problems of
borrowers caused management to have concerns as to the ability of the borrowers
to comply with present loan repayment terms amounted to $2.4 million at December
31, 1997. These loans consisted of one residential mortgage loan of $26,000, 21
installment loans totalling $264,000, and one commercial loan of $2.1 million.
The commercial loan is likely to be restructured during 1998.
Asset Concentrations. The Corporation's loan portfolio contains certain
concentrations of related borrowers. At December 31, 1997, the combined three
largest concentrations totalled $31.2 million, or 18.5% 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 13 loans with an aggregate balance of $15.0 million. The second
relationship consisted of 11 loans totalling $8.2 million. The third
relationship consisted of 16 loans totalling $8.0 million. At December 31, 1997,
management believes all loans within these concentrations, including adversely
classified loans, were properly valued on the Corporation's books.
At December 31, 1997 and 1996, commercial real estate mortgage and
construction loans totalled $105.7 million and $102.4 million and represented
62.5% 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, 1997, 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 .......................... $23,775 $60,989 $25,825 $110,589
Commercial real estate construction ............................ 4,975 5,578 -- 10,553
- -------------------------------------------------------------------------------------------------------------------------------
Total ...................................................... $28,750 $66,567 $25,825 $121,142
===============================================================================================================================
Loans with predetermined interest rates ........................ $10,336 $45,099 $21,519 $ 76,954
Loans with floating interest rates ............................. 18,414 21,468 4,306 44,188
- -------------------------------------------------------------------------------------------------------------------------------
Total ...................................................... $28,750 $66,567 $25,825 $121,142
===============================================================================================================================
</TABLE>
14
<PAGE>
Asset Quality (continued)
Allowance for Possible Loan Losses. The allowance for possible loan losses
is determined by management based upon its 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, 1997 of $4.6 million, or
540.0% 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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income (at end of year) (1) ............... $ 169,106 $ 165,070 $ 160,580 $ 164,345 $ 206,214
====================================================================================================================================
Average loans outstanding (2) .................................... $ 165,444 $ 160,125 $ 157,715 $ 171,395 $ 240,651
====================================================================================================================================
Allowance balance (at beginning of year) ......................... $ 5,115 $ 4,853 $ 6,501 $ 7,499 $ 7,670
Loans charged off:
Commercial and commercial real estate (3) ...................... 968 824 3,640 2,265 4,011
Residential real estate mortgage ............................... 7 18 3 49 22
Installment .................................................... 126 99 51 182 518
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans charged off ....................................... 1,101 941 3,694 2,496 4,551
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans:
Commercial and commercial real estate, net (3) ................ 104 783 1,511 253 275
Real estate mortgage .......................................... -- 2 6 -- 4
Installment ................................................... 30 18 29 24 61
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries ............................................. 134 803 1,546 277 340
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off ............................................ 967 138 2,148 2,219 4,211
Provision for the period ......................................... 480 400 500 1,221 4,440
Allowance related to loans sold .................................. -- -- -- -- (400)
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) ............................... $ 4,628 $ 5,115 $ 4,853 $ 6,501 $ 7,499
====================================================================================================================================
Allowance for possible loan losses as a percentage of total
outstanding loans (at end of year) .............................. 2.74% 3.10% 3.02% 3.96% 3.64%
Allowance for possible loan losses as a percentage of
nonperforming loans (at end of year) ............................ 540.02% 424.48% 112.05% 83.47% 32.52%
Net loans charged off as a percentage of average loans outstanding .58% .09% 1.36% 1.29% 1.75%
====================================================================================================================================
</TABLE>
(1) Includes loans held for sale of $0, $0, $34,000, $34,000 and $19.6 million
at December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Includes average loans held for sale of $0, $32,000, $70,000, $2.6 million,
and $20.5 million at December 31, 1997, 1996, 1995, 1994 and 1993
respectively.
(3) Includes commercial real estate construction loans.
The Corporation made provisions for possible loan losses during the years
ended December 31, 1997, 1996 and 1995 of $480,000, $400,000 and $500,000,
respectively, in order to address the uncertainty inherent in the loan
portfolio. Beginning in 1992, 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 1997, 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
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year................................................... $ 553 $ 2,611 $1,634
Provision charged to expense.................................................. 130 780 1,850
Write-downs to fair value and net losses incurred on sales.................... (544) (2,838) (873)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year......................................................... $ 139 $ 553 $2,611
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Asset Quality (continued)
Gross ORE balances have continued to decline, going from $7.0 million at
December 31, 1995 to $2.3 million at December 31, 1997. The latter total is
comprised of four properties, the largest of which is valued at $1.4 million.
Management is striving to further reduce ORE balances in 1998. As such,
valuation adjustments for ORE in 1998 are expected to be below the 1997 level.
The FDIC and the New Jersey Department of Banking, 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, 1997, securities having a book value of $11.5 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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(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%
U.S. Government Agencies ................................ 35,793 73.7 34,622 83.2 27,746 70.6
Obligations of State and Political Subdivisions ......... 1,876 3.9 851 2.0 883 2.2
Other ................................................... 10,887 22.4 6,175 14.8 6,167 15.7
- ------------------------------------------------------------------------------------------------------------------------------------
$48,556 100.0% $41,648 100.0% $39,328 100.0%
====================================================================================================================================
Held to Maturity:
U.S. Treasury ........................................... $11,541 28.5% $ 7,516 28.5% $ -- --%
U.S. Government Agencies ................................ 24,176 59.8 17,542 66.5 19,530 97.5
Obligations of State and Political Subdivisions ......... 4,721 11.7 1,337 5.0 500 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
$40,438 100.0% $26,395 100.0% $20,030 100.0%
====================================================================================================================================
</TABLE>
The Corporation's securities increased from $59.4 million at December 31,
1995, to $68.0 million at December 31, 1996, and to $89.0 million at December
31, 1997. The $21.0 million increase in securities during the year ended
December 31, 1997 was due to the Corporation's investing both the net new
deposits acquired during the year and the excess federal funds sold. The prior
year's $8.6 million increase resulted from investing the deposits acquired from
another commercial bank and loan paydown proceeds.
Overall, the Corporation's securities portfolio is high grade. At December
31, 1997, securities comprising 85.7% of the portfolio carry Moody's highest
rating - 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 underlying credit rating of the
municipality or political subdivision must be A rated. At December 31, 1997, the
weighted average maturity of all owned securities is 4 years, 8 months. A
further breakdown of the portfolio reveals that the $78.4 million of
non-mortgage-backed securities and $10.6 million of mortgage-backed securities
have weighted average maturities of 2 years, 6 months and 20 years, 9 months,
respectively. Further, the mortgage-backed securities were required by policy to
project a return of half of their principal in seven years or less at the time
of purchase. Also, $10.0 million and $14.0 million of securities classified as
available for sale and held to maturity, respectively, at December 31, 1997,
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 determines the appropriate classification of debt securities at the
time of purchase. During 1997 and 1996, the Corporation classified certain
purchased securities as held to maturity. At December 31, 1997, 1996 and 1995,
the Corporation had no securities held for trading purposes. See Notes 1 and 2
of Notes to Consolidated Financial Statements.
16
<PAGE>
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 31,1997:
<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 . $ 4,652(1) 5.69% $29,364(2) 5.79% $ -- --% $ 1,777(3) 5.51%
Obligations of State and
Political Subdivisions .. 50 11.36 1,315 7.16 376 11.36 135 11.36
Other .................... 151(3) 6.25 9,325(4) 5.95 -- -- 1,411(5) 6.16
- -------------------------------------------------------------------------------------------------------------------------
Total Securities ......... $ 4,853 5.77% $40,004 5.87% $ 376 11.36% $ 3,323 6.02%
=========================================================================================================================
Held to Maturity:
U.S. Treasury ............ $ -- --% $11,541 5.87% $ -- --% $ -- --%
U.S. Government Agencies . 7,229 6.06 9,880 6.56 1,890 6.90 5,177 6.77
Obligations of State and
Political Subdivisions .. 176 5.68 4,545 6.48 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total Securities ......... $ 7,405 6.05% $25,966 6.24% $ 1,890 6.90% $ 5,177 6.77%
=========================================================================================================================
<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 . $35,793 $35,793 5.76%
Obligations of State and
Political Subdivisions .. 1,876 1,876 8.42
Other .................... 10,887 10,887 5.98
- -----------------------------------------------------------------
Total Securities ......... $48,556 $48,556 5.91%
=================================================================
Held to Maturity:
U.S. Treasury ............ $11,541 $11,589 5.87%
U.S. Government Agencies . 24,176 24,304 6.48
Obligations of State and
Political Subdivisions .. 4,721 4,759 6.45
- -----------------------------------------------------------------
Total Securities ......... $40,438 $40,652 6.30%
=================================================================
</TABLE>
(1)Includes $3,638,000 of securities with floating rates. (2) Includes
$22,353,000 of securities with floating rates. (3) Entire amount consists of
securities with floating rates. (4) Includes $9,289,000 of securities with
floating rates. (5) Includes $1,410,000 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 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 are 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
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
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 ................................... $ 58,035 --% $ 48,048 --% $ 46,100 --%
Interest-bearing demand ...................................... 32,006 1.12 27,388 1.22 23,669 1.54
Savings ...................................................... 81,468 2.99 74,549 2.73 76,032 2.53
Time ......................................................... 68,750 5.05 68,608 5.01 73,558 5.17
- -----------------------------------------------------------------------------------------------------------------------------------
$240,259 2.61% $218,593 2.65% $219,359 2.78%
===================================================================================================================================
</TABLE>
The Corporation does not rely heavily on certificates of deposit over
$100,000 as a source of funds. During 1997, certificates of deposit of $100,000
or more averaged only 2.4% 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, 1997:
================================================================================
Certificates of Deposit
- --------------------------------------------------------------------------------
(In thousands)
Maturity period:
Three months or less ....................................... $5,945
Over three through twelve months ........................... 1,220
Over twelve months ......................................... 337
- --------------------------------------------------------------------------------
Total ................................................... $7,502
================================================================================
In addition to deposits, at December 31,1997, the Corporation's liabilities
included $1.7 million of securities sold under agreements to repurchase and $3.0
million in accrued and other liabilities. The Corporation had no purchases of
federal funds in 1997 and 1995, and an immaterial amount of federal funds
purchased in 1996.
17
<PAGE>
Liquidity and Capital Resources (continued)
At December 31, 1997, the total approved loan commitments outstanding
amounted to $35.8 million and commitments under standby letters of credit
amounted to $1,028,000. 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, 1997 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from the subsidiary Bank.
The parent company's cash obligations subsequent to December 31, 1997
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
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,
1997, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, 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>
====================================================================================================================================
For Capital To Be Well Capitalized Under
Actual Adequacy Purposes Prompt Corrective Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $31,854,000 16.5% >|=$15,417,000 >|=8.0% >|=$19,271,000 >|=10.0%
Bank.................................. $29,405,000 15.3% >|=$15,377,000 >|=8.0% >|=$19,221,000 >|=10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $29,417,000 15.3% >|=$ 7,708,000 >|=4.0% >|=$11,563,000 >|= 6.0%
Bank.................................. $26,975,000 14.0% >|=$ 7,688,000 >|=4.0% >|=$11,533,000 >|= 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... $29,417,000 10.5% >|=$11,234,000 >|=4.0% >|=$14,042,000 >|= 5.0%
Bank.................................. $26,975,000 9.6% >|=$11,219,000 >|=4.0% >|=$14,024,000 >|= 5.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $29,424,000 15.5% >|=$15,148,000 >|=8.0% >|=$18,935,000 >|=10.0%
Bank.................................. $26,831,000 14.2% >|=$15,106,000 >|=8.0% >|=$18,882,000 >|=10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $27,032,000 14.3% >|=$ 7,574,000 >|=4.0% >|=$11,361,000 >|= 6.0%
Bank.................................. $24,446,000 12.9% >|=$ 7,553,000 >|=4.0% >|=$11,329,000 >|= 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... $27,032,000 10.5% >|=$10,321,000 >|=4.0% >|=$12,902,000 >|= 5.0%
Bank.................................. $24,446,000 9.5% >|=$10,312,000 >|=4.0% >|=$12,889,000 >|= 5.0%
====================================================================================================================================
</TABLE>
18
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Corporation
are monetary in nature. As a result, interest rates have a greater impact on the
Corporation's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Impact of New Accounting Standards
The Corporation adopted SFAS No. 128, "Earnings Per Share", as of December
31, 1997. In accordance with the standard, net income per share is expressed in
two ways - basic and diluted. Basic earnings per share is calculated by dividing
the weighted average common shares outstanding into income available to common
shareholders. Diluted earnings per share gives effect to the Corporation's
outstanding stock options, which would dilute earnings per share if they were
exercised. All prior annual and interim periods presented in this report have
been restated in the new format.
In June, 1997, the FASB issued two additional Statements. SFAS No. 130,
"Reporting Comprehensive Income", establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997; earlier
application is permitted. The Corporation has elected not to adopt this
Statement prior to its effective date and has not determined which financial
statement will be utilized to display comprehensive income. The second
Statement, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Statement becomes effective for fiscal years beginning after December 15,
1997; earlier application is permitted. The Corporation has elected not to adopt
this Statement prior to its effective date and has not determined if it has any
reportable segments.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
===================================================================================================================================
December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks .............................................................. $ 9,550,000 $ 12,078,000
Federal Funds Sold ................................................................... 10,725,000 17,680,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ..................................................... 20,275,000 29,758,000
- -----------------------------------------------------------------------------------------------------------------------------------
Due from Bank - Interest-Bearing ....................................................... -- 1,000,000
Securities:
Available for Sale, at Fair Value .................................................... 48,556,000 41,648,000
Held to Maturity, at Cost (Fair Value $40,652,000 and $26,339,000) ................... 40,438,000 26,395,000
Loans .................................................................................. 169,106,000 165,070,000
Less: Allowance for Possible Loan Losses ............................................. 4,628,000 5,115,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans ........................................................................... 164,478,000 159,955,000
Premises and Equipment, net ............................................................ 3,246,000 3,260,000
Other Real Estate, net ................................................................. 2,192,000 2,211,000
Other Assets, net ...................................................................... 5,921,000 6,428,000
Intangible Assets, net ................................................................. 621,000 869,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ......................................................................... $ 285,727,000 $ 271,524,000
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Noninterest-Bearing ......................................................... $ 60,367,000 $ 58,421,000
- Interest-Bearing ............................................................ 34,546,000 31,846,000
Savings .............................................................................. 84,973,000 80,832,000
Time ................................................................................. 62,372,000 64,325,000
Certificates of Deposit over $100,000 ................................................ 7,502,000 4,465,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits ....................................................................... 249,760,000 239,889,000
Securities Sold Under Agreements to Repurchase ......................................... 1,677,000 --
Accrued Expenses and Other Liabilities ................................................. 2,993,000 2,599,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities .................................................................... 254,430,000 242,488,000
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A Preferred Stock, no par value:
Authorized shares - 1,950, none issued ............................................... -- --
Common Stock, $1 par value:
Authorized shares - 15,000,000
Issued shares - 8,107,074 at December 31, 1997 and
8,160,605 at December 31, 1996 ................................................. 8,107,000 8,161,000
Capital In Excess of Par Value ......................................................... 12,901,000 13,103,000
Retained Earnings ...................................................................... 10,339,000 8,105,000
Net Unrealized Holding Losses on Securities Available for Sale, Net of Tax ............. (50,000) (39,000)
Treasury Stock at Cost (63,406 shares at December 31, 1996) ............................ -- (294,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity ........................................................... 31,297,000 29,036,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $ 285,727,000 $ 271,524,000
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
===================================================================================================================================
Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including Fees ......................................................... $14,417,000 $13,993,000 $14,021,000
Securities:
Taxable...................................................................... 4,545,000 3,693,000 3,150,000
Nontaxable................................................................... 214,000 79,000 68,000
Other.......................................................................... 558,000 453,000 1,104,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME........................................................ 19,734,000 18,218,000 18,343,000
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings and Interest-Bearing Demand Deposits................................... 2,799,000 2,367,000 2,288,000
Time Deposits and Certificates of Deposit over $100,000........................ 3,469,000 3,435,000 3,806,000
Other Borrowings .............................................................. 29,000 2,000 12,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE....................................................... 6,297,000 5,804,000 6,106,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME............................................................ 13,437,000 12,414,000 12,237,000
PROVISION FOR POSSIBLE LOAN LOSSES ............................................... 480,000 400,000 500,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES....................................................... 12,957,000 12,014,000 11,737,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts............................................ 1,368,000 1,392,000 1,515,000
Brokerage Commissions.......................................................... 376,000 312,000 298,000
(Loss) Gain on Securities Transactions, net.................................... (14,000) (16,000) 33,000
Other Income................................................................... 452,000 686,000 601,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME........................................................... 2,182,000 2,374,000 2,447,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits ................................................ 5,413,000 4,817,000 4,574,000
Net Occupancy Expense.......................................................... 883,000 811,000 760,000
Equipment Expense.............................................................. 687,000 586,000 561,000
Other Real Estate Expense - Cost of Operations, net............................ 104,000 252,000 958,000
- Valuation Adjustments.............................. 130,000 780,000 1,850,000
Other Expense ................................................................. 2,811,000 2,808,000 3,445,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE........................................................ 10,028,000 10,054,000 12,148,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES..................................................... 5,111,000 4,334,000 2,036,000
Provision (Benefit) for Income Taxes ...................................... 1,906,000 1,278,000 (4,212,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME..................................................................... $ 3,205,000 $ 3,056,000 $ 6,248,000
===================================================================================================================================
NET INCOME PER COMMON SHARE - Basic ........................................... $ .40 $ .38 $ .76
- Diluted ......................................... $ .38 $ .37 $ .75
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
21
<PAGE>
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, 1995, 1996 and 1997: 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, 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)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income - 1997 .................. -- -- -- 3,205,000 -- --
Cash Dividends on Common Stock,
$.12 per Share .................. -- -- -- (971,000) -- --
Stock Options Exercised ............ -- 10,000 28,000 -- -- --
Change in Net Unrealized Holding
(Losses) Gains, Net of Tax ...... -- -- -- -- (11,000) --
Retirement of Treasury Stock ....... -- (64,000) (230,000) -- -- 294,000
===================================================================================================================================
BALANCE, December 31, 1997 ......... $ -- $ 8,107,000 $ 12,901,000 $ 10,339,000 $ (50,000) $ --
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===================================================================================================================================
Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income ............................................................. $ 3,205,000 $ 3,056,000 $ 6,248,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization of Premises and Equipment .............. 571,000 485,000 444,000
Amortization of Intangible Assets .................................... 258,000 256,000 270,000
Accretion of Securities Discount, net ................................ (100,000) (96,000) (395,000)
Provision for Possible Loan Losses ................................... 480,000 400,000 500,000
Provision for Possible Losses on Other Real Estate ................... 130,000 780,000 1,850,000
Deferred Income Tax Provision (Benefit) .............................. 883,000 829,000 (4,235,000)
Loss (Gain) on Securities Transactions, net ........................ 14,000 16,000 (33,000)
Loans Made or Acquired and Held for Sale ............................. -- (720,000) (321,000)
Proceeds from Loans Held for Sale .................................... -- 721,000 325,000
Gain on Sales of Loans Held for Sale ................................. -- (1,000) (4,000)
Gain on Sale of Other Real Estate .................................... (22,000) (137,000) (83,000)
(Increase) Decrease in Interest Receivable ........................... (47,000) 319,000 (797,000)
Increase (Decrease) in Accrued Expenses and Other Liabilities ........ 473,000 232,000 (1,100,000)
(Increase) Decrease in Other Assets .................................. (481,000) 392,000 378,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities .......................... 5,364,000 6,532,000 3,047,000
- -----------------------------------------------------------------------------------------------------------------------------------
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 1,000,000 --
Securities Available for Sale:
Proceeds from Maturities ............................................. 3,890,000 3,533,000 15,051,000
Proceeds from Sales Prior to Maturity ................................ 11,072,000 14,309,000 8,504,000
Proceeds from Calls Prior to Maturity ................................ -- 8,000,000 1,000,000
Purchases ............................................................ (21,798,000) (28,295,000) (30,264,000)
Securities Held to Maturity:
Proceeds from Maturities ............................................. 6,451,000 3,500,000 --
Proceeds from Calls Prior to Maturity ................................ 1,000,000 4,002,000 8,925,000
Purchases ............................................................ (21,497,000) (13,863,000) (40,443,000)
Net (Increase) Decrease in Loans Outstanding ........................... (5,131,000) (5,105,000) 903,000
Capital Expenditures ................................................... (558,000) (1,074,000) (535,000)
Payments Received on Other Real Estate ................................. -- -- 2,674,000
Advances Made on Other Real Estate ..................................... (997,000) (286,000) (677,000)
Proceeds from Sales of Other Real Estate ............................... 1,038,000 2,316,000 2,537,000
Premium Paid for Deposits .............................................. (10,000) (622,000) --
Other .................................................................. (2,000) 4,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities .............................. (25,542,000) (13,581,000) (33,325,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net Increase in Total Deposits ......................................... 9,871,000 22,827,000 5,198,000
Redemption of Subordinated Debentures .................................. -- -- (1,292,000)
Redemption of Class A Preferred Stock .................................. -- (717,000) (1,033,000)
Cash Dividends on Preferred Stock ...................................... -- (106,000) (119,000)
Cash Dividends on Common Stock ......................................... (891,000) (162,000) --
Proceeds from Stock Options Exercised .................................. 38,000 3,000 --
Increase in Securities Sold under Agreements to Repurchase ............. 1,677,000 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities .......................... 10,695,000 21,845,000 2,754,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents ...................... (9,483,000) 14,796,000 (27,524,000)
Cash and Cash Equivalents, Beginning of Year .............................. 29,758,000 14,962,000 42,486,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year .................................... $ 20,275,000 $ 29,758,000 $ 14,962,000
===================================================================================================================================
Supplemental Cash Flow Disclosures:
Cash paid during year for:
Interest ............................................................. $ 6,321,000 $ 5,816,000 $ 5,948,000
Income Taxes, Net of Refunds ......................................... $ 1,479,000 $ (103,000) $ (373,000)
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE>
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 eight 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. 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 1997 and 1996, the Corporation classified certain purchased
securities as held to maturity. The Corporation had no securities held for
trading purposes at December 31, 1997 or 1996.
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 income. 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 1995, loans were considered troubled-debt restructurings if, for
economic or legal reasons, a concession had been granted to the borrower related
to the borrower's financial difficulties that the creditor would not otherwise
consider. The Corporation had restructured certain loans in instances where a
determination was made that greater economic value will be realized under new
terms than through foreclosure, liquidation, or other disposition. Interest is
recognized on restructured loans such that a constant effective interest rate is
applied to the carrying amount of the loan in each period between restructuring
and maturity. A restructured loan that has demonstrated repayment performance
(for a period of six months either before or after the restructuring date) and
has an effective yield at least equal to a market rate at the time of
restructuring is classified as performing in the reporting period immediately
following the year it was disclosed as restructured. At December 31, 1997, the
Corporation had one remaining restructured loan with a balance of $1.5 million.
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
All loans are individually evaluated for impairment 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.
A loan is considered impaired when, 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. The
Corporation evaluated impairment for those loans that cannot be easily grouped
into homogeneous pools of loans and collectively evaluated for impairment. These
loans generally are commercial and real estate development loans. Because these
loans are collateral-dependent, the Bank primarily uses the fair value of the
collateral to determine impairment of loans. See Notes 3 and 4 for additional
information regarding impairment of loans.
24
<PAGE>
Note 1: Summary Of Significant Accounting Policies (continued)
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 $15,300,000 and $18,745,000 at December
31, 1997 and 1996, 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.
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:
================================================================================
December 31
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Purchased Mortgage Servicing Rights .................. $ 43 $ 83
Core Deposit Premiums ................................ 565 665
Premiums on Purchased Home Equity
Lines of Credit ................................... 13 121
- --------------------------------------------------------------------------------
$621 $869
================================================================================
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. In addition, $10,000 of deposit premium relating to this transaction
was paid in 1997. Amortization of intangibles totaled $258,000, $256,000 and
$270,000 for 1997, 1996 and 1995, respectively, of which $40,000 in each year
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, 1997 and 1996, the Bank had aggregate retained earnings
of $13,662,000 and $11,247,000, 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 9 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 instruments is presented in Note 13.
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
In June, 1997, the FASB issued two additional statements. SFAS No. 130,
"Reporting Comprehensive Income", establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997; earlier
application is permitted. The Corporation has elected not to adopt this
Statement prior to its effective date and has not determined which financial
statement will be utilized to display comprehensive income. The second
Statement, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Statement becomes effective for fiscal years beginning after December 15,
1997; earlier application is permitted. The Corporation has elected not to adopt
this Statement prior to its effective date and has not determined if it has any
reportable segments.
25
<PAGE>
Note 1: Summary Of Significant Accounting Policies (continued)
Net Income Per Share
The Corporation adopted SFAS No. 128, "Earnings Per Share", as of December
31, 1997. In accordance with the standard, net income per share is expressed in
two ways - basic and diluted. All prior annual and interim periods presented in
this report have been restated in the new format. The following table shows the
calculation of both basic and diluted net income per share for the years ended
1997, 1996, and 1995:
<TABLE>
<CAPTION>
====================================================================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg.
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations ......... $3,205,000 $3,056,000
Less: Preferred stock dividends ........... -- (12,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders.... $3,205,000 8,100,055 $.40 $3,044,000 8,096,961 $.38
====================================================================================================================================
Effect of Dilutive Securities:
Options granted to employees .............. 274,436 84,783
Options granted to nonemployee directors... 35,386 16,312
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
plus assumed conversions ............... $3,205,000 8,409,877 $.38 $3,044,000 8,198,056 $.37
====================================================================================================================================
<CAPTION>
==========================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------
Weighted Avg.
Income Shares Per Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations ......... $6,248,000
Less: Preferred stock dividends ........... (96,000)
- ------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders.... $6,152,000 8,096,449 $.76
==========================================================================================
Effect of Dilutive Securities:
Options granted to employees .............. 74,234
Options granted to nonemployee directors... 5,136
- ------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
plus assumed conversions ............... $6,152,000 8,175,819 $.75
==========================================================================================
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
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, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 ........... $ 4,654 $ 4 $ (5) $ 4,653
Maturing 1 to 5 years ............ 29,431 33 (100) 29,364
Maturing after 10 years .......... 1,771 5 -- 1,776
- ------------------------------------------------------------------------------------------------------------------------------------
35,856 42 (105) 35,793
- ------------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year ........... 50 -- -- 50
Maturing 1 to 5 years ............ 1,312 3 -- 1,315
Maturing 5 to 10 years ........... 426 -- -- 426
Maturing after 10 years .......... 85 -- -- 85
- ------------------------------------------------------------------------------------------------------------------------------------
1,873 3 -- 1,876
- ------------------------------------------------------------------------------------------------------------------------------------
Other:
Maturing within 1 year ........... 151 -- -- 151
Maturing 1 to 5 years ............ 9,348 4 (27) 9,325
Maturing after 10 years .......... 1,410 1 -- 1,411
- ------------------------------------------------------------------------------------------------------------------------------------
10,909 5 (27) 10,887
- ------------------------------------------------------------------------------------------------------------------------------------
$ 48,638 $ 50 $(132) $ 48,556
====================================================================================================================================
HELD TO MATURITY
U.S. Treasury:
Maturing 1 to 5 years ............ $ 11,541 $ 66 $ (18) $ 11,589
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Maturing within 1 year ........... 7,229 14 -- 7,243
Maturing 1 to 5 years ............ 9,880 35 (5) 9,910
Maturing 5 to 10 years ........... 1,890 17 -- 1,907
Maturing after 10 years .......... 5,177 67 -- 5,244
- ------------------------------------------------------------------------------------------------------------------------------------
24,176 133 (5) 24,304
- ------------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year ........... 176 -- -- 176
Maturing 1 to 5 years ............ 4,545 38 -- 4,583
- ------------------------------------------------------------------------------------------------------------------------------------
4,721 38 -- 4,759
- ------------------------------------------------------------------------------------------------------------------------------------
$ 40,438 $237 $ (23) $ 40,652
====================================================================================================================================
</TABLE>
26
<PAGE>
Note 2: Securities (continued)
<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>
Securities at December 31, 1997 and 1996 having a book value of $11,541,000
and $6,507,000, 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 1997 were $11,072,000, resulting in gross gains of $1,000 and gross
losses of $15,000. Proceeds from calls prior to maturity of securities held to
maturity during 1997 were $1,000,000, resulting in no gains or losses. 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.
27
<PAGE>
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:
================================================================================
December 31
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Commercial and commercial real estate................... $ 110,589 $105,819
Commercial real estate construction..................... 10,553 10,949
Residential real estate mortgage........................ 6,179 7,443
Installment............................................. 41,785 40,859
- --------------------------------------------------------------------------------
$ 169,106 $165,070
================================================================================
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
$31,245,000 and $32,605,000 at December 31, 1997 and 1996, respectively. The
largest borrower concentration consists of loans to a group of affiliated
borrowers with an aggregate balance of $15,011,000 and $15,157,000 at December
31, 1997 and 1996, respectively. A majority of these loans is 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 relationship consists of loans primarily for the construction or
renovation of condominium units, totaling $8,209,000 and $7,222,000 at December
31, 1997 and 1996, respectively.
The third concentration involves loans to certain affiliated real estate
development companies whose principal owners have had a long-standing
relationship with the Bank. Outstanding balances for this group at December 31,
1997 and 1996 were $8,025,000 and $10,226,000, respectively. One commercial loan
of $2.1 million from these concentrations became nonperforming subsequent to
December 31, 1997.
Loans for which the accrual of interest has been discontinued totaled
$745,000 and $1,053,000 at December 31, 1997 and 1996, respectively.
Restructured loans for which terms have been modified totaled $1,475,000 and
$1,540,000 at December 31, 1997 and 1996, respectively. At December 31, 1997,
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
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Interest income which would have been recognized on nonaccrual loans...................................... $326 $349
Contractual interest income which would have been recognized on restructured loans........................ 144 260
Interest income received.................................................................................. (118) (262)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income not recognized............................................................................ $352 $347
=================================================================================================================================
</TABLE>
Accounting standards require 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's impaired loans totaled $2,464,000 and $2,426,000 at
December 31, 1997 and 1996, respectively, the amount of its commercial
nonaccrual and restructured loan portfolios and other qualifying loans, if any,
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.
28
<PAGE>
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
- ----------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year............................... $ 5,115 $ 4,853 $ 6,501
Provision charged to expense.......................... 480 400 500
Recoveries of loans previously charged off ........... 134 803 1,546
Loans charged off..................................... (1,101) (941) (3,694)
- ----------------------------------------------------------------------------------------
Balance, end of year..................................... $ 4,628 $ 5,115 $ 4,853
========================================================================================
</TABLE>
Note 5: 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 1997:
================================================================================
(In thousands)
Balance, December 31, 1996........................................ $1,849
Additions ...................................................... 459
Repayments ..................................................... (326)
Resignation of officers......................................... (1)
- --------------------------------------------------------------------------------
Balance, December 31, 1997 ....................................... $1,981
================================================================================
All related party loans were current as to interest and principal at December
31, 1997.
Note 6: Premises and Equipment
At December 31, premises and equipment consists of the following:
================================================================================
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Land and improvements....................................... $ 286 $ 286
Buildings and improvements.................................. 2,810 2,815
Leasehold improvements...................................... 358 378
Furniture and equipment..................................... 2,975 2,726
- --------------------------------------------------------------------------------
6,429 6,205
Less - Accumulated depreciation and amortization............ 3,183 2,945
- --------------------------------------------------------------------------------
$3,246 $ 3,260
================================================================================
29
<PAGE>
Note 7: Deposits
The following is an expected maturity distribution of time deposits less
than $100,000 as of December 31:
===============================================================================
1997 1996
- -------------------------------------------------------------------------------
(In thousands)
Due in three months or less............................. $17,454 $18,804
Due between three months and one year................... 35,834 34,408
Due over one year....................................... 9,084 11,113
- -------------------------------------------------------------------------------
$62,372 $64,325
===============================================================================
As of December 31, 1997 and 1996, there were $7,502,000 and $4,465,000,
respectively, of certificates of deposits over $100,000. Such certificates
totalling $7,165,000 and $4,127,000, respectively, had remaining maturities of
one year or less on those dates.
Note 8: 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"). 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.
30
<PAGE>
Note 9: Income Taxes
The current and deferred amounts of the provision (benefit) for income taxes
as of December 31 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal ......................................................................... $ 880 $ 449 $ 21
State ........................................................................... 143 -- 2
Deferred .......................................................................... 883 829 1,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total current and deferred ........................................................ 1,906 1,278 1,062
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit of reduction in deferred tax asset valuation allowance .................... -- -- (5,274)
Total provision (benefit) for income taxes ........................................ $ 1,906 $ 1,278 $(4,212)
====================================================================================================================================
</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
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Allowance for possible losses on loans and other real estate.............................................. $1,530 $1,802
Gain on restructured loans................................................................................ 299 299
Depreciation and amortization............................................................................. 161 173
Net nonaccrual interest recoveries (charge-offs).......................................................... 15 (74)
Accrued liabilities not currently deductible.............................................................. 266 148
State net operating loss carryforward, net of reserves ................................................... -- 222
Alternative minimum tax credits........................................................................... 266 750
Net holding losses on securities available for sale....................................................... 33 26
Other..................................................................................................... (126) (64)
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset included in Other Assets $2,444 $3,282
==================================================================================================================================
</TABLE>
At December 31, 1997, the Corporation had no federal or state net operating loss
carryforwards. 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>
==================================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Statutory provision...................................................................... $1,738 $1,474 $ 692
Reduction in Federal taxes resulting from tax-exempt income............................... (55) (15) (23)
State taxes on income, net of Federal tax benefit......................................... 313 327 122
Reversals of accruals no longer required.................................................. -- (496) --
Tax refund greater than receivable recorded............................................... -- -- (81)
Decrease in valuation allowance for deferred tax assets................................... -- -- (5,274)
Other..................................................................................... (90) (12) 352
- ----------------------------------------------------------------------------------------------------------------------------------
$1,906 $1,278 $(4,212)
==================================================================================================================================
</TABLE>
31
<PAGE>
Note 10: Stockholders' Equity
Preferred Stock
During 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 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 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 1995 annual meeting of stockholders, 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.
In February, 1997, the Board of Directors voted to terminate the 1986
Nonstatutory Stock Option Plan, which had 100,000 shares of common stock
reserved for future issuance and no previously granted options outstanding. As
of December 31, 1997, 1,158,309 shares were reserved for future issuance under
the Option Agreement and these two Plans.
Option activity for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Number Price Number Price Number Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year................ 767,534 545,434 230,934
Options granted........................... 272,600 $5.69 - $6.00 262,100 $4.81 - $ 4.88 320,000 $3.50 - $ 3.81
Options exercised......................... (9,875) 3.50 - 4.81 (750) 3.81 -- --
Options cancelled......................... (5,250) 4.81 - 6.00 (39,250) 3.81 - 18.13 (5,500) 3.81
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year...................... 1,025,009 2.00 - 6.00 767,534 2.00 - 4.88 545,434 2.00 - 18.13
Options exercisable, end of year 543,444 $2.00 - $6.00 304,736 $2.00 - $ 4.88 139,375 $2.00 - $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 $296,000, $108,000 and $120,000 for 1997, 1996, and 1995, 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 proforma amounts indicated below:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
Net Income:
As reported .................... $ 3,205 $ 3,056 $ 6,248
Proforma ....................... $ 2,912 $ 2,880 $ 6,117
Income per share - basic:
As reported .................... $ .40 $ .38 $ .76
Proforma ....................... $ .36 $ .35 $ .74
Income per share - diluted:
As reported .................... $ .38 $ .37 $ .75
Proforma ....................... $ .35 $ .35 $ .74
================================================================================
32
<PAGE>
Note 10: 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 1997, 1996 and 1995, respectively: dividend yield
of 1.4% for 1997 and 2.5% for 1996 and 1995; expected volatility of 28%, 25% and
29% for all options; risk-free interest rates of 6.5%, 6.9% and 6.1% for the
Employee Plan options, and 6.6%, 6.5% and 6.4% for the Directors' Plan options;
and expected lives of 8.0, 7.8 and 7.7 years for the Employee Plan options and
6.4, 6.5 and 6.3 years for the Directors' Plan options.
The weighted average fair values at grant-date for options awarded in 1997,
1996 and 1995 were $2.42, $1.60 and $1.26, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
================================================================================
Exercise Remaining
Price Number Outstanding Number Exercisable Contractual Life
- --------------------------------------------------------------------------------
$2.00 85,000 63,750 3.2 years
2.32 71,244 35,622 3.2
2.63 62,690 15,672 3.2
3.50 60,000 60,000 7.4
3.81 218,750 163,375 7.4
4.81 245,125 121,875 8.5
4.88 12,600 12,600 8.3
5.69 12,600 6,300 9.3
6.00 257,000 64,250 9.4
- --------------------------------------------------------------------------------
1,025,009 543,444 7.3
================================================================================
Note 11: Commitments and Contingencies
The consolidated balance sheets as of December 31, 1997 and 1996 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 $35,799,000 and $31,163,000 to its borrowers as of December
31, 1997 and 1996, 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 $1,028,000
and $825,000 as of December 31, 1997 and 1996, 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 $232,000, $183,000, and $154,000, for 1997,
1996 and 1995, 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 $76,000.
At December 31, 1997, aggregate annual minimum rental commitments under
noncancelable leases having an initial or remaining term of more than one year
are as follows:
================================================================================
1998................................................................. $ 202,000
1999................................................................. 152,000
2000................................................................. 95,000
2001................................................................. 96,000
2002................................................................. 98,000
Thereafter........................................................... 455,000
- --------------------------------------------------------------------------------
$1,098,000
================================================================================
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 1998.
Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. The reserve
balances aggregated $299,000 and $4,299,000 at December 31, 1997 and 1996,
respectively.
The Corporation may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In management's judgment,
the consolidated financial position or results of operations of the Corporation
will not be materially affected by the final outcome of any present legal
proceedings.
33
<PAGE>
Note 12: 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, 1997, 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,
1997, 1996 and 1995 were $165,000, $167,000 and $146,000, 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 13: 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, 1997 and 1996, were as follows:
Financial instruments actively traded in the secondary market have been
valued using available market prices.
<TABLE>
<CAPTION>
===================================================================================================================================
December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents......................................... $20,275,000 $20,275,000 $29,758,000 $29,758,000
Securities available for sale at fair value (Note 2) ............. 48,556,000 48,556,000 41,648,000 41,648,000
Securities held to maturity (Note 2) ............................. 40,438,000 40,652,000 26,395,000 26,339,000
===================================================================================================================================
</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, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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
Gross loans, including accrued interest........................... 170,317,000 169,689,000 166,336,000 164,050,000
Deposits, including accrued interest.............................. 250,550,000 250,682,000 240,704,000 240,848,000
Securities sold under agreements to repurchase ................... 1,677,000 1,677,000 -- --
====================================================================================================================================
</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 $35,799,000 and $31,163,000 at December 31, 1997 and 1996, respectively,
and are generally priced at market at time of funding. Standby letters of credit
totaling $1,028,000 and $825,000 as of December 31, 1997 and 1996, 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 11
for additional discussion relating to these off-balance-sheet activities. At
December 31, 1997 and 1996, fees related to the unexpired terms of letters of
credit were not significant.
34
<PAGE>
Note 14: 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
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,
1997, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1997, 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>
====================================================================================================================================
For Capital To Be Well Capitalized Under
Actual Adequacy Purposes Prompt Corrective Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $31,854,000 16.5% >|=$15,417,000 >|=8.0% >|=$19,271,000 >|=10.0%
Bank.................................. $29,405,000 15.3% >|=$15,377,000 >|=8.0% >|=$19,221,000 >|=10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $29,417,000 15.3% >|=$ 7,708,000 >|=4.0% >|=$11,563,000 >|= 6.0%
Bank.................................. $26,975,000 14.0% >|=$ 7,688,000 >|=4.0% >|=$11,533,000 >|= 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... $29,417,000 10.5% >|=$11,234,000 >|=4.0% >|=$14,042,000 >|= 5.0%
Bank.................................. $26,975,000 9.6% >|=$11,219,000 >|=4.0% >|=$14,024,000 >|= 5.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Corporation........................... $29,424,000 15.5% >|=$15,148,000 >|=8.0% >|=$18,935,000 >|=10.0%
Bank.................................. $26,831,000 14.2% >|=$15,106,000 >|=8.0% >|=$18,882,000 >|=10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation........................... $27,032,000 14.3% >|=$ 7,574,000 >|=4.0% >|=$11,361,000 >|= 6.0%
Bank.................................. $24,446,000 12.9% >|=$ 7,553,000 >|=4.0% >|=$11,329,000 >|= 6.0%
Tier 1 Capital (to Average Assets):
Corporation........................... $27,032,000 10.5% >|=$10,321,000 >|=4.0% >|=$12,902,000 >|= 5.0%
Bank.................................. $24,446,000 9.5% >|=$10,312,000 >|=4.0% >|=$12,889,000 >|= 5.0%
====================================================================================================================================
</TABLE>
35
<PAGE>
Note 15: Condensed Financial Statements of Ramapo Financial Corporation
(Parent Company Only)
<TABLE>
<CAPTION>
===================================================================================================================================
BALANCE SHEETS December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets (In thousands)
<S> <C> <C>
Cash and Due from Banks ............................................................... $ 57 $ 76
Interest-Bearing Time Deposits ........................................................ 2,904 2,469
Investment in Bank Subsidiary (Equity Method) ......................................... 28,855 26,450
Other Assets .......................................................................... 672 847
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ........................................................................ $ 32,488 $ 29,842
===================================================================================================================================
Liabilities - Other ...................................................................... $ 1,191 $ 806
===================================================================================================================================
Stockholders' Equity
Common Stock .......................................................................... 8,107 8,161
Capital in Excess of Par Value ........................................................ 12,901 13,103
Retained Earnings ..................................................................... 10,339 8,105
Net Unrealized Holding Losses on Securities Available for Sale ........................ (50) (39)
Treasury Stock ........................................................................ -- (294)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity .......................................................... 31,297 29,036
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $ 32,488 $ 29,842
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================================
STATEMENTS OF INCOME Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Income
Rental Income from Subsidiary Bank .................................. $ 180 $ 180 $ 165
Interest on Time Deposit at Subsidiary Bank ......................... 117 124 195
Dividends from Subsidiary Bank ...................................... 971 324 --
Other Income ........................................................ 7 58 1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Income ............................................ 1,275 686 361
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses ..................................................... 580 559 603
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes and Equity in
Undistributed Income of Subsidiaries ................................ 695 127 (242)
Income Tax (Benefit) Provision ......................................... (94) (67) 5
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Equity in Undistributed Income
of Subsidiaries ..................................................... 789 194 (247)
Equity in Undistributed Income of Subsidiaries ......................... 2,416 2,862 6,495
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income .......................................................... $ 3,205 $ 3,056 $ 6,248
===================================================================================================================================
</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.
36
<PAGE>
Note 15: Condensed Financial Statements of Ramapo Financial Corporation
(Parent Company Only) (Continued)
<TABLE>
<CAPTION>
===================================================================================================================================
STATEMENTS OF CASH FLOWS Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income .............................................................. $ 3,205 $ 3,056 $ 6,248
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Income of Subsidiaries ..................... (2,416) (2,862) (6,495)
Depreciation and Amortization ...................................... 48 115 116
Dividends Declared but Not Paid .................................... (80) (162) --
Decrease (Increase) in Other Assets ................................ 127 (474) 193
Increase in Other Liabilities ...................................... 385 498 147
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ........................... 1,269 171 209
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities ...................................... -- -- --
===================================================================================================================================
Cash Flows from Financing Activities:
Redemption of Subordinated Debentures .............................. -- -- (1,292)
Redemption of Class A Preferred Stock .............................. -- (717) (1,033)
Cash Dividends on Preferred Stock .................................. -- (106) (119)
Cash Dividends on Common Stock ..................................... (891) (162) --
Proceeds from Stock Options Exercised .............................. 38 3 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Financing Activities ..................................... (853) (982) (2,444)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... 416 (811) (2,235)
Cash and Cash Equivalents, Beginning of Year .............................. 2,545 3,356 5,591
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year .................................... $ 2,961 $ 2,545 $ 3,356
===================================================================================================================================
</TABLE>
The parent company's resources available to meet its cash obligations
subsequent to December 31, 1997 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from subsidiary Bank.
Based on current resources discussed above, management expects to meet its
obligations at the parent company level for the foreseeable future.
37
<PAGE>
Note 16: Supplementary Statements of Income Information
Major categories of other expense for the indicated periods are as follows:
<TABLE>
<CAPTION>
==================================================================================================================================
Year ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Legal* .................................................................................. $ 196 $ 312 $ 457
Postage and freight ..................................................................... 158 167 171
Stationery and printing.................................................................. 288 248 198
FDIC insurance assessment................................................................ 29 34 398
Audit and examinations .................................................................. 150 174 259
Telephone ............................................................................... 194 152 165
Consulting fees ......................................................................... 260 212 325
Credit reports/appraisal fees ........................................................... 103 125 156
Bonding and insurance ................................................................... 156 207 241
Amortization of intangible assets ....................................................... 258 256 270
Advertising.............................................................................. 235 231 137
All other expenses ...................................................................... 784 690 688
- ----------------------------------------------------------------------------------------------------------------------------------
$2,811 $2,808 $3,445
==================================================================================================================================
</TABLE>
* Includes $181,000, $288,000 and $360,000 for 1997, 1996 and 1995,
respectively, paid to a law firm of which two directors of the Corporation are
principals.
38
<PAGE>
Note 17: Quarterly Financial Information (Unaudited)
The following quarterly financial information for the years ended December
31, 1997 and 1996 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>
====================================================================================================================================
1997
- ------------------------------------------------------------------------------------------------------------------------------------
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................................................. $4,735 $4,907 $4,994 $5,098
Total interest expense ............................................... 1,512 1,544 1,577 1,664
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income................................................. 3,223 3,363 3,417 3,434
Provision for possible loan losses.................................... 120 120 120 120
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses .............................................. 3,103 3,243 3,297 3,314
Total other income ................................................... 515 548 560 559
Total other expense .................................................. 2,472 2,483 2,558 2,515
Net income............................................................ $ 714 $ 822 $ 816 $ 853
Net income per common share - basic .................................. $ .09 $ .10 $ .10 $ .11
- diluted ................................ $ .09 $ .10 $ .10 $ .10
====================================================================================================================================
<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 - basic................................... $ .06 $ .07 $ .09 $ .15
- diluted ................................ $ .06 $ .07 $ .09 $ .14
====================================================================================================================================
</TABLE>
(A) Includes the effect of the reversal of $496,000 of tax reserves no longer
deemed necessary.
39
<PAGE>
ARTHUR ANDERSEN LLP
To the Stockholders and
Board of Directors of
Ramapo Financial Corporation:
We have audited the accompanying consolidated balance sheets of Ramapo
Financial Corporation (a New Jersey corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 16, 1998
40
<PAGE>
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
Mortimer J. O'Shea
President and
Chief Executive Officer
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
CPA, Retired
Richard S. Miller
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation
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
Rose Marie Sabatini
Robert Sferrazza
Lars Swanson
Todd Ullrich
- --------------------------------------------------------------------------------
ASSISTANT
SECRETARIES
Virginia L. Huff
- --------------------------------------------------------------------------------
ASSISTANT
TREASURERS
Kathleen Bozzo
Aladel Habbab
Laura Humble
Kelly Kapusta
Barbara Redding Massenzio
Paula McKowen
Cynthia Murillo
Alberta Pino
Genevieve Restivo
- --------------------------------------------------------------------------------
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
John A. Demetrius, CPA
President
Demetrius & Co., L.L.C.
Robert Garofalo, Esq.
Garofalo & Pryor, PA
Louis D. March
President & Owner
March Associates, Inc.
John J. Scura, II, Esq.
John J. Scura, Attorney at Law
Gerard J. Donnelly, Jr.
President, Donnelly Industries, Inc.
41
<PAGE>
CORPORATE INFORMATION
================================================================================
FORM 10-K
The Corporation's annual report, on Form 10-K,
required to be filed with the Securities and Exchange
Commission, is available on written request to:
Mr. Walter A. Wojcik, Jr., Treasurer
Ramapo Financial Corporation
64 Mountain View Boulevard
Wayne, New Jersey 07470
ANNUAL MEETING OF
STOCKHOLDERS Monday,
April 27, 1998, 4:00 p.m.
Radisson Hotel
690 Rt. 46 East
Fairfield, New Jersey 07004
TRANSFER AGENT
Chase Mellon Shareholder Services, L.L.C.
85 Challenger Road, Overpeck Center
Ridgefield Park, New Jersey 07660
INQUIRIES
All other information - contact:
Janet M. Maloy, Corporate Secretary
Ramapo Financial Corporation
64 Mountain View Boulevard
Wayne, New Jersey 07470
(973) 305-4102
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, 1997, there were 1,725 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 $.03 per share
were declared in each quarter of 1997. Cash dividends of $.02 per share were
declared in each of the third and fourth quarters of 1996.
<TABLE>
<CAPTION>
========================================================================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------
High Low High Low High Low High Low
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 6 3/8 5 6 5/8 5 5/8 8 3/8 6 3/16 10 7 3/4
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
========================================================================================================================
</TABLE>
================================================================================
MARKET
MAKERS
FIA Capital Group Inc.
Gruntal & Co. Incorporated
Herzog, Heine, Geduld, Inc.
Legg Mason Wood Walker Inc.
Mayer & Schweitzer Inc.
McConnell Budd & Downes
M.H. Myerson & Co.
Oppenheimer & Co. Inc.
Nash Weiss/Div of Shatkin Inv.
Ryan Beck & Co. Inc.
Sandler O'Neill & Partners
SBC Warburg Inc.
Sherwood Securities Corp.
Smith Barney Inc.
Tucker Anthony Incorporated
42
<PAGE>
[LOGO]
Ramapo
Financial Corporation
CORPORATE HEADQUARTERS
64 Mountain View Boulevard
Wayne, New Jersey 07470
[LOGO]
The
Ramapo
Bank
MOUNTAIN VIEW
64 Mountain View Boulevard
Wayne, New Jersey 07470
VALLEY
1400 Valley Road
Wayne, New Jersey 07470
PACKANACK
1445 Route 23
Wayne, New Jersey 07470
CLIFTON/NUTLEY
6 Main Avenue
Clifton, New Jersey 07014
NORTH HALEDON
475 High Mountain Road
North Haledon, New Jersey 07508
BUTLER
Meadtown Shopping Center
Route 23
Butler, New Jersey 07405
FAIRFIELD
250 Passaic Avenue
Fairfield, New Jersey 07004
PARSIPPANY
120 Rt. 46 East (Baldwin Ave.)
Parsippany, New Jersey 07054
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 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.
ARTHUR ANDERSEN LLP
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 16, 1998 and to all
references to our Firm. It should be noted that we haved not audited any
financial statements of Ramapo Finaancial Corporation subsequent to December 31,
1997 or performed any audit procedures subsequent to the date of our report.
/s/ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,550,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,725,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,556,000
<INVESTMENTS-CARRYING> 40,438,000
<INVESTMENTS-MARKET> 40,652,000
<LOANS> 169,106,000
<ALLOWANCE> 4,628,000
<TOTAL-ASSETS> 285,727,000
<DEPOSITS> 249,760,000
<SHORT-TERM> 1,677,000
<LIABILITIES-OTHER> 2,993,000
<LONG-TERM> 0
0
0
<COMMON> 8,107,000
<OTHER-SE> 23,190,000
<TOTAL-LIABILITIES-AND-EQUITY> 285,727,000
<INTEREST-LOAN> 14,417,000
<INTEREST-INVEST> 4,759,000
<INTEREST-OTHER> 558,000
<INTEREST-TOTAL> 19,734,000
<INTEREST-DEPOSIT> 6,268,000
<INTEREST-EXPENSE> 6,297,000
<INTEREST-INCOME-NET> 13,437,000
<LOAN-LOSSES> 480,000
<SECURITIES-GAINS> (14,000)
<EXPENSE-OTHER> 10,028,000
<INCOME-PRETAX> 5,111,000
<INCOME-PRE-EXTRAORDINARY> 3,205,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,205,000
<EPS-PRIMARY> .40
<EPS-DILUTED> .38
<YIELD-ACTUAL> 5.27
<LOANS-NON> 745,000
<LOANS-PAST> 112,000
<LOANS-TROUBLED> 1,475,000
<LOANS-PROBLEM> 2,420,000
<ALLOWANCE-OPEN> 5,115,000
<CHARGE-OFFS> 1,101,000
<RECOVERIES> 134,000
<ALLOWANCE-CLOSE> 4,628,000
<ALLOWANCE-DOMESTIC> 4,628,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
