UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NO.:0-18187
BANKERS CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3257724
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
210 Smith Street, Perth Amboy, New Jersey 08861
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 442-4100
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
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(Title of class)
The Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 /X /.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $244,253,528 and is based upon the last sales price as
quoted on NASDAQ on March 3, 1997.
The Registrant had 12,378,184 shares of Common Stock outstanding as of
March 3, 1997.
<PAGE>
PART I
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ITEM 1. BUSINESS ........................................................... 4
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(A) GENERAL ....................................................... 4
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(B) PROPOSED ACQUISITION BY SOVEREIGN BANCORP, INC ................ 4
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(C) STOCK REPURCHASE PLAN ......................................... 5
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(D) NARRATIVE DESCRIPTION OF BUSINESS ............................. 5
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(i) GENERAL................................................. 5
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(ii) MARKET AREA............................................. 5
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(iii) LENDING ACTIVITIES...................................... 5
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(a) GENERAL............................................. 5
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(b) NON-PERFORMING ASSETS............................... 8
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(iv) INVESTMENT ACTIVITIES................................... 11
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(a) GENERAL............................................. 11
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(b) SHORT-TERM INVESTMENTS.............................. 11
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(c) SECURITIES AVAILABLE FOR SALE....................... 11
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(d) INVESTMENT SECURITIES - HELD TO MATURITY............ 11
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(e) MORTGAGE AND ASSET-BACKED SECURITIES -
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HELD TO MATURITY.................................... 11
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(v) DEPOSITS................................................ 13
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(vi) SHORT-TERM BORROWINGS................................... 13
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(vii) ACTIVITIES OF SUBSIDIARY COMPANIES...................... 13
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(viii) COMPETITION............................................. 13
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(ix) PERSONNEL............................................... 13
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(x) REGULATION AND SUPERVISION.............................. 14
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(a) GENERAL............................................. 14
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(b) NEW JERSEY LAW...................................... 14
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(c) THE FINANCIAL INSTITUTIONS REFORM,
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RECOVERY AND ENFORCEMENT ACT OF 1989................ 14
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(d) FEDERAL DEPOSIT INSURANCE CORPORATION
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IMPROVEMENTS ACT OF 1991............................ 14
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(e) INSURANCE OF DEPOSIT ACCOUNTS....................... 16
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(f) REGULATORY CAPITAL REQUIREMENTS..................... 16
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(g) LOANS-TO-ONE-BORROWER LIMITATIONS................... 17
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(h) COMMUNITY REINVESTMENT ACT.......................... 17
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(i) FEDERAL RESERVE SYSTEM.............................. 17
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(j) ACQUISITION OF THE CORPORATION...................... 18
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(k) SECURITIES EXCHANGE ACT 1934........................ 18
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(xi) FEDERAL AND STATE TAXATION.............................. 19
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(a) FEDERAL INCOME TAXATION............................. 19
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(b) STATE TAXATION...................................... 20
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ITEM 2. PROPERTIES.......................................................... 20
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS................................................... 22
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 22
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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AND RELATED STOCKHOLDER MATTERS................................ 22
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ITEM 6. SELECTED FINANCIAL DATA............................................. 23
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 24
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 33
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 63
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 63
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ITEM 11. EXECUTIVE COMPENSATION............................................. 65
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN
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BENEFICIAL OWNERS AND MANAGEMENT............................... 70
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 71
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT
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SCHEDULES AND REPORTS ON FORM 8-K.............................. 72
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<PAGE>
.
PART I
ITEM 1. BUSINESS
(A) GENERAL
On March 23, 1990, Bankers Corp. (the "Corporation") completed its public
offering of 14,269,200 shares (restated to reflect the 10% stock dividend
declared in November 1992, the 2 for 1 stock split declared in October 1993 and
the 20% stock dividend declared in June 1994) of its common stock and acquired
Bankers Savings (the "Bank") as a part of the Bank's conversion from mutual to
stock form. The Corporation was incorporated under Delaware law on October 23,
1989. The reincorporation of Bankers Corp. from the state of Delaware to the
state of New Jersey was approved by the stockholders at the Annual Meeting on
April 30, 1993 and was completed during 1993. The Corporation is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"BHCA") and is subject to regulation and supervision by the Board of Governors
of the Federal Reserve System ("FRB"). The Corporation does not transact any
material business other than through its subsidiary, the Bank.
The Bank is a New Jersey-chartered savings bank, organized in 1869 as Perth
Amboy Savings Institution. The Bank's deposits are insured by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC"). In 1987,
the Bank changed its name to Bankers Savings. The Bank's main office and
administrative offices are located in Perth Amboy, New Jersey. The Bank conducts
its business through fifteen retail banking offices in Middlesex, Monmouth and
Ocean Counties, New Jersey. The Bank joined the MAC network during June of 1993.
The Bank's primary market area for its deposit gathering consists of Middlesex,
Monmouth and Ocean Counties and certain municipalities in the contiguous county
of Union, New Jersey. The Bank's lending activities are predominately conducted
in central and southern New Jersey. The Bank invests its funds in mortgage
loans, which are predominately secured by one- to four-family owner-occupied
real estate, home equity credit lines, other consumer loans and securities. At
December 31, 1996, the Corporation had total assets of $2.5 billion, deposits
(including mortgage escrow deposits) of $1.6 billion and stockholders' equity of
$192.9 million.
(B) PROPOSED ACQUISITION BY SOVEREIGN BANCORP, INC.
On February 5, 1997, the Corporation entered into an Agreement and Plan of
Merger (the "Merger Agreement"), with Sovereign Bancorp, Inc., a Pennsylvania
corporation ("Sovereign"). The Merger Agreement provides, among other things,
that the Corporation will be merged with and into Sovereign, with Sovereign
being the surviving corporation. Pursuant to the Merger Agreement, each issued
and outstanding share of common stock of the Corporation shall be converted into
and become a right to receive $25.50 in Sovereign common stock, except for
shares of the Corporation's common stock held directly or indirectly by
Sovereign or a subsidiary of Sovereign (other than shares held in trust,
managed, custodial or nominee accounts, held by investment companies for which
an affiliate of Sovereign acts as investment adviser or held in satisfaction of
a debt previously contracted), which shall be canceled.
The price will stay fixed at $25.50 in Sovereign common stock per share of the
Corporation's common stock if Sovereign's average stock price remains between
$11.00 and $16.50 per share (the "collars") during a 15-day pricing period prior
to the closing of the transaction. If Sovereign's average stock price falls
below $11.00 per share during the pricing period prior to closing, the
Corporation's shareholders shall receive a fixed rate of 2.318 shares of
Sovereign common stock for each share of the Corporation's common stock.
Conversely, if Sovereign's average stock price is higher than $16.50 per share
during the pricing period prior to closing, the Corporation's shareholders shall
receive a fixed rate of 1.545 shares of Sovereign common stock for each share of
the Corporation's common stock. The collars and the maximum and minimum exchange
ratio will be adjusted for Sovereign's 6-for-5 stock dividend declared January
16, 1997 and payable March 14, 1997 and will be further adjusted for subsequent
stock dividends and splits. The Merger Agreement contains customary
anti-dilution provisions.
The Corporation has the right to terminate the Merger Agreement if the average
stock price of Sovereign (as defined in the Merger Agreement) falls below $10.31
per share and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar financial institutions, unless Sovereign delivers
to the Corporation's shareholders Sovereign shares having a minimum value of
$23.90 per share of the Corporation's common stock.
Consummation of the merger is subject to certain customary conditions, including
approval and adoption of the Merger Agreement by the Corporation's stockholders,
approval of the issuance of shares of Sovereign's common stock by Sovereign's
stockholders and the approval of the Office of Thrift Supervision, FRB and the
appropriate
4
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federal regulatory authority under section 18 of the Federal Deposit Insurance
Act, as amended. The merger is expected to be consummated during the fourth
quarter of 1997.
In connection with the Merger Agreement, the Corporation and Sovereign also
entered into a Stock Option Agreement, dated as of February 5, 1997, pursuant to
which the Corporation granted Sovereign an option to purchase up to 2,463,258,
or 19.9%, of the Corporation's issued and outstanding shares of common stock,
upon the terms and conditions stated therein.
The Corporation's Annual Meeting of Stockholders has been postponed to coincide
with the meeting of stockholders to approve the Merger Agreement, which is
expected to occur during the third quarter of 1997.
(C) STOCK REPURCHASE PLAN
During February 1994, a program to repurchase up to 720,000 shares (restated for
the 20% stock dividend declared in June 1994) or approximately 5% of the
Corporation's common stock was announced, of which 396,220 were available to be
purchased under such program at December 31, 1995. On February 18, 1996, the
Corporation's Board of Directors authorized the repurchase of additional shares
for a total to be repurchased of up to one million shares of the Corporations's
common stock. The number of shares repurchased under these plans during 1996 was
620,913. There will be no further repurchases of common stock due to the signed
definitive Merger Agreement with Sovereign. See note 2 of Notes to Consolidated
Financial Statements contained in Item 8. "Financial Statements and
Supplementary Data" of this report.
(D) NARRATIVE DESCRIPTION OF BUSINESS
(i) GENERAL
The Corporation is a bank holding company whose only active subsidiary is the
Bank. The Bank's revenues are derived principally from interest income on loans,
investments, mortgage and asset-backed securities, and to a much lesser extent,
fees on loans and fees for selected banking services. The Bank's sources of
funds are: deposits, scheduled amortization and prepayments of loans, sales of
loans available for sale, borrowings, maturities of investment securities and
other funds provided by operations.
The Bank is a community-oriented, financial institution serving its market area
with a wide selection of residential loans and retail financial services,
emphasizing customer service. Management believes that the Bank's reputation for
customer service is a significant competitive advantage in attracting and
retaining customers.
(ii) MARKET AREA
Traditionally, the Bank's market area consisted of Middlesex County and certain
municipalities in contiguous Union County, New Jersey. The Bank expanded its
market area through the acquisition, during 1990 and 1991, of six retail branch
offices in Monmouth and Ocean Counties. In February 1991, the Bank opened a new
branch in Toms River, Ocean County. On July 31, 1993, the Bank acquired $15.3
million in deposit liabilities from Provident Savings Bank located in Red Bank,
New Jersey. In 1993 the Bank's branch in Freehold was relocated next to a major
supermarket and in 1996, the branch office in Toms River was relocated to a
newly built medical office complex. During 1994, the Bank opened a new office in
Manchester further increasing its presence in Ocean County. In March 1996, the
Bank opened a branch office inside a large newly built supermarket in Old
Bridge, New Jersey.
The Bank's market area is a short distance from the New York City Boroughs of
Staten Island and Manhattan. It is in close proximity to Newark International
Airport and major rail transportation lines. New Jersey's major highways, the
New Jersey Turnpike, Garden State Parkway, Interstate 287 and U.S. Highway #1,
intersect within the Bank's market area.
(iii) LENDING ACTIVITIES
(a) GENERAL
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank offers a variety of loans in
order to serve the credit needs of customers in its community. The Bank
emphasizes the origination and purchase of adjustable rate one- to four-family
mortgage loans for retention in its own portfolio. The Bank offers first
mortgage loans secured by one- to four-family residences, including townhouse
and condominium units. Loan originations are generally obtained from existing or
past customers, members of the local communities in the Bank's primary market
area and third party originators. One- to four-family residential mortgage loans
are generally underwritten according to FNMA/FHLMC guidelines. In addition, the
Bank offers programs with modified income and asset
5
<PAGE>
verification. These programs are priced to accommodate the inherent additional
risk of flexible underwriting. The Bank originates adjustable rate mortgage
("ARM") loans solely for its portfolio. The Bank also originates fixed rate
mortgage loans which are sold servicing retained, to FHLMC or other investors.
An origination fee of up to 3.0% is generally charged on loans. All one- to
four-family mortgage loan applications are reviewed by a Loan Officer.
Originated mortgage loans in the Bank's portfolio generally include due-on-sale
clauses which provide the Bank with the contractual right to declare the loan
immediately due and payable in the event that the borrower transfers ownership
of the property without the Bank's consent. It is the Bank's policy to enforce
due-on-sale provisions.
Since the early 1980's, the Bank has emphasized the origination of ARM loans
secured primarily by owner-occupied residences for retention in its portfolio.
At December 31, 1996, over 90% of the Bank's one- to four-family residential
mortgage loans consisted of ARM loans. ARM loans are made for terms up to 30
years. The Bank offers an ARM loan secured by owner-occupied residences with a
conversion option whereby the borrower may convert the loan into a fixed-rate
loan. Upon conversion to a fixed rate, the Bank classifies these loans as
held-for-sale. ARM loans with a conversion option are originated with loan to
value ratios of up to 95% of the appraised value of the property securing the
loan, provided that private mortgage insurance is obtained on loan amounts in
excess of 80% of such appraised value. ARM loans without a conversion option are
originated with loan to value ratios of up to 90% of the appraised value of the
property securing the loan without private mortgage insurance and are priced to
accommodate the additional risk of not obtaining private mortgage insurance.
Substantially all of the Bank's ARM loans have interest rates which adjust every
year, based upon a spread above the one-year U.S. Treasury Securities Index,
adjusted to constant maturity. The Bank's ARM loans are subject to limitations
on interest rate increases of 2.0% per adjustment period and may not exceed a
predetermined lifetime cap rate. The Bank also offers ARM loans that have a
fixed interest rate for 3 to 5 years and then adjust annually. The Bank also
offers variable rate loans secured by non-owner-occupied properties, which
adjust based upon a spread above the one-year U.S. Treasury Securities Index,
adjusted to constant maturity. These loans are made in amounts of up to $500,000
and for terms of up to 30 years. The Bank makes such loans up to 75% of the
appraised value of the secured property. For the year ended December 31, 1996,
the Bank originated approximately $150 million of residential ARM loans. The
Bank originates ARM loans at an introductory rate, which is less than the
fully-indexed interest rate. The introductory rate remains in effect for one
year.
The retention of ARM loans, as opposed to fixed-rate residential loans, in the
Bank's loan portfolio helps reduce the Bank's exposure to increases in interest
rates. However, ARM loans generally pose credit risks different from the risks
inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrowers rise, thereby increasing the potential for
default. In order to minimize risks, the borrowers of one-year ARM loans are
qualified at 2.0% above the fully-indexed rate.
The volume and types of ARM loans originated by the Bank are affected by such
market factors as the level of interest rates, competition, consumer preferences
for ARM versus fixed-rate loans and the availability of funds. Although the Bank
will continue to offer ARM loans, there can be no assurance that, in the future,
the Bank will be able to originate a sufficient volume of adjustable rate loans
to increase or maintain the proportion that these loans currently bear to total
loans.
The Bank's fixed-rate mortgage loans are currently originated with terms of 15
or 30 yrs.. Fixed-rate mortgage loans are offered only on owner-occupied
residences. Interest rates charged on fixed-rate loans are competitively priced
on a regular basis based on market conditions. The Bank originates fixed-rate
loans with loan to value ratios of up to 95% of the appraised value of the
property securing the loan, provided that private mortgage insurance is obtained
on loan amounts in excess of 80% of such appraised value. The Bank generally
originates its fixed-rate mortgage loans in accordance with FHLMC standards. For
the year ended December 31, 1996, the Bank originated $2.1 million of fixed-rate
one- to four-family residential mortgage loans.
The Bank also purchases one- to four-family, primarily owner-occupied, ARM loans
in the secondary market. These loans meet FNMA/FHLMC underwriting standards with
the exception of loan size limits. Customary due diligence is performed on all
loan package purchases.
The Bank also originates home equity lines of credit, which are secured by one-
to four-family, owner-occupied primary residences. These loans are originated as
variable-rate loans with interest rates of up to 2.75% above the published prime
rate, subject to a lifetime cap of 16%. Borrowers are qualified for home equity
lines of credit based on 4% over the initial rates. Home equity lines of credit
are originated with loan to value ratios of up to 90% of the appraised value of
the property securing the loan, less existing liens. Home equity lines of credit
are made in amounts of up to $100,000 and for terms of 15 years.
6
<PAGE>
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Loans secured by multi-family
and commercial real estate totaled $50.5 million, or 3.0% of the Bank's total
loans at December 31, 1996. Multi-family and commercial real estate loans are
generally originated with loan to value ratios of up to 70% of the appraised
value of the property securing the loan. Such appraised value is determined by
an independent appraiser previously approved by the Bank. The Bank also obtains
personal guarantees. The Bank currently originates multi-family and commercial
real estate loans with adjustable rates based on a spread above either the
published prime rate or a U.S. Treasury Securities Index, adjusted to constant
maturity and with maturities of three to five years which typically require
principal payments based on a 20 to 25 year amortization period. The Bank's
multi-family and commercial real estate loans are permanent loans secured by
improved property such as apartment buildings, small office buildings, multi-use
buildings, retail stores and other non-residential buildings. The Bank limits
its lending to properties within its primary lending area.
Loans secured by multi-family and commercial real estate properties generally
involve a greater degree of risk than residential mortgage loans. Because the
payments on these loans are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks and currently restricts such loans to its
primary market area.
COMMERCIAL BUSINESS LENDING. The Bank also makes commercial business loans to
businesses located in the Bank's primary market area. The Bank intends to
increase its level of non-mortgage commercial and small business lending over
the next few years to fulfill its community lending requirements. Commercial
loans include commercial lines of credit, installment loans and medium term
loans. Commercial business loans may be unsecured or secured by inventory,
accounts receivable or vehicles. Commercial business loans carry adjustable
interest rates based on a spread above the published prime rate. Personal
guarantees are obtained on loans to closely held companies.
CONSTRUCTION LENDING. In the area of real estate construction lending, loans
are made primarily for residential and apartment construction. Loan to value
ratios on construction loans are limited to 70%. As of December 31, 1996, $1.2
million, or 0.1% of the banks total loans, were in this category.
CONSUMER LENDING. Consumer loans, which amounted to $7.0 million, or 0.4% of
total loans receivable, at December 31, 1996, consist primarily of auto loans
and unsecured personal loans.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. All loans originated by the Bank
and secured by real estate must be reviewed by the Bank's Board of Directors.
Loan requests from $500,000 to $1,000,000 require the approval of the President
and the Senior Lending Officer. All loan requests over $1,000,000 require
approval of the Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information is verified and, if necessary, additional financial
information is requested. An appraisal of the real estate intended to secure the
proposed loan is required and is currently performed by an independent appraiser
designated and approved by the Board of Directors. The Bank requires title
insurance on all first mortgage loans. Borrowers must also obtain hazard
insurance and flood insurance, as required, prior to closing. Borrowers are
generally required to include 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, hazard insurance
premiums and private mortgage insurance premiums, if required.
7
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Of Of Of Of Of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One to four-family:
Adjustable rate ............. $1,531,731 91.9% $1,176,776 89.3% $1,073,821 87.7% $ 954,788 85.1% $ 827,344 81.0%
Fixed Rate .................. 26,155 1.5% 31,978 2.4% 35,527 2.9% 52,218 4.7% 82,976 8.1%
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Total one to four-family ...... 1,557,886 93.4% 1,208,754 91.7% 1,109,348 90.6% 1,007,006 89.8% 910,320 89.1%
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Multi-family and commercial
real estate ................. 50,525 3.0% 56,143 4.3% 57,100 4.7% 53,565 4.8% 47,099 4.6%
Construction .................. 1,157 0.1% 1,880 0.1% 4,070 0.3% 2,782 0.2% 4,212 0.4%
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Total Mortgage loans .......... 1,609,568 96.5% 1,266,777 96.1% 1,170,518 95.6% 1,063,353 94.8% 961,631 94.1%
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Home equity loans and credit lines 50,920 3.1% 43,846 3.3% 45,990 3.8% 48,790 4.3% 50,282 4.9%
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Consumer and other loans:
Student ....................... 97 0.0% 140 0.0% 182 0.0% 1,558 0.1% 1,751 0.2%
Secured and unsecured ......... 6,913 0.4% 7,442 0.6% 7,710 0.6% 8,275 0.8% 8,275 0.8%
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Total Consumer and other loans 7,010 0.4% 7,582 0.6% 7,892 0.6% 9,833 0.9% 10,026 1.0%
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Total loans ................... 1,667,498 100% 1,318,205 100% 1,224,400 100.0% 1,121,976 100.0% 1,021,939 100.0%
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Net premiums on loans purchased... 5,253 3,932 5,622 5,186 3,968
Less: Deferred fees.............. 517 741 1,022 845 1,521
Allowance for loan losses.. 6,596 8,137 8,145 8,898 10,515
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Net Loans......................... $1,665,638 $1,313,259 $1,220,855 $1,117,419 $1,013,871
====================================================================================================================================
</TABLE>
The following table shows the approximate maturities of selected loans at
December 31, 1996. The loans are segregated between those which are at
predetermined interest rates and those at adjustable interest rates.
<TABLE>
<CAPTION>
Over One Year
(dollars in thousands) One Year or Less Through Five Years Over Five Years Total
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<S> <C> <C> <C> <C>
Loan Categories:
Commercial, financial &
agricultural ........................ $ 380 $ 0 $ 0 $ 380
Real Estate construction .................. 1,157 0 0 1,157
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TOTAL ............................... $1,537 $ 0 $ 0 $1,537
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Amounts of Loans Based Upon:
Predetermined interest rates ........ $ 367 $ 0 $ 0 $ 367
Floating or Adjustable interest
rates ............................... 1,170 0 0 1,170
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TOTAL ............................... $1,537 $ 0 $ 0 $1,537
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) NON-PERFORMING ASSETS
Management conducts regular review and follow-up of all loan delinquencies. When
a borrower fails to make a payment on a loan, the Bank will take steps to have
the borrower cure the delinquency and restore the loan to current status. The
Bank commences collection procedures once a loan payment is 15 days past due. If
a delinquency is not cured through the Bank's normal collection procedures, the
Bank will institute measures after 120 days to enforce its remedies resulting
from the default, including, in the case of mortgage loans, commencing a
foreclosure action. A summary analysis of all delinquencies is reviewed monthly
by the Bank's Board of Directors.
At December 31, 1996, non-performing assets were $29.0 million, or 1.18% of the
total assets compared to $32.5 million, or 1.71% at December 31, 1995.
Non-performing assets include non-accrual loans, loans over 90 days delinquent
still accruing interest and other real estate owned ("OREO"). OREO consists of
properties acquired through foreclosure.
8
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994 1993 1992
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Non-accrual loans............................$ 21,345 $ 24,947 $ 29,417 $ 32,513 $ 35,501
Loans 90 days or more past due and
still accruing.......................... 3,014 1,446 1,839 2,207 3,498
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Total non-performing loans.......... 24,359 26,393 31,256 34,720 38,999
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Other Real Estate Owned................. 5,267 6,407 5,313 6,744 3,079
Less allowance for other real
estate owned........................... 605 350 602 935 300
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Total other real estate owned........... 4,662 6,057 4,711 5,809 2,779
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Total non-performing assets.......$ 29,021 $ 32,450 $ 35,967 $ 40,529 $ 41,778
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Non-performing assets to total assets....... 1.18% 1.71% 2.05% 2.50% 2.77%
Non-performing loans to total loans......... 1.46% 2.00% 2.55% 3.08% 3.81%
</TABLE>
The non-accrual category includes loans on which income under the accrual method
has been reserved with subsequent interest payments credited to income as
received. Loans are generally designated as non-accrual when they become 120
days past due or when certain factors indicate reasonable doubt as to the
collectibility of principal and interest. Gross income for the year 1996 would
have been increased by $2.3 million had the non-accrual loans been current
during the year.
The decrease in non-performing assets, beginning in 1993, was the result of the
reduction of incidences of loans moving to non-performing, an improvement in the
New Jersey legal process, which has shortened the time required to complete
foreclosure actions, and an improved market for selling OREO.
The following table provides a further breakdown of the Bank's non-performing
loans for the years ended 1996 and 1995:
(dollars in thousands) December 31,
Mortgage Loans: 1996 1995
---- ----
1-4 family residential $22,880 $23,455
Construction 0 578
Commercial and multi-family 1,470 2,326
Consumer and other loans 9 34
Total non-performing loans $24,359 $26,393
======= =======
Losses on loans are charged to the allowance for loan losses. Additions to this
allowance are made by recoveries of loans previously charged off and by a
provision charged to expense. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible. The determination of the balance of the allowance for loan
losses is based on an analysis of the loan portfolio, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate allowance. Additions to the allowance may be necessary
based on changes in the economic conditions and other factors or as various
regulatory agencies may require after an examination based on their judgement
and the information available to them at the time of the examination. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and note 8 of Notes to Consolidated Financial Statements contained
in Item 8. "Financial Statements and Supplementary Data" of this report.
At December 31, 1996, management was unaware of any potential problem loans on
which the collection of principal and interest may be doubtful other than those
included in the prior two tables.
9
<PAGE>
The following table shows an analysis of the allowances for loan losses for the
years indicated:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 8,137 $ 8,145 $ 8,898 $ 10,515 $ 5,842
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 3,950 5,500 3,970 2,040 5,600
- ---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Construction loans --- --- --- --- 181
1-4 Family mortgage loans 4,323 5,023 4,375 3,601 735
Multi-family and commercial
real estate loans 1,160 586 236 93 ---
Home equity loans 146 20 48 10 9
Other consumer loans 39 36 74 28 15
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs 5,668 5,665 4,733 3,732 940
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Mortgage loans 171 157 10 70 ---
Other consumer loans 6 --- --- 5 13
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 177 157 10 75 13
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 6,596 $ 8,137 $ 8,145 $ 8,898 $ 10,515
- ---------------------------------------------------------------------------------------------------------------------------
Allowances for loan losses
to total outstanding loans at end
of period 0.40% 0.62% 0.67% 0.79% 1.03%
Ratio of net charge-offs to average
loans outstanding 0.36% 0.43% 0.39% 0.34% 0.09%
</TABLE>
The following table sets forth the allocation of the allowances for loan losses
at the dates indicated by category of loans. The amount allocated on the
following table to any category cannot be interpreted as an indication of
expected future charge offs in that category. The percentage of loans is based
upon the classification of loans shown on page 8 of this report.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
% of Loans % of Loans % of Loans % of Loans % of Loans
to Total to Total to Total to Total to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for losses allocated to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-mortgage loans $6,207 96.4% $7,884 96.0% $7,573 95.3% $8,340 94.5% $10,191 93.7%
Real estate-construction loans 12 0.1% 13 0.1% 225 0.3% 236 0.2% 45 0.4%
Home equity loans......... 354 3.1% 227 3.3% 332 3.8% 301 4.4% 256 4.9%
Other consumer loans......... 23 0.4% 13 0.6% 15 0.6% 21 0.9% 23 1.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $6,596 100.0% $8,137 100.0% $8,145 100.0% $8,898 100.0% $10,515 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
(iv) INVESTMENT ACTIVITIES
(a) GENERAL
The Bank's Board of Directors establishes the investment policy of the Bank.
This policy dictates that investment decisions will be made based on the safety
of the security, liquidity requirements of the Bank and potential return on the
securities. The Board of Directors delegates authority to certain executive
officers to carry out the Bank's investment policy. The Chief Executive Officer
and Chief Financial Officer meet on an as-needed basis to make investment
decisions.
Securities classified as held to maturity are stated at amortized cost (unpaid
principal in the case of mortgage-backed securities), adjusted for amortization
of premiums and accretion of discounts, as the Corporation has the intent and
ability to hold these securities until maturity. Premiums and discounts on these
securities are recognized in interest income using the level-yield method over
the period to maturity, adjusted in the case of mortgage-backed securities for
anticipated prepayments. Marketable equity securities, bond and other debt and
mortgage-backed securities to be held for indefinite periods of time, including
securities that management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk or other similar factors are classified as available for sale
and recorded at estimated fair value.
Unrealized gains or losses on trading securities are included in the
determination of net income. At December 31, 1996, market value adjustments
amounted to an unrealized loss of $901,000. The net unrealized loss included as
a separate component of stockholders' equity is net of deferred taxes of
$333,000. Management does not consider any of the securities available for sale
permanently impaired at December 31, 1996.
(b) SHORT-TERM INVESTMENTS
Short-term investments are used as an alternative to cash and federal funds sold
to meet daily or short-term liquidity and investment needs. During 1996 and
1995, short-term investments consisted primarily of securities and loans
purchased under agreements to resell with terms exceeding one day. There were no
short-term investments as of December 31, 1996 or 1995.
(c) SECURITIES AVAILABLE FOR SALE
Securities available for sale are purchased as available for sale or are
acquired through the securitization of loans available for sale. Securities that
are purchased are used for short-term investment purposes where the total return
during the holding period is anticipated to exceed alternative short-term
investments. See note 5 of Notes to Consolidated Financial Statements contained
in Item 8. "Financial Statements and Supplementary Data" of this report.
(d) INVESTMENT SECURITIES - HELD TO MATURITY
Investment securities with short to intermediate fixed maturities are purchased
primarily to satisfy the Bank's liquidity needs and to provide a return on
residual funds after lending activities. Investments may be in bonds provided
that they are all of bank qualified investment grade pursuant to the Bank's
written investment policy. A goal of the Bank's investment policy is to minimize
interest rate risk wherever possible. See note 6 of Notes to Consolidated
Financial Statements contained in Item 8. "Financial Statements and
Supplementary Data" of this report.
(e) MORTGAGE AND ASSET-BACKED SECURITIES - HELD TO MATURITY
The Bank currently invests in early tranche collateralized mortgage obligations
("CMOs") with anticipated average lives ranging from 2 years to 5 years or with
adjustable rates. It also currently invests in participation certificates
("PC's") in pools of adjustable rate mortgage loans. See note 7 of Notes to
Consolidated Financial Statements contained in Item 8. "Financial Statements and
Supplementary Data" of this report.
11
<PAGE>
The following table sets forth the book value of the securities portfolio at the
periods indicated.
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities Available For Sale:
US Treasury Securities............................................ $ 34,181 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Securities-Held to Maturity:
US Treasury Securities and US Government Agency................... 500 25,469 26,539
Corporate......................................................... 24,486 40,382 54,597
Municipals........................................................ 975 980 1,135
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities-Held to Maturity................... $ 25,961 $ 66,831 $ 82,271
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage and Asset-Backed Securities-Held to Maturity:
Certificates of participation in pools of residential
mortgage loans.................................................. 337,668 293,563 196,314
Collateralized mortgage obligations (includes
Remics) and asset-backed securities............................... 343,850 167,011 199,884
- ---------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-backed and Asset-backed
Securities-Held to Maturity................................. 681,518 460,574 396,198
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Portfolio............................. $ 741,660 $527,405 $478,469
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT PORTFOLIO
The table below sets forth certain information regarding the book value, average
yields and maturities of the investment portfolio at December 31, 1996.
<TABLE>
<CAPTION>
=============================================================================================
At December 31, 1996
1 Year or Less 1 to 5 Years 5 to 10 Years After 10 Years Total
---------------------------------------------------------------------------------------------
Book Avg Book Avg Book Avg Book Avg Book Avg
Value Yield Value Yield Value Yield Value Yield Value Yield
=============================================================================================
(dollars in thousands)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale.......... $ --- --- $34,181 5.43% $--- --- $ --- --- $34,181 5.43%
US treasury securities, US Government
agency and Corp. obligations......... 500 7.35% --- --- --- --- --- --- 500 7.35%
Corporate........................... 20,404 7.05% 2,944 6.67% 200 6.03% 938 6.97% 24,486 6.99%
Municipals (1)......................... --- --- --- --- --- --- 975 6.18% 975 6.18%
Certificates of participation in pools
of residential mortgage loans........ 1,707 9.07% 12 7.50% 424 6.69% 335,525 6.78% 337,668 6.79%
Collateralized mortgage obligations and
asset backed securities.............. --- --- 8,336 7.35% --- --- 335,514 6.99% 343,850 7.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Portfolio......... $22,611 7.21% $45,473 5.86% $624 6.48% $672,952 6.88% $741,660 6.83%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) No tax equivalent adjustments have been made.
Based on historical experience, management expects that mortgage and
asset-backed securities will be prepaid significantly in advance of their stated
maturities reflected in the above table.
12
<PAGE>
At December 31, 1996, the Bank held CMO's having an aggregate book value of
$38.3 million which represent investments in separate trusts containing pools of
loans serviced by Prudential Home Mortgage Company or one of its subsidiaries.
These securities have an aggregate market value of $38.0 million and are in
excess of 10% of the Corporation's stockholders' equity.
(v) DEPOSITS
The Bank offers a variety of deposit accounts having a range of interest rates
and terms. The Bank's deposits consist of savings accounts, NOW/Super NOW, money
market, checking accounts and time deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in prevailing interest
rates and competition. The Bank's deposits are obtained primarily from the areas
in which its banking offices are located. Management determines the Bank's
deposit rates based upon market conditions and local competition. The Bank does
not use brokers to obtain deposits, relying primarily on customer service and
long-standing relationships with customers to attract and retain these deposits.
Time deposits in excess of $100,000 are not actively solicited by the Bank.
The average balance of deposits and the average rates paid thereon are
summarized on page 27 of this report.
At December 31, 1996, the Bank had approximately $66.9 million outstanding in
market-rate certificates of deposit in amounts of $100,000 or more maturing as
follows:
(dollars in thousands)
Three months or less $26,317
Over three months through six months 12,746
Over six months through one year 19,047
Over one year 8,754
Total $66,864
=======
(vi) SHORT-TERM BORROWINGS
The Bank engages in short-term borrowings to cover normal cash flow and for
investment opportunities including short-term arbitrages. For borrowings of a
term less than a month, the Bank utilizes one of its lines of credit which, in
the aggregate, amounted to $45.0 million. For longer term (one to twelve month)
borrowings, the Bank engages in borrowing transactions involving securities sold
under agreements to repurchase. These borrowings are entered into with
nationally recognized securities dealers. The securities underlying the
agreements are delivered to the dealers who arrange the transactions. Securities
sold under agreements to repurchase totaled $603.1 million at December 31, 1996.
See note 11 of Notes to Consolidated Financial Statements contained in Item 8.
"Financial Statements and Supplementary Data" of this report.
(vii) ACTIVITIES OF SUBSIDIARY COMPANIES
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned
subsidiary, PASI Development, Inc.(PASI). PASI has been inactive since 1987.
(viii)COMPETITION
The Bank faces significant competition both in making loans and in attracting
deposits. The Bank's competition for loans comes principally from commercial
banks, savings and loan associations and savings banks, mortgage banking
companies (many of which are subsidiaries of major commercial banks), insurance
companies and other institutional lenders. Its most direct competition for
deposits has historically come from savings and loan associations, savings
banks, commercial banks, credit unions and other financial institutions.
Competition may increase as a result of interstate banking laws now in effect or
that may be in effect in the future. The Bank faces additional competition for
deposits from short-term money market mutual funds and other corporate and
government securities funds. Many of the Bank's competitors, whether traditional
financial institutions or otherwise, have much greater financial and marketing
resources than those of the Bank.
The Bank competes for loans principally through low interest rates and loan
fees, and the efficiency and quality of service it provides borrowers through
the automation of the lending operation. The Bank has placed major emphasis on
superior service and timely responses to loan applications. The Bank competes
for deposits through pricing and the offering of a variety of deposit accounts.
(ix) PERSONNEL
At December 31, 1996, the Bank had 359 employees, of whom 205 were full-time and
154 were part-time. The employees are not represented by a collective bargaining
unit, and the Bank considers its relationship with its employees to be
excellent.
13
<PAGE>
(x) REGULATION AND SUPERVISION
(a) GENERAL
The Bank is a New Jersey-chartered stock savings bank, the accounts of which are
insured by the FDIC, and as such is subject to regulation, supervision and
examination by the Commissioner of Banking and the FDIC. As a bank holding
company, the activities of the Corporation and the Bank are subject to FRB
regulation and examination. The Corporation is also subject to the reporting
requirements of the Securities Exchange Commission ("SEC").The following
discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on the Bank.
It is intended only to briefly summarize some material provisions. To the extent
that the following information describes statutory and regulatory provisions, it
is qualified in its entirety by reference to the particular statutory and
regulatory provisions involved. A change in applicable law or regulations may
have a material effect on the Bank's business. In this regard, it should be
noted that there have been numerous statements by legislative, regulatory and
industry officials regarding the potential for legislative and regulatory
changes.
(b) NEW JERSEY LAW
The New Jersey Department of Banking (the "Banking Department") regulates the
Bank's internal organization as well as its deposit, lending and investment
activities. The Commissioner of Banking must approve, among other things,
changes to the Bank's certificate of incorporation, the establishment or
relocation of branch offices, mergers and acquisitions, and the issuance of
stock. In addition, the Banking Department conducts periodic examinations of the
Bank.
As a result of changes in federal and state laws, savings banks may engage in
commercial bank activities. Under New Jersey Banking Law, the Bank also has the
leeway authority to invest up to the lesser of 3% of the Bank's total assets or
50% of its capital in any type of asset. Further, savings banks have been
granted parity with commercial banks with respect to the origination of
commercial loans, subject to an aggregate 10% of total assets limitation unless
the Commissioner's approval is received to exceed such limitation.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New Jersey Banking Law are limited by FDIC
regulations and other federal law and regulations. The activities of the
Corporation and its non-banking subsidiaries are limited by the BHCA. In
particular, the applicable provisions of New Jersey Banking law and regulations
governing the investment authority and activities of an FDIC insured
state-chartered savings bank, have been effectively limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 and the FDIC regulations
issued pursuant thereto. See "Federal Deposit Insurance Corporation Improvement
Act of 1991 - Restrictions of State Chartered Banks."
The New Jersey Banking Law also restricts the payment of dividends by the Bank.
See note 17 of Notes to Consolidated Financial Statements contained in Item 8.
"Financial Statements and Supplementary Data" of this report.
(c) THE FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF
1989
On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") was enacted. Although the primary emphasis of the law was
to recapitalize and restructure the regulation and insurance of the savings and
loan industry, certain provisions do affect banks and the FDIC-insured savings
banks. Notably, FIRREA abolished the Federal Savings and Loan Insurance
Corporation and required that the FDIC establish two separate deposit insurance
funds, the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). Banks, including state chartered savings banks, are insured under
the BIF. "Savings associations" (i.e. savings and loan associations) are insured
under the SAIF. Under FIRREA, the SAIF insured deposits acquired from any
savings association may not be commingled with BIF insured deposits. Other
provisions include authority to increase deposit insurance premiums, place
restrictions on acceptance of brokered deposits and increase consumer-related
disclosure requirements.
(d) FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENTS ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") became law. FDICIA substantially revised various regulatory
and funding provisions of the Federal Deposit Insurance Act ("FDIA") and other
Federal banking laws. Among other things, FDICIA requires the Federal banking
agencies to take prompt corrective action with respect to depository
institutions which do not meet minimum capital standards.
The FDIC adopted regulations which establish a scheme for prompt regulatory
corrective action with respect to depository institutions that do not meet
minimum capital requirements. The "prompt corrective action" regulations
establish five categories of depository
14
<PAGE>
institutions: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized and (5) critically
undercapitalized. Each category relates to the level of capital for the
depository institution so that:
(1) a well capitalized depository institution is one which significantly
exceeds the minimum level required by regulation (i.e., a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater);
(2) an adequately capitalized depository institution is one which meets
the minimum level required by regulation and does not meet the
"well-capitalized" institution definition (i.e., a total risk-based
capital ratio of 8% or greater, a Tier 1 riskbased capital ratio of 4%
or greater, and a leverage ratio of 4% or greater);
(3) an undercapitalized depository institution is one with a total
risk-based capital ratio of less than 8%, a Tier 1 riskbased capital
ratio of less than 4% or a leverage ratio of less than 4% (unless such
institution is currently rated composite 1 under the CAMEL rating system
which would lower the leverage ratio threshold to 3%);
(4) a significantly undercapitalized depository institution is one with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based
capital ratio of less than 3% or a leverage ratio of less than 3%, and
(5) a critically undercapitalized depository institution is one with a
leverage ratio of 2% or less.
The FDIC "prompt corrective action" regulations provide for significant
restrictions on the business activities of depository institutions which have
become undercapitalized including restrictions on interest rates to be paid on
deposits, restrictions on asset growth and restrictions on availability of
sources of liquidity. In addition, these regulations provide the appropriate
regulatory agency with significant authority to take regulatory action with
respect to undercapitalized, significantly undercapitalized, and critically
undercapitalized depository institutions. Under the capital ratio categories
established by the "prompt corrective action" regulations adopted pursuant to
FDICIA, the Bank would be considered to be "well capitalized" at December 31,
1996.
In general, under FDICIA no bank is permitted to make capital distributions or
pay management fees to its parent bank holding company if, after making such
distribution or payment, such bank would be undercapitalized. An
undercapitalized bank must submit a capital restoration plan guaranteed by its
parent company. The liability of the parent company under any such guarantee is
limited to the lesser of 5% of the bank's assets at the time it became
undercapitalized, or the amount needed to comply with the plan. An
undercapitalized bank also is subject to limitations in numerous areas
including, but not limited to: asset growth; acquisitions; branching; new
business lines; acceptance of brokered deposits; and borrowing from Federal
Reserve Banks. In addition, a significantly undercapitalized bank, or an
undercapitalized bank that fails to submit or implement a capital restoration
plan, can be required to, among other things: raise capital through the sale of
stock; replace or improve management; limit or cease acceptance of correspondent
bank deposits; restrict senior executive compensation; and limit capital
inter-affiliate transactions. The parent bank holding company of such a bank can
be required to limit capital distributions and to divest any non-depository
subsidiaries in danger of insolvency or likely to significantly dissipate the
assets or earnings. A critically undercapitalized bank is further subject to
restrictions on: payments of principal or interest on subordinated debt;
investments; expansion; acquisitions or sales of assets; extending credit for
highly leveraged transactions; paying excessive bonuses or compensation;
amending its charter or by-laws; and making any material changes in accounting
procedures. In addition, a critically undercapitalized bank is subject to the
appointment of a receiver or conservator.
FDICIA requires financial institutions to take certain actions relating to their
internal operations, including: providing annual reports on financial condition
and management to the appropriate federal banking regulators, having an annual
independent audit of financial statements performed by an independent public
accountant and establishing an independent audit committee comprised solely of
outside directors. FDICIA also imposes certain operational and managerial
standards on financial institutions relating to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits.
RESTRICTIONS UPON STATE-CHARTERED BANKS. FDICIA added new Section 24 of the
FDIA, which generally limits the activities and equity investments of
state-chartered FDIC insured banks and their subsidiaries to those permissible
for federally chartered national banks and their subsidiaries, unless such
activities and investments are specifically exempted by Section 24 or consented
to by the FDIC. In October 1992, the FDIC adopted final regulations governing
the equity investments of such banks, effective on December 9, 1992, which
generally prohibit equity investments by such banks and require the divestiture
of such investments by December 19, 1996. Section 24 provides an exception for
investments in common and preferred stocks listed on a national securities
exchange or the shares of registered investment companies by a bank if (1) the
bank held such types of investments
15
<PAGE>
during the 14 month period from September 30, 1990 through November 26, 1991,
(2) the state in which the bank is chartered permitted such investments as of
September 30, 1991, and (3) the bank notifies the FDIC and obtains approval from
the FDIC to make or retain such investments. Upon receiving such FDIC approval,
an institution's investment in such equity securities will be subject to an
aggregate limit up to its core capital. Section 24 also contains an exception
for certain majority owned subsidiaries engaged in activities permissible for a
national bank.
(e) INSURANCE OF DEPOSIT ACCOUNTS
The Bank's deposits are insured up to applicable limits by the FDIC under the
BIF. The branch deposits acquired from Carteret Savings Bank and Mainstay
Federal Savings were purchased under the Oakar amendment to FIRREA and they are
insured by the FDIC under the SAIF fund. The Bank, at December 31, 1996, has
approximately $484.1 million, adjusted attributable deposit amount, with respect
to which it pays SAIF assessments.
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each institution to one of three capital
groups (well-capitalized, adequately-capitalized or under capitalized) and
further assigns such institution to one of three subgroups within a capital
group. The institutions's subgroup assignment is based upon the FDIC's judgment
of the institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital to
risk-adjusted assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5.0%
or greater, are assigned to the well-capitalized group. At December 31, 1996,
the Bank was classified as well-capitalized for purposes of calculating
insurance assessments. Institutions are prohibited from disclosing the risk
classification of the subgroup to which they have been assigned.
In August 1995, the FDIC adopted an amendment to the BIF risk-based assessment
schedule that lowers the deposit insurance assessment rate for most (90% or
more) commercial banks and other depository institutions with deposits insured
by BIF to $.04 per $100 of insured deposits. On November 14,1995, the FDIC
further reduced the BIF assessment rates to a range of $.00 per $100 of insured
deposits (subject to a minimum annual premium of $2,000) for those institutions
with the least risk to $.27 for every $100 of insured deposits for institutions
deemed to have the highest risk, beginning January 1, 1996. At that time, the
FDIC voted to retain the existing assessment rates for SAIF insurance premiums
of $.23 for every $100 of deposits in the lowest risk-based premium category and
$.31 for every $100 of insured deposits for institutions in the highest
risk-based premium category. The reduced BIF assessment rates resulted in a
substantial disparity in the deposit insurance premiums paid by BIF and SAIF
members.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds Act")
was enacted into law, and it amended the FDIA in several ways to recapitalize
the SAIF and reduce the disparity in the assessment rates for the BIF and the
SAIF. The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, the special assessment was
fixed, subject to adjustment, at 65.7 basis points of an institution's
SAIF-assessable deposits, and the special assessment was paid on November 27,
1996. The special assessment paid by the Bank with respect to its
SAIF-assessable deposits amounted to an after-tax charge of $1.8 million in the
third quarter of 1996. In view of the recapitalization of the SAIF by the
special assessment, the FDIC reduced the assessment rates for SAIF-assessable
deposits. Beginning January 1, 1997, the schedules of assessment rates for the
BIF and the SAIF were the same, ranging from 0 to 27 basis points.
In addition, the Funds Act also expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980's by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation
to include the deposits of both BIF- and SAIF-insured institutions beginning
January 1, 1997. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
annual rate of assessments for the payments on the FICO bonds for the
semi-annual period beginning on January 1, 1997 is 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits.
(f) REGULATORY CAPITAL REQUIREMENTS
The FDIC has issued regulations that require the Bank to maintain minimum levels
of capital. The regulations establish a minimum leverage capital requirement of
not less than 3.0% core capital to total assets for banks in the strongest
financial and managerial condition, with a CAMEL Rating of 1 (the highest
examination rating of the FDIC for banks). For all other banks, the minimum
leverage capital requirement is 3% plus an additional cushion of at least 100 to
200 basis points. Core capital is comprised of the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in
16
<PAGE>
consolidated subsidiaries, minus all intangible assets (other than qualifying
servicing rights). At December 31, 1996, the Bank's ratio of core capital to
total assets was 7.9%, which exceeded the minimum leverage requirement.
The FDIC also requires that savings banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital (which
is defined as core capital and supplementary capital) to risk weighted assets of
8% and core capital to riskweighted assets of 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk-weight ranging from 0% to 100%, based on the risks the FDIC
believes are inherent in the type of asset or item. The components of core
capital are equivalent to those discussed earlier under the 3% leverage
requirement. The components of supplementary capital currently include
cumulative perpetual preferred stock, perpetual preferred stock, mandatory
convertible securities, subordinated debt, intermediate preferred stock and
allowance for possible loan and lease losses. Allowance for possible loan and
lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At December 31, 1996,
the Bank's core capital and total capital to risk-weighted assets was 16.6% and
17.0% respectively, which exceeded the FDIC risk-based capital requirements.
(g) LOANS-TO-ONE-BORROWER LIMITATIONS
With certain limited exceptions, a New Jersey chartered savings bank may not
make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. Loans may be made to a single
borrower in amounts aggregating an additional 10% of the Bank's net worth if
such loans are secured by qualifying collateral. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
(h) COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. FIRREA
amended the CRA to require, effective July 1, 1990, public disclosure of an
institution's CRA rating and require the FDIC to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system which replaced the five-tiered numerical rating system. The Bank's latest
CRA rating, received from the FDIC in August 1995, was "satisfactory."
In April 1995, the FDIC and the other federal banking agencies adopted
amendments revising the CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the system focuses on three tests:
(i) a lending test, to evaluate the institution's record of making loans in its
service areas; (ii) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing and programs
benefiting low or moderate income individuals and businesses; and (iii) a
service test, to evaluate the institution's delivery of services through its
branches, ATMs and other offices. The amended CRA regulations also clarify how
an institution's CRA performance would be considered during the application
process.
(i) FEDERAL RESERVE SYSTEM
Under the FRB regulations, the Bank is required to maintain reserves against its
transaction accounts (primarily checking and NOW accounts), non-personal money
market deposit accounts, and non-personal time deposits. Because reserves must
generally be maintained in cash or in non-interest bearing accounts, the effect
of the reserve requirement is to increase the Bank's cost of funds. Institutions
are permitted to designate and exempt $4.4 million of reservable liabilities
from these reserve requirements. These regulations currently require reserves of
3% up to $49.3 million and 10% over $49.3 million on transaction accounts.
Currently, no reserves are required on non-personal money market deposit
accounts and on non-personal time deposits that have original maturities of less
than one and one-half years. These amounts and percentages are subject to
adjustment by the FRB. The Bank was in compliance with these requirements at
December 31, 1996.
As part of the original agreement with the FRB, in order for the Corporation to
receive approval for the acquisition of the Bank, the Corporation agreed not to
engage in real estate investments or development activities. A bank holding
company is generally prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities. One of the
principal exceptions to this prohibition is for activities found by the FRB to
be so closely related to banking or managing or controlling banks
17
<PAGE>
as to be a proper incident thereto. Some of the principal activities that the
FRB has determined by regulation to be so closely related to banking are: (i)
making or servicing loans; (ii) performing certain data processing services;
(iii) providing discount brokerage services; (iv) acting as fiduciary,
investment or financial advisor; (v) leasing personal or real property; and (vi)
making investments in corporations or projects designed primarily to promote
community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on any extension of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities of such holding company or its subsidiaries, and on the acceptance of
such stocks or securities as collateral for loans. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit, lease or sale of property or furnishing of
services.
The Corporation is subject to examination, regulation and periodic reporting
under the BHCA, as administered by the FRB. The FRB has minimum capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for the Bank. The Corporation is in compliance
with these requirements. See "Management's Discussion and Analysis of Financial
Condition and Liquidity and Capital Resources" at Item 7. of this report.
The Corporation is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval is required for the Corporation to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any voting shares of such bank or
bank holding company. This also applies to savings banks or holding companies
for savings banks. See "Acquisition of the Corporation". In addition to the
approval of the FRB, before any bank acquisition can be completed, prior
approval thereof may also be required to be obtained from other agencies having
supervisory jurisdiction over the bank to be acquired.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") passed by Congress and signed into law
on September 29, 1994, significantly changed interstate banking rules. Pursuant
to the interstate Banking and Branching Act, a bank holding company will be able
to acquire banks in states other than its home state beginning September 29,
1995, regardless of applicable state law. Until such provisions are effective,
interstate acquisitions by bank holding companies will continue to be subject to
current state law restrictions.
The Interstate Banking and Branching Act also authorizes banks to merge across
state lines, thereby creating interstate branches, beginning June 1, 1997. Under
this legislation, each state may "opt out", thereby prohibiting interstate
branching within its state, or to "opt in" at an earlier time, thereby allowing
interstate branching within its state borders prior to June 1, 1997.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting an out-of-state bank to open new branches, or without de novo
branching, enter the state only by acquiring an existing bank. New Jersey has
not passed enabling legislation to date. New Jersey law presently prohibits
foreign banks from entering New Jersey unless the foreign bank first acquired a
domestic bank in another state.
(j) ACQUISITION OF THE CORPORATION
Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be
submitted to the FRB if any person, or group acting in concert, seeks to acquire
10% or more of the Corporation's shares of Common Stock outstanding, unless the
FRB finds that the acquisition will not result in a change in control of the
Corporation.. Under the CIBCA, the FRB has 60 days within which to act on such
notices, taking into consideration certain factors, including the financial and
managerial resources of the acquired, the convenience and needs of the
communities served by the Corporation and the Bank, and the anti-trust effects
of the acquisition. Under the BHCA, any company would be required to obtain
prior approval from the FRB before it may obtain control of the Corporation.
Control is generally defined to mean the beneficial ownership of 25 percent or
more of any class of voting securities of the Corporation.
(k) SECURITIES EXCHANGE ACT 1934
The Corporation's Common Stock is registered with the SEC under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"). The Corporation is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
18
<PAGE>
(xi) FEDERAL AND STATE TAXATION
(a) FEDERAL INCOME TAXATION
GENERAL. The following discussion of tax matters is intended only as a
summary and not a comprehensive description of the tax rules applicable to the
Bank or the Corporation. Since January 1987, for Federal income tax purposes,
the Bank reported its income and expenses on the accrual method of accounting.
For Federal income tax purposes, the Corporation filed its consolidated federal
income tax return with the Bank. The return is filed on a calendar year basis.
The Bank is subject to the rules of Federal income taxation applicable to
corporations.
The maximum corporate income tax rate for all income, including capital gains is
35% for taxable years beginning after September 30, 1987. The Bank was audited
by the IRS for the taxable years through 1983. No material changes were required
as a result of the audit, and the tax returns were accepted as filed.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, savings
institutions such as the Bank, which met certain definitional tests primarily
relating to their assets and the nature of their business, were permitted to
establish tax reserves for bad debts and to make annual additions thereto, which
additions could, within specified limitations, be deducted in arriving at their
taxable income. The Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, could be
computed using an amount based on a six-year moving average of the Bank's actual
loss experience (the "Experience Method"), or a percentage equal to 8.0% of the
Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve.
Under the 1996 Act, the PTI Method was repealed and the Bank, as a "large bank"
(one with assets having an adjusted basis of more than $500 million), will be
unable to make additions to its tax bad debt reserve, will be permitted to
deduct bad debts only as they occur and will be required to recapture (I.E.,
take into income) over a six-year period, beginning with the Bank's taxable year
beginning January 1, 1996, the excess of the balance of its bad debt reserves
(other than the supplemental reserve) as of December 31, 1995, over its "base
year reserve," I.E., the balance of its reserves as of December 31, 1987 (or
over a lesser amount if the Bank's loan portfolio decreased since December 31,
1987). However, under the 1996 Act, such recapture requirements will be
suspended for each of the two successive taxable years beginning January 1,
1996, in which the Bank originates a minimum amount of certain residential loans
during such years that is not less than the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 34% federal corporate income tax rate.
CORPORATE ALTERNATIVE MAXIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating
losses. AMTI is also adjusted by determining the tax treatment of certain items
in a manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, the Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses). In addition, for taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modifications) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Maximum Tax
("AMT") is paid. The Bank does not expect to be subject to the AMT. The Bank was
subject to an environmental tax liability for the year ended [December 31, 1995
which was not material.] Under President Clinton's fiscal year 1998 budget
proposal, as submitted to Congress on February 6, 1997 ("President Clinton's
Proposal"), the corporate environmental income tax would be reinstated for
taxable years beginning after December 31, 1996 and before January 1, 2008.
19
<PAGE>
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted. Under President Clinton's Proposal, the 70%
dividends-received deduction would be reduced to 50% with respect to dividends
paid after enactment of any such legislation.
(b) STATE TAXATION
The Bank is taxed under the New Jersey Savings Institution Tax Act. The tax is
an annual privilege tax imposed at a rate of 3% on the net income of the Bank as
reported for Federal income tax purposes, with certain modifications. The
Corporation is taxed under the New Jersey Corporation Business Tax Act, and if
it meets certain tests, would be taxed as an investment company at an effective
annual rate of 2.25% of New Jersey Taxable Income (as defined). If it fails to
meet such test, it will be taxed at an annual rate of 9.00% for the taxable year
ending December 31, 1994 and thereafter of New Jersey Taxable Income. It is
anticipated, based upon representations of the Corporation regarding its future
holdings and operations, that the Corporation will be taxed as an investment
company.
ITEM 2. PROPERTIES
The Bank conducts its business through fifteen retail banking offices, a
computer center, a lending center and administrative offices. The Bank owns its
own data processing equipment and an ATM system. The following table sets forth
certain information relating to each of the Bank's offices. The net book value
of the Bank's premises and equipment at December 31, 1996 was $10.8 million.
20
<PAGE>
OWNED PROPERTIES (DOLLARS IN THOUSANDS)
- ----------------
NET BOOK VALUE AS OF
LOCATION YEAR OPENED DECEMBER 31, 1996
- -------- ----------- --------------------
ADMINISTRATIVE MAIN OFFICE: 1917 $1,720
210 Smith St
Perth Amboy (1)
571 Florida Grove Rd. 1968 1,079
Woodbridge (2)
Bordentown Ave. & Route 9 1973 815
Sayreville
1197 Amboy Ave. 1975 1,315
Edison
541 Rahway Ave. 1978 570
Woodbridge
587 Main St. 1980 689
Woodbridge
160 Main St. 1990 755
Matawan (3)
36 Monmouth St. 1992 540
Red Bank (4)
Computer Center &
Loan Administration 1981 870
319 Maple St.
Perth Amboy
- --------------------------------------------------------------------------------
TOTAL $8,353
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEASED PROPERTIES
- -----------------
EXPIRATION LEASE RENEWAL NET LEASEHOLD
LOCATION DATE OPTION IMPROVEMENTS
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
Route 9 & South St., Freehold (5) 2/28/99 one 5 year option $ 147
Route 35 & Poole Ave., Hazlet 7/27/03 none 540
Route 70 & Chambersbridge Rd.
Bricktown 3/31/04 one 10 year option 316
Mule Rd & Route 37 East, Toms River 10/31/01 one 5 year option 138
Route 9 & Route 571, Toms River (6) 2/28/01 one 10 year option 132
Route 70 & Colonial Drive, Lakehurst 7/31/99 three 5 year options 145
3500 US Highway 9, Old Bridge 3/31/01 three 5 year terms 60
- ------------------------------------------------------------------------------------------------------------------------
Total $ 1,478
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a parking lot for the Bank.
(2) Relocated in 1989 to current address.
(3) Purchase from Carteret Savings Bank as part of the Branch acquisition.
(4) Purchase of Mainstay Federal Savings Bank from the Resolution Trust Company.
(5) Relocated in 1993 to current address.
(6) Relocated in 1996 to current address.
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in routine legal proceedings occurring in the ordinary
course of business, which in the aggregate are believed by management to be
immaterial to the financial condition of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE CORPORATION
See Part III, Item 10 of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded over-the-counter and is quoted on the
Nasdaq National Market under the symbol "BKCO". At December 31, 1996 there were
1,034 holders of record of the Corporation's Common Stock.
The following table sets forth the high and low sales prices per share of the
common stock, as reported on the Nasdaq National Market, as well as dividend
information regarding dividends per share declared during such periods.
<TABLE>
<CAPTION>
1996 High Low Dividends
<S> <C> <C> <C>
Quarter ended December 31, 1996................................ $20.63 $18.25 $0.16
Quarter ended September 30,1996................................ 19.50 17.25 0.16
Quarter ended June 30, 1996.................................... 17.50 16.88 0.16
Quarter ended March 31, 1996................................... 17.38 16.38 0.14
----
$0.62
</TABLE>
<TABLE>
<CAPTION>
1995 High Low Dividends
<S> <C> <C> <C>
Quarter ended December 31, 1995................................ $18.25 $16.25 $0.14
Quarter ended September 30, 1995............................... 18.78 16.25 0.14
Quarter ended June 30, 1995.................................... 17.50 16.13 0.12
Quarter ended March 31, 1995................................... 16.38 13.25 0.12
-----
$0.52
</TABLE>
See note 17 of Notes to Consolidated Financial Statements contained in Item 8.
"Financial Statements and Supplementary Data" of this report for a discussion of
the restrictions on the Corporation's and the Bank's ability to pay dividends.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial and other data of the Corporation set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Corporation and Notes thereto contained elsewhere in this
report.
Five Year Financial Comparison
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA
(dollars in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total assets......................................... $2,459,784 $1,901,915 $1,756,717 $1,622,262 $1,509,010
Total loans, net..................................... 1,665,638 1,313,259 1,220,855 1,117,419 1,013,871
Mortgage and asset-backed securities, net............ 681,518 460,574 396,198 330,732 299,530
Securities available for sale........................ 34,181 0 0 0 4,906
Investment securities................................ 25,961 66,831 82,271 117,804 126,987
Total deposits....................................... 1,629,062 1,631,254 1,453,534 1,375,989 1,339,720
Short-term borrowings................................ 614,090 67,245 115,766 68,952 0
Total stockholders' equity........................... 192,877 186,938 172,005 161,126 152,392
</TABLE>
<TABLE>
SUMMARY STATEMENT OF OPERATING DATA
(dollars in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total interest income............................... $153,105 $129,265 $106,602 $100,965 $112,728
Total interest expense.............................. 90,879 73,818 51,123 47,840 58,594
-------- -------- -------- -------- --------
Net interest income 62,226 55,447 55,479 53,125 54,134
Provisions for loan losses........................... (3,950) (5,500) (3,970) (2,040) (5,600)
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses........................................ 58,276 49,947 51,509 51,085 48,534
-------- -------- -------- -------- --------
Total other income................................... 2,141 739 1,683 3,894 5,890
-------- -------- -------- -------- --------
Total other expense.................................. 22,591 19,999 21,130 21,444 19,883
-------- -------- -------- -------- --------
Income before tax expense and cumulative effect of
accounting changes.............................. 37,826 30,687 32,062 33,535 34,541
Income tax expense................................... 13,501 10,683 11,058 12,067 12,326
Net income before cumulative -------- -------- -------- -------- --------
effect of accounting changes.................... $ 24,325 $ 20,004 $ 21,004 $ 21,468 $ 22,215
======== ======== ======== ======== ========
Net income........................................... $ 24,325 $ 20,004 $ 21,004 $ 21,468 $ 20,357
======== ======== ======== ======== ========
</TABLE>
PER SHARE DATA (1)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Earnings (fully diluted)
Before cumulative effect of change in accounting
principle................................... $1.90 $1.51 $1.56 $1.56 $1.50
After cumulative effect of change in accounting
principle................................... 1.90 1.51 1.56 1.56 1.38
Book Value Per Common Share....................... 15.58 14.47 13.30 12.22 11.19
Common Stock Closing Price at year-end............ 20.125 16.25 13.375 13.75 11.23
</TABLE>
23
<PAGE>
OTHER DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average assets (2)......................... 1.13% 1.11% 1.25% 1.38% 1.48%
Return on average equity (2)......................... 13.04 11.23 12.56 14.09 15.18
Average equity to average assets..................... 8.65 9.87 9.99 9.76 9.75
Equity to assets at period end....................... 7.84 9.83 9.79 9.93 10.10
Interest rate spread for period...................... 2.48 2.64 3.03 3.14 3.24
Net yield on average interest-earning
assets............................................. 2.96 3.16 3.42 3.52 3.72
Non-performing assets to total assets at
period end......................................... 1.18 1.71 2.05 2.50 2.77
Average interest-earning assets to average
interest-bearing liabilities....................... 1.11x 1.12x 1.12x 1.12x 1.12x
Other expenses to average
assets............................................. 1.05% 1.11% 1.26% 1.37% 1.32%
Net interest income, after provision for
loan losses, to other expenses..................... 2.58x 2.50x 2.44x 2.38x 2.44x
Number of full service offices....................... 15 14 14 13 13
</TABLE>
(1) Per share data and closing price are computed and/or restated giving effect
to the 10% stock dividend declared in November 1992, the 2 for 1 stock split
declared in October 1993 and the 20% stock dividend declared in June 1994.
(2) The 1992 results are before the cumulative effect of change in accounting
principal resulting from adoption of SFAS No. 109 and No. 106 in 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In March 1990, the Bank converted from a mutual savings bank to a stock savings
bank and simultaneously formed the Corporation as its parent holding company.
The Bank is the only operating subsidiary of the Corporation.
The Bank's operating results depend primarily upon the net interest income,
which is the difference between the interest income earned on its
interest-earning assets, such as loans and investments, and the cost of the
Bank's interest-bearing liabilities, primarily deposit accounts. A major factor
in the Bank's strong net operating results is its efficiency and low operating
costs represented by the Bank's efficiency ratio of 28.4% (excluding intangible
amortization, OREO expenses/losses, provisions for loan losses and a one-time
SAIF assessment) for the year ended December 31, 1996.
In February 1997, the Corporation entered into a definitive merger agreement
with Sovereign Bancorp, Inc. (Sovereign). For a more complete discussion of the
proposed merger with and into Sovereign, see Part I, Item 1. "Business" of this
report.
ASSET-LIABILITY MANAGEMENT
Since 1983, the Bank focused on originating one-year adjustable-rate mortgage
loans and has expanded its consumer loan programs by featuring open-end home
equity lines at floating rates based on the prime rate announced by large New
York-based commercial banks. It has been the Bank's policy to sell a substantial
portion of all fixed-rate loans originated since 1983, either in whole or in
securitized form, while retaining servicing. The Bank has also purchased
mortgage-backed securities with adjustable interest rates or with substantial
projected short-term cash-flows. As a result of its business strategy, the Bank
has, over the years, significantly reduced its vulnerability to interest rate
risk.
24
<PAGE>
Interest rate risk may be analyzed by examining the extent to which assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between interest-earning assets maturing or repricing within a specific time
period and interest-bearing liabilities maturing or repricing within that time
period. In general, rising interest rates will have an adverse effect on an
institution with a negative interest rate sensitivity gap (i.e., with
interest-bearing liabilities exceeding interest earning assets) at specified
time periods.
The following table sets forth the amounts of the interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1996, which are
anticipated by the Corporation, based on certain assumptions, to reprice or
mature in each of the future time periods shown. Except for the assumptions
stated below, the amounts of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
contractual terms of the asset or liability. The table assumes a 20% prepayment
rate for up to 10 years for mortgage loans, home equity loans and
mortgage-backed securities including collateralized mortgage obligations. Loans
and mortgage-backed securities that have adjustable rates are shown as being due
in the period during which the interest rates are next subject to change. Assets
in a non-accrual status are excluded. The Bank has assumed that its
interest-bearing NOW accounts, money market deposit accounts ("MMDA"), savings
and club deposits, which totaled $82.4 million, $97.6 million and $165.8
million, respectively, at December 31, 1996 are withdrawn at the following
rates; 17.00%, 8.50%, 8.50%, 16.00%, 14.00% and 100.00% of the cumulative
declining balance of such accounts during the periods shown. Liquid investment
accounts ("LIA") which are MMDA accounts requiring a $25,000 balance, are
assumed to reprice within one year.
25
<PAGE>
<TABLE>
<CAPTION>
ASSET-LIABILITY MANAGEMENT GAP TABLE
ONE MORE THAN MORE THAN MORE THAN MORE THAN
YEAR 1 YEAR TO 2 YEARS TO 3 YEARS TO 5 YEARS TO OVER 10
(dollars in thousands) OR LESS 2 YEARS 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans and home equity loans(1)... $1,046,638 $ 244,454 $ 202,639 $ 135,192 $ 5,020 $ 1,023 $1,634,966
Loans held for sale(1).................... 8,916 0 0 0 0 0 8,916
Other consumer loans(1)................... 6,234 305 372 95 0 0 7,006
Mortgage and asset-backed securities...... 455,165 46,904 58,464 43,558 52,101 25,325 681,517
Investment securities..................... 20,905 550 400 1,993 200 1,913 25,961
Securities available for sale............. 34,181 0 0 0 0 0 34,181
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets(1).......... $1,572,039 $ 292,213 $ 261,875 $ 180,838 $ 57,321 $ 28,261 2,392,547
---------- ---------- ---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
NOW and Super NOW accounts................ $ 14,010 $ 5,814 $ 5,320 $ 9,163 $ 6,734 $ 41,370 $ 82,411
Money market deposit accounts............. 16,594 6,887 6,301 10,853 7,977 49,002 97,614
Liquid investment accounts................ 321,967 0 0 0 0 0 321,967
Savings and club accounts................. 28,183 11,696 10,702 18,432 13,547 83,220 165,780
Time accounts............................. 769,576 101,519 39,585 0 0 0 910,680
Securities sold u/a/r & Fed funds purchased 614,090 0 0 0 0 0 614,090
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities........ $1,764,420 $ 125,916 $ 61,908 $ 38,448 $ 28,258 $ 173,592 $2,192,542
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity gap per period....... ($192,381) $ 166,297 $ 199,967 $ 142,390 $ 29,063 ($145,331) $ 200,005
========== ========== ========== ========== ========== ========== ==========
Cumulative interest sensitivity gap(2).... ($192,381) ($26,084) $ 173,884 $ 316,275 $345,338 $ 200,007
========== ========== ========== ========== ========== ==========
Cumulative gap as a percent of total assets -7.8% -1.1% 7.1% 12.9% 14.0% 8.1%
Cumulative interest-sensitive assets as a percent of
interest-sensitive liabilities............ 89.1% 98.6% 108.9% 115.9% 117.1% 109.1%
</TABLE>
(1)Excludes assets in a non-accrual status.
(2)If all NOW, MMDA and savings and club accounts were assumed to reprice within
one year, the one year cumulative interest sensitivity gap would have been
($479,399) or (19.5%) of total assets.
The preceding table does not necessarily indicate the impact of general interest
rate movements on the Bank's net interest income because the repricing and/or
prepayments of various assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, assets and liabilities indicated
as repricing within the same period may in fact reprice at different times and
at different rate levels. The Bank's loan and investment portfolio yields may
adjust more slowly to interest rate changes than its cost of funds because of
the timing of the repricing of its interest-earning assets, i.e., fixed time
periods to the next interest rate adjustment or maturity date together with the
potentially restrictive periodic interest rate caps. Moreover, measurement of
interest rate sensitivity is dependent on the assumptions with respect to loan
prepayments and core deposit decay rates.
ANALYSIS OF NET INTEREST INCOME
Net interest income, the primary contributor to earnings, represents the
difference between income on interest-earning assets and expense on
interest-bearing liabilities. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned or paid on them.
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from daily or
month-end balances. Management does not believe that the use of the month-end
balances instead of daily average balances caused any material difference in the
information presented.
26
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME 1996 1995 1994
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(dollars in thousands) BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
ASSETS:
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans, net (1) (2) (3).. $1,471,517 $ 109,460 7.44% $1,219,509 $ 91,278 7.48% $1,140,887 $ 75,212 6.59%
Home equity loans, net (1)....... 46,465 4,259 9.17 45,143 4,516 10.00 46,830 3,899 8.33
Other consumer loans, net (1)..... 5,685 402 7.07 5,845 473 8.09 6,276 478 7.62
---------- ---------- ---------- ---------- ---------- ----------
Total net loans ................ 1,523,667 114,121 7.49 1,270,497 96,267 7.58 1,193,993 79,589 6.67
---------- ---------- ---------- ---------- ---------- ----------
Mortgage and asset-backed securities. 501,229 33,642 6.71 404,359 26,949 6.66 323,221 19,106 5.91
---------- ---------- ---------- ---------- ---------- ----------
Taxable investment securities........ 76,479 5,112 6.68 72,591 5,468 7.53 101,678 7,724 7.60
Non-taxable investment securities (4) 980 61 6.22 986 61 6.19 1,140 71 6.23
Short-term investments............ 1,552 87 5.61 5,748 354 6.16 164 7 4.27
Federal funds sold................ 1,541 82 5.32 2,720 166 6.10 2,767 105 3.79
---------- ---------- ---------- ---------- ---------- ----------
Total investment portfolio...... 80,552 5,342 6.63 82,045 6,049 7.37 105,749 7,907 7.48
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets... 2,105,448 153,105 7.27 1,756,901 129,265 7.36 1,622,963 106,602 6.57
Non-interest-earning assets.......... 49,315 ---------- 48,324 ---------- 50,858 ----------
---------- ---------- ----------
Total........................... $2,154,763 $1,805,225 $1,673,821
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Savings and club accounts........ $ 174,000 $ 4,551 2.62% $ 190,097 $ 5,078 2.67% $ 220,137 $ 5,613 2.55%
Time accounts.................... 928,273 50,170 5.40 903,399 48,890 5.41 745,661 30,311 4.06
NOW and money market accounts.... 479,637 18,637 3.89 405,425 15,865 3.91 385,005 11,042 2.87
Short-term borrowings............ 315,236 17,521 5.56 66,451 3,985 6.00 92,473 4,103 4.44
ESOP debt........................ 0 0 0 0 0.00 754 54 7.16
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,897,146 90,879 4.79 1,565,372 73,818 4.72 1,444,030 51,123 3.54
Non-interest-bearing demand deposits ---------- ---------- ----------
and other deposits............... 59,218 55,752 56,868
Other liabilities................... 11,919 5,905 5,693
---------- ---------- ----------
Total liabilities.............. 1,968,283 1,627,029 1,506,591
Stockholders' Equity................ 186,480 178,196 167,230
---------- ---------- ----------
Total.......................... $2,154,763 $1,805,225 $1,673,821
========== ========== ==========
Net interest income/interest
rate spread (5) $ 62,226 2.48 $ 55,447 2.64 $ 55,479 3.03
---------- ---------- ----------
Net earning assets/net yield on average
interest-earning assets (6)...... $ 208,302 2.96 $ 191,529 3.16 $ 178,933 3.42
========== ========== ==========
Ratio of interest-earning assets to interest-
bearing liabilities.............. 1.11x 1.12x 1.12x
</TABLE>
(1) Average balances include loans which are delinquent 120 days or more and not
accruing interest.
(2) Net loan origination and commitment fees included in interest income were
$279,000, $302,000 and $385,000 for the years ended December 31, 1996,1995,
and 1994, respectively.
(3) Includes one to four-family, multi-family and commercial real estate and
construction loans and conventional mortgage loans available for sale.
(4) No tax equivalent adjustments have been made.
(5) Interest rate spread represents the difference between average rate earned
on interest-earning assets and average rate paid on interest-bearing
liabilities.
(6) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
27
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the years indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rates multiplied by prior volume) and (iii) the net change.
Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Rate/Volume Analysis
Year Ended Year Ended
December 31,1996 December 31, 1995
Compared With Year Ended Compared With Year Ended
December 31, 1995 December 31, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Change in Change In
(dollars in thousands) Volume Rate Net Volume Rate Net
Interest and dividend income on:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans, net ................ $ 18,675 $ (493) $ 18,182 $ 5,420 $ 10,646 $ 16,066
Home equity loans, net ............. 129 (386) (257) (145) 762 617
Other consumer loans, net .......... (13) (58) (71) (34) 29 (5)
---------- ---------- ---------- ---------- ---------- ----------
Total loans net .................... 18,791 (937) 17,854 5,241 11,437 16,678
Mortgage and asset-backed securities 6,490 203 6,693 5,202 2,641 7,843
Taxable investment securities ...... 282 (638) (356) (2,192) (64) (2,256)
Non-taxable investment securities .. 0 0 0 (10) 0 (10)
Short-term investments ............. (238) (29) (267) 343 4 347
Federal funds sold ................. (65) (19) (84) (2) 63 61
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 25,260 (1,420) 23,840 8,582 14,081 22,663
---------- ---------- ---------- ---------- ---------- ----------
Interest expense on:
Savings and club accounts .......... (432) (95) (527) (793) 258 (535)
Time accounts ...................... 1,369 (88) 1,281 7,240 11,339 18,579
NOW and money market accounts ...... 2,854 (82) 2,772 613 4,210 4,823
Short-term borrowings .............. 13,849 (313) 13,536 (1,335) 1,217 (118)
ESOP debt .......................... 0 0 0 (54) 0 (54)
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 17,640 (578) 17,062 5,671 17,024 22,695
---------- ---------- ---------- ---------- ---------- ----------
Net change in interest income ......... $ 7,620 ($ 842) $ 6,778 $ 2,911 ($ 2,943) ($ 32)
========== ========== ========== ========== ========== ==========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets increased by $557.9 million to $2.5 billion at December 31, 1996,
representing an increase of 29.3%. Total loans for the year increased $350.8
million or 26.6% to $1.7 billion at December 31, 1996 compared to an increase of
$92.4 million or 7.5% to $1.3 billion at December 31, 1995.
Total mortgage and asset-backed securities increased $220.9 million or 48.0% to
$681.5 million at December 31, 1996 compared to $460.6 at December 31, 1995.
Total deposits decreased by $2.2 million to $1.629 billion at December 31, 1996
compared to $1.631 billion at December 31, 1995. During 1996, time accounts
decreased by $43.5 million to $910.7 million at December 31, 1996 compared to
$954.2 million at December 31, 1995. The decrease in time deposits was offset
by an increase in demand and savings deposits by $41.3 million to $718.4 million
at December 31, 1996 compared to $677.1 million at December 31, 1995.
The Corporation in 1996 utilized borrowings as a major source of funds for its
asset growth. Total borrowings which consist primarily of reverse repurchase
agreements totaled $614.1 million at December 31, 1996 compared to $67.2 million
at December 31, 1995.
28
<PAGE>
COMPARISON OF OPERATING RESULTS
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL. The Corporation's net income for 1996 increased $4.3 million to
$24.3 million compared to $20.0 million for the prior year. Earnings for 1996
included net gains on sales of securities and loans totaling $26,000 compared to
net losses totaling $1.6 million for 1995. Core earnings prior to taxes, which
excludes gains (losses) on sales, totaled $37.8 million and $32.3 million for
years ended December 31, 1996 and 1995, respectively. The $5.5 million increase
in core earnings was due to a $6.8 million increase in net interest income to
$62.2 million for the year ended December 31, 1996 compared to $55.4 million for
the year ended December 31, 1995. The increase in core earnings was also due to
a $1.5 million reduction in the provision for loan losses to $4.0 million for
the year ended December 31, 1996 from $5.5 million for the year ended December
31, 1995, offset by a onetime FDIC assessment charge of $2.8 million to
recapitalize the SAIF. The increase in net interest income was primarily due to
the growth in earning assets partially offset by a narrowing in the average
interest rate spread of 2.48% for the year 1996 compared to 2.64% for the year
1995.
INTEREST INCOME. Total interest income increased by $23.8 million or 18.4% to
$153.1 million for the year 1996 compared to $129.3 million for the year 1995.
Interest income increased due primarily to loans and mortgage-backed securities,
where the primary contributor was volume, offset to a small extent by a rate
decline in interest earning assets.
INTEREST EXPENSE. Total interest expense on deposits increased by $3.5
million or 5.0% to $73.4 million for the year ended December 31, 1996 compared
to $69.8 million for the same period in 1995. Interest expense increased due
primarily to volume increases in higher cost time and money market accounts
offset by volume decreases in lower cost savings accounts and decreases in
deposit rates. Interest expense on short-term borrowings increased by $13.5
million to $17.5 million for the year 1996. This increase was the result of an
increase in average balances partially offset by a decrease in interest rates
paid.
PROVISIONS FOR LOAN LOSSES. The provision for loan losses decreased by $1.5
million to $4.0 million for 1996 compared to $5.5 million for the prior year.
The allowance for loan losses at December 31, 1996 was $6.6 million or 27.1% of
non-performing loans compared to $8.1 million or 30.8% at December 31, 1995.
Non-performing loans, which includes loans past due 90 days or more and still
accruing and non-accrual loans decreased $2.0 million to $24.4 million or 1.5%
of total loans at December 31, 1996 compared to $26.4 million or 2.0% at the
prior year end. Non-performing loans are primarily secured by 1-4 family
residential properties which represent $22.9 million or 93.9% of the total
amount of non-performing loans at December 31, 1996. The remainder of the
non-performing loans includes $258,000 and $1.2 million secured by multi-family
and non-residential properties, respectively, and $9,000 in consumer loans. The
average non-performing loan balance secured by real estate was approximately
$105,000. The Bank continues to closely monitor the real estate market and the
loan portfolio on an ongoing basis and makes adjustments to the allowance for
loan losses based on the Bank's policy, economic conditions, historical loan
loss experience and other factors that warrant recognition in providing for an
adequate allowance for loan losses to be adequate at December 31, 1996.
However, additions to the allowance may be necessary based on changes in the
economic conditions and other factors or as various regulatory agencies may
require after an examination based on their judgment.
OTHER INCOME. Other income excluding net gains on the sale of loans and
securities of $26,000 totaled $2.1 million for the year ended December 31, 1996
and excluding net losses on the sale of loans and securities of $1.6 million
totaled $2.4 million for the year ended December 31, 1995. The decrease in
other income is primarily due to the reduction of service charges on demand
deposit accounts and NOW accounts along with the reduction of commissions
received on mortgage life and disability insurance. The reduction of service
charges is the result of waived fees under a new relationship banking program.
OTHER EXPENSE. Salaries and employee benefits for the year 1996 increased
$174,000 or 2.0% primarily due to cost of living and merit increases.
Amortization of intangibles for the year ended December 31, 1996 decreased
$157,000 to $781,000 compared to $938,000 for the prior year. Amortization of
the remaining intangibles totaling $3.3 million at December 31, 1996 will
decrease to $640,000 and $538,000 for 1997 and 1998, respectively. The FDIC
insurance premium for the year 1996 increased $1.6 million due to a special
assessment levied by the FDIC to recapitalize the SAIF. This special assessment
totaled $2.8 million and was partially offset by a reduced insurance premium on
the Bank's deposits insured under the FDIC's Bank Insurance Fund ("BIF") from 23
basis points during the first five months of 1995 to zero thereafter. All other
expenses increased by $1.0 million or 12.7% compared to the
29
<PAGE>
prior year. This increase was primarily due to the growth of mortgage loans
purchased and serviced by others which necessitated a servicing fee totaling
$1.6 million at December 31, 1996 compared to $733,000 at December 31, 1995.
INCOME TAX EXPENSE. Income tax expense increased by $2.8 million to $13.5
million for the year 1996 compared to $10.7 million the prior year. This was
attributable to an increase in taxable earnings.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND 1994
Total assets increased by $145.2 million to $1.902 billion at December 31, 1995
representing an increase of 8.3% for the year.
Total loans for the year increased $92.4 million or 7.5% to $1.321 billion at
December 31, 1995, compared to an increase of $102.7 million or 9.1% for 1994.
Total mortgage and asset-backed securities increased $64.4 million or 16.2% to
$460.6 million at December 31, 1995. The securities purchased during 1995
totaled $144.3 million and were predominantly backed by adjustable rate
mortgages.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994
GENERAL. The Corporation's net income for 1995 decreased $1.0 million to
$20.0 million compared to $21.0 million for 1994. Earnings for 1995 included net
losses on sales of securities and loans totaling $1.6 million compared to
$712,000 for 1994. Core earnings prior to taxes which excludes gains (losses) on
sales, totaled $32.3 million and $32.8 million for years ended December 31, 1995
and 1994, respectively. The $450,000 decrease in core earnings was due to a $1.5
million increase in the provision for loan losses, partially offset by a
$839,000 decrease in our FDIC Insurance premium and a $315,000 decrease in the
amortization of intangibles. Net interest income remained virtually unchanged
primarily due to an increase in average earning assets for 1995 compared to 1994
offset by a narrowing in the average interest rate spread of 2.64% for the year
1995 compared to 3.03% for the year 1994.
INTEREST INCOME. Total interest income increased by $22.7 million or 21.3% to
$129.3 million for the year 1995 compared to $106.6 million for the year 1994.
Interest income increased due primarily to loans, wherein the primary
contributor was rate, and mortgage-backed securities, where the primary
contributor was volume, offset to an extent by a volume decline in taxable
investment securities.
INTEREST EXPENSE. Total interest expense on deposits increased by $22.9
million or 48.7% to $69.8 million for the year ended December 31, 1995 compared
to the same period in 1994. Interest expense increased due primarily to rate and
volume increases in higher cost time and money market accounts offset by volume
decreases in lower cost savings accounts. Interest expense on short-term
borrowings decreased $118,000 to $4.0 million for the year 1995. This decrease
was the result of a decrease in average balances partially offset by an increase
in interest rates paid.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by $1.5
million to $5.5 million for 1995 compared to $4.0 million for 1994.
Approximately 25% of the increase in the provision for loan losses relates to
one borrowing relationship, with the remaining increase primarily due to
deterioration of collateral value of loans in foreclosure during 1995. The
allowance for loan losses at December 31, 1995 was $8.1 million or 30.8% of
non-performing loans compared to $8.1 million or 26.1% at December 31, 1994.
Non-performing loans which includes loans past due 90 days or more and still
accruing and non-accrual loans, decreased $4.9 million to $26.4 million or 2.0%
of total loans at December 31, 1995 compared to $31.3 million or 2.6% at
December 31, 1994. Non-performing loans are primarily secured by 1-4 family
residential properties which represent $23.5 million or 88.9% of the total at
December 31, 1995. The remainder of the non-performing loans includes $2.1
million and $276,000 secured by multi-family and non-residential properties,
respectively, $578,000 in construction loans and $34,000 in consumer loans. The
average non-performing loan balance secured by real estate was approximately
$114,000.
30
<PAGE>
OTHER INCOME. Other income excluding net losses on the sale of loans and
securities of $1.6 million previously discussed totaled $2.4 million for both
the year ended December 31, 1995 and the year ended December 31,1994.
OTHER EXPENSE. Salaries and employee benefits for the year 1995 increased
$199,000 or 2.3% primarily due to cost of living and merit increases.
Amortization of intangibles for the year ended December 31, 1995 decreased
$315,000 to $938,000 compared to $1.3 million for 1994. The FDIC insurance
premium for the year 1995 decreased $839,000 due to a reduction of the insurance
premium on the Bank's deposits insured under the BIF from 23 basis points to 4
basis points as of June 1, 1995. All other expenses decreased by $176,000 or
2.4% compared to 1994.
INCOME TAX EXPENSE. Income tax expense decreased by $375,000 to $10.7 million
for the year 1996 compared to $11.1 million for 1994. This was attributable to a
decrease in taxable earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits and other cash outflows in a cost-effective manner. The Bank's
principal sources of funds are deposits, scheduled amortization and prepayments
of loans and mortgage and asset-backed securities, sales of loans available for
sale, borrowings, maturities of investment securities and short-term investments
and other funds provided by operations. While scheduled loan payments and
maturing investments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Significant sources of funds in 1996 and 1995 were the return of principal on
mortgage loans and mortgage-backed securities due to loan prepayments. Other
significant sources of funds during 1996 were the net increase in short-term
borrowing, the proceeds from maturities and calls of investments securities held
to maturity and the net increase in demand and money market deposit accounts.
Other significant sources of funds during 1995 were the net increase in time
deposits and money market deposit accounts. The primary uses of funds during
1996 and 1995 were the origination and purchase of mortgage loans and
mortgage-backed securities held to maturity. Other significant uses of funds
during 1996 were a net decrease in time deposits, the purchase of securities
available for sale and the purchase of investment securities held to maturity.
Other significant uses of funds during 1995 were the net decrease in short-term
borrowings. The Bank anticipates that it will have sufficient funds to meet its
current commitments to originate mortgage loans and fund unused home equity
lines which totaled $77.8 million at December 31, 1996. Certificates of deposit
maturing within one year or less totaled $769.6 million. Management believes
that a significant portion of such deposits will remain with the Bank.
During 1996, the Bank did not sell any securities available for sale. During
1995, the Bank sold securities available for sale for proceeds totaling $14.6
million resulting in net losses of $1.7 million. The Bank has not invested in
long term bonds since 1983 and at December 31, 1996, the Bank held $2.1 million
of investment securities with remaining maturities in excess of 5 years.
During February 1994, a program to repurchase up to 720,000 shares (restated
to reflect the 20% stock dividend declared in June 1994) or approximately 5% of
the Corporation's common stock was announced, of which 396,220 were available to
be purchased under such program at December 31, 1995. On February 18, 1996, the
Corporation's Board of Directors authorized the repurchase of additional shares
for a total to be repurchased of up to one million shares of the Corporations's
common stock. The number of shares repurchased under these plans during 1996 was
620,913. There will be no further repurchases of common stock due to the signed
definitive Merger Agreement with Sovereign. See note 2 of Notes to Consolidated
Financial Statements contained in Item 8. "Financial Statements and
Supplementary Data" of this report.
Stockholders' equity increased by $6.0 million to $192.9 million at December 31,
1996 compared to $186.9 million at December 31, 1995. This increase is primarily
due to the retention of earnings and exercise of stock options totaling $262,000
offset by treasury stock repurchases aggregating $10.7 million and a $568,000
increase in unrealized losses on securities available for sale.
The regulatory capital ratios of the Corporation and the Bank, its wholly
owned subsidiary, are well in excess of those required by all regulatory
authorities (see note 21 of Notes to Consolidated Financial Statements contained
in Item 8. "Financial Statements and Supplementary Data" of this report). The
Corporation's core capital and total capital to risk-weighted assets ratios were
16.9% and
31
<PAGE>
17.2% and the Bank's were 16.6% and 17.0%, respectively, at December 31, 1996.
The Corporation's and the Bank's tangible core capital to total assets ratios
("leverage ratio") at December 31, 1996 were 8.0% and 7.9%, respectively.
IMPACT OF INFLATION
The Corporation's Financial Statements and Notes thereto contained in Item 8.
"Financial Statements and Supplementary Data" of this report have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
generally 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
industrial companies, nearly all of 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 price of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). See note
22 of Notes to Consolidated Financial Statements contained in Item. 8 "Financial
Statements and Supplementary Data" of this report for a more detailed
discussion.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Bankers Corp.:
We have audited the accompanying consolidated statements of condition of Bankers
Corp. and subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bankers Corp. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 31, 1997 except as to note 2,
which is as of February 5, 1997
33
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition
(dollars in thousands) December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash on hand and due from banks (note 4)............................................................. $ 15,957 $ 23,337
Securities available for sale (note 5)............................................................... 34,181 0
Investment securities held to maturity, estimated market value of $26,036 and $67,735
at December 31, 1996 and 1995, respectively (note 6)............................................. 25,961 66,831
Mortgage and asset-backed securities, held to maturity, estimated market value of $685,780
and $463,116 at December 31, 1996 and 1995, respectively (note 7 )............................... 681,518 460,574
Loans net of unearned income and premiums (note 8)................................................... 1,672,234 1,321,396
Less: Allowance for loan losses................................................................. 6,596 8,137
------------ ------------
Net loans..................................................................................... 1,665,638 1,313,259
Banking premises, furniture and equipment, net (note 9).............................................. 10,846 11,357
Accrued interest receivable ......................................................................... 15,181 13,090
Intangible assets, net of accumulated amortization of $8,712 and $7,931
at December 31, 1996 and 1995, respectively...................................................... 3,329 4,110
Other Real Estate Owned, net (OREO) (note 8)......................................................... 4,662 6,057
Other assets (notes 12 and 15)....................................................................... 2,511 3,300
------------ ------------
Total Assets.................................................................................. 2,459,784 1,901,915
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to depositors: (note 10)
Interest bearing................................................................................. 1,578,452 1,581,094
Non-interest bearing............................................................................. 50,610 50,160
------------ ------------
Total deposits................................................................................ 1,629,062 1,631,254
Short-term borrowings (notes 5, 6, 7 and 11)......................................................... 614,090 67,245
Mortgage escrow deposits............................................................................. 12,203 10,078
Income taxes payable (note 12)....................................................................... 1,348 869
Other liabilities.................................................................................... 10,204 5,531
------------ ------------
Total liabilities............................................................................. 2,266,907 1,714,977
------------ ------------
Stockholders' equity (notes 2, 14 and 15): Preferred stock, authorized
10,000,000 shares None issued Common stock, par value $.01:20,000,000 shares
authorized,
14,269,200 shares issued........................................................................ 143 143
Additional paid-in capital....................................................................... 101,138 101,138
Retained earnings................................................................................ 117,525 101,592
Less:
Unallocated Common Stock held by the ESOP........................................................ 301 621
Common Stock in Treasury, at cost: 1,891,016 shares and 1,347,043 shares, respectively .......... 25,060 15,314
Net unrealized losses on securities available for sale, net of tax............................... 568 0
------------ ------------
Total stockholders' equity.................................................................... 192,877 186,938
------------ ------------
Commitments and contingencies (notes 14, 15 and 16).................................................. 0 0
------------ ------------
Total Liabilities and Stockholders' Equity........................................................... $ 2,459,784 $ 1,901,915
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended December 31,
(dollars in thousands except per share data) 1996 1995 1994
<S> <C> <C> <C>
Interest income:
Real estate loans (note 8)........................ $ 109,460 $ 91,278 $ 75,212
Other loans....................................... 4,661 4,989 4,377
Mortgage and asset-backed securities.............. 33,642 26,949 19,106
Investment securities, includes dividends-taxable. 5,112 5,468 7,724
Municipals-nontaxable............................. 61 61 71
Short-term investments............................ 87 354 7
Federal funds sold................................ 82 166 105
------------ ------------ ------------
Total interest income........................... 153,105 129,265 106,602
------------ ------------ ------------
Interest expense:
Deposits.......................................... 73,358 69,833 46,966
Short-term borrowings............................. 17,521 3,985 4,103
ESOP debt (note 14)............................... 0 0 54
------------ ------------ ------------
Total interest expense.......................... 90,879 73,818 51,123
------------ ------------ ------------
Net interest income............................. 62,226 55,447 55,479
Provision for loan losses (note 8).............. (3,950) (5,500) (3,970)
------------ ------------ ------------
Net interest income after provision for loan losses 58,276 49,947 51,509
------------ ------------ ------------
Other Income:
Fees and service charges.......................... 1,946 2,145 2,043
(Losses) gains on securities transactions (notes 5,6 and 7) 0 (1,665) 0
Gains (losses) on loan sales.................... 26 28 (712)
Other income...................................... 169 231 352
------------ ------------ ------------
Total other income.............................. 2,141 739 1,683
------------ ------------ ------------
Other Expense:
Salaries and employee benefits (notes 14 and 15).. 9,018 8,844 8,645
Occupancy expense (note 16)....................... 2,855 2,770 3,052
FDIC Insurance premium (note 13).................. 3,883 2,309 3,148
Amortization of intangibles....................... 781 938 1,253
Net losses and expenses on OREO................... 758 674 675
Other operating expense........................... 5,296 4,464 4,357
------------ ------------ ------------
Total other expenses............................ 22,591 19,999 21,130
------------ ------------ ------------
Income before income tax expense................ 37,826 30,687 32,062
Income tax expense (note 12)......................... 13,501 10,683 11,058
------------ ------------ ------------
Net income...................................... $ 24,325 $ 20,004 $ 21,004
============ ============ ============
Primary earnings per share....................................... $1.90 $1.51 $1.56
Fully diluted earnings per share................................ $1.90 $1.51 $1.56
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Net Unrealized
Losses on
Additional Common Stock Common Stock Securities Total
Common Paid-In Retained held by held by Treasury Available Stockholders'
(dollars in thousands) Stock Capital Earnings the ESOP the MRP Stock For Sale Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ............ $ 119 $ 59,675 $114,656 ($ 1,506) ($ 317) ($11,501) $ 0 $161,126
Changes in accounting principle,
January 1, 1994- Securities
available for sale .................... 0 0 0 0 0 0 9 9
20% stock dividend declared June, 1994 .. 24 41,463 (41,487) 0 0 0 0 0
Net income .............................. 0 0 21,004 0 0 0 0 21,004
Cash Dividends .......................... 0 0 (5,290) 0 0 0 0 (5,290)
Exercise of stock options ............... 0 0 (177) 0 0 259 0 82
Treasury Stock acquired, net ............ 0 0 0 0 0 (3,699) 0 (3,699)
Allocation of ESOP shares ............... 0 0 0 435 0 0 0 435
Amortization of MRP shares .............. 0 0 0 0 254 0 0 254
Net increase in unrealized losses on
securities available for sale,
net of tax ............................ 0 0 0 0 0 0 (1,916) (1,916)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ............ $ 143 $101,138 $ 88,706 ($ 1,071) ($ 63) ($14,941) ($ 1,907) $172,005
Net income .............................. 0 0 20,004 0 0 0 0 20,004
Cash Dividends .......................... 0 0 (6,710) 0 0 0 0 (6,710)
Exercise of stock options ............... 0 0 (408) 0 0 583 0 175
Treasury Stock acquired, net ............ 0 0 0 0 0 (956) 0 (956)
Allocation of ESOP shares ............... 0 0 0 450 0 0 0 450
Amortization of MRP shares .............. 0 0 0 0 63 0 0 63
Decrease in unrealized losses on
securities available for sale,
net of tax ............................ 0 0 0 0 0 0 1,907 1,907
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ............ $ 143 $101,138 $101,592 ($ 621) $ 0 ($15,314) 0 $186,938
Net Income .............................. 0 0 24,325 0 0 0 0 24,325
Cash Dividends .......................... 0 0 (7,742) 0 0 0 0 (7,742)
Exercise of stock options ............... 0 0 (650) 0 0 912 0 262
Treasury Stock acquired, net ............ 0 0 0 0 0 (10,658) 0 (10,658)
Allocation of ESOP shares ............... 0 0 0 320 0 0 0 320
Increase in unrealized losses on
securities available for sale,
net of tax ........................... 0 0 0 0 0 0 (568) (568)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 ............ $ 143 $101,138 $117,525 ($ 301) $ 0 $(25,060) ($ 568) $192,877
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................. $ 24,325 $ 20,004 $ 21,004
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation .............................................................................. 1,027 1,165 1,488
Provision for loan losses ................................................................. 3,950 5,500 3,970
Provision for uncollectible interest receivable ........................................... 2,267 2,809 2,243
Provision for deferred taxes .............................................................. 571 (1,238) 0
Net amortization of deferred fees, discounts and premiums on loans ........................ 515 530 433
Origination of loans available for sale ................................................... (1,226) (1,426) (6,955)
Proceeds from sales of loans available for sale ........................................... 1,342 9,871 13,566
Net (gains) losses on sales of loans available for sale ................................... (26) (28) 712
Net (accretion) amortization of premiums and discounts on securities held to maturity ..... (349) (632) 530
Net losses on the sale of securities available for sale ................................... 0 1,665 0
Net decrease in OREO from sales and losses ................................................ 8,864 7,339 8,507
Amortization of ESOP & MRPs ............................................................... 320 513 689
Amortization of intangibles ............................................................... 781 938 1,252
Increase in accrued interest receivable ................................................... (4,358) (4,517) (3,054)
Decrease (increase) in other assets ....................................................... 551 1,743 (1,532)
Increase in mortgage escrow deposits ...................................................... 2,125 540 1,542
Increase (decrease) in other liabilities and income taxes payable ......................... 4,980 269 (1,271)
--------- --------- ---------
Net cash provided by operating activities ............................................... 45,659 45,045 43,124
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans ......................................................................... (517,457) (183,740) (212,831)
Net decrease in loans ..................................................................... 153,054 68,204 90,260
Purchase of mortgage and asset-backed securities held to maturity ......................... (335,865) (144,298) (159,271)
Principal payments of mortgage and asset-backed securities held to maturity ............... 115,294 69,990 90,804
Purchase of investment securities held to maturity ........................................ (13,756) (4,925) 0
Proceeds from maturities and calls of investment securities held to maturity .............. 54,620 20,256 34,977
Purchase of securities available for sale ................................................. (35,099) (1,929) 0
Proceeds from sale of securities available for sale ....................................... 0 14,625 0
Banking premises, furniture and equipment expenditures .................................... (516) (316) (661)
--------- --------- ---------
Net cash used in investing activities ................................................... (579,725) (162,133) (156,722)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchases .................................................................. (10,658) (956) (3,699)
Principal payment on ESOP debt ............................................................ 0 0 (1,506)
Net increase (decrease) in demand and savings deposits .................................... 41,307 34,511 (3,688)
Net (decrease) increase in time deposits .................................................. (43,499) 143,209 81,233
Net increase (decrease)in short-term borrowings ........................................... 546,845 (48,521) 46,814
Dividends paid ............................................................................ (7,571) (6,453) (4,838)
Exercise of stock options- ................................................................ 262 175 82
--------- --------- ---------
Net cash provided by financing activities ............................................... 526,686 121,965 114,398
--------- --------- ---------
(Decrease) increase in cash and cash equivalents .......................................... (7,380) 4,877 800
Cash and cash equivalents at beginning of year ............................................ 23,337 18,460 17,660
--------- --------- ---------
Cash and cash equivalents at end of year ................................................ $ 15,957 $ 23,337 $ 18,460
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest ................................................................................ $ 86,801 $ 73,917 $ 51,280
Income taxes ............................................................................ 12,145 12,027 10,265
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans ............................................. $ 7,469 $ 8,685 $ 7,409
Loans held to maturity reclassified as loans available for sale ......................... 8,013 9,410 0
Loans available for sale reclassified as loans held to maturity ......................... 0 0 3,351
Mortgage backed securities held to maturity reclassified as securities
available for sale ..................................................................... 0 13,700 17,149
Securities available for sale reclassified as mortgage backed
securities held to maturity ........................................................... 0 0 12,363
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bankers Corp. (the
Corporation) and its wholly-owned subsidiary Bankers Savings (the Bank) and its
inactive wholly-owned subsidiary, PASI Development, Incorporated. All
inter-company balances and transactions have been eliminated in the consolidated
financial statements. Certain amounts in prior periods have been restated to
conform to current presentation.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through branch offices in New Jersey. The Bank is subject to
competition from other financial institutions. The Bank is subject to the
regulations of certain Federal agencies and undergoes periodic examinations by
those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
condition and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
SECURITIES
Securities include investment securities and mortgage and asset-backed
securities. Effective January 1, 1994, the Bank accounts for securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115
requires that securities classified as available for sale be carried at fair
value with unrealized gains and losses reported net of applicable taxes as a
separate component of stockholders' equity.
Management determines the appropriate classification of the securities at the
time of purchase. Securities that may be sold in response to changing market and
interest rate conditions or as part of an overall asset liability strategy are
classified as available for sale. If management has the intent and the Bank has
the ability at the time of purchase to hold securities until maturity, they are
classified as held to maturity and carried at cost, adjusted for amortization of
premiums and accretion of discounts. Any portion of unrealized loss on an
individual security deemed to be other than temporary is recognized as a
realized loss in the period in which such determination is made. Gains or losses
on sales of securities are based upon the specific identification method.
PREMIUMS AND DISCOUNTS
Premiums and discounts on loans and securities purchased are amortized on a
method that approximates a level yield over the estimated average lives of the
assets.
LOANS
Loans are stated at their outstanding principal amount. Interest income on loans
is accrued and credited to interest income as earned. The accrual of income on
loans is discontinued after the loan becomes 120 days past due or when certain
factors indicate reasonable doubt as to the collectibility of principal and
interest. Once a loan becomes 120 days past due, interest accrued but not
collected is reserved. Subsequent cash receipts are either applied to the
outstanding principal balance or recorded as interest income depending on
management's assessment of the ultimate collectibility of principal and
interest.
LOANS AVAILABLE FOR SALE
38
<PAGE>
Mortgage loans available for sale are reported at the lower of cost or market on
an aggregate basis. Mortgages are carried net of deferred fees which are
recognized as income at the time the loans are sold to permanent investors.
Mortgage loans available for sale when securitized to facilitate their sale are
then included with securities available for sale. Gains and losses on the sale
of loans are recognized at the settlement date and are determined by the
difference between the net proceeds and the carrying value.
ALLOWANCE FOR LOAN LOSSES
Losses on loans are charged to the allowance for loan losses. Additions to this
allowance are made by recoveries of loans previously charged off and by a
provision charged to expense. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on collectibility of loans and prior loan loss
experience. Management believes that the allowance for loan losses is adequate.
The determination of the balance for the allowance for the loan losses is based
on an analysis of the loan portfolio, historical loan loss experience, economic
conditions and other factors that warrant recognition in providing for an
adequate allowance. Additions to the allowance may be necessary based on changes
in the economic conditions and other factors or as various regulatory agencies
may require after an examination based on their judgement and the information
available to them at the time of the examination.
LOAN FEES
Loan origination fees and certain direct costs of originations are deferred and
recognized over the estimated life of the loan as an adjustment to the loan's
yield.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Statement of Financial Accounting Standards No. 114, ("SFAS No. 114")
"Accounting by Creditors for Impairment of a Loan" and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," were adopted on January 1, 1995. These
statements address the accounting for impaired loans and specify how allowances
for loan losses related to these impaired loans are calculated. The Corporation
defined the population of impaired loans to include non-accrual loans in excess
of $500,000. Smaller balance homogeneous loans that are collectively evaluated
for impairment such as residential mortgage loans are specifically excluded from
the impaired loan portfolio. Adoption of these new standards had no effect on
the level of the allowance for loan losses or operating results for the year
ended December 31, 1995.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consists of foreclosed properties and is
recorded at the lower of the book value of the loan or the fair value of the
asset acquired, less estimated disposition costs. The excess, if any, of the
loan amount over the fair value of the asset acquired is charged off against the
allowance for loan losses. In accordance with AICPA Statement of Position 92-3,
"Accounting for Foreclosed Assets," subsequent changes in the value of OREO are
recorded directly to an OREO reserve. Increases in the OREO reserve as well as
expenses to administer such OREO, and any gains or losses realized upon the sale
of the property are charged to operating expenses.
BANKING PREMISES, FURNITURE AND EQUIPMENT
Land is carried at cost, and banking premises, furniture and equipment are
carried at cost, less accumulated depreciation. Depreciation on land
improvements and banking premises is provided for using the straight-line method
over the estimated useful life of ten to fifty years. The Bank depreciates
furniture and equipment using the declining balance method over the estimated
useful life of three to ten years. Leasehold improvements are amortized over the
term of the lease or estimated useful life of the asset, if shorter.
Expenditures for betterments and major renewals are capitalized, while repairs
and maintenance costs are charged to operations as incurred. Gains and losses on
dispositions are reflected in current operations.
INTANGIBLE ASSETS
Cost in excess of fair value of net assets acquired as the result of branch
purchases are being amortized on an accelerated basis over a period
approximating an average life of 10 years.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In the third quarter of 1995, the Corporation adopted, retroactive to January 1,
1995, Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Financial Accounting
Standards Board ("FASB") Statement No. 65, "Accounting for Certain Mortgage
Banking Activities" ("SFAS 65"), to require that mortgage banking enterprises
recognize as a separate asset the right to service mortgage loans for others
however those servicing rights are acquired. Previously under SFAS 65, only
39
<PAGE>
purchased mortgage servicing rights were permitted to be recognized. Under SFAS
122, mortgage servicing rights acquired through the sale of loans with servicing
rights retained will also be recognized. SFAS 122 also requires that mortgage
servicing rights be assessed for impairment based on the fair value of those
rights.
The Corporation's criteria for, and policies relating to, estimating the fair
value of mortgage servicing rights are consistent with the methods utilized for
estimating the fair value of purchased mortgage servicing rights as determined
by references to independent third party sources.
The adoption of SFAS 122 did not have a material effect on the Corporation's
earnings, liquidity and capital resources. As a result of the adoption of SFAS
122, the Corporation recognized a gain of $13,000 and $99,000 during the years
1996 and 1995, respectively. Originated mortgage servicing rights amounted to
$99,000 at December 31, 1996 and are being amortized over the life of the loans.
PENSION PLAN
The Bank's funded pension plan covers all employees who have met the eligibility
requirements of the plan. The Bank's funding policy is to contribute annually an
amount that can be deducted for Federal income tax purposes.
INCOME TAXES
The Corporation accounts for income taxes in accordance with the asset and
liability method. Under this method ,deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and due from banks and Federal funds sold. Generally, Federal funds are
sold for one-day periods.
EARNINGS PER SHARE
Earnings per share was computed by dividing net income applicable to common
stock by the total of the average number of common shares outstanding and the
additional dilutive effect of stock options outstanding during the respective
periods. The dilutive effect of stock options are considered in both primary and
fully diluted computations using the treasury stock method.
40
<PAGE>
Earnings per share has been computed based on the following:
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net income applicable to
common stock............................................ $24,325 $20,004 $21,004
Average number of common
shares outstanding...................................... 12,556 12,904 13,173
Average number of common
shares and common
equivalent shares outstanding........................... 12,808 13,223 13,500
Average number of common
shares and common
equivalent shares outstanding,
assuming full dilution.................................. 12,820 13,227 13,506
</TABLE>
STOCK OPTION PLANS
The Bank has accounted for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Bank adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Bank has
elected to continue to apply the provisions of APB Opinion No. 25.
NOTE 2 SUBSEQUENT EVENTS
On February 5, 1997, the Corporation signed a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Sovereign Bancorp, Inc. ("Sovereign")
headquartered in Wyomissing, Pennsylvania, providing for the merger of the
Corporation with and into Sovereign. The transaction is subject to customary
conditions including regulatory and shareholder approvals and is expected to be
consummated during the fourth quarter of 1997. The terms of the Merger Agreement
in part call for Sovereign to exchange $25.50 in Sovereign common stock for each
outstanding share of the Corporation's common stock. The price will stay fixed
at $25.50 per share of the Corporation's common stock if Sovereign's average
stock price remains between $11.00 and $16.50 per share (collectively, the
"collars") during a 15-day pricing period prior to the closing of the
transaction. The collars and the maximum and minimum exchange ratio will be
adjusted for Sovereign's 6-for-5 stock dividend declared January 16, 1997 and
payable March 14, 1997 and will be further adjusted for subsequent stock
dividends and splits so that the Corporation's shareholders shall receive the
same total dollar value. The number of shares of Sovereign common stock which
stockholders of the Corporation will receive upon consummation is based upon the
calculation set forth in the Merger Agreement.
NOTE 3 CONVERSION TO STOCK SAVINGS BANK, FORMATION OF BANK HOLDING COMPANY AND
SALE OF COMMON STOCK
On March 23, 1990 the Bank converted from a mutual savings bank to a capital
stock savings bank. The Bank issued all of its outstanding capital stock to
the Corporation, the holding company for the Bank's common stock.
At the time of conversion, the Bank established a liquidation account in an
amount equal to the Bank's net worth at March 31, 1989, for the benefit of
eligible account holders. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts in
the Bank after conversion.
41
<PAGE>
The liquidation account will be reduced annually to the extent that eligible
account holders have reduced their eligible deposits, and shall cease upon the
closing of the accounts and shall never be increased. In the event of
liquidation of the Bank, such person shall be entitled, after all payments to
creditors, to a distribution from the liquidation account before any
distribution to stockholders. As of December 31, 1996 the balance in the
liquidation account was $3.9 million.
NOTE 4 CASH ON HAND AND DUE FROM BANKS
Included in cash on hand and due from banks at December 31, 1996 and 1995 was
$4,975,000 and $4,637,000, respectively, representing reserves required to be
maintained by the Federal Reserve Bank.
NOTE 5 SECURITIES AVAILABLE FOR SALE
Securities available for sale as of December 31, 1996 are comprised of US
Treasury Notes with an estimated market value of $34,181,000 and an amortized
cost of $35,082,000. Gross unrealized losses on these securities were $901,000
at December 31, 1996. There were no security sales in 1996. Proceeds from sales
of securities available sale for 1995 were $14,625,000 with gross gains of $0
and gross losses of $1,665,000. There were no security sales in 1994. Securities
available for sale with an amortized cost of approximately $30,103,000 were
pledged under repurchase agreements at December 31, 1996.
In November 1995, the FASB issued a special report on the implementation of SFAS
No. 115. This special report provided an opportunity for a onetime reassessment
of the classification of securities as of a single measurement date between
November 15, 1995 and December 31, 1995. On December 19, 1995, the Bank recorded
a net transfer of $13,700,000 of mortgage-backed securities to available for
sale and subsequently sold the securities prior to December 31, 1995.
NOTE 6 INVESTMENT SECURITIES - HELD TO MATURITY
A summary of the amortized cost and estimated market value of investment
securities held to maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
(dollars in thousands)
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds:
US Treasury securities,
US Government Agency
obligations ................. $ 500 $ 0 $ 0 $ 500 $ 25,469 $ 308 $ 0 $ 25,777
Corporate ...................... 24,486 104 71 24,519 40,382 533 6 40,909
Municipals ..................... 975 42 0 1,017 980 69 0 1,049
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Investment Securities
held to maturity ............ $ 25,961 $ 146 $ 71 $ 26,036 $ 66,831 $ 910 $ 6 $ 67,735
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities due to prepayment or early call
privileges of the issuer.
42
<PAGE>
Estimated
Amortized Market
(dollars in thousands) Cost Value
Due in one year or less ...................... $20,904 $21,004
Due after one year
through five years ........................ 2,944 2,897
Due after five years
through ten years ......................... 200 193
Due after ten years .......................... 1,913 1,942
------- -------
$25,961 $26,036
======= =======
There were no sales of investment securities during 1996, 1995 and 1994.
Proceeds from maturities and calls of investment securities held to maturity
during 1996, 1995 and 1994 were $54,620,000, $20,256,000 and $34,977,000,
respectively.
Securities with an amortized cost of approximately $500,000 and $300,000 were
pledged for Treasury, Tax and Loan balances and public funds, respectively, at
December 31, 1996 and $5,005,000 and $300,000, respectively, at December 31,
1995. Securities with an amortized cost of approximately $0 and $14,998,000 were
pledged under repurchase agreements at December 31, 1996 and 1995, respectively.
NOTE 7 MORTGAGE-AND ASSET-BACKED SECURITIES - HELD TO MATURITY
Mortgage and asset-backed securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
(dollars in thousands)
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
Certificates of
participants in
pools of mort-
gage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC and FNMA .......... $ 180,847 $ 4,045 $ 0 $ 184,892 $ 206,267 $ 3,701 $ 0 $ 209,968
GNMA .................... 156,044 1,508 93 157,459 86,305 633 0 86,938
Sears Mortgage
Securities Corp. ........ 777 0 17 760 991 8 0 999
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
337,668 5,553 110 343,111 293,563 4,342 0 297,905
Collateralized ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
mortgage
obligations
and asset-backed
securities:
FHLMC and FNMA .......... 183,266 694 589 183,371 19,170 0 236 18,934
Privately issued ........ 160,584 425 1,711 159,298 147,841 268 1,832 146,277
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
343,850 1,119 2,300 342,669 167,011 268 2,068 165,211
Total mortgage ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
and asset-backed
securities held
to maturity ............. $ 681,518 $ 6,672 $ 2,410 $ 685,780 $ 460,574 $ 4,610 $ 2,068 $ 463,116
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
There were no sales of mortgage and asset-backed securities during 1996, 1995
and 1994.
43
<PAGE>
Securities with an amortized cost of approximately $351,000 and $442,000 were
pledged for public funds at December 31, 1996 and 1995, respectively. Securities
with an amortized cost of approximately $599,774,000 and $34,258,000 were
pledged under repurchase agreements at December 31, 1996 and 1995, respectively.
NOTE 8 LOANS AND OREO
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
Mortgage loans:
<S> <C> <C>
1-4 Family Residential .............................................. $ 1,517,069 $ 1,169,271
V.A. guaranteed and
F.H.A insured ..................................................... 31,901 38,490
Construction ........................................................ 1,157 1,880
Commercial and multi-family ......................................... 50,525 56,143
Conventional available
for sale .......................................................... 8,916 993
----------- -----------
1,609,568 1,266,777
Home equity loans ...................................................... 50,920 43,846
Consumer loans and other ............................................... 7,010 7,582
----------- -----------
1,667,498 1,318,205
Net premium on loans purchased ......................................... 5,253 3,932
Deferred loan fees ..................................................... (517) (741)
----------- -----------
Total loans ....................................................... $ 1,672,234 $ 1,321,396
=========== ===========
</TABLE>
Non-performing assets are as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Non-accrual loans ............................................................ $21,345 $24,947
Loans 90 days or more past due
and still accruing ....................................................... 3,014 1,446
------- -------
Non-performing loans ......................................................... $24,359 $26,393
======= =======
Other real estate owned ...................................................... 5,267 6,407
Less allowance for other
real estate owned ........................................................ 605 350
------- -------
Total other real estate owned ................................................ $ 4,662 $ 6,057
======= =======
</TABLE>
44
<PAGE>
The activity in the allowance for other real estate owned is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year ................................... $ 350 $ 602 $ 935
Provision charged
to operations ............................................... 0 0 0
Recoveries(Charge-offs) ........................................ 255 (252) (333)
----- ----- -----
Balance at end of year ......................................... $ 605 $ 350 $ 602
===== ===== =====
</TABLE>
The average balance of impaired loans during 1996 and 1995 was $120,000 and
$981,000, respectively. At December 31, 1996 there were no impaired loans and at
December 31, 1995 impaired loans totaled $604,000. Included in the allowance for
loan losses at December 31, 1995 was $240,000 relating to impaired loans. There
was no cash basis interest income recognized on impaired loans during 1996.
There were no commitments to fund additional amounts to these borrowers. The
amount of interest income which would have been recorded under contractual terms
for non-accrual loans totaled $2,267,000, $2,809,000 and $2,243,000 in 1996,
1995 and 1994, respectively.
Loans serviced by the Bank for others at December 31, 1996 and 1995 totaled
approximately $105,666,000 and $118,706,000, respectively, and are excluded from
the Bank's portfolio.
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year .................................. $ 8,137 $ 8,145 $ 8,898
Provision charged
to operations .............................................. 3,950 5,500 3,970
Charge-offs ................................................... (5,668) (5,665) (4,733)
Recoveries .................................................... 177 157 10
------- ------- -------
Balance at end of year ........................................ $ 6,596 $ 8,137 $ 8,145
======= ======= =======
</TABLE>
The Bank grants residential real estate loans on single and multi-family
dwellings throughout the State of New Jersey and purchases in and out of state
residential mortgage pools. Its borrowers' abilities to repay their obligations
are dependent upon various factors, including the borrowers' income and net
worth, cash flows generated by the underlying collateral, value of the
underlying collateral and priority of the Bank's lien on the property. Such
factors are dependent upon various economic conditions and individual
circumstances beyond the Bank's control. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and other
real estate owned is susceptible to changes in market conditions. The Bank
believes its lending policies and procedures, including those procedures over
purchased mortgage pools, adequately minimize the potential exposure to such
risks and that adequate provisions for loan losses are provided for all known
and inherent risks. Collateral and/or government or private guarantees are
required for virtually all loans.
45
<PAGE>
NOTE 9 BANKING PREMISES, FURNITURE AND EQUIPMENT
Banking premises, furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
1996 1995
<S> <C> <C>
Cost:
Land .................................................................... $ 1,833 $ 1,833
Banking premises ........................................................ 11,156 11,165
Leasehold improvements .................................................. 1,738 1,599
Furniture and equipment ................................................. 8,179 7,793
------- -------
22,906 22,390
Less accumulated
depreciation ............................................................ 12,060 11,033
------- -------
Total banking premises,
furniture and equipment ................................................. $10,846 $11,357
======= =======
</TABLE>
NOTE 10 DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(dollars in thousands)
<S> <C> <C>
Savings ............................................................................ $ 163,559 $ 175,777
Money market accounts .............................................................. 419,581 371,129
NOW and Super NOW accounts ......................................................... 82,411 77,730
Time accounts ...................................................................... 843,816 891,302
Time accounts, $100,000 or over .................................................... 66,864 62,877
Club deposits ...................................................................... 3,118 2,652
Demand deposits .................................................................... 49,713 49,787
---------- ----------
Total deposits ..................................................................... $1,629,062 $1,631,254
========== ==========
</TABLE>
Time deposit account maturities are summarized below:
<TABLE>
<CAPTION>
December 31,
1996 1995
(dollars in thousands)
<S> <C> <C>
Within one year ........................................................ $769,576 $762,803
One to two years ....................................................... 101,519 113,764
Over two years ......................................................... 39,585 77,612
-------- --------
Total time deposits .................................................... $910,680 $954,179
======== ========
</TABLE>
46
<PAGE>
NOTE 11 SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
Federal funds purchased:
<S> <C> <C>
Balance at December 31.................................... $11,000 $18,500
Average balance........................................... 8,116 5,555
Maximum amount
outstanding at any
month end............................................. 31,000 21,000
Average interest rate:
During the year........................................ 5.45% 5.86%
At December 31......................................... 7.25% 6.00%
</TABLE>
Federal funds purchased generally mature the day following the date of purchase.
<TABLE>
<CAPTION>
Securities sold under agreements to repurchase:
<S> <C> <C> <C>
Balance at December 31 ................................ $603,090 $48,745
Average balance............................................ 307,120 60,896
Maximum amount
outstanding at any
month end............................................. 605,822 89,745
Average interest rate:
During the year........................................ 5.56% 6.01%
At December 31......................................... 5.65% 5.82%
</TABLE>
The following table presents the repurchase liability, interest rate, amortized
cost and estimated market value of the securities sold under agreement to
repurchase at December 31, 1996, summarized by maturity distribution. Mortgage
and asset-backed securities held to maturity with an amortized cost of
$599,774,000 and US Treasury securities available for sale with an amortized
cost of $30,103,000 were pledged under repurchase agreements.
<TABLE>
<CAPTION>
At December 31, 1996
Repurchase Interest Amortized Estimated
(dollars in thousands) Liability Rate Cost Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in 31 to 90 days..................... $407,400 5.67% $423,003 $427,625
Due in 91 to 180 days.................... 143,178 5.59 150,854 150,926
Due in over 180 days..................... 52,512 5.50 56,020 55,093
</TABLE>
47
<PAGE>
NOTE 12 INCOME TAXES
Income tax expense attributable to income from continuing operations consists
of:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
Current tax expense:
<S> <C> <C> <C>
Federal .............................................. $ 11,887 $ 10,936 $ 10,159
State ................................................ 1,043 985 898
-------- -------- --------
12,930 11,921 11,057
Deferred tax expense:
Federal .............................................. 525 (1,136) 1
State ................................................ 46 (102) 0
-------- -------- --------
571 (1,238) 1
Total income tax expense ................................. $ 13,501 $ 10,683 $ 11,058
======== ======== ========
</TABLE>
A reconciliation between the effective Federal income tax expense and the amount
computed by multiplying the applicable statutory Federal income tax rate is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Income before tax .......................................... $ 37,826 $ 30,687 $ 32,062
======== ======== ========
Computed "expected"
tax expense at 35%
for 1996, 1995, and 1994 ................................ $ 13,239 $ 10,740 $ 11,222
Increase (decrease)
in income tax
expense resulting from:
State income tax,
net of Federal benefit .................................. 708 574 584
Other, net ................................................. (446) (631) (748)
-------- -------- --------
Income tax expense ......................................... $ 13,501 $ 10,683 $ 11,058
======== ======== ========
</TABLE>
48
<PAGE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1996, 1995 and 1994 are presented below in
thousands:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
Deferred tax assets:
<S> <C> <C> <C>
Deferred compensation, principally due to financial accrual .............................. $ 408 $ 358 $ 316
Accrual for post-retirement
benefits ............................................................................... 252 264 270
Unrealized holding losses on securities available for sale ............................... 0 0 1,120
Accrued interest ......................................................................... 46 30 0
Deferred origination fees ................................................................ 323 353 463
Compensated absences, principally due to accrual for financial
reporting purposes ..................................................................... 74 136 134
Mortgages, principally due to financial reporting allowance
for loan loss reserves ................................................................. 2,437 3,007 3,010
Other Real Estate Owned, due to financial reporting provisions for
doubtful collection .................................................................... 223 129 222
Other .................................................................................... 36 18 17
------ ------ ------
Total gross deferred tax assets .......................................................... 3,799 4,295 5,552
Less valuation allowances ................................................................ 0 0 0
------ ------ ------
Total deferred tax assets ................................................................ $3,799 $4,295 $5,552
Deferred tax liabilities:
Banking premises, furniture, & equipment, principally due to
differences in depreciation ............................................................ $ 228 $ 213 $ 208
Investments, due to difference in basis in accreted discount for tax
and financial reporting purposes ....................................................... 458 371 162
Prepaid FDIC Insurance ................................................................... 42 115 601
Intangible assets due to differences in amortization expected allowable
for tax versus financial reporting purposes .............................................. 394 456 574
Mortgages, principally due to tax basis reserve increases in excess of
base year reserves ..................................................................... 400 396 1,510
Deferred loan origination cost ........................................................... 221 168 86
Bonds, due to basis differences due to tax versus financial reporting
carrying values ........................................................................ 87 66 44
Pension accruals, principally due to differences in allowable funding
levels for tax versus financial reporting purposes ..................................... 32 5 14
Originated mortgage servicing rights (SFAS 122) .......................................... 37 34 0
------ ------ ------
Total deferred tax liabilities ........................................................... $1,899 $1,824 $3,199
------ ------ ------
Net Deferred Tax Assets .................................................................. $1,900 $2,471 $2,353
====== ====== ======
</TABLE>
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax asset account since it is "more likely than not"
that the deferred tax asset will be realized through a carryback to taxable
income and tax planning strategies. The conclusion that it is "more likely than
not" that the deferred tax asset will be realized is based on the history of
earnings and the prospects for continued growth including an analysis of
potential uncertainties that may affect future operating results. Management
believes that future taxable income will be sufficient to realize the benefits
of temporary deductible differences. Management will continue to review the tax
criteria related to the recognition of deferred tax assets.
The tax bad debt reserve method previously available to thrift institutions was
repealed in 1996. As a result, the Bank must change from the reserve method to
the specific charge-off method to compute its bad debt deduction.
Upon repeal, the Bank is required generally to recapture into income the portion
of its bad debt reserves (other than the supplemental reserve) that exceeds its
base year reserves, approximately $1,100,000.
49
<PAGE>
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. If the Bank meets a
"residential loan requirement" for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax years. Thus, recapture
can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior to
1996. Refinancings and home equity loans are excluded. The Bank has already
accrued the tax liability for the recapture amount.
NOTE 13 RECAPITALIZATION OF SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
institutions such as the Bank that have SAIF deposits, to recapitalize the SAIF
and spread the obligations for payment of Financing Corporation ("FICO") bonds
across all SAIF and BIF members. The Federal Deposit Insurance Corporation
("FDIC") special assessment amounted to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The special assessment was recognized in
1996 and is tax deductible. The Bank took a charge of $2.8 million before
tax-effect, as a result of the FDIC special assessment. This legislation
eliminated the substantial disparity between the amount that BIF and SAIF member
institutions have been paying for deposit insurance premiums.
NOTE 14 EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") DEBT
As part of the conversion to stock ownership, the Bank established an Employee
Stock Ownership Plan and Trust (the "ESOP"). The ESOP borrowed $2,956,770 from a
third party and purchased 867,319 shares of common stock of the Corporation. The
loan was secured by the shares of stock and guaranteed by the Bank. Shares have
been restated to reflect the 10% stock dividend, the 2 for 1 stock split and the
20% stock dividend. The loan to the third party with a remaining balance of
$1,249,670 was paid off by the Corporation in July 1994 and an unsecured term
note in the same amount was entered into between the ESOP and the Corporation.
The net cost to the Bank in 1996 for shares allocated to participants was
$222,000 and was included in salaries and employee expense which is exclusive of
$98,000 for dividends received by the ESOP during the year. The net cost to the
Bank in 1995 for shares allocated to participants was $305,000 and was included
in salaries and employee benefit expense which is exclusive of $145,000 for
dividends received by the ESOP during the year. The net cost to the Bank in 1994
for shares allocated to participants was $326,000, of which $54,000 was included
in interest expense paid to a third party and $272,000 was included in salaries
and employee benefits expense which is exclusive of $163,000 for dividends
received by the ESOP during the year
NOTE 15 EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank's non-contributory pension plan covers eligible employees who have met
the age and continuous service requirements of the plan. The benefits are based
on years of service and the employees' compensation during the last three years
of employment.
The following tables set forth the plan's funded status based on actuarial
valuation at September 30, 1996 and 1995 and amounts recognized in the
Corporation's consolidated financial statements at December 31, 1996 and 1995.
50
<PAGE>
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested ......................................................................... $ 5,060 $ 4,885
Non-vested ..................................................................... 302 257
------- -------
Accumulated benefit
obligation ...................................................................... 5,362 5,142
Effect of projected
future compensation
levels .......................................................................... 1,245 1,164
------- -------
Projected benefit
obligation ...................................................................... 6,607 6,306
Fair value of plan assets .......................................................... 8,039 7,268
------- -------
Excess of assets over
projected benefit
obligation ...................................................................... 1,432 962
Amount contributed
during fourth quarter ........................................................... 0 14
Unrecognized transition asset ...................................................... (270) (376)
Unrecognized gain .................................................................. (1,187) (549)
Unrecognized past
service liability ............................................................... (35) (38)
------- -------
(Accrued) prepaid expense .......................................................... $ (60) $ 13
======= =======
</TABLE>
Benefit obligations were determined using a weighted average discount rate of
7.75% as of September 30, 1996 and 7.50% as of September 30, 1995.
Net pension benefit includes the following components:
<TABLE>
<CAPTION>
Years ended
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost benefits earned
during the year ............................................ $ 290 $ 240 $ 288
Interest cost on projected
benefit obligation ......................................... 464 435 386
Return on plan assets ......................................... (1,005) (1,299) (12)
Net amortization and
deferral ................................................... 324 702 (587)
------- ------- -------
Total net periodic pension
expense ................................................... $ 73 $ 78 $ 75
======= ======= =======
</TABLE>
51
<PAGE>
The net periodic pension expense was determined using a weighted average
discount rate of 7.50% in 1996, 8.25% in 1995 and 7.00% in 1994. The long-term
weighted average rate of compensation was 5.50% for 1996, 6.00% for 1995 and
5.50% for 1994. The long-term weighted average rate of return on plan assets was
8.00% for 1996, 1995 and 1994. Plan assets consist of pooled mutual funds
managed by the Retirement System Group Inc.
POST-RETIREMENT BENEFITS
The Bank also provides certain health care and life insurance benefits to
eligible retired employees. Current eligible employees must satisfy certain
service and age requirements in order to be covered for post-retirement benefits
other than pensions. Currently, the Post-Retirement Benefit Plan is unfunded.
The post-retirement health care costs are capped. In addition, benefits are not
provided to anyone who was not at least age 55 on October 1, 1991.
The components of net periodic post-retirement benefit costs are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost ....................................................... $ 0 $ 6 $ 8
Interest cost ...................................................... 45 71 64
Net amortization ................................................... (7) 24 34
---- ---- ----
Net periodic post-retirement
benefit cost .................................................... $ 38 $101 $106
==== ==== ====
</TABLE>
The status of the post-retirement plan is as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Accumulated post-retirement benefit obligation:
A) Retirees ........................................................... ($405) ($726) ($663)
B) Active fully eligible
plan participants ................................................ (172) (130) (146)
C) Other active plan
participants ..................................................... (16) (79) (78)
----- ----- -----
(593) (935) (887)
Unrecognized (gain)/loss .................................................. (90) 220 156
----- ----- -----
Accrued post-retirement
benefit cost ......................................................... ($683) ($715) ($731)
===== ===== =====
</TABLE>
The 1996, 1995 and 1994 post-retirement costs were determined using assumed
weighted average discount rates of 7.50 %, 8.25% and 7.00%, respectively.
Assumed compensation increases were 5.50% for 1996, 6.00% for 1995 and 5.50% for
1994.
STOCK OPTION PLANS
Under the terms of two previous stock option plans, a total of 1,426,920 shares
of the Corporation's common stock were initially reserved for grant to eligible
employees and directors. The options granted under such plans are, in general,
exercisable not earlier than one year after the date of grant, at a price equal
to the fair market value of the common stock on the date of grant, and expire
not more than ten years after the date of grant. The stock options will vest
during a period of up to five years after the date of grant.
52
<PAGE>
A summary of stock activity related to these stock option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
STOCK OPTION PLANS ---------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1993 ......................................... 454,173 $3.41 & 11.98
Exercised ............................................................. (24,162) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1994 ......................................... 430,011 $3.41 & 11.98
Exercised ............................................................. (51,467) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1995 ......................................... 378,544 $3.41 & 11.98
Exercised ............................................................. (76,940) 3.41
Forfeited ............................................................. 0
-------- -------------
Outstanding at December 31, 1996 ......................................... 301,604 $3.41 & 11.98
</TABLE>
As of December 31, 1996 options for 290,085 shares were exercisable and the
weighted average exercise price was $3.92. No additional options will be granted
under these plans.
In 1993, the Corporation's stockholders approved two new stock option plans: a
key employees plan and an outside director plan. The number of shares reserved
under those plans shall not exceed 912,000 shares subject to adjustment for
stock dividends and splits. The options granted under this plan are, in general,
exercisable not earlier than one year after the date of grant, at a price equal
to the fair market value of the common stock on the date of grant, and expire
not more than ten years after the date of grant. The stock options will vest
during a period of up to five years after the date of grant.
53
<PAGE>
A summary of the key employee stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
-------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 ............................................... 31,200 $11.98
Granted .................................................................... 0
Exercised .................................................................. 0
------ ------
Outstanding at December 31, 1994 ............................................... 31,200 $11.98
Granted .................................................................... 9,000 13.50
Exercised .................................................................. 0
Expired .................................................................... 0
------ ------
Outstanding at December 31, 1995 ............................................... 40,200 $11.98 & 13.50
Granted .................................................................... 6,000 16.69
Exercised .................................................................. 0
Expired .................................................................... 0
------ ------
Outstanding at December 31, 1996 ............................................... 46,200 $11.98, 13.50 & 16.69
</TABLE>
There were no options granted under the outside directors' plan at December 31,
1996. All 46,200 options outstanding at December 31, 1996 were related to the
key employees stock option plan and 20,520 were exercisable with a weighted
average exercise price of $12.11. Options for 865,800 shares were available for
future grant. The option price per share represents the market value of the
Corporation's stock on the date of grant. The per share weighted-average fair
value of stock options granted during 1996 and 1995 was $3.16 and $3.46 on the
date of grant using the Black Shcoles option-pricing model with the following
weighted-average assumptions: 1996-expected dividend yield 3.46%, risk-free
interest rate of 5.36% and the expected life of 5 years; 1995-expected dividend
yield 3.13%, risk-free interest rate of 7.76% and the expected life of 5 years.
The Bank applies APB Opinion No. 25 in accounting for its Plans and accordingly,
no compensation cost has been recognized for its stock options in the financial
statements. Had the Bank determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the effect on 1996 and
1995 income before taxes and net income would have been immaterial, and the
effect is not expected to be material in future years.
DIRECTORS' PLANS
The Board of Directors of the Corporation has adopted the Bankers Corp. Outside
Directors' Deferred Compensation Plan ("Deferred Compensation Plan"). Under the
Deferred Compensation Plan each outside director shall become a participant in
the plan as of the first day of the month coincident with or next following his
completion of 84 months of credited service as an outside director. The deferred
compensation benefit will be paid to the participant or his heirs in equal
monthly installments for a period which shall not exceed the lesser of the
number of months of the participants credited service or 180 months. The annual
deferred compensation benefit shall be an amount equal to one-half of the sum of
the average of the last three (3) years annual Directors' retainer fee paid by
the Corporation to its Outside Directors, plus the average of the last three (3)
years fee paid for attendance at the regular Directors' Meeting. Two former
director's are currently receiving benefits under this plan which totaled
$16,704 for 1996 and $11,836 for 1995. The unfunded cost of this obligation is
accrued for on a current basis and totaled $45,000 for 1996, $42,000 for 1995
and $29,000 for 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
Under the ESOP, an employee of the Bank and/or its affiliates shall become a
participant when he or she has completed at least six (6) months of credited
service. The ESOP is to be funded by the Bank's annual contributions made in
cash (which will be invested primarily in the Corporation's common stock) or
common stock. Shares purchased by the ESOP are held in a suspense account for
allocation among the participants as the loan is paid.
54
<PAGE>
Contributions to the ESOP and shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. Benefits become 20% vested after the third year of credited service,
with an additional 20% vesting each year thereafter until 100% vesting after
seven years. For any year in which the aggregate of benefits to key employees
exceeds 60% of the aggregate benefits accrued to non-key employees, benefits
allocated to participants in that year will become 20% vested after two years,
increasing to 100% after six years. Forfeitures will be reallocated annually
among remaining participating employees. Benefits may be payable upon
retirement, separation from service, disability or death.
MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST
The Bank has established the Bankers Savings 1989 Management Recognition and
Retention Plan and Trust (the "MRP"), as a method of providing employees in key
management positions with a proprietary interest in the Corporation and to
encourage such key employees to remain with the Bank. The Bank contributed
$1,269,000 to the MRP to enable it to acquire 372,240 shares of the common stock
offered in the initial public offering. Under the MRP, awards can be granted to
key employees in the form of shares of common stock held by the MRP. Key
employees of the Bank will earn (i.e. become vested in) the shares of common
stock over a period of five years at an annual cost to the Bank of $254,000. The
cost to the Bank in 1995 totaled $63,000 and is now complete. There will be no
ongoing costs for future periods.
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
The Corporation and the Bank have entered into an employment agreement with one
executive officer for three (3) years with an annual provision for automatic
continuance unless timely notice is given. In an event of a change of control,
as defined in the agreement, or if the Corporation or the Bank terminates the
executive officer for reasons other than cause, the executive officer would be
entitled to receive severance payments of approximately three years salary,
bonus and other benefits.
Special termination agreements among the Corporation, the Bank and three
executive officers provide for a three year term. Commencing on the first
anniversary date and continuing on each anniversary thereafter, the agreements
will automatically be extended so that the remaining term shall be three years.
In the event a change in control occurs, each executive would be entitled to
receive payments in an amount equal to three times the highest annual base
salary paid. All agreements provide for termination for cause at any time.
NOTE 16 COMMITMENTS AND CONTINGENCIES
The Bank has entered into several lease agreements for branch sites. At December
31, 1996, approximate minimum annual rental commitments under these operating
leases, including the option periods, are as follows (dollars in thousands):
December 31,
PERIOD AMOUNT
1997........................................... $ 369
1998........................................... 369
1999........................................... 309
2000........................................... 275
2001........................................... 160
Thereafter through 2004..................... 190
--------------
Total $ 1,672
=========
Rental expense for 1996, 1995, and 1994 was $378,000, $289,000 and $239,000,
respectively.
In the normal course of business, there are outstanding various legal
proceedings, claims, commitments and contingent liabilities, such as guarantees
and commitments to extend credit, including loan commitments of $35.9 million
and $18.7 million (primarily residential mortgages) at December 31, 1996 and
1995, respectively, standby letters of credit of $1,778,000 and $128,000 at
December 31, 1996 and 1995, respectively, and undisbursed home equity credit
lines of $41.9 million and $36.2 million at December 31, 1996 and 1995,
respectively, which are not reflected in the accompanying consolidated financial
statements. In the
55
<PAGE>
opinion of management, the consolidated financial position of the Corporation
will not be materially affected by the outcome of such legal proceedings and
claims or by such commitments and contingent liabilities.
The Bank maintains $45.0 million in lines of credit with other banks. Borrowings
outstanding under these lines totaled $11.0 million and $18.5 million at
December 31, 1996 and 1995, respectively.
NOTE 17 DIVIDEND RESTRICTIONS
Subject to applicable law, the Board of Directors of the Bank and of Bankers
Corp. may each provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including,
without limitation, net income, capital requirements, financial condition,
alternative investment options, tax implications, prevailing economic
conditions, industry practices and other factors deemed to be relevant at the
time.
No dividends may be paid by the Bank to the Corporation if such dividends reduce
stockholders' equity below the amount required for the liquidation account (see
note 3) or applicable regulatory capital requirements.
The New Jersey Banking Law further restricts the amounts of dividends paid by
the Bank on its common stock to an amount which, following the payments of such
dividends, will not reduce paid in capital and retained earnings to an amount
less than 50% of common stock or the payment of such dividend will not reduce
the statutory surplus of the Bank. The Bank's certificate of incorporation
requires a capital surplus of $4 million. At December 31, 1996, the Bank's total
equity was $192.4 million of which $2.5 million was common stock.
NOTE 18 CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
<TABLE>
STATEMENTS OF CONDITION December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Assets
Investment in subsidiary bank ............................................... $192,442 $186,309
Advances to subsidiary bank ................................................. 2,115 217
Loans to subsidiary bank ESOP ............................................... 301 621
Dividends receivable
from subsidiary bank ...................................................... 0 1,600
-------- --------
Total assets .............................................................. $194,858 $188,747
======== ========
Liabilities and Stockholders' Equity:
Dividends payable ........................................................... 1,981 1,809
-------- --------
Total liabilities ......................................................... 1,981 1,809
-------- --------
Stockholders' Equity ...................................................... 192,877 186,938
-------- --------
Total Liabilities and
Stockholders' Equity .................................................. $194,858 $188,747
======== ========
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Years ended December 31,
(dollars in thousands) 1996 1995 1994
Dividend income from
<S> <C> <C> <C>
subsidiary Bank ........................................... $ 18,000 $ 6,200 $ 7,800
Interest Income on ESOP Loan .................................. 38 76 38
Expenses ...................................................... (93) (84) (136)
-------- -------- --------
Income before equity in
undistributed earnings
of the subsidiary bank .................................. 17,945 6,192 7,702
Equity in undistributed
earnings of the
subsidiary bank ......................................... 6,380 13,812 13,302
-------- -------- --------
Net income .............................................. $ 24,325 $ 20,004 $ 21,004
======== ======== ========
</TABLE>
57
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOW Years ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 24,325 $ 20,004 $ 21,004
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
earnings of the
subsidiary bank ...................................... (6,380) (13,812) (13,302)
(Decrease)increase
in other liabilities ............................................. 1 (132) 132
Decrease (increase) in dividends
receivable ....................................................... 1,600 (1,600) 0
-------- -------- --------
Net cash provided by
operating activities ....................................... 19,546 4,460 7,834
-------- -------- --------
Cash flows from investing activities:
Net change in ESOP loan ........................................ 320 450 (1,071)
(Increase) decrease in advances
to subsidiary bank ....................................... (1,899) 2,324 1,692
-------- -------- --------
Net cash (used in) provided
by investing activities .................................. (1,579) 2,774 621
-------- -------- --------
Cash flows from financing activities:
Treasury stock purchases ....................................... (10,658) (956) (3,699)
Dividends paid ................................................. (7,571) (6,453) (4,838)
Exercise of stock
options, net .......................................... 262 175 82
-------- -------- --------
Net cash used in
financing activities ........................................... (17,967) (7,234) (8,455)
-------- -------- --------
Net change in cash
for the year ..................................................... $ 0 $ 0 $ 0
======== ======== ========
</TABLE>
58
<PAGE>
NOTE 19 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain 1996 and 1995 quarterly consolidated financial
data:
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Quarter ended
Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
1996
Interest income............................ $42,546 $39,254 $36,895 $34,410
Interest expense........................... 26,429 23,586 21,464 19,400
Net Interest income........................ 16,117 15,668 15,431 15,010
Provision for loan losses.................. 900 900 1,250 900
Gains on sale of loans................... 11 5 5 5
Income before income tax expense......... 10,921 7,612 9,592 9,701
Net income................................. 6,957 5,022 6,139 6,207
Earnings per share:
Primary................................. .55 .40 .48 .47
Fully diluted........................... .55 .40 .48 .47
Cash Dividend Per share............... .16 .16 .16 .14
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Quarter ended
Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
1995
Interest income....................................... $33,945 $32,521 $31,885 $30,914
Interest expense...................................... 20,066 19,014 18,205 16,533
Net Interest income................................... 13,879 13,507 13,680 14,381
Provision for loan losses............................. 2,000 1,500 1,000 1,000
Loss on security transactions......................... (1,655) 0 0 (10)
Income before income tax expense...................... 6,062 8,071 8,039 8,515
Net income............................................ 4,222 5,181 5,149 5,452
Earnings per share:
Primary........................................... 0.32 0.39 0.39 0.41
Fully diluted..................................... 0.32 0.39 0.39 0.41
Cash Dividend Per share............................... 0.14 0.14 0.12 0.12
</TABLE>
59
<PAGE>
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107. "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Corporation
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments at
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 15,957 $ 15,957 $ 23,337 $ 23,337
Securities available for sale................... 34,181 34,181 --- ---
Investment securities........................... 25,961 26,036 66,831 67,735
Mortgage and asset-backed securities........... 681,518 685,780 460,574 463,116
Net loans...................................... 1,665,638 1,676,961 1,313,259 1,324,951
Accrued interest receivable.................... 15,181 15,181 13,090 13,090
Financial liabilities:
Deposits....................................... $1,629,062 1,630,952 $1,631,254 $1,634,635
Short-term borrowings.......................... 614,090 614,204 67,245 67,245
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.
INVESTMENT SECURITIES
All investment securities are actively traded in a secondary market and have
been valued using quoted market prices.
MORTGAGE AND ASSET-BACKED SECURITIES
All mortgage-and asset-backed securities are actively traded in a secondary
market and have been valued using quoted market prices.
NET LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as residential and
commercial real estate, commercial and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms, and by
performing and non-performing categories.
The fair value of loans is estimated by discounting contractual cash flows using
estimated market discount rates which reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing credit costs.
The fair value of significant non-performing loans is based on either recent
external appraisals or estimated cash flows which are discounted using a rate
commensurate with the associated risk. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available market
information and specific borrower information.
ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.
60
<PAGE>
DEPOSITS
The fair value of deposits, with no stated maturity, such as non-interest
bearing demand deposits, savings, and NOW and money market accounts, is equal to
the amount payable on demand as of December 31, 1996 and 1995. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
SHORT-TERM BORROWINGS
The fair value of short-term borrowings is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for borrowing of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties and at
December 31, 1996 and 1995 approximates the contract amount.
LIMITATIONS
The preceding fair value estimates were made at December 31, 1996 and 1995,
based on pertinent market data and relevant information on the financial
instrument. These estimates do not include any premium or discount that could
result from an offer to sell at one-time the Bank's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Bank's financial instruments, fair value estimates
were necessarily based on judgments with respect to future expected loss
experience, current economic conditions, risk assessments of various financial
instruments involving a myriad of individual borrowers, and other factors. Given
the innately subjective nature of these estimates, the uncertainties surrounding
them and the matters of significant judgment that must be applied, these fair
value estimates cannot be calculated with precision. Modifications in such
assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 1996 and 1995, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
NOTE 21 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1996, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject and meets the requirements to be
categorized as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events that management believes
would have changed the Bank's capital classification.
61
<PAGE>
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
FDIC REQUIREMENTS
------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL CAPITALIZED
--------------- ----------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Leverage(Tier 1)capital $189,680 7.87% $ 96,435 4.00% $120,544 5.00%
Risk-based capital:
Tier 1 189,680 16.64 45,584 4.00 68,377 6.00
Total 193,308 16.96 91,169 8.00 113,961 10.00
DECEMBER 31, 1995
Leverage(Tier 1)capital $182,200 9.69% $ 75,178 4.00% 93,973 5.00%
Risk-based capital:
Tier 1 182,200 19.47 37,424 4.00 56,137 6.00
Total 184,797 19.75 74,849 8.00 93,561 10.00
</TABLE>
NOTE 22 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
The statement provides standards for distinguishing transfers of financial
assets that are sales from those that are secured borrowings, and provides
guidance on the recognition and measurement of asset servicing contracts and on
debt extinguishments. As issued, SFAS 125 is effective for transactions
occurring after December 31, 1996. However, as a result of an amendment to SFAS
125 issued by the FASB in December 1996, certain provisions of SFAS 125
are deferred for an additional year. Adoption of the new accounting standard is
not expected to have a material impact on the Corporation.
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names of the Corporation's directors, their
ages and the year in which each became a director of the Corporation. There are
no arrangements or understandings between the Corporation and any director
pursuant to which such person was elected or nominated to be a director of the
Corporation.
<TABLE>
<CAPTION>
END OF DIRECTOR
NAME AGE(1) TERM POSITION HELD WITH THE COMPANY SINCE(2)
- ---- ------ ---- ------------------------------ --------
<S> <C> <C> <C> <C>
Joseph P. Gemmell 61 1999 Chairman of the Board, President 1983
and Chief Executive Officer
Andrew P. Arbes 66 1997 Director 1979
James J. Elek 59 1999 Director 1989
George Gundrum 72 1997 Director 1972
Joseph H. Harrigan 53 1997 Director 1985
Michael J. McMahon 53 1998 Director 1986
Ralph Mendez 60 1998 Director 1989
</TABLE>
- -----------------------
(1) At March 1, 1997.
(2) Includes service as a director of the Bank prior to the conversion of the
Bank from mutual to stock form and the issuance of the Bank's stock to the
Corporation.
63
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Corporation and Bank are Mr. Gemmell, who also
serves as a director of the Corporation and Bank, Howard S. Garfield II, Michael
Ghabrial and Margaret Paronich, who do not serve as directors of the Corporation
or Bank.
BIOGRAPHICAL INFORMATION
The principal occupation and business experience of each director and executive
officer is set forth below.
DIRECTORS
JOSEPH P. GEMMELL has served as President and Chief Executive Officer
of the Corporation and Bank since 1983 and Chairman of the Board of Directors
since 1989. His prior banking experience spans some 40 years with thrift and
commercial banking organizations. Mr. Gemmell has been the state chairman of
Conference of State Bank Supervisors, since 1992. He is a member of the Federal
Reserve Bank of New York Thrift Institutions Advisory Panel. He is also a member
of the board of directors of each of the following: Retirement System Group of
New York, Middlesex County College Foundation, Garden State Hospitalization
Plan, Blue Badge Association of Middlesex County, and Vice Chairman of the
Woodbridge Economic Development Corp.
ANDREW P. ARBES is the former President and owner-operator of Clare &
Coby's Restaurant in Old Bridge, New Jersey.
JAMES J. ELEK serves as the President and owner of J.J. Elek Realty
Company, an independent real estate firm in Middlesex County, New Jersey.
GEORGE GUNDRUM is the owner of Gundrum Service Home for Funerals.
JOSEPH H. HARRIGAN serves as President of J.J. Harrigan & Co. Inc., a
real estate, insurance and appraisal firm. He is a Director of South Amboy
Memorial Hospital and serves as Chairman of the Garden State Hospitalization
Plan.
MICHAEL J. MCMAHON serves as Chairman and Chief Executive Officer of
Boynton Brothers & Company, an independent insurance agency. He is also a
member of the Board of Directors of Raritan Bay Medical Center.
RALPH MENDEZ serves as President of Mendez Dairy, Inc., the distributor
of Ideal Dairy Products in the tri-state area, and is Chief Executive Officer of
Tropical Cheese Industries, a cheese manufacturing company. Mr. Mendez
previously served as a member of the Board of Directors of First Jersey National
Bank/Central.
64
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
HOWARD S. GARFIELD II, age 49, serves as Senior Vice President and
Chief Financial Officer of the Corporation and Bank. Prior to 1996, he also
served as Comptroller of the Bank. He has been with the Bank since 1981 and is
responsible for the treasury functions of the Bank and the management of the
Bank's securities investment portfolio. He has over 26 years of banking and
thrift experience. Mr. Garfield is a past president of the New York/New Jersey
Chapter of the Financial Managers Society.
MICHAEL GHABRIAL, age 43, has served as Senior Vice President and Chief
Operations Officer of the Corporation and Bank since 1993. Prior to such time,
he served as Senior Vice President and Chief Administrative Officer. He is
responsible for general Bank operations, special projects and corporate
insurance. Mr. Ghabrial has over 18 years of banking and accounting experience.
Mr. Ghabrial is the vice chairman of the automation committee for the Savings
Council and the treasurer for the Perth Amboy Special Improvement District. He
is also a director for the Perth Amboy Chamber of Commerce Board, past president
and director for the Woodbridge-Perth Amboy Rotary Club, a member of the Perth
Amboy Mayor's Economic Development Committee and a director of the Edison
Educational Foundation.
MARGARET PARONICH, age 49, has served as Senior Vice President and
Corporate Secretary of the Corporation and Bank since 1993. She has served as
Marketing Director of the Bank since 1989 and has been a Vice President of the
Bank since 1987. She has also been Investor Relations department head since 1990
and Depositor Services Department head since 1992. She is responsible for all
marketing, advertising, stockholder relations and the Administrative and
Depositor Services Departments of the Bank, including new banking systems
development and procedural documentation. Ms. Paronich has over 30 years of
thrift banking experience.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Corporation's directors and
certain officers, and persons who own more than ten percent of a registered
class of the Corporation's equity securities to file reports of ownership and
changes in ownership with the SEC and the National Association of Securities
Dealers, Inc. Officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Corporation with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished to the
Corporation, or written representations that no forms were necessary, the
Corporation believes that, during the last fiscal year, all filing requirements
applicable to its officers, directors and greater than ten percent stockholders
were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. In 1996, Directors of the Corporation who were not
employees of the Bank or the Corporation received a $12,000 annual retainer fee
and a fee of $600 for each meeting of the Board of Directors of the Bank
attended. The Vice Chairman of the Board received an additional retainer fee of
$12,000. In addition, each Committee chairperson received a $3,000 annual
retainer fee and members of the Committees received $450 for each meeting
attended. Officers of the Bank or Corporation who are Directors did not receive
fees for attending meetings.
DEFERRED COMPENSATION PLAN. The Bank maintains the Bankers Savings
Outside Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan"). Under the Deferred Compensation Plan, members of the Board of Directors
become participants following the completion of 84 months of service, except
that in the event of a change in control, as defined in the Deferred
Compensation Plan, all directors will be eligible for a benefit under the
Deferred Compensation Plan regardless of their period of service. Following the
date a participant ceases to be an outside director, such participant will be
eligible to receive an annual amount equal to one-half the sum of the average of
the last three year's annual retainer fee paid to directors plus the average of
the last three years fee paid for attendance at the meetings of the Board of
Directors. Such amount will be paid in equal monthly installments for a period
not to exceed the lesser of the number of months of the participant's service or
180 months. In the event of a change in control, as defined in the Deferred
Compensation Plan, a participant may elect to require the company or its
65
<PAGE>
successor to purchase an annuity contract from an insurance company to provide
such participant's benefit or to receive an immediate lump sum payment equal to
the present value of the sum of such participant's monthly benefit payments. Two
former directors received benefits under the Deferred Compensation Plan in 1996
which totaled $16,704.
DIRECTORS' STOCK OPTION PLAN. The Corporation maintains the 1993 Stock
Option Plan for Outside Directors ("Directors' Stock Option Plan"). Under the
Directors' Stock Option Plan, each outside director who began service as a
member of the Board of Directors after April 30, 1993 may be granted
non-statutory stock options to purchase up to 24,000 shares of Common Stock (as
adjusted to reflect stock splits and dividends). The exercise price of such
options will be equal to the fair market value of the Common Stock on the date
of grant. All options granted under the Directors' Stock Option Plan vest at a
rate of 20% per year. Each option granted will expire upon the earlier of 10
years following the date of grant, or 30 days following the date on which the
Director ceases to serve on the Board of Directors, except in the event of a
Director's death, in which case the option must be exercised with 6 months. No
options have been granted under the Directors' Option Plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table shows, for the fiscal
years ended December 31, 1996, December 31, 1995 and December 31, 1994, the cash
compensation paid by the Bank, as well as certain other compensation paid or
accrued for those years, to the CEO and the highest paid executive officer whose
base salary and bonus exceeded $100,000 in 1996 ("Named Executive Officers") of
the Corporation. The Corporation has not paid any cash compensation to the Named
Executive Officers. No other officers received total compensation in excess of
$100,000 in fiscal 1996.
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- -------------------- -----------------------
All
Other Restricted Other
Annual Stock Options/ LTIP Annual
Name and Salary Bonus Compensation(2) Awards SARs(3) Payouts Compensation(4)
Principal Position(1) Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- -------- -------- --------------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph P. Gemmell
Chairman of the Board,
President and Chief
Executive Officer 1996 $425,000 $125,000 --- --- --- --- $52,746
1995 400,000 125,000 --- --- --- --- 66,979
1994 365,000 150,000 --- --- --- --- 56,399
Howard S Garfield II
Senior Vice President
and Chief Financial
Officer 1996 108,000 --- --- --- --- --- 41,694
1995 101,000 --- --- --- --- --- 41,716
1994 94,000 --- --- --- --- --- 33,602
</TABLE>
- ------------------
(1) Titles are for both the Corporation and the Bank
(2) Perquisites for the years ended December 31, 1996, December 31, 1995
and December 31, 1994 did not exceed the lesser of $50,000 or 10% of
the total of salary and bonus as reported for the Named Executive
Officer.
(3) No options were awarded under the Corporation's 1989 Incentive Stock
Option Plan ("Incentive Stock Option Plan") and the Long-Term Stock
Benefit Plan for the years ending December 31, 1996, December 31, 1995
and December 31, 1994. For a discussion of the terms of the grants and
vesting of options awarded in prior years, see "Incentive Stock Option
Plan and Long-Term Stock Benefit Plan" below and the corresponding
tables.
(4) Includes allocations of shares of Common Stock with a total market
value of $46,428, $60,661 and $52,349 as of December 31, 1996, 1995 and
1994, respectively, under the Bank's ESOP for the account of Mr.
Gemmell, and allocations of shares of Common Stock with a market value
of $40,814, $40,836 and $32,795 as of December 31, 1996, 1995 and 1994,
respectively, under the ESOP for the account of Mr. Garfield. Includes
term life insurance paid by the Bank for Mr. Gemmell of $6,318, $6318
and $4,050 for the years ending December 31, 1996, 1995, and 1994,
respectively, and for Mr. Garfield of $880, 880 and $807 for the years
ending December 31, 1996, 1995, and 1994, respectively.
66
<PAGE>
EMPLOYMENT AGREEMENT
The Corporation and the Bank entered into an employment agreement ("Employment
Agreement") with Mr. Gemmell, effective as of March 23, 1990, which was
subsequently amended effective as of January 22, 1996. Such Employment Agreement
is designed to establish his duties and compensation, to assure his continued
employment and to assure that the Corporation and the Bank will be able to
maintain a stable and experienced management base.
The Employment Agreement provides for an initial five year term. Commencing on
the third anniversary of the effective date of the Employment Agreement, the
Employment Agreement provides for automatic annual extensions so that the
remaining term will be three years, unless either the executive or the
Corporation gives timely written notice of termination.
The Employment Agreement provides for an annual base salary of $425,000 to be
reviewed and increased annually in an amount not less than the percentage
increase in the cost-of-living as measured by the Consumer Price Index for the
preceding twelve (12) months. In addition to base salary, the Employment
Agreement provides, among other things, for participation in stock and other
employee benefit plans and other fringe benefits for executive personnel.
The Employment Agreement provides for Termination for Cause, as defined in the
Employment Agreement, by the Bank and Corporation at any time. In the event that
the Bank and the Corporation terminate the executive's employment for reasons
other than a Termination for Cause, or in the event of the executive's
resignation from the Bank and the Corporation upon (i) a failure to reappoint
him to his current offices, (ii) a material reduction of his functions, duties
or responsibilities, or a relocation of his principal place of employment, (iii)
a liquidation, dissolution, consolidation or merger in which the Bank or the
Corporation is not the resulting entity, or (iv) a breach of the Employment
Agreement by the Bank or Corporation, the executive or, in the event of death,
his beneficiary, would be entitled to a severance payment equal to the greater
of thirty-six times the executive's highest monthly rate of base salary during
the term of the Employment Agreement or the remaining salary payments due under
the Employment Agreement, and other benefits that would have been received by
the executive during the remaining term of the Employment Agreement. The Bank
and Corporation would also continue life, health and disability insurance
coverage for the earlier of the remaining unexpired term of the Employment
Agreement or until the executive's full-time employment by another employer.
Upon a change in control of the Bank or the Corporation followed by the
voluntary or involuntary termination of the executive, he would be entitled to a
severance payment equal to the sum of (i) the greater of thirty-six times the
executive's highest monthly rate of base salary or the salary payable to the
executive under the remaining term of the Employment Agreement, and (ii) the
aggregate amount of the bonuses that would have been paid to him during the
thirty-six months following his termination. In addition, the executive would
receive an amount equal to the other cash compensation and benefits that he
would have received during the remaining term of his Employment Agreement.
Payments made under the Employment Agreement in the event of a change in control
may constitute an "excess parachute payment" under Section 280G of the Code for
the executive, resulting in the imposition of an excise tax on the recipient.
The Employment Agreement provides that the executive will be indemnified for any
excise taxes imposed due to such excess parachute payments, and any additional
income and employment taxes imposed as a result of such indemnification of
excise taxes. Any excess parachute payments and indemnification amounts paid
will not be deductible compensation expenses for the Corporation or the Bank.
Assuming a change in control had occurred on December 31, l996 followed by the
executive's termination of employment, he would receive severance payments
having a present value of approximately $2,167,000 in addition to other non-cash
benefits provided for under the Employment Agreement.
For purposes of the Employment Agreement, a "change in control" is generally
defined to mean: (i) a change in control of a nature that would be required to
be reported in response to Item 1 of the Current Report on Form 8-K or as
defined by the Rules and Regulations of the Federal Reserve Board; (ii) the
acquisition by a person or group of persons of beneficial ownership of 20% or
more of the Common Stock of the Bank or the Corporation during the term of the
Employment Agreement; (iii) a tender offer for 20% or more of the voting
securities of the Bank or the Corporation or an exchange offer, business
combinations, sale of assets; or (iv) contested election which results in a
change of a majority of the Board of Directors.
67
<PAGE>
SPECIAL TERMINATION AGREEMENT
The Corporation and Bank have entered into a special termination agreement
("Special Termination Agreement") with Mr. Garfield, effective as of March 23,
1990. The Special Termination Agreement provides for an initial three-year term.
Commencing on the first anniversary of the effective date of the Special
Termination Agreement, the Special Termination Agreement provides for automatic
annual extensions so that the remaining term will be three years, unless either
the executive or the Corporation gives timely written notice of termination. The
Special Termination Agreement provides that any time following a change in
control, as generally defined above, of the Corporation or the Bank, if the
Corporation or the Bank were to terminate the executive's employment for any
reason other than "cause", as defined in the Special Termination Agreement, or
if the executive were to terminate his own employment following his demotion,
loss of title, office, significant authority, a reduction in his compensation,
or a relocation of his principal place of employment, the executive or, in the
event of death, his beneficiary, would be entitled to receive a payment in an
amount equal to three times the highest annual base salary paid for the three
previous years of his employment with the Bank. In addition, the Bank and
Corporation would also continue life, health and disability insurance coverage
for the lesser of the remaining term of the employment Special Termination
Agreement or until the executive's full-time employment by another employer. The
Special Termination Agreement provides that, if payments thereunder constitute
an "excess parachute payment" under Section 280G of the Code for the executive,
the aggregate amount payable under the Special Termination Agreement will be
reduced to one dollar below the amount which would subject the executive to the
payment of an excise tax. Assuming a change in control had occurred on December
31, 1996 followed by the executive's termination of employment, the amount
payable to the executive pursuant to his Special Termination Agreement would be
approximately $340,000.
INCENTIVE STOCK OPTION PLAN AND LONG-TERM INCENTIVE STOCK BENEFIT PLAN
The Corporation maintains the Incentive Stock Option Plan and the Long-Term
Incentive Stock Benefit Plan, which provide for discretionary awards of stock
options to officers and key employees as determined by the committee that
administers the plan. No options were granted in 1996. The following table
provides certain information with respect to the number of shares of Common
Stock represented by outstanding options held by the Named Executive Officers as
of December 31, 1996. Also reported are the values for "in-the-money" options
which represents positive spread between the exercise price of any such existing
stock options and the year end price of Common Stock.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF VALUE OF UNEXERCISED
VALUE SECURITIES UNDERLYING IN-THE-MONEY
SHARES REALIZED UNEXERCISED OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON AT FISCAL YEAR-END AT FISCAL YEAR-END
ON EXERCISE EXERCISE (#) ($)(2)
NAME (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Joseph P. Gemmell 25,000 $325,688 $137,647/0 $2,300,770/0
Howard S. Garfield 13,983 $182,164 0/0 $ 0/0
</TABLE>
- ------------------------
(1) Based upon the difference between the average market price of the
Common Stock as reported on the Nasdaq National Market System on the
date of exercise and the $3.41 exercise price of the options.
(2) Based upon the difference between $20.125, the closing price of the
Common Stock as reported on the Nasdaq National Market System on
December 31, 1996, and the $3.41 exercise price of the options.
RETIREMENT PLAN
The Bank maintains and funds a tax-qualified non-contributory defined benefit
plan for its employees, which is jointly administered by the Bank and RSI
Retirement Fund, a full-service pension trust that serves the thrift industry.
All full-time employees age 21 or older who have completed at least one year of
service participate in the plan. The plan provides an annual benefit payable at
age 65, equal to 2.0% of the participant's three-year average annual earnings,
as defined in the Retirement Plan, multiplied by
68
<PAGE>
credited service, reduced by 1 2/3% of the annual primary social security
benefit multiplied by years of credited service after January 1, 1977.
<TABLE>
<CAPTION>
PENSION PLAN TABLE(1)
AVERAGE YEARS OF CREDITED SERVICE
ANNUAL
EARNINGS 15 20 25 30 35(2)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
150,000 45,000 60,000 75,000 90,000 90,000
175,000(4) 52,500 70,000 87,500 105,000 105,000
200,000(4) 60,000 80,000 100,000 120,000(3) 120,000(3)
250,000(4) 75,000 100,000 125,000(3) 150,000(3) 150,000(3)
300,000(4) 90,000 120,000(3) 150,000(3) 180,000(3) 180,000(3)
350,000(4) 105,000 140,000(3) 175,000(3) 210,000(3) 210,000(3)
400,000(4) 120,000(3) 160,000(3) 200,000(3) 240,000(3) 240,000(3)
450,000(4) 135,000(3) 180,000(3) 225,000(3) 270,000(3) 270,000(3)
500,000(4) 150,000(3) 200,000(3) 250,000(3) 300,000(3) 300,000(3)
525,000(4) 157,500(3) 210,000(3) 262,500(3) 315,000(3) 315,000(3)
</TABLE>
- ------------------------
(1) The annual benefits shown in the table above assume the participant
would receive his benefits under the Retirement Plan in the form of a
straight life annuity at normal retirement age, without reduction for
Social Security benefits. Benefit payments are based on the employee's
base salary. See "Summary Compensation Table".
(2) Normal retirement benefits are limited to 60% of average annual
earnings not to exceed 30 years.
(3) The benefits shown are hypothetical benefits based upon the Retirement
Plan's normal retirement benefit formula. The maximum annual benefit
permitted under Section 415 of the Code in 1996 is $120,000 and in 1997
is $125,000, or if higher, a member's current accrued benefit as of
December 31, 1982 (but not more than $136,425). The $125,000 ceiling
will be adjusted to reflect cost of living increases after 1997 in
accordance with Section 415 of the Code. The Bank's Supplemental
Retirement Plan ("SERP") will provide the difference between the amounts
appearing in this table and the maximum amount allowed by the Code.
(4) The benefits shown corresponding to these compensation ranges are
hypothetical benefits based upon the Retirement Plan's normal retirement
benefit formula. Under Section 401(a)(17) of the Code, a participant's
compensation in excess of $150,000 (as adjusted to reflect
cost-of-living increases) is disregarded for purposes of determining
average annual earnings. The limitation is $160,000 for plan years
beginning in 1997. The limitation will be adjusted to reflect cost of
living increases after 1997 in accordance with Section 401(a)(17) of the
Code. The table reflects amounts payable in conjunction with the SERP.
As of December 31, l996, Mr. Gemmell had 23 years and 5 months of credited
service and Mr. Garfield had 15 years and 5 months of credited service.
SUPPLEMENTAL RETIREMENT PLAN. The Bank has adopted the SERP, which provides for
a retirement benefit payable to a participant equal to the difference between
the annual benefit such participant would have been entitled to under the
Retirement Plan if such benefits were computed without giving effect to the
limitations on benefits payable imposed by Sections 415 and 401(a)(17) of the
Code, and the annual amount payable to the employee under the Retirement Plan.
Benefits commence under the SERP on the same date as payments under the
Retirement Plan. Benefits under the SERP are paid directly by the Bank. The SERP
is unfunded.
As of December 31, 1996, only Mr. Gemmell is eligible for a benefit under the
SERP in an annual amount of $82,061. At age 65, based on actuarial assumptions,
Mr. Gemmell would be eligible for an annual benefit of $137,963 under the SERP.
69
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as to those persons believed
by management to be beneficial owners of more than 5% of the Corporation's
shares of Common Stock as of March 1, 1997. Persons and groups owning in excess
of 5% of the Corporation's Common Stock outstanding are required to file certain
reports regarding such ownership with the Corporation and with the Securities
and Exchange Commission, in accordance with Sections 13(d) and 13(g) of the
Exchange Act. Other than those persons listed below, the Corporation is not
aware of any person or group who is the beneficial owner of more than 5% of the
Corporation's Common Stock as of March 1, 1997.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT
NATURE OF OWNERSHIP OF
NAME AND ADDRESS BENEFICIAL COMMON STOCK
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Bankers Savings 1,090,735(2) 8.8%
Employee Stock Ownership Plan
and Trust (the "ESOP")
210 Smith Street
Perth Amboy, New Jersey
Common Stock Joseph P. Gemmell 895,085 7.1%
Chairman of the Board, President and
Chief Executive Officer
Bankers Corp.
210 Smith Street
Perth Amboy, New Jersey
</TABLE>
- ------------------------
(1) The percentage ownership has been calculated based upon 12,387,184
shares outstanding as if March 1, 1997, except that the percentage with
respect to Mr. Gemmell has been calculated on the basis of such number
of shares outstanding, plus 137,647 shares which Mr. Gemmell has the
right to acquire within 60 days after March 1, 1997 by the exercise of
stock options.
(2) The entire Board of Directors, which acts as the trustee for the ESOP
(the "ESOP Trustee"), may be deemed to share investment and voting
power of the shares of Common Stock held by the ESOP Trust. Each member
of the Board of Directors disclaims beneficial ownership of the shares
of Common Stock held by the ESOP Trust. Common Stock purchased by the
ESOP is released from a suspense account and allocated to participants
annually based on contributions made to the ESOP by the Corporation.
Shares released from the suspense account are allocated among
participants in proportion to their compensation, as defined in the
ESOP, for the year the contributions are made, up to the limits
permitted under the Code. The ESOP Trustee must vote all allocated
shares held in the ESOP in accordance with the instructions of
participants. Shares of Common Stock are allocated to participants
under the ESOP as of December 31st of each year. As of December 31,
1996, 1,002,457 shares of Common Stock in the ESOP had been allocated,
but not distributed, to participants. Under the ESOP, unallocated
shares will be voted by the ESOP Trustee in a manner calculated to most
accurately reflect the voting instructions received from participants
regarding the allocated shares so long as such vote is in accordance
with the requirements of the Employee Retirement Income Security Act of
1974, as amended.
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of Common
Stock beneficially owned by each director of the Corporation, by each Named
Executive Officer of the Corporation identified in the Summary Compensation
Table included in Item 11 herein and all directors and executive officers of the
Corporation or the Bank as a group as of March 1, 1997. Except as otherwise
indicated, each person and each group shown in the table has sole voting and
investment power with respect to the shares of Common Stock indicated.
70
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OWNERSHIP
BENEFICIAL OWNERSHIP OF COMMON
NAME TITLE(1) (2)(3)(4)(5)(6) STOCK OUTSTANDING
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joseph P. Gemmell Chairman of the Board, President and 895,085 7.1%
Chief Executive Officer
Howard S. Garfield Senior Vice President and 126,383 1.0%
Chief Financial Officer
Andrew P. Arbes Director 147,657 1.2%
James J. Elek Director 416,241 3.4%
George Gundrum Director 43,032 *
Joseph H. Harrigan Director 88,854 *
Michael J. McMahon Director 329,136 2.6%
Ralph Mendez Director 353,388 2.9%
All directors and executive
officers as a group (10 persons) 2,615,841(7) 20.7%
</TABLE>
- ------------------------
* Less than 1% of outstanding Common Stock.
(1) Titles are for both the Corporation and the Bank.
(2) The figures shown include shares with the right to acquire beneficial
ownership by the exercise of stock options as follows: Mr. Gemmell,
137,647 shares; Mr. Harrigan, 71,344 shares; Mr. McMahon, 35,344
shares; and all directors and executive officers as a group, 274,099
shares.
(3) The figures shown include shares held in trust pursuant to the ESOP
that have been allocated as of December 31, 1996 to individual accounts
as follows: Mr. Gemmell, 98,993 shares; Mr. Garfield, 38,022 shares;
and all directors and executive officers as a group, 190,221 shares.
Such persons have sole voting power but no investment power, except in
limited circumstances, as to such shares. The figures shown do not
include 88,287 shares held in trust pursuant to the ESOP that have not
been allocated to any individual's account and as to which the members
of the Bank's Board of Directors, as the ESOP Trustee, may be deemed to
share investment and voting power, and as to which Messrs. Gemmell and
Garfield as participants may be deemed to share voting power, thereby
causing each such person to be deemed a beneficial owner of such
shares. Each of the members of the Board of Directors disclaims
beneficial ownership of the unallocated stock held by the ESOP Trust.
(4) The figures shown include shares over which individuals share voting
and investment power (other than as disclosed in notes 3, 4 and 5) as
follows: Mr. McMahon, 34,956 shares; and Mr. Mendez, 4,491 shares.
(5) Includes 194,618 shares held by the Employee Profit Sharing Plan of
J.J. Elek Realty over which Mr. Elek has sole voting power.
(6) Excludes 14,320 shares with respect to all executive officers which may
be acquired pursuant to options which are not exercisable within 60
days. Includes 274,099 shares subject to options awarded to directors
and officers which are presently exercisable.
(7) Percentages with respect to each person or group of persons have been
calculated on the basis of 12,387,184 shares outstanding as of March 1,
1997, plus the number of shares of Common Stock which such person or
group of persons has the right to acquire within 60 days after March 1,
1997 by the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time the Bank makes mortgage loans and consumer loans to its
executive officers and to members of the immediate families of its executive
officers and directors, to the extent consistent with applicable laws and
regulations. Such loans are made in the ordinary course of business and on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and do not and will not
involve more than the normal risk of collectibility or present other unfavorable
features.
71
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this report:
(i) The consolidated statements of condition of the Corporation and
subsidiary as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996, together with the
related notes and the independent auditor's report of KPMG Peat Marwick LLP,
independent certified accountants.
(ii) Financial statement schedules are omitted because they are not required
or applicable, or the required information is shown in the consolidated
financial statements or notes thereto.
(iii) Exhibits
72
<PAGE>
(a) The following Exhibits are filed as part of this report.
Exhibit
Number
- ------
2.1 Agreement and Plan of Merger, dated February 5, 1997, between
Sovereign Bancorp, Inc. and Bankers Corp. (1)
2.2 Stock Option Agreement, dated February 5, 1997, by and between
Sovereign Bancorp, Inc. and Bankers Corp. (1)
3.1 Restated Certificate of Incorporation of Bankers Corp.(2)
3.2 By-Laws of Bankers Corp.(3)
4 Stock Certificate of Bankers Corp.(4)
10.1 Employment Agreement between the Bank, the Holding Company and
Joseph P. Gemmell.(5)
Amended on October 18, 1993 and January 21, 1996. (4)
10.2 Special Termination Agreement between the Bank, the Holding Company
and Michael Ghabrial.(5)
10.3 Special Termination Agreement between the Bank, the Holding Company
and Howard Garfield.(5)
10.4 Special Termination Agreement between the Bank, the Holding Company
and Margaret Paronich.(5)
10.5 Bankers Corp. 1989 Incentive Stock Option Plan.(6)
10.6 Bankers Corp. Stock Option Plan for Outside Directors.(7)
10.7 Bankers Savings 1989 Management Recognition and Retention Plan and
Trust.(6)
10.8 Bankers Savings Outside Directors' Deferred Compensation Plan,
Amended and Restated March 11, 1996.
10.9 Summary Plan Description of the Retirement Plan of Bankers Savings.(8)
10.10 Bankers Corp. 1993 Stock Option Plan for Outside Directors.(9)
10.11 Bankers Corp. 1993 Long-Term Incentive Stock Benefit Plan.(9)
21 Subsidiary information is incorporated herein by reference to "Part I
-Activities of Subsidiary Companies."
23 Independent Auditors' Consent
27.1 Financial Data Schedule (Edgar Filing Only).
- ------------
(1) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on February 11, 1997.
(2) Incorporated herein by reference to Annex A of the Registrant's
Proxy Statement for its 1995 Annual Meeting of Stockholders held on April 28,
1995 and filed with the SEC on March 28, 1995.
(3) Incorporated herein by reference to the Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ending March 31, 1995,
filed with the SEC on May 15, 1995.
(4) Incorporated herein by reference to the Exhibits to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(5) Incorporated herein by reference to the Exhibits to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
(6) Incorporated herein by reference to the Exhibits to the
Registrant's Amended Annual Report on Form 10-K/A for the year ended December
31, 1993 filed with the SEC on May 19, 1995.
(7) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed with the SEC on August 5, 1991, Registration No.
33-42104.
(8) Incorporated herein by reference to the Exhibits to the
Registrant's Amended Annual Report on Form 10-K/A, for the year ended on
December 31, 1994, filed on May 19, 1995.
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed with the SEC on July 20, 1995, Registration No.
33-94764.
73
<PAGE>
Signatures
Pursuant to the requirements of section 13 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.
BANKERS CORP.
(Registrant)
March 25, 1997 By:/s/ Joseph P. Gemmell
---------------------------------------
Joseph P. Gemmell
Chairman of the Board
President and
Chief Executive Officer
March 25, 1997 By:/s/ Howard S. Garfield II
---------------------------------------
Howard S. Garfield II
Senior Vice President
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Joseph P. Gemmell Chairman of the Board March 25, 1997
- -------------------------------- President and --------------
Joseph P. Gemmell Chief Executive Officer
/s/ Howard S. Garfield II Senior Vice President and March 25, 1997
- -------------------------------- Chief Financial Officer --------------
Howard S. Garfield II
/s/ Eileen L. Roemer Vice President and March 25, 1997
- -------------------------------- Comptroller --------------
Eileen L. Roemer
/s/ Andrew P. Arbes Director March 25, 1997
- -------------------------------- --------------
Andrew P. Arbes
/s/ James J. Elek Director March 25, 1997
- -------------------------------- --------------
James J. Elek
/s/ George Gundrum Director March 25, 1997
- -------------------------------- --------------
George Gundrum
/s/ Joseph H. Harrigan Director March 25, 1997
- -------------------------------- --------------
Joseph H. Harrigan
/s/ Michael J. Mcmahon Director March 25, 1997
- -------------------------------- --------------
Michael J. McMahon
/s/ Ralph Mendez Director March 25, 1997
- -------------------------------- --------------
Ralph Mendez
74
BANKERS SAVINGS
OUTSIDE DIRECTORS' DEFERRED
COMPENSATION PLAN
AMENDED AND RESTATED MARCH 11, 1996
1. PURPOSE The purpose of this Bankers Savings Outside Directors'
Deferred Compensation Plan (the "Plan") is to provide deferred compensation
benefits to certain directors of Bankers Savings (the "Corporation") who are not
officers or employees of the Corporation and who have provided the expertise
necessary to enable the Corporation to experience successful growth and
development.
2. DEFINITIONS (a) "Corporation" means Bankers Savings and any
successor or predecessor thereto, whether by merger, consolidation, liquidation
or other reorganization.
(b) "Outside Director" means a person who is not an officer or
employee of the Corporation and who is elected or appointed to the office of
Director of the Corporation.
(c) "Participant" means an Outside Director who is eligible to
receive deferred compensation benefits hereunder.
(d) "Deferred Compensation Benefit" means an annual amount equal to
one-half of the sum of (i) the average of the last three (3) years annual
Directors' retainer fee paid by the Corporation to its Outside Directors, plus
(ii) the average of the last three (3) years fee paid for attendance at the
regular Directors' Meeting.
(e) "Credited Service" means the number of full months of a
Participant's service as an Outside Director of the Corporation or a predecessor
to the Corporation between his Initial Date and his Termination Date, including
service as an Outside Director prior to the adoption of this Plan.
(f) "Initial Date" means the date of a person's initial
appointment or election as an Outside Director of the Corporation.
(g) "Termination Date" means the date as of which a Participant ceases
to serve as an Outside Director of the Corporation by reason of retirement,
resignation, disability or discharge.
(h) "Change in Control" means (i) an event of a nature that (A) would
be required to be reported by Bankers Corp. ("Holding Company") in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (B) results in a Change in Control of the Corporation or the
Holding Company within the meaning of 12 USC 1817, Change in Bank Control Act,
or 12 CFR 225.41(b) of the Rules and Regulations of the Federal Reserve Board
promulgated thereunder, as in effect on the date hereof; and (ii) in addition, a
Change in Control shall be deemed to have occurred at such time as: (A) any
"person" (as used in this section, the term "person" shall have the same
definition as contained in the Exchange Act and
-1-
<PAGE>
as further defined and applied in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation or the
Holding Company representing 20% or more of the Corporation's or the Holding
Company's outstanding common stock or other voting securities ordinarily having
the right to vote at the election of directors, except for any securities of the
Corporation purchased by the Holding Company in connection with the conversion
of the Corporation to the stock form and any securities purchased by the
Corporation's employee stock benefit plans; or (B) individuals who constitute
the Board of Directors of the Corporation or the Holding Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose nomination and election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, shall be, for
purposes of this clause (B), treated as though he were a member of the Incumbent
Board; or (C) a merger, consolidation or sale of all or substantially all the
assets of the Corporation or the Holding Company or a similar transaction occurs
in which the Corporation or the Holding Company is not the resulting entity; or
(D) a proxy statement soliciting proxies from stockholders of the Holding
Company is distributed, by a person other than the Incumbent Board of the
Holding Company seeking stockholder approval of a sale, plan of reorganization,
merger or consolidation of the Holding Company or Bank or similar transaction
with one or more persons as a result of which the outstanding shares of the
class of securities then subject to such plan would be exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company; or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Holding Company.
3. ELIGIBILITY Each Outside Director shall become a Participant in the
Plan as of the first day of the month coincident with or next following his
completion of 84 months of Credited Service as an Outside Director. Any Outside
Director who has completed 84 months of Credited Service as of the date the Plan
is adopted and who has not ceased his service as an Outside Director shall
become a Participant on the date the Plan is adopted. Except as provided in
Section 6 hereof, any person who (i) has less than 84 months of Credited Service
on his Termination Date, or (ii) whose service as an Outside Director has ceased
for cause irrespective of his number of months of Credited Service shall not be
a Participant in the Plan and shall have no rights to a benefit.
4. BENEFITS Each Participant shall commence receiving a Deferred
Compensation Benefit on the first day of the month next following his
Termination Date. Thereafter, the Deferred Compensation Benefit will be paid to
the participant or his heirs in equal monthly installments for a period which
shall not exceed the lesser of the number of months of the Participant's
Credited Service or 180 months. All benefits shall cease at the expiration of
the period for which the Participant is entitled to benefits under this
paragraph.
5. FUNDING At the Corporation's option, the Plan may be either an
unfunded liability of the Corporation or funded by way of a "Rabbi Trust" except
as outlined in Section 6 of this Plan.
6. CHANGE IN CONTROL In the event a Participant's service as a Director
of the Corporation terminates in connection with a Change in Control, the
Participant may elect to (a) require the Corporation or its successor to
purchase an annuity contract from an insurance
-2-
<PAGE>
company to provide such Participant's Deferred Compensation Benefit payments, or
(b) receive an immediate lump sum payment equal to the present value of the sum
of his monthly Deferred Compensation Benefit payments, subject to such
limitations as may be required to prevent constructive receipt of income by the
Participant if no such election is made. Furthermore, in this event, the 84
month criterion shall not apply in determining the eligibility of the
Participant. If such a Director has less than 3 years of Credited Service upon
his termination of service, the Benefit shall be determined based on the
Director's total Credited Service. In the event an Outside Director continues
service as a Director of the Corporation or its successor following a Change in
Control, and the surviving company elects not to continue the Plan or offer an
acceptable alternative to such Outside Director, the Outside Director may elect
to (A) require the Corporation to purchase an annuity contract from an insurance
company to provide the Outside Director with Deferred Compensation Benefit
payments upon termination of service, or (B) receive an immediate lump sum
payment equal to the sum of his monthly Deferred Compensation Benefit payments,
subject to such limitations as may be required to prevent constructive receipt
of income by the Outside Director if no such election is made. Such Deferred
Compensation Benefit shall be determined based on the Outside Director's
Credited Service to the date the Change in Control occurred, regardless of
whether such Outside Director was a Participant prior to the Change in Control.
7. DEATH OF A PARTICIPANT Notwithstanding any other provision of this
Plan, a Participant's benefits hereunder shall continue to the Participant's
spouse, successors, beneficiaries, heirs and assigns.
8. ADMINISTRATION The Plan shall be administered by a committee (the
"Committee") of three or more persons appointed by the Board of Directors of the
Corporation. The Committee shall have the sole and absolute discretion to settle
all questions of interpretation of the Plan and eligibility for benefits, and
the Committee's decisions regarding the interpretation and administration of the
Plan shall be final and binding upon all persons having an interest in the Plan.
Any and all powers and discretion vested in the Committee under the Plan may be
exercised by a subcommittee of three or more persons which may be established by
the Committee from time to time.
9. AMENDMENT The Board of Directors may amend, modify, suspend or
terminate this Plan at any time, provided, however, that any such amendment,
modification, suspension or termination shall not affect the rights of
Participants to payments to which they are entitled pursuant to Paragraphs 4 or
6, above, immediately prior to such amendment, modification, suspension or
termination of the Plan.
10. STATE LAW This Plan shall be governed and construed in accordance
with the laws of the State of New Jersey.
11. EFFECTIVE DATE This Plan is effective as originally adopted and
ratified by the Board of Directors of Bankers Savings on December 14, 1992 at a
duly called Board Meeting and as amended and restated by the Board of Directors
of Bankers Savings at duly called meetings held on October 18, 1993 and March
11, 1996.
-3-
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Bankers Corp:
We consent to incorporation by reference in Registration Statement Nos.
33-42104, 33-42105 and 33-94764 on Form S-8 of Bankers Corp. of our report dated
January 31, 1997, except as to note 2, which is as of February 5, 1997, relating
to the consolidated statements of condition of Bankers Corp. and subsidiary as
of December 31, 1996 and 1995, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1996, which report appears in the
December 31, 1996 Annual Report on Form 10-K of Bankers Corp.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 25, 1997
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