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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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
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RAMAPO FINANCIAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-1946561
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
64 MOUNTAIN VIEW BOULEVARD, WAYNE, NEW JERSEY 07470
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (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
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 25, 1999, the aggregate market value of the 7,774,488 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $81.6 million based on the closing sales price of
$10.50 per share of the registrant's Common Stock on February 25, 1999 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 February 25, 1999: 8,148,949.
Documents incorporated by reference - None.
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RAMAPO FINANCIAL CORPORATION AND SUBSIDIARIES
Index to Form 10-K for December 31, 1998
<TABLE>
<CAPTION>
PART I PAGE NO.
<S> <C>
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 57
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners and Management 66
Item 13. Certain Relationships and Related Transactions 67
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
SIGNATURES 69
</TABLE>
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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 of December 31, 1998, the Corporation had
consolidated assets, deposits and stockholders' equity of $337.8 million, $295.5
million and $34.0 million, respectively.
The Corporation considers its primary banking markets to be the Wayne
area, in which five of its eight offices are located, and 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.
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.
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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, 1998, the Corporation's loans, net
of unearned discount, represented 50.3% of its total assets. As of December 31,
1998, its loan portfolio consisted of approximately 68.8% commercial and
commercial real estate loans, 6.8% commercial real estate construction loans,
2.6% residential real estate mortgage loans and 21.8% installment loans. At
December 31, 1998, 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, 1998, the Corporation had no concentrations of loans
exceeding 10% of total loans.
<TABLE>
<CAPTION>
AT DECEMBER 31,
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1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and commercial real estate $116,839 68.8% $110,589 65.4% $105,819 64.1% $ 96,469 60.1% $101,292 61.7%
Commercial real estate construction 11,619 6.8 10,553 6.2 10,949 6.6 15,177 9.5 18,462 11.2
Residential real estate mortgage (1) 4,380 2.6 6,179 3.7 7,443 4.5 8,772 5.4 10,346 6.3
Installment 36,961 21.8 41,785 24.7 40,859 24.8 40,128 25.0 34,211 20.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $169,799 100.0% $169,106 100.0% $165,070 100.0% $160,546 100.0% $164,311 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(1) Excludes loans held for sale.
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Origination of Loans. The Bank markets its loan programs primarily
through its branch managers and loan officers. 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 state, 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, 1998 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.
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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
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 ("SBA") and the New Jersey Economic Development Authority ("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 $100,00 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 many 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 which is subordinate to the Bank's 75% participation and may
guarantee an additional 25% of the Bank's portion 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 guaranteed portion of 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.
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Although terms vary, commercial real estate loans generally have
maturities of up to 5 years with payments based on amortization schedules of up
to 25 years. Loans are offered at both fixed interest rates and rates that float
at a margin over the Bank's commercial lending base rate. The exact margin
varies with each loan and is determined based on the risk associated with the
loan. 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.
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 to 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.
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 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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ASSET CONCENTRATIONS
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
$25,577,000 (15.1% of total loans) and $31,245,000 (18.5%) at December 31, 1998
and 1997, respectively. All outstanding loans to these affiliated borrowers were
performing in accordance with either their original or modified terms on those
dates. At December 31, 1998, management believes all loans within these
concentrations, including adversely classified loans, were properly valued on
the Corporation's books.
The largest borrower concentration consists of loans to a group of
affiliated borrowers with an aggregate balance of $13,050,000 and $15,011,000 at
December 31, 1998 and 1997, 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 $7,152,000 and $8,209,000 at
December 31, 1998 and 1997, 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,
1998 and 1997 were $5,375,000 and $8,025,000, respectively.
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. Bancorps' has no assets
and will be formally dissolved in October, 1999.
COMPETITION
The Corporation encounters competition primarily in seeking deposits
and in obtaining loan customers. The level of competition for deposits is quite
high. The Corporation's principal competitors for deposits are other financial
institutions within a few miles of the Bank's offices, including other banks,
savings institutions, and credit unions. Competition among these institutions is
based primarily on interest rates offered, service charges imposed on deposit
accounts, the quality of services rendered, and the convenience of banking
facilities. The Corporation's competitors are generally permitted, subject to
regulatory approval, to establish branches throughout the Corporation's market.
Additional competition for depositors' funds comes from United States Government
securities, private issuers of debt obligations and suppliers of other
investment alternatives for depositors, such as securities firms.
The Corporation also competes in its lending activities with other
financial institutions such as savings institutions, credit unions, securities
firms, insurance companies, small loan companies, finance companies, mortgage
companies and other sources of funds. Many of the Corporation's nonbank
competitors are not subject to the same extensive federal regulations that
govern bank holding companies and federally insured banks or state regulations
governing state-chartered banks. As a result, such nonbank competitors have
advantages over the Corporation in providing certain services. Many of the
financial institutions with which the Corporation competes in both lending and
deposit activities are larger than the Corporation.
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EMPLOYEES
As of December 31, 1998 the Corporation and its subsidiaries had
approximately 115 full-time equivalent employees. None of the employees are
subject to a collective bargaining agreement. The Corporation considers its
relationships with its employees to be good.
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
The banking industry is highly regulated. Statutory and regulatory
controls increase a bank holding company's cost of doing business, limit its
management's options to deploy assets and maximize income, and may significantly
limit the activities of institutions which do not meet regulatory capital or
other requirements. Areas subject to regulation and supervision by the bank
regulatory agencies include, among others: minimum capital levels; dividends;
affiliate transactions; expansion of locations; acquisitions and mergers;
reserves against deposits; deposit insurance premiums; credit underwriting
standards; management and internal controls; investments; and general safety and
soundness of banks and bank holding companies. Supervision, regulation and
examination of the Bank and the Corporation by the bank regulatory agencies are
intended primarily for the protection of depositors, the communities served by
the institutions or other governmental interests, rather than for holders of
stock of the Bank or the Corporation.
The following is a brief summary of certain statutes, rules and
regulations affecting the Corporation and the Bank. A number of other statutes
and regulations and governmental policies have an impact on their operations.
The Corporation is unable to predict the nature or the extent of the effects on
its business and earnings that fiscal or monetary policies, economic control or
new federal or state legislation may have in the future. The following summary
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
("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 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.
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 the 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.
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Under the Holding Company Act, a bank holding company must obtain the
prior approval of the Federal Reserve before (1) 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.
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 ("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.
11
<PAGE> 12
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. 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 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 ("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
12
<PAGE> 13
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 1998 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 1998 ranged from .01164% to .01256%. The
rate for the first quarter of 1999 was set at .01220%.
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 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
being 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; (vi) the institution's assets
are less than its obligations to its creditors and others; (vii) substantial
dissipation in the institution's assets or earnings due to violation of a
statute or regulation or unsafe or unsound practice; (viii) a willful violation
of a cease and desist order that has become final; (ix) an inability of the
institution to pay its obligations or meet its depositors' demands in the normal
course of business; or (x) 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.
13
<PAGE> 14
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 nonmember banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve and the FDIC
require bank holding companies and state nonmember banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a Tier 1 or core capital requirement and a Tier 2 or supplementary
capital requirement. Tier 1 capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less most intangible assets, primarily goodwill. Tier 2 capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier 1 and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations assign balance sheet assets and
credit equivalent amounts of off-balance sheet obligations to one of four broad
risk categories based principally on the degree of credit risk associated with
the obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential constructions 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
14
<PAGE> 15
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, 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 adopted 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, 1998, the Corporation's total risk-based capital and
leverage capital ratios were 16.5% and 10.1%, 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, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause them to fail to satisfy the minimum
levels for any of their 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 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 ("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.
15
<PAGE> 16
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, 1998. The
Corporation owns all of its offices except as indicated.
<TABLE>
<CAPTION>
BRANCH YEAR TOTAL TOTAL NET BOOK APPROXIMATE
- ------ OPENED DEPOSITS INVESTMENT VALUE SQUARE FOOTAGE
------ -------- ---------- ----- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Main office 1980 $63,667 $1,701 $922 23,000
Packanack 1967 60,774 666 310 4,000
Valley 1972 50,601 731 423 8,000
Clifton 1974 31,061 57 8(1) 2,000
North Haledon 1986(2) 25,694 -- --(3) 2,000
Butler 1986(2) 44,233 226 191(3) 2,000
Fairfield 1996 11,170 4 1(3) 2,000
Parsippany 1997 8,260 -- --(3) 1,900
</TABLE>
(1) Land lease.
(2) Date acquired.
(3) Leased.
The net book value of the Corporation's investment in premises and
equipment totalled approximately $3.0 million at December 31, 1998, For a
discussion of premises and equipment, see Note 6 of Notes to Consolidated
Financial Statements contained in Item 8 of this report.
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, 1998.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Market Price for Common Stock. The Corporation's common stock is 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, 1998, there were
approximately 1,656 stockholders of record of the common stock and 8,114,199
common shares outstanding. The number of holders of record does not reflect the
number of persons or entities who or which hold their stock in nominee or
"street" name through various brokerage firms or other entities.
The following table sets forth, for the calendar periods indicated, the
high and low closing NASDAQ market quotations as reported by Francis Emory
Fitch, Inc.
<TABLE>
<CAPTION>
CLOSING SALE
PRICE PER SHARE
---------------
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1997
1st quarter ........................ $ 6.31 $ 5.00
2nd quarter ........................ 6.50 5.63
3rd quarter ........................ 8.06 6.19
4th quarter ........................ 9.64 7.75
Year ended December 31, 1998
1st quarter ........................ $ 8.88 $ 7.63
2nd quarter ........................ 8.25 7.13
3rd quarter ........................ 8.38 6.13
4th quarter ........................ 11.13 4.75
</TABLE>
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.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA
(Not covered by Report of Independent Public Accountants)
The selected consolidated financial and other data of the 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 in Item 8 below.
<TABLE>
<CAPTION>
===================================================================================================================================
At or For the Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Financial Condition Data:
Total assets .............................................. $337,762 $285,727 $271,524 $246,516 $238,216
Cash and cash equivalents ................................. 16,227 20,275 29,758 14,962 42,486
Securities ................................................ 145,187 88,994 68,043 59,358 21,248
Gross loans (net of unearned income) ...................... 169,799 169,106 165,070 160,580 164,345
Allowance for possible loan losses ........................ 4,773 4,628 5,115 4,853 6,501
Total deposits ............................................ 295,460 249,760 239,889 217,062 211,864
Other borrowings .......................................... 4,536 1,677 -- -- 1,292
Stockholders' equity ...................................... 34,022 31,297 29,036 27,249 21,755
Asset Quality (1):
Nonaccrual loans .......................................... $444 $745 $1,053 $4,190 $7,548
Accruing loans 90 days or more delinquent ................. 59 112 152 141 240
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans ............................... 503 857 1,205 4,331 7,788
- -----------------------------------------------------------------------------------------------------------------------------------
Other real estate, net ..................................... 1,920 2,192 2,211 4,408 9,995
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets .............................. 2,423 3,049 3,416 8,739 17,783
Restructured loans ........................................ 1,260 1,475 1,540 1,702 5,983
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and restructured loans ....... $3,683 $4,524 $4,956 $10,441 $23,766
===================================================================================================================================
Summary of Operations:
Total interest income ..................................... $21,637 $19,734 $18,218 $18,343 $14,919
Total interest expense .................................... 7,554 6,297 5,804 6,106 4,958
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ....................................... 14,083 13,437 12,414 12,237 9,961
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses ........................ 275 480 400 500 1,221
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses ................................. 13,808 12,957 12,014 11,737 8,740
- -----------------------------------------------------------------------------------------------------------------------------------
Other income .............................................. 2,301 2,182 2,374 2,447 3,322
- -----------------------------------------------------------------------------------------------------------------------------------
Other expense ............................................. 9,956 10,028 10,054 12,148 13,324
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ......................... 6,153 5,111 4,334 2,036 (1,262)
Provision (benefit) for income taxes ...................... 2,230 1,906 1,278 (4,212) (285)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ......................................... $3,923 $3,205 $3,056 $6,248 $(977)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)
<TABLE>
<CAPTION>
==================================================================================================================================
At or For the Year ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Common Share Data:
Net income (loss) per common share - basic ............... $ .48 $ .40 $ .38 $ .76 $ (.38)
- diluted ............. .46 .38 .37 .75 (.38)
Book value per common share .............................. 4.19 3.86 3.59 3.28 2.47
Cash dividends declared per common share (2) ............. .15 .12 .04 -- --
Selected Operating Ratios:
Return on average assets ................................. 1.25% 1.17% 1.23% 2.56% (.42)%
Return on average equity ................................. 12.06 10.66 11.09 27.85 (9.04)
Interest rate spread(3) .................................. 3.86 4.34 4.54 4.59 4.38
Net interest margin(3) ................................... 4.83 5.31 5.41 5.41 4.84
Asset Quality Ratios (1)(4):
Nonperforming loans as a percentage of loans, net of
unearned income ........................................ .30% .51% .73% 2.70% 4.74%
Nonperforming assets as a percentage of total assets ..... .72 1.07 1.26 3.55 7.47
Nonperforming assets and restructured loans
as a percentage of total assets ........................ 1.09 1.58 1.83 4.24 9.98
Allowance for possible loan losses as a percentage
of loans, net of unearned income ....................... 2.81 2.74 3.10 3.02 3.96
Allowance for possible loan losses as a percentage
of nonperforming loans ................................. 948.91 540.02 424.48 112.05 83.47
Net charge-offs as a percentage of average loans,
net of unearned income ................................. .08 .58 .09 1.36 1.29
Capital Ratios (4)(5):
Stockholders' equity to total assets ..................... 10.07% 10.93% 10.69% 11.05% 9.13%
Average stockholders' equity to average assets ........... 10.35 10.98 11.07 9.19 4.64
Tier 1 leverage capital ratio ............................ 10.09 10.47 10.47 10.08 9.16
Tier 1 risk-based capital ratio .......................... 15.22 15.26 14.27 13.37 12.18
Total risk-based capital ratio ........................... 16.48 16.52 15.54 14.66 13.46
==================================================================================================================================
</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 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 Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources."
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this analysis is to provide the reader with information
relevant to understanding and assessing the Corporation's results of
operations for each of the past three years and financial condition for
each of the past two years. In order to fully appreciate this analysis the
reader is encouraged to review the consolidated financial statements and
statistical data presented in this document.
Cautionary Statement Concerning Forward-Looking Statements. This Form
10-K, both in the MD&A and elsewhere, contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about management's
confidence and strategies and management's expectations about new and existing
programs and products, relationships, opportunities, technology and market
conditions. These statements may be identified by such forward-looking
terminology as "expect", "look", "believe", "anticipate", "may", "will", or
similar statements or variations of such terms. Such forward-looking statements
involve certain risks and uncertainties. These include, but are not limited to,
the direction of interest rates, continued levels of loan quality and
origination volume, continued relationships with major customers including
sources for loans, successful completion of the implementation of Year 2000
technology changes, as well as the effects of economic conditions and legal and
regulatory barriers and structure. Actual results may differ materially from
such forward-looking statements. The Corporation assumes no obligation for
updating any such forward-looking statement at any time.
Financial Condition and Recent Operating Environment
General. In 1998, the Corporation achieved record pre-tax earnings and
recorded the lowest level of nonperforming assets since 1981. Strong deposit
growth led to an 18.2% increase in total assets during the year. These results
continue the trend that began in 1994. After incurring significant operating
losses in 1992 and 1993, the Corporation, under new leadership, successfully
completed a rights/community equity offering in October 1994, which resulted in
$11.7 million of new capital, after expenses. Having reduced nonperforming
assets to acceptable levels in recent years, the Corporation once again turned
its attention to product innovation, marketing initiatives and growth.
The Corporation is committed to providing superior service to businesses,
professionals, and consumers alike. It has managed to reduce its exposure to
large, individual borrower concentrations and introduced two new products in
1997 aimed at its commercial customers. Although the Corporation did not open a
new branch office in 1998 as it did in 1997 and 1996, it achieved excellent
deposit growth due to the maturation of a calling program and sales culture
which were implemented years earlier. Despite these positive efforts and
results, the Corporation found it difficult to match its deposit growth with
loan growth.
After exploring various strategic alternatives, the Corporation decided,
in late 1998, to seek a merger partner. On December 17, 1998, the Corporation
entered into an Agreement and Plan of Merger ("Merger Agreement") with Valley
National Bancorp ("Valley"). In accordance with the Merger Agreement, each share
of the Corporation's common stock will be exchanged for 0.425 shares of Valley
common stock. Also in connection with the Merger Agreement, the Corporation
granted Valley an option to acquire 1,608,159 shares of the Corporation's
authorized but unissued common stock at an exercise price of $7.50 per share.
The proposed transaction is subject to approval by the Corporation's
shareholders and certain regulatory authorities. The transaction is expected to
be accounted for as a pooling-of-interests.
Significant changes in individual asset and liability categories are
discussed below.
Federal funds sold dropped $4.6 million between the two year-ends,
although the average daily balance for this category rose $2.2 million in 1998
as compared to 1997. A similar situation occurred in 1997, when federal funds
sold declined $7.0 million from December 31, 1996 to December 31, 1997 while the
average balance increased $1.8 million.
The Corporation's securities portfolio grew $56.2 million (63.1%) in 1998,
from $89.0 million at December 31, 1997 to $145.2 million at December 31, 1998.
This growth, mostly in the available for sale portfolio, was made possible by
deposit growth. In 1997, deposit growth and reductions in the due from banks and
federal funds sold categories made a $21.0 million increase in the securities
portfolio possible.
Loans increased only $693,000 in 1998, following a $4.0 million increase
in 1997. In both years, significant loan paydowns offset new loan originations
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.
Premises and equipment, other real estate and other assets each recorded
very small balance decreases in 1998 and 1997.
The Corporation's intangible assets were $501,000, $621,000 and $869,000
at December 31, 1998, 1997 and 1996, respectively. The decrease in both 1998 and
1997 was due to normal amortization. At December 31, 1998, the balance of
intangible assets consisted solely of a core deposit premium.
Deposit growth for the years ended December 31, 1998 and 1997 totaled
$45.7 million (18.3%) and $9.9 million (4.1%). All deposit categories grew in
1998, with the largest increases being recorded in the interest-bearing demand
($13.7 million) and savings ($14.0 million) categories. The 1997 increase was
spread among all categories of deposits except time deposits under $100,000.
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
20
<PAGE> 21
Financial Condition and Recent Operating Environment (continued)
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. By December 31, 1998, nonperforming assets
declined further to $2.4 million, or .72% of total assets, while ORE operating
expenses and valuation adjustments resulted in a $2,000 credit in 1998.
All of the remaining ORE properties are under contract of sale as of
December 31, 1998. It is expected that they will be disposed of in 1999 and that
ORE-related expenses incurred prior to their sale will be minimal.
Results Of Operations
Net Income. The Corporation recorded net income of $3.9 million for the
year ended December 31, 1998, an increase of $718,000 (22.4%) over the $3.2
million of net income for the prior year. On a pre-tax basis, the Corporation
earned $6.2 million, $5.1 million and $4.3 million for the years ended December
31, 1998, 1997 and 1996, respectively. The principal reason for the increases in
1998 and 1997 is net interest income, which increased $646,000 in 1998 and $1.0
million in 1997 over prior year totals. A $205,000 reduction in the provision
for possible loan losses and a $258,000 increase in other income also
contributed to the 1998 increase. A reduction of $192,000 in other income and a
$80,000 increase in the provision for possible loan losses helped to offset a
part of the 1997 increase.
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 $740,000,
going from $13.5 million for the year ended December 31, 1997 to $14.3 million
for the year ended December 31, 1998. A volume-related increase of $1.5 million
was offset in part by a $758,000 rate-related decrease. The volume increase was
due to a $41.1 million rise in average earning assets while the rate decrease
was caused by a 48 basis point drop in the net interest spread. All but $2.3
million of the increase in interest-earning assets came in the securities
portfolio, which increased $39.8 million (50.1%). A $14.2 million rise in
average mortgage-backed securities and a $12.6 million rise in corporate
securities are the two largest increases by type and represent the majority of
the overall increase. The 48 basis point drop in the net interest spread was due
to a 40 basis point decline in the yield on earning assets and an eight basis
point rise in the cost of interest-bearing liabilities.
In 1997, net interest income on a tax-equivalent basis increased $1.1
million compared to 1996. The increase was due to a $1.4 million volume-related
rise caused by a $24.9 million increase in average interest-earning assets which
was partially offset by a $316,000 rate-related decline due to a 20 basis point
drop in the net interest spread. Again, the securities portfolio was responsible
for the largest increase in interest-earning assets - $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.
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.
21
<PAGE> 22
Results Of Operations (continued)
<TABLE>
<CAPTION>
===================================================================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing time deposits ... $ -- $ -- --% $ 899 $ 52 5.78% $ 923
Securities:
Taxable .......................... 110,337 6,425 5.82 75,039 4,545 6.06 60,467
Nontaxable (tax-equivalent basis) 8,965 600 6.69 4,424 325 7.35 1,197
Federal funds sold ................ 11,336 617 5.44 9,146 506 5.53 7,354
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2) ................. 120,557 10,489 8.70 117,372 10,308 8.78 112,124
Residential real estate (3) ...... 5,384 442 8.21 6,766 570 8.42 8,152
Installment ...................... 39,489 3,268 8.28 41,306 3,539 8.57 39,849
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans ..................... 165,430 14,199 8.58 165,444 14,417 8.71 160,125
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ... 296,068 21,841 7.38 254,952 19,845 7.78 230,066
- ------------------------------------------------------------------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks ........... 10,802 11,512 10,157
Other assets ...................... 11,737 12,200 13,996
Allowance for possible loan losses (4,370) (4,884) (5,345)
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonearning assets .......... 18,169 18,828 18,808
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ................... $314,237 $273,780 $248,874
====================================================================================================================================
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits .. $ 40,386 $ 488 1.21% $ 32,006 $ 360 1.12% $ 27,388
Savings deposits .................. 94,486 2,973 3.15 81,468 2,439 2.99 74,549
Time deposits ..................... 74,363 3,833 5.15 68,750 3,470 5.05 68,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .. 209,235 7,294 3.49 182,224 6,269 3.44 170,545
Other borrowings .................. 5,202 260 5.00 628 29 4.62 35
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 214,437 7,554 3.52 182,852 6,298 3.44 170,580
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits .................... 63,938 58,035 48,048
Other liabilities .................. 3,330 2,841 2,695
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities ...................... 67,268 60,876 50,743
Stockholders' equity ................ 32,532 30,052 27,551
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ........................... $314,237 $273,780 $248,874
====================================================================================================================================
Net interest income
(tax-equivalent basis) 14,287 13,547
Tax-equivalent adjustment (204) (110)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $14,083 $13,437
====================================================================================================================================
Net interest spread
(tax-equivalent basis) 3.86% 4.34%
====================================================================================================================================
Net interest margin
(tax-equivalent basis) 4.83% 5.31%
====================================================================================================================================
Ratio of average interest-earning
assets to average interest-bearing
liabilities 138.07% 139.43% 134.87%
====================================================================================================================================
<CAPTION>
=============================================================================
Year ended December 31
- -----------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------
Average
Yield/
Interest Cost
- -----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing time deposits ... $ 56 6.07%
Securities:
Taxable .......................... 3,693 6.11
Nontaxable (tax-equivalent basis) 120 9.86
Federal funds sold ................ 397 5.40
Loans (net of unearned income) (1):
Commercial and commercial
real estate (2) ................. 9,781 8.72
Residential real estate (3) ...... 702 8.61
Installment ...................... 3,510 8.81
- -----------------------------------------------------------------------------
Total loans ..................... 13,993 8.74
- -----------------------------------------------------------------------------
Total interest-earning assets ... 18,259 7.94
- -----------------------------------------------------------------------------
Nonearning assets:
Cash and due from banks ...........
Other assets ......................
Allowance for possible loan losses
- -----------------------------------------------------------------------------
Total nonearning assets ..........
- -----------------------------------------------------------------------------
Total assets ...................
================================================================================
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits .. $ 335 1.22%
Savings deposits .................. 2,032 2.73
Time deposits ..................... 3,435 5.01
- -----------------------------------------------------------------------------
Total interest-bearing deposits .. 5,802 3.40
Other borrowings .................. 2 5.71
- -----------------------------------------------------------------------------
Total interest-bearing liabilities 5,804 3.40
- -----------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits ....................
Other liabilities ..................
- -----------------------------------------------------------------------------
Total noninterest-bearing
liabilities ......................
Stockholders' equity ................
- -----------------------------------------------------------------------------
Total liabilities and stockholders'
equity ...........................
================================================================================
Net interest income
(tax-equivalent basis) 12,455
Tax-equivalent adjustment (41)
- -----------------------------------------------------------------------------
Net interest income $12,414
================================================================================
Net interest spread
(tax-equivalent basis) 4.54%
================================================================================
Net interest margin
(tax-equivalent basis) 5.41%
================================================================================
Ratio of average interest-earning
assets to average interest-bearing
liabilities
================================================================================
</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.
22
<PAGE> 23
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
- -----------------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
- -----------------------------------------------------------------------------------------------------------------
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 ...... $ (26) $ (26) $ (52) $ (1) $ (3) $ (4)
Loans ............................... (1) (217) (218) 471 (47) 424
Securities:
Taxable ............................ 2,066 (186) 1,880 882 (30) 852
Nontaxable ......................... 306 (31) 275 242 (37) 205
Federal funds sold .................. 119 (8) 111 99 10 109
- -----------------------------------------------------------------------------------------------------------------
Total interest income .............. 2,464 (468) 1,996 1,693 (107) 1,586
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits and interest-bearing
demand deposits .................... 498 164 662 254 178 432
Time deposits ....................... 292 71 363 7 28 35
Other borrowings .................... 176 55 231 24 3 27
- -----------------------------------------------------------------------------------------------------------------
Total interest expense ............. 966 290 1,256 285 209 494
- -----------------------------------------------------------------------------------------------------------------
Changes in net interest income ...... $1,498 $(758) $ 740 $1,408 $(316) $1,092
=================================================================================================================
</TABLE>
Interest Income. Interest income on a tax-equivalent basis rose $2.0
million (10.1%) in 1998, reaching $21.8 million in 1998 from $19.8 million in
1997. The $2.0 million rise resulted from volume-related increases totaling $2.5
million being offset in part by rate-related decreases of $468,000.
Most of the increase in interest income came from the securities
portfolio, which gained $2.2 million (44.3%) over the 1997 total. This increase
was primarily volume related, as average taxable securities rose $35.3 million
(47.0%) and average nontaxable securities increased $4.5 million (102.6%),
resulting in a combined increase of $2.4 million. These gains were partially
offset by the 24 and 66 basis point declines in the respective yields on these
securities categories. Funding for the purchase of securities during 1997 came
primarily from deposit growth. Another $111,000 of the increase in interest
income came from federal funds sold, which experienced a $2.2 million increase
in average balance and nine basis point drop in rate. A reduction of $52,000 in
interest income resulted from an interest-bearing time deposit which matured in
1997 and was not renewed.
The $218,000 reduction in interest income due to loans was almost all
rate-related. Each major loan category showed a drop in average yields, with the
largest decline being the 29 basis point drop in the installment loan category.
The average balance of total loans decreased slightly with a $14,000 decline, as
the $3.2 increase in average commercial and commercial real estate loans was
more than offset by declines of $1.8 million and $1.4 million in the installment
and mortgage categories, respectively.
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 continued 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.
23
<PAGE> 24
Results Of Operations (continued)
Interest Expense. Total interest expense increased $1.3 million (19.9%) in
1998, reaching $7.6 million for the year ended December 31, 1998 as compared to
$6.3 million for the prior year. The majority ($966,000) of this increase was
due to a $31.6 million (17.3%) increase in average interest-bearing liabilities;
the remainder was due to an eight basis point increase in the average rate paid
on those liabilities. The savings category accounted for the largest gain in
average balance with a $13.0 million (16.0%) increase, while interest-bearing
demand, time and other borrowings posted increases of $8.4 million (26.2%), $5.6
million (8.2%) and $4.6 million (728.3%), respectively. Management believes that
these deposit increases are due to the continued calling efforts of branch
managers, loan officers and senior officers which have resulted in new deposit
relationships. More than one half of the increase in average other borrowings is
the result of a leverage strategy whereby wholesale reverse repurchase
agreements were used to fund securities purchases. This borrowing position was
liquidated in the fourth quarter of 1998. Each major category of
interest-bearing liabilities had a rise in the average rate paid in 1998 versus
1997. Interest-bearing demand, savings and time deposits had increases of nine,
16 and 10 basis points, respectively. The rise in the savings category was the
result of a continued migration of funds from lower yielding savings products to
higher yielding savings products.
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. The average rate paid on
other borrowings dropped 109 basis points, reflecting the lower daily rates
prevailing in 1997 versus 1996.
Provision for Possible Loan Losses. The provision for possible loan losses
was $275,000, $480,000, and $400,000 for the years ended December 31, 1998, 1997
and 1996, respectively. The reductions in the provision in 1998 compared to 1997
and 1996 and in the three years as a whole compared to provisions taken 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 have increased slightly from $941,000 in 1996 to $1.1 million in
1997 and $1.3 million in 1998. These levels are well below the $3.7 million and
$2.5 million charged off in 1995 and 1994, respectively. Loan recoveries totaled
$1.1 million in 1998, up from $134,000 in 1997 and $803,000 in 1996. 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. Total other income increased $119,000 (5.5%) in 1998, going
from $2.2 million for the year ended December 31, 1997 to $2.3 million in 1998.
A major component of the increase was a $62,000 (16.5%) rise in brokerage
commissions in 1998 over 1997. A second licensed broker was added in the third
quarter of 1998 to bolster this operation. In addition, interest recoveries and
gains on sales of ORE during 1998 exceeded the 1997 total by $33,000. A small
decrease of $23,000 (1.7%) in service charges on deposit accounts offset these
gains in part.
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 Expense. Total other expense decreased $72,000 in 1998 compared to
1997. The primary reason for the decline is a $269,000 decrease in ORE valuation
adjustments in 1998. This decrease was due to the reversal of a $139,000
valuation reserve against ORE which was established prior to 1998. The reserve
was deemed to be no longer needed because all three of the ORE properties were
under contract of sale at December 31, 1998 and expected to fully realize their
carrying value before consideration of the valuation reserve. Also, other
expense decreased $156,000 (5.5%) in 1998, largely due to a $102,000 drop in
legal expense. These decreases were partially offset by a $328,000 (6.1%) rise
in salaries and employee benefits in 1998 over 1997. A number of factors
contributed to the increase in salaries and employee benefits. A total of
$73,000 in salaries, commissions and payroll taxes were paid in excess of 1997
amounts to staff a branch office which opened in the third quarter of 1997.
Providing health, dental and life insurance for employees cost $60,000 more in
1998 than in 1997. The employer match and plan expenses of the Corporation's
401k retirement plan increased by a combined $26,000 in 1998 versus 1997.
Commissions paid as part of incentive compensation in 1998 (excluding amounts
paid to the above referenced branch) aggregated $363,000 in 1998, an increase of
$74,000 (25.6%). Normal merit raises make up the balance of the increase.
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. The
decline in ORE expenses was a direct result of the reduction of properties held
for sale. The increase in salaries and employee benefits was 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 were 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.
24
<PAGE> 25
Results Of Operations (continued)
Year 2000. The Corporation utilizes software and related technologies throughout
its business that will be affected by the century date change in the year 2000
("Y2K"). During 1997, a committee comprised of the entire senior management team
and other key associates was formed 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.
The first phase of this project, the assessment phase, has been completed.
The Y2K committee has identified all hardware, software, systems and processes
that might be affected by the century date change, the year 2000 leap year, and
other significant dates. It has evaluated the criticality of each and assigned a
code ranging from 1 - High to 4 - Not Critical.
A plan of action for each item was developed which includes tests and
alternatives. Possible worst case scenarios were discussed to help determine the
criticality of an item. For example, if the Corporation's primary accounting
software does not read the century date change correctly, it is possible that
borrowers' and depositors' accounts will have miscalculations and balance
errors. The entire internal bookkeeping process could be affected to the point
where the Corporation would halt operations until a remedy was put in place.
Thus, the Corporation's primary accounting system is considered to be a mission
critical item and was assigned a 1-High code. On the positive side, the
accounting system's vendor has represented to the Corporation that its software
is Y2K compliant. The vendor has obtained Y2K compliance certification from an
independent testing organization and the software has also been reviewed by the
Federal Financial Institution Examination Council. In addition, a lending
subcommittee was formed to evaluate the risk that the Y2K problem might have on
all of the Corporation's borrowers who have indebtedness in excess of $250,000.
The evaluation, now completed, was undertaken to assess borrowers' ability to
repay loans in the year 2000 and beyond. Overall, the Corporation believes that
the Y2K issue poses a low risk to a large majority of its borrowers.
The project is currently in the second or testing phase. Written testing
plans have been prepared for all items assigned a High or Moderate criticality
code. Testing has been completed on the majority of these applications. Testing
of the Corporation's most critical application, its primary accounting software
system, is ongoing. The vendor of this system has supplied the Corporation with
a utility program which will allow the system's operating date to be advanced.
The vendor has also provided the Corporation with a copy of its internal test of
the system for Y2K compatibility. To date, the Corporation has advanced the
system's operating date to March 1, 2000 and is satisfied with the results. In
addition, the results of the sixty internal tests provided by the vendor have
been reviewed for their adequacy. The Corporation expects to have tests of all
items coded High or Moderate completed by June 30, 1999.
The final phase of this project is to administer the contingency plans
where testing has uncovered weaknesses. This phase has already begun in certain
areas. For instance, many old personal computers ("PC's") and their software
have been replaced with Y2K compliant PC's and software. The Corporation's
primary processor, an IBM AS/400 certified by IBM to be Y2K compliant, was
installed in July, 1998 to replace an older version. The old AS/400 was kept and
had its operating system upgraded to be the same as in the new machine. The
system date of the upgraded software has been successfully advanced into the
year 2000, although further testing still remains.
The Corporation believes it has committed sufficient resources to this
project to insure its success. Costs incurred to date have not been material.
The Corporation has no programmers on staff and is reliant on the vendors of
purchased software to upgrade their products to be Y2K compliant if necessary.
To date, the Y2K project is on schedule and future costs are not expected to be
material.
Income Taxes. The Corporation recorded income tax provisions of $2.2
million, $1.9 million and $1.3 million for the years ended December 31, 1998,
1997, and 1996, respectively. The effective tax rate of 36.2% in 1998 was lower
than the 37.3% rate for 1997 due to a higher level of nontaxable income and the
reactivation of a New Jersey investment corporation subsidiary, which is taxed
by New Jersey at a lower rate than a regular corporation.The 1996 provision
includes the effect of the reversal of $496,000 of tax reserves no longer deemed
necessary.
At December 31, 1998, the Corporation had no federal or state net
operating loss carry forwards.
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.
25
<PAGE> 26
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 ("ALCO"). ALCO 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. ALCO'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 other 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 1999 assuming that both interest rates and
the Corporation's interest sensitive assets and liabilities remain at December
31, 1998 levels. The rate shock information shows estimates of net interest
income for 1999 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.
<TABLE>
<CAPTION>
================================================================================
Net Interest Income for 1999
- --------------------------------------------------------------------------------
% Change
From
Rate Scenario Amount Base Case
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
+200 basis point rate shock.................. $13,162 (4.65)%
+100 basis point rate shock.................. 13,437 (2.66)
Base Case ................................... 13,804 --
- -100 basis point rate shock.................. 13,540 (1.91)
- -200 basis point rate shock.................. 12,034 (5.58)
================================================================================
</TABLE>
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 of 100 basis points 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.
26
<PAGE> 27
Interest Rate Risk (continued)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Assets:
Loans, net (1) ..................... $49,969 $ 8,104 $ 22,881 $ 34,255 $49,817 $ -- $165,026
Securities ......................... -- 40,919 7,320 83,861 13,087 -- 145,187
Federal funds sold ................. 6,100 -- -- -- -- -- 6,100
Cash and other assets .............. -- -- -- -- -- 21,449 21,449
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ...................... $56,069 $ 49,023 $ 30,201 $118,116 $62,904 $ 21,449 $337,762
====================================================================================================================================
Liabilities and stockholders' equity:
Demand deposits .................... $ -- $ 48,206 $ -- $ -- $ -- $ 69,623 $117,829
Savings and time deposits (2) ...... -- 124,625 40,273 12,716 17 -- 177,631
Securities sold under agreements to
repurchase ...................... 4,536 -- -- -- -- -- 4,536
Other liabilities .................. -- -- -- -- -- 3,744 3,744
Stockholders' equity ............... -- -- -- -- -- 34,022 34,022
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ........................... $ 4,536 $ 172,831 $ 40,273 $ 12,716 $ 17 $107,389 $337,762
====================================================================================================================================
Interest rate sensitivity gap ....... $51,533 $(123,808) $(10,072) $105,400 $62,887 $(85,940)
Interest rate sensitivity gap as a
percentage of total assets ......... 15.3% (36.7)% (3.0)% 31.2% 18.6% (25.4)%
Cumulative interest rate
sensitivity gap .................... $51,533 $ (72,275) $(82,347) $ 23,053 $85,940 --
Cumulative interest rate
sensitivity gap as a percentage
of total assets ................... 15.3% (21.4)% (24.4)% 6.8% 25.4%
====================================================================================================================================
</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.
27
<PAGE> 28
Asset Quality (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans 30 - 89 days past due .......................... $ 541 $3,256 $1,023 $ 3,644 $ 4,725
====================================================================================================================================
Nonaccrual loans:
Commercial and commercial real estate .......................... $ 298 $ 490 $ 886 $ 3,459 $ 6,617
Residential real estate mortgage ............................... 146 211 104 375 509
Installment .................................................... -- 44 63 356 422
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans ........................................ 444 745 1,053 4,190 7,548
- ------------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial and commercial real estate .......................... -- 8 46 37 20
Residential real estate mortgage ............................... 59 104 61 53 216
Installment .................................................... -- -- 45 51 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more .......................... 59 112 152 141 240
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans ..................................... $ 503 $ 857 $1,205 $ 4,331 $ 7,788
====================================================================================================================================
ORE, net (1) .................................................... $1,920 $2,192 $2,211 $ 4,408 $ 9,995
====================================================================================================================================
Total nonperforming assets ...................................... $2,423 $3,049 $3,416 $ 8,739 $17,783
====================================================================================================================================
Restructured loans .............................................. $1,260 $1,475 $1,540 $ 1,702 $ 5,983
====================================================================================================================================
Total nonperforming assets and restructured loans ............. $3,683 $4,524 $4,956 $10,441 $23,766
====================================================================================================================================
</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, 1998, gross interest income of $123,000
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 $56,000. Gross interest income of $79,000
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 $75,000.
Nonperforming assets continued to decline in 1998, going from $3.0 million
at December 31, 1997 to $2.4 million at December 31, 1998. Loans past due 90
days or more decreased $53,000 during 1998, while ORE declined by $272,000
during the same period. Nonaccrual loans decreased $301,000 in 1998. Nonaccrual
loan activity during the year included the payment in full of a $44,000
installment loan and additions, paydowns, and charge-offs of $1.3 million,
$366,000 and $60,000, respectively, in commercial loans and $152,000, $196,000
and $21,000 respectively, in mortgage loans. In addition, one commercial loan
for $1.1 million was returned to accruing status. A $1.4 million restructured
loan at December 31, 1997 was removed from restructured status during 1998 due
to the improved financial status of the borrower and continued payment
performance, but was replaced by two loans totaling $1.3 million which were
performing in accordance with their restructured terms at December 31, 1998.
The dramatic reduction in nonperforming assets from $17.8 million at
December 31, 1994 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 1998 and 1997, ORE-related expenses were much lower than in preceding
years. Management expects to sell the remaining ORE properties in the first half
of 1999 and has instituted policies and procedures to help minimize the risk of
future 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, 1998:
<TABLE>
<CAPTION>
====================================================================================================================================
Loans 90 Days Nonaccrual
or More Past Due Loans
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
One-to four-family residential real estate................................................. $59 $344
Commercial and industrial.................................................................. -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Total.................................................................................... $59 $444
====================================================================================================================================
</TABLE>
28
<PAGE> 29
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, 1998, 1997
and 1996, the Corporation's restructured loans totalled $1.3 million, $1.5
million and $1.5 million, respectively. A $1.4 million restructured loan at
December 31, 1997 was removed from restructured status during 1998 due to the
improved financial condition of the borrower and continued payment performance,
but was replaced by two loans totaling $1.3 million. Both of these loans were
performing in accordance with their restructured terms at December 31, 1998.
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 $1,558,000 and $2,164,000 at
December 31, 1998 and 1997, respectively, the amount of its commercial
nonaccrual and restructured loan portfolios and other qualifying loans. 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.
All of the Corporation's ORE is located in northern New Jersey.
At December 31, 1998, ORE consisted of one parcel of raw land carried at
$1.4 million, two parcels of residential building lots carried at a total of
$414,000, and one residence carried at $141,000. The general valuation allowance
of $139,000 that existed at December 31, 1997 was reversed in 1998 due to the
fact that all properties were under contract of sale at December 31, 1998 and
were expected to realize their carrying value.
Although management believes that the aforementioned contracts of sale
will close in the first half of 1999, unforeseen economic events could cause the
postponement or cancellation of these contracts or reduce the amounts ultimately
realized at the closings.
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 $41,000 at December 31,
1998. This total consisted of eight installment loans. The decrease in this
category from the prior year end total of $2.4 million is primarily due to a
change in the status of one $2.2 million loan. This loan, part of a $15.0
million concentration (at December 31, 1997) to a group of affiliated borrowers,
was deemed to be impaired in March, 1998. Approximately one-half of the loan was
placed on nonaccrual status at March 31, 1998 but was subsequently restructured
and returned to performing status as of June 30, 1998; the remainder was charged
off.
Asset Concentrations. 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 $25,577,000 (15.1% of total loans) and $31,245,000 (18.5%) at December
31, 1998 and 1997, respectively. All outstanding loans to these affiliated
borrowers were performing in accordance with either their original or modified
terms on those dates. The largest borrower concentration consists of loans to a
group of affiliated borrowers with an aggregate balance of $13,050,000 and
$15,011,000 at December 31, 1998 and 1997, 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 $7,152,000 and $8,209,000 at December
31, 1998 and 1997 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,
1998 and 1997 were $5,375,000 and $8,025,000, respectively. At December 31,
1998, management believes all loans within these concentrations, including
adversely classified loans, were properly valued on the Corporation's books.
At December 31, 1998 and 1997, commercial real estate mortgage and
construction loans totalled $114.4 million and $105.7 million and represented
67.4% and 62.5%, 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, 1998, 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 ............... $33,161 $43,335 $40,343 $116,839
Commercial real estate construction ................. 5,552 4,598 1,469 11,619
- -------------------------------------------------------------------------------------------------------------------
Total ........................................... $38,713 $47,933 $41,812 $128,458
===================================================================================================================
Loans with predetermined interest rates ............. $22,000 $31,831 $38,290 $ 92,121
Loans with floating interest rates .................. 16,713 16,102 3,522 36,337
- -------------------------------------------------------------------------------------------------------------------
Total ........................................... $38,713 $47,933 $41,812 $128,458
===================================================================================================================
</TABLE>
29
<PAGE> 30
Asset Quality (continued)
Allowance for Possible Loan Losses. The Corporation attempts to maintain
an allowance for loan losses at a level sufficient to provide for potential
losses in the loan portfolio and commitments to lend. The provision for loan
losses is determined periodically by senior management based on consideration of
several factors including an ongoing review of quality, mix, and size of the
portfolio, historical loan loss experience, evaluation of nonperforming loans,
assessment of economic conditions and their related effects on the portfolio,
and amount and quality of collateral, including guarantees.
There were no significant changes in the mix of the portfolio in 1998. The
Corporation no longer considers conventional residential mortgage loans and this
segment of the portfolio is expected to decline as a percentage of the total
loan portfolio.
The Corporation monitors risk in the portfolio through an internal rating
system which rates all loans according to the financial condition of the
borrower, collateral, management, previous repayment history, and industry and
economic conditions. Indicative of the risks identified under this rating
system, the Corporation has assigned each a risk code classification and related
loss allocation factor (reserve rate) that, in aggregate, is intended to
quantify the extent of inherent losses in the portfolio. The reserve rates are
reviewed periodically by senior management. Loan ratings and reserve rates are
also reviewed periodically by a certified public accounting firm which performs
the loan review function for the Corporation.
The allowance increased by $145,000 (3.1%) to $4,773,000 in 1998, Net
charge-offs declined by $837,000 as a $1,011,000 increase in recoveries was
partially offset by a $174,000 increase in charge-offs. The provision for loan
losses was reduced to $275,000 in 1998 compared to $480,000 in 1997 due to the
decline in delinquent and nonaccrual loans.
Management believes the allowance for possible loan losses at December 31,
1998 of $4.8 million, or 948.9% 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income (at end of year) (1) ..................... $169,799 $169,106 $165,070 $160,580 $164,345
====================================================================================================================================
Average loans outstanding (2) .......................................... $165,430 $165,444 $160,125 $157,715 $171,395
====================================================================================================================================
Allowance balance (at beginning of year) ............................... $ 4,628 $ 5,115 $ 4,853 $ 6,501 $ 7,499
Loans charged off:
Commercial and commercial real estate (3) ............................ 1,186 968 824 3,640 2,265
Residential real estate mortgage ..................................... 28 7 18 3 49
Installment .......................................................... 61 126 99 51 182
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans charged off ............................................. 1,275 1,101 941 3,694 2,496
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans:
Commercial and commercial real estate, net (3) ...................... 1,068 104 783 1,511 253
Real estate - mortgage .............................................. 1 -- 2 6 --
Installment ......................................................... 76 30 18 29 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries ................................................... 1,145 134 803 1,546 277
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off .................................................. 130 967 138 2,148 2,219
Provision for the period ............................................... 275 480 400 500 1,221
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) ............................... $ 4,773 $ 4,628 $ 5,115 $ 4,853 $ 6,501
====================================================================================================================================
Allowance for possible loan losses as a percentage of total
outstanding loans (at end of year) .................................... 2.81% 2.74% 3.10% 3.02% 3.96%
Allowance for possible loan losses as a percentage of
nonperforming loans (at end of year) .................................. 948.91% 540.02% 424.48% 112.05% 83.47%
Net loans charged off as a percentage of average loans outstanding ..... .08% .58% .09% 1.36% 1.29%
====================================================================================================================================
</TABLE>
(1) Includes loans held for sale of $0, $0, $0, $34,000 and $34,000 at
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(2) Includes average loans held for sale of $0, $0, $32,000, $70,000, and $2.6
million at December 31, 1998, 1997, 1996, 1995 and 1994 respectively.
(3) Includes commercial real estate construction loans.
The Corporation made provisions for possible loan losses during the years
ended December 31, 1998, 1997 and 1996 of $275,000, $480,000 and $400,000,
respectively, in order to address the uncertainty inherent in the loan
portfolio. 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 1998, 1997 and 1996 below the level of the
previous years, while representing a significantly higher percentage of
nonperforming loans.
30
<PAGE> 31
Asset Quality (continued)
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
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year ...................... $ 139 $ 553 $ 2,611
Provision charged to expense ..................... -- 130 780
Write-downs to fair value and net
losses incurred on sales ....................... -- (544) (2,838)
Reversal due to pending sales .................... (139) -- --
- -------------------------------------------------------------------------------
Balance at end of year ............................ $ -- $ 139 $ 553
- -------------------------------------------------------------------------------
</TABLE>
Due to the fact that the three remaining ORE properties are under contract
of sale at December 31, 1998 and are expected to realize their stated value,
management does not expect to have any valuation adjustments in 1999 relative to
these properties.
The FDIC and the State, as part of their respective supervisory functions,
periodically review the Bank's allowance for possible loan losses and the
allowance for potential ORE losses. Such regulatory reviews may require the Bank
to increase its provision for loan losses or to recognize further loan
charge-offs or write-downs of the carrying value of ORE, based on judgments
different from those of management.
Securities Portfolio. The Corporation invests a portion of its available
funds in a variety of short-term and medium-term instruments. The securities
portfolio provides a measure of liquidity through proceeds from scheduled
maturities and is utilized for pledging requirements on public and fiduciary
deposits. At December 31, 1998, securities having a book value of $13.6 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amount Percent Amount Percent Amount Percent
Available for Sale:
U.S. Government Agencies ................................ $46,488 48.5% $34,017 70.0% $34,622 83.2%
Obligations of State and Political Subdivisions ......... 6,514 6.8 ,876 3.9 851 2.0
Mortgage-Backed Securities .............................. 20,166 21.1 3,187 6.6 -- --
Other ................................................... 22,539 23.6 9,476 19.5 6,175 14.8
- -----------------------------------------------------------------------------------------------------------------------------------
$95,707 100.0% $48,556 100.0% $41,648 100.0%
====================================================================================================================================
Held to Maturity:
U.S. Treasury ........................................... $13,557 27.4% $11,541 28.5% $ 7,516 28.5%
U.S. Government Agencies ................................ 20,894 42.2 16,724 41.4 17,542 66.5
Obligations of State and Political Subdivisions ......... 6,330 12.8 4,721 11.7 1,337 5.0
Mortgage-Backed Securities .............................. 5,473 11.1 7,452 18.4 -- --
Other ................................................... 3,226 6.5 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
$49,480 100.0% $40,438 100.0% $26,395 100.0%
====================================================================================================================================
</TABLE>
The Corporation's securities portfolio continued to grow in 1998,
increasing from $68.0 million and $89.0 million at December 31, 1996 and 1997,
respectively, to $145.2 million at December 31, 1998. The $56.2 million growth
in 1998 and $21.0 million increase in 1997 was due to the Corporation's
investing both the new deposits acquired during the year and the excess federal
funds sold.
Overall, the Corporation's securities portfolio is high grade. At December
31, 1998, securities comprising 78.2% of the portfolio carry Moody's highest
rating - Aaa. Obligations of state and political subdivisions are primarily
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, 1998, the
weighted average maturity of all owned securities is 6 years, 5 months. A
further breakdown of the portfolio reveals that the $119.6 million of
non-mortgage-backed securities and $25.6 million of mortgage-backed securities
have weighted average maturities of 2 years, 9 months and 23 years, 5 months,
respectively. Further, the mortgage-backed securities were required by the
Corporation's policy to project a return of half of their principal in seven
years or less at the time of purchase. Also, $27.4 million and $20.0 million of
securities classified as available for sale and held to maturity, respectively,
at December 31, 1998, 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 1998 and 1997, the Corporation classified certain
purchased securities as held to maturity. At December 31, 1998, 1997 and 1996,
the Corporation had no securities held for trading purposes. See Notes 1 and 2
of Notes to Consolidated Financial Statements contained in Item 8 below.
31
<PAGE> 32
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 31,1998:
<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>
Available for Sale:
U.S. Government Agencies . $17,268(1) 4.42% $29,220(2) 5.58% $ -- --% $ -- --%
Obligations of State and
Political Subdivisions . 220 7.29 5,856 6.14 438 11.36 -- --
Mortgage-Backed Securities -- -- -- -- 1,810(3) 6.08 18,356(4) 6.41
Other .................... 5,129(5) 5.24 17,409(6) 5.72 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities ......... $22,617 4.63% $52,485 5.69% $2,248 7.12% $18,357 6.41%
==============================================================================================================================
Held to Maturity:
U.S. Treasury ............ $ 1,502 6.27% $12,055 5.59% $ -- --% $ -- --%
U.S. Government Agencies . -- -- 20,894 5.69 -- -- -- --
Obligations of State and
Political Subdivisions . 1,262 5.40 5,068 6.33 -- -- -- --
Mortgage-Backed Securities 218 6.54 -- -- 1,186 6.90 4,069 6.74
Other .................... -- -- 3,226 6.04 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities ......... $ 2,982 5.90% $41,243 5.77% $1,186 6.90% $ 4,069 6.74%
==============================================================================================================================
<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 . $46,488 $46,488 5.15%
Obligations of State and
Political Subdivisions . 6,514 6,514 6.53
Mortgage-Backed Securities 20,166 20,166 6.38
Other .................... 22,539 22,539 5.61
- --------------------------------------------------------------------------------
Total Securities ......... $95,707 $95,707 5.61%
================================================================================
Held to Maturity:
U.S. Treasury ............ $13,557 $13,790 5.66%
U.S. Government Agencies . 20,894 20,812 5.69
Obligations of State and
Political Subdivisions . 6,330 6,413 6.15
Mortgage-Backed Securities 5,473 5,603 6.77
Other .................... 3,226 3,273 6.04
- --------------------------------------------------------------------------------
Total Securities ......... $49,480 $49,891 5.88%
================================================================================
</TABLE>
(1) Entire amount consists of securities with floating rates. (2) Includes
$1,855,000 of securities with floating rates. (3) Entire amount consists of one
security with a floating rate. (4) Includes $10,964,000 of securities with
floating rates. (5) Includes $5,128,000 of securities with floating rates. (6)
Includes $8,012,000 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. Liquid-
ity 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 ALCO.
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
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
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................................... $ 63,938 --% $ 58,035 --% $ 48,048 --%
Interest-bearing demand ..................................... 40,386 1.21 32,006 1.12 27,388 1.22
Savings ..................................................... 94,486 3.15 81,468 2.99 74,549 2.73
Time ........................................................ 74,363 5.15 68,750 5.05 68,608 5.01
- ------------------------------------------------------------------------------------------------------------------------------
$273,173 2.67% $240,259 2.61% $218,593 2.65%
==============================================================================================================================
</TABLE>
The Corporation does not rely heavily on certificates of deposit over $100,000
as a source of funds. During 1998, certificates of deposit of $100,000 or more
averaged only 3.5% 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,
1998:
<TABLE>
<CAPTION>
==============================================================================================================================
Certificates of Deposit
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C>
Maturity period:
Three months or less ............................................................................... $ 9,980
Over three through twelve months ................................................................... 704
Over twelve months ................................................................................. 406
- ------------------------------------------------------------------------------------------------------------------------------
Total ........................................................................................... $11,090
==============================================================================================================================
</TABLE>
In addition to deposits, at December 31,1998, the Corporation's
liabilities included $4.5 million of securities sold under agreements to
repurchase and $3.7 million in accrued and other liabilities. The Corporation
had no purchases of federal funds in 1998 and 1997, and an immaterial amount of
federal funds purchased in 1996.
32
<PAGE> 33
Liquidity and Capital Resources (continued)
At December 31, 1998, the total approved loan commitments outstanding
amounted to $38.9 million and commitments under standby letters of credit
amounted to $784,000. 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, 1998 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, 1998
primarily include (1) additional equity investments in the Bank as may be
necessary for the Bank to maintain certain regulatory capital levels, (2)
dividends on common stock, and (3) 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 classifications 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,
1998, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. The most recent notification by the FRB categorized
the Corporation as "well capitalized". 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 below. 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
Actual Adequacy Purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... $36,357,000 16.5% greater than or equal to $17,651,000
Bank ............................................ $31,017,000 14.1% greater than or equal to $17,599,000
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... $33,574,000 15.2% greater than or equal to $ 8,826,000
Bank ............................................ $28,243,000 12.8% greater than or equal to $ 8,800,000
Tier 1 Capital (to Average Assets):
Corporation ..................................... $33,574,000 10.1% greater than or equal to $13,308,000
Bank ............................................ $28,243,000 8.5% greater than or equal to $13,287,000
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... $31,854,000 16.5% greater than or equal to $15,417,000
Bank ............................................ $29,405,000 15.3% greater than or equal to $15,377,000
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... $29,417,000 15.3% greater than or equal to $ 7,708,000
Bank ............................................ $26,975,000 14.0% greater than or equal to $ 7,688,000
Tier 1 Capital (to Average Assets):
Corporation ..................................... $29,417,000 10.5% greater than or equal to $11,234,000
Bank ............................................ $26,975,000 9.6% greater than or equal to $11,219,000
====================================================================================================================================
<CAPTION>
====================================================================================================================================
For Capital
Adequacy Purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to 8.0%
Bank ............................................ greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to 4.0%
Bank ............................................ greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation ..................................... greater than or equal to 4.0%
Bank ............................................ greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to 8.0%
Bank ............................................ greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to 4.0%
Bank ............................................ greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation ..................................... greater than or equal to 4.0%
Bank ............................................ greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
====================================================================================================================================
To Be Well Capitalized Under
Prompt Corrective Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to $22,064,000 greater than or equal to 10.0%
Bank ............................................ greater than or equal to $21,999,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to $13,238,000 greater than or equal to 6.0%
Bank ............................................ greater than or equal to $13,199,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation ..................................... greater than or equal to $16,634,000 greater than or equal to 5.0%
Bank ............................................ greater than or equal to $16,609,000 greater than or equal to 5.0%
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to $19,271,000 greater than or equal to 10.0%
Bank ............................................ greater than or equal to $19,221,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ..................................... greater than or equal to $11,563,000 greater than or equal to 6.0%
Bank ............................................ greater than or equal to $11,533,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation ..................................... greater than or equal to $14,042,000 greater than or equal to 5.0%
Bank ............................................ greater than or equal to $14,024,000 greater than or equal to 5.0%
====================================================================================================================================
</TABLE>
33
<PAGE> 34
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. 130, "Reporting Comprehensive Income",
effective January 1, 1998. In accordance with the new accounting standard a
complete set of financial statements includes the components of comprehensive
income. Comprehensive income consists of net income or loss for the current
period and revenues, expenses, gains, and losses that have been previously
excluded from the income statement and were only reported as a component of
equity. All prior periods have been restated. Adoption of SFAS No. 130 did not
have a material impact on the results of operations, financial condition or
disclosures of the Corporation.
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. The
Corporation has determined that it does not have any reportable segments.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits", in February, 1998. This Statement revises
employers' disclosures about pension and other postretirement benefit plans. The
Statement is effective for fiscal years beginning after December 15, 1997. Other
than the benefit provided by the supplemental benefit plan described in Note 12,
the Corporation is not obligated to provide any post-retirement benefits for its
employees. Therefore, the impact of adoption on its current disclosures was
immaterial.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Statement 133 is effective for
fiscal quarters beginning after June 15, 1999. The Corporation currently has no
derivative instruments and expects that the impact of adoption on its financial
statements will be immaterial.
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. Financial Statements
The required information follows on pages 36 to 56.
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.
35
<PAGE> 36
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 15, 1999
36
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
====================================================================================================
December 31
- ----------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks .......................................... $ 10,127,000 $ 9,550,000
Federal Funds Sold ............................................... 6,100,000 10,725,000
- ----------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ................................. 16,227,000 20,275,000
- ----------------------------------------------------------------------------------------------------
Securities:
Available for Sale, at Fair Value ................................ 95,707,000 48,556,000
Held to Maturity, at Cost (Fair Value
$49,891,000 and $40,652,000) .................................... 49,480,000 40,438,000
Loans .............................................................. 169,799,000 169,106,000
Less: Allowance for Possible Loan Losses ......................... 4,773,000 4,628,000
- ----------------------------------------------------------------------------------------------------
Net Loans ....................................................... 165,026,000 164,478,000
Premises and Equipment, net ........................................ 3,034,000 3,246,000
Other Real Estate, net ............................................. 1,920,000 2,192,000
Other Assets, net .................................................. 5,867,000 5,921,000
Intangible Assets, net ............................................. 501,000 621,000
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS ....................................................... $337,762,000 $285,727,000
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - Noninterest-Bearing ..................................... $ 69,623,000 $ 60,367,000
- Interest-Bearing ........................................ 48,206,000 34,546,000
Savings .......................................................... 98,946,000 84,973,000
Time ............................................................. 67,595,000 62,372,000
Certificates of Deposit over $100,000 ............................ 11,090,000 7,502,000
- ----------------------------------------------------------------------------------------------------
Total Deposits ................................................... 295,460,000 249,760,000
Securities Sold Under Agreements to Repurchase ................... 4,536,000 1,677,000
Accrued Expenses and Other Liabilities ........................... 3,744,000 2,993,000
- ----------------------------------------------------------------------------------------------------
Total Liabilities ................................................ 303,740,000 254,430,000
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $1 par value:
Authorized shares - 15,000,000
Issued shares - 8,114,199 at December 31, 1998 and
8,107,074 at December 31, 1997 ................................ 8,114,000 8,107,000
Capital In Excess of Par Value .................................... 13,267,000 12,901,000
Retained Earnings ................................................. 12,694,000 10,339,000
Accumulated Other Comprehensive Loss .............................. (53,000) (50,000)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity ........................................ 34,022,000 31,297,000
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $337,762,000 $285,727,000
====================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
===================================================================================================================================
Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including Fees ..................................................... $14,199,000 $14,417,000 $13,993,000
Securities:
Taxable ................................................................. 6,425,000 4,545,000 3,693,000
Nontaxable .............................................................. 396,000 214,000 79,000
Other ..................................................................... 617,000 558,000 453,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME ................................................... 21,637,000 19,734,000 18,218,000
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings and Interest-Bearing Demand Deposits .............................. 3,461,000 2,799,000 2,367,000
Time Deposits and Certificates of Deposit over $100,000 ................... 3,833,000 3,469,000 3,435,000
Other Borrowings .......................................................... 260,000 29,000 2,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE .................................................. 7,554,000 6,297,000 5,804,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ....................................................... 14,083,000 13,437,000 12,414,000
PROVISION FOR POSSIBLE LOAN LOSSES ........................................... 275,000 480,000 400,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES ..................................................... 13,808,000 12,957,000 12,014,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts ....................................... 1,345,000 1,368,000 1,392,000
Brokerage Commissions ..................................................... 438,000 376,000 312,000
Gain (Loss) on Securities Transactions, net ............................... 1,000 (14,000) (16,000)
Other Income .............................................................. 517,000 452,000 686,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME ...................................................... 2,301,000 2,182,000 2,374,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits ............................................ 5,741,000 5,413,000 4,817,000
Net Occupancy Expense ..................................................... 863,000 883,000 811,000
Equipment Expense ......................................................... 699,000 687,000 586,000
Other Real Estate Expense - Cost of Operations, net ....................... 137,000 104,000 252,000
- Valuation Adjustments ......................... (139,000) 130,000 780,000
Other Expense ............................................................. 2,655,000 2,811,000 2,808,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE ...................................................... 9,956,000 10,028,000 10,054,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ................................................ 6,153,000 5,111,000 4,334,000
Provision for Income Taxes ............................................... 2,230,000 1,906,000 1,278,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME ................................................................ $ 3,923,000 $ 3,205,000 $ 3,056,000
===================================================================================================================================
NET INCOME PER COMMON SHARE - Basic ....................................... $ .48 $ .40 $ .38
- Diluted ..................................... $ .46 $ .38 $ .37
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
38
<PAGE> 39
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===================================================================================================================================
Accumulated
Other Class A
For the years ended Comprehensive Retained Comprehensive Preferred
December 31, 1996, 1997 and 1998: Total Income Earnings Income (Loss) Stock
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 ............... $27,249,000 $ 5,479,000 $ 86,000 $ 717,000
Comprehensive Income:
Net Income ............................ 3,056,000 $3,056,000 3,056,000 -- --
Unrealized Losses on Securities, Net .. (125,000) (125,000) -- (125,000) --
------------
Comprehensive Income ............... $2,931,000
============
Redemption of Preferred Stock ............ (717,000) -- -- (717,000)
Cash Dividends on Preferred Stock Redeemed (106,000) (106,000) -- --
Stock Options Exercised .................. 3,000 -- -- --
Cash Dividends, $.04 Per Share ........... (324,000) (324,000) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 ............... 29,036,000 8,105,000 (39,000) --
Comprehensive Income:
Net Income ............................ 3,205,000 $3,205,000 3,205,000 -- --
Unrealized Losses on Securities, Net .. (11,000) (11,000) -- (11,000) --
------------
Comprehensive Income ............... $3,194,000
============
Stock Options Exercised .................. 38,000 -- -- --
Cash Dividends, $.12 Per Share ........... (971,000) (971,000) -- --
Retirement of Treasury Stock ............. -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 ............... 31,297,000 10,339,000 (50,000) --
Comprehensive Income:
Net Income ............................ 3,923,000 $3,923,000 3,923,000 -- --
Unrealized Losses on Securities, Net .. (3,000) (3,000) -- (3,000) --
------------
Comprehensive Income ............... $3,920,000
============
Stock Options Exercised .................. 438,000 -- -- --
Cash Dividends, $.15 Per Share ........... (1,219,000) (1,219,000) -- --
Common Stock Repurchased and Retired ..... (414,000) (349,000) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 ............... $34,022,000 $12,694,000 $ (53,000) $ --
===================================================================================================================================
<CAPTION>
=========================================================================================================
Capital
For the years ended Common in Excess of Treasury
December 31, 1996, 1997 and 1998: Stock Par Value Stock
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1995 ............... $8,160,000 $13,101,000 $(294,000)
Comprehensive Income:
Net Income ............................ -- -- --
Unrealized Losses on Securities, Net .. -- -- --
Comprehensive Income ...............
Redemption of Preferred Stock ............ -- -- --
Cash Dividends on Preferred Stock Redeemed -- -- --
Stock Options Exercised .................. 1,000 2,000 --
Cash Dividends, $.04 Per Share ........... -- -- --
- ---------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 ............... 8,161,000 13,103,000 (294,000)
Comprehensive Income:
Net Income ............................ -- -- --
Unrealized Losses on Securities, Net .. -- -- --
Comprehensive Income ...............
Stock Options Exercised .................. 10,000 28,000 --
Cash Dividends, $.12 Per Share ........... -- -- --
Retirement of Treasury Stock ............. (64,000) (230,000) 294,000
- ---------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 ............... 8,107,000 12,901,000 --
Comprehensive Income:
Net Income ............................ -- -- --
Unrealized Losses on Securities, Net .. -- -- --
Comprehensive Income ...............
Stock Options Exercised .................. 72,000 366,000 --
Cash Dividends, $.15 Per Share ........... -- -- --
Common Stock Repurchased and Retired ..... (65,000) -- --
- ---------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 ............... $8,114,000 $13,267,000 $ --
=========================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
39
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
====================================================================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income ...................................................................... $ 3,923,000 $ 3,205,000 $ 3,056,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization of Premises and Equipment ....................... 588,000 571,000 485,000
Amortization of Intangible Assets ............................................. 120,000 258,000 256,000
Amortization (Accretion) of Securities Premium (Discount), net ................ 109,000 (100,000) (96,000)
Provision for Possible Loan Losses ............................................ 275,000 480,000 400,000
(Recovery of) Provision for Possible Losses on Other Real Estate .............. (139,000) 130,000 780,000
Deferred Income Tax (Benefit) Provision ....................................... (122,000) 883,000 829,000
(Gain) Loss on Securities Transactions, net ................................... (1,000) 14,000 16,000
Loans Made or Acquired and Held for Sale ...................................... -- -- (720,000)
Proceeds from Loans Held for Sale ............................................. -- -- 721,000
Gain on Sales of Loans Held for Sale .......................................... -- -- (1,000)
Gain on Sale of Other Real Estate ............................................. (20,000) (22,000) (137,000)
(Increase) Decrease in Interest Receivable .................................... (232,000) (47,000) 319,000
Increase in Accrued Expenses and Other Liabilities ............................ 671,000 473,000 232,000
Decrease (Increase) in Other Assets ........................................... 409,000 (481,000) 392,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ................................... 5,581,000 5,364,000 6,532,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of Time Deposit from Bank .............................................. -- -- (1,000,000)
Maturity of Time Deposit from Bank .............................................. -- 1,000,000 1,000,000
Securities Available for Sale:
Proceeds from Maturities ...................................................... 10,430,000 3,890,000 3,533,000
Proceeds from Sales Prior to Maturity ......................................... 4,504,000 11,072,000 14,309,000
Proceeds from Calls Prior to Maturity ......................................... 16,000,000 -- 8,000,000
Purchases ..................................................................... (78,218,000) (21,798,000) (28,295,000)
Securities Held to Maturity:
Proceeds from Maturities ...................................................... 9,410,000 6,451,000 3,500,000
Proceeds from Calls Prior to Maturity ......................................... 10,540,000 1,000,000 4,002,000
Purchases ..................................................................... (28,973,000) (21,497,000) (13,863,000)
Net Increase in Loans Outstanding ............................................... (823,000) (5,131,000) (5,105,000)
Capital Expenditures ............................................................ (376,000) (558,000) (1,074,000)
Advances Made on Other Real Estate .............................................. (326,000) (997,000) (286,000)
Proceeds from Sales of Other Real Estate ........................................ 757,000 1,038,000 2,316,000
Premium Paid for Deposits ....................................................... -- (10,000) (622,000)
Other ........................................................................... -- (2,000) 4,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities ....................................... (57,075,000) (25,542,000) (13,581,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net Increase in Total Deposits .................................................. 45,700,000 9,871,000 22,827,000
Redemption of Class A Preferred Stock ........................................... -- -- (717,000)
Cash Dividends on Preferred Stock ............................................... -- -- (106,000)
Cash Dividends on Common Stock .................................................. (1,137,000) (891,000) (162,000)
Purchase and Retirement of Common Stock ......................................... (414,000) -- --
Proceeds from Stock Options Exercised ........................................... 438,000 38,000 3,000
Increase in Securities Sold under Agreements to Repurchase ...................... 2,859,000 1,677,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities ................................... 47,446,000 10,695,000 21,845,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents ............................... (4,048,000) (9,483,000) 14,796,000
Cash and Cash Equivalents, Beginning of Year ....................................... 20,275,000 29,758,000 14,962,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ............................................. $ 16,227,000 $ 20,275,000 $ 29,758,000
====================================================================================================================================
Supplemental Cash Flow Disclosures:
Cash paid during year for:
Interest ...................................................................... $ 7,543,000 $ 6,321,000 $ 5,816,000
Income Taxes, Net of Refunds .................................................. $ 1,876,000 $ 1,479,000 $ (103,000)
Write-off of Fully Depreciated Assets ......................................... $ 1,119,000 $ 334,000 $ 607,000
====================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
40
<PAGE> 41
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 1998 and 1997, the Corporation classified certain purchased
securities as held to maturity. The Corporation had no securities held for
trading purposes at December 31, 1998 or 1997.
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, 1998, the
Corporation had two restructured loans which totaled $1.3 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, borrower and industry
concentrations, 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.
41
<PAGE> 42
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 $10,601,000 and $15,300,000 at December
31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
================================================================================
December 31
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights .......... $ -- $ 43
Core Deposit Premiums......................... 501 565
Premiums on Purchased Home Equity
Lines of Credit............................. -- 13
- --------------------------------------------------------------------------------
$501 $621
================================================================================
</TABLE>
Intangible assets are being amortized over the following periods:
Core Deposit Premiums.................... 10 years
Premium on Purchased Home Equity
Lines of Credit...................... 7 years
Purchased Mortgage Servicing Rights ..... Estimated average term of the loans
seriviced, 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 $120,000, $258,000 and
$256,000 for 1998, 1997 and 1996, respectively, of which $43,000 in 1998 and
$40,000 in 1997 and 1996 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, 1998 and 1997, the Bank had aggregate retained earnings
of $13,501,000 and $13,662,000, 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
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. In accordance with the new accounting standard a
complete set of financial statements includes the components of comprehensive
income. Comprehensive income consists of net income or loss for the current
period and revenues, expenses, gains and losses that have been previously
excluded from the income statement and were only reported as a component of
equity. All prior periods have been restated. Adoption of SFAS No. 130 did not
have a material impact on the results of operations, financial condition or
disclosures of the Corporation.
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. The
Corporation has determined that it does not have any reportable segments.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", in February, 1998. This Statement revises employers'
disclosures about pension and other postretirement benefit plans. The Statement
is effective for fiscal years beginning after December 15, 1997. Other than the
benefit provided by the supplemental benefit plan described in Note 12, the
Corporation is not obligated to provide any post-retirement benefits for its
employees. Therefore, the impact of adoption on its current disclosures was
immaterial.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Statement 133 is effective for
fiscal quarters beginning after June 15, 1999. The Corporation currently has no
derivative instruments and expects that the impact of adoption on its financial
statements will be immaterial.
42
<PAGE> 43
Note 1: Summary Of Significant Accounting Policies (continued)
Net Income Per Share
Net income per share is expressed in two ways - basic and diluted. The
following table shows the calculation of both basic and diluted net income per
share for the years ended 1998, 1997, and 1996:
<TABLE>
<CAPTION>
==================================================================================================================================
Year ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg.
Income Shares Per Share Income Shares
(Numerator) (Denominator) Amount (Numerator) (Denominator)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations ................... $3,923,000 $3,205,000
Less: Preferred stock dividends...................... -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders.............. 3,923,000 8,119,839 $.48 3,205,000 8,100,055
==================================================================================================================================
Effect of Dilutive Securities:
Options granted to employees......................... 349,902 274,436
Options granted to nonemployee directors............. 40,024 35,386
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
plus assumed conversions.......................... $3,923,000 8,509,765 $.46 $3,205,000 8,409,877
==================================================================================================================================
<CAPTION>
============================================================================================================
Year ended December 31
- ------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------
Weighted Avg.
Per Share Income Shares Per Share
Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations ................... $3,056,000
Less: Preferred stock dividends...................... (12,000)
- ------------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders.............. $.40 3,044,000 8,096,961 $.38
============================================================================================================
Effect of Dilutive Securities:
Options granted to employees......................... 84,783
Options granted to nonemployee directors............. 16,312
- ------------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
plus assumed conversions.......................... $.38 $3,044,000 8,198,056 $.37
============================================================================================================
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 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, 1998
- ------------------------------------------------------------------------------------------------------------------------
Historical Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE (In thousands)
<S> <C> <C> <C> <C>
U.S. Government Agencies:
Maturing within 1 year .......... $17,323 $ -- $ (55) $17,268
Maturing 1 to 5 years ........... 29,306 24 (110) 29,220
- ------------------------------------------------------------------------------------------------------------------------
46,629 24 (165) 46,488
- ------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year .......... 220 -- -- 220
Maturing 1 to 5 years ........... 5,803 57 (4) 5,856
Maturing 5 to 10 years .......... 438 -- -- 438
- ------------------------------------------------------------------------------------------------------------------------
6,461 57 (4) 6,514
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities:
Maturing 5 to 10 years .......... 1,783 27 -- 1,810
Maturing after 10 years ......... 18,371 77 (92) 18,356
- ------------------------------------------------------------------------------------------------------------------------
20,154 104 (92) 20,166
- ------------------------------------------------------------------------------------------------------------------------
Other:
Maturing within 1 year .......... 5,133 -- (4) 5,129
Maturing 1 to 5 years ........... 17,419 69 (78) 17,410
- ------------------------------------------------------------------------------------------------------------------------
22,552 69 (82) 22,539
- ------------------------------------------------------------------------------------------------------------------------
$95,796 $254 $(343) $95,707
========================================================================================================================
HELD TO MATURITY
U.S. Treasury:
Maturing within 1 year .......... $ 1,502 $ 12 $ -- $ 1,514
Maturing 1 to 5 years ........... 12,055 226 (5) 12,276
- ------------------------------------------------------------------------------------------------------------------------
13,557 238 (5) 13,790
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Maturing 1 to 5 years ........... 20,894 43 (125) 20,812
- ------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Maturing within 1 year .......... 1,262 4 -- 1,266
Maturing 1 to 5 years ........... 5,068 79 -- 5,147
- ------------------------------------------------------------------------------------------------------------------------
6,330 83 -- 6,413
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities:
Maturing within 1 year .......... 218 2 -- 220
Maturing 1 to 5 years ........... 1,186 21 -- 1,207
Maturing after 10 years ......... 4,069 107 -- 4,176
- ------------------------------------------------------------------------------------------------------------------------
5,473 130 -- 5,603
- ------------------------------------------------------------------------------------------------------------------------
Other:
Maturing 1 to 5 years ........... 3,226 47 -- 3,273
- ------------------------------------------------------------------------------------------------------------------------
$49,480 $541 $(130) $49,891
========================================================================================================================
</TABLE>
43
<PAGE> 44
Note 2: Securities (continued)
<TABLE>
<CAPTION>
========================================================================================================================
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Historical Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE (In thousands)
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------
34,085 37 (105) 34,017
- ------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
Mortage-Backed Securities:
Maturing after 10 years ......... 3,181 6 -- 3,187
- ------------------------------------------------------------------------------------------------------------------------
Other:
Maturing within 1 year .......... 151 -- -- 151
Maturing 1 to 5 years ........... 9,348 4 (27) 9,325
- ------------------------------------------------------------------------------------------------------------------------
9,499 4 (27) 9,476
- ------------------------------------------------------------------------------------------------------------------------
$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 .......... 6,844 14 -- 6,858
Maturing 1 to 5 years ........... 9,880 35 (5) 9,910
- ------------------------------------------------------------------------------------------------------------------------
16,724 49 (5) 16,768
- ------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
Mortage-Backed Securities:
Maturing within 1 year .......... 385 -- -- 385
Maturing 5 to 10 years .......... 1,890 17 -- 1,907
Maturing after 10 years ......... 5,177 67 -- 5,244
- ------------------------------------------------------------------------------------------------------------------------
7,452 84 -- 7,536
- ------------------------------------------------------------------------------------------------------------------------
$40,438 $237 $ (23) $40,652
========================================================================================================================
</TABLE>
Securities at December 31, 1998 and 1997 having a book value of
$13,556,000 and $11,541,000, 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 1998 were $20,504,000, resulting in gross gains of $21,000 and
gross losses of $20,000. Proceeds from calls prior to maturity of securities
held to maturity during 1998 were $10,540,000, resulting in no gains or losses.
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.
44
<PAGE> 45
Note 3: Loans
The Bank grants various commercial and consumer loans, principally within
New Jersey. A substantial portion of the Bank's commercial loan portfolio
consists of loans for which the purpose was to acquire or develop real estate or
for which the primary source of repayment is the liquidation of the real estate
held as collateral. Accordingly, a substantial portion of the borrowers' ability
to honor their loans is dependent on the success of the real estate industry in
the Bank's market area. The Bank's commercial loan portfolio also includes loans
which may be at least partially secured by real estate but for which the
expected source of repayment is the cash flow from the borrower's business.
The composition of the loan portfolio, net of unearned income, is as
follows:
<TABLE>
<CAPTION>
================================================================================
December 31
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial and commercial real estate ............ $116,839 $110,589
Commercial real estate construction .............. 11,619 10,553
Residential real estate mortgage ................. 4,380 6,179
Installment ...................................... 36,961 41,785
- --------------------------------------------------------------------------------
$169,799 $169,106
================================================================================
</TABLE>
The Bank's loan portfolio has certain concentrations of affiliated
borrowers. The three largest concentrations, all of which are involved in
commercial and residential real estate development and management, aggregate
$25,577,000 and $31,245,000 at December 31, 1998 and 1997, respectively. All
outstanding loans to these affiliated borrowers were performing in accordance
with either their original or modified terms on those dates. The largest
borrower concentration consists of loans to a group of affiliated borrowers with
an aggregate balance of $13,050,000 and $15,011,000 at December 31, 1998 and
1997, 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 $7,152,000 and $8,209,000 at December
31, 1998 and 1997 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,
1998 and 1997 were $5,375,000 and $8,025,000, respectively.
Loans for which the accrual of interest has been discontinued totaled
$444,000 and $745,000 at December 31, 1998 and 1997, respectively. Restructured
loans for which terms have been modified totaled $1,260,000 and $1,475,000 at
December 31, 1998 and 1997 respectively. At December 31, 1998, 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
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Interest income which would have
been recognized on nonaccrual loans ................. $ 123 $ 326
Contractual interest income which would
have been recognized on restructured loans .......... 79 144
Interest income received ............................. (131) (118)
- -------------------------------------------------------------------------------
Interest income not recognized ....................... $ 71 $ 352
================================================================================
</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 $1,558,000 and $2,164,000 at December
31, 1998 and 1997, respectively, comprised of its commercial nonaccrual and
restructured loan portfolios and other qualifying loans, if any. Average
impaired loans during 1998 and 1997 were $1,991,000 and $2,502,000,
respectively. 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.
45
<PAGE> 46
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
- --------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year .................... $ 4,628 $ 5,115 $4,853
Provision charged to expense ................ 275 480 400
Recoveries of loans previously charged off .. 1,145 134 803
Loans charged off ........................... (1,275) (1,101) (941)
- -------------------------------------------------------------------------------
Balance, end of year .......................... $ 4,773 $ 4,628 $5,115
================================================================================
</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 1998:
<TABLE>
<CAPTION>
================================================================================
(In thousands)
<S> <C>
Balance, December 31, 1997....................................... $ 1,981
Additions ..................................................... 2,674
Repayments .................................................... (2,323)
Resignation or death of officers............................... (207)
- --------------------------------------------------------------------------------
Balance, December 31, 1998 ...................................... $ 2,125
================================================================================
</TABLE>
All related party loans were current as to interest and principal at December
31, 1998.
Note 6: Premises and Equipment
At December 31, premises and equipment consists of the following:
<TABLE>
<CAPTION>
================================================================================
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land and improvements ........................................ $ 286 $ 286
Buildings and improvements ................................... 2,812 2,810
Leasehold improvements ....................................... 287 358
Furniture and equipment ...................................... 2,301 2,975
- --------------------------------------------------------------------------------
5,686 6,429
Less - Accumulated depreciation and amortization ............. 2,652 3,183
- --------------------------------------------------------------------------------
$3,034 $3,246
================================================================================
</TABLE>
46
<PAGE> 47
Note 7: Other Comprehensive Income
The tax effect of other comprehensive income is as folows:
<TABLE>
<CAPTION>
============================================================================================================
Before-Tax Net of Tax
Amount Tax Effect Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1998:
Unrealized losses on securities -
Unrealized holding losses arising during period .................... $ (6,000) $ 2,000 $ (4,000)
Less: Reclassification adjustments for gains realized in net income (1,000) -- (1,000)
- ------------------------------------------------------------------------------------------------------------
Other comprehensive loss ............................................. $ (5,000) $ 2,000 $ (3,000)
============================================================================================================
Year Ended December 31, 1997:
Unrealized losses on securities -
Unrealized holding losses arising during period .................... $ (31,000) $12,000 $ (19,000)
Less: Reclassification adjustments for losses realized in net income 14,000 (6,000) 8,000
- ------------------------------------------------------------------------------------------------------------
Other comprehensive loss ............................................. $ (17,000) $ 6,000 $ (11,000)
============================================================================================================
Year Ended December 31, 1996:
Unrealized losses on securities -
Unrealized holding losses arising during period .................... $(224,000) $89,000 $(135,000)
Less: Reclassification adjustments for losses realized in net income 16,000 (6,000) 10,000
- ------------------------------------------------------------------------------------------------------------
Other comprehensive loss ............................................. $(208,000) $83,000 $(125,000)
============================================================================================================
</TABLE>
Note 8: Deposits
The following is an expected maturity distribution of time deposits less
than $100,000 as of December 31:
<TABLE>
<CAPTION>
===============================================================================
1998 1997
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in three months or less ............................... $17,715 $17,454
Due between three months and one year ..................... 37,553 35,834
Due over one year ......................................... 12,327 9,084
- -------------------------------------------------------------------------------
$67,595 $62,372
===============================================================================
</TABLE>
As of December 31, 1998 and 1997, there were $11,090,000 and $7,502,000,
respectively, of certificates of deposits over $100,000. Such certificates
totalling $10,684,000 and $7,165,000, respectively, had remaining maturities of
one year or less on those dates.
47
<PAGE> 48
Note 9: Income Taxes
The current and deferred amounts of the provision for income taxes as of
December 31 are as follows:
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal ....................................... $2,026 $ 880 $ 449
State ......................................... 326 143 --
Deferred ........................................ (122) 883 829
- --------------------------------------------------------------------------------
Total provision for income taxes ................ $2,230 $1,906 $1,278
================================================================================
</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
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Allowance for possible losses on loans and
other real estate ....................................... $1,909 $1,530
Gain on restructured loans ................................ 299 299
Depreciation and amortization ............................. 69 161
Net nonaccrual interest recoveries ........................ 31 15
Accrued liabilities not currently deductible .............. 437 266
Alternative minimum tax credits ........................... -- 266
Net holding losses on securities available for sale ....... 35 33
Other ..................................................... (104) (126)
- --------------------------------------------------------------------------------
Net deferred tax asset included in Other Assets ...... $2,676 $2,444
================================================================================
</TABLE>
A reconciliation of income taxes calculated at the U. S. statutory rate of
34% to the actual income tax provision is as follows:
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Statutory provision ........................... $2,092 $1,738 $1,474
Reduction in Federal taxes resulting from
tax-exempt income................ ............ (126) (55) (15)
State taxes on income, net of Federal
tax benefit .................................. 264 313 327
Reversals of accruals no longer required ....... -- -- (496)
Other .......................................... -- (90) (12)
- --------------------------------------------------------------------------------
$2,230 $1,906 $1,278
================================================================================
</TABLE>
48
<PAGE> 49
Note 10: Stockholders' Equity
No Par Stock
During 1998, the Corporation amended its Certificate of Incorporation to
delete the Preferred Stock as a category of no par stock. At December 31, 1998,
no par stock consisted of 1,000,000 authorized shares which may be divided into
classes and series and into series within any class as determined by the Board
of Directors.
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. 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.
As of December 31, 1998, 1,086,184 shares were reserved for future
issuance under the Option Agreement and these two Plans. 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.
Option activity for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number Price Number Price Number Price
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year ....... 1,025,009 767,534 545,434
Options granted .................. 16,200 $7.94 272,600 $5.69 - $6.00 262,100 $4.81 - $4.88
Options exercised ................ (72,125) 2.00 - 6.00 (9,875) 3.50 - 4.81 (750) 3.81
Options cancelled ................ (10,500) 3.81 - 6.00 (5,250) 4.81 - 6.00 (39,250) 3.81 - 18.13
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year ............. 958,584 2.00 - 7.94 1,025,009 2.00 - 6.00 767,534 2.00 - 4.88
====================================================================================================================================
Options exercisable, end of year.. 718,703 $2.00 - $7.94 543,444 $2.00 - $6.00 304,736 $2.00 - $4.88
====================================================================================================================================
</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 $308,000, $296,000 and $108,000 for 1998, 1997, and 1996, 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
for Stock Based Compensation," the Corporation's net income and income per share
would have been reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net Income:
As reported ....................... $3,923 $3,205 $3,056
Pro forma ...................... $3,729 $2,912 $2,880
Income per share - basic:
As reported .................... $ .48 $ .40 $ .38
Pro forma ...................... $ .46 $ .36 $ .35
Income per share - diluted:
As reported .................... $ .46 $ .38 $ .37
Pro forma ...................... $ .44 $ .35 $ .35
================================================================================
</TABLE>
49
<PAGE> 50
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 1998, 1997 and 1996, respectively: dividend yield
of 1.3%, 1.4% and 2.5%; expected volatility of 27%, 28% and 25% for all options;
risk-free interest rates of 5.8%, 6.6% and 6.5% for the Directors' Plan options,
and 6.5%, and 6.9% in 1997 and 1996, respectively, for the Employee Plan
options; and expected lives of 5.6, 6.4 and 6.5 years for the Directors' Plan
options and 8.0 and 7.8 years in 1997 and 1996, respectively, for the Employee
Plan options.
The weighted average fair values at grant-date for options awarded in
1998, 1997 and 1996 were $2.59, $2.42 and $1.60, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
================================================================================
Exercise Remaining
Price Number Outstanding Number Exercisable Contractual Life
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$2.00 45,000 45,000 2.2 years
2.32 71,244 53,433 2.2
2.63 62,690 31,345 2.2
3.50 60,000 60,000 6.4
3.81 196,875 196,875 6.4
4.81 234,500 174,875 7.5
4.88 12,600 12,600 7.3
5.69 12,600 12,600 8.3
6.00 246,875 123,875 8.4
7.94 16,200 8,100 9.3
- --------------------------------------------------------------------------------
958,584 718,703 6.4
================================================================================
</TABLE>
Note 11: Commitments and Contingencies
The consolidated balance sheets as of December 31, 1998 and 1997 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 $38,890,000 and $35,799,000 to its borrowers as of December
31, 1998 and 1997, respectively. The majority of such commitments expire within
one year. These commitments include a $300,000 revolving line of credit, at a
fixed rate above 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 $784,000
and $1,028,000 as of December 31, 1998 and 1997, 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 $243,000, $232,000, and $183,000, for 1998,
1997 and 1996, 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 $87,000.
At December 31, 1998, aggregate annual minimum rental commitments under
noncancelable leases having an initial or remaining term of more than one year
are as follows:
<TABLE>
================================================================================
<S> <C>
1999 ................................................................ $ 192,000
2000 ................................................................ 134,000
2001 ................................................................ 136,000
2002 ................................................................ 137,000
2003 ................................................................ 126,000
Thereafter .......................................................... 355,000
- --------------------------------------------------------------------------------
$1,080,000
================================================================================
</TABLE>
It is expected that in the normal course of business leases that expire
will be renewed or replaced by leases of other properties; thus it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1999.
Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. The reserve
balances aggregated $235,000 and $299,000 at December 31, 1998 and 1997,
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.
50
<PAGE> 51
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, 1998, 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,
1998, 1997 and 1996 were $191,000, $165,000 and $167,000, respectively.
Other than the benefit provided by the supplemental income plan described
above, the Corporation is not obligated to 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, 1998 and 1997, were as follows:
Financial instruments actively traded in the secondary market have been
valued using available market prices.
<TABLE>
<CAPTION>
========================================================================================================================
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ............................ $16,227,000 $16,227,000 $20,275,000 $20,275,000
Securities available for sale at fair value (Note 2).. 95,707,000 95,707,000 48,556,000 48,556,000
Securities held to maturity (Note 2) ................. 49,480,000 49,891,000 40,438,000 40,652,000
========================================================================================================================
</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, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross loans, including accrued interest ........ $170,802,000 $173,771,000 $170,317,000 $169,689,000
Deposits, including accrued interest ........... 296,260,000 296,636,000 250,550,000 250,682,000
Securities sold under agreements to repurchase.. 3,008,000 3,008,000 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 $38,890,000 and $35,799,000 at December 31, 1998 and 1997, respectively,
and are generally priced at market at time of funding. Standby letters of credit
totaling $784,000 and $1,028,000 as of December 31, 1998 and 1997, 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, 1998 and 1997, fees related to the unexpired terms of letters of
credit were not significant.
51
<PAGE> 52
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 classifications 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,
1998, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. The
most recent notification by the Federal Reserve Bank of New York
categorized the Corporation as "well capitalized". 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 below. 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
Actual Adequacy Purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... $36,357,000 16.5% greater than or equal to $17,651,000
Bank .................................. $31,017,000 14.1% greater than or equal to $17,599,000
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... $33,574,000 15.2% greater than or equal to $ 8,826,000
Bank .................................. $28,243,000 12.8% greater than or equal to $ 8,800,000
Tier 1 Capital (to Average Assets):
Corporation ........................... $33,574,000 10.1% greater than or equal to $13,308,000
Bank .................................. $28,243,000 8.5% greater than or equal to $13,287,000
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... $31,854,000 16.5% greater than or equal to $15,417,000
Bank .................................. $29,405,000 15.3% greater than or equal to $15,377,000
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... $29,417,000 15.3% greater than or equal to $ 7,708,000
Bank .................................. $26,975,000 14.0% greater than or equal to $ 7,688,000
Tier 1 Capital (to Average Assets):
Corporation ........................... $29,417,000 10.5% greater than or equal to $11,234,000
Bank .................................. $26,975,000 9.6% greater than or equal to $11,219,000
====================================================================================================================================
<CAPTION>
====================================================================================================================================
For Capital
Adequacy Purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to 8.0%
Bank .................................. greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to 4.0%
Bank .................................. greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation ........................... greater than or equal to 4.0%
Bank .................................. greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to 8.0%
Bank .................................. greater than or equal to 8.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to 4.0%
Bank .................................. greater than or equal to 4.0%
Tier 1 Capital (to Average Assets):
Corporation ........................... greater than or equal to 4.0%
Bank .................................. greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
====================================================================================================================================
To Be Well Capitalized Under
Prompt Corrective Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to $22,064,000 greater than or equal to 10.0%
Bank .................................. greater than or equal to $21,999,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to $13,238,000 greater than or equal to 6.0%
Bank .................................. greater than or equal to $13,199,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation ........................... greater than or equal to $16,634,000 greater than or equal to 5.0%
Bank .................................. greater than or equal to $16,609,000 greater than or equal to 5.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to $19,271,000 greater than or equal to 10.0%
Bank .................................. greater than or equal to $19,221,000 greater than or equal to 10.0%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation ........................... greater than or equal to $11,563,000 greater than or equal to 6.0%
Bank .................................. greater than or equal to $11,533,000 greater than or equal to 6.0%
Tier 1 Capital (to Average Assets):
Corporation ........................... greater than or equal to $14,042,000 greater than or equal to 5.0%
Bank .................................. greater than or equal to $14,024,000 greater than or equal to 5.0%
===================================================================================================================================
</TABLE>
52
<PAGE> 53
Note 15: Condensed Financial Statements of Ramapo Financial Corporation
(Parent Company Only)
<TABLE>
<CAPTION>
BALANCE SHEETS December 31
================================================================================
1998 1997
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Cash and Due from Banks .......................... $ 273 $ 57
Interest-Bearing Deposits ........................ 5,535 2,904
Investment in Bank Subsidiary (Equity Method) .... 28,691 28,855
Other Assets ..................................... 1,020 672
- -------------------------------------------------------------------------------
TOTAL ASSETS ................................... $35,519 $32,488
================================================================================
Liabilities - Other ................................ $ 1,497 $ 1,191
- --------------------------------------------------------------------------------
Stockholders' Equity
Common Stock ..................................... 8,114 8,107
Capital in Excess of Par Value ................... 13,267 12,901
Retained Earnings ................................ 12,694 10,339
Accumulated Other Comprehensive Loss ............. (53) (50)
- -------------------------------------------------------------------------------
Total Stockholders' Equity ..................... 34,022 31,297
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ..... $35,519 $32,488
================================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================
STATEMENTS OF INCOME Year ended December 31
- ---------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Income
Rental Income from Subsidiary Bank ............ $ 125 $ 180 $ 180
Interest on Deposit Accounts at Subsidiary Bank 201 117 124
Dividends from Subsidiary Bank ................ 4,219 971 324
Other Income .................................. 6 7 58
- ---------------------------------------------------------------------------------
Total Operating Income ...................... 4,551 1,275 686
- ---------------------------------------------------------------------------------
Operating Expenses .............................. 536 580 559
- ---------------------------------------------------------------------------------
Income before Income Taxes and Equity in
Undistributed Income of Subsidiaries .......... 4,015 695 127
Income Tax Benefit .............................. (69) (94) (67)
- ---------------------------------------------------------------------------------
Income before Equity in Undistributed Income
of Subsidiaries ............................... 4,084 789 194
Equity in Undistributed Income of Subsidiaries .. (161) 2,416 2,862
- ---------------------------------------------------------------------------------
Net Income .................................... $3,923 $3,205 $3,056
=================================================================================
</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.
53
<PAGE> 54
Note 15: Condensed Financial Statements of Ramapo Financial Corporation
(Parent Company Only) (Continued)
<TABLE>
<CAPTION>
===========================================================================================
STATEMENTS OF CASH FLOWS Year ended December 31
- -------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income .............................................. $ 3,923 $ 3,205 $ 3,056
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Income of Subsidiaries ...... 161 (2,416) (2,862)
Depreciation and Amortization ....................... 14 48 115
Dividends Declared but Not Paid ..................... (82) (80) (162)
(Increase) Decrease in Other Assets ................. (221) 127 (474)
Increase in Other Liabilities ....................... 306 385 498
- -------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ........... 4,101 1,269 171
- -------------------------------------------------------------------------------------------
Cash Flows from Investing Activities - Capital Expenditures (141) -- --
- -------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Redemption of Class A Preferred Stock ............... -- -- (717)
Cash Dividends on Preferred Stock ................... -- -- (106)
Cash Dividends on Common Stock ...................... (1,137) (891) (162)
Purchase and Retirement of Common Stock ............. (414) -- --
Proceeds from Stock Options Exercised ............... 438 38 3
- -------------------------------------------------------------------------------------------
Net Cash Used In Financing Activities ..................... (1,113) (853) (982)
- -------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ...... 2,847 416 (811)
Cash and Cash Equivalents, Beginning of Year .............. 2,961 2,545 3,356
- -------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year .................... $ 5,808 $ 2,961 $ 2,545
===========================================================================================
</TABLE>
The parent company's resources available to meet its cash obligations
subsequent to December 31, 1998 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing 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.
54
<PAGE> 55
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
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Legal* ................................ $ 94 $ 196 $ 312
Postage and freight ................... 180 158 167
Stationery and printing................ 199 288 248
Audit and examinations ................ 120 150 174
Telephone ............................. 210 194 152
Consulting fees ....................... 239 260 212
Credit reports/appraisal fees ......... 127 103 125
Bonding and insurance ................. 136 156 207
Amortization of intangible assets ..... 120 258 256
Advertising............................ 235 235 231
All other expenses .................... 995 813 724
- --------------------------------------------------------------------------------
$2,655 $2,811 $2,808
================================================================================
</TABLE>
* Includes $120,000, $181,000 and $288,000 for 1998, 1997 and 1996,
respectively, paid to a law firm of which two directors of the Corporation are
principals. Payments are higher than recorded expense in 1998 due to the timing
of cash payments and expense accruals.
Note 17: Merger Agreement
On December 17, 1998, the Corporation entered into an agreement and Plan
of Merger ("Merger Agreement") with Valley National Bancorp ("Valley"). In
accordance with the Merger Agreement, each share of the Corporation's common
stock will be exchanged for 0.425 shares of Valley common stock. In connection
with the Merger Agreement, the Corporation also granted Valley an option to
acquire 1,608,159 shares of the Corporation's authorized but unissued common
stock at an exercise price of $7.50 per share. The proposed transaction is
subject to approval by the Corporation's shareholders and certain regulatory
authorities. The transaction is expected to be accounted for as a
pooling-of-interests.
55
<PAGE> 56
Note 18: Quarterly Financial Information (Unaudited)
The following quarterly financial information for the years ended December
31, 1998 and 1997 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>
====================================================================================================================================
1998
- ------------------------------------------------------------------------------------------------------------------------------------
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 .................................................. $5,079 $5,379 $5,616 $5,563
Total interest expense ................................................. 1,694 1,858 2,009 1,993
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income .................................................. 3,385 3,521 3,607 3,570
Provision for possible loan losses ..................................... 75 75 75 50
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses ................................................ 3,310 3,446 3,532 3,520
Total other income ..................................................... 574 582 552 593
Total other expense .................................................... 2,584 2,588 2,489 2,295
Net income ............................................................. $ 800 $ 887 $1,038 $1,198
Net income per common share - basic .................................... $ .10 $ .11 $ .13 $ .15
- diluted .................................. $ .09 $ .10 $ .12 $ .14
====================================================================================================================================
<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
====================================================================================================================================
</TABLE>
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth, for each nominee and each continuing
director, his name, age as of March 1, 1999 and the year he first became a
director of the Corporation. The table also sets forth the names, ages and
positions of the Corporation's current executive officers and the year each was
first elected to his current position. Each director of the Corporation also is
a member of the Board of Directors of the Bank and each executive officer
(excluding Chairman Victor C. Otley, Jr.) also serves as an executive officer of
the Bank. There are no arrangements or understandings between the Corporation
and any director or executive officer pursuant to which such person has been
elected a director or executive officer of the Corporation other than the
agreements respectively between Messrs. O'Shea and Knauer and the Corporation
and the Bank (discussed under " - Certain Agreements"), and no director or
executive officer is related to any other director or executive officer by
blood, marriage or adoption. All executive officers other than Mr. O'Shea are
elected annually by the Board of Directors,. Mr. O'Shea is serving pursuant to
an employment agreement dated March 14, 1996, which provides for a term of
employment of three years with the Corporation and one year with the Bank. See
"- Certain Agreements".
<TABLE>
<CAPTION>
YEAR FIRST
AGE AS OF ELECTED AS CURRENT TERM
NAME MARCH 1, 1999 DIRECTOR TO EXPIRE
---- ------------- ---------- ------------
<S> <C> <C> <C>
James R. Kaplan 64 1993 1999
Erwin D. Knauer 53 1993 1999
Louis S. Miller 84 1974 2000
Mortimer J. O'Shea 53 1994 2000
Victor C. Otley, Jr. 63 1974 2000
Donald W. Barney 58 1993 2001
Richard S. Miller 64 1974 2001
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
AGE AS OF YEAR FIRST ELECTED
NAME OFFICE MARCH 1, 1999 TO CURRENT OFFICE
- ---- ------ ------------- -----------------
<S> <C> <C> <C>
Mortimer J. O'Shea President and Chief
Executive Officer 53 1994
Erwin D. Knauer Senior Vice President 53 1993
Walter A. Wojcik, Jr. Treasurer 49 1985
</TABLE>
Presented below is certain information concerning the directors and the
executive officers of the Corporation. In addition to serving as Directors of
the Corporation and the Bank, all directors of the Corporation named below also
serve as Directors of one or more of the Corporation's nonbank subsidiaries.
JAMES R. KAPLAN has been a director of the Corporation since 1993 and has been a
director of the Bank since 1991. He is currently Chairman, President and Chief
Executive Officer of Cornell Dubilier Electronics, Inc., located in Wayne, New
Jersey. He also serves on the Board of Governors of the Electronic Industries
Association.
ERWIN D. KNAUER has been a director of the Corporation since 1993 and a director
of the Bank since 1989. He has served as Vice President of the Corporation from
April 1984 to April 1992 and Senior Vice President of the Corporation from that
date to the present. Mr. Knauer has served as President of the Bank since 1989,
prior to which he served as Executive Vice President of the Bank.
57
<PAGE> 58
LOUIS S. MILLER has served as a director of the Corporation since its formation
in 1974 and has been a director of the Bank since 1968. Mr. Miller is a retired
certified public accountant.
MORTIMER J. O'SHEA became Director, President and Chief Executive Officer of the
Corporation and Chairman and Chief Executive Officer of the Bank in March 1994.
From 1985 to March 1994, he served in various capacities with The Summit
Bancorporation ("Summit") and its subsidiaries. From October 1993 until his
resignation in 1994, he served as Regional President of Summit Bank with
responsibility for its Western Region. He also served on Summit's Management
Executive Committee. From June 1990 to October 1993, he served as President and
Chief Executive Officer of Somerset Trust Company, which was a wholly-owned
subsidiary of Summit. Mr. O'Shea was President and Chief Executive Officer of
The Trust Company of Princeton, also a wholly-owned subsidiary of Summit, from
its organization in December 1985 through June 1990. During his tenure, this
start-up bank grew to $50 million in assets. Prior to joining Summit, Mr. O'Shea
held various lending and management positions with First Fidelity Bancorporation
and Irving Trust Corporation.
VICTOR C. OTLEY, JR. has served as a director of the Corporation since 1974 and
a director of the Bank since 1970. From September 1993 to March 1994, Mr. Otley
served as President and Chief Executive Officer of the Corporation and Chairman
of the Board and Chief Executive Officer of the Bank on a temporary basis. In
January 1994, Mr. Otley became Chairman of the Board of the Corporation and
continues to serve in that capacity. Prior to assuming executive officer
positions with the Corporation and the Bank in September 1993, he was a Director
and a Vice President of the law firm of Williams, Caliri, Miller & Otley, a
professional corporation, of Wayne, New Jersey ("Williams, Caliri, Miller &
Otley"), which acts as legal counsel to the Corporation and its subsidiaries.
See " - Certain Relationships and Related Transactions". Mr. Otley returned to
that firm after stepping down as Chief Executive Officer of the Corporation and
the Bank in March 1994.
DONALD W. BARNEY became a director of the Corporation in 1993, having been a
member of the Bank's Board of Directors since 1989. He joined the Union Camp
Corporation, Wayne, New Jersey in 1969, from which he recently retired as Vice
President and Treasurer. Mr. Barney is also a certified public accountant. He is
President and a Trustee of the First Real Estate Investment Trust of New Jersey.
RICHARD S. MILLER has served as a director of the Corporation since 1974 and a
director of the Bank since 1970. Mr. Miller is a director and the President of
Williams, Caliri, Miller & Otley. See " - Certain Relationships and Related
Transactions".
WALTER A. WOJCIK, JR. has served as Treasurer of the Corporation since 1985 and
Senior Vice President and Treasurer of the Bank from 1989 to the present. Prior
to that, he was Vice President and Treasurer of the Bank. He also served as
Treasurer of Pilgrim State Bank, which was then a subsidiary of the Corporation,
from 1988 to its sale in June 1993. He is a certified public accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and executive officers to file reports of holdings and
transactions in common stock with the SEC. Based on Corporation records and
other information, the Corporation believes that all SEC filing requirements
applicable to its directors and executive officers with respect to the
Corporation's 1998 fiscal year were met in timely fashion.
ITEM 11. EXECUTIVE COMPENSATION.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
Each executive officer of the Corporation, with the exception of
Chairman Victor C. Otley, Jr., also serves as an executive officer of the Bank.
These executive officers devote the great majority of their time to and receive
their salaries from the Bank. Neither the Bank nor the Corporation has a
compensation committee. Compensation decisions for the Bank are made by its
Board of Directors. The Corporation's Board reviews and approves the
compensation decisions of the Bank's Board for the two most highly compensated
executives -- Messrs. O'Shea and Knauer.
58
<PAGE> 59
The Corporation's policy with respect to executive compensation
continues to be one which seeks to compensate its executives fairly and
adequately for their responsibilities, taking into account (i) the profitability
of the operating unit for which the executive is responsible (except in the case
of the Corporation's Chief Executive Officer, who is responsible for the
profitability of the Corporation as a whole), (ii) the profitability of the
Corporation as a whole and (iii) prevailing levels of compensation for
executives of other institutions in New Jersey with comparable responsibilities
and experience. The policy recognizes that in order to recruit and retain
quality executive talent, the Corporation's total compensation package must be
competitive in the marketplace.
Within the foregoing general guidelines, the Boards' specific
compensation strategy is to attempt to arrive at appropriate individual levels
of compensation for each executive officer by looking at total compensation
including annual base salary, incentive bonus potential, and employee benefit
plans and stock option awards.
In an effort to link compensation directly to performance and enhanced
stockholder values, the Bank Board implemented a Management Incentive Bonus Plan
for the year 1996. The Board considered the Plan to have achieved its objectives
and renewed it for 1998. Bonuses under the Plan are awarded by the Bank's Board
based 50% upon overall earnings performance of the Corporation and 50% upon the
individual executive's performance. Bonuses totaling $210,575 were awarded in
January 1999 based upon 1998 performance.
When Mr. O'Shea joined the Corporation in March 1994 as President and
CEO of the Corporation and Chairman and CEO of the Bank, he entered into an
employment agreement with the Corporation and the Bank. In March 1996 that
agreement was modified and extended. The term of Mr. O'Shea's employment with
the Corporation was extended until March 1999, and the term of Mr. O'Shea's
employment with the Bank was extended until March 1998. In March of 1998 the
agreement with the Bank was extended until March 1999. Also in July 1996 Mr.
Knauer entered into a salary continuation agreement with the Corporation and the
Bank (See " - Certain Agreements" below). That agreement was amended in 1998.
This report and the comparative stock performance graph which follows
shall not be deemed incorporated by reference by any general statement
incorporating by reference this annual report into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Corporation specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
Respectfully submitted,
Donald W. Barney
James R. Kaplan
Erwin D. Knauer
Louis S. Miller
Richard S. Miller
Mortimer J. O'Shea
Victor C. Otley, Jr.
INTERLOCKS AND INSIDER PARTICIPATION REGARDING COMPENSATION MATTERS
The Board of Directors of the Bank reviews the compensation of
employees of the Bank. The Board of Directors of the Corporation reviews and
approves the compensation decisions of the Bank's Board for Messrs. O'Shea and
Knauer. Options under the Corporation's 1995 Employee Stock Option Plan are
awarded by the Corporation's Stock Option Committee, which is comprised of all
of the directors of the Corporation other than Messrs. O'Shea and Knauer. The
Corporation does not have any employees of its own.
During 1998, Victor C. Otley, Jr. served as Chairman of the Board of
Directors of the Corporation and as a Director of the Bank. Mortimer J. O'Shea
served as a Director, Chief Executive Officer and President of the Corporation
and Chairman of the Board of Directors and Chief Executive Officer of the Bank.
Erwin D. Knauer, Senior Vice President of the Corporation and President of the
Bank, is also a member of the Corporation's Board of Directors. Messrs. O'Shea
and Knauer each absented himself from all discussions, and abstained from all
voting, with respect to his own compensation.
59
<PAGE> 60
COMPARATIVE STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
a hypothetical $100 investment made on December 31, 1993, assuming reinvestment
of dividends, in (1) the Corporation's Common Stock, (2) the NASDAQ Stock Market
(U.S.) Index, and (3) the NASDAQ Bank Stock Index.
[CHART - PLOT POINTS FOLLOW]
<TABLE>
<CAPTION>
Ramapo NASDAQ NASDAQ
Financial Corp. (US) Bank Stock
<S> <C> <C> <C>
12/31/93 100.00 100.00 100.00
12/30/94 127.95 97.75 99.64
12/29/95 188.24 138.26 148.38
12/31/96 236.24 170.01 195.91
12/31/97 414.70 208.30 328.02
12/31/98 544.47 293.52 325.38
</TABLE>
60
<PAGE> 61
EXECUTIVE COMPENSATION AND OTHER BENEFITS
SUMMARY COMPENSATION TABLE
The following table summarizes compensation earned or awarded during
the years ended December 31, 1998, 1997 and 1996 to the Corporation's Chief
Executive Officer, and its other executive officers whose total salary and bonus
in 1998 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- ---------------------------------
AWARDS PAYOUTS
----------------------- ---------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK OPTIONS LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION(1) AWARDS($) (SHARES)(2) PAYOUTS SATION
- ------------------------------ ------ -------- -------- --------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortimer J. O'Shea 1998 $233,462 $40,200 $-- $-- -- $-- $338,337 (4)
Chief Executive Officer (3) 1997 219,808 35,000 -- -- 10,000 -- 10,787
1996 210,000 -- -- -- 30,000 -- 8,787
Erwin D. Knauer 1998 163,269 32,275 -- -- -- -- 18,673 (6)
Senior Vice President(5) 1997 149,692 27,500 -- -- 30,000 -- 17,895
1996 142,000 -- -- -- 30,000 -- 17,437
Walter A. Wojcik, Jr 1998 91,231 14,763 -- -- -- -- 5,448 (7)
Treasurer 1997 83,846 13,250 -- -- 20,000 -- 4,996
1996 80,000 -- -- -- 20,000 -- 4,910
</TABLE>
(1) The Corporation provides certain perquisites and other benefits to
executive officers. The aggregate amount of such compensation did not
exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for each of the named executive officers during any of
the years reported.
(2) Incentive stock options and nonqualified stock options granted pursuant
to the Corporation's 1995 Employee Stock Option Plan.
(3) In March 1994, Mr. O'Shea was appointed President and Chief Executive
Officer of the Corporation and Chairman of the Board and Chief
Executive Officer of the Bank. At that time, Mr. O'Shea entered into an
employment agreement and a nonstatutory stock option agreement with the
Corporation and the Bank. See " - Certain Agreements".
(4) Consists of $328,750 in income attributable to the exercise of
nonstatutory stock options, $1,587 in life insurance premiums, and
$8,000 in employer 401(k) matching contributions.
(5) In July 1996 Mr. Knauer entered into a salary continuation agreement
with the Corporation and the Bank. See " - Certain Agreements".
(6) Consists of $1,326 in life insurance premiums, $8,000 in employer
401(k) matching contributions, and $9,346 in automobile allowance.
(7) Consists of $887 in life insurance premiums and $4,562 in employer
401(k) matching contributions.
61
<PAGE> 62
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
No stock options were granted to executive employees during 1998. The
following table sets forth information concerning the value of options held by
the individuals listed in the Summary Compensation Table at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END($)
ACQUIRED VALUE --------------------- ----------------------
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ---------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Mortimer J. O'Shea (1) 40,000 $328,750 187,278 / 61,656 $1,534,561 / $496,079
Erwin D. Knauer (2) 0 0 67,500 / 22,500 $ 438,281 / $124,219
Walter A. Wojcik, Jr. (3) 0 0 45,000 / 15,000 $ 292,188 / $ 82,813
</TABLE>
(1) Mr. O'Shea's options consist of nonstatutory stock options to purchase
218,934 shares which he received concurrent with his employment with
the Corporation (see " - Certain Agreements", below) and incentive
stock options to purchase 70,000 shares which were granted to him
pursuant to the Corporation's 1995 Employee Stock Option Plan.
(2) Mr. Knauer's options consist of incentive stock options to purchase
86,770 shares and nonqualified stock options to purchase 3,230 shares
which were granted pursuant to the Corporation's 1995 Employee Stock
Option Plan.
(3) Mr. Wojcik's options consist of incentive stock options to purchase
60,000 shares which were granted pursuant to the Corporation's 1995
Employee Stock Option Plan.
CERTAIN AGREEMENTS
On March 14, 1996, the Corporation and the Bank extended and modified
the original employment agreement with Mortimer J. O'Shea, President and Chief
Executive Officer of the Corporation and Chairman of the Board and Chief
Executive Officer of the Bank, that had been originally entered into on March
17, 1994.
The extended and modified employment agreement ("Employment Agreement")
provides for a term of employment of three years with the Corporation while his
term of employment with the Bank shall be for a period of one year. In February
1998, the term of Mr. O'Shea's employment with the Bank was extended until March
1999. It is anticipated that the Corporation and the Bank will renew Mr.
O'Shea's Employment Agreement in March 1999. The Employment Agreement provides
for inclusion of Mr. O'Shea in all of the employee benefit plans that the
Corporation or the Bank maintain for the benefit of their employees and which
include any medical or other insurance plans, the 401(k) plan and vacation
policies. The Employment Agreement provides for an annual base salary equal to
Mr. O'Shea's then current base salary, which will be paid by the Bank so long as
the Bank is an employer of Mr. O'Shea and by the Corporation for the remaining
term of the Employment Agreement. In December 1998 Mr. O'Shea's annual base
salary was increased to $232,500 effective in January 1999.
The Employment Agreement will terminate upon Mr. O'Shea's death or
disability, and is terminable by the Corporation or the Bank with or without
"just cause". If Mr. O'Shea's employment is terminated without "just cause", he
shall be entitled to his salary at the annual rate then in effect for the
remainder of the term of the Employment Agreement (plus any renewal term). In
the event of termination for "just cause", Mr. O'Shea will not be entitled to
any salary for any period after such termination. If Mr. O'Shea's employment is
terminated or suspended as a result of an order or notice being served under
Section 8 of the Federal Deposit Insurance Act, all obligations of the
Corporation and the Bank shall terminate as of the effective date of the order
or notice. If such an order or notice suspends or temporarily prohibits Mr.
O'Shea from participating in the conduct of the Corporation's or the Bank's
affairs, the Employment Agreement shall be suspended as of the effective date of
such order or notice. If the charges in the order or notice are dismissed, the
Bank shall pay Mr. O'Shea all or part of the compensation withheld while the
Employment Agreement was suspended and reinstate any of its obligations
thereunder.
62
<PAGE> 63
If the Employment Agreement is terminated due to Mr. O'Shea's
"disability" (as defined in the Employment Agreement), he will be entitled to a
continuation of his compensation and benefits through the date of the
establishment of his disability and for a period of six months thereafter. In
addition, he shall be entitled to one-half of his base salary plus any other
employee benefits in effect at such time for an additional six-month period. Any
and all such payments made as the result of disability shall be reduced by the
amount he receives under any disability insurance policy maintained by the
Corporation or the Bank.
Mr. O'Shea may voluntarily terminate his Employment Agreement by
providing 60 days written notice to the Boards of Directors of both the
Corporation and the Bank, in which case he will be entitled to receive only his
compensation, vested rights and employee benefits up to the date of his
termination.
The Employment Agreement contains provisions stating that in the event
of Mr. O'Shea's involuntary termination in connection with, or within one year
after, any change in control of the Corporation or the Bank, other than for
"just cause", Mr. O'Shea will be paid within 10 days of such termination an
amount equal to two times his base annual compensation less that amount of base
compensation actually paid after the change of control, unless the Bank was
placed in conservatorship or receivership in connection with such change in
control and the Board of Directors of the Corporation or the Bank determines in
good faith that the change of control was directed by or otherwise required by
the FDIC. In no event, however, may the aggregate amount payable in the event of
a change in control equal or exceed the difference between (i) the product of
2.99 times Mr. O'Shea's "base amount" as defined in Section 280G(b)(3) of the
Code and regulations promulgated thereunder, and (ii) the sum of any other
parachute payments (as defined in Section 280G(b)(2) of the Code) that he
receives on account of the change in control.
"Control" generally refers to the acquisition, by any person or entity,
of the ownership or power to vote more than 25% of the Corporation's voting
stock, the control of the election of a majority of the Corporation's or the
Bank's directors or the exercise of a controlling influence over the management
or policies of the Corporation or the Bank. In addition, under the Employment
Agreement, a change in control occurs when, during any consecutive two-year
period, directors of the Bank or the Corporation at the beginning of such period
cease to constitute two-thirds of the Board of Directors of the Bank or the
Corporation, unless the election of replacement directors was approved by a
two-thirds vote of the initial directors then in office. The Employment
Agreement also provides for a similar lump sum payment to be made in the event
of Mr. O'Shea's voluntary termination of employment within one year following a
change in control, upon the occurrence, or within 90 days thereafter, of certain
specified events following the change in control, which have not been consented
to in writing by Mr. O'Shea, including (i) requiring the Executive to move his
personal residence, (ii) the assignment of duties and responsibilities which are
substantially inconsistent with those normally associated with his position with
the Bank or the Corporation, and (iii) materially diminishing his authority and
responsibility. The aggregate payments that would be made to Mr. O'Shea assuming
his termination of employment under the foregoing circumstances would be
$450,000. This provision may have an anti-takeover effect by making it more
expensive for a potential acquiror to obtain control of the Corporation.
Concurrently with entering into the original Employment Agreement in
1994, the Corporation also entered into a nonstatutory Stock Option Agreement
("Stock Option Agreement") with Mr. O'Shea. Pursuant to the terms of the Stock
Option Agreement, the Corporation granted to Mr. O'Shea an option to purchase
shares of Common Stock having an aggregate exercise price of $500,000. The
options were granted in three separate tiers as follows: (1) Tier 1 Options for
Common Stock having an aggregate exercise price of $170,000 exercisable at
$2.00 per share, (2) Tier 2 Options for Common Stock having an aggregate
exercise price of $165,000 exercisable at $2.32 per share, and (3) Tier 3
Options for Common Stock having an aggregate exercise price of $165,000
exercisable at $2.63 per share. All of Tier 1 Options are exercisable.
Twenty-five percent of Tier 2 Options became exercisable on the second, third
and fourth anniversaries of March 17, 1994 ("Effective Date") with an
additional 25% to vest on March 17, 1999. Twenty-five percent of Tier 3 Options
each became exercisable on the third and fourth anniversary date of the
Effective Date with an additional 25% to vest on each of the two subsequent
anniversaries of the Effective Date. The Stock Option Agreement further
provides that the vesting schedule shall be accelerated and all options are to
become immediately exercisable upon a "change in control" as that term is
defined in the Employment Agreement. All unexercised options expire in seven
years from the Effective Date.
Exercise of the options granted pursuant to the Stock Option Agreement
is also subject to the Corporation's achieving certain annual performance
standards relating to the Corporation's profitability and return on equity.
63
<PAGE> 64
Based upon the Corporation's performance relative to such performance standards
during 1998, 75% of the options which would be otherwise exercisable during 1999
are exercisable. In addition, Mr. O'Shea may not exercise options in any given
taxable year of the Corporation to the extent that such exercise would result in
Mr. O'Shea having taxable compensation that is not deductible to the
Corporation. If such restriction results in Mr. O'Shea's being unable to
exercise options that are otherwise exercisable, then, notwithstanding any other
provision of the Stock Option Agreement, if the term of the option would have
expired in such year, its term shall be extended until December 31st of the next
succeeding year. In the event of such an extension of exercisability, the
applicable performance standards shall be those applicable in the first year in
which exercise was denied.
In the event of Mr. O'Shea's termination for "just cause" as that term
is defined in the Employment Agreement or by resignation, the options granted
shall immediately become null and void. If employment is terminated without just
cause, any options which are otherwise exercisable on such termination date may
be exercised for an additional 90 days following the termination date. In the
event of termination of employment due to disability, all outstanding options
will immediately become fully vested and may be exercised by Mr. O'Shea for a
period of 90 days following the date of his termination due to disability. All
outstanding options become fully vested upon the death of Mr. O'Shea and may be
exercised for a period of one year following his death by the personal
representative of his estate unless the Corporation elects to extend such
period.
The Corporation and the Bank have entered into a salary agreement
("Salary Agreement"), dated as of July 31, 1996, with Erwin D. Knauer, Senior
Vice President of the Corporation and President of the Bank. This agreement was
subsequently amended in September, 1998. The Salary Agreement provides that Mr.
Knauer shall be paid an amount equal to two times his annual salary in the event
he is terminated in connection with or within 12 months after a change in
control of the Corporation or the Bank, unless such termination is with Mr.
Knauer's prior written consent or is for one of a number of specified reasons
which are collectively defined in the Salary Agreement as "Just Cause". The
Salary Agreement may be terminated pursuant to a resolution of the Board of
Directors of the Corporation effective as of the date of the Corporation's 1999
annual meeting of shareholders or any subsequent annual meeting, provided that
no change of control of the Corporation or the Bank shall have occurred.
SUPPLEMENTAL EMPLOYEE BENEFITS PLAN
The Supplemental Employee Benefits Plan ("SEBP"), which the
Corporation's Board of Directors adopted in 1989, became fixed as to
participants and benefits on January 1, 1994. The SEBP provides a combination of
benefits for designated salaried officers or other designated key employees of
the Corporation and its subsidiaries. Participants in the SEBP had been
designated annually by the Board of Directors of the Corporation on a
prospective basis for each of the years 1990 through 1994. The Board also had
designated the type and amount of benefits to be granted to each SEBP
participant.
Three types of benefits have been granted under the SEBP: (i) a
pre-retirement death benefit which is payable in 10 equal annual installments if
a participant dies while actively employed during the period for which benefits
have been granted; (ii) a severance benefit which is payable in a lump sum if a
participant's employment terminates during the period for which benefits have
been provided other than by reason of the participant's death, retirement,
permanent disability or termination by the employer for certain specified
causes; and (iii) a retirement benefit payable in 10 equal annual installments
following a participant's retirement after attaining age 65 or such other date
as may be approved by the Board of Directors, or after attaining age 65 or such
earlier date as may be approved by the Board of Directors if the participant's
employment was previously terminated due to total disability. Each participant
has been granted a Supplemental Benefits Agreement which specifies benefits to
which such participant will be entitled as long as he or she remains actively
employed by the Corporation or its subsidiaries.
64
<PAGE> 65
The following table sets forth benefits payable under SEBP in 10
equal annual installments following retirement at age 65 to the individuals
named in the Summary Compensation Table above who were participants in the SEBP.
<TABLE>
<CAPTION>
ANNUAL
RETIREMENT
NAME BENEFIT
---- -------
<S> <C>
Erwin D. Knauer $34,900
Walter A. Wojcik, Jr. 18,800
</TABLE>
DIRECTOR COMPENSATION
Directors of the Corporation who are not members of management receive
an annual fee for serving as a director and a fee for attending each meeting of
the Corporation's Board and of the Bank's Board and, as applicable, each meeting
of the Corporation's Audit Committee, the Bank's Asset/Liability Management
Committee and the Bank's Executive Committee. The current fees are as follows:
The annual fee is $10,000; Board meeting fees are $300 per meeting; and
Committee meeting fees are $250 per meeting. Directors are not compensated for
attendance at any other Corporation or Bank committee meetings. If the Board of
Directors of the Corporation and the Board of Directors of the Bank meet on the
same day, the directors are only compensated for the Bank's Board meeting.
Directors who are members of management do not receive any fees for their
service as directors.
At the 1995 Annual Meeting of Shareholders the 1995 Stock Option Plan
for Nonemployee Directors was approved. This 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 of the Corporation,
$1 par value, that may be made subject to options granted pursuant to this plan
is 200,000. Upon approval of this plan each director received a grant based upon
his years of service according to the following schedule:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
YEARS OF SERVICE SUBJECT TO OPTION
---------------- -----------------
<S> <C>
at least three, but less than ten 5,000
at least ten, but less than fifteen 10,000
at least fifteen 15,000
</TABLE>
Options to purchase a total of 65,000 shares at $3.50 per share were
granted upon approval of the 1995 Stock Option Plan for Nonemployee Directors as
provided above. In addition, commencing in 1996 and thereafter until the
expiration date of the plan, the plan provides for automatic grants of options
to purchase 1,800 shares to each person who, on the date of the annual meeting
for such year, is then a Nonemployee Director of the Corporation and/or
subsidiary of the Corporation regardless of the number of Boards on which they
serve.
In April, 1998, at the time of the 1998 Annual Meeting of Stockholders,
nonqualified stock options to purchase 1,800 shares were automatically granted
pursuant to the 1995 Stock Option Plan for Nonemployee Directors to each
individual who was then a non-management director of the Corporation and the
Bank. The exercise price is $7.9375 per share, the closing price on the date of
grant as reported on the NASDAQ National Market. No non-management director
exercised any stock options during 1998. The following table summarizes cash
compensation earned during 1998 by the Corporation's non-management directors.
Meeting fees include fees paid for attending meetings of the Corporation, its
bank subsidiaries and committees thereof. The table also presents information
regarding the number of shares underlying unexercised options at that time. All
unexercised options shown were "in-the-money" at the end of 1998.
65
<PAGE> 66
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES DOLLAR VALUE OF
OPTIONS UNDERLYING UNEXERCISED IN-
GRANTED ON UNEXERCISED THE-MONEY
COMMON STOCK OPTIONS AT FISCAL OPTIONS AT FISCAL
CASH COMPENSATION DURING 1998 YEAR END YEAR END
----------------------------------------------------------------------------------------------
VALUE
ANNUAL FEE REALIZED
AND ON EXERCISE
MEETING OF STOCK NUMBER OF EXERCISABLE/ EXERCISABLE/
NAME FEES ($) OPTIONS ($) SHARES UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donald W. Barney $19,750 n.a. 1,800 9,500 / 900 $ 62,032 / $2,869
James R. Kaplan $13,450 n.a. 1,800 4,500 / 900 $ 23,907 / $2,869
Louis S. Miller $22,100 n.a. 1,800 19,500 / 900 $138,282 / $2,869
Richard S. Miller $17,500 n.a. 1,800 19,500 / 900 $138,282 / $2,869
Victor C. Otley, Jr. $21,000 n.a. 1,800 19,500 / 900 $138,282 / $2,869
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS: As of March 1, 1999,
there were 8,148,949 shares of Common Stock issued and outstanding. On
that date, the Corporation knew of no beneficial owner of more than 5%
of the outstanding Common Stock.
(b) SECURITY OWNERSHIP OF MANAGEMENT: The following table sets forth as of
March 1, 1999 certain information concerning the ownership of Common
Stock by each director of the Corporation, by the officers named in the
Summary Compensation Table and by all directors and executive officers
as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
------------------------ ----------------------- ---------------
<S> <C> <C>
Donald W. Barney 66,500(3) 0.82%
James R. Kaplan 24,935(4) 0.31
Erwin D. Knauer 74,210(5) 0.90
Louis S. Miller 23,500(6) 0.29
Richard S. Miller 102,365(7) 1.25
Mortimer J. O'Shea 256,012(8) 3.07
Victor C. Otley, Jr. 69,982(9) 0.86
Walter A. Wojcik, Jr. 47,774(10) 0.58
All Directors and Executive
Officers as a Group (13 persons) 777,539(11) 9.10%
</TABLE>
- -----------------------------
66
<PAGE> 67
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, a person is deemed to be the beneficial owner, for purposes of
this table, of any shares of Common Stock if he or she has or shares
voting or investment power with respect to such Common Stock or has a
right to acquire beneficial ownership at any time within 60 days from
March 1, 1999. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to
dispose or direct the disposition of shares. Except as otherwise noted,
ownership is direct, and the named individuals and group exercise sole
voting and investment power over the shares of the Common Stock.
(2) In calculating the percentage ownership of each named individual and
the group, the number of shares outstanding includes any shares of the
Common Stock which the individual or the group has the right to acquire
within 60 days of March 1, 1999.
(3) Includes 9,500 shares Mr. Barney has the right to acquire pursuant to
the exercise of options.
(4) Includes 4,500 shares Mr. Kaplan has the right to acquire pursuant to
the exercise of options.
(5) Includes 67,500 shares Mr. Knauer has the right to acquire pursuant to
the exercise of options.
(6) Includes 19,500 shares Mr. Miller has the right to acquire pursuant to
the exercise of options.
(7) Includes 19,500 shares Mr. Miller has the right to acquire pursuant to
the exercise of options. Also includes 2,728 shares owned of record by
Williams, Caliri, Miller & Otley. Mr. Miller disclaims beneficial
ownership of all but 767 of the shares owned by Williams, Caliri,
Miller & Otley. Also includes 3,000 shares owned by Mr. Miller's wife
directly. Also includes 14,000 shares held by Mr. Miller as Trustee for
himself and others; Mr. Miller disclaims beneficial ownership of 7,000
of such shares in which others have a beneficial interest.
(8) Includes 187,278 shares Mr. O'Shea has the right to acquire pursuant to
the exercise of options. Also includes 7,663 shares owned by Mr.
O'Shea's wife. Mr. O'Shea disclaims beneficial ownership of his wife's
shares.
(9) Includes 19,500 shares Mr. Otley has the right to acquire pursuant to
the exercise of options. Also includes 34,724 shares owned by Mr.
Otley's wife. Mr. Otley disclaims beneficial ownership of his wife's
shares. Also includes 2,728 shares owned of record by Williams, Caliri,
Miller & Otley. Mr. Otley disclaims beneficial ownership of all but 767
of the shares owned by Williams, Caliri, Miller & Otley.
(10) Includes 45,000 shares Mr. Wojcik has the right to acquire pursuant to
the exercise of options.
(11) Includes 403,078 shares subject to options held by all directors and
executive officers as a group.
(c) CHANGES IN CONTROL: Except for the Merger Agreement and
related stock option agreement with Valley National Bancorp
dated December 17, 1998, 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.
Williams, Caliri Miller & Otley, of which Director Richard S. Miller
and Chairman of the Board Victor C. Otley, Jr. are principals, serves as the
Corporation's general counsel. The Corporation and its subsidiaries paid
$120,000 in legal fees to such firm during 1998. In addition, borrower customers
of the Bank paid $151,839 in legal fees to that firm in 1998 in connection with
loans made by the Bank. It is believed that the amounts paid to such firm are
reasonable and competitive. It is anticipated that during 1999, the Corporation
will continue to use the services of such firm, together with other law firms,
to handle the legal aspects of troubled loans, regulatory and corporate matters.
The Corporation provides a liability insurance policy for all its
officers and directors. Coverage is provided by a policy with a major insurance
company for $5 million per occurrence, with a standard deductible clause. The
policy also insures the Corporation against amounts paid by it to indemnify
directors and officers. The policy runs for a period of three years from July 1,
1996 to June 30, 1999 at a cost to the Corporation of $83,100.
67
<PAGE> 68
Directors and officers of the Corporation and their associates are
customers of and had transactions with the Bank during 1998, and it is expected
that they will continue such transactions in the future. All deposit accounts
and commitments comprising such transactions were made in the ordinary course of
business of the Bank on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons, and, in the opinion of management of the Corporation and the
Bank, do not involve more than the normal risks of collectibility or present
other unfavorable features.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
(1) Financial Statements. The following consolidated
financial statements are filed as a part of this
report in Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996
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.
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
NO. DESCRIPTION NUMBERED COPY
--- ----------- -------------
<S> <C> <C>
11 Statement to Computation of Per Share Earnings 71
21 Subsidiaries of the Registrant 72
27 Financial Data Schedule 73
</TABLE>
(b) REPORTS ON FORM 8-K. During the quarter ended December 31,
1998, the registrant filed one Current Report on Form 8-K
dated December 23, 1998, reporting a merger agreement with
Valley National Bancorp.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K
are filed as part of this Annual 0Report on Form 10-K.
(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.
68
<PAGE> 69
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 4, 1999 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 4,1999
- ------------------------------------------------
Mortimer J. O'Shea, Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Walter A. Wojcik, Jr. March 4,1999
- --------------------------------------------------
Walter A. Wojcik, Jr.
Treasurer
(Principal Financial and Accounting Officer)
/s/ Victor C. Otley, Jr. March 4,1999
- ---------------------------------------------------
Victor C. Otley, Jr.
Chairman of the Board
/s/ Erwin D. Knauer March 4,1999
- ---------------------------------------------------
Erwin D. Knauer, Director
Senior Vice President
/s/ Donald W. Barney March 4,1999
- ---------------------------------------------------
Donald W. Barney
Director
/s/ Louis S. Miller March 4,1999
- ---------------------------------------------------
Louis S. Miller
Director
/s/ Richard S. Miller March 4,1999
- ---------------------------------------------------
Richard S. Miller
Director
69
<PAGE> 70
EXHIBIT INDEX
PAGE IN
SEQUENTIAL
NO. DESCRIPTION NUMBERED COPY
--- ----------- -------------
11 Statement re Computation of Per Share Earnings 71
21 Subsidiaries of the Registrant 72
27 Financial Data Schedule 73
70
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------------------
WEIGHTED AVG. PER WEIGHTED AVG. PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $3,923,000 $3,205,000
Less: Preferred stock
dividends ................... -- --
Net Income Per Share - Basic:
Income available to common
shareholders ................ $3,923,000 8,119,839 $.48 $3,205,000 8,100,055 $.40
Effect of Dilutive Securities:
Options granted to employees .... 349,902 274,436
Options granted to nonemployee
directors ................... 40,024 35,386
Net Income Per Share - Diluted:
Income available to common
shareholders plus assumed
conversions ................. $3,923,000 8,509,765 $.46 $3,205,000 8,409,877 $.38
YEAR ENDED DECEMBER 31
---------------------------------------------
1996
------------------------------------------
WEIGHTED AVG. PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Income from continuing operations $3,056,000
Less: Preferred stock
dividends.................... (12,000)
Net Income Per Share - Basic:
Income available to common
shareholders ................ $3,044,000 8,096,961 $.38
Effect of Dilutive Securities:
Options granted to employees .... 84,783
Options granted to nonemployee
directors ................... 16,312
Net Income Per Share - Diluted:
Income available to common
shareholders plus assumed
conversions ................. $3,044,000 8,198,056 $.37
</TABLE>
71
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Ramapo Financial Corporation
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF PERCENTAGE
SUBSIDIARIES(1) INCORPORATION OWNERSHIP
- --------------- ------------- ---------
<C> <C>
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%
</TABLE>
- ----------------------
(1) Except for Bancorps' International Trading Corporation, which is
accounted for using the equity method of accounting, the assets,
liabilities and operations of the subsidiaries are included in the
consolidated financial statements contained in Item 8 hereof. Unless
otherwise indicated, all subsidiaries are subsidiaries of the Bank.
(2) Subsidiary of the Corporation.
72
<TABLE> <S> <C>
<ARTICLE> 9
<CAPTION>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,127,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,707,000
<INVESTMENTS-CARRYING> 49,480,000
<INVESTMENTS-MARKET> 49,891,000
<LOANS> 169,799,000
<ALLOWANCE> 4,773,000
<TOTAL-ASSETS> 337,762,000
<DEPOSITS> 295,460,000
<SHORT-TERM> 4,536,000
<LIABILITIES-OTHER> 3,744,000
<LONG-TERM> 0
0
0
<COMMON> 8,114,000
<OTHER-SE> 25,908,000
<TOTAL-LIABILITIES-AND-EQUITY> 337,762,000
<INTEREST-LOAN> 14,199,000
<INTEREST-INVEST> 6,821,000
<INTEREST-OTHER> 617,000
<INTEREST-TOTAL> 21,637,000
<INTEREST-DEPOSIT> 7,294,000
<INTEREST-EXPENSE> 7,554,000
<INTEREST-INCOME-NET> 14,083,000
<LOAN-LOSSES> 275,000
<SECURITIES-GAINS> 1,000
<EXPENSE-OTHER> 9,956,000
<INCOME-PRETAX> 6,153,000
<INCOME-PRE-EXTRAORDINARY> 3,923,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,923,000
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
<YIELD-ACTUAL> 4.76
<LOANS-NON> 444,000
<LOANS-PAST> 59,000
<LOANS-TROUBLED> 1,260,000
<LOANS-PROBLEM> 41,000
<ALLOWANCE-OPEN> 4,628,000
<CHARGE-OFFS> 1,275,000
<RECOVERIES> 1,145,000
<ALLOWANCE-CLOSE> 4,773,000
<ALLOWANCE-DOMESTIC> 4,773,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
